A.M. No.

133-J May 31, 1982

BERNARDITA R. MACARIOLA, complainant, vs. HONORABLE ELIAS B. ASUNCION,
Judge of the Court of First Instance of Leyte, respondent.
MAKASIAR, J:

In a verified complaint dated August 6, 1968 Bernardita R. Macariola charged respondent
Judge Elias B. Asuncion of the Court of First Instance of Leyte, now Associate Justice of the
Court of Appeals, with "acts unbecoming a judge."
The factual setting of the case is stated in the report dated May 27, 1971 of then Associate
Justice Cecilia Muoz Palma of the Court of Appeals now retired Associate Justice of the
Supreme Court, to whom this case was referred on October 28, 1968 for investigation, thus:
Civil Case No. 3010 of the Court of First Instance of Leyte was a complaint for
partition filed by Sinforosa R. Bales, Luz R. Bakunawa, Anacorita Reyes, Ruperto
Reyes, Adela Reyes, and Priscilla Reyes, plaintiffs, against Bernardita R. Macariola,
defendant, concerning the properties left by the deceased Francisco Reyes, the
common father of the plaintiff and defendant.
In her defenses to the complaint for partition, Mrs. Macariola alleged among other
things that; a) plaintiff Sinforosa R. Bales was not a daughter of the deceased
Francisco Reyes; b) the only legal heirs of the deceased were defendant Macariola,
she being the only offspring of the first marriage of Francisco Reyes with Felisa
Espiras, and the remaining plaintiffs who were the children of the deceased by his
second marriage with Irene Ondez; c) the properties left by the deceased were all
the conjugal properties of the latter and his first wife, Felisa Espiras, and no
properties were acquired by the deceased during his second marriage; d) if there
was any partition to be made, those conjugal properties should first be partitioned
into two parts, and one part is to be adjudicated solely to defendant it being the share
of the latter's deceased mother, Felisa Espiras, and the other half which is the share
of the deceased Francisco Reyes was to be divided equally among his children by
his two marriages.
On June 8, 1963, a decision was rendered by respondent Judge Asuncion in Civil
Case 3010, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court, upon a
preponderance of evidence, finds and so holds, and hereby renders
judgment (1) Declaring the plaintiffs Luz R. Bakunawa, Anacorita Reyes,
Ruperto Reyes, Adela Reyes and Priscilla Reyes as the only children
legitimated by the subsequent marriage of Francisco Reyes Diaz to Irene
Ondez; (2) Declaring the plaintiff Sinforosa R. Bales to have been an
illegitimate child of Francisco Reyes Diaz; (3) Declaring Lots Nos. 4474,
4475, 4892, 5265, 4803, 4581, 4506 and 1/4 of Lot 1145 as belonging to the
conjugal partnership of the spouses Francisco Reyes Diaz and Felisa
Espiras; (4) Declaring Lot No. 2304 and 1/4 of Lot No. 3416 as belonging to
the spouses Francisco Reyes Diaz and Irene Ondez in common partnership;
(5) Declaring that 1/2 of Lot No. 1184 as belonging exclusively to the
deceased Francisco Reyes Diaz; (6) Declaring the defendant Bernardita R.
Macariola, being the only legal and forced heir of her mother Felisa Espiras,
as the exclusive owner of one-half of each of Lots Nos. 4474, 4475, 4892,
5265, 4803, 4581, 4506; and the remaining one-half (1/2) of each of said
Lots Nos. 4474, 4475, 4892, 5265, 4803, 4581, 4506 and one-half (1/2) of
one-fourth (1/4) of Lot No. 1154 as belonging to the estate of Francisco
Reyes Diaz; (7) Declaring Irene Ondez to be the exclusive owner of one-half
(1/2) of Lot No. 2304 and one-half (1/2) of one-fourth (1/4) of Lot No. 3416;
the remaining one-half (1/2) of Lot 2304 and the remaining one-half (1/2) of
one-fourth (1/4) of Lot No. 3416 as belonging to the estate of Francisco
Reyes Diaz; (8) Directing the division or partition of the estate of Francisco
Reyes Diaz in such a manner as to give or grant to Irene Ondez, as
surviving widow of Francisco Reyes Diaz, a hereditary share of. one-twelfth
(1/12) of the whole estate of Francisco Reyes Diaz (Art. 996 in relation to
Art. 892, par 2, New Civil Code), and the remaining portion of the estate to
be divided among the plaintiffs Sinforosa R. Bales, Luz R. Bakunawa,
Anacorita Reyes, Ruperto Reyes, Adela Reyes, Priscilla Reyes and
defendant Bernardita R. Macariola, in such a way that the extent of the total
share of plaintiff Sinforosa R. Bales in the hereditary estate shall not exceed
the equivalent of two-fifth (2/5) of the total share of any or each of the other
plaintiffs and the defendant (Art. 983, New Civil Code), each of the latter to
receive equal shares from the hereditary estate, (Ramirez vs. Bautista, 14
Phil. 528; Diancin vs. Bishop of Jaro, O.G. [3rd Ed.] p. 33); (9) Directing the
parties, within thirty days after this judgment shall have become final to
submit to this court, for approval a project of partition of the hereditary estate
in the proportion above indicated, and in such manner as the parties may, by
agreement, deemed convenient and equitable to them taking into
consideration the location, kind, quality, nature and value of the properties
involved; (10) Directing the plaintiff Sinforosa R. Bales and defendant
Bernardita R. Macariola to pay the costs of this suit, in the proportion of one-
third (1/3) by the first named and two-thirds (2/3) by the second named; and
(I 1) Dismissing all other claims of the parties [pp 27-29 of Exh. C].
The decision in civil case 3010 became final for lack of an appeal, and on October
16, 1963, a project of partition was submitted to Judge Asuncion which is marked
Exh. A. Notwithstanding the fact that the project of partition was not signed by the
parties themselves but only by the respective counsel of plaintiffs and defendant,
Judge Asuncion approved it in his Order dated October 23, 1963, which for
convenience is quoted hereunder in full:
The parties, through their respective counsels, presented to this Court for
approval the following project of partition:
COMES NOW, the plaintiffs and the defendant in the above-entitled case, to
this Honorable Court respectfully submit the following Project of Partition:
l. The whole of Lots Nos. 1154, 2304 and 4506 shall belong exclusively to
Bernardita Reyes Macariola;
2. A portion of Lot No. 3416 consisting of 2,373.49 square meters along the
eastern part of the lot shall be awarded likewise to Bernardita R. Macariola;
3. Lots Nos. 4803, 4892 and 5265 shall be awarded to Sinforosa Reyes
Bales;
4. A portion of Lot No. 3416 consisting of 1,834.55 square meters along the
western part of the lot shall likewise be awarded to Sinforosa Reyes-Bales;
5. Lots Nos. 4474 and 4475 shall be divided equally among Luz Reyes
Bakunawa, Anacorita Reyes, Ruperto Reyes, Adela Reyes and Priscilla
Reyes in equal shares;
6. Lot No. 1184 and the remaining portion of Lot No. 3416 after taking the
portions awarded under item (2) and (4) above shall be awarded to Luz
Reyes Bakunawa, Anacorita Reyes, Ruperto Reyes, Adela Reyes and
Priscilla Reyes in equal shares, provided, however that the remaining portion
of Lot No. 3416 shall belong exclusively to Priscilla Reyes.
WHEREFORE, it is respectfully prayed that the Project of Partition indicated
above which is made in accordance with the decision of the Honorable Court
be approved.
Tacloban City, October 16, 1963.
(SGD) BONIFACIO RAMO Atty. for the Defendant Tacloban City
(SGD) ZOTICO A. TOLETE Atty. for the Plaintiff Tacloban City
While the Court thought it more desirable for all the parties to have signed this
Project of Partition, nevertheless, upon assurance of both counsels of the
respective parties to this Court that the Project of Partition, as above- quoted,
had been made after a conference and agreement of the plaintiffs and the
defendant approving the above Project of Partition, and that both lawyers had
represented to the Court that they are given full authority to sign by
themselves the Project of Partition, the Court, therefore, finding the above-
quoted Project of Partition to be in accordance with law, hereby approves the
same. The parties, therefore, are directed to execute such papers, documents
or instrument sufficient in form and substance for the vesting of the rights,
interests and participations which were adjudicated to the respective parties,
as outlined in the Project of Partition and the delivery of the respective
properties adjudicated to each one in view of said Project of Partition, and to
perform such other acts as are legal and necessary to effectuate the said
Project of Partition.
SO ORDERED.
Given in Tacloban City, this 23rd day of October, 1963.
(SGD) ELIAS B. ASUNCION Judge
EXH. B.
The above Order of October 23, 1963, was amended on November 11, 1963, only
for the purpose of giving authority to the Register of Deeds of the Province of Leyte
to issue the corresponding transfer certificates of title to the respective adjudicatees
in conformity with the project of partition (see Exh. U).
One of the properties mentioned in the project of partition was Lot 1184 or rather
one-half thereof with an area of 15,162.5 sq. meters. This lot, which according to the
decision was the exclusive property of the deceased Francisco Reyes, was
adjudicated in said project of partition to the plaintiffs Luz, Anacorita Ruperto, Adela,
and Priscilla all surnamed Reyes in equal shares, and when the project of partition
was approved by the trial court the adjudicatees caused Lot 1184 to be subdivided
into five lots denominated as Lot 1184-A to 1184-E inclusive (Exh. V).
Lot 1184-D was conveyed to Enriqueta D. Anota, a stenographer in Judge
Asuncion's court (Exhs. F, F-1 and V-1), while Lot 1184-E which had an area of
2,172.5556 sq. meters was sold on July 31, 1964 to Dr. Arcadio Galapon (Exh. 2)
who was issued transfer certificate of title No. 2338 of the Register of Deeds of the
city of Tacloban (Exh. 12).
On March 6, 1965, Dr. Arcadio Galapon and his wife Sold a portion of Lot 1184-E
with an area of around 1,306 sq. meters to Judge Asuncion and his wife, Victoria S.
Asuncion (Exh. 11), which particular portion was declared by the latter for taxation
purposes (Exh. F).
On August 31, 1966, spouses Asuncion and spouses Galapon conveyed their
respective shares and interest in Lot 1184-E to "The Traders Manufacturing and
Fishing Industries Inc." (Exit 15 & 16). At the time of said sale the stockholders of the
corporation were Dominador Arigpa Tan, Humilia Jalandoni Tan, Jaime Arigpa Tan,
Judge Asuncion, and the latter's wife, Victoria S. Asuncion, with Judge Asuncion as
the President and Mrs. Asuncion as the secretary (Exhs. E-4 to E-7). The Articles of
Incorporation of "The Traders Manufacturing and Fishing Industries, Inc." which we
shall henceforth refer to as "TRADERS" were registered with the Securities and
Exchange Commission only on January 9, 1967 (Exh. E) [pp. 378-385, rec.].
Complainant Bernardita R. Macariola filed on August 9, 1968 the instant complaint dated
August 6, 1968 alleging four causes of action, to wit: [1] that respondent Judge Asuncion
violated Article 1491, paragraph 5, of the New Civil Code in acquiring by purchase a portion
of Lot No. 1184-E which was one of those properties involved in Civil Case No. 3010 decided
by him; [2] that he likewise violated Article 14, paragraphs I and 5 of the Code of Commerce,
Section 3, paragraph H, of R.A. 3019, otherwise known as the Anti-Graft and Corrupt
Practices Act, Section 12, Rule XVIII of the Civil Service Rules, and Canon 25 of the Canons
of Judicial Ethics, by associating himself with the Traders Manufacturing and Fishing
Industries, Inc., as a stockholder and a ranking officer while he was a judge of the Court of
First Instance of Leyte; [3] that respondent was guilty of coddling an impostor and acted in
disregard of judicial decorum by closely fraternizing with a certain Dominador Arigpa Tan who
openly and publicly advertised himself as a practising attorney when in truth and in fact his
name does not appear in the Rolls of Attorneys and is not a member of the Philippine Bar;
and [4] that there was a culpable defiance of the law and utter disregard for ethics by
respondent Judge (pp. 1-7, rec.).
Respondent Judge Asuncion filed on September 24, 1968 his answer to which a reply was
filed on October 16, 1968 by herein complainant. In Our resolution of October 28, 1968, We
referred this case to then Justice Cecilia Muoz Palma of the Court of Appeals, for
investigation, report and recommendation. After hearing, the said Investigating Justice
submitted her report dated May 27, 1971 recommending that respondent Judge should be
reprimanded or warned in connection with the first cause of action alleged in the complaint,
and for the second cause of action, respondent should be warned in case of a finding that he
is prohibited under the law to engage in business. On the third and fourth causes of action,
Justice Palma recommended that respondent Judge be exonerated.
The records also reveal that on or about November 9 or 11, 1968 (pp. 481, 477, rec.),
complainant herein instituted an action before the Court of First Instance of Leyte, entitled
"Bernardita R. Macariola, plaintiff, versus Sinforosa R. Bales, et al., defendants," which was
docketed as Civil Case No. 4235, seeking the annulment of the project of partition made
pursuant to the decision in Civil Case No. 3010 and the two orders issued by respondent
Judge approving the same, as well as the partition of the estate and the subsequent
conveyances with damages. It appears, however, that some defendants were dropped from
the civil case. For one, the case against Dr. Arcadio Galapon was dismissed because he was
no longer a real party in interest when Civil Case No. 4234 was filed, having already
conveyed on March 6, 1965 a portion of lot 1184-E to respondent Judge and on August 31,
1966 the remainder was sold to the Traders Manufacturing and Fishing Industries, Inc.
Similarly, the case against defendant Victoria Asuncion was dismissed on the ground that
she was no longer a real party in interest at the time the aforesaid Civil Case No. 4234 was
filed as the portion of Lot 1184 acquired by her and respondent Judge from Dr. Arcadio
Galapon was already sold on August 31, 1966 to the Traders Manufacturing and Fishing
industries, Inc. Likewise, the cases against defendants Serafin P. Ramento, Catalina Cabus,
Ben Barraza Go, Jesus Perez, Traders Manufacturing and Fishing Industries, Inc., Alfredo R.
Celestial and Pilar P. Celestial, Leopoldo Petilla and Remedios Petilla, Salvador Anota and
Enriqueta Anota and Atty. Zotico A. Tolete were dismissed with the conformity of complainant
herein, plaintiff therein, and her counsel.
On November 2, 1970, Judge Jose D. Nepomuceno of the Court of First Instance of Leyte,
who was directed and authorized on June 2, 1969 by the then Secretary (now Minister) of
Justice and now Minister of National Defense Juan Ponce Enrile to hear and decide Civil
Case No. 4234, rendered a decision, the dispositive portion of which reads as follows:
A. IN THE CASE AGAINST JUDGE ELIAS B. ASUNCION
(1) declaring that only Branch IV of the Court of First Instance of Leyte has
jurisdiction to take cognizance of the issue of the legality and validity of the
Project of Partition [Exhibit "B"] and the two Orders [Exhibits "C" and "C- 3"]
approving the partition;
(2) dismissing the complaint against Judge Elias B. Asuncion;
(3) adjudging the plaintiff, Mrs. Bernardita R. Macariola to pay defendant
Judge Elias B. Asuncion,
(a) the sum of FOUR HUNDRED THOUSAND PESOS
[P400,000.00] for moral damages;
(b) the sum of TWO HUNDRED THOUSAND PESOS
[P200,000.001 for exemplary damages;
(c) the sum of FIFTY THOUSAND PESOS [P50,000.00] for
nominal damages; and
(d) he sum of TEN THOUSAND PESOS [PI0,000.00] for
Attorney's Fees.
B. IN THE CASE AGAINST THE DEFENDANT MARIQUITA
VILLASIN, FOR HERSELF AND FOR THE HEIRS OF THE
DECEASED GERARDO VILLASIN
(1) Dismissing the complaint against the defendants Mariquita Villasin and
the heirs of the deceased Gerardo Villasin;
(2) Directing the plaintiff to pay the defendants Mariquita Villasin and the
heirs of Gerardo Villasin the cost of the suit.
C. IN THE CASE AGAINST THE DEFENDANT
SINFOROSA R. BALES, ET AL., WHO WERE PLAINTIFFS
IN CIVIL CASE NO. 3010
(1) Dismissing the complaint against defendants Sinforosa R. Bales, Adela
R. Herrer, Priscilla R. Solis, Luz R. Bakunawa, Anacorita R. Eng and
Ruperto O. Reyes.
D. IN THE CASE AGAINST DEFENDANT BONIFACIO
RAMO
(1) Dismissing the complaint against Bonifacio Ramo;
(2) Directing the plaintiff to pay the defendant Bonifacio Ramo the cost of the
suit.
SO ORDERED [pp. 531-533, rec.]
It is further disclosed by the record that the aforesaid decision was elevated to the Court of
Appeals upon perfection of the appeal on February 22, 1971.
I
WE find that there is no merit in the contention of complainant Bernardita R. Macariola, under
her first cause of action, that respondent Judge Elias B. Asuncion violated Article 1491,
paragraph 5, of the New Civil Code in acquiring by purchase a portion of Lot No. 1184-E
which was one of those properties involved in Civil Case No. 3010. 'That Article provides:
Article 1491. The following persons cannot acquire by purchase, even at a
public or judicial action, either in person or through the mediation of another:
xxx xxx xxx
(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior
courts, and other officers and employees connected with the administration
of justice, the property and rights in litigation or levied upon an execution
before the court within whose jurisdiction or territory they exercise their
respective functions; this prohibition includes the act of acquiring by
assignment and shall apply to lawyers, with respect to the property and
rights which may be the object of any litigation in which they may take part
by virtue of their profession [emphasis supplied].
The prohibition in the aforesaid Article applies only to the sale or assignment of the property
which is the subject of litigation to the persons disqualified therein. WE have already ruled
that "... for the prohibition to operate, the sale or assignment of the property must take
place during the pendency of the litigation involving the property" (The Director of Lands vs.
Ababa et al., 88 SCRA 513, 519 [1979], Rosario vda. de Laig vs. Court of Appeals, 86 SCRA
641, 646 [1978]).
In the case at bar, when the respondent Judge purchased on March 6, 1965 a portion of Lot
1184-E, the decision in Civil Case No. 3010 which he rendered on June 8, 1963 was already
final because none of the parties therein filed an appeal within the reglementary period;
hence, the lot in question was no longer subject of the litigation. Moreover, at the time of the
sale on March 6, 1965, respondent's order dated October 23, 1963 and the amended order
dated November 11, 1963 approving the October 16, 1963 project of partition made pursuant
to the June 8, 1963 decision, had long become final for there was no appeal from said
orders.
Furthermore, respondent Judge did not buy the lot in question on March 6, 1965 directly from
the plaintiffs in Civil Case No. 3010 but from Dr. Arcadio Galapon who earlier purchased
on July 31, 1964 Lot 1184-E from three of the plaintiffs, namely, Priscilla Reyes, Adela
Reyes, and Luz R. Bakunawa after the finality of the decision in Civil Case No. 3010. It may
be recalled that Lot 1184 or more specifically one-half thereof was adjudicated in equal
shares to Priscilla Reyes, Adela Reyes, Luz Bakunawa, Ruperto Reyes and Anacorita Reyes
in the project of partition, and the same was subdivided into five lots denominated as Lot
1184-A to 1184-E. As aforestated, Lot 1184-E was sold on July 31, 1964 to Dr. Galapon for
which he was issued TCT No. 2338 by the Register of Deeds of Tacloban City, and on March
6, 1965 he sold a portion of said lot to respondent Judge and his wife who declared the same
for taxation purposes only. The subsequent sale on August 31, 1966 by spouses Asuncion
and spouses Galapon of their respective shares and interest in said Lot 1184-E to the
Traders Manufacturing and Fishing Industries, Inc., in which respondent was the president
and his wife was the secretary, took place long after the finality of the decision in Civil Case
No. 3010 and of the subsequent two aforesaid orders therein approving the project of
partition.
While it appears that complainant herein filed on or about November 9 or 11, 1968 an action
before the Court of First Instance of Leyte docketed as Civil Case No. 4234, seeking to annul
the project of partition and the two orders approving the same, as well as the partition of the
estate and the subsequent conveyances, the same, however, is of no moment.
The fact remains that respondent Judge purchased on March 6, 1965 a portion of Lot 1184-E
from Dr. Arcadio Galapon; hence, after the finality of the decision which he rendered on June
8, 1963 in Civil Case No. 3010 and his two questioned orders dated October 23, 1963 and
November 11, 1963. Therefore, the property was no longer subject of litigation.
The subsequent filing on November 9, or 11, 1968 of Civil Case No. 4234 can no longer alter,
change or affect the aforesaid facts that the questioned sale to respondent Judge, now
Court of Appeals Justice, was effected and consummated long after the finality of the
aforesaid decision or orders.
Consequently, the sale of a portion of Lot 1184-E to respondent Judge having taken place
over one year after the finality of the decision in Civil Case No. 3010 as well as the two
orders approving the project of partition, and not during the pendency of the litigation, there
was no violation of paragraph 5, Article 1491 of the New Civil Code.
It is also argued by complainant herein that the sale on July 31, 1964 of Lot 1184-E to Dr.
Arcadio Galapon by Priscilla Reyes, Adela Reyes and Luz R. Bakunawa was only a mere
scheme to conceal the illegal and unethical transfer of said lot to respondent Judge as a
consideration for the approval of the project of partition. In this connection, We agree with the
findings of the Investigating Justice thus:
And so we are now confronted with this all-important question whether or not
the acquisition by respondent of a portion of Lot 1184-E and the subsequent
transfer of the whole lot to "TRADERS" of which respondent was the
President and his wife the Secretary, was intimately related to the Order of
respondent approving the project of partition, Exh. A.
Respondent vehemently denies any interest or participation in the
transactions between the Reyeses and the Galapons concerning Lot 1184-
E, and he insists that there is no evidence whatsoever to show that Dr.
Galapon had acted, in the purchase of Lot 1184-E, in mediation for him and
his wife. (See p. 14 of Respondent's Memorandum).
xxx xxx xxx
On this point, I agree with respondent that there is no evidence in the record
showing that Dr. Arcadio Galapon acted as a mere "dummy" of respondent
in acquiring Lot 1184-E from the Reyeses. Dr. Galapon appeared to this
investigator as a respectable citizen, credible and sincere, and I believe him
when he testified that he bought Lot 1184-E in good faith and for valuable
consideration from the Reyeses without any intervention of, or previous
understanding with Judge Asuncion (pp. 391- 394, rec.).
On the contention of complainant herein that respondent Judge acted illegally in approving
the project of partition although it was not signed by the parties, We quote with approval the
findings of the Investigating Justice, as follows:
1. I agree with complainant that respondent should have required the
signature of the parties more particularly that of Mrs. Macariola on the
project of partition submitted to him for approval; however, whatever error
was committed by respondent in that respect was done in good faith as
according to Judge Asuncion he was assured by Atty. Bonifacio Ramo, the
counsel of record of Mrs. Macariola, That he was authorized by his client to
submit said project of partition, (See Exh. B and tsn p. 24, January 20,
1969). While it is true that such written authority if there was any, was not
presented by respondent in evidence, nor did Atty. Ramo appear to
corroborate the statement of respondent, his affidavit being the only one that
was presented as respondent's Exh. 10, certain actuations of Mrs. Macariola
lead this investigator to believe that she knew the contents of the project of
partition, Exh. A, and that she gave her conformity thereto. I refer to the
following documents:
1) Exh. 9 Certified true copy of OCT No. 19520 covering Lot 1154 of the
Tacloban Cadastral Survey in which the deceased Francisco Reyes holds a
"1/4 share" (Exh. 9-a). On tills certificate of title the Order dated November
11, 1963, (Exh. U) approving the project of partition was duly entered and
registered on November 26, 1963 (Exh. 9-D);
2) Exh. 7 Certified copy of a deed of absolute sale executed by Bernardita
Reyes Macariola onOctober 22, 1963, conveying to Dr. Hector Decena the
one-fourth share of the late Francisco Reyes-Diaz in Lot 1154. In this deed
of sale the vendee stated that she was the absolute owner of said one-fourth
share, the same having been adjudicated to her as her share in the estate of
her father Francisco Reyes Diaz as per decision of the Court of First
Instance of Leyte under case No. 3010 (Exh. 7-A). The deed of sale was
duly registered and annotated at the back of OCT 19520 on December 3,
1963 (see Exh. 9-e).
In connection with the abovementioned documents it is to be noted that in
the project of partition dated October 16, 1963, which was approved by
respondent on October 23, 1963, followed by an amending Order on
November 11, 1963, Lot 1154 or rather 1/4 thereof was adjudicated to Mrs.
Macariola. It is this 1/4 share in Lot 1154 which complainant sold to Dr.
Decena on October 22, 1963, several days after the preparation of the
project of partition.
Counsel for complainant stresses the view, however, that the latter sold her
one-fourth share in Lot 1154 by virtue of the decision in Civil Case 3010 and
not because of the project of partition, Exh. A. Such contention is absurd
because from the decision, Exh. C, it is clear that one-half of one- fourth of
Lot 1154 belonged to the estate of Francisco Reyes Diaz while the other half
of said one-fourth was the share of complainant's mother, Felisa Espiras; in
other words, the decision did not adjudicate the whole of the one-fourth of
Lot 1154 to the herein complainant (see Exhs. C-3 & C-4). Complainant
became the owner of the entire one-fourth of Lot 1154 only by means of the
project of partition, Exh. A. Therefore, if Mrs. Macariola sold Lot 1154 on
October 22, 1963, it was for no other reason than that she was wen aware of
the distribution of the properties of her deceased father as per Exhs. A and
B. It is also significant at this point to state that Mrs. Macariola admitted
during the cross-examination that she went to Tacloban City in connection
with the sale of Lot 1154 to Dr. Decena (tsn p. 92, November 28, 1968) from
which we can deduce that she could not have been kept ignorant of the
proceedings in civil case 3010 relative to the project of partition.
Complainant also assails the project of partition because according to her
the properties adjudicated to her were insignificant lots and the least
valuable. Complainant, however, did not present any direct and positive
evidence to prove the alleged gross inequalities in the choice and
distribution of the real properties when she could have easily done so by
presenting evidence on the area, location, kind, the assessed and market
value of said properties. Without such evidence there is nothing in the record
to show that there were inequalities in the distribution of the properties of
complainant's father (pp. 386389, rec.).
Finally, while it is. true that respondent Judge did not violate paragraph 5, Article 1491 of the
New Civil Code in acquiring by purchase a portion of Lot 1184-E which was in litigation in his
court, it was, however, improper for him to have acquired the same. He should be reminded
of Canon 3 of the Canons of Judicial Ethics which requires that: "A judge's official conduct
should be free from the appearance of impropriety, and his personal behavior, not only upon
the bench and in the performance of judicial duties, but also in his everyday life, should be
beyond reproach." And as aptly observed by the Investigating Justice: "... it was unwise and
indiscreet on the part of respondent to have purchased or acquired a portion of a piece of
property that was or had been in litigation in his court and caused it to be transferred to a
corporation of which he and his wife were ranking officers at the time of such transfer. One
who occupies an exalted position in the judiciary has the duty and responsibility of
maintaining the faith and trust of the citizenry in the courts of justice, so that not only must he
be truly honest and just, but his actuations must be such as not give cause for doubt and
mistrust in the uprightness of his administration of justice. In this particular case of
respondent, he cannot deny that the transactions over Lot 1184-E are damaging and render
his actuations open to suspicion and distrust. Even if respondent honestly believed that Lot
1184-E was no longer in litigation in his court and that he was purchasing it from a third
person and not from the parties to the litigation, he should nonetheless have refrained from
buying it for himself and transferring it to a corporation in which he and his wife were
financially involved, to avoid possible suspicion that his acquisition was related in one way or
another to his official actuations in civil case 3010. The conduct of respondent gave cause for
the litigants in civil case 3010, the lawyers practising in his court, and the public in general to
doubt the honesty and fairness of his actuations and the integrity of our courts of justice" (pp.
395396, rec.).
II
With respect to the second cause of action, the complainant alleged that respondent Judge
violated paragraphs 1 and 5, Article 14 of the Code of Commerce when he associated
himself with the Traders Manufacturing and Fishing Industries, Inc. as a stockholder and a
ranking officer, said corporation having been organized to engage in business. Said Article
provides that:
Article 14 The following cannot engage in commerce, either in person or
by proxy, nor can they hold any office or have any direct, administrative, or
financial intervention in commercial or industrial companies within the limits
of the districts, provinces, or towns in which they discharge their duties:
1. Justices of the Supreme Court, judges and officials of the department of
public prosecution in active service. This provision shall not be applicable to
mayors, municipal judges, and municipal prosecuting attorneys nor to those
who by chance are temporarily discharging the functions of judge or
prosecuting attorney.
xxx xxx xxx
5. Those who by virtue of laws or special provisions may not engage in
commerce in a determinate territory.
It is Our considered view that although the aforestated provision is incorporated in the Code
of Commerce which is part of the commercial laws of the Philippines, it, however, partakes of
the nature of a political law as it regulates the relationship between the government and
certain public officers and employees, like justices and judges.
Political Law has been defined as that branch of public law which deals with the organization
and operation of the governmental organs of the State and define the relations of the state
with the inhabitants of its territory (People vs. Perfecto, 43 Phil. 887, 897 [1922]). It may be
recalled that political law embraces constitutional law, law of public corporations,
administrative law including the law on public officers and elections. Specifically, Article 14 of
the Code of Commerce partakes more of the nature of an administrative law because it
regulates the conduct of certain public officers and employees with respect to engaging in
business: hence, political in essence.
It is significant to note that the present Code of Commerce is the Spanish Code of Commerce
of 1885, with some modifications made by the "Commission de Codificacion de las
Provincias de Ultramar," which was extended to the Philippines by the Royal Decree of
August 6, 1888, and took effect as law in this jurisdiction on December 1, 1888.
Upon the transfer of sovereignty from Spain to the United States and later on from the United
States to the Republic of the Philippines, Article 14 of this Code of Commerce must be
deemed to have been abrogated because where there is change of sovereignty, the political
laws of the former sovereign, whether compatible or not with those of the new sovereign, are
automatically abrogated, unless they are expressly re-enacted by affirmative act of the new
sovereign.
Thus, We held in Roa vs. Collector of Customs (23 Phil. 315, 330, 311 [1912]) that:
By well-settled public law, upon the cession of territory by one nation to
another, either following a conquest or otherwise, ... those laws which are
political in their nature and pertain to the prerogatives of the former
government immediately cease upon the transfer of sovereignty. (Opinion,
Atty. Gen., July 10, 1899).
While municipal laws of the newly acquired territory not in conflict with the,
laws of the new sovereign continue in force without the express assent or
affirmative act of the conqueror, the political laws do not. (Halleck's Int. Law,
chap. 34, par. 14). However, such political laws of the prior sovereignty as
are not in conflict with the constitution or institutions of the new sovereign,
may be continued in force if the conqueror shall so declare by affirmative act
of the commander-in-chief during the war, or by Congress in time of peace.
(Ely's Administrator vs. United States, 171 U.S. 220, 43 L. Ed. 142). In the
case of American and Ocean Ins. Cos. vs. 356 Bales of Cotton (1 Pet. [26
U.S.] 511, 542, 7 L. Ed. 242), Chief Justice Marshall said:
On such transfer (by cession) of territory, it has never been
held that the relations of the inhabitants with each other
undergo any change. Their relations with their former
sovereign are dissolved, and new relations are created
between them and the government which has acquired their
territory. The same act which transfers their country,
transfers the allegiance of those who remain in it; and the
law which may be denominated political, is necessarily
changed, although that which regulates the intercourse and
general conduct of individuals, remains in force, until altered
by the newly- created power of the State.
Likewise, in People vs. Perfecto (43 Phil. 887, 897 [1922]), this Court stated that: "It is a
general principle of the public law that on acquisition of territory the previous political relations
of the ceded region are totally abrogated. "
There appears no enabling or affirmative act that continued the effectivity of the aforestated
provision of the Code of Commerce after the change of sovereignty from Spain to the United
States and then to the Republic of the Philippines. Consequently, Article 14 of the Code of
Commerce has no legal and binding effect and cannot apply to the respondent, then Judge of
the Court of First Instance, now Associate Justice of the Court of Appeals.
It is also argued by complainant herein that respondent Judge violated paragraph H, Section
3 of Republic Act No. 3019, otherwise known as the Anti-Graft and Corrupt Practices Act,
which provides that:
Sec. 3. Corrupt practices of public officers. In addition to acts or
omissions of public officers already penalized by existing law, the following
shall constitute corrupt practices of any public officer and are hereby
declared to be unlawful:
xxx xxx xxx
(h) Directly or indirectly having financial or pecuniary
interest in any business, contract or transaction in
connection with which he intervenes or takes part in his
official capacity, or in which he is prohibited by the
Constitution or by any Iaw from having any interest.
Respondent Judge cannot be held liable under the aforestated paragraph because there is
no showing that respondent participated or intervened in his official capacity in the business
or transactions of the Traders Manufacturing and Fishing Industries, Inc. In the case at bar,
the business of the corporation in which respondent participated has obviously no relation or
connection with his judicial office. The business of said corporation is not that kind where
respondent intervenes or takes part in his capacity as Judge of the Court of First Instance. As
was held in one case involving the application of Article 216 of the Revised Penal Code
which has a similar prohibition on public officers against directly or indirectly becoming
interested in any contract or business in which it is his official duty to intervene, "(I)t is not
enough to be a public official to be subject to this crime; it is necessary that by reason of his
office, he has to intervene in said contracts or transactions; and, hence, the official who
intervenes in contracts or transactions which have no relation to his office cannot commit this
crime.' (People vs. Meneses, C.A. 40 O.G. 11th Supp. 134, cited by Justice Ramon C.
Aquino; Revised Penal Code, p. 1174, Vol. 11 [1976]).
It does not appear also from the records that the aforesaid corporation gained any undue
advantage in its business operations by reason of respondent's financial involvement in it, or
that the corporation benefited in one way or another in any case filed by or against it in court.
It is undisputed that there was no case filed in the different branches of the Court of First
Instance of Leyte in which the corporation was either party plaintiff or defendant except Civil
Case No. 4234 entitled "Bernardita R. Macariola, plaintiff, versus Sinforosa O. Bales, et
al.,"wherein the complainant herein sought to recover Lot 1184-E from the aforesaid
corporation. It must be noted, however, that Civil Case No. 4234 was filed only on November
9 or 11, 1968 and decided on November 2, 1970 by CFI Judge Jose D. Nepomuceno when
respondent Judge was no longer connected with the corporation, having disposed of his
interest therein on January 31, 1967.
Furthermore, respondent is not liable under the same paragraph because there is no
provision in both the 1935 and 1973 Constitutions of the Philippines, nor is there an existing
law expressly prohibiting members of the Judiciary from engaging or having interest in any
lawful business.
It may be pointed out that Republic Act No. 296, as amended, also known as the Judiciary
Act of 1948, does not contain any prohibition to that effect. As a matter of fact, under Section
77 of said law, municipal judges may engage in teaching or other vocation not involving the
practice of law after office hours but with the permission of the district judge concerned.
Likewise, Article 14 of the Code of Commerce which prohibits judges from engaging in
commerce is, as heretofore stated, deemed abrogated automatically upon the transfer of
sovereignty from Spain to America, because it is political in nature.
Moreover, the prohibition in paragraph 5, Article 1491 of the New Civil Code against the
purchase by judges of a property in litigation before the court within whose jurisdiction they
perform their duties, cannot apply to respondent Judge because the sale of the lot in question
to him took place after the finality of his decision in Civil Case No. 3010 as well as his two
orders approving the project of partition; hence, the property was no longer subject of
litigation.
In addition, although Section 12, Rule XVIII of the Civil Service Rules made pursuant to the
Civil Service Act of 1959 prohibits an officer or employee in the civil service from engaging in
any private business, vocation, or profession or be connected with any commercial, credit,
agricultural or industrial undertaking without a written permission from the head of
department, the same, however, may not fall within the purview of paragraph h, Section 3 of
the Anti-Graft and Corrupt Practices Act because the last portion of said paragraph speaks of
a prohibition by the Constitution or law on any public officer from having any interest in any
business and not by a mere administrative rule or regulation. Thus, a violation of the
aforesaid rule by any officer or employee in the civil service, that is, engaging in private
business without a written permission from the Department Head may not constitute graft and
corrupt practice as defined by law.
On the contention of complainant that respondent Judge violated Section 12, Rule XVIII of
the Civil Service Rules, We hold that the Civil Service Act of 1959 (R.A. No. 2260) and the
Civil Service Rules promulgated thereunder, particularly Section 12 of Rule XVIII, do not
apply to the members of the Judiciary. Under said Section 12: "No officer or employee shall
engage directly in any private business, vocation, or profession or be connected with any
commercial, credit, agricultural or industrial undertaking without a written permission from the
Head of Department ..."
It must be emphasized at the outset that respondent, being a member of the Judiciary, is
covered by Republic Act No. 296, as amended, otherwise known as the Judiciary Act of 1948
and by Section 7, Article X, 1973 Constitution.
Under Section 67 of said law, the power to remove or dismiss judges was then vested in the
President of the Philippines, not in the Commissioner of Civil Service, and only on two
grounds, namely, serious misconduct and inefficiency, and upon the recommendation of the
Supreme Court, which alone is authorized, upon its own motion, or upon information of the
Secretary (now Minister) of Justice to conduct the corresponding investigation. Clearly, the
aforesaid section defines the grounds and prescribes the special procedure for the discipline
of judges.
And under Sections 5, 6 and 7, Article X of the 1973 Constitution, only the Supreme Court
can discipline judges of inferior courts as well as other personnel of the Judiciary.
It is true that under Section 33 of the Civil Service Act of 1959: "The Commissioner may, for
... violation of the existing Civil Service Law and rules or of reasonable office regulations, or
in the interest of the service, remove any subordinate officer or employee from the service,
demote him in rank, suspend him for not more than one year without pay or fine him in an
amount not exceeding six months' salary." Thus, a violation of Section 12 of Rule XVIII is a
ground for disciplinary action against civil service officers and employees.
However, judges cannot be considered as subordinate civil service officers or employees
subject to the disciplinary authority of the Commissioner of Civil Service; for, certainly, the
Commissioner is not the head of the Judicial Department to which they belong. The Revised
Administrative Code (Section 89) and the Civil Service Law itself state that the Chief Justice
is the department head of the Supreme Court (Sec. 20, R.A. No. 2260) [1959]); and under
the 1973 Constitution, the Judiciary is the only other or second branch of the government
(Sec. 1, Art. X, 1973 Constitution). Besides, a violation of Section 12, Rule XVIII cannot be
considered as a ground for disciplinary action against judges because to recognize the same
as applicable to them, would be adding another ground for the discipline of judges and, as
aforestated, Section 67 of the Judiciary Act recognizes only two grounds for their removal,
namely, serious misconduct and inefficiency.
Moreover, under Section 16(i) of the Civil Service Act of 1959, it is the Commissioner of Civil
Service who has original and exclusive jurisdiction "(T)o decide, within one hundred twenty
days, after submission to it, all administrative cases against permanent officers and
employees in the competitive service, and, except as provided by law, to have final authority
to pass upon their removal, separation, and suspension and upon all matters relating to the
conduct, discipline, and efficiency of such officers and employees; and prescribe standards,
guidelines and regulations governing the administration of discipline" (emphasis supplied).
There is no question that a judge belong to the non-competitive or unclassified service of the
government as a Presidential appointee and is therefore not covered by the aforesaid
provision. WE have already ruled that "... in interpreting Section 16(i) of Republic Act No.
2260, we emphasized that only permanent officers and employees who belong to the
classified service come under the exclusive jurisdiction of the Commissioner of Civil Service"
(Villaluz vs. Zaldivar, 15 SCRA 710,713 [1965], Ang-Angco vs. Castillo, 9 SCRA 619 [1963]).
Although the actuation of respondent Judge in engaging in private business by joining the
Traders Manufacturing and Fishing Industries, Inc. as a stockholder and a ranking officer, is
not violative of the provissions of Article 14 of the Code of Commerce and Section 3(h) of the
Anti-Graft and Corrupt Practices Act as well as Section 12, Rule XVIII of the Civil Service
Rules promulgated pursuant to the Civil Service Act of 1959, the impropriety of the same is
clearly unquestionable because Canon 25 of the Canons of Judicial Ethics expressly
declares that:
A judge should abstain from making personal investments in enterprises
which are apt to be involved in litigation in his court; and, after his accession
to the bench, he should not retain such investments previously made, longer
than a period sufficient to enable him to dispose of them without serious
loss. It is desirable that he should, so far as reasonably possible, refrain from
all relations which would normally tend to arouse the suspicion that such
relations warp or bias his judgment, or prevent his impartial attitude of mind
in the administration of his judicial duties. ...
WE are not, however, unmindful of the fact that respondent Judge and his wife had
withdrawn on January 31, 1967 from the aforesaid corporation and sold their respective
shares to third parties, and it appears also that the aforesaid corporation did not in anyway
benefit in any case filed by or against it in court as there was no case filed in the different
branches of the Court of First Instance of Leyte from the time of the drafting of the Articles of
Incorporation of the corporation on March 12, 1966, up to its incorporation on January 9,
1967, and the eventual withdrawal of respondent on January 31, 1967 from said corporation.
Such disposal or sale by respondent and his wife of their shares in the corporation only 22
days after the incorporation of the corporation, indicates that respondent realized that early
that their interest in the corporation contravenes the aforesaid Canon 25. Respondent Judge
and his wife therefore deserve the commendation for their immediate withdrawal from the
firm after its incorporation and before it became involved in any court litigation
III
With respect to the third and fourth causes of action, complainant alleged that respondent
was guilty of coddling an impostor and acted in disregard of judicial decorum, and that there
was culpable defiance of the law and utter disregard for ethics. WE agree, however, with the
recommendation of the Investigating Justice that respondent Judge be exonerated because
the aforesaid causes of action are groundless, and WE quote the pertinent portion of her
report which reads as follows:
The basis for complainant's third cause of action is the claim that respondent
associated and closely fraternized with Dominador Arigpa Tan who openly
and publicly advertised himself as a practising attorney (see Exhs. I, I-1 and
J) when in truth and in fact said Dominador Arigpa Tan does not appear in
the Roll of Attorneys and is not a member of the Philippine Bar as certified to
in Exh. K.
The "respondent denies knowing that Dominador Arigpa Tan was an
"impostor" and claims that all the time he believed that the latter was a bona
fide member of the bar. I see no reason for disbelieving this assertion of
respondent. It has been shown by complainant that Dominador Arigpa Tan
represented himself publicly as an attorney-at-law to the extent of putting up
a signboard with his name and the words "Attorney-at Law" (Exh. I and 1- 1)
to indicate his office, and it was but natural for respondent and any person
for that matter to have accepted that statement on its face value. "Now with
respect to the allegation of complainant that respondent is guilty of
fraternizing with Dominador Arigpa Tan to the extent of permitting his wife to
be a godmother of Mr. Tan's child at baptism (Exh. M & M-1), that fact even
if true did not render respondent guilty of violating any canon of judicial
ethics as long as his friendly relations with Dominador A. Tan and family did
not influence his official actuations as a judge where said persons were
concerned. There is no tangible convincing proof that herein respondent
gave any undue privileges in his court to Dominador Arigpa Tan or that the
latter benefitted in his practice of law from his personal relations with
respondent, or that he used his influence, if he had any, on the Judges of the
other branches of the Court to favor said Dominador Tan.
Of course it is highly desirable for a member of the judiciary to refrain as
much as possible from maintaining close friendly relations with practising
attorneys and litigants in his court so as to avoid suspicion 'that his social or
business relations or friendship constitute an element in determining his
judicial course" (par. 30, Canons of Judicial Ethics), but if a Judge does have
social relations, that in itself would not constitute a ground for disciplinary
action unless it be clearly shown that his social relations be clouded his
official actuations with bias and partiality in favor of his friends (pp. 403-405,
rec.).
In conclusion, while respondent Judge Asuncion, now Associate Justice of the Court of
Appeals, did not violate any law in acquiring by purchase a parcel of land which was in
litigation in his court and in engaging in business by joining a private corporation during his
incumbency as judge of the Court of First Instance of Leyte, he should be reminded to be
more discreet in his private and business activities, because his conduct as a member of the
Judiciary must not only be characterized with propriety but must always be above suspicion.
WHEREFORE, THE RESPONDENT ASSOCIATE JUSTICE OF THE COURT OF APPEALS
IS HEREBY REMINDED TO BE MORE DISCREET IN HIS PRIVATE AND BUSINESS
ACTIVITIES.
SO ORDERED.




























A.M. No. MTJ-02-1443 July 31, 2002
JOSIE BERIN and MERLY ALORRO, complainants, vs. JUDGE FELIXBERTO P. BARTE,
Municipal Circuit Trial Court, Hamtic, Antique, respondent.
MENDOZA, J.:
This is a complaint for grave and serious misconduct filed by Josie Berin and Merly Alorro
against Judge Felixberto P. Barte, Presiding Judge of the Municipal Circuit Trial Court
(MCTC), Hamtic, Tobias Fornier and Anini-y, Antique.
Complainants Josie Berin and Merly Alorro are real estate agents. They allege that sometime
during the last week of January 2001, respondent judge invited them to his office and asked
them to look for a vendor of a lot for sale in Antique because the Manila Mission of the
Church of Jesus Christ of Latter Day Saints, Inc. wanted to buy a site for its church in
Antique. Complainants claim that they found a vendor, Eleanor M. Checa-Santos, who
owned a lot consisting of 4,000 square meters, known as Lot 5555-B, Psd-06-000304 and
located in Barrio Caridad, Municipality of Now, Hamtic, Antique, which she was willing to sell;
that they told respondent judge about the lot; that respondent judge informed them three
days later that the Church was willing to pay P2.3 million for the lot; that respondent judge
agreed that complainants would each receive a commission of P100,000.00 in case the sale
took place; and that respondent judge would receive the money from the vendee and then
deliver the share of each of the complainants. Complainants said they wanted to have the
agreement in writing, but respondent judge refused, saying, "Do you have no trust in your
Judge Barte?" This is the reason there is no written agreement of the transaction between
them.
Complainants alleged that the sale was consummated and respondent judge received the
purchase price, but, despite demands made by them for the payment of their commission,
respondent judge gave them onlyP10,000.00 each, telling them to "take it or leave it." Hence,
this complaint.
In his Comment, dated August 23, 2001, and Supplemental Comment, dated August 27,
2001, respondent judge denied the charges against him. He denied that he ever invited the
complainants to his office in January 2001 and told them of the desire of the Church to buy a
lot in Antique. According to him, as early as January 25, 2001, the Church had already
purchased the same land described in the complaint and the vendee had already paid 50%
of the sale price to the vendor, as evidenced by a Closing Certificate showing that the
payment took place at the Metrobank, San Jose, Antique Branch on said date. Complainants
said the Deed of Sale was notarized on February 12, 2001.
Respondent judge likewise denied that he agreed to pay complainants P100,000.00 each as
commission for the sale. But he said that, sometime in November 1999, complainant Merly
Alorro, whom he considered his friend, learned from complainant Josie Berin that the lot in
question was up for sale, and Alorro told him about it. Based on such information, respondent
judge said he was able to facilitate the sale of the land after almost two (2) years of hard
work. Since he was able to realize some amount from the sale, he decided to give
complainants a share for the information they gave him, although they never contributed to
the success of the transaction. He gave complainant Berin P7,000.00 and Merly
Alorro P12,000.00.
Respondent judge contended that he cannot be held liable in this administrative proceeding
since the act complained of does not pertain to the performance of his official function as
judge. He further contended that the case of Teofilo Gil v. Eufronio Son,
1
which involved the
dismissal of a judge for refusing to acknowledge and repay a loan of P15,000.00 which was
acquired in return for a favor for employment, is inapplicable to this case because his
transaction was an open and honest one, compared to the "secret deal" involved in
the Gil case.
The Office of the Court Administrator (OCA) agrees that respondent judge cannot be held
liable for refusing to honor his obligation under the alleged contract on the ground that the
same has no relation to his official duties as a judge and does not amount either to
maladministration or willful intentional neglect and failure to discharge the duties of a judge.
However, it believes that respondent is liable for violation of Canon 5, Rule 5.02 of the Code
of Judicial Conduct and recommends accordingly that he be fined P5,000.00.
The recommendation is on the main well taken.
The peoples confidence in the judicial system is founded not only on the competence and
diligence of the members of the bench, but also on their integrity and moral uprightness. He
must not only be honest but also appear to be so. He must not only be a "good judge," he
must also appear to be a "good person."
2

Whether the sale of the property was effected through the efforts of complainants making
them entitled to a commission is a matter that should be threshed out in a judicial proceeding.
Our concern in this case is whether respondent judge committed an impropriety in acting as a
broker in the sale of a real estate, for which he admits receiving a commission.
Article 14 of the Code of Commerce prohibits members of the judiciary and prosecutors from
engaging in commerce within their jurisdiction. It provides:
Art. 14. The following cannot engage in commerce, either in person or by proxy, nor
can they hold any office or have any direct, administrative, or financial intervention in
commercial or industrial companies within the limits of the districts, provinces, or
towns in which they discharge their duties:
1. Justices of the Supreme Court, judges and officials of the department of public
prosecution in active service. This provision shall not be applicable to mayors,
municipal judges, and municipal prosecuting attorneys nor those who by chance are
temporarily discharging the functions of judge or prosecuting attorney.
. . . .
5. Those who by virtue of laws or special provisions may not engage in commerce in
a determinate territory.
However, in Macaruta v. Asuncion,
3
it was held that Art. 14 is in the nature of political law and
since it was extended to this country by Spain it was necessarily abrogated upon the change
of sovereignty from Spain to the United States. Nevertheless, the Court admonished a judge
who had been found to have engaged in business "to be more discreet in his private and
business activities, because his conduct as a member of the Judiciary must not only be
characterized by propriety but must always be above suspicion."
4

After the decision in Macariola v. Asuncion, this Court adopted the Code of Judicial Conduct,
which took effect on October 20, 1989, the pertinent provision of which states:
Rule 5.02. A judge shall refrain from financial and business dealings that tend to
reflect adversely on the courts impartiality, interfere with the proper performance of
judicial activities, or increase involvement with lawyers or persons likely to come
before the court. A judge should so manage investments and other financial interests
as to minimize the number of cases giving grounds for disqualification.
This provision thus supplies the void left by the abrogation of Art. 14 of the Spanish Code of
Commerce. Indeed, it is not good for judges to engage in business except only to the extent
allowed by Rule 5.03 of the Code of Judicial Conduct which provides:
Subject to the provisions of the preceding rule, a judge may hold and manage
investments but should not serve as an officer, director, manager, advisor, or
employee of any business except as director of a family business of the judge.
As the OCA observed:
By allowing himself to act as agent in the sale of the subject property, respondent
judge has increased the possibility of his disqualification to act as an impartial judge
in the event that a dispute involving the said contract of sale arises. Also, the
possibility that the parties to the sale might plead before his court is not remote and
his business dealings with them might [not only] create suspicion as to his fairness
but also to [his ability to] render it in a manner that is free from any suspicion as to its
fairness and impartiality, and also as to the judges integrity (Martinez vs. Gironella,
65 SCRA 245). One who occupies an exalted position in the administration of justice
must pay a high price for the honor bestowed upon him, for his private as well as his
official conduct must at all times be free from the appearance of impropriety (Jugueta
vs. Boncaros, 60 SCRA 27).
A similar complaint is pending before this Court against respondent judge arising from the
sale, also to the Manila Mission Church of Jesus Christ of Latter Day Saints, Inc., of three
pieces of real estate in Antique, one of which is the property owned by Eleanor Checa-
Santos involved in this case. The complainant there is Editha O. Catbagan.
5
This case
appears to be the first offense of respondent judge. Since that case is still pending
investigation, it cannot be considered in fixing the penalty in this case.
WHEREFORE, respondent Judge Felixberto P. Barte is found GUILTY of violation of Canon
5.02 of the Code of Judicial Conduct and, considering this to be his first offense, is hereby
FINED in the amount of P2,000.00, with the ADMONITION to him to be more discreet and
prudent in his private dealings as in his judicial duties. A repetition of a similar infraction will
be sanctioned more severely.
SO ORDERED.




G.R. No. L-2880 December 4, 1906
FRANK S. BOURNS, plaintiff-appellee, vs. D. M. CARMAN, ET AL., defendants-appellants.
MAPA, J.:
The plaintiff in this action seeks to recover the sum of $437.50, United Stated currency,
balance due on a contract for the sawing of lumber for the lumber yard of Lo-Chim-Lim. the
contract relating to the said work was entered into by the said Lo-Chim-Lim, acting as in his
own name with the plaintiff, and it appears that the said Lo-Chim-Lim personally agreed to
pay for the work himself. The plaintiff, however, has brought this action against Lo-Chim-Lim
and his codefendants jointly, alleging that, at the time the contract was made, they were
the joint proprietors and operators of the said lumber yard engaged in the purchase and sale
of lumber under the name and style of Lo-Chim-Lim. Apparently the plaintiff tries to show by
the words above italicized that the other defendants were the partners of Lo-Chim-Lim in the
said lumber-yard business.lawphil.net
The court below dismissed the action as to the defendants D. M. Carman and Fulgencio Tan-
Tongco on the ground that they were not the partners of Lo-Chim-Lim, and rendered
judgment against the other defendants for the amount claimed in the complaint with the costs
of proceedings. Vicente Palanca and Go-Tauco only excepted to the said judgment, moved
for a new trial, and have brought the case to this court by bill of exceptions.
The evidence of record shows, according to the judgment of the court, "That Lo-Chim-Lim
had a certain lumber yard in Calle Lemery of the city of Manila, and that he was the manager
of the same, having ordered the plaintiff to do some work for him at his sawmill in the city of
Manila; and that Vicente Palanca was his partner, and had an interest in the said business as
well as in the profits and losses thereof . . .," and that Go-Tuaco received part of the earnings
of the lumber yard in the management of which he was interested.
The court below accordingly found that "Lo-Chim-Lim, Vicente Palanca, Go-Tuaco had a
lumber yard in Calle Lemmery of the city of Manila in the year 1904, and participated in the
profits and losses of business and that Lo-Chim-Lim was managing partner of the said
lumber yard." In other words, coparticipants with the said Lo-Chim-Lim in the business in
question.
Although the evidence upon this point as stated by the by the however, that is plainly and
manifestly in conflict with the above finding of that court. Such finding should therefore be
sustained. lawphil.net
The question thus raised is, therefore, purely one of law and reduces itself to determining the
real legal nature of the participation which the appellants had in Lo-Chim-Lim's lumber yard,
and consequently their liability toward the plaintiff, in connection with the transaction which
gave rise to the present suit.
It seems that the alleged partnership between Lo-Chim-Lim and the appellants was formed
by verbal agreement only. At least there is no evidence tending to show that the said
agreement was reduced to writing, or that it was ever recorded in a public instrument.
Moreover, that partnership had no corporate name. The plaintiff himself alleges in his
complaint that the partnership was engaged in business under the name and style of Lo-
Chim-Lim only, which according to the evidence was the name of one of the defendants. On
the other hand, and this is very important, it does not appear that there was any mutual
agreement, between the parties, and if there were any, it has not been shown what the
agreement was. As far as the evidence shows it seems that the business was conducted by
Lo-Chim-Lim in his own name, although he gave to the appellants a share was has been
shown with certainty. The contracts made with the plaintiff were made by Lo-Chim-Lim
individually in his own name, and there is no evidence that the partnership over contracted in
any other form. Under such circumstances we find nothing upon which to consider this
partnership other than as a partnership of cuentas en participacion. It may be that, as a
matter of fact, it is something different, but a simple business and scant evidence introduced
by the partnership We see nothing, according to the evidence, but a simple business
conducted by Lo-Chim-Lim exclusively, in his own name, the names of other persons
interested in the profits and losses of the business nowhere appearing. A partnership
constituted in such a manner, the existence of which was only known to those who had an
interest in the same, being no mutual agreements between the partners and without a
corporate name indicating to the public in some way that there were other people besides the
one who ostensibly managed and conducted the business, is exactly the accidental
partnership of cuentas en participacion defined in article 239 of the Code of Commerce.
Those who contract with the person under whose name the business of such partnership
of cuentas en participacion is conducted, shall have only a right of action against such person
and not against the other persons interested, and the latter, on the other hand, shall have no
right of action against the third person who contracted with the manager unless such
manager formally transfers his right to them. (Art 242 of the code Of Commerce.) It follows,
therefore that the plaintiff has no right to demand from the appellants the payment of the
amount claimed in the complaint, as Lo-Chim-Lim was the only one who contracted with him.
the action of the plaintiff lacks, therefore, a legal foundation and should be accordingly
dismissed.
The judgment appealed from this hereby reversed and the appellants are absolved of the
complaint without express provisions as to the costs of both instances. After the expiration of
twenty days let judgment be entered in accordance herewith, and ten days thereafter the
cause be remanded to the court below for execution. So ordered.































































G.R. No. 105395 December 10, 1993
BANK OF AMERICA, NT & SA, petitioners, vs. COURT OF APPEALS, INTER-RESIN
INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE
DOE, respondents.
VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has found the distressed parties coming to
court as adversaries in seeking a definition of their respective rights or liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered mail
an Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya,
Samyaek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of
US$2,782,000.00 to cover the sale of plastic ropes and "agricultural files," with the petitioner
as advising bank and private respondent Inter-Resin Industrial Corporation as beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing
and transmitting, along with the bank's communication, the latter of credit. Upon receipt of the
letter-advice with the letter of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America
to have the letter of credit confirmed. The bank did not. Reynaldo Dueas, bank employee in
charge of letters of credit, however, explained to Atty. Tanay that there was no need for
confirmation because the letter of credit would not have been transmitted if it were not
genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the
letter of credit by submitting to Bank of America invoices, covering the shipment of 24,000
bales of polyethylene rope to General Chemicals valued at US$1,320,600.00, the
corresponding packing list, export declaration and bill of lading. Finally, after being satisfied
that Inter-Resin's documents conformed with the conditions expressed in the letter of credit,
Bank of America issued in favor of Inter-Resin a Cashier's Check for P10,219,093.20, "the
Peso equivalent of the draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting the
costs for documentary stamps, postage and mail issuance." 1 The check was picked up by
Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of America
wrote Bank of Ayudhya advising the latter of the availment under the letter of credit and
sought the corresponding reimbursement therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for
the second availment under the same letter of credit consisting of a packing list, bill of lading,
invoices, export declaration and bills in set, evidencing the second shipment of goods.
Immediately upon receipt of a telex from the Bank of Ayudhya declaring the letter of credit
fraudulent, 2 Bank of America stopped the processing of Inter-Resin's documents and sent a
telex to its branch office in Bangkok, Thailand, requesting assistance in determining the
authenticity of the letter of credit. 3 Bank of America kept Inter-Resin informed of the
developments. Sensing a fraud, Bank of America sought the assistance of the National
Bureau of Investigation (NBI). With the help of the staff of the Philippine Embassy at
Bangkok, as well as the police and customs personnel of Thailand, the NBI agents, who were
sent to Thailand, discovered that the vans exported by Inter-Resin did not contain ropes but
plastic strips, wrappers, rags and waste materials. Here at home, the NBI also investigated
Inter-Resin's President Francisco Trajano and Executive Vice President Barcelina Tio, who,
thereafter, were criminally charged for estafa through falsification of commercial documents.
The case, however, was eventually dismissed by the Rizal Provincial Fiscal who found
no prima facie evidence to warrant prosecution.
Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso equivalent of
the draft for US$1,320,600.00 on the partial availment of the now disowned letter of credit.
On the other hand, Inter-Resin claimed that not only was it entitled to retain P10,219,093.20
on its first shipment but also to the balance US$1,461,400.00 covering the second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that: (a) Bank of America
made assurances that enticed Inter-Resin to send the merchandise to Thailand; (b) the telex
declaring the letter of credit fraudulent was unverified and self-serving, hence, hearsay, but
even assuming that the letter of credit was fake, "the fault should be borne by the BA which
was careless and negligent" 5 for failing to utilize its modern means of communication to
verify with Bank of Ayudhya in Thailand the authenticity of the letter of credit before sending
the same to Inter-Resin; (c) the loading of plastic products into the vans were under strict
supervision, inspection and verification of government officers who have in their favor the
presumption of regularity in the performance of official functions; and (d) Bank of America
failed to prove the participation of Inter-Resin or its employees in the alleged fraud as, in fact,
the complaint for estafa through falsification of documents was dismissed by the Provincial
Fiscal of Rizal. 6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this present recourse by
petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it has warranted the
genuineness and authenticity of the letter of credit and, corollarily, whether it has acted
merely as an advising bank or as a confirming bank; (b) whether Inter-Resin has actually
shipped the ropes specified by the letter of credit; and (c) following the dishonor of the letter
of credit by Bank of Ayudhya, whether Bank of America may recover against Inter-Resin
under the draft executed in its partial availment of the letter of credit. 8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the
issue of being only an advising bank; (b) the findings of the trial court that the ropes have
actually been shipped is binding on the Court; and, (c) Bank of America cannot recover from
Inter-Resin because the drawer of the letter of credit is the Bank of Ayudhya and not Inter-
Resin.
If only to understand how the parties, in the first place, got themselves into the mess, it may
be well to start by recalling how, in its modern use, a letter of credit is employed in trade
transactions.
A letter of credit is a financial device developed by merchants as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a
seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have
control of the goods before paying. 9 To break the impasse, the buyer may be required to
contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the latter of
credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon
their presentment simultaneously with the tender of documents required by the letter of
credit. 10 The buyer and the seller agree on what documents are to be presented for
payment, but ordinarily they are documents of title evidencing or attesting to the shipment of
the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer and in the process
secures the required shipping documents or documents of title. To get paid, the seller
executes a draft and presents it together with the required documents to the issuing bank.
The issuing bank redeems the draft and pays cash to the seller if it finds that the documents
submitted by the seller conform with what the letter of credit requires. The bank then obtains
possession of the documents upon paying the seller. The transaction is completed when the
buyer reimburses the issuing bank and acquires the documents entitling him to the goods.
Under this arrangement, the seller gets paid only if he delivers the documents of title over the
goods, while the buyer acquires said documents and control over the goods only after
reimbursing the bank.
What characterizes letters of credit, as distinguished from other accessory contracts, is the
engagement of the issuing bank to pay the seller of the draft and the required shipping
documents are presented to it. In turn, this arrangement assures the seller of prompt
payment, independent of any breach of the main sales contract. By this so-called
"independence principle," the bank determines compliance with the letter of credit only by
examining the shipping documents presented; it is precluded from determining whether the
main contract is actually accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of credit
and obliges himself to reimburse the issuing bank upon receipts of the documents of title; (b)
the bank issuing the letter of credit, 13 which undertakes to pay the seller upon receipt of the
draft and proper document of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, 14 who in compliance with the contract of sale ships the
goods to the buyer and delivers the documents of title and draft to the issuing bank to recover
payment.
The number of the parties, not infrequently and almost invariably in international trade
practice, may be increased. Thus, the services of an advising (notifying) bank 15 may be
utilized to convey to the seller the existence of the credit; or, of a confirming bank 16 which
will lend credence to the letter of credit issued by a lesser known issuing bank; or, of apaying
bank, 17 which undertakes to encash the drafts drawn by the exporter. Further, instead of
going to the place of the issuing bank to claim payment, the buyer may approach another
bank, termed the negotiating bank, 18 to have the draft discounted.
Being a product of international commerce, the impact of this commercial instrument
transcends national boundaries, and it is thus not uncommon to find a dearth of national law
that can adequately provide for its governance. This country is no exception. Our own Code
of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof.
It is no wonder then why great reliance has been placed on commercial usage and practice,
which, in any case, can be justified by the universal acceptance of the autonomy of contract
rules. The rules were later developed into what is now known as the Uniform Customs and
Practice for Documentary Credits ("U.C.P.") issued by the International Chamber of
Commerce. It is by no means a complete text by itself, for, to be sure, there are other
principles, which, although part of lex mercatoria, are not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the extent
of their pertinency, the application in our jurisdiction of this international commercial credit
regulatory set of rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said that the
observances of the U.C.P. is justified by Article 2 of the Code of Commerce which expresses
that, in the absence of any particular provision in the Code of Commerce, commercial
transactions shall be governed by usages and customs generally observed. We have further
observed that there being no specific provisions which govern the legal complexities arising
from transactions involving letters of credit not only between or among banks themselves but
also between banks and the seller or the buyer, as the case may be, the applicability of the
U.C.P. is undeniable.
The first issue raised with the petitioner, i.e., that it has in this instance merely been advising
bank, is outrightly rejected by Inter-Resin and is thus sought to be discarded for having been
raised only on appeal. We cannot agree. The crucial point of dispute in this case is whether
under the "letter of credit," Bank of America has incurred any liability to the "beneficiary"
thereof, an issue that largely is dependent on the bank's participation in that transaction; as a
mere advising or notifying bank, it would not be liable, but as a confirming bank, had this
been the case, it could be considered as having incurred that liability. 22
In Insular Life Assurance Co. Ltd. Employees Association Natu vs. Insular Life Assurance
Co., Ltd., 23 the Court said: Where the issues already raised also rest on other issues not
specifically presented, as long as the latter issues bear relevance and close relation to the
former and as long as they arise from the matters on record, the court has the authority to
include them in its discussion of the controversy and to pass upon them just as well. In brief,
in those cases where questions not particularly raised by the parties surface as necessary for
the complete adjudication of the rights and obligations of the parties, the interests of justice
dictate that the court should consider and resolve them. The rule that only issues or theories
raised in the initial proceedings may be taken up by a party thereto on appeal should only
refer to independent, not concomitant matters, to support or oppose the cause of action or
defense. The evil that is sought to be avoided, i.e., surprise to the adverse party, is in reality
not existent on matters that are properly litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only
been an advising, not confirming, bank, and this much is clearly evident, among other things,
by the provisions of the letter of credit itself, the petitioner bank's letter of advice, its request
for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That
Bank of America has asked Inter-Resin to submit documents required by the letter of credit
and eventually has paid the proceeds thereof, did not obviously make it a confirming bank.
The fact, too, that the draft required by the letter of credit is to be drawn under the account of
General Chemicals (buyer) only means the same had to be presented to Bank of Ayudhya
(issuing bank) for payment. It may be significant to recall that the letter of credit is an
engagement of the issuing bank, not the advising bank, to pay the draft.
No less important is that Bank of America's letter of 11 March 1981 has expressly stated that
"[t]he enclosure issolely an advise of credit opened by the abovementioned correspondent
and conveys no engagement by us." 24This written reservation by Bank of America in limiting
its obligation only to being an advising bank is in consonance with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not incur any obligation more than just
notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of
credit. 25 The bare statement of the bank employees, aforementioned, in responding to the
inquiry made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of
credit certainly did not have the effect of novating the letter of credit and Bank of America's
letter of advise, 26 nor can it justify the conclusion that the bank must now assume total
liability on the letter of credit. Indeed, Inter-Resin itself cannot claim to have been all that free
from fault. As the seller, the issuance of the letter of credit should have obviously been a
great concern to it. 27 It would have, in fact, been strange if it did not, prior to the letter of
credit, enter into a contract, or negotiated at the every least, with General Chemicals. 28 In
the ordinary course of business, the perfection of contract precedes the issuance of a letter of
credit.
Bringing the letter of credit to the attention of the seller is the primordial obligation of an
advising bank. The view that Bank of America should have first checked the authenticity of
the letter of credit with bank of Ayudhya, by using advanced mode of business
communications, before dispatching the same to Inter-Resin finds no real support in U.C.P.
Article 18 of the U.C.P. states that: "Banks assume no liability or responsibility for the
consequences arising out of the delay and/or loss in transit of any messages, letters or
documents, or for delay, mutilation or other errors arising in the transmission of any
telecommunication . . ." As advising bank, Bank of America is bound only to check the
"apparent authenticity" of the letter of credit, which it did. 29 Clarifying its meaning, Webster's
Ninth New Collegiate Dictionary 30 explains that the word "APPARENT suggests appearance
to unaided senses that is not or may not be borne out by more rigorous examination or
greater knowledge."
May Bank of America then recover what it has paid under the letter of credit when the
corresponding draft for partial availment thereunder and the required documents were later
negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is
commonly referred to as a discounting arrangement. This time, Bank of America has acted
independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting
the documents directly to Bank of Ayudhya to recover payment. (Inter-Resin, of course, could
have chosen other banks with which to negotiate the draft and the documents.) As a
negotiating bank, Bank of America has a right to recourse against the issuer bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a
contingent liability thereon. 31
While bank of America has indeed failed to allege material facts in its complaint that might
have likewise warranted the application of the Negotiable Instruments Law and possible then
allowed it to even go after the indorsers of the draft, this failure, 32/ nonetheless, does not
preclude petitioner bank's right (as negotiating bank) of recovery from Inter-Resin itself. Inter-
Resin admits having received P10,219,093.20 from bank of America on the letter of credit
and in having executed the corresponding draft. The payment to Inter-Resin has given, as
aforesaid, Bank of America the right of reimbursement from the issuing bank, Bank of
Ayudhya which, in turn, would then seek indemnification from the buyer (the General
Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit, however, Bank
of America may now turn to Inter-Resin for restitution.
Between the seller and the negotiating bank there is the usual relationship
existing between a drawer and purchaser of drafts. Unless drafts drawn in
pursuance of the credit are indicated to be without recourse therefore, the
negotiating bank has the ordinary right of recourse against the seller in the
event of dishonor by the issuing bank . . . The fact that the correspondent
and the negotiating bank may be one and the same does not affect its rights
and obligations in either capacity, although a special agreement is always a
possibility . . . 33
The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste instead of its
products, is really of no consequence. In the operation of a letter of credit, the involved banks
deal only with documents and not on goods described in those documents. 34
The other issues raised in then instant petition, for instance, whether or not Bank of Ayudhya
did issue the letter of credit and whether or not the main contract of sale that has given rise to
the letter of credit has been breached, are not relevant to this controversy. They are matters,
instead, that can only be of concern to the herein parties in an appropriate recourse against
those, who, unfortunately, are not impleaded in these proceedings.
In fine, we hold that
First, given the factual findings of the courts below, we conclude that petitioner Bank of
America has acted merely as a notifying bank and did not assume the responsibility of
a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's partial
availment as beneficiary of the letter of credit which has been disowned by the alleged issuer
bank.
No judgment of civil liability against the other defendants, Francisco Trajano and other
unidentified parties, can be made, in this instance, there being no sufficient evidence to
warrant any such finding.
WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Industrial
Corporation is ordered to refund to petitioner Bank of America NT & SA the amount of
P10,219,093.20 with legal interest from the filing of the complaint until fully paid.
No costs.
SO ORDERED.









G.R. No. L-10195 November 29, 1958
BELMAN COMPAIA INCORPORADA, plaintiff-appellee, vs. CENTRAL BANK OF THE
PHILIPPINES, defendant-appellant.
PADILLA, J.:
In a complaint filed on 18 March 1955 in the Court of First Instance of Manila the plaintiff, a
corporation, alleges that having been a successful bidder to supply the Republic of the
Philippines with 1,000 reams of onion skin paper, on 21 September 1950 it applied to the
Philippine National Bank for a letter of credit in the sum of $4,300, United States currency, in
favor of Getz Bros. & Co., San Francisco, California, U.S.A., to pay for such reams, and the
Philippine National Bank approved and granted the application for the letter of credit; that the
Philippine National Bank, through the Crocker First National Bank, its correspondent in the
United States, paid to the payee the sum of $4,300, United States Currency; that on 26 April
1951 when the plaintiff paid its account to the Philippine National Bank in Manila, the
defendant, pursuant to Republic Act No. 601, as amended, assessed and collected from it
17% special excise tax on the amount in Philippine peso of foreign exchange sold, amounting
to P1,474.70 which the plaintiff paid to the defendant under protest for the reason that as the
letter of credit was approved and granted on 21 September 1950, or before 28 March 1951,
the date of the enactment or approval of Republic Act No. 601, as amended, the amount of
foreign exchange sold by the defendant bank by the letter of credit to the plaintiff corporation
was not subject to such excise tax; that on 28 December 1954 the plaintiff corporation made
a demand in writing upon the defendant bank for the refund of the aforesaid sum; and that
notwithstanding repeated demands the defendant bank refused to make the refund. The
plaintiff corporation prays that the 17% special excise tax assessed and collected from it on
the amount in Philippine peso of foreign exchange sold on 21 September 1950, be declared
illegal; and that the defendant bank be ordered to refund to it the sum of P1,474.70 illegally
assessed and collected (civil No. 25708).
On 25 March 1955 the defendant bank moved for the dismissal of the complaint on the
ground that
1. The assessment and collection from the plaintiff of the sum of P1,474.70 as 17%
special excise tax is in accordance with law, because it was a tax collected after
March 28, 1951, when the 17% special excise tax law went into effect, when the
plaintiff paid to the Philippine National Bank on April 25, 1951 the peso equivalent of
the draft in U. S. dollars accepted by the plaintiff.
2. The transaction in which foreign exchange was sold subject to the 17% excise tax
is not one of those exempted or refundable under Section 2, 3, 4, and 8 of said 17%
tax law, Republic Act No. 601.
On 1 April 1955 the plaintiff corporation objected to the motion to dismiss; on 5 April the
defendant bank filed a reply thereto; and on 11 April the plaintiff a "rejoinder to defendant's
reply." On 19 April the Court denied the motion to dismiss.
On 28 April 1955 the defendant filed its answer reiterating that although the plaintiff
corporation had applied for and been granted a commercial letter of credit on 21 September
1950, before the effectivity of Republic Act No. 601, as amended, no sale of foreign
exchange took place on that date, because such sale actually took place on 26 April 1951,
when the plaintiff paid to the Philippine National Bank the amount in Philippine currency of
the foreign exchange sold. Hence it was subject to the 17% special excise tax.
After hearing and filing by the parties of their respective memoranda, the Court rendered
judgment ordering the defendant bank to refund to the plaintiff corporation the sum of
P1,474.70, with legal interest thereon from 25 April 1951 until fully paid and to pay the costs.
A motion to set aside the judgment thus rendered was denied. The defendant has appealed.
Foreign exchange is the conversion of an amount of money or currency of one country into
an equivalent amount of money or currency of another.1 The appellant claims that the grant
or approval on an application for a letter of credit for an amount payable in foreign currency is
only an executory contract, in the sense that until payment, return, or settlement of the
amount paid and delivered by, or collected from, the bank in foreign currency be made by the
debtor, the contract is not executed or consummated. Hence, if on the date of payment by
the debtor to the bank of the amount of foreign exchange sold the law imposing the excise
tax was already in force, such tax must be collected. On the other hand, the appellee
contends that, upon the approval or grant of an application for a letter of credit for an amount
payable in foreign currency, the contract is perfected or consummated. Hence, if on the date
of such approval or grant the law imposing the excise tax was not yet in existence, such tax
can not be assessed and collected. Both contentions cannot be sustained.
An irrevocable letter of credit granted by a bank, which authorizes a creditor in a foreign
country to draw upon a debtor of another and to negotiate the draft through the agent or
correspondent bank or any bank in the country of the creditor, is a consummated contract,
when the agent or correspondent bank or any bank in the country of the creditor pays or
delivers to the latter the amount in foreign currency, as authorized by the bank in the country
of the debtor in compliance with the letter of credit granted by it. It is the date of the payment
of the amount in foreign currency to the creditor in his country by the agent or correspondent
bank of the bank in the country of the debtor that turns from executory to executed or
consummated contract. It is not the date of payment by the debtor to the bank in his country
of the amount of foreign exchange sold that makes the contract executed or consummated,
because the bank may grant the debtor extension of time to pay such debt. The contention of
the appellee that as there was a meeting of the minds and of contracting parties as to price
and object of the contract2upon the approval or grant of an application for a letter of credit for
an amount payable in payable in foreign currency, the contract was a valid and executed
contract of sale of foreign exchange. True, there was such a contract in the sense that one
party who has performed his part may compel the other to perform his.3 Still until payment be
made in foreign currency of the amount applied for in the letter of credit and approved and
granted by the bank, the same is not an executed or consummated contract. The payment of
the amount in foreign currency to the creditor by the bank or its agent or correspondent is
necessary to consummate the contract. Hence the date of such payment or delivery of the
amount in foreign currency to the creditor determines whether such amount of foreign
currency is subject to the tax imposed by the Government of the country where such letter of
credit was granted.
It appearing that the draft authorized by the letter of credit applied for by the appellee and
granted by the appellant must be drawn and presented or negotiated in San Francisco,
California, U.S.A., not later than 19 October 1950 (Exhibit H), it may be presumed that the
payment of $4,300 in favor of Getz Bros., Inc. in San Francisco, California, U.S.A., for the
account of the appellee was paid by the Crocker First National Bank, as agent or
correspondent of the Philippine National Bank, on or before 19 October 1950. Such being the
case, the excise tax at the rate of 17% on the amount to be paid by the appellant in Philippine
currency for the foreign exchange sold is not subject to such tax, because Republic Act No.
601 imposing such tax took effect only on 28 March 1951.4
The judgment appealed from is affirmed, without pronouncement as to costs.












































G.R. No. 94209 April 30, 1991
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING
CORPORATION), petitioner, vs. THE COURT OF APPEALS, and BERNARDO E.
VILLALUZ, respondents.
GUTIERREZ, JR., J.:p
This is a petition for review seeking the reversal of the decision of the Court of Appeals dated
June 29, 1990 which affirmed the decision of the Regional Trial Court of Rizal dated October
20, 1986 ordering the defendants Christiansen and the petitioner, to pay various sums to
respondent Villaluz, jointly and severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen
2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB.
After inspecting the logs, Christiansen issued purchase order No. 76171.
On the arrangements made and upon the instructions of the consignee, Hanmi Trade
Development, Ltd., de Santa Ana, California, the Security Pacific National Bank of Los
Angeles, California issued Irrevocable Letter of Credit No. IC-46268 available at sight in favor
of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the
instruction to the latter that it "forward the enclosed letter of credit to the beneficiary."
(Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is on Security Pacific National
Bank and that it be accompanied by the following documents:
1. Signed Commercial Invoice in four copies showing the number of the purchase
order and certifying that
a. All terms and conditions of the purchase order have been complied with
and that all logs are fresh cut and quality equal to or better than that
described in H.A. Christiansen's telex #201 of May 1, 1970, and that all logs
have been marked "BEV-EX."
b. One complete set of documents, including 1/3 original bills of lading was
airmailed to Consignee and Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise Broker.
c. One set of non-negotiable documents was airmailed to Han Mi Trade
Development Company and one set to Consignee and Parties to be advised
by Hans-Axel Christiansen, Ship and Merchandise Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to
be advised by Hans Axel Christiansen, showing Freight Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California
92711 and Han Mi Trade Development Company, Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating
that logs have been approved prior to shipment in accordance with terms and
conditions of corresponding purchase Order. (Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for
Documentary Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by
Christiansen. Before its loading, the logs were inspected by custom inspectors Nelo
Laurente, Alejandro Cabiao, Estanislao Edera from the Bureau of Customs (Records, Vol. I,
p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the Bureau of Forestry
(Records, Vol. I, pp. 16-17) all of whom certified to the good condition and exportability of the
logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate
receipt of the cargo which stated the same are in good condition (Records, Vol. I, p. 363).
However, Christiansen refused to issue the certification as required in paragraph 4 of the
letter of credit, despite several requests made by the private respondent.
Because of the absence of the certification by Christiansen, the Feati Bank and Trust
Company refused to advance the payment on the letter of credit.
The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without
the private respondent receiving any certification from Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the private
respondent to bring the matter before the Central Bank. In a memorandum dated August 16,
1971, the Central Bank ruled that:
. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3,
1971, in all log exports, the certification of the lumber inspectors of the
Bureau of Forestry . . . shall be considered final for purposes of negotiating
documents. Any provision in any letter of credit covering log exports
requiring certification of buyer's agent or representative that said logs have
been approved for shipment as a condition precedent to negotiation of
shipping documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi
Trade Development Company, to whom Christiansen sold the logs for the amount of $37.50
per cubic meter, for a net profit of $10 per cubic meter. Hanmi Trade Development Company,
on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute the certification
proved futile, Villaluz, on September 1, 1971, instituted an action for mandamus and specific
performance against Christiansen and the Feati Bank and Trust Company (now Citytrust)
before the then Court of First Instance of Rizal. The petitioner was impleaded as defendant
before the lower court only to afford complete relief should the court a quo order Christiansen
to execute the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of him under the Letter
of Credit;
2. Upon issuance of such certification, or, if the court should find it unnecessary,
FEATI BANK be ordered to accept negotiation of the Letter of Credit and make
payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left the Philippines
without informing the Court and his counsel. Hence, Villaluz, filed an amended complaint to
make the petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs
right to demand payment is absolute. Defendant CHRISTIANSEN having accepted
delivery of the logs by having them loaded in his chartered vessel the "Zenlin Glory"
and shipping them to the consignee, his buyer Han Mi Trade in Inchon, South Korea
(Art. 1585, Civil Code), his obligation to pay the purchase order had clearly arisen
and the plaintiff may sue and recover the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit
and with intent to defraud the plaintiff, reflected in and aggravated by, not only his
refusal to issue the certification that would have enabled without question the plaintiff
to negotiate the letter of credit, but his accusing the plaintiff in his answer of fraud,
intimidation, violence and deceit. These accusations said defendant did not attempt
to prove, as in fact he left the country without even notifying his own lawyer. It was to
the Court's mind a pure swindle.
The defendant Feati Bank and Trust Company, on the other hand, must be held
liable together with his (sic) co-defendant for having, by its wrongful act, i.e., its
refusal to negotiate the letter of credit in the absence of CHRISTIANSEN's
certification (in spite of the Central Bank's ruling that the requirement was illegal),
prevented payment to the plaintiff. The said letter of credit, as may be seen on its
face, is irrevocable and the issuing bank, the Security Pacific National Bank in Los
Angeles, California, undertook by its terms that the same shall be honored upon its
presentment. On the other hand, the notifying bank, the defendant Feati Bank and
Trust Company, by accepting the instructions from the issuing bank, itself assumed
the very same undertaking as the issuing bank under the terms of the letter of credit.
xxx xxx xxx
The Court likewise agrees with the plaintiff that the defendant BANK may also be
held liable under the principles and laws on both trust and estoppel. When the
defendant BANK accepted its role as the notifying and negotiating bank for and in
behalf of the issuing bank, it in effect accepted a trust reposed on it, and became a
trustee in relation to plaintiff as the beneficiary of the letter of credit. As trustee, it was
then duty bound to protect the interests of the plaintiff under the terms of the letter of
credit, and must be held liable for damages and loss resulting to the plaintiff from its
failure to perform that obligation.
Furthermore, when the defendant BANK assumed the role of a notifying and
negotiating BANK it in effect represented to the plaintiff that, if the plaintiff complied
with the terms and conditions of the letter of credit and presents the same to the
BANK together with the documents mentioned therein the said BANK will pay the
plaintiff the amount of the letter of credit. The Court is convinced that it was upon the
strength of this letter of credit and this implied representation of the defendant BANK
that the plaintiff delivered the logs to defendant CHRISTIANSEN, considering that
the issuing bank is a foreign bank with whom plaintiff had no business connections
and CHRISTIANSEN had not offered any other Security for the payment of the logs.
Defendant BANK cannot now be allowed to deny its commitment and liability under
the letter of credit:
A holder of a promissory note given because of gambling who indorses the same to
an innocent holder for value and who assures said party that the note has no legal
defect, is in estoppel from asserting that there had been an illegal consideration for
the note, and so, he has to pay its value. (Rodriguez v. Martinez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of defendant
CHRISTIANSEN as a condition precedent to negotiating the letter of credit, likewise
in the Court's opinion acted in bad faith, not only because of the clear declaration of
the Central Bank that such a requirement was illegal, but because the BANK, with all
the legal counsel available to it must have known that the condition was void since it
depended on the sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182,
Civil Code) (Rollo, pp. 29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private
respondent. The dispositive portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants
to pay the plaintiff, jointly and severally, the following sums:
a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time
payment is actually made, representing the purchase price of the logs;
b) P17,340.00, representing government fees and charges paid by plaintiff in
connection with the logs shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).
All three foregoing sums shall be with interest thereon at 12% per annum from
September 1, 1971, when the complaint was filed, until fully paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation expense.
(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or
on November 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the immediate execution of
the judgment on the ground that the appeal of the petitioner was frivolous and dilatory.
The trial court ordered the immediate execution of its judgment upon the private respondent's
filing of a bond.
The petitioner then filed a motion for reconsideration and a motion to suspend the
implementation of the writ of execution. Both motions were, however, denied. Thus, petitioner
filed before the Court of Appeals a petition forcertiorari and prohibition with preliminary
injunction to enjoin the immediate execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the
order of execution, the dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of
execution dated December 29, 1986, as well as his order dated January 14, 1987
denying the petitioner's urgent motion to suspend the writ of execution against its
properties are hereby annulled and set aside insofar as they are sought to be
enforced and implemented against the petitioner Feati Bank & Trust Company, now
Citytrust Banking Corporation, during the pendency of its appeal from the adverse
decision in Civil Case No. 15121. However, the execution of the same decision
against defendant Axel Christiansen did not appeal said decision may proceed
unimpeded. The Sheriff s levy on the petitioner's properties, and the notice of sale
dated January 13, 1987 (Annex M), are hereby annulled and set aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private respondent. The Court of
Appeals, in a resolution dated June 29, 1987 denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due
course. In its decision dated June 29, 1990, the Court of Appeals affirmed the decision of the
lower court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses" section of its answer
that it was the bank to negotiate the letter of credit issued by the Security Pacific
National Bank of Los Angeles, California. (Record, pp. 156, 157). Feati Bank did
notify Villaluz of such letter of credit. In fact, as such negotiating bank, even before
the letter of credit was presented for payment, Feati Bank had already made an
advance payment of P75,000.00 to Villaluz in anticipation of such presentment. As
the negotiating bank, Feati Bank, by notifying Villaluz of the letter of credit in behalf
of the issuing bank (Security Pacific), confirmed such letter of credit and made the
same also its own obligation. This ruling finds support in the authority cited by
Villaluz:
A confirmed letter of credit is one in which the notifying bank gives its assurance also
that the opening bank's obligation will be performed. In such a case, the notifying
bank will not simply transmit but will confirm the opening bank's obligation by making
it also its own undertaking, or commitment, or guaranty or obligation. (Ward &
Hatfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, p. 77).
Feati Bank argues further that it would be considered as the negotiating bank only
upon negotiation of the letter of credit. This stance is untenable. Assurance,
commitments or guaranties supposed to be made by notifying banks to the
beneficiary of a letter of credit, as defined above, can be relevant or meaningful only
with respect to a future transaction, that is, negotiation. Hence, even before actual
negotiation, the notifying bank, by the mere act of notifying the beneficiary of the
letter of credit, assumes as of that moment the obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the
latter's principal or client, i.e. Hans Axel-Christiansen. (sic) Such being the case,
when Christiansen refused to issue the certification, it was as though refusal was
made by Feati Bank itself. Feati Bank should have taken steps to secure the
certification from Christiansen; and, if the latter should still refuse to comply, to hale
him to court. In short, Feati Bank should have honored Villaluz's demand for payment
of his logs by virtue of the irrevocable letter of credit issued in Villaluz's favor and
guaranteed by Feati Bank.
3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which
contained the statement "Since Villaluz" draft was not drawn strictly in compliance
with the terms of the letter of credit, Feati Bank's refusal to negotiate it was justified,"
did not dispose of this question on the merits. In that case, the question involved was
jurisdiction or discretion, and not judgment. The quoted pronouncement should not
be taken as a preemptive judgment on the merits of the present case on appeal.
4. The original action was for "Mandamus and/or specific performance." Feati Bank
may not be a party to the transaction between Christiansen and Security Pacific
National Bank on the one hand, and Villaluz on the other hand; still, being guarantor
or agent of Christiansen and/or Security Pacific National Bank which had directly
dealt with Villaluz, Feati Bank may be sued properly on specific performance as a
procedural means by which the relief sought by Villaluz may be entertained. (Rollo,
pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal
is hereby dismissed. Costs against the petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE
ESTABLISHED FACTS AND INDEED, WENT AGAINST THE EVIDENCE AND
DECISION OF THIS HONORABLE COURT, THAT PETITIONER BANK IS LIABLE
ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS NON-
COMPLIANCE WITH THE TERMS THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD
THAT PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE
LETTER OF CREDIT, CONFIRMED SUCH CREDIT AND MADE THE SAME ALSO
ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN
IT AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a correspondent bank is to be held liable
under the letter of credit despite non-compliance by the beneficiary with the terms thereof?
The petition is impressed with merit.
It is a settled rule in commercial transactions involving letters of credit that the documents
tendered must strictly conform to the terms of the letter of credit. The tender of documents by
the beneficiary (seller) must include all documents required by the letter. A correspondent
bank which departs from what has been stipulated under the letter of credit, as when it
accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from
the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary
Thus the rule of strict compliance.
In the United States, commercial transactions involving letters of credit are governed by the
rule of strict compliance. In the Philippines, the same holds true. The same rule must also be
followed.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded
clearly on the rule of strict compliance.
We have heretofore held that these letters of credit are to be strictly complied with
which documents, and shipping documents must be followed as stated in the letter.
There is no discretion in the bank or trust company to waive any requirements. The
terms of the letter constitutes an agreement between the purchaser and the bank. (p.
743)
Although in some American decisions, banks are granted a little discretion to accept a faulty
tender as when the other documents may be considered immaterial or superfluous, this
theory could lead to dangerous precedents. Since a bank deals only with documents, it is not
in a position to determine whether or not the documents required by the letter of credit are
material or superfluous. The mere fact that the document was specified therein readily means
that the document is of vital importance to the buyer.
Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit
(U.C.P. for short) in the letter of credit resulted in the applicability of the said rules in the
governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in
the affirmative as to the applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the
U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the
Code of Commerce enunciates that in the absence of any particular provision in the Code of
Commerce, commercial transactions shall be governed by the usages and customs generally
observed.
There being no specific provision which governs the legal complexities arising from
transactions involving letters of credit not only between the banks themselves but also
between banks and seller and/or buyer, the applicability of the U.C.P. is undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
An irrevocable credit is a definite undertaking on the part of the issuing bank and
constitutes the engagement of that bank to the beneficiary and bona fide holders of
drafts drawn and/or documents presented thereunder, that the provisions for
payment, acceptance or negotiation contained in the credit will be duly
fulfilled, provided that all the terms and conditions of the credit are complied with.
An irrevocable credit may be advised to a beneficiary through another bank (the
advising bank) without engagement on the part of that bank, but when an issuing
bank authorizes or requests another bank to confirm its irrevocable credit and the
latter does so, such confirmation constitutes a definite undertaking of the confirming
bank. . . .
Article 7.
Banks must examine all documents with reasonable care to ascertain that they
appear on their face to be in accordance with the terms and conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which appear on their face
to be in accordance with the terms and conditions of a credit by a bank authorized to
do so, binds the party giving the authorization to take up documents and reimburse
the bank which has effected the payment, acceptance or negotiation. (Emphasis
Supplied)
Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if
the documents tendered to it are on their face in accordance with the terms and conditions of
the documentary credit. And since a correspondent bank, like the petitioner, principally deals
only with documents, the absence of any document required in the documentary credit
justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as
it is not its obligation to look beyond the documents. It merely has to rely on the
completeness of the documents tendered by the beneficiary.
In regard to the ruling of the lower court and affirmed by the Court of Appeals that the
petitioner is not a notifying bank but a confirming bank, we find the same erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed
credit. In its decision, the trial court ruled that the petitioner, in accepting the obligation to
notify the respondent that the irrevocable credit has been transmitted to the petitioner on
behalf of the private respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an irrevocable credit is not
synonymous with a confirmed credit. These types of letters have different meanings and the
legal relations arising from there varies. A credit may be an irrevocable credit and at the
same time a confirmed credit or vice-versa.
An irrevocable credit refers to the duration of the letter of credit. What is simply means is that
the issuing bank may not without the consent of the beneficiary (seller) and the applicant
(buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right
to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of
obligation assumed by the correspondent bank. In this case, the correspondent bank gives
an absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as
its own according to the terms and conditions of the credit. (Agbayani, Commercial Laws of
the Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the
correspondent bank in accepting the instructions of the issuing bank has also confirmed the
letter of credit. Another error which the lower court and the Court of Appeals made was to
confuse the obligation assumed by the petitioner.
In commercial transactions involving letters of credit, the functions assumed by a
correspondent bank are classified according to the obligations taken up by it. The
correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to notify
and/or transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc.
v. Public National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import
Banking, p. 292, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). A
negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft
under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller. (Scanlon v. First
National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293,
cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the
seller and its liability is a primary one as if the correspondent bank itself had issued the letter
of credit. (Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of
the Philippines, Vol. 1, p. 77)
In this case, the letter merely provided that the petitioner "forward the enclosed original credit
to the beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid instruction to the
petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the
petitioner is only a notifying bank and not a confirming bank as ruled by the courts below.
If the petitioner was a confirming bank, then a categorical declaration should have been
stated in the letter of credit that the petitioner is to honor all drafts drawn in conformity with
the letter of credit. What was simply stated therein was the instruction that the petitioner
forward the original letter of credit to the beneficiary.
Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or
transmit the documentary of credit to the private respondent and its obligation ends there.
The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone
does not imply that the notifying bank promises to accept the draft drawn under the
documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he
assumes no liability. It follows therefore that when the petitioner refused to negotiate with the
private respondent, the latter has no cause of action against the petitioner for the
enforcement of his rights under the letter. (See Kronman and Co., Inc. v. Public National
Bank of New York, supra)
In order that the petitioner may be held liable under the letter, there should be proof that the
petitioner confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that the petitioner has
confirmed the letter of credit. The only evidence in this case, and upon which the private
respondent premised his argument, is the P75,000.00 loan extended by the petitioner to him.
The private respondent relies on this loan to advance his contention that the letter of credit
was confirmed by the petitioner. He claims that the loan was granted by the petitioner to him,
"in anticipation of the presentment of the letter of credit."
The proposition advanced by the private respondent has no basis in fact or law. That the loan
agreement between them be construed as an act of confirmation is rather far-fetched, for it
depends principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance on the part of the petitioner
that it will undertake the issuing bank's obligation as its own. Verily, the loan agreement it
entered into cannot be categorized as an emphatic assurance that it will carry out the issuing
bank's obligation as its own.
The loan agreement is more reasonably classified as an isolated transaction independent of
the documentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private respondent
in anticipation that it would later be paid by the latter upon the receipt of the letter. Yet, we
would have no basis to rule definitively that such "act" should be construed as an act of
confirmation.
The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin
Glory" and the only way to satisfy this need was to borrow money from the petitioner which
the latter granted. From these circumstances, a logical conclusion that can be gathered is
that the letter of credit was merely to serve as a collateral.
At the most, when the petitioner extended the loan to the private respondent, it assumed the
character of a negotiating bank. Even then, the petitioner will still not be liable, for a
negotiating bank before negotiation has no contractual relationship with the seller.
The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship
between the seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no
contractual duty toward the person for whose benefit the letter is written to discount
or purchase any draft drawn against the credit. No relationship of agent and
principal, or of trustee and cestui, between the receiving bank and the beneficiary of
the letter is established. (P.568)
Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held
liable. Absent any definitive proof that it has confirmed the letter of credit or has actually
negotiated with the private respondent, the refusal by the petitioner to accept the tender of
the private respondent is justified.
In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private
respondent) as the beneficiary of the letter of credit," the same has no legal basis.
A trust has been defined as the "right, enforceable solely in equity, to the beneficial
enjoyment of property the legal title to which is vested to another." (89 C.J.S. 712)
The concept of a trust presupposes the existence of a specific property which has been
conferred upon the person for the benefit of another. In order therefore for the trust theory of
the private respondent to be sustained, the petitioner should have had in its possession a
sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it
in favor of the private respondent. This does not obtain in this case.
The mere opening of a letter of credit, it is to be noted, does not involve a specific
appropriation of a sum of money in favor of the beneficiary. It only signifies that the
beneficiary may be able to draw funds upon the letter of credit up to the designated amount
specified in the letter. It does not convey the notion that a particular sum of money has been
specifically reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent bank does not
receive in advance the sum of money from the buyer or the issuing bank. On the contrary,
when the correspondent bank accepts the tender and pays the amount stated in the letter,
the money that it doles out comes not from any particular fund that has been advanced by
the issuing bank, rather it gets the money from its own funds and then later seeks
reimbursement from the issuing bank.
Granting that a trust has been created, still, the petitioner may not be considered a trustee.
As the petitioner is only a notifying bank, its acceptance of the instructions of the issuing bank
will not create estoppel on its part resulting in the acceptance of the trust. Precisely, as a
notifying bank, its only obligation is to notify the private respondent of the existence of the
letter of credit. How then can such create estoppel when that is its only duty under the law?
We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a
guarantor of the issuing bank and in effect also of the latter's principal or client, i.e., Hans
Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only of the contract
between the buyer and the seller but also of the credit agreement between the issuing bank
and the buyer. (See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]).
The relationship between the buyer (Christiansen) and the issuing bank (Security Pacific
National Bank) is entirely independent from the letter of credit issued by the latter.
The contract between the two has no bearing as to the non-compliance by the buyer with the
agreement between the latter and the seller. Their contract is similar to that of a contract of
services (to open the letter of credit) and not that of agency as was intimated by the Court of
Appeals. The unjustified refusal therefore by Christiansen to issue the certification under the
letter of credit should not likewise be charged to the issuing bank.
As a mere notifying bank, not only does the petitioner not have any contractual relationship
with the buyer, it has also nothing to do with the contract between the issuing bank and the
buyer regarding the issuance of the letter of credit.
The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The
concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each
other.
In the first place, the guarantee theory destroys the independence of the bank's responsibility
from the contract upon which it was opened. In the second place, the nature of both contracts
is mutually in conflict with each other. In contracts of guarantee, the guarantor's obligation is
merely collateral and it arises only upon the default of the person primarily liable. On the
other hand, in an irrevocable credit the bank undertakes a primary obligation. (SeeNational
Bank of Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922])
The relationship between the issuing bank and the notifying bank, on the contrary, is more
similar to that of an agency and not that of a guarantee. It may be observed that the notifying
bank is merely to follow the instructions of the issuing bank which is to notify or to transmit
the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New
York, supra). Its commitment is only to notify the beneficiary. It does not undertake any
assurance that the issuing bank will perform what has been mandated to or expected of it. As
an agent of the issuing bank, it has only to follow the instructions of the issuing bank and to it
alone is it obligated and not to buyer with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents required under the
letter of credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still
not be held liable for its only engagement is to notify and/or transmit to the seller the letter of
credit.
Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be
forced to pay the amount under the letter. As we have previously explained, there was a
failure on the part of the private respondent to comply with the terms of the letter of credit.
The failure by him to submit the certification was fatal to his case. The U.C.P. which is
incorporated in the letter of credit ordains that the bank may only pay the amount specified
under the letter if all the documents tendered are on their face in compliance with the credit. It
is not tasked with the duty of ascertaining the reason or reasons why certain documents have
not been submitted, as it is only concerned with the documents. Thus, whether or not the
buyer has performed his responsibility towards the seller is not the bank's problem.
We are aware of the injustice committed by Christiansen on the private respondent but we
are deciding the controversy on the basis of what the law is, for the law is not meant to favor
only those who have been oppressed, the law is to govern future relations among people as
well. Its commitment is to all and not to a single individual. The faith of the people in our
justice system may be eroded if we are to decide not what the law states but what we believe
it should declare. Dura lex sed lex.
Considering the foregoing, the materiality of ruling upon the validity of the certificate of
approval required of the private respondent to submit under the letter of credit, has become
insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard
to the petition before it for certiorari and prohibition with preliminary injunction, to wit:
There is no merit in the respondent's contention that the certification required in
condition No. 4 of the letter of credit was "patently illegal." At the time the letter of
credit was issued there was no Central Bank regulation prohibiting such a condition
in the letter of credit. The letter of credit (Exh. C) was issued on June 7, 1971, more
than two months before the issuance of the Central Bank Memorandum on August
16, 1971 disallowing such a condition in a letter of credit. In fact the letter of credit
had already expired on July 30, 1971 when the Central Bank memorandum was
issued. In any event, it is difficult to see how such a condition could be categorized
as illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs, could
and should have done was to refuse to load the logs on the vessel "Zenlin Glory",
unless Christiansen first issued the required certification that the logs had been
approved by him to be in accordance with the terms and conditions of his purchase
order. Apparently, Villaluz was in too much haste to ship his logs without taking all
due precautions to assure that all the terms and conditions of the letter of credit had
been strictly complied with, so that there would be no hitch in its negotiation. (Rollo,
p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and
SETS ASIDE the decision of the Court of Appeals dated June 29, 1990. The amended
complaint in Civil Case No. 15121 is DISMISSED.
SO ORDERED.










G.R. No. 160732 June 21, 2004
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs. HON.
REYNALDO B. DAWAY, in his capacity as Presiding Judge of the Regional Trial Court
of Quezon City, Branch 90 and Maynilad Water Services, Inc., respondents
D E C I S I O N
AZCUNA, J.:
On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a
determination that the Petition for Rehabilitation with Prayer for Suspension of Actions and
Proceedings filed by Maynilad Water Services, Inc. (Maynilad) conformed substantially to the
provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation
(Interim Rules). It forthwith issued a Stay Order1 which states, in part, that the court was
thereby:
x x x x x x x x x
2. Staying enforcement of all claims, whether for money or otherwise and whether
such enforcement is by court action or otherwise, against the petitioner, its
guarantors and sureties not solidarily liable with the petitioner;
3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in
any manner any of its properties except in the ordinary course of business;
4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as
at the date of the filing of the petition;
x x x x x x x x x
Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex
Parte motions2 filed by respondent Maynilad, issued the herein questioned Order3 which
stated that it thereby:
"1. DECLARES that the act of MWSS in commencing on November 24, 2003 the
process for the payment by the banks of US$98 million out of the US$120 million
standby letter of credit so the banks have to make good such call/drawing of
payment of US$98 million by MWSS not later than November 27, 2003 at 10:00 P.
M. or any similar act for that matter, is violative of the above-quoted sub-paragraph
2.) of the dispositive portion of this Courts Stay Order dated November 17, 2003.
2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt
the written certification/notice of draw to Citicorp International Limited dated
November 24, 2003 and DECLARES void any payment by the banks to MWSS in
the event such written certification/notice of draw is not withdrawn by MWSS and/or
MWSS receives payment by virtue of the aforesaid standby letter of credit."
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this
petition for review by way of certiorari under Rule 65 of the Rules of Court questioning the
legality of said order as having been issued without or in excess of the lower courts
jurisdiction or that the court a quo acted with grave abuse of discretion amounting to lack or
excess of jurisdiction.4
ANTECEDENTS OF THE CASE
On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-
year period to manage, operate, repair, decommission and refurbish the existing MWSS
water delivery and sewerage services in the West Zone Service Area, for which Maynilad
undertook to pay the corresponding concession fees on the dates agreed upon in said
agreement5 which, among other things, consisted of payments of petitioners mostly foreign
loans.
To secure the concessionaires performance of its obligations under the Concession
Agreement, Maynilad was required under Section 6.9 of said contract to put up a bond, bank
guarantee or other security acceptable to MWSS.
In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year
facility with a number of foreign banks, led by Citicorp International Limited, for the issuance
of an Irrevocable Standby Letter of Credit6 in the amount of US$120,000,000 in favor of
MWSS for the full and prompt performance of Maynilads obligations to MWSS as
aforestated.
Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by
which it hoped to recover the losses it had allegedly incurred and would be incurring as a
result of the depreciation of the Philippine Peso against the US Dollar. Failing to get what it
desired, Maynilad issued a Force Majeure Notice on March 8, 2001 and unilaterally
suspended the payment of the concession fees. In an effort to salvage the Concession
Agreement, the parties entered into a Memorandum of Agreement (MOA)7 on June 8, 2001
wherein Maynilad was allowed to recover foreign exchange losses under a formula agreed
upon between them. Sometime in August 2001 Maynilad again filed another Force Majeure
Notice and, since MWSS could not agree with the terms of said Notice, the matter was
referred on August 30, 2001 to the Appeals Panel for arbitration. This resulted in the parties
agreeing to resolve the issues through an amendment of the Concession Agreement on
October 5, 2001, known as Amendment No. 1,8 which was based on the terms set down in
MWSS Board of Trustees Resolution No. 457-2001, as amended by MWSS Board of
Trustees Resolution No. 487-2001,9 which provided inter alia for a formula that would allow
Maynilad to recover foreign exchange losses it had incurred or would incur under the terms of
the Concession Agreement.
As part of this agreement, Maynilad committed, among other things, to:
a) infuse the amount of UD$80.0 million as additional funding support from its
stockholders;
b) resume payment of the concession fees; and
c) mutually seek the dismissal of the cases pending before the Court of Appeals and
with Minor Dispute Appeals Panel.
However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of
Termination, claiming that MWSS failed to comply with its obligations under the Concession
Agreement and Amendment No. 1 regarding the adjustment mechanism that would cover
Maynilads foreign exchange losses. On December 9, 2002, Maynilad filed a Notice of Early
Termination of the concession, which was challenged by MWSS. This matter was eventually
brought before the Appeals Panel on January 7, 2003 by MWSS.10 On November 7, 2003,
the Appeals Panel ruled that there was no Event of Termination as defined under Art. 10.2 (ii)
or 10.3 (iii) of the Concession Agreement and that, therefore, Maynilad should pay the
concession fees that had fallen due.
The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter,
submitted a written notice11 on November 24, 2003, to Citicorp International Limited, as
agent for the participating banks, that by virtue of Maynilads failure to perform its obligations
under the Concession Agreement, it was drawing on the Irrevocable Standby Letter of Credit
and thereby demanded payment in the amount of US$98,923,640.15.
Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation
before the court a quowhich resulted in the issuance of the Stay Order of November 17, 2003
and the disputed Order of November 27, 2003.12
PETITIONERS CASE
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT
PATENTLY WITHOUT JURISDICTION OR IN EXCESS OF JURISDICTION OR
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN CONSIDERING THE PERFORMANCE BOND OR ASSETS OF
THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE
PRIVATE RESPONDENT MAYNILAD SUBJECT TO REHABILITATION.
2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF
JURISDICTION OR COMMIT A GRAVE ERROR OF LAW IN HOLDING THAT THE
PERFORMANCE BOND OBLIGATIONS OF THE BANKS WERE NOT SOLIDARY
IN NATURE.
3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING
MAYNILAD TO IN EFFECT SEEK A REVIEW OR APPEAL OF THE FINAL AND
BINDING DECISION OF THE APPEALS PANEL.
In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million
Standby Letter of Credit and Performance Bond are not property of the estate of the debtor
Maynilad and, therefore, not subject to the in rem rehabilitation jurisdiction of the trial court.
Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset
of Maynilad but only assets of the banks. Furthermore, a call on the Standby Letter of Credit
cannot also be considered a "claim" falling under the purview of the stay order as alleged by
respondent as it is not directed against the assets of respondent Maynilad.
Petitioner concludes that the public respondent erred in declaring and holding that the
commencement of the process for the payment of US$98 million is a violation of the order
issued on November 17, 2003.
RESPONDENT MAYNILADS CASE
Respondent Maynilad seeks to refute this argument by alleging that:
a) the order objected to was strictly and precisely worded and issued after carefully
considering/evaluating the import of the arguments and documents referred to by
Maynilad, MWSS and/or creditors Chinatrust Commercial Bank and Suez in relation
to admissions, pleadings and/or pertinent records13 and that public respondent had
the authority to issue the same;
b) public respondent never considered nor held that the Performance bond or assets
of the issuing banks are part or property of the estate of respondent Maynilad subject
to rehabilitation and which respondent Maynilad has not and has never claimed to
be;14
c) what is relevant is not whether the performance bond or assets of the issuing
banks are part of the estate of respondent Maynilad but whether the act of petitioner
in commencing the process for the payment by the banks of US$98 million out of the
US$120 million performance bond is covered and/or prohibited under sub-
paragraphs 2.) and 4.) of the stay order dated November 17, 2003;
d) the jurisdiction of public respondent extends not only to the assets of respondent
Maynilad but also over persons and assets of "all those affected by the proceedings
x x x upon publication of the notice of commencement;15" and
e) the obligations under the Standby Letter of Credit are not solidary and are not
exempt from the coverage of the stay order.
OUR RULING
We will discuss the first two issues raised by petitioner as these are interrelated and make up
the main issue of the petition before us which is, did the rehabilitation court sitting as such,
act in excess of its authority or jurisdiction when it enjoined herein petitioner from seeking the
payment of the concession fees from the banks that issued the Irrevocable Standby Letter of
Credit in its favor and for the account of respondent Maynilad?
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate
Rehabilitation to support its jurisdiction over the Irrevocable Standby Letter of Credit and the
banks that issued it. The section reads in part "that jurisdiction over those affected by the
proceedings is considered acquired upon the publication of the notice of commencement of
proceedings in a newspaper of general circulation" and goes further to define rehabilitation as
an in rem proceeding. This provision is a logical consequence of the in rem nature of the
proceedings, where jurisdiction is acquired by publication and where it is necessary that the
assets of the debtor come within the courts jurisdiction to secure the same for the benefit of
creditors. The reference to "all those affected by the proceedings" covers creditors or such
other persons or entities holding assets belonging to the debtor under rehabilitation which
should be reflected in its audited financial statements. The banks do not hold any assets of
respondent Maynilad that would be material to the rehabilitation proceedings nor is Maynilad
liable to the banks at this point.
Respondent Maynilads Financial Statement as of December 31, 2001 and 2002 do not show
the Irrevocable Standby Letter of Credit as part of its assets or liabilities, and by respondent
Maynilads own admission it is not. In issuing the clarificatory order of November 27, 2003,
enjoining petitioner from claiming from an asset that did not belong to the debtor and over
which it did not acquire jurisdiction, the rehabilitation court acted in excess of its jurisdiction.
Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that
supports its claim that the commencement of the process to draw on the Standby Letter of
Credit is an enforcement of claim prohibited by and under the Interim Rules and the order of
public respondent.
Respondent Maynilad would persuade us that the above provision justifies a leap to the
conclusion that such an enforcement is prohibited by said section because it is a "claim
against the debtor, its guarantors and sureties not solidarily liable with the debtor" and that
there is nothing in the Standby Letter of Credit nor in law nor in the nature of the obligation
that would show or require the obligation of the banks to be solidary with the respondent
Maynilad.
We disagree.
First, the claim is not one against the debtor but against an entity that respondent Maynilad
has procured to answer for its non-performance of certain terms and conditions of the
Concession Agreement, particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all
claims against guarantors and sureties, but only those claims against guarantors and
sureties who are not solidarily liable with the debtor. Respondent Maynilads claim that
the banks are not solidarily liable with the debtor does not find support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals16 that the concept of
guarantee vis--vis the concept of an irrevocable letter of credit are inconsistent with each
other. The guarantee theory destroys the independence of the banks responsibility from the
contract upon which it was opened and the nature of both contracts is mutually in conflict with
each other. In contracts of guarantee, the guarantors obligation is merely collateral and it
arises only upon the default of the person primarily liable. On the other hand, in an
irrevocable letter of credit, the bank undertakes a primary obligation. We have also defined a
letter of credit as an engagement by a bank or other person made at the request of a
customer that the issuer shall honor drafts or other demands of payment upon compliance
with the conditions specified in the credit.17
Letters of credit were developed for the purpose of insuring to a seller payment of a definite
amount upon the presentation of documents18 and is thus a commitment by the issuer that
the party in whose favor it is issued and who can collect upon it will have his credit against
the applicant of the letter, duly paid in the amount specified in the letter.19 They are in
effect absolute undertakings to pay the money advanced or the amount for which credit is
given on the faith of the instrument. They are primary obligations and not accessory contracts
and while they are security arrangements, they are not converted thereby into contracts of
guaranty.20 What distinguishes letters of credit from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and other required shipping
documents are presented to it.21 They are definite undertakings to pay at sight once the
documents stipulated therein are presented.
Letters of Credits have long been and are still governed by the provisions of the Uniform
Customs and Practice for Documentary Credits of the International Chamber of Commerce.
In the 1993 Revision it provides in Art. 2 that "the expressions Documentary Credit(s) and
Standby Letter(s) of Credit mean any arrangement, however made or described, whereby a
bank acting at the request and on instructions of a customer or on its own behalf is to make
payment against stipulated document(s)" and Art. 9 thereof defines the liability of the issuing
banks on an irrevocable letter of credit as a "definite undertaking of the issuing bank,
provided that the stipulated documents are presented to the nominated bank or the issuing
bank and the terms and conditions of the Credit are complied with, to pay at sight if the Credit
provides for sight payment."22
We have accepted, in Feati Bank and Trust Company v. Court of Appeals23 and Bank of
America NT & SA v. Court of Appeals,24 to the extent that they are pertinent, the application
in our jurisdiction of the international credit regulatory set of rules known as the Uniform
Customs and Practice for Documentary Credits (U.C.P) issued by the International Chamber
of Commerce, which we said in Bank of the Philippine Islands v. Nery25 was justified under
Art. 2 of the Code of Commerce, which states:
"Acts of commerce, whether those who execute them be merchants or not, and
whether specified in this Code or not should be governed by the provisions contained
in it; in their absence, by the usages of commerce generally observed in each place;
and in the absence of both rules, by those of the civil law."
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein
petitioner as the prohibition is on the enforcement of claims against guarantors or sureties of
the debtors whose obligations are not solidary with the debtor. The participating banks
obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an
absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtors
assets. These are the same characteristics of a surety or solidary obligor.
Being solidary, the claims against them can be pursued separately from and independently of
the rehabilitation case, as held in Traders Royal Bank v. Court of Appeals26 and reiterated
in Philippine Blooming Mills, Inc. v. Court of Appeals,27 where we said that property of the
surety cannot be taken into custody by the rehabilitation receiver (SEC) and said surety can
be sued separately to enforce his liability as surety for the debts or obligations of the debtor.
The debts or obligations for which a surety may be liable include future debts, an amount
which may not be known at the time the surety is given.
The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the
banks are not solidary with those of respondent Maynilad. On the contrary, it is issued at the
request of and for the account of Maynilad Water Services, Inc., in favor of the Metropolitan
Waterworks and Sewerage System, as a bond for the full and prompt performance of the
obligations by the concessionaire under the Concession Agreement28 and herein petitioner
is authorized by the banks to draw on it by the simple act of delivering to the agent a written
certification substantially in the form Annex "B" of the Letter of Credit. It provides further in
Sec. 6, that for as long as the Standby Letter of Credit is valid and subsisting, the Banks shall
honor any written Certification made by MWSS in accordance with Sec. 2, of the Standby
Letter of Credit regardless of the date on which the event giving rise to such Written
Certification arose.29
Taking into consideration our own rulings on the nature of letters of credit and the customs
and usage developed over the years in the banking and commercial practice of letters of
credit, we hold that except when a letter of credit specifically stipulates otherwise, the
obligation of the banks issuing letters of credit are solidary with that of the person or entity
requesting for its issuance, the same being a direct, primary, absolute and definite
undertaking to pay the beneficiary upon the presentation of the set of documents required
therein.
The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent
to act on the obligation of the banks under the Letter of Credit under the argument that this
was not a solidary obligation with that of the debtor. Being a solidary obligation, the letter of
credit is excluded from the jurisdiction of the rehabilitation court and therefore in enjoining
petitioner from proceeding against the Standby Letters of Credit to which it had a clear right
under the law and the terms of said Standby Letter of Credit, public respondent acted in
excess of his jurisdiction.
ADDITIONAL ISSUES
We proceed to consider the other issues raised in the oral arguments and included in the
parties memoranda:
1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate
remedy under the Interim Rules itself which provides in Sec. 12, Rule 4 that the court
may on motion or motu proprio, terminate, modify or set conditions for the
continuance of the stay order or relieve a claim from coverage thereof. We find,
however, that the public respondent had already accomplished this during the
hearing set for the two Urgent Ex Parte motions filed by respondent Maynilad on
November 21 and 24, 2003,30 where the parties including the creditors, Suez and
Chinatrust Commercial "presented their respective arguments."31 The public
respondent then ruled, "after carefully considering/evaluating the import of the
arguments and documents referred to by Maynilad, MWSS and/or the creditors
Chinatrust Commercial Bank and Suez in relation to the admissions, the pleadings,
and/or pertinent portions of the records, this court is of the considered and humble
view that the issue must perforce be resolved in favor of Maynilad."32 Hence to
pursue their opposition before the same court would result in the presentation of the
same arguments and issues passed upon by public respondent.
Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective
remedy questioning the orders of the rehabilitation court since they are immediately
executory and a petition for review or an appeal therefrom shall not stay the
execution of the order unless restrained or enjoined by the appellate court." In this
situation, it had no other remedy but to seek recourse to us through this petition
for certiorari.
In Silvestre v. Torres and Oben,33 we said that it is not enough that a remedy is
available to prevent a party from making use of the extraordinary remedy
of certiorari but that such remedy be an adequate remedy which is equally beneficial,
speedy and sufficient, not only a remedy which at some time in the future may offer
relief but a remedy which will promptly relieve the petitioner from the injurious acts of
the lower tribunal. It is the inadequacy -- not the mere absence -- of all other legal
remedies and the danger of failure of justice without the writ, that must usually
determine the propriety of certiorari.34
2. Respondent Maynilad argues that by commencing the process for payment under
the Standby Letter of Credit, petitioner violated an immediately executory order of the
court and, therefore, comes to Court with unclean hands and should therefore be
denied any relief.
It is true that the stay order is immediately executory. It is also true, however, that the
Standby Letter of Credit and the banks that issued it were not within the jurisdiction
of the rehabilitation court. The call on the Standby Letter of Credit, therefore, could
not be considered a violation of the Stay Order.
3. Respondents claim that the filing of the petition pre-empts the original jurisdiction
of the lower court is without merit. The purpose of the initial hearing is to determine
whether the petition for rehabilitation has merit or not. The propriety of the stay order
as well as the clarificatory order had already been passed upon in the hearing
previously had for that purpose. The determination of whether the public respondent
was correct in enjoining the petitioner from drawing on the Standby Letter of Credit
will have no bearing on the determination to be made by public respondent whether
the petition for rehabilitation has merit or not. Our decision on the instant petition
does not pre-empt the original jurisdiction of the rehabilitation court.
WHEREFORE, the petition for certiorari is granted. The Order of November 27, 2003 of the
Regional Trial Court of Quezon City, Branch 90, is hereby declared NULL AND
VOID and SET ASIDE. The status quo Order herein previously issued is hereby LIFTED. In
view of the urgency attending this case, this decision is immediately executory.
No costs. SO ORDERED.
G.R. No. 105387 November 11, 1993
JOHANNES SCHUBACK & SONS PHILIPPINE TRADING CORPORATION, petitioner,
vs. THE HON. COURT OF APPEALS, RAMON SAN JOSE, JR., doing business under the
name and style "PHILIPPINE SJ INDUSTRIAL TRADING," respondents.
ROMERO, J.:
In this petition for review on certiorari, petitioner questions the reversal by the Court of
Appeals 1 of the trial court's ruling that a contract of sale had been perfected between
petitioner and private respondent over bus spare parts.
The facts as quoted from the decision of the Court of Appeals are as follows:
Sometime in 1981, defendant 2 established contact with plaintiff 3 through
the Philippine Consulate General in Hamburg, West Germany, because he
wanted to purchase MAN bus spare parts from Germany. Plaintiff
communicated with its trading partner. Johannes Schuback and Sohne
Handelsgesellschaft m.b.n. & Co. (Schuback Hamburg) regarding the spare
parts defendant wanted to order.
On October 16, 1981, defendant submitted to plaintiff a list of the parts
(Exhibit B) he wanted to purchase with specific part numbers and
description. Plaintiff referred the list to Schuback Hamburg for quotations.
Upon receipt of the quotations, plaintiff sent to defendant a letter dated 25
November, 1981 (Exh. C) enclosing its offer on the items listed by
defendant.
On December 4, 1981, defendant informed plaintiff that he preferred genuine
to replacement parts, and requested that he be given 15% on all items (Exh.
D).
On December 17, 1981, plaintiff submitted its formal offer (Exh. E)
containing the item number, quantity, part number, description, unit price
and total to defendant. On December, 24, 1981, defendant informed plaintiff
of his desire to avail of the prices of the parts at that time and enclosed
Purchase Order No. 0101 dated 14 December 1981 (Exh. F to F-4). Said
Purchase Order contained the item number, part number and description.
Defendant promised to submit the quantity per unit he wanted to order on
December 28 or 29 (Exh. F).
On December 29, 1981, defendant personally submitted the quantities he
wanted to Mr. Dieter Reichert, General Manager of plaintiff, at the latter's
residence (t.s.n., 13 December, 1984, p. 36). The quantities were written in
ink by defendant in the same Purchase Order previously submitted. At the
bottom of said Purchase Order, defendant wrote in ink above his signature:
"NOTE: Above P.O. will include a 3% discount. The above will serve as our
initial P.O." (Exhs. G to G-3-a).
Plaintiff immediately ordered the items needed by defendant from Schuback
Hamburg to enable defendant to avail of the old prices. Schuback Hamburg
in turn ordered (Order No. 12204) the items from NDK, a supplier of MAN
spare parts in West Germany. On January 4, 1982, Schuback Hamburg sent
plaintiff a proforma invoice (Exhs. N-1 to N-3) to be used by defendant in
applying for a letter of credit. Said invoice required that the letter of credit be
opened in favor of Schuback Hamburg. Defendant acknowledged receipt of
the invoice (t.s.n., 19 December 1984, p. 40).
An order confirmation (Exhs. I, I-1) was later sent by Schuback Hamburg to
plaintiff which was forwarded to and received by defendant on February 3,
1981 (t.s.n., 13 Dec. 1984, p. 42).
On February 16, 1982, plaintiff reminded defendant to open the letter of
credit to avoid delay in shipment and payment of interest (Exh. J). Defendant
replied, mentioning, among others, the difficulty he was encountering in
securing: the required dollar allocations and applying for the letter of credit,
procuring a loan and looking for a partner-financier, and of finding ways 'to
proceed with our orders" (Exh. K).
In the meantime, Schuback Hamburg received invoices from, NDK for partial
deliveries on Order No.12204 (Direct Interrogatories., 07 Oct, 1985, p. 3).
Schuback Hamburg paid NDK. The latter confirmed receipt of payments
made on February 16, 1984 (Exh.C-Deposition).
On October 18, 1982, Plaintiff again reminded defendant of his order and
advised that the case may be endorsed to its lawyers (Exh. L). Defendant
replied that he did not make any valid Purchase Order and that there was no
definite contract between him and plaintiff (Exh. M). Plaintiff sent a rejoinder
explaining that there is a valid Purchase Order and suggesting that
defendant either proceed with the order and open a letter of credit or cancel
the order and pay the cancellation fee of 30% of F.O.B. value, or plaintiff will
endorse the case to its lawyers (Exh. N).
Schuback Hamburg issued a Statement of Account (Exh. P) to plaintiff
enclosing therewith Debit Note (Exh. O) charging plaintiff 30% cancellation
fee, storage and interest charges in the total amount of DM 51,917.81. Said
amount was deducted from plaintiff's account with Schuback Hamburg
(Direct Interrogatories, 07 October, 1985).
Demand letters sent to defendant by plaintiff's counsel dated March 22, 1983
and June 9, 1983 were to no avail (Exhs R and S).
Consequently, petitioner filed a complaint for recovery of actual or compensatory damages,
unearned profits, interest, attorney's fees and costs against private respondent.
In its decision dated June 13, 1988, the trial court 4 ruled in favor of petitioner by ordering
private respondent to pay petitioner, among others, actual compensatory damages in the
amount of DM 51,917.81, unearned profits in the amount of DM 14,061.07, or their peso
equivalent.
Thereafter, private respondent elevated his case before the Court of Appeals. On February
18, 1992, the appellate court reversed the decision of the trial court and dismissed the
complaint of petitioner. It ruled that there was no perfection of contract since there was no
meeting of the minds as to the price between the last week of December 1981 and the first
week of January 1982.
The issue posed for resolution is whether or not a contract of sale has been perfected
between the parties.
We reverse the decision of the Court of Appeals and reinstate the decision of the trial court. It
bears emphasizing that a "contract of sale is perfected at the moment there is a meeting of
minds upon the thing which is the object of the contract and upon the price. . . . " 5
Article 1319 of the Civil Code states: "Consent is manifested by the meeting of the offer and
acceptance upon the thing and the cause which are to constitute the contract. The offer must
be certain and the acceptance absolute. A qualified acceptance constitutes a counter offer."
The facts presented to us indicate that consent on both sides has been manifested.
The offer by petitioner was manifested on December 17, 1981 when petitioner submitted its
proposal containing the item number, quantity, part number, description, the unit price and
total to private respondent. On December 24, 1981, private respondent informed petitioner of
his desire to avail of the prices of the parts at that time and simultaneously enclosed its
Purchase Order No. 0l01 dated December 14, 1981. At this stage, a meeting of the minds
between vendor and vendee has occurred, the object of the contract: being the spare parts
and the consideration, the price stated in petitioner's offer dated December 17, 1981 and
accepted by the respondent on December 24,1981.
Although said purchase order did not contain the quantity he wanted to order, private
respondent made good, his promise to communicate the same on December 29, 1981. At
this juncture, it should be pointed out that private respondent was already in the process of
executing the agreement previously reached between the parties.
Below Exh. G-3, marked as Exhibit G-3-A, there appears this statement made by private
respondent: "Note. above P.O. will include a 3% discount. The above will serve as our initial
P.O." This notation on the purchase order was another indication of acceptance on the part of
the vendee, for by requesting a 3% discount, he implicitly accepted the price as first offered
by the vendor. The immediate acceptance by the vendee of the offer was impelled by the fact
that on January 1, 1982, prices would go up, as in fact, the petitioner informed him that there
would be a 7% increase, effective January 1982. On the other hand, concurrence by the
vendor with the said discount requested by the vendee was manifested when petitioner
immediately ordered the items needed by private respondent from Schuback Hamburg which
in turn ordered from NDK, a supplier of MAN spare parts in West Germany.
When petitioner forwarded its purchase order to NDK, the price was still pegged at the old
one. Thus, the pronouncement of the Court Appeals that there as no confirmed price on or
about the last week of December 1981 and/or the first week of January 1982 was erroneous.
While we agree with the trial court's conclusion that indeed a perfection of contract was
reached between the parties, we differ as to the exact date when it occurred, for perfection
took place, not on December 29, 1981. Although the quantity to be ordered was made
determinate only on December 29, 1981, quantity is immaterial in the perfection of a sales
contract. What is of importance is the meeting of the minds as to the object and cause, which
from the facts disclosed, show that as of December 24, 1981, these essential elements had
already occurred.
On the part of the buyer, the situation reveals that private respondent failed to open an
irrevocable letter of credit without recourse in favor of Johannes Schuback of Hamburg,
Germany. This omission, however. does not prevent the perfection of the contract between
the parties, for the opening of the letter of credit is not to be deemed a suspensive condition.
The facts herein do not show that petitioner reserved title to the goods until private
respondent had opened a letter of credit. Petitioner, in the course of its dealings with private
respondent, did not incorporate any provision declaring their contract of sale without effect
until after the fulfillment of the act of opening a letter of credit.
The opening of a etter of credit in favor of a vendor is only a mode of payment. It is not
among the essential requirements of a contract of sale enumerated in Article 1305 and 1474
of the Civil Code, the absence of any of which will prevent the perfection of the contract from
taking place.
To adopt the Court of Appeals' ruling that the contract of sale was dependent on the opening
of a letter of credit would be untenable from a pragmatic point of view because private
respondent would not be able to avail of the old prices which were open to him only for a
limited period of time. This explains why private respondent immediately placed the order
with petitioner which, in turn promptly contacted its trading partner in Germany. As succinctly
stated by petitioner, "it would have been impossible for respondent to avail of the said old
prices since the perfection of the contract would arise much later, or after the end of the year
1981, or when he finally opens the letter of credit." 6
WHEREFORE, the petition is GRANTED and the decision of the trial court dated June 13,
1988 is REINSTATED with modification.
SO ORDERED.









































G.R. No. 74886 December 8, 1992
PRUDENTIAL BANK, petitioner, vs. INTERMEDIATE APPELLATE COURT, PHILIPPINE
RAYON MILLS, INC. and ANACLETO R. CHI, respondents.
DAVIDE, JR., J.:
Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate
Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which
affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of
First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter
involved an action instituted by the petitioner for the recovery of a sum of money representing
the amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by
the defendant, now private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine
Rayon), represented by co-defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are summarized by the public
respondent as follows:
On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered
into a contract with Nissho Co., Ltd. of Japan for the importation of textile
machineries under a five-year deferred payment plan (Exhibit B, Plaintiff's
Folder of Exhibits, p 2). To effect payment for said machineries, the
defendant-appellant applied for a commercial letter of credit with the
Prudential Bank and Trust Company in favor of Nissho. By virtue of said
application, the Prudential Bank opened Letter of Credit No. DPP-63762 for
$128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts were
drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76),
which were all paid by the Prudential Bank through its correspondent in
Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these
drafts (Exhibit X and X-1, Ibid., pp. 65-66) were accepted by the defendant-
appellant through its president, Anacleto R. Chi, while the others were not
(Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank indorsed the
shipping documents to the defendant-appellant which accepted delivery of
the same. To enable the defendant-appellant to take delivery of the
machineries, it executed, by prior arrangement with the Prudential Bank, a
trust receipt which was signed by Anacleto R. Chi in his capacity as
President (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be accomplished by two
sureties who, by the very terms and conditions thereof, were to be jointly and
severally liable to the Prudential Bank should the defendant-appellant fail to
pay the total amount or any portion of the drafts issued by Nissho and paid
for by Prudential Bank. The defendant-appellant was able to take delivery of
the textile machineries and installed the same at its factory site at 69
Obudan Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased business operation (sic).
On December 29, 1969, defendant-appellant's factory was leased by
Yupangco Cotton Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p.
22). The lease was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On
January 5, 1974, all the textile machineries in the defendant-appellant's
factory were sold to AIC Development Corporation for P300,000.00 (Exhibit
K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the letter of credit and
the trust receipt remained unpaid and unliquidated. Repeated formal
demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the
said trust receipt yielded no result Hence, the present action for the
collection of the principal amount of P956,384.95 was filed on October 3,
1974 against the defendant-appellant and Anacleto R. Chi. In their
respective answers, the defendants interposed identical special
defenses, viz., the complaint states no cause of action; if there is, the same
has prescribed; and the plaintiff is guilty of laches. 2
On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered sentencing the defendant
Philippine Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the
amounts due under Exhibits "X" & "X-1", with interest at 6% per annum
beginning September 15, 1974 until fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive,
the same not having been accepted by defendant Philippine Rayon Mills,
Inc., plaintiff's cause of action thereon has not accrued, hence, the instant
case is premature.
Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed.
Plaintiff is ordered to pay defendant Anacleto R. Chi the sum of P20,000.00
as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said
court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred
in (a) disregarding its right to reimbursement from the private respondents for the entire
unpaid balance of the imported machines, the total amount of which was paid to the Nissho
Company Ltd., thereby violating the principle of the third party payor's right to reimbursement
provided for in the second paragraph of Article 1236 of the Civil Code and under the rule
against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the responsible officer of
defendant corporation, liable under Section 13 of P.D No 115 for the entire unpaid balance of
the imported machines covered by the bank's trust receipt (Exhibit "C"); (c) finding that the
solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting
the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of the said
trust receipt obligation; (e) contravening, based on the assumption that Chi is a simple
guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and
jurisprudence which provide that such liability had already attached; (f) contravening the
judicial admissions of Philippine Rayon with respect to its liability to pay the petitioner the
amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight" drafts
as requiring acceptance by Philippine Rayon before the latter could be held liable thereon. 4
In its decision, public respondent sustained the trial court in all respects. As to the first and
last assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil
Code, applies only if there is no express contract between the parties and there is a clear
showing that the payment is justified. In the instant case, the relationship existing between
the petitioner and Philippine Rayon is governed by specific contracts, namely the application
for letters of credit, the promissory note, the drafts and the trust receipt. With respect to the
last ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not
accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts
stated therein. The public respondent did not agree with the petitioner's claim that the drafts
were sight drafts which did not require presentment for acceptance to Philippine Rayon
because paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since
the ten (10) drafts were not presented and accepted, no valid demand for payment can be
made.
Public respondent also disagreed with the petitioner's contention that private respondent Chi
is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on
his signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the
first contention, the public respondent ruled that the civil liability provided for in said Section
13 attaches only after conviction. As to the second, it expressed misgivings as to whether
Chi's signature on the trust receipt made the latter automatically liable thereon because the
so-called solidary guaranty clause at the dorsal portion of the trust receipt is to be signed not
by one (1) person alone, but by two (2) persons; the last sentence of the same is incomplete
and unsigned by witnesses; and it is not acknowledged before a notary public. Besides, even
granting that it was executed and acknowledged before a notary public, Chi cannot be held
liable therefor because the records fail to show that petitioner had either exhausted the
properties of Philippine Rayon or had resorted to all legal remedies as required in Article
2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the
obligation of a guarantor is merely accessory and subsidiary, respectively. Chi's liability would
therefore arise only when the principal debtor fails to comply with his obligation. 5
Its motion to reconsider the decision having been denied by the public respondent in its
Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting
the following legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT
GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR FULL
REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE
PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT
OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL
CODE OF THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE
AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE
UNDER THE TRUST RECEIPT (EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS
OF RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT
EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE
GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY
ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE
OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS
PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION 13,
P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE
PETITIONER UNDER THE TRUST RECEIPT (EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS
RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER
THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR
ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE
LATTER BECOMES LIABLE TO PETITIONER. 7
In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the
filing of the Comment thereto by private respondent Anacleto Chi and of the Reply to the
latter by the petitioner; both parties were also required to submit their respective memoranda
which they subsequently complied with.
As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the drafts was indispensable to
make Philippine Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the trust receipt;
3. Whether private respondent Chi is jointly and severally liable with
Philippine Rayon for the obligation sought to be enforced and if not, whether
he may be considered a guarantor; in the latter situation, whether the case
should have been dismissed on the ground of lack of cause of action as
there was no prior exhaustion of Philippine Rayon's properties.
Both the trial court and the public respondent ruled that Philippine Rayon could be held liable
for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been
accepted by the latter after due presentment. The liability for the remaining ten (10) drafts
(Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for
acceptance. In short, both courts concluded that acceptance of the drafts by Philippine
Rayon was indispensable to make the latter liable thereon. We are unable to agree with this
proposition. The transaction in the case at bar stemmed from Philippine Rayon's application
for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the
former's contract to purchase and import loom and textile machinery from Nissho Company,
Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application.
As correctly ruled by the trial court in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for Commercial Letter of
Credit, plaintiff bank 10 was under obligation to pay through its
correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd.,
periodically drew against said letter of credit from 1963 to 1968, pursuant to
plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In turn,
defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the
amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said
plaintiff bank together with any accruing commercial charges, interest, etc.
pursuant to the terms and conditions stipulated in the Application and
Agreement of Commercial Letter of Credit Annex "A".
A letter of credit is defined as an engagement by a bank or other person made at the request
of a customer that the issuer will honor drafts or other demands for payment upon
compliance with the conditions specified in the credit. 11 Through a letter of credit, the bank
merely substitutes its own promise to pay for one of its customers who in return promises to
pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment
fees mutually agreed upon. 12 In the instant case then, the drawee was necessarily the
herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there
was no need for acceptance as the issued drafts are sight drafts. Presentment for
acceptance is necessary only in the cases expressly provided for in Section 143 of the
Negotiable Instruments Law (NIL). 13 The said section reads:
Sec. 143. When presentment for acceptance must be made. Presentment
for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case,
where presentment for acceptance is necessary in order to
fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be
presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in order to render
any party to the bill liable.
Obviously then, sight drafts do not require presentment for acceptance.
The acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate
instrument. 15
The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight
drafts. Said the latter:
. . . In the instant case the drafts being at sight, they are supposed to be
payable upon acceptance unless plaintiff bank has given the Philippine
Rayon Mills Inc. time within which to pay the same. The first two drafts
(Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their
face (sic), and upon such acceptance should have been paid forthwith.
These two drafts were not paid and although Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they are still
unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7
provides:
Sec. 7. When payable on demand. An instrument is payable on demand

(a) When so it is expressed to be payable on demand, or at
sight, or on presentation; or
(b) In which no time for payment in expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as
regards the person so issuing, accepting, or indorsing it, payable on
demand. (emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at
maturity of any accepted draft, bill of exchange or indebtedness shall not be
extinguished or modified" 17 does not, contrary to the holding of the public
respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner.
Acceptance, however, was not even necessary in the first place because the drafts
which were eventually issued were sight drafts And even if these were not sight
drafts, thereby necessitating acceptance, it would be the petitioner and not
Philippine Rayon which had to accept the same for the latter was not the drawee.
Presentment for acceptance is defined an the production of a bill of exchange to a
drawee for acceptance. 18 The trial court and the public respondent, therefore, erred
in ruling that presentment for acceptance was an indispensable requisite for
Philippine Rayon's liability on the drafts to attach. Contrary to both courts'
pronouncements, Philippine Rayon immediately became liable thereon upon
petitioner's payment thereof. Such is the essence of the letter of credit issued by the
petitioner. A different conclusion would violate the principle upon which commercial
letters of credit are founded because in such a case, both the beneficiary and the
issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the
mercy of Philippine Rayon even if the latter had already received the imported
machinery and the petitioner had fully paid for it. The typical setting and purpose of a
letter of credit are described in Hibernia Bank and Trust Co. vs. J. Aron & Co.,
Inc., 19 thus:
Commercial letters of credit have come into general use in international
sales transactions where much time necessarily elapses between the sale
and the receipt by a purchaser of the merchandise, during which interval
great price changes may occur. Buyers and sellers struggle for the
advantage of position. The seller is desirous of being paid as surely and as
soon as possible, realizing that the vendee at a distant point has it in his
power to reject on trivial grounds merchandise on arrival, and cause
considerable hardship to the shipper. Letters of credit meet this condition by
affording celerity and certainty of payment. Their purpose is to insure to a
seller payment of a definite amount upon presentation of documents. The
bank deals only with documents. It has nothing to do with the quality of the
merchandise. Disputes as to the merchandise shipped may arise and be
litigated later between vendor and vendee, but they may not impede
acceptance of drafts and payment by the issuing bank when the proper
documents are presented.
The trial court and the public respondent likewise erred in disregarding the trust receipt and in
not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court
explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:
By this arrangement a banker advances money to an intending importer, and
thereby lends the aid of capital, of credit, or of business facilities and
agencies abroad, to the enterprise of foreign commerce. Much of this trade
could hardly be carried on by any other means, and therefore it is of the first
importance that the fundamental factor in the transaction, the banker's
advance of money and credit, should receive the amplest protection.
Accordingly, in order to secure that the banker shall be repaid at the critical
point that is, when the imported goods finally reach the hands of the
intended vendee the banker takes the full title to the goods at the very
beginning; he takes it as soon as the goods are bought and settled for by his
payments or acceptances in the foreign country, and he continues to hold
that title as his indispensable security until the goods are sold in the United
States and the vendee is called upon to pay for them. This security is not an
ordinary pledge by the importer to the banker, for the importer has never
owned the goods, and moreover he is not able to deliver the possession; but
the security is the complete title vested originally in the bankers, and this
characteristic of the transaction has again and again been recognized and
protected by the courts. Of course, the title is at bottom a security title, as it
has sometimes been called, and the banker is always under the obligation to
reconvey; but only after his advances have been fully repaid and after the
importer has fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:
. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as
provided by the Chattel Mortgage Law, that is, the importer becomes
absolute owner of the imported merchandise as soon an he has paid its
price. The ownership of the merchandise continues to be vested in the
owner thereof or in the person who has advanced payment, until he has
been paid in full, or if the merchandise has already been sold, the proceeds
of the sale should be turned over to him by the importer or by his
representative or successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29
January 1973, a trust receipt transaction is defined as "any transaction by and between a
person referred to in this Decree as the entruster, and another person referred to in this
Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security
interests' over certain specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter's execution and delivery to the entruster of a
signed document called the "trust receipt" wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the entruster and to sell or otherwise
dispose of the goods, documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to the entruster or as
appears in the trust receipt or the goods, instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions specified in the trusts
receipt, or for other purposes substantially equivalent to any one of the following: . . ."
It is alleged in the complaint that private respondents "not only have presumably put said
machinery to good use and have profited by its operation and/or disposition but very recent
information that (sic) reached plaintiff bank that defendants already sold the machinery
covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property
covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants
have willfully violated their duty to account for the whereabouts of the machinery covered by
the trust receipt or for the proceeds of any lease, sale or other disposition of the same that
they may have made, notwithstanding demands therefor; defendants have fraudulently
misapplied or converted to their own use any money realized from the lease, sale, and other
disposition of said machinery." 23 While there is no specific prayer for the delivery to the
petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered by the
trust receipt, such relief is covered by the general prayer for "such further and other relief as
may be just and equitable on the premises."24 And although it is true that the petitioner
commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle
prevented it from enforcing the civil liability arising out of the trust, receipt in a separate civil
action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over
the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appear in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions
of Article 315, paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of the Civil
Code, a civil action for damages, entirely separate and distinct from the criminal action, may
be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa
falls under fraud.
We also conclude, for the reason hereinafter discussed, and not for that adduced by the
public respondent, that private respondent Chi's signature in the dorsal portion of the trust
receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion
of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST COMPANY
complying with the foregoing, we jointly and severally agree and undertake
to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all
sums of money which the said PRUDENTIAL BANK AND TRUST
COMPANY may call upon us to pay arising out of or pertaining to, and/or in
any event connected with the default of and/or non-fulfillment in any respect
of the undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY
does not have to take any steps or exhaust its remedy against aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI 26
Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ".
. . we jointly and severally agree and undertake . . .," and the concluding sentence on
exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
With respect to the second argument, we have our misgivings as to whether
the mere signature of defendant-appellee Chi of (sic) the guaranty
agreement, Exhibit "C-1", will make it an actionable document. It should be
noted that Exhibit "C-1" was prepared and printed by the plaintiff-appellant. A
perusal of Exhibit "C-1" shows that it was to be signed and executed by two
persons. It was signed only by defendant-appellee Chi. Exhibit "C-1" was to
be witnessed by two persons, but no one signed in that capacity. The last
sentence of the guaranty clause is incomplete. Furthermore, the plaintiff-
appellant also failed to have the purported guarantee clause acknowledged
before a notary public. All these show that the alleged guaranty provision
was disregarded and, therefore, not consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was fully
executed and acknowledged still defendant-appellee Chi cannot be held
liable thereunder because the records show that the plaintiff-appellant had
neither exhausted the property of the defendant-appellant nor had it resorted
to all legal remedies against the said defendant-appellant as provided in
Article 2058 of the Civil Code. The obligation of a guarantor is merely
accessory under Article 2052 of the Civil Code and subsidiary under Article
2054 of the Civil Code. Therefore, the liability of the defendant-appellee
arises only when the principal debtor fails to comply with his obligation. 27
Our own reading of the questioned solidary guaranty clause yields no other conclusion than
that the obligation of Chi is only that of a guarantor. This is further bolstered by the last
sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this
case because the space therein for the party whose property may not be exhausted was not
filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be
raised by a guarantor before he may be held liable for the obligation. Petitioner likewise
admits that the questioned provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however, described the guaranty as solidary
between the guarantors; this would have been correct if two (2) guarantors had signed it. The
clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2)
parties who are to sign it or to the liability existing between themselves. It does not refer to
the undertaking between either one or both of them on the one hand and the petitioner on the
other with respect to the liability described under the trust receipt. Elsewise stated, their
liability is not divisible as between them, i.e., it can be enforced to its full extent against any
one of them.
Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should
be resolved against the petitioner. The trust receipt, together with the questioned solidary
guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's participation
therein is limited to the affixing of his signature thereon. It is, therefore, a contract of
adhesion; 28 as such, it must be strictly construed against the party responsible for its
preparation. 29
Neither can We agree with the reasoning of the public respondent that this solidary guaranty
clause was effectively disregarded simply because it was not signed and witnessed by two
(2) persons and acknowledged before a notary public. While indeed, the clause ought to
have been signed by two (2) guarantors, the fact that it was only Chi who signed the same
did not make his act an idle ceremony or render the clause totally meaningless. By his
signing, Chi became the sole guarantor. The attestation by witnesses and the
acknowledgement before a notary public are not required by law to make a party liable on the
instrument. The rule is that contracts shall be obligatory in whatever form they may have
been entered into, provided all the essential requisites for their validity are present; however,
when the law requires that a contract be in some form in order that it may be valid or
enforceable, or that it be proved in a certain way, that requirement is absolute and
indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for the debt or
default of another, the law merely requires that it, or some note or memorandum thereof, be
in writing. Otherwise, it would be unenforceable unless ratified. 32 While the
acknowledgement of a surety before a notary public is required to make the same a public
document, under Article 1358 of the Civil Code, a contract of guaranty does not have to
appear in a public document.
And now to the other ground relied upon by the petitioner as basis for the solidary liability of
Chi, namely the criminal proceedings against the latter for the violation of P.D. No. 115.
Petitioner claims that because of the said criminal proceedings, Chi would be answerable for
the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent
rejected this claim because such civil liability presupposes prior conviction as can be gleaned
from the phrase "without prejudice to the civil liability arising from the criminal offense." Both
are wrong. The said section reads:
Sec. 13. Penalty Clause. The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or instruments covered by a
trust receipt to the extent of the amount owing to the entruster or as appears
in the trust receipt or to return said goods, documents or instruments if they
were not sold or disposed of in accordance with the terms of the trust receipt
shall constitute the crime of estafa, punishable under the provisions of Article
Three hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known as the
Revised Penal Code. If the violation or offense is committed by a
corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense,
without prejudice to the civil liabilities arising from the criminal offense.
A close examination of the quoted provision reveals that it is the last sentence which provides
for the correct solution. It is clear that if the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty shall be imposed upon the
directors, officers, employees or other officials or persons therein responsible for the offense.
The penalty referred to is imprisonment, the duration of which would depend on the amount
of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is
obvious: corporations, partnerships, associations and other juridical entities cannot be put in
jail. However, it is these entities which are made liable for the civil liability arising from the
criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising
from the criminal offense." And, as We stated earlier, since that violation of a trust receipt
constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its rights
in filing an independent civil action to enforce the civil liability arising therefrom against
Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal of the case
against private respondent Chi. The trial court based the dismissal, and the respondent Court
its affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity
either as surety or as guarantor because his signature at the dorsal portion thereof was
useless; and even if he could be bound by such signature as a simple guarantor, he cannot,
pursuant to Article 2058 of the Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the principal debtor,
Philippine Rayon. The records fail to show that petitioner had done so 33 Reliance is thus
placed on Article 2058 of the Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor, and has resorted to all the
legal remedies against the debtor.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua non for the institution of an
action against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court stated:
4. Although an ordinary personal guarantor not a mortgagor or pledgor
may demand the aforementioned exhaustion, the creditor may, prior thereto,
secure a judgment against said guarantor, who shall be entitled, however, to
a deferment of the execution of said judgment against him until after the
properties of the principal debtor shall have been exhausted to satisfy the
obligation involved in the case.
There was then nothing procedurally objectionable in impleading private respondent Chi as a
co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6,
Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads:
Sec. 6. Permissive joinder of parties. All persons in whom or against
whom any right to relief in respect to or arising out of the same transaction or
series of transactions is alleged to exist, whether jointly, severally, or in the
alternative, may, except as otherwise provided in these rules, join as
plaintiffs or be joined as defendants in one complaint, where any question of
law or fact common to all such plaintiffs or to all such defendants may arise
in the action; but the court may make such orders as may be just to prevent
any plaintiff or defendant from being embarrassed or put to expense in
connection with any proceedings in which he may have no interest.
This is the equity rule relating to multifariousness. It is based on trial convenience and is
designed to permit the joinder of plaintiffs or defendants whenever there is a common
question of law or fact. It will save the parties unnecessary work, trouble and expense. 35
However, Chi's liability is limited to the principal obligation in the trust receipt plus all the
accessories thereof including judicial costs; with respect to the latter, he shall only be liable
for those costs incurred after being judicially required to pay. 36 Interest and damages, being
accessories of the principal obligation, should also be paid; these, however, shall run only
from the date of the filing of the complaint. Attorney's fees may even be allowed in
appropriate cases. 37
In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be
paid by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and
not the full extent of the latter's liability. All things considered, he can be held liable for the
sum of P10,000.00 as attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the complaint as
against private respondent Chi and condemning petitioner to pay him P20,000.00 as
attorney's fees.
In the light of the foregoing, it would no longer necessary to discuss the other issues raised
by the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV
No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the then Court of First
Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE
and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the
twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive) and on the
trust receipt (Exhibit "C"), and ordering it to pay petitioner: (a) the amounts
due thereon in the total sum of P956,384.95 as of 15 September 1974, with
interest thereon at six percent (6%) per annum from 16 September 1974
until it is fully paid, less whatever may have been applied thereto by virtue of
foreclosure of mortgages, if any; (b) a sum equal to ten percent (10%) of the
aforesaid amount as attorney's fees; and (c) the costs.
2. Declaring private respondent Anacleto R. Chi secondarily liable on the
trust receipt and ordering him to pay the face value thereof, with interest at
the legal rate, commencing from the date of the filing of the complaint in Civil
Case No. Q-19312 until the same is fully paid as well as the costs and
attorney's fees in the sum of P10,000.00 if the writ of execution for the
enforcement of the above awards against Philippine Rayon Mills, Inc. is
returned unsatisfied.
Costs against private respondents.
SO ORDERED.
G.R. No. 146717 November 22, 2004
TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO CORPORATION,
AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK
CORPORATION, respondents.
D E C I S I O N
TINGA, J.:
Subject of this case is the letter of credit which has evolved as the ubiquitous and most
important device in international trade. A creation of commerce and businessmen, the letter
of credit is also unique in the number of parties involved and its supranational character.
Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901
entitled "Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31
January 2001.2
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC)
entered into a Turnkey Contract3 whereby petitioner, as Turnkey Contractor, undertook to
construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the
Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner
was given the sole responsibility for the design, construction, commissioning, testing and
completion of the Project.4
The Turnkey Contract provides that: (1) the target completion date of the Project shall be on
1 June 2000, or such later date as may be agreed upon between petitioner and respondent
LHC or otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is
entitled to claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract,
among which are variations, force majeure, and delays caused by LHC itself.5 Further, in
case of dispute, the parties are bound to settle their differences through mediation,
conciliation and such other means enumerated under Clause 20.3 of the Turnkey Contract.6
To secure performance of petitioner's obligation on or before the target completion date, or
such time for completion as may be determined by the parties' agreement, petitioner opened
in favor of LHC two (2) standby letters of credit both dated 20 March 2000 (hereinafter
referred to as "the Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the
local branch of respondent Australia and New Zealand Banking Group Limited (ANZ
Bank)7 and Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank
Corporation (SBC)8each in the amount of US$8,988,907.00.9
In the course of the construction of the project, petitioner sought various EOT to complete the
Project. The extensions were requested allegedly due to several factors which prevented the
completion of the Project on target date, such as force majeure occasioned by typhoon Zeb,
barricades and demonstrations. LHC denied the requests, however. This gave rise to a
series of legal actions between the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction
Industry Arbitration Commission (CIAC) on 1 June 1999.10 This was followed by another
Request for Arbitration, this time filed by petitioner before the International Chamber of
Commerce (ICC)11 on 3 November 2000. In both arbitration proceedings, the common
issues presented were: [1) whether typhoon Zeb and any of its associated events constituted
force majeure to justify the extension of time sought by petitioner; and [2) whether LHC had
the right to terminate the Turnkey Contract for failure of petitioner to complete the Project on
target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent
provisions of the Turnkey Contract,12 petitionerin two separate letters13 both dated 10
August 2000advised respondent banks of the arbitration proceedings already pending
before the CIAC and ICC in connection with its alleged default in the performance of its
obligations. Asserting that LHC had no right to call on the Securities until the resolution of
disputes before the arbitral tribunals, petitioner warned respondent banks that any transfer,
release, or disposition of the Securities in favor of LHC or any person claiming under LHC
would constrain it to hold respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to
Clause 8.214 of the Turnkey Contract, it failed to comply with its obligation to complete the
Project. Despite the letters of petitioner, however, both banks informed petitioner that they
would pay on the Securities if and when LHC calls on them.15
LHC asserted that additional extension of time would not be warranted; accordingly it
declared petitioner in default/delay in the performance of its obligations under the Turnkey
Contract and demanded from petitioner the payment of US$75,000.00 for each day of delay
beginning 28 June 2000 until actual completion of the Project pursuant to Clause 8.7.1 of the
Turnkey Contract. At the same time, LHC served notice that it would call on the securities for
the payment of liquidated damages for the delay.16
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for
temporary restraining order and writ of preliminary injunction, against herein respondents as
defendants before the Regional Trial Court (RTC) of Makati.17 Petitioner sought to restrain
respondent LHC from calling on the Securities and respondent banks from transferring,
paying on, or in any manner disposing of the Securities or any renewals or substitutes
thereof. The RTC issued a seventy-two (72)-hour temporary restraining order on the same
day. The case was docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC
of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000,
extending the temporary restraining order for a period of seventeen (17) days or until 26
November 2000.18
The RTC, in its Order19 dated 24 November 2000, denied petitioner's application for a writ of
preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable
injury to justify the issuance of the writ. Employing the principle of "independent contract" in
letters of credit, the trial court ruled that LHC should be allowed to draw on the Securities for
liquidated damages. It debunked petitioner's contention that the principle of "independent
contract" could be invoked only by respondent banks since according to it respondent LHC is
the ultimate beneficiary of the Securities. The trial court further ruled that the banks were
mere custodians of the funds and as such they were obligated to transfer the same to the
beneficiary for as long as the latter could submit the required certification of its claims.
Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction,
petitioner elevated the case to the Court of Appeals via a Petition for Certiorari under Rule
65, with prayer for the issuance of a temporary restraining order and writ of preliminary
injunction.20 Petitioner submitted to the appellate court that LHC's call on the Securities was
premature considering that the issue of its default had not yet been resolved with finality by
the CIAC and/or the ICC. It asserted that until the fact of delay could be established, LHC
had no right to draw on the Securities for liquidated damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call
on and use of the Securities as payment for liquidated damages. It averred that the Securities
are independent of the main contract between them as shown on the face of the two Standby
Letters of Credit which both provide that the banks have no responsibility to investigate the
authenticity or accuracy of the certificates or the declarant's capacity or entitlement to so
certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary
restraining order, enjoining LHC from calling on the Securities or any renewals or substitutes
thereof and ordering respondent banks to cease and desist from transferring, paying or in
any manner disposing of the Securities.
However, the appellate court failed to act on the application for preliminary injunction until the
temporary restraining order expired on 27 January 2001. Immediately thereafter,
representatives of LHC trooped to ANZ Bank and withdrew the total amount of
US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate
court expressed conformity with the trial court's decision that LHC could call on the Securities
pursuant to the first principle in credit law that the credit itself is independent of the underlying
transaction and that as long as the beneficiary complied with the credit, it was of no moment
that he had not complied with the underlying contract. Further, the appellate court held that
even assuming that the trial court's denial of petitioner's application for a writ of preliminary
injunction was erroneous, it constituted only an error of judgment which is not correctible by
certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for
resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY
BE INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL
THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES
BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S DISPUTES BY THE
APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING
THE AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED
THAT LHC'S CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE
DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND
SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING
BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY
DRAWN FROM THE SECURITIES.21
Petitioner contends that the courts below improperly relied on the "independence principle"
on letters of credit when this case falls squarely within the "fraud exception rule." Respondent
LHC deliberately misrepresented the supposed existence of delay despite its knowledge that
the issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities
pursuant to the principle against unjust enrichment and that, under the premises, injunction
was the appropriate remedy obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition22 and Supplemental
Memorandum,23 alleging that in the course of the proceedings in the ICC Arbitration, a
number of documentary and testimonial evidence came out through the use of different
modes of discovery available in the ICC Arbitration. It contends that after the filing of the
petition facts and admissions were discovered which demonstrate that LHC knowingly
misrepresented that petitioner had incurred delays notwithstanding its knowledge and
admission that delays were excused under the Turnkey Contractto be able to draw against
the Securities. Reiterating that fraud constitutes an exception to the independence principle,
petitioner urges that this warrants a ruling from this Court that the call on the Securities was
wrongful, as well as contrary to law and basic principles of equity. It avers that it would suffer
grave irreparable damage if LHC would be allowed to use the proceeds of the Securities and
not ordered to return the amounts it had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,24 LHC contends that the supplemental
pleadings filed by petitioner present erroneous and misleading information which would
change petitioner's theory on appeal.
In yet another Manifestation dated 12 April 2004,25 petitioner alleges that on 18 February
2004, the ICC handed down its Third Partial Award, declaring that LHC wrongfully drew upon
the Securities and that petitioner was entitled to the return of the sums wrongfully taken by
LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,26 stating that petitioner's
Manifestation dated 12 April 2004 enlarges the scope of its Petition for Review of the 31
January 2001 Decision of the Court of Appeals. LHC notes that the Petition for Review
essentially dealt only with the issue of whether injunction could issue to restrain the
beneficiary of an irrevocable letter of credit from drawing thereon. It adds that petitioner has
filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled "Transfield
Philippines Inc. v. Luzon Hydro Corporation," in which the parties made claims and
counterclaims arising from petitioner's performance/misperformance of its obligations as
contractor for LHC; and (2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v.
Luzon Hydro Corporation" before Branch 56 of the RTC of Makati, which is an action to
enforce and obtain execution of the ICC's partial award mentioned in petitioner's
Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's
Memorandum, LHC stresses that the question of whether the funds it drew on the subject
letters of credit should be returned is outside the issue in this appeal. At any rate, LHC adds
that the action to enforce the ICC's partial award is now fully within the Makati RTC's
jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in forum-
shopping by keeping this appeal and at the same time seeking the suit for enforcement of the
arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 200327 contends that the Court of
Appeals correctly dismissed the petition for certiorari. Invoking the independence principle,
SBC argues that it was under no obligation to look into the validity or accuracy of the
certification submitted by respondent LHC or into the latter's capacity or entitlement to so
certify. It adds that the act sought to be enjoined by petitioner was already fait accompli and
the present petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 200328 posits
that its actions could not be regarded as unjustified in view of the prevailing independence
principle under which it had no obligation to ascertain the truth of LHC's allegations that
petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of
Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary injunction
had been rendered moot and academic.
At the core of the present controversy is the applicability of the "independence principle" and
"fraud exception rule" in letters of credit. Thus, a discussion of the nature and use of letters of
credit, also referred to simply as "credits," would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its
facets is to recognize that it is an entity unto itself. The relationship between the beneficiary
and the issuer of a letter of credit is not strictly contractual, because both privity and a
meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right.
Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn
against a letter regardless of problems subsequently arising in the underlying contract. Since
the bank's customer cannot draw on the letter, it does not function as an assignment by the
customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee,
because it entails a primary liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is generally conditional, yet the
draft presented under it is often negotiable.29
In commercial transactions, a letter of credit is a financial device developed by merchants as
a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a
buyer, who wants to have control of the goods before paying.30 The use of credits in
commercial transactions serves to reduce the risk of nonpayment of the purchase price under
the contract for the sale of goods. However, credits are also used in non-sale settings where
they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings
have come to be known as standby credits.31
There are three significant differences between commercial and standby credits. First,
commercial credits involve the payment of money under a contract of sale. Such credits
become payable upon the presentation by the seller-beneficiary of documents that show he
has taken affirmative steps to comply with the sales agreement. In the standby type, the
credit is payable upon certification of a party's nonperformance of the agreement. The
documents that accompany the beneficiary's draft tend to show that the applicant has not
performed. The beneficiary of a commercial credit must demonstrate by documents that he
has performed his contract. The beneficiary of the standby credit must certify that his obligor
has not performed the contract.32
By definition, a letter of credit is a written instrument whereby the writer requests or
authorizes the addressee to pay money or deliver goods to a third person and assumes
responsibility for payment of debt therefor to the addressee.33 A letter of credit, however,
changes its nature as different transactions occur and if carried through to completion ends
up as a binding contract between the issuing and honoring banks without any regard or
relation to the underlying contract or disputes between the parties thereto.34
Since letters of credit have gained general acceptability in international trade transactions,
the ICC has published from time to time updates on the Uniform Customs and Practice
(UCP) for Documentary Credits to standardize practices in the letter of credit area. The vast
majority of letters of credit incorporate the UCP.35 First published in 1933, the UCP for
Documentary Credits has undergone several revisions, the latest of which was in 1993.36
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,37 this Court ruled that
the observance of the UCP is justified by Article 2 of the Code of Commerce which provides
that in the absence of any particular provision in the Code of Commerce, commercial
transactions shall be governed by usages and customs generally observed. More recently, in
Bank of America, NT & SA v. Court of Appeals,38 this Court ruled that there being no specific
provisions which govern the legal complexities arising from transactions involving letters of
credit, not only between or among banks themselves but also between banks and the seller
or the buyer, as the case may be, the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate transactions from the
sales or other contract(s) on which they may be based and banks are in no way concerned
with or bound by such contract(s), even if any reference whatsoever to such contract(s) is
included in the credit. Consequently, the undertaking of a bank to pay, accept and pay
draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims
or defenses by the applicant resulting from his relationships with the issuing bank or the
beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing
between the banks or between the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once
the draft and the required documents are presented to it. The so-called "independence
principle" assures the seller or the beneficiary of prompt payment independent of any breach
of the main contract and precludes the issuing bank from determining whether the main
contract is actually accomplished or not. Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of
any documents, or for the general and/or particular conditions stipulated in the documents or
superimposed thereon, nor do they assume any liability or responsibility for the description,
quantity, weight, quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers, or the insurers of the goods, or any
other person whomsoever.39
The independent nature of the letter of credit may be: (a) independence in toto where the
credit is independent from the justification aspect and is a separate obligation from the
underlying agreement like for instance a typical standby; or (b) independence may be only as
to the justification aspect like in a commercial letter of credit or repayment standby, which is
identical with the same obligations under the underlying agreement. In both cases the
payment may be enjoined if in the light of the purpose of the credit the payment of the credit
would constitute fraudulent abuse of the credit.40
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case and
assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand,
contends that it would be contrary to common sense to deny the benefit of an independent
contract to the very party for whom the benefit is intended. As beneficiary of the letter of
credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the credit is
stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the
beneficiary provided that the stipulated documents are presented and the conditions of the
credit are complied with.41 Precisely, the independence principle liberates the issuing bank
from the duty of ascertaining compliance by the parties in the main contract. As the principle's
nomenclature clearly suggests, the obligation under the letter of credit is independent of the
related and originating contract. In brief, the letter of credit is separate and distinct from the
underlying transaction.
Given the nature of letters of credit, petitioner's argumentthat it is only the issuing bank that
may invoke the independence principle on letters of creditdoes not impress this Court. To
say that the independence principle may only be invoked by the issuing banks would render
nugatory the purpose for which the letters of credit are used in commercial transactions. As it
is, the independence doctrine works to the benefit of both the issuing bank and the
beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial transactions,
not for the benefit of the issuing bank but mainly for the benefit of the parties to the original
transactions. With the letter of credit from the issuing bank, the party who applied for and
obtained it may confidently present the letter of credit to the beneficiary as a security to
convince the beneficiary to enter into the business transaction. On the other hand, the other
party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest
assured of being empowered to call on the letter of credit as a security in case the
commercial transaction does not push through, or the applicant fails to perform his part of the
transaction. It is for this reason that the party who is entitled to the proceeds of the letter of
credit is appropriately called "beneficiary."
Petitioner's argument that any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in
essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid
down a clear distinction between a letter of credit and a guarantee in that the settlement of a
dispute between the parties is not a pre-requisite for the release of funds under a letter of
credit. In other words, the argument is incompatible with the very nature of the letter of credit.
If a letter of credit is drawable only after settlement of the dispute on the contract entered into
by the applicant and the beneficiary, there would be no practical and beneficial use for letters
of credit in commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the
issue:
The standby credit is an attractive commercial device for many of the same reasons
that commercial credits are attractive. Essentially, these credits are inexpensive and
efficient. Often they replace surety contracts, which tend to generate higher costs
than credits do and are usually triggered by a factual determination rather than by
the examination of documents.
Because parties and courts should not confuse the different functions of the surety
contract on the one hand and the standby credit on the other, the distinction between
surety contracts and credits merits some reflection. The two commercial devices
share a common purpose. Both ensure against the obligor's nonperformance. They
function, however, in distinctly different ways.
Traditionally, upon the obligor's default, the surety undertakes to complete the
obligor's performance, usually by hiring someone to complete that performance.
Surety contracts, then, often involve costs of determining whether the obligor
defaulted (a matter over which the surety and the beneficiary often litigate) plus the
cost of performance. The benefit of the surety contract to the beneficiary is obvious.
He knows that the surety, often an insurance company, is a strong financial
institution that will perform if the obligor does not. The beneficiary also should
understand that such performance must await the sometimes lengthy and costly
determination that the obligor has defaulted. In addition, the surety's performance
takes time.
The standby credit has different expectations. He reasonably expects that he will
receive cash in the event of nonperformance, that he will receive it promptly, and that
he will receive it before any litigation with the obligor (the applicant) over the nature
of the applicant's performance takes place. The standby credit has this opposite
effect of the surety contract: it reverses the financial burden of parties during
litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the
beneficiary establishes the fact of the obligor's performance. The beneficiary may
have to establish that fact in litigation. During the litigation, the surety holds the
money and the beneficiary bears most of the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and
receives his money promptly upon presentation of the required documents. It may be
that the applicant has, in fact, performed and that the beneficiary's presentation of
those documents is not rightful. In that case, the applicant may sue the beneficiary in
tort, in contract, or in breach of warranty; but, during the litigation to determine
whether the applicant has in fact breached the obligation to perform, the beneficiary,
not the applicant, holds the money. Parties that use a standby credit and courts
construing such a credit should understand this allocation of burdens. There is a
tendency in some quarters to overlook this distinction between surety contracts and
standby credits and to reallocate burdens by permitting the obligor or the issuer to
litigate the performance question before payment to the beneficiary.42
While it is the bank which is bound to honor the credit, it is the beneficiary who has the right
to ask the bank to honor the credit by allowing him to draw thereon. The situation itself
emasculates petitioner's posture that LHC cannot invoke the independence principle and
highlights its puerility, more so in this case where the banks concerned were impleaded as
parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their releases of
the amounts due under the Securities. Owing to the nature and purpose of the standby letters
of credit, this Court rules that the respondent banks were left with little or no alternative but to
honor the credit and both of them in fact submitted that it was "ministerial" for them to honor
the call for payment.43
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant
provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the
Contractor at its cost shall on the Commencement Date provide security to the
Employer in the form of two irrevocable and confirmed standby letters of credit (the
"Securities"), each in the amount of US$8,988,907, issued and confirmed by banks
or financial institutions acceptable to the Employer. Each of the Securities must be in
form and substance acceptable to the Employer and may be provided on an annually
renewable basis.44
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the
Employer by way of liquidated damages ("Liquidated Damages for Delay") the
amount of US$75,000 for each and every day or part of a day that shall elapse
between the Target Completion Date and the Completion Date, provided that
Liquidated Damages for Delay payable by the Contractor shall in the aggregate not
exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages for
Delay for each day of the delay on the following day without need of demand from
the Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct
the amount of such damages from any monies due, or to become due to the
Contractor and/or by drawing on the Security."45
A contract once perfected, binds the parties not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which according to their nature, may be
in keeping with good faith, usage, and law.46A careful perusal of the Turnkey Contract
reveals the intention of the parties to make the Securities answerable for the liquidated
damages occasioned by any delay on the part of petitioner. The call upon the Securities,
while not an exclusive remedy on the part of LHC, is certainly an alternative recourse
available to it upon the happening of the contingency for which the Securities have been
proffered. Thus, even without the use of the "independence principle," the Turnkey Contract
itself bestows upon LHC the right to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the
Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that
there is already a breach in the Turnkey Contract knowing fully well that this is yet to be
determined by the arbitral tribunals. It asserts that the "fraud exception" exists when the
beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming
bank, documents that contain, expressly or by implication, material representations of fact
that to his knowledge are untrue. In such a situation, petitioner insists, injunction is
recognized as a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is
not without limits and it is important to fashion those limits in light of the principle's purpose,
which is to serve the commercial function of the credit. If it does not serve those functions,
application of the principle is not warranted, and the commonlaw principles of contract should
apply.
It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with
the fact of default which is the self-same issue pending resolution before the arbitral tribunals.
To be able to declare the call on the Securities wrongful or fraudulent, it is imperative to
resolve, among others, whether petitioner was in fact guilty of delay in the performance of its
obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the issue of
defaultsuch issue having been submitted by the parties to the jurisdiction of the arbitral
tribunals pursuant to the terms embodied in their agreement.47
Would injunction then be the proper remedy to restrain the alleged wrongful draws on the
Securities?
Most writers agree that fraud is an exception to the independence principle. Professor Dolan
opines that the untruthfulness of a certificate accompanying a demand for payment under a
standby credit may qualify as fraud sufficient to support an injunction against payment.48 The
remedy for fraudulent abuse is an injunction. However, injunction should not be granted
unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the
independent purpose of the letter of credit and not only fraud under the main agreement; and
(c) irreparable injury might follow if injunction is not granted or the recovery of damages
would be seriously damaged.49
In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total
extension of two hundred fifty-three (253) days which would move the target completion date.
It argued that if its claims for extension would be found meritorious by the ICC, then LHC
would not be entitled to any liquidated damages.50
Generally, injunction is a preservative remedy for the protection of one's substantive right or
interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a
main suit. The issuance of the writ of preliminary injunction as an ancillary or preventive
remedy to secure the rights of a party in a pending case is entirely within the discretion of the
court taking cognizance of the case, the only limitation being that this discretion should be
exercised based upon the grounds and in the manner provided by law.51
Before a writ of preliminary injunction may be issued, there must be a clear showing by the
complaint that there exists a right to be protected and that the acts against which the writ is to
be directed are violative of the said right.52 It must be shown that the invasion of the right
sought to be protected is material and substantial, that the right of complainant is clear and
unmistakable and that there is an urgent and paramount necessity for the writ to prevent
serious damage.53 Moreover, an injunctive remedy may only be resorted to when there is a
pressing necessity to avoid injurious consequences which cannot be remedied under any
standard compensation.54
In the instant case, petitioner failed to show that it has a clear and unmistakable right to
restrain LHC's call on the Securities which would justify the issuance of preliminary injunction.
By petitioner's own admission, the right of LHC to call on the Securities was contractually
rooted and subject to the express stipulations in the Turnkey Contract.55Indeed, the Turnkey
Contract is plain and unequivocal in that it conferred upon LHC the right to draw upon the
Securities in case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any
of the Securities, stating the nature of the default for which the claim on any of the
Securities is to be made, provided that no notice will be required if the Employer calls
upon any of the Securities for the payment of Liquidated Damages for Delay or for
failure by the Contractor to renew or extend the Securities within 14 days of their
expiration in accordance with Clause 4.2.2.56
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct
the amount of such damages from any monies due, or to become due, to the
Contractor and/or by drawing on the Security.57
The pendency of the arbitration proceedings would not per se make LHC's draws on the
Securities wrongful or fraudulent for there was nothing in the Contract which would indicate
that the parties intended that all disputes regarding delay should first be settled through
arbitration before LHC would be allowed to call upon the Securities. It is therefore premature
and absurd to conclude that the draws on the Securities were outright fraudulent given the
fact that the ICC and CIAC have not ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before the appellate
court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an
injunction.58 What petitioner did assert before the courts below was the fact that LHC's
draws on the Securities would be premature and without basis in view of the pending
disputes between them. Petitioner should not be allowed in this instance to bring into play the
fraud exception rule to sustain its claim for the issuance of an injunctive relief. Matters,
theories or arguments not brought out in the proceedings below will ordinarily not be
considered by a reviewing court as they cannot be raised for the first time on appeal.59 The
lower courts could thus not be faulted for not applying the fraud exception rule not only
because the existence of fraud was fundamentally interwoven with the issue of default still
pending before the arbitral tribunals, but more so, because petitioner never raised it as an
issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show
that it had a clear and unmistakable right to prevent LHC's call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the pending issues
before the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier
stated, the Turnkey Contract did not require LHC to do so and, therefore, it was merely
enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts
have the force of law between the contracting parties and should be complied with in good
faith.60 More importantly, pursuant to the principle of autonomy of contracts embodied in
Article 1306 of the Civil Code,61 petitioner could have incorporated in its Contract with LHC,
a proviso that only the final determination by the arbitral tribunals that default had occurred
would justify the enforcement of the Securities. However, the fact is petitioner did not do so;
hence, it would have to live with its inaction.
With respect to the issue of whether the respondent banks were justified in releasing the
amounts due under the Securities, this Court reiterates that pursuant to the independence
principle the banks were under no obligation to determine the veracity of LHC's certification
that default has occurred. Neither were they bound by petitioner's declaration that LHC's call
thereon was wrongful. To repeat, respondent banks' undertaking was simply to pay once the
required documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's
draws upon the Securities were wrongful due to the non-existence of the fact of default, its
right to seek indemnification for damages it suffered would not normally be foreclosed
pursuant to general principles of law.
Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this Court that the
subject letters of credit had been fully drawn. This fact alone would have been sufficient
reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be enjoined have
already become fait accompli or an accomplished or consummated act.63 In Ticzon v. Video
Post Manila, Inc.64 this Court ruled that where the period within which the former employees
were prohibited from engaging in or working for an enterprise that competed with their former
employerthe very purpose of the preliminary injunction has expired, any declaration
upholding the propriety of the writ would be entirely useless as there would be no actual case
or controversy between the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the
instant petition mootfor any declaration by this Court as to propriety or impropriety of the
non-issuance of injunctive relief could have no practical effect on the existing
controversy.65 The other issues raised by petitioner particularly with respect to its right to
recover the amounts wrongfully drawn on the Securities, according to it, could properly be
threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two
occasions. First, in its Counter-Manifestation dated 29 June 200466 LHC alleges that
petitioner presented before this Court the same claim for money which it has filed in two other
proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC
of Makati. LHC argues that petitioner's acts constitutes forum-shopping which should be
punished by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's
Motion for Leave to File Addendum to Petitioner's Memorandum dated 8 October 2004, LHC
alleges that by maintaining the present appeal and at the same time pursuing Civil Case No.
04-332wherein petitioner pressed for judgment on the issue of whether the funds LHC
drew on the Securities should be returnedpetitioner resorted to forum-shopping. In both
instances, however, petitioner has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of several
judicial remedies in different courts, simultaneously or successively, all substantially founded
on the same transactions and the same essential facts and circumstances, and all raising
substantially the same issues either pending in, or already resolved adversely, by some other
court.67 It may also consist in the act of a party against whom an adverse judgment has
been rendered in one forum, of seeking another and possibly favorable opinion in another
forum other than by appeal or special civil action of certiorari, or the institution of two or more
actions or proceedings grounded on the same cause on the supposition that one or the other
court might look with favor upon the other party.68 To determine whether a party violated the
rule against forum-shopping, the test applied is whether the elements of litis pendentia are
present or whether a final judgment in one case will amount to res judicata in
another.69 Forum-shopping constitutes improper conduct and may be punished with
summary dismissal of the multiple petitions and direct contempt of court.70
Considering the seriousness of the charge of forum-shopping and the severity of the
sanctions for its violation, the Court will refrain from making any definitive ruling on this issue
until after petitioner has been given ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days
from notice.
SO ORDERED.

























































G.R. No. 159622 July 30, 2004
LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL P.
LUCENTE, petitioners, vs. METROPOLITAN BANK & TRUST COMPANY, respondent.
D E C I S I O N
YNARES-SANTIAGO, J.:
At issue in this petition for review on certiorari is whether or not, in a trust receipt transaction,
an entruster which had taken actual and juridical possession of the goods covered by the
trust receipt may subsequently avail of the right to demand from the entrustee the deficiency
of the amount covered by the trust receipt.
As correctly appreciated by the Court of Appeals, the undisputed facts of this case are as
follows:
Respondent Metropolitan Bank and Trust Company (Metrobank) filed a complaint for sum of
money against Landl and Company (Phil.) Inc. (Landl) and its directors, Percival G. Llaban
and Manuel P. Lucente before the Regional Trial Court of Cebu City, Branch 19, docketed as
Civil Case No. CEB-4895.
Respondent alleged that petitioner corporation is engaged in the business of selling imported
welding rods and alloys. On June 17, 1983, it opened Commercial Letter of Credit No. 4998
with respondent bank, in the amount of US$19,606.77, which was equivalent to P218,733.92
in Philippine currency at the time the transaction was consummated. The letter of credit was
opened to purchase various welding rods and electrodes from Perma Alloys, Inc., New York,
U.S.A., as evidenced by a Pro-Forma Invoice dated March 10, 1983. Petitioner corporation
put up a marginal deposit of P50,414.00 from the proceeds of a separate clean loan.
As an additional security, and as a condition for the approval of petitioner corporation's
application for the opening of the commercial letter of credit, respondent bank required
petitioners Percival G. Llaban and Manuel P. Lucente to execute a Continuing Suretyship
Agreement to the extent of P400,000.00, excluding interest, in favor of respondent bank.
Petitioner Lucente also executed a Deed of Assignment in the amount of P35,000.00 in favor
of respondent bank to cover the amount of petitioner corporation's obligation to the bank.
Upon compliance with these requisites, respondent bank opened an irrevocable letter of
credit for the petitioner corporation.
To secure the indebtedness of petitioner corporation, respondent bank required the execution
of a Trust Receipt in an amount equivalent to the letter of credit, on the condition that
petitioner corporation would hold the goods in trust for respondent bank, with the right to sell
the goods and the obligation to turn over to respondent bank the proceeds of the sale, if any.
If the goods remained unsold, petitioner corporation had the further obligation to return them
to respondent bank on or before November 23, 1983.
Upon arrival of the goods in the Philippines, petitioner corporation took possession and
custody thereof.
On November 23, 1983, the maturity date of the trust receipt, petitioner corporation defaulted
in the payment of its obligation to respondent bank and failed to turn over the goods to the
latter. On July 24, 1984, respondent bank demanded that petitioners, as entrustees, turn over
the goods subject of the trust receipt. On September 24, 1984, petitioners turned over the
subject goods to the respondent bank.
On July 31, 1985, in the presence of representatives of the petitioners and respondent bank,
the goods were sold at public auction. The goods were sold for P30,000.00 to respondent
bank as the highest bidder.
The proceeds of the auction sale were insufficient to completely satisfy petitioners'
outstanding obligation to respondent bank, notwithstanding the application of the time deposit
account of petitioner Lucente. Accordingly, respondent bank demanded that petitioners pay
the remaining balance of their obligation. After petitioners failed to do so, respondent bank
instituted the instant case to collect the said deficiency.
On March 31, 1997, after trial on the merits, the trial court rendered a decision, the
dispositive portion of which reads:
WHEREFORE, foregoing premises considered, Judgment is hereby rendered in
favor of the plaintiff and against the defendant by (1) ordering the defendant to pay
jointly and severally to the plaintiff the sum of P292,172.23 representing the
defendant's obligation, as of April 17, 1986; (2) to pay the interest at the rate of 19%
per annum to be reckoned from April 18, 1986 until [the] obligation is fully paid; (3) to
pay service charge at the rate of 2% per annum starting April 18, 1986; (4) to pay the
sum equivalent to 10% per annum of the total amount due collectible by way of
Attorney's Fees; (5) to pay Litigation Expenses of P3,000.00 and to pay the cost of
the suit; and (6) to pay penalty charge of 12% per annum.
SO ORDERED.1
Petitioners appealed to the Court of Appeals, raising the issues of: (1) whether or not
respondent bank has the right to recover any deficiency after it has retained possession of
and subsequently effected a public auction sale of the goods covered by the trust receipt; (2)
whether or not respondent bank is entitled to the amount of P3,000.00 as and for litigation
expenses and costs of the suit; and (3) whether or not respondent bank is entitled to the
award of attorney's fees.
On February 13, 2003, the Court of Appeals rendered a decision affirming in toto the decision
of the trial court.2
Hence, this petition for review on the following assignment of errors:
I.
THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING THE
TRIAL COURT'S RULING THAT RESPONDENT HAD THE RIGHT TO CLAIM THE
DEFICIENCY FROM PETITIONERS NOTWITHSTANDING THE FACT THAT THE
GOODS COVERED BY THE TRUST RECEIPT WERE FULLY TURNED OVER TO
RESPONDENT.
II.
THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING THE
TRIAL COURT'S PATENTLY ERRONEOUS AWARD OF PRINCIPAL OBLIGATION,
INTEREST, ATTORNEY'S FEES, AND PENALTY AGAINST THE PETITIONERS.3
The instant petition is partly meritorious.
The resolution of the first assigned error hinges on the proper interpretation of Section 7 of
Presidential Decree No. 115, or the Trust Receipts Law, which reads:
Sec. 7. Rights of the entruster. - The entruster shall be entitled to the proceeds from
the sale of the goods, documents or instruments released under a trust receipt to the
entrustee to the extent of the amount owing to the entruster or as appears in the trust
receipt, or to the return of the goods, documents or instruments in case of non-sale,
and to the enforcement of all other rights conferred on him in the trust receipt
provided such are not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the goods, documents or
instruments subject of the trust or of the proceeds realized therefrom at any time
upon default or failure of the entrustee to comply with any of the terms and
conditions of the trust receipt or any other agreement between the entruster and the
entrustee, and the entruster in possession of the goods, documents or instruments
may, on or after default, give notice to the entrustee of the intention to sell, and may,
not less than five days after serving or sending of such notice, sell the goods,
documents or instruments at public or private sale, and the entruster may, at a public
sale, become a purchaser. The proceeds of any such sale, whether public or private,
shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the
expenses of re-taking, keeping and storing the goods, documents or instruments; (c)
to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee
shall receive any surplus but shall be liable to the entruster for any deficiency. Notice
of sale shall be deemed sufficiently given if in writing, and either personally served
on the entrustee or sent by post-paid ordinary mail to the entrustee's last known
business address.
There is no question that petitioners failed to pay their outstanding obligation to respondent
bank. They contend, however, that when the entrustee fails to settle his principal loan, the
entruster may choose between two separate and alternative remedies: (1) the return of the
goods covered by the trust receipt, in which case, the entruster now acquires the ownership
of the goods which the entrustee failed to sell; or (2) cancel the trust and take possession of
the goods, for the purpose of selling the same at a private sale or at public auction.
Petitioners assert that, under this second remedy, the entruster does not acquire ownership
of the goods, in which case he is entitled to the deficiency. Petitioners argue that these two
remedies are so distinct that the availment of one necessarily bars the availment of the other.
Thus, when respondent bank availed of the remedy of demanding the return of the goods,
the actual return of all the unsold goods completely extinguished petitioners' liability.4
Petitioners' argument is bereft of merit.
A trust receipt is inextricably linked with the primary agreement between the parties. Time
and again, we have emphasized that a trust receipt agreement is merely a collateral
agreement, the purpose of which is to serve as security for a loan. Thus, in Abad v. Court of
Appeals,5 we ruled:
A letter of credit-trust receipt arrangement is endowed with its own distinctive
features and characteristics. Under that set-up, a bank extends a loan covered by
the letter of credit, with the trust receipt as security for the loan. In other words, the
transaction involves a loan feature represented by the letter of credit, and a security
feature which is in the covering trust receipt. x x x.
A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires
a "security interest" in the goods. It secures an indebtedness and there can be no
such thing as security interest that secures no obligation.6
The Trust Receipts Law was enacted to safeguard commercial transactions and to offer an
additional layer of security to the lending bank. Trust receipts are indispensable contracts in
international and domestic business transactions. The prevalent use of trust receipts, the
danger of their misuse and/or misappropriation of the goods or proceeds realized from the
sale of goods, documents or instruments held in trust for entruster banks, and the need for
regulation of trust receipt transactions to safeguard the rights and enforce the obligations of
the parties involved are the main thrusts of the Trust Receipts Law.7
The second paragraph of Section 7 provides a statutory remedy available to an entruster in
the event of default or failure of the entrustee to comply with any of the terms and conditions
of the trust receipt or any other agreement between the entruster and the entrustee. More
specifically, the entruster "may cancel the trust and take possession of the goods, documents
or instruments subject of the trust or of the proceeds realized therefrom at any time". The law
further provides that "the entruster in possession of the goods, documents or instruments
may, on or after default, give notice to the entrustee of the intention to sell, and may, not less
than five days after serving or sending of such notice, sell the goods, documents or
instruments at public or private sale, and the entruster may, at a public sale, become a
purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to
the payment of the expenses thereof; (b) to the payment of the expenses of re-taking,
keeping and storing the goods, documents or instruments; (c) to the satisfaction of the
entrustee's indebtedness to the entruster. The entrustee shall receive any surplus but shall
be liable to the entruster for any deficiency."
The trust receipt between respondent bank and petitioner corporation contains the following
relevant clauses:
The BANK/ENTRUSTER may, at any time, and only at its option, cancel this trust
and take possession of the goods/documents/instruments subject hereof or of the
proceeds realized therefrom wherever they may then be found, upon default or
failure of the ENTRUSTEE to comply with any of the terms and conditions of this
Trust Receipt or of any other agreement between the BANK/ENTRUSTER and the
ENTRUSTEE; and the BANK/ENTRUSTER having taken repossession of the
goods/documents/instruments object hereof may, on or after default, give at least
five (5) days' previous notice to the ENTRUSTEE of its intention to sell the
goods/documents/instruments at public or private sale, at which public sale, it may
become a purchaser; Provided, that the proceeds of any such sale, whether public or
private, shall be applied: (a) to the payment of the expenses thereof; (b) to the
payment of the expenses of retaking, keeping and storing the
goods/documents/instruments; (c) to the satisfaction of all of the ENTRUSTEE's
indebtedness to the BANK/ENTRUSTER; and Provided, further, that the
ENTRUSTEE shall receive any surplus thereof but shall, in any case, be liable to the
BANK/ENTRUSTER for any deficiency. x x x
No act or omission on the part of the BANK/ENTRUSTER shall be deemed and
considered a waiver of any of its rights hereunder or under any related letters of
credit, drafts or other documents unless such waiver is expressly made in writing
over the signature of the BANK/ENTRUSTER.8
The afore-cited stipulations in the trust receipt are a near-exact reproduction of the second
paragraph of Section 7 of the Trust Receipts Law. The right of repossession and subsequent
sale at public auction which were availed of by respondent bank were rights available upon
default, and which were conferred by statute and reinforced by the contract between the
parties.
The initial repossession by the bank of the goods subject of the trust receipt did not result in
the full satisfaction of the petitioners' loan obligation. Petitioners are apparently laboring
under the mistaken impression that the full turn-over of the goods suffices to divest them of
their obligation to repay the principal amount of their loan obligation. This is definitely not the
case. In Philippine National Bank v. Hon. Gregorio G. Pineda and Tayabas Cement
Company, Inc.,9 we had occasion to rule:
PNB's possession of the subject machinery and equipment being precisely as a form
of security for the advances given to TCC under the Letter of Credit, said possession
by itself cannot be considered payment of the loan secured thereby. Payment would
legally result only after PNB had foreclosed on said securities, sold the same and
applied the proceeds thereof to TCC's loan obligation. Mere possession does not
amount to foreclosure for foreclosure denotes the procedure adopted by the
mortgagee to terminate the rights of the mortgagor on the property and includes the
sale itself.
Neither can said repossession amount to dacion en pago. Dation in payment takes
place when property is alienated to the creditor in satisfaction of a debt in money and
the same is governed by sales. Dation in payment is the delivery and transmission of
ownership of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation. As aforesaid, the repossession of the machinery and
equipment in question was merely to secure the payment of TCC's loan obligation
and not for the purpose of transferring ownership thereof to PNB in satisfaction of
said loan. Thus, no dacion en pago was ever accomplished. (Citations omitted,
underscoring supplied)10
Indeed, in the 1987 case of Vintola v. Insular Bank of Asia and America,11 we struck down
the position of the petitioner-spouses that their obligation to the entruster bank had been
extinguished when they relinquished possession of the goods in question. Thus:
A trust receipt is a security agreement, pursuant to which a bank acquires a
"security interest" in the goods. It secures an indebtedness and there can be no such
thing as security interest that secures no obligation. As defined in our laws:
(h) Security Interest means a property interest in goods, documents or
instruments to secure performance of some obligations of the entrustee or of
some third persons to the entruster and includes title, whether or not
expressed to be absolute, whenever such title is in substance taken or
retained for security only.
x x x x x x x x x
Contrary to the allegations of the VINTOLAS, IBAA did not become the real owner of
the goods. It was merely the holder of a security title for the advances it had made to
the VINTOLAS. The goods the VINTOLAS had purchased through IBAA financing
remain their own property and they hold it at their own risk. The trust receipt
arrangement did not convert the IBAA into an investor; the latter remained a lender
and creditor.
"x x x for the bank has previously extended a loan which the L/C represents
to the importer, and by that loan, the importer should be the real owner of
the goods. If under the trust receipt, the bank is made to appear as the
owner, it was but an artificial expedient, more of a legal fiction than fact, for if
it were so, it could dispose of the goods in any manner it wants, which it
cannot do, just to give consistency with the purpose of the trust receipt of
giving a stronger security for the loan obtained by the importer. To consider
the bank as the true owner from the inception of the transaction would be to
disregard the loan feature thereof. x x x"
Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot
justifiably claim that because they have surrendered the goods to IBAA and
subsequently deposited them in the custody of the court, they are absolutely relieved
of their obligation to pay their loan because of their inability to dispose of the goods.
The fact that they were unable to sell the seashells in question does not affect IBAA's
right to recover the advances it had made under the Letter of Credit. (Citations
omitted.)12
Respondent bank's repossession of the properties and subsequent sale of the goods were
completely in accordance with its statutory and contractual rights upon default of petitioner
corporation.
The second paragraph of Section 7 expressly provides that the entrustee shall be liable to
the entruster for any deficiency after the proceeds of the sale have been applied to the
payment of the expenses of the sale, the payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments, and the satisfaction of the entrustee's
indebtedness to the entruster.
In the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely
petitioner corporation's indebtedness to the respondent bank. Respondent bank was thus
well within its rights to institute the instant case to collect the deficiency.
We find, however, that there has been an error in the computation of the total amount of
petitioners' indebtedness to respondent bank.
Although respondent bank contends that the error of computation is a question of fact which
is beyond the power of this Court to review,13 the total amount of petitioners' indebtedness in
this case is not a question of fact. Rather, it is a question of law, i.e., the application of legal
principles for the computation of the amount owed to respondent bank, and is thus a matter
properly brought for our determination.
The first issue involves the amount of indebtedness prior to the imposition of interest and
penalty charges. The initial amount of the trust receipt of P218,733.92, was reduced to
P192,265.92 as of June 14, 1984, as per respondent's Statement of Past Due Trust Receipt
dated December 1, 1993.14 This amount presumably includes the application of P35,000.00,
the amount of petitioner Lucente's Deed of Assignment, which amount was applied by
respondent bank to petitioners' obligation. No showing was made, however, that the
P30,000.00 proceeds of the auction sale on July 31, 1985 was ever applied to the loan.
Neither was the amount of P50,414.00, representing the marginal deposit made by petitioner
corporation, deducted from the loan. Although respondent bank contends that the marginal
deposit should not be deducted from the principal obligation, this is completely contrary to
prevailing jurisprudence allowing the deduction of the marginal deposit, thus:
The marginal deposit requirement is a Central Bank measure to cut off excess
currency liquidity which would create inflationary pressure. It is a collateral security
given by the debtor, and is supposed to be returned to him upon his compliance with
his secured obligation. Consequently, the bank pays no interest on the marginal
deposit, unlike an ordinary bank deposit which earns interest in the bank. As a matter
of fact, the marginal deposit requirement for letters of credit has been discontinued,
except in those cases where the applicant for a letter of credit is not known to the
bank or does not maintain a good credit standing therein.
It is only fair then that the importer's marginal deposit (if one was made, as in this
case), should be set off against his debt, for while the importer earns no interest on
his marginal deposit, the bank, apart from being able to use said deposit for its own
purposes, also earns interest on the money it loaned to the importer. It would be
onerous to compute interest and other charges on the face value of the letter of
credit which the bank issued, without first crediting or setting off the marginal deposit
which the importer paid to the bank. Compensation is proper and should take place
by operation of law because the requisites in Article 1279 of the Civil Code are
present and should extinguish both debts to the concurrent amount (Art. 1290, Civil
Code). Although Abad is only a surety, he may set up compensation as regards what
the creditor owes the principal debtor, TOMCO (Art. 1280, Civil Code).15
The net amount of the obligation, represented by respondent bank to be P292,172.23 as of
April 17, 1986, would thus be P211,758.23.
To this principal amount must be imposed the following charges: (1) 19% interest per annum,
in keeping with the terms of the trust receipt;16 and (2) 12% penalty per annum, collected
based on the outstanding principal obligation plus unpaid interest, again in keeping with the
wording of the trust receipt.17 It appearing that petitioners have paid the interest and penalty
charges until April 17, 1986, the reckoning date for the computation of the foregoing charges
must be April 18, 1986.
A perusal of the records reveals that the trial court and the Court of Appeals erred in
imposing service charges upon the petitioners. No such stipulation is found in the trust
receipt. Moreover, the trial court and the Court of Appeals erred in computing attorney's fees
equivalent to 10% per annum, rather than 10% of the total amount due. There is no basis for
compounding the interest annually, as the trial court and Court of Appeals have done. This
amount would be unconscionable.
Finally, Lucente and Llaban's contention that they are not solidarily liable with petitioner
corporation is untenable. As co-signatories of the Continuing Suretyship Agreement, they
bound themselves, inter alia, to pay the principal sum in the amount of not more than
P400,000.00; interest due on the principal obligation; attorney's fees; and expenses that may
be incurred in collecting the credit. The amount owed to respondent bank is the amount of
the principal, interest, attorney's fees, and expenses in collecting the principal amount. The
Continuing Suretyship Agreement expressly states the nature of the liability of Lucente and
Llaban:
The liability of the SURETY shall be solidary, direct and immediate and not
contingent upon the bank's pursuit of whatever remedies the BANK have [sic]
against the Borrower or the securities or liens the BANK may possess and the
SURETY will at any time, whether due or not due, pay to the BANK with or withour
demand upon the Borrower, any of the instruments of indebtedness or other
obligation hereby guaranteed by the SURETY.18
Solidary liability is one of the primary characteristics of a surety contract,19 and the
Continuing Suretyship Agreement expressly stipulates the solidary nature of Lucente and
Llaban's liability. All three petitioners thus share the solidary obligation in favor of respondent
bank, which is given the right, under the Civil Code, to proceed against any one of the
solidary debtors or some or all of them simultaneously.20
WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED. The
decision of the Court of Appeals in CA-G.R. CV No. 58193 dated February 13, 2003 is
AFFIRMED with MODIFICATIONS. Accordingly, petitioners are ordered to pay respondent
bank the following: (1) P211,758.23 representing petitioners' net obligation as of April 17,
1986; (2) interest at the rate of 19% per annum and penalty at the rate of 12% per
annum reckoned from April 18, 1986; (3) attorney's fees equivalent to 10% of the total
amount due and collectible; and (4) litigation expenses in the amount of P3,000.00. The
service charge at the rate of 2% per annum beginning April 18, 1986 is deleted. Costs
against petitioners.
SO ORDERED.





























































G.R. No. 143772 November 22, 2005
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, vs. PRUDENTIAL
BANK, Respondent.
D E C I S I O N
CORONA, J.:
Development Bank of the Philippines (DBP) assails in this petition for review on certiorari
under Rule 45 of the Rules of Court the December 14, 1999 decision1 and the June 8, 2000
resolution of the Court of Appeals in CA-G.R. CV No. 45783. The challenged decision
dismissed DBPs appeal and affirmed the February 12, 1991 decision of the Regional Trial
Court of Makati, Branch 137 in Civil Case No. 88-931 in toto, while the impugned resolution
denied DBPs motion for reconsideration for being pro forma.
In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with
respondent Prudential Bank for US$498,000. This was in connection with its importation of
5,000 spindles for spinning machinery with drawing frame, simplex fly frame, ring spinning
frame and various accessories, spare parts and tool gauge. These were released to Litex
under covering "trust receipts" it executed in favor of Prudential Bank. Litex installed and
used the items in its textile mill located in Montalban, Rizal.
On October 10, 1980, DBP granted a foreign currency loan in the amount of US$4,807,551 to
Litex. To secure the loan, Litex executed real estate and chattel mortgages on its plant site in
Montalban, Rizal, including the buildings and other improvements, machineries and
equipments there. Among the machineries and equipments mortgaged in favor of DBP were
the articles covered by the "trust receipts."
Sometime in June 1982, Prudential Bank learned about DBPs plan for the overall
rehabilitation of Litex. In a July 14, 1982 letter, Prudential Bank notified DBP of its claim over
the various items covered by the "trust receipts" which had been installed and used by Litex
in the textile mill. Prudential Bank informed DBP that it was the absolute and juridical owner
of the said items and they were thus not part of the mortgaged assets that could be legally
ceded to DBP.
For the failure of Litex to pay its obligation, DBP extra-judicially foreclosed on the real estate
and chattel mortgages, including the articles claimed by Prudential Bank. During the
foreclosure sale held on April 19, 1983, DBP acquired the foreclosed properties as the
highest bidder.
Subsequently, DBP caused to be published in the September 2, 1984 issue of the Times
Journal an invitation to bid in the public sale to be held on September 10, 1984. It called on
interested parties to submit bids for the sale of the textile mill formerly owned by Litex, the
land on which it was built, as well as the machineries and equipments therein. Learning of the
intended public auction, Prudential Bank wrote a letter dated September 6, 1984 to DBP
reasserting its claim over the items covered by "trust receipts" in its name and advising DBP
not to include them in the auction. It also demanded the turn-over of the articles or
alternatively, the payment of their value.
An exchange of correspondences ensued between Prudential Bank and DBP. In reply to
Prudential Banks September 6, 1984 letter, DBP requested documents to enable it to
evaluate Prudential Banks claim. On September 28, 1994, Prudential Bank provided DBP
the requested documents. Two months later, Prudential Bank followed up the status of its
claim. In a letter dated December 3, 1984, DBP informed Prudential Bank that its claim had
been referred to DBPs legal department and instructed Prudential Bank to get in touch with
its chief legal counsel. There being no concrete action on DBPs part, Prudential Bank, in a
letter dated July 30, 1985, made a final demand on DBP for the turn-over of the contested
articles or the payment of their value. Without the knowledge of Prudential Bank, however,
DBP sold the Litex textile mill, as well as the machineries and equipments therein, to Lyon
Textile Mills, Inc. (Lyon) on June 8, 1987.
Since its demands remained unheeded, Prudential Bank filed a complaint for a sum of money
with damages against DBP with the Regional Trial Court of Makati, Branch 137, on May 24,
1988. The complaint was docketed as Civil Case No. 88-931.
On February 12, 1991, the trial court decided2 in favor of Prudential Bank. Applying the
provisions of PD 115, otherwise known as the "Trust Receipts Law," it ruled:
When PRUDENTIAL BANK released possession of the subject properties, over which it
holds absolute title to LITEX upon the latters execution of the trust receipts, the latter was
bound to hold said properties in trust for the former, and (a) to sell or otherwise dispose of the
same and to turn over to PRUDENTIAL BANK the amount still owing; or (b) to return the
goods if unsold. Since LITEX was allowed to sell the properties being claimed by
PRUDENTIAL BANK, all the more was it authorized to mortgage the same, provided of
course LITEX turns over to PRUDENTIAL BANK all amounts owing. When DBP, well aware
of the status of the properties, acquired the same in the public auction, it was bound by the
terms of the trust receipts of which LITEX was the entrustee. Simply stated, DBP held no
better right than LITEX, and is thus bound to turn over whatever amount was due
PRUDENTIAL BANK. Being a trustee ex maleficio of PRUDENTIAL BANK, DBP is
necessarily liable therefor. In fact, DBP may well be considered as an agent of LITEX when
the former sold the properties being claimed by PRUDENTIAL BANK, with the corresponding
responsibility to turn over the proceeds of the same to PRUDENTIAL BANK.3 (Citations
omitted)
The dispositive portion of the decision read:
WHEREFORE, judgment is hereby rendered ordering defendant DEVELOPMENT BANK OF
THE PHILIPPINES to pay plaintiff PRUDENTIAL BANK:
a) P3,261,834.00, as actual damages, with interest thereon computed from 10 August 1985
until the entire amount shall have been fully paid;
b) P50,000.00 as exemplary damages; and
c) 10% of the total amount due as and for attorneys fees.
SO ORDERED.
Aggrieved, DBP filed an appeal with the Court of Appeals. However, the appellate court
dismissed the appeal and affirmed the decision of the trial court in toto. It applied the
provisions of PD 115 and held that ownership over the contested articles belonged to
Prudential Bank as entrustor, not to Litex. Consequently, even if Litex mortgaged the items to
DBP and the latter foreclosed on such mortgage, DBP was duty-bound to turn over the
proceeds to Prudential Bank, being the party that advanced the payment for them.
On DBPs argument that the disputed articles were not proper objects of a trust receipt
agreement, the Court of Appeals ruled that the items were part of the trust agreement
entered into by and between Prudential Bank and Litex. Since the agreement was not
contrary to law, morals, public policy, customs and good order, it was binding on the parties.
Moreover, the appellate court found that DBP was not a mortgagee in good faith. It also
upheld the finding of the trial court that DBP was a trustee ex maleficio of Prudential Bank
over the articles covered by the "trust receipts."
DBP filed a motion for reconsideration but the appellate court denied it for being pro forma.
Hence, this petition.
Trust receipt transactions are governed by the provisions of PD 115 which defines such a
transaction as follows:
Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the
meaning of this Decree, is any transaction by and between a person referred to in this
Decree as the entruster, and another person referred to in this Decree as entrustee, whereby
the entruster, who owns or holds absolute title or security interests over certain specified
goods, documents or instruments, releases the same to the possession of the entrustee upon
the latters execution and delivery to the entruster of a signed document called a "trust
receipt" wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents
or instruments with the obligation to turn over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or as appears in the trust receipt or the goods,
documents or instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the
case of goods delivered under trust receipt for the purpose of manufacturing or processing
before its ultimate sale, the entruster shall retain its title over the goods whether in its original
or processed form until the entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or tranship or otherwise deal with them in a manner
preliminary or necessary to their sale; or
2. In the case of instruments, (a) to sell or procure their sale or exchange; or (b) to deliver
them to a principal; or (c) to effect the consummation of some transactions involving delivery
to a depository or register; or (d) to effect their presentation, collection or renewal.
x x x x x x x x x
In a trust receipt transaction, the goods are released by the entruster (who owns or holds
absolute title or security interests over the said goods) to the entrustee on the latters
execution and delivery to the entruster of a trust receipt. The trust receipt evidences the
absolute title or security interest of the entruster over the goods. As a consequence of the
release of the goods and the execution of the trust receipt, a two-fold obligation is imposed
on the entrustee, namely: (1) to hold the designated goods, documents or instruments in trust
for the purpose of selling or otherwise disposing of them and (2) to turn over to the entruster
either the proceeds thereof to the extent of the amount owing to the entruster or as appears
in the trust receipt, or the goods, documents or instruments themselves if they are unsold or
not otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt. In the case of goods, they may also be released for other purposes substantially
equivalent to (a) their sale or the procurement of their sale; or (b) their manufacture or
processing with the purpose of ultimate sale, in which case the entruster retains his title over
the said goods whether in their original or processed form until the entrustee has complied
fully with his obligation under the trust receipt; or (c) the loading, unloading, shipment or
transshipment or otherwise dealing with them in a manner preliminary or necessary to their
sale.4 Thus, in a trust receipt transaction, the release of the goods to the entrustee, on his
execution of a trust receipt, is essentially for the purpose of their sale or is necessarily
connected with their ultimate or subsequent sale.
Here, Litex was not engaged in the business of selling spinning machinery, its accessories
and spare parts but in manufacturing and producing textile and various kinds of fabric. The
articles were not released to Litex to be sold. Nor was the transfer of possession intended to
be a preliminary step for the said goods to be ultimately or subsequently sold. Instead, the
contemporaneous and subsequent acts of both Litex and Prudential Bank showed that the
imported articles were released to Litex to be installed in its textile mill and used in its
business. DBP itself was aware of this. To support its assertion that the contested articles
were excluded from goods that could be covered by a trust receipt, it contended:
First. That the chattels in controversy were procured by DBPs mortgagor Lirag Textile Mills
("LITEX") for theexclusive use of its textile mills. They were not procured -
(a) to sell or otherwise procure their sale;
(b) to manufacture or process the goods with the
purpose of ultimate sale.5 (emphasis supplied)
Hence, the transactions between Litex and Prudential Bank were allegedly not trust receipt
transactions within the meaning of PD 115. It follows that, contrary to the decisions of the trial
court and the appellate court, the transactions were not governed by the Trust Receipts Law.
We disagree.
The various agreements between Prudential Bank and Litex commonly denominated as "trust
receipts" were valid. As the Court of Appeals correctly ruled, their provisions did not
contravene the law, morals, good customs, public order or public policy.
The agreements uniformly provided:
Received, upon the Trust hereinafter mentioned from the PRUDENTIAL BANK (hereinafter
referred to as BANK) the following goods and merchandise, the property of said
BANK specified in the bill of lading as follows:
Amount of Bill Description of Security Marks & Nos. Vessel

and in consideration thereof, I/We hereby agree to hold said goods in trust for the BANK
and as its property with liberty to sell the same for its account but without authority to make
any other disposition whatsoever of the said goods or any part thereof (or the proceeds
thereof) either by way of conditional sale, pledge, or otherwise.
x x x x x x x x x6 (Emphasis supplied)
The articles were owned by Prudential Bank and they were only held by Litex in trust. While it
was allowed to sell the items, Litex had no authority to dispose of them or any part thereof or
their proceeds through conditional sale, pledge or any other means.
Article 2085 (2) of the Civil Code requires that, in a contract of pledge or mortgage, it is
essential that the pledgor or mortgagor should be the absolute owner of the thing pledged or
mortgaged. Article 2085 (3) further mandates that the person constituting the pledge or
mortgage must have the free disposal of his property, and in the absence thereof, that he be
legally authorized for the purpose.
Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the
articles. Litex could not have subjected them to a chattel mortgage. Their inclusion in the
mortgage was void7 and had no legal effect.8 There being no valid mortgage, there could
also be no valid foreclosure or valid auction sale.9 Thus, DBP could not be considered either
as a mortgagee or as a purchaser in good faith.10
No one can transfer a right to another greater than what he himself has.11 Nemo dat quod
non habet. Hence, Litex could not transfer a right that it did not have over the disputed items.
Corollarily, DBP could not acquire a right greater than what its predecessor-in-interest had.
The spring cannot rise higher than its source.12 DBP merely stepped into the shoes of Litex
as trustee of the imported articles with an obligation to pay their value or to return them on
Prudential Banks demand. By its failure to pay or return them despite Prudential Banks
repeated demands and by selling them to Lyon without Prudential Banks knowledge and
conformity, DBP became a trusteeex maleficio.
On the matter of actual damages adjudged by the trial court and affirmed by the Court of
Appeals, DBP wants this Court to review the evidence presented during the trial and to
reverse the factual findings of the trial court. This Court is, however, not a trier of facts and it
is not its function to analyze or weigh evidence anew.13 The rule is that factual findings of the
trial court, when adopted and confirmed by the CA, are binding and conclusive on this Court
and generally will not be reviewed on appeal.14 While there are recognized exceptions to this
rule, none of the established exceptions finds application here.
With regard to the imposition of exemplary damages, the appellate court agreed with the trial
court that the requirements for the award thereof had been sufficiently established. Prudential
Banks entitlement to compensatory damages was likewise amply proven. It was also shown
that DBP was aware of Prudential Banks claim as early as July, 1982. However, it ignored
the latters demand, included the disputed articles in the mortgage foreclosure and caused
their sale in a public auction held on April 19, 1983 where it was declared as the highest
bidder. Thereafter, in the series of communications between them, DBP gave Prudential
Bank the false impression that its claim was still being evaluated. Without acting on
Prudential Banks plea, DBP included the contested articles among the properties it sold to
Lyon in June, 1987. The trial court found that this chain of events showed DBPs fraudulent
attempt to prevent Prudential Bank from asserting its rights. It smacked of bad faith, if not
deceit. Thus, the award of exemplary damages was in order. Due to the award of exemplary
damages, the grant of attorneys fees was proper.15
DBPs assertion that both the trial and appellate courts failed to address the issue of
prescription is of no moment. Its claim that, under Article 1146 (1) of the Civil Code,
Prudential Banks cause of action had prescribed as it should be reckoned from October 10,
1980, the day the mortgage was registered, is not correct. The written extra-judicial demand
by the creditor interrupted the prescription of action.16 Hence, the four-year prescriptive
period which DBP insists should be counted from the registration of the mortgage was
interrupted when Prudential Bank wrote the extra-judicial demands for the turn over of the
articles or their value. In particular, the last demand letter sent by Prudential Bank was dated
July 30, 1988 and this was received by DBP the following day. Thus, contrary to DBPs claim,
Prudential Banks right to enforce its action had not yet prescribed when it filed the complaint
on May 24, 1988.
WHEREFORE, the petition is hereby DENIED. The December 14, 1999 decision and June 8,
2000 resolution of the Court of Appeals in CA-G.R. CV No. 45783 are AFFIRMED.
Costs against the petitioner.
SO ORDERED.


















G. R. No. 164317 February 6, 2006
ALFREDO CHING, Petitioner, vs. THE SECRETARY OF JUSTICE, ASST. CITY
PROSECUTOR ECILYN BURGOS-VILLAVERT, JUDGE EDGARDO SUDIAM of the
Regional Trial Court, Manila, Branch 52; RIZAL COMMERCIAL BANKING CORP. and
THE PEOPLE OF THE PHILIPPINES, Respondents.
D E C I S I O N
CALLEJO, SR., J.:
Before the Court is a petition for review on certiorari of the Decision1 of the Court of Appeals
(CA) in CA-G.R. SP No. 57169 dismissing the petition for certiorari, prohibition and
mandamus filed by petitioner Alfredo Ching, and its Resolution2 dated June 28, 2004
denying the motion for reconsideration thereof.
Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime
in September to October 1980, PBMI, through petitioner, applied with the Rizal Commercial
Banking Corporation (respondent bank) for the issuance of commercial letters of credit to
finance its importation of assorted goods.3
Respondent bank approved the application, and irrevocable letters of credit were issued in
favor of petitioner. The goods were purchased and delivered in trust to PBMI. Petitioner
signed 13 trust receipts4 as surety, acknowledging delivery of the following goods:
T/R
Nos.
Date
Granted
Maturity
Date
Principal Description of Goods
1845 12-05-80 03-05-81 P1,596,470.05 79.9425 M/T "SDK"
Brand Synthetic
Graphite Electrode
1853 12-08-80 03-06-81 P198,150.67 3,000 pcs. (15 bundles)
Calorized Lance Pipes
1824 11-28-80 02-26-81 P707,879.71 One Lot High Fired
Refractory Tundish
Bricks
1798 11-21-80 02-19-81 P835,526.25 5 cases spare parts for
CCM
1808 11-21-80 02-19-81 P370,332.52 200 pcs. ingot moulds
2042 01-30-81 04-30-81 P469,669.29 High Fired Refractory
Nozzle Bricks
1801 11-21-80 02-19-81 P2,001,715.17 Synthetic Graphite
Electrode [with] tapered
pitch filed nipples
1857 12-09-80 03-09-81 P197,843.61 3,000 pcs. (15 bundles
calorized lance pipes [)]
1895 12-17-80 03-17-81 P67,652.04 Spare parts for
Spectrophotometer
1911 12-22-80 03-20-81 P91,497.85 50 pcs. Ingot moulds
2041 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot moulds
2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls for
rolling mills
2100 02-10-81 05-12-81 P210,748.00 Spare parts for
Lacolaboratory
Equipment5
Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with
authority to sell but not by way of conditional sale, pledge or otherwise; and in case such
goods were sold, to turn over the proceeds thereof as soon as received, to apply against the
relative acceptances and payment of other indebtedness to respondent bank. In case the
goods remained unsold within the specified period, the goods were to be returned to
respondent bank without any need of demand. Thus, said "goods, manufactured products or
proceeds thereof, whether in the form of money or bills, receivables, or accounts separate
and capable of identification" were respondent banks property.
When the trust receipts matured, petitioner failed to return the goods to respondent bank, or
to return their value amounting to P6,940,280.66 despite demands. Thus, the bank filed a
criminal complaint for estafa6 against petitioner in the Office of the City Prosecutor of Manila.
After the requisite preliminary investigation, the City Prosecutor found probable cause estafa
under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to Presidential
Decree (P.D.) No. 115, otherwise known as the Trust Receipts Law. Thirteen (13)
Informations were filed against the petitioner before the Regional Trial Court (RTC) of Manila.
The cases were docketed as Criminal Cases No. 86-42169 to 86-42181, raffled to Branch 31
of said court.
Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice. The
appeal was dismissed in a Resolution7 dated March 17, 1987, and petitioner moved for its
reconsideration. On December 23, 1987, the Minister of Justice granted the motion, thus
reversing the previous resolution finding probable cause against petitioner.8 The City
Prosecutor was ordered to move for the withdrawal of the Informations.
This time, respondent bank filed a motion for reconsideration, which, however, was denied on
February 24, 1988.9The RTC, for its part, granted the Motion to Quash the Informations filed
by petitioner on the ground that the material allegations therein did not amount to estafa.10
In the meantime, the Court rendered judgment in Allied Banking Corporation v.
Ordoez,11 holding that the penal provision of P.D. No. 115 encompasses any act violative
of an obligation covered by the trust receipt; it is not limited to transactions involving goods
which are to be sold (retailed), reshipped, stored or processed as a component of a product
ultimately sold. The Court also ruled that "the non-payment of the amount covered by a trust
receipt is an act violative of the obligation of the entrustee to pay."12
On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against
petitioner before the Office of the City Prosecutor of Manila. The case was docketed as I.S.
No. 95B-07614.
Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that there
was no probable cause to charge petitioner with violating P.D. No. 115, as petitioners liability
was only civil, not criminal, having signed the trust receipts as surety.13 Respondent bank
appealed the resolution to the Department of Justice (DOJ) via petition for review, alleging
that the City Prosecutor erred in ruling:
1. That there is no evidence to show that respondent participated in the
misappropriation of the goods subject of the trust receipts;
2. That the respondent is a mere surety of the trust receipts; and
3. That the liability of the respondent is only civil in nature.14
On July 13, 1999, the Secretary of Justice issued Resolution No. 25015 granting the petition
and reversing the assailed resolution of the City Prosecutor. According to the Justice
Secretary, the petitioner, as Senior Vice-President of PBMI, executed the 13 trust receipts
and as such, was the one responsible for the offense. Thus, the execution of said receipts is
enough to indict the petitioner as the official responsible for violation of P.D. No. 115. The
Justice Secretary also declared that petitioner could not contend that P.D. No. 115 covers
only goods ultimately destined for sale, as this issue had already been settled in Allied
Banking Corporation v. Ordoez,16where the Court ruled that P.D. No. 115 is "not limited to
transactions in goods which are to be sold (retailed), reshipped, stored or processed as a
component of a product ultimately sold but covers failure to turn over the proceeds of the sale
of entrusted goods, or to return said goods if unsold or not otherwise disposed of in
accordance with the terms of the trust receipts."
The Justice Secretary further stated that the respondent bound himself under the terms of the
trust receipts not only as a corporate official of PBMI but also as its surety; hence, he could
be proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in
its decision in Rizal Commercial Banking Corporation v. Court of Appeals;17 and second, as
the corporate official responsible for the offense under P.D. No. 115, via criminal prosecution.
Moreover, P.D. No. 115 explicitly allows the prosecution of corporate officers "without
prejudice to the civil liabilities arising from the criminal offense." Thus, according to the
Justice Secretary, following Rizal Commercial Banking Corporation, the civil liability imposed
is clearly separate and distinct from the criminal liability of the accused under P.D. No. 115.
Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13
Informations against petitioner for violation of P.D. No. 115 before the RTC of Manila. The
cases were docketed as Criminal Cases No. 99-178596 to 99-178608 and consolidated for
trial before Branch 52 of said court. Petitioner filed a motion for reconsideration, which the
Secretary of Justice denied in a Resolution18 dated January 17, 2000.
Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing
the resolutions of the Secretary of Justice on the following grounds:
1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT,
ARE ACTING OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY
ALLOWED HIS PROSECUTION DESPITE THE FACT THAT NO EVIDENCE HAD
BEEN PRESENTED TO PROVE HIS PARTICIPATION IN THE ALLEGED
TRANSACTIONS.
2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN
GRAVE ABUSE OF DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN
THEY CONTINUED PROSECUTION OF THE PETITIONER DESPITE THE
LENGTH OF TIME INCURRED IN THE TERMINATION OF THE PRELIMINARY
INVESTIGATION THAT SHOULD JUSTIFY THE DISMISSAL OF THE INSTANT
CASE.
3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY
PROSECUTOR ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN
EXCESS OF JURISDICTION WHEN THEY CONTINUED THE PROSECUTION OF
THE PETITIONER DESPITE LACK OF SUFFICIENT BASIS.19
In his petition, petitioner incorporated a certification stating that "as far as this Petition is
concerned, no action or proceeding in the Supreme Court, the Court of Appeals or different
divisions thereof, or any tribunal or agency. It is finally certified that if the affiant should learn
that a similar action or proceeding has been filed or is pending before the Supreme Court, the
Court of Appeals, or different divisions thereof, of any other tribunal or agency, it hereby
undertakes to notify this Honorable Court within five (5) days from such notice."20
In its Comment on the petition, the Office of the Solicitor General alleged that -
A.
THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT
PETITIONER ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE
OFFENSE CHARGED AND THAT THE ACTS OF PETITIONER FALL WITHIN THE
AMBIT OF VIOLATION OF P.D. [No.] 115 IN RELATION TO ARTICLE 315, PAR.
1(B) OF THE REVISED PENAL CODE.
B.
THERE IS NO MERIT IN PETITIONERS CONTENTION THAT EXCESSIVE DELAY
HAS MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE
CASE, JUSTIFYING ITS DISMISSAL.
C.
THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND
MANDAMUS IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION
OF THE DEPARTMENT OF JUSTICE. THE PRESENT PETITION MUST
THEREFORE BE DISMISSED.21
On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on
procedural grounds. On the procedural issue, it ruled that (a) the certification of non-forum
shopping executed by petitioner and incorporated in the petition was defective for failure to
comply with the first two of the three-fold undertakings prescribed in Rule 7, Section 5 of the
Revised Rules of Civil Procedure; and (b) the petition for certiorari, prohibition and
mandamus was not the proper remedy of the petitioner.
On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of
Justice were correctly issued for the following reasons: (a) petitioner, being the Senior Vice-
President of PBMI and the signatory to the trust receipts, is criminally liable for violation of
P.D. No. 115; (b) the issue raised by the petitioner, on whether he violated P.D. No. 115 by
his actuations, had already been resolved and laid to rest in Allied Bank Corporation v.
Ordoez;22 and (c) petitioner was estopped from raising the
City Prosecutors delay in the final disposition of the preliminary investigation because he
failed to do so in the DOJ.
Thus, petitioner filed the instant petition, alleging that:
I
THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE
GROUND THAT THE CERTIFICATION OF NON-FORUM SHOPPING
INCORPORATED THEREIN WAS DEFECTIVE.
II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE
OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS
COMMITTED BY THE SECRETARY OF JUSTICE IN COMING OUT WITH THE
ASSAILED RESOLUTIONS.23
The Court will delve into and resolve the issues seriatim.
The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He
claims that the rules of procedure should be used to promote, not frustrate, substantial
justice. He insists that the Rules of Court should be construed liberally especially when, as in
this case, his substantial rights are adversely affected; hence, the deficiency in his
certification of non-forum shopping should not result in the dismissal of his petition.
The Office of the Solicitor General (OSG) takes the opposite view, and asserts that
indubitably, the certificate of non-forum shopping incorporated in the petition before the CA is
defective because it failed to disclose essential facts about pending actions concerning
similar issues and parties. It asserts that petitioners failure to comply with the Rules of Court
is fatal to his petition. The OSG cited Section 2, Rule 42, as well as the ruling of this Court in
Melo v. Court of Appeals.24
We agree with the ruling of the CA that the certification of non-forum shopping petitioner
incorporated in his petition before the appellate court is defective. The certification reads:
It is further certified that as far as this Petition is concerned, no action or proceeding in the
Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or agency.
It is finally certified that if the affiant should learn that a similar action or proceeding has been
filed or is pending before the Supreme Court, the Court of Appeals, or different divisions
thereof, of any other tribunal or agency, it hereby undertakes to notify this Honorable Court
within five (5) days from such notice.25
Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition
should be accompanied by a sworn certification of non-forum shopping, as provided in the
third paragraph of Section 3, Rule 46 of said Rules. The latter provision reads in part:
SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. The
petition shall contain the full names and actual addresses of all the petitioners and
respondents, a concise statement of the matters involved, the factual background of the case
and the grounds relied upon for the relief prayed for.
xxx
The petitioner shall also submit together with the petition a sworn certification that he has not
theretofore commenced any other action involving the same issues in the Supreme Court,
the Court of Appeals or different divisions thereof, or any other tribunal or agency; if there is
such other action or proceeding, he must state the status of the same; and if he should
thereafter learn that a similar action or proceeding has been filed or is pending before the
Supreme Court, the Court of Appeals, or different divisions thereof, or any other tribunal or
agency, he undertakes to promptly inform the aforesaid courts and other tribunal or agency
thereof within five (5) days therefrom. xxx
Compliance with the certification against forum shopping is separate from and independent of
the avoidance of forum shopping itself. The requirement is mandatory. The failure of the
petitioner to comply with the foregoing requirement shall be sufficient ground for the dismissal
of the petition without prejudice, unless otherwise provided.26
Indubitably, the first paragraph of petitioners certification is incomplete and unintelligible.
Petitioner failed to certify that he "had not heretofore commenced any other action involving
the same issues in the Supreme Court, the Court of Appeals or the different divisions thereof
or any other tribunal or agency" as required by paragraph 4, Section 3, Rule 46 of the
Revised Rules of Court.
We agree with petitioners contention that the certification is designed to promote and
facilitate the orderly administration of justice, and therefore, should not be interpreted with
absolute literalness. In his works on the Revised Rules of Civil Procedure, former Supreme
Court Justice Florenz Regalado states that, with respect to the contents of the certification
which the pleader may prepare, the rule of substantial compliance may be availed
of.27 However, there must be a special circumstance or compelling reason which makes the
strict application of the requirement clearly unjustified. The instant petition has not alleged
any such extraneous circumstance. Moreover, as worded, the certification cannot even be
regarded as substantial compliance with the procedural requirement. Thus, the CA was not
informed whether, aside from the petition before it, petitioner had commenced any other
action involving the same issues in other tribunals.
On the merits of the petition, the CA ruled that the petitioner failed to establish that the
Secretary of Justice committed grave abuse of discretion in finding probable cause against
the petitioner for violation of estafa under Article 315, paragraph 1(b) of the Revised Penal
Code, in relation to P.D. No. 115. Thus, the appellate court ratiocinated:
Be that as it may, even on the merits, the arguments advanced in support of the petition are
not persuasive enough to justify the desired conclusion that respondent Secretary of Justice
gravely abused its discretion in coming out with his assailed Resolutions. Petitioner posits
that, except for his being the Senior Vice-President of the PBMI, there is no iota of evidence
that he was a participes crimines in violating the trust receipts sued upon; and that his
liability, if at all, is purely civil because he signed the said trust receipts merely as a xxx
surety and not as the entrustee. These assertions are, however, too dull that they cannot
even just dent the findings of the respondent Secretary, viz:
"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:
xxx If the violation or offense is committed by a corporation, partnership, association or other
judicial entities, the penalty provided for in this Decree shall be imposed upon the directors,
officers, employees or other officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense.
"There is no dispute that it was the respondent, who as senior vice-president of PBM,
executed the thirteen (13) trust receipts. As such, the law points to him as the official
responsible for the offense. Since a corporation cannot be proceeded against criminally
because it cannot commit crime in which personal violence or malicious intent is required,
criminal action is limited to the corporate agents guilty of an act amounting to a crime and
never against the corporation itself (West Coast Life Ins. Co. vs. Hurd, 27 Phil. 401; Times,
[I]nc. v. Reyes, 39 SCRA 303). Thus, the execution by respondent of said receipts is enough
to indict him as the official responsible for violation of PD 115.
"Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which
are ultimately destined for sale and not goods, like those imported by PBM, for use in
manufacture. This issue has already been settled in the Allied Banking Corporation case,
supra, where he was also a party, when the Supreme Court ruled that PD 115 is not limited
to transactions in goods which are to be sold (retailed), reshipped, stored or processed as a
component or a product ultimately sold but covers failure to turn over the proceeds of the
sale of entrusted goods, or to return said goods if unsold or disposed of in accordance with
the terms of the trust receipts.
"In regard to the other assigned errors, we note that the respondent bound himself under the
terms of the trust receipts not only as a corporate official of PBM but also as its surety. It is
evident that these are two (2) capacities which do not exclude the other. Logically, he can be
proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in its
decision in RCBC vs. Court of Appeals, 178 SCRA 739; and, secondly, as the corporate
official responsible for the offense under PD 115, the present case is an appropriate remedy
under our penal law.
"Moreover, PD 115 explicitly allows the prosecution of corporate officers without prejudice to
the civil liabilities arising from the criminal offense thus, the civil liability imposed on
respondent in RCBC vs. Court of Appeals case is clearly separate and distinct from his
criminal liability under PD 115."28
Petitioner asserts that the appellate courts ruling is erroneous because (a) the transaction
between PBMI and respondent bank is not a trust receipt transaction; (b) he entered into the
transaction and was sued in his capacity as PBMI Senior Vice-President; (c) he never
received the goods as an entrustee for PBMI, hence, could not have committed any
dishonesty or abused the confidence of respondent bank; and (d) PBMI acquired the goods
and used the same in operating its machineries and equipment and not for resale.
The OSG, for its part, submits a contrary view, to wit:
34. Petitioner further claims that he is not a person responsible for the offense allegedly
because "[b]eing charged as the Senior Vice-President of Philippine Blooming Mills (PBM),
petitioner cannot be held criminally liable as the transactions sued upon were clearly entered
into in his capacity as an officer of the corporation" and that [h]e never received the goods as
an entrustee for PBM as he never had or took possession of the goods nor did he commit
dishonesty nor "abuse of confidence in transacting with RCBC." Such argument is bereft of
merit.
35. Petitioners being a Senior Vice-President of the Philippine Blooming Mills does not
exculpate him from any liability. Petitioners responsibility as the corporate official of PBM
who received the goods in trust is premised on Section 13 of P.D. No. 115, which provides:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale
of the goods, documents or instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and
fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense
is committed by a corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense. (Emphasis supplied)
36. Petitioner having participated in the negotiations for the trust receipts and having received
the goods for PBM, it was inevitable that the petitioner is the proper corporate officer to be
proceeded against by virtue of the PBMs violation of P.D. No. 115.29
The ruling of the CA is correct.
In Mendoza-Arce v. Office of the Ombudsman (Visayas),30 this Court held that the acts of a
quasi-judicial officer may be assailed by the aggrieved party via a petition for certiorari and
enjoined (a) when necessary to afford adequate protection to the constitutional rights of the
accused; (b) when necessary for the orderly administration of justice; (c) when the acts of the
officer are without or in excess of authority; (d) where the charges are manifestly false and
motivated by the lust for vengeance; and (e) when there is clearly no prima facie case
against the accused.31 The Court also declared that, if the officer conducting a preliminary
investigation (in that case, the Office of the Ombudsman) acts without or in excess of his
authority and resolves to file an Information despite the absence of probable cause, such act
may be nullified by a writ of certiorari.32
Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure,33 the
Information shall be prepared by the Investigating Prosecutor against the respondent only if
he or she finds probable cause to hold such respondent for trial. The Investigating Prosecutor
acts without or in excess of his authority under the Rule if the Information is filed against the
respondent despite absence of evidence showing probable cause therefor.34 If the Secretary
of Justice reverses the Resolution of the Investigating Prosecutor who found no probable
cause to hold the respondent for trial, and orders such prosecutor to file the Information
despite the absence of probable cause, the Secretary of Justice acts contrary to law, without
authority and/or in excess of authority. Such resolution may likewise be nullified in a petition
for certiorari under Rule 65 of the Revised Rules of Civil Procedure.35
A preliminary investigation, designed to secure the respondent against hasty, malicious and
oppressive prosecution, is an inquiry to determine whether (a) a crime has been committed;
and (b) whether there is probable cause to believe that the accused is guilty thereof. It is a
means of discovering the person or persons who may be reasonably charged with a crime.
Probable cause need not be based on clear and convincing evidence of guilt, as the
investigating officer acts upon probable cause of reasonable belief. Probable cause implies
probability of guilt and requires more than bare suspicion but less than evidence which would
justify a conviction. A finding of probable cause needs only to rest on evidence showing that
more likely than not, a crime has been committed by the suspect.36
However, while probable cause should be determined in a summary manner, there is a need
to examine the evidence with care to prevent material damage to a potential accuseds
constitutional right to liberty and the guarantees of freedom and fair play37 and to protect the
State from the burden of unnecessary expenses in prosecuting alleged offenses and holding
trials arising from false, fraudulent or groundless charges.38
In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse
of discretion in issuing the assailed resolutions. Indeed, he acted in accord with law and the
evidence.
Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:
Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the
meaning of this Decree, is any transaction by and between a person referred to in this
Decree as the entruster, and another person referred to in this Decree as entrustee, whereby
the entruster, who owns or holds absolute title or security interests over certain specified
goods, documents or instruments, releases the same to the possession of the entrustee upon
the latters execution and delivery to the entruster of a signed document called a "trust
receipt" wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents
or instruments with the obligation to turn over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or as appears in the trust receipt or the goods,
documents or instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale; Provided, That,
in the case of goods delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its title over the goods
whether in its original or processed form until the entrustee has complied fully with
his obligation under the trust receipt; or (c) to load, unload, ship or otherwise deal
with them in a manner preliminary or necessary to their sale; or
2. In the case of instruments a) to sell or procure their sale or exchange; or b) to
deliver them to a principal; or c) to effect the consummation of some transactions
involving delivery to a depository or register; or d) to effect their presentation,
collection or renewal.
The sale of goods, documents or instruments by a person in the business of selling goods,
documents or instruments for profit who, at the outset of the transaction, has, as against the
buyer, general property rights in such goods, documents or instruments, or who sells the
same to the buyer on credit, retaining title or other interest as security for the payment of the
purchase price, does not constitute a trust receipt transaction and is outside the purview and
coverage of this Decree.
An entrustee is one having or taking possession of goods, documents or instruments under a
trust receipt transaction, and any successor in interest of such person for the purpose of
payment specified in the trust receipt agreement.39 The entrustee is obliged to: (1) hold the
goods, documents or instruments in trust for the entruster and shall dispose of them strictly in
accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust
for the entruster and turn over the same to the entruster to the extent of the amount owing to
the entruster or as appears on the trust receipt; (3) insure the goods for their total value
against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds
thereof whether in money or whatever form, separate and capable of identification as
property of the entruster; (5) return the goods, documents or instruments in the event of non-
sale or upon demand of the entruster; and (6) observe all other terms and conditions of the
trust receipt not contrary to the provisions of the decree.40
The entruster shall be entitled to the proceeds from the sale of the goods, documents or
instruments released under a trust receipt to the entrustee to the extent of the amount owing
to the entruster or as appears in the trust receipt, or to the return of the goods, documents or
instruments in case of non-sale, and to the enforcement of all other rights conferred on him in
the trust receipt; provided, such are not contrary to the provisions of the document.41
In the case at bar, the transaction between petitioner and respondent bank falls under the
trust receipt transactions envisaged in P.D. No. 115. Respondent bank imported the goods
and entrusted the same to PBMI under the trust receipts signed by petitioner, as entrustee,
with the bank as entruster. The agreement was as follows:
And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK
as its property with liberty to sell the same within ____days from the date of the execution of
this Trust Receipt and for the Banks account, but without authority to make any other
disposition whatsoever of the said goods or any part thereof (or the proceeds) either by way
of conditional sale, pledge or otherwise.
I/we agree to keep the said goods insured to their full value against loss from fire, theft,
pilferage or other casualties as directed by the BANK, the sum insured to be payable in case
of loss to the BANK, with the understanding that the BANK is, not to be chargeable with the
storage premium or insurance or any other expenses incurred on said goods.
In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to
the BANK, to apply against the relative acceptances (as described above) and for the
payment of any other indebtedness of mine/ours to the BANK. In case of non-sale within the
period specified herein, I/we agree to return the goods under this Trust Receipt to the BANK
without any need of demand.
I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in
the form of money or bills, receivables, or accounts separate and capable of identification as
property of the BANK.42
It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter
of public policy, the failure of person to turn over the proceeds of the sale of the goods
covered by a trust receipt or to return said goods, if not sold, is a public nuisance to be
abated by the imposition of penal sanctions.43
The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions
involving goods procured as a component of a product ultimately sold has been resolved in
the affirmative in Allied Banking Corporation v. Ordoez.44 The law applies to goods used by
the entrustee in the operation of its machineries and equipment. The non-payment of the
amount covered by the trust receipts or the non-return of the goods covered by the receipts,
if not sold or otherwise not disposed of, violate the entrustees obligation to pay the amount
or to return the goods to the entruster.
In Colinares v. Court of Appeals,45 the Court declared that there are two possible situations
in a trust receipt transaction. The first is covered by the provision which refers to money
received under the obligation involving the duty to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision which refers to merchandise
received under the obligation to return it (devolvera) to the owner.46 Thus, failure of the
entrustee to turn over the proceeds of the sale of the goods covered by the trust receipts to
the entruster or to return said goods if they were not disposed of in accordance with the
terms of the trust receipt is a crime under P.D. No. 115, without need of proving intent to
defraud. The law punishes dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of the entruster, regardless of whether the latter is the owner or not. A
mere failure to deliver the proceeds of the sale of the goods, if not sold, constitutes a criminal
offense that causes prejudice, not only to another, but more to the public interest.47
The Court rules that although petitioner signed the trust receipts merely as Senior Vice-
President of PBMI and had no physical possession of the goods, he cannot avoid
prosecution for violation of P.D. No. 115.
The penalty clause of the law, Section 13 of P.D. No. 115 reads:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale
of the goods, documents or instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and
fifteen, as amended, otherwise known as the Revised Penal Code.1wphi1 If the violation or
offense is committed by a corporation, partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed upon the directors, officers, employees
or other officials or persons therein responsible for the offense, without prejudice to the civil
liabilities arising from the criminal offense.
The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under
paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It
may be committed by a corporation or other juridical entity or by natural persons. However,
the penalty for the crime is imprisonment for the periods provided in said Article 315, which
reads:
ARTICLE 315. Swindling (estafa). Any person who shall defraud another by any of the
means mentioned hereinbelow shall be punished by:
1st. The penalty of prision correccional in its maximum period to prision mayor in its
minimum period, if the amount of the fraud is over 12,000 pesos but does not exceed
22,000 pesos; and if such amount exceeds the latter sum, the penalty provided in
this paragraph shall be imposed in its maximum period, adding one year for each
additional 10,000 pesos; but the total penalty which may be imposed shall not
exceed twenty years. In such cases, and in connection with the accessory penalties
which may be imposed and for the purpose of the other provisions of this Code, the
penalty shall be termed prision mayor or reclusion temporal, as the case may be;
2nd. The penalty of prision correccional in its minimum and medium periods, if the
amount of the fraud is over 6,000 pesos but does not exceed 12,000 pesos;
3rd. The penalty of arresto mayor in its maximum period to prision correccional in its
minimum period, if such amount is over 200 pesos but does not exceed 6,000 pesos;
and
4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed
200 pesos, provided that in the four cases mentioned, the fraud be committed by any of the
following means; xxx
Though the entrustee is a corporation, nevertheless, the law specifically makes the officers,
employees or other officers or persons responsible for the offense, without prejudice to the
civil liabilities of such corporation and/or board of directors, officers, or other officials or
employees responsible for the offense. The rationale is that such officers or employees are
vested with the authority and responsibility to devise means necessary to ensure compliance
with the law and, if they fail to do so, are held criminally accountable; thus, they have a
responsible share in the violations of the law.48
If the crime is committed by a corporation or other juridical entity, the directors, officers,
employees or other officers thereof responsible for the offense shall be charged and
penalized for the crime, precisely because of the nature of the crime and the penalty therefor.
A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime
punishable by imprisonment.49 However, a corporation may be charged and prosecuted for
a crime if the imposable penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be
fined.50
A crime is the doing of that which the penal code forbids to be done, or omitting to do what it
commands. A necessary part of the definition of every crime is the designation of the author
of the crime upon whom the penalty is to be inflicted. When a criminal statute designates an
act of a corporation or a crime and prescribes punishment therefor, it creates a criminal
offense which, otherwise, would not exist and such can be committed only by the corporation.
But when a penal statute does not expressly apply to corporations, it does not create an
offense for which a corporation may be punished. On the other hand, if the State, by statute,
defines a crime that may be committed by a corporation but prescribes the penalty therefor to
be suffered by the officers, directors, or employees of such corporation or other persons
responsible for the offense, only such individuals will suffer such penalty.51 Corporate
officers or employees, through whose act, default or omission the corporation commits a
crime, are themselves individually guilty of the crime.52
The principle applies whether or not the crime requires the consciousness of wrongdoing. It
applies to those corporate agents who themselves commit the crime and to those, who, by
virtue of their managerial positions or other similar relation to the corporation, could be
deemed responsible for its commission, if by virtue of their relationship to the corporation,
they had the power to prevent the act.53 Moreover, all parties active in promoting a crime,
whether agents or not, are principals.54 Whether such officers or employees are benefited by
their delictual acts is not a touchstone of their criminal liability. Benefit is not an operative fact.
In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the
cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl
Warren, a corporate officer cannot protect himself behind a corporation where he is the
actual, present and efficient actor.55
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against
the petitioner.
SO ORDERED.

























G.R. No. 90828 September 5, 2000
MELVIN COLINARES and LORDINO VELOSO, petitioners, vs. HONORABLE COURT OF
APPEALS, and THE PEOPLE OF THE PHILIPPINES, respondents.
D E C I S I O N
DAVIDE, JR., C.J.:
In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a
consideration ofP40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the
latters convent at Camaman-an, Cagayan de Oro City.
On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical board 2x4x", 300
SF tanguile wood tiles 12"x12", 260 SF Marcelo economy tiles and 2 gallons UMYLIN
cement adhesive from CM Builders Centre for the construction project.1 The following day,
31 October 1979, Petitioners applied for a commercial letter of credit2with the Philippine
Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of CM Builders
Centre. PBC approved the letter of credit3 for P22,389.80 to cover the full invoice value of
the goods. Petitioners signed a pro-forma trust receipt4 as security. The loan was due on 29
January 1980.
On 31 October 1979, PBC debited P6,720 from Petitioners marginal deposit as partial
payment of the loan.5
On 7 May 1980, PBC wrote6 to Petitioners demanding that the amount be paid within seven
days from notice. Instead of complying with PBCs demand, Veloso confessed that they
lost P19,195.83 in the Carmelite Monastery Project and requested for a grace period of until
15 June 1980 to settle the account.7
PBC sent a new demand letter8 to Petitioners on 16 October 1980 and informed them that
their outstanding balance as of 17 November 1979 was P20,824.40 exclusive of attorneys
fees of 25%.9
On 2 December 1980, Petitioners proposed10 that the terms of payment of the loan be
modified as follows: P2,000 on or before 3 December 1980, and P1,000 per month starting
31 January 1980 until the account is fully paid. Pending approval of the proposal, Petitioners
paid P1,000 to PBC on 4 December 1980,11 and thereafter P500 on 11 February 1981,12 16
March 1981,13 and 20 April 1981.14 Concurrently with the separate demand for attorneys
fees by PBCs legal counsel, PBC continued to demand payment of the balance.15
On 14 January 1983, Petitioners were charged with the violation of P.D. No. 115 (Trust
Receipts Law) in relation to Article 315 of the Revised Penal Code in an Information which
was filed with Branch 18, Regional Trial Court of Cagayan de Oro City. The accusatory
portion of the Information reads:
That on or about October 31, 1979, in the City of Cagayan de Oro, Philippines, and within the
jurisdiction of this Honorable Court, the above-named accused entered into a trust receipt
agreement with the Philippine Banking Corporation at Cagayan de Oro City wherein the
accused, as entrustee, received from the entruster the following goods to wit:
Solatone Acoustical board
Tanguile Wood Tiles
Marcelo Cement Tiles
Umylin Cement Adhesive
with a total value of P22,389.80, with the obligation on the part of the accused-entrustee to
hold the aforesaid items in trust for the entruster and/or to sell on cash basis or otherwise
dispose of the said items and to turn over to the entruster the proceeds of the sale of said
goods or if there be no sale to return said items to the entruster on or before January 29,
1980 but that the said accused after receipt of the goods, with intent to defraud and cause
damage to the entruster, conspiring, confederating together and mutually helping one
another, did then and there wilfully, unlawfully and feloniously fail and refuse to remit the
proceeds of the sale of the goods to the entruster despite repeated demands but instead
converted, misappropriated and misapplied the proceeds to their own personal use, benefit
and gain, to the damage and prejudice of the Philippine Banking Corporation, in the aforesaid
sum of P22,389.80, Philippine Currency.
Contrary to PD 115 in relation to Article 315 of the Revised Penal Code.16
The case was docketed as Criminal Case No. 1390.
During trial, petitioner Veloso insisted that the transaction was a "clean loan" as per verbal
guarantee of Cayo Garcia Tuiza, PBCs former manager. He and petitioner Colinares signed
the documents without reading the fine print, only learning of the trust receipt implication
much later. When he brought this to the attention of PBC, Mr. Tuiza assured him that the
trust receipt was a mere formality.17
On 7 July 1986, the trial court promulgated its decision18 convicting Petitioners of estafa for
violating P.D. No. 115 in relation to Article 315 of the Revised Penal Code and sentencing
each of them to suffer imprisonment of two years and one day of prision correccional as
minimum to six years and one day of prision mayor as maximum, and to solidarily indemnify
PBC the amount of P20,824.44, with legal interest from 29 January 1980, 12 % penalty
charge per annum, 25% of the sums due as attorneys fees, and costs.
The trial court considered the transaction between PBC and Petitioners as a trust receipt
transaction under Section 4, P.D. No. 115. It considered Petitioners use of the goods in their
Carmelite monastery project an act of "disposing" as contemplated under Section 13, P.D.
No. 115, and treated the charge invoice19 for goods issued by CM Builders Centre as a
"document" within the meaning of Section 3 thereof. It concluded that the failure of
Petitioners to turn over the amount they owed to PBC constituted estafa.
Petitioners appealed from the judgment to the Court of Appeals which was docketed as CA-
G.R. CR No. 05408. Petitioners asserted therein that the trial court erred in ruling that they
violated the Trust Receipt Law, and in holding them criminally liable therefor. In the
alternative, they contend that at most they can only be made civilly liable for payment of the
loan.
In its decision20 6 March 1989, the Court of Appeals modified the judgment of the trial court
by increasing the penalty to six years and one day of prision mayor as minimum to fourteen
years eight months and one day ofreclusion temporal as maximum. It held that the
documentary evidence of the prosecution prevails over Velosos testimony, discredited
Petitioners claim that the documents they signed were in blank, and disbelieved that they
were coerced into signing them.
On 25 March 1989, Petitioners filed a Motion for New Trial/Reconsideration21 alleging that
the "Disclosure Statement on Loan/Credit Transaction"22 (hereafter Disclosure Statement)
signed by them and Tuiza was suppressed by PBC during the trial. That document would
have proved that the transaction was indeed a loan as it bears a 14% interest as opposed to
the trust receipt which does not at all bear any interest. Petitioners further maintained that
when PBC allowed them to pay in installment, the agreement was novated and a creditor-
debtor relationship was created.
In its resolution23 of 16 October 1989 the Court of Appeals denied the Motion for New
Trial/Reconsideration because the alleged newly discovered evidence was actually forgotten
evidence already in existence during the trial, and would not alter the result of the case.
Hence, Petitioners filed with us the petition in this case on 16 November 1989. They raised
the following issues:
1. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL ON THE
GROUND OF NEWLY DISCOVERED EVIDENCE, NAMELY, "DISCLOSURE ON
LOAN/CREDIT TRANSACTION," WHICH IF INTRODUCED AND ADMITTED,
WOULD CHANGE THE JUDGMENT, DOES NOT CONSTITUTE A DENIAL OF
DUE PROCESS.
2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR NOT THE
ACCUSED WERE PROPERLY CHARGED, TRIED AND CONVICTED FOR
VIOLATION OF SEC. 13, PD NO. 115 IN RELATION TO ARTICLE 315
PARAGRAPH (I) (B) NOTWITHSTANDING THE NOVATION OF THE SO-CALLED
TRUST RECEIPT CONVERTING THE TRUSTOR-TRUSTEE RELATIONSHIP TO
CREDITOR-DEBTOR SITUATION.
In its Comment of 22 January 1990, the Office of the Solicitor General urged us to deny the
petition for lack of merit.
On 28 February 1990 Petitioners filed a Motion to Dismiss the case on the ground that they
had already fully paid PBC on 2 February 1990 the amount of P70,000 for the balance of the
loan, including interest and other charges, as evidenced by the different receipts issued by
PBC,24 and that the PBC executed an Affidavit of desistance.25
We required the Solicitor General to comment on the Motion to Dismiss.
In its Comment of 30 July 1990, the Solicitor General opined that payment of the loan was
akin to a voluntary surrender or plea of guilty which merely serves to mitigate Petitioners
culpability, but does not in any way extinguish their criminal liability.
In the Resolution of 13 August 1990, we gave due course to the Petition and required the
parties to file their respective memoranda.
The parties subsequently filed their respective memoranda.
It was only on 18 May 1999 when this case was assigned to the ponente. Thereafter, we
required the parties to move in the premises and for Petitioners to manifest if they are still
interested in the further prosecution of this case and inform us of their present whereabouts
and whether their bail bonds are still valid.
Petitioners submitted their Compliance.
The core issues raised in the petition are the denial by the Court of Appeals of Petitioners
Motion for New Trial and the true nature of the contract between Petitioners and the PBC. As
to the latter, Petitioners assert that it was an ordinary loan, not a trust receipt agreement
under the Trust Receipts Law.
The grant or denial of a motion for new trial rests upon the discretion of the judge. New trial
may be granted if: (1) errors of law or irregularities have been committed during the trial
prejudicial to the substantial rights of the accused; or (2) new and material evidence has
been discovered which the accused could not with reasonable diligence have discovered and
produced at the trial, and which, if introduced and admitted, would probably change the
judgment.26
For newly discovered evidence to be a ground for new trial, such evidence must be (1)
discovered after trial; (2) could not have been discovered and produced at the trial even with
the exercise of reasonable diligence; and (3) material, not merely cumulative, corroborative,
or impeaching, and of such weight that, if admitted, would probably change the
judgment.27 It is essential that the offering party exercised reasonable diligence in seeking to
locate the evidence before or during trial but nonetheless failed to secure it.28
We find no indication in the pleadings that the Disclosure Statement is a newly discovered
evidence.
Petitioners could not have been unaware that the two-page document exists. The Disclosure
Statement itself states, "NOTICE TO BORROWER: YOU ARE ENTITLED TO A COPY OF
THIS PAPER WHICH YOU SHALL SIGN."29 Assuming Petitioners copy was then
unavailable, they could have compelled its production in court,30which they never did.
Petitioners have miserably failed to establish the second requisite of the rule on newly
discovered evidence.
Petitioners themselves admitted that "they searched again their voluminous records,
meticulously and patiently, until they discovered this new and material evidence" only upon
learning of the Court of Appeals decision and after they were "shocked by the penalty
imposed."31 Clearly, the alleged newly discovered evidence is mere forgotten evidence that
jurisprudence excludes as a ground for new trial.32
However, the second issue should be resolved in favor of Petitioners.
Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt transaction as any
transaction by and between a person referred to as the entruster, and another person
referred to as the entrustee, whereby the entruster who owns or holds absolute title or
security interest over certain specified goods, documents or instruments, releases the same
to the possession of the entrustee upon the latters execution and delivery to the entruster of
a signed document called a "trust receipt" wherein the entrustee binds himself to hold the
designated goods, documents or instruments with the obligation to turn over to the entruster
the proceeds thereof to the extent of the amount owing to the entruster or as appears in the
trust receipt or the goods, documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt.
There are two possible situations in a trust receipt transaction. The first is covered by the
provision which refers tomoney received under the obligation involving the duty to deliver it
(entregarla) to the owner of the merchandise sold. The second is covered by the provision
which refers to merchandise received under the obligation to "return" it (devolvera) to the
owner.33
Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the
trust receipt to the entruster or to return said goods if they were not disposed of in
accordance with the terms of the trust receipt shall be punishable as estafa under Article 315
(1) of the Revised Penal Code,34 without need of proving intent to defraud.
A thorough examination of the facts obtaining in the case at bar reveals that the transaction
intended by the parties was a simple loan, not a trust receipt agreement.
Petitioners received the merchandise from CM Builders Centre on 30 October 1979. On that
day, ownership over the merchandise was already transferred to Petitioners who were to use
the materials for their construction project. It was only a day later, 31 October 1979, that they
went to the bank to apply for a loan to pay for the merchandise.
This situation belies what normally obtains in a pure trust receipt transaction where goods are
owned by the bank and only released to the importer in trust subsequent to the grant of the
loan. The bank acquires a "security interest" in the goods as holder of a security title for the
advances it had made to the entrustee.35 The ownership of the merchandise continues to be
vested in the person who had advanced payment until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the sale should be turned over to him by
the importer or by his representative or successor in interest.36 To secure that the bank shall
be paid, it takes full title to the goods at the very beginning and continues to hold that title as
his indispensable security until the goods are sold and the vendee is called upon to pay for
them; hence, the importer has never owned the goods and is not able to deliver
possession.37 In a certain manner, trust receipts partake of the nature of a conditional sale
where the importer becomes absolute owner of the imported merchandise as soon as he has
paid its price.38
Trust receipt transactions are intended to aid in financing importers and retail dealers who do
not have sufficient funds or resources to finance the importation or purchase of merchandise,
and who may not be able to acquire credit except through utilization, as collateral, of the
merchandise imported or purchased.39
The antecedent acts in a trust receipt transaction consist of the application and approval of
the letter of credit, the making of the marginal deposit and the effective importation of goods
through the efforts of the importer.40
PBC attempted to cover up the true delivery date of the merchandise, yet the trial court took
notice even though it failed to attach any significance to such fact in the judgment. Despite
the Court of Appeals contrary view that the goods were delivered to Petitioners previous to
the execution of the letter of credit and trust receipt, we find that the records of the case
speak volubly and this fact remains uncontroverted. It is not uncommon for us to peruse
through the transcript of the stenographic notes of the proceedings to be satisfied that the
records of the case do support the conclusions of the trial court.41 After such perusal Grego
Mutia, PBCs credit investigator, admitted thus:
ATTY. CABANLET: (continuing)
Q Do you know if the goods subject matter of this letter of credit and trust receipt agreement
were received by the accused?
A Yes, sir
Q Do you have evidence to show that these goods subject matter of this letter of credit and
trust receipt were delivered to the accused?
A Yes, sir.
Q I am showing to you this charge invoice, are you referring to this document?
A Yes, sir.
xxx
Q What is the date of the charge invoice?
A October 31, 1979.
COURT:
Make it of record as appearing in Exhibit D, the zero in 30 has been superimposed with
numeral 1.42
During the cross and re-direct examinations he also impliedly admitted that the transaction
was indeed a loan. Thus:
Q In short the amount stated in your Exhibit C, the trust receipt was a loan to the accused
you admit that?
A Because in the bank the loan is considered part of the loan.
xxx
RE-DIRECT BY ATTY. CABANLET:
ATTY. CABANLET (to the witness)
Q What do you understand by loan when you were asked?
A Loan is a promise of a borrower from the value received. The borrower will pay the bank on
a certain specified date with interest43
Such statement is akin to an admission against interest binding upon PBC.
Petitioner Velosos claim that they were made to believe that the transaction was a loan was
also not denied by PBC. He declared:
Q Testimony was given here that that was covered by trust receipt. In short it was a special
kind of loan.1wphi1 What can you say as to that?
A I dont think that would be a trust receipt because we were made to understand by the
manager who encouraged us to avail of their facilities that they will be granting us a loan44
PBC could have presented its former bank manager, Cayo Garcia Tuiza, who contracted with
Petitioners, to refute Velosos testimony, yet it only presented credit investigator Grego Mutia.
Nowhere from Mutias testimony can it be gleaned that PBC represented to Petitioners that
the transaction they were entering into was not a pure loan but had trust receipt implications.
The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the
dishonesty and abuse of confidence in the handling of money or goods to the prejudice of
another regardless of whether the latter is the owner.45 Here, it is crystal clear that on the
part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of
money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations,
as shown by several receipts issued by PBC acknowledging payment of the loan.
The Information charges Petitioners with intent to defraud and misappropriating the money
for their personal use. The mala prohibita nature of the alleged offense notwithstanding,
intent as a state of mind was not proved to be present in Petitioners situation. Petitioners
employed no artifice in dealing with PBC and never did they evade payment of their
obligation nor attempt to abscond. Instead, Petitioners sought favorable terms precisely to
meet their obligation.
Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale,
contrary to the express provision embodied in the trust receipt. They are contractors who
obtained the fungible goods for their construction project. At no time did title over the
construction materials pass to the bank, but directly to the Petitioners from CM Builders
Centre. This impresses upon the trust receipt in question vagueness and ambiguity, which
should not be the basis for criminal prosecution in the event of violation of its provisions.46
The practice of banks of making borrowers sign trust receipts to facilitate collection of loans
and place them under the threats of criminal prosecution should they be unable to pay it may
be unjust and inequitable, if not reprehensible. Such agreements are contracts of adhesion
which borrowers have no option but to sign lest their loan be disapproved. The resort to this
scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to
misinterpretation, as had happened in this case. Eventually, PBC showed its true colors and
admitted that it was only after collection of the money, as manifested by its Affidavit of
Desistance.
WHEREFORE, the challenged Decision of 6 March 1989 and the Resolution of 16 October
1989 of the Court of Appeals in CA-GR. No. 05408 are REVERSED and SET ASIDE.
Petitioners are hereby ACQUITTED of the crime charged, i.e., for violation of P.D. No. 115 in
relation to Article 315 of the Revised Penal Code.
No costs.
SO ORDERED.








G.R. No. 133176 August 8, 2002
PILIPINAS BANK, petitioner, vs. ALFREDO T. ONG and LEONCIA LIM, respondents.
D E C I S I O N
SANDOVAL-GUTIERREZ, J.:
Petition for review on certiorari1 of the Resolutions2 dated January 9, 1998 and March 25,
1998 of the Court of Appeals in CA-G.R. SP No. 42005, "Pilipinas Bank vs. The Honorable
Secretary of Justice, the City Prosecutor of Makati City, Alfredo T. Ong and Leoncia
Lim," reversing its Decision dated August 29, 1997.
On April 1991, Baliwag Mahogany Corporation (BMC), through its president, respondent
Alfredo T. Ong, applied for a domestic commercial letter of credit with petitioner Pilipinas
Bank (hereinafter referred to as the bank) to finance the purchase of about 100,000 board
feet of "Air Dried, Dark Red Lauan" sawn lumber.
The bank approved the application and issued Letter of Credit No. 91/725-HO in the amount
of P3,500,000.00. To secure payment of the amount, BMC, through respondent Ong,
executed two (2) trust receipts3 providing inter aliathat it shall turn over the proceeds of the
goods to the bank, if sold, or return the goods, if unsold, upon maturity on July 28, 1991 and
August 4, 1991.
On due dates, BMC failed to comply with the trust receipt agreement. On November 22,
1991, it filed with the Securities and Exchange Commission (SEC) a Petition for
Rehabilitation and for a Declaration in a State of Suspension of Payments under Section 6 (c)
of P.D. No. 902-A,4 as amended, docketed as SEC Case No. 4109. After BMC informed its
creditors (including the bank) of the filing of the petition, a Creditors' Meeting was held to:
(a) inform all creditor banks of the present status of BMC to avert any action which would
affect the company's operations, and (b) reach an accord on a common course of action to
restore the company to sound financial footing.
On January 8, 1992, the SEC issued an order5 creating a Management Committee wherein
the bank is represented. The Committee shall, among others, undertake the management of
BMC, take custody and control of all its existing assets and liabilities, study, review and
evaluate its operation and/or the feasibility of its being restructured.
On October 13, 1992, BMC and a consortium of 14 of its creditor banks entered into a
Memorandum of Agreement6 (MOA) rescheduling the payment of BMCs existing debts.
On November 27, 1992, the SEC rendered a Decision7 approving the Rehabilitation Plan of
BMC as contained in the MOA and declaring it in a state of suspension of payments.
However, BMC and respondent Ong defaulted in the payment of their obligations under the
rescheduled payment scheme provided in the MOA. Thus, on April 1994, the bank filed with
the Makati City Prosecutors Office a complaint8 charging respondents Ong and Leoncia Lim
(as president and treasurer of BMC, respectively) with violation of the Trust Receipts Law
(PD No. 115), docketed as I.S. No. 94-3324. The bank alleged that both respondents failed to
pay their obligations under the trust receipts despite demand.9
On July 7, 1994, 3rd Assistant Prosecutor Edgardo E. Bautista issued a
Resolution10 recommending the dismissal of the complaint. On July 11, 1994, the Resolution
was approved by Provincial Prosecutor of Rizal Herminio T. Ubana, Sr.11 The bank filed a
motion for reconsideration but was denied.
Upon appeal by the bank, the Department of Justice (DOJ) rendered judgment12 denying the
same for lack of merit. Its motion for reconsideration was likewise denied.13
On July 5, 1996, the bank filed with this Court a petition for certiorari and mandamus seeking
to annul the resolution of the DOJ. In a Resolution dated August 21, 1996, this Court referred
the petition to the Court of Appeals for proper determination and disposition.14
On August 29, 1997, the Court of Appeals rendered judgment, the dispositive portion of
which reads:
"WHEREFORE, in view of all the foregoing, the assailed resolutions of the public
respondents are hereby SET ASIDE and in lieu thereof a new one rendered directing the
public respondents to file the appropriate criminal charges for violation of P.D. No. 115,
otherwise known as The Trust Receipts Law, against private respondents."15
However, upon respondents motion for reconsideration, the Court of Appeals reversed itself,
holding that the execution of the MOA constitutes novation which "places petitioner Bank in
estoppel to insist on the original trust relation and constitutes a bar to the filing of any criminal
information for violation of the trust receipts law."16
The bank filed a motion for reconsideration but was denied.17 Hence this petition.
Petitioner bank contends that the MOA did not novate, much less extinguish, the existing
obligations of BMC under the trust receipt agreement. The bank, through the execution of the
MOA, merely assisted BMC to settle its obligations by rescheduling the same. Hence, when
BMC defaulted in its payment, all its rights, including the right to charge respondents for
violation of the Trust Receipts Law, were revived.
Respondents Ong and Lim maintain that the MOA, which has the effect of a compromise
agreement, novated BMCs existing obligations under the trust receipt agreement. The
novation converted the parties relationship into one of an ordinary creditor and debtor.
Moreover, the execution of the MOA precludes any criminal liability on their part which may
arise in case they violate any provision thereof.
The only issue for our determination is whether respondents can be held liable for violation of
the Trust Receipts Law.
Section 4 of PD No. 115 (The Trust Receipts Law) defines a trust receipt as any transaction
by and between a person referred to as the entruster, and another person referred to as the
entrustee, whereby the entruster who owns or holds absolute title or security interest over
certain specified goods, documents or instruments, releases the same to the possession of
the entrustee upon the latter's execution and delivery to the entruster of a signed document
called a "trust receipt" wherein the entrustee binds himself to hold the designated goods,
documents or instruments with the obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the entruster or as appears in the trust receipt, or
the goods, documents or instruments themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and conditions specified in the trust receipt.18
Failure of the entrustee to turn over the proceeds of the sale of the goods covered by a trust
receipt to the entruster or to return the goods, if they were not disposed of, shall constitute
the crime of estafa under Article 315, par. 1(b) of the Revised Penal Code.19 If the violation
or offense is committed by a corporation, the penalty shall be imposed upon the directors,
officers, employees or other officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense.20 It is on this premise that
petitioner bank charged respondents with violation of the Trust Receipts Law.1wphi1
Mere failure to deliver the proceeds of the sale or the goods, if not sold, constitutes violation
of PD No. 115.21However, what is being punished by the law is the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of another regardless of
whether the latter is the owner. 22
In this case, no dishonesty nor abuse of confidence can be attributed to respondents. Record
shows that BMC failed to comply with its obligations upon maturity of the trust receipts due to
serious liquidity problems, prompting it to file a Petition for Rehabilitation and Declaration in a
State of Suspension of Payments. It bears emphasis that when petitioner bank made a
demand upon BMC on February 11, 1994 to comply with its obligations under the trust
receipts, the latter was already under the control of the Management Committee created by
the SEC in its Order dated January 8, 1992.23 The Management Committee took custody of
all BMCs assets and liabilities, including the red lauan lumber subject of the trust receipts,
and authorized their use in the ordinary course of business operations. Clearly, it was the
Management Committee which could settle BMCs obligations. Moreover, it has not escaped
this Courts observation that respondent Ong paid P21,000,000.00 in compliance with the
equity infusion required by the MOA. The mala prohibita nature of the offense
notwithstanding, respondents intent to misuse or misappropriate the goods or their proceeds
has not been established by the records.24
Did the MOA novate the trust agreement between the parties?
In Quinto vs. People,25 this Court held that there are two ways which could indicate the
presence of novation, thereby producing the effect of extinguishing an obligation by another
which substitutes the same. The first is when novation has been stated and declared in
unequivocal terms. The second is when the old and the new obligations are incompatible on
every point. The test of incompatibility is whether or not the two obligations can stand
together. If they cannot, they are incompatible and the latter obligation novates the first.
Corollarily, changes that breed incompatibility must be essential in nature and not merely
accidental. The incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions, otherwise, the change is merely
modificatory in nature and insufficient to extinguish the original obligation.
Contrary to petitioner's contention, the MOA did not only reschedule BMCs debts, but more
importantly, it provided principal conditions which are incompatible with the trust agreement.
The undisputed points of incompatibility between the two agreements are:
Points of incompatibility Trust Receipt MOA
1) Nature of contract Trust Receipt Loan26
2) Juridical relationship Trustor-Trustee Lender-Borrower
3) Status of obligation Matured Payable within 7 years27
4) Governing law Criminal Civil & Commercial28
5) Security offered Trust Receipts Real estate/chattel mortgages29
6) Interest rate per annum (Unspecified) 14%30
7) Default charges 24% 14%31
8) No. of parties 3 16
Hence, applying the pronouncement in Quinto, we can safely conclude that the MOA novated
and effectively extinguished BMC's obligations under the trust receipt agreement.
Petitioner bank's argument that BMC's non-compliance with the MOA revived respondents
original liabilities under the trust receipt agreement is completely misplaced. Section 8.4 of
the MOA on termination reads:
"8.4 Termination. Any provision of this Agreement to the contrary notwithstanding, if the
conditions for rescheduling specified in Section 7 shall not be complied with on such later
date as the Qualified Majority Lenders in their sole and absolute discretion may agree in
writing, then
(i) the obligation of the Lenders to reschedule the Existing Credits as contemplated
hereby shall automatically terminate on such date:
(ii) the Existing Agreements shall continue in full force and effect on the remaining
loan balances as if this Agreement had not been entered into;
(iii) all the rights of the lenders against the borrower and Spouses Ong prior to the
agreement shall revest to the lenders."
Indeed, what is automatically terminated in case BMC failed to comply with the conditions
under the MOA is not the MOA itself but merely the obligation of the lender (the bank) to
reschedule the existing credits. Moreover, it is erroneous to assume that the revesting of "all
the rights of lenders against the borrower" means that petitioner can charge respondents for
violation of the Trust Receipts Law under the original trust receipt agreement. As explained
earlier, the execution of the MOA extinguished respondents obligation under the trust
receipts. Respondents liability, if any, would only be civil in nature since the trust receipts
were transformed into mere loan documents after the execution of the MOA. This is
reinforced by the fact that the mortgage contracts executed by the BMC survive despite its
non-compliance with the conditions set forth in the MOA.
All told, we find no reversible error committed by the Court of Appeals in rendering the
assailed Resolutions.
WHEREFORE, the petition is DENIED. The assailed Resolutions of the Court of Appeals
dated January 9, 1998 and March 25, 1998 in CA-G.R. SP No. 42005 are hereby
AFFIRMED.
SO ORDERED.











G.R. No. L-22405 June 30, 1971
PHILIPPINE EDUCATION CO., INC., plaintiff-appellant, vs. MAURICIO A. SORIANO, ET
AL., defendant-appellees.
DIZON, J.:
An appeal from a decision of the Court of First Instance of Manila dismissing the complaint
filed by the Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and
Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10)
money orders of P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon.
After the postal teller had made out money ordersnumbered 124685, 124687-124695,
Montinola offered to pay for them with a private checks were not generally accepted in
payment of money orders, the teller advised him to see the Chief of the Money Order
Division, but instead of doing so, Montinola managed to leave building with his own check
and the ten(10) money orders without the knowledge of the teller.
On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money
orders, an urgent message was sent to all postmasters, and the following day notice was
likewise served upon all banks, instructing them not to pay anyone of the money orders
aforesaid if presented for payment. The Bank of America received a copy of said notice three
days later.
On April 23, 1958 one of the above-mentioned money orders numbered 124688 was
received by appellant as part of its sales receipts. The following day it deposited the same
with the Bank of America, and one day thereafter the latter cleared it with the Bureau of Posts
and received from the latter its face value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of
the Manila Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico
Palomar, notified the Bank of America that money order No. 124688 attached to his letter had
been found to have been irregularly issued and that, in view thereof, the amount it
represented had been deducted from the bank's clearing account. For its part, on August 2 of
the same year, the Bank of America debited appellant's account with the same amount and
gave it advice thereof by means of a debit memo.
On October 12, 1961 appellant requested the Postmaster General to reconsider the action
taken by his office deducting the sum of P200.00 from the clearing account of the Bank of
America, but his request was denied. So was appellant's subsequent request that the matter
be referred to the Secretary of Justice for advice. Thereafter, appellant elevated the matter to
the Secretary of Public Works and Communications, but the latter sustained the actions
taken by the postal officers.
In connection with the events set forth above, Montinola was charged with theft in the Court
of First Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the
ground of reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal Court of
Manila praying for judgment as follows:
WHEREFORE, plaintiff prays that after hearing defendants be ordered:
(a) To countermand the notice given to the Bank of America on September
27, 1961, deducting from the said Bank's clearing account the sum of
P200.00 represented by postal money order No. 124688, or in the
alternative indemnify the plaintiff in the same amount with interest at 8-%
per annum from September 27, 1961, which is the rate of interest being paid
by plaintiff on its overdraft account;
(b) To pay to the plaintiff out of their own personal funds, jointly and
severally, actual and moral damages in the amount of P1,000.00 or in such
amount as will be proved and/or determined by this Honorable Court:
exemplary damages in the amount of P1,000.00, attorney's fees of
P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be deemed just
and equitable.
On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at
pages 12 to 15 of the Record on Appeal, the above-named court rendered judgment as
follows:
WHEREFORE, judgment is hereby rendered, ordering the defendants to
countermand the notice given to the Bank of America on September 27,
1961, deducting from said Bank's clearing account the sum of P200.00
representing the amount of postal money order No. 124688, or in the
alternative, to indemnify the plaintiff in the said sum of P200.00 with interest
thereon at the rate of 8-% per annum from September 27, 1961 until fully
paid; without any pronouncement as to cost and attorney's fees.
The case was appealed to the Court of First Instance of Manila where, after the parties had
resubmitted the same stipulation of facts, the appealed decision dismissing the complaint,
with costs, was rendered.
The first, second and fifth assignments of error discussed in appellant's brief are related to
the other and will therefore be discussed jointly. They raise this main issue: that the postal
money order in question is a negotiable instrument; that its nature as such is not in anyway
affected by the letter dated October 26, 1948 signed by the Director of Posts and addressed
to all banks with a clearing account with the Post Office, and that money orders, once issued,
create a contractual relationship of debtor and creditor, respectively, between the
government, on the one hand, and the remitters payees or endorses, on the other.
It is not disputed that our postal statutes were patterned after statutes in force in the United
States. For this reason, ours are generally construed in accordance with the construction
given in the United States to their own postal statutes, in the absence of any special reason
justifying a departure from this policy or practice. The weight of authority in the United States
is that postal money orders are not negotiable instruments (Bolognesi vs. U.S. 189 Fed. 395;
U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule being that,
in establishing and operating a postal money order system, the government is not engaging
in commercial transactions but merely exercises a governmental power for the public benefit.
It is to be noted in this connection that some of the restrictions imposed upon money orders
by postal laws and regulations are inconsistent with the character of negotiable instruments.
For instance, such laws and regulations usually provide for not more than one endorsement;
payment of money orders may be withheld under a variety of circumstances (49 C.J. 1153).
Of particular application to the postal money order in question are the conditions laid down in
the letter of the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for
the redemption of postal money orders received by it from its depositors. Among others, the
condition is imposed that "in cases of adverse claim, the money order or money orders
involved will be returned to you (the bank) and the, corresponding amount will have to be
refunded to the Postmaster, Manila, who reserves the right to deduct the value thereof from
any amount due you if such step is deemed necessary." The conditions thus imposed in
order to enable the bank to continue enjoying the facilities theretofore enjoyed by its
depositors, were accepted by the Bank of America. The latter is therefore bound by them.
That it is so is clearly referred from the fact that, upon receiving advice that the amount
represented by the money order in question had been deducted from its clearing account
with the Manila Post Office, it did not file any protest against such action.
Moreover, not being a party to the understanding existing between the postal officers, on the
one hand, and the Bank of America, on the other, appellant has no right to assail the terms
and conditions thereof on the ground that the letter setting forth the terms and conditions
aforesaid is void because it was not issued by a Department Head in accordance with Sec.
79 (B) of the Revised Administrative Code. In reality, however, said legal provision does not
apply to the letter in question because it does not provide for a department regulation but
merely sets down certain conditions upon the privilege granted to the Bank of Amrica to
accept and pay postal money orders presented for payment at the Manila Post Office. Such
being the case, it is clear that the Director of Posts had ample authority to issue it pursuant to
Sec. 1190 of the Revised Administrative Code.
In view of the foregoing, We do not find it necessary to resolve the issues raised in the third
and fourth assignments of error.
WHEREFORE, the appealed decision being in accordance with law, the same is hereby
affirmed with costs.








G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS and SECURITY BANK
AND TRUST COMPANY, respondents.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the decision
promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming
with modifications, the earlier decision of the Regional Trial Court of Manila, Branch
XLII, 2 which dismissed the complaint filed therein by herein petitioner against respondent
bank.
The undisputed background of this case, as found by the court a quo and adopted by
respondent court, appears of record:
1. On various dates, defendant, a commercial banking institution, through its
Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one
Angel dela Cruz who deposited with herein defendant the aggregate amount
of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and
Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to
280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000

Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein
plaintiff in connection with his purchased of fuel products from the latter
(Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco,
the Sucat Branch Manger, that he lost all the certificates of time deposit in
dispute. Mr. Tiangco advised said depositor to execute and submit a
notarized Affidavit of Loss, as required by defendant bank's procedure, if he
desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant
bank the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of
said affidavit of loss, 280 replacement CTDs were issued in favor of said
depositor (Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from
defendant bank in the amount of Eight Hundred Seventy Five Thousand
Pesos (P875,000.00). On the same date, said depositor executed a
notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated,
among others, that he (de la Cruz) surrenders to defendant bank "full control
of the indicated time deposits from and after date" of the assignment and
further authorizes said bank to pre-terminate, set-off and "apply the said time
deposits to the payment of whatever amount or amounts may be due" on the
loan upon its maturity (TSN, February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff
Caltex (Phils.) Inc., went to the defendant bank's Sucat branch and
presented for verification the CTDs declared lost by Angel dela Cruz alleging
that the same were delivered to herein plaintiff "as security for purchases
made with Caltex Philippines, Inc." by said depositor (TSN, February 9,
1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit
563) from herein plaintiff formally informing it of its possession of the CTDs
in question and of its decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein defendant to
furnish the former "a copy of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela
Cruz" obligation against which plaintiff proposed to apply the time deposits
(Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim for
payment of the value of the CTDs in a letter dated February 7, 1983
(Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank
matured and fell due and on August 5, 1983, the latter set-off and applied
the time deposits in question to the payment of the matured loan (TSN,
February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that
defendant bank be ordered to pay it the aggregate value of the certificates of
time deposit of P1,120,000.00 plus accrued interest and compounded
interest therein at 16% per annum, moral and exemplary damages as well as
attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant
complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the
complaint, hence this petition wherein petitioner faults respondent court in ruling (1) that the
subject certificates of deposit are non-negotiable despite being clearly negotiable
instruments; (2) that petitioner did not become a holder in due course of the said certificates
of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating
to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better
understanding of the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this
Bank the sum of PESOS: FOUR THOUSAND ONLY,
SECURITY BANK SUCAT OFFICE P4,000 & 00
CTS Pesos, Philippine Currency, repayable to said
depositor 731 days. after date, upon presentation and
surrender of this certificate, with interest at the rate
of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)

AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable instruments,
nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather boldly in the
CTDs issued, it is important to note that after the word "BEARER" stamped
on the space provided supposedly for the name of the depositor, the words
"has deposited" a certain amount follows. The document further provides
that the amount deposited shall be "repayable to said depositor" on the
period indicated. Therefore, the text of the instrument(s) themselves
manifest with clarity that they are payable, not to whoever purports to be the
"bearer" but only to the specified person indicated therein, the depositor. In
effect, the appellee bank acknowledges its depositor Angel dela Cruz as the
person who made the deposit and further engages itself to pay said
depositor the amount indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in question
are negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable
Instruments Law, enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in
money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The
parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr.
Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open
court that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books
of the bank, the depositor referred (sic) in these certificates
states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that
Angel dela Cruz was the one who cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these
certificates of time deposit insofar as the bank is
concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument
is determined from the writing, that is, from the face of the instrument itself. 9 In the
construction of a bill or note, the intention of the parties is to control, if it can be legally
ascertained. 10 While the writing may be read in the light of surrounding circumstances in
order to more perfectly understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their meaning, no
other words are to be added to it or substituted in its stead. The duty of the court in such case
is to ascertain, not what the parties may have secretly intended as contradistinguished from
what their words express, but what is the meaning of the words they have used. What the
parties meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments. The
documents provide that the amounts deposited shall be repayable to the depositor. And who,
according to the document, is the depositor? It is the "bearer." The documents do not say
that the depositor is Angel de la Cruz and that the amounts deposited are repayable
specifically to him. Rather, the amounts are to be repayable to the bearer of the documents
or, for that matter, whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it
could have with facility so expressed that fact in clear and categorical terms in the
documents, instead of having the word "BEARER" stamped on the space provided for the
name of the depositor in each CTD. On the wordings of the documents, therefore, the
amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's
aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the bank
is concerned," but obviously other parties not privy to the transaction between them would
not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence,
the situation would require any party dealing with the CTDs to go behind the plain import of
what is written thereon to unravel the agreement of the parties thereto through
facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the
Negotiable Instruments Law and calls for the application of the elementary rule that the
interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time, the
answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose
not to implead in this suit for reasons of its own, delivered the CTDs amounting to
P1,120,000.00 to petitioner without informing respondent bank thereof at any time.
Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation
thereof for the true purpose and agreement between it and De la Cruz, as ultimately
ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect
this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its
fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel
products or as a security has been dissipated and resolved in favor of the latter by petitioner's
own authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas,
Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by
Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This
admission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine
of estoppel, an admission or representation is rendered conclusive upon the person making
it, and cannot be denied or disproved as against the person relying thereon. 14 A party may
not go back on his own acts and representations to the prejudice of the other party who relied
upon them. 15 In the law of evidence, whenever a party has, by his own declaration, act, or
omission, intentionally and deliberately led another to believe a particular thing true, and to
act upon such belief, he cannot, in any litigation arising out of such declaration, act, or
omission, be permitted to falsify it.16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit
manager could have easily said so, instead of using the words "to guarantee" in the letter
aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a
bill of particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to
aver with sufficient definiteness or particularity (a) the due date or dates of payment of the
alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt
showing that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged
indebtedness to it, plaintiff corporation opposed the motion. 18Had it produced the receipt
prayed for, it could have proved, if such truly was the fact, that the CTDs were delivered as
payment and not as security. Having opposed the motion, petitioner now labors under the
presumption that evidence willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al.
vs. Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we
quote therefrom:
The character of the transaction between the parties is to be
determined by their intention, regardless of what language
was used or what the form of the transfer was. If it was
intended to secure the payment of money, it must be
construed as a pledge; but if there was some other
intention, it is not a pledge. However, even though a
transfer, if regarded by itself, appears to have been
absolute, its object and character might still be qualified and
explained by contemporaneous writing declaring it to have
been a deposit of the property as collateral security. It has
been said that a transfer of property by the debtor to a
creditor, even if sufficient on its face to make an absolute
conveyance, should be treated as a pledge if the debt
continues in inexistence and is not discharged by the
transfer, and that accordingly the use of the terms ordinarily
importing conveyance of absolute ownership will not be
given that effect in such a transaction if they are also
commonly used in pledges and mortgages and therefore do
not unqualifiedly indicate a transfer of absolute ownership,
in the absence of clear and unambiguous language or other
circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the
Negotiable Instruments Law, an instrument is negotiated when it is transferred from one
person to another in such a manner as to constitute the transferee the holder thereof, 21 and
a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the
bearer thereof. 22 In the present case, however, there was no negotiation in the sense of a
transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious
reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof
only as security for the purchases of Angel de la Cruz (and we even disregard the fact that
the amount involved was not disclosed) could at the most constitute petitioner only as a
holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be
effected by mere delivery of the instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of non-payment of the principal
obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising
from contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of
collateral security, he would be a pledgee but the requirements therefor and the effects
thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may
also be pledged. The instrument proving the right pledged shall be delivered
to the creditor, and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description
of the thing pledged and the date of the pledge do not appear in a public
instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel
de la Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner
any right effective against and binding upon respondent bank. The requirement under Article
2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof
may be made of the date of a pledge contract, but a rule of substantive law prescribing a
condition without which the execution of a pledge contract cannot affect third persons
adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of
respondent bank was embodied in a public instrument. 27 With regard to this other mode of
transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as
against third persons, unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case the assignment
involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner,
whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its
credit or the extent of its lien nor the execution of any public instrument which could affect or
bind private respondent. Necessarily, therefore, as between petitioner and respondent bank,
the latter has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or
not private respondent observed the requirements of the law in the case of lost negotiable
instruments and the issuance of replacement certificates therefor, on the ground that
petitioner failed to raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of
private respondent was not included in the stipulation of the parties and in the statement of
issues submitted by them to the trial court.29 The issues agreed upon by them for resolution
in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the
CTDs against the depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the
amount covered by the CTDs and the depositor's outstanding account with
defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs
before the maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and
litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some doctrinal
authorities, the foregoing enumeration does not include the issue of negligence on the part of
respondent bank. An issue raised for the first time on appeal and not raised timely in the
proceedings in the lower court is barred by estoppel. 30 Questions raised on appeal must be
within the issues framed by the parties and, consequently, issues not raised in the trial court
cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a
case are properly raised. Thus, to obviate the element of surprise, parties are expected to
disclose at a pre-trial conference all issues of law and fact which they intend to raise at the
trial, except such as may involve privileged or impeaching matters. The determination of
issues at a pre-trial conference bars the consideration of other questions on appeal.32
To accept petitioner's suggestion that respondent bank's supposed negligence may be
considered encompassed by the issues on its right to preterminate and receive the proceeds
of the CTDs would be tantamount to saying that petitioner could raise on appeal any issue.
We agree with private respondent that the broad ultimate issue of petitioner's entitlement to
the proceeds of the questioned certificates can be premised on a multitude of other legal
reasons and causes of action, of which respondent bank's supposed negligence is only one.
Hence, petitioner's submission, if accepted, would render a pre-trial delimitation of issues a
useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court below,
petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the Code
of Commerce laying down the rules to be followed in case of lost instruments payable to
bearer, which it invokes, will reveal that said provisions, even assuming their applicability to
the CTDs in the case at bar, are merely permissive and not mandatory. The very first article
cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may
be, may apply to the judge or court of competent jurisdiction, asking that the
principal, interest or dividends due or about to become due, be not paid a
third person, as well as in order to prevent the ownership of the instrument
that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary
on the part of the "dispossessed owner" to apply to the judge or court of competent
jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads
"may," this word shows that it is not mandatory but discretional. 34 The word "may" is usually
permissive, not mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission
and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence,
merely established, on the one hand, a right of recourse in favor of a dispossessed owner or
holder of a bearer instrument so that he may obtain a duplicate of the same, and, on the
other, an option in favor of the party liable thereon who, for some valid ground, may elect to
refuse to issue a replacement of the instrument. Significantly, none of the provisions cited by
petitioner categorically restricts or prohibits the issuance a duplicate or replacement
instrument sans compliance with the procedure outlined therein, and none establishes a
mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the
appealed decision is hereby AFFIRMED.
SO ORDERED.




G.R. No. 88866 February 18, 1991
METROPOLITAN BANK & TRUST COMPANY, petitioner, vs. COURT OF APPEALS,
GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO
CASTILLO and GLORIA CASTILLO, respondents.
CRUZ, J.:p
This case, for all its seeming complexity, turns on a simple question of negligence. The facts,
pruned of all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the
Philippines and even abroad. Golden Savings and Loan Association was, at the time these
events happened, operating in Calapan, Mindoro, with the other private respondents as its
principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and
deposited over a period of two months 38 treasury warrants with a total value of
P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and
purportedly signed by its General Manager and countersigned by its Auditor. Six of these
were directly payable to Gomez while the others appeared to have been indorsed by their
respective payees, followed by Gomez as second indorser. 1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently
indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings
Account No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for
clearing by the branch office to the principal office of Metrobank, which forwarded them to the
Bureau of Treasury for special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several
times to ask whether the warrants had been cleared. She was told to wait. Accordingly,
Gomez was meanwhile not allowed to withdraw from his account. Later, however,
"exasperated" over Gloria's repeated inquiries and also as an accommodation for a "valued
client," the petitioner says it finally decided to allow Golden Savings to withdraw from the
proceeds of the warrants. 3 The first withdrawal was made on July 9, 1979, in the amount of
P508,000.00, the second on July 13, 1979, in the amount of P310,000.00, and the third on
July 16, 1979, in the amount of P150,000.00. The total withdrawal was P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own
account, eventually collecting the total amount of P1,167,500.00 from the proceeds of the
apparently cleared warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been
dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden
Savings of the amount it had previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court
of Mindoro. 5 After trial, judgment was rendered in favor of Golden Savings, which, however,
filed a motion for reconsideration even as Metrobank filed its notice of appeal. On November
4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of defendant
Golden Savings and Loan Association, Inc. and defendant Spouses Magno
Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No.
2498 of the sum of P1,754,089.00 and to reinstate and credit to such
account such amount existing before the debit was made including the
amount of P812,033.37 in favor of defendant Golden Savings and Loan
Association, Inc. and thereafter, to allow defendant Golden Savings and
Loan Association, Inc. to withdraw the amount outstanding thereon before
the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan
Association, Inc. attorney's fees and expenses of litigation in the amount of
P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and
Lucia Castillo attorney's fees and expenses of litigation in the amount of
P100,000.00.
SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file
this petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the
clear contractual terms and conditions on the deposit slips allowing
Metrobank to charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to instances where the
checks or treasury warrants are forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is that of a
mere collecting agent which cannot be held liable for its failure to collect on
the warrants.
2. Under the lower court's decision, affirmed by respondent Court of
Appeals, Metrobank is made to pay for warrants already dishonored, thereby
perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between
Metrobank and Golden Savings, the latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants
involved in this case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed
negligent in giving Golden Savings the impression that the treasury warrants had been
cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof
from his account with it. Without such assurance, Golden Savings would not have allowed
the withdrawals; with such assurance, there was no reason not to allow the withdrawal.
Indeed, Golden Savings might even have incurred liability for its refusal to return the money
that to all appearances belonged to the depositor, who could therefore withdraw it any time
and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings
deposited them to its account with Metrobank. Golden Savings had no clearing facilities of its
own. It relied on Metrobank to determine the validity of the warrants through its own services.
The proceeds of the warrants were withheld from Gomez until Metrobank allowed Golden
Savings itself to withdraw them from its own deposit. 7 It was only when Metrobank gave the
go-signal that Gomez was finally allowed by Golden Savings to withdraw them from his own
account.
The argument of Metrobank that Golden Savings should have exercised more care in
checking the personal circumstances of Gomez before accepting his deposit does not hold
water. It was Gomez who was entrusting the warrants, not Golden Savings that was
extending him a loan; and moreover, the treasury warrants were subject to clearing, pending
which the depositor could not withdraw its proceeds. There was no question of Gomez's
identity or of the genuineness of his signature as checked by Golden Savings. In fact, the
treasury warrants were dishonored allegedly because of the forgery of the signatures of the
drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden
Savings acted with due care and diligence and cannot be faulted for the withdrawals it
allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not
trifling more than one and a half million pesos (and this was 1979). There was no reason
why it should not have waited until the treasury warrants had been cleared; it would not have
lost a single centavo by waiting. Yet, despite the lack of such clearance and
notwithstanding that it had not received a single centavo from the proceeds of the treasury
warrants, as it now repeatedly stresses it allowed Golden Savings to withdraw not
once, not twice, but thrice from the uncleared treasury warrants in the total amount of
P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the
clearance and it also wanted to "accommodate" a valued client. It "presumed" that the
warrants had been cleared simply because of "the lapse of one week." 8 For a bank with its
long experience, this explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on
the dorsal side of the deposit slips through which the treasury warrants were deposited by
Golden Savings with its Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only
as the depositor's collecting agent, assuming no responsibility beyond care
in selecting correspondents, and until such time as actual payment shall
have come into possession of this bank, the right is reserved to charge back
to the depositor's account any amount previously credited, whether or not
such item is returned. This also applies to checks drawn on local banks and
bankers and their branches as well as on this bank, which are unpaid due
to insufficiency of funds, forgery, unauthorized overdraft or any other reason.
(Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a
collecting agent for Golden Savings and give it the right to "charge back to the depositor's
account any amount previously credited, whether or not such item is returned. This also
applies to checks ". . . which are unpaid due to insufficiency of funds, forgery, unauthorized
overdraft of any other reason." It is claimed that the said conditions are in the nature of
contractual stipulations and became binding on Golden Savings when Gloria Castillo, as its
Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they
have apparently been imposed by the bank unilaterally, without the consent of the depositor.
Indeed, it could be argued that the depositor, in signing the deposit slip, does so only to
identify himself and not to agree to the conditions set forth in the given permit at the back of
the deposit slip. We do not have to rule on this matter at this time. At any rate, the Court feels
that even if the deposit slip were considered a contract, the petitioner could still not validly
disclaim responsibility thereunder in the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank
seems to be suggesting that as a mere agent it cannot be liable to the principal. This is not
exactly true. On the contrary, Article 1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also for
negligence, which shall be judged 'with more or less rigor by the courts,
according to whether the agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it
was the clearance given by it that assured Golden Savings it was already safe to allow
Gomez to withdraw the proceeds of the treasury warrants he had deposited
Metrobank misled Golden Savings. There may have been no express clearance, as
Metrobank insists (although this is refuted by Golden Savings) but in any case that clearance
could be implied from its allowing Golden Savings to withdraw from its account not only once
or even twice but three times. The total withdrawal was in excess of its original balance
before the treasury warrants were deposited, which only added to its belief that the treasury
warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid for
any reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there
would have been no need at all for Golden Savings to deposit the treasury warrants with it for
clearance. There would have been no need for it to wait until the warrants had been cleared
before paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way the
petitioner suggests, is not binding for being arbitrary and unconscionable. And it becomes
more so in the case at bar when it is considered that the supposed dishonor of the warrants
was not communicated to Golden Savings before it made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at
least implied clearance to the treasury warrants and allowing payments therefrom to Golden
Savings. But that is not all. On top of this, the supposed reason for the dishonor, to wit, the
forgery of the signatures of the general manager and the auditor of the drawer corporation,
has not been established. 9 This was the finding of the lower courts which we see no reason
to disturb. And as we said in MWSS v. Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It
must be established by clear, positive and convincing evidence. This was
not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question
are not negotiable instruments. Clearly stamped on their face is the word "non-negotiable."
Moreover, and this is of equal significance, it is indicated that they are payable from a
particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts,
are pertinent:
Sec. 1. Form of negotiable instruments. An instrument to be negotiable must
conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. An unqualified order or promise to pay is
unconditional within the meaning of this Act though coupled with
(a) An indication of a particular fund out of which reimbursement is to be made or a
particular account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury
warrants makes the order or promise to pay "not unconditional" and the warrants themselves
non-negotiable. There should be no question that the exception on Section 3 of the
Negotiable Instruments Law is applicable in the case at bar. This conclusion conforms to
Abubakar vs. Auditor General 11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable
instrument and is entitled to the rights and privileges of a holder in due course, free
from defenses. But this treasury warrant is not within the scope of the negotiable
instrument law. For one thing, the document bearing on its face the words "payable
from the appropriation for food administration, is actually an Order for payment out of
"a particular fund," and is not unconditional and does not fulfill one of the essential
requirements of a negotiable instrument (Sec. 3 last sentence and section [1(b)] of
the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings
assumed that they were "genuine and in all respects what they purport to be," in accordance
with Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not
applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria
Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to
deposit them with Metrobank for clearing. It was in fact Metrobank that made the guarantee
when it stamped on the back of the warrants: "All prior indorsement and/or lack of
endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine
Islands, 12 but we feel this case is inapplicable to the present controversy. That case
involved checks whereas this case involves treasury warrants. Golden Savings never
represented that the warrants were negotiable but signed them only for the purpose of
depositing them for clearance. Also, the fact of forgery was proved in that case but not in the
case before us. Finally, the Court found the Jai Alai Corporation negligent in accepting the
checks without question from one Antonio Ramirez notwithstanding that the payee was the
Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it. No
similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we will have to amend it
insofar as it directs the petitioner to credit Golden Savings with the full amount of the treasury
checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which
Gomez was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the
dishonor. The amount he has withdrawn must be charged not to Golden Savings but to
Metrobank, which must bear the consequences of its own negligence. But the balance of
P586,589.00 should be debited to Golden Savings, as obviously Gomez can no longer be
permitted to withdraw this amount from his deposit because of the dishonor of the warrants.
Gomez has in fact disappeared. To also credit the balance to Golden Savings would unduly
enrich it at the expense of Metrobank, let alone the fact that it has already been informed of
the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3
of the dispositive portion of the judgment of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter
allowing defendant Golden Savings & Loan Association, Inc. to withdraw the amount
outstanding thereon, if any, after the debit.
SO ORDERED.
G.R. No. 148789 January 16, 2003
BPI FAMILY SAVINGS BANK, INC. AND HEDZELITO NOEL
BAYABORDA, petitioners, vs. ROMEO MANIKAN, respondent.
VITUG, J.:
Petitioners seek a review of the decision of the Court of Appeals in C.A. G.R. SP. No. 48011
which has affirmed the judgment of the Regional Trial Court, Branch 26, of Iloilo City,
dismissing the complaint of petitioners formandamus and ordering them to pay respondent
the sum of P30,000.00 by way of attorney's fees.
It would appear that respondent, being the City Treasurer of Iloilo City, assessed petitioner
bank business taxes for the years 1992 and 1993. On 26 January 1994, the bank issued two
manager's checks payable to the City Treasurer of Iloilo City, the first, Manager's Check No.
010649 for P462,270.60, was to cover the business tax for the year 1992, and the second,
Manager's Check No. 010650 in the amount of P482,988.45, was to settle the business tax
for the year 1993. Hedzelito Bayaborda, then manager of the banks Iloilo Branch, instructed
an employee, Edmund Sabio, to deliver the two manager's checks to the Secretary to the
City Mayor, a certain Toto Espinosa, who, in turn, handed them over to his secretary, Leila
Salcedo, for transmittal to the City Treasurer. The value of the checks were eventually
credited to the account of the City Treasurer of Iloilo City. The checks, however, were not
applied to satisfy the tax liabilities of petitioner but of other taxpayers.
The misapplication of the proceeds of the checks came to the knowledge of respondent City
Treasurer who, thereupon, created a committee to look into the matter. The investigation
revealed that it was upon the representation of Leila Salcedo that the manager's checks were
used to pay tax liabilities of other taxpayers and not those of petitioner bank. Meanwhile, the
bank, through counsel, made a demand on respondent to issue official receipts to show that
it had paid its business taxes for the years 1992 and 1993 covered by the diverted manager's
checks. When he refused to issue the receipts requested, respondent was sued by
petitioners formandamus and damages.
The Regional Trial Court dismissed the complaint for mandamus and ruled that petitioners
had no clear legal right to demand the issuance of official receipts nor could respondent,
given the circumstances, be compelled to issue another set of receipts in the name of the
bank. The trial court further ordered petitioners to pay respondent the sum of P30,000.00 by
way of attorney's fees.
The Court of Appeals, on appeal by petitioners, sustained the trial court in toto.
In their petition for review before this Court, petitioners urge a reversal of the decision of the
appellate court contending that -
"a) AN ACTION FOR MANDAMUS NECESSARILY INCLUDES INDEMNIFICATION
FOR DAMAGES AND IS ASSESSED ON A PUBLIC OFFICIAL'S PRIVATE
CAPACITY. HENCE, SUING A PUBLIC OFFICIAL IN HIS PRIVATE CAPACITY
DOES NOT AS A MATTER OF RIGHT ENTITLE HIM TO AN AWARD OF
ATTORNEY'S FEES BY WAY OF COUNTERCLAIM.
"b) THE RECEIPT BY THE CITY TREASURER'S OFFICE OF ILOILO OF THE
FACE VALUE OF THE TWO MANAGER'S CHECKS INTENDED FOR PAYMENT
OF ITS BUSINESS TAXES FOR THE YEAR 1992 AND 1993 ENTITLES IT TO THE
ISSUANCE OF AN OFFICIAL RECEIPT ENFORCEABLE BY A WRIT OF
MANDAMUS."
In order that a writ of mandamus may aptly issue, it is essential that, on the one hand, the
person petitioning for it has a clear legal right to the claim that is sought and that, on the other
hand, the respondent has an imperative duty to perform that which is demanded of
him.1 Mandamus will not issue to enforce a right, or to compel compliance with a duty, which
is questionable or over which a substantial doubt exists. The principal function of the writ
of mandamus is to command and to expedite, not to inquire and to adjudicate; thus, it is
neither the office nor the aim of the writ to secure a legal right but to implement that which is
already established. Unless the right to the relief sought is unclouded, mandamus will not
issue.2
The checks delivered by petitioner bank to Toto Espinosa were managers checks. A
managers check, like a cashiers check, is an order of the bank to pay, drawn upon itself,
committing in effect its total resources, integrity and honor behind its issuance. By its peculiar
character and general use in commerce, a managers check or a cashiers check is regarded
substantially to be as good as the money it represents.3
By allowing the delivery of the subject checks to a person who is not directly charged with the
collection of its tax liabilities, the bank must be deemed to have assumed the risk of a
possible misuse thereof even as it appears to have fallen short of the diligence ordinarily
expected of it. The bank, of course, is not precluded from pursuing a right of action against
those who could have been responsible for the wrongdoing or who might have been unjustly
benefited thereby.
The award of attorneys fees in favor of respondent City Treasurer, however, should be
deleted. Such an award, in the concept of damages under Article 2208 of the Civil Code,
demands factual and legal justifications.4 While the law allows some degree of discretion on
the part of the courts in awarding attorneys fees and expenses of litigation, the use of that
judgment, however, must be done with great care approximating as closely as possible the
instances exemplified by the law. Attorneys fees in the concept of damages are not
recoverable against a party just because of an unfavorable judgment. Repeatedly, it has
been said that no premium should be placed on the right to litigate.5
WHEREFORE, the instant petition is partly granted. The appealed decision is affirmed save
for the award of attorneys fees in favor of private respondent which is ordered deleted. No
costs.
SO ORDERED.
























































G.R. No. L-2516 September 25, 1950
ANG TEK LIAN, petitioner, vs. THE COURT OF APPEALS, respondent.
BENGZON, J.:
For having issued a rubber check, Ang Tek Lian was convicted of estafa in the Court of First
Instance of Manila. The Court of Appeals affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on Saturday,
November 16, 1946, the check Exhibits A upon the China Banking Corporation for the sum of
P4,000, payable to the order of "cash". He delivered it to Lee Hua Hong in exchange for
money which the latter handed in act. On November 18, 1946, the next business day, the
check was presented by Lee Hua Hong to the drawee bank for payment, but it was
dishonored for insufficiency of funds, the balance of the deposit of Ang Tek Lian on both
dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who testified that "on
November 16, 1946, appellant went to his (complainant's) office, at 1217 Herran, Paco,
Manila, and asked him to exchange Exhibit A which he (appellant) then brought with him
with cash alleging that he needed badly the sum of P4,000 represented by the check, but
could not withdraw it from the bank, it being then already closed; that in view of this request
and relying upon appellant's assurance that he had sufficient funds in the blank to meet
Exhibit A, and because they used to borrow money from each other, even before the war,
and appellant owns a hotel and restaurant known as the North Bay Hotel, said complainant
delivered to him, on the same date, the sum of P4,000 in cash; that despite repeated efforts
to notify him that the check had been dishonored by the bank, appellant could not be located
any-where, until he was summoned in the City Fiscal's Office in view of the complaint
for estafa filed in connection therewith; and that appellant has not paid as yet the amount of
the check, or any part thereof."
Inasmuch as the findings of fact of the Court of Appeals are final, the only question of law for
decision is whether under the facts found, estafa had been accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling
committed "By post dating a check, or issuing such check in payment of an obligation the
offender knowing that at the time he had no funds in the bank, or the funds deposited by him
in the bank were not sufficient to cover the amount of the check, and without informing the
payee of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly held liable. In this
connection, it must be stated that, as explained in People vs. Fernandez (59 Phil.,
615), estafa is committed by issuing either a postdated check or an ordinary check to
accomplish the deceit.
It is argued, however, that as the check had been made payable to "cash" and had not been
endorsed by Ang Tek Lian, the defendant is not guilty of the offense charged. Based on the
proposition that "by uniform practice of all banks in the Philippines a check so drawn is
invariably dishonored," the following line of reasoning is advanced in support of the
argument:
. . . When, therefore, he (the offended party ) accepted the check (Exhibit A) from the
appellant, he did so with full knowledge that it would be dishonored upon
presentment. In that sense, the appellant could not be said to have acted
fraudulently because the complainant, in so accepting the check as it was drawn,
must be considered, by every rational consideration, to have done so fully aware of
the risk he was running thereby." (Brief for the appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have undoubtedly occurred
wherein the Bank required the indorsement of the drawer before honoring a check payable to
"cash." But cases there are too, where no such requirement had been made . It depends
upon the circumstances of each transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order of
"cash" is a check payable to bearer, and the bank may pay it to the person presenting it for
payment without the drawer's indorsement.
A check payable to the order of cash is a bearer instrument. Bacal vs. National City
Bank of New York (1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. De Beck
Plate Glass Co. (1907), 54 Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding &
Insurance Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S. W.
(2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E.,
713.
Where a check is made payable to the order of "cash", the word cash "does not
purport to be the name of any person", and hence the instrument is payable to
bearer. The drawee bank need not obtain any indorsement of the check, but may
pay it to the person presenting it without any indorsement. . . . (Zollmann, Banks and
Banking, Permanent Edition, Vol. 6, p. 494.)
Of course, if the bank is not sure of the bearer's identity or financial solvency, it has the right
to demand identification and /or assurance against possible complications, for instance,
(a) forgery of drawer's signature, (b) loss of the check by the rightful owner, (c) raising of the
amount payable, etc. The bank may therefore require, for its protection, that the indorsement
of the drawer or of some other person known to it be obtained. But where the Bank is
satisfied of the identity and /or the economic standing of the bearer who tenders the check for
collection, it will pay the instrument without further question; and it would incur no liability to
the drawer in thus acting.
A check payable to bearer is authority for payment to holder. Where a check is in the
ordinary form, and is payable to bearer, so that no indorsement is required, a bank,
to which it is presented for payment, need not have the holder identified, and is not
negligent in falling to do so. . . . (Michie on Banks and Banking, Permanent Edition,
Vol. 5, p. 343.)
. . . Consequently, a drawee bank to which a bearer check is presented for payment
need not necessarily have the holder identified and ordinarily may not be charged
with negligence in failing to do so. See Opinions 6C:2 and 6C:3 If the bank has no
reasonable cause for suspecting any irregularity, it will be protected in paying a
bearer check, "no matter what facts unknown to it may have occurred prior to the
presentment." 1 Morse, Banks and Banking, sec. 393.
Although a bank is entitled to pay the amount of a bearer check without further
inquiry, it is entirely reasonable for the bank to insist that holder give satisfactory
proof of his identity. . . . (Paton's Digest, Vol. I, p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check Exhibit A was totally
unconnected with its dishonor. The Court of Appeals declared that it was returned
unsatisfied because the drawer had insufficient funds not because the drawer's
indorsement was lacking.
Wherefore, there being no question as to the correctness of the penalty imposed on the
appellant, the writ ofcertiorari is denied and the decision of the Court of Appeals is hereby
affirmed, with costs.



















G.R. No. 126568 April 30, 2003
QUIRINO GONZALES LOGGING CONCESSIONAIRE, QUIRINO GONZALES and
EUFEMIA GONZALES,petitioners, vs. THE COURT OF APPEALS (CA) and REPUBLIC
PLANTERS BANK, respondents.
CARPIO MORALES, J.:
In the expansion of its logging business, petitioner Quirino Gonzales Logging Concessionaire
(QGLC), through its proprietor, general manager co-petitioner Quirino Gonzales, applied
on October 15, 1962 for credit accommodations1 with respondent Republic Bank (the Bank),
later known as Republic Planters Bank.
The Bank approved QGLC's application on December 21, 1962, granting it a credit line of
P900,000.002 broken into an overdraft line of P500,000.00 which was later reduced to
P450,000.00 and a Letter of Credit (LC) line of P400,000.00.3
Pursuant to the grant, the Bank and petitioners QGLC and the spouses Quirino and Eufemia
Gonzales executed ten documents: two denominated "Agreement for Credit in Current
Account,"4 four denominated "Application and Agreement for Commercial Letter of
Credit,"5 and four denominated "Trust Receipt."6
Petitioners' obligations under the credit line were secured by a real estate mortgage on four
parcels of land: two in Pandacan, Manila, one in Makati (then part of Rizal), and another in
Diliman, Quezon City.7
In separate transactions, petitioners, to secure certain advances from the Bank in connection
with QGLC's exportation of logs, executed a promissory note in 1964 in favor of the Bank.
They were to execute three more promissory notes in 1967.
In 1965, petitioners having long defaulted in the payment of their obligations under the credit
line, the Bank foreclosed the mortgage and bought the properties covered thereby, it being
the highest bidder in the auction sale held in the same year. Ownership over the properties
was later consolidated in the Bank on account of which new titles thereto were issued to it.8
On January 27, 1977, alleging non-payment of the balance of QGLC's obligation after the
proceeds of the foreclosure sale were applied thereto, and non-payment of the promissory
notes despite repeated demands, the Bank filed a complaint for "sum of money" (Civil Case
No. 106635) against petitioners before the Regional Trial Court (RTC) of Manila.
The complaint listed ten causes of action. The first concerns the overdraft line under which
the Bank claimed that petitioners withdrew amounts (unspecified) at twelve percent per
annum which were unpaid at maturity and that after it applied the proceeds of the foreclosure
sale to the overdraft debt, there remained an unpaid balance of P1,224,301.56.
The Bank's second to fifth causes of action pertain to the LC line under which it averred that
on the strength of the LCs it issued, the beneficiaries thereof drew and presented sight drafts
to it which it all paid after petitioners' acceptance; and that it delivered the tractors and
equipment subject of the LCs to petitioners who have not paid either the full or part of the
face value of the drafts.
Specifically with respect to its second cause of action, the Bank alleged that it issued LC No.
63-0055D on January 15, 1963 in favor of Monark International Incorporated9 covering the
purchase of a tractor10 on which the latter allegedly drew a sight draft with a face value of
P71,500.00,11 which amount petitioners have not, however, paid in full.
Under its third cause of action, the Bank charged that it issued LC No. 61-1110D on
December 27, 1962 also in favor of Monark International covering the purchase of another
tractor and other equipment;12 and that Monark International drew a sight draft with a face
value of P80,350.00,13 and while payments for the value thereof had been made by
petitioners, a balance of P68,064.97 remained.
Under the fourth cause of action, the Bank maintained that it issued LC No. 63-0182D on
February 11, 1963 in favor of J.B.L. Enterprises, Inc.14 covering the purchase of two
tractors,15 and J.B.L. Enterprises drew on February 13, 1963 a sight draft on said LC in the
amount of P155,000.00 but petitioners have not paid said amount.
On its fifth cause of action, the Bank alleged that it issued LC No. 63-0284D on March 14,
1963 in favor of Super Master Auto Supply (SMAS) covering the purchase of "Eight Units
GMC (G.I.) Trucks"; that on March 14, 1963, SMAS drew a sight draft with a face value of
P64,000.0016 on the basis of said LC; and that the payments made by petitioners for the
value of said draft were deficient by P45,504.74.
The Bank thus prayed for the settlement of the above-stated obligations at an interest rate of
eleven percent per annum, and for the award of trust receipt commissions, attorney's fees
and other fees and costs of collection.
The sixth to ninth causes of action are anchored on the promissory notes issued by
petitioners allegedly to secure certain advances from the Bank in connection with the
exportation of logs as reflected above.17 The notes were payable 30 days after date and
provided for the solidary liability of petitioners as well as attorney's fees at ten percent of the
total amount due18 in the event of their non-payment at maturity.
The note dated June 18, 1964, subject of the sixth cause of action, has a face value of
P55,000.00 with interest rate of twelve percent per annum;19 that dated July 7, 1967 subject
of the seventh has a face value of P20,000.00;20 that dated July 18, 1967 subject of the
eighth has a face value of P38,000.00;21 and that dated August 23, 1967 subject of the ninth
has a face value of P11,000.00.22 The interest rate of the last three notes is pegged at
thirteen percent per annum.23
On its tenth and final cause of action, the Bank claimed that it has accounts receivable from
petitioners in the amount of P120.48.
In their Answer24 of March 3, 1977, petitioners admit the following: having applied for credit
accommodations totaling P900,000.00 to secure which they mortgaged real properties;
opening of the LC/Trust Receipt Line; the issuance by the Bank of the various LCs; and the
foreclosure of the real estate mortgage and the consolidation of ownership over the
mortgaged properties in favor of the Bank. They deny, however, having availed of the credit
accommodations and having received the value of the promissory notes, as they do deny
having physically received the tractors and equipment subject of the LCs.
As affirmative defenses, petitioners assert that the complaint states no cause of action, and
assuming that it does, the same is/are barred by prescription or null and void for want of
consideration.
By Order of March 10, 1977, Branch 36 of the Manila RTC attached the preferred shares of
stocks of the spouses Quirino and Eufemia Gonzales with the Bank with a total par value of
P414,000.00.
Finding for petitioners, the trial court rendered its Decision of April 22, 1992 the dispositive
portion of which reads:
WHEREFORE, judgment is rendered as follows:
1. All the claims of plaintiff particularly those described in the first to the tenth causes
of action of its complaint are denied for the reasons earlier mentioned in the body of
this decision;
2. As regards the claims of defendants pertaining to their counterclaim (Exhibits "1",
"2" and "3"), they are hereby given ten (10) years from the date of issuance of the
torrens title to plaintiff and before the transfer thereof in good faith to a third party
buyer within which to ask for the reconveyance of the real properties foreclosed by
plaintiff,
3. The order of attachment which was issued against the preferred shares of stocks
of defendants-spouses Quirino Gonzales and Eufemia Gonzales with the Republic
Bank now known as Republic Planters Bank dated March 21, 1977 is hereby
dissolved and/or lifted, and
4. Plaintiff is likewise ordered to pay the sum of P20,000.00, as and for attorney's
fees, with costs against plaintiff.
SO ORDERED.
In finding for petitioners, the trial court ratiocinated:25
Art. 1144 of the Civil Code states that an action upon a written contract prescribes in
ten (10) years from the time the right of action accrues. Art. 1150 states that
prescription starts to run from the day the action may be brought. The obligations
allegedly created by the written contracts or documents supporting plaintiff's first to
the sixth causes of action were demandable at the latest in 1964. Thus when the
complaint was filed on January 27, 1977 more than ten (10) years from 1964 [when
the causes of action accrued] had already lapsed. The first to the sixth causes of
action are thus barred by prescription. . . .
As regards the seventh and eight causes of action, the authenticity of which
documents were partly in doubt in the light of the categorical and uncontradicted
statements that in 1965, defendant Quirino Gonzales logging concession was
terminated based on the policy of the government to terminate logging concessions
covering less than 20,000 hectares. If this is the case, the Court is in a quandary why
there were log exports in 1967? Because of the foregoing, the Court does not find
any valid ground to sustain the seventh and eight causes of action of plaintiff's
complaint.
As regards the ninth cause of action, the Court is baffled why plaintiff extended to
defendants another loan when defendants according to plaintiff's records were
defaulting creditors? The above facts and circumstances has (sic) convinced this
Court to give credit to the testimony of defendants' witnesses thatthe Gonzales
spouses signed the documents in question in blank and that the promised loan was
never released to them. There is therefore a total absence of consent since
defendants did not give their consent to loans allegedly procured, the proceeds of
which were never received by the alleged debtors, defendants herein. . . .
Plaintiff did not present evidence to support its tenth cause of action. For this reason,
it must consequently be denied for lack of evidence.
On the matter of [the] counterclaims of defendants, they seek the return of the real
and personal properties which they have given in good faith to plaintiff. Again,
prescription may apply. The real properties of defendants acquired by plaintiff were
foreclosed in 1965 and consequently, defendants had one (1) year to redeem the
property or ten (10) years from issuance of title on the ground that the obligation
foreclosed was fictitious.
xxx xxx xxx
On appeal,26 the Court of Appeals (CA) reversed the decision of the trial court by
Decision27 of June 28, 1996 which disposed as follows:28
WHEREFORE, premises considered, the appealed decision (dated April 22, 1992) of
the Regional Trial Court (Branch 36) in Manila in Civil Case No. 82-4141 is hereby
REVERSED and let the case be remanded back to the court a quo for the
determination of the amount(s) to be awarded to the [the Bank]-appellant relative to
its claims against the appellees.
SO ORDERED.
With regard to the first to sixth causes of action, the CA upheld the contention of the Bank
that the notices of foreclosure sale were "tantamount" to demand letters upon the petitioners
which interrupted the running of the prescriptive period.29
As regards the seventh to ninth causes of action, the CA also upheld the contention of the
Bank that the written agreements-promissory notes prevail over the oral testimony of
petitioner Quirino Gonzales that the cancellation of their logging concession in 1967 made it
unbelievable for them to secure in 1967 the advances reflected in the promissory notes.30
With respect to petitioners' counterclaim, the CA agreed with the Bank that:31
Certainly, failure on the part of the trial court to pass upon and determine the
authenticity and genuineness of [the Bank's] documentary evidence [the trial court
having ruled on the basis of prescription of the Bank's first to sixth causes of action]
makes it impossible for the trial court' to eventually conclude that theobligation
foreclosed (sic) was fictitious. Needless to say, the trial court's ruling averses (sic)
the well-entrenched rule that 'courts must render verdict on their findings of facts."
(China Banking Co. vs. CA, 70 SCRA 398)
Furthermore, the defendants-appellees' [herein petitioners'] counterclaim is basically
an action for the reconveyance of their properties, thus, the trial court's earlier ruling
that the defendants-appellees' counterclaim has prescribed is itself a ruling that the
defendants-appellees' separate action for reconveyance has also prescribed.
The CA struck down the trial court's award of attorney's fees for lack of legal basis.32
Hence, petitioners now press the following issues before this Court by the present petition for
review on certiorari:
1. WHETHER OR NOT RESPONDENT COURT ERRED IN SO HOLDING THAT
RESPONDENT-APPELLEES (SIC.) REPUBLIC PLANTERS BANK['S] FIRST,
SECOND, THIRD, FOURTH, FIFTH AND SIXTH CAUSES OF ACTION HAVE NOT
PRESCRIBED CONTRARY TO THE FINDINGS OF THE LOWER COURT, RTC
BRANCH 36 THAT THE SAID CAUSES OF ACTION HAVE ALREADY
PRESCRIBED.
2. WHETHER OR NOT RESPONDENT COURT ERRED IN SO HOLDING THAT
RESPODNENT-APPELLEES (SIC.) REPUBLIC PLANTERS BANK['S] SEVENTH,
EIGHT AND NINTH CAUSES OF ACTION APPEARS (SIC.) TO BE IMPRESSED
WITH MERIT CONTRARY TO THE FINDINGS OF THE LOWER COURT RTC
BRANCH 36 THAT THE SAID CAUSES HAVE NO VALID GROUND TO SUSTAIN
[THEM] AND FOR LACK OF EVIDENCE.
3. WHETHER OR NOT RESPONDENT COURT [ERRED] IN REVERSING THE
FINDINGS OF THE REGIONAL TRIAL COURT BRANCH 36 OF MANILA THAT
PETITIONERS-APPELLANT (SIC.) MAY SEEK THE RETURN OF THE REAL AND
PERSONAL PROPERTIES WHICH THEY MAY HAVE GIVEN IN GOOD FAITH AS
THE SAME IS BARRED BY PRESCRIPTION AND THAT PETITIONERS-
APPELLANT (SIC.) HAD ONE (1) YEAR TO REDEEM THE PROPERTY OR TEN
(10) YEARS FROM ISSUANCE OF THE TITLE ON THE GROUND THAT THE
OBLIGATION FORECLOSED WAS FICTITIOUS.
4. WHETHER OR NOT RESPONDENT COURT ERRED IN SO HOLDING THAT
PEITIONERS-APPELLANTS [SIC] ARE NOT ENTITLED TO AN AWARD OF
ATTORNEY'S FEES.
The petition is partly meritorious.
On the first issue. The Civil Code provides that an action upon written contract, an obligation
created by law, and a judgment must be brought within ten years from the time the right of
action accrues.33
The finding of the trial court that more than ten years had elapsed since the right to bring an
action on the Bank's first to sixth causes had arisen34 is not disputed. The Bank contends,
however, that "the notices of foreclosure sale in the foreclosure proceedings of 1965 are
tantamount to formal demands upon petitioners for the payment of their past due loan
obligations with the Bank, hence, said notices of foreclosure sale interrupted/forestalled the
running of the prescriptive period."35
The Bank's contention does not impress. Prescription of actions is interrupted when they are
filed before the court, when there is a written extrajudicial demand by the creditors, and when
there is any written acknowledgment of the debt by the debtor.36
The law specifically requires a written extrajudicial demand by the creditors which is absent in
the case at bar. The contention that the notices of foreclosure are "tantamount" to a written
extrajudicial demand cannot be appreciated, the contents of said notices not having been
brought to light.
But even assuming arguendo that the notices interrupted the running of the prescriptive
period, the argument would still not lie for the following reasons:
With respect to the first to the fifth causes of action, as gleaned from the complaint, the Bank
seeks the recovery of the deficient amount of the obligation after the foreclosure of the
mortgage. Such suit is in the nature of a mortgage action because its purpose is precisely to
enforce the mortgage contract.37 A mortgage action prescribes after ten years from the time
the right of action accrued.38
The law gives the mortgagee the right to claim for the deficiency resulting from the price
obtained in the sale of the property at public auction and the outstanding obligation at the
time of the foreclosure proceedings.39 In the present case, the Bank, as mortgagee, had the
right to claim payment of the deficiency after it had foreclosed the mortgage in 1965.40 In
other words, the prescriptive period started to run against the Bank in 1965. As it filed the
complaint only on January 27, 1977, more than ten years had already elapsed, hence, the
action on its first to fifth causes had by then prescribed. No other conclusion can be reached
even if the suit is considered as one upon a written contract or upon an obligation to pay the
deficiency which is created by law,41 the prescriptive period of both being also ten years.42
As regards the promissory note subject of the sixth cause of action, its period of prescription
could not have been interrupted by the notices of foreclosure sale not only because, as
earlier discussed, petitioners' contention that the notices of foreclosure are tantamount to
written extra-judicial demand cannot be considered absent any showing of the contents
thereof, but also because it does not appear from the records that the said note is covered by
the mortgage contract.
Coming now to the second issue, petitioners seek to evade liability under the Bank's seventh
to ninth causes of action by claiming that petitioners Quirino and Eufemia Gonzales signed
the promissory notes in blank; that they had not received the value of said notes, and that the
credit line thereon was unnecessary in view of their money deposits, they citing "Exhibits 2 to
2-B,"43 in, and unremitted proceeds on log exports from, the Bank. In support of their claim,
they also urge this Court to look at Exhibits "B" (the Bank's recommendation for approval of
petitioners' application for credit accommodations), "P" (the "Application and Agreement for
Commercial Letter of Credit" dated January 16, 1963) and "T" (the "Application and
Agreement for Commercial Letter of Credit" dated February 14, 1963).
The genuineness and due execution of the notes had, however, been deemed admitted by
petitioners, they having failed to deny the same under oath.44 Their claim that they signed
the notes in blank does not thus lie.
Petitioners' admission of the genuineness and due execution of the promissory notes
notwithstanding, they raise want of consideration45 thereof. The promissory notes, however,
appear to be negotiable as they meet the requirements of Section 146 of the Negotiable
Instruments Law. Such being the case, the notes are prima faciedeemed to have been
issued for consideration.47 It bears noting that no sufficient evidence was adduced by
petitioners to show otherwise.
Exhibits "2" to "2-B" to which petitioners advert in support of their claim that the credit line on
the notes was unnecessary because they had deposits in, and remittances due from, the
Bank deserve scant consideration. Said exhibits are merely claims by petitioners under their
then proposals for a possible settlement of the case dated February 3, 1978. Parenthetically,
the proposals were not even signed by petitioners but by certain Attorneys Osmundo R.
Victoriano and Rogelio P. Madriaga.
In any case, it is no defense that the promissory notes were signed in blank as Section
1448 of the Negotiable Instruments Law concedes the prima facie authority of the person in
possession of negotiable instruments, such as the notes herein, to fill in the blanks.
As for petitioners' reliance on Exhibits "B", "P" and "T," they have failed to show the
relevance thereof to the seventh up to the ninth causes of action of the Bank.
On the third issue, petitioners asseverate that with the trial court's dismissal of the Bank's
complaint and the denial of its first to sixth causes of action, it is but fair and just that the real
properties which were mortgaged and foreclosed be returned to them.49 Such, however,
does not lie. It is not disputed that the properties were foreclosed under Act No. 3135 (An Act
to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate
Mortgages), as amended. Though the Bank's action for deficiency is barred by prescription,
nothing irregular attended the foreclosure proceedings to warrant the reconveyance of the
properties covered thereby.
As for petitioners' prayer for moral and exemplary damages, it not having been raised as
issue before the courts below, it can not now be considered. Neither can the award of
attorney's fees for lack of legal basis.
WHEREFORE, the CA Decision is hereby AFFIRMED with MODIFICATION.
Republic Bank's Complaint with respect to its first to sixth causes of action is hereby
DISMISSED. Its complaint with respect to its seventh to ninth causes of action is
REMANDED to the court of origin, the Manila Regional Trial Court, Branch 36, for it to
determine the amounts due the Bank thereunder.
SO ORDERED.
















G.R. No. 85419 March 9, 1993
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner, vs. SIMA WEI and/or LEE KIAN
HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC
CORPORATION and PRODUCERS BANK OF THE PHILIPPINES, defendants-
respondents.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint
for a sum of money against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy,
Samson Tung, Asian Industrial Plastic Corporation (Plastic Corporation for short) and the
Producers Bank of the Philippines, on two causes of action:
(1) To enforce payment of the balance of P1,032,450.02 on a promissory
note executed by respondent Sima Wei on June 9, 1983; and
(2) To enforce payment of two checks executed by Sima Wei, payable to
petitioner, and drawn against the China Banking Corporation, to pay the
balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a
common ground that the complaint states no cause of action. The trial court granted the
defendants' Motions to Dismiss. The Court of Appeals affirmed this decision, * to which the
petitioner Bank, represented by its Legal Liquidator, filed this Petition for Review
by Certiorari, assigning the following as the alleged errors of the Court of Appeals: 1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE
PLAINTIFF-PETITIONER HAS NO CAUSE OF ACTION AGAINST
DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13,
RULE 3 OF THE REVISED RULES OF COURT ON ALTERNATIVE
DEFENDANTS IS NOT APPLICABLE TO HEREIN DEFENDANTS-
RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter
executed and delivered to the former a promissory note, engaging to pay the petitioner Bank
or order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per
annum. Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02.
On November 18, 1983, Sima Wei issued two crossed checks payable to petitioner Bank
drawn against China Banking Corporation, bearing respectively the serial numbers 384934,
for the amount of P550,000.00 and 384935, for the amount of P500,000.00. The said checks
were allegedly issued in full settlement of the drawer's account evidenced by the promissory
note. These two checks were not delivered to the petitioner-payee or to any of its authorized
representatives. For reasons not shown, these checks came into the possession of
respondent Lee Kian Huat, who deposited the checks without the petitioner-payee's
indorsement (forged or otherwise) to the account of respondent Plastic Corporation, at the
Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the
Balintawak branch of Producers Bank, relying on the assurance of respondent Samson Tung,
President of Plastic Corporation, that the transaction was legal and regular, instructed the
cashier of Producers Bank to accept the checks for deposit and to credit them to the account
of said Plastic Corporation, inspite of the fact that the checks were crossed and payable to
petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the complaint as
aforestated.
The main issue before Us is whether petitioner Bank has a cause of action against any or all
of the defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation of the legal right or
rights of another. The essential elements are: (1) legal right of the plaintiff; (2) correlative
obligation of the defendant; and (3) an act or omission of the defendant in violation of said
legal right. 2
The normal parties to a check are the drawer, the payee and the drawee bank. Courts have
long recognized the business custom of using printed checks where blanks are provided for
the date of issuance, the name of the payee, the amount payable and the drawer's signature.
All the drawer has to do when he wishes to issue a check is to properly fill up the blanks and
sign it. However, the mere fact that he has done these does not give rise to any liability on his
part, until and unless the check is delivered to the payee or his representative. A negotiable
instrument, of which a check is, is not only a written evidence of a contract right but is also a
species of property. Just as a deed to a piece of land must be delivered in order to convey
title to the grantee, so must a negotiable instrument be delivered to the payee in order to
evidence its existence as a binding contract. Section 16 of the Negotiable Instruments Law,
which governs checks, provides in part:
Every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its
delivery to him. 3Delivery of an instrument means transfer of possession, actual or
constructive, from one person to another. 4 Without the initial delivery of the instrument from
the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery
must be intended to give effect to the instrument.
The allegations of the petitioner in the original complaint show that the two (2) China Bank
checks, numbered 384934 and 384935, were not delivered to the payee, the petitioner
herein. Without the delivery of said checks to petitioner-payee, the former did not acquire any
right or interest therein and cannot therefore assert any cause of action, founded on said
checks, whether against the drawer Sima Wei or against the Producers Bank or any of the
other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the
promissory note, and the alternative defendants, including Sima Wei, on the two checks. On
appeal from the orders of dismissal of the Regional Trial Court, petitioner Bank alleged that
its cause of action was not based on collecting the sum of money evidenced by the
negotiable instruments stated but on quasi-delict a claim for damages on the ground of
fraudulent acts and evident bad faith of the alternative respondents. This was clearly an
attempt by the petitioner Bank to change not only the theory of its case but the basis of his
cause of action. It is well-settled that a party cannot change his theory on appeal, as this
would in effect deprive the other party of his day in court. 5
Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed
from liability to petitioner Bank under the loan evidenced by the promissory note agreed to by
her. Her allegation that she has paid the balance of her loan with the two checks payable to
petitioner Bank has no merit for, as We have earlier explained, these checks were never
delivered to petitioner Bank. And even granting, without admitting, that there was delivery to
petitioner Bank, the delivery of checks in payment of an obligation does not constitute
payment unless they are cashed or their value is impaired through the fault of the
creditor. 6 None of these exceptions were alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from liability on
the promissory note by some other cause, petitioner Bank has a right of action against her for
the balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with
them. Since petitioner Bank never received the checks on which it based its action against
said respondents, it never owned them (the checks) nor did it acquire any interest therein.
Thus, anything which the respondents may have done with respect to said checks could not
have prejudiced petitioner Bank. It had no right or interest in the checks which could have
been violated by said respondents. Petitioner Bank has therefore no cause of action against
said respondents, in the alternative or otherwise. If at all, it is Sima Wei, the drawer, who
would have a cause of action against her co-respondents, if the allegations in the complaint
are found to be true.
With respect to the second assignment of error raised by petitioner Bank regarding the
applicability of Section 13, Rule 3 of the Rules of Court, We find it unnecessary to discuss the
same in view of Our finding that the petitioner Bank did not acquire any right or interest in the
checks due to lack of delivery. It therefore has no cause of action against the respondents, in
the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of Appeals dismissing the petitioner's
complaint is AFFIRMED insofar as the second cause of action is concerned. On the first
cause of action, the case is REMANDED to the trial court for a trial on the merits, consistent
with this decision, in order to determine whether respondent Sima Wei is liable to the
Development Bank of Rizal for any amount under the promissory note allegedly signed by
her.
SO ORDERED.







G.R. No. L-18657 August 23, 1922
THE GREAT EASTERN LIFE INSURANCE CO., plaintiff-appellant, vs. HONGKONG &
SHANGHAI BANKING CORPORATION and PHILIPPINE NATIONAL BANK, defendants-
appellees.
STATEMENT
The plaintiff is an insurance corporation, and the defendants are banking corporations, and
each is duly licensed to do its respective business in the Philippines Islands.
May 3, 1920, the plaintiff drew its check for P2,000 on the Hongkong and Shanghai Banking
Corporation with whom it had an account, payable to the order of Lazaro Melicor. E. M.
Maasim fraudulently obtained possession of the check, forged Melicor's signature, as an
endorser, and then personally endorsed and presented it to the Philippine National Bank
where the amount of the check was placed to his credit. After having paid the check, and on
the next day, the Philippine national Bank endorsed the check to the Hongkong and
Shanghai Banking Corporation which paid it and charged the amount of the check to the
account of the plaintiff. In the ordinary course of business, the Hongkong Shanghai Banking
Corporation rendered a bank statement to the plaintiff showing that the amount of the check
was charged to its account, and no objection was then made to the statement. About four
months after the check was charged to the account of the plaintiff, it developed that Lazaro
Melicor, to whom the check was made payable, had never received it, and that his signature,
as an endorser, was forged by Maasim, who presented and deposited it to his private
account in the Philippine National Bank. With this knowledge , the plaintiff promptly made a
demand upon the Hongkong and Shanghai Banking Corporation that it should be given credit
for the amount of the forged check, which the bank refused to do, and the plaintiff
commenced this action to recover the P2,000 which was paid on the forged check. On the
petition of the Shanghai Bank, the Philippine National Bank was made defendant. The
Shanghai Bank denies any liability, but prays that, if a judgment should be rendered against
it, in turn, it should have like judgment against the Philippine National Bank which denies all
liability to either party.
Upon the issues being joined, a trial was had and judgment was rendered against the plaintiff
and in favor of the defendants, from which the plaintiff appeals, claiming that the court erred
in dismissing the case, notwithstanding its finding of fact, and in not rendering a judgment in
its favor, as prayed for in its complaint.
JOHNS, J.:
There is no dispute about any of the findings of fact made by the trial court, and the plaintiff
relies upon them for a reversal. Among other things, the trial court says:
Who is responsible for the refund to the drawer of the amount of the check drawn
and payable to order, when its value was collected by a third person by means of
forgery of the signature of the payee? Is it the drawee or the last indorser, who
ignored the forgery at the time of making the payment, or the forger?
To lower court found that Melicor's name was forged to the check. "So that the person to
whose order the check was issued did not receive the money, which was collected by E. M.
Maasim," and then says:
Now then, the National Bank should not be held responsible for the payment of made
to Maasim in good faith of the amount of the check, because the indorsement of
Maasim is unquestionable and his signature perfectly genuine, and the bank was not
obliged to identify the signature of the former indorser. Neither could the Hongkong
and Shanghai Banking Corporation be held responsible in making payment in good
faith to the National Bank, because the latter is a holder in due course of the check in
question. In other words, the two defendant banks can not be held civilly responsible
for the consequences of the falsification or forgery of the signature of Lazaro Melicor,
the National Bank having had no notice of said forgery in making payment to
Maasim, nor the Hongkong bank in making payment to National Bank. Neither bank
incurred in any responsibility arising from that crime, nor was either of the said banks
by subsequent acts, guilty of negligence or fault.
This was fundamental error.
Plaintiff's check was drawn on Shanghai Bank payable to the order of Melicor. In other words,
the plaintiff authorized and directed the Shanghai Bank to pay Melicor, or his order, P2,000. It
did not authorize or direct the bank to pay the check to any other person than Melicor, or his
order, and the testimony is undisputed that Melicor never did part with his title or endorse the
check, and never received any of its proceeds. Neither is the plaintiff estopped or bound by
the banks statement, which was made to it by the Shanghai Bank. This is not a case where
the plaintiff's own signature was forged to one of it checks. In such a case, the plaintiff would
have known of the forgery, and it would have been its duty to have promptly notified the bank
of any forged signature, and any failure on its part would have released bank from any
liability. That is not this case. Here, the forgery was that of Melicor, who was the payee of the
check, and the legal presumption is that the bank would not honor the check without the
genuine endorsement of Melicor. In other words, when the plaintiff received it banks
statement, it had a right to assume that Melicor had personally endorsed the check, and that,
otherwise, the bank would not have paid it.
Section 23 of Act No. 2031, known as the Negotiable Instruments Law, says:
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.
That section is square in point.
The money was on deposit in the Shanghai Bank, and it had no legal right to pay it out to
anyone except the plaintiff or its order. Here, the plaintiff ordered the Shanghai Bank to pay
the P2,000 to Melicor, and the money was actually paid to Maasim and was never paid to
Melicor, and he never paid to Melicor, and he never personally endorsed the check, or
authorized any one to endorse it for him, and the alleged endorsement was a forgery. Hence,
upon the undisputed facts, it must follow that the Shanghai Bank has no defense to this
action.
It is admitted that the Philippine National Bank cashed the check upon a forged signature,
and placed the money to the credit of Maasim, who was a forger. That the Philippine National
Bank then endorsed the check and forwarded it to the Shanghai Bank by whom it was paid.
The Philippine National Bank had no license or authority to pay the money to Maasim or
anyone else upon a forge signature. It was its legal duty to know that Melicor's endorsment
was genuine before cashing the check. Its remedy is against Maasim to whom it paid the
money.
The judgment of the lower court is reversed, and one will be entered here in favor of the
plaintiff and against the Hongkong and Shanghai Banking Corporation for the P2,000, with
interest thereon from November 8, 1920 at the rate of 6 per cent per annum, and the costs of
this action, and a corresponding judgment will be entered in favor of the Hongkong Shanghai
Banking Corporation against the Philippine National Bank for the same amount, together with
the amount of its costs in this action. So ordered.



















G.R. No. L-43596 October 31, 1936
PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. THE NATIONAL CITY BANK OF
NEW YORK, and MOTOR SERVICE COMPANY, INC., defendants.
MOTOR SERVICE COMPANY, INC., appellant.
RECTO, J.:
This case was submitted for decision to the court below on the following stipulation of facts:
1. That plaintiff is a banking corporation organized and existing under and by virtue
of a special act of the Philippine Legislature, with office as principal place of business
at the Masonic Temple Bldg., Escolta, Manila, P. I.; that the defendant National City
Bank of New York is a foreign banking corporation with a branch office duly
authorized and licensed to carry and engage in banking business in the Philippine
Islands, with branch office and place of business in the National City Bank Bldg., City
of Manila, P. I., and that the defendant Motor Service Company, Inc., is a corporation
organized and existing under and by virtue of the general corporation law of the
Philippine Islands, with office and principal place of business at 408 Rizal Avenue,
City of Manila, P. I., engaged in the purchase and sale of automobile spare parts and
accessories.
2. That on April 7 and 9, 1933, an unknown person or persons negotiated with
defendant Motor Service Company, Inc., the checks marked as Exhibits A and A-1,
respectively, which are made parts of the stipulation, in payment for automobile tires
purchased from said defendant's stores, purporting to have been issued by the
"Pangasinan Transportation Co., Inc. by J. L. Klar, Manager and Treasurer", against
the Philippine National Bank and in favor of the International Auto Repair Shop, for
P144.50 and P215.75; and said checks were indorsed by said unknown persons in
the manner indicated at the back thereof, the Motor Service Co., Inc., believing at the
time that the signature of J. L. Klar, Manager and Treasurer of the Pangasinan
Transportation Co., Inc., on both checks were genuine.
3. The checks Exhibits A and A-1 were then indorsed for deposit by the defendant
Motor Service Company, Inc, at the National City Bank of New York and the former
was accordingly credited with the amounts thereof, or P144.50 and P215.75.
4. On April 8 and 10, 1933, the said checks were cleared at the clearing house and
the Philippine National Bank credited the National City Bank of New York for the
amounts thereof, believing at the time that the signatures of the drawer were
genuine, that the payee is an existing entity and the endorsement at the back thereof
regular and genuine.
5. The Philippine National Bank then found out that the purported signatures of J. L.
Klar, as Manager and Treasurer of the Pangasinan Transportation Company, Inc., in
said Exhibits A and A-1 were forged when so informed by the said Company, and it
accordingly demanded from the defendants the reimbursement of the amounts for
which it credited the National City Bank of New York at the clearing house and for
which the latter credited the Motor Service Co., but the defendants refused, and
continue to refuse, to make such reimbursements.
6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of said
check deducted from their deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the municipal
court of Manila and forming part of the record of the present case, are admitted by
the parties as genuine and are made part of this stipulation as well as Exhibit H
hereto attached and made a part hereof.
Upon plaintiff's motion, the case was dismissed before trial as to the defendant National City
Bank of New York. a decision was thereafter rendered giving plaintiff judgment for the total
amount of P360.25, with interest and costs. From this decision the instant appeal was taken.
Before us is the preliminary question of whether the original appeal taken by the plaintiff from
the decision of the municipal court of Manila where this case originated, became perfected
because of plaintiff's failure to attach to the record within 15 days from receipt of notice of
said decision, the certificate of appeal bond required by section 76 of the Code of Civil
Procedure. It is not disputed that both the appeal docket fee and the appeal cash bond were
paid and deposited within the prescribed time. The issue is whether the mere failure to file
the official receipt showing that such deposit was made within the said period is a sufficient
ground to dismiss plaintiff's appeal. This question was settled by our decision in the case of
Blanco vs. Bernabe and lawyers Cooperative Publishing Co. (page 124, ante), and no further
consideration. No error was committed in allowing said appeal.
We now pass on to consider and determine the main question presented by this appeal,
namely, whether the appellee has the right to recover from the appellant, under the
circumstances of this case, the value of the checks on which the signatures of the drawer
were forged. The appellant maintains that the question should be answered in the negative
and in support of its contention appellant advanced various reasons presently to be
examined carefully.
I. It is contended, first of all, that the payment of the checks in question made by the drawee
bank constitutes an "acceptance", and, consequently, the case should be governed by the
provisions of section 62 of the Negotiable Instruments Law, which says:
SEC. 62. Liability of acceptor. The acceptor by accepting the instrument engages
that he will pay it according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
This contention is without merit. A check is a bill of exchange payable on demand and only
the rules governing bills of exchange payable on demand are applicable to it, according to
section 185 of the Negotiable Instruments Law. In view of the fact that acceptance is a step
unnecessary, in so far as bills of exchange payable on demand are concerned (sec. 143), it
follows that the provisions relative to "acceptance" are without application to checks.
Acceptance implies, in effect, subsequent negotiation of the instrument, which is not true in
case of the payment of a check because from the moment a check is paid it is withdrawn
from circulation. The warranty established by section 62, is in favor of holders of the
instrument after its acceptance. When the drawee bank cashes or pays a check, the cycle of
negotiation is terminated, and it is illogical thereafter to speak of subsequent holders who can
invoke the warranty provided in section 62 against the drawee. Moreover, according to
section 191, "acceptance" means "an acceptance completed by delivery or notification" and
this concept is entirely incompatible with payment, because when payment is made the
check is retained by the bank, and there is no such thing as delivery or notification to the
party receiving the payment. Checks are not to be accepted, but presented at once for
payment. (1 Bouvier's Law Dictionary, 476.) There can be no such thing as "acceptance" in
the ordinary sense of the term. A check being payable immediately and on demand, the bank
can fulfill its duty to the depositor only by paying the amount demanded. The holder has no
right to demand from the bank anything but payment of the check, and the bank has no right,
as against the drawer, to do anything but pay it. (5 R. C. L., p. 516, par. 38.) A check is not
an instrument which in the ordinary course of business calls for acceptance. The holder can
never claim acceptance as his legal right. He can present for payment, and only for payment.
(1 Morse on Banks and Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice against the presentation of
checks for acceptance, before they are paid, in which case we have a "certification"
equivalent to "acceptance" according to section 187, which provides that "where a check is
certified by the bank on which it is drawn, the certification is equivalent to an acceptance",
and it is then that the warranty under section 62 exists. This certification or acceptance
consists in the signification by the drawee of his assent to the order of the drawer, which
must not express that the drawee will perform his promise by any other means than the
payment of money. (Sec. 132.) When the holder of a check procures it to be accepted or
certified, the drawer and all indorsers are discharged from liability thereon (sec. 188), and
then the check operates as an assignment of a part of the funds to the credit of the drawer
with the bank. (Sec. 189.) There is nothing in the nature of the check which intrinsically
precludes its acceptance, in like manner and with like effect as a bill of exchange or draft may
be accepted. The bank may accept if it chooses; and it is frequently induced by convenience,
by the exigencies of business, or by the desire to oblige customers, voluntarily to incur the
obligation. The act by which the bank places itself under obligation to pay to the holder the
sum called for by a check must be the expressed promise or undertaking of the bank
signifying its intent to assume the obligation, or some act from which the law will imperatively
imply such valid promise or undertaking. The most ordinary form which such an act assumes
is the acceptance by the bank of the check, or, as it is perhaps more often called, the
certifying of the check. (1 Morse on Banks and Banking, pp. 898, 899; 5 R. C. L., p. 520.)
No doubt a bank may by an unequivocal promise in writing make itself liable in any event to
pay the check upon demand, but this is not an "acceptance" of the check in the true sense of
that term. Although a check does not call for acceptance, and the holder can present it only
for payment, the certification of checks is a means in constant and extensive use in the
business of banking, and its effects and consequences are regulated by the law merchant.
Checks drawn upon banks or bankers, thus marked and certified, enter largely into the
commercial and financial transactions of the country; they pass from hand to hand, in the
payment of debts, the purchase of property, and in the transfer of balances from one house
and one bank to another. In the great commercial centers, they make up no inconsiderable
portion of the circulation, and thus perform a useful, valuable, and an almost indispensable
office. The purpose of procuring a check to be certified is to impart strength and credit to the
paper by obtaining an acknowledgment from the certifying bank that the drawer has funds
therein sufficient to cover the check and securing the engagement of the bank that the check
will be paid upon presentation. A certified check has a distinctive character as a species of
commercial paper, and performs important functions in banking and commercial
business. When a check is certified, it ceases to possess the character, or to perform the
functions, of a check, and represents so much money on deposit, payable to the holder on
demand. The check becomes a basis of credit an easy mode of passing money from hand
to hand, and answers the purposes of money. (5 R. C. L., pp. 516, 517.)lwphi1.nt
All the authorities, both English and American, hold that a check may be accepted, though
acceptance is not usual. By the law merchant, the certificate of the bank that a check is good
is equivalent to acceptance. It implies that the check is drawn upon sufficient funds in the
hands of the drawee, that they have been set apart for its satisfaction, and that they shall be
so applied whenever the check is presented for payment. It is an undertaking that the check
is good then, and shall continue good, and this agreement is as binding on the bank as its
notes of circulation, a certificate of deposit payable to the order of the depositor, or any other
obligation it can assume. The object of certifying a check, as regards both parties is to enable
the holder to use it as money. The transferee takes it with the same readiness and sense of
security that he would take the notes of the bank. It is available also to him for all the
purposes of money. Thus it continues to perform its important functions until in the course of
business it goes back to the bank for redemption, and is extinguished by payment. It cannot
be doubted that the certifying bank intended these consequences, and it is liable accordingly.
To hold otherwise would render these important securities only a snare and a delusion. A
bank incurs no greater risk in certifying a check than in giving a certificate of deposit. In well-
regulated banks the practice is at once to charge the check to the account of the drawer, to
credit it in a certified check account, and, when the check is paid, to debit that account with
the amount. Nothing can be simpler or safer than this process. (Merchants' Bank vs. States
Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008, 1019.)
Ordinarily the acceptance or certification of a check is performed and evidenced by some
word or mark, usually the words "good", "certified" or "accepted" written upon the check by
the banker or bank officer. (1 Morse, Banks and Banking, 915; 1 Bouvier's Law Dictionary,
476.) The bank virtually says, that check is good; we have the money of the drawer here
ready to pay it. We will pay it now if you will receive it. The holder says, No, I will not take the
money; you may certify the check and retain the money for me until this check is presented.
The law will not permit a check, when due, to be thus presented, and the money to be left
with the bank for the accommodation of the holder without discharging the drawer. The
money being due and the check presented, it is his own fault if the holder declines to receive
the pay, and for his own convenience has the money appropriated to that check subject to its
future presentment at any time within the statute of limitations. (1 Morse on Banks and
Banking, p. 920.)
The theory of the appellant and of the decisions on which it relies to support its view is
vitiated by the fact that they take the word "acceptance" in its ordinary meaning and not in the
technical sense in which it is used in the Negotiable Instruments Law. Appellant says that
when payment is made, such payment amounts to an acceptance, because he who pays
accepts. This is true in common parlance but "acceptance" in legal contemplation. The word
"acceptance" has a peculiar meaning in the Negotiable Instruments Law, and, as has been
above stated, in the instant case there was payment but no acceptatance, or what is
equivalent to acceptance, certification.
With few exceptions, the weight of authority is to the effect that "payment" neither includes
nor implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W., 513), the
court asks, if a mere promise to pay a check is binding on a bank, why should not the
absolute payment of the check have the same effect? In response, it is submitted that the two
things, that is acceptance and payment, are entirely different. If the drawee accepts the
paper after seeing it, and then permits it to go into circulation as genuine, on all the principles
of estoppel, he ought to be prevented from setting up forgery to defeat liability to one who
has taken the paper on the faith of the acceptance, or certification. On the other hand, mere
payment of the paper at the termination of its course does not act as an estoppel. The
attempt to state a general rule covering both acceptance and payment is responsible for a
large part of the conflicting arguments which have been advanced by the courts with respect
to the rule. (Annotation at 12 A. L. R., 1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the court
said:
We are of the opinion that "payment is not acceptance". Acceptance, as defined by
section 131, cannot be confounded with payment. . . .
Acceptance, certification, or payment of a check, by the express language of the
statute, discharges the liability only of the persons named in the statute, to wit, the
drawer and all indorsers, and the contract of indorsement by the negotiator if the
check is discharged by acceptance, certification, or payment. But clearly the statute
does not say that the contract of warranty of the negotiator, created by section 65, is
discharged by these acts.
The rule supported by the majority of the cases (14 A. L. R. 764), that payment of a check on
a forged or unauthorized indorsement of the payee's name, and charging the same to the
drawer's account, do not amount to an acceptance so as to make the bank liable to the
payee, is supported by all of the recent cases in which the question is considered. (Cases
cited, Annotation at 69 A. L. R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged or unauthorized indorsement is
not an acceptance thereof so as to render the drawee bank liable to the true payee.
(Anderson vs. Tacoma National Bank [1928], 146 Wash., 520; 264 Pac., 8; Annotation at 69
A. L. R., 1077, [1930].)
In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991, 992), the
court said:
The defendant in error contends that the payment of the check shows acceptance by the
bank, urging that there can be no more definite act by the bank upon which a check has been
drawn, showing acceptance than the payment of the check. Section 184 of the Negotiable
Instruments Act (sec. 202) provides that the provisions of the act applicable to bills of
exchange apply to a check, and section 131 (sec. 149), that the acceptance of a bill must be
in writing signed by the drawee. Payment is the final act which extinguishes a bill.
Acceptance is a promise to pay in the future and continues the life of the bill. It was held in
the First National Bank vs. Whitman (94 U. S., 343; 24 L. ed., 229), that payment of a check
upon a forged indorsement did not operate as an acceptance in favor of the true owner. The
contrary was held in Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn., 380; 7 L.R.A.,
93; 17 Am. St. Rep., 900; 12 S. W., 919), and Seventh National Bank vs. Cook (73 Pa., 483;
13 Am. Rep., 751) at a time when the Negotiable Instruments Act was not in force in those
states. The opinion of the Supreme Court of the United States seems more logical, and the
provision of the Negotiable Instruments Act now require an acceptance to be in writing.
Under this statute the payment of a check on a forged indorsement, stamping it "paid," and
charging it to the account of the drawer, do not constitute an acceptance of the check or
create a liability of the bank to the true holder or the payee. (Elyria Sav. & Bkg.
Co. vs. Walker Bin Co., 92 Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas.
1917D, 1055; Baltimore & O. R. Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837;
State Bank of Chicago vs. Mid-City Trust & Savings Bank 12 A. L. R., pp. 989, 991, 992.)
Before drawee's acceptance of check there is no privity of contract between drawee and
payee. Drawee's payment of check on unauthorized indorsement does not constitute
"acceptance" of check. (Sinclair Refining Co.vs. Moultrie Banking Co., 165 S. E., 860 [1932].)
The great weight of authority is to the effect that the payment of a check upon a forged or
unauthorized indorsement and the stamping of it "paid" does not constitute an acceptance.
(Dakota Radio Apparatus Co. vs.First Nat. Bank of Rapid City, 244 N. W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not acceptance. (South Boston Trust
Co. vs. Levin, 249 Mass., 45, 48, 49; 143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust
Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637 [1908]), the
language of the decision was as follows:
. . . The plaintiffs say that this acceptance was made by the very unauthorized
payments of which they complain. This suggestion does not seem forceful to us. It is
the contention which was made before the Supreme Court of the United States in
First National Bank vs. Whitman (94 U. S., 343), and repudiated by that court. The
language of the opinion in that case is so apt in the present case that we quote it:
"It is further contended that such an acceptance of a check as creates a privity
between the payee and the bank is established by the payment of the amount of this
check in the manner described. This argument is based upon the erroneous
assumption that the bank has paid this check. If this were true, it would have
discharged all of its duty, and there would be an end to the claim against it. The bank
supposed that it had paid the check, but this was an error. The money it paid was
upon a pretended and not a real indorsement of the name of the payee. . . . We
cannot recognize the argument that payment of the amount of the check or sight
draft under such circumstances amounts to an acceptance creating a privity of
contract with the real owner.
"It is difficult to construe a payment as an acceptance under any circumstances. . . .
A banker or individual may be ready to make actual payment of a check or draft
when presented, while unwilling to make a promise to pay at a future time. Many, on
the other hand, are more ready to promise to pay than to meet the promise when
required. The difference between the transactions is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):
It is the rule that payment of a check on unauthorized or forged indorsement does
not operate as an acceptance of the check so as to authorize an action by the real
owner to recover its amount from the drawee bank. (Michie on Banks and Banking,
vol. 5, sec. 278, p. 521.) A full list of the authorities supporting the rule will be found
in a footnote to the foregoing citation. (See also, Federal Land Bank vs. Collins, 156
Miss., 893; 127 So., 570; 69 A. L. R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074), this
question was discussed at considerable length. The court said:
In the light of the first of these statutes, counsel for appellant is forced to stand upon the
narrow ledge that the payment of the check by the two banks will constitute an acceptance.
The drawee bank simply marked it "paid" and did not write anything else except the date. The
bank first paying the check, the Commercial National Bank and Trust Company, simply wrote
its name as indorser and passed the check on to the drawee bank; does this constitute an
acceptance? The precise question has not been presented to this court for decision. Without
reference to authorities in other jurisdictions it would appear that the drawee bank had never
written its name across the paper and therefore, under the strict terms of the statute, could
not be bound as an acceptor; in the second place, it does not appear to us to be illogical and
unsound to say that the payment of a check by the drawee, and the stamping of it "paid", is
equivalent to the same thing as the acceptance of a check; however, there is a variety of
opinions in the various jurisdictions on this question. Counsel correctly states that the theory
upon which the numerous courts hold that the payment of a check creates privity between
the holder of the check and the drawee bank is tantamount to a pro tanto assignment of that
part of the funds. It is most easily understood how the payment of the check, when not
authorized to be done by the drawee bank, might under such circumstances create liability on
the part of the drawee to the drawer. Counsel cites the case of Pickle vs. Muse (88 Tenn,
380; 12 S. W., 919; 7 L. R. A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton held that the
acceptance of a check was necessary in order to give the holder thereof a right of action
thereon against the bank, and further held in a case similar to this, so far as this question is
concerned, that the acceptance of a check so as to give a right of action to the payee is
inferred from the retention of the check by the bank and its subsequent charge of the amount
to the drawer, although it was presented by, and payment made, an unauthorized person.
Judge Lurton cited the case of National Bank of the Republic vs. Millard (10 Wall., 152; 19 L.
ed., 897), wherein the Supreme Court of the United States, not having such a case before it,
threw out the suggestion that, if it was shown that a bank had charged the check on its books
against the drawer and made settlement with the drawee that the holder could recover on
account of money had and received, invoking the rule of justice and fairness, it might be said
there was an implied promise to the holder to pay it on demand. (SeeNational Bank of the
Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee court then
argued that it would be inequitable and unconscionable for the owner and payee of the check
to be limited to an action against an insolvent drawer and might thereby lose the debt. They
recognized the legal principle that there is no privity between the drawer bank and the holder,
or payee, of the check, and proceeded to hold that no particular kind of writing was
necessary to constitute an acceptance and that it became a question of fact, and the bank
became liable when it stamped it "paid" and charged it to the account of the drawer, and
cites, in support of its opinion, Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep.,
751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and Dodge vs. Bank (20 Ohio St.,
234; 5 Am. Rep., 648).
This decision was in 1890, prior to the enactment of the Negotiable Instruments Law
by the State of Tennessee. However, in this case Judge Snodgrass points out that
the Millard case, supra, was dicta. The Dodge case, from the Ohio court, held exactly
as the Tennessee court, but subsequently in the case of Elyria Bank vs. Walker Bin
Co. (92 Ohio St., 406; 111 N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055),
the court held to the contrary, called attention to the fact that the Dodge case was no
longer the law, and proceeded to announce that, whatever might have been the law
before the passage of the Negotiable Instrument Act in that state, it was no longer
the law; that the rule announced in the Dodge case had been "discarded." The court,
in the latter case, expressed its doubts that the courts of Tennessee and
Pennsylvania would adhere to the rule announced in the Pickle case, quoted supra,
in the face of the Negotiable Instrument Law. Subsequent to the Millard case, the
Supreme Court of the United States, in the case of First National Bank of
Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229), where the bank,
without any knowledge that the indorsement of the payee was unauthorized, paid the
check, and it was contended that by the payment the privity of contract existing
between the drawer and drawee was imparted to the payee, said:
"It is further contended that such an acceptance of the check as creates a privity
between the payee and the bank is established by the payment of the amount of this
check in the manner described. This argument is based upon the erroneous
assumption that the bank has paid this check. If this were true, it would have
discharged all of its duty, and there would be an end of the claim against it. The bank
supposed that it had paid the check; but this was an error. The money it paid was
upon a pretended and not a real indorsement of the name of the payee. The real
indorsement of the payee was as necessary to a valid payment as the real signature
of the drawer; and in law the check remains unpaid. Its pretended payment did not
diminish the funds of the drawer in the bank, or put money in the pocket of the
person entitled to the payment. The state of the account was the same after the
pretended payment as it was before.
"We cannot recognize the argument that a payment of the amount of a check or sight
draft under such circumstances amounts to an acceptance, creating a privity of
contract with the real owner. It is difficult to construe a payment as an acceptance
under any circumstances. The two things are essentially different. One is a promise
to perform an act, the other an actual performance. A banker or an individual may be
ready to make actual payment of a check or draft when presented, while unwilling to
make a promise to pay at a future time. Many, on the other hand, are more ready to
promise to pay than to meet the promise when required. The difference between the
transactions is essential and inherent."
Counsel for the appellant cite other cases holding that the stamping of the check
"paid" and the charging of the amount thereof to the drawer constituted an
acceptance, but we are of opinion that none of these cases cited hold that it is in
compliance with the Negotiable Instruments Act; paying the check and stamping
same is not the equivalent of accepting the check in writing signed by the drawee.
The cases holding that payment as indicated above constituted acceptance were
rendered prior to the adoption of the Negotiable Instruments Act in the particular
state, and these decisions are divided into two classes: the one holding that the
check delivered by the drawer to the holder and presented to the bank or drawee
constitutes an assignment pro tanto; the other holding that the payment of the check
and the charging of same to the drawee although paid to an unauthorized person
creates privity of contract between the holder and the drawee bank.
We have already seen that our own court has repudiated the assignment pro
tanto theory, and since the adoption of the Negotiable Instrument Act by this state we
are compelled to say that payment of a check is not equivalent to accepting a check
in writing and signing the name of the acceptor thereon. Payment of the check and
the charging of same to the drawer does not constitute an acceptance. Payment of
the check is the end of the voyage; acceptance of the check is to fuel the vessel and
strengthen it for continued operation on the commercial sea. What we have said
applies to the holder and not to the drawer of the check. On this question we
conclude that the general rule is that an action cannot be maintained by a payee of
the check against the bank on which is draw unless the check has been certified or
accepted by the bank in compliance with the statute, even though at the time the
check is that an action cannot be maintained by a payee of the drawer of the check
out of which the check is legally payable; and that the payment of the check by the
bank on which it is drawn, even though paid on the unauthorized indorsement of the
name of the holder (without notice of the defect by the bank), does not constitute a
certification thereof, neither is it an acceptance thereof; and without acceptance or
certification, as provided by statute, there is no privity of contract between the
drawee bank and the payee, or holder of the check. Neither is there an
assignmentpro tanto of the funds where the check is not drawn on a particular fund,
or does not show on its face that it is an assignment of a particular fund. The above
rule as stated seems to have been the rule in the majority of the states even before
the passage of the uniform Negotiable Instruments Act in the several states.
The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388),
which appellant cites in its brief (pp. 12, 13 ) has been expressly overruled by the Supreme
Court of Massachusetts in South Boston Trust Co. vs. Levin (143 N. E., 816, 817), in the
following language:
In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293, 296, at
page 396), it was said: "The payment of a bill or check by the drawee amounts to
more than an acceptance. The rule, holding that such a payment has all the efficacy
of an acceptance, is founded upon the principle that the greater includes the less."
We are unable to agree with this statement as there is no similarity between
acceptance and payment; payment discharges the instrument, and no one else is
expected to advance anything on the faith of it; acceptance, contemplates further
circulation, induced by the fact of acceptance. The rule that the acceptor made
certain admissions which will inure to the benefit of subsequent holders, has no
applicability to payment of the instrument where subsequent holders can never exist.
II. The old doctrine that a bank was bound to know its correspondent's signature and that a
drawee could not recover money paid upon a forgery of the drawer's name, because it was
said, the drawee was negligent not to know the forgery and it must bear the consequence of
its negligence, is fast fading into the misty past, where it belongs. It was founded in
misconception of the fundamental principles of law and common sense. (2 Morse, Banks and
Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and held that under no circumstances
(except, of course, where the purchaser of the bill has participated in the fraud upon the
drawee) would the drawee be allowed to recover bank money paid under a mistake of fact
upon a bill of exchange to which the name of the drawer had been forged. This doctrine has
been freely criticized by the eminent authorities, as a rule too favorable to the holder, not the
most fair, nor best calculated to effectuate justice between the drawee and the drawer. (5
R.C.L., p. 556.)
The old rule which was originally announced by Lord Mansfield in the leading case of
Price vs. Neal (3 Burr., 1354), elicited the following comment from Justice Holmes, then Chief
Justice of the Supreme Court of Massachusetts, in the case of Dedham National
Bank vs. Everett National Bank (177 Mass., 392). "Probably the rule was adopted from an
impression of convenience rather than for any more academic reason; or perhaps we may
say that Lord Mansfield took the case out of the doctrine as to payments under a mistake of
fact by the assumption that a holder who simply presents negotiable paper for payment
makes no representation as to the signature, and that the drawee pays at his peril."
Such was the reaction that followed Lord Mansfield's rule which Justice Story of the United
States Supreme adopted in the case of Bank of United States vs. Georgia (10 Wheat., 333),
that in B. B. Ford & Co. vs. People's Bank of Orangeburg (74 S. C., 180), it was held that "an
unrestricted indorsement of a draft and presentation to the drawee is a representation that
the signature of the drawer is genuine", and in Lisbon First National Bank vs.Wyndmere Bank
(15 N. D., 299), it was also held that "the drawee of a forged check who has paid the same
without detecting the forgery, may upon discovery of the forgery, recover the money paid
from the party who received the money, even though the latter was a good faith holder,
provided the latter has not been misled or prejudiced by the drawee's failure to detect the
forgery."
Daniel, in his treatise on Negotiable Instruments, has the following to say:
In all the cases which hold the drawee absolutely estoppel by acceptance or payment from
denying genuineness of the drawer's name, the loss is thrown upon him on the ground of
negligence on his part in accepting or paying, until he has ascertained the bill to be genuine.
But the holder has preceded him in negligence, by himself not ascertaining the true character
of the paper before he received it, or presented it for acceptance or payment. And although,
as a general rule, the drawee is more likely to know the drawer's handwriting than a stranger
is, if he is in fact deceived as to its genuineness, we do not perceive that he should suffer
more deeply by mistake than a stranger, who, without knowing the handwriting, has taken the
paper without previously ascertaining its genuineness. And the mistake of the drawee should
always be allowed to be corrected, unless the holder, acting upon faith and confidence
induced by his honoring the draft, would be placed in a worse position by according such
privilege to him. This view has been applied in a well considered case, and is intimidated in
another; and is forcibly presented by Mr. Chitty, who says it is going a great way to charge
the acceptor with knowledge of his correspondent's handwriting, "unless some bona
fide holder has purchased the paper on the faith of such an act." Negligence in making
payment under a mistake of fact is not now deemed a bar to recovery of it, and we do not see
why any exception should be made to the principle, which would apply as well as to release
an obligation not consummated by payment. ( Vol. 2, 6th edition, pp. 1537-1539.)
III. But now the rule is perfectly well settled that in determining the relative rights of a drawee
who, under a mistake of fact, has paid, and a holder who has received such payment, upon a
check to which the name of the drawer has been forged, it is only fair to consider the
question of diligence or negligence of the parties in respect thereto. (Woods and
Malone vs. Colony Bank [1902], 56 L. R. A., 929, 932.) The responsibility of the drawee who
pays a forged check, for the genuineness of the drawer's signature, is absolute only in favor
of one who has not, by his own fault or negligence, contributed to the success of the fraud or
to mislead the drawee. (National Bank of America vs. Bangs, 106 Mass., 441; 8 Am. Rep.,
349; Woods and Malone vs. Colony Bank, supra; De Feriet vs.Bank of America, 23 La. Ann.,
310; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 10 L. R. A. [N. S.],
63.) If it appears that the one to whom payment was made was not an innocent sufferer, but
was guilty of negligence in not doing something, which plain duty demanded, and which, if it
had been done, would have avoided entailing loss on any one, he is not entitled to retain the
moneys paid through a mistake on the part of the drawee bank. (First Nat. Bank of
Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450; First
Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R., 294;
American Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188;
B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R.,
986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299;
12 S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of Commerce vs. Bingham,
30 Wash., 484; 71 Pac., 43; 60 L. R. A., 955.) In other words, to entitle the holder of a forged
check to retain the money obtained he must be able to show that the whole responsibility of
determining the validity of the signature was upon the drawee, and that the negligence of
such drawee was not lessened by any failure of any precaution which, from his implied
assertion in presenting the check as a sufficient voucher, the drawee had the right to believe
he had taken. (Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St., 628; Rouvantvs. Bank,
63 Tex., 610; Bank vs. Ricker, 71 Ill., 429; First National Bank of Danvers vs. First Nat. Bank
of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs. People's Bank of Orangeburg, supra.) The
recovery is permitted in such case, because, although the drawee was constructively
negligent in failing to detect the forgery, yet if the purchaser had performed his duty, the
forgery would in all probability have been detected and the fraud defeated. (First National
Bank of Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.) In the absence
of actual fault on the part of the drawee, his constructive fault in not knowing the signature of
the drawer and detecting the forgery will not preclude his recovery from one who took the
check under circumstances of suspicion without proper precaution, or whose conduct has
been such as to mislead the drawee or induce him to pay the check without the usual
scrutiny or other precautions against mistake or fraud. (National Bank of
America vs. Bangs, supra; First National Bank vs. Indiana National Bank, 30 N. E., 808-810;
Woods and Malone vs. Colony Bank, supra; First National Bank of Danvers vs. First Nat.
Bank of Salem, 151 Mass., 280.) Where a loss, which must be borne by one of two parties
alike innocent of forgery, can be traced to the neglect or fault of either, it is unreasonable that
it would be borne by him, even if innocent of any intentional fraud, through whose means it
has succeeded. (Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of
Danvers vs. First National Bank of Salem,supra; B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra.) Again if the indorser is guilty of negligence in receiving and paying the
check or draft, or has reason to believe that the instrument is not genuine, but fails to inform
the drawee of his suspicions the indorser according to the reasoning of some courts will be
held liable to the drawee upon his implied warranty that the instrument is genuine. (B. B. Ford
& Co. vs. People's Bank of Orangeburg, supra; Newberry Sav. Bank vs. Bank of Columbia,
93 S. C., 294; 38 L. R. A. [N. S], 1200.) Most of the courts now agree that one who
purchases a check or draft is bound to satisfy himself that the paper is genuine; and that by
indorsing it or presenting it for payment or putting it into circulation before presentation he
impliedly asserts that he has performed his duty, the drawee, who has, without actual
negligence on his part, paid the forged demand, may recover the money paid from such
negligent purchaser. (Lisbon First National Bank vs.Wyndmere Bank, supra.) Of course, the
drawee must, in order to recover back the holder, show that he himself was free from fault.
(See also 5 R. C. L., pp. 556-558.)
So, if a collecting bank is alone culpable, and, on account of its negligence only, the loss has
occurred, the drawee may recover the amount it paid on the forged draft or check. (Security
Commercial & Sav. Bank vs.Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac.,
945.)
But we are aware of no case in which the principle that the drawee is bound to know the
signature of the drawer of a bill or check which he undertakes to pay has been held to be
decisive in favor of a payee of a forged bill or check to which he has himself given credit by
his indorsement. (Secalso, Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of
Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N.
E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R., 479; 197
Pac., 547), the court declared: "A holder cannot profit by a mistake which his negligent
disregard of duty has contributed to induce the drawee to commit. . . . The holder must
refund, if by his negligence he has contributed to the consummation of the mistake on the
part of the drawee by misleading him. . . . If the only fault attributable to the drawee is the
constructive fault which the law raises from the bald fact that he has failed to detect the
forgery, and if he is not chargeable with actual fault in addition to such constructive fault, then
he is not precluded from recovery from a holder whose conduct has been such as to mislead
the drawee or induce him to pay the check or bill of exchange without the usual security
against fraud. The holder must refund to a drawee who is not guilty of actual fault if the holder
was negligent in not making due inquiry concerning the validity of the check before he took it,
and if the drawee can be said to have been excused from making inquiry before taking the
check because of having had a right to, presume that the holder had made such inquiry."
The rule that one who first negotiates forged paper without taking some precaution to learn
whether or not it is genuine should not be allowed to retain the proceeds of the draft or check
from the drawee, whose sole fault was that he did not discover the forgery before he paid the
draft or check, has been followed by the later cases. (Security Commercial & Savings
Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945; Hutcheson
Hardware Co. vs. Planters State Bank [1921], 26 Ga. App., 321; 105 S. E., 854; [Annotation
at 71 A. L. R., 337].)
Where a bank, without inquiry or identification of the person presenting a forged check,
purchases it, indorses it, generally, and presents it to the drawee bank, which pays it, the
latter may recover if its only negligence was its mistake in having failed to detect the forgery,
since its mistake, did not mislead the purchaser or bring about a change in position. (Security
Commercial & Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241
Pac., 945.)
Also, a drawee could recover from another bank the portion of the proceeds of a forged
check cashed by the latter and deposited by the forger in the second bank and never
withdrawn, upon the discovery of the forgery three months later, after the drawee had paid
the check and returned the voucher to the purported drawer, where the purchasing bank was
negligent in taking the check, and was not injured by the drawee's negligence in discovering
and reporting the forgery as to the amount left on deposit, since it was not a purchaser for
value. (First State Bank & T. Co. vs. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could recover the amount paid on the
check, after discovery of the forgery, from another bank, which put the check into circulation
by cashing it for the one who had forged the signature of both drawer and payee without
making any inquiry as to who he was although he was a stranger, after which the check
reached, and was paid by, the drawee, after going through the hands of several intermediate
indorsees. (71 A. L. R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the following
statement was made:
We are clearly of opinion, therefore that the warranty of genuineness, arising upon the act of
the Brule National Bank in putting the check in circulation, was not discharged by payment of
the check by the drawee (First National Bank), nor was the Brule National Bank deceived or
misled to its prejudice by such payment. The Brule National Bank by its indorsement and
delivery warranted its own identification of Kost and the genuineness of his signature. The
indorsement of the check by the Brule National Bank was such as to assign the title to the
check to its assignee, the Whitbeck National Bank, and the amount was credited to the
indorser. The check bore no indication that it was deposited for collection, and was not in any
manner restricted so as to constitute the indorsee the agent of the indorser, nor did it prohibit
farther negotiation of the instrument, nor did it appear to be in trust for, or to the use of, any
other person, nor was it conditional. Certainly the Pukwana Bank was justified in relying upon
the warrant of genuineness, which implied the full identification of Kost, and his signature by
the defendant bank. This view of the statute is in accord with the decisions of many courts.
(First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First
National Bank vs. First National Bank, 151 Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44;
People's Bank vs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S.
W., 716.)"
The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L. R., 331),
decided in 1929. We have carefully examined this decision and we do not feel justified in
accepting its conclusions. It is but a restatement of the long abandoned rule of Neal vs. Price,
and it predicated on the wrong premise that the payment includes acceptance, and that a
bank drawee paying a check drawn on it becomes ipso facto an acceptor within the meaning
of section 62 of the Negotiable Instruments Act. Moreover in a more recent decision, that of
Louisa National Bank vs. Kentucky National Bank (39 S. W. [2nd] 497, 501) decided in 1931,
the Court of Appeals of Kentucky held the following:
The appellee, on presentation for payment of $600 check, failed to discover it was a
forgery. It was bound to know the signature of its customer, Armstrong, and it was
derelict in failing to give his signature to the check sufficient attention and
examination to enable it to discover instantly the forgery. The appellant, when the
check was presented to it by Banfield, failed to make an inquiry of or about him and
did not cause or have him to be identified. Its act in so paying to him the check is a
degree of negligence on its part equivalent to positive negligence. It indorsed the
check, and, while such indorsement may not be regarded within the meaning of the
Negotiable Instrument Law as amounting to a warranty to appellant of that which it
indorsed, it at least substantially served as a representation to it that it had exercised
ordinary care and had complied with the rules and customs of prudent banking. Its
indorsement was calculated, if it did not in fact do so, to lull the drawee bank into
indifference as to the drawer's signature to it when paying the check and charging it
to its customer's account and remitting its proceeds to appellant's correspondent.
If in such a transaction between the drawee and the holder of a check both are
without fault, no recovery may be had of the money so paid. (Deposit Bank of
Georgetown vs. Fayette National Bank, supra, and cases cited.) Or the rule may be
more accurately stated that, where the drawee pays the money, he cannot recover it
back from a holder in good faith, for value and without fault.
If, on the other hand, the holder acts in bad faith, or is guilty of culpable negligence, a
recovery may be had by the drawee of such holder. The negligence of the Bank of
Louisa in failing to inquire of and about Banfield, and to cause or to have him
identified before it parted with its money on the forged check, may be regarded as
the primary and proximate cause of the loss. Its negligence in this respect reached in
its effect the appellee, and induced incaution on its part. In comparison of the
degrees of the negligence of the two, it is apparent that of the appellant excels in
culpability. Both appellant and appellee inadvertently made a mistake, doubtless due
to a hurry incident to business. The first and most grievous one was made by the
appellant , amounting to its disregard of the duty, it owed itself as well as the duty it
owed to the appellee, and it cannot on account thereof retain as against the appellee
the money which it so received. It cannot shift the loss to the appellee, for such
disregard of its duty inevitably contributed to induce the appellee to omit its duty
critically to examine the signature of Armstrong, even if it did not know it instantly at
the time it paid the check. (Farmers' Bank of Augusta vs. Farmer's Bank of
Maysville, supra, and cases cited.)
IV. The question now is to determine whether the appellant's negligence in purchasing the
checks in question is such as to give the appellee the right to recover upon said checks, and
on the other hand, whether the drawee bank was not itself negligent, except for its
constructive fault in not knowing the signature of the drawer and detecting the forgery.
We quote with approval the following conclusions of the court a quo:
Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas check
Exhibit A-1 bears number 637020-D and is dated April 7, 1933. Therefore, the latter
check, which is prior in number to the former check, is however, issued on a later
date. This circumstance must have aroused at least the curiosity of the Motor
Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks from unknown persons. And
not only this; check Exhibit A is indorsed by a subagent of the agent of the payee,
International Auto Repair Shop. The Motor Service Co., Inc., made no inquiry
whatsoever as to the extent of the authority of these unknown persons. Our Supreme
Court said once that "any person taking checks made payable to a corporation,
which can act only by agents, does so at his peril, and must abide by the
consequences if the agent who indorses the same is without authority" (Insular Drug
Co. vs. National Bank, 58, Phil., 684).
x x x x x x x x x
Check Exhibit A-1, aside from having been indorsed by a supposed agent of the
international Auto Repair Shop is crossed generally. The existence of two parallel
lines transversally drawn on the face of this check was a warning that the check
could only be collected through a banking institution (Jacobs, Law of Bills of
Exchange, etc., pp., 179, 180; Bills of Exchange Act of England, secs. 76 and 79).
Yet the Motor Service Co., Inc., accepted the check in payment for merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the
Motor Service Co., Inc., stated the following:
"The Pangasinan Transportation Co. is a good customer of this firm and we received
checks from them every month in payment of their account. The two checks in
question seem to be exactly similar to the checks which we received from the
Pangasinan Transportation Co. every month."
If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's
signature in the two checks, may be considered as an omission in good faith
because of the similarity stated in the letter, then the same consideration applies to
the Philippine National Bank, for the drawer is a customer of both the Motor Service
Co., Inc., and the Philippine National Bank. (B. of E., pp. 25, 28, 35.)
We are of opinion that the facts of the present case do not make it one between two equally
innocent persons, the drawee bank and the holder, and that they are governed by the
authorities already cited and also the following:
The point in issue has sometimes been said to be that of negligence. The drawee
who has paid upon the forged signature is held to bear the loss, because he has
been negligent in failing to recognize that the handwriting is not that of his customer.
But it follows obviously that if the payee, holder, or presenter of the forged paper has
himself been in default, if he has himself been guilty of a negligence prior to that of
the banker, or if by any act of his own he has at all contributed to induce the banker's
negligence, then he may lose his right to cast the loss upon the banker. The courts
have shown a steadily increasing disposition to extend the application of this rule
over the new conditions of fact which from time to time arise, until it can now rarely
happen that the holder, payee, or presenter can escape the imputation of having
been in some degree contributory towards the mistake. Without any actual change in
the abstract doctrines of the law, which are clear, just, and simple enough, the
gradual but sure tendency and effect of the decisions have been to put as heavy a
burden of responsibility upon the payee as upon the drawee, contrary to the original
custom. . . . (2 Morse on Banks and Banking, 5th ed., secs. 464 and 466, pp. 82-85
and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the following
statement appears in the concurring opinion:
What, then, should be the rule? The drawee asks to recover for money had and
received. If his claim did not rest upon a transaction relating to a negotiable
instrument plaintiff could recover as for money paid under mistake, unless defendant
could show some equitable reason, such as changed condition since, and relying
upon, payment by plaintiff. In the Wyndmere Case, the North Dakota court holds that
this rule giving right to recover money paid under mistake should extend to
negotiable paper, and it rejects in its entirety the theory of estoppel and puts a case
of this kind on exactly the same basis as the ordinary case of payment under
mistake. But the great weight of authority, and that based on the better reasoning,
holds that the exigencies of business demand a different rule in relation to negotiable
paper. What is that rule? Is it an absolute estoppel against the drawee in favor of a
holder, no matter how negligent such holder has been? It surely is not. The correct
rule recognizes the fact that, in case of payment without a prior acceptance or
certification, the holder takes the paper upon the of the prior indorsers and the credit
of the drawer, and not upon the credit of the drawee, in making payment, has a right
to rely upon the assumption that the payee used due diligence, especially where
such payee negotiated the bill or check to a holder, thus representing that it had so
fully satisfied itself as to the identity and signature of the maker that it was willing to
warrant as relates thereto to all subsequent holders. (Uniform Act, secs. 65 and 66.)
Such correct rule denies the drawee the right to recover when the holder was without
fault or when there has been some change of position calling for equitable relief.
When a holder of a bill of exchange uses all due care in the taking of bill or check
and the drawee thereafter pays same, the transaction is absolutely closed modern
business could not be done on any other basis. While the correct rule promotes the
fluidity of two recognized mediums of exchange, those mediums by which the great
bulk of business is carried on, checks and drafts, upon the other hand it encourages
and demands prudent business methods upon the part of those receiving such
mediums of exchange. (Pennington County Bank vs. First State Bank, 110 Minn.,
263; 26 L. R. A. [N. S.], 849; 136 Am. St. Rep., 496; 125 N. W., 119; First National
Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; Bank of
Williamson, vs. McDowell County Bank, 66 W. Va., 545; 36 L. R. A. [N. S.], 605; 66
S. E., 761; Germania Bank vs. Boutell, 60 Minn., 189; 27 L. R. A., 635; 51 Am. St.
Rep., 519; 62 N. W., 327; American Express Co. vs. State National Bank, 27 Okla.,
824; 33 L. R. A. [N. S.], 188; 113 Pac., 711; Farmers' National Bank vs. Farmers' &
Traders Bank, L. R. A., 1915A, 77, and note (159 Ky., 141; 166 S. W., 986].)
That the defendant bank did not use reasonable business prudence is clear. It took
this check from a stranger without other identification than that given by another
stranger; its cashier witnessed the mark of such stranger thus vouching for the
identity and signature of the maker; and it indorsed the check as "Paid," thus further
throwing plaintiff off guard. Defendant could not but have known, when negotiating
such check and putting it into the channel through which it would finally be presented
to plaintiff for payment, that plaintiff, if it paid such check, as defendant was asking it
to do, would have to rely solely upon the apparent faith and credit that defendant had
placed in the drawer. From the very circumstances of this case plaintiff had to act on
the facts as presented to it by defendant, upon such facts only.
But appellant argues that it so changed its position, after payment by plaintiff, that in
"equity and good conscience" plaintiff should not recover it says it did not pay over
any money to the forger until after plaintiff had paid the check. There would be merit
in such contention if defendant had indorsed the check for "collection," thus advising
plaintiff that it was relying on plaintiff and not on the drawer. It stands in court where
it would have been if it had done as it represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:
. . . If the holder has been negligent in paying the forged paper, or has by his
conduct, however innocent, misled or deceived the drawee to his damage, it would
be unjust for him to be allowed to shield himself from the results of his own
carelessness by asserting that the drawee was bound in law to know his drawer's
signature.
V. Section 23 of the Negotiable Instruments Act provides that "when a signature is forged or
made without the authority of the person whose signature it purports to be, is wholly
inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.
It not appearing that the appellee bank did not warrant to the appellant the genuineness of
the checks in question, by its acceptance thereof, nor did it perform any act which would
have induced the appellant to believe in the genuineness of said instruments before appellant
purchased them for value, it can not be said that the appellee is precluded from setting up the
forgery and, therefore, the appellant is not entitled to retain the amount of the forged check
paid to it by the appellee.
VI. It has been held by many courts that a drawee of a check, who is deceived by a forgery of
the drawer's signature may recover the payment back, unless his mistake has placed an
innocent holder of the paper in a worse position than he would have been in if the discovery
of the forgery had been made on presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable
Instruments, 1538.) Forgeries often deceived the eye of the most cautious experts; and when
a bank has been deceived, it is a harsh rule which compels it to suffer although no one has
suffered by its being deceived. (17 A. L. R. 891; 5 R. C. L., 559.)
In the instant case should the drawee bank be allowed recovery, the appellant's position
would not become worse than if the drawee had refused the payment of these checks upon
their presentation. The appellant has lost nothing by anything which the drawee has done. It
had in its hands some forged worthless papers. It did not purchase or acquire these papers
because of any representation made to it by the drawee. It purchased them from unknown
persons and under suspicious circumstances. It had no valid title to them, because the
persons from whom it received them did not have such title. The appellant could not have
compelled the drawee to pay them, and the drawee could have refused payment had it been
able to detect the forgery. By making a refund, the appellant would only returning what it had
received without any title or right. And when appellant pays back the money it had received it
will be entitled to have restored to it the forged papers it parted with. There is no good reason
why the accidental payment made by the appellant should inure to the benefit of the
appellant. If there were injury to the appellant said injury was caused not by the failure of the
appellee to detect the forgery but by the very negligence of the appellant in purchasing
commercial papers from unknown persons without making inquiry as to their genuineness.
In the light of the foregoing discussion, we conclude:
1. That where a check is accepted or certified by the bank on which it is drawn, the
bank is estopped to deny the genuineness of the drawer's signature and his capacity
to issue the instrument;
2. That if a drawee bank pays a forged check which was previously accepted or
certified by the said bank it cannot recover from a holder who did not participate in
the forgery and did not have actual notice thereof;
3. That the payment of a check does not include or imply its acceptance in the sense
that this word is used in section 62 of the Negotiable Instruments Law;
4. That in the case of the payment of a forged check, even without former
acceptance, the drawee can not recover from a holder in due course not chargeable
with any act of negligence or disregard of duty;
5. That to entitle the holder of a forged check to retain the money obtained thereon,
there must be a showing that the duty to ascertain the genuineness of the signature
rested entirely upon the drawee, and that the constructive negligence of such drawee
in failing to detect the forgery was not affected by any disregard of duty on the part of
the holder, or by failure of any precaution which, from his implied assertion in
presenting the check as a sufficient voucher, the drawee had the right to believe he
had taken;
6. That in the absence of actual fault on the part of the drawee, his constructive fault
in not knowing the signature of the drawer and detecting the forgery will nor preclude
his recovery from one who took the check under circumstances of suspicion and
without proper precaution, or whose conduct has been such as to mislead the
drawee or induce him to pay the check without the usual scrutiny or other
precautions against mistake or fraud;
7. That on who purchases a check or draft is bound to satisfy himself that the paper
is genuine, and that by indorsing it or presenting it for payment or putting it into
circulation before presentation he impliedly asserts that he performed his duty;
8. That while the foregoing rule, chosen from a welter of decisions on the issue as
the correct one, will not hinder the circulation of two recognized mediums of
exchange by which the great bulk of business is carried on, namely, drafts and
checks, on the other hand, it will encourage and demand prudent business methods
on the part of those receiving such mediums of exchange;
9. That it being a matter of record in the present case, that the appellee bank in no
more chargeable with the knowledge of the drawer's signature than the appellant is,
as the drawer was as much the customer of the appellant as of the appellee, the
presumption that a drawee bank is bound to know more than any indorser the
signature of its depositor does not hold;
10. That according to the undisputed facts of the case the appellant in purchasing
the papers in question from unknown persons without making any inquiry as to the
identity and authority of the said persons negotiating and indorsing them, acted
negligently and contributed to the appellee's constructive negligence in failing to
detect the forgery;
11. That under the circumstances of the case, if the appellee bank is allowed to
recover, there will be no change of position as to the injury or prejudice of the
appellant.
Wherefore, the assignments of error are overruled, and the judgment appealed from must be,
as it is hereby, affirmed, with costs against the appellant. So ordered.
G.R. No. L-29432, August 06, 1975
JAI-ALAI CORPORATION OF THE PHILIPPINES, PETITIONER, VS. BANK OF THE
PHILIPPINE ISLANDS, RESPONDENT.
D E C I S I O N
CASTRO, J.:
This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as the
petitioner) for review of the decision of the Court of Appeals in C.A.-G.R. 34042-R dated June
25, 1968 in favor of the Bank of the Philippine Islands (hereinafter referred to as the
respondent).
From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were
deposited by the petitioner in its current account with the respondent bank. The particulars of
these checks are as follows:
1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and
payable to the Inter-Island Gas Service, Inc. or order:
Date Check Exhibit
Deposited Number Amount Number
4/2/59 B-352680 P500.00 18
4/20/59 A-156907 372.32 19
4/24/59 A-156924 397.82 20
5/4/59 B-364764 250.00 23
5/6/59 B-364775 250.00 24
2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to
the Inter-Island Gas Service, Inc. or bearer:
4/13/59 B-335063 P2108.70 21
4/27/59 B-335072 2210.94 22
3. Drawn by the Luzon Tinsmith & Company upon the China Banking Corporation and
payable to the Inter-Island Gas Service, Inc. or bearer:
5/18/59 VN430188 P940.80 25
4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to
the Inter-Island Gas Service, Inc. or order:
5/14/59 1860160 P500.00 26
5/18/59 1860660 500.00 27
All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez,
a sales agent of the Inter-Island Gas and a regular bettor at jai-alai games, were, upon
deposit, temporarily credited to the petitioner's account in accordance with the clause printed
on the deposit slips issued by the respondent and which reads:
"Any credit allowed the depositor on the books of the Bank for checks or drafts hereby
received for deposit, is provisional only, until such time as the proceeds thereof, in current
funds or solvent credits, shall have been actually received by the Bank and the latter
reserves to itself the right to charge back the item to the account of itsdepositor, at any time
before that event, regardless of whether or not the item itself can be returned."
About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and
after the checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered
that all the indorsements made on the checks purportedly by its cashiers,
Santiago Amplayo and Vicenta Mucor (who were merely authorized to deposit checks issued
payable to the said company) as well as the rubber stamp impression thereon reading "Inter-
Island Gas Service, Inc.," were forgeries. In due time, the Inter-Island Gas advised the
petitioner, the respondent, the drawers and the drawee-banks of the said checks about the
forgeries, and filed a criminal complaint against Ramirez with the Office of the City Fiscal of
Manila.[1]
The respondent's cashier, Ramon Sarthou, upon receipt of the letter of Inter-Island Gas
dated August 31, 1959, called up the petitioner's cashier, Manuel Garcia, and advised the
latter that in view of the circumstances he would debit the value of the checks against the
petitioner's account as soon as they were returned by the respectivedrawee-banks.
Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded
reimbursement to their respective accounts from the drawee-banks, which in turn demanded
from the respondent, as collecting bank, the return of the amounts they had paid on account
thereof. When the drawee-banks returned the checks to the respondent, the latter paid their
value which the former in turn paid to the Inter-Island Gas. The respondent, for its part,
debited the petitioner's current account and forwarded to the latter the checks containing the
forgedindorsements, which the petitioner, however, refused to accept.
On October 8, 1959 the petitioner drew against its current account with the respondent a
check for P135,000 payable to the order of the Marino Olondriz y Cia. in payment of certain
shares of stock. The check was, however, dishonored by the respondent as its records
showed that as of October 8, 1959 the current account of the petitioner, after netting out the
value of the checks (P8,030.58) with the forged indorsements, had a balance of only
P128,257.65.
The petitioner then filed a complaint against the respondent with the Court of First Instance of
Manila, which was however dismissed by the trial court after due trial, and as well by the
Court of Appeals, on appeal.
Hence, the present recourse.
The issues posed by the petitioner in the instant petition may be briefly stated as follows:
(a) Whether the respondent had the right to debit the petitioner's current account in the
amount corresponding to the total value of the checks in question after more than three
months had elapsed from the date their value was credited to the petitioner's account;
(b) Whether the respondent is estopped from claiming that the amount of P8,030.58,
representing the total value of the checks with the forged indorsements, had not been
properly credited to the petitioner's account, since the same had already been paid by
the drawee-banks and received in due course by the respondent; and
(c) On the assumption that the respondent had improperly debited the petitioner's current
account, whether the latter is entitled to damages.
These three issues interlock and will be resolved jointly.
In our opinion, the respondent acted within legal bounds when it debited the petitioner's
account. When the petitioner deposited the checks with the respondent, the nature of the
relationship created at that stage was one of agency, that is, the bank was to collect from
the drawees of the checks the corresponding proceeds. It is true that the respondent had
already collected the proceeds of the checks when it debited the petitioner's account, so that
following the rule in Gullas vs. Philippine National Bank[2] it might be argued that the
relationship between the parties had become that of creditor and debtor as to preclude the
respondent from using the petitioner's funds to make payments not authorized by the
latter. It is our view nonetheless that no creditor-debtor relationship was created between the
parties.
Section 23 of the Negotiable Instruments Law (Act 2031) states that[3]
"When a signature is forged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority."
Since under the foregoing provision, a forged signature in a negotiable instrument is wholly
inoperative and no right to discharge it or enforce its payment can be acquired through or
under the forged signature except against a party who cannot invoke the forgery, it stands to
reason, upon the facts of record, that the respondent, as a collecting bank which indorsed the
checks to the drawee-banks for clearing, should be liable to the latter for reimbursement, for,
as found by the court a quo and by the appellate court, the indorsements on the checks had
been forged prior to their delivery to the petitioner. In legal contemplation, therefore, the
payments made by thedrawee-banks to the respondent on account of the said checks were
ineffective; and, such being the case, the relationship of creditor and debtor between the
petitioner and the respondent had not been validly effected, the checks not having been
properly and legitimately converted into cash.[4]
In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank,[5] the Court ruled that it is the
obligation of the collecting bank to reimburse the drawee-bank the value of the checks
subsequently found to contain the forgedindorsement of the payee. The reason is that the
bank with which the check was deposited has no right to pay the sum stated therein to the
forger "or anyone else upon a forged signature." "It was its duty to know," said the Court,
"that [the payee's] endorsement was genuine before cashing the check." The petitioner must
in turn shoulder the loss of the amounts which the respondent, as its collecting agent, had to
reimburse to the drawee-banks.
We do not consider material for the purposes of the case at bar that more than three months
had elapsed since the proceeds of the checks in question were collected by the
respondent. The record shows that the respondent had acted promptly after being informed
that the indorsements on the checks were forged. Moreover, having received the checks
merely for collection and deposit, the respondent cannot be expected to know or ascertain
the genuineness of all prior indorsements on the said checks. Indeed, having itself indorsed
them to the respondent in accordance with the rules and practices of commercial banks, of
which the Court takes due cognizance, the petitioner is deemed to have given the warranty
prescribed in Section 66 of the Negotiable Instruments Law that every single one of those
checks "is genuine and in all respects what it purports to be."
The petitioner was, moreover, grossly recreant in accepting the checks in question from
Ramirez. It could not have escaped the attention of the petitioner that the payee of all the
checks was a corporation the Inter-Island Gas Service, Inc. Yet, the petitioner cashed
these checks to a mere individual who was admittedly a habitue at its jai-alai games without
making any inquiry as to his authority to exchange checks belonging to the payee-
corporation. In Insular Drug Co. vs. National[6] the Court made the pronouncement that
". . . The right of an agent to indorse commercial paper is a very responsible power and will
not be lightly inferred. A salesman with authority to collect money belonging to his principal
does not have the implied authority to indorse checks received in payment. Any person
taking checks made payable to a corporation, which can act only by agents, does so at his
peril, and must abide by the consequences if the agent who indorses the same is without
authority." (italics supplied)
It must be noted further that three of the checks in question are crossed checks,
namely, exhs. 21, 25 and 27, which may only be deposited, but not encashed; yet, the
petitioner negligently accepted them for cash. That two of the crossed checks, namely, exhs.
21 and 25, are bearer instruments would not, in our view, exculpate the petitioner from
liability with respect to them. The fact that they are bearer checks and at the same time
crossed checks should have aroused the petitioner's suspicion as to the title of Ramirez over
them and his authority to cash them (apparently to purchase jai-alai tickets from the
petitioner), it appearing on their face that a corporate entity the Inter-Island Gas Service,
Inc. was the payee thereof and Ramirez delivered the said checks to the petitioner
ostensibly on the strength of the payee's cashiers' indorsements.
At all events, under Section 67 of the Negotiable Instruments Law, "Where a person places
his indorsement on an instrument negotiable by delivery he incurs all the liability of
an indorser," and under Section 66 of the same statute a general indorser warrants that the
instrument "is genuine and in all respects what it purports to be." Considering that the
petitioner indorsed the said checks when it deposited them with the respondent, the petitioner
as an indorser guaranteed the genuineness of all prior indorsements thereon. The
respondent which relied upon the petitioner's warranty should not be held liable for the
resulting loss. This conclusion applies similarly to exh. 22 which is an uncrossed bearer
instrument, for under Section 65 of the Negotiable Instruments Law, "Every person
negotiating an instrument by deliverywarrants (a) That the instrument is genuine and in all
respects what it purports to be." Under that same section this warranty "extends in favor of no
holder other than the immediate transferee," which, in the case at bar, would be the
respondent.
The provision in the deposit slip issued by the respondent which stipulates that it "reserves to
itself the right to charge back the item to the account of its depositor," at any time before
"current funds or solvent credits shall have been actually received by the Bank," would not
materially affect the conclusion we have reached. That stipulation prescribes that there must
be an actual receipt by the bank of current funds or solvent credits; but as we have earlier
indicated the transfer by the drawee-banks of funds to the respondent on account of the
checks in question was ineffectual because made under the mistaken and valid assumption
that the indorsements of the payee thereon were genuine. Under article 2154 of the New
Civil Code "If something is received when there is no right to demand it and it was unduly
delivered through mistake, the obligation to return it arises." There was, therefore, in
contemplation of law, no valid payment of money made by the drawee-banks to the
respondent on account of the questioned checks.
ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioner's cost.






G.R. No. L-40796 July 31, 1975
REPUBLIC BANK, plaintiff-appellee, vs. MAURICIA T. EBRADA, defendant-appellant.
MARTIN, J.:
Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch
XXIII in Civil Case No. 69288, entitled "Republic Bank vs. Mauricia T. Ebrada."
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check
No. 508060 dated January 15, 1963 for P1,246.08 at the main office of the plaintiff Republic
Bank at Escolta, Manila. The check was issued by the Bureau of Treasury. 1 Plaintiff Bank
was later advised by the said bureau that the alleged indorsement on the reverse side of the
aforesaid check by the payee, "Martin Lorenzo" was a forgery 2 since the latter had allegedly
died as of July 14, 1952. 3 Plaintiff Bank was then requested by the Bureau of Treasury to
refund the amount of P1,246.08. 4 To recover what it had refunded to the Bureau of
Treasury, plaintiff Bank made verbal and formal demands upon defendant Ebrada to account
for the sum of P1,246.08, but said defendant refused to do so. So plaintiff Bank sued
defendant Ebrada before the City Court of Manila.
On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the
complaint and as affirmative defenses alleged that she was a holder in due course of the
check in question, or at the very least, has acquired her rights from a holder in due course
and therefore entitled to the proceeds thereof. She also alleged that the plaintiff Bank has no
cause of action against her; that it is in estoppel, or so negligent as not to be entitled to
recover anything from her. 5
About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against
Adelaida Dominguez who, in turn, filed on September 14, 1966 a Fourth-Party complaint
against Justina Tinio.
On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against
defendant Ebrada; for Third-Party plaintiff against Third-Party defendant, Adelaida
Dominguez, and for Fourth-Party plaintiff against Fourth-Party defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First
Instance of Manila where the parties submitted a partial stipulation of facts as follows:
COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party
defendant and Fourth-Party plaintiff and unto this Honorable Court most
respectfully submit the following:
PARTIAL STIPULATION OF FACTS
1. That they admit their respective capacities to sue and be sued;
2. That on January 15, 1963 the Treasury of the Philippines issued its Check
No. BP-508060, payable to the order of one MARTIN LORENZO, in the sum
of P1,246.08, and drawn on the Republic Bank, plaintiff herein, which check
will be marked as Exhibit "A" for the plaintiff;
3. That the back side of aforementioned check bears the following
signatures, in this order:
1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA;
4. That the aforementioned check was delivered to the defendant MAURICIA T. EBRADA by
the Third-Party defendant and Fourth-Party plaintiff ADELAIDA DOMINGUEZ, for the
purpose of encashment;
5. That the signature of defendant MAURICIA T. EBRADA was affixed on
said check on February 27, 1963 when she encashed it with the plaintiff
Bank;
6. That immediately after defendant MAURICIA T. EBRADA received the
cash proceeds of said check in the sum of P1,246.08 from the plaintiff Bank,
she immediately turned over the said amount to the third-party defendant
and fourth-party plaintiff ADELAIDA DOMINGUEZ, who in turn handed the
said amount to the fourth-party defendant JUSTINA TINIO on the same date,
as evidenced by the receipt signed by her which will be marked as Exhibit
"1-Dominguez"; and
7. That the parties hereto reserve the right to present evidence on any other
fact not covered by the foregoing stipulations,
Manila, Philippines, June 6, 1969.
Based on the foregoing stipulation of facts and the documentary evidence presented, the trial
court rendered a decision, the dispositive portion of which reads as follows:
WHEREFORE, the Court renders judgment ordering the defendant Mauricia
T. Ebrada to pay the plaintiff the amount of ONE THOUSAND TWO FORTY-
SIX 08/100 (P1,246.08), with interest at the legal rate from the filing of the
complaint on June 16, 1966, until fully paid, plus the costs in both instances
against Mauricia T. Ebrada.
The right of Mauricia T. Ebrada to file whatever claim she may have against
Adelaida Dominguez in connection with this case is hereby reserved. The
right of the estate of Dominguez to file the fourth-party complaint against
Justina Tinio is also reserved.
SO ORDERED.
In her appeal, defendant-appellant presses that the lower court erred:
IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE
VALUE OF THE SUBJECT CHECK AFTER FINDING THAT THE DRAWER
ISSUED THE SUBJECT CHECK TO A PERSON ALREADY DECEASED
FOR 11- YEARS AND THAT THE APPELLANT DID NOT BENEFIT
FROM ENCASHING SAID CHECK.
From the stipulation of facts it is admitted that the check in question was delivered to
defendant-appellant by Adelaida Dominguez for the purpose of encashment and that her
signature was affixed on said check when she cashed it with the plaintiff Bank. Likewise it is
admitted that defendant-appellant was the last indorser of the said check. As such indorser,
she was supposed to have warranted that she has good title to said check; for under Section
65 of the Negotiable Instruments Law: 6
Every person negotiating an instrument by delivery or by qualified
indorsement, warrants:
(a) That the instrument is genuine and in all respects what it purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification warrants to all subsequent
holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the
next preceding sections;
(b) That the instrument is at the time of his indorsement valid and subsisting.
It turned out, however, that the signature of the original payee of the check, Martin Lorenzo
was a forgery because he was already dead 7 almost 11 years before the check in question
was issued by the Bureau of Treasury. Under action 23 of the Negotiable Instruments Law
(Act 2031):
When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to
retain the instruments, or to give a discharge thereof against any party
thereto, can be acquired through or under such signature unless the party
against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.
It is clear from the provision that where the signature on a negotiable instrument if forged, the
negotiation of the check is without force or effect. But does this mean that the existence of
one forged signature therein will render void all the other negotiations of the check with
respect to the other parties whose signature are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several
indorsements on it, it was held that it is only the negotiation based on the forged or
unauthorized signature which is inoperative. Applying this principle to the case before Us, it
can be safely concluded that it is only the negotiation predicated on the forged indorsement
that should be declared inoperative. This means that the negotiation of the check in question
from Martin Lorenzo, the original payee, to Ramon R. Lorenzo, the second indorser, should
be declared of no affect, but the negotiation of the aforesaid check from Ramon R. Lorenzo
to Adelaida Dominguez, the third indorser, and from Adelaida Dominguez to the defendant-
appellant who did not know of the forgery, should be considered valid and enforceable,
barring any claim of forgery.
What happens then, if, after the drawee bank has paid the amount of the check to the holder
thereof, it was discovered that the signature of the payee was forged? Can the drawee bank
recover from the one who encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee
of a check can recover from the holder the money paid to him on a forged instrument. It is not
supposed to be its duty to ascertain whether the signatures of the payee or indorsers are
genuine or not. This is because the indorser is supposed to warrant to the drawee that the
signatures of the payee and previous indorsers are genuine, warranty not extending only to
holders in due course. One who purchases a check or draft is bound to satisfy himself that
the paper is genuine and that by indorsing it or presenting it for payment or putting it into
circulation before presentation he impliedly asserts that he has performed his duty and the
drawee who has paid the forged check, without actual negligence on his part, may recover
the money paid from such negligent purchasers. In such cases the recovery is permitted
because although the drawee was in a way negligent in failing to detect the forgery, yet if the
encasher of the check had performed his duty, the forgery would in all probability, have been
detected and the fraud defeated. The reason for allowing the drawee bank to recover from
the encasher is:
Every one with even the least experience in business knows that no
business man would accept a check in exchange for money or goods unless
he is satisfied that the check is genuine. He accepts it only because he has
proof that it is genuine, or because he has sufficient confidence in the
honesty and financial responsibility of the person who vouches for it. If he is
deceived he has suffered a loss of his cash or goods through his own
mistake. His own credulity or recklessness, or misplaced confidence was the
sole cause of the loss. Why should he be permitted to shift the loss due to
his own fault in assuming the risk, upon the drawee, simply because of the
accidental circumstance that the drawee afterwards failed to detect the
forgery when the check was presented? 8
Similarly, in the case before Us, the defendant-appellant, upon receiving the check in
question from Adelaida Dominguez, was duty-bound to ascertain whether the check in
question was genuine before presenting it to plaintiff Bank for payment. Her failure to do so
makes her liable for the loss and the plaintiff Bank may recover from her the money she
received for the check. As reasoned out above, had she performed the duty of ascertaining
the genuineness of the check, in all probability the forgery would have been detected and the
fraud defeated.
In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance
Company drew its check for P2000.00 on the Hongkong and Shanghai Banking Corporation
payable to the order of Lazaro Melicor. A certain E. M. Maasin fraudulently obtained the
check and forged the signature of Melicor, as an indorser, and then personally indorsed and
presented the check to the Philippine National Bank where the amount of the check was
placed to his (Maasin's) credit. On the next day, the Philippine National Bank indorsed the
cheek to the Hongkong and Shanghai Banking Corporation which paid it and charged the
amount of the check to the insurance company. The Court held that the Hongkong and
Shanghai Banking Corporation was liable to the insurance company for the amount of the
check and that the Philippine National Bank was in turn liable to the Hongkong and Shanghai
Banking Corporation. Said the Court:
Where a check is drawn payable to the order of one person and is presented
to a bank by another and purports upon its face to have been duly indorsed
by the payee of the check, it is the duty of the bank to know that the check
was duly indorsed by the original payee, and where the bank pays the
amount of the check to a third person, who has forged the signature of the
payee, the loss falls upon the bank who cashed the check, and its only
remedy is against the person to whom it paid the money.
With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss
when it paid the amount of the check in question to defendant-appellant, but it has the
remedy to recover from the latter the amount it paid to her. Although the defendant-appellant
to whom the plaintiff Bank paid the check was not proven to be the author of the supposed
forgery, yet as last indorser of the check, she has warranted that she has good title to
it 10 even if in fact she did not have it because the payee of the check was already dead 11
years before the check was issued. The fact that immediately after receiving title cash
proceeds of the check in question in the amount of P1,246.08 from the plaintiff Bank,
defendant-appellant immediately turned over said amount to Adelaida Dominguez (Third-
Party defendant and the Fourth-Party plaintiff) who in turn handed the amount to Justina
Tinio on the same date would not exempt her from liability because by doing so, she acted as
an accommodation party in the check for which she is also liable under Section 29 of the
Negotiable Instruments Law (Act 2031), thus: .An accommodation party is one who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value, notwithstanding such holder at the time of
taking the instrument knew him to be only an accommodation party.
IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with
costs against defendant-appellant.
SO ORDERED.






































G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner, vs. THE HONORABLE COURT OF APPEALS and
PHILIPPINE BANK OF COMMUNICATIONS, respondents.
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner,
Natividad Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right
of the drawer to recover from the drawee bank who pays a check with a forged indorsement
of the payee, debiting the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against the private
respondent Philippine Bank of Communications (respondent drawee Bank) for recovery of
the money value of eighty-two (82) checks charged against the petitioner's account with the
respondent drawee Bank on the ground that the payees' indorsements were forgeries. The
Regional Trial Court, Branch CXXVIII of Caloocan City, which tried the case, rendered a
decision on November 17, 1987 dismissing the complaint as well as the respondent drawee
Bank's counterclaim. On appeal, the Court of Appeals in a decision rendered on February 22,
1990, affirmed the decision of the RTC on two grounds, namely (1) that the plaintiff's
(petitioner herein) gross negligence in issuing the checks was the proximate cause of the
loss and (2) assuming that the bank was also negligent, the loss must nevertheless be borne
by the party whose negligence was the proximate cause of the loss. On March 5, 1990, the
petitioner filed this petition under Rule 45 of the Rules of Court setting forth the following as
the alleged errors of the respondent Court: 1
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE
RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF
AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT
FINDING AND RULING THAT IT IS THE GROSS AND INEXCUSABLE
NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND
EMPLOYEES OF THE RESPONDENT BANK IN FORGING THE
SIGNATURE OF THE PAYEES AND THE WRONG AND/OR ILLEGAL
PAYMENTS MADE TO PERSONS, OTHER THAN TO THE INTENDED
PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE
CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING (SIC)
ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT
ORDERING THE RESPONDENT BANK TO RESTORE OR RE-CREDIT
THE CHECKING ACCOUNT OF THE PETITIONER IN THE CALOOCAN
CITY BRANCH BY THE VALUE OF THE EIGHTY-TWO (82) CHECKS
WHICH IS IN THE AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located
at Rizal Avenue Extension and at Second Avenue, Caloocan City. Among these groceries
are D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking account
numbered 13-00038-1 with the Caloocan City Branch of the respondent drawee Bank. To
facilitate payment of debts to her suppliers, petitioner draws checks against her checking
account with the respondent bank as drawee. Her customary practice of issuing checks in
payment of her suppliers was as follows: the checks were prepared and filled up as to all
material particulars by her trusted bookkeeper, Alicia Galang, an employee for more than
eight (8) years. After the bookkeeper prepared the checks, the completed checks were
submitted to the petitioner for her signature, together with the corresponding invoice receipts
which indicate the correct obligations due and payable to her suppliers. Petitioner signed
each and every check without bothering to verify the accuracy of the checks against the
corresponding invoices because she reposed full and implicit trust and confidence on her
bookkeeper. The issuance and delivery of the checks to the payees named therein were left
to the bookkeeper. Petitioner admitted that she did not make any verification as to whether or
not the checks were delivered to their respective payees. Although the respondent drawee
Bank notified her of all checks presented to and paid by the bank, petitioner did not verify he
correctness of the returned checks, much less check if the payees actually received the
checks in payment for the supplies she received. In the course of her business operations
covering a period of two years, petitioner issued, following her usual practice stated above, a
total of eighty-two (82) checks in favor of several suppliers. These checks were all presented
by the indorsees as holders thereof to, and honored by, the respondent drawee Bank.
Respondent drawee Bank correspondingly debited the amounts thereof against petitioner's
checking account numbered 30-00038-1. Most of the aforementioned checks were for
amounts in excess of her actual obligations to the various payees as shown in their
corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of
P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual obligation
to said payee was only P895.33 (Exh. A-83); (2) in Check No. 652282 issued
on September 18, 1984 in favor of Senson Enterprises in the amount of
P11,041.20 (Exh. A-67) appellant's actual obligation to said payee was only
P1,041.20 (Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the
amount of P11,672.47 in favor of Marchem (Exh. A-61) appellant's obligation
was only P1,672.47 (Exh. B); (4) in Check No. 620450 dated May 10, 1984
in favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation was
only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9,
1984 in favor of Malinta Exchange Mart for P11,107.16 (Exh. A-62), her
obligation was only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated
August 11, 1984 in favor of Grocer's International Food Corp. in the amount
of P11,335.60 (Exh. A-66), her obligation was only P1,335.60 (Exh. E and E-
1); (7) in Check No. 589019 dated March 17, 1984 in favor of Sophy
Products in the amount of P11,648.00 (Exh. A-78), her obligation was only
P648.00 (Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the
amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the
latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated
May 23, 1984 in the amount of P11,504.00 in favor of Monde Denmark
Biscuit (Exh. A-34), her obligation was only P504.00 (Exhs. I-1 and I-2). 2
Practically, all the checks issued and honored by the respondent drawee bank were crossed
checks. 3 Aside from the daily notice given to the petitioner by the respondent drawee Bank,
the latter also furnished her with a monthly statement of her transactions, attaching thereto all
the cancelled checks she had issued and which were debited against her current account. It
was only after the lapse of more two (2) years that petitioner found out about the fraudulent
manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L.
Boon, Chief Accountant of respondent drawee Bank at the Buendia branch, who, without
authority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in
the accounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of
Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82) checks were deposited in
Savings Account No. 00844-5 of Alfredo Y. Romero at the respondent drawee Bank's
Buendia branch, and four (4) checks in his Savings Account No. 32-81-9 at its Ongpin
branch. The rest of the checks were deposited in Account No. 0443-4, under the name of
Benito Lam at the Elcao branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified
that they did not receive nor even see the subject checks and that the indorsements
appearing at the back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted
periodic inspection of the branches' operations failed to discover, check or stop the
unauthorized acts of Ernest L. Boon. Under the rules of the respondent drawee Bank, only a
Branch Manager and no other official of the respondent drawee bank, may accept a second
indorsement on a check for deposit. In the case at bar, all the deposit slips of the eighty-two
(82) checks in question were initialed and/or approved for deposit by Ernest L. Boon. The
Branch Managers of the Ongpin and Elcao branches accepted the deposits made in the
Buendia branch and credited the accounts of Alfredo Y. Romero and Benito Lam in their
respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to
credit her account with the money value of the eighty-two (82) checks totalling P1,208.606.89
for having been wrongfully charged against her account. Respondent drawee Bank refused
to grant petitioner's demand. On January 23, 1985, petitioner filed the complaint with the
Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against the
drawee bank. The payees are not parties to the case. Rather, it is the drawer, whose
signature is genuine, who instituted this action to recover from the drawee bank the money
value of eighty-two (82) checks paid out by the drawee bank to holders of those checks
where the indorsements of the payees were forged. How and by whom the forgeries were
committed are not established on the record, but the respective payees admitted that they did
not receive those checks and therefore never indorsed the same. The applicable law is the
Negotiable Instruments Law 4 (heretofore referred to as the NIL). Section 23 of the NIL
provides:
When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to
retain the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party
whose signature is forged. A party whose signature to an instrument was forged was
never a party and never gave his consent to the contract which gave rise to the
instrument. Since his signature does not appear in the instrument, he cannot be held
liable thereon by anyone, not even by a holder in due course. Thus, if a person's
signature is forged as a maker of a promissory note, he cannot be made to pay
because he never made the promise to pay. Or where a person's signature as a
drawer of a check is forged, the drawee bank cannot charge the amount thereof
against the drawer's account because he never gave the bank the order to pay. And
said section does not refer only to the forged signature of the maker of a promissory
note and of the drawer of a check. It covers also a forged indorsement, i.e., the
forged signature of the payee or indorsee of a note or check. Since under said
provision a forged signature is "wholly inoperative", no one can gain title to the
instrument through such forged indorsement. Such an indorsement prevents any
subsequent party from acquiring any right as against any party whose name appears
prior to the forgery. Although rights may exist between and among parties
subsequent to the forged indorsement, not one of them can acquire rights against
parties prior to the forgery. Such forged indorsement cuts off the rights of all
subsequent parties as against parties prior to the forgery. However, the law makes
an exception to these rules where a party is precluded from setting up forgery as a
defense.
As a matter of practical significance, problems arising from forged indorsements of checks
may generally be broken into two types of cases: (1) where forgery was accomplished by a
person not associated with the drawer for example a mail robbery; and (2) where the
indorsement was forged by an agent of the drawer. This difference in situations would
determine the effect of the drawer's negligence with respect to forged indorsements. While
there is no duty resting on the depositor to look for forged indorsements on his cancelled
checks in contrast to a duty imposed upon him to look for forgeries of his own name, a
depositor is under a duty to set up an accounting system and a business procedure as are
reasonably calculated to prevent or render difficult the forgery of indorsements, particularly by
the depositor's own employees. And if the drawer (depositor) learns that a check drawn by
him has been paid under a forged indorsement, the drawer is under duty promptly to report
such fact to the drawee bank. 5 For his negligence or failure either to discover or to report
promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee
who has debited his account under a forged indorsement. 6 In other words, he is precluded
from using forgery as a basis for his claim for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and completed by her
trusted employee, Alicia Galang, and were given to her for her signature. Her signing the
checks made the negotiable instrument complete. Prior to signing the checks, there was no
valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument to the payee for the purpose of giving effect thereto. 7 The first delivery of the
instrument, complete in form, to the payee who takes it as a holder, is called issuance of the
instrument. 8 Without the initial delivery of the instrument from the drawer of the check to the
payee, there can be no valid and binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized her
employee Alicia Galang to deliver the eighty-two (82) checks to their respective payees.
Instead of issuing the checks to the payees as named in the checks, Alicia Galang delivered
them to the Chief Accountant of the Buendia branch of the respondent drawee Bank, a
certain Ernest L. Boon. It was established that the signatures of the payees as first indorsers
were forged. The record fails to show the identity of the party who made the forged
signatures. The checks were then indorsed for the second time with the names of Alfredo Y.
Romero and Benito Lam, and were deposited in the latter's accounts as earlier noted. The
second indorsements were all genuine signatures of the alleged holders. All the eighty-two
(82) checks bearing the forged indorsements of the payees and the genuine second
indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit at the
Buendia branch of respondent drawee Bank to the credit of their respective savings accounts
in the Buendia, Ongpin and Elcao branches of the same bank. The total amount of
P1,208,606.89, represented by eighty-two (82) checks, were credited and paid out by
respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against
petitioner's checking account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged
cannot charge the drawer's account for the amount of said check. An exception to this rule is
where the drawer is guilty of such negligence which causes the bank to honor such a check
or checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot
possibly discover the forged indorsement by mere examination of his cancelled check. This
accounts for the rule that although a depositor owes a duty to his drawee bank to examine
his cancelled checks for forgery of his own signature, he has no similar duty as to forged
indorsements. A different situation arises where the indorsement was forged by an employee
or agent of the drawer, or done with the active participation of the latter. Most of the cases
involving forgery by an agent or employee deal with the payee's indorsement. The drawer
and the payee often time shave business relations of long standing. The continued
occurrence of business transactions of the same nature provides the opportunity for the
agent/employee to commit the fraud after having developed familiarity with the signatures of
the parties. However, sooner or later, some leak will show on the drawer's books. It will then
be just a question of time until the fraud is discovered. This is specially true when the agent
perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is
based on failure of the depositor to act as a prudent businessman would under the
circumstances. In the case at bar, the petitioner relied implicitly upon the honesty and loyalty
of her bookkeeper, and did not even verify the accuracy of amounts of the checks she signed
against the invoices attached thereto. Furthermore, although she regularly received her bank
statements, she apparently did not carefully examine the same nor the check stubs and the
returned checks, and did not compare them with the same invoices. Otherwise, she could
have easily discovered the discrepancies between the checks and the documents serving as
bases for the checks. With such discovery, the subsequent forgeries would not have been
accomplished. It was not until two years after the bookkeeper commenced her fraudulent
scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to her
account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers
complained of non-payment. Assuming that even one single complaint had been made,
petitioner would have been duty-bound, as far as the respondent drawee Bank was
concerned, to make an adequate investigation on the matter. Had this been done, the
discrepancies would have been discovered, sooner or later. Petitioner's failure to make such
adequate inquiry constituted negligence which resulted in the bank's honoring of the
subsequent checks with forged indorsements. On the other hand, since the record mentions
nothing about such a complaint, the possibility exists that the checks in question covered
inexistent sales. But even in such a case, considering the length of a period of two (2) years,
it is hard to believe that petitioner did not know or realize that she was paying more than she
should for the supplies she was actually getting. A depositor may not sit idly by, after
knowledge has come to her that her funds seem to be disappearing or that there may be a
leak in her business, and refrain from taking the steps that a careful and prudent
businessman would take in such circumstances and if taken, would result in stopping the
continuance of the fraudulent scheme. If she fails to take steps, the facts may establish her
negligence, and in that event, she would be estopped from recovering from the bank. 9
One thing is clear from the records that the petitioner failed to examine her records with
reasonable diligence whether before she signed the checks or after receiving her bank
statements. Had the petitioner examined her records more carefully, particularly the invoice
receipts, cancelled checks, check book stubs, and had she compared the sums written as
amounts payable in the eighty-two (82) checks with the pertinent sales invoices, she would
have easily discovered that in some checks, the amounts did not tally with those appearing in
the sales invoices. Had she noticed these discrepancies, she should not have signed those
checks, and should have conducted an inquiry as to the reason for the irregular entries.
Likewise had petitioner been more vigilant in going over her current account by taking careful
note of the daily reports made by respondent drawee Bank in her issued checks, or at least
made random scrutiny of cancelled checks returned by respondent drawee Bank at the close
of each month, she could have easily discovered the fraud being perpetrated by Alicia
Galang, and could have reported the matter to the respondent drawee Bank. The respondent
drawee Bank then could have taken immediate steps to prevent further commission of such
fraud. Thus, petitioner's negligence was the proximate cause of her loss. And since it was her
negligence which caused the respondent drawee Bank to honor the forged checks or
prevented it from recovering the amount it had already paid on the checks, petitioner cannot
now complain should the bank refuse to recredit her account with the amount of such
checks. 10 Under Section 23 of the NIL, she is now precluded from using the forgery to
prevent the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai
Bank 11 is not applicable to the case at bar because in said case, the check was fraudulently
taken and the signature of the payee was forged not by an agent or employee of the drawer.
The drawer was not found to be negligent in the handling of its business affairs and the theft
of the check by a total stranger was not attributable to negligence of the drawer; neither was
the forging of the payee's indorsement due to the drawer's negligence. Since the drawer was
not negligent, the drawee was duty-bound to restore to the drawer's account the amount
theretofore paid under the check with a forged payee's indorsement because the drawee did
not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks because
they were crossed checks. Issuing a crossed check imposes no legal obligation on the
drawee not to honor such a check. It is more of a warning to the holder that the check cannot
be presented to the drawee bank for payment in cash. Instead, the check can only be
deposited with the payee's bank which in turn must present it for payment against the drawee
bank in the course of normal banking transactions between banks. The crossed check cannot
be presented for payment but it can only be deposited and the drawee bank may only pay to
another bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks
with more than one indorsement. The banking rule banning acceptance of checks for deposit
or cash payment with more than one indorsement unless cleared by some bank officials does
not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said
check. In effect, this rule destroys the negotiability of bills/checks by limiting their negotiation
by indorsement of only the payee. Under the NIL, the only kind of indorsement which stops
the further negotiation of an instrument is a restrictive indorsement which prohibits the further
negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement is restrictive
which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written
in express words at the back of the instrument, so that any subsequent party may be
forewarned that ceases to be negotiable. However, the restrictive indorsee acquires the right
to receive payment and bring any action thereon as any indorser, but he can no longer
transfer his rights as such indorsee where the form of the indorsement does not authorize
him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it because there is no
privity between them, as far as the drawer-depositor is concerned, such bank may not legally
refuse to honor a negotiable bill of exchange or a check drawn against it with more than one
indorsement if there is nothing irregular with the bill or check and the drawer has sufficient
funds. The drawee cannot be compelled to accept or pay the check by the drawer or any
holder because as a drawee, he incurs no liability on the check unless he accepts it. But the
drawee will make itself liable to a suit for damages at the instance of the drawer for wrongful
dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery
by reason of her gross negligence. But under Section 196 of the NIL, any case not provided
for in the Act shall be governed by the provisions of existing legislation. Under the laws
of quasi-delict, she cannot point to the negligence of the respondent drawee Bank in the
selection and supervision of its employees as being the cause of the loss because
negligence is the proximate cause thereof and under Article 2179 of the Civil Code, she may
not be awarded damages. However, under Article 1170 of the same Code the respondent
drawee Bank may be held liable for damages. The article provides
Those who in the performance of their obligations are guilty of fraud,
negligence or delay, and those who in any manner contravene the tenor
thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner as depositor
(obligee) and the respondent drawee bank as the obligor. In the performance of its obligation,
the drawee bank is bound by its internal banking rules and regulations which form part of any
contract it enters into with any of its depositors. When it violated its internal rules that second
endorsements are not to be accepted without the approval of its branch managers and it did
accept the same upon the mere approval of Boon, a chief accountant, it contravened the
tenor of its obligation at the very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with
respect to the acceptance of checks with second indorsement for deposit even without the
approval of the branch manager despite periodic inspection conducted by a team of auditors
from the main office constitutes negligence on the part of the bank in carrying out its
obligations to its depositors. Article 1173 provides
The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds
with the circumstance of the persons, of the time and of the place. . . .
We hold that banking business is so impressed with public interest where the trust and
confidence of the public in general is of paramount importance such that the appropriate
standard of diligence must be a high degree of diligence, if not the utmost diligence. Surely,
respondent drawee Bank cannot claim it exercised such a degree of diligence that is required
of it. There is no way We can allow it now to escape liability for such negligence. Its liability
as obligor is not merely vicarious but primary wherein the defense of exercise of due
diligence in the selection and supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the
petitioner on a fifty-fifty ratio in accordance with Article 172 which provides:
Responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the
courts according to the circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made clear that
the decision to hold the drawee bank liable is based on law and substantial justice and not on
mere equity. And although the case was brought before the court not on breach of
contractual obligations, the courts are not precluded from applying to the circumstances of
the case the laws pertinent thereto. Thus, the fact that petitioner's negligence was found to
be the proximate cause of her loss does not preclude her from recovering damages. The
reason why the decision dealt on a discussion on proximate cause is due to the error pointed
out by petitioner as allegedly committed by the respondent court. And in breaches of contract
under Article 1173, due diligence on the part of the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the
reception of evidence to determine the exact amount of loss suffered by the petitioner,
considering that she partly benefited from the issuance of the questioned checks since the
obligation for which she issued them were apparently extinguished, such that only the excess
amount over and above the total of these actual obligations must be considered as loss of
which one half must be paid by respondent drawee bank to herein petitioner.
SO ORDERED.












































G.R. No. L-8844 December 16, 1914
FERNANDO MAULINI, ET AL., plaintiffs-appellees, vs. ANTONIO G.
SERRANO, defendant-appellant.
MORELAND, J.:
This is an appeal from a judgment of the Court of First Instance of the city of Manila in favor
of the plaintiff for the sum of P3,000, with interest thereon at the rate of 1 per cent month
from September 5, 1912, together with the costs.
The action was brought by the plaintiff upon the contract of indorsement alleged to have been
made in his favor by the defendant upon the following promissory note:
3,000. Due 5th of September, 1912.
We jointly and severally agree to pay to the order of Don Antonio G. Serrano on or
before the 5th day of September, 1912, the sum of three thousand pesos (P3,000)
for value received for commercial operations. Notice and protest renounced. If the
sum herein mentioned is not completely paid on the 5th day of September, 1912, this
instrument will draw interest at the rate of 1 per cent per month from the date when
due until the date of its complete payment. The makers hereof agree to pay the
additional sum of P500 as attorney's fees in case of failure to pay the note.
Manila, June 5, 1912.
(Sgd.) For Padern, Moreno & Co., by F. Moreno, member of the firm. For Jose
Padern, by F. Moreno. Angel Gimenez.
The note was indorsed on the back as follows:
Pay note to the order of Don Fernando Maulini, value received. Manila, June 5,
1912. (Sgd.) A.G. Serrano.
The first question for resolution on this appeal is whether or not, under the Negotiable
Instruments Law, an indorser of a negotiable promissory note may, in an action brought by
his indorsee, show, by parol evidence, that the indorsement was wholly without consideration
and that, in making it, the indorser acted as agent for the indorsee, as a mere vehicle of
transfer of the naked title from the maker to the indorsee, for which he received no
consideration whatever.
The learned trial court, although it received parol evidence on the subject provisionally, held,
on the final decision of the case, that such evidence was not admissible to alter, very, modify
or contradict the terms of the contract of indorsement, and, therefore, refused to consider the
evidence thus provisionally received, which tended to show that, by verbal agreement
between the indorser and the indorsee, the indorser, in making the indorsement, was acting
as agent for the indorsee, as a mere vehicle for the transference of naked title, and that his
indorsement was wholly without consideration. The court also held that it was immaterial
whether there was a consideration for the transfer or not, as the indorser, under the evidence
offered, was an accommodation indorser.
We are of the opinion that the trial court erred in both findings.1awphil.net
In the first place, the consideration of a negotiable promissory note, or of any of the contracts
connected therewith, like that of any other written instrument, is, between the immediate
parties to the contract, open to attack, under proper circumstances, for the purpose of
showing an absolute lack or failure of consideration.
It seems, according to the parol evidence provisionally admitted on the trial, that the
defendant was a broker doing business in the city of Manila and that part of his business
consisted in looking up and ascertaining persons who had money to loan as well as those
who desired to borrow money and, acting as a mediary, negotiate a loan between the two.
He had done much business with the plaintiff and the borrower, as well as with many other
people in the city of Manila, prior to the matter which is the basis of this action, and was well
known to the parties interested. According to his custom in transactions of this kind, and the
arrangement made in this particular case, the broker obtained compensation for his services
of the borrower, the lender paying nothing therefor. Sometimes this was a certain per cent of
the sum loaned; at other times it was a part of the interest which the borrower was to pay, the
latter paying 1 per cent and the broker per cent. According to the method usually
followed in these transactions, and the procedure in this particular case, the broker delivered
the money personally to the borrower, took note in his own name and immediately
transferred it by indorsement to the lender. In the case at bar this was done at the special
request of the indorsee and simply as a favor to him, the latter stating to the broker that he
did not wish his name to appear on the books of the borrowing company as a lender of
money and that he desired that the broker take the note in his own name, immediately
transferring to him title thereto by indorsement. This was done, the note being at
once transferred to the lender.
According to the evidence referred to, there never was a moment when Serrano was the real
owner of the note. It was always the note of the indorsee, Maulini, he having furnished the
money which was the consideration for the note directly to the maker and being the only
person who had the slightest interest therein, Serrano, the broker, acting solely as an agent,
a vehicle by which the naked title to the note passed fro the borrower to the lender. The only
payment that the broker received was for his services in negotiating the loan. He was paid
absolutely nothing for becoming responsible as an indorser on the paper, nor did the
indorsee lose, pay or forego anything, or alter his position thereby.
Nor was the defendant an accommodation indorser. The learned trial court quoted that
provision of the Negotiable Instruments Law which defines an accommodation party as "one
who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person. Such a person
is liable on the instrument to a holder for value, notwithstanding such holder at the time of
taking the instrument knew the same to be only an accommodation party." (Act No. 2031,
sec. 29.)
We are of the opinion that the trial court misunderstood this definition. The accommodation to
which reference is made in the section quoted is not one to the person who takes the note
that is, the payee or indorsee, but one to the maker or indorser of the note. It is true that in
the case at bar it was an accommodation to the plaintiff, in a popular sense, to have the
defendant indorse the note; but it was not the accommodation described in the law, but,
rather, a mere favor to him and one which in no way bound Serrano. In cases of
accommodation indorsement the indorser makes the indorsement for the accommodation of
the maker. Such an indorsement is generally for the purpose of better securing the payment
of the note that is, he lend his name to the maker, not to the holder. Putting it in another
way: An accommodation note is one to which the accommodation party has put his name,
without consideration, for the purpose of accommodating some other party who is to use it
and is expected to pay it. The credit given to the accommodation part is sufficient
consideration to bind the accommodation maker. Where, however, an indorsement is made
as a favor to the indorsee, who requests it, not the better to secure payment, but to relieve
himself from a distasteful situation, and where the only consideration for such indorsement
passes from the indorser to the indorsee, the situation does not present one creating an
accommodation indorsement, nor one where there is a consideration sufficient to sustain an
action on the indorsement.
The prohibition in section 285 of the Code of Civil Procedure does not apply to a case like the
one before us. The purpose of that prohibition is to prevent alternation, change, modification
or contradiction of the terms of a written instrument, admittedly existing, by the use of parol
evidence, except in the cases specifically named in the section. The case at bar is not one
where the evidence offered varies, alters, modifies or contradicts the terms of the contract of
indorsement admittedly existing. The evidence was not offered for that purpose. The purpose
was to show that no contract of indorsement ever existed; that the minds of the parties never
met on the terms of such contract; that they never mutually agreed to enter into such a
contract; and that there never existed a consideration upon which such an agreement could
be founded. The evidence was not offered to vary, alter, modify, or contradict the terms of an
agreement which it is admitted existed between the parties, but to deny that there ever
existed any agreement whatever; to wipe out all apparent relations between the parties, and
not to vary, alter or contradict the terms of a relation admittedly existing; in other words, the
purpose of the parol evidence was to demonstrate, not that the indorser did not intend to
make the particular indorsement which he did make; not that he did not intend to make the
indorsement in the terms made; but, rather, to deny the reality of any indorsement; that a
relation of any kind whatever was created or existed between him and the indorsee by
reason of the writing on the back of the instrument; that no consideration ever passed to
sustain an indorsement of any kind whatsoever.
The contention has some of the appearances of a case in which an indorser seeks prove
forgery. Where an indorser claims that his name was forged, it is clear that parol evidence is
admissible to prove that fact, and, if he proves it, it is a complete defense, the fact being that
the indorser never made any such contract, that no such relation ever existed between him
and the indorsee, and that there was no consideration whatever to sustain such a contract. In
the case before us we have a condition somewhat similar. While the indorser does not claim
that his name was forged, he does claim that it was obtained from him in a manner which,
between the parties themselves, renders, the contract as completely inoperative as if it had
been forged.
Parol evidence was admissible for the purpose named.1awphil.net
There is no contradiction of the evidence offered by the defense and received provisionally
by the court. Accepting it as true the judgment must be reversed.
The judgment appealed from is reversed and the complaint dismissed on the merits; no
special finding as to costs.

G.R. No. L-17845 April 27, 1967
INTESTATE ESTATE OF VICTOR SEVILLA. SIMEON SADAYA, petitioner, vs.
FRANCISCO SEVILLA, respondent.
SANCHEZ, J.:
On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon Sadaya executed, jointly and
severally, in favor of the Bank of the Philippine Islands, or its order, a promissory note for
P15,000.00 with interest at 8% per annum, payable on demand. The entire, amount of
P15,000.00, proceeds of the promissory note, was received from the bank by Oscar Varona
alone. Victor Sevilla and Simeon Sadaya signed the promissory note as co-makers only as a
favor to Oscar Varona. Payments were made on account. As of June 15, 1950, the
outstanding balance stood P4,850.00. No payment thereafter made.
On October 6, 1952, the bank collected from Sadaya the foregoing balance which, together
with interest, totalled P5,416.12. Varona failed to reimburse Sadaya despite repeated
demands.
Victor Sevilla died. Intestate estate proceedings were started in the Court of First Instance of
Rizal, Special Proceeding No. 1518. Francisco Sevilla was named administrator.
In Special Proceeding No. 1518, Sadaya filed a creditor's claim for the above sum of
P5,746.12, plus attorneys fees in the sum of P1,500.00. The administrator resisted the claim
upon the averment that the deceased Victor Sevilla "did not receive any amount as
consideration for the promissory note," but signed it only "as surety for Oscar Varona".
On June 5, 1957, the trial court issued an order admitting the claim of Simeon Sadaya in the
amount of P5,746.12, and directing the administrator to pay the same from any available
funds belonging to the estate of the deceased Victor Sevilla.
The motion to reconsider having been overruled, the administrator appealed.1 The Court of
Appeals, in a decision promulgated on July, 15, 1960, voted to set aside the order appealed
from and to disapprove and disallow "appellee's claim of P5,746.12 against the intestate
estate."
The case is now before this Court on certiorari to review the judgment of the Court of
Appeals.
Sadaya's brief here seeks reversal of the appellate court's decision and prays that his claim
"in the amount of 50% of P5,746.12, or P2,873.06, against the intestate estate of the
deceased Victor Sevilla," be approved.
1. That Victor Sevilla and Simeon Sadaya were joint and several accommodation makers of
the 15,000.00-peso promissory note in favor of the Bank of the Philippine Islands, need not
be essayed. As such accommodation the makers, the individual obligation of each of them to
the bank is no different from, and no greater and no less than, that contract by Oscar Varona.
For, while these two did not receive value on the promissory note, they executed the same
with, and for the purpose of lending their names to, Oscar Varona. Their liability to the bank
upon the explicit terms of the promissory note is joint and several.2 Better yet, the bank could
have pursued its right to collect the unpaid balance against either Sevilla or Sadaya. And the
fact is that one of the last two, Simeon Sadaya, paid that balance.
2. It is beyond debate that Simeon Sadaya could have sought reimbursement of the total
amount paid from Oscar Varona. This is but right and just. Varona received full value of the
promissory note.3 Sadaya received nothing therefrom. He paid the bank because he was a
joint and several obligor. The least that can be said is that, as between Varona and Sadaya,
there is an implied contract of indemnity. And Varona is bound by the obligation to reimburse
Sadaya.4
3. The common creditor, the Bank of the Philippine Islands, now out of the way, we first look
into the relations inter se amongst the three consigners of the promissory note. Their
relations vis-a-vis the Bank, we repeat, is that of joint and several obligors. But can the same
thing be said about the relations of the three consigners, in respect to each other?
Surely enough, as amongst the three, the obligation of Varona and Sevilla to Sadaya who
paid can not be joint and several. For, indeed, had payment been made by Oscar Varona,
instead of Simeon Sadaya, Varona could not have had reason to seek reimbursement from
either Sevilla or Sadaya, or both. After all, the proceeds of the loan went to Varona and the
other two received nothing therefrom.
4. On principle, a solidary accommodation maker who made payment has the right to
contribution, from his co-accommodation maker, in the absence of agreement to the contrary
between them, and subject to conditions imposed by law. This right springs from an implied
promise between the accommodation makers to share equallythe burdens that may ensue
from their having consented to stamp their signatures on the promissory note.5 For having
lent their signatures to the principal debtor, they clearly placed themselves in so far as
payment made by one may create liability on the other in the category of mere joint
grantors of the former.6 This is as it should be. Not one of them benefited by the promissory
note. They stand on the same footing. In misfortune, their burdens should be equally spread.
Manresa, commenting on Article 1844 of the Civil Code of Spain,7 which is substantially
reproduced in Article 20738 of our Civil Code, on this point stated:
Otros, como Pothier, entienden que, si bien el principio es evidente enestricto
concepto juridico, se han extremado sus consecuencias hasta el punto de que estas
son contrarias, no solo a la logica, sino tambien a la equidad, que debe ser el alma
del Derecho, como ha dicho Laurent.
Esa accion sostienen no nace de la fianza, pues, en efecto, el hecho de
afianzar una misma deuda no crea ningun vinculo juridico, ni ninguna razon de
obligar entre los fiadores, sino que trae, por el contrario, su origen de una acto
posterior, cual es el pago de toda la deuda realizado por uno de ellos, y la equdad,
no permite que los denias fiadores, que igualmente estaban estaban obligos a dicho
pago, se aprovenchen de ese acto en perjuico del que lo realozo.
Lo cierto es que esa accion concedida al fiador nace, si, del hecho del pago, pero es
consecuencia del beneficio o del derecho de division, como tenemos ya dicho. En
efecto, por virtud de esta todos los cofiadores vienen obligados a contribuir al pago
de parte que a cada uno corresponde. De ese obligacion, contraida por todos ellos,
se libran los que no han pagado por consecuencia del acto realizado por el que
pago, y si bien este no hizo mas que cumplir el deber que el contracto de fianza le
imponia de responder de todo el debito cuando no limito su obligacion a parte
alguna del mismo, dicho acto redunda en beneficio de los otros cofiadores los cuales
se aprovechan de el para quedar desligados de todo compromiso con el acreedor.9
5. And now, to the requisites before one accommodation maker can seek reimbursement
from a co-accommodation maker.
By Article 18 of the Civil Code in matters not covered by the special laws, "their deficiency
shall be supplied by the provisions of this Code". Nothing extant in the Negotiable
Instruments Law would define the right of one accommodation maker to seek reimbursement
from another. Perforce, we must go to the Civil Code.1wph1.t
Because Sevilla and Sadaya, in themselves, are but co-guarantors of Varona, their case
comes within the ambit of Article 2073 of the Civil Code which reads:
ART. 2073. When there are two or more guarantors of the same debtor and for the
same debt, the one among them who has paid may demand of each of the others
the share which is proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be borne by the others,
including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the payment has been
made in virtue of a judicial demand or unless the principal debtor is insolvent.10
As Mr. Justice Street puts it: "[T]hat article deals with the situation which arises when one
surety has paid the debt to the creditor and is seeking contribution from his cosureties."11
Not that the requirements in paragraph 3, Article 2073, just quoted, are devoid of cogent
reason. Says Manresa:12
c) Requisitos para el ejercicio del derecho de reintegro o de reembolso derivado de
la corresponsabilidad de los cofiadores.
La tercera de las prescripciones que comprende el articulo se refiere a los
requisitos que deben concurrir para que pueda tener lugar lo dispuesto en el mismo.
Ese derecho que concede al fiador para reintegrarse directamente de los fiadores de
lo que pago por ellos en vez de dirigir su reclamacion contra el deudor, es un
beneficio otorgado por la ley solo ell dos casos determinados, cuya justificacion
resulta evidenciada desde luego; y esa limitacion este debidamente aconsejada por
una razon de prudencia que no puede desconocerse, cual es la de evitar que por la
mera voluntad de uno de los cofiadores pueda hacerse surgir la accion de reintegro
contra los demas en prejuicio de los mismos.
El perjuicio que con tal motivo puede inferirse a los cofiadores es bien notorio, pues
teniendo en primer termino el fiador que paga por el deudor el derecho de
indemnizacion contra este, sancionado por el art. 1,838, es de todo punto indudable
que ejercitando esta accion pueden quedar libres de toda responsabilidad los demas
cofiadores si, a consecuencia de ella, indemniza el fiado a aquel en los terminos
establecidos en el expresado articulo. Por el contrario de prescindir de dicho
derecho el fiador, reclamando de los confiadores en primer lugar el oportuno
reintegro, estos en tendrian mas remedio que satisfacer sus ductares respectivas,
repitiendo despues por ellas contra el deudor con la imposicion de las molestias y
gastos consiguientes.
No es aventurado asegurar que si el fiador que paga pudiera libremente utilizar uno
u otro de dichos derechos, el de indemnizacion por el deudor y el del reintegro por
los cofiadores, indudablemente optaria siempre y en todo caso por el segundo,
puesto que mucha mas garantias de solvencia y mucha mas seguridad del cobro ha
de encontrar en los fiadores que en el deudor; y en la practica quedaria reducido el
primero a la indemnizacion por el deudor a los confiadores que hubieran hecho el
reintegro, obligando a estos, sin excepcion alguna, a soportar siempre los gastos y
las molestias que anteriormente homos indicado. Y para evitar estos perjuicios, la
ley no ha podido menos de reducir el ejercicio de ese derecho a los casos en que
absolutamente sea indispensable.13
6. All of the foregoing postulate the following rules: (1) A joint and several accommodation
maker of a negotiable promissory note may demand from the principal debtor reimbursement
for the amount that he paid to the payee; and (2) a joint and several accommodation maker
who pays on the said promissory note may directly demand reimbursement from his co-
accommodation maker without first directing his action against the principal debtor provided
that (a) he made the payment by virtue of a judicial demand, or (b) a principal debtor is
insolvent.
The Court of Appeals found that Sadaya's payment to the bank "was made voluntarily and
without any judicial demand," and that "there is an absolute absence of evidence showing
that Varona is insolvent". This combination of fact and lack of fact epitomizes the fatal
distance between payment by Sadaya and Sadaya's right to demand of Sevilla "the share
which is proportionately owing from him."
For the reasons given, the judgment of the Court of Appeals under review is hereby affirmed.
No costs. So ordered.

































G.R. No. 80599 September 15, 1989
ERNESTINA CRISOLOGO-JOSE, petitioner, vs. COURT OF APPEALS and RICARDO S.
SANTOS, JR. in his own behalf and as Vice-President for Sales of Mover Enterprises,
Inc., respondents.
REGALADO, J.:
Petitioner seeks the annulment of the decision 1 of respondent Court of Appeals,
promulgated on September 8, 1987, which reversed the decision of the trial
Court 2 dismissing the complaint for consignation filed by therein plaintiff Ricardo S. Santos,
Jr.
The parties are substantially agreed on the following facts as found by both lower courts:
In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover
Enterprises, Inc. in-charge of marketing and sales; and the president of the
said corporation was Atty. Oscar Z. Benares. On April 30, 1980, Atty.
Benares, in accommodation of his clients, the spouses Jaime and Clarita
Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated
June 14, 1980, in the amount of P45,000.00 (Exh- 'I') payable to defendant
Ernestina Crisologo-Jose. Since the check was under the account of Mover
Enterprises, Inc., the same was to be signed by its president, Atty. Oscar Z.
Benares, and the treasurer of the said corporation. However, since at that
time, the treasurer of Mover Enterprises was not available, Atty. Benares
prevailed upon the plaintiff, Ricardo S. Santos, Jr., to sign the aforesaid
chEck as an alternate story. Plaintiff Ricardo S. Santos, Jr. did sign the
check.
It appears that the check (Exh. '1') was issued to defendant Ernestina
Crisologo-Jose in consideration of the waiver or quitclaim by said defendant
over a certain property which the Government Service Insurance System
(GSIS) agreed to sell to the clients of Atty. Oscar Benares, the spouses
Jaime and Clarita Ong, with the understanding that upon approval by the
GSIS of the compromise agreement with the spouses Ong, the check will be
encashed accordingly. However, since the compromise agreement was not
approved within the expected period of time, the aforesaid check for
P45,000.00 (Exh. '1') was replaced by Atty. Benares with another Traders
Royal Bank cheek bearing No. 379299 dated August 10, 1980, in the same
amount of P45,000.00 (Exhs. 'A' and '2'), also payable to the defendant
Jose. This replacement check was also signed by Atty. Oscar Z. Benares
and by the plaintiff Ricardo S. Santos, Jr. When defendant deposited this
replacement check (Exhs. 'A' and '2') with her account at Family Savings
Bank, Mayon Branch, it was dishonored for insufficiency of funds. A
subsequent redepositing of the said check was likewise dishonored by the
bank for the same reason. Hence, defendant through counsel was
constrained to file a criminal complaint for violation of Batas Pambansa Blg.
22 with the Quezon City Fiscal's Office against Atty. Oscar Z. Benares and
plaintiff Ricardo S. Santos, Jr. The investigating Assistant City Fiscal,
Alfonso Llamas, accordingly filed an amended information with the court
charging both Oscar Benares and Ricardo S. Santos, Jr., for violation of
Batas Pambansa Blg. 22 docketed as Criminal Case No. Q-14867 of then
Court of First Instance of Rizal, Quezon City.
Meanwhile, during the preliminary investigation of the criminal charge
against Benares and the plaintiff herein, before Assistant City Fiscal Alfonso
T. Llamas, plaintiff Ricardo S. Santos, Jr. tendered cashier's check No. CC
160152 for P45,000.00 dated April 10, 1981 to the defendant Ernestina
Crisologo-Jose, the complainant in that criminal case. The defendant refused
to receive the cashier's check in payment of the dishonored check in the
amount of P45,000.00. Hence, plaintiff encashed the aforesaid cashier's
check and subsequently deposited said amount of P45,000.00 with the Clerk
of Court on August 14, 1981 (Exhs. 'D' and 'E'). Incidentally, the cashier's
check adverted to above was purchased by Atty. Oscar Z. Benares and
given to the plaintiff herein to be applied in payment of the dishonored
check. 3
After trial, the court a quo, holding that it was "not persuaded to believe that consignation
referred to in Article 1256 of the Civil Code is applicable to this case," rendered judgment
dismissing plaintiff s complaint and defendant's counterclaim. 4
As earlier stated, respondent court reversed and set aside said judgment of dismissal and
revived the complaint for consignation, directing the trial court to give due course thereto.
Hence, the instant petition, the assignment of errors wherein are prefatorily stated and
discussed seriatim.
1. Petitioner contends that respondent Court of Appeals erred in holding that
private respondent, one of the signatories of the check issued under the
account of Mover Enterprises, Inc., is an accommodation party under the
Negotiable Instruments Law and a debtor of petitioner to the extent of the
amount of said check.
Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and not
private respondent who merely signed the check in question in a representative capacity, that
is, as vice-president of said corporation, hence he is not liable thereon under the Negotiable
Instruments Law.
The pertinent provision of said law referred to provides:
Sec. 29. Liability of accommodation party an accommodation party is one
who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the instrument to a holder for
value, notwithstanding such holder, at the time of taking the instrument,
knew him to be only an accommodation party.
Consequently, to be considered an accommodation party, a person must (1) be a party to the
instrument, signing as maker, drawer, acceptor, or indorser, (2) not receive value therefor,
and (3) sign for the purpose of lending his name for the credit of some other person.
Based on the foregoing requisites, it is not a valid defense that the accommodation party did
not receive any valuable consideration when he executed the instrument. From the
standpoint of contract law, he differs from the ordinary concept of a debtor therein in the
sense that he has not received any valuable consideration for the instrument he signs.
Nevertheless, he is liable to a holder for value as if the contract was not for
accommodation 5in whatever capacity such accommodation party signed the instrument,
whether primarily or secondarily. Thus, it has been held that in lending his name to the
accommodated party, the accommodation party is in effect a surety for the latter. 6
Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this case, as
petitioner suggests, the inevitable question is whether or not it may be held liable on the
accommodation instrument, that is, the check issued in favor of herein petitioner.
We hold in the negative.
The aforequoted provision of the Negotiable Instruments Law which holds an accommodation
party liable on the instrument to a holder for value, although such holder at the time of taking
the instrument knew him to be only an accommodation party, does not include nor apply to
corporations which are accommodation parties. 7 This is because the issue or indorsement
of negotiable paper by a corporation without consideration and for the accommodation of
another is ultra vires. 8 Hence, one who has taken the instrument with knowledge of the
accommodation nature thereof cannot recover against a corporation where it is only an
accommodation party. If the form of the instrument, or the nature of the transaction, is such
as to charge the indorsee with knowledge that the issue or indorsement of the instrument by
the corporation is for the accommodation of another, he cannot recover against the
corporation thereon. 9
By way of exception, an officer or agent of a corporation shall have the power to execute or
indorse a negotiable paper in the name of the corporation for the accommodation of a third
person only if specifically authorized to do so. 10 Corollarily, corporate officers, such as the
president and vice-president, have no power to execute for mere accommodation a
negotiable instrument of the corporation for their individual debts or transactions arising from
or in relation to matters in which the corporation has no legitimate concern. Since such
accommodation paper cannot thus be enforced against the corporation, especially since it is
not involved in any aspect of the corporate business or operations, the inescapable
conclusion in law and in logic is that the signatories thereof shall be personally liable therefor,
as well as the consequences arising from their acts in connection therewith.
The instant case falls squarely within the purview of the aforesaid decisional rules. If we
indulge petitioner in her aforesaid postulation, then she is effectively barred from recovering
from Mover Enterprises, Inc. the value of the check. Be that as it may, petitioner is not
without recourse.
The fact that for lack of capacity the corporation is not bound by an accommodation paper
does not thereby absolve, but should render personally liable, the signatories of said
instrument where the facts show that the accommodation involved was for their personal
account, undertaking or purpose and the creditor was aware thereof.
Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the
cheek was issued at the instance and for the personal account of Atty. Benares who merely
prevailed upon respondent Santos to act as co-signatory in accordance with the arrangement
of the corporation with its depository bank. That it was a personal undertaking of said
corporate officers was apparent to petitioner by reason of her personal involvement in the
financial arrangement and the fact that, while it was the corporation's check which was issued
to her for the amount involved, she actually had no transaction directly with said corporation.
There should be no legal obstacle, therefore, to petitioner's claims being directed personally
against Atty. Oscar Z. Benares and respondent Ricardo S. Santos, Jr., president and vice-
president, respectively, of Mover Enterprises, Inc.
2. On her second assignment of error, petitioner argues that the Court of
Appeals erred in holding that the consignation of the sum of P45,000.00,
made by private respondent after his tender of payment was refused by
petitioner, was proper under Article 1256 of the Civil Code.
Petitioner's submission is that no creditor-debtor relationship exists between the parties,
hence consignation is not proper. Concomitantly, this argument was premised on the
assumption that private respondent Santos is not an accommodation party.
As previously discussed, however, respondent Santos is an accommodation party and is,
therefore, liable for the value of the check. The fact that he was only a co-signatory does not
detract from his personal liability. A co-maker or co-drawer under the circumstances in this
case is as much an accommodation party as the other co-signatory or, for that matter, as a
lone signatory in an accommodation instrument. Under the doctrine in Philippine Bank of
Commerce vs. Aruego, supra, he is in effect a co-surety for the accommodated party with
whom he and his co-signatory, as the other co-surety, assume solidary liability ex lege for the
debt involved. With the dishonor of the check, there was created a debtor-creditor
relationship, as between Atty. Benares and respondent Santos, on the one hand, and
petitioner, on the other. This circumstance enables respondent Santos to resort to an action
of consignation where his tender of payment had been refused by petitioner.
We interpose the caveat, however, that by holding that the remedy of consignation is proper
under the given circumstances, we do not thereby rule that all the operative facts for
consignation which would produce the effect of payment are present in this case. Those are
factual issues that are not clear in the records before us and which are for the Regional Trial
Court of Quezon City to ascertain in Civil Case No. Q-33160, for which reason it has
advisedly been directed by respondent court to give due course to the complaint for
consignation, and which would be subject to such issues or claims as may be raised by
defendant and the counterclaim filed therein which is hereby ordered similarly revived.
3. That respondent court virtually prejudged Criminal Case No. Q-14687 of
the Regional Trial Court of Quezon City filed against private respondent for
violation of Batas Pambansa Blg. 22, by holding that no criminal liability had
yet attached to private respondent when he deposited with the court the
amount of P45,000.00 is the final plaint of petitioner.
We sustain petitioner on this score.
Indeed, respondent court went beyond the ratiocination called for in the appeal to it in CA-
G.R. CV. No. 05464. In its own decision therein, it declared that "(t)he lone issue dwells in the
question of whether an accommodation party can validly consign the amount of the debt due
with the court after his tender of payment was refused by the creditor." Yet, from the
commercial and civil law aspects determinative of said issue, it digressed into the merits of
the aforesaid Criminal Case No. Q-14867, thus:
Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of
such insufficiency of funds or credit. Thus, the making, drawing and issuance
of a check, payment of which is refused by the drawee because of
insufficient funds in or credit with such bank is prima facie evidence of
knowledge of insufficiency of funds or credit, when the check is presented
within 90 days from the date of the check.
It will be noted that the last part of Section 2 of B.P. 22 provides that the
element of knowledge of insufficiency of funds or credit is not present and,
therefore, the crime does not exist, when the drawer pays the holder the
amount due or makes arrangements for payment in full by the drawee of
such check within five (5) banking days after receiving notice that such
check has not been paid by the drawee.
Based on the foregoing consideration, this Court finds that the plaintiff-
appellant acted within Ms legal rights when he consigned the amount of
P45,000.00 on August 14, 1981, between August 7, 1981, the date when
plaintiff-appellant receive (sic) the notice of non-payment, and August 14,
1981, the date when the debt due was deposited with the Clerk of Court (a
Saturday and a Sunday which are not banking days) intervened. The fifth
banking day fell on August 14, 1981. Hence, no criminal liability has yet
attached to plaintiff-appellant when he deposited the amount of P45,000.00
with the Court a quo on August 14, 1981. 11
That said observations made in the civil case at bar and the intrusion into the merits of the
criminal case pending in another court are improper do not have to be belabored. In the latter
case, the criminal trial court has to grapple with such factual issues as, for instance, whether
or not the period of five banking days had expired, in the process determining whether notice
of dishonor should be reckoned from any prior notice if any has been given or from receipt by
private respondents of the subpoena therein with supporting affidavits, if any, or from the first
day of actual preliminary investigation; and whether there was a justification for not making
the requisite arrangements for payment in full of such check by the drawee bank within the
said period. These are matters alien to the present controversy on tender and consignation of
payment, where no such period and its legal effects are involved.
These are aside from the considerations that the disputed period involved in the criminal
case is only a presumptive rule, juris tantum at that, to determine whether or not there was
knowledge of insufficiency of funds in or credit with the drawee bank; that payment of civil
liability is not a mode for extinguishment of criminal liability; and that the requisite quantum of
evidence in the two types of cases are not the same.
To repeat, the foregoing matters are properly addressed to the trial court in Criminal Case
No. Q-14867, the resolution of which should not be interfered with by respondent Court of
Appeals at the present posture of said case, much less preempted by the inappropriate and
unnecessary holdings in the aforequoted portion of the decision of said respondent court.
Consequently, we modify the decision of respondent court in CA-G.R. CV No. 05464 by
setting aside and declaring without force and effect its pronouncements and findings insofar
as the merits of Criminal Case No. Q-14867 and the liability of the accused therein are
concerned.
WHEREFORE, subject to the aforesaid modifications, the judgment of respondent Court of
Appeals is AFFIRMED.
SO ORDERED.























G.R. No. L-15126 November 30, 1961
VICENTE R. DE OCAMPO & CO., plaintiff-appellee, vs. ANITA GATCHALIAN, ET
AL., defendants-appellants.
LABRADOR, J.:
Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez,
presiding, sentencing the defendants to pay the plaintiff the sum of P600, with legal interest
from September 10, 1953 until paid, and to pay the costs.
The action is for the recovery of the value of a check for P600 payable to the plaintiff and
drawn by defendant Anita C. Gatchalian. The complaint sets forth the check and alleges that
plaintiff received it in payment of the indebtedness of one Matilde Gonzales; that upon receipt
of said check, plaintiff gave Matilde Gonzales P158.25, the difference between the face value
of the check and Matilde Gonzales' indebtedness. The defendants admit the execution of the
check but they allege in their answer, as affirmative defense, that it was issued subject to a
condition, which was not fulfilled, and that plaintiff was guilty of gross negligence in not taking
steps to protect itself.
At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:
Plaintiff and defendants through their respective undersigned attorney's respectfully
submit the following Agreed Stipulation of Facts;
First. That on or about 8 September 1953, in the evening, defendant Anita C.
Gatchalian who was then interested in looking for a car for the use of her husband
and the family, was shown and offered a car by Manuel Gonzales who was
accompanied by Emil Fajardo, the latter being personally known to defendant Anita
C. Gatchalian;
Second. That Manuel Gonzales represented to defend Anita C. Gatchalian that he
was duly authorized by the owner of the car, Ocampo Clinic, to look for a buyer of
said car and to negotiate for and accomplish said sale, but which facts were not
known to plaintiff;
Third. That defendant Anita C. Gatchalian, finding the price of the car quoted by
Manuel Gonzales to her satisfaction, requested Manuel Gonzales to bring the car the
day following together with the certificate of registration of the car, so that her
husband would be able to see same; that on this request of defendant Anita C.
Gatchalian, Manuel Gonzales advised her that the owner of the car will not be willing
to give the certificate of registration unless there is a showing that the party
interested in the purchase of said car is ready and willing to make such purchase
and that for this purpose Manuel Gonzales requested defendant Anita C. Gatchalian
to give him (Manuel Gonzales) a check which will be shown to the owner as
evidence of buyer's good faith in the intention to purchase the said car, the said
check to be for safekeeping only of Manuel Gonzales and to be returned to
defendant Anita C. Gatchalian the following day when Manuel Gonzales brings the
car and the certificate of registration, but which facts were not known to plaintiff;
Fourth. That relying on these representations of Manuel Gonzales and with his
assurance that said check will be only for safekeeping and which will be returned to
said defendant the following day when the car and its certificate of registration will be
brought by Manuel Gonzales to defendants, but which facts were not known to
plaintiff, defendant Anita C. Gatchalian drew and issued a check, Exh. "B"; that
Manuel Gonzales executed and issued a receipt for said check, Exh. "1";
Fifth. That on the failure of Manuel Gonzales to appear the day following and on
his failure to bring the car and its certificate of registration and to return the check,
Exh. "B", on the following day as previously agreed upon, defendant Anita C.
Gatchalian issued a "Stop Payment Order" on the check, Exh. "3", with the drawee
bank. Said "Stop Payment Order" was issued without previous notice on plaintiff not
being know to defendant, Anita C. Gatchalian and who furthermore had no reason to
know check was given to plaintiff;
Sixth. That defendants, both or either of them, did not know personally Manuel
Gonzales or any member of his family at any time prior to September 1953, but that
defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo;
Seventh. That defendants, both or either of them, had no arrangements or
agreement with the Ocampo Clinic at any time prior to, on or after 9 September 1953
for the hospitalization of the wife of Manuel Gonzales and neither or both of said
defendants had assumed, expressly or impliedly, with the Ocampo Clinic, the
obligation of Manuel Gonzales or his wife for the hospitalization of the latter;
Eight. That defendants, both or either of them, had no obligation or liability,
directly or indirectly with the Ocampo Clinic before, or on 9 September 1953;
Ninth. That Manuel Gonzales having received the check Exh. "B" from defendant
Anita C. Gatchalian under the representations and conditions herein above specified,
delivered the same to the Ocampo Clinic, in payment of the fees and expenses
arising from the hospitalization of his wife;
Tenth. That plaintiff for and in consideration of fees and expenses of
hospitalization and the release of the wife of Manuel Gonzales from its hospital,
accepted said check, applying P441.75 (Exhibit "A") thereof to payment of said fees
and expenses and delivering to Manuel Gonzales the amount of P158.25 (as per
receipt, Exhibit "D") representing the balance on the amount of the said check, Exh.
"B";
Eleventh. That the acts of acceptance of the check and application of its proceeds
in the manner specified above were made without previous inquiry by plaintiff from
defendants:
Twelfth. That plaintiff filed or caused to be filed with the Office of the City Fiscal of
Manila, a complaint for estafa against Manuel Gonzales based on and arising from
the acts of said Manuel Gonzales in paying his obligations with plaintiff and receiving
the cash balance of the check, Exh. "B" and that said complaint was subsequently
dropped;
Thirteenth. That the exhibits mentioned in this stipulation and the other exhibits
submitted previously, be considered as parts of this stipulation, without necessity of
formally offering them in evidence;
WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be
admitted and that the parties hereto be given fifteen days from today within which to
submit simultaneously their memorandum to discuss the issues of law arising from
the facts, reserving to either party the right to submit reply memorandum, if
necessary, within ten days from receipt of their main memoranda. (pp. 21-25,
Defendant's Record on Appeal).
No other evidence was submitted and upon said stipulation the court rendered the judgment
already alluded above.
In their appeal defendants-appellants contend that the check is not a negotiable instrument,
under the facts and circumstances stated in the stipulation of facts, and that plaintiff is not a
holder in due course. In support of the first contention, it is argued that defendant Gatchalian
had no intention to transfer her property in the instrument as it was for safekeeping merely
and, therefore, there was no delivery required by law (Section 16, Negotiable Instruments
Law); that assuming for the sake of argument that delivery was not for safekeeping merely,
delivery was conditional and the condition was not fulfilled.
In support of the contention that plaintiff-appellee is not a holder in due course, the appellant
argues that plaintiff-appellee cannot be a holder in due course because there was no
negotiation prior to plaintiff-appellee's acquiring the possession of the check; that a holder in
due course presupposes a prior party from whose hands negotiation proceeded, and in the
case at bar, plaintiff-appellee is the payee, the maker and the payee being original parties. It
is also claimed that the plaintiff-appellee is not a holder in due course because it acquired the
check with notice of defect in the title of the holder, Manuel Gonzales, and because under the
circumstances stated in the stipulation of facts there were circumstances that brought
suspicion about Gonzales' possession and negotiation, which circumstances should have
placed the plaintiff-appellee under the duty, to inquire into the title of the holder. The
circumstances are as follows:
The check is not a personal check of Manuel Gonzales. (Paragraph Ninth,
Stipulation of Facts). Plaintiff could have inquired why a person would use the check
of another to pay his own debt. Furthermore, plaintiff had the "means of knowledge"
inasmuch as defendant Hipolito Gatchalian is personally acquainted with V. R. de
Ocampo (Paragraph Sixth, Stipulation of Facts.).
The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr.
V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts).
The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales.
(Par. 7, Stipulation of Facts.)
The check could not have been intended to pay the hospital fees which amounted
only to P441.75. The check is in the amount of P600.00, which is in excess of the
amount due plaintiff. (Par. 10, Stipulation of Facts).
It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25
(Par. 10, Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay,
plaintiff should have been more cautious and wary in accepting a piece of paper and
disbursing cold cash.
The check is payable to bearer. Hence, any person who holds it should have been
subjected to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT
INQUIRY FROM THE BEARER. The same inquiries should have been made by
plaintiff. (Defendants-appellants' brief, pp. 52-53)
Answering the first contention of appellant, counsel for plaintiff-appellee argues that in
accordance with the best authority on the Negotiable Instruments Law, plaintiff-appellee may
be considered as a holder in due course, citing Brannan's Negotiable Instruments Law, 6th
edition, page 252. On this issue Brannan holds that a payee may be a holder in due course
and says that to this effect is the greater weight of authority, thus:
Whether the payee may be a holder in due course under the N. I. L., as he was at
common law, is a question upon which the courts are in serious conflict. There can
be no doubt that a proper interpretation of the act read as a whole leads to the
conclusion that a payee may be a holder in due course under any circumstance in
which he meets the requirements of Sec. 52.
The argument of Professor Brannan in an earlier edition of this work has never been
successfully answered and is here repeated.
Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. Sec. 52 defendants defines a holder in due
course as "a holder who has taken the instrument under the following conditions: 1.
That it is complete and regular on its face. 2. That he became the holder of it before
it was overdue, and without notice that it had been previously dishonored, if such
was the fact. 3. That he took it in good faith and for value. 4. That at the time it was
negotiated to him he had no notice of any infirmity in the instrument or defect in the
title of the person negotiating it."
Since "holder", as defined in sec. 191, includes a payee who is in possession the
word holder in the first clause of sec. 52 and in the second subsection may be
replaced by the definition in sec. 191 so as to read "a holder in due course is a payee
or indorsee who is in possession," etc. (Brannan's on Negotiable Instruments Law,
6th ed., p. 543).
The first argument of the defendants-appellants, therefore, depends upon whether or not the
plaintiff-appellee is a holder in due course. If it is such a holder in due course, it is immaterial
that it was the payee and an immediate party to the instrument.
The other contention of the plaintiff is that there has been no negotiation of the instrument,
because the drawer did not deliver the instrument to Manuel Gonzales with the intention of
negotiating the same, or for the purpose of giving effect thereto, for as the stipulation of facts
declares the check was to remain in the possession Manuel Gonzales, and was not to be
negotiated, but was to serve merely as evidence of good faith of defendants in their desire to
purchase the car being sold to them. Admitting that such was the intention of the drawer of
the check when she delivered it to Manuel Gonzales, it was no fault of the plaintiff-appellee
drawee if Manuel Gonzales delivered the check or negotiated it. As the check was payable to
the plaintiff-appellee, and was entrusted to Manuel Gonzales by Gatchalian, the delivery to
Manuel Gonzales was a delivery by the drawer to his own agent; in other words, Manuel
Gonzales was the agent of the drawer Anita Gatchalian insofar as the possession of the
check is concerned. So, when the agent of drawer Manuel Gonzales negotiated the check
with the intention of getting its value from plaintiff-appellee, negotiation took place through no
fault of the plaintiff-appellee, unless it can be shown that the plaintiff-appellee should be
considered as having notice of the defect in the possession of the holder Manuel Gonzales.
Our resolution of this issue leads us to a consideration of the last question presented by the
appellants, i.e., whether the plaintiff-appellee may be considered as a holder in due course.
Section 52, Negotiable Instruments Law, defines holder in due course, thus:
A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it
had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
The stipulation of facts expressly states that plaintiff-appellee was not aware of the
circumstances under which the check was delivered to Manuel Gonzales, but we agree with
the defendants-appellants that the circumstances indicated by them in their briefs, such as
the fact that appellants had no obligation or liability to the Ocampo Clinic; that the amount of
the check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de
Ocampo; and that the check had two parallel lines in the upper left hand corner, which
practice means that the check could only be deposited but may not be converted into cash
all these circumstances should have put the plaintiff-appellee to inquiry as to the why and
wherefore of the possession of the check by Manuel Gonzales, and why he used it to pay
Matilde's account. It was payee's duty to ascertain from the holder Manuel Gonzales what the
nature of the latter's title to the check was or the nature of his possession. Having failed in
this respect, we must declare that plaintiff-appellee was guilty of gross neglect in not finding
out the nature of the title and possession of Manuel Gonzales, amounting to legal absence of
good faith, and it may not be considered as a holder of the check in good faith. To such effect
is the consensus of authority.
In order to show that the defendant had "knowledge of such facts that his action in
taking the instrument amounted to bad faith," it is not necessary to prove that the
defendant knew the exact fraud that was practiced upon the plaintiff by the
defendant's assignor, it being sufficient to show that the defendant had notice that
there was something wrong about his assignor's acquisition of title, although he did
not have notice of the particular wrong that was committed. Paika v. Perry, 225
Mass. 563, 114 N.E. 830.
It is sufficient that the buyer of a note had notice or knowledge that the note was in
some way tainted with fraud. It is not necessary that he should know the particulars
or even the nature of the fraud, since all that is required is knowledge of such facts
that his action in taking the note amounted bad faith. Ozark Motor Co. v. Horton (Mo.
App.), 196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.
Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years
old, less than five feet tall, immature in appearance and bearing on his face the
stamp a degenerate, to the defendants' clerk for sale. The boy stated that they
belonged to his mother. The defendants paid the boy for the bonds without any
further inquiry. Held, the plaintiff could recover the value of the bonds. The term 'bad
faith' does not necessarily involve furtive motives, but means bad faith in a
commercial sense. The manner in which the defendants conducted their Liberty
Loan department provided an easy way for thieves to dispose of their plunder. It was
a case of "no questions asked." Although gross negligence does not of itself
constitute bad faith, it is evidence from which bad faith may be inferred. The
circumstances thrust the duty upon the defendants to make further inquiries and they
had no right to shut their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc.
Rep. 739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp.
945." (pp. 640-642, Brannan's Negotiable Instruments Law, 6th ed.).
The above considerations would seem sufficient to justify our ruling that plaintiff-appellee
should not be allowed to recover the value of the check. Let us now examine the express
provisions of the Negotiable Instruments Law pertinent to the matter to find if our ruling
conforms thereto. Section 52 (c) provides that a holder in due course is one who takes the
instrument "in good faith and for value;" Section 59, "that every holder is deemed prima facie
to be a holder in due course;" and Section 52 (d), that in order that one may be a holder in
due course it is necessary that "at the time the instrument was negotiated to him "he had no
notice of any . . . defect in the title of the person negotiating it;" and lastly Section 59, that
every holder is deemed prima facieto be a holder in due course.
In the case at bar the rule that a possessor of the instrument is prima faciea holder in due
course does not apply because there was a defect in the title of the holder (Manuel
Gonzales), because the instrument is not payable to him or to bearer. On the other hand, the
stipulation of facts indicated by the appellants in their brief, like the fact that the drawer had
no account with the payee; that the holder did not show or tell the payee why he had the
check in his possession and why he was using it for the payment of his own personal account
show that holder's title was defective or suspicious, to say the least. As holder's title was
defective or suspicious, it cannot be stated that the payee acquired the check without
knowledge of said defect in holder's title, and for this reason the presumption that it is a
holder in due course or that it acquired the instrument in good faith does not exist. And
having presented no evidence that it acquired the check in good faith, it (payee) cannot be
considered as a holder in due course. In other words, under the circumstances of the case,
instead of the presumption that payee was a holder in good faith, the fact is that it acquired
possession of the instrument under circumstances that should have put it to inquiry as to the
title of the holder who negotiated the check to it. The burden was, therefore, placed upon it to
show that notwithstanding the suspicious circumstances, it acquired the check in actual good
faith.
The rule applicable to the case at bar is that described in the case of Howard National Bank
v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont made
the following disquisition:
Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in
this country. The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215,
where the rule was distinctly laid down by the court of King's Bench that the
purchaser of negotiable paper must exercise reasonable prudence and caution, and
that, if the circumstances were such as ought to have excited the suspicion of a
prudent and careful man, and he made no inquiry, he did not stand in the legal
position of a bona fide holder. The rule was adopted by the courts of this country
generally and seem to have become a fixed rule in the law of negotiable paper. Later
in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English court abandoned
its former position and adopted the rule that nothing short of actual bad faith or fraud
in the purchaser would deprive him of the character of a bona fide purchaser and let
in defenses existing between prior parties, that no circumstances of suspicion
merely, or want of proper caution in the purchaser, would have this effect, and that
even gross negligence would have no effect, except as evidence tending to establish
bad faith or fraud. Some of the American courts adhered to the earlier rule, while
others followed the change inaugurated in Goodman v. Harvey. The question was
before this court in Roth v. Colvin, 32 Vt. 125, and, on full consideration of the
question, a rule was adopted in harmony with that announced in Gill v. Cubitt, which
has been adhered to in subsequent cases, including those cited above. Stated
briefly, one line of cases including our own had adopted the test of the reasonably
prudent man and the other that of actual good faith. It would seem that it was the
intent of the Negotiable Instruments Act to harmonize this disagreement by adopting
the latter test. That such is the view generally accepted by the courts appears from a
recent review of the cases concerning what constitutes notice of defect. Brannan on
Neg. Ins. Law, 187-201. To effectuate the general purpose of the act to make
uniform the Negotiable Instruments Law of those states which should enact it, we are
constrained to hold (contrary to the rule adopted in our former decisions) that
negligence on the part of the plaintiff, or suspicious circumstances sufficient to put a
prudent man on inquiry, will not of themselves prevent a recovery, but are to be
considered merely as evidence bearing on the question of bad faith. See G. L. 3113,
3172, where such a course is required in construing other uniform acts.
It comes to this then: When the case has taken such shape that the plaintiff is called
upon to prove himself a holder in due course to be entitled to recover, he is required
to establish the conditions entitling him to standing as such, including good faith in
taking the instrument. It devolves upon him to disclose the facts and circumstances
attending the transfer, from which good or bad faith in the transaction may be
inferred.
In the case at bar as the payee acquired the check under circumstances which should have
put it to inquiry, why the holder had the check and used it to pay his own personal account,
the duty devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in
good faith. The stipulation of facts contains no statement of such good faith, hence we are
forced to the conclusion that plaintiff payee has not proved that it acquired the check in good
faith and may not be deemed a holder in due course thereof.
For the foregoing considerations, the decision appealed from should be, as it is hereby,
reversed, and the defendants are absolved from the complaint. With costs against plaintiff-
appellee.














G.R. No. 101163 January 11, 1993
STATE INVESTMENT HOUSE, INC., petitioner, vs. COURT OF APPEALS and NORA B.
MOULIC, respondents.
BELLOSILLO, J.:
The liability to a holder in due course of the drawer of checks issued to another merely as
security, and the right of a real estate mortgagee after extrajudicial foreclosure to recover the
balance of the obligation, are the issues in this Petition for Review of the Decision of
respondent Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of
jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation checks
in the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and
the other, 30 September 1979. Thereafter, the payee negotiated the checks to petitioner
State Investment House. Inc. (STATE).
MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before
maturity of the checks. The checks, however, could no longer be retrieved as they had
already been negotiated. Consequently, before their maturity dates, MOULIC withdrew her
funds from the drawee bank.
Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20
December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and
requested that it be paid in cash instead, although MOULIC avers that no such notice was
given her.
On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and
expenses of litigation.
In her Answer, MOULIC contends that she incurred no obligation on the checks because the
jewelry was never sold and the checks were negotiated without her knowledge and consent.
She also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed
full responsibility for the checks.
On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party
Complaint, and ordered STATE to pay MOULIC P3,000.00 for attorney's fees.
STATE elevated the order of dismissal to the Court of Appeals, but the appellate court
affirmed the trial court on the ground that the Notice of Dishonor to MOULIC was made
beyond the period prescribed by the Negotiable Instruments Law and that even if STATE did
serve such notice on MOULIC within the reglementary period it would be of no consequence
as the checks should never have been presented for payment. The sale of the jewelry was
never effected; the checks, therefore, ceased to serve their purpose as security for the
jewelry.
We are not persuaded.
The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at
the pre-trial, the parties agreed to limit the issue to whether or not STATE was a holder of the
checks in due course. 1
In this regard, Sec. 52 of the Negotiable Instruments Law provides
Sec. 52. What constitutes a holder in due course. A holder in due course
is a holder who has taken the instrument under the following conditions: (a)
That it is complete and regular upon its face; (b) That he became the holder
of it before it was overdue, and without notice that it was previously
dishonored, if such was the fact; (c) That he took it in good faith and for
value; (d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it.
Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable
instrument is a holder in due course. 2 Consequently, the burden of proving that STATE is
not a holder in due course lies in the person who disputes the presumption. In this regard,
MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-dated checks were complete and
regular: (b) petitioner bought these checks from the payee, Corazon Victoriano, before their
due dates; 3 (c) petitioner took these checks in good faith and for value, albeit at a
discounted price; and, (d) petitioner was never informed nor made aware that these checks
were merely issued to payee as security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free
from any defect of title of prior parties, and from defenses available to prior parties among
themselves; STATE may, therefore, enforce full payment of the checks. 4
MOULIC cannot set up against STATE the defense that there was failure or absence of
consideration. MOULIC can only invoke this defense against STATE if it was privy to the
purpose for which they were issued and therefore is not a holder in due course.
That the post-dated checks were merely issued as security is not a ground for the discharge
of the instrument as against a holder in due course. For the only grounds are those outlined
in Sec. 119 of the Negotiable Instruments Law:
Sec. 119. Instrument; how discharged. A negotiable instrument is
discharged: (a) By payment in due course by or on behalf of the principal
debtor; (b) By payment in due course by the party accommodated, where the
instrument is made or accepted for his accommodation; (c) By the intentional
cancellation thereof by the holder; (d) By any other act which will discharge a
simple contract for the payment of money; (e) When the principal debtor
becomes the holder of the instrument at or after maturity in his own right.
Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the
discharge of the instrument. But, the intentional cancellation contemplated under paragraph
(c) is that cancellation effected by destroying the instrument either by tearing it up, 5 burning
it, 6 or writing the word "cancelled" on the instrument. The act of destroying the instrument
must also be made by the holder of the instrument intentionally. Since MOULIC failed to get
back possession of the post-dated checks, the intentional cancellation of the said checks is
altogether impossible.
On the other hand, the acts which will discharge a simple contract for the payment of money
under paragraph (d) are determined by other existing legislations since Sec. 119 does not
specify what these acts are, e.g., Art. 1231 of the Civil Code 7 which enumerates the modes
of extinguishing obligations. Again, none of the modes outlined therein is applicable in the
instant case as Sec. 119 contemplates of a situation where the holder of the instrument is the
creditor while its drawer is the debtor. In the present action, the payee, Corazon Victoriano,
was no longer MOULIC's creditor at the time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the
mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she
has no legal basis to excuse herself from liability on her checks to a holder in due course.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment.
The need for such notice is not absolute; there are exceptions under Sec. 114 of the
Negotiable Instruments Law:
Sec. 114. When notice need not be given to drawer. Notice of dishonor is
not required to be given to the drawer in the following cases: (a) Where the
drawer and the drawee are the same person; (b) When the drawee is a
fictitious person or a person not having capacity to contract; (c) When the
drawer is the person to whom the instrument is presented for payment: (d)
Where the drawer has no right to expect or require that the drawee or
acceptor will honor the instrument; (e) Where the drawer had
countermanded payment.
Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks
when she returned the jewelry. She simply withdrew her funds from her drawee bank and
transferred them to another to protect herself. After withdrawing her funds, she could not
have expected her checks to be honored. In other words, she was responsible for the
dishonor of her checks, hence, there was no need to serve her Notice of Dishonor, which is
simply bringing to the knowledge of the drawer or indorser of the instrument, either verbally
or by writing, the fact that a specified instrument, upon proper proceedings taken, has not
been accepted or has not been paid, and that the party notified is expected to pay it. 8
In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not
hindering or hampering transactions in commercial paper. Thus, the said statute should not
be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the
necessities in a single case. 9
The drawing and negotiation of a check have certain effects aside from the transfer of title or
the incurring of liability in regard to the instrument by the transferor. The holder who takes the
negotiated paper makes a contract with the parties on the face of the instrument. There is an
implied representation that funds or credit are available for the payment of the instrument in
the bank upon which it is drawn. 10 Consequently, the withdrawal of the money from the
drawee bank to avoid liability on the checks cannot prejudice the rights of holders in due
course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic, liable to
STATE, a holder in due course of the checks.
Under the facts of this case, STATE could not expect payment as MOULIC left no funds with
the drawee bank to meet her obligation on the checks, 11 so that Notice of Dishonor would
be futile.
The Court of Appeals also held that allowing recovery on the checks would constitute unjust
enrichment on the part of STATE Investment House, Inc. This is error.
The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation
of Corazon Victoriano and her husband at the time their property mortgaged to STATE was
extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was only
P1 million. 12 Thus, the value of the property foreclosed was not even enough to pay the
debt in full.
Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial
foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from the
debtor. 13 The step thus taken by the mortgagee-bank in resorting to an extra-judicial
foreclosure was merely to find a proceeding for the sale of the property and its action cannot
be taken to mean a waiver of its right to demand payment for the whole debt. 14 For, while
Act 3135, as amended, does not discuss the mortgagee's right to recover such deficiency, it
does not contain any provision either, expressly or impliedly, prohibiting recovery. In this
jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any
deficiency resulting from foreclosure of a security given to guarantee an obligation, it so
expressly provides. For instance, with respect to pledges, Art. 2115 of the Civil Code 15 does
not allow the creditor to recover the deficiency from the sale of the thing pledged. Likewise, in
the case of a chattel mortgage, or a thing sold on installment basis, in the event of
foreclosure, the vendor "shall have no further action against the purchaser to recover any
unpaid balance of the price. Any agreement to the contrary will be void". 16
It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it
cannot be concluded that the creditor loses his right recognized by the Rules of Court to take
action for the recovery of any unpaid balance on the principal obligation simply because he
has chosen to extrajudicially foreclose the real estate mortgage pursuant to a Special Power
of Attorney given him by the mortgagor in the contract of mortgage. 17
The filing of the Complaint and the Third-Party Complaint to enforce the checks against
MOULIC and the VICTORIANO spouses, respectively, is just another means of recovering
the unpaid balance of the debt of the VICTORIANOs.
In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in
due course, STATE, without prejudice to any action for recompense she may pursue against
the VICTORIANOs as Third-Party Defendants who had already been declared as in default.
WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a
new one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE
INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in
the total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without
prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-
Party Defendants.
Costs against private respondent.
SO ORDERED.





















G.R. No. 93048 March 3, 1994
BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner, vs. THE COURT OF
APPEALS and STATE INVESTMENT HOUSE, INC., respondents.
NOCON, J.:
For our review is the decision of the Court of Appeals in the case entitled "State Investment
House, Inc. v. Bataan Cigar & Cigarette Factory Inc.," 1 affirming the decision of the Regional
Trial Court 2 in a complaint filed by the State Investment House, Inc. (hereinafter referred to
as SIHI) for collection on three unpaid checks issued by Bataan Cigar & Cigarette Factory,
Inc. (hereinafter referred to as BCCFI). The foregoing decisions unanimously ruled in favor of
SIHI, the private respondent in this case.
Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette
Factory, Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes, engaged one
of its suppliers, King Tim Pua George (herein after referred to as George King), to deliver
2,000 bales of tobacco leaf starting October 1978. In consideration thereof, BCCFI, on July
13, 1978 issued crossed checks post dated sometime in March 1979 in the total amount of
P820,000.00. 3
Relying on the supplier's representation that he would complete delivery within three months
from December 5, 1978, petitioner agreed to purchase additional 2,500 bales of tobacco
leaves, despite the supplier's failure to deliver in accordance with their earlier agreement.
Again petitioner issued post dated crossed checks in the total amount of P1,100,000.00,
payable sometime in September 1979. 4
During these times, George King was simultaneously dealing with private respondent SIHI.
On July 19, 1978, he sold at a discount check TCBT 551826 5 bearing an amount of
P164,000.00, post dated March 31, 1979, drawn by petitioner, naming George King as payee
to SIHI. On December 19 and 26, 1978, he again sold to respondent checks TCBT Nos.
608967 & 608968, 6 both in the amount of P100,000.00, post dated September 15 & 30,
1979 respectively, drawn by petitioner in favor of George King.
In as much as George King failed to deliver the bales of tobacco leaf as agreed despite
petitioner's demand, BCCFI issued on March 30, 1979, a stop payment order on all checks
payable to George King, including check TCBT 551826. Subsequently, stop payment was
also ordered on checks TCBT Nos. 608967 & 608968 on September 14 & 28, 1979,
respectively, due to George King's failure to deliver the tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only
BCCFI as party defendant. The trial court pronounced SIHI as having a valid claim being a
holder in due course. It further said that the non-inclusion of King Tim Pua George as party
defendant is immaterial in this case, since he, as payee, is not an indispensable party.
The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a
holder in due course, to be able to collect from the drawer, BCCFI.
The Negotiable Instruments Law states what constitutes a holder in due course, thus:
Sec. 52 A holder in due course is a holder who has taken the instrument
under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice
that it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.
Section 59 of the NIL further states that every holder is deemed prima facie a holder in due
course. However, when it is shown that the title of any person who has negotiated the
instrument was defective, the burden is on the holder to prove that he or some person under
whom he claims, acquired the title as holder in due course.
The facts in this present case are on all fours to the case of State Investment House, Inc. (the
very respondent in this case) v. Intermediate Appellate Court 7 wherein we made a discourse
on the effects of crossing of checks.
As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on
demand. 8 There are a variety of checks, the more popular of which are the memorandum
check, cashier's check, traveler's check and crossed check. Crossed check is one where two
parallel lines are drawn across its face or across a corner thereof. It may be crossed
generally or specially.
A check is crossed specially when the name of a particular banker or a company is written
between the parallel lines drawn. It is crossed generally when only the words "and company"
are written or nothing is written at all between the parallel lines. It may be issued so that the
presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL)
does not mention "crossed checks," although Article 541 9 of the Code of Commerce refers
to such instruments.
According to commentators, the negotiability of a check is not affected by its being crossed,
whether specially or generally. It may legally be negotiated from one person to another as
long as the one who encashes the check with the drawee bank is another bank, or if it is
specially crossed, by the bank mentioned between the parallel lines. 10 This is specially true
in England where the Negotiable Instrument Law originated.
In the Philippine business setting, however, we used to be beset with bouncing checks,
forging of checks, and so forth that banks have become quite guarded in encashing checks,
particularly those which name a specific payee. Unless one is a valued client, a bank will not
even accept second indorsements on checks.
In order to preserve the credit worthiness of checks, jurisprudence has pronounced that
crossing of a check should have the following effects: (a) the check may not be encashed but
only deposited in the bank; (b) the check may be negotiated only once to one who has an
account with a bank; (c) and the act of crossing the check serves as warning to the holder
that the check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose, otherwise, he is not a holder in due course. 11
The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna
Wood Industries, Inc. also sold at a discount to SIHI three post dated crossed checks, issued
by Anita Pea Chua naming as payee New Sikatuna Wood Industries, Inc. Ruling that SIHI
was not a holder in due course, we then said:
The three checks in the case at bar had been crossed generally and issued
payable to New Sikatuna Wood Industries, Inc. which could only mean that
the drawer had intended the same for deposit only by the rightful person, i.e.
the payee named therein. Apparently, it was not the payee who presented
the same for payment and therefore, there was no proper presentment, and
the liability did not attach to the drawer. Thus, in the absence of due
presentment, the drawer did not become liable. Consequently, no right of
recourse is available to petitioner (SIHI) against the drawer of the subject
checks, private respondent wife (Anita), considering that petitioner is not the
proper party authorized to make presentment of the checks in question.
xxx xxx xxx
That the subject checks had been issued subject to the condition that private
respondents (Anita and her husband) on due date would make the back up
deposit for said checks but which condition apparently was not made, thus
resulting in the non-consummation of the loan intended to be granted by
private respondents to New Sikatuna Wood Industries, Inc., constitutes a
good defense against petitioner who is not a holder in due course. 12
It is then settled that crossing of checks should put the holder on inquiry and upon him
devolves the duty to ascertain the indorser's title to the check or the nature of his possession.
Failing in this respect, the holder is declared guilty of gross negligence amounting to legal
absence of good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, 13 and as
such the consensus of authority is to the effect that the holder of the check is not a holder in
due course.
In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to
George King. Because, really, the checks were issued with the intention that George King
would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI
is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the checks.
The foregoing does not mean, however, that respondent could not recover from the checks.
The only disadvantage of a holder who is not a holder in due course is that the instrument is
subject to defenses as if it were
non-negotiable. 14 Hence, respondent can collect from the immediate indorser, in this case,
George King.
WHEREFORE, finding that the court a quo erred in the application of law, the instant petition
is hereby GRANTED. The decision of the Regional Trial Court as affirmed by the Court of
Appeals is hereby REVERSED. Cost against private respondent.
SO ORDERED.

G.R. No. 138074 August 15, 2003
CELY YANG, Petitioner, vs. HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, FAR EAST BANK & TRUST CO., EQUITABLE BANKING
CORPORATION, PREM CHANDIRAMANI and FERNANDO DAVID, Respondents.
D E C I S I O N
QUISUMBING, J.:
For review on certiorari is the decision1 of the Court of Appeals, dated March 25, 1999, in
CA-G.R. CV No. 52398, which affirmed with modification the joint decision of the Regional
Trial Court (RTC) of Pasay City, Branch 117, dated July 4, 1995, in Civil Cases Nos.
54792 and 5492.3 The trial court dismissed the complaint against herein respondents Far
East Bank & Trust Company (FEBTC), Equitable Banking Corporation (Equitable), and
Philippine Commercial International Bank (PCIB) and ruled in favor of respondent Fernando
David as to the proceeds of the two cashiers checks, including the earnings thereof
pendente lite. Petitioner Cely Yang was ordered to pay David moral damages of P100,000.00
and attorneys fees also in the amount of P100,000.00.
The facts of this case are not disputed, to wit:
On or before December 22, 1987, petitioner Cely Yang and private respondent Prem
Chandiramani entered into an agreement whereby the latter was to give Yang a PCIB
managers check in the amount of P4.2 million in exchange for two (2) of Yangs managers
checks, each in the amount of P2.087 million, both payable to the order of private respondent
Fernando David. Yang and Chandiramani agreed that the difference of P26,000.00 in the
exchange would be their profit to be divided equally between them.
Yang and Chandiramani also further agreed that the former would secure from FEBTC a
dollar draft in the amount of US$200,000.00, payable to PCIB FCDU Account No. 4195-
01165-2, which Chandiramani would exchange for another dollar draft in the same amount to
be issued by Hang Seng Bank Ltd. of Hong Kong.
Accordingly, on December 22, 1987, Yang procured the following:
a) Equitable Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00,
dated December 22, 1987, payable to the order of Fernando David;
b) FEBTC Cashiers Check No. 287078, in the amount of P2,087,000.00, dated
December 22, 1987, likewise payable to the order of Fernando David; and
c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in the amount
of US$200,000.00, dated December 22, 1987, payable to PCIB FCDU Account No.
4195-01165-2.
At about one oclock in the afternoon of the same day, Yang gave the aforementioned
cashiers checks and dollar drafts to her business associate, Albert Liong, to be delivered to
Chandiramani by Liongs messenger, Danilo Ranigo. Ranigo was to meet Chandiramani at
Philippine Trust Bank, Ayala Avenue, Makati City, Metro Manila where he would turn over
Yangs cashiers checks and dollar draft to Chandiramani who, in turn, would deliver to
Ranigo a PCIB managers check in the sum of P4.2 million and a Hang Seng Bank dollar
draft for US$200,000.00 in exchange.
Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two cashiers
checks and the dollar draft bought by petitioner. Ranigo reported the alleged loss of the
checks and the dollar draft to Liong at half past four in the afternoon of December 22, 1987.
Liong, in turn, informed Yang, and the loss was then reported to the police.
It transpired, however, that the checks and the dollar draft were not lost, for Chandiramani
was able to get hold of said instruments, without delivering the exchange consideration
consisting of the PCIB managers check and the Hang Seng Bank dollar draft.
At three oclock in the afternoon or some two (2) hours after Chandiramani and Ranigo were
to meet in Makati City, Chandiramani delivered to respondent Fernando David at China
Banking Corporation branch in San Fernando City, Pampanga, the following: (a) FEBTC
Cashiers Check No. 287078, dated December 22, 1987, in the sum of P2.087 million; and
(b) Equitable Cashiers Check No. CCPS 14-009467, dated December 22, 1987, also in the
amount of P2.087 million. In exchange, Chandiramani got US$360,000.00 from David, which
Chandiramani deposited in the savings account of his wife, Pushpa Chandiramani; and his
mother, Rani Reynandas, who held FCDU Account No. 124 with the United Coconut Planters
Bank branch in Greenhills, San Juan, Metro Manila. Chandiramani also deposited FEBTC
Dollar Draft No. 4771, dated December 22, 1987, drawn upon the Chemical Bank, New York
for US$200,000.00 in PCIB FCDU Account No. 4195-01165-2 on the same date.
Meanwhile, Yang requested FEBTC and Equitable to stop payment on the instruments she
believed to be lost. Both banks complied with her request, but upon the representation of
PCIB, FEBTC subsequently lifted the stop payment order on FEBTC Dollar Draft No. 4771,
thus enabling the holder of PCIB FCDU Account No. 4195-01165-2 to receive the amount of
US$200,000.00.
On December 28, 1987, herein petitioner Yang lodged a Complaint4 for injunction and
damages against Equitable, Chandiramani, and David, with prayer for a temporary
restraining order, with the Regional Trial Court of Pasay City. The Complaint was docketed
as Civil Case No. 5479. The Complaint was subsequently amended to include a prayer for
Equitable to return to Yang the amount of P2.087 million, with interest thereon until fully
paid.5
On January 12, 1988, Yang filed a separate case for injunction and damages, with prayer for
a writ of preliminary injunction against FEBTC, PCIB, Chandiramani and David, with the RTC
of Pasay City, docketed as Civil Case No. 5492. This complaint was later amended to include
a prayer that defendants therein return to Yang the amount of P2.087 million, the value of
FEBTC Dollar Draft No. 4771, with interest at 18% annually until fully paid.6
On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a writ of
preliminary injunction in Civil Case No. 5479. A writ of preliminary injunction was
subsequently issued in Civil Case No. 5492 also.
Meanwhile, herein respondent David moved for dismissal of the cases against him and for
reconsideration of the Orders granting the writ of preliminary injunction, but these motions
were denied. David then elevated the matter to the Court of Appeals in a special civil action
for certiorari docketed as CA-G.R. SP No. 14843, which was dismissed by the appellate
court.
As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two cases were
consolidated. The trial court then conducted pre-trial and trial of the two cases, but the
proceedings had to be suspended after a fire gutted the Pasay City Hall and destroyed the
records of the courts.
After the records were reconstituted, the proceedings resumed and the parties agreed that
the money in dispute be invested in Treasury Bills to be awarded in favor of the prevailing
side. It was also agreed by the parties to limit the issues at the trial to the following:
1. Who, between David and Yang, is legally entitled to the proceeds of Equitable
Banking Corporation (EBC) Cashiers Check No. CCPS 14-009467 in the sum
of P2,087,000.00 dated December 22, 1987, and Far East Bank and Trust Company
(FEBTC) Cashiers Check No. 287078 in the sum of P2,087,000.00 dated December
22, 1987, together with the earnings derived therefrom pendente lite?
2. Are the defendants FEBTC and PCIB solidarily liable to Yang for having allowed
the encashment of FEBTC Dollar Draft No. 4771, in the sum of US$200,000.00 plus
interest thereon despite the stop payment order of Cely Yang?7
On July 4, 1995, the trial court handed down its decision in Civil Cases Nos. 5479 and 5492,
to wit:
WHEREFORE, the Court renders judgment in favor of defendant Fernando David against the
plaintiff Cely Yang and declaring the former entitled to the proceeds of the two (2) cashiers
checks, together with the earnings derived therefrom pendente lite; ordering the plaintiff to
pay the defendant Fernando David moral damages in the amount of P100,000.00; attorneys
fees in the amount of P100,000.00 and to pay the costs. The complaint against Far East
Bank and Trust Company (FEBTC), Philippine Commercial International Bank (PCIB) and
Equitable Banking Corporation (EBC) is dismissed. The decision is without prejudice to
whatever action plaintiff Cely Yang will file against defendant Prem Chandiramani for
reimbursement of the amounts received by him from defendant Fernando David.
SO ORDERED.8
In finding for David, the trial court ratiocinated:
The evidence shows that defendant David was a holder in due course for the reason that the
cashiers checks were complete on their face when they were negotiated to him. They were
not yet overdue when he became the holder thereof and he had no notice that said checks
were previously dishonored; he took the cashiers checks in good faith and for value. He
parted some $200,000.00 for the two (2) cashiers checks which were given to defendant
Chandiramani; he had also no notice of any infirmity in the cashiers checks or defect in the
title of the drawer. As a matter of fact, he asked the manager of the China Banking
Corporation to inquire as to the genuineness of the cashiers checks (tsn, February 5, 1988,
p. 21, September 20, 1991, pp. 13-14). Another proof that defendant David is a holder in due
course is the fact that the stop payment order on [the] FEBTC cashiers check was lifted upon
his inquiry at the head office (tsn, September 20, 1991, pp. 24-25). The apparent reason for
lifting the stop payment order was because of the fact that FEBTC realized that the checks
were not actually lost but indeed reached the payee defendant David.9
Yang then moved for reconsideration of the RTC judgment, but the trial court denied her
motion in its Order of September 20, 1995.
In the belief that the trial court misunderstood the concept of a holder in due course and
misapprehended the factual milieu, Yang seasonably filed an appeal with the Court of
Appeals, docketed as CA-G.R. CV No. 52398.
On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this wise:
WHEREFORE, this court AFFIRMS the judgment of the lower court with modification and
hereby orders the plaintiff-appellant to pay defendant-appellant PCIB the amount of
Twenty-Five Thousand Pesos (P25,000.00).
SO ORDERED.10
In affirming the trial courts judgment with respect to herein respondent David, the appellate
court found that:
In this case, defendant-appellee had taken the necessary precautions to verify, through his
bank, China Banking Corporation, the genuineness of whether (sic) the cashiers checks he
received from Chandiramani. As no stop payment order was made yet (at) the time of the
inquiry, defendant-appellee had no notice of what had transpired earlier between the plaintiff-
appellant and Chandiramani. All he knew was that the checks were issued to Chandiramani
with whom he was he had (sic) a transaction. Further on, David received the checks in
question in due course because Chandiramani, who at the time the checks were delivered to
David, was acting as Yangs agent.
David had no notice, real or constructive, cogent for him to make further inquiry as to any
infirmity in the instrument(s) and defect of title of the holder. To mandate that each holder
inquire about every aspect on how the instrument came about will unduly impede commercial
transactions, Although negotiable instruments do not constitute legal tender, they often
take the place of money as a means of payment.
The mere fact that David and Chandiramani knew one another for a long time is not sufficient
to establish that they connived with each other to defraud Yang. There was no concrete proof
presented by Yang to support her theory.11
The appellate court awarded P25,000.00 in attorneys fees to PCIB as it found the action filed
by Yang against said bank to be "clearly unfounded and baseless." Since PCIB was
compelled to litigate to protect itself, then it was entitled under Article 220812 of the Civil
Code to attorneys fees and litigation expenses.
Hence, the instant recourse wherein petitioner submits the following issues for resolution:
a - WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI BY
PETITIONER;
b - WHETHER THE ALLEGED TRANSACTION BETWEEN PREM CHANDIRAMANI
AND FERNANDO DAVID IS LEGITIMATE OR A SCHEME BY BOTH PRIVATE
RESPONDENTS TO SWINDLE PETITIONER;
c - WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI US$360,000.00
OR JUST A FRACTION OF THE AMOUNT REPRESENTING HIS SHARE OF THE
LOOT;
d - WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE
ENTITLED TO DAMAGES AND ATTORNEYS FEES.13
At the outset, we must stress that this is a petition for review under Rule 45 of the 1997 Rules
of Civil Procedure. It is basic that in petitions for review under Rule 45, the jurisdiction of this
Court is limited to reviewing questions of law, questions of fact are not entertained absent a
showing that the factual findings complained of are totally devoid of support in the record or
are glaringly erroneous.14 Given the facts in the instant case, despite petitioners formulation,
we find that the following are the pertinent issues to be resolved:
a) Whether the Court of Appeals erred in holding herein respondent Fernando David
to be a holder in due course; and
b) Whether the appellate court committed a reversible error in awarding damages
and attorneys fees to David and PCIB.
On the first issue, petitioner Yang contends that private respondent Fernando David is not a
holder in due course of the checks in question. While it is true that he was named the payee
thereof, David failed to inquire from Chandiramani about how the latter acquired possession
of said checks. Given his failure to do so, it cannot be said that David was unaware of any
defect or infirmity in the title of Chandiramani to the checks at the time of their negotiation.
Moreover, inasmuch as the checks were crossed, then David should have, pursuant to our
ruling inBataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, G.R. No. 93048, March 3,
1994, 230 SCRA 643, been put on guard that the checks were issued for a definite purpose
and accordingly, made inquiries to determine if he received the checks pursuant to that
purpose. His failure to do so negates the finding in the proceedings below that he was a
holder in due course.
Finally, the petitioner argues that there is no showing whatsoever that David gave
Chandiramani any consideration of value in exchange for the aforementioned checks.
Private respondent Fernando David counters that the evidence on record shows that when
he received the checks, he verified their genuineness with his bank, and only after said
verification did he deposit them. David stresses that he had no notice of previous dishonor or
any infirmity that would have aroused his suspicions, the instruments being complete and
regular upon their face. David stresses that the checks in question were cashiers checks.
From the very nature of cashiers checks, it is highly unlikely that he would have suspected
that something was amiss. David also stresses negotiable instruments are presumed to have
been issued for valuable consideration, and he who alleges otherwise must controvert the
presumption with sufficient evidence. The petitioner failed to discharge this burden, according
to David. He points out that the checks were delivered to him as the payee, and he took them
as holder and payee thereof. Clearly, he concludes, he should be deemed to be their holder
in due course.
We shall now resolve the first issue.
Every holder of a negotiable instrument is deemed prima facie a holder in due course.
However, this presumption arises only in favor of a person who is a holder as defined in
Section 191 of the Negotiable Instruments Law,15meaning a "payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof."
In the present case, it is not disputed that David was the payee of the checks in question.
The weight of authority sustains the view that a payee may be a holder in due
course.16 Hence, the presumption that he is a prima facieholder in due course applies in his
favor. However, said presumption may be rebutted. Hence, what is vital to the resolution of
this issue is whether David took possession of the checks under the conditions provided for
in Section 5217 of the Negotiable Instruments Law. All the requisites provided for in Section
52 must concur in Davids case, otherwise he cannot be deemed a holder in due course.
We find that the petitioners challenge to Davids status as a holder in due course hinges on
two arguments: (1) the lack of proof to show that David tendered any valuable consideration
for the disputed checks; and (2) Davids failure to inquire from Chandiramani as to how the
latter acquired possession of the checks, thus resulting in Davids intentional ignorance
tantamount to bad faith. In sum, petitioner posits that the last two requisites of Section 52 are
missing, thereby preventing David from being considered a holder in due course.
Unfortunately for the petitioner, her arguments on this score are less than meritorious and far
from persuasive.
First, with respect to consideration, Section 2418 of the Negotiable Instruments Law creates
a presumption that every party to an instrument acquired the same for a consideration19 or
for value.20 Thus, the law itself creates a presumption in Davids favor that he gave valuable
consideration for the checks in question. In alleging otherwise, the petitioner has the onus to
prove that David got hold of the checks absent said consideration. In other words, the
petitioner must present convincing evidence to overthrow the presumption. Our scrutiny of
the records, however, shows that the petitioner failed to discharge her burden of proof. The
petitioners averment that David did not give valuable consideration when he took possession
of the checks is unsupported, devoid of any concrete proof to sustain it. Note that both the
trial court and the appellate court found that David did not receive the checksgratis, but
instead gave Chandiramani US$360,000.00 as consideration for the said instruments.
Factual findings of the Court of Appeals are conclusive on the parties and not reviewable by
this Court; they carry great weight when the factual findings of the trial court are affirmed by
the appellate court.21
Second, petitioner fails to point any circumstance which should have put David on inquiry as
to the why and wherefore of the possession of the checks by Chandiramani. David was not
privy to the transaction between petitioner and Chandiramani. Instead, Chandiramani and
David had a separate dealing in which it was precisely Chandiramanis duty to deliver the
checks to David as payee. The evidence shows that Chandiramani performed said task to
the letter. Petitioner admits that David took the step of asking the manager of his bank to
verify from FEBTC and Equitable as to the genuineness of the checks and only accepted the
same after being assured that there was nothing wrong with said checks. At that time, David
was not aware of any "stop payment" order. Under these circumstances, David thus had no
obligation to ascertain from Chandiramani what the nature of the latters title to the checks
was, if any, or the nature of his possession. Thus, we cannot hold him guilty of gross neglect
amounting to legal absence of good faith, absent any showing that there was something
amiss about Chandiramanis acquisition or possession of the checks. David did not close his
eyes deliberately to the nature or the particulars of a fraud allegedly committed by
Chandiramani upon the petitioner, absent any knowledge on his part that the action in taking
the instruments amounted to bad faith.22
Belatedly, and we say belatedly since petitioner did not raise this matter in the proceedings
below, petitioner now claims that David should have been put on alert as the instruments in
question were crossed checks. Pursuant toBataan Cigar & Cigarette Factory, Inc. v. Court of
Appeals, David should at least have inquired as to whether he was acquiring said checks for
the purpose for which they were issued, according to petitioners submission.
Petitioners reliance on the Bataan Cigar case, however, is misplaced. The facts in the
present case are not on all fours with Bataan Cigar. In the latter case, the crossed checks
were negotiated and sold at a discount by the payee, while in the instant case, the payee did
not negotiate further the checks in question but promptly deposited them in his bank account.
The Negotiable Instruments Law is silent with respect to crossed checks, although the Code
of Commerce23makes reference to such instruments. Nonetheless, this Court has taken
judicial cognizance of the practice that a check with two parallel lines in the upper left hand
corner means that it could only be deposited and not converted into cash.24 The effects of
crossing a check, thus, relates to the mode of payment, meaning that the drawer had
intended the check for deposit only by the rightful person, i.e., the payee named therein.
In Bataan Cigar, the rediscounting of the check by the payee knowingly violated the avowed
intention of crossing the check. Thus, in accepting the cross checks and paying cash for
them, despite the warning of the crossing, the subsequent holder could not be considered in
good faith and thus, not a holder in due course. Our ruling in Bataan Cigar reiterates that
in De Ocampo & Co. v. Gatchalian.25
The factual circumstances in De Ocampo and in Bataan Cigar are not present in this case.
For here, there is no dispute that the crossed checks were delivered and duly deposited by
David, the payee named therein, in his bank account. In other words, the purpose behind the
crossing of the checks was satisfied by the payee.
Proceeding to the issue of damages, petitioner merely argues that respondents David and
PCIB are not entitled to damages, attorneys fees, and costs of suit as both acted in bad faith
towards her, as shown by her version of the facts which gave rise to the instant case.
Respondent David counters that he was maliciously and unceremoniously dragged into this
suit for reasons which have nothing to do with him at all, but which arose from petitioners
failure to receive her share of the profit promised her by Chandiramani.1wphi1 Moreover, in
filing this suit which has lasted for over a decade now, the petitioner deprived David of the
rightful enjoyment of the two checks, to which he is entitled, under the law, compelled him to
hire the services of counsel to vindicate his rights, and subjected him to social humiliation
and besmirched reputation, thus harming his standing as a person of good repute in the
business community of Pampanga. David thus contends that it is but proper that moral
damages, attorneys fees, and costs of suit be awarded him.
For its part, respondent PCIB stresses that it was established by both the trial court and the
appellate court that it was needlessly dragged into this case. Hence, no error was committed
by the appellate court in declaring PCIB entitled to attorneys fees as it was compelled to
litigate to protect itself.
We have thoroughly perused the records of this case and find no reason to disagree with the
finding of the trial court, as affirmed by the appellate court, that:
[D]efendant David is entitled to [the] award of moral damages as he has been needlessly and
unceremoniously dragged into this case which should have been brought only between the
plaintiff and defendant Chandiramani.26
A careful reading of the findings of facts made by both the trial court and appellate court
clearly shows that the petitioner, in including David as a party in these proceedings, is
barking up the wrong tree. It is apparent from the factual findings that David had no dealings
with the petitioner and was not privy to the agreement of the latter with Chandiramani.
Moreover, any loss which the petitioner incurred was apparently due to the acts or omissions
of Chandiramani, and hence, her recourse should have been against him and not against
David. By needlessly dragging David into this case all because he and Chandiramani knew
each other, the petitioner not only unduly delayed David from obtaining the value of the
checks, but also caused him anxiety and injured his business reputation while waiting for its
outcome. Recall that under Article 221727 of the Civil Code, moral damages include mental
anguish, serious anxiety, besmirched reputation, wounded feelings, social humiliation, and
similar injury. Hence, we find the award of moral damages to be in order.
The appellate court likewise found that like David, PCIB was dragged into this case on
unfounded and baseless grounds. Both were thus compelled to litigate to protect their
interests, which makes an award of attorneys fees justified under Article 2208 (2)28 of the
Civil Code. Hence, we rule that the award of attorneys fees to David and PCIB was proper.
WHEREFORE, the instant petition is DENIED. The assailed decision of the Court of Appeals,
dated March 25, 1999, in CA-G.R. CV No. 52398 is AFFIRMED. Costs against the petitioner.
SO ORDERED.
G.R. No. 107508 April 25, 1996
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, CAPITOL CITY
DEVELOPMENT BANK, PHILIPPINE BANK OF COMMUNICATIONS, and F. ABANTE
MARKETING, respondents.
KAPUNAN, J.:p
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the
decision dated April 29, 1992 of respondent Court of Appeals in CA-G.R. CV No. 24776 and
its resolution dated September 16, 1992, denying petitioner Philippine National Bank's motion
for reconsideration of said decision.
The facts of the case are as follows.
A check with serial number 7-3666-223-3, dated August 7, 1981 in the amount of P97,650.00
was issued by the Ministry of Education and Culture (now Department of Education, Culture
and Sports [DECS]) payable to F. Abante Marketing. This check was drawn against
Philippine National Bank (herein petitioner).
On August 11, 1981, F. Abante Marketing, a client of Capitol City Development Bank
(Capitol), deposited the questioned check in its savings account with said bank. In turn,
Capitol deposited the same in its account with the Philippine Bank of Communications
(PBCom) which, in turn, sent the check to petitioner for clearing.
Petitioner cleared the check as good and, thereafter, PBCom credited Capitol's account for
the amount stated in the check. However, on October 19, 1981, petitioner returned the check
to PBCom and debited PBCom's account for the amount covered by the check, the reason
being that there was a "material alteration" of the check number.
PBCom, as collecting agent of Capitol, then proceeded to debit the latter's account for the
same amount, and subsequently, sent the check back to petitioner. Petitioner, however,
returned the check to PBCom.
On the other hand, Capitol could not, in turn, debit F. Abante Marketing's account since the
latter had already withdrawn the amount of the check as of October 15, 1981. Capitol sought
clarification from PBCom and demanded the re-crediting of the amount. PBCom followed suit
by requesting an explanation and re-crediting from petitioner.
Since the demands of Capitol were not heeded, it filed a civil suit with the Regional Trial
Court of Manila against PBCom which, in turn, filed a third-party complaint against petitioner
for reimbursement/indemnity with respect to the claims of Capitol. Petitioner, on its part, filed
a fourth-party complaint against F. Abante Marketing.
On October 3, 1989; the Regional Trial Court rendered its decision the dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered as follows:
1.) On plaintiffs complaint, defendant Philippine Bank of Communications is
ordered to re-credit or reimburse plaintiff Capitol City Development Bank the
amount of P97,650.00, plus interest of 12 percent thereto from October 19,
1981 until the amount is fully paid;
2.) On Philippine Bank of Communications third-party complaint third-party
defendant PNB is ordered to reimburse and indemnify Philippine Bank of
Communications for whatever amount PBCom pays to plaintiff;
3.) On Philippine National Bank's fourth-party complaint, F. Abante
Marketing is ordered to reimburse and indemnify PNB for whatever amount
PNB pays to PBCom;
4.) On attorney's fees, Philippine Bank of Communications is ordered to pay
Capitol City Development Bank attorney's fees in the amount of Ten
Thousand (P10,000.00) Pesos; but PBCom is entitled to
reimbursement/indemnity from PNB; and Philippine National Bank to be, in
turn reimbursed or indemnified by F. Abante Marketing for the same amount;
5.) The Counterclaims of PBCom and PNB are hereby dismissed;
6.) No pronouncement as to costs.
SO ORDERED. 1
An appeal was interposed before the respondent Court of Appeals which rendered its
decision on April 29, 1992, the decretal portion of which reads:
WHEREFORE, the judgment appealed from is modified by exempting
PBCom from liability to plaintiff-appellee for attorney's fees and ordering
PNB to honor the check for P97,650.00, with interest as declared by the trial
court, and pay plaintiff-appellee attorney's fees of P10,000.00. After the
check shall have been honored by PNB, PBCom shall re-credit plaintiff-
appellee's account with it with the amount. No pronouncement as to costs.
SO ORDERED. 2
A motion for reconsideration of the decision was denied by the respondent Court in its
resolution dated September 16, 1992 for lack of merit. 3
Hence, petitioner filed the instant petition which raises the following issues:
I
WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A
CHECK IS A MATERIAL ALTERATION UNDER THE NEGOTIABLE
INSTRUMENTS LAW.
II
WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE
MINISTRY OF EDUCATION CAN BE GIVEN WEIGHT IN EVIDENCE.
III
WHETHER OR NOT A DRAWEE BANK WHO FAILED TO RETURN A.
CHECK WITHIN THE TWENTY FOUR (24) HOUR CLEARING PERIOD
MAY RECOVER THE VALUE OF THE CHECK FROM THE COLLECTING
BANK.
IV
WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL
PETITIONER PNB MAY BE HELD LIABLE FOR ATTORNEY'S FEES. 4
We find no merit in the petition.
We shall first deal with the effect of the alteration of the serial number on the negotiability of
the check in question.
Petitioner anchors its position on Section 125 of the Negotiable Instruments Law (ACT No.
2031) 5 which provides:
Sec. 225. What constitutes a material alteration. Any alteration which
changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect of the
instrument in any respect, is a material alteration.
Petitioner alleges that there is no hard and fast rule in the interpretation of the aforequoted
provision of the Negotiable Instruments Law. It maintains that under Section 125(f), any
change that alters the effect of the instrument is a material alteration. 6
We do not agree.
An alteration is said to be material if it alters the effect of the
instrument. 7 It means an unauthorized change in an instrument that purports to modify in
any respect the obligation of a party or an unauthorized addition of words or numbers or
other change to an incomplete instrument relating to the obligation of a party. 8 In other
words, a material alteration is one which changes the items which are required to be stated
under Section 1 of the Negotiable Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
Sec. 1. Form of negotiable instruments. An instrument to be negotiable
must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in
money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
In his book entitled "Pandect of Commercial Law and Jurisprudence," Justice Jose C. Vitug
opines that "an innocent alteration (generally, changes on items other than those required to
be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid
the instrument, but the holder may enforce it only according to its original tenor." 9
Reproduced hereunder are some examples of material and immaterial alterations:
A. Material Alterations:
(1) Substituting the words "or bearer" for "order."
(2) Writing "protest waived" above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: "Iron County Bank, Crystal Falls,
Mich. Aug. 5, 1901. Pay to G.L. or order $9 fifty cents CTR" The insertion of
the figure 5 before the figure 9, the instrument being otherwise unchanged.
(5) Adding the words "with interest" with or without a fixed rate.
(6) An alteration in the maturity of a note, whether the time for payment is
thereby curtailed or extended.
(7) An instrument was payable "First Nat'l Bank" the plaintiff added the word
"Marion."
(8) Plaintiff, without consent of the defendant, struck out the name of the
defendant as payee and inserted the name of the maker of the original note.
(9) Striking out the name of the payee and substituting that of the person
who actually discounted the note.
(10) Substituting the address of the maker for the name of a co-maker. 10
B. Immaterial Alterations:
(1) Changing "I promise to pay" to "We promise to pay", where there are two
makers.
(2) Adding the word "annual" after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of actual delivery where the makers of a note gave it
with the date in blank, "July ____."
(5) An alteration of the marginal figures of a note where the sum stated in
words in the body remained unchanged.
(6) The insertion of the legal rate of interest where the note had a provision
for "interest at _______ per cent."
(7) A printed form of promissory note had on the margin the printed words,
"Extended to ________." The holder on or after maturity wrote in the blank
space the words "May 1, 1913," as a reference memorandum of a promise
made by him to the principal maker at the time the words were written to
extend the time of payment.
(8) Where there was a blank for the place of payment, filling in the blank with
the place desired.
(9) Adding to an indorsee's name the abbreviation "Cash" when it had been
agreed that the draft should be discounted by the trust company of which the
indorsee was cashier.
(10) The indorsement of a note by a stranger after its delivery to the payee
at the time the note was negotiated to the plaintiff.
(11) An extension of time given by the holder of a note to the principal
maker, without the consent of a surety co-maker. 11
The case at bench is unique in the sense that what was altered is the serial number of the
check in question, an item which, it can readily be observed, is not an essential requisite for
negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned
alteration did not change the relations between the parties. The name of the drawer and the
drawee were not altered. The intended payee was the same. The sum of money due to the
payee remained the same. Despite these findings, however, petitioner insists, that:
xxx xxx xxx
It is an accepted concept, besides being a negotiable instrument itself, that a
TCAA check by its very nature is the medium of exchange of governments
(sic) instrumentalities of agencies. And as (a) safety measure, every
government office o(r) agency (is) assigned TCAA checks bearing different
number series.
A concrete example is that of the disbursements of the Ministry of Education
and Culture. It is issued by the Bureau of Treasury sizeable bundles of
checks in booklet form with serial numbers different from other government
office or agency. Now, for fictitious payee to succeed in its malicious
intentions to defraud the government, all it need do is to get hold of a TCAA
Check and have the serial numbers of portion (sic) thereof changed or
altered to make it appear that the same was issued by the MEG.
Otherwise, stated, it is through the serial numbers that (a) TCAA Check is
determined to have been issued by a particular office or agency of the
government. 12
xxx xxx xxx
Petitioner's arguments fail to convince. The check's serial number is not the sole indication of
its origin.. As succinctly found by the Court of Appeals, the name of the government agency
which issued the subject check was prominently printed therein. The check's issuer was
therefore sufficiently identified, rendering the referral to the serial number redundant and
inconsequential. Thus, we quote with favor the findings of the respondent court:
xxx xxx xxx
If the purpose of the serial number is merely to identify the issuing
government office or agency, its alteration in this case had no material effect
whatsoever on the integrity of the check. The identity of the issuing
government office or agency was not changed thereby and the amount of
the check was not charged against the account of another government office
or agency which had no liability under the check. The owner and issuer of
the check is boldly and clearly printed on its face, second line from the
top: "MINISTRY OF EDUCATION AND CULTURE," and below the name of
the payee are the rubber-stamped words: "Ministry of Educ. &
Culture." These words are not alleged to have been falsely or fraudulently
intercalated into the check. The ownership of the check is established
without the necessity of recourse to the serial number. Neither there any
proof that the amount of the check was erroneously charged against the
account of a government office or agency other than the Ministry of
Education and Culture. Hence, the alteration in the number of the check did
not affect or change the liability of the Ministry of Education and Culture
under the check and, therefore, is immaterial. The genuineness of the
amount and the signatures therein of then Deputy Minister of Education
Hermenegildo C. Dumlao and of the resident Auditor, Penomio C. Alvarez
are not challenged. Neither is the authenticity of the different codes
appearing therein questioned . . . 13 (Emphasis ours.)
Petitioner, thus cannot refuse to accept the check in question on the ground that the serial
number was altered, the same being an immaterial or innocent one.
We now go to the second issue. It is petitioner's submission that the certification issued by
Minrado C. Batonghinog, Cashier III of the MEC clearly shows that the check was altered.
Said certification reads:
July 22, 1985
TO WHOM IT MAY CONCERN:
This is to certify that according to the records of this Office, TCAA PNB
Check Mo. SN7-3666223-3 dated August 7, 1981 drawn in favor of F.
Abante Marketing in the amount of NINETY (S)EVEN THOUSAND SIX
HUNDRED FIFTY PESOS ONLY (P97,650.00) was not issued by this Office
nor released to the payee concerned. The series number of said check was
not included among those requisition by this Office from the Bureau of
Treasury.
Very truly yours,
(SGD.) MINRADO C. BATONGHINOG
Cashier III 14
Petitioner claims that even if the author of the certification issued by the Ministry of Education
and Culture (MEG) was not presented, still the best evidence of the material alteration would
be the disputed check itself and the serial number thereon. Petitioner thus assails the refusal
of respondent court to give weight to the certification because the author thereof was not
presented to identify it and to be cross-examined thereon. 15
We agree with the respondent court.
The one who signed the certification was not presented before the trial court to prove that the
said document was really the document he prepared and that the signature below the said
document is his own signature. Neither did petitioner present an eyewitness to the execution
of the questioned document who could possibly identify it. 16 Absent this proof, we cannot
rule on the authenticity of the contents of the certification. Moreover, as we previously
emphasized, there was no material alteration on the check, the change of its serial number
not being substantial to its negotiability.
Anent the third issue whether or not the drawee bank may still recover the value of the
check from the collecting bank even if it failed to return the check within the twenty-four (24)
hour clearing period because the check was tampered suffice it to state that since there is
no material alteration in the check, petitioner has no right to dishonor it and return it to
PBCom, the same being in all respects negotiable.
However, the amount of P10,000.00 as attorney's fees is hereby deleted. In their respective
decisions, the trial court and the Court of Appeals failed to explicitly state the rationale for the
said award. The trial court merely ruled as follows:
With respect to Capitol's claim for damages consisting of alleged loss of
opportunity, this Court finds that Capitol failed to adequately substantiate its
claim. What Capitol had presented was a self-serving, unsubstantiated and
speculative computation of what it allegedly could have earned or realized
were it not for the debit made by PBCom which was triggered by the return
and debit made by PNB. However, this Court finds that it would be fair and
reasonable to impose interest at 12% per annum on the principal amount of
the check computed from October 19, 1981 (the date PBCom debited
Capitol's account) until the amount is fully paid and reasonable attorney's
fees. 17 (Emphasis ours.)
And contrary to the Court of Appeal's resolution, petitioner unambiguously questioned before
it the award of attorney's fees, assigning the latter as one of the errors committed by the trial
court. 18
The foregoing is in conformity with the guiding principles laid down in a long line of cases and
reiterated recently inConsolidated Bank & Trust Corporation (Solidbank) v. Court of
Appeals: 19
The award of attorney's fees lies within the discretion of the court and
depends upon the circumstances of each case. However, the discretion of
the court to award attorney's fees under Article 2208 of the Civil Code of the
Philippines demands factual, legal and equitable justification, without which
the award is a conclusion without a premise and improperly left to
speculation and conjecture. It becomes a violation of the proscription against
the imposition of a penalty on the right to litigate (Universal Shipping Lines,
Inc. v. Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for
the award must be stated in the text of the court's decision. If it is stated only
in the dispositive portion of the decision, the same shall be disallowed. As to
the award of attorney's fees being an exception rather than the rule, it is
necessary for the court to make findings of fact and law that would bring the
case within the exception and justify the grant of the award (Refractories
Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA
539 [176 SCRA 539]).
WHEREFORE, premises considered, except for the deletion of the award of attorney's fees,
the decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.
































G.R. No. 89802 May 7, 1992
ASSOCIATED BANK and CONRADO CRUZ, petitioners, vs. HON. COURT OF APPEALS,
and MERLE V. REYES, doing business under the name and style "Melissa's
RTW," respondents.
CRUZ, J.:
The sole issue raised in this case is whether or not the private respondent has a cause of
action against the petitioners for their encashment and payment to another person of certain
crossed checks issued in her favor.
The private respondent is engaged in the business of ready-to-wear garments under the firm
name "Melissa's RTW." She deals with, among other customers, Robinson's Department
Store, Payless Department Store, Rempson Department Store, and the Corona Bazaar.
These companies issued in payment of their respective accounts crossed checks payable to
Melissa's RTW in the amounts and on the dates indicated below:
PAYOR BANK AMOUNT DATE
Payless Solid Bank P3,960.00 January 19, 1982
Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981
When she went to these companies to collect on what she thought were still unpaid
accounts, she was informed of the issuance of the above-listed crossed checks. Further
inquiry revealed that the said checks had been deposited with the Associated Bank
(hereinafter, "the Bank") and subsequently paid by it to one Rafael Sayson, one of its "trusted
depositors," in the words of its branch manager and co-petitioner, Conrado Cruz, Sayson had
not been authorized by the private respondent to deposit and encash the said checks.
The private respondent sued the petitioners in the Regional Trial Court of Quezon City for
recovery of the total value of the checks plus damages. After trial, judgment was rendered
requiring them to pay the private respondent the total value of the subject checks in the
amount of P15,805.00 plus 12% interest, P50,000.00 actual damages, P25,000.00
exemplary damages, P5,000.00 attorney's fees, and the costs of the suit. 1
The petitioners appealed to the respondent court, reiterating their argument that the private
respondent had no cause of action against them and should have proceeded instead against
the companies that issued the checks. In disposing of this contention, the Court of
Appeals 2 said:
The cause of action of the appellee in the case at bar arose from the illegal,
anomalous and irregular acts of the appellants in violating common banking
practices to the damage and prejudice of the appellees, in allowing to be
deposited and encashed as well as paying to improper parties without the
knowledge, consent, authority or endorsement of the appellee which totalled
P15,805.00, the six (6) checks in dispute which were "crossed checks" or
"for payee's account only," the appellee being the payee.
The three (3) elements of a cause of action are present in the case at bar,
namely: (1) a right in favor of the plaintiff by whatever means and under
whatever law it arises or is created; (2) an obligation on the part of the
named defendant to respect or not to violate such right; and (3) an act or
omission on the part of such defendant violative of the right of the plaintiff or
constituting a breach thereof. (Republic Planters Bank vs. Intermediate
Appellate Court, 131 SCRA 631).
And such cause of action has been proved by evidence of great weight. The
contents of the said checks issued by the customers of the appellee had not
been questioned. There is no dispute that the same are crossed checks or
for payee's account only, which is Melissa's RTW. The appellee had clearly
shown that she had never authorized anyone to deposit the said checks nor
to encash the same; that the appellants had allowed all said checks to be
deposited, cleared and paid to one Rafael Sayson in violation of the
instructions in the said crossed checks that the same were for payee's
account only; and that the appellee maintained a savings account with the
Prudential Bank, Cubao Branch, Quezon City which never cleared the said
checks and the appellee had been damaged by such encashment of the
same.
We affirm.
Under accepted banking practice, crossing a check is done by writing two parallel lines
diagonally on the left top portion of the checks. The crossing is special where the name of a
bank or a business institution is written between the two parallel lines, which means that the
drawee should pay only with the intervention of that company.3 The crossing is general
where the words written between the two parallel lines are "and Co." or "for payee's account
only," as in the case at bar. This means that the drawee bank should not encash the check
but merely accept it for deposit. 4
In State Investment House vs. IAC, 5 this Court declared that "the effects of crossing a check
are: (1) that the check may not be encashed but only deposited in the bank; (2) that the
check may be negotiated only once to one who has an account with a bank; and (3) that
the act of crossing the check serves as a warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check pursuant to
that purpose."
The effects therefore of crossing a check relate to the mode of its presentment for payment.
Under Sec. 72 of the Negotiable Instruments Law, presentment for payment, to be sufficient,
must be made by the holder or by some person authorized to receive payment on his behalf.
Who the holder or authorized person is depends on the instruction stated on the face of the
check.
The six checks in the case at bar had been crossed and issued "for payee's account only."
This could only signify that the drawers had intended the same for deposit only by the person
indicated, to wit, Melissa's RTW.
The petitioners argue that the cause of action for violation of the common instruction found
on the face of the checks exclusively belongs to the issuers thereof and not to the payee.
Moreover, having acted in good faith as they merely facilitated the encashment of the checks,
they cannot be made liable to the private respondent.
The subject checks were accepted for deposit by the Bank for the account of Rafael Sayson
although they were crossed checks and the payee was not Sayson but Melissa's RTW. The
Bank stamped thereon its guarantee that "all prior endorsements and/or lack of
endorsements (were) guaranteed." By such deliberate and positive act, the Bank had for all
legal intents and purposes treated the said checks as negotiable instruments and,
accordingly, assumed the warranty of the endorser.
The weight of authority is to the effect that "the possession of check on a forged or
unauthorized indorsement is wrongful, and when the money is collected on the check, the
bank can be held 'for moneys had and received." 6The proceeds are held for the rightful
owner of the payment and may be recovered by him. The position of the bank taking the
check on the forged or unauthorized indorsement is the same as if it had taken the check and
collected without indorsement at all. The act of the bank amounts to conversion of the
check. 7
It is not disputed that the proceeds of the subject checks belonged to the private respondent.
As she had not at any time authorized Rafael Sayson to endorse or encash them, there was
conversion of the funds by the Bank.
When the Bank paid the checks so endorsed notwithstanding that title had not passed to the
endorser, it did so at its peril and became liable to the payee for the value of the checks. This
liability attached whether or not the Bank was aware of the unauthorized endorsement. 8
The petitioners were negligent when they permitted the encashment of the checks by
Sayson. The Bank should have first verified his right to endorse the crossed checks, of which
he was not the payee, and to deposit the proceeds of the checks to his own account. The
Bank was by reason of the nature of the checks put upon notice that they were issued for
deposit only to the private respondent's account. Its failure to inquire into Sayson's authority
was a breach of a duty it owed to the private respondent.
As the Court stressed in Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corp., 9 "the law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with it, for the purpose of determining their genuineness and regularity. The
collecting bank, being primarily engaged in banking, holds itself out to the public as the
expert on this field, and the law thus holds it to a high standard of conduct."
The petitioners insist that the private respondent has no cause of action against them
because they have no privity of contract with her. They also argue that it was Eddie Reyes,
the private respondent's own husband, who endorsed the checks.
Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank would
still be liable to the private respondent because he was not authorized to make the
endorsements. And even if the endorsements were forged, as alleged, the Bank would still
be liable to the private respondent for not verifying the endorser's authority. There is no
substantial difference between an actual forging of a name to a check as an endorsement by
a person not authorized to make the signature and the affixing of a name to a check as an
endorsement by a person not authorized to endorse it. 10
The Bank does not deny collecting the money on the endorsement. It was its responsibility to
inquire as to the authority of Rafael Sayson to deposit crossed checks payable to Melissa's
RTW upon a prior endorsement by Eddie Reyes. The failure of the Bank to make this inquiry
was a breach of duty that made it liable to the private respondent for the amount of the
checks.
There being no evidence that the crossed checks were actually received by the private
respondent, she would have a right of action against the drawer companies, which in turn
could go against their respective drawee banks, which in turn could sue the herein petitioner
as collecting bank. In a similar situation, it was held that, to simplify proceedings, the payee
of the illegally encashed checks should be allowed to recover directly from the bank
responsible for such encashment regardless of whether or not the checks were actually
delivered to the payee. 11We approve such direct action in the case at bar.
It is worth repeating that before presenting the checks for clearing and for payment, the Bank
had stamped on the back thereof the words: "All prior endorsements and/or lack of
endorsements guaranteed," and thus made the assurance that it had ascertained the
genuineness of all prior endorsements.
We find that the respondent court committed no reversible error in holding that the private
respondent had a valid cause of action against the petitioners and that the latter are indeed
liable to her for their unauthorized encashment of the subject checks. We also agree with the
reduction of the award of the exemplary damages for lack of sufficient evidence to support
them.
WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so ordered.









































G.R. No. 75954 October 22, 1992
PEOPLE OF THE PHILIPPINES, petitioner, vs. HON. DAVID G. NITAFAN, Presiding
Judge, Regional Trial Court, Branch 52, Manila, and K.T. LIM alias MARIANO
LIM, respondents.
BELLOSILLO, J.:
Failing in his argument that B.P. 22, otherwise known as the "Bouncing Check Law", is
unconstitutional, 1 private respondent now argues that the check he issued, a memorandum
check, is in the nature of a promissory note, hence, outside the purview of the statute. Here,
his argument must also fail.
The facts are simple. Private respondent K.T. Lim was charged before respondent court with
violation of B.P. 22 in an Information alleging
That on . . . January 10, 1985, in the City of Manila . . . the said accused did then and
there wilfully, unlawfully and feloniously make or draw and issue to Fatima Cortez
Sasaki . . . Philippine Trust Company Check No. 117383 dated February 9, 1985 . . .
in the amount of P143,000.00, . . . well knowing that at the time of issue he . . . did
not have sufficient funds in or credit with the drawee bank . . . which check . . . was
subsequently dishonored by the drawee bank for insufficiency of funds, and despite
receipt of notice of such dishonor, said accused failed to pay said Fatima Cortez
Sasaki the amount of said check or to make arrangement for full payment of the
same within five (5) banking days after receiving said notice. 2
On 18 July 1986, private respondent moved to quash the Information of the ground that the
facts charged did not constitute a felony as B.P. 22 was unconstitutional and that the check
he issued was a memorandum check which was in the nature of a promissory note, perforce,
civil in nature. On 1 September 1986, respondent judge, ruling that B.P. 22 on which the
Information was based was unconstitutional, issued the questioned Order quashing the
Information. Hence, this petition for review on certiorari filed by the Solicitor General in behalf
of the government.
Since the constitutionality of the "Bouncing Check Law" has already been sustained by this
Court in Lozano v.Martinez 3 and the seven (7) other cases decided jointly with it, 4 the
remaining issue, as aptly stated by private respondent in his Memorandum, is whether a
memorandum check issued postdated in partial payment of a pre-existing obligation is within
the coverage of B.P. 22.
Citing U.S. v. Isham, 5 private respondent contends that although a memorandum check may
not differ in form and appearance from an ordinary check, such a check is given by the
drawer to the payee more in the nature of memorandum of indebtedness and, should be
sued upon in a civil action.
We are not persuaded.
A memorandum check is in the form of an ordinary check, with the word "memorandum",
"memo" or "mem" written across its face, signifying that the maker or drawer engages to pay
the bona fide holder absolutely, without any condition concerning its presentment. 6 Such a
check is an evidence of debt against the drawer, and although may not be intended to be
presented, 7 has the same effect as an ordinary check, 8 and if passed to the third person,
will be valid in his hands like any other check. 9
From the above definition, it is clear that a memorandum check, which is in the form of an
ordinary check, is still drawn on a bank and should therefore be distinguished from a
promissory note, which is but a mere promise to pay. If private respondent seeks to equate
memorandum check with promissory note, as he does to skirt the provisions of B.P. 22, he
could very well have issued a promissory note, and this would be have exempted him form
the coverage of the law. In the business community a promissory note, certainly, has less
impact and persuadability than a check.
Verily, a memorandum check comes within the meaning of Sec. 185 of the Negotiable
Instruments Law which defines a check as "a bill of exchange drawn on a bank payable on
demand." A check is also defined as " [a] written order or request to a bank or persons
carrying on the business of banking, by a party having money in their hands, desiring them to
pay, on presentment, to a person therein named or bearer, or to such person or order, a
named sum of money," citing 2 Dan. Neg. Inst. 528; Blair v. Wilson, 28 Gratt. (Va.)
170; Deener v. Brown,1 MacArth. (D.C.) 350; In re Brown, 2 Sto. 502, Fed. Cas. No.
1,985. See Chapman v. White, 6 N.Y. 412, 57 Am. Dec 464. 10 Another definition of check is
that is "[a] draft drawn upon a bank and payable on demand, signed by the maker or drawer,
containing an unconditional promise to pay a sum certain in money to the order of the
payee," citing State v.Perrigoue, 81 Wash, 2d 640, 503 p. 2d 1063, 1066. 11
A memorandum check must therefore fall within the ambit of B.P. 22 which does not
distinguish but merely provides that "[a]ny person who makes or draws and issues any
check knowing at the time of issue that he does not have sufficient funds in or credit with the
drawee bank . . . which check is subsequently dishonored . . . shall be punished by
imprisonment . . ." (Emphasis supplied ). 12 Ubi lex no distinguit nec nos distinguere
debemus.
But even if We retrace the enactment of the "Bouncing Check Law" to determine the
parameters of the concept of "check", We can easily glean that the members of the then
Batasang Pambansa intended it to be comprehensive as to include all checks drawn against
banks. This was particularly the ratiocination of Mar. Estelito P. Mendoza, co-sponsor of
Cabinet Bill No. 9 which later became B.P. 22, when in response to the interpellation of Mr.
Januario T. Seo, Mr. Mendoza explained that the draft or order must be addressed to a
bank or depository, 13 and accepted the proposed amendment of Messrs. Antonio P. Roman
and Arturo M. Tolentino that the words "draft or order", and certain terms which technically
meant promissory notes, wherever they were found in the text of the bill, should be deleted
since the bill was mainly directed against the pernicious practice of issuing checks with
insufficient or no funds, and not to drafts which were not drawn against banks. 14
A memorandum check, upon presentment, is generally accepted by the bank. Hence it does
not matter whether the check issued is in the nature of a memorandum as evidence of
indebtedness or whether it was issued is partial fulfillment of a pre-existing obligation, for
what the law punishes is the issuance itself of a bouncing check 15 and not the purpose for
which it was issuance. The mere act of issuing a worthless check, whether as a deposit, as a
guarantee, or even as an evidence of a pre-existing debt, is malum prohibitum. 16
We are not unaware that a memorandum check may carry with it the understanding that it is
not be presented at the bank but will be redeemed by the maker himself when the loan fall
due. This understanding may be manifested by writing across the check "Memorandum",
"Memo" or "Mem." However, with the promulgation of B.P. 22, such understanding or private
arrangement may no longer prevail to exempt it from penal sanction imposed by the law. To
require that the agreement surrounding the issuance of check be first looked into and
thereafter exempt such issuance from the punitive provision of B.P. 22 on the basis of such
agreement or understanding would frustrate the very purpose for which the law was enacted
to stem the proliferation of unfunded checks. After having effectively reduced the
incidence of worthless checks changing hands, the country will once again experience the
limitless circulation of bouncing checks in the guise of memorandum checks if such checks
will be considered exempt from the operation of B.P. 22. It is common practice in commercial
transactions to require debtors to issue checks on which creditors must rely as guarantee of
payment. To determine the reasons for which checks are issued, or the terms and conditions
for their issuance, will greatly erode the faith the public responses in the stability and
commercial value of checks as currency substitutes, and bring about havoc in trade and in
banking communities. 17
WHEREFORE, the petition is GRANTED and the Order of respondent Judge of 1 September
1986 is SET ASIDE. Consequently, respondent Judge, or whoever presides over the
Regional Trial Court of Manila, Branch 52, is hereby directed forthwith to proceed with the
hearing of the case until terminated.
SO ORDERED.














G.R. No. 121413 January 29, 2001
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA
AND AMERICA),petitioner, vs. COURT OF APPEALS and FORD PHILIPPINES, INC. and
CITIBANK, N.A., respondents.

G.R. No. 121479 January 29, 2001
FORD PHILIPPINES, INC., petitioner-plaintiff, vs. COURT OF APPEALS and CITIBANK,
N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK,respondents.

G.R. No. 128604 January 29, 2001
FORD PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A., PHILIPPINE COMMERCIAL
INTERNATIONAL BANK and COURT OF APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the drawee
bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial International
Bank (PCIBank) [formerly Insular Bank of Asia and America], the value of several checks
payable to the Commissioner of Internal Revenue, which were embezzled allegedly by an
organized syndicate.1wphi1.nt
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995
Decision1 of the Court of Appeals in CA-G.R. CV No. 25017, entitled "Ford Philippines, Inc.
vs. Citibank, N.A. and Insular Bank of Asia and America (now Philipppine Commercial
International Bank), and the August 8, 1995 Resolution,2 ordering the collecting bank,
Philippine Commercial International Bank, to pay the amount of Citibank Check No. SN-
04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision3 of the
Court of Appeals and its March 5, 1997 Resolution4 in CA-G.R. No. 28430 entitled "Ford
Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial International Bank," affirming in
toto the judgment of the trial court holding the defendant drawee bank, Citibank, N.A., solely
liable to pay the amount of P12,163,298.10 as damages for the misapplied proceeds of the
plaintiff's Citibanl Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of Appeals are as
follows:
"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-
04867 in the amount of P4,746,114.41, in favor of the Commissioner of Internal
Revenue as payment of plaintiff;s percentage or manufacturer's sales taxes for the
third quarter of 1977.
The aforesaid check was deposited with the degendant IBAA (now PCIBank) and
was subsequently cleared at the Central Bank. Upon presentment with the defendant
Citibank, the proceeds of the check was paid to IBAA as collecting or depository
bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or
received by the payee thereof, the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal
Revenue, the plaintiff was compelled to make a second payment to the Bureau of
Internal Revenue of its percentage/manufacturers' sales taxes for the third quarter of
1977 and that said second payment of plaintiff in the amount of P4,746,114.41 was
duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the transactions in
question, plaintiff had been maintaining a checking account with defendant Citibank;
that Citibank Check No. SN-04867 which was drawn and issued by the plaintiff in
favor of the Commissioner of Internal Revenue was a crossed check in that, on its
face were two parallel lines and written in between said lines was the phrase
"Payee's Account Only"; and that defendant Citibank paid the full face value of the
check in the amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff's percentage tax for the
last quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax Receipt
No. 18747002, dated October 20, 1977, designating therein in Muntinlupa, Metro
Manila, as the authorized agent bank of Metrobanl, Alabang branch to receive the
tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the
Revenue Tax Receipt No. 18747002, was deposited with defendant IBAA, through
its Ermita Branch. The latter accepted the check and sent it to the Central Clearing
House for clearing on the samd day, with the indorsement at the back "all prior
indorsements and/or lack of indorsements guaranteed." Thereafter, defendant IBAA
presented the check for payment to defendant Citibank on same date, December 19,
1977, and the latter paid the face value of the check in the amount of P4,746,114.41.
Consequently, the amount of P4,746,114.41 was debited in plaintiff's account with
the defendant Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the
amount of P4,746,114.41 was not paid to the Commissioner of Internal Revenue.
Hence, in separate letters dated October 26, 1979, addressed to the defendants, the
plaintiff notified the latter that in case it will be re-assessed by the BIR for the
payment of the taxes covered by the said checks, then plaintiff shall hold the
defendants liable for reimbursement of the face value of the same. Both defendants
denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue
addressed to the plaintiff - supposed to be Exhibit "D", the latter was officially
informed, among others, that its check in the amount of P4, 746,114.41 was not paid
to the government or its authorized agent and instead encashed by unauthorized
persons, hence, plaintiff has to pay the said amount within fifteen days from receipt
of the letter. Upon advice of the plaintiff's lawyers, plaintiff on March 11, 1982, paid to
the Bureau of Internal Revenue, the amount of P4,746,114.41, representing payment
of plaintiff's percentage tax for the third quarter of 1977.
As a consequence of defendant's refusal to reimburse plaintiff of the payment it had
made for the second time to the BIR of its percentage taxes, plaintiff filed on January
20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial
International Bank (PCI Bank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check
No. SN-04867 in the amount of P4,746,114.41 "was in due course"; it merely relied
on the clearing stamp of the depository/collecting bank, the defendant IBAA that "all
prior indorsements and/or lack of indorsements guaranteed"; and the proximate
cause of plaintiff's injury is the gross negligence of defendant IBAA in indorsing the
plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank
Check No. SN-048867 was paid to defendant IBAA as collecting bank, plaintiff was
maintaining a checking account with defendant Citibank."5
Although it was not among the stipulated facts, an investigation by the National Bureau of
Investigation (NBI) revealed that Citibank Check No. SN-04867 was recalled by Godofredo
Rivera, the General Ledger Accountant of Ford. He purportedly needed to hold back the
check because there was an error in the computation of the tax due to the Bureau of Internal
Revenue (BIR). With Rivera's instruction, PCIBank replaced the check with two of its own
Manager's Checks (MCs). Alleged members of a syndicate later deposited the two MCs with
the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific
Banking Corporation (PBC) and Godofredo Rivera, as third party defendants. But the court
dismissed the complaint against PBC for lack of cause of action. The course likewise
dismissed the third-party complaint against Godofredo Rivera because he could not be
served with summons as the NBI declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:
"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and
severally, to pay the plaintiff the amount of P4,746,114.41 representing the
face value of plaintiff's Citibank Check No. SN-04867, with interest thereon
at the legal rate starting January 20, 1983, the date when the original
complaint was filed until the amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA
(now PCI Bank) to reimburse defendant Citibank for whatever amount the
latter has paid or may pay to the plaintiff in accordance with next preceding
paragraph;
"3. The counterclaims asserted by the defendants against the plaintiff, as
well as that asserted by the cross-defendant against the cross-claimant are
dismissed, for lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their
respective petitions for review on certiorari to the Courts of Appeals. On March 27, 1995, the
appellate court issued its judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision
with modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant
Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the
amount of P4,746,114.41 representing the face value of plaintiff's Citibank
Check No. SN-04867, with interest thereon at the legal rate starting January
20, 1983, the date when the original complaint was filed until the amount is
fully paid;
3. Dismissing the counterclaims asserted by the defendants against the
plaintiff as well as that asserted by the cross-defendant against the cross-
claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford
filed a "Motion for Partial Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under
Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth
Division of the Court of Appeals contending that it merely acted on the instruction of Ford and
such casue of action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner acted on the
check drawn by respondent Ford on the said respondent's instructions, it
nevertheless found the petitioner liable to the said respondent for the full amount of
the said check.
II. Did the respondent court err when it did not find prescription in favor of the
petitioner.8
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same
decision and resolution of the Court of Appeals, and praying for the reinstatement in toto of
the decision of the trial court which found both PCIBank and Citibank jointly and severally
liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering that:
1. As drawee bank, respondent Citibank owes to petitioner Ford, as the
drawer of the subject check and a depositor of respondent Citibank, an
absolute and contractual duty to pay the proceeds of the subject check only
to the payee thereof, the Commissioner of Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to
the subject check, which was crossed and payable to "Payee's Account
Only."
3. Respondent Citibank raises an issue for the first time on appeal; thus the
same should not be considered by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross
negligence on the part of petitioner Ford.9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to deliver the proceeds of
the subject check to a person other than the payee named therein, the
Commissioner of the Bureau of Internal Revenue; thus, PCIBank's only
obligation is to deliver the proceeds to the Commissioner of the Bureau of
Internal Revenue.10
2. PCIBank which affixed its indorsement on the subject check ("All prior
indorsement and/or lack of indorsement guaranteed"), is liable as collecting
bank.11
3. PCIBank is barred from raising issues of fact in the instant proceedings.12
4. Petitioner Ford's cause of action had not prescribed.13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds of checks intended, this time, to
settle Ford's percentage taxes appertaining to the second quarter of 1978 and the first
quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37
representing the percentage tax due for the second quarter of 1978 payable to the
Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued
for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of
P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979 and
payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A-
1697160 was issued for the said purpose.
Both checks were "crossed checks" and contain two diagonal lines on its upper corner
between, which were written the words "payable to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the
BIR, Region 4-B, demanded for the said tax payments the corresponding periods above-
mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered
"fake and spurious". This anomaly was confirmed by the NBI upon the initiative of the BIR.
The findings forced Ford to pay the BIR a new, while an action was filed against Citibank and
PCIBank for the recovery of the amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on
the modus operandi of the syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General
Ledger Accountant. As such, he prepared the plaintiff's check marked Ex. 'A'
[Citibank Check No. Sn-10597] for payment to the BIR. Instead, however, fo
delivering the same of the payee, he passed on the check to a co-conspirator named
Remberto Castro who was a pro-manager of the San Andres Branch of PCIB.* In
connivance with one Winston Dulay, Castro himself subsequently opened a
Checking Account in the name of a fictitious person denominated as 'Reynaldo
reyes' in the Meralco Branch of PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a
worthless Bank of America Check in exactly the same amount as the first FORD
check (Exh. "A", P5,851,706.37) while this worthless check was coursed through
PCIB's main office enroute to the Central Bank for clearing, replaced this worthless
check with FORD's Exhibit 'A' and accordingly tampered the accompanying
documents to cover the replacement. As a result, Exhibit 'A' was cleared by
defendant CITIBANK, and the fictitious deposit account of 'Reynaldo Reyes' was
credited at the PCIB Meralco Branch with the total amount of the FORD check
Exhibit 'A'. The same method was again utilized by the syndicate in profiting from
Exh. 'B' [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis
Marindo, Rivera's Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks distributing the
sahres of the other participating conspirators namely (1) CRISANTO BERNABE, the
mastermind who formulated the method for the embezzlement; (2) RODOLFO R. DE
LEON a customs broker who negotiated the initial contact between Bernabe, FORD's
Godofredo Rivera and PCIB's Remberto Castro; (3) JUAN VASTILLO who assisted
de Leon in the initial arrangements; (4) GODOFREDO RIVERA, FORD's accountant
who passed on the first check (Exhibit "A") to Castro; (5) REMERTO CASTRO,
PCIB's pro-manager at San Andres who performed the switching of checks in the
clearing process and opened the fictitious Reynaldo Reyes account at the PCIB
Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at its Meralco
Branch, who assisted Castro in switching the checks in the clearing process and
facilitated the opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS
MARINDO, Rivera's Assistant at FORD, who gave the second check (Exh. "B") to
Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and
spurious revenue tax receipts to make it appear that the BIR had received FORD's
tax payments.
Several other persons and entities were utilized by the syndicate as conduits in the
disbursements of the proceeds of the two checks, but like the aforementioned
participants in the conspiracy, have not been impleaded in the present case. The
manner by which the said funds were distributed among them are traceable from the
record of checks drawn against the original "Reynaldo Reyes" account and
indubitably identify the parties who illegally benefited therefrom and readily indicate
in what amounts they did so."14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank,
Citibank, liable for the value of the two checks while adsolving PCIBank from any liability,
disposing as follows:
"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to
reimburse plaintiff FORD the total amount of P12,163,298.10 prayed for in its
complaint, with 6% interest thereon from date of first written demand until full
payment, plus P300,000.00 attorney's fees and expenses litigation, and to pay the
defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00 as
attorney's fees and costs of litigation, and pay the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision
of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of
Appeals decision and its resolution dated March 5, 1997, with respect to the dismissal of the
complaint against PCIBank and holding Citibank solely responsible for the proceeds of
Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73
respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant
PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence
required to be exercised by it as a banking insitution.
II. Defendant PCIBank clearly failed to observe the diligence required in the selection
and supervision of its officers and employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or
damage resulting to the plaintiff Ford as a consequence of the substitution of the
check consistent with Section 5 of Central Bank Circular No. 580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in
due course the subject checks, it is liable, under Article 2154 of the Civil Code, to
return the money which it admits having received, and which was credited to it its
Central bank account.16
The main issue presented for our consideration by these petitions could be simplified as
follows: Has petitioner Ford the right to recover from the collecting bank (PCIBank) and the
drawee bank (Citibank) the value of the checks intended as payment to the Commissioner of
Internal Revenue? Or has Ford's cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the title of the
person negotiating the same was allegedly defective because the instrument was obtained
by fraud and unlawful means, and the proceeds of the checks were not remitted to the payee.
It was established that instead of paying the checks to the CIR, for the settlement of the
approprite quarterly percentage taxes of Ford, the checks were diverted and encashed for
the eventual distribution among the mmbers of the syndicate. As to the unlawful negotiation
of the check the applicable law is Section 55 of the Negotiable Instruments Law (NIL), which
provides:
"When title defective -- The title of a person who negotiates an instrument is
defective within the meaning of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or fore and fear, or other unlawful means, or for
an illegal consideration, or when he negotiates it in breach of faith or under such
circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in
breach of faith amounting to fraud. The person negotiating the checks must have gone
beyond the authority given by his principal. If the principal could prove that there was no
negligence in the performance of his duties, he may set up the personal defense to escape
liability and recover from other parties who. Though their own negligence, alowed the
commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers
belonging to a syndicate, are now fugitives from justice. They have, even if temporarily,
escaped liability for the embezzlement of millions of pesos. We are thus left only with the task
of determining who of the present parties before us must bear the burden of loss of these
millions. It all boils down to thequestion of liability based on the degree of negligence among
the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed
contributory negligence" that would defeat its claim for reimbursement, bearing ing mind that
its employees, Godofredo Rivera and Alexis Marindo, were among the members of the
syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate
the checks to his co-conspirators, instead of delivering them to the designated authorized
collecting bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that Ford
was remiss in the supervision and control of its own employees, inasmuch as it only
discovered the syndicate's activities through the information given by the payee of the checks
after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to
divert the proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to
the subsequent run-around of unds of Citibank Check Nos. SN-10597 and 16508, PCIBank
claims that the proximate cause of the damge to Ford lies in its own officers and employees
who carried out the fradulent schemes and the transactions. These circumstances were not
checked by other officers of the company including its comptroller or internal auditor.
PCIBank contends that the inaction of Ford despite the enormity of the amount involved was
a sheer negligence and stated that, as between two innocent persons, one of whom must
suffer the consequences of a breach of trust, the one who made it possible, by his act of
negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there
was no evidence presented before the trial court showing lack of diligence on the part of
Ford. And, citing the case of Gempesaw vs. Court of Appeals,17 Ford argues that even if
there was a finding therein that the drawer was negligent, the drawee bank was still ordered
to pay damages.
Furthermore, Ford contends the Godofredo rivera was not authorized to make any
representation in its behalf, specifically, to divert the proceeds of the checks. It adds that
Citibank raised the issue of imputed negligence against Ford for the first time on appeal.
Thus, it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-
servant relationship is instructive. Since a master may be held for his servant's wrongful act,
the law imputes to the master the act of the servant, and if that act is negligent or wrongful
and proximately results in injury to a third person, the negligence or wrongful conduct is the
negligence or wrongful conduct of the master, for which he is liable.18 The general rule is
that if the master is injured by the negligence of a third person and by the concuring
contributory negligence of his own servant or agent, the latter's negligence is imputed to his
superior and will defeat the superior's action against the third person, asuming, of course that
the contributory negligence was the proximate cause of the injury of which complaint is
made.19
Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's
General Ledger Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of
the loss or damage. AS defined, proximate cause is that which, in the natural and continuous
sequence, unbroken by any efficient, intervening cause produces the injury and without the
result would not have occurred.20
It appears that although the employees of Ford initiated the transactions attributable to an
organized syndicate, in our view, their actions were not the proximate cause of encashing the
checks payable to the CIR. The degree of Ford's negligence, if any, could not be
characterized as the proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to
recall Citibank Check No. SN-04867. Rivera's instruction to replace the said check with
PCIBank's Manager's Check was not in theordinary course of business which could have
prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that
these checks were made payable to the CIR. Both were crossed checks. These checks were
apparently turned around by Ford's emploees, who were acting on their own personal
capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-
payor's confidential employee or agent, who by virtue of his position had unusual facilities for
perpertrating the fraud and imposing the forged paper upon the bank, does notentitle the
bank toshift the loss to the drawer-payor, in the absence of some circumstance raising
estoppel against the drawer.21 This rule likewise applies to the checks fraudulently
negotiated or diverted by the confidential employees who hold them in their possession.
With respect to the negligence of PCIBank in the payment of the three checks involved,
separately, the trial courts found variations between the negotiation of Citibank Check No.
SN-04867 and the misapplication of total proceeds of Checks SN-10597 and 16508.
Therefore, we have to scrutinize, separately, PCIBank's share of negligence when the
syndicate achieved its ultimate agenda of stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was
coursed through the ordinary banking transaction, sent to Central Clearing with the
indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed,"
and was presented to Citibank for payment. Thereafter PCIBank, instead of remitting the
proceeds to the CIR, prepared two of its Manager's checks and enabled the syndicate to
encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The
neglect of PCIBank employees to verify whether his letter requesting for the replacement of
the Citibank Check No. SN-04867 was duly authorized, showed lack of care and prudence
required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers
in behalf of the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal
regarding the unwarranted instructions given by the payor or its agent. As aptly stated by the
trial court, to wit:
"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank],
which claimed to be a depository/collecting bank of BIR, it has the responsibility to
make sure that the check in question is deposited in Payee's account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant IBAA should receive
instructions only from its principal BIR and not from any other person especially so
when that person is not known to the defendant. It is very imprudent on the part of
the defendant IBAA to just rely on the alleged telephone call of the one Godofredo
Rivera and in his signature considering that the plaintiff is not a client of the
defendant IBAA."
It is a well-settled rule that the relationship between the payee or holder of commercial paper
and the bank to which it is sent for collection is, in the absence of an argreement to the
contrary, that of principal and agent.22 A bank which receives such paper for collection is the
agent of the payee or holder.23
Even considering arguendo, that the diversion of the amount of a check payable to the
collecting bank in behalf of the designated payee may be allowed, still such diversion must
be properly authorized by the payor. Otherwise stated, the diversion can be justified only by
proof of authority from the drawer, or that the drawer has clothed his agent with apparent
authority to receive the proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at the back of the
questioned checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF
INDORSEMENTS GURANTEED should render PCIBank liable because it made it pass
through the clearing house and therefore Citibank had no other option but to pay it. Thus,
Citibank had no other option but to pay it. Thus, Citibank assets that the proximate cause of
Ford's injury is the gross negligence of PCIBank. Since the questione dcrossed check was
deposited with PCIBank, which claimed to be a depository/collecting bank of the BIR, it had
the responsibility to make sure that the check in questions is deposited in Payee's account
only.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that
the check should be deposited only in the account of the CIR. Thus, it is the duty of the
collecting bank PCIBank to ascertain that the check be deposited in payee's account only.
Therefore, it is the collecting bank (PCIBank) which is bound to scruninize the check and to
know its depositors before it could make the clearing indorsement "all prior indorsements
and/or lack of indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,24 we ruled:
"Anent petitioner's liability on said instruments, this court is in full accord with the
ruling of the PCHC's Board of Directors that:
'In presenting the checks for clearing and for payment, the defendant made an
express guarantee on the validity of "all prior endorsements." Thus, stamped at the
back of the checks are the defedant's clear warranty: ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty,
plaintiff would not have paid on the checks.'
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As
the warranty has proven to be false and inaccurate, the defendant is liable for any
damage arising out of the falsity of its representation."25
Lastly, banking business requires that the one who first cashes and negotiates the check
must take some percautions to learn whether or not it is genuine. And if the one cashing the
check through indifference or othe circumstance assists the forger in committing the fraud, he
should not be permitted to retain the proceeds of the check from the drawee whose sole fault
was that it did not discover the forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which cashes a check drawn
upon another bank, without requiring proof as to the identity of persons presenting it, or
making inquiries with regard to them, cannot hold the proceeds against the drawee when the
proceeds of the checks were afterwards diverted to the hands of a third party. In such cases
the drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by
the usual proper investigation, satisfied itself of the authenticity of the negotiation of the
checks. Thus, one who encashed a check which had been forged or diverted and in turn
received payment thereon from the drawee, is guilty of negligence which proximately
contributed to the success of the fraud practiced on the drawee bank. The latter may recover
from the holder the money paid on the check.26
Having established that the collecting bank's negligence is the proximate cause of the loss,
we conclude that PCIBank is liable in the amount corresponding to the proceeds of Citibank
Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary
course of business that would attribute to it the case of the embezzlement of Citibank Check
Numbers SN-10597 and 16508, because PCIBank did not actually receive nor hold the two
Ford checks at all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank contributed any official or
conscious participation in the process of the embezzlement. This Court is convinced
that the switching operation (involving the checks while in transit for "clearing") were
the clandestine or hidden actuations performed by the members of the syndicate in
their own personl, covert and private capacity and done without the knowledge of the
defendant PCIBank"27
In this case, there was no evidence presented confirming the conscious particiapation of
PCIBank in the embezzlement. As a general rule, however, a banking corporation is liable for
the wrongful or tortuous acts and declarations of its officers or agents within the course and
scope of their employment.28 A bank will be held liable for the negligence of its officers or
agents when acting within the course and scope of their employment. It may be liable for the
tortuous acts of its officers even as regards that species of tort of which malice is an essential
element. In this case, we find a situation where the PCIBank appears also to be the victim of
the scheme hatched by a syndicate in which its own management employees had
particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank
Check Numbers SN-10597 and 16508. He passed the checks to a co-conspirator, an
Assistant Manager of PCIBank's Meralco Branch, who helped Castro open a Checking
account of a fictitious person named "Reynaldo Reyes." Castro deposited a worthless Bank
of America Check in exactly the same amount of Ford checks. The syndicate tampered with
the checks and succeeded in replacing the worthless checks and the eventual encashment of
Citibank Check Nos. SN 10597 and 16508. The PCIBank Ptro-manager, Castro, and his co-
conspirator Assistant Manager apparently performed their activities using facilities in their
official capacity or authority but for their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of confidence will not be permitted to
profit by the frauds these officers or agents were enabled to perpetrate in the apparent
course of their employment; nor will t be permitted to shirk its responsibility for such frauds,
even though no benefit may accrue to the bank therefrom. For the general rule is that a bank
is liable for the fraudulent acts or representations of an officer or agent acting within the
course and apparent scope of his employment or authority.29 And if an officer or employee of
a bank, in his official capacity, receives money to satisfy an evidence of indebetedness
lodged with his bank for collection, the bank is liable for his misappropriation of such sum.30
Moreover, as correctly pointed out by Ford, Section 531 of Central Bank Circular No. 580,
Series of 1977 provides that any theft affecting items in transit for clearing, shall be for the
account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the
performance of its duties. Citibank failed to establish that its payment of Ford's checjs were
made in due course and legally in order. In its defense, Citibank claims the genuineness and
due execution of said checks, considering that Citibank (1) has no knowledge of any informity
in the issuance of the checks in question (2) coupled by the fact that said checks were
sufficiently funded and (3) the endorsement of the Payee or lack thereof was guaranteed by
PCI Bank (formerly IBAA), thus, it has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and
contractual duty to pay the proceeds of the subject check only to the payee thereof, the CIR.
Citing Section 6232 of the Negotiable Instruments Law, Ford argues that by accepting the
instrument, the acceptro which is Citibank engages that it will pay according to the tenor of its
acceptance, and that it will pay only to the payee, (the CIR), considering the fact that here the
check was crossed with annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by
Ford on Citibank Checks Numbers SN 10597 and 16508, because of the contractual
relationship existing between the two. Citibank, as the drawee bank breached its contractual
obligation with Ford and such degree of culpability contributed to the damage caused to the
latter. On this score, we agree with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before
paying the amount of the proceeds thereof to the collecting bank of the BIR. One thing is
clear from the record: the clearing stamps at the back of Citibank Check Nos. SN 10597 and
16508 do not bear any initials. Citibank failed to notice and verify the absence of the clearing
stamps. Had this been duly examined, the switching of the worthless checks to Citibank
Check Nos. 10597 and 16508 would have been discovered in time. For this reason, Citibank
had indeed failed to perform what was incumbent upon it, which is to ensure that the amount
of the checks should be paid only to its designated payee. The fact that the drawee bank did
not discover the irregularity seasonably, in our view, consitutes negligence in carrying out the
bank's duty to its depositors. The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of their
relationship.33
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank
and Citibank failed in their respective obligations and both were negligent in the selection and
supervision of their employees resulting in the encashment of Citibank Check Nos. SN 10597
AND 16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds
of said checks issued by Ford in favor of the CIR.
Time and again, we have stressed that banking business is so impressed with public interest
where the trust and confidence of the public in general is of paramount umportance such that
the appropriate standard of diligence must be very high, if not the highest, degree of
diligence.34 A bank's liability as obligor is not merely vicarious but primary, wherein the
defense of exercise of due diligence in the selection and supervision of its employees is of no
moment.35
Banks handle daily transactions involving millions of pesos.36 By the very nature of their
work the degree of responsibility, care and trustworthiness expected of their employees and
officials is far greater than those of ordinary clerks and employees.37 Banks are expected to
exercise the highest degree of diligence in the selection and supervision of their
employees.38
On the issue of prescription, PCIBank claims that the action of Ford had prescribed because
of its inability to seek judicial relief seasonably, considering that the alleged negligent act took
place prior to December 19, 1977 but the relief was sought only in 1983, or seven years
thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the
payment, which is ordinarily when the check is returned to the alleged drawer as a voucher
with a statement of his account,39 and an action upon a check is ordinarily governed by the
statutory period applicable to instruments in writing.40
Our laws on the matter provide that the action upon a written contract must be brought within
ten year from the time the right of action accrues.41 hence, the reckoning time for the
prescriptive period begins when the instrument was issued and the corresponding check was
returned by the bank to its depositor (normally a month thereafter). Applying the same rule,
the cause of action for the recovery of the proceeds of Citibank Check No. SN 04867 would
normally be a month after December 19, 1977, when Citibank paid the face value of the
check in the amount of P4,746,114.41. Since the original complaint for the cause of action
was filed on January 20, 1984, barely six years had lapsed. Thus, we conclude that Ford's
cause of action to recover the amount of Citibank Check No. SN 04867 was seasonably filed
within the period provided by law.
Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud.
Failure on the part of the depositor to examine its passbook, statements of account, and
cancelled checks and to give notice within a reasonable time (or as required by statute) of
any discrepancy which it may in the exercise of due care and diligence find therein, serves to
mitigate the banks' liability by reducing the award of interest from twelve percent (12%) to six
percent (6%) per annum. As provided in Article 1172 of the Civil Code of the Philippines,
respondibility arising from negligence in the performance of every kind of obligation is also
demandable, but such liability may be regulated by the courts, according to the
circumstances. In quasi-delicts, the contributory negligence of the plaintiff shall reduce the
damages that he may recover.42
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV
No. 25017 areAFFIRMED. PCIBank, know formerly as Insular Bank of Asia and America, id
declared solely responsible for the loss of the proceeds of Citibank Check No SN 04867 in
the amount P4,746,114.41, which shall be paid together with six percent (6%) interest
thereon to Ford Philippines Inc. from the date when the original complaint was filed until said
amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430
are MODIFIED as follows: PCIBank and Citibank are adjudged liable for and must share the
loss, (concerning the proceeds of Citibank Check Numbers SN 10597 and 16508 totalling
P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDEREDto pay Ford Philippines Inc.
P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed
until full payment of said amount.1wphi1.nt
Costs against Philippine Commercial International Bank and Citibank N.A.
SO ORDERED.


















G.R. No. 105188 January 23, 1998
MYRON C. PAPA, Administrator of the Testate Estate of Angela M. Butte, petitioner, vs.
A.U. VALENCIA and CO. INC., FELIX PEARROYO, SPS. ARSENIO B. REYES &
AMANDA SANTOS, and DELFIN JAO, respondents.
KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Myron
C. Papa seeks to reverse and set aside 1) the Decision dated 27 January 1992 of the Court
of Appeals which affirmed with modification the decision of the trial court; and 2) the
Resolution dated 22 April 1992 of the same court, which denied petitioner's motion for
reconsideration of the above decision.
The antecedent facts of this case are as follows:
Sometime in June 1982, herein private respondents A.U. Valencia and Co., Inc. (hereinafter
referred to as respondent Valencia, for brevity) and Felix Pearroyo (hereinafter called
respondent Pearroyo), filed with the Regional Trial Court of Pasig, Branch 151, a complaint
for specific performance against herein petitioner Myron C. Papa, in his capacity as
administrator of the Testate Estate of one Angela M. Butte.
The complaint alleged that on 15 June 1973, petitioner Myron C. Papa, acting as attorney-in-
fact of Angela M. Butte, sold to respondent Pearroyo, through respondent Valencia, a parcel
of land, consisting of 286.60 square meters, located at corner Retiro and Cadiz Streets, La
Loma, Quezon City, and covered by Transfer Certificate of Title No. 28993 of the Register of
Deeds of Quezon City; that prior to the alleged sale, the said property, together with several
other parcels of land likewise owned by Angela M. Butte, had been mortgaged by her to the
Associated Banking Corporation (now Associated Citizens Bank); that after the alleged sale,
but before the title to the subject property had been released, Angela M. Butte passed away;
that despite representations made by herein respondents to the bank to release the title to
the property sold to respondent Pearroyo, the bank refused to release it unless and until all
the mortgaged properties of the late Angela M. Butte were also redeemed; that in order to
protect his rights and interests over the property, respondent Pearroyo caused the
annotation on the title of an adverse claim as evidenced by Entry No. P.E.-6118/T-28993,
inscribed on 18 January 1997.
The complaint further alleged that it was only upon the release of the title to the property,
sometime in April 1977, that respondents Valencia and Pearroyo discovered that the
mortgage rights of the bank had been assigned to one Tomas L. Parpana (now deceased),
as special administrator of the Estate of Ramon Papa, Jr., on 12 April 1977; that since then,
herein petitioner had been collecting monthly rentals in the amount of P800.00 from the
tenants of the property, knowing that said property had already been sold to private
respondents on 15 June 1973; that despite repeated demands from said respondents,
petitioner refused and failed to deliver the title to the property. Thereupon, respondents
Valencia and Pearroyo filed a complaint for specific performance, praying that petitioner be
ordered to deliver to respondent Pearroyo the title to the subject property (TCT 28993); to
turn over to the latter the sum of P72,000.00 as accrued rentals as of April 1982, and the
monthly rental of P800.00 until the property is delivered to respondent Pearroyo; to pay
respondents the sum of P20,000.00 as attorney's fees; and to pay the costs of the suit.
In his Answer, petitioner admitted that the lot had been mortgaged to the Associated Banking
Corporation (now Associated Citizens Bank). He contended, however, that the complaint did
not state a cause of action; that the real property in interest was the Testate Estate of Angela
M. Butte, which should have been joined as a party defendant; that the case amounted to a
claim against the Estate of Angela M. Butte and should have been filed in Special
Proceedings No. A-17910 before the Probate Court in Quezon City; and that, if as alleged in
the complaint, the property had been assigned to Tomas L. Parpana, as special administrator
of the Estate of Ramon Papa, Jr., said estate should be impleaded. Petitioner, likewise,
claimed that he could not recall in detail the transaction which allegedly occurred in 1973;
that he did not have TCT No. 28993 in his possession; that he could not be held personally
liable as he signed the deed merely as attorney-in-fact of said Angela M. Butte. Finally,
petitioner asseverated that as a result of the filing of the case, he was compelled to hire the
services of counsel for a fee of P20,000.00 for which respondents should be held liable.
Upon his motion, herein private respondent Delfin Jao was allowed to intervene in the case.
Making common cause with respondents Valencia and Pearroyo, respondent Jao alleged
that the subject lot which had been sold to respondent Pearroyo through respondent
Valencia was in turn sold to him on 20 August 1973 for the sum of P71,500.00, upon his
paying earnest money in the amount of P5,000.00. He, therefore, prayed that judgment be
rendered in favor of respondents, the latter in turn be ordered to execute in his favor the
appropriate deed of conveyance covering the property in question and to turn over to him the
rentals which aforesaid respondents sought to collect from petitioner Myron V. Papa.
Respondent Jao, likewise, averred that as a result of petitioner's refusal to deliver the title to
the property to respondents Valencia and Pearroyo, who in turn failed to deliver the said title
to him, he suffered mental anguish and serious anxiety for which he sought payment of moral
damages; and, additionally, the payment of attorney's fees and costs.
For his part, petitioner, as administrator of the Testate Estate of Angela M. Butte, filed a third-
party complaint against herein private respondents, spouses Arsenio B. Reyes and Amanda
Santos (respondent Reyes spouses, for short). He averred, among other's that the late
Angela M. Butte was the owner of the subject property; that due to non-payment of real
estate tax said property was sold at public auction the City Treasurer of Quezon City to the
respondent Reyes spouses on 21 January 1980 for the sum of P14,000.00; that the one-year
period of redemption had expired; that respondents Valencia and Pearroyo had sued
petitioner Papa as administrator of the estate of Angela M. Butte, for the delivery of the title to
the property; that the same aforenamed respondents had acknowledged that the price paid
by them was insufficient, and that they were willing to add a reasonable amount or a
minimum of P55,000.00 to the price upon delivery of the property, considering that the same
was estimated to be worth P143,000.00; that petitioner was willing to reimburse respondents
Reyes spouses whatever amount they might have paid for taxes and other charges, since the
subject property was still registered in the name of the late Angela M. Butte; that it was
inequitable to allow respondent Reyes spouses to acquire property estimated to be worth
P143,000.00, for a measly sum of P14,000.00. Petitioner prayed that judgment be rendered
canceling the tax sale to respondent Reyes spouses; restoring the subject property to him
upon payment by him to said respondent Reyes spouses of the amount of P14,000.00, plus
legal interest; and, ordering respondents Valencia and Pearroyo to pay him at least
P55,000.00 plus everything they might have to pay the Reyes spouses in recovering the
property.
Respondent Reyes spouses in their Answer raised the defense of prescription of petitioner's
right to redeem the property.
At the trial, only respondent Pearroyo testified. All the other parties only submitted
documentary proof.
On 29 June 1987, the trial court rendered a decision, the dispositive portion of which reads:
WHEREUPON, judgment is hereby rendered as follows:
1) Allowing defendant to redeem from third-party defendants and ordering
the latter to allow the former to redeem the property in question, by paying
the sum of P14,000.00 plus legal interest of 12% thereon from January 21,
1980;
2) Ordering defendant to execute a Deed of Absolute Sale in favor of plaintiff
Felix Pearroyo covering the property in question and to deliver peaceful
possession and enjoyment of the said property to the said plaintiff, free from
any liens and encumbrances;
Should this not be possible, for any reason not attributable to defendant,
said defendant is ordered to pay to plaintiff Felix Pearroyo the sum of
P45,000.00 plus legal interest of 12% from June 15, 1973;
3) Ordering plaintiff Felix Pearroyo to execute and deliver to intervenor a
deed of absolute sale over the same property, upon the latter's payment to
the former of the balance of the purchase price of P71,500.00;
Should this not be possible, plaintiff Felix Pearroyo is ordered to pay
intervenor the sum of P5,000.00 plus legal interest of 12% from August 23,
1973; and
4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as
attorney's fees and litigation expenses.
SO ORDERED. 1
Petitioner appealed the aforesaid decision of the trial court to the Court of Appeals, alleging
among others that the sale was never "consummated" as he did not encash the check (in the
amount of P40,000.00) given by respondents Valencia and Pearroyo in payment of the full
purchase price of the subject lot. He maintained that what said respondent had actually paid
was only the amount of P5,000.00 (in cash) as earnest money.
Respondent Reyes spouses, likewise, appealed the above decision. However, their appeal
was dismissed because of failure to file their appellant's brief.
On 27 January 1992, the Court of Appeals rendered a decision, affirming with modification
the trial court's decision, thus:
WHEREFORE, the second paragraph of the dispositive portion of the
appealed decision is MODIFIED, by ordering the defendant-appellant to
deliver to plaintiff-appellees the owner's duplicate of TCT No. 28993 of
Angela M. Butte and the peaceful possession and enjoyment of the lot in
question or, if the owner's duplicate certificate cannot be produced, to
authorize the Register of Deeds to cancel it and issue a certificate of title in
the name of Felix Pearroyo. In all other respects, the decision appealed
from is AFFIRMED. Costs against defendant-appellant Myron C. Papa.
SO ORDERED. 2
In affirming the trial court's decision, respondent court held that contrary to petitioner's claim
that he did not encash the aforesaid check, and therefore, the sale was not consummated,
there was no evidence at all that petitioner did not, in fact, encash said check. On the other
hand, respondent Pearroyo testified in court that petitioner Papa had received the amount of
P45,000.00 and issued receipts therefor. According to respondent court, the presumption is
that the check was encashed, especially since the payment by check was not denied by
defendant-appellant (herein petitioner) who, in his Answer, merely alleged that he "can no
longer recall the transaction which is supposed to have happened 10 years ago." 3
On petitioner's claim that he cannot be held personally liable as he had acted merely as
attorney-in-fact of the owner, Angela M. Butte, respondent court held that such contention is
without merit. This action was not brought against him in his personal capacity, but in his
capacity as the administrator of the Testate Estate of Angela M. Butte. 4
On petitioner's contention that the estate of Angela M. Butte should have been joined in the
action as the real party in interest, respondent court held that pursuant to Rule 3, Section 3 of
the Rules of Court, the estate of Angela M. Butte does not have to be joined in the action.
Likewise, the estate of Ramon Papa, Jr., is not an indispensable party under Rule 3, Section
7 of the same Rules. For the fact is that Ramon Papa, Jr., or his estate, was not a party to
the Deed of Absolute Sale, and it is basic law that contracts bind only those who are parties
thereto. 5
Respondent court observed that the conditions under which the mortgage rights of the bank
were assigned are not clear. In any case, any obligation which the estate of Angela M. Butte
might have to the estate of Ramon Papa, Jr. is strictly between them. Respondents Valencia
and Pearroyo are not bound by any such obligation.
Petitioner filed a motion for reconsideration of the above decision, which motion was denied
by respondent Court of Appeals.
Hence, this petition wherein petitioner raises the following issues:
I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS THAT
THE SALE IN QUESTION WAS CONSUMMATED IS GROUNDED ON
SPECULATION OR CONJECTURE, AND IS CONTRARY TO THE
APPLICABLE LEGAL PRINCIPLE.
II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE
TRIAL COURT, ERRED BECAUSE IT, IN EFFECT, CANCELLED OR
NULLIFIED AN ASSIGNMENT OF THE SUBJECT PROPERTY IN FAVOR
OF THE ESTATE OF RAMON PAPA, JR. WHICH IS NOT A PARTY IN
THIS CASE.
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
ESTATE OF ANGELA M. BUTTE AND THE ESTATE OF RAMON PAPA,
JR. ARE INDISPENSABLE PARTIES IN THIS
CASE. 6
Petitioner argues that respondent Court of Appeals erred in concluding that alleged sale of
the subject property had been consummated. He contends that such a conclusion is based
on the erroneous presumption that the check (in the amount of P40,000.00) had been
cashed, citing Art. 1249 of the Civil Code, which provides, in part, that payment by checks
shall produce the effect of payment only when they have been cashed or when through the
fault of the creditor they have been impaired. 7 Petitioner insists that he never cashed said
check; and, such being the case, its delivery never produced the effect of payment.
Petitioner, while admitting that he had issued receipts for the payments, asserts that said
receipts, particularly the receipt of PCIB Check No. 761025 in the amount of P40,000.00, do
not prove payment. He avers that there must be a showing that said check had been
encashed. If, according to petitioner, the check had been encashed, respondent Pearroyo
should have presented PCIB Check No. 761025 duly stamped received by the payee, or at
least its microfilm copy.
Petitioner finally avers that, in fact, the consideration for the sale was still in the hands of
respondents Valencia and Pearroyo, as evidenced by a letter addressed to him in which
said respondents wrote, in part:
. . . Please be informed that I had been authorized by Dr. Ramon Papa, Jr.,
heir of Mrs. Angela M. Butte to pay you the aforementioned amount of
P75,000.00 for the release and cancellation of subject property's mortgage.
The money is with me and if it is alright with you, I would like to tender the
payment as soon as possible. . . . 8
We find no merit in petitioner's arguments.
It is an undisputed fact that respondents Valencia and Pearroyo had given petitioner Myron
C. Papa the amounts of Five Thousand Pesos (P5,000.00) in cash on 24 May 1973, and
Forty Thousand Pesos (P40,000.00) in check on 15 June 1973, in payment of the purchase
price of the subject lot. Petitioner himself admits having received said amounts, 9 and having
issued receipts therefor. 10 Petitioner's assertion that he never encashed the aforesaid check
is not substantiated and is at odds with his statement in his answer that "he can no longer
recall the transaction which is supposed to have happened 10 years ago." After more than
ten (10) years from the payment in party by cash and in part by check, the presumption is
that the check had been encashed. As already stated, he even waived the presentation of
oral evidence.
Granting that petitioner had never encashed the check, his failure to do so for more than ten
(10) years undoubtedly resulted in the impairment of the check through his unreasonable and
unexplained delay.
While it is true that the delivery of a check produces the effect of payment only when it is
cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is
prejudiced by the creditor's unreasonable delay in presentment. The acceptance of a check
implies an undertaking of due diligence in presenting it for payment, and if he from whom it is
received sustains loss by want of such diligence, it will be held to operate as actual payment
of the debt or obligation for which it was given. 11 It has, likewise, been held that if no
presentment is made at all, the drawer cannot be held liable irrespective of loss or
injury 12 unless presentment is otherwise excused. This is in harmony with Article 1249 of
the Civil Code under which payment by way of check or other negotiable instrument is
conditioned on its being cashed, except when through the fault of the creditor, the instrument
is impaired. The payee of a check would be a creditor under this provision and if its no-
payment is caused by his negligence, payment will be deemed effected and the obligation for
which the check was given as conditional payment will be discharged. 13
Considering that respondents Valencia and Pearroyo had fulfilled their part of the contract of
sale by delivering the payment of the purchase price, said respondents, therefore, had the
right to compel petitioner to deliver to them the owner's duplicate of TCT No. 28993 of Angela
M. Butte and the peaceful possession and enjoyment of the lot in question.
With regard to the alleged assignment of mortgage rights, respondent Court of Appeals has
found that the conditions under which said mortgage rights of the bank were assigned are not
clear. Indeed, a perusal of the original records of the case would show that there is nothing
there that could shed light on the transactions leading to the said assignment of rights; nor is
there any evidence on record of the conditions under which said mortgage rights were
assigned. What is certain is that despite the said assignment of mortgage rights, the title to
the subject property has remained in the name of the late Angela M. Butte. 14 This much is
admitted by petitioner himself in his answer to respondent's complaint as well as in the third-
party complaint that petitioner filed against respondent-spouses Arsenio B. Reyes and
Amanda Santos. 15 Assuming arquendo that the mortgage rights of the Associated Citizens
Bank had been assigned to the estate of Ramon Papa, Jr., and granting that the assigned
mortgage rights validly exists and constitute a lien on the property, the estate may file the
appropriate action to enforce such lien. The cause of action for specific performance which
respondents Valencia and Pearroyo have against petitioner is different from the cause of
action which the estate of Ramon Papa, Jr. may have to enforce whatever rights or liens it
has on the property by reason of its being an alleged assignee of the bank's rights of
mortgage.
Finally, the estate of Angela M. Butte is not an indispensable party. Under Section 3 of Rule 3
of the Rules of Court, an executor or administrator may sue or be sued without joining the
party for whose benefit the action is presented or defended, thus:
Sec. 3. Representative parties. A trustee of an express trust, a guardian,
executor or administrator, or a party authorized by statute, may sue or be
sued without joining the party for whose benefit the action is presented or
defended; but the court may, at any stage of the proceedings, order such
beneficiary to be made a party. An agent acting in his own name and for the
benefit of an undisclosed principal may sue or be sued without joining the
principal except when the contract involves things belonging to the
principal. 16
Neither is the estate of Ramon Papa, Jr. an indispensable party without whom, no final
determination of the action can be had. Whatever prior and subsisting mortgage rights the
estate of Ramon Papa, Jr. has over the property may still be enforced regardless of the
change in ownership thereof.
WHEREFORE, the petition for review is hereby DENIED and the Decision of the Court of
Appeals, dated 27 January 1992 is AFFIRMED. SO ORDERED.
G.R. No. 141968 February 12, 2001
THE INTERNATIONAL CORPORATE BANK (now UNION BANK OF THE
PHILIPPINES), petitioner, vs. SPS. FRANCIS S. GUECO and MA. LUZ E.
GUECO, respondents.
KAPUNAN, J.:
The respondent Gueco Spouses obtained a loan from petitioner International Corporate Bank
(now Union Bank of the Philippines) to purchase a car - a Nissan Sentra 1600 4DR, 1989
Model. In consideration thereof, the Spouses executed promissory notes which were payable
in monthly installments and chattel mortgage over the car to serve as security for the
notes.1wphi1.nt
The Spouses defaulted in payment of installments. Consequently, the Bank filed on August 7,
1995 a civil action docketed as Civil Case No. 658-95 for "Sum of Money with Prayer for a
Writ of Replevin"1 before the Metropolitan Trial Court of Pasay City, Branch 45.2 On August
25, 1995, Dr. Francis Gueco was served summons and was fetched by the sheriff and
representative of the bank for a meeting in the bank premises. Desi Tomas, the Bank's
Assistant Vice President demanded payment of the amount of P184,000.00 which represents
the unpaid balance for the car loan. After some negotiations and computation, the amount
was lowered to P154,000.00, However, as a result of the non-payment of the reduced
amount on that date, the car was detained inside the bank's compound.
On August 28, 1995, Dr. Gueco went to the bank and talked with its Administrative Support,
Auto Loans/Credit Card Collection Head, Jefferson Rivera. The negotiations resulted in the
further reduction of the outstanding loan to P150,000.00.
On August 29, 1995, Dr. Gueco delivered a manager's check in amount of P150,000.00 but
the car was not released because of his refusal to sign the Joint Motion to Dismiss. It is the
contention of the Gueco spouses and their counsel that Dr. Gueco need not sign the motion
for joint dismissal considering that they had not yet filed their Answer. Petitioner, however,
insisted that the joint motion to dismiss is standard operating procedure in their bank to effect
a compromise and to preclude future filing of claims, counterclaims or suits for damages.
After several demand letters and meetings with bank representatives, the respondents
Gueco spouses initiated a civil action for damages before the Metropolitan Trial Court of
Quezon City, Branch 33. The Metropolitan Trial Court dismissed the complaint for lack of
merit.3
On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of the
Metropolitan Trial Court was reversed. In its decision, the RTC held that there was a meeting
of the minds between the parties as to the reduction of the amount of indebtedness and the
release of the car but said agreement did not include the signing of the joint motion to dismiss
as a condition sine qua non for the effectivity of the compromise. The court further ordered
the bank:
1. to return immediately the subject car to the appellants in good working condition;
Appellee may deposit the Manager's check - the proceeds of which have long been
under the control of the issuing bank in favor of the appellee since its issuance,
whereas the funds have long been paid by appellants to .secure said Manager's
Check, over which appellants have no control;
2. to pay the appellants the sum of P50,000.00 as moral damages; P25,000.00 as
exemplary damages, and P25,000.00 as attorney's fees, and
3. to pay the cost of suit.
In other respect, the decision of the Metropolitan Trial Court Branch 33 is hereby
AFFIRMED.4
The case was elevated to the Court of Appeals, which on February 17, 2000, issued the
assailed decision, the decretal portion of which reads:
WHEREFORE, premises considered, the petition for review on certiorari is hereby
DENIED and the Decision of the Regional Trial Court of Quezon City, Branch 227, in
Civil Case No. Q-97-31176, for lack of any reversible error, is AFFIRMED in
toto. Costs against petitioner.
SO ORDERED.5
The Court of Appeals essentially relied on the respect accorded to the finality of the findings
of facts by the lower court and on the latter's finding of the existence of fraud which
constitutes the basis for the award of damages.
The petitioner comes to this Court by way of petition for review on certiorari under Rule 45 of
the Rules of Court, raising the following assigned errors:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO
AGREEMENT WITH RESPECT TO THE EXECUTION OF THE JOINT MOTION TO
DISMISS AS A CONDITION FOR THE COMPROMISE AGREEMENT.
II
THE COURT OF APPEALS ERRED IN GRANTING MORAL AND EXEMPLARY
DAMAGES AND ATTORNEY'S FEES IN FAVOR OF THE RESPONDENTS.
III
THE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER
RETURN THE SUBJECT CAR TO THE RESPONDENTS, WITHOUT MAKING ANY
PROVISION FOR THE ISSUANCE OF THE NEW MANAGER'S/CASHIER'S
CHECK BY THE RESPONDENTS IN FAVOR OF THE PETITIONER IN LIEU OF
THE ORIGINAL CASHIER'S CHECK THAT ALREADY BECAME STALE.6
As to the first issue, we find for the respondents. The issue as to what constitutes the terms
of the oral compromise or any subsequent novation is a question of fact that was resolved by
the Regional Trial Court and the Court of Appeals in favor of respondents. It is well settled
that the findings of fact of the lower court, especially when affirmed by the Court of Appeals,
are binding upon this Court.7 While there are exceptions to this rule,8 the present case does
not fall under anyone of them, the petitioner's claim to the contrary, notwithstanding.
Being an affirmative allegation, petitioner has the burden of evidence to prove his claim that
the oral compromise entered into by the parties on August 28, 1995 included the stipulation
that the parties would jointly file a motion to dismiss. This petitioner failed to do. Notably,
even the Metropolitan Trial Court, while ruling in favor of the petitioner and thereby
dismissing the complaint, did not make a factual finding that the compromise agreement
included the condition of the signing of a joint motion to dismiss.
The Court of Appeals made the factual findings in this wise:
In support of its claim, petitioner presented the testimony of Mr. Jefferson Rivera who
related that respondent Dr. Gueco was aware that the signing of the draft of the Joint
Motion to Dismiss was one of the conditions set by the bank for the acceptance of
the reduced amount of indebtedness and the release of the car. (TSN, October 23,
1996, pp. 17-21, Rollo, pp. 18, 5). Respondents, however, maintained that no such
condition was ever discussed during their meeting of August 28, 1995 (Rollo, p. 32).
The trial court, whose factual findings are entitled to respect since it has the
'opportunity to directly observe the witnesses and to determine by their demeanor on
the stand the probative value of their testimonies' (People vs. Yadao, et al. 216
SCRA 1, 7 [1992]), failed to make a categorical finding on the issue. In dismissing
the claim of damages of the respondents, it merely observed that respondents are
not entitled to indemnity since it was their unjustified reluctance to sign of the Joint
Motion to Dismiss that delayed the release of the car. The trial court opined, thus:
'As regards the third issue, plaintiffs' claim for damages is unavailing. First,
the plaintiffs could have avoided the renting of another car and could have
avoided this litigation had he signed the Joint Motion to Dismiss. While it is
true that herein defendant can unilaterally dismiss the case for collection of
sum of money with replevin, it is equally true that there is nothing wrong for
the plaintiff to affix his signature in the Joint Motion to Dismiss, for after all,
the dismissal of the case against him is for his own good and benefit. In fact,
the signing of the Joint Motion to Dismiss gives the plaintiff three (3)
advantages. First, he will recover his car. Second, he will pay his obligation
to the bank on its reduced amount of P150,000.00 instead of its original
claim of P184,985.09. And third, the case against him will be dismissed.
Plaintiffs, likewise, are not entitled to the award of moral damages and
exemplary damages as there is no showing that the defendant bank acted
fraudulently or in bad faith.' (Rollo, p. 15)
The Court has noted, however, that the trial court, in its findings of facts, clearly
indicated that the agreement of the parties on August 28, 1995 was merely for the
lowering of the price, hence -
'xxx On August 28, 1995, bank representative Jefferson Rivera and plaintiff
entered into an oral compromise agreement, whereby the original claim of
the bank of P184,985.09 was reduced to P150,000.00 and that upon
payment of which, plaintiff was informed that the subject motor vehicle would
be released to him.' (Rollo, p. 12)
The lower court, on the other hand, expressly made a finding that petitioner failed to
include the aforesaid signing of the Joint Motion to Dismiss as part of the agreement.
In dismissing petitioner's claim, the lower court declared, thus:
'If it is true, as the appellees allege, that the signing of the joint motion was a
condition sine qua nonfor the reduction of the appellants' obligation, it is only
reasonable and logical to assume that the joint motion should have been
shown to Dr. Gueco in the August 28, 1995 meeting. Why Dr. Gueco was
not given a copy of the joint motion that day of August 28, 1995, for his
family or legal counsel to see to be brought signed, together with the
P150,000.00 in manager's check form to be submitted on the following day
on August 29, 1995? (sic) [I]s a question whereby the answer up to now
eludes this Court's comprehension. The appellees would like this Court to
believe that Dr Gueco was informed by Mr. Rivera Rivera of the bank
requirement of signing the joint motion on August 28, 1995 but he did not
bother to show a copy thereof to his family or legal counsel that day August
28, 1995. This part of the theory of appellee is too complicated for any
simple oral agreement. The idea of a Joint Motion to Dismiss being signed
as a condition to the pushing through a deal surfaced only on August 29,
1995.
'This Court is not convinced by the appellees' posturing. Such claim rests on
too slender a frame, being inconsistent with human experience. Considering
the effect of the signing of the Joint Motion to Dismiss on the appellants'
substantive right, it is more in accord with human experience to expect Dr.
Gueco, upon being shown the Joint Motion to Dismiss, to refuse to pay the
Manager's Check and for the bank to refuse to accept the manager's check.
The only logical explanation for this inaction is that Dr. Gueco was not shown
the Joint Motion to Dismiss in the meeting of August 28, 1995, bolstering his
claim that its signing was never put into consideration in reaching a
compromise.' xxx.9
We see no reason to reverse.
Anent the issue of award of damages, we find the claim of petitioner meritorious. In finding
the petitioner liable for damages, both .the Regional Trial Court and the Court of Appeals
ruled that there was fraud on the part of the petitioner. The CA thus declared:
The lower court's finding of fraud which became the basis of the award of damages
was likewise sufficiently proven. Fraud under Article 1170 of the Civil Code of the
Philippines, as amended is the 'deliberate and intentional evasion of the normal
fulfillment of obligation' When petitioner refused to release the car despite
respondent's tender of payment in the form of a manager's check, the former
intentionally evaded its obligation and thereby became liable for moral and
exemplary damages, as well as attorney's fees.10
We disagree.
Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the
voluntary execution of a wrongful act, or a willful omission, knowing and intending the effects
which naturally and necessarily arise from such act or omission; the fraud referred to in
Article 1170 of the Civil Code is the deliberate and intentional evasion of the normal
fulfillment of obligation.11 We fail to see how the act of the petitioner bank in requiring the
respondent to sign the joint motion to dismiss could constitute as fraud. True, petitioner may
have been remiss in informing Dr. Gueco that the signing of a joint motion to dismiss is a
standard operating procedure of petitioner bank. However, this can not in anyway have
prejudiced Dr. Gueco. The motion to dismiss was in fact also for the benefit of Dr. Gueco, as
the case filed by petitioner against it before the lower court would be dismissed with
prejudice. The whole point of the parties entering into the compromise agreement was in
order that Dr. Gueco would pay his outstanding account and in return petitioner would return
the car and drop the case for money and replevin before the Metropolitan Trial Court. The
joint motion to dismiss was but a natural consequence of the compromise agreement and
simply stated that Dr. Gueco had fully settled his obligation, hence, the dismissal of the case.
Petitioner's act of requiring Dr. Gueco to sign the joint motion to dismiss can not be said to be
a deliberate attempt on the part of petitioner to renege on the compromise agreement of the
parties. It should, likewise, be noted that in cases of breach of contract, moral damages may
only be awarded when the breach was attended by fraud or bad faith.12 The law presumes
good faith. Dr. Gueco failed to present an iota of evidence to overcome this presumption. In
fact, the act of petitioner bank in lowering the debt of Dr. Gueco from P184,000.00 to
P150,000.00 is indicative of its good faith and sincere desire to settle the case. If respondent
did suffer any damage, as a result of the withholding of his car by petitioner, he has only
himself to blame. Necessarily, the claim for exemplary damages must fait. In no way, may the
conduct of petitioner be characterized as "wanton, fraudulent, reckless, oppressive or
malevolent."13
We, likewise, find for the petitioner with respect to the third assigned error. In the meeting of
August 29, 1995, respondent Dr. Gueco delivered a manager's check representing the
reduced amount of P150,000.00. Said check was given to Mr. Rivera, a representative of
respondent bank. However, since Dr. Gueco refused to sign the joint motion to dismiss, he
was made to execute a statement to the effect that he was withholding the payment of the
check.14 Subsequently, in a letter addressed to Ms. Desi Tomas, vice president of the bank,
dated September 4, 1995, Dr. Gueco instructed the bank to disregard the 'hold order" letter
and demanded the immediate release of his car,15 to which the former replied that the
condition of signing the joint motion to dismiss must be satisfied and that they had kept the
check which could be claimed by Dr. Gueco anytime.16 While there is controversy as to
whether the document evidencing the order to hold payment of the check was formally
offered as evidence by petitioners,17 it appears from the pleadings that said check has not
been encashed.
The decision of the Regional Trial Court, which was affirmed in toto by the Court of Appeals,
orders the petitioner:
1. to return immediately the subject car to the appellants in good working condition.
Appellee may deposit the Manager's Check - the proceeds of which have long been
under the control of the issuing bank in favor of the appellee since its issuance,
whereas the funds have long been paid by appellants to secure said Manager's
Check over which appellants have no control.18
Respondents would make us hold that petitioner should return the car or its value and that
the latter, because of its own negligence, should suffer the loss occasioned by the fact that
the check had become stale.19 It is their position that delivery of the manager's check
produced the effect of payment20 and, thus, petitioner was negligent in opting not to deposit
or use said check. Rudimentary sense of justice and fair play would not countenance
respondents' position.
A stale check is one which has not been presented for payment within a reasonable time
after its issue. It is valueless and, therefore, should not be paid. Under the negotiable
instruments law, an instrument not payable on demand must be presented for payment on
the day it falls due. When the instrument is payable on demand, presentment must be made
within a reasonable time after its issue. In the case of a bill of exchange, presentment is
sufficient if made within a reasonable time after the last negotiation thereof.21
A check must be presented for payment within a reasonable time after its issue,22 and in
determining what is a "reasonable time," regard is to be had to the nature of the instrument,
the usage of trade or business with respect to such instruments, and the facts of the
particular case.23 The test is whether the payee employed such diligence as a prudent man
exercises in his own affairs.24 This is because the nature and theory behind the use of a
check points to its immediate use and payability. In a case, a check payable on demand
which was long overdue by about two and a half (2-1/2) years was considered a stale
check.25 Failure of a payee to encash a check for more than ten (10) years undoubtedly
resulted in the check becoming stale.26 Thus, even a delay of one (1) week27 or two (2)
days,28 under the specific circumstances of the cited cases constituted unreasonable time as
a matter of law.
In the case at bar, however, the check involved is not an ordinary bill of exchange but a
manager's check. A manager's check is one drawn by the bank's manager upon the bank
itself. It is similar to a cashier's check both as to effect and use. A cashier's check is a check
of the bank's cashier on his own or another check. In effect, it is a bill of exchange drawn by
the cashier of a bank upon the bank itself, and accepted in advance by the act of its
issuance.29 It is really the bank's own check and may be treated as a promissory note with
the bank as a maker.30The check becomes the primary obligation of the bank which issues it
and constitutes its written promise to pay upon demand. The mere issuance of it is
considered an acceptance thereof. If treated as promissory note, the drawer would be the
maker and in which case the holder need not prove presentment for payment or present the
bill to the drawee for acceptance.31
Even assuming that presentment is needed, failure to present for payment within a
reasonable time will result to the discharge of the drawer only to the extent of the loss caused
by the delay.32 Failure to present on time, thus, does not totally wipe out all liability. In fact,
the legal situation amounts to an acknowledgment of liability in the sum stated in the check.
In this case, the Gueco spouses have not alleged, much less shown that they or the bank
which issued the manager's check has suffered damage or loss caused by the delay or non-
presentment. Definitely, the original obligation to pay certainly has not been erased.
It has been held that, if the check had become stale, it becomes imperative that the
circumstances that caused its non-presentment be determined.33 In the case at bar, there is
no doubt that the petitioner bank held on the check and refused to encash the same because
of the controversy surrounding the signing of the joint motion to dismiss. We see no bad faith
or negligence in this position taken by the Bank.1wphi1.nt
WHEREFORE, premises considered, the petition for review is given due course. The
decision of the Court of Appeals affirming the decision of the Regional Trial Court is SET
ASIDE. Respondents are further ordered to pay the original obligation amounting to
P150,000.00 to the petitioner upon surrender or cancellation of the manager's check in the
latter's possession, afterwhich, petitioner is to return the subject motor vehicle in good
working condition.
SO ORDERED.

































G.R. No. L-47822 December 22, 1988
PEDRO DE GUZMAN, petitioner, vs. COURT OF APPEALS and ERNESTO
CENDANA, respondents.
FELICIANO, J.:
Respondent Ernesto Cendana, a junk dealer, was engaged in buying up used bottles and
scrap metal in Pangasinan. Upon gathering sufficient quantities of such scrap material,
respondent would bring such material to Manila for resale. He utilized two (2) six-wheeler
trucks which he owned for hauling the material to Manila. On the return trip to Pangasinan,
respondent would load his vehicles with cargo which various merchants wanted delivered to
differing establishments in Pangasinan. For that service, respondent charged freight rates
which were commonly lower than regular commercial rates.
Sometime in November 1970, petitioner Pedro de Guzman a merchant and authorized dealer
of General Milk Company (Philippines), Inc. in Urdaneta, Pangasinan, contracted with
respondent for the hauling of 750 cartons of Liberty filled milk from a warehouse of General
Milk in Makati, Rizal, to petitioner's establishment in Urdaneta on or before 4 December
1970. Accordingly, on 1 December 1970, respondent loaded in Makati the merchandise on to
his trucks: 150 cartons were loaded on a truck driven by respondent himself, while 600
cartons were placed on board the other truck which was driven by Manuel Estrada,
respondent's driver and employee.
Only 150 boxes of Liberty filled milk were delivered to petitioner. The other 600 boxes never
reached petitioner, since the truck which carried these boxes was hijacked somewhere along
the MacArthur Highway in Paniqui, Tarlac, by armed men who took with them the truck, its
driver, his helper and the cargo.
On 6 January 1971, petitioner commenced action against private respondent in the Court of
First Instance of Pangasinan, demanding payment of P 22,150.00, the claimed value of the
lost merchandise, plus damages and attorney's fees. Petitioner argued that private
respondent, being a common carrier, and having failed to exercise the extraordinary diligence
required of him by the law, should be held liable for the value of the undelivered goods.
In his Answer, private respondent denied that he was a common carrier and argued that he
could not be held responsible for the value of the lost goods, such loss having been due
to force majeure.
On 10 December 1975, the trial court rendered a Decision 1 finding private respondent to be
a common carrier and holding him liable for the value of the undelivered goods (P 22,150.00)
as well as for P 4,000.00 as damages and P 2,000.00 as attorney's fees.
On appeal before the Court of Appeals, respondent urged that the trial court had erred in
considering him a common carrier; in finding that he had habitually offered trucking services
to the public; in not exempting him from liability on the ground of force majeure; and in
ordering him to pay damages and attorney's fees.
The Court of Appeals reversed the judgment of the trial court and held that respondent had
been engaged in transporting return loads of freight "as a casual occupation a sideline to
his scrap iron business" and not as a common carrier. Petitioner came to this Court by way of
a Petition for Review assigning as errors the following conclusions of the Court of Appeals:
1. that private respondent was not a common carrier;
2. that the hijacking of respondent's truck was force majeure; and
3. that respondent was not liable for the value of the undelivered cargo.
(Rollo, p. 111)
We consider first the issue of whether or not private respondent Ernesto Cendana may,
under the facts earlier set forth, be properly characterized as a common carrier.
The Civil Code defines "common carriers" in the following terms:
Article 1732. Common carriers are persons, corporations, firms or
associations engaged in the business of carrying or transporting passengers
or goods or both, by land, water, or air for compensation, offering their
services to the public.
The above article makes no distinction between one whose principal business activity is the
carrying of persons or goods or both, and one who does such carrying only as
an ancillary activity (in local Idiom as "a sideline"). Article 1732 also carefully avoids making
any distinction between a person or enterprise offering transportation service on a regular or
scheduled basis and one offering such service on an occasional, episodic or unscheduled
basis. Neither does Article 1732 distinguish between a carrier offering its services to the
"general public," i.e., the general community or population, and one who offers services or
solicits business only from a narrow segment of the general population. We think that Article
1733 deliberaom making such distinctions.
So understood, the concept of "common carrier" under Article 1732 may be seen to coincide
neatly with the notion of "public service," under the Public Service Act (Commonwealth Act
No. 1416, as amended) which at least partially supplements the law on common carriers set
forth in the Civil Code. Under Section 13, paragraph (b) of the Public Service Act, "public
service" includes:
... every person that now or hereafter may own, operate, manage, or control
in the Philippines, for hire or compensation, with general or limited clientele,
whether permanent, occasional or accidental, and done for general business
purposes, any common carrier, railroad, street railway, traction railway,
subway motor vehicle, either for freight or passenger, or both, with or without
fixed route and whatever may be its classification, freight or carrier service of
any class, express service, steamboat, or steamship line, pontines, ferries
and water craft, engaged in the transportation of passengers or freight or
both, shipyard, marine repair shop, wharf or dock, ice plant,
ice-refrigeration plant, canal, irrigation system, gas, electric light, heat and
power, water supply and power petroleum, sewerage system, wire or
wireless communications systems, wire or wireless broadcasting stations
and other similar public services. ... (Emphasis supplied)
It appears to the Court that private respondent is properly characterized as a common carrier
even though he merely "back-hauled" goods for other merchants from Manila to Pangasinan,
although such back-hauling was done on a periodic or occasional rather than regular or
scheduled manner, and even though private respondent'sprincipal occupation was not the
carriage of goods for others. There is no dispute that private respondent charged his
customers a fee for hauling their goods; that fee frequently fell below commercial freight rates
is not relevant here.
The Court of Appeals referred to the fact that private respondent held no certificate of public
convenience, and concluded he was not a common carrier. This is palpable error. A
certificate of public convenience is not a requisite for the incurring of liability under the Civil
Code provisions governing common carriers. That liability arises the moment a person or firm
acts as a common carrier, without regard to whether or not such carrier has also complied
with the requirements of the applicable regulatory statute and implementing regulations and
has been granted a certificate of public convenience or other franchise. To exempt private
respondent from the liabilities of a common carrier because he has not secured the
necessary certificate of public convenience, would be offensive to sound public policy; that
would be to reward private respondent precisely for failing to comply with applicable statutory
requirements. The business of a common carrier impinges directly and intimately upon the
safety and well being and property of those members of the general community who happen
to deal with such carrier. The law imposes duties and liabilities upon common carriers for the
safety and protection of those who utilize their services and the law cannot allow a common
carrier to render such duties and liabilities merely facultative by simply failing to obtain the
necessary permits and authorizations.
We turn then to the liability of private respondent as a common carrier.
Common carriers, "by the nature of their business and for reasons of public policy" 2 are held
to a very high degree of care and diligence ("extraordinary diligence") in the carriage of
goods as well as of passengers. The specific import of extraordinary diligence in the care of
goods transported by a common carrier is, according to Article 1733, "further expressed in
Articles 1734,1735 and 1745, numbers 5, 6 and 7" of the Civil Code.
Article 1734 establishes the general rule that common carriers are responsible for the loss,
destruction or deterioration of the goods which they carry, "unless the same is due to any of
the following causes only:
(1) Flood, storm, earthquake, lightning or other natural
disaster or calamity;
(2) Act of the public enemy in war, whether international or
civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character-of the goods or defects in the packing or-
in the containers; and
(5) Order or act of competent public authority.
It is important to point out that the above list of causes of loss, destruction or deterioration
which exempt the common carrier for responsibility therefor, is a closed list. Causes falling
outside the foregoing list, even if they appear to constitute a species of force majeure fall
within the scope of Article 1735, which provides as follows:
In all cases other than those mentioned in numbers 1, 2, 3, 4 and 5 of the
preceding article, if the goods are lost, destroyed or deteriorated, common
carriers are presumed to have been at fault or to have acted negligently,
unless they prove that they observed extraordinary diligence as required in
Article 1733. (Emphasis supplied)
Applying the above-quoted Articles 1734 and 1735, we note firstly that the specific cause
alleged in the instant case the hijacking of the carrier's truck does not fall within any of
the five (5) categories of exempting causes listed in Article 1734. It would follow, therefore,
that the hijacking of the carrier's vehicle must be dealt with under the provisions of Article
1735, in other words, that the private respondent as common carrier is presumed to have
been at fault or to have acted negligently. This presumption, however, may be overthrown by
proof of extraordinary diligence on the part of private respondent.
Petitioner insists that private respondent had not observed extraordinary diligence in the care
of petitioner's goods. Petitioner argues that in the circumstances of this case, private
respondent should have hired a security guard presumably to ride with the truck carrying the
600 cartons of Liberty filled milk. We do not believe, however, that in the instant case, the
standard of extraordinary diligence required private respondent to retain a security guard to
ride with the truck and to engage brigands in a firelight at the risk of his own life and the lives
of the driver and his helper.
The precise issue that we address here relates to the specific requirements of the duty of
extraordinary diligence in the vigilance over the goods carried in the specific context of
hijacking or armed robbery.
As noted earlier, the duty of extraordinary diligence in the vigilance over goods is, under
Article 1733, given additional specification not only by Articles 1734 and 1735 but also by
Article 1745, numbers 4, 5 and 6, Article 1745 provides in relevant part:
Any of the following or similar stipulations shall be considered unreasonable,
unjust and contrary to public policy:
xxx xxx xxx
(5) that the common carrier shall not be responsible for the
acts or omissions of his or its employees;
(6) that the common carrier's liability for acts committed by
thieves, or of robbers who donot act with grave or
irresistible threat, violence or force, is dispensed with or
diminished; and
(7) that the common carrier shall not responsible for the
loss, destruction or deterioration of goods on account of the
defective condition of the car vehicle, ship, airplane or other
equipment used in the contract of carriage. (Emphasis
supplied)
Under Article 1745 (6) above, a common carrier is held responsible and will not be allowed
to divest or to diminish such responsibility even for acts of strangers like thieves or
robbers, except where such thieves or robbers in fact acted "with grave or irresistible threat,
violence or force." We believe and so hold that the limits of the duty of extraordinary diligence
in the vigilance over the goods carried are reached where the goods are lost as a result of a
robbery which is attended by "grave or irresistible threat, violence or force."
In the instant case, armed men held up the second truck owned by private respondent which
carried petitioner's cargo. The record shows that an information for robbery in band was filed
in the Court of First Instance of Tarlac, Branch 2, in Criminal Case No. 198 entitled "People of
the Philippines v. Felipe Boncorno, Napoleon Presno, Armando Mesina, Oscar Oria and one
John Doe." There, the accused were charged with willfully and unlawfully taking and carrying
away with them the second truck, driven by Manuel Estrada and loaded with the 600 cartons
of Liberty filled milk destined for delivery at petitioner's store in Urdaneta, Pangasinan. The
decision of the trial court shows that the accused acted with grave, if not irresistible, threat,
violence or force. 3 Three (3) of the five (5) hold-uppers were armed with firearms. The
robbers not only took away the truck and its cargo but also kidnapped the driver and his
helper, detaining them for several days and later releasing them in another province (in
Zambales). The hijacked truck was subsequently found by the police in Quezon City. The
Court of First Instance convicted all the accused of robbery, though not of robbery in band. 4
In these circumstances, we hold that the occurrence of the loss must reasonably be regarded
as quite beyond the control of the common carrier and properly regarded as a fortuitous
event. It is necessary to recall that even common carriers are not made absolute insurers
against all risks of travel and of transport of goods, and are not held liable for acts or events
which cannot be foreseen or are inevitable, provided that they shall have complied with the
rigorous standard of extraordinary diligence.
We, therefore, agree with the result reached by the Court of Appeals that private respondent
Cendana is not liable for the value of the undelivered merchandise which was lost because of
an event entirely beyond private respondent's control.
ACCORDINGLY, the Petition for Review on certiorari is hereby DENIED and the Decision of
the Court of Appeals dated 3 August 1977 is AFFIRMED. No pronouncement as to costs.
SO ORDERED.










































G.R. No. 131166 September 30, 1999
CALTEX (PHILIPPINES), INC., petitioner, vs. SULPICIO LINES, INC., GO SIOC SO,
ENRIQUE S. GO, EUSEBIO S. GO, CARLOS S. GO, VICTORIANO S. GO, DOMINADOR
S. GO, RICARDO S. GO, EDWARD S. GO, ARTURO S. GO, EDGAR S. GO, EDMUND S.
GO, FRANCISCO SORIANO, VECTOR SHIPPING CORPORATION, TERESITA G.
CAEZAL, AND SOTERA E. CAEZAL, respondents.
PARDO, J.:
Is the charterer of a sea vessel liable for damages resulting from a collision between the
chartered vessel and a passenger ship?
When MT Vector left the port of Limay, Bataan, on December 19, 1987 carrying petroleum
products of Caltex (Philippines), Inc. (hereinafter Caltex) no one could have guessed that it
would collide with MV Doa Paz, killing almost all the passengers and crew members of both
ships, and thus resulting in one of the country's worst maritime disasters.
The petition before us seeks to reverse the Court of Appeals decision 1 holding petitioner
jointly liable with the operator of MT Vector for damages when the latter collided with Sulpicio
Lines, Inc.'s passenger ship MV Doa Paz.
The facts are as follows:
On December 19, 1987, motor tanker MT Vector left Limay, Bataan, at about 8:00 p.m.,
enroute to Masbate, loaded with 8,800 barrels of petroleum products shipped by petitioner
Caltex. 2 MT Vector is a tramping motor tanker owned and operated by Vector Shipping
Corporation, engaged in the business of transporting fuel products such as gasoline,
kerosene, diesel and crude oil. During that particular voyage, the MT Vector carried on board
gasoline and other oil products owned by Caltex by virtue of a charter contract between
them. 3
On December 20, 1987, at about 6:30 a.m., the passenger ship MV Doa Paz left the port of
Tacloban headed for Manila with a complement of 59 crew members including the master
and his officers, and passengers totaling 1,493 as indicated in the Coast Guard
Clearance. 4 The MV Doa Paz is a passenger and cargo vessel owned and operated by
Sulpicio Lines, Inc. plying the route of Manila/ Tacloban/ Catbalogan/ Manila/ Catbalogan/
Tacloban/ Manila, making trips twice a week.
At about 10:30 p.m. of December 20, 1987, the two vessels collided in the open sea within
the vicinity of Dumali Point between Marinduque and Oriental Mindoro. All the crewmembers
of MV Doa Paz died, while the two survivors from MT Vector claimed that they were
sleeping at the time of the incident.1wphi1.nt
The MV Doa Paz carried an estimated 4,000 passengers; many indeed, were not in the
passenger manifest. Only 24 survived the tragedy after having been rescued from the
burning waters by vessels that responded to distress calls. 5 Among those who perished
were public school teacher Sebastian Caezal (47 years old) and his daughter Corazon
Caezal (11 years old), both unmanifested passengers but proved to be on board the vessel.
On March 22, 1988, the board of marine inquiry in BMI Case No. 659-87 after investigation
found that the MT Vector, its registered operator Francisco Soriano, and its owner and actual
operator Vector Shipping Corporation, were at fault and responsible for its collision with MV
Doa Paz. 6
On February 13, 1989, Teresita Caezal and Sotera E. Caezal, Sebastian Caezal's wife
and mother respectively, filed with the Regional Trial Court, Branch 8, Manila, a complaint for
"Damages Arising from Breach of Contract of Carriage" against Sulpicio Lines, Inc. (hereafter
Sulpicio). Sulpicio, in turn, filed a third party complaint against Francisco Soriano, Vector
Shipping Corporation and Caltex (Philippines), Inc. Sulpicio alleged that Caltex chartered MT
Vector with gross and evident bad faith knowing fully well that MT Vector was improperly
manned, ill-equipped, unseaworthy and a hazard to safe navigation; as a result, it rammed
against MV Doa Paz in the open sea setting MT Vector's highly flammable cargo ablaze.
On September 15, 1992, the trial court rendered decision dismissing, the third party
complaint against petitioner. The dispositive portion reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiffs and against
defendant-3rd party plaintiff Sulpicio Lines, Inc., to wit:
1. For the death of Sebastian E. Caezal and his 11-year old daughter
Corazon G. Caezal, including loss of future earnings of said Sebastian,
moral and exemplary damages, attorney's fees, in the total amount of P
1,241,287.44 and finally;
2. The statutory costs of the proceedings.
Likewise, the 3rd party complaint is hereby DISMISSED for want of
substantiation and with costs against the 3rd party plaintiff.
IT IS SO ORDERED.
DONE IN MANILA, this 15th day of September 1992.
ARSENIO M. GONONG
Judge 7
On appeal to the Court of Appeals interposed by Sulpicio Lines, Inc., on April 15, 1997, the
Court of Appeal modified the trial court's ruling and included petitioner Caltex as one of the
those liable for damages. Thus:
WHEREFORE, in view of all the foregoing, the judgment rendered by the
Regional Trial Court is hereby MODIFIED as follows:
WHEREFORE, defendant Sulpicio Lines, Inc., is ordered to pay the heirs of
Sebastian E. Caezal and Corazon Caezal:
1. Compensatory damages for the death of Sebastian E. Caezal and
Corazon Caezal the total amount of ONE HUNDRED THOUSAND PESOS
(P100,000);
2. Compensatory damages representing the unearned income of Sebastian
E. Caezal, in the total amount of THREE HUNDRED SIX THOUSAND
FOUR HUNDRED EIGHTY (P306,480.00) PESOS;
3. Moral damages in the amount of THREE HUNDRED THOUSAND PESOS
(P300,000.00);
4. Attorney's fees in the concept of actual damages in the amount of FIFTY
THOUSAND PESOS (P50,000.00);
5. Costs of the suit.
Third party defendants Vector Shipping Co. and Caltex (Phils.), Inc. are held
equally liable under the third party complaint to reimburse/indemnify
defendant Sulpicio Lines, Inc. of the above-mentioned damages, attorney's
fees and costs which the latter is adjudged to pay plaintiffs, the same to be
shared half by Vector Shipping Co. (being the vessel at fault for the collision)
and the other half by Caltex (Phils.), Inc. (being the charterer that negligently
caused the shipping of combustible cargo aboard an unseaworthy vessel).
SO ORDERED.
JORGE S. IMPERIAL
Associate Justice
WE CONCUR:
RAMON U. MABUTAS, JR. PORTIA ALIO HERMACHUELOS
Associate Justice Associate Justice. 8
Hence, this petition.
We find the petition meritorious.
First: The charterer has no liability for damages
under Philippine Maritime laws.
The respective rights and duties of a shipper and the carrier depends not on whether the
carrier is public or private, but on whether the contract of carriage is a bill of lading or
equivalent shipping documents on the one hand, or a charter party or similar contract on the
other. 9
Petitioner and Vector entered into a contract of affreightment, also known as a voyage
charter. 10
A charter party is a contract by which an entire ship, or some principal part thereof, is let by
the owner to another person for a specified time or use; a contract of affreightment is one by
which the owner of a ship or other vessel lets the whole or part of her to a merchant or other
person for the conveyance of goods, on a particular voyage, in consideration of the payment
of freight. 11
A contract of affreightment may be either time charter, wherein the leased vessel is leased to
the charterer for a fixed period of time, or voyage charter, wherein the ship is leased for a
single voyage. In both cases, the charter-party provides for the hire of the vessel only, either
for a determinate period of time or for a single or consecutive voyage, the ship owner to
supply the ship's store, pay for the wages of the master of the crew, and defray the expenses
for the maintenance of the ship. 12
Under a demise or bareboat charter on the other hand, the charterer mans the vessel with his
own people and becomes, in effect, the owner for the voyage or service stipulated, subject to
liability for damages caused by negligence.
If the charter is a contract of affreightment, which leaves the general owner in possession of
the ship as owner for the voyage, the rights and the responsibilities of ownership rest on the
owner. The charterer is free from liability to third persons in respect of the ship. 13
Second: MT Vector is a common carrier
Charter parties fall into three main categories: (1) Demise or bareboat, (2) time charter, (3)
voyage charter. Does a charter party agreement turn the common carrier into a private one?
We need to answer this question in order to shed light on the responsibilities of the parties.
In this case, the charter party agreement did not convert the common carrier into a private
carrier. The parties entered into a voyage charter, which retains the character of the vessel
as a common carrier.
In Planters Products, Inc. vs. Court of Appeals, 14 we said:
It is therefore imperative that a public carrier shall remain as such,
notwithstanding the charter of the whole portion of a vessel of one or more
persons, provided the charter is limited to the ship only, as in the case of a
time-charter or the voyage charter. It is only when the charter includes both
the vessel and its crew, as in a bareboat or demise that a common carrier
becomes private, at least insofar as the particular voyage covering the
charter-party is concerned. Indubitably, a ship-owner in a time or voyage
charter retains possession and control of the ship, although her holds may,
for the moment, be the property of the charterer.
Later, we ruled in Coastwise Lighterage Corporation vs. Court of Appeals: 15
Although a charter party may transform a common carrier into a private one,
the same however is not true in a contract of affreightment . . .
A common carrier is a person or corporation whose regular business is to carry passengers
or property for all persons who may choose to employ and to remunerate him. 16 MT Vector
fits the definition of a common carrier under Article 1732 of the Civil Code. In Guzman
vs. Court of Appeals, 17 we ruled:
The Civil Code defines "common carriers" in the following terms:
Art. 1732. Common carriers are persons, corporations, firms or associations
engaged in the business of carrying or transporting passengers for
passengers or goods or both, by land, water, or air for compensation,
offering their services to the public.
The above article makes no distinction between one
whose principal business activity is the carrying of persons or goods or both,
and one who does such carrying only as an ancillary activity (in local idiom,
as "a sideline"). Article 1732 also carefully avoids making any distinction
between a person or enterprise offering transportation service on a regular
or scheduled basis and one offering such services on an occasional,
episodic or unscheduled basis. Neither does Article 1732 distinguish
between a carrier offering its services to the "general public," i.e., the general
community or population, and one who offers services or solicits business
only from a narrow segment of the general population. We think that Article
1733 deliberately refrained from making such distinctions.
It appears to the Court that private respondent is properly characterized as a
common carrier even though he merely "back-hauled" goods for other
merchants from Manila to Pangasinan, although such backhauling was done
on a periodic, occasional rather than regular or scheduled manner, and even
though respondent's principal occupation was not the carriage of goods for
others. There is no dispute that private respondent charged his customers a
fee for hauling their goods; that the fee frequently fell below commercial
freight rates is not relevant here.
Under the Carriage of Goods by Sea Act :
Sec. 3. (1) The carrier shall be bound before and at the beginning of the
voyage to exercise due diligence to
(a) Make the ship seaworthy;
(b) Properly man, equip, and supply the ship;
xxx xxx xxx
Thus, the carriers are deemed to warrant impliedly the seaworthiness of the ship. For a
vessel to be seaworthy, it must be adequately equipped for the voyage and manned with a
sufficient number of competent officers and crew. The failure of a common carrier to maintain
in seaworthy condition the vessel involved in its contract of carriage is a clear breach of its
duty prescribed in Article 1755 of the Civil Code. 18
The provisions owed their conception to the nature of the business of common carriers. This
business is impressed with a special public duty. The public must of necessity rely on the
care and skill of common carriers in the vigilance over the goods and safety of the
passengers, especially because with the modern development of science and invention,
transportation has become more rapid, more complicated and somehow more
hazardous. 19 For these reasons, a passenger or a shipper of goods is under no obligation to
conduct an inspection of the ship and its crew, the carrier being obliged by law to impliedly
warrant its seaworthiness.
This aside, we now rule on whether Caltex is liable for damages under the Civil Code.
Third: Is Caltex liable for damages under the Civil Code?
We rule that it is not.
Sulpicio argues that Caltex negligently shipped its highly combustible fuel cargo aboard an
unseaworthy vessel such as the MT Vector when Caltex:
1. Did not take steps to have M/T Vector's certificate of inspection and coastwise license
renewed;
2. Proceeded to ship its cargo despite defects found by Mr. Carlos Tan of Bataan Refinery
Corporation;
3. Witnessed M/T Vector submitting fake documents and certificates to the Philippine Coast
Guard.
Sulpicio further argues that Caltex chose MT Vector transport its cargo despite these
deficiencies.
1. The master of M/T Vector did not posses the required Chief Mate license to command and
navigate the vessel;
2. The second mate, Ronaldo Tarife, had the license of a Minor Patron, authorized to
navigate only in bays and rivers when the subject collision occurred in the open sea;
3. The Chief Engineer, Filoteo Aguas, had no license to operate the engine of the vessel;
4. The vessel did not have a Third Mate, a radio operator and lookout; and
5. The vessel had a defective main engine. 20
As basis for the liability of Caltex, the Court of Appeals relied on Articles 20 and 2176 of the
Civil Code, which provide:
Art. 20. Every person who contrary to law, willfully or negligently causes
damage to another, shall indemnify the latter for the same.
Art. 2176. Whoever by act or omission causes damage to another, there
being fault or negligence, is obliged to pay for the damage done. Such fault
or negligence, if there is no pre-existing contractual relation between the
parties, is called a quasi-delict and is governed by the provisions of this
Chapter.
And what is negligence?
The Civil Code provides:
Art. 1173. The fault or negligence of the obligor consists in the omission of
that diligence which is required by the nature of the obligation and
corresponds with the circumstances of the persons, of the time and of the
place. When negligence shows bad faith, the provisions of Article 1171 and
2201 paragraph 2, shall apply.
If the law does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be
required.
In Southeastern College, Inc. vs. Court of Appeals, 21 we said that negligence, as commonly
understood, is conduct which naturally or reasonably creates undue risk or harm to others. It
may be the failure to observe that degree of care, precaution, and vigilance, which the
circumstances justly demand, or the omission to do something which ordinarily regulate the
conduct of human affairs, would do.
The charterer of a vessel has no obligation before transporting its cargo to ensure that the
vessel it chartered complied with all legal requirements. The duty rests upon the common
carrier simply for being engaged in "public service." 22 The Civil Code demands diligence
which is required by the nature of the obligation and that which corresponds with the
circumstances of the persons, the time and the place. Hence, considering the nature of the
obligation between Caltex and MT Vector, liability as found by the Court of Appeals is without
basis.1wphi1.nt
The relationship between the parties in this case is governed by special laws. Because of the
implied warranty of seaworthiness, 23 shippers of goods, when transacting with common
carriers, are not expected to inquire into the vessel's seaworthiness, genuineness of its
licenses and compliance with all maritime laws. To demand more from shippers and hold
them liable in case of failure exhibits nothing but the futility of our maritime laws insofar as the
protection of the public in general is concerned. By the same token, we cannot expect
passengers to inquire every time they board a common carrier, whether the carrier
possesses the necessary papers or that all the carrier's employees are qualified. Such a
practice would be an absurdity in a business where time is always of the essence.
Considering the nature of transportation business, passengers and shippers alike customarily
presume that common carriers possess all the legal requisites in its operation.
Thus, the nature of the obligation of Caltex demands ordinary diligence like any other shipper
in shipping his cargoes.
A cursory reading of the records convinces us that Caltex had reasons to believe that MT
Vector could legally transport cargo that time of the year.
Atty. Poblador: Mr. Witness, I direct your attention to this portion here
containing the entries here under "VESSEL'S DOCUMENTS
1. Certificate of Inspection No. 1290-85, issued December
21, 1986, and Expires December 7, 1987", Mr. Witness,
what steps did you take regarding the impending expiry of
the C.I. or the Certificate of Inspection No. 1290-85 during
the hiring of MT Vector?
Apolinario Ng: At the time when I extended the Contract, I
did nothing because the tanker has a valid C.I. which will
expire on December 7, 1987 but on the last week of
November, I called the attention of Mr. Abalos to ensure that
the C.I. be renewed and Mr. Abalos, in turn, assured me
they will renew the same.
Q: What happened after that?
A: On the first week of December, I again made a follow-up
from Mr. Abalos, and said they were going to send me a
copy as soon as possible, sir. 24
xxx xxx xxx
Q: What did you do with the C.I.?
A: We did not insist on getting a copy of the C.I. from Mr.
Abalos on the first place, because of our long business
relation, we trust Mr. Abalos and the fact that the vessel was
able to sail indicates that the documents are in order. . . . 25
On cross examination
Atty. Sarenas: This being the case, and this being an
admission by you, this Certificate of Inspection has expired
on December 7. Did it occur to you not to let the vessel sail
on that day because of the very approaching date of
expiration?
Apolinar Ng: No sir, because as I said before, the operation
Manager assured us that they were able to secure a
renewal of the Certificate of Inspection and that they will in
time submit us a
copy. 26
Finally, on Mr. Ng's redirect examination:
Atty. Poblador: Mr. Witness, were you aware of the pending
expiry of the Certificate of Inspection in the coastwise
license on December 7, 1987. What was your assurance for
the record that this document was renewed by the MT
Vector?
Atty. Sarenas: . . .
Atty. Poblador: The certificate of Inspection?
A: As I said, firstly, we trusted Mr. Abalos as he is a long
time business partner; secondly, those three years; they
were allowed to sail by the Coast Guard. That are some that
make me believe that they in fact were able to secure the
necessary renewal.
Q: If the Coast Guard clears a vessel to sail, what would
that mean?
Atty. Sarenas: Objection.
Court: He already answered that in the cross examination to
the effect that if it was allowed, referring to MV Vector, to
sail, where it is loaded and that it was scheduled for a
destination by the Coast Guard, it means that it has
Certificate of Inspection extended as assured to this witness
by Restituto Abalos. That in no case MV Vector will be
allowed to sail if the Certificate of inspection is, indeed, not
to be extended. That was his repeated explanation to the
cross-examination. So, there is no need to clarify the same
in the re-direct examination. 27
Caltex and Vector Shipping Corporation had been doing business since 1985, or for about
two years before the tragic incident occurred in 1987. Past services rendered showed no
reason for Caltex to observe a higher degree of diligence.
Clearly, as a mere voyage charterer, Caltex had the right to presume that the ship was
seaworthy as even the Philippine Coast Guard itself was convinced of its seaworthiness. All
things considered, we find no legal basis to hold petitioner liable for damages.
As Vector Shipping Corporation did not appeal from the Court of Appeals' decision, we limit
our ruling to the liability of Caltex alone. However, we maintain the Court of Appeals' ruling
insofar as Vector is concerned.
WHEREFORE, the Court hereby GRANTS the petition and SETS ASIDE the decision of the
Court of Appeals in CA-G.R. CV No. 39626, promulgated on April 15, 1997, insofar as it held
Caltex liable under the third party complaint to reimburse/indemnify defendant Sulpicio Lines,
Inc. the damages the latter is adjudged to pay plaintiffs-appellees. The Court AFFIRMS the
decision of the Court of Appeals insofar as it orders Sulpicio Lines, Inc. to pay the heirs of
Sebastian E. Caezal and Corazon Caezal damages as set forth therein. Third-party
defendant-appellee Vector Shipping Corporation and Francisco Soriano are held liable to
reimburse/indemnify defendant Sulpicio Lines, Inc. whatever damages, attorneys' fees and
costs the latter is adjudged to pay plaintiffs-appellees in the case.1wphi1.nt
No costs in this instance.
SO ORDERED.


G.R. No. 114167 July 12, 1995
COASTWISE LIGHTERAGE CORPORATION, petitioner, vs. COURT OF APPEALS and
the PHILIPPINE GENERAL INSURANCE COMPANY, respondents.
R E S O L U T I O N
FRANCISCO, R., J.:
This is a petition for review of a Decision rendered by the Court of Appeals, dated December
17, 1993, affirming Branch 35 of the Regional Trial Court, Manila in holding that herein
petitioner is liable to pay herein private respondent the amount of P700,000.00, plus legal
interest thereon, another sum of P100,000.00 as attorney's fees and the cost of the suit.
The factual background of this case is as follows:
Pag-asa Sales, Inc. entered into a contract to transport molasses from the province of
Negros to Manila with Coastwise Lighterage Corporation (Coastwise for brevity), using the
latter's dumb barges. The barges were towed in tandem by the tugboat MT Marica, which is
likewise owned by Coastwise.
Upon reaching Manila Bay, while approaching Pier 18, one of the barges, "Coastwise 9",
struck an unknown sunken object. The forward buoyancy compartment was damaged, and
water gushed in through a hole "two inches wide and twenty-two inches long" 1 As a
consequence, the molasses at the cargo tanks were contaminated and rendered unfit for the
use it was intended. This prompted the consignee, Pag-asa Sales, Inc. to reject the shipment
of molasses as a total loss. Thereafter, Pag-asa Sales, Inc. filed a formal claim with the
insurer of its lost cargo, herein private respondent, Philippine General Insurance Company
(PhilGen, for short) and against the carrier, herein petitioner, Coastwise Lighterage.
Coastwise Lighterage denied the claim and it was PhilGen which paid the consignee, Pag-
asa Sales, Inc., the amount of P700,000.00, representing the value of the damaged cargo of
molasses.
In turn, PhilGen then filed an action against Coastwise Lighterage before the Regional Trial
Court of Manila, seeking to recover the amount of P700,000.00 which it paid to Pag-asa
Sales, Inc. for the latter's lost cargo. PhilGen now claims to be subrogated to all the
contractual rights and claims which the consignee may have against the carrier, which is
presumed to have violated the contract of carriage.
The RTC awarded the amount prayed for by PhilGen. On Coastwise Lighterage's appeal to
the Court of Appeals, the award was affirmed.
Hence, this petition.
There are two main issues to be resolved herein. First, whether or not petitioner Coastwise
Lighterage was transformed into a private carrier, by virtue of the contract of affreightment
which it entered into with the consignee, Pag-asa Sales, Inc. Corollarily, if it were in fact
transformed into a private carrier, did it exercise the ordinary diligence to which a private
carrier is in turn bound? Second, whether or not the insurer was subrogated into the rights of
the consignee against the carrier, upon payment by the insurer of the value of the
consignee's goods lost while on board one of the carrier's vessels.
On the first issue, petitioner contends that the RTC and the Court of Appeals erred in finding
that it was a common carrier. It stresses the fact that it contracted with Pag-asa Sales, Inc. to
transport the shipment of molasses from Negros Oriental to Manila and refers to this contract
as a "charter agreement". It then proceeds to cite the case ofHome Insurance Company vs.
American Steamship Agencies, Inc. 2 wherein this Court held: ". . . a common carrier
undertaking to carry a special cargo or chartered to a special person only becomes a private
carrier."
Petitioner's reliance on the aforementioned case is misplaced. In its entirety, the conclusions
of the court are as follows:
Accordingly, the charter party contract is one of affreightment over the whole
vessel, rather than a demise. As such, the liability of the shipowner for acts
or negligence of its captain and crew, would remain in the absence of
stipulation. 3
The distinction between the two kinds of charter parties (i.e. bareboat or demise and contract
of affreightment) is more clearly set out in the case of Puromines, Inc. vs. Court of
Appeals, 4 wherein we ruled:
Under the demise or bareboat charter of the vessel, the charterer will
generally be regarded as the owner for the voyage or service stipulated. The
charterer mans the vessel with his own people and becomes the owner pro
hac vice, subject to liability to others for damages caused by negligence. To
create a demise, the owner of a vessel must completely and exclusively
relinquish possession, command and navigation thereof to the
charterer, anything short of such a complete transfer is a contract of
affreightment (time or voyage charter party) or not a charter party at all.
On the other hand a contract of affreightment is one in which the owner of
the vessel leases part or all of its space to haul goods for others. It is a
contract for special service to be rendered by the owner of the vessel and
under such contract the general owner retains the possession, command
and navigation of the ship, the charterer or freighter merely having use of the
space in the vessel in return for his payment of the charter hire. . . . .
. . . . An owner who retains possession of the ship though the hold is the
property of the charterer, remains liable as carrier and must answer for any
breach of duty as to the care, loading and unloading of the cargo. . . .
Although a charter party may transform a common carrier into a private one, the same
however is not true in a contract of affreightment on account of the aforementioned
distinctions between the two.
Petitioner admits that the contract it entered into with the consignee was one of
affreightment. 5 We agree. Pag-asa Sales, Inc. only leased three of petitioner's vessels, in
order to carry cargo from one point to another, but the possession, command and navigation
of the vessels remained with petitioner Coastwise Lighterage.
Pursuant therefore to the ruling in the aforecited Puromines case, Coastwise Lighterage, by
the contract of affreightment, was not converted into a private carrier, but remained a
common carrier and was still liable as such.
The law and jurisprudence on common carriers both hold that the mere proof of delivery of
goods in good order to a carrier and the subsequent arrival of the same goods at the place of
destination in bad order makes for a prima facie case against the carrier.
It follows then that the presumption of negligence that attaches to common carriers, once the
goods it transports are lost, destroyed or deteriorated, applies to the petitioner. This
presumption, which is overcome only by proof of the exercise of extraordinary diligence,
remained unrebutted in this case.
The records show that the damage to the barge which carried the cargo of molasses was
caused by its hitting an unknown sunken object as it was heading for Pier 18. The object
turned out to be a submerged derelict vessel. Petitioner contends that this navigational
hazard was the efficient cause of the accident. Further it asserts that the fact that the
Philippine Coastguard "has not exerted any effort to prepare a chart to indicate the location of
sunken derelicts within Manila North Harbor to avoid navigational accidents" 6 effectively
contributed to the happening of this mishap. Thus, being unaware of the hidden danger that
lies in its path, it became impossible for the petitioner to avoid the same. Nothing could have
prevented the event, making it beyond the pale of even the exercise of extraordinary
diligence.
However, petitioner's assertion is belied by the evidence on record where it appeared that far
from having rendered service with the greatest skill and utmost foresight, and being free from
fault, the carrier was culpably remiss in the observance of its duties.
Jesus R. Constantino, the patron of the vessel "Coastwise 9" admitted that he was not
licensed. The Code of Commerce, which subsidiarily governs common carriers (which are
primarily governed by the provisions of the Civil Code) provides:
Art. 609. Captains, masters, or patrons of vessels must be Filipinos, have
legal capacity to contract in accordance with this code, and prove the skill
capacity and qualifications necessary to command and direct the vessel, as
established by marine and navigation laws, ordinances or regulations, and
must not be disqualified according to the same for the discharge of the
duties of the position. . . .
Clearly, petitioner Coastwise Lighterage's embarking on a voyage with an unlicensed patron
violates this rule. It cannot safely claim to have exercised extraordinary diligence, by placing
a person whose navigational skills are questionable, at the helm of the vessel which
eventually met the fateful accident. It may also logically, follow that a person without license
to navigate, lacks not just the skill to do so, but also the utmost familiarity with the usual and
safe routes taken by seasoned and legally authorized ones. Had the patron been licensed,
he could be presumed to have both the skill and the knowledge that would have prevented
the vessel's hitting the sunken derelict ship that lay on their way to Pier 18.
As a common carrier, petitioner is liable for breach of the contract of carriage, having failed to
overcome the presumption of negligence with the loss and destruction of goods it
transported, by proof of its exercise of extraordinary diligence.
On the issue of subrogation, which petitioner contends as inapplicable in this case, we once
more rule against the petitioner. We have already found petitioner liable for breach of the
contract of carriage it entered into with Pag-asa Sales, Inc. However, for the damage
sustained by the loss of the cargo which petitioner-carrier was transporting, it was not the
carrier which paid the value thereof to Pag-asa Sales, Inc. but the latter's insurer, herein
private respondent PhilGen.
Article 2207 of the Civil Code is explicit on this point:
Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the
wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person
who violated the contract. . . .
This legal provision containing the equitable principle of subrogation has been applied in a
long line of cases including Compania Maritima v. Insurance Company of North
America; 7 Fireman's Fund Insurance Company v. Jamilla & Company, Inc., 8 and Pan
Malayan Insurance Corporation v. Court of Appeals, 9 wherein this Court explained:
Article 2207 of the Civil Code is founded on the well-settled principle of
subrogation. If the insured property is destroyed or damaged through the
fault or negligence of a party other than the assured, then the insurer, upon
payment to the assured will be subrogated to the rights of the assured to
recover from the wrongdoer to the extent that the insurer has been obligated
to pay. Payment by the insurer to the assured operated as an equitable
assignment to the former of all remedies which the latter may have against
the third party whose negligence or wrongful act caused the loss. The right
of subrogation is not dependent upon, nor does it grow out of, any privity of
contract or upon written assignment of claim. It accrues simply upon
payment of the insurance claim by the insurer.
Undoubtedly, upon payment by respondent insurer PhilGen of the amount of P700,000.00 to
Pag-asa Sales, Inc., the consignee of the cargo of molasses totally damaged while being
transported by petitioner Coastwise Lighterage, the former was subrogated into all the rights
which Pag-asa Sales, Inc. may have had against the carrier, herein petitioner Coastwise
Lighterage.
WHEREFORE, premises considered, this petition is DENIED and the appealed decision
affirming the order of Branch 35 of the Regional Trial Court of Manila for petitioner Coastwise
Lighterage to pay respondent Philippine General Insurance Company the "principal amount
of P700,000.00 plus interest thereon at the legal rate computed from March 29, 1989, the
date the complaint was filed until fully paid and another sum of P100,000.00 as attorney's
fees and costs" 10 is likewise hereby AFFIRMED
SO ORDERED.






























G.R. No. 125948 December 29, 1998
FIRST PHILIPPINE INDUSTRIAL CORPORATION, petitioner, vs. COURT OF APPEALS,
HONORABLE PATERNO V. TAC-AN, BATANGAS CITY and ADORACION C.
ARELLANO, in her official capacity as City Treasurer of Batangas, respondents.
MARTINEZ, J.:
This petition for review on certiorari assails the Decision of the Court of Appeals dated
November 29, 1995, in CA-G.R. SP No. 36801, affirming the decision of the Regional Trial
Court of Batangas City, Branch 84, in Civil Case No. 4293, which dismissed petitioners'
complaint for a business tax refund imposed by the City of Batangas.
Petitioner is a grantee of a pipeline concession under Republic Act No. 387, as amended, to
contract, install and operate oil pipelines. The original pipeline concession was granted in
1967 1 and renewed by the Energy Regulatory Board in 1992. 2
Sometime in January 1995, petitioner applied for a mayor's permit with the Office of the
Mayor of Batangas City. However, before the mayor's permit could be issued, the respondent
City Treasurer required petitioner to pay a local tax based on its gross receipts for the fiscal
year 1993 pursuant to the Local Government Code 3. The respondent City Treasurer
assessed a business tax on the petitioner amounting to P956,076.04 payable in four
installments based on the gross receipts for products pumped at GPS-1 for the fiscal year
1993 which amounted to P181,681,151.00. In order not to hamper its operations, petitioner
paid the tax under protest in the amount of P239,019.01 for the first quarter of 1993.
On January 20, 1994, petitioner filed a letter-protest addressed to the respondent City
Treasurer, the pertinent portion of which reads:
Please note that our Company (FPIC) is a pipeline operator with a
government concession granted under the Petroleum Act. It is engaged in
the business of transporting petroleum products from the Batangas
refineries, via pipeline, to Sucat and JTF Pandacan Terminals. As such, our
Company is exempt from paying tax on gross receipts under Section 133 of
the Local Government Code of 1991 . . . .
Moreover, Transportation contractors are not included in the enumeration of
contractors under Section 131, Paragraph (h) of the Local Government
Code. Therefore, the authority to impose tax "on contractors and other
independent contractors" under Section 143, Paragraph (e) of the Local
Government Code does not include the power to levy on transportation
contractors.
The imposition and assessment cannot be categorized as a mere fee
authorized under Section 147 of the Local Government Code. The said
section limits the imposition of fees and charges on business to such
amounts as may be commensurate to the cost of regulation, inspection, and
licensing. Hence, assuming arguendo that FPIC is liable for the license fee,
the imposition thereof based on gross receipts is violative of the aforecited
provision. The amount of P956,076.04 (P239,019.01 per quarter) is not
commensurate to the cost of regulation, inspection and licensing. The fee is
already a revenue raising measure, and not a mere regulatory imposition. 4
On March 8, 1994, the respondent City Treasurer denied the protest contending that
petitioner cannot be considered engaged in transportation business, thus it cannot claim
exemption under Section 133 (j) of the Local Government Code. 5
On June 15, 1994, petitioner filed with the Regional Trial Court of Batangas City a
complaint 6 for tax refund with prayer for writ of preliminary injunction against respondents
City of Batangas and Adoracion Arellano in her capacity as City Treasurer. In its complaint,
petitioner alleged, inter alia, that: (1) the imposition and collection of the business tax on its
gross receipts violates Section 133 of the Local Government Code; (2) the authority of cities
to impose and collect a tax on the gross receipts of "contractors and independent
contractors" under Sec. 141 (e) and 151 does not include the authority to collect such taxes
on transportation contractors for, as defined under Sec. 131 (h), the term "contractors"
excludes transportation contractors; and, (3) the City Treasurer illegally and erroneously
imposed and collected the said tax, thus meriting the immediate refund of the tax paid. 7
Traversing the complaint, the respondents argued that petitioner cannot be exempt from
taxes under Section 133 (j) of the Local Government Code as said exemption applies only to
"transportation contractors and persons engaged in the transportation by hire and common
carriers by air, land and water." Respondents assert that pipelines are not included in the
term "common carrier" which refers solely to ordinary carriers such as trucks, trains, ships
and the like. Respondents further posit that the term "common carrier" under the said code
pertains to the mode or manner by which a product is delivered to its destination. 8
On October 3, 1994, the trial court rendered a decision dismissing the complaint, ruling in this
wise:
. . . Plaintiff is either a contractor or other independent contractor.
. . . the exemption to tax claimed by the plaintiff has become unclear. It is a
rule that tax exemptions are to be strictly construed against the taxpayer,
taxes being the lifeblood of the government. Exemption may therefore be
granted only by clear and unequivocal provisions of law.
Plaintiff claims that it is a grantee of a pipeline concession under Republic
Act 387. (Exhibit A) whose concession was lately renewed by the Energy
Regulatory Board (Exhibit B). Yet neither said law nor the deed of
concession grant any tax exemption upon the plaintiff.
Even the Local Government Code imposes a tax on franchise holders under
Sec. 137 of the Local Tax Code. Such being the situation obtained in this
case (exemption being unclear and equivocal) resort to distinctions or other
considerations may be of help:
1. That the exemption granted under Sec. 133 (j)
encompasses onlycommon carriers so as not to overburden
the riding public or commuters with taxes. Plaintiff is not a
common carrier, but a special carrier extending its services
and facilities to a single specific or "special customer" under
a "special contract."
2. The Local Tax Code of 1992 was basically enacted to
give more and effective local autonomy to local
governments than the previous enactments, to make them
economically and financially viable to serve the people and
discharge their functions with a concomitant obligation to
accept certain devolution of powers, . . . So, consistent with
this policy even franchise grantees are taxed (Sec. 137) and
contractors are also taxed under Sec. 143 (e) and 151 of
the Code. 9
Petitioner assailed the aforesaid decision before this Court via a petition for review. On
February 27, 1995, we referred the case to the respondent Court of Appeals for consideration
and adjudication. 10On November 29, 1995, the respondent court rendered a
decision 11 affirming the trial court's dismissal of petitioner's complaint. Petitioner's motion for
reconsideration was denied on July 18, 1996. 12
Hence, this petition. At first, the petition was denied due course in a Resolution dated
November 11, 1996. 13 Petitioner moved for a reconsideration which was granted by this
Court in a Resolution 14 of January 22, 1997. Thus, the petition was reinstated.
Petitioner claims that the respondent Court of Appeals erred in holding that (1) the petitioner
is not a common carrier or a transportation contractor, and (2) the exemption sought for by
petitioner is not clear under the law.
There is merit in the petition.
A "common carrier" may be defined, broadly, as one who holds himself out to the public as
engaged in the business of transporting persons or property from place to place, for
compensation, offering his services to the public generally.
Art. 1732 of the Civil Code defines a "common carrier" as "any person, corporation, firm or
association engaged in the business of carrying or transporting passengers or goods or both,
by land, water, or air, for compensation, offering their services to the public."
The test for determining whether a party is a common carrier of goods is:
1. He must be engaged in the business of carrying goods for others as a
public employment, and must hold himself out as ready to engage in the
transportation of goods for person generally as a business and not as a
casual occupation;
2. He must undertake to carry goods of the kind to which his business is
confined;
3. He must undertake to carry by the method by which his business is
conducted and over his established roads; and
4. The transportation must be for hire. 15
Based on the above definitions and requirements, there is no doubt that petitioner is a
common carrier. It is engaged in the business of transporting or carrying goods, i.e.
petroleum products, for hire as a public employment. It undertakes to carry for all persons
indifferently, that is, to all persons who choose to employ its services, and transports the
goods by land and for compensation. The fact that petitioner has a limited clientele does not
exclude it from the definition of a common carrier. In De Guzman vs. Court of Appeals 16 we
ruled that:
The above article (Art. 1732, Civil Code) makes no distinction between one whose
principal business activity is the carrying of persons or goods or both, and one who
does such carrying only as an ancillary activity (in local idiom, as a "sideline"). Article
1732 . . . avoids making any distinction between a person or enterprise offering
transportation service on a regular or scheduled basis and one offering such service
on an occasional, episodic or unscheduled basis. Neither does Article 1732
distinguish between a carrier offering its services to the "general public," i.e., the
general community or population, and one who offers services or solicits business
only from a narrow segment of the general population. We think that Article 1877
deliberately refrained from making such distinctions.
So understood, the concept of "common carrier" under Article 1732 may be seen to
coincide neatly with the notion of "public service," under the Public Service Act
(Commonwealth Act No. 1416, as amended) which at least partially supplements the
law on common carriers set forth in the Civil Code. Under Section 13, paragraph (b)
of the Public Service Act, "public service" includes:
every person that now or hereafter may own, operate. manage, or control in
the Philippines, for hire or compensation, with general or limited clientele,
whether permanent, occasional or accidental, and done for general business
purposes, any common carrier, railroad, street railway, traction railway,
subway motor vehicle, either for freight or passenger, or both, with or without
fixed route and whatever may be its classification, freight or carrier service of
any class, express service, steamboat, or steamship line, pontines, ferries
and water craft, engaged in the transportation of passengers or freight or
both, shipyard, marine repair shop, wharf or dock, ice plant, ice-refrigeration
plant, canal, irrigation system gas, electric light heat and power, water supply
and power petroleum, sewerage system, wire or wireless communications
systems, wire or wireless broadcasting stations and other similar public
services. (Emphasis Supplied)
Also, respondent's argument that the term "common carrier" as used in Section 133 (j) of the
Local Government Code refers only to common carriers transporting goods and passengers
through moving vehicles or vessels either by land, sea or water, is erroneous.
As correctly pointed out by petitioner, the definition of "common carriers" in the Civil Code
makes no distinction as to the means of transporting, as long as it is by land, water or air. It
does not provide that the transportation of the passengers or goods should be by motor
vehicle. In fact, in the United States, oil pipe line operators are considered common
carriers. 17
Under the Petroleum Act of the Philippines (Republic Act 387), petitioner is considered a
"common carrier." Thus, Article 86 thereof provides that:
Art. 86. Pipe line concessionaire as common carrier. A pipe line shall have the
preferential right to utilize installations for the transportation of petroleum owned by
him, but is obligated to utilize the remaining transportation capacity pro rata for the
transportation of such other petroleum as may be offered by others for transport, and
to charge without discrimination such rates as may have been approved by the
Secretary of Agriculture and Natural Resources.
Republic Act 387 also regards petroleum operation as a public utility. Pertinent portion of
Article 7 thereof provides:
that everything relating to the exploration for and exploitation of petroleum . . . and
everything relating to the manufacture, refining, storage, or transportation by special
methods of petroleum, is hereby declared to be a public utility. (Emphasis Supplied)
The Bureau of Internal Revenue likewise considers the petitioner a "common carrier." In BIR
Ruling No. 069-83, it declared:
. . . since [petitioner] is a pipeline concessionaire that is engaged only in transporting
petroleum products, it is considered a common carrier under Republic Act No. 387 . .
. . Such being the case, it is not subject to withholding tax prescribed by Revenue
Regulations No. 13-78, as amended.
From the foregoing disquisition, there is no doubt that petitioner is a "common carrier" and,
therefore, exempt from the business tax as provided for in Section 133 (j), of the Local
Government Code, to wit:
Sec. 133. Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
xxx xxx xxx
(j) Taxes on the gross receipts of transportation contractors and
persons engaged in the transportation of passengers or freight by
hire and common carriers by air, land or water, except as provided
in this Code.
The deliberations conducted in the House of Representatives on the Local Government Code
of 1991 are illuminating:
MR. AQUINO (A). Thank you, Mr. Speaker.
Mr. Speaker, we would like to proceed to page 95, line
1. It states: "SEC. 121 [now Sec. 131]. Common Limitations on the Taxing
Powers of Local Government Units." . . .
MR. AQUINO (A.). Thank you Mr. Speaker.
Still on page 95, subparagraph 5, on taxes on the business of transportation.
This appears to be one of those being deemed to be exempted from the
taxing powers of the local government units. May we know the reason why
the transportation business is being excluded from the taxing powers of the
local government units?
MR. JAVIER (E.). Mr. Speaker, there is an exception contained in Section
121 (now Sec. 131), line 16, paragraph 5. It states that local government
units may not impose taxes on the business of transportation, except as
otherwise provided in this code.
Now, Mr. Speaker, if the Gentleman would care to go to page 98 of Book II,
one can see there that provinces have the power to impose a tax on
business enjoying a franchise at the rate of not more than one-half of 1
percent of the gross annual receipts. So, transportation contractors who are
enjoying a franchise would be subject to tax by the province. That is the
exception, Mr. Speaker.
What we want to guard against here, Mr. Speaker, is the imposition of taxes
by local government units on the carrier business. Local government units
may impose taxes on top of what is already being imposed by the National
Internal Revenue Code which is the so-called "common carriers tax." We do
not want a duplication of this tax, so we just provided for an exception under
Section 125 [now Sec. 137] that a province may impose this tax at a specific
rate.
MR. AQUINO (A.). Thank you for that clarification, Mr. Speaker. . . . 18
It is clear that the legislative intent in excluding from the taxing power of the local government
unit the imposition of business tax against common carriers is to prevent a duplication of the
so-called "common carrier's tax."
Petitioner is already paying three (3%) percent common carrier's tax on its gross
sales/earnings under the National Internal Revenue Code. 19 To tax petitioner again on its
gross receipts in its transportation of petroleum business would defeat the purpose of the
Local Government Code.
WHEREFORE, the petition is hereby GRANTED. The decision of the respondent Court of
Appeals dated November 29, 1995 in CA-G.R. SP No. 36801 is REVERSED and SET
ASIDE.
SO ORDERED.










G.R. No. L-69044 May 29, 1987
EASTERN SHIPPING LINES, INC., petitioner, vs. INTERMEDIATE APPELLATE COURT
and DEVELOPMENT INSURANCE & SURETY CORPORATION,respondents.
No. 71478 May 29, 1987
EASTERN SHIPPING LINES, INC., petitioner, vs. THE NISSHIN FIRE AND MARINE
INSURANCE CO., and DOWA FIRE & MARINE INSURANCE CO., LTD.,respondents.
MELENCIO-HERRERA, J.:
These two cases, both for the recovery of the value of cargo insurance, arose from the same
incident, the sinking of the M/S ASIATICA when it caught fire, resulting in the total loss of
ship and cargo.
The basic facts are not in controversy:
In G.R. No. 69044, sometime in or prior to June, 1977, the M/S ASIATICA, a vessel operated
by petitioner Eastern Shipping Lines, Inc., (referred to hereinafter as Petitioner Carrier)
loaded at Kobe, Japan for transportation to Manila, 5,000 pieces of calorized lance pipes in
28 packages valued at P256,039.00 consigned to Philippine Blooming Mills Co., Inc., and 7
cases of spare parts valued at P92,361.75, consigned to Central Textile Mills, Inc. Both sets
of goods were insured against marine risk for their stated value with respondent
Development Insurance and Surety Corporation.
In G.R. No. 71478, during the same period, the same vessel took on board 128 cartons of
garment fabrics and accessories, in two (2) containers, consigned to Mariveles Apparel
Corporation, and two cases of surveying instruments consigned to Aman Enterprises and
General Merchandise. The 128 cartons were insured for their stated value by respondent
Nisshin Fire & Marine Insurance Co., for US $46,583.00, and the 2 cases by respondent
Dowa Fire & Marine Insurance Co., Ltd., for US $11,385.00.
Enroute for Kobe, Japan, to Manila, the vessel caught fire and sank, resulting in the total loss
of ship and cargo. The respective respondent Insurers paid the corresponding marine
insurance values to the consignees concerned and were thus subrogated unto the rights of
the latter as the insured.
G.R. NO. 69044
On May 11, 1978, respondent Development Insurance & Surety Corporation (Development
Insurance, for short), having been subrogated unto the rights of the two insured companies,
filed suit against petitioner Carrier for the recovery of the amounts it had paid to the insured
before the then Court of First instance of Manila, Branch XXX (Civil Case No. 6087).
Petitioner-Carrier denied liability mainly on the ground that the loss was due to an
extraordinary fortuitous event, hence, it is not liable under the law.
On August 31, 1979, the Trial Court rendered judgment in favor of Development Insurance in
the amounts of P256,039.00 and P92,361.75, respectively, with legal interest, plus
P35,000.00 as attorney's fees and costs. Petitioner Carrier took an appeal to the then Court
of Appeals which, on August 14, 1984, affirmed.
Petitioner Carrier is now before us on a Petition for Review on Certiorari.
G.R. NO. 71478
On June 16, 1978, respondents Nisshin Fire & Marine Insurance Co. NISSHIN for short), and
Dowa Fire & Marine Insurance Co., Ltd. (DOWA, for brevity), as subrogees of the insured,
filed suit against Petitioner Carrier for the recovery of the insured value of the cargo lost with
the then Court of First Instance of Manila, Branch 11 (Civil Case No. 116151), imputing
unseaworthiness of the ship and non-observance of extraordinary diligence by petitioner
Carrier.
Petitioner Carrier denied liability on the principal grounds that the fire which caused the
sinking of the ship is an exempting circumstance under Section 4(2) (b) of the Carriage of
Goods by Sea Act (COGSA); and that when the loss of fire is established, the burden of
proving negligence of the vessel is shifted to the cargo shipper.
On September 15, 1980, the Trial Court rendered judgment in favor of NISSHIN and DOWA
in the amounts of US $46,583.00 and US $11,385.00, respectively, with legal interest, plus
attorney's fees of P5,000.00 and costs. On appeal by petitioner, the then Court of Appeals on
September 10, 1984, affirmed with modification the Trial Court's judgment by decreasing the
amount recoverable by DOWA to US $1,000.00 because of $500 per package limitation of
liability under the COGSA.
Hence, this Petition for Review on certiorari by Petitioner Carrier.
Both Petitions were initially denied for lack of merit. G.R. No. 69044 on January 16, 1985 by
the First Division, and G. R. No. 71478 on September 25, 1985 by the Second Division. Upon
Petitioner Carrier's Motion for Reconsideration, however, G.R. No. 69044 was given due
course on March 25, 1985, and the parties were required to submit their respective
Memoranda, which they have done.
On the other hand, in G.R. No. 71478, Petitioner Carrier sought reconsideration of the
Resolution denying the Petition for Review and moved for its consolidation with G.R. No.
69044, the lower-numbered case, which was then pending resolution with the First Division.
The same was granted; the Resolution of the Second Division of September 25, 1985 was
set aside and the Petition was given due course.
At the outset, we reject Petitioner Carrier's claim that it is not the operator of the M/S Asiatica
but merely a charterer thereof. We note that in G.R. No. 69044, Petitioner Carrier stated in its
Petition:
There are about 22 cases of the "ASIATICA" pending in various courts
where various plaintiffs are represented by various counsel representing
various consignees or insurance companies. The common defendant in
these cases is petitioner herein, being the operator of said vessel. ... 1
Petitioner Carrier should be held bound to said admission. As a general rule, the facts
alleged in a party's pleading are deemed admissions of that party and binding upon it. 2 And
an admission in one pleading in one action may be received in evidence against the pleader
or his successor-in-interest on the trial of another action to which he is a party, in favor of a
party to the latter action. 3
The threshold issues in both cases are: (1) which law should govern the Civil Code
provisions on Common carriers or the Carriage of Goods by Sea Act? and (2) who has the
burden of proof to show negligence of the carrier?
On the Law Applicable
The law of the country to which the goods are to be transported governs the liability of the
common carrier in case of their loss, destruction or deterioration. 4 As the cargoes in
question were transported from Japan to the Philippines, the liability of Petitioner Carrier is
governed primarily by the Civil Code. 5 However, in all matters not regulated by said Code,
the rights and obligations of common carrier shall be governed by the Code of Commerce
and by special laws. 6 Thus, the Carriage of Goods by Sea Act, a special law, is suppletory
to the provisions of the Civil Code. 7
On the Burden of Proof
Under the Civil Code, common carriers, from the nature of their business and for reasons of
public policy, are bound to observe extraordinary diligence in the vigilance over goods,
according to all the circumstances of each case. 8 Common carriers are responsible for the
loss, destruction, or deterioration of the goods unless the same is due to any of the following
causes only:
(1) Flood, storm, earthquake, lightning or other natural disaster or calamity;
xxx xxx xxx 9
Petitioner Carrier claims that the loss of the vessel by fire exempts it from liability under the
phrase "natural disaster or calamity. " However, we are of the opinion that fire may not be
considered a natural disaster or calamity. This must be so as it arises almost invariably from
some act of man or by human means. 10 It does not fall within the category of an act of God
unless caused by lightning 11 or by other natural disaster or calamity. 12 It may even be
caused by the actual fault or privity of the carrier. 13
Article 1680 of the Civil Code, which considers fire as an extraordinary fortuitous event refers
to leases of rural lands where a reduction of the rent is allowed when more than one-half of
the fruits have been lost due to such event, considering that the law adopts a protection
policy towards agriculture. 14
As the peril of the fire is not comprehended within the exception in Article 1734, supra, Article
1735 of the Civil Code provides that all cases than those mention in Article 1734, the
common carrier shall be presumed to have been at fault or to have acted negligently, unless
it proves that it has observed the extraordinary deligence required by law.
In this case, the respective Insurers. as subrogees of the cargo shippers, have proven that
the transported goods have been lost. Petitioner Carrier has also proved that the loss was
caused by fire. The burden then is upon Petitioner Carrier to proved that it has exercised the
extraordinary diligence required by law. In this regard, the Trial Court, concurred in by the
Appellate Court, made the following Finding of fact:
The cargoes in question were, according to the witnesses defendant placed
in hatches No, 2 and 3 cf the vessel, Boatswain Ernesto Pastrana noticed
that smoke was coming out from hatch No. 2 and hatch No. 3; that where the
smoke was noticed, the fire was already big; that the fire must have started
twenty-four 24) our the same was noticed; that carbon dioxide was ordered
released and the crew was ordered to open the hatch covers of No, 2 tor
commencement of fire fighting by sea water: that all of these effort were not
enough to control the fire.
Pursuant to Article 1733, common carriers are bound to extraordinary
diligence in the vigilance over the goods. The evidence of the defendant did
not show that extraordinary vigilance was observed by the vessel to prevent
the occurrence of fire at hatches numbers 2 and 3. Defendant's evidence did
not likewise show he amount of diligence made by the crew, on orders, in
the care of the cargoes. What appears is that after the cargoes were stored
in the hatches, no regular inspection was made as to their condition during
the voyage. Consequently, the crew could not have even explain what could
have caused the fire. The defendant, in the Court's mind, failed to
satisfactorily show that extraordinary vigilance and care had been made by
the crew to prevent the occurrence of the fire. The defendant, as a common
carrier, is liable to the consignees for said lack of deligence required of it
under Article 1733 of the Civil Code. 15
Having failed to discharge the burden of proving that it had exercised the extraordinary
diligence required by law, Petitioner Carrier cannot escape liability for the loss of the cargo.
And even if fire were to be considered a "natural disaster" within the meaning of Article 1734
of the Civil Code, it is required under Article 1739 of the same Code that the "natural
disaster" must have been the "proximate and only cause of the loss," and that the carrier has
"exercised due diligence to prevent or minimize the loss before, during or after the
occurrence of the disaster. " This Petitioner Carrier has also failed to establish satisfactorily.
Nor may Petitioner Carrier seek refuge from liability under the Carriage of Goods by Sea Act,
It is provided therein that:
Sec. 4(2). Neither the carrier nor the ship shall be responsible for loss or
damage arising or resulting from
(b) Fire, unless caused by the actual fault or privity of the carrier.
xxx xxx xxx
In this case, both the Trial Court and the Appellate Court, in effect, found, as a fact, that there
was "actual fault" of the carrier shown by "lack of diligence" in that "when the smoke was
noticed, the fire was already big; that the fire must have started twenty-four (24) hours before
the same was noticed; " and that "after the cargoes were stored in the hatches, no regular
inspection was made as to their condition during the voyage." The foregoing suffices to show
that the circumstances under which the fire originated and spread are such as to show that
Petitioner Carrier or its servants were negligent in connection therewith. Consequently, the
complete defense afforded by the COGSA when loss results from fire is unavailing to
Petitioner Carrier.
On the US $500 Per Package Limitation:
Petitioner Carrier avers that its liability if any, should not exceed US $500 per package as
provided in section 4(5) of the COGSA, which reads:
(5) Neither the carrier nor the ship shall in any event be or become liable for
any loss or damage to or in connection with the transportation of goods in an
amount exceeding $500 per package lawful money of the United States, or
in case of goods not shipped in packages, per customary freight unit, or the
equivalent of that sum in other currency, unless the nature and value of such
goods have been declared by the shipper before shipment and inserted in
bill of lading. This declaration if embodied in the bill of lading shall be prima
facie evidence, but all be conclusive on the carrier.
By agreement between the carrier, master or agent of the carrier, and the
shipper another maximum amount than that mentioned in this paragraph
may be fixed: Provided, That such maximum shall not be less than the figure
above named. In no event shall the carrier be Liable for more than the
amount of damage actually sustained.
xxx xxx xxx
Article 1749 of the New Civil Code also allows the limitations of liability in this wise:
Art. 1749. A stipulation that the common carrier's liability as limited to the
value of the goods appearing in the bill of lading, unless the shipper or
owner declares a greater value, is binding.
It is to be noted that the Civil Code does not of itself limit the liability of the common carrier to
a fixed amount per package although the Code expressly permits a stipulation limiting such
liability. Thus, the COGSA which is suppletory to the provisions of the Civil Code, steps in
and supplements the Code by establishing a statutory provision limiting the carrier's liability in
the absence of a declaration of a higher value of the goods by the shipper in the bill of lading.
The provisions of the Carriage of Goods by.Sea Act on limited liability are as much a part of a
bill of lading as though physically in it and as much a part thereof as though placed therein by
agreement of the parties. 16
In G.R. No. 69044, there is no stipulation in the respective Bills of Lading (Exhibits "C-2" and
"I-3") 1 7 limiting the carrier's liability for the loss or destruction of the goods. Nor is there a
declaration of a higher value of the goods. Hence, Petitioner Carrier's liability should not
exceed US $500 per package, or its peso equivalent, at the time of payment of the value of
the goods lost, but in no case "more than the amount of damage actually sustained."
The actual total loss for the 5,000 pieces of calorized lance pipes was P256,039 (Exhibit "C"),
which was exactly the amount of the insurance coverage by Development Insurance (Exhibit
"A"), and the amount affirmed to be paid by respondent Court. The goods were shipped in 28
packages (Exhibit "C-2") Multiplying 28 packages by $500 would result in a product of
$14,000 which, at the current exchange rate of P20.44 to US $1, would be P286,160, or
"more than the amount of damage actually sustained." Consequently, the aforestated amount
of P256,039 should be upheld.
With respect to the seven (7) cases of spare parts (Exhibit "I-3"), their actual value was
P92,361.75 (Exhibit "I"), which is likewise the insured value of the cargo (Exhibit "H") and
amount was affirmed to be paid by respondent Court. however, multiplying seven (7) cases
by $500 per package at the present prevailing rate of P20.44 to US $1 (US $3,500 x P20.44)
would yield P71,540 only, which is the amount that should be paid by Petitioner Carrier for
those spare parts, and not P92,361.75.
In G.R. No. 71478, in so far as the two (2) cases of surveying instruments are concerned, the
amount awarded to DOWA which was already reduced to $1,000 by the Appellate Court
following the statutory $500 liability per package, is in order.
In respect of the shipment of 128 cartons of garment fabrics in two (2) containers and insured
with NISSHIN, the Appellate Court also limited Petitioner Carrier's liability to $500 per
package and affirmed the award of $46,583 to NISSHIN. it multiplied 128 cartons (considered
as COGSA packages) by $500 to arrive at the figure of $64,000, and explained that "since
this amount is more than the insured value of the goods, that is $46,583, the Trial Court was
correct in awarding said amount only for the 128 cartons, which amount is less than the
maximum limitation of the carrier's liability."
We find no reversible error. The 128 cartons and not the two (2) containers should be
considered as the shipping unit.
In Mitsui & Co., Ltd. vs. American Export Lines, Inc. 636 F 2d 807 (1981), the consignees of
tin ingots and the shipper of floor covering brought action against the vessel owner and
operator to recover for loss of ingots and floor covering, which had been shipped in vessel
supplied containers. The U.S. District Court for the Southern District of New York rendered
judgment for the plaintiffs, and the defendant appealed. The United States Court of Appeals,
Second Division, modified and affirmed holding that:
When what would ordinarily be considered packages are shipped in a
container supplied by the carrier and the number of such units is disclosed in
the shipping documents, each of those units and not the container
constitutes the "package" referred to in liability limitation provision of
Carriage of Goods by Sea Act. Carriage of Goods by Sea Act, 4(5), 46
U.S.C.A.& 1304(5).
Even if language and purposes of Carriage of Goods by Sea Act left doubt
as to whether carrier-furnished containers whose contents are disclosed
should be treated as packages, the interest in securing international
uniformity would suggest that they should not be so treated. Carriage of
Goods by Sea Act, 4(5), 46 U.S.C.A. 1304(5).
... After quoting the statement in Leather's Best, supra, 451 F 2d at 815, that
treating a container as a package is inconsistent with the congressional
purpose of establishing a reasonable minimum level of liability, Judge Beeks
wrote, 414 F. Supp. at 907 (footnotes omitted):
Although this approach has not completely escaped criticism, there
is, nonetheless, much to commend it. It gives needed recognition to
the responsibility of the courts to construe and apply the statute as
enacted, however great might be the temptation to "modernize" or
reconstitute it by artful judicial gloss. If COGSA's package limitation
scheme suffers from internal illness, Congress alone must
undertake the surgery. There is, in this regard, obvious wisdom in
the Ninth Circuit's conclusion in Hartford that technological
advancements, whether or not forseeable by the COGSA
promulgators, do not warrant a distortion or artificial construction of
the statutory term "package." A ruling that these large reusable
metal pieces of transport equipment qualify as COGSA packages
at least where, as here, they were carrier owned and supplied
would amount to just such a distortion.
Certainly, if the individual crates or cartons prepared by the shipper
and containing his goods can rightly be considered "packages"
standing by themselves, they do not suddenly lose that character
upon being stowed in a carrier's container. I would liken these
containers to detachable stowage compartments of the ship. They
simply serve to divide the ship's overall cargo stowage space into
smaller, more serviceable loci. Shippers' packages are quite literally
"stowed" in the containers utilizing stevedoring practices and
materials analogous to those employed in traditional on board
stowage.
In Yeramex International v. S.S. Tando,, 1977 A.M.C. 1807 (E.D. Va.) rev'd
on other grounds, 595 F 2nd 943 (4 Cir. 1979), another district with many
maritime cases followed Judge Beeks' reasoning in Matsushita and similarly
rejected the functional economics test. Judge Kellam held that when rolls of
polyester goods are packed into cardboard cartons which are then placed in
containers, the cartons and not the containers are the packages.
xxx xxx xxx
The case of Smithgreyhound v. M/V Eurygenes, 18 followed the Mitsui test:
Eurygenes concerned a shipment of stereo equipment packaged by the
shipper into cartons which were then placed by the shipper into a carrier-
furnished container. The number of cartons was disclosed to the carrier in
the bill of lading. Eurygenes followed the Mitsui test and treated the cartons,
not the container, as the COGSA packages. However, Eurygenes indicated
that a carrier could limit its liability to $500 per container if the bill of lading
failed to disclose the number of cartons or units within the container, or if the
parties indicated, in clear and unambiguous language, an agreement to treat
the container as the package.
(Admiralty Litigation in Perpetuum: The Continuing Saga of
Package Limitations and Third World Delivery Problems by
Chester D. Hooper & Keith L. Flicker, published in Fordham
International Law Journal, Vol. 6, 1982-83, Number 1)
(Emphasis supplied)
In this case, the Bill of Lading (Exhibit "A") disclosed the following data:
2 Containers
(128) Cartons)
Men's Garments Fabrics and Accessories Freight Prepaid
Say: Two (2) Containers Only.
Considering, therefore, that the Bill of Lading clearly disclosed the contents of the containers,
the number of cartons or units, as well as the nature of the goods, and applying the ruling in
the Mitsui and Eurygenes cases it is clear that the 128 cartons, not the two (2) containers
should be considered as the shipping unit subject to the $500 limitation of liability.
True, the evidence does not disclose whether the containers involved herein were carrier-
furnished or not. Usually, however, containers are provided by the carrier. 19 In this case, the
probability is that they were so furnished for Petitioner Carrier was at liberty to pack and carry
the goods in containers if they were not so packed. Thus, at the dorsal side of the Bill of
Lading (Exhibit "A") appears the following stipulation in fine print:
11. (Use of Container) Where the goods receipt of which is acknowledged on
the face of this Bill of Lading are not already packed into container(s) at the
time of receipt, the Carrier shall be at liberty to pack and carry them in any
type of container(s).
The foregoing would explain the use of the estimate "Say: Two (2) Containers Only" in the
Bill of Lading, meaning that the goods could probably fit in two (2) containers only. It cannot
mean that the shipper had furnished the containers for if so, "Two (2) Containers" appearing
as the first entry would have sufficed. and if there is any ambiguity in the Bill of Lading, it is a
cardinal principle in the construction of contracts that the interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the obscurity. 20 This applies
with even greater force in a contract of adhesion where a contract is already prepared and
the other party merely adheres to it, like the Bill of Lading in this case, which is draw. up by
the carrier. 21
On Alleged Denial of Opportunity to Present Deposition of Its Witnesses: (in G.R. No. 69044
only)
Petitioner Carrier claims that the Trial Court did not give it sufficient time to take the
depositions of its witnesses in Japan by written interrogatories.
We do not agree. petitioner Carrier was given- full opportunity to present its evidence but it
failed to do so. On this point, the Trial Court found:
xxx xxx xxx
Indeed, since after November 6, 1978, to August 27, 1979, not to mention
the time from June 27, 1978, when its answer was prepared and filed in
Court, until September 26, 1978, when the pre-trial conference was
conducted for the last time, the defendant had more than nine months to
prepare its evidence. Its belated notice to take deposition on written
interrogatories of its witnesses in Japan, served upon the plaintiff on August
25th, just two days before the hearing set for August 27th, knowing fully well
that it was its undertaking on July 11 the that the deposition of the witnesses
would be dispensed with if by next time it had not yet been obtained, only
proves the lack of merit of the defendant's motion for postponement, for
which reason it deserves no sympathy from the Court in that regard. The
defendant has told the Court since February 16, 1979, that it was going to
take the deposition of its witnesses in Japan. Why did it take until August 25,
1979, or more than six months, to prepare its written interrogatories. Only
the defendant itself is to blame for its failure to adduce evidence in support
of its defenses.
xxx xxx xxx 22
Petitioner Carrier was afforded ample time to present its side of the case. 23 It cannot
complain now that it was denied due process when the Trial Court rendered its Decision on
the basis of the evidence adduced. What due process abhors is absolute lack of opportunity
to be heard. 24
On the Award of Attorney's Fees:
Petitioner Carrier questions the award of attorney's fees. In both cases, respondent Court
affirmed the award by the Trial Court of attorney's fees of P35,000.00 in favor of
Development Insurance in G.R. No. 69044, and P5,000.00 in favor of NISSHIN and DOWA in
G.R. No. 71478.
Courts being vested with discretion in fixing the amount of attorney's fees, it is believed that
the amount of P5,000.00 would be more reasonable in G.R. No. 69044. The award of
P5,000.00 in G.R. No. 71478 is affirmed.
WHEREFORE, 1) in G.R. No. 69044, the judgment is modified in that petitioner Eastern
Shipping Lines shall pay the Development Insurance and Surety Corporation the amount of
P256,039 for the twenty-eight (28) packages of calorized lance pipes, and P71,540 for the
seven (7) cases of spare parts, with interest at the legal rate from the date of the filing of the
complaint on June 13, 1978, plus P5,000 as attorney's fees, and the costs.
2) In G.R.No.71478,the judgment is hereby affirmed.
SO ORDERED.






G.R. No. L-49407 August 19, 1988
NATIONAL DEVELOPMENT COMPANY, petitioner-appellant, vs. THE COURT OF
APPEALS and DEVELOPMENT INSURANCE & SURETY CORPORATION, respondents-
appellees.
No. L-49469 August 19, 1988
MARITIME COMPANY OF THE PHILIPPINES, petitioner-appellant, vs. THE COURT OF
APPEALS and DEVELOPMENT INSURANCE & SURETY CORPORATION, respondents-
appellees.
PARAS, J.:
These are appeals by certiorari from the decision * of the Court of Appeals in CA G.R. No: L-
46513-R entitled "Development Insurance and Surety Corporation plaintiff-appellee vs.
Maritime Company of the Philippines and National Development Company defendant-
appellants," affirmingin toto the decision ** in Civil Case No. 60641 of the then Court of First
Instance of Manila, Sixth Judicial District, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered ordering the defendants
National Development Company and Maritime Company of the Philippines,
to pay jointly and severally, to the plaintiff Development Insurance and
Surety Corp., the sum of THREE HUNDRED SIXTY FOUR THOUSAND
AND NINE HUNDRED FIFTEEN PESOS AND EIGHTY SIX CENTAVOS
(364,915.86) with the legal interest thereon from the filing of plaintiffs
complaint on April 22, 1965 until fully paid, plus TEN THOUSAND PESOS
(Pl0,000.00) by way of damages as and for attorney's fee.
On defendant Maritime Company of the Philippines' cross-claim against the
defendant National Development Company, judgment is hereby rendered,
ordering the National Development Company to pay the cross-claimant
Maritime Company of the Philippines the total amount that the Maritime
Company of the Philippines may voluntarily or by compliance to a writ of
execution pay to the plaintiff pursuant to the judgment rendered in this case.
With costs against the defendant Maritime Company of the Philippines.
(pp. 34-35, Rollo, GR No. L-49469)
The facts of these cases as found by the Court of Appeals, are as follows:
The evidence before us shows that in accordance with a memorandum
agreement entered into between defendants NDC and MCP on September
13, 1962, defendant NDC as the first preferred mortgagee of three ocean
going vessels including one with the name 'Dona Nati' appointed defendant
MCP as its agent to manage and operate said vessel for and in its behalf
and account (Exh. A). Thus, on February 28, 1964 the E. Philipp Corporation
of New York loaded on board the vessel "Dona Nati" at San Francisco,
California, a total of 1,200 bales of American raw cotton consigned to the
order of Manila Banking Corporation, Manila and the People's Bank and
Trust Company acting for and in behalf of the Pan Asiatic Commercial
Company, Inc., who represents Riverside Mills Corporation (Exhs. K-2 to K7-
A & L-2 to L-7-A). Also loaded on the same vessel at Tokyo, Japan, were the
cargo of Kyokuto Boekui, Kaisa, Ltd., consigned to the order of Manila
Banking Corporation consisting of 200 cartons of sodium lauryl sulfate and
10 cases of aluminum foil (Exhs. M & M-1). En route to Manila the vessel
Dofia Nati figured in a collision at 6:04 a.m. on April 15, 1964 at Ise Bay,
Japan with a Japanese vessel 'SS Yasushima Maru' as a result of which 550
bales of aforesaid cargo of American raw cotton were lost and/or destroyed,
of which 535 bales as damaged were landed and sold on the authority of the
General Average Surveyor for Yen 6,045,-500 and 15 bales were not landed
and deemed lost (Exh. G). The damaged and lost cargoes was worth
P344,977.86 which amount, the plaintiff as insurer, paid to the Riverside
Mills Corporation as holder of the negotiable bills of lading duly endorsed
(Exhs. L-7-A, K-8-A, K-2-A, K-3-A, K-4-A, K-5-A, A- 2, N-3 and R-3}. Also
considered totally lost were the aforesaid shipment of Kyokuto, Boekui Kaisa
Ltd., consigned to the order of Manila Banking Corporation, Manila, acting
for Guilcon, Manila, The total loss was P19,938.00 which the plaintiff as
insurer paid to Guilcon as holder of the duly endorsed bill of lading (Exhibits
M-1 and S-3). Thus, the plaintiff had paid as insurer the total amount of
P364,915.86 to the consignees or their successors-in-interest, for the said
lost or damaged cargoes. Hence, plaintiff filed this complaint to recover said
amount from the defendants-NDC and MCP as owner and ship agent
respectively, of the said 'Dofia Nati' vessel. (Rollo, L-49469, p.38)
On April 22, 1965, the Development Insurance and Surety Corporation filed before the then
Court of First Instance of Manila an action for the recovery of the sum of P364,915.86 plus
attorney's fees of P10,000.00 against NDC and MCP (Record on Appeal), pp. 1-6).
Interposing the defense that the complaint states no cause of action and even if it does, the
action has prescribed, MCP filed on May 12, 1965 a motion to dismiss (Record on Appeal,
pp. 7-14). DISC filed an Opposition on May 21, 1965 to which MCP filed a reply on May 27,
1965 (Record on Appeal, pp. 14-24). On June 29, 1965, the trial court deferred the resolution
of the motion to dismiss till after the trial on the merits (Record on Appeal, p. 32). On June 8,
1965, MCP filed its answer with counterclaim and cross-claim against NDC.
NDC, for its part, filed its answer to DISC's complaint on May 27, 1965 (Record on Appeal,
pp. 22-24). It also filed an answer to MCP's cross-claim on July 16, 1965 (Record on Appeal,
pp. 39-40). However, on October 16, 1965, NDC's answer to DISC's complaint was stricken
off from the record for its failure to answer DISC's written interrogatories and to comply with
the trial court's order dated August 14, 1965 allowing the inspection or photographing of the
memorandum of agreement it executed with MCP. Said order of October 16, 1965 likewise
declared NDC in default (Record on Appeal, p. 44). On August 31, 1966, NDC filed a motion
to set aside the order of October 16, 1965, but the trial court denied it in its order dated
September 21, 1966.
On November 12, 1969, after DISC and MCP presented their respective evidence, the trial
court rendered a decision ordering the defendants MCP and NDC to pay jointly and solidarity
to DISC the sum of P364,915.86 plus the legal rate of interest to be computed from the filing
of the complaint on April 22, 1965, until fully paid and attorney's fees of P10,000.00.
Likewise, in said decision, the trial court granted MCP's crossclaim against NDC.
MCP interposed its appeal on December 20, 1969, while NDC filed its appeal on February
17, 1970 after its motion to set aside the decision was denied by the trial court in its order
dated February 13,1970.
On November 17,1978, the Court of Appeals promulgated its decision affirming in toto the
decision of the trial court.
Hence these appeals by certiorari.
NDC's appeal was docketed as G.R. No. 49407, while that of MCP was docketed as G.R.
No. 49469. On July 25,1979, this Court ordered the consolidation of the above cases (Rollo,
p. 103). On August 27,1979, these consolidated cases were given due course (Rollo, p. 108)
and submitted for decision on February 29, 1980 (Rollo, p. 136).
In its brief, NDC cited the following assignments of error:
I
THE COURT OF APPEALS ERRED IN APPLYING ARTICLE 827 OF THE CODE OF
COMMERCE AND NOT SECTION 4(2a) OF COMMONWEALTH ACT NO. 65, OTHERWISE
KNOWN AS THE CARRIAGE OF GOODS BY SEA ACT IN DETERMINING THE LIABILITY
FOR LOSS OF CARGOES RESULTING FROM THE COLLISION OF ITS VESSEL "DONA
NATI" WITH THE YASUSHIMA MARU"OCCURRED AT ISE BAY, JAPAN OR OUTSIDE
THE TERRITORIAL JURISDICTION OF THE PHILIPPINES.
II
THE COURT OF APPEALS ERRED IN NOT DISMISSING THE C0MPLAINT FOR
REIMBURSEMENT FILED BY THE INSURER, HEREIN PRIVATE RESPONDENT-
APPELLEE, AGAINST THE CARRIER, HEREIN PETITIONER-APPELLANT. (pp. 1-2, Brief
for Petitioner-Appellant National Development Company; p. 96, Rollo).
On its part, MCP assigned the following alleged errors:
I
THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT
RESPONDENT DEVELOPMENT INSURANCE AND SURETY CORPORATION HAS NO
CAUSE OF ACTION AS AGAINST PETITIONER MARITIME COMPANY OF THE
PHILIPPINES AND IN NOT DISMISSING THE COMPLAINT.
II
THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CAUSE
OF ACTION OF RESPONDENT DEVELOPMENT INSURANCE AND SURETY
CORPORATION IF ANY EXISTS AS AGAINST HEREIN PETITIONER MARITIME
COMPANY OF THE PHILIPPINES IS BARRED BY THE STATUTE OF LIMITATION AND
HAS ALREADY PRESCRIBED.
III
THE RESPONDENT COURT OF APPEALS ERRED IN ADMITTING IN EVIDENCE
PRIVATE RESPONDENTS EXHIBIT "H" AND IN FINDING ON THE BASIS THEREOF THAT
THE COLLISION OF THE SS DONA NATI AND THE YASUSHIMA MARU WAS DUE TO
THE FAULT OF BOTH VESSELS INSTEAD OF FINDING THAT THE COLLISION WAS
CAUSED BY THE FAULT, NEGLIGENCE AND LACK OF SKILL OF THE COMPLEMENTS
OF THE YASUSHIMA MARU WITHOUT THE FAULT OR NEGLIGENCE OF THE
COMPLEMENT OF THE SS DONA NATI
IV
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT UNDER THE
CODE OF COMMERCE PETITIONER APPELLANT MARITIME COMPANY OF THE
PHILIPPINES IS A SHIP AGENT OR NAVIERO OF SS DONA NATI OWNED BY CO-
PETITIONER APPELLANT NATIONAL DEVELOPMENT COMPANY AND THAT SAID
PETITIONER-APPELLANT IS SOLIDARILY LIABLE WITH SAID CO-PETITIONER FOR
LOSS OF OR DAMAGES TO CARGO RESULTING IN THE COLLISION OF SAID VESSEL,
WITH THE JAPANESE YASUSHIMA MARU.
V
THE RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT THE LOSS OF OR
DAMAGES TO THE CARGO OF 550 BALES OF AMERICAN RAW COTTON, DAMAGES
WERE CAUSED IN THE AMOUNT OF P344,977.86 INSTEAD OF ONLY P110,000 AT
P200.00 PER BALE AS ESTABLISHED IN THE BILLS OF LADING AND ALSO IN
HOLDING THAT PARAGRAPH 1O OF THE BILLS OF LADING HAS NO APPLICATION IN
THE INSTANT CASE THERE BEING NO GENERAL AVERAGE TO SPEAK OF.
VI
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THE PETITIONERS
NATIONAL DEVELOPMENT COMPANY AND COMPANY OF THE PHILIPPINES TO PAY
JOINTLY AND SEVERALLY TO HEREIN RESPONDENT DEVELOPMENT INSURANCE
AND SURETY CORPORATION THE SUM OF P364,915.86 WITH LEGAL INTEREST FROM
THE FILING OF THE COMPLAINT UNTIL FULLY PAID PLUS P10,000.00 AS AND FOR
ATTORNEYS FEES INSTEAD OF SENTENCING SAID PRIVATE RESPONDENT TO PAY
HEREIN PETITIONERS ITS COUNTERCLAIM IN THE AMOUNT OF P10,000.00 BY WAY
OF ATTORNEY'S FEES AND THE COSTS. (pp. 1-4, Brief for the Maritime Company of the
Philippines; p. 121, Rollo)
The pivotal issue in these consolidated cases is the determination of which laws govern loss
or destruction of goods due to collision of vessels outside Philippine waters, and the extent of
liability as well as the rules of prescription provided thereunder.
The main thrust of NDC's argument is to the effect that the Carriage of Goods by Sea Act
should apply to the case at bar and not the Civil Code or the Code of Commerce. Under
Section 4 (2) of said Act, the carrier is not responsible for the loss or damage resulting from
the "act, neglect or default of the master, mariner, pilot or the servants of the carrier in the
navigation or in the management of the ship." Thus, NDC insists that based on the findings of
the trial court which were adopted by the Court of Appeals, both pilots of the colliding vessels
were at fault and negligent, NDC would have been relieved of liability under the Carriage of
Goods by Sea Act. Instead, Article 287 of the Code of Commerce was applied and both NDC
and MCP were ordered to reimburse the insurance company for the amount the latter paid to
the consignee as earlier stated.
This issue has already been laid to rest by this Court of Eastern Shipping Lines Inc. v. IAC (1
50 SCRA 469-470 [1987]) where it was held under similar circumstance "that the law of the
country to which the goods are to be transported governs the liability of the common carrier in
case of their loss, destruction or deterioration" (Article 1753, Civil Code). Thus, the rule was
specifically laid down that for cargoes transported from Japan to the Philippines, the liability
of the carrier is governed primarily by the Civil Code and in all matters not regulated by said
Code, the rights and obligations of common carrier shall be governed by the Code of
commerce and by laws (Article 1766, Civil Code). Hence, the Carriage of Goods by Sea Act,
a special law, is merely suppletory to the provision of the Civil Code.
In the case at bar, it has been established that the goods in question are transported from
San Francisco, California and Tokyo, Japan to the Philippines and that they were lost or due
to a collision which was found to have been caused by the negligence or fault of both
captains of the colliding vessels. Under the above ruling, it is evident that the laws of the
Philippines will apply, and it is immaterial that the collision actually occurred in foreign waters,
such as Ise Bay, Japan.
Under Article 1733 of the Civil Code, common carriers from the nature of their business and
for reasons of public policy are bound to observe extraordinary diligence in the vigilance over
the goods and for the safety of the passengers transported by them according to all
circumstances of each case. Accordingly, under Article 1735 of the same Code, in all other
than those mentioned is Article 1734 thereof, the common carrier shall be presumed to have
been at fault or to have acted negigently, unless it proves that it has observed the
extraordinary diligence required by law.
It appears, however, that collision falls among matters not specifically regulated by the Civil
Code, so that no reversible error can be found in respondent courses application to the case
at bar of Articles 826 to 839, Book Three of the Code of Commerce, which deal exclusively
with collision of vessels.
More specifically, Article 826 of the Code of Commerce provides that where collision is
imputable to the personnel of a vessel, the owner of the vessel at fault, shall indemnify the
losses and damages incurred after an expert appraisal. But more in point to the instant case
is Article 827 of the same Code, which provides that if the collision is imputable to both
vessels, each one shall suffer its own damages and both shall be solidarily responsible for
the losses and damages suffered by their cargoes.
Significantly, under the provisions of the Code of Commerce, particularly Articles 826 to 839,
the shipowner or carrier, is not exempt from liability for damages arising from collision due to
the fault or negligence of the captain. Primary liability is imposed on the shipowner or carrier
in recognition of the universally accepted doctrine that the shipmaster or captain is merely the
representative of the owner who has the actual or constructive control over the conduct of the
voyage (Y'eung Sheng Exchange and Trading Co. v. Urrutia & Co., 12 Phil. 751 [1909]).
There is, therefore, no room for NDC's interpretation that the Code of Commerce should
apply only to domestic trade and not to foreign trade. Aside from the fact that the Carriage of
Goods by Sea Act (Com. Act No. 65) does not specifically provide for the subject of collision,
said Act in no uncertain terms, restricts its application "to all contracts for the carriage of
goods by sea to and from Philippine ports in foreign trade." Under Section I thereof, it is
explicitly provided that "nothing in this Act shall be construed as repealing any existing
provision of the Code of Commerce which is now in force, or as limiting its application." By
such incorporation, it is obvious that said law not only recognizes the existence of the Code
of Commerce, but more importantly does not repeal nor limit its application.
On the other hand, Maritime Company of the Philippines claims that Development Insurance
and Surety Corporation, has no cause of action against it because the latter did not prove
that its alleged subrogers have either the ownership or special property right or beneficial
interest in the cargo in question; neither was it proved that the bills of lading were transferred
or assigned to the alleged subrogers; thus, they could not possibly have transferred any right
of action to said plaintiff- appellee in this case. (Brief for the Maritime Company of the
Philippines, p. 16).
The records show that the Riverside Mills Corporation and Guilcon, Manila are the holders of
the duly endorsed bills of lading covering the shipments in question and an examination of
the invoices in particular, shows that the actual consignees of the said goods are the
aforementioned companies. Moreover, no less than MCP itself issued a certification attesting
to this fact. Accordingly, as it is undisputed that the insurer, plaintiff appellee paid the total
amount of P364,915.86 to said consignees for the loss or damage of the insured cargo, it is
evident that said plaintiff-appellee has a cause of action to recover (what it has paid) from
defendant-appellant MCP (Decision, CA-G.R. No. 46513-R, p. 10; Rollo, p. 43).
MCP next contends that it can not be liable solidarity with NDC because it is merely the
manager and operator of the vessel Dona Nati not a ship agent. As the general managing
agent, according to MCP, it can only be liable if it acted in excess of its authority.
As found by the trial court and by the Court of Appeals, the Memorandum Agreement of
September 13, 1962 (Exhibit 6, Maritime) shows that NDC appointed MCP as Agent, a term
broad enough to include the concept of Ship-agent in Maritime Law. In fact, MCP was even
conferred all the powers of the owner of the vessel, including the power to contract in the
name of the NDC (Decision, CA G.R. No. 46513, p. 12; Rollo, p. 40). Consequently, under
the circumstances, MCP cannot escape liability.
It is well settled that both the owner and agent of the offending vessel are liable for the
damage done where both are impleaded (Philippine Shipping Co. v. Garcia Vergara, 96 Phil.
281 [1906]); that in case of collision, both the owner and the agent are civilly responsible for
the acts of the captain (Yueng Sheng Exchange and Trading Co. v. Urrutia &
Co., supra citing Article 586 of the Code of Commerce; Standard Oil Co. of New York v.
Lopez Castelo, 42 Phil. 256, 262 [1921]); that while it is true that the liability of the naviero in
the sense of charterer or agent, is not expressly provided in Article 826 of the Code of
Commerce, it is clearly deducible from the general doctrine of jurisprudence under the Civil
Code but more specially as regards contractual obligations in Article 586 of the Code of
Commerce. Moreover, the Court held that both the owner and agent (Naviero) should be
declared jointly and severally liable, since the obligation which is the subject of the action had
its origin in a tortious act and did not arise from contract (Verzosa and Ruiz, Rementeria y
Cia v. Lim, 45 Phil. 423 [1923]). Consequently, the agent, even though he may not be the
owner of the vessel, is liable to the shippers and owners of the cargo transported by it, for
losses and damages occasioned to such cargo, without prejudice, however, to his rights
against the owner of the ship, to the extent of the value of the vessel, its equipment, and the
freight (Behn Meyer Y Co. v. McMicking et al. 11 Phil. 276 [1908]).
As to the extent of their liability, MCP insists that their liability should be limited to P200.00
per package or per bale of raw cotton as stated in paragraph 17 of the bills of lading. Also the
MCP argues that the law on averages should be applied in determining their liability.
MCP's contention is devoid of merit. The declared value of the goods was stated in the bills
of lading and corroborated no less by invoices offered as evidence ' during the trial. Besides,
common carriers, in the language of the court in Juan Ysmael & Co., Inc. v. Barrette et al.,
(51 Phil. 90 [1927]) "cannot limit its liability for injury to a loss of goods where such injury or
loss was caused by its own negligence." Negligence of the captains of the colliding vessel
being the cause of the collision, and the cargoes not being jettisoned to save some of the
cargoes and the vessel, the trial court and the Court of Appeals acted correctly in not
applying the law on averages (Articles 806 to 818, Code of Commerce).
MCP's claim that the fault or negligence can only be attributed to the pilot of the vessel SS
Yasushima Maru and not to the Japanese Coast pilot navigating the vessel Dona Nati need
not be discussed lengthily as said claim is not only at variance with NDC's posture, but also
contrary to the factual findings of the trial court affirmed no less by the Court of Appeals, that
both pilots were at fault for not changing their excessive speed despite the thick fog
obstructing their visibility.
Finally on the issue of prescription, the trial court correctly found that the bills of lading issued
allow trans-shipment of the cargo, which simply means that the date of arrival of the ship
Dona Nati on April 18,1964 was merely tentative to give allowances for such contingencies
that said vessel might not arrive on schedule at Manila and therefore, would necessitate the
trans-shipment of cargo, resulting in consequent delay of their arrival. In fact, because of the
collision, the cargo which was supposed to arrive in Manila on April 18, 1964 arrived only on
June 12, 13, 18, 20 and July 10, 13 and 15, 1964. Hence, had the cargoes in question been
saved, they could have arrived in Manila on the above-mentioned dates. Accordingly, the
complaint in the instant case was filed on April 22, 1965, that is, long before the lapse of one
(1) year from the date the lost or damaged cargo "should have been delivered" in the light of
Section 3, sub-paragraph (6) of the Carriage of Goods by Sea Act.
PREMISES CONSIDERED, the subject petitions are DENIED for lack of merit and the
assailed decision of the respondent Appellate Court is AFFIRMED.
SO ORDERED.


















G.R. No. L-30212 September 30, 1987
BIENVENIDO GELISAN, petitioner, vs. BENITO ALDAY, respondent.
PADILLA, J.:
Review on certiorari of the judgment * rendered by the Court of Appeals, dated 11 October
1968, as amended by its resolution, dated 11 February 1969, in CA-G.R. No. 32670-R,
entitled: "Benito Alday, plaintiff-appellant, vs. Roberto Espiritu and Bienvenido Gelisan,
defendants-appellees," which ordered the herein petitioner Bienvenido Gelisan to pay, jointly
and severally, with Roberto Espiritu, the respondent Benito Alday the amount of P5,397.30,
with. legal interest thereon from the filing of the complaint, and the costs of suit; and for the
said Roberto Espiritu to pay or refund the petitioner Bienvenido Gelisan whatever amount the
latter may have paid to the respondent Benito Alday by virtue of the judgment.
The uncontroverted facts of the case are, as follows:
Defendant Bienvenido Gelisan is the owner of a freight truck bearing plate
No. TH-2377. On January 31, 1962, defendant Bienvenido Gelisan and
Roberto Espiritu entered into a contract marked Exhibit 3-Gelisan under
which Espiritu hired the same freight truck of Gelisan for the purpose of
hauling rice, sugar, flour and fertilizer at an agreed price of P18.00 per trip
within the limits of the City of Manila provided the loads shall not exceed 200
sacks. It is also agreed that Espiritu shall bear and pay all losses and
damages attending the carriage of the goods to be hauled by him. The truck
was taken by a driver of Roberto Espiritu on February 1, 1962. Plaintiff
Benito Alday, a trucking operator, and who owns about 15 freight trucks, had
known the defendant Roberto Espiritu since 1948 as a truck operator.
Plaintiff had a contract to haul the fertilizers of the Atlas Fertilizer Corporation
from Pier 4, North Harbor, to its Warehouse in Mandaluyong. Alday met
Espiritu at the gate of Pier 4 and the latter offered the use of his truck with
the driver and helper at 9 centavos per bag of fertilizer. The offer was
accepted by plaintiff Alday and he instructed his checker Celso Henson to let
Roberto Espiritu haul the fertilizer. Espiritu made two hauls of 200 bags of
fertilizer per trip. The fertilizer was delivered to the driver and helper of
Espiritu with the necessary way bill receipts, Exhibits A and B. Espiritu,
however, did not deliver the fertilizer to the Atlas Fertolizer bodega at
Mandaluyong. The signatures appearing in the way bill receipts Exhibits A
and B of the Alday Transportation admittedly not the signature of any
representative or employee of the Atlas Fertilizer Corporation. Roberto
Espiritu could not be found, and plaintiff reported the loss to the Manila
Police Department. Roberto Espiritu was later arrested and booked for theft.
...
Subsequently, plaintiff Aiday saw the truck in question on Sto. Cristo St. and
he notified the Manila Police Department, and it was impounded by the
police. It was claimed by Bienvenido Gelisan from the Police Department
after he had been notified by his employees that the truck had been
impounded by the police; but as he could not produce at the time the
registration papers, the police would not release the truck to Gelisan. As a
result of the impounding of the truck according to Gelisan, ... and that for the
release of the truck he paid the premium of P300 to the surety company. 1
Benito Alday was compelled to pay the value of the 400 bags of fertilizer, in the amount of
P5,397.33, to Atlas Fertilizer Corporation so that, on 12 February 1962, he (Alday) filed a
complaint against Roberto Espiritu and Bienvenido Gelisan with the Court of First Instance of
Manila, docketed therein as Civil Case No. 49603, for the recovery of damages suffered by
him thru the criminal acts committed by the defendants.
The defendant, Roberto Espiritu failed to file an answer and was, accordingly, declared in
default.
The defendant, Bienvenido Gelisan, upon the other hand, disowned responsibility. He
claimed that he had no contractual relations with the plaintiff Benito Alday as regards the
hauling and/or delivery of the 400 bags of fertilizer mentioned in the complaint; that the
alleged misappropriation or nondelivery by defendant Roberto Espiritu of plaintiff's 400 bags
of fertilizer, was entirely beyond his (Gelisan's) control and knowledge, and which fact
became known to him, for the first time, on 8 February 1962 when his freight truck, with plate
No. TH-2377, was impounded by the Manila Police Department, at the instance of the
plaintiff; and that in his written contract of hire with Roberto Espiritu, it was expressly provided
that the latter will bear and pay all loss and damages attending the carriage of goods to be
hauled by said Roberto Espiritu.
After trial, the Court of First Instance of Manila ruled that Roberto Espiritu alone was liable to
Benito Alday, since Bienvenido Gelisan was not privy to the contract between Espiritu and
Alday. The dispositive portion of the decision reads, as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendant Roberto Espiritu for the sum of P6,000 with interest at
the legal rate from the time of the filing of the complaint, and the costs of the
suit. Plantiff's complaint is dismissed with respect to defendant Bienvenido
Gelisan, and judgment is rendered in favor of defendant Bienvenido Gelisan
and against the plaintiff for the sum of P350. 2
On appeal, however, the Court of Appeals, citing the case of Montoya vs. Ignacio, 3 found
that Bienvenido Gelisan is likewise liable for being the registered owner of the truck; and that
the lease contract, executed by and between Bienvenido Gelisan and Roberto Espiritu, is not
binding upon Benito Alday for not having been previously approved by the Public Service
Commission. Accordingly, it sentenced Bienvenido Gelisan to pay, jointly and severally with
Roberto Espiritu, Benito Alday the amount of P5,397.30, with legal interest thereon from the
filing of the complaint; and to pay the costs. Roberto Espiritu, in turn, was ordered to pay or
refund Bienvenido Gelisan whatever amount the latter may have paid to Benito Alday by
virtue of the judgment. 4
Hence, the present recourse by Bienvenido Gelisan.
The petition is without merit. The judgment rendered by the Court of Appeals, which is sought
to be reviewed, is in accord with the facts and the law on the case and we find no cogent
reason to disturb the same. The Court has invariably held in several decisions that the
registered owner of a public service vehicle is responsible for damages that may arise from
consequences incident to its operation or that may be caused to any of the passengers
therein. 5 The claim of the petitioner that he is not hable in view of the lease contract
executed by and between him and Roberto Espiritu which exempts him from liability to third
persons, cannot be sustained because it appears that the lease contract, adverted to, had
not been approved by the Public Service Commission. It is settled in our jurisprudence that if
the property covered by a franchise is transferred or leased to another without obtaining the
requisite approval, the transfer is not binding upon the public and third persons. 6
We also find no merit in the petitioner's argument that the rule requiring the previous approval
by the Public Service Commission, of the transfer or lease of the motor vehicle, may be
applied only in cases where there is no positive Identification of the owner or driver, or where
there are very scant means of Identification, but not in those instances where the person
responsible for damages has been fixed or determined beforehand, as in the case at bar.
The reason for the rule we reiterate in the present case, was explained by the Court
in Montoya vs. Ignacio, 7thus:
There is merit in this contention. The law really requires the approval of the
Public Service Commission in order that a franchise, or any privilege
pertaining thereto, may be sold or leased without infringing the certificate
issued to the grantee. The reason is obvious. Since a franchise is personal
in nature any transfer or lease thereof should be notified to the Public
Service Commission so that the latter mav take proper safeguards to protect
the interest of the public. In fact, the law requires that, before the approval is
granted, there should be a public hearing, with notice to all interested
parties, in order that the Commission may determine if there are good and
reasonable grounds justifying the transfer or lease of the property covered
by the franchise, or if the sale or lease is detrimental to public interest. Such
being the reason and philosophy behind this requirement, it follows that if the
property covered by the franchise is transferred, or leased to another without
obtaining the requisite approval, the transfer is not binding against the Public
Service Commission and in contemplation of law the grantee continues to be
responsible under the franchise in relation to the Commission and to the
Public. Since the lease of the jeepney in question was made without such
approval the only conclusion that can be drawn is that Marcelino Ignacio still
continues to be its operator in contemplation of law, and as such is
responsible for the consequences incident to its operation, one of them
being the collision under consideration.
Bienvenido Gelisan, the registered owner, is not however without recourse. He has a right to
be indemnified by Roberto Espiritu for the amount titat he may be required to pay as
damages for the injury caused to Benito Alday, since the lease contract in question, although
not effective against the public for not having been approved by the Public Service
Commission, is valid and binding between the contracting parties. 8
We also find no merit in the petitioner's contention that his liability is only subsidiary. The
Court has consistently considered the registered owner/operator of a public service vehicle to
be jointly and severally liable with the driver for damages incurred by passengers or third
persons as a consequence of injuries sustained in the operation of said vehicles. Thus, in the
case of Vargas vs. Langcay, 9 the Court said:
We hold that the Court of Appeals erred in considering appellant-petitioner
Diwata Vargas only subsidiarily liable under Article 103 of the Revised Penal
Code. This court, in previous decisions, has always considered the
registered owner/operator of a passenger vehicle, jointly and severally liable
with the driver, for damages incurred by passengers or third persons as a
consequence of injuries (or death) sustained in the operation of said
vehicles. (Montoya vs. Ignacio, 94 Phil., 182; Timbol vs. Osias, G.R. No. L-
7547, April 30, 1955; Vda. de Medina vs. Cresencia, 99 Phil., 506; Necesito
vs. Paras, 104 Phil., 75; Erezo vs. Jepte, 102 Phil., 103; Tamayo vs. Aquino
and Rayos vs Tamayo, 105 Phil., 949; 56 Off. Gaz. [36] 5617.) In the case of
Erezo vs. Jepte, Supra, We held:
* * * In synthesis, we hold that the registered owner, the defendant-appellant
herein, is primarily responsible for the damage caused * * * (Emphasis
supplied)
In the case of Tamayo vs. Aquino, supra, We said:
* * * As Tamayo is the registered owner of the truck, his responsibffity to the
public or to any passenger riding in the vehicle or truck must be direct * * *
(Emphasis supplied)
WHEREFORE, the petition is hereby DENIED. With costs against the petitioner.
SO ORDERED.











































G.R. No. 82318 May 18, 1989
GILBERTO M. DUAVIT, petitioner, vs. THE HON. COURT OF APPEALS, Acting through
the Third Division, as Public Respondent, and ANTONIO SARMIENTO, SR. & VIRGILIO
CATUAR respondents.
GUTIERREZ, JR., J.:
This petition raises the sole issue of whether or not the owner of a private vehicle which
figured in an accident can be held liable under Article 2180 of the Civil Code when the said
vehicle was neither driven by an employee of the owner nor taken with the consent of the
latter.
The facts are summarized in the contested decision, as follows:
From the evidence adduced by the plaintiffs, consisting of the testimonies of
witnesses Virgilio Catuar, Antonio Sarmiento, Jr., Ruperto Catuar, Jr. and
Norberto Bernarte it appears that on July 28, 1971 plaintiffs Antonio
Sarmiento, Sr. and Virgilio Catuar were aboard a jeep with plate number 77-
99-F-I Manila, 1971, owned by plaintiff, Ruperto Catuar was driving the said
jeep on Ortigas Avenue, San Juan, Rizal; that plaintiff's jeep, at the time,
was running moderately at 20 to 35 kilometers per hour and while
approaching Roosevelt Avenue, Virgilio Catuar slowed down; that suddenly,
another jeep with plate number 99-97-F-J Manila 1971 driven by defendant
Oscar Sabiniano hit and bumped plaintiff's jeep on the portion near the left
rear wheel, and as a result of the impact plaintiff's jeep fell on its right and
skidded by about 30 yards; that as a result plaintiffs jeep was damaged,
particularly the windshield, the differential, the part near the left rear wheel
and the top cover of the jeep; that plaintiff Virgilio Catuar was thrown to the
middle of the road; his wrist was broken and he sustained contusions on the
head; that likewise plaintiff Antonio Sarmiento, Sr. was trapped inside the
fallen jeep, and one of his legs was fractured.
Evidence also shows that the plaintiff Virgilio Catuar spent a total of
P2,464.00 for repairs of the jeep, as shown by the receipts of payment of
labor and spare parts (Exhs. H to H-7 Plaintiffs likewise tried to prove that
plaintiff Virgilio Catuar, immediately after the accident was taken to
Immaculate Concepcion Hospital, and then was transferred to the National
Orthopedic Hospital; that while plaintiff Catuar was not confined in the
hospital, his wrist was in a plaster cast for a period of one month, and the
contusions on his head were under treatment for about two (2) weeks; that
for hospitalization, medicine and allied expenses, plaintiff Catuar spent
P5,000.00.
Evidence also shows that as a result of the incident, plaintiff Antonio
Sarmiento, Sr. sustained injuries on his leg; that at first, he was taken to the
National Orthopedic Hospital (Exh. K but later he was confined at the Makati
Medical Center from July 29, to August 29, 1971 and then from September
15 to 25, 1971; that his leg was in a plaster cast for a period of eight (8)
months; and that for hospitalization and medical attendance, plaintiff Antonio
Sarmiento, Sr. spent no less than P13,785.25 as evidenced by receipts in
his possession. (Exhs. N to N-1).
Proofs were adduced also to show that plaintiff Antonio sarmiento Sr. is
employed as Assistant Accountant of the Canlubang Sugar Estate with a
salary of P1,200.00 a month; that as sideline he also works as accountant of
United Haulers Inc. with a salary of P500.00 a month; and that as a result of
this incident, plaintiff Sarmiento was unable to perform his normal work for a
period of at least 8 months. On the other hand, evidence shows that the
other plaintiff Virgilio Catuar is a Chief Clerk in Canlubang Sugar Estate with
a salary of P500.00 a month, and as a result of the incident, he was
incapacitated to work for a period of one (1) month.
The plaintiffs have filed this case both against Oscar Sabiniano as driver,
and against Gualberto Duavit as owner of the jeep.
Defendant Gualberto Duavit, while admitting ownership of the other jeep
(Plate No. 99-07-F-J Manila, 1971), denied that the other defendant (Oscar
Sabiniano) was his employee. Duavit claimed that he has not been an
employer of defendant Oscar Sabiniano at any time up to the present.
On the other hand documentary and testimonial evidence show that
defendant Oscar Sabiniano was an employee of the Board of Liquidators
from November 14, 1966 up to January 4, 1973 (Annex A of Answer).
Defendant Sabiniano, in his testimony, categorically admitted that he took
the jeep from the garage of defendant Duavit without the consent or
authority of the latter (TSN, September 7, 1978, p. 8). He testified further,
that Duavit even filed charges against him for theft of the jeep, but which
Duavit did not push through as his (Sabiniano's) parents apologized to
Duavit on his behalf.
Defendant Oscar Sabiniano, on the other hand in an attempt to exculpate
himself from liability, makes it appear that he was taking all necessary
precaution while driving and the accident occurred due to the negligence of
Virgilio Catuar. Sabiniano claims that it was plaintiffs vehicle which hit and
bumped their jeep. (Reno, pp. 21-23)
The trial court found Oscar Sabiniano negligent in driving the vehicle but found no employer-
employee relationship between him and the petitioner because the latter was then a
government employee and he took the vehicle without the authority and consent of the
owner. The petitioner was, thus, absolved from liability under Article 2180 of the Civil Code.
The private respondents appealed the case.
On January 7, 1988, the Court of Appeals rendered the questioned decision holding the
petitioner jointly and severally liable with Sabiniano. The appellate court in part ruled:
We cannot go along with appellee's argument. It will be seen that in Vargas
v. Langcay, supra, it was held that it is immaterial whether or not the driver
was actually employed by the operator of record or registered owner, and it
is even not necessary to prove who the actual owner of the vehicle and who
the employer of the driver is. When the Supreme Court ruled, thus: 'We must
hold and consider such owner-operator of record (registered owner) as the
employer in contemplation of law, of the driver,' it cannot be construed other
than that the registered owner is the employer of the driver in contemplation
of law. It is a conclusive presumption of fact and law, and is not subject to
rebuttal of proof to the contrary. Otherwise, as stated in the decision, we
quote:
The purpose of the principles evolved by the decisions in these matters will
be defeated and thwarted if we entertain the argument of petitioner that she
is not liable because the actual owner and employer was established by the
evidence. . . .
Along the same vein, the defendant-appellee Gualberto Duavit cannot be allowed to prove
that the driver Sabiniano was not his employee at the time of the vehicular accident.
The ruling laid down in Amar V. Soberano (1966), 63 O.G. 6850, by this
Court to the effect that the burden of proving the non-existence of an
employer-employee relationship is upon the defendant and this he must do
by a satisfactory preponderance of evidence, has to defer to the doctrines
evolved by the Supreme Court in cases of damages arising from vehicular
mishaps involving registered motor vehicle. (See Tugade v. Court of
Appeals, 85 SCRA 226, 230). (Rollo, pp. 26-27)
The appellate court also denied the petitioner's motion for reconsideration. Hence, this
petition.
The petitioner contends that the respondent appellate court committed grave abuse of
discretion in holding him jointly and severally liable with Sabiniano in spite of the absence of
an employer-employee relationship between them and despite the fact that the petitioner's
jeep was taken out of his garage and was driven by Sabiniano without his consent.
As early as in 1939, we have ruled that an owner of a vehicle cannot be held liable for an
accident involving the said vehicle if the same was driven without his consent or knowledge
and by a person not employed by him. Thus, in Duquillo v. Bayot (67 Phil. 131-133-134)
[1939] we said:
Under the facts established, the defendant cannot be held liable for
anything. At the time of the accident, James McGurk was driving the truck,
and he was not an employee of the defendant, nor did he have anything to
do with the latter's business; neither the defendant nor Father Ayson, who
was in charge of her business, consented to have any of her trucks driven
on the day of the accident, as it was a holy day, and much less by a
chauffeur who was not in charge of driving it; the use of the defendant's truck
in the circumstances indicated was done without her consent or knowledge;
it may, therefore, be said, that there was not the remotest contractual
relation between the deceased Pio Duquillo and the defendant. It necessarily
follows from all this that articles 1101 and following of the Civil Code, cited
by the appellant, have no application in this case, and, therefore, the errors
attributed to the inferior court are without basis.
The Court upholds the above ruling as still relevant and better applicable to present day
circumstances.
The respondent court's misplaced reliance on the cases of Erezo v. Jepte (102 Phil. 103
[1957] and Vargas v. Langcay (6 SCRA 174 [1962]) cannot be sustained. In the Erezo case,
Jepte, the registered owner of the truck which collided with a taxicab, and which resulted in
the killing of Erezo, claimed that at the time of the accident, the truck belonged to the Port
Brokerage in an arrangement with the corporation but the same was not known to the Motor
Vehicles Office. This Court sustained the trial court's ruling that since Jepte represented
himself to be the owner of the truck and the Motor Vehicles Office, relying on his
representation, registered the vehicle in his name, the Government and all persons affected
by the representation had the right to rely on his declaration of ownership and registration.
Thus, even if Jepte were not the owner of the truck at the time of the accident, he was still
held liable for the death of Erezo significantly, the driver of the truck was fully authorized to
drive it.
Likewise, in the Vargas case, just before the accident occurred Vargas had sold her jeepney
to a third person, so that at the time of the accident she was no longer the owner of the
jeepney. This court, nevertheless, affirmed Vargas' liability since she failed to surrender to
the Motor Vehicles Office the corresponding AC plates in violation of the Revised Motor
Vehicle Law and Commonwealth Act No. 146. We further ruled that the operator of record
continues to be the operator of the vehicle in contemplation of law, as regards the public and
third persons, and as such is responsible for the consequences incident to its operator. The
vehicle involved was a public utility jeepney for hire. In such cases, the law does not only
require the surrender of the AC plates but orders the vendor operator to stop the operation of
the jeepney as a form of public transportation until the matter is reported to the authorities.
As can be seen, the circumstances of the above cases are entirely different from those in the
present case. Herein petitioner does not deny ownership of the vehicle involved in tire
mishap but completely denies having employed the driver Sabiniano or even having
authorized the latter to drive his jeep. The jeep was virtually stolen from the petitioner's
garage. To hold, therefore, the petitioner liable for the accident caused by the negligence of
Sabiniano who was neither his driver nor employee would be absurd as it would be like
holding liable the owner of a stolen vehicle for an accident caused by the person who stole
such vehicle. In this regard, we cannot ignore the many cases of vehicles forcibly taken from
their owners at gunpoint or stolen from garages and parking areas and the instances of
service station attendants or mechanics of auto repair shops using, without the owner's
consent, vehicles entrusted to them for servicing or repair.
We cannot blindly apply absolute rules based on precedents whose facts do not jibe four
square with pending cases. Every case must be determined on its own peculiar factual
circumstances. Where, as in this case, the records of the petition fail to indicate the slightest
indicia of an employer-employee relationship between the owner and the erring driver or any
consent given by the owner for the vehicle's use, we cannot hold the owner liable.
We, therefore, find that the respondent appellate court committed reversible error in holding
the petitioner jointly and severally liable with Sabiniano to the private respondent.
WHEREFORE, the petition is GRANTED and the decision and resolution appealed from are
hereby ANNULLED and SET ASIDE. The decision of the then Court of First Instance (now
Regional Trial Court) of Laguna, 8th Judicial District, Branch 6, dated July 30, 1981 is
REINSTATED.
SO ORDERED.






















G.R. No. L-64693 April 27, 1984
LITA ENTERPRISES, INC., petitioner, vs. SECOND CIVIL CASES DIVISION,
INTERMEDIATE APPELLATE COURT, NICASIO M. OCAMPO and FRANCISCA P.
GARCIA, respondents.
ESCOLIN, J.:
"Ex pacto illicito non oritur actio" [No action arises out of an illicit bargain] is the tune-honored
maxim that must be applied to the parties in the case at bar. Having entered into an illegal
contract, neither can seek relief from the courts, and each must bear the consequences of his
acts.
The factual background of this case is undisputed.
Sometime in 1966, the spouses Nicasio M. Ocampo and Francisca Garcia, herein private
respondents, purchased in installment from the Delta Motor Sales Corporation five (5) Toyota
Corona Standard cars to be used as taxicabs. Since they had no franchise to operate
taxicabs, they contracted with petitioner Lita Enterprises, Inc., through its representative,
Manuel Concordia, for the use of the latter's certificate of public convenience in consideration
of an initial payment of P1,000.00 and a monthly rental of P200.00 per taxicab unit. To
effectuate Id agreement, the aforesaid cars were registered in the name of petitioner Lita
Enterprises, Inc, Possession, however, remained with tile spouses Ocampo who operated
and maintained the same under the name Acme Taxi, petitioner's trade name.
About a year later, on March 18, 1967, one of said taxicabs driven by their employee,
Emeterio Martin, collided with a motorcycle whose driver, one Florante Galvez, died from the
head injuries sustained therefrom. A criminal case was eventually filed against the driver
Emeterio Martin, while a civil case for damages was instituted by Rosita Sebastian Vda. de
Galvez, heir of the victim, against Lita Enterprises, Inc., as registered owner of the taxicab in
the latter case, Civil Case No. 72067 of the Court of First Instance of Manila, petitioner Lita
Enterprises, Inc. was adjudged liable for damages in the amount of P25,000.00 and
P7,000.00 for attorney's fees.
This decision having become final, a writ of execution was issued. One of the vehicles of
respondent spouses with Engine No. 2R-914472 was levied upon and sold at public auction
for 12,150.00 to one Sonnie Cortez, the highest bidder. Another car with Engine No. 2R-
915036 was likewise levied upon and sold at public auction for P8,000.00 to a certain Mr.
Lopez.
Thereafter, in March 1973, respondent Nicasio Ocampo decided to register his taxicabs in his
name. He requested the manager of petitioner Lita Enterprises, Inc. to turn over the
registration papers to him, but the latter allegedly refused. Hence, he and his wife filed a
complaint against Lita Enterprises, Inc., Rosita Sebastian Vda. de Galvez, Visayan Surety &
Insurance Co. and the Sheriff of Manila for reconveyance of motor vehicles with damages,
docketed as Civil Case No. 90988 of the Court of First Instance of Manila. Trial on the merits
ensued and on July 22, 1975, the said court rendered a decision, the dispositive portion of
which reads: t.hqw
WHEREFORE, the complaint is hereby dismissed as far as defendants
Rosita Sebastian Vda. de Galvez, Visayan Surety & Insurance Company
and the Sheriff of Manila are concerned.
Defendant Lita Enterprises, Inc., is ordered to transfer the registration
certificate of the three Toyota cars not levied upon with Engine Nos. 2R-
230026, 2R-688740 and 2R-585884 [Exhs. A, B, C and D] by executing a
deed of conveyance in favor of the plaintiff.
Plaintiff is, however, ordered to pay Lita Enterprises, Inc., the rentals in
arrears for the certificate of convenience from March 1973 up to May 1973 at
the rate of P200 a month per unit for the three cars. (Annex A, Record on
Appeal, p. 102-103, Rollo)
Petitioner Lita Enterprises, Inc. moved for reconsideration of the decision, but the same was
denied by the court a quo on October 27, 1975. (p. 121, Ibid.)
On appeal by petitioner, docketed as CA-G.R. No. 59157-R, the Intermediate Appellate Court
modified the decision by including as part of its dispositive portion another paragraph, to
wit: t.hqw
In the event the condition of the three Toyota rears will no longer serve the
purpose of the deed of conveyance because of their deterioration, or
because they are no longer serviceable, or because they are no longer
available, then Lita Enterprises, Inc. is ordered to pay the plaintiffs their fair
market value as of July 22, 1975. (Annex "D", p. 167, Rollo.)
Its first and second motions for reconsideration having been denied, petitioner came to Us,
praying that: t.hqw
1. ...
2. ... after legal proceedings, decision be rendered or resolution be issued,
reversing, annulling or amending the decision of public respondent so that:
(a) the additional paragraph added by the public respondent to the
DECISION of the lower court (CFI) be deleted;
(b) that private respondents be declared liable to petitioner for whatever
amount the latter has paid or was declared liable (in Civil Case No. 72067) of
the Court of First Instance of Manila to Rosita Sebastian Vda. de Galvez, as
heir of the victim Florante Galvez, who died as a result ot the gross
negligence of private respondents' driver while driving one private
respondents' taxicabs. (p. 39, Rollo.)
Unquestionably, the parties herein operated under an arrangement, comonly known as the
"kabit system", whereby a person who has been granted a certificate of convenience allows
another person who owns motors vehicles to operate under such franchise for a fee. A
certificate of public convenience is a special privilege conferred by the government . Abuse of
this privilege by the grantees thereof cannot be countenanced. The "kabit system" has been
Identified as one of the root causes of the prevalence of graft and corruption in the
government transportation offices. In the words of Chief Justice Makalintal, 1 "this is a
pernicious system that cannot be too severely condemned. It constitutes an imposition upon
the goo faith of the government.
Although not outrightly penalized as a criminal offense, the "kabit system" is invariably
recognized as being contrary to public policy and, therefore, void and inexistent under Article
1409 of the Civil Code, It is a fundamental principle that the court will not aid either party to
enforce an illegal contract, but will leave them both where it finds them. Upon this premise, it
was flagrant error on the part of both the trial and appellate courts to have accorded the
parties relief from their predicament. Article 1412 of the Civil Code denies them such aid. It
provides:t.hqw
ART. 1412. if the act in which the unlawful or forbidden cause consists does
not constitute a criminal offense, the following rules shall be observed;
(1) when the fault, is on the part of both contracting parties, neither may
recover what he has given by virtue of the contract, or demand the
performance of the other's undertaking.
The defect of inexistence of a contract is permanent and incurable, and cannot be cured by
ratification or by prescription. As this Court said in Eugenio v. Perdido, 2 "the mere lapse of
time cannot give efficacy to contracts that are null void."
The principle of in pari delicto is well known not only in this jurisdiction but also in the United
States where common law prevails. Under American jurisdiction, the doctrine is stated thus:
"The proposition is universal that no action arises, in equity or at law, from an illegal contract;
no suit can be maintained for its specific performance, or to recover the property agreed to be
sold or delivered, or damages for its property agreed to be sold or delivered, or damages for
its violation. The rule has sometimes been laid down as though it was equally universal, that
where the parties are in pari delicto, no affirmative relief of any kind will be given to one
against the other." 3 Although certain exceptions to the rule are provided by law, We see no
cogent reason why the full force of the rule should not be applied in the instant case.
WHEREFORE, all proceedings had in Civil Case No. 90988 entitled "Nicasio Ocampo and
Francisca P. Garcia, Plaintiffs, versus Lita Enterprises, Inc., et al., Defendants" of the Court
of First Instance of Manila and CA-G.R. No. 59157-R entitled "Nicasio Ocampo and
Francisca P. Garica, Plaintiffs-Appellees, versus Lita Enterprises, Inc., Defendant-
Appellant," of the Intermediate Appellate Court, as well as the decisions rendered therein are
hereby annuleled and set aside. No costs.
SO ORDERED.






G.R. No. L-16790 April 30, 1963
URBANO MAGBOO and EMILIA C. MAGBOO, plaintiffs-appellees, vs. DELFIN
BERNARDO, defendant-appellant.
MAKALINTAL, J.:
Appeal from the Court of First Instance of Manila to the Court of Appeals, and certified by the
latter to this Court on the ground that only questions of law are involved.
The action of the spouses Urbano Magboo and Emilia C. Magboo against Delfin Bernardo is
for enforcement of his subsidiary liability as employer in accordance with Article 103, Revised
Penal Code. The trial court ordered defendant to pay plaintiffs P3,000.00 and costs upon the
following stipulated facts:
1. That plaintiffs are the parents of Cesar Magboo, a child of 8 years old, who lived
with them and was under their custody until his death on October 24,1956 when he
was killed in a motor vehicle accident, the fatal vehicle being a passenger jeepney
with Plate No, AC-1963 (56) owned by the defendant;
2. That at the time of the accident, said passenger jeepney was driven by Conrado
Roque;
3. That the contract between Conrado Roque and defendant Delfin Bernardo was
that Roque was to pay to defendant the sum of P8.00, which he paid to said
defendant, for privilege of driving the jeepney on October 24, 1956, it being their
agreement that whatever earnings Roque could make out of the use of the jeepney
in transporting passengers from one point to another in the City of Manila would
belong entirely to Conrado Roque;
4. That as a consequence of the accident and as a result of the death of Cesar
Magboo in said accident, Conrado Roque was prosecuted for homicide thru reckless
imprudence before the Court of First Instance of Manila, the information having been
docketed as Criminal Case No. 37736, and that upon arraignment Conrado Roque
pleaded guilty to the information and was sentenced to six (6) months of arresto
mayor, with the accessory penalties of the law; to indemnify the heirs of the
deceased in the sum of P3,000.00, with subsidiary imprisonment in case of
insolvency, and to pay the costs;
5. That pursuant to said judgment Conrado Roque served his sentence but he was
not able to pay the indemnity because he was insolvent."
Appellant assails said decision, assigning three errors which boil down to the question of
whether or not an employer-employee relationship exists between a jeepney-owner and a
driver under a "boundary system" arrangement. Appellant contends that the relationship is
essentially that of lessor and lessee.
A similar contention has been rejected by this Court in several cases. In National Labor
Union v. Dinglasan, 52 O.G., No. 4, 1933, it was held that the features which characterize the
"boundary system" namely, the fact that the driver does not receive a fixed wage but gets
only the excess of the receipt of fares collected by him over the amount he pays to the jeep-
owner and that the gasoline consumed by the jeep is for the account of the driver are not
sufficient to withdraw the relationship between them from that of employer and employee.
The ruling was subsequently cited and applied in Doce v. Workmen's Compensation
Commission, L-9417, December 22, 1958, which involved the liability of a bus owner for
injury compensation to a conductor working under the "boundary system."
The same principle applies with greater reason in negligence cases concerning the right of
third parties to recover damages for injuries sustained. In Montoya v. Ignacio, L-5868,
December 29, 1953, the owner and operator of a passenger jeepney leased it to another, but
without the approval of the Public Service Commission. In a subsequent collision a
passenger died. We ruled that since the lease was made without such approval, which was
required by law, the owner continued to be the operator of the vehicle in legal contemplation
and as such was responsible for the consequences incident to its operation. The same
responsibility was held to attach in a case where the injured party was not a passenger but a
third person, who sued on the theory of culpa aquiliana (Timbol vs. Osias, L-7547, April 30,
1955). There is no reason why a different rule should be applied in a subsidiary liability case
under Article 103 of the Revised Penal Code. As in the existence of an employer-employee
relationship between the owner of the vehicle and the driver. Indeed to exempt from liability
the owner of a public vehicle who operates it under the "boundary system" on the ground that
he is a mere lessor would be not only to abet flagrant violations of the Public Service law but
also to place the riding public at the mercy of reckless and irresponsible drivers - reckless
because the measure of their earnings depends largely upon the number of trips they make
and, hence, the speed at which they drive; and irresponsible because most if not all of them
are in no position to pay the damages they might cause. (See Erezo vs. Jepte, L-9605,
September 30, 1957).
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and
approved by this Honorable Court, without prejudice to the parties adducing other evidence
to prove their case not covered by this stipulation of facts. 1wph1.t
Appellant further argues that he should not have been held subsidiarily liable because
Conrado Roque (the driver of the jeepney) pleaded guilty to the charge in the criminal case
without appellant's knowledge and contrary to the agreement between them that such plea
would not be entered but, instead evidence would be presented to prove Roque's innocence.
On this point we quote with approval the pertinent portion of the decision appealed from:
"'With respect to the contention of the defendant that he was taken unaware by the
spontaneous plea of guilt entered by the driver Conrado Roque, and that he did not
have a chance to prove the innocence of said Conrado Roque, the Court holds that
at this stage, it is already too late to try the criminal case all over again. Defendant's
allegation that he relied on his belief that Conrado Roque would defend himself and
they had sufficient proof to show that Roque was not guilty of the crime charged
cannot be entertained. Defendant should have taken it to himself to aid in the
defense of Conrado Roque. Having failed to take this step and the accused having
been declared guilty by final judgment of the crime of homicide thru reckless
imprudence, there appears no more way for the defendant to escape his subsidiary
liability as provided for in Article 103 of the Revised Penal Code."'
WHEREFORE, the judgment appealed from, being in accordance with law, is hereby
affirmed, with costs against defendant-appellant.


















































G.R. No. L-48757 May 30, 1988
MAURO GANZON, petitioner, vs. COURT OF APPEALS and GELACIO E.
TUMAMBING, respondents.
SARMIENTO, J.:
The private respondent instituted in the Court of First Instance of Manila 1 an action against
the petitioner for damages based on culpa contractual. The antecedent facts, as found by the
respondent Court, 2 are undisputed:
On November 28, 1956, Gelacio Tumambing contracted the services of Mauro B. Ganzon to
haul 305 tons of scrap iron from Mariveles, Bataan, to the port of Manila on board the lighter
LCT "Batman" (Exhibit 1, Stipulation of Facts, Amended Record on Appeal, p. 38). Pursuant
to that agreement, Mauro B. Ganzon sent his lighter "Batman" to Mariveles where it docked
in three feet of water (t.s.n., September 28, 1972, p. 31). On December 1, 1956, Gelacio
Tumambing delivered the scrap iron to defendant Filomeno Niza, captain of the lighter, for
loading which was actually begun on the same date by the crew of the lighter under the
captain's supervision. When about half of the scrap iron was already loaded (t.s.n.,
December 14, 1972, p. 20), Mayor Jose Advincula of Mariveles, Bataan, arrived and
demanded P5,000.00 from Gelacio Tumambing. The latter resisted the shakedown and after
a heated argument between them, Mayor Jose Advincula drew his gun and fired at Gelacio
Tumambing (t.s.n., March 19, 1971, p. 9; September 28, 1972, pp. 6-7).<re||an1w> The
gunshot was not fatal but Tumambing had to be taken to a hospital in Balanga, Bataan, for
treatment (t.s.n., March 19, 1971, p. 13; September 28, 1972, p. 15).
After sometime, the loading of the scrap iron was resumed. But on December 4, 1956, Acting
Mayor Basilio Rub, accompanied by three policemen, ordered captain Filomeno Niza and his
crew to dump the scrap iron (t.s.n., June 16, 1972, pp. 8-9) where the lighter was docked
(t.s.n., September 28, 1972, p. 31). The rest was brought to the compound of NASSCO
(Record on Appeal, pp. 20-22). Later on Acting Mayor Rub issued a receipt stating that the
Municipality of Mariveles had taken custody of the scrap iron (Stipulation of Facts, Record on
Appeal, p. 40; t.s.n., September 28, 1972, p. 10.)
On the basis of the above findings, the respondent Court rendered a decision, the dispositive
portion of which states:
WHEREFORE, the decision appealed from is hereby reversed and set aside
and a new one entered ordering defendant-appellee Mauro Ganzon to pay
plaintiff-appellant Gelacio E. Tumambimg the sum of P5,895.00 as actual
damages, the sum of P5,000.00 as exemplary damages, and the amount of
P2,000.00 as attorney's fees. Costs against defendant-appellee Ganzon. 3
In this petition for review on certiorari, the alleged errors in the decision of the Court of
Appeals are:
I
THE COURT OF APPEALS FINDING THE HEREIN PETITIONER GUILTY OF BREACH OF
THE CONTRACT OF TRANSPORTATION AND IN IMPOSING A LIABILITY AGAINST HIM
COMMENCING FROM THE TIME THE SCRAP WAS PLACED IN HIS CUSTODY AND
CONTROL HAVE NO BASIS IN FACT AND IN LAW.
II
THE APPELLATE COURT ERRED IN CONDEMNING THE PETITIONER FOR THE ACTS
OF HIS EMPLOYEES IN DUMPING THE SCRAP INTO THE SEA DESPITE THAT IT WAS
ORDERED BY THE LOCAL GOVERNMENT OFFICIAL WITHOUT HIS PARTICIPATION.
III
THE APPELLATE COURT FAILED TO CONSIDER THAT THE LOSS OF THE SCRAP WAS
DUE TO A FORTUITOUS EVENT AND THE PETITIONER IS THEREFORE NOT LIABLE
FOR LOSSES AS A CONSEQUENCE THEREOF. 4
The petitioner, in his first assignment of error, insists that the scrap iron had not been
unconditionally placed under his custody and control to make him liable. However, he
completely agrees with the respondent Court's finding that on December 1, 1956, the private
respondent delivered the scraps to Captain Filomeno Niza for loading in the lighter "Batman,"
That the petitioner, thru his employees, actually received the scraps is freely admitted.
Significantly, there is not the slightest allegation or showing of any condition, qualification, or
restriction accompanying the delivery by the private respondent-shipper of the scraps, or the
receipt of the same by the petitioner. On the contrary, soon after the scraps were delivered
to, and received by the petitioner-common carrier, loading was commenced.
By the said act of delivery, the scraps were unconditionally placed in the possession and
control of the common carrier, and upon their receipt by the carrier for transportation, the
contract of carriage was deemed perfected. Consequently, the petitioner-carrier's
extraordinary responsibility for the loss, destruction or deterioration of the goods commenced.
Pursuant to Art. 1736, such extraordinary responsibility would cease only upon the delivery,
actual or constructive, by the carrier to the consignee, or to the person who has a right to
receive them. 5 The fact that part of the shipment had not been loaded on board the lighter
did not impair the said contract of transportation as the goods remained in the custody and
control of the carrier, albeit still unloaded.
The petitioner has failed to show that the loss of the scraps was due to any of the following
causes enumerated in Article 1734 of the Civil Code, namely:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.
Hence, the petitioner is presumed to have been at fault or to have acted negligently. 6 By
reason of this presumption, the court is not even required to make an express finding of fault
or negligence before it could hold the petitioner answerable for the breach of the contract of
carriage. Still, the petitioner could have been exempted from any liability had he been able to
prove that he observed extraordinary diligence in the vigilance over the goods in his custody,
according to all the circumstances of the case, or that the loss was due to an unforeseen
event or to force majeure. As it was, there was hardly any attempt on the part of the petitioner
to prove that he exercised such extraordinary diligence.
It is in the second and third assignments of error where the petitioner maintains that he is
exempt from any liability because the loss of the scraps was due mainly to the intervention of
the municipal officials of Mariveles which constitutes a caso fortuito as defined in Article 1174
of the Civil Code. 7
We cannot sustain the theory of caso fortuito. In the courts below, the petitioner's defense
was that the loss of the scraps was due to an "order or act of competent public authority,"
and this contention was correctly passed upon by the Court of Appeals which ruled that:
... In the second place, before the appellee Ganzon could be absolved from
responsibility on the ground that he was ordered by competent public
authority to unload the scrap iron, it must be shown that Acting Mayor Basilio
Rub had the power to issue the disputed order, or that it was lawful, or that it
was issued under legal process of authority. The appellee failed to establish
this. Indeed, no authority or power of the acting mayor to issue such an
order was given in evidence. Neither has it been shown that the cargo of
scrap iron belonged to the Municipality of Mariveles. What we have in the
record is the stipulation of the parties that the cargo of scrap iron was
accilmillated by the appellant through separate purchases here and there
from private individuals (Record on Appeal, pp. 38-39). The fact remains that
the order given by the acting mayor to dump the scrap iron into the sea was
part of the pressure applied by Mayor Jose Advincula to shakedown the
appellant for P5,000.00. The order of the acting mayor did not constitute
valid authority for appellee Mauro Ganzon and his representatives to carry
out.
Now the petitioner is changing his theory to caso fortuito. Such a change of theory on appeal
we cannot, however, allow. In any case, the intervention of the municipal officials was not In
any case, of a character that would render impossible the fulfillment by the carrier of its
obligation. The petitioner was not duty bound to obey the illegal order to dump into the sea
the scrap iron. Moreover, there is absence of sufficient proof that the issuance of the same
order was attended with such force or intimidation as to completely overpower the will of the
petitioner's employees. The mere difficulty in the fullfilment of the obligation is not
considered force majeure. We agree with the private respondent that the scraps could have
been properly unloaded at the shore or at the NASSCO compound, so that after the dispute
with the local officials concerned was settled, the scraps could then be delivered in
accordance with the contract of carriage.
There is no incompatibility between the Civil Code provisions on common carriers and
Articles 361 8 and 362 9 of the Code of Commerce which were the basis for this Court's
ruling in Government of the Philippine Islands vs. Ynchausti & Co.10 and which the petitioner
invokes in tills petition. For Art. 1735 of the Civil Code, conversely stated, means that the
shipper will suffer the losses and deterioration arising from the causes enumerated in Art.
1734; and in these instances, the burden of proving that damages were caused by the fault
or negligence of the carrier rests upon him. However, the carrier must first establish that the
loss or deterioration was occasioned by one of the excepted causes or was due to an
unforeseen event or to force majeure. Be that as it may, insofar as Art. 362 appears to
require of the carrier only ordinary diligence, the same is .deemed to have been modified by
Art. 1733 of the Civil Code.
Finding the award of actual and exemplary damages to be proper, the same will not be
disturbed by us. Besides, these were not sufficiently controverted by the petitioner.
WHEREFORE, the petition is DENIED; the assailed decision of the Court of Appeals is
hereby AFFIRMED. Costs against the petitioner.
This decision is IMMEDIATELY EXECUTORY.


















































G.R. No. 122039 May 31, 2000
VICENTE CALALAS, petitioner, vs. COURT OF APPEALS, ELIZA JUJEURCHE SUNGA
and FRANCISCO SALVA, respondents.
MENDOZA, J.:
This is a petition for review on certiorari of the decision1 of the Court of Appeals, dated March
31, 1991, reversing the contrary decision of the Regional Trial Court, Branch 36, Dumaguete
City, and awarding damages instead to private respondent Eliza Jujeurche Sunga as plaintiff
in an action for breach of contract of carriage.
The facts, as found by the Court of Appeals, are as follows:
At 10 o'clock in the morning of August 23, 1989, private respondent Eliza Jujeurche G.
Sunga, then a college freshman majoring in Physical Education at the Siliman University,
took a passenger jeepney owned and operated by petitioner Vicente Calalas. As the jeepney
was filled to capacity of about 24 passengers, Sunga was given by the conductor an
"extension seat," a wooden stool at the back of the door at the rear end of the vehicle.
On the way to Poblacion Sibulan, Negros Occidental, the jeepney stopped to let a passenger
off. As she was seated at the rear of the vehicle, Sunga gave way to the outgoing passenger.
Just as she was doing so, an Isuzu truck driven by Iglecerio Verena and owned by Francisco
Salva bumped the left rear portion of the jeepney. As a result, Sunga was injured. She
sustained a fracture of the "distal third of the left tibia-fibula with severe necrosis of the
underlying skin." Closed reduction of the fracture, long leg circular casting, and case wedging
were done under sedation. Her confinement in the hospital lasted from August 23 to
September 7, 1989. Her attending physician, Dr. Danilo V. Oligario, an orthopedic surgeon,
certified she would remain on a cast for a period of three months and would have to ambulate
in crutches during said period.
On October 9, 1989, Sunga filed a complaint for damages against Calalas, alleging violation
of the contract of carriage by the former in failing to exercise the diligence required of him as
a common carrier. Calalas, on the other hand, filed a third-party complaint against Francisco
Salva, the owner of the Isuzu truck.
The lower court rendered judgment against Salva as third-party defendant and absolved
Calalas of liability, holding that it was the driver of the Isuzu truck who was responsible for the
accident. It took cognizance of another case (Civil Case No. 3490), filed by Calalas against
Salva and Verena, for quasi-delict, in which Branch 37 of the same court held Salva and his
driver Verena jointly liable to Calalas for the damage to his jeepney.
On appeal to the Court of Appeals, the ruling of the lower court was reversed on the ground
that Sunga's cause of action was based on a contract of carriage, not quasi-delict, and that
the common carrier failed to exercise the diligence required under the Civil Code. The
appellate court dismissed the third-party complaint against Salva and adjudged Calalas liable
for damages to Sunga. The dispositive portion of its decision reads:
WHEREFORE, the decision appealed from is hereby REVERSED and SET
ASIDE, and another one is entered ordering defendant-appellee Vicente
Calalas to pay plaintiff-appellant:
(1) P50,000.00 as actual and compensatory damages;
(2) P50,000.00 as moral damages;
(3) P10,000.00 as attorney's fees; and
(4) P1,000.00 as expenses of litigation; and
(5) to pay the costs.
SO ORDERED.
Hence, this petition. Petitioner contends that the ruling in Civil Case No. 3490 that the
negligence of Verena was the proximate cause of the accident negates his liability and that to
rule otherwise would be to make the common carrier an insurer of the safety of its
passengers. He contends that the bumping of the jeepney by the truck owned by Salva was
a caso fortuito. Petitioner further assails the award of moral damages to Sunga on the ground
that it is not supported by evidence.
The petition has no merit.
The argument that Sunga is bound by the ruling in Civil Case No. 3490 finding the driver and
the owner of the truck liable for quasi-delict ignores the fact that she was never a party to that
case and, therefore, the principle ofres judicata does not apply.
Nor are the issues in Civil Case No. 3490 and in the present case the same. The issue in
Civil Case No. 3490 was whether Salva and his driver Verena were liable for quasi-delict for
the damage caused to petitioner's jeepney. On the other hand, the issue in this case is
whether petitioner is liable on his contract of carriage. The first, quasi-delict, also known
as culpa aquiliana or culpa extra contractual, has as its source the negligence of the
tortfeasor. The second, breach of contract or culpa contractual, is premised upon the
negligence in the performance of a contractual obligation.
Consequently, in quasi-delict, the negligence or fault should be clearly established because it
is the basis of the action, whereas in breach of contract, the action can be prosecuted merely
by proving the existence of the contract and the fact that the obligor, in this case the common
carrier, failed to transport his passenger safely to his destination.2 In case of death or injuries
to passengers, Art. 1756 of the Civil Code provides that common carriers are presumed to
have been at fault or to have acted negligently unless they prove that they observed
extraordinary diligence as defined in Arts. 1733 and 1755 of the Code. This provision
necessarily shifts to the common carrier the burden of proof.
There is, thus, no basis for the contention that the ruling in Civil Case No. 3490, finding Salva
and his driver Verena liable for the damage to petitioner's jeepney, should be binding on
Sunga. It is immaterial that the proximate cause of the collision between the jeepney and the
truck was the negligence of the truck driver. The doctrine of proximate cause is applicable
only in actions for quasi-delict, not in actions involving breach of contract. The doctrine is a
device for imputing liability to a person where there is no relation between him and another
party. In such a case, the obligation is created by law itself. But, where there is a pre-existing
contractual relation between the parties, it is the parties themselves who create the
obligation, and the function of the law is merely to regulate the relation thus created. Insofar
as contracts of carriage are concerned, some aspects regulated by the Civil Code are those
respecting the diligence required of common carriers with regard to the safety of passengers
as well as the presumption of negligence in cases of death or injury to passengers. It
provides:
Art. 1733. Common carriers, from the nature of their business and for
reasons of public policy, are bound to observe extraordinary diligence in the
vigilance over the goods and for the safety of the passengers transported by
them, according to all the circumstances of each case.
Such extraordinary diligence in the vigilance over the goods is further
expressed in articles 1734, 1735, and 1746, Nos. 5, 6, and 7, while the
extraordinary diligence for the safety of the passengers is further set forth in
articles 1755 and 1756.
Art. 1755. A common carrier is bound to carry the passengers safely as far
as human care and foresight can provide, using the utmost diligence of very
cautious persons, with due regard for all the circumstances.
Art. 1756. In case of death of or injuries to passengers, common carriers are
presumed to have been at fault or to have acted negligently, unless they
prove that they observed extraordinary diligence as prescribed by articles
1733 and 1755.
In the case at bar, upon the happening of the accident, the presumption of negligence at
once arose, and it became the duty of petitioner to prove that he had to observe
extraordinary diligence in the care of his passengers.
Now, did the driver of jeepney carry Sunga "safely as far as human care and foresight could
provide, using the utmost diligence of very cautious persons, with due regard for all the
circumstances" as required by Art. 1755? We do not think so. Several factors militate against
petitioner's contention.
First, as found by the Court of Appeals, the jeepney was not properly parked, its rear portion
being exposed about two meters from the broad shoulders of the highway, and facing the
middle of the highway in a diagonal angle. This is a violation of the R.A. No. 4136, as
amended, or the Land Transportation and Traffic Code, which provides:
Sec. 54. Obstruction of Traffic. No person shall drive his motor vehicle in
such a manner as to obstruct or impede the passage of any vehicle, nor,
while discharging or taking on passengers or loading or unloading freight,
obstruct the free passage of other vehicles on the highway.
Second, it is undisputed that petitioner's driver took in more passengers than the allowed
seating capacity of the jeepney, a violation of 32(a) of the same law. It provides:
Exceeding registered capacity. No person operating any motor vehicle
shall allow more passengers or more freight or cargo in his vehicle than its
registered capacity.
The fact that Sunga was seated in an "extension seat" placed her in a peril greater than that
to which the other passengers were exposed. Therefore, not only was petitioner unable to
overcome the presumption of negligence imposed on him for the injury sustained by Sunga,
but also, the evidence shows he was actually negligent in transporting passengers.
We find it hard to give serious thought to petitioner's contention that Sunga's taking an
"extension seat" amounted to an implied assumption of risk. It is akin to arguing that the
injuries to the many victims of the tragedies in our seas should not be compensated merely
because those passengers assumed a greater risk of drowning by boarding an overloaded
ferry. This is also true of petitioner's contention that the jeepney being bumped while it was
improperly parked constitutes caso fortuito. A caso fortuito is an event which could not be
foreseen, or which, though foreseen, was inevitable.3 This requires that the following
requirements be present: (a) the cause of the breach is independent of the debtor's will; (b)
the event is unforeseeable or unavoidable; (c) the event is such as to render it impossible for
the debtor to fulfill his obligation in a normal manner, and (d) the debtor did not take part in
causing the injury to the
creditor.4 Petitioner should have foreseen the danger of parking his jeepney with its body
protruding two meters into the highway.
Finally, petitioner challenges the award of moral damages alleging that it is excessive and
without basis in law. We find this contention well taken.
In awarding moral damages, the Court of Appeals stated:
Plaintiff-appellant at the time of the accident was a first-year college student
in that school year 1989-1990 at the Silliman University, majoring in Physical
Education. Because of the injury, she was not able to enroll in the second
semester of that school year. She testified that she had no more intention of
continuing with her schooling, because she could not walk and decided not
to pursue her degree, major in Physical Education "because of my leg which
has a defect already."
Plaintiff-appellant likewise testified that even while she was under
confinement, she cried in pain because of her injured left foot. As a result of
her injury, the Orthopedic Surgeon also certified that she has "residual
bowing of the fracture side." She likewise decided not to further pursue
Physical Education as her major subject, because "my left leg . . . has a
defect already."
Those are her physical pains and moral sufferings, the inevitable bedfellows
of the injuries that she suffered. Under Article 2219 of the Civil Code, she is
entitled to recover moral damages in the sum of P50,000.00, which is fair,
just and reasonable.
As a general rule, moral damages are not recoverable in actions for damages predicated on
a breach of contract for it is not one of the items enumerated under Art. 2219 of the Civil
Code.5 As an exception, such damages are recoverable: (1) in cases in which the mishap
results in the death of a passenger, as provided in Art. 1764, in relation to Art. 2206(3) of the
Civil Code; and (2) in the cases in which the carrier is guilty of fraud or bad faith, as provided
in Art. 2220.6
In this case, there is no legal basis for awarding moral damages since there was no factual
finding by the appellate court that petitioner acted in bad faith in the performance of the
contract of carriage. Sunga's contention that petitioner's admission in open court that the
driver of the jeepney failed to assist her in going to a nearby hospital cannot be construed as
an admission of bad faith. The fact that it was the driver of the Isuzu truck who took her to the
hospital does not imply that petitioner was utterly indifferent to the plight of his injured
passenger. If at all, it is merely implied recognition by Verena that he was the one at fault for
the accident.
WHEREFORE, the decision of the Court of Appeals, dated March 31, 1995, and its
resolution, dated September 11, 1995, are AFFIRMED, with the MODIFICATION that the
award of moral damages is DELETED.
SO ORDERED.






G.R. No. 118126 March 4, 1996
TRANS-ASIA SHIPPING LINES, INC., petitioner, vs. COURT OF APPEALS and ATTY.
RENATO T. ARROYO, respondents.
DAVIDE, JR., J.:p
As formulated by the petitioner, the issue in this petition for review on certiorari under Rule 45
of the Rules of Court is as follows:
In case of interruption of a vessel's voyage and the consequent delay in that
vessel's arrival at its port of destination, is the right of a passenger affected
thereby to be determined and governed by the vague Civil Code provision
on common carriers, or shall it be, in the absence of a specific provision
thereon governed by Art. 698 of the Code of Commerce? 1
The petitioner considers it a "novel question of law."
Upon a closer evaluation, however, of the challenged decision of the Court of Appeals of 23
November 1994, 2 vis-a-vis, the decision of 29 June 1992 in Civil Case No. 91-491 of the
Regional Trial Court (RTC) of Cagayan de Oro City, Branch 24, 3 as well as the allegations
and arguments adduced by the parties, we find the petitioner's formulation of the issue
imprecise. As this Court sees it, what stands for resolution is a common carrier's liability for
damages to a passenger who disembarked from the vessel upon its return to the port of
origin, after it suffered engine trouble and had to stop at sea, having commenced the
contracted voyage on one engine.
The antecedents are summarized by the Court of Appeals as follows:
Plaintiff [herein private respondent Atty. Renato Arroyo], a public attorney,
bought a ticket [from] defendant [herein petitioner], a corporation engaged in
. . . inter-island shipping, for the voyage of M/V Asia Thailand vessel to
Cagayan de Oro City from Cebu City on November 12, 1991.
At around 5:30 in the evening of November 12, 1991, plaintiff boarded the
M/V Asia Thailand vessel. At that instance, plaintiff noticed that some repair
works [sic] were being undertaken on the engine of the vessel. The vessel
departed at around 11:00 in the evening with only one (1) engine running.
After an hour of slow voyage, the vessel stopped near Kawit Island and
dropped its anchor thereat. After half an hour of stillness, some passengers
demanded that they should be allowed to return to Cebu City for they were
no longer willing to continue their voyage to, Cagayan de Oro City. The
captain acceeded [sic] to their request and thus the vessel headed back to
Cebu City.
At Cebu City, plaintiff together with the other passengers who requested to
be brought back to Cebu City, were allowed to disembark. Thereafter, the
vessel proceeded to Cagayan de Oro City. Plaintiff, the next day, boarded
the M/V Asia Japan for its voyage to Cagayan de Oro City, likewise a vessel
of defendant.
On account of this failure of defendant to transport him to the place of
destination on November 12, 1991, plaintiff filed before the trial court a
complaint for damages against defendant. 4
In his complaint, docketed as Civil Case No. 91-491, plaintiff (hereinafter private respondent)
alleged that the engines of the M/V Asia Thailand conked out in the open sea, and for more
than an hour it was stalled and at the mercy of the waves, thus causing fear in the
passengers. It sailed back to Cebu City after it regained power, but for unexplained reasons,
the passengers, including the private respondent, were arrogantly told to disembark without
the necessary precautions against possible injury to them. They were thus unceremoniously
dumped, which only exacerbated the private respondent's mental distress. He further alleged
that by reason of the petitioner's wanton, reckless, and willful acts, he was unnecessarily
exposed to danger and, having been stranded in Cebu City for a day, incurred additional
expenses and loss of income. He then prayed that he be awarded P1,100.00, P50,000.00,
and P25,000.00 as compensatory, moral; and exemplary damages, respectively. 5
In his pre-trial brief, the private respondent asserted that his complaint was "an action for
damages arising from bad faith, breach of contract and from tort," with the former arising from
the petitioner's "failure to carry [him] to his place of destination as contracted," while the latter
from the "conduct of the [petitioner] resulting [in] the infliction of emotional distress" to the
private respondent. 6
After due trial, the trial court rendered its decision 7 and ruled that the action was only for
breach of contract, with Articles 1170, 1172, and 1173 of the Civil Code as applicable law
not Article 2180 of the same Code. It was of the opinion that Article 1170 made a person
liable for damages if, in the performance of his obligation, he was guilty of fraud, negligence,
or delay, or in any manner contravened the tenor thereof; moreover, pursuant to Article 2201
of the same Code, to be entitled to damages, the non-performance of the obligation must
have been tainted not only by fraud, negligence, or delay, but also bad faith, malice, and
wanton attitude. It then disposed of the case as follows:
WHEREFORE, it not appearing from the evidence that plaintiff was left in the
Port of Cebu because of the fault, negligence, malice or wanton attitude of
defendant's employees, the complaint is DISMISSED. Defendant's
counterclaim is likewise dismissed it not appearing also that filing of the case
by plaintiff was motivated by malice or bad faith. 8
The trial court made the following findings to support its disposition:
In the light of the evidence adduced by the parties and of the above
provisions of the New Civil Code, the issue to be resolved, in the resolution
of this case is whether or not, defendant thru its employees in [sic] the night
of November 12, 1991, committed fraud, negligence, bad faith or malice
when it left plaintiff in the Port of Cebu when it sailed back to Cagayan de
Oro City after it has [sic] returned from Kawit Island.
Evaluation of the evidence of the parties tended to show nothing that
defendant committed fraud. As early as 3:00 p.m. of November 12, 1991,
defendant did not hide the fact that the cylinder head cracked. Plaintiff even
saw during its repair. If he had doubts as to the vessel's capacity to sail, he
had time yet to take another boat. The ticket could be returned to defendant
and corresponding cash [would] be returned to him.
Neither could negligence, bad faith or malice on the part of defendant be
inferred from the evidence of the parties. When the boat arrived at [the] Port
of Cebu after it returned from Kawit Island, there was an announcement that
passengers who would like to disembark were given ten (10) minutes only to
do so. By this announcement, it could be inferred that the boat will [sic]
proceed to Cagayan de Oro City. If plaintiff entertained doubts, he should
have asked a member of the crew of the boat or better still, the captain of
the boat. But as admitted by him, he was of the impression only that the boat
will not proceed to Cagayan de Oro that evening so he disembarked. He was
instead, the ones [sic] negligent. Had he been prudent, with the
announcement that those who will disembark were given ten minutes only,
he should have lingered a little by staying in his cot and inquired whether the
boat will proceed to Cagayan de Oro City or not. Defendant cannot be
expected to be telling [sic] the reasons to each passenger. Announcement
by microphone was enough.
The court is inclined to believe that the story of defendant that the boat
returned to the Port of Cebu because of the request of the passengers in
view of the waves. That it did not return because of the defective engines as
shown by the fact that fifteen (15) minutes after the boat docked [at] the Port
of Cebu and those who wanted to proceed to Cagayan de Oro disembarked,
it left for Cagayan de Oro City.
The defendant got nothing when the boat returned to Cebu to let those who
did not want to proceed to Cagayan de Oro City including plaintiff
disembarked. On the contrary, this would mean its loss instead because it
will have to refund their tickets or they will use it the next trip without paying
anymore. It is hard therefore, to imagine how defendant by leaving plaintiff in
Cebu could have acted in bad faith, negligently, wantonly and with malice.
If plaintiff, therefore, was not able to [m]ake the trip that night of November
12, 1991, it was not because defendant maliciously did it to exclude him
[from] the trip. If he was left, it was because of his fault or negligence. 9
Unsatisfied, the private respondent appealed to the Court of Appeals (CA-G.R. CV No.
39901) and submitted for its determination the following assignment of errors: (1) the trial
court erred in not finding that the defendant-appellee was guilty of fraud, delay, negligence,
and bad faith; and (2) the trial court. erred in not awarding moral and exemplary damages. 10
In its decision of 23 November 1994, 11 the Court of Appeals reversed the trial court's
decision by applying Article 1755 in relation to Articles 2201, 2208, 2217, and 2232 of the
Civil Code and, accordingly, awarded compensatory, moral, and exemplary damages as
follows:
WHEREFORE, premises considered, the appealed decision is hereby
REVERSED and SET ASIDE and another one is rendered ordering
defendant-appellee to pay plaintiff-appellant:
1. P20,000.00 as moral damages;
2. P10,000.00 as exemplary damages;
3. P5,000.00 as attorney's fees;
4. Cost of suit.
SO ORDERED. 12
It did not, however, allow the grant of damages for the delay in the performance of the
petitioner's obligation as the requirement of demand set forth in Article 1169 of the Civil Code
had not been met by the private respondent. Besides, it found that the private respondent
offered no evidence to prove that his contract of carriage with the petitioner provided for
liability in case of delay in departure, nor that a designation of the time of departure was the
controlling motive for the establishment of the contract. On the latter, the court a
quo observed that the private respondent even admitted he was unaware of the vessel's
departure time, and it was only when he boarded the vessel that he became aware of such.
Finally, the respondent Court found no reasonable basis for the private respondent's belief
that demand was useless because the petitioner had rendered it beyond its power to perform
its obligation; on the contrary, he even admitted that the petitioner had been assuring the
passengers that the vessel would leave on time, and that it could still perform its obligation to
transport them as scheduled.
To justify its award of damages, the Court of Appeals ratiocinated as follows:
It is an established and admitted fact that the vessel before the voyage had
undergone some repair work on the cylinder head of the engine. It is likewise
admitted by defendant-appellee that it left the port of Cebu City with only one
engine running. Defendant-appellee averred:
. . . The dropping of the vessel's anchor after running slowly
on only one engine when it departed earlier must have
alarmed some nervous passengers . . .
The entries in the logbook which defendant-appellee itself offered as
evidence categorically stated therein that the vessel stopped at Kawit Island
because of engine trouble. It reads:
2330 HRS STBD ENGINE' EMERGENCY STOP
2350 HRS DROP ANCHOR DUE TO ENGINE TROUBLE, 2 ENGINE
STOP.
The stoppage was not to start and synchronized [sic] the engines of the
vessel as claimed by defendant-appellee. It was because one of the engines
of the vessel broke down; it was because of the disability of the vessel which
from the very beginning of the voyage was known to defendant-appellee.
Defendant-appellee from the very start of the voyage knew for a fact that the
vessel was not yet in its sailing condition because the second engine was
still being repaired. Inspite of this knowledge, defendant-appellee still
proceeded to sail with only one engine running.
Defendant-appellee at that instant failed to exercise the diligence which all
common carriers should exercise in transporting or carrying passengers. The
law does not merely require extraordinary diligence in the performance of the
obligation. The law mandates that common carrier[s] should exercise utmost
diligence the transport of passengers.
Article 1755 of the New Civil Code provides:
Art. 1755. A common carrier is bound to carry the
passengers safely as far as human care and foresight can
provide, using the utmost diligence of very cautious
persons, with a due regard for all the circumstances.
Utmost diligence of a VERY CAUTIOUS person dictates that defendant-
appellee should have pursued the voyage only when its vessel was already
fit to sail. Defendant-appellee should have made certain that the vessel
[could] complete the voyage before starting [to] sail. Anything less than this,
the vessel [could not] sail . . . with so many passengers on board it.
However, defendant-appellant [sic] in complete disregard of the safety of the
passengers, chose to proceed with its voyage even if only one engine was
running as the second engine was still being repaired during the voyage.
Defendant-appellee disregarded the not very remote possibility that because
of the disability of the vessel, other problems might occur which would
endanger the lives of the passengers sailing with a disabled vessel.
As expected, . . . engine trouble occurred. Fortunate[ly] for defendant-
appellee, such trouble only necessitated the stoppage of the vessel and did
not cause the vessel to capsize. No wonder why some passengers
requested to be brought back to Cebu City. Common carriers which are
mandated to exercise utmost diligence should not be taking these risks.
On this premise, plaintiff-appellant should not be faulted why he chose to
disembark from the vessel with the other passengers when it returned back
to Cebu City. Defendant-appellee may call him a very "panicky passenger"
or a "nervous person", but this will not relieve defendant-appellee from the
liability it incurred for its failure to exercise utmost diligence. 13
xxx xxx xxx
As to the second assigned error, we find that plaintiff-appellant is entitled to
the award of moral and exemplary damages for the breach committed by
defendant-appellee.
As discussed, defendant-appellee in sailing to Cagayan de Oro City with
only one engine and with full knowledge of the true condition of the vessel,
acted. in bad faith with malice, in complete disregard for the safety of the
passengers and only for its own personal advancement/interest.
The Civil Code provides:
Art. 2201.
xxx xxx xxx
In case of fraud, bad faith, malice or wanton attitude, the
obligor shall be responsible for all damages which may be
reasonably attributed to the non-performance of the
obligation.
Plaintiff-appellant is entitled to moral damages for the mental anguish, fright
and serious anxiety he suffered during the voyage when the vessel's engine
broke down and when he disembarked from the vessel during the wee hours
of the morning at Cebu City when it returned. 14
Moral damages are recoverable in a damage suit predicated upon a breach
of contract of carriage where it is proved that the carrier was guilty of fraud or
bad faith even if death does not result. 15
Fraud and bad faith by defendant-appellee having been established, the
award of moral damages is in order. 16
To serve as a deterrent to the commission of similar acts in the future,
exemplary damages should be imposed upon defendant-
appellee. 17 Exemplary damages are designed by our civil law to permit the
courts to reshape behavior that is socially deleterious in its consequence by
creating . . . negative incentives or deterrents against such behavior. 18
Moral damages having been awarded, exemplary damages maybe properly
awarded. When entitlement to moral damages has been established, the
award of exemplary damages is proper. 19
The petitioner then instituted this petition and submitted the question of law earlier adverted
to.
Undoubtedly, there was, between the petitioner and the private respondent, a contract of
common carriage. The laws of primary application then are the provisions on common
carriers under Section 4, Chapter 3, Title VIII, Book IV of the Civil Code, while for all other
matters not regulated thereby, the Code of Commerce and special laws. 20
Under Article 1733 of the Civil Code, the petitioner was bound to observe extraordinary
diligence in ensuring the safety of the private respondent. That meant that the petitioner was,
pursuant to Article 1755 of the said Code, bound to carry the private respondent safely as far
as human care and foresight could provide, using the utmost diligence of very cautious
persons, with due regard for all the circumstances. In this case, we are in full accord with the
Court of Appeals that the petitioner failed to discharge this obligation.
Before commencing the contracted voyage, the petitioner undertook some repairs on the
cylinder head of one of the vessel's engines. But even before it could finish these repairs, it
allowed the vessel to leave the port of origin on only one functioning engine, instead of two.
Moreover, even the lone functioning engine was not in perfect condition as sometime after it
had run its course, it conked out. This caused the vessel to stop and remain a drift at sea,
thus in order to prevent the ship from capsizing, it had to drop anchor. Plainly, the vessel was
unseaworthy even before the voyage began. For a vessel to be seaworthy, it must be
adequately equipped for the voyage and manned with a sufficient number of competent
officers and crew. 21 The failure of a common carrier to maintain in seaworthy condition its
vessel involved in a contract of carriage is a clear breach of its duty prescribed in Article 1755
of the Civil Code.
As to its liability for damages to the private respondent, Article 1764 of the Civil Code
expressly provides:
Art. 1764. Damages in cases comprised in this Section shall be awarded in
accordance with Title XVIII of this Book, concerning Damages. Article 2206
shall also apply to the death of a passenger caused by the breach of
contract by common carrier.
The damages comprised in Title XVIII of the Civil Code are actual or compensatory,
moral, nominal, temperate or moderate, liquidated, and exemplary.
In his complaint, the private respondent claims actual or compensatory, moral, and
exemplary damages.
Actual or compensatory damages represent the adequate compensation for pecuniary loss
suffered and for profits the obligee failed to obtain. 22
In contracts or quasi-contracts, the obligor is liable for all the damages which may be
reasonably attributed to the non-performance of the obligation if he is guilty of fraud, bad
faith, malice, or wanton attitude. 23
Moral damages include moral suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, or similar injury. They may be
recovered in the cases enumerated in Article 2219 of the Civil Code, likewise, if they are the
proximate result of, as in this case, the petitioner's breach of the contract of
carriage. 24 Anent a breach of a contract of common carriage, moral damages may be
awarded if the common carrier, like the petitioner, acted fraudulently or in bad faith. 25
Exemplary damages are imposed by way of example or correction for the public good, in
addition to moral, temperate, liquidated or compensatory damages. 26 In contracts
and quasi-contracts, exemplary damages may be awarded if the defendant acted in a
wanton, fraudulent, reckless, oppressive or malevolent manner. 27 It cannot, however, be
considered as a matter of right; the court having to decide whether or not they should be
adjudicated. 28 Before the court may consider an award for exemplary damages, the plaintiff
must first show that he is entitled to moral, temperate or compensatory damages; but it is not
necessary that he prove the monetary value thereof. 29
The Court of Appeals did not grant the private respondent actual or compensatory damages,
reasoning that no delay was incurred since there was no demand, as required by Article 1169
of the Civil Code. This article, however, finds no application in this case because, as found by
the respondent Court, there was in fact no delay in the commencement of the contracted
voyage. If any delay was incurred, it was after the commencement of such voyage, more
specifically, when the voyage was subsequently interrupted when the vessel had to stop near
Kawit Island after the only functioning engine conked out.
As to the rights and duties of the parties strictly arising out of such delay, the Civil Code is
silent. However, as correctly pointed out by the petitioner, Article 698 of the Code of
Commerce specifically provides for such a situation. It reads:
In case a voyage already begun should be interrupted, the passengers shall
be obliged to pay the fare in proportion to the distance covered, without right
to recover for losses and damages if the interruption is due to fortuitous
event or force majeure, but with a right to indemnity if the interruption should
have been caused by the captain exclusively. If the interruption should be
caused by the disability of the vessel and a passenger should agree to await
the repairs, he may not be required to pay any increased price of passage,
but his living expenses during the stay shall be for his own account.
This article applies suppletorily pursuant to Article 1766 of the Civil Code.
Of course, this does not suffice for a resolution of the case at bench for, as earlier stated, the
cause of the delay or interruption was the petitioner's failure to observe extraordinary
diligence. Article 698 must then be read together with Articles 2199, 2200, 2201, and 2208 in
relation to Article 21 of the Civil Code. So read, it means that the petitioner is liable for any
pecuniary loss or loss of profits which the private respondent may have suffered by reason
thereof. For the private respondent, such would be the loss of income if unable to report to
his office on the day he was supposed to arrive were it not for the delay. This, however,
assumes that he stayed on the vessel and was with it when it thereafter resumed its voyage;
but he did not. As he and some passengers resolved not to complete the voyage, the vessel
had to return to its port of origin and allow them to disembark. The private respondent then
took the petitioner's other vessel the following day, using the ticket he had purchased for the
previous day's voyage.
Any further delay then in the private respondent's arrival at the port of destination was caused
by his decision to disembark. Had he remained on the first vessel, he would have reached his
destination at noon of 13 November 1991, thus been able to report to his office in the
afternoon. He, therefore, would have lost only the salary for half of a day. But actual or
compensatory damages must be proved, 30 which the private respondent failed to do. There
is no convincing evidence that he did not receive his salary for 13 November 1991 nor that
his absence was not excused.
We likewise fully agree with the Court of Appeals that the petitioner is liable for moral and
exemplary damages. In allowing its unseaworthy M/V Asia Thailand to leave the port of origin
and undertake the contracted voyage, with full awareness that it was exposed to perils of the
sea, it deliberately disregarded its solemn duty to exercise extraordinary diligence and
obviously acted with bad faith and in a wanton and reckless manner. On this score, however,
the petitioner asserts that the safety or the vessel and passengers was never at stake
because the sea was "calm" in the vicinity where it stopped as faithfully recorded in the
vessel's log book (Exhibit "4"). Hence, the petitioner concludes, the private respondent was
merely "over-reacting" to the situation obtaining then. 31
We hold that the petitioner's defense cannot exculpate it nor mitigate its liability. On the
contrary, such a claim demonstrates beyond cavil the petitioner's lack of genuine concern for
the safety of its passengers. It was, perhaps, only providential then the sea happened to be
calm. Even so, the petitioner should not expect its passengers to act in the manner it desired.
The passengers were not stoics; becoming alarmed, anxious, or frightened at the stoppage
of a vessel at sea in an unfamiliar zone as nighttime is not the sole prerogative of the faint-
hearted. More so in the light of the many tragedies at sea resulting in the loss of lives of
hopeless passengers and damage to property simply because common carriers failed in their
duty to exercise extraordinary diligence in the performance of their obligations.
We cannot, however, give our affirmance to the award of attorney's fees. Under Article 2208
of the Civil Code, these are recoverable only in the concept of actual damages, 32 not as
moral damages 33 nor judicial costs. 34Hence, to merit such an award, it is settled that the
amount thereof must be proven. 35 Moreover, such must be specifically prayed for as was
not done in this caseand may not be deemed incorporated within a general prayer for
"such other relief and remedy as this court may deem just and equitable." 36 Finally, it must
be noted that aside from the following, the body of the respondent Court's decision was
devoid of any statement regarding attorney's fees:
Plaintiff-appellant was forced to litigate in order that he can claim moral and
exemplary damages for the suffering he encurred [sic]. He is entitled to
attorney's fees pursuant to Article 2208 of the Civil Code. It states:
Art. 2208. In the absence of stipulation, attorney's fees and expenses of
litigation, other than judicial costs cannot be recovered except:
1. When exemplary damages are awarded;
2. When the defendant's act or omission has compelled the
plaintiff to litigate with third persons or to incur expenses to
protect his interest.
This Court holds that the above does not satisfy the benchmark of "factual, legal and
equitable justification" needed as basis for an award of attorney's fees. 37 In sum, for
lack of factual and legal basis, the award of attorney's fees must be deleted.
WHEREFORE, the instant petition is DENIED and the challenged decision of the Court of
Appeals in CA-G.R. CV No. 39901 is AFFIRMED subject to the modification as to the award
for attorney's fees which is hereby SET ASIDE.
Costs against the petitioner.
SO ORDERED.


G.R. No. 127897 November 15, 2001
DELSAN TRANSPORT LINES, INC., petitioner, vs. THE HON. COURT OF APPEALS and
AMERICAN HOME ASSURANCE CORPORATION, respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-
G.R. CV No. 39836 promulgated on June 17, 1996, reversing the decision of the Regional
Trial Court of Makati City, Branch 137, ordering petitioner to pay private respondent the sum
of Five Million Ninety-Six Thousand Six Hundred Thirty-Five Pesos and Fifty-Seven Centavos
(P5,096,635.57) and costs and the Resolution2 dated January 21, 1997 which denied the
subsequent motion for reconsideration.
The facts show that Caltex Philippines (Caltex for brevity) entered into a contract of
affreightment with the petitioner, Delsan Transport Lines, Inc., for a period of one year
whereby the said common carrier agreed to transport Caltexs industrial fuel oil from the
Batangas-Bataan Refinery to different parts of the country. Under the contract, petitioner took
on board its vessel, MT Maysun 2,277.314 kiloliters of industrial fuel oil of Caltex to be
delivered to the Caltex Oil Terminal in Zamboanga City. The shipment was insured with the
private respondent, American Home Assurance Corporation.
On August 14, 1986, MT Maysum set sail from Batangas for Zamboanga City. Unfortunately,
the vessel sank in the early morning of August 16, 1986 near Panay Gulf in the Visayas
taking with it the entire cargo of fuel oil.
Subsequently, private respondent paid Caltex the sum of Five Million Ninety-Six Thousand
Six Hundred Thirty-Five Pesos and Fifty-Seven Centavos (P5,096,635.67) representing the
insured value of the lost cargo. Exercising its right of subrogation under Article 2207 of the
New Civil Code, the private respondent demanded of the petitioner the same amount it paid
to Caltex.1wphi1.nt
Due to its failure to collect from the petitioner despite prior demand, private respondent filed a
complaint with the Regional Trial Court of Makati City, Branch 137, for collection of a sum of
money. After the trial and upon analyzing the evidence adduced, the trial court rendered a
decision on November 29, 1990 dismissing the complaint against herein petitioner without
pronouncement as to cost. The trial court found that the vessel, MT Maysum, was seaworthy
to undertake the voyage as determined by the Philippine Coast Guard per Survey Certificate
Report No. M5-016-MH upon inspection during its annual dry-docking and that the incident
was caused by unexpected inclement weather condition or force majeure, thus exempting the
common carrier (herein petitioner) from liability for the loss of its cargo.3
The decision of the trial court, however, was reversed, on appeal, by the Court of Appeals.
The appellate court gave credence to the weather report issued by the Philippine
Atmospheric, Geophysical and Astronomical Services Administration (PAGASA for brevity)
which showed that from 2:00 oclock to 8:oo oclock in the morning on August 16, 1986, the
wind speed remained at 10 to 20 knots per hour while the waves measured from .7 to two (2)
meters in height only in the vicinity of the Panay Gulf where the subject vessel sank, in
contrast to herein petitioners allegation that the waves were twenty (20) feet high. In the
absence of any explanation as to what may have caused the sinking of the vessel coupled
with the finding that the same was improperly manned, the appellate court ruled that the
petitioner is liable on its obligation as common carrier4 to herein private respondent
insurance company as subrogee of Caltex. The subsequent motion for reconsideration of
herein petitioner was denied by the appellate court.
Petitioner raised the following assignments of error in support of the instant petition,5 to wit:
I
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE
REGIONAL TRIAL COURT.
II
THE COURT OF APPEALS ERRED AND WAS NOT JUSTIFIED IN REBUTTING
THE LEGAL PRESUMPTION THAT THE VESSEL MT "MAYSUN" WAS
SEAWORTHY.
III
THE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE OF THE
SUPREME COURT IN THE CASE OF HOME INSURANCE CORPORATION V.
COURT OF APPEALS.
Petitioner Delsan Transport Lines, Inc. invokes the provision of Section 113 of the Insurance
Code of the Philippines, which states that in every marine insurance upon a ship or freight, or
freightage, or upon any thin which is the subject of marine insurance there is an implied
warranty by the shipper that the ship is seaworthy. Consequently, the insurer will not be liable
to the assured for any loss under the policy in case the vessel would later on be found as not
seaworthy at the inception of the insurance. It theorized that when private respondent paid
Caltex the value of its lost cargo, the act of the private respondent is equivalent to a tacit
recognition that the ill-fated vessel was seaworthy; otherwise, private respondent was not
legally liable to Caltex due to the latters breach of implied warranty under the marine
insurance policy that the vessel was seaworthy.
The petitioner also alleges that the Court of Appeals erred in ruling that MT Maysun was not
seaworthy on the ground that the marine officer who served as the chief mate of the vessel,
Francisco Berina, was allegedly not qualified. Under Section 116 of the Insurance Code of
the Philippines, the implied warranty of seaworthiness of the vessel, which the private
respondent admitted as having been fulfilled by its payment of the insurance proceeds to
Caltex of its lost cargo, extends to the vessels complement. Besides, petitioner avers that
although Berina had merely a 2nd officers license, he was qualified to act as the vessels
chief officer under Chapter IV(403), Category III(a)(3)(ii)(aa) of the Philippine Merchant
Marine Rules and Regulations. In fact, all the crew and officers of MT Maysun were
exonerated in the administrative investigation conducted by the Board of Marine Inquiry after
the subject accident.6
In any event, petitioner further avers that private respondent failed, for unknown reason, to
present in evidence during the trial of the instant case the subject marine cargo insurance
policy it entered into with Caltex. By virtue of the doctrine laid down in the case of Home
Insurance Corporation vs. CA,7 the failure of the private respondent to present the insurance
policy in evidence is allegedly fatal to its claim inasmuch as there is no way to determine the
rights of the parties thereto.
Hence, the legal issues posed before the Court are:
I
Whether or not the payment made by the private respondent to Caltex for the insured
value of the lost cargo amounted to an admission that the vessel was seaworthy,
thus precluding any action for recovery against the petitioner.
II
Whether or not the non-presentation of the marine insurance policy bars the
complaint for recovery of sum of money for lack of cause of action.
We rule in the negative on both issues.
The payment made by the private respondent for the insured value of the lost cargo operates
as waiver of its (private respondent) right to enforce the term of the implied warranty against
Caltex under the marine insurance policy. However, the same cannot be validly interpreted
as an automatic admission of the vessels seaworthiness by the private respondent as to
foreclose recourse against the petitioner for any liability under its contractual obligation as a
common carrier. The fact of payment grants the private respondent subrogatory right which
enables it to exercise legal remedies that would otherwise be available to Caltex as owner of
the lost cargo against the petitioner common carrier.8 Article 2207 of the New civil Code
provides that:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company shall be subrogated to the rights
of the insured against the wrongdoer or the person who has violated the contract. If
the amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing
the loss or injury.
The right of subrogation has its roots in equity. It is designed to promote and to accomplish
justice and is the mode which equity adopts to compel the ultimate payment of a debt by one
who in justice and good conscience ought to pay.9 It is not dependent upon, nor does it grow
out of, any privity of contract or upon written assignment of claim. It accrues simply upon
payment by the insurance company of the insurance claim.10 Consequently, the payment
made by the private respondent (insurer) to Caltex (assured) operates as an equitable
assignment to the former of all the remedies which the latter may have against the petitioner.
From the nature of their business and for reasons of public policy, common carriers are
bound to observe extraordinary diligence in the vigilance over the goods and for the safety of
passengers transported by them, according to all the circumstance of each case.11 In the
event of loss, destruction or deterioration of the insured goods, common carriers shall be
responsible unless the same is brought about, among others, by flood, storm, earthquake,
lightning or other natural disaster or calamity.12 In all other cases, if the goods are lost,
destroyed or deteriorated, common carriers are presumed to have been at fault or to have
acted negligently, unless they prove that they observed extraordinary diligence.13
In order to escape liability for the loss of its cargo of industrial fuel oil belonging to Caltex,
petitioner attributes the sinking of MT Maysun to fortuitous even or force majeure. From the
testimonies of Jaime Jarabe and Francisco Berina, captain and chief mate, respectively of
the ill-fated vessel, it appears that a sudden and unexpected change of weather condition
occurred in the early morning of August 16, 1986; that at around 3:15 oclock in the morning
a squall ("unos") carrying strong winds with an approximate velocity of 30 knots per hour and
big waves averaging eighteen (18) to twenty (20) feet high, repeatedly buffeted MT Maysun
causing it to tilt, take in water and eventually sink with its cargo.14 This tale of strong winds
and big waves by the said officers of the petitioner however, was effectively rebutted and
belied by the weather report15 from the Philippine Atmospheric, Geophysical and
Astronomical Services Administration (PAGASA), the independent government agency
charged with monitoring weather and sea conditions, showing that from 2:00 oclock to 8:00
oclock in the morning on August 16, 1986, the wind speed remained at ten (10) to twenty
(20) knots per hour while the height of the waves ranged from .7 to two (2) meters in the
vicinity of Cuyo East Pass and Panay Gulf where the subject vessel sank. Thus, as the
appellate court correctly ruled, petitioners vessel, MT Maysun, sank with its entire cargo for
the reason that it was not seaworthy. There was no squall or bad weather or extremely poor
sea condition in the vicinity when the said vessel sank.
The appellate court also correctly opined that the petitioners witnesses, Jaime Jarabe and
Francisco Berina, ship captain and chief mate, respectively, of the said vessel, could not be
expected to testify against the interest of their employer, the herein petitioner common
carrier.
Neither may petitioner escape liability by presenting in evidence certificates16 that tend to
show that at the time of dry-docking and inspection by the Philippine Coast Guard, the vessel
MT Maysun, was fit for voyage. These pieces of evidence do not necessarily take into
account the actual condition of the vessel at the time of the commencement of the voyage.
As correctly observed by the Court of appeals:
At the time of dry-docking and inspection, the ship may have appeared fit. The
certificates issued, however, do not negate the presumption of unseaworthiness
triggered by an unexplained sinking. Of certificates issued in this regard, authorities
are likewise clear as to their probative value, (thus):
Seaworthiness relates to a vessels actual condition. Neither the granting of
classification or the issuance of certificates established seaworthiness. (2-A
Benedict on Admiralty, 7-3, Sec. 62).
And also:
Authorities are clear that diligence in securing certificates of seaworthiness
does not satisfy the vessel owners obligation. Also securing the approval of
the shipper of the cargo, or his surveyor, of the condition of the vessel or her
stowage does not establish due diligence if the vessel was in fact
unseaworthy, for the cargo owner has no obligation in relation to
seaworthiness. (Ibid.)17
Additionally, the exoneration of MT Maysuns officers and crew by the Board of Marine
Inquiry merely concerns their respective administrative liabilities. It does not in any way
operate to absolve the petitioner common carrier from its civil liabilities. It does not in any way
operate to absolve the petitioner common carrier from its civil liability arising from its failure to
observe extraordinary diligence in the vigilance over the goods it was transporting and for the
negligent acts or omissions of its employees, the determination of which properly belongs to
the courts.18 In the case at bar, petitioner is liable for the insured value of the lost cargo of
industrial fuel oil belonging to Caltex for its failure to rebut the presumption of fault or
negligence as common carrier19 occasioned by the unexplained sinking of its vessel, MT
Maysun, while in transit.
Anent the second issue, it is our view and so hold that the presentation in evidence of the
marine insurance policy is not indispensable in this case before the insurer may recover from
the common carrier the insured value of the lost cargo in the exercise of its subrogatory right.
The subrogation receipt, by itself, is sufficient to establish not only the relationship of herein
private respondent as insurer and Caltex, as the assured shipper of the lost cargo of
industrial fuel oil, but also the amount paid to settle the insurance claim. The right of
subrogation accrues simply upon payment by the insurance company of the insurance
claim.20
The presentation of the insurance policy was necessary in the case of Home Insurance
Corporation v. CA21 (a case cited by petitioner) because the shipment therein (hydraulic
engines) passed through several stages with different parties involved in each stage. First,
from the shipper to the port of departure; second, from the port of departure to the M/S
Oriental Statesman; third, from the M/S Oriental Statesman to the M/S Pacific Conveyor;
fourth, from the M/S Pacific Conveyor to the port or arrival; fifth, from the port of arrival to the
arrastre operator; sixth, from the arrastre operator to the hauler, Mabuhay Brokerage Co.,
Inc. (private respondent therein); and lastly, from the hauler to the consignee. We
emphasized in that case that in the absence of proof of stipulations to the contrary, the hauler
can be liable only for any damage that occurred from the time it received the cargo until it
finally delivered it to the consignee. Ordinarily, it cannot be held responsible for the handling
of the cargo before it actually received it. The insurance contract, which was not presented in
evidence in that case would have indicated the scope of the insurers liability, if any, since no
evidence was adduced indicating at what stage in the handling process the damage to the
cargo was sustained.
Hence, our ruling on the presentation of the insurance policy in the said case of Home
Insurance Corporation is not applicable to the case at bar. In contrast, there is no doubt that
the cargo of industrial fuel oil belonging to Caltex, in the case at bar, was lost while on board
petitioners vessel, MT Maysun, which sank while in transit in the vicinity of Panay Gulf and
Cuyo East Pass in the early morning of August 16, 1986.
WHEREFORE, the instant petition is DENIED. The Decision dated June 17, 1996 of the
Court of Appeals in CA-G.R. CV No. 39836 is AFFIRMED. Costs against the petitioner.
SO ORDERED.1wphi1.nt






























G.R. No. 143133 June 5, 2002
BELGIAN OVERSEAS CHARTERING AND SHIPPING N.V. and JARDINE DAVIES
TRANSPORT SERVICES, INC.,petitioners, vs. PHILIPPINE FIRST INSURANCE CO.,
INC., respondents.
PANGANIBAN, J.:
Proof of the delivery of goods in good order to a common carrier and of their arrival in bad
order at their destination constitutes prima facie fault or negligence on the part of the carrier.
If no adequate explanation is given as to how the loss, the destruction or the deterioration of
the goods happened, the carrier shall be held liable therefor.
Statement of the Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the July 15,
1998 Decision1 and the May 2, 2000 Resolution2 of the Court of Appeals3 (CA) in CA-GR
CV No. 53571. The decretal portion of the Decision reads as follows:
"WHEREFORE, in the light of the foregoing disquisition, the decision appealed from
is hereby REVERSED and SET ASIDE. Defendants-appellees are ORDERED to
jointly and severally pay plaintiffs-appellants the following:
'1) FOUR Hundred Fifty One Thousand Twenty-Seven Pesos and 32/100
(P451,027.32) as actual damages, representing the value of the damaged
cargo, plus interest at the legal rate from the time of filing of the complaint on
July 25, 1991, until fully paid;
'2) Attorney's fees amounting to 20% of the claim; and
'3) Costs of suit.'"4
The assailed Resolution denied petitioner's Motion for Reconsideration.
The CA reversed the Decision of the Regional Trial Court (RTC) of Makati City (Branch 134),
which had disposed as follows:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered, dismissing
the complaint, as well as defendant's counterclaim."5
The Facts
The factual antecedents of the case are summarized by the Court of Appeals in this wise:
"On June 13, 1990, CMC Trading A.G. shipped on board the M/V 'Anangel Sky' at
Hamburg, Germany 242 coils of various Prime Cold Rolled Steel sheets for
transportation to Manila consigned to the Philippine Steel Trading Corporation. On
July 28, 1990, M/V Anangel Sky arrived at the port of Manila and, within the
subsequent days, discharged the subject cargo. Four (4) coils were found to be in
bad order B.O. Tally sheet No. 154974. Finding the four (4) coils in their damaged
state to be unfit for the intended purpose, the consignee Philippine Steel Trading
Corporation declared the same as total loss.1wphi1.nt
"Despite receipt of a formal demand, defendants-appellees refused to submit to the
consignee's claim. Consequently, plaintiff-appellant paid the consignee five hundred
six thousand eighty six & 50/100 pesos (P506,086.50), and was subrogated to the
latter's rights and causes of action against defendants-appellees. Subsequently,
plaintiff-appellant instituted this complaint for recovery of the amount paid by them, to
the consignee as insured.
"Impugning the propriety of the suit against them, defendants-appellees imputed that
the damage and/or loss was due to pre-shipment damage, to the inherent nature,
vice or defect of the goods, or to perils, danger and accidents of the sea, or to
insufficiency of packing thereof, or to the act or omission of the shipper of the goods
or their representatives. In addition thereto, defendants-appellees argued that their
liability, if there be any, should not exceed the limitations of liability provided for in the
bill of lading and other pertinent laws. Finally, defendants-appellees averred that, in
any event, they exercised due diligence and foresight required by law to prevent any
damage/loss to said shipment."6
Ruling of the Trial Court
The RTC dismissed the Complaint because respondent had failed to prove its claims with the
quantum of proof required by law.7
It likewise debunked petitioners' counterclaim, because respondent's suit was not manifestly
frivolous or primarily intended to harass them.8
Ruling of the Court of Appeals
In reversing the trial court, the CA ruled that petitioners were liable for the loss or the damage
of the goods shipped, because they had failed to overcome the presumption of negligence
imposed on common carriers.
The CA further held as inadequately proven petitioners' claim that the loss or the
deterioration of the goods was due to pre-shipment damage.9 It likewise opined that the
notation "metal envelopes rust stained and slightly dented" placed on the Bill of Lading had
not been the proximate cause of the damage to the four (4) coils.10
As to the extent of petitioners' liability, the CA held that the package limitation under COGSA
was not applicable, because the words "L/C No. 90/02447" indicated that a higher valuation
of the cargo had been declared by the shipper. The CA, however, affirmed the award of
attorney's fees.
Hence, this Petition.11
Issues
In their Memorandum, petitioners raise the following issues for the Court's consideration:
I
"Whether or not plaintiff by presenting only one witness who has never seen the
subject shipment and whose testimony is purely hearsay is sufficient to pave the
way for the applicability of Article 1735 of the Civil Code;
II
"Whether or not the consignee/plaintiff filed the required notice of loss within the time
required by law;
III
"Whether or not a notation in the bill of lading at the time of loading is sufficient to
show pre-shipment damage and to exempt herein defendants from liability;
IV
"Whether or not the "PACKAGE LIMITATION" of liability under Section 4 (5) of
COGSA is applicable to the case at bar."12
In sum, the issues boil down to three:
1. Whether petitioners have overcome the presumption of negligence of a common
carrier
2. Whether the notice of loss was timely filed
3. Whether the package limitation of liability is applicable
This Court's Ruling
The Petition is partly meritorious.
First Issue:
Proof of Negligence
Petitioners contend that the presumption of fault imposed on common carriers should not be
applied on the basis of the lone testimony offered by private respondent. The contention is
untenable.
Well-settled is the rule that common carriers, from the nature of their business and for
reasons of public policy, are bound to observe extraordinary diligence and vigilance with
respect to the safety of the goods and the passengers they transport.13 Thus, common
carriers are required to render service with the greatest skill and foresight and "to use all
reason[a]ble means to ascertain the nature and characteristics of the goods tendered for
shipment, and to exercise due care in the handling and stowage, including such methods as
their nature requires."14 The extraordinary responsibility lasts from the time the goods are
unconditionally placed in the possession of and received for transportation by the carrier until
they are delivered, actually or constructively, to the consignee or to the person who has a
right to receive them.15
This strict requirement is justified by the fact that, without a hand or a voice in the preparation
of such contract, the riding public enters into a contract of transportation with common
carriers.16 Even if it wants to, it cannot submit its own stipulations for their
approval.17 Hence, it merely adheres to the agreement prepared by them.
Owing to this high degree of diligence required of them, common carriers, as a general rule,
are presumed to have been at fault or negligent if the goods they transported deteriorated or
got lost or destroyed.18 That is, unless they prove that they exercised extraordinary diligence
in transporting the goods.19 In order to avoid responsibility for any loss or damage, therefore,
they have the burden of proving that they observed such diligence.20
However, the presumption of fault or negligence will not arise21 if the loss is due to any of
the following causes: (1) flood, storm, earthquake, lightning, or other natural disaster or
calamity; (2) an act of the public enemy in war, whether international or civil; (3) an act or
omission of the shipper or owner of the goods; (4) the character of the goods or defects in the
packing or the container; or (5) an order or act of competent public authority.22 This is a
closed list. If the cause of destruction, loss or deterioration is other than the enumerated
circumstances, then the carrier is liable therefor.23
Corollary to the foregoing, mere proof of delivery of the goods in good order to a common
carrier and of their arrival in bad order at their destination constitutes a prima facie case of
fault or negligence against the carrier. If no adequate explanation is given as to how the
deterioration, the loss or the destruction of the goods happened, the transporter shall be held
responsible.24
That petitioners failed to rebut the prima facie presumption of negligence is revealed in the
case at bar by a review of the records and more so by the evidence adduced by
respondent.25
First, as stated in the Bill of Lading, petitioners received the subject shipment in good order
and condition in Hamburg, Germany.26
Second, prior to the unloading of the cargo, an Inspection Report27 prepared and signed by
representatives of both parties showed the steel bands broken, the metal envelopes rust-
stained and heavily buckled, and the contents thereof exposed and rusty.
Third, Bad Order Tally Sheet No. 15497928 issued by Jardine Davies Transport Services,
Inc., stated that the four coils were in bad order and condition. Normally, a request for a bad
order survey is made in case there is an apparent or a presumed loss or damage.29
Fourth, the Certificate of Analysis30 stated that, based on the sample submitted and tested,
the steel sheets found in bad order were wet with fresh water.
Fifth, petitioners -- in a letter31 addressed to the Philippine Steel Coating Corporation and
dated October 12, 1990 -- admitted that they were aware of the condition of the four coils
found in bad order and condition.
These facts were confirmed by Ruperto Esmerio, head checker of BM Santos Checkers
Agency. Pertinent portions of his testimony are reproduce hereunder:
"Q. Mr. Esmerio, you mentioned that you are a Head Checker. Will you inform
the Honorable Court with what company you are connected?
A. BM Santos Checkers Agency, sir.
Q. How is BM Santos checkers Agency related or connected with defendant
Jardine Davies Transport Services?
A. It is the company who contracts the checkers, sir.
Q. You mentioned that you are a Head Checker, will you inform this Honorable
Court your duties and responsibilities?
A. I am the representative of BM Santos on board the vessel, sir, to supervise the
discharge of cargoes.
x x x x x x x x x
Q. On or about August 1, 1990, were you still connected or employed with BM
Santos as a Head Checker?
A. Yes, sir.
Q. And, on or about that date, do you recall having attended the discharging and
inspection of cold steel sheets in coil on board the MV/AN ANGEL SKY?
A. Yes, sir, I was there.
x x x x x x x x x
Q. Based on your inspection since you were also present at that time, will you
inform this Honorable Court the condition or the appearance of the bad order
cargoes that were unloaded from the MV/ANANGEL SKY?
ATTY. MACAMAY:
Objection, Your Honor, I think the document itself reflects the condition of
the cold steel sheets and the best evidence is the document itself, Your
Honor that shows the condition of the steel sheets.
COURT:
Let the witness answer.
A. The scrap of the cargoes is broken already and the rope is loosen and the
cargoes are dent on the sides."32
All these conclusively prove the fact of shipment in good order and condition and the
consequent damage to the four coils while in the possession of petitioner,33 who notably
failed to explain why.34
Further, petitioners failed to prove that they observed the extraordinary diligence and
precaution which the law requires a common carrier to know and to follow to avoid damage to
or destruction of the goods entrusted to it for safe carriage and delivery.35
True, the words "metal envelopes rust stained and slightly dented" were noted on the Bill of
Lading; however, there is no showing that petitioners exercised due diligence to forestall or
lessen the loss.36 Having been in the service for several years, the master of the vessel
should have known at the outset that metal envelopes in the said state would eventually
deteriorate when not properly stored while in transit.37 Equipped with the proper knowledge
of the nature of steel sheets in coils and of the proper way of transporting them, the master of
the vessel and his crew should have undertaken precautionary measures to avoid possible
deterioration of the cargo. But none of these measures was taken.38 Having failed to
discharge the burden of proving that they have exercised the extraordinary diligence required
by law, petitioners cannot escape liability for the damage to the four coils.39
In their attempt to escape liability, petitioners further contend that they are exempted from
liability under Article 1734(4) of the Civil Code. They cite the notation "metal envelopes rust
stained and slightly dented" printed on the Bill of Lading as evidence that the character of the
goods or defect in the packing or the containers was the proximate cause of the damage. We
are not convinced.
From the evidence on record, it cannot be reasonably concluded that the damage to the four
coils was due to the condition noted on the Bill of Lading.40 The aforecited exception refers
to cases when goods are lost or damaged while in transit as a result of the natural decay of
perishable goods or the fermentation or evaporation of substances liable therefor, the
necessary and natural wear of goods in transport, defects in packages in which they are
shipped, or the natural propensities of animals.41 None of these is present in the instant
case.
Further, even if the fact of improper packing was known to the carrier or its crew or was
apparent upon ordinary observation, it is not relieved of liability for loss or injury resulting
therefrom, once it accepts the goods notwithstanding such condition.42 Thus, petitioners
have not successfully proven the application of any of the aforecited exceptions in the
present case.43
Second Issue:
Notice of Loss
Petitioners claim that pursuant to Section 3, paragraph 6 of the Carriage of Goods by Sea
Act44 (COGSA), respondent should have filed its Notice of Loss within three days from
delivery. They assert that the cargo was discharged on July 31, 1990, but that respondent
filed its Notice of Claim only on September 18, 1990.45
We are not persuaded. First, the above-cited provision of COGSA provides that the notice of
claim need not be given if the state of the goods, at the time of their receipt, has been the
subject of a joint inspection or survey. As stated earlier, prior to unloading the cargo, an
Inspection Report46 as to the condition of the goods was prepared and signed by
representatives of both parties.47
Second, as stated in the same provision, a failure to file a notice of claim within three days
will not bar recovery if it is nonetheless filed within one year.48 This one-year prescriptive
period also applies to the shipper, the consignee, the insurer of the goods or any legal holder
of the bill of lading.49
In Loadstar Shipping Co., Inc, v. Court of Appeals,50 we ruled that a claim is not barred by
prescription as long as the one-year period has not lapsed. Thus, in the words of
the ponente, Chief Justice Hilario G. Davide Jr.:
"Inasmuch as the neither the Civil Code nor the Code of Commerce states a specific
prescriptive period on the matter, the Carriage of Goods by Sea Act (COGSA)--which
provides for a one-year period of limitation on claims for loss of, or damage to,
cargoes sustained during transit--may be applied suppletorily to the case at bar."
In the present case, the cargo was discharged on July 31, 1990, while the Complaint51 was
filed by respondent on July 25, 1991, within the one-year prescriptive period.
Third Issue:
Package Limitation
Assuming arguendo they are liable for respondent's claims, petitioners contend that their
liability should be limited to US$500 per package as provided in the Bill of Lading and by
Section 4(5)52 of COGSA.53
On the other hand, respondent argues that Section 4(5) of COGSA is inapplicable, because
the value of the subject shipment was declared by petitioners beforehand, as evidenced by
the reference to and the insertion of the Letter of Credit or "L/C No. 90/02447" in the said Bill
of Lading.54
A bill of lading serves two functions. First, it is a receipt for the goods shipped.53 Second, it is
a contract by which three parties -- namely, the shipper, the carrier, and the consignee --
undertake specific responsibilities and assume stipulated obligations.56 In a nutshell, the
acceptance of the bill of lading by the shipper and the consignee, with full knowledge of its
contents, gives rise to the presumption that it constituted a perfected and binding contract.57
Further, a stipulation in the bill of lading limiting to a certain sum the common carrier's liability
for loss or destruction of a cargo -- unless the shipper or owner declares a greater value58 --
is sanctioned by law.59 There are, however, two conditions to be satisfied: (1) the contract is
reasonable and just under the circumstances, and (2) it has been fairly and freely agreed
upon by the parties.60 The rationale for this rule is to bind the shippers by their agreement to
the value (maximum valuation) of their goods.61
It is to be noted, however, that the Civil Code does not limit the liability of the common carrier
to a fixed amount per package.62 In all matters not regulated by the Civil Code, the right and
the obligations of common carriers shall be governed by the Code of Commerce and special
laws.63 Thus, the COGSA, which is suppletory to the provisions of the Civil Code,
supplements the latter by establishing a statutory provision limiting the carrier's liability in the
absence of a shipper's declaration of a higher value in the bill of lading.64 The provisions on
limited liability are as much a part of the bill of lading as though physically in it and as though
placed there by agreement of the parties.65
In the case before us, there was no stipulation in the Bill of Lading66 limiting the carrier's
liability. Neither did the shipper declare a higher valuation of the goods to be shipped. This
fact notwithstanding, the insertion of the words "L/C No. 90/02447 cannot be the basis for
petitioners' liability.
First, a notation in the Bill of Lading which indicated the amount of the Letter of Credit
obtained by the shipper for the importation of steel sheets did not effect a declaration of the
value of the goods as required by the bill.67 That notation was made only for the
convenience of the shipper and the bank processing the Letter of Credit.68
Second, in Keng Hua Paper Products v. Court of Appeals,69 we held that a bill of lading was
separate from the Other Letter of Credit arrangements. We ruled thus:
"(T)he contract of carriage, as stipulated in the bill of lading in the present case, must
be treated independently of the contract of sale between the seller and the buyer,
and the contract of issuance of a letter of credit between the amount of goods
described in the commercial invoice in the contract of sale and the amount allowed in
the letter of credit will not affect the validity and enforceability of the contract of
carriage as embodied in the bill of lading. As the bank cannot be expected to look
beyond the documents presented to it by the seller pursuant to the letter of credit,
neither can the carrier be expected to go beyond the representations of the shipper
in the bill of lading and to verify their accuracy vis--vis the commercial invoice and
the letter of credit. Thus, the discrepancy between the amount of goods indicated in
the invoice and the amount in the bill of lading cannot negate petitioner's obligation to
private respondent arising from the contract of transportation."70
In the light of the foregoing, petitioners' liability should be computed based on US$500 per
package and not on the per metric ton price declared in the Letter of Credit.71 In Eastern
Shipping Lines, Inc. v. Intermediate Appellate Court,72 we explained the meaning
of packages:
"When what would ordinarily be considered packages are shipped in a container
supplied by the carrier and the number of such units is disclosed in the shipping
documents, each of those units and not the container constitutes the 'package'
referred to in the liability limitation provision of Carriage of Goods by Sea Act."
Considering, therefore, the ruling in Eastern Shipping Lines and the fact that the Bill of Lading
clearly disclosed the contents of the containers, the number of units, as well as the nature of
the steel sheets, the four damaged coils should be considered as the shipping unit subject to
the US$500 limitation.1wphi1.nt
WHEREFORE, the Petition is partly granted and the assailed Decision MODIFIED.
Petitioners' liability is reduced to US$2,000 plus interest at the legal rate of six percent from
the time of the filing of the Complaint on July 25, 1991 until the finality of this Decision, and
12 percent thereafter until fully paid. No pronouncement as to costs.
SO ORDERED.

























G.R. No. 147246 August 19, 2003
ASIA LIGHTERAGE AND SHIPPING, INC., petitioner, vs. COURT OF APPEALS and
PRUDENTIAL GUARANTEE AND ASSURANCE, INC., respondents.
PUNO, J.:
On appeal is the Court of Appeals' May 11, 2000 Decision1 in CA-G.R. CV No. 49195 and
February 21, 2001 Resolution2 affirming with modification the April 6, 1994 Decision3 of the
Regional Trial Court of Manila which found petitioner liable to pay private respondent the
amount of indemnity and attorney's fees.
First, the facts.
On June 13, 1990, 3,150 metric tons of Better Western White Wheat in bulk, valued at
US$423,192.354 was shipped by Marubeni American Corporation of Portland, Oregon on
board the vessel M/V NEO CYMBIDIUM V-26 for delivery to the consignee, General Milling
Corporation in Manila, evidenced by Bill of Lading No. PTD/Man-4.5The shipment was
insured by the private respondent Prudential Guarantee and Assurance, Inc. against loss or
damage for P14,621,771.75 under Marine Cargo Risk Note RN 11859/90.6
On July 25, 1990, the carrying vessel arrived in Manila and the cargo was transferred to the
custody of the petitioner Asia Lighterage and Shipping, Inc. The petitioner was contracted by
the consignee as carrier to deliver the cargo to consignee's warehouse at Bo. Ugong, Pasig
City.
On August 15, 1990, 900 metric tons of the shipment was loaded on barge PSTSI III,
evidenced by Lighterage Receipt No. 03647 for delivery to consignee. The cargo did not
reach its destination.
It appears that on August 17, 1990, the transport of said cargo was suspended due to a
warning of an incoming typhoon. On August 22, 1990, the petitioner proceeded to pull the
barge to Engineering Island off Baseco to seek shelter from the approaching typhoon. PSTSI
III was tied down to other barges which arrived ahead of it while weathering out the storm
that night. A few days after, the barge developed a list because of a hole it sustained after
hitting an unseen protuberance underneath the water. The petitioner filed a Marine Protest on
August 28, 1990.8 It likewise secured the services of Gaspar Salvaging Corporation which
refloated the barge.9 The hole was then patched with clay and cement.
The barge was then towed to ISLOFF terminal before it finally headed towards the
consignee's wharf on September 5, 1990. Upon reaching the Sta. Mesa spillways, the barge
again ran aground due to strong current. To avoid the complete sinking of the barge, a
portion of the goods was transferred to three other barges.10
The next day, September 6, 1990, the towing bits of the barge broke. It sank completely,
resulting in the total loss of the remaining cargo.11 A second Marine Protest was filed on
September 7, 1990.12
On September 14, 1990, a bidding was conducted to dispose of the damaged wheat
retrieved and loaded on the three other barges.13 The total proceeds from the sale of the
salvaged cargo was P201,379.75.14
On the same date, September 14, 1990, consignee sent a claim letter to the petitioner, and
another letter dated September 18, 1990 to the private respondent for the value of the lost
cargo.
On January 30, 1991, the private respondent indemnified the consignee in the amount
of P4,104,654.22.15Thereafter, as subrogee, it sought recovery of said amount from the
petitioner, but to no avail.
On July 3, 1991, the private respondent filed a complaint against the petitioner for recovery of
the amount of indemnity, attorney's fees and cost of suit.16 Petitioner filed its answer with
counterclaim.17
The Regional Trial Court ruled in favor of the private respondent. The dispositive portion of its
Decision states:
WHEREFORE, premises considered, judgment is hereby rendered ordering
defendant Asia Lighterage & Shipping, Inc. liable to pay plaintiff Prudential
Guarantee & Assurance Co., Inc. the sum of P4,104,654.22 with interest from the
date complaint was filed on July 3, 1991 until fully satisfied plus 10% of the amount
awarded as and for attorney's fees. Defendant's counterclaim is hereby DISMISSED.
With costs against defendant.18
Petitioner appealed to the Court of Appeals insisting that it is not a common carrier. The
appellate court affirmed the decision of the trial court with modification. The dispositive
portion of its decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED with modification in
the sense that the salvage value of P201,379.75 shall be deducted from the amount
of P4,104,654.22. Costs against appellant.
SO ORDERED.
Petitioner's Motion for Reconsideration dated June 3, 2000 was likewise denied by the
appellate court in a Resolution promulgated on February 21, 2001.
Hence, this petition. Petitioner submits the following errors allegedly committed by the
appellate court, viz:19
(1) THE COURT OF APPEALS DECIDED THE CASE A QUO IN A WAY NOT IN
ACCORD WITH LAW AND/OR WITH THE APPLICABLE DECISIONS OF THE
SUPREME COURT WHEN IT HELD THAT PETITIONER IS A COMMON CARRIER.
(2) THE COURT OF APPEALS DECIDED THE CASE A QUO IN A WAY NOT IN
ACCORD WITH LAW AND/OR WITH THE APPLICABLE DECISIONS OF THE
SUPREME COURT WHEN IT AFFIRMED THE FINDING OF THE LOWER COURT
A QUO THAT ON THE BASIS OF THE PROVISIONS OF THE CIVIL CODE
APPLICABLE TO COMMON CARRIERS, "THE LOSS OF THE CARGO IS,
THEREFORE, BORNE BY THE CARRIER IN ALL CASES EXCEPT IN THE FIVE
(5) CASES ENUMERATED."
(3) THE COURT OF APPEALS DECIDED THE CASE A QUO IN A WAY NOT IN
ACCORD WITH LAW AND/OR WITH THE APPLICABLE DECISIONS OF THE
SUPREME COURT WHEN IT EFFECTIVELY CONCLUDED THAT PETITIONER
FAILED TO EXERCISE DUE DILIGENCE AND/OR WAS NEGLIGENT IN ITS CARE
AND CUSTODY OF THE CONSIGNEE'S CARGO.
The issues to be resolved are:
(1) Whether the petitioner is a common carrier; and,
(2) Assuming the petitioner is a common carrier, whether it exercised extraordinary
diligence in its care and custody of the consignee's cargo.
On the first issue, we rule that petitioner is a common carrier.
Article 1732 of the Civil Code defines common carriers as persons, corporations, firms or
associations engaged in the business of carrying or transporting passengers or goods or
both, by land, water, or air, for compensation, offering their services to the public.
Petitioner contends that it is not a common carrier but a private carrier. Allegedly, it has no
fixed and publicly known route, maintains no terminals, and issues no tickets. It points out
that it is not obliged to carry indiscriminately for any person. It is not bound to carry goods
unless it consents. In short, it does not hold out its services to the general public.20
We disagree.
In De Guzman vs. Court of Appeals,21 we held that the definition of common carriers in
Article 1732 of the Civil Code makes no distinction between one whose principal business
activity is the carrying of persons or goods or both, and one who does such carrying only as
an ancillary activity. We also did not distinguish between a person or enterprise offering
transportation service on a regular or scheduled basis and one offering such service on an
occasional, episodic or unscheduled basis. Further, we ruled that Article 1732 does not
distinguish between a carrier offering its services to the general public, and one who offers
services or solicits business only from a narrow segment of the general population.
In the case at bar, the principal business of the petitioner is that of lighterage and
drayage22 and it offers its barges to the public for carrying or transporting goods by water for
compensation. Petitioner is clearly a common carrier. In De Guzman, supra,23 we
considered private respondent Ernesto Cendaa to be a common carrier even if his principal
occupation was not the carriage of goods for others, but that of buying used bottles and scrap
metal in Pangasinan and selling these items in Manila.
We therefore hold that petitioner is a common carrier whether its carrying of goods is done on
an irregular rather than scheduled manner, and with an only limited clientele. A common
carrier need not have fixed and publicly known routes. Neither does it have to maintain
terminals or issue tickets.
To be sure, petitioner fits the test of a common carrier as laid down in Bascos vs. Court of
Appeals.24 The test to determine a common carrier is "whether the given undertaking is a
part of the business engaged in by the carrier which he has held out to the general public as
his occupation rather than the quantity or extent of the business transacted."25 In the case at
bar, the petitioner admitted that it is engaged in the business of shipping and
lighterage,26 offering its barges to the public, despite its limited clientele for carrying or
transporting goods by water for compensation.27
On the second issue, we uphold the findings of the lower courts that petitioner failed to
exercise extraordinary diligence in its care and custody of the consignee's goods.
Common carriers are bound to observe extraordinary diligence in the vigilance over the
goods transported by them.28 They are presumed to have been at fault or to have acted
negligently if the goods are lost, destroyed or deteriorated.29 To overcome the presumption
of negligence in the case of loss, destruction or deterioration of the goods, the common
carrier must prove that it exercised extraordinary diligence. There are, however, exceptions
to this rule. Article 1734 of the Civil Code enumerates the instances when the presumption of
negligence does not attach:
Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration
of the goods, unless the same is due to any of the following causes only:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.
In the case at bar, the barge completely sank after its towing bits broke, resulting in the total
loss of its cargo. Petitioner claims that this was caused by a typhoon, hence, it should not be
held liable for the loss of the cargo. However, petitioner failed to prove that the typhoon is the
proximate and only cause of the loss of the goods, and that it has exercised due diligence
before, during and after the occurrence of the typhoon to prevent or minimize the loss.30 The
evidence show that, even before the towing bits of the barge broke, it had already previously
sustained damage when it hit a sunken object while docked at the Engineering Island. It even
suffered a hole. Clearly, this could not be solely attributed to the typhoon. The partly-
submerged vessel was refloated but its hole was patched with only clay and cement. The
patch work was merely a provisional remedy, not enough for the barge to sail safely. Thus,
when petitioner persisted to proceed with the voyage, it recklessly exposed the cargo to
further damage. A portion of the cross-examination of Alfredo Cunanan, cargo-surveyor of
Tan-Gatue Adjustment Co., Inc., states:
CROSS-EXAMINATION BY ATTY. DONN LEE:31
x x x x x x x x x
q - Can you tell us what else transpired after that incident?
a - After the first accident, through the initiative of the barge owners, they tried
to pull out the barge from the place of the accident, and bring it to the anchor
terminal for safety, then after deciding if the vessel is stabilized, they tried to pull it to
the consignee's warehouse, now while on route another accident occurred, now this
time the barge totally hitting something in the course.
q - You said there was another accident, can you tell the court the nature of the
second accident?
a - The sinking, sir.
q - Can you tell the nature . . . can you tell the court, if you know what caused
the sinking?
a - Mostly it was related to the first accident because there was already a
whole (sic) on the bottom part of the barge.
x x x x x x x x x
This is not all. Petitioner still headed to the consignee's wharf despite knowledge of an
incoming typhoon. During the time that the barge was heading towards the consignee's wharf
on September 5, 1990, typhoon "Loleng" has already entered the Philippine area of
responsibility.32 A part of the testimony of Robert Boyd, Cargo Operations Supervisor of the
petitioner, reveals:
DIRECT-EXAMINATION BY ATTY. LEE:33
x x x x x x x x x
q - Now, Mr. Witness, did it not occur to you it might be safer to just allow the
Barge to lie where she was instead of towing it?
a - Since that time that the Barge was refloated, GMC (General Milling
Corporation, the consignee) as I have said was in a hurry for their goods to be
delivered at their Wharf since they needed badly the wheat that was loaded in
PSTSI-3. It was needed badly by the consignee.
q - And this is the reason why you towed the Barge as you did?
a - Yes, sir.
x x x x x x x x x
CROSS-EXAMINATION BY ATTY. IGNACIO:34
x x x x x x x x x
q - And then from ISLOFF Terminal you proceeded to the premises of the
GMC? Am I correct?
a - The next day, in the morning, we hired for additional two (2) tugboats as I
have stated.
q - Despite of the threats of an incoming typhoon as you testified a while ago?
a - It is already in an inner portion of Pasig River. The typhoon would be coming
and it would be dangerous if we are in the vicinity of Manila Bay.
q - But the fact is, the typhoon was incoming? Yes or no?
a - Yes.
q - And yet as a standard operating procedure of your Company, you have to
secure a sort of Certification to determine the weather condition, am I correct?
a - Yes, sir.
q - So, more or less, you had the knowledge of the incoming typhoon, right?
a - Yes, sir.
q - And yet you proceeded to the premises of the GMC?
a - ISLOFF Terminal is far from Manila Bay and anytime even with the typhoon
if you are already inside the vicinity or inside Pasig entrance, it is a safe place to tow
upstream.
Accordingly, the petitioner cannot invoke the occurrence of the typhoon as force majeure to
escape liability for the loss sustained by the private respondent. Surely, meeting a typhoon
head-on falls short of due diligence required from a common carrier. More importantly, the
officers/employees themselves of petitioner admitted that when the towing bits of the vessel
broke that caused its sinking and the total loss of the cargo upon reaching the Pasig River, it
was no longer affected by the typhoon. The typhoon then is not the proximate cause of the
loss of the cargo; a human factor, i.e., negligence had intervened.
IN VIEW THEREOF, the petition is DENIED. The Decision of the Court of Appeals in CA-
G.R. CV No. 49195 dated May 11, 2000 and its Resolution dated February 21, 2001 are
hereby AFFIRMED. Costs against petitioner.
SO ORDERED.







G.R. No. 95536 March 23, 1992
ANICETO G. SALUDO, JR., MARIA SALVACION SALUDO, LEOPOLDO G. SALUDO and
SATURNINO G. SALUDO, petitioners, vs. HON. COURT OF APPEALS, TRANS WORLD
AIRLINES, INC., and PHILIPPINE AIRLINES, INC., respondents.
REGALADO, J.:
Assailed in this petition for review on certiorari is the decision in CA-G.R. CV No. 20951 of
respondent Court of Appeals 1 which affirmed the decision of the trial court 2 dismissing for
lack of evidence herein petitioners' complaint in Civil Case No R-2101 of the then Court of
First Instance of Southern Leyte, Branch I.
The facts, as recounted by the court a quo and adopted by respondent court after
"considering the evidence on record," are as follows:
After the death of plaintiffs' mother, Crispina Galdo Saludo, in Chicago
Illinois, (on) October 23, 1976 (Exh. A), Pomierski and Son Funeral Home of
Chicago, made the necessary preparations and arrangements for the
shipment, of the remains from Chicago to the Philippines. The funeral home
had the remains embalmed (Exb. D) and secured a permit for the disposition
of dead human body on October 25, 1976 (Exh. C), Philippine Vice Consul
in Chicago, Illinois, Bienvenido M. Llaneta, at 3:00 p.m. on October 26, 1976
at the Pomierski & Son Funeral Home, sealed the shipping case containing a
hermetically sealed casket that is airtight and waterproof wherein was
contained the remains of Crispina Saludo Galdo (sic) (Exb. B). On the same
date, October 26, 1976, Pomierski brought the remains to C.M.A.S.
(Continental Mortuary Air Services) at the airport (Chicago) which made the
necessary arrangements such as flights, transfers, etc.; C.M.A.S. is a
national service used by undertakers to throughout the nation (U.S.A.), they
furnish the air pouch which the casket is enclosed in, and they see that the
remains are taken to the proper air freight terminal (Exh. 6-TWA). C.M.A.S.
booked the shipment with PAL thru the carrier's agent Air Care International,
with Pomierski F.H. as the shipper and Mario (Maria) Saludo as the
consignee. PAL Airway Bill No. 079-01180454 Ordinary was issued wherein
the requested routing was from Chicago to San Francisco on board TWA
Flight 131 of October 27, 1976 and from San Francisco to Manila on board
PAL Flight No. 107 of the same date, and from Manila to Cebu on board
PAL Flight 149 of October 29, 1976 (See Exh. E., Also Exh. 1-PAL).
In the meantime, plaintiffs Maria Salvacion Saludo and Saturnino Saludo,
thru a travel agent, were booked with United Airlines from Chicago to
California, and with PAL from California to Manila. She then went to the
funeral director of Pomierski Funeral Home who had her mother's remains
and she told the director that they were booked with United Airlines. But the
director told her that the remains were booked with TWA flight to California.
This upset her, and she and her brother had to change reservations from UA
to the TWA flight after she confirmed by phone that her mother's remains
should be on that TWA flight. They went to the airport and watched from the
look-out area. She saw no body being brought. So, she went to the TWA
counter again, and she was told there was no body on that flight.
Reluctantly, they took the TWA flight upon assurance of her cousin, Ani
Bantug, that he would look into the matter and inform her about it on the
plane or have it radioed to her. But no confirmation from her cousin reached
her that her mother was on the West Coast.
Upon arrival at San Francisco at about 5:00 p.m., she went to the TWA
counter there to inquire about her mother's remains. She was told they did
not know anything about it.
She then called Pomierski that her mother's remains were not at the West
Coast terminal, and Pomierski immediately called C.M.A.S., which in a
matter of 10 minutes informed him that the remains were on a plane to
Mexico City, that there were two bodies at the terminal, and somehow they
were switched; he relayed this information to Miss Saludo in California; later
C.M.A.S. called and told him they were sending the remains back to
California via Texas (see Exh. 6-TWA).
It-turned out that TWA had carried a shipment under PAL Airway Bill No.
079-ORD-01180454 on TWA Flight 603 of October 27, 1976, a flight earlier
than TWA Flight 131 of the same date. TWA delivered or transferred the said
shipment said to contain human remains to PAL at 1400H or 2:00 p.m. of the
same date, October 27, 1976 (Bee Exh. 1- TWA). "Due to a switch(ing) in
Chicago", this shipment was withdrawn from PAL by CMAS at 1805H (or
6:05 p.m.) of the same date, October 27 (Exh. 3-PAL, see Exh. 3-a-PAL).
What transpired at the Chicago (A)irport is explained in a memo or incident
report by Pomierski (Exh. 6-TWA) to Pomierski's lawyers who in turn
referred to said' memo and enclosed it in their (Pomierski's lawyers) answer
dated July 18, 1981 to herein plaintiff's counsel (See Exh. 5-TWA). In that
memo or incident report (Exh. 6-TWA), it is stated that the remains (of
Crispina Saludo) were taken to CMAS at the airport; that there were two
bodies at the (Chicago Airport) terminal, and somehow they were switched,
that the remains (of Crispina Saludo) were on a plane to Mexico City; that
CMAS is a national service used by undertakers throughout the nation
(U.S.A.), makes all the necessary arrangements, such as flights, transfers,
etc., and see(s) to it that the remains are taken to the proper air freight
terminal.
The following day October 28, 1976, the shipment or remains of Crispina
Saludo arrived (in) San Francisco from Mexico on board American Airlines.
This shipment was transferred to or received by PAL at 1945H or 7:45 p.m.
(Exh. 2-PAL, Exh. 2-a-PAL). This casket bearing the remains of Crispina
Saludo, which was mistakenly sent to Mexico and was opened (there), was
resealed by Crispin F. Patagas for shipment to the Philippines (See Exh. B-
1). The shipment was immediately loaded on PAL flight for Manila that same
evening and arrived (in) Manila on October 30, 1976, a day after its
expected arrival on October 29, 1976. 3
In a letter dated December 15, 1976, 4 petitioners' counsel informed private respondent
Trans World Airlines (TWA) of the misshipment and eventual delay in the delivery of the
cargo containing the remains of the late Crispin Saludo, and of the discourtesy of its
employees to petitioners Maria Salvacion Saludo and Saturnino Saludo. In a separate letter
on June 10, 1977 addressed to co-respondent Philippine Airlines (PAL), 5 petitioners stated
that they were holding PAL liable for said delay in delivery and would commence judicial
action should no favorable explanation be given.
Both private respondents denied liability. Thus, a damage suit 6 was filed by petitioners
before the then Court of First Instance, Branch III, Leyte, praying for the award of actual
damages of P50,000.00, moral damages of P1,000,000.00, exemplary damages, attorney's
fees and costs of suit.
As earlier stated, the court below absolved the two respondent airlines companies of liability.
The Court of Appeals affirmed the decision of the lower court in toto, and in a subsequent
resolution, 7 denied herein petitioners' motion for reconsideration for lack of merit.
In predictable disagreement and dissatisfaction with the conclusions reached by respondent
appellate court, petitioners now urge this Court to review the appealed decision and to
resolve whether or not (1) the delay in the delivery of the casketed remains of petitioners'
mother was due to the fault of respondent airline companies, (2) the one-day delay in the
delivery of the same constitutes contractual breach as would entitle petitioners to damages,
(3) damages are recoverable by petitioners for the humiliating, arrogant and indifferent acts
of the employees of TWA and PAL, and (4) private respondents should be held liable for
actual, moral and exemplary damages, aside from attorney's fees and litigation expenses. 8
At the outset and in view of the spirited exchanges of the parties on this aspect, it is to be
stressed that only questions of law may be raised in a petition filed in this Court to review
on certiorari the decision of the Court of Appeals. 9 This being so, the factual findings of the
Court of Appeals are final and conclusive and cannot be reviewed by the Supreme Court.
The rule, however, admits of established exceptions, to wit: (a) where there is grave abuse of
discretion; (b) when the finding is grounded entirely on speculations, surmises or
conjectures;(c) when the inference made is manifestly-mistaken, absurd or impossible; (d)
when the judgment of the Court of Appeals was based on a misapprehension of facts; (e)
when the factual findings are conflicting; (f) when the Court of Appeals, in making its findings,
went beyond the issues of the case and the same are contrary to the admissions of both
appellant and appellee; 10 (g) when the Court of Appeals manifestly overlooked certain
relevant facts not disputed by the parties and which, if properly considered, would justify a
different conclusion; 11 and (h) where the findings of fact of the Court of Appeals are contrary
to those of the trial court, or are mere conclusions without citation of specific evidence, or
where the facts of set forth by the petitioner are not disputed by the respondent, or where the
findings of fact of the Court of Appeals are premised on the absence of evidence and are
contradicted by the evidence on record. 12
To distinguish, a question of law is one which involves a doubt or controversy on what the
law is on a certain state of facts; and, a question of fact, contrarily, is one in which there is a
doubt or difference as to the truth or falsehood of the alleged facts. 13 One test, it has been
held, is whether the appellate court can determine the issue raised without reviewing or
evaluating the evidence, in which case it is a question of law, otherwise it will be a question of
fact. 14
Respondent airline companies object to the present recourse of petitioners on the ground
that this petition raises only factual questions. 15 Petitioners maintain otherwise or,
alternatively, they are of the position that, assuming that the petition raises factual questions,
the same are within the recognized exceptions to the general rule as would render the
petition cognizable and worthy of review by the Court. 16
Since it is precisely the soundness of the inferences or conclusions that may be drawn from
the factual issues which are here being assayed, we find that the issues raised in the instant
petition indeed warrant a second look if this litigation is to come to a reasonable denouement.
A discussion seriatim of said issues will further reveal that the sequence of the events
involved is in effect disputed. Likewise to be settled is whether or not the conclusions of the
Court of Appeals subject of this review indeed find evidentiary and legal support.
I. Petitioners fault respondent court for "not finding that private respondents failed to exercise
extraordinary diligence required by law which resulted in the switching and/or misdelivery of
the remains of Crispina Saludo to Mexico causing gross delay in its shipment to the
Philippines, and consequently, damages to petitioners." 17
Petitioner allege that private respondents received the casketed remains of petitioners'
mother on October 26, 1976, as evidenced by the issuance of PAL Air Waybill No. 079-
01180454 18 by Air Care International as carrier's agent; and from said date, private
respondents were charged with the responsibility to exercise extraordinary diligence so much
so that for the alleged switching of the caskets on October 27, 1976, or one day after private
respondents received the cargo, the latter must necessarily be liable.
To support their assertion, petitioners rely on the jurisprudential dictum, both under American
and Philippine law, that "(t)he issuance of a bill of lading carries the presumption that the
goods were delivered to the carrier issuing the bill, for immediate shipment, and it is nowhere
questioned that a bill of lading is prima facie evidence of the receipt of the goods by the
carrier. . . . In the absence of convincing testimony establishing mistake, recitals in the bill of
lading showing that the carrier received the goods for shipment on a specified date control
(13 C.J.S. 235)."19
A bill of lading is a written acknowledgment of the receipt of the goods and an agreement to
transport and deliver them at a specified place to a person named or on his order. Such
instrument may be called a shipping receipt, forwarder's receipt and receipt for
transportation. 20 The designation, however, is immaterial. It has been hold that freight
tickets for bus companies as well as receipts for cargo transported by all forms of
transportation, whether by sea or land, fall within the definition. Under the Tariff and Customs
Code, a bill of lading includes airway bills of lading. 21 The two-fold character of a bill of
lading is all too familiar; it is a receipt as to the quantity and description of the goods shipped
and a contract to transport the goods to the consignee or other person therein designated, on
the terms specified in such instrument. 22
Logically, since a bill of lading acknowledges receipt of goods to be transported, delivery of
the goods to the carrier normally precedes the issuance of the bill; or, to some extent,
delivery of the goods and issuance of the bill are regarded in commercial practice as
simultaneous acts. 23 However, except as may be prohibited by law, there is nothing to
prevent an inverse order of events, that is, the execution of the bill of lading even prior to
actual possession and control by the carrier of the cargo to be transported. There is no law
which requires that the delivery of the goods for carriage and the issuance of the covering bill
of lading must coincide in point of time or, for that matter, that the former should precede the
latter.
Ordinarily, a receipt is not essential to a complete delivery of goods to the carrier for
transportation but, when issued, is competent and prima facie, but not conclusive, evidence
of delivery to the carrier. A bill of lading, when properly executed and delivered to a shipper,
is evidence that the carrier has received the goods described therein for shipment. Except as
modified by statute, it is a general rule as to the parties to a contract of carriage of goods in
connection with which a bill of lading is issued reciting that goods have been received for
transportation, that the recital being in essence a receipt alone, is not conclusive, but may be
explained, varied or contradicted by parol or other evidence. 24
While we agree with petitioners' statement that "an airway bill estops the carrier from denying
receipt of goods of the quantity and quality described in the bill," a further reading and a more
faithful quotation of the authority cited would reveal that "(a) bill of lading may contain
constituent elements of estoppel and thus become something more than a contract between
the shipper and the carrier. . . . (However), as between the shipper and the carrier, when no
goods have been delivered for shipment no recitals in the bill can estop the carrier from
showing the true facts . . . Between the consignor of goods and receiving carrier, recitals in a
bill of lading as to the goods shipped raise only a rebuttable presumption that such goods
were delivered for shipment. As between the consignor and a receiving carrier, the fact must
outweigh the recital." 25 (Emphasis supplied)
For this reason, we must perforce allow explanation by private respondents why, despite the
issuance of the airway bill and the date thereof, they deny having received the remains of
Crispina Saludo on October 26, 1976 as alleged by petitioners.
The findings of the trial court, as favorably adopted by the Court of Appeals and which we
have earner quoted, provide us with the explanation that sufficiently over comes the
presumption relied on by petitioners in insisting that the remains of their mother were
delivered to and received by private respondents on October 26, 1976. Thus
. . . Philippine Vice Consul in Chicago, Illinois, Bienvenido M. Llaneta, at
3:00 p.m. on October 26, 1976 at the Pomierski & Son Funeral Home,
sealed the shipping case containing a hermetically sealed casket that is
airtight and waterproof wherein was contained the remains of Crispina
Saludo Galdo (sic) (Exh. B). On the same date October 26, 1976, Pomierski
brought the remains to C.M.A.S. (Continental Mortuary Air Services) at the
airport (Chicago) which made the necessary arrangements such as flights,
transfers, etc; C.M.A.S. is a national service used by undertakers throughout
the nation (U.S.A.), they furnish the air pouch which the casket is enclosed
in, and they see that the remains are taken to the proper air freight terminal
(Exh. G-TWA). C.M.A.S. booked the shipment with PAL thru the carrier's
agent Air Care International, with Pomierski F.H. as the shipper and Mario
(Maria) Saludo as the consignee. PAL Airway Bill No. 079- 01180454
Ordinary was issued wherein the requested routing was from Chicago to San
Francisco on board TWA Flight-131 of October 27;1976, and from San
Francisco to Manila on board PAL Flight No. 107 of the same date, and from
Manila to Cebu on board PAL Flight 149 of October 29, 1976 (See Exh. E,
also Exh. 1-PAL). 26(Emphasis ours.)
Moreover, we are persuaded to believe private respondent PAL's account as to what
transpired October 26, 1976:
. . . Pursuant thereto, on 26 October 1976, CMAS acting upon the instruction
of Pomierski, F.H., the shipper requested booking of the casketed remains of
Mrs. Cristina (sic) Saludo on board PAL's San Francisco-Manila Flight No.
PR 107 on October 27, 1976.
2. To signify acceptance and confirmation of said booking, PAL issued to
said Pomierski F.H., PAL Airway Bill No. 079-01180454 dated October 27,
1976 (sic, "10/26/76"). PAL confirmed the booking and transporting of the
shipment on board of its Flight PR 107 on October 27, 1976 on the basis of
the representation of the shipper and/or CMAS that the said cargo would
arrive in San Francisco from Chicago on board United Airlines Flight US 121
on 27 October 1976. 27
In other words, on October 26, 1976 the cargo containing the casketed remains of Crispina
Saludo was booked for PAL Flight Number PR-107 leaving San Francisco for Manila on
October 27, 1976, PAL Airway Bill No. 079-01180454 was issued, not as evidence of receipt
of delivery of the cargo on October 26, 1976, but merely as a confirmation of the booking
thus made for the San Francisco-Manila flight scheduled on October 27, 1976. Actually, it
was not until October 28, 1976 that PAL received physical delivery of the body at San
Francisco, as duly evidenced by the Interline Freight Transfer Manifest of the American
Airline Freight System and signed for by Virgilio Rosales at 1945H, or 7:45 P.M. on said
date. 28
Explicit is the rule under Article 1736 of the Civil Code that the extraordinary responsibility of
the common carrier begins from the time the goods are delivered to the carrier. This
responsibility remains in full force and effect even when they are temporarily unloaded or
stored in transit, unless the shipper or owner exercises the right of stoppage in
transitu, 29 and terminates only after the lapse of a reasonable time for the acceptance, of
the goods by the consignee or such other person entitled to receive them. 30 And, there is
delivery to the carrier when the goods are ready for and have been placed in the exclusive
possession, custody and control of the carrier for the purpose of their immediate
transportation and the carrier has accepted them. 31 Where such a delivery has thus been
accepted by the carrier, the liability of the common carrier commences eo instanti. 32
Hence, while we agree with petitioners that the extraordinary diligence statutorily required to
be observed by the carrier instantaneously commences upon delivery of the goods thereto,
for such duty to commence there must in fact have been delivery of the cargo subject of the
contract of carriage. Only when such fact of delivery has been unequivocally established can
the liability for loss, destruction or deterioration of goods in the custody of the carrier, absent
the excepting causes under Article 1734, attach and the presumption of fault of the carrier
under Article 1735 be invoked.
As already demonstrated, the facts in the case at bar belie the averment that there was
delivery of the cargo to the carrier on October 26, 1976. Rather, as earlier explained, the
body intended to be shipped as agreed upon was really placed in the possession and control
of PAL on October 28, 1976 and it was from that date that private respondents became
responsible for the agreed cargo under their undertakings in PAL Airway Bill No. 079-
01180454. Consequently, for the switching of caskets prior thereto which was not caused by
them, and subsequent events caused thereby, private respondents cannot be held liable.
Petitioners, proceeding on the premise that there was delivery of the cargo to private
respondents on October 26,1976 and that the latter's extraordinary responsibility had by then
become operative, insist on foisting the blame on private respondents for the switching of the
two caskets which occurred on October 27, 1976. It is argued that since there is no clear
evidence establishing the fault Continental Mortuary Air Services (CMAS) for the mix-up,
private respondents are presumably negligent pursuant to Article 1735 of the Civil Code and,
for failure to rebut such presumption, they must necessarily be held liable; or, assuming that
CMAS was at fault, the same does not absolve private respondents of liability because
whoever brought the cargo to the airport or loaded it on the plane did so as agent of private
respondents.
This contention is without merit. As pithily explained by the Court of Appeals:
The airway bill expressly provides that "Carrier certifies goods described
below were received for carriage", and said cargo was "casketed human
remains of Crispina Saludo," with "Maria Saludo as Consignee; Pomierski
F.H. as Shipper; Air Care International as carrier's agent." On the face of the
said airway bill, the specific flight numbers, specific routes of shipment and
dates of departure and arrival were typewritten, to wit: Chicago TWA Flight
131/27 to San Francisco and from San Francisco by PAL 107 on, October
27, 1976 to Philippines and to Cebu via PAL Flight 149 on October 29, 1976.
The airway bill also contains the following typewritten words, as follows: all
documents have been examined (sic). Human remains of Crispina Saludo.
Please return back (sic) first available flight to SFO.
But, as it turned out and was discovered later the casketed human remains
which was issued PAL Airway Bill #079-1180454 was not the remains of
Crispina Saludo, the casket containing her remains having been shipped to
Mexico City.
However, it should be noted that, Pomierski F.H., the shipper of Mrs.
Saludo's remains, hired Continental Mortuary Services (hereafter referred to
as C.M.A.S.), which is engaged in the business of transporting and
forwarding human remains. Thus, C.M.A.S. made all the necessary
arrangements such as flights, transfers, etc. for shipment of the remains
of Crispina Saludo.
The remains were taken on October 26th, 1976, to C.M.A.S.
at the airport. These people made all the necessary
arrangements, such as flights, transfers, etc. This is a
national service used by undertakers throughout the nation.
They furnished the air pouch which the casket is enclosed
in, and they see that the remains are taken to the proper air
frieght terminal. I was very surprised when Miss Saludo
called me to say that the remains were not at the west coast
terminal. I immediately called C.M.A.S. They called me back
in a matter of ten minutes to inform me that the remains
were on a plane to Mexico City. The man said that there
were two bodies at the terminal, and somehow they were
switched. . . . (Exb. 6 "TWA", which is the memo or
incident report enclosed in the stationery of Walter
Pomierski & Sons Ltd.)
Consequently, when the cargo was received from C.M.A.S. at the Chicago
airport terminal for shipment, which was supposed to contain the remains of
Crispina Saludo, Air Care International and/or TWA, had no way of
determining its actual contents, since the casket was hermetically sealed by
the Philippine Vice-Consul in Chicago and in an air pouch of C.M.A.S., to the
effect that Air Care International and/or TWA had to rely on the information
furnished by the shipper regarding the cargo's content. Neither could Air
Care International and/or TWA open the casket for further verification, since
they were not only without authority to do so, but even prohibited.
Thus, under said circumstances, no fault and/or negligence can be attributed
to PAL (even if Air Care International should be considered as an agent of
PAL) and/or TWA, the entire fault or negligence being exclusively with
C.M.A.S. 33 (Emphasis supplied.)
It can correctly and logically be concluded, therefore, that the switching occurred or, more
accurately, was discovered on October 27, 1976; and based on the above findings of the
Court of appeals, it happened while the cargo was still with CMAS, well before the same was
place in the custody of private respondents.
Thus, while the Air Cargo Transfer Manifest of TWA of October 27, 1976 34 was signed by
Garry Marcial of PAL at 1400H, or 2:00 P.M., on the same date, thereby indicating
acknowledgment by PAL of the transfer to them by TWA of what was in truth the erroneous
cargo, said misshipped cargo was in fact withdrawn by CMAS from PAL as shown by the
notation on another copy of said manifest 35 stating "Received by CMAS Due to switch in
Chicago 10/27-1805H," the authenticity of which was never challenged. This shows that said
misshipped cargo was in fact withdrawn by CMAS from PAL and the correct shipment
containing the body of Crispina Saludo was received by PAL only on October 28, 1976, at
1945H, or 7:45 P.M., per American Airlines Interline Freight Transfer Manifest No.
AA204312. 36
Witness the deposition of TWA's ramp serviceman, Michael Giosso, on this matter:
ATTY. JUAN COLLAS, JR.:
On that date, do (sic) you have occasion to handle or deal
with the transfer of cargo from TWA Flight No. 603 to PAL
San Francisco?
MICHAEL GIOSSO:
Yes, I did.
ATTY. JUAN COLLAS, JR.:
What was your participation with the transfer of the cargo?
MICHAEL GIOSSO:
I manifested the freight on a transfer manifest and physically
moved it to PAL and concluded the transfer by signing it off.
ATTY. JUAN COLLAS, JR.:
You brought it there yourself?
MICHAEL GIOSSO:
Yes sir.
ATTY. JUAN COLIAS, JR.:
Do you have anything to show that PAL received the cargo
from TWA on October 27, 1976?
MICHAEL GIOSSO:
Yes, I do.
(Witness presenting a document)
ATTY. JUAN COLLAS, JR.:
For purposes of clarity, Exhibit I is designated as Exhibit I-
TWA.
xxx xxx xxx
ATTY. JUAN COLLAS, JR.:
This Exhibit I-TWA, could you tell what it is, what it shows?
MICHAEL GIOSSO:
It shows transfer of manifest on 10-27-76 to PAL at 1400
and verified with two signatures as it completed the transfer.
ATTY. JUAN COLLAS, JR.:
Very good,. Who was the PAL employee who received the
cargo?
MICHAEL GIOSSO:
The name is Garry Marcial." 37
The deposition of Alberto A. Lim, PAL's cargo supervisor at San Francisco, as deponent-
witness for PAL, makes this further clarification:
ATTY. CESAR P. MANALAYSAY:
You mentioned Airway Bill, Mr. Lim. I am showing to you a
PAL Airway Bill Number 01180454 which for purposes of
evidence, I would like to request that the same be marked
as evidence Exhibit I for PAL.
xxx xxx xxx
In what circumstances did you encounter Exhibit I-PAL?
ALBERTO A. LIM:
If I recall correctly, I was queried by Manila, our Manila
office with regard to a certain complaint that a consignee
filed that this shipment did not arrive on the day that the
consignee expects the shipment to arrive.
ATTY CESAR P. MANALAYSAY:
Okay. Now, upon receipt of that query from your Manila
office, did you conduct any investigation to pinpoint the
possible causes of mishandling?
ALBERTO A. LIM:
Yes.
xxx xxx xxx
ATTY. CESAR P. MANALAYSAY:
What is the result of your investigation?
ALBERTO A. LIM:
In the course of my investigation, I found that we received
the body on October 28, 1976, from American Airlines.
ATTY. CESAR P. MANALAYSAY:
What body are you referring to?
xxx xxx xxx
ALBERTO A. LIM:
The remains of Mrs. Cristina (sic) Saludo.
ATTY. CESAR P. MANALAYSAY:
Is that the same body mentioned in this Airway Bill?
ALBERTO A. LIM:
Yes.
ATTY. CESAR P. MANALAYSAY:
What time did you receive said body on October 28, 1976?
ALBERTO A. LIM:
If I recall correctly, approximately 7:45 of October 28, 1976.
ATTY. CESAR P. MANALAYSAY:
Do you have any proof with you to back the statement?
ALBERTO A. LIM:
Yes. We have on our records a Transfer Manifest from
American Airlines Number 204312 showing that we
received a human remains shipment belong to Mrs. Cristina
(sic) Saludo or the human remains of Mrs. Cristina (sic)
Saludo.
ATTY. CESAR P. MAIALAYSAY:
At this juncture, may I request that the Transfer Manifest
referred to by the witness be marked as an evidence as
Exhibit II-PAL.
xxx xxx xxx
Mr. Lim, yesterday your co-defendant TWA presented as
their Exhibit I evidence tending to show that on October 27,
1976 at about 2:00 in the, afternoon they delivered to you a
cargo bearing human remains. Could you go over this
Exhibit I and please give us your comments as to that
exhibit?
ATTY. ALBERTO C. MENDOZA:
That is a vague question. I would rather request that
counsel propound specific questions rather than asking for
comments on Exhibit I-TWA.
ATTY. CESAR P. MANALAYSAY:
In that case, I will reform my question. Could you tell us
whether TWA in fact delivered to you the human remains as
indicated in that Transfer Manifest?
ALBERTO A. LIM:
Yes, they did.
ATTY. CESAR P. MANALAYSAY:
I noticed that the Transfer Manifest of TWA marked as
Exhibit I-TWA bears the same numbers or the same entries
as the Airway Bill marked as Exhibit I-A PAL tending to
show that this is the human remains of Mrs Cristina (sic)
Saludo. Could you tell us whether this is true?
ALBERTO A. LIM:
It is true that we received human remains shipment from
TWA as indicated on this Transfer Manifest. But in the
course of investigation, it was found out that the human
remains transferred to us is not the remains of Mrs. Cristina
(sic) Saludo this is the reason why we did not board it on
our flight. 38
Petitioners consider TWA's statement that "it had to rely on the information furnished by the
shipper" a lame excuse and that its failure to prove that its personnel verified and identified
the contents of the casket before loading the same constituted negligence on the part of
TWA. 39
We upbold the favorable consideration by the Court of Appeals of the following findings of the
trial court:
It was not (to) TWA, but to C.M.A.S. that the Pomierski & Son Funeral Home
delivered the casket containing the remains of Crispina Saludo. TWA would
have no knowledge therefore that the remains of Crispina Saludo were not
the ones inside the casket that was being presented to it for shipment. TWA
would have to rely on there presentations of C.M.A.S. The casket was
hermetically sealed and also sealed by the Philippine Vice Consul in
Chicago. TWA or any airline for that matter would not have opened such a
sealed casket just for the purpose of ascertaining whose body was inside
and to make sure that the remains inside were those of the particular person
indicated to be by C.M.A.S. TWA had to accept whatever information was
being furnished by the shipper or by the one presenting the casket for
shipment. And so as a matter of fact, TWA carried to San Francisco and
transferred to defendant PAL a shipment covered by or under PAL Airway
Bill No. 079-ORD-01180454, the airway bill for the shipment of the casketed
remains of Crispina Saludo. Only, it turned out later, while the casket was
already with PAL, that what was inside the casket was not the body of
Crispina Saludo so much so that it had to be withdrawn by C.M.A.S. from
PAL. The body of Crispina Saludo had been shipped to Mexico. The casket
containing the remains of Crispina Saludo was transshipped from Mexico
and arrived in San Francisco the following day on board American Airlines. It
was immediately loaded by PAL on its flight for Manila.
The foregoing points at C.M.A.S., not defendant TWA much less defendant
PAL, as the ONE responsible for the switching or mix-up of the two bodies at
the Chicago Airport terminal, and started a chain reaction of the misshipment
of the body of Crispina Saludo and a one-day delay in the delivery thereof to
its destination. 40
Verily, no amount of inspection by respondent airline companies could have guarded against
the switching that had already taken place. Or, granting that they could have opened the
casket to inspect its contents, private respondents had no means of ascertaining whether the
body therein contained was indeed that of Crispina Saludo except, possibly, if the body was
that of a male person and such fact was visually apparent upon opening the casket.
However, to repeat, private respondents had no authority to unseal and open the same nor
did they have any reason or justification to resort thereto.
It is the right of the carrier to require good faith on the part of those persons who deliver
goods to be carried, or enter into contracts with it, and inasmuch as the freight may depend
on the value of the article to be carried, the carrier ordinarily has the right to inquire as to its
value. Ordinarily, too, it is the duty of the carrier to make inquiry as to the general nature of
the articles shipped and of their value before it consents to carry them; and its failure to do so
cannot defeat the shipper's right to recovery of the full value of the package if lost, in the
absence of showing of fraud or deceit on the part of the shipper. In the absence of more
definite information, the carrier has a the right to accept shipper's marks as to the contents of
the package offered for transportation and is not bound to inquire particularly about them in
order to take advantage of a false classification and where a shipper expressly represents
the contents of a package to be of a designated character, it is not the duty of the carrier to
ask for a repetition of the statement nor disbelieve it and open the box and see for
itself. 41 However, where a common carrier has reasonable ground to suspect that the
offered goods are of a dangerous or illegal character, the carrier has the right to know the
character of such goods and to insist on an inspection, if reasonable and practical under the
circumstances, as a condition of receiving and transporting such goods. 42
It can safely be said then that a common carrier is entitled to fair representation of the nature
and value of the goods to be carried, with the concomitant right to rely thereon, and further
noting at this juncture that a carrier has no obligation to inquire into the correctness or
sufficiency of such information. 43 The consequent duty to conduct an inspection thereof
arises in the event that there should be reason to doubt the veracity of such representations.
Therefore, to be subjected to unusual search, other than the routinary inspection procedure
customarily undertaken, there must exist proof that would justify cause for apprehension that
the baggage is dangerous as to warrant exhaustive inspection, or even refusal to accept
carriage of the same; and it is the failure of the carrier to act accordingly in the face of such
proof that constitutes the basis of the common carrier's liability. 44
In the case at bar, private respondents had no reason whatsoever to doubt the truth of the
shipper's representations. The airway bill expressly providing that "carrier certifies goods
received below were received for carriage," and that the cargo contained "casketed human
remains of Crispina Saludo," was issued on the basis of such representations. The reliance
thereon by private respondents was reasonable and, for so doing, they cannot be said to
have acted negligently. Likewise, no evidence was adduced to suggest even an iota of
suspicion that the cargo presented for transportation was anything other than what it was
declared to be, as would require more than routine inspection or call for the carrier to insist
that the same be opened for scrutiny of its contents per declaration.
Neither can private respondents be held accountable on the basis of petitioners'
preposterous proposition that whoever brought the cargo to the airport or loaded it on the
airplane did so as agent of private respondents, so that even if CMAS whose services were
engaged for the transit arrangements for the remains was indeed at fault, the liability therefor
would supposedly still be attributable to private respondents.
While we agree that the actual participation of CMAS has been sufficiently and correctly
established, to hold that it acted as agent for private respondents would be both an
inaccurate appraisal and an unwarranted categorization of the legal position it held in the
entire transaction.
It bears repeating that CMAS was hired to handle all the necessary shipping arrangements
for the transportation of the human remains of Crispina Saludo to Manila. Hence, it was to
CMAS that the Pomierski & Son Funeral Home, as shipper, brought the remains of
petitioners' mother for shipment, with Maria Saludo as consignee. Thereafter, CMAS booked
the shipment with PAL through the carrier's agent, Air Care International. 45 With its
aforestated functions, CMAS may accordingly be classified as a forwarder which, by
accepted commercial practice, is regarded as an agent of the shipper and not of the carrier.
As such, it merely contracts for the transportation of goods by carriers, and has no interest in
the freight but receives compensation from the shipper as his agent. 46
At this point, it can be categorically stated that, as culled from the findings of both the trial
court and appellate courts, the entire chain of events which culminated in the present
controversy was not due to the fault or negligence of private respondents. Rather, the facts of
the case would point to CMAS as the culprit. Equally telling of the more likely possibility of
CMAS' liability is petitioners' letter to and demanding an explanation from CMAS regarding
the statement of private respondents laying the blame on CMAS for the incident, portions of
which, reading as follows:
. . . we were informed that the unfortunate a mix-up occurred due to your
negligence. . . .
Likewise, the two airlines pinpoint the responsibility upon your agents.
Evidence were presented to prove that allegation.
On the face of this overwhelming evidence we could and should have filed a
case against you. . . . 47
clearly allude to CMAS as the party at fault. This is tantamount to an admission by petitioners
that they consider private respondents without fault, or is at the very least indicative of the
fact that petitioners entertained serious doubts as to whether herein private respondents
were responsible for the unfortunate turn of events.
Undeniably, petitioners' grief over the death of their mother was aggravated by the
unnecessary inconvenience and anxiety that attended their efforts to bring her body home for
a decent burial. This is unfortunate and calls for sincere commiseration with petitioners. But,
much as we would like to give them consolation for their undeserved distress, we are barred
by the inequity of allowing recovery of the damages prayed for by them at the expense of
private respondents whose fault or negligence in the very acts imputed to them has not been
convincingly and legally demonstrated.
Neither are we prepared to delve into, much less definitively rule on, the possible liability of
CMAS as the evaluation and adjudication of the same is not what is presently at issue here
and is best deferred to another time and addressed to another forum.
II. Petitioners further fault the Court of Appeals for ruling that there was no contractual breach
on the part of private respondents as would entitle petitioners to damages.
Petitioners hold that respondent TWA, by agreeing to transport the remains of petitioners'
mother on its Flight 131 from Chicago to San Francisco on October 27, 1976, made itself a
party to the contract of carriage and, therefore, was bound by the terms of the issued airway
bill. When TWA undertook to ship the remains on its Flight 603, ten hours earlier than
scheduled, it supposedly violated the express agreement embodied in the airway bill. It was
allegedly this breach of obligation which compounded, if not directly caused, the switching of
the caskets.
In addition, petitioners maintain that since there is no evidence as to who placed the body on
board Flight 603, or that CMAS actually put the cargo on that flight, or that the two caskets at
the Chicago airport were to be transported by the same airline, or that they came from the
same funeral home, or that both caskets were received by CMAS, then the employees or
agents of TWA presumably caused the mix-up by loading the wrong casket on the plane. For
said error, they contend, TWA must necessarily be presumed negligent and this presumption
of negligence stands undisturbed unless rebutting evidence is presented to show that the
switching or misdelivery was due to circumstances that would exempt the carrier from
liability.
Private respondent TWA professes otherwise. Having duly delivered or transferred the cargo
to its co-respondent PAL on October 27, 1976 at 2:00 P.M., as supported by the TWA
Transfer Manifest, TWA faithfully complied with its obligation under the airway bill. Said
faithful compliance was not affected by the fact that the remains were shipped on an earlier
flight as there was no fixed time for completion of carriage stipulated on. Moreover, the
carrier did not undertake to carry the cargo aboard any specified aircraft, in view of the
condition on the back of the airway bill which provides:
CONDITIONS OF CONTRACT
xxx xxx xxx
It is agreed that no time is fixed for the completion of carriage hereunder and
that Carrier may without notice substitute alternate carriers or aircraft. Carrier
assumes no obligation to carry the goods by any specified aircraft or over
any particular route or routes or to make connection at any point according
to any particular schedule, and Carrier is hereby authorized to select, or
deviate from the route or routes of shipment, notwithstanding that the same
may be stated on the face hereof. The shipper guarantees payment of all
charges and advances. 48
Hence, when respondent TWA shipped the body on earlier flight and on a different aircraft, it
was acting well within its rights. We find this argument tenable.
The contention that there was contractual breach on the part of private respondents is
founded on the postulation that there was ambiguity in the terms of the airway bill, hence
petitioners' insistence on the application of the rules on interpretation of contracts and
documents. We find no such ambiguity. The terms are clear enough as to preclude the
necessity to probe beyond the apparent intendment of the contractual provisions.
The hornbook rule on interpretation of contracts consecrates the primacy of the intention of
the parties, the same having the force of law between them. When the terms of the
agreement are clear and explicit, that they do not justify an attempt to read into any alleged
intention of the parties, the terms are to be understood literally just as they appear on the
face of the contract. 49 The various stipulations of a contract shall be interpreted
together 50 and such a construction is to be adopted as will give effect to all provisions
thereof. 51 A contract cannot be construed by parts, but its clauses should be interpreted in
relation to one another. The whole contract must be interpreted or read together in order to
arrive at its true meaning. Certain stipulations cannot be segregated and then made to
control; neither do particular words or phrases necessarily determine the character of a
contract. The legal effect of the contract is not to be determined alone by any particular
provision disconnected from all others, but in the ruling intention of the parties as gathered
from all the language they have used and from their contemporaneous and subsequent
acts. 52
Turning to the terms of the contract at hand, as presented by PAL Air Waybill No. 079-
01180454, respondent court approvingly quoted the trial court's disquisition on the
aforequoted condition appearing on the reverse side of the airway bill and its disposition of
this particular assigned error:
The foregoing stipulation fully answers plaintiffs' objections to the one-day
delay and the shipping of the remains in TWA Flight 603 instead of TWA
Flight 131. Under the stipulation, parties agreed that no time was fixed to
complete the contract of carriage and that the carrier may, without notice,
substitute alternate carriers or aircraft. The carrier did not assume the
obligation to carry the shipment on any specified aircraft.
xxx xxx xxx
Furthermore, contrary to the claim of plaintiffs-appellants, the conditions of
the Air Waybill are big enough to be read and noticed. Also, the mere fact
that the cargo in question was shipped in TWA Flight 603, a flight earlier on
the same day than TWA Flight 131, did not in any way cause or add to the
one-day delay complained of and/or the switching or mix-up of the
bodies. 53
Indubitably, that private respondent can use substitute aircraft even without notice and
without the assumption of any obligation whatsoever to carry the goods on any specified
aircraft is clearly sanctioned by the contract of carriage as specifically provided for under the
conditions thereof.
Petitioners' invocation of the interpretative rule in the Rules of Court that written words control
printed words in documents, 54 to bolster their assertion that the typewritten provisions
regarding the routing and flight schedule prevail over the printed conditions, is tenuous. Said
rule may be considered only when there is inconsistency between the written and printed
words of the contract.
As previously stated, we find no ambiguity in the contract subject of this case that would call
for the application of said rule. In any event, the contract has provided for such a situation by
explicitly stating that the above condition remains effective "notwithstanding that the same
(fixed time for completion of carriage, specified aircraft, or any particular route or schedule)
may be stated on the face hereof." While petitioners hinge private respondents' culpability on
the fact that the carrier "certifies goods described below were received for carriage," they
may have overlooked that the statement on the face of the airway bill properly and
completely reads
Carrier certifies goods described below were received for carriage subject to
the Conditions on the reverse hereof the goods then being in apparent good
order and condition except as noted hereon.55 (Emphasis ours.)
Private respondents further aptly observe that the carrier's certification regarding receipt of
the goods for carriage "was of a smaller print than the condition of the Air Waybill, including
Condition No. 5 and thus if plaintiffs-appellants had recognized the former, then with more
reason they were aware of the latter. 56
In the same vein, it would also be incorrect to accede to the suggestion of petitioners that the
typewritten specifications of the flight, routes and dates of departures and arrivals on the face
of the airway bill constitute a special contract which modifies the printed conditions at the
back thereof. We reiterate that typewritten provisions of the contract are to be read and
understood subject to and in view of the printed conditions, fully reconciling and giving effect
to the manifest intention of the parties to the agreement.
The oft-repeated rule regarding a carrier's liability for delay is that in the absence of a special
contract, a carrier is not an insurer against delay in transportation of goods. When a common
carrier undertakes to convey goods, the law implies a contract that they shall be delivered at
destination within a reasonable time, in the absence, of any agreement as to the time of
delivery. 57 But where a carrier has made an express contract to transport and deliver
property within a specified time, it is bound to fulfill its contract and is liable for any delay, no
matter from what cause it may have arisen. 58 This result logically follows from the well-
settled rule that where the law creates a duty or charge, and the party is disabled from
performing it without any default in himself, and has no remedy over, then the law will excuse
him, but where the party by his own contract creates a duty or charge upon himself, he is
bound to make it good notwithstanding any accident or delay by inevitable necessity because
he might have provided against it by contract. Whether or not there has been such an
undertaking on the part of the carrier to be determined from the circumstances surrounding
the case and by application of the ordinary rules for the interpretation of contracts. 59
Echoing the findings of the trial court, the respondent court correctly declared that
In a similar case of delayed delivery of air cargo under a very similar
stipulation contained in the airway bill which reads: "The carrier does not
obligate itself to carry the goods by any specified aircraft or on a specified
time. Said carrier being hereby authorized to deviate from the route of the
shipment without any liability therefor", our Supreme Court ruled that
common carriers are not obligated by law to carry and to deliver
merchandise, and persons are not vested with the right to prompt delivery,
unless such common carriers previously assume the obligation. Said rights
and obligations are created by a specific contract entered into by the parties
(Mendoza vs. PAL, 90 Phil. 836).
There is no showing by plaintiffs that such a special or specific contract had
been entered into between them and the defendant airline companies.
And this special contract for prompt delivery should call the attention of the
carrier to the circumstances surrounding the case and the approximate
amount of damages to be suffered in case of delay (See Mendoza vs.
PAL, supra). There was no such contract entered into in the instant case.60
Also, the theory of petitioners that the specification of the flights and dates of departure and
arrivals constitute a special contract that could prevail over the printed stipulations at the
back of the airway bill is vacuous. To countenance such a postulate would unduly burden the
common carrier for that would have the effect of unilaterally transforming every single bill of
lading or trip ticket into a special contract by the simple expedient of filling it up with the
particulars of the flight, trip or voyage, and thereby imposing upon the carrier duties and/or
obligations which it may not have been ready or willing to assume had it been timely, advised
thereof.
Neither does the fact that the challenged condition No. 5 was printed at the back of the
airway bill militate against its binding effect on petitioners as parties to the contract, for there
were sufficient indications on the face of said bill that would alert them to the presence of
such additional condition to put them on their guard. Ordinary prudence on the part of any
person entering or contemplating to enter into a contract would prompt even a cursory
examination of any such conditions, terms and/or stipulations.
There is a holding in most jurisdictions that the acceptance of a bill of lading without dissent
raises a presumption that all terms therein were brought to the knowledge of the shipper and
agreed to by him, and in the absence of fraud or mistake, he is estopped from thereafter
denying that he assented to such terms. This rule applies with particular force where a
shipper accepts a bill of lading with full knowledge of its contents, and acceptance under
such circumstances makes it a binding contract. In order that any presumption of assent to a
stipulation in a bill of lading limiting the liability of a carrier may arise, it must appear that the
clause containing this exemption from liability plainly formed a part of the contract contained
in the bill of lading. A stipulation printed on the back of a receipt or bill of lading or on papers
attached to such receipt will be quite as effective as if printed on its face, if it is shown that
the consignor knew of its terms. Thus, where a shipper accepts a receipt which states that its
conditions are to be found on the back, such receipt comes within the general rule, and the
shipper is held to have accepted and to be bound by the conditions there to be found. 61
Granting arguendo that Condition No. 5 partakes of the nature of a contract of adhesion and
as such must be construed strictly against the party who drafted the same or gave rise to any
ambiguity therein, it should be borne in mind that a contract of adhesion may be struck down
as void and unenforceable, for being subversive of public policy, only when the weaker party
is imposed upon in dealing with the dominant bargaining party and is reduced to the
alternative of taking it or leaving it, completely deprived of the opportunity to bargain on equal
footing. 62However, Ong Yiu vs. Court of Appeals, et al 63 instructs us that contracts of
adhesion are not entirely prohibited. The one who adheres to the contract is in reality free to
reject it entirely; if he adheres, be gives his consent. Accordingly, petitioners, far from being
the weaker party in this situation, duly signified their presumed assent to all terms of the
contract through their acceptance of the airway bill and are consequently bound thereby. It
cannot be gainsaid that petitioners' were not without several choices as to carriers in Chicago
with its numerous airways and airliner servicing the same.
We wish to allay petitioners' apprehension that Condition No. 5 of the airway bill is productive
of mischief as it would validate delay in delivery, sanction violations of contractual obligations
with impunity or put a premium on breaches of contract.
Just because we have said that condition No. 5 of the airway bill is binding upon the parties
to and fully operative in this transaction, it does not mean, and let this serve as fair warning to
respondent carriers, that they can at all times whimsically seek refuge from liability in the
exculpatory sanctuary of said Condition No. 5 or arbitrarily vary routes, flights and schedules
to the prejudice of their customers. This condition only serves to insulate the carrier from
liability in those instances when changes in routes, flights and schedules are clearly justified
by the peculiar circumstances of a particular case, or by general transportation practices,
customs and usages, or by contingencies or emergencies in aviation such as weather
turbulence, mechanical failure, requirements of national security and the like. And even as it
is conceded that specific routing and other navigational arrangements for a trip, flight or
voyage, or variations therein, generally lie within the discretion of the carrier in the absence of
specific routing instructions or directions by the shipper, it is plainly incumbent upon the
carrier to exercise its rights with due deference to the rights, interests and convenience of its
customers.
A common carrier undertaking to transport property has the implicit duty to carry and deliver it
within reasonable time, absent any particular stipulation regarding time of delivery, and to
guard against delay. In case of any unreasonable delay, the carrier shall be liable for
damages immediately and proximately resulting from such neglect of duty. 64 As found by
the trial court, the delay in the delivery of the remains of Crispina Saludo, undeniable and
regrettable as it was, cannot be attributed to the fault, negligence or malice of private
respondents, 65 a conclusion concurred in by respondent court and which we are not inclined
to disturb.
We are further convinced that when TWA opted to ship the remains of Crispina Saludo on an
earlier flight, it did so in the exercise of sound discretion and with reasonable prudence, as
shown by the explanation of its counsel in his letter of February 19, 1977 in response to
petitioners' demand letter:
Investigation of TWA's handling of this matter reveals that although the
shipment was scheduled on TWA Flight 131 of October 27, 1976, it was
actually boarded on TWA Flight 603 of the same day, approximately 10
hours earlier, in order to assure that the shipment would be received in San
Francisco in sufficient time for transfer to PAL. This transfer was effected in
San Francisco at 2:00 P.M. on October 27, 1976. 66
Precisely, private respondent TWA knew of the urgency of the shipment by reason of this
notation on the lower portion of the airway bill: "All documents have been certified. Human
remains of Cristina (sic) Saludo. Please return bag first available flight to SFO." Accordingly,
TWA took it upon itself to carry the remains of Crispina Saludo on an earlier flight, which we
emphasize it could do under the terms of the airway bill, to make sure that there would be
enough time for loading said remains on the transfer flight on board PAL.
III. Petitioners challenge the validity of respondent court's finding that private respondents are
not liable for tort on account of the humiliating, arrogant and indifferent acts of their officers
and personnel. They posit that since their mother's remains were transported ten hours
earlier than originally scheduled, there was no reason for private respondents' personnel to
disclaim knowledge of the arrival or whereabouts of the same other than their sheer
arrogance, indifference and extreme insensitivity to the feelings of petitioners. Moreover,
being passengers and not merely consignors of goods, petitioners had the right to be treated
with courtesy, respect, kindness and due consideration.
In riposte, TWA claims that its employees have always dealt politely with all clients,
customers and the public in general. PAL, on the other hand, declares that in the
performance of its obligation to the riding public, other customers and clients, it has always
acted with justice, honesty, courtesy and good faith.
Respondent appellate court found merit in and reproduced the trial court's refutation of this
assigned error:
About the only evidence of plaintiffs that may have reference to the manner
with which the personnel of defendants treated the two plaintiffs at the San
Francisco Airport are the following pertinent portions of Maria Saludo's
testimony:
Q When you arrived there, what did you do, if any?
A I immediately went to the TWA counter and I inquired
about whether my mother was there or if' they knew
anything about it.
Q What was the answer?
A They said they do not know. So, we waited.
Q About what time was that when you reached San
Francisco from Chicago?
A I think 5 o'clock. Somewhere around that in the afternoon.
Q You made inquiry it was immediately thereafter?
A Right after we got off the plane.
Q Up to what time did you stay in the airport to wait until the
TWA people could tell you the whereabouts?
A Sorry, Sir, but the TWA did not tell us anything. We
stayed there until about 9 o'clock. They have not heard
anything about it. They did not say anything.
Q Do you want to convey to the Court that from 5 up to 9
o'clock in the evening you yourself went back to the TWA
and they could not tell you where the remains of your
mother were?
A Yes sir.
Q And after nine o'clock, what did you do?
A I told my brother my Mom was supposed to be on the
Philippine Airlines flight. "Why don't" we check with PAL
instead to see if she was there?" We tried to comfort each
other. I told him anyway that was a shortest flight from
Chicago to California. We will be with our mother on this
longer flight. So, we checked with the PAL.
Q What did you find?
A We learned, Yes, my Mom would be on the flight.
Q Who was that brother?
A Saturnino Saludo.
Q And did you find what was your flight from San Francisco
to the Philippines?
A I do not know the number. It was the evening flight of the
Philippine Airline(s) from San Francisco to Manila.
Q You took that flight with your mother?
A We were scheduled to, Sir.
Q Now, you could not locate the remains of your mother in
San Francisco could you tell us what did you feel?
A After we were told that my mother was not there?
Q After you learned that your mother could not fly with you
from Chicago to California?
A Well, I was very upset. Of course, I wanted the
confirmation that my mother was in the West Coast. The
fliqht was about 5 hours from Chicago to California. We
waited anxiously all that time on the plane. I wanted to be
assured about my mother's remains. But there was nothing
and we could not get any assurance from anyone about it.
Q Your feeling when you reached San Francisco and you
could not find out from the TWA the whereabouts of the
remains, what did you feel?
A Something nobody would be able to describe unless he
experiences it himself. It is a kind of panic. I think it's a
feeling you are about to go crazy. It is something I do not
want to live through again. (Inting, t.s.n., Aug. 9, 1983, pp.
14-18).
The foregoing does not show any humiliating or arrogant manner with which
the personnel of both defendants treated the two plaintiffs. Even their
alleged indifference is not clearly established. The initial answer of the TWA
personnel at the counter that they did not know anything about the remains,
and later, their answer that they have not heard anything about the remains,
and the inability of the TWA counter personnel to inform the two plaintiffs of
the whereabouts of the remains, cannot be said to be total or complete
indifference to the said plaintiffs. At any rate, it is any rude or discourteous
conduct, malfeasance or neglect, the use of abusive or insulting language
calculated to humiliate and shame passenger or had faith by or on the part
of the employees of the carrier that gives the passenger an action for
damages against the carrier (Zulueta vs. Pan American World Airways, 43
SCRA 397; Air France vs. Carrascoso, et al., 18 SCRA 155; Lopez, et al. vs.
Pan American World Airways, 16 SCRA 431; Northwest Airlines, Inc. vs.
Cuenca, 14 SCRA 1063), and none of the above is obtaining in the instant
case. 67
We stand by respondent court's findings on this point, but only to the extent where it holds
that the manner in which private respondent TWA's employees dealt with petitioners was not
grossly humiliating, arrogant or indifferent as would assume the proportions of malice or bad
faith and lay the basis for an award of the damages claimed. It must however, be pointed out
that the lamentable actuations of respondent TWA's employees leave much to be desired,
particularly so in the face of petitioners' grief over the death of their mother, exacerbated by
the tension and anxiety wrought by the impasse and confusion over the failure to ascertain
over an appreciable period of time what happened to her remains.
Airline companies are hereby sternly admonished that it is their duty not only to cursorily
instruct but to strictly require their personnel to be more accommodating towards customers,
passengers and the general public. After all, common carriers such as airline companies are
in the business of rendering public service, which is the primary reason for their
enfranchisement and recognition in our law. Because the passengers in a contract of
carriage do not contract merely for transportation, they have a right to be treated with
kindness, respect, courtesy and consideration. 68 A contract to transport passengers is quite
different in kind and degree from any other contractual relation, and generates a relation
attended with public duty. The operation of a common carrier is a business affected with
public interest and must be directed to serve the comfort and convenience of
passengers. 69 Passengers are human beings with human feelings and emotions; they
should not be treated as mere numbers or statistics for revenue.
The records reveal that petitioners, particularly Maria and Saturnino Saludo, agonized for
nearly five hours, over the possibility of losing their mother's mortal remains, unattended to
and without any assurance from the employees of TWA that they were doing anything about
the situation. This is not to say that petitioners were to be regaled with extra special attention.
They were, however, entitled to the understanding and humane consideration called for by
and commensurate with the extraordinary diligence required of common carriers, and not the
cold insensitivity to their predicament. It is hard to believe that the airline's counter personnel
were totally helpless about the situation. Common sense would and should have dictated that
they exert a little extra effort in making a more extensive inquiry, by themselves or through
their superiors, rather than just shrug off the problem with a callous and uncaring remark that
they had no knowledge about it. With all the modern communications equipment readily
available to them, which could have easily facilitated said inquiry and which are used as a
matter of course by airline companies in their daily operations, their apathetic stance while
not legally reprehensible is morally deplorable.
Losing a loved one, especially one's, parent, is a painful experience. Our culture accords the
tenderest human feelings toward and in reverence to the dead. That the remains of the
deceased were subsequently delivered, albeit belatedly, and eventually laid in her final
resting place is of little consolation. The imperviousness displayed by the airline's personnel,
even for just that fraction of time, was especially condemnable particularly in the hour of
bereavement of the family of Crispina Saludo, intensified by anguish due to the uncertainty of
the whereabouts of their mother's remains. Hence, it is quite apparent that private
respondents' personnel were remiss in the observance of that genuine human concern and
professional attentiveness required and expected of them.
The foregoing observations, however, do not appear to be applicable or imputable to
respondent PAL or its employees. No attribution of discourtesy or indifference has been
made against PAL by petitioners and, in fact, petitioner Maria Saludo testified that it was to
PAL that they repaired after failing to receive proper attention from TWA. It was from PAL
that they received confirmation that their mother's remains would be on the same flight to
Manila with them.
We find the following substantiation on this particular episode from the deposition of Alberto
A. Lim, PAL's cargo supervisor earlier adverted to, regarding their investigation of and the
action taken on learning of petitioner's problem:
ATTY. ALBERTO C. MENDOZA:
Yes.
Mr. Lim, what exactly was your procedure adopted in your
so called investigation?
ALBERTO A. LIM:
I called the lead agent on duty at that time and requested for
a copy of airway bill, transfer manifest and other documents
concerning the shipment.
ATTY ALBERTO C. MENDOZA:
Then, what?
ALBERTO A. LIM:
They proceeded to analyze exactly where PAL failed, if any,
in forwarding the human remains of Mrs. Cristina (sic)
Saludo. And I found out that there was not (sic) delay in
shipping the remains of Mrs. Saludo to Manila. Since we
received the body from American Airlines on 28 October at
7:45 and we expedited the shipment so that it could have
been loaded on our flight leaving at 9:00 in the evening or
just barely one hour and 15 minutes prior to the departure of
the aircraft. That is so (sic) being the case, I reported to
Manila these circumstances. 70
IV. Finally, petitioners insist, as a consequence of the delay in the shipment of their mother's
remains allegedly caused by wilful contractual breach, on their entitlement to actual, moral
and exemplary damages as well as attorney's fees, litigation expenses, and legal interest.
The uniform decisional tenet in our jurisdiction bolds that moral damages may be awarded for
wilful or fraudulent breach of contract 71 or when such breach is attended by malice or bad
faith. 72 However, in the absence of strong and positive evidence of fraud, malice or bad
faith, said damages cannot be awarded. 73 Neither can there be an award of exemplary
damages 74 nor of attorney's fees 75 as an item of damages in the absence of proof that
defendant acted with malice, fraud or bad faith.
The censurable conduct of TWA's employees cannot, however, be said to have
approximated the dimensions of fraud, malice or bad faith. It can be said to be more of a
lethargic reaction produced and engrained in some people by the mechanically routine nature
of their work and a racial or societal culture which stultifies what would have been their
accustomed human response to a human need under a former and different ambience.
Nonetheless, the facts show that petitioners' right to be treated with due courtesy in
accordance with the degree of diligence required by law to be exercised by every common
carrier was violated by TWA and this entitles them, at least, to nominal damages from TWA
alone. Articles 2221 and 2222 of the Civil Code make it clear that nominal damages are not
intended for indemnification of loss suffered but for the vindication or recognition of a right
violated of invaded. They are recoverable where some injury has been done but the amount
of which the evidence fails to show, the assessment of damages being left to the discretion of
the court according to the circumstances of the case. 76 In the exercise of our discretion, we
find an award of P40,000.00 as nominal damages in favor of, petitioners to be a reasonable
amount under the circumstances of this case.
WHEREFORE, with the modification that an award of P40,000.00 as and by way of nominal
damages is hereby granted in favor of petitioners to be paid by respondent Trans World
Airlines, the appealed decision is AFFIRMED in all other respects.
SO ORDERED.










































G.R. No. L-20099 July 7, 1966
PARMANAND SHEWARAM, plaintiff and appellee, vs. PHILIPPINE AIR LINES,
INC., defendant and appellant.
ZALDIVAR, J.:
Before the municipal court of Zamboanga City, plaintiff-appellee Parmanand Shewaram
instituted an action to recover damages suffered by him due to the alleged failure of
defendant-appellant Philippines Air Lines, Inc. to observe extraordinary diligence in the
vigilance and carriage of his luggage. After trial the municipal court of Zamboanga City
rendered judgment ordering the appellant to pay appellee P373.00 as actual damages,
P100.00 as exemplary damages, P150.00 as attorney's fees, and the costs of the action.
Appellant Philippine Air Lines appealed to the Court of First Instance of Zamboanga City.
After hearing the Court of First Instance of Zamboanga City modified the judgment of the
inferior court by ordering the appellant to pay the appellee only the sum of P373.00 as actual
damages, with legal interest from May 6, 1960 and the sum of P150.00 as attorney's fees,
eliminating the award of exemplary damages.
From the decision of the Court of First Instance of Zamboanga City, appellant appeals to this
Court on a question of law, assigning two errors allegedly committed by the lower court a
quo, to wit:
1. The lower court erred in not holding that plaintiff-appellee was bound by the
provisions of the tariff regulations filed by defendant-appellant with the civil
aeronautics board and the conditions of carriage printed at the back of the plane
ticket stub.
2. The lower court erred in not dismissing this case or limiting the liability of the
defendant-appellant to P100.00.
The facts of this case, as found by the trial court, quoted from the decision appealed from,
are as follows:
That Parmanand Shewaram, the plaintiff herein, was on November 23, 1959, a
paying passenger with ticket No. 4-30976, on defendant's aircraft flight No. 976/910
from Zamboanga City bound for Manila; that defendant is a common carrier engaged
in air line transportation in the Philippines, offering its services to the public to carry
and transport passengers and cargoes from and to different points in the Philippines;
that on the above-mentioned date of November 23, 1959, he checked in three (3)
pieces of baggages a suitcase and two (2) other pieces; that the suitcase was
mistagged by defendant's personnel in Zamboanga City, as I.G.N. (for Iligan) with
claim check No. B-3883, instead of MNL (for Manila). When plaintiff Parmanand
Shewaram arrived in Manila on the date of November 23, 1959, his suitcase did not
arrive with his flight because it was sent to Iligan. So, he made a claim with
defendant's personnel in Manila airport and another suitcase similar to his own which
was the only baggage left for that flight, the rest having been claimed and released to
the other passengers of said flight, was given to the plaintiff for him to take delivery
but he did not and refused to take delivery of the same on the ground that it was not
his, alleging that all his clothes were white and the National transistor 7 and a
Rollflex camera were not found inside the suitcase, and moreover, it contained a
pistol which he did not have nor placed inside his suitcase; that after inquiries made
by defendant's personnel in Manila from different airports where the suitcase in
question must have been sent, it was found to have reached Iligan and the station
agent of the PAL in Iligan caused the same to be sent to Manila for delivery to Mr.
Shewaram and which suitcase belonging to the plaintiff herein arrived in Manila
airport on November 24, 1959; that it was also found out that the suitcase shown to
and given to the plaintiff for delivery which he refused to take delivery belonged to a
certain Del Rosario who was bound for Iligan in the same flight with Mr. Shewaram;
that when the plaintiff's suitcase arrived in Manila as stated above on November 24,
1959, he was informed by Mr. Tomas Blanco, Jr., the acting station agent of the
Manila airport of the arrival of his suitcase but of course minus his Transistor Radio 7
and the Rollflex Camera; that Shewaram made demand for these two (2) items or for
the value thereof but the same was not complied with by defendant.
x x x x x x x x x
It is admitted by defendant that there was mistake in tagging the suitcase of plaintiff
as IGN. The tampering of the suitcase is more apparent when on November 24,
1959, when the suitcase arrived in Manila, defendant's personnel could open the
same in spite of the fact that plaintiff had it under key when he delivered the suitcase
to defendant's personnel in Zamboanga City. Moreover, it was established during the
hearing that there was space in the suitcase where the two items in question could
have been placed. It was also shown that as early as November 24, 1959, when
plaintiff was notified by phone of the arrival of the suitcase, plaintiff asked that check
of the things inside his suitcase be made and defendant admitted that the two items
could not be found inside the suitcase. There was no evidence on record sufficient to
show that plaintiff's suitcase was never opened during the time it was placed in
defendant's possession and prior to its recovery by the plaintiff. However, defendant
had presented evidence that it had authority to open passengers' baggage to verify
and find its ownership or identity. Exhibit "1" of the defendant would show that the
baggage that was offered to plaintiff as his own was opened and the plaintiff denied
ownership of the contents of the baggage. This proven fact that baggage may and
could be opened without the necessary authorization and presence of its owner,
applied too, to the suitcase of plaintiff which was mis-sent to Iligan City because of
mistagging. The possibility of what happened in the baggage of Mr. Del Rosario at
the Manila Airport in his absence could have also happened to plaintiffs suitcase at
Iligan City in the absence of plaintiff. Hence, the Court believes that these two items
were really in plaintiff's suitcase and defendant should be held liable for the same by
virtue of its contract of carriage.
It is clear from the above-quoted portions of the decision of the trial court that said court had
found that the suitcase of the appellee was tampered, and the transistor radio and the
camera contained therein were lost, and that the loss of those articles was due to the
negligence of the employees of the appellant. The evidence shows that the transistor radio
cost P197.00 and the camera cost P176.00, so the total value of the two articles was
P373.00.
There is no question that the appellant is a common carrier.1 As such common carrier the
appellant, from the nature of its business and for reasons of public policy, is bound to
observe extraordinary diligence in the vigilance over the goods and for the safety of the
passengers transported by it according to the circumstances of each case. 2 It having been
shown that the loss of the transistor radio and the camera of the appellee, costing P373.00,
was due to the negligence of the employees of the appellant, it is clear that the appellant
should be held liable for the payment of said loss.3
It is, however, contended by the appellant that its liability should be limited to the amount
stated in the conditions of carriage printed at the back of the plane ticket stub which was
issued to the appellee, which conditions are embodied in Domestic Tariff Regulations No. 2
which was filed with the Civil Aeronautics Board. One of those conditions, which is pertinent
to the issue raised by the appellant in this case provides as follows:
The liability, if any, for loss or damage to checked baggage or for delay in the
delivery thereof is limited to its value and, unless the passenger declares in advance
a higher valuation and pay an additional charge therefor, the value shall be
conclusively deemed not to exceed P100.00 for each ticket.
The appellant maintains that in view of the failure of the appellee to declare a higher value for
his luggage, and pay the freight on the basis of said declared value when he checked such
luggage at the Zamboanga City airport, pursuant to the abovequoted condition, appellee can
not demand payment from the appellant of an amount in excess of P100.00.
The law that may be invoked, in this connection is Article 1750 of the New Civil Code which
provides as follows:
A contract fixing the sum that may be recovered by the owner or shipper for the loss,
destruction, or deterioration of the goods is valid, if it is reasonable and just under the
circumstances, and has been fairly and freely agreed upon.
In accordance with the above-quoted provision of Article 1750 of the New Civil Code, the
pecuniary liability of a common carrier may, by contract, be limited to a fixed amount. It is
required, however, that the contract must be "reasonable and just under the circumstances
and has been fairly and freely agreed upon."
The requirements provided in Article 1750 of the New Civil Code must be complied with
before a common carrier can claim a limitation of its pecuniary liability in case of loss,
destruction or deterioration of the goods it has undertaken to transport. In the case before us
We believe that the requirements of said article have not been met. It can not be said that the
appellee had actually entered into a contract with the appellant, embodying the conditions as
printed at the back of the ticket stub that was issued by the appellant to the appellee. The fact
that those conditions are printed at the back of the ticket stub in letters so small that they are
hard to read would not warrant the presumption that the appellee was aware of those
conditions such that he had "fairly and freely agreed" to those conditions. The trial court has
categorically stated in its decision that the "Defendant admits that passengers do not sign the
ticket, much less did plaintiff herein sign his ticket when he made the flight on November 23,
1959." We hold, therefore, that the appellee is not, and can not be, bound by the conditions
of carriage found at the back of the ticket stub issued to him when he made the flight on
appellant's plane on November 23, 1959.
The liability of the appellant in the present case should be governed by the provisions of
Articles 1734 and 1735 of the New Civil Code, which We quote as follows:
ART. 1734. Common carries are responsible for the loss, destruction, or
deterioration of the goods, unless the same is due to any of the following causes
only:
(1) Flood, storm, earthquake, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.1wph1.t
ART. 1735. In all cases other than those mentioned in Nos. 1, 2, 3, 4 and 5 of the
preceding article, if the goods are lost, destroyed or deteriorated, common carriers
are presumed to have been at fault or to have acted negligently, unless they prove
that they observed extraordinary diligence as required in Article 1733.
It having been clearly found by the trial court that the transistor radio and the camera of the
appellee were lost as a result of the negligence of the appellant as a common carrier, the
liability of the appellant is clear it must pay the appellee the value of those two articles.
In the case of Ysmael and Co. vs. Barreto, 51 Phil. 90, cited by the trial court in support of its
decision, this Court had laid down the rule that the carrier can not limit its liability for injury to
or loss of goods shipped where such injury or loss was caused by its own negligence.
Corpus Juris, volume 10, p. 154, says:
"Par. 194, 6. Reasonableness of Limitations. The validity of stipulations limiting
the carrier's liability is to be determined by their reasonableness and their conformity
to the sound public policy, in accordance with which the obligations of the carrier to
the public are settled. It cannot lawfully stipulate for exemption from liability, unless
such exemption is just and reasonable, and unless the contract is freely and fairly
made. No contractual limitation is reasonable which is subversive of public policy.
"Par. 195. 7. What Limitations of Liability Permissible. a. Negligence (1) Rule in
America (a) In Absence of Organic or Statutory Provisions Regulating Subject
aa. Majority Rule. In the absence of statute, it is settled by the weight of authority
in the United States, that whatever limitations against its common-law liability are
permissible to a carrier, it cannot limit its liability for injury to or loss of goods
shipped, where such injury or loss is caused by its own negligence. This is the
common law doctrine and it makes no difference that there is no statutory prohibition
against contracts of this character.
"Par. 196. bb. Considerations on which Rule Based. The rule, it is said, rests on
considerations of public policy. The undertaking is to carry the goods, and to relieve
the shipper from all liability for loss or damage arising from negligence in performing
its contract is to ignore the contract itself. The natural effect of a limitation of liability
against negligence is to induce want of care on the part of the carrier in the
performance of its duty. The shipper and the common carrier are not on equal terms;
the shipper must send his freight by the common carrier, or not at all; he is therefore
entirely at the mercy of the carrier unless protected by the higher power of the law
against being forced into contracts limiting the carrier's liability. Such contracts are
wanting in the element of voluntary assent.
"Par. 197. cc. Application and Extent of Rule (aa) Negligence of Servants. The
rule prohibiting limitation of liability for negligence is often stated as a prohibition of
any contract relieving the carrier from loss or damage caused by its own negligence
or misfeasance, or that of its servants; and it has been specifically decided in many
cases that no contract limitation will relieve the carrier from responsibility for the
negligence, unskillfulness, or carelessness of its employer." (Cited in Ysmael and
Co. vs. Barreto, 51 Phil. 90, 98, 99).
In view of the foregoing, the decision appealed from is affirmed, with costs against the
appellant.




G.R. No. L-36481-2 October 23, 1982
AMPARO C. SERVANDO, CLARA UY BICO, plaintiffs-appellees, vs. PHILIPPINE STEAM
NAVIGATION CO., defendant-appellant.
ESCOLIN, J.:
This appeal, originally brought to the Court of Appeals, seeks to set aside the decision of the
Court of First Instance of Negros Occidental in Civil Cases Nos. 7354 and 7428, declaring
appellant Philippine Steam Navigation liable for damages for the loss of the appellees'
cargoes as a result of a fire which gutted the Bureau of Customs' warehouse in Pulupandan,
Negros Occidental.
The Court of Appeals certified the case to Us because only pure questions of law are raised
therein.
The facts culled from the pleadings and the stipulations submitted by the parties are as
follows:
On November 6, 1963, appellees Clara Uy Bico and Amparo Servando loaded on board the
appellant's vessel, FS-176, for carriage from Manila to Pulupandan, Negros Occidental, the
following cargoes, to wit:
Clara Uy Bico
1,528 cavans of rice valued
at P40,907.50;
Amparo Servando
44 cartons of colored paper,
toys and general merchandise valued at P1,070.50;
as evidenced by the corresponding bills of lading issued by the appellant. 1
Upon arrival of the vessel at Pulupandan, in the morning of November 18, 1963, the cargoes
were discharged, complete and in good order, unto the warehouse of the Bureau of Customs.
At about 2:00 in the afternoon of the same day, said warehouse was razed by a fire of
unknown origin, destroying appellees' cargoes. Before the fire, however, appellee Uy Bico
was able to take delivery of 907 cavans of rice 2 Appellees' claims for the value of said goods
were rejected by the appellant.
On the bases of the foregoing facts, the lower court rendered a decision, the decretal portion
of which reads as follows:
WHEREFORE, judgment is rendered as follows:
1. In case No. 7354, the defendant is hereby ordered to pay the plaintiff
Amparo C. Servando the aggregate sum of P1,070.50 with legal interest
thereon from the date of the filing of the complaint until fully paid, and to pay
the costs.
2. In case No. 7428, the defendant is hereby ordered to pay to plaintiff Clara
Uy Bico the aggregate sum of P16,625.00 with legal interest thereon from
the date of the filing of the complaint until fully paid, and to pay the costs.
Article 1736 of the Civil Code imposes upon common carriers the duty to observe
extraordinary diligence from the moment the goods are unconditionally placed in their
possession "until the same are delivered, actually or constructively, by the carrier to the
consignee or to the person who has a right to receive them, without prejudice to the
provisions of Article 1738. "
The court a quo held that the delivery of the shipment in question to the warehouse of the
Bureau of Customs is not the delivery contemplated by Article 1736; and since the burning of
the warehouse occurred before actual or constructive delivery of the goods to the appellees,
the loss is chargeable against the appellant.
It should be pointed out, however, that in the bills of lading issued for the cargoes in question,
the parties agreed to limit the responsibility of the carrier for the loss or damage that may be
caused to the shipment by inserting therein the following stipulation:
Clause 14. Carrier shall not be responsible for loss or damage to shipments
billed 'owner's risk' unless such loss or damage is due to negligence of
carrier. Nor shall carrier be responsible for loss or damage caused by force
majeure, dangers or accidents of the sea or other waters; war; public
enemies; . . . fire . ...
We sustain the validity of the above stipulation; there is nothing therein that is contrary to law,
morals or public policy.
Appellees would contend that the above stipulation does not bind them because it was
printed in fine letters on the back-of the bills of lading; and that they did not sign the same.
This argument overlooks the pronouncement of this Court in Ong Yiu vs. Court of Appeals,
promulgated June 29, 1979, 3 where the same issue was resolved in this wise:
While it may be true that petitioner had not signed the plane ticket (Exh. '12'),
he is nevertheless bound by the provisions thereof. 'Such provisions have
been held to be a part of the contract of carriage, and valid and binding upon
the passenger regardless of the latter's lack of knowledge or assent to the
regulation'. It is what is known as a contract of 'adhesion', in regards which it
has been said that contracts of adhesion wherein one party imposes a ready
made form of contract on the other, as the plane ticket in the case at bar, are
contracts not entirely prohibited. The one who adheres to the contract is in
reality free to reject it entirely; if he adheres, he gives his consent."
(Tolentino, Civil Code, Vol. IV, 1962 Ed., p. 462, citing Mr. Justice J.B.L.
Reyes, Lawyer's Journal, Jan. 31, 1951, p. 49).
Besides, the agreement contained in the above quoted Clause 14 is a mere iteration of the
basic principle of law written in Article 1 1 7 4 of the Civil Code:
Article 1174. Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall be responsible for those
events which could not be foreseen, or which, though foreseen, were
inevitable.
Thus, where fortuitous event or force majeure is the immediate and proximate cause of the
loss, the obligor is exempt from liability for non-performance. The Partidas, 4 the antecedent
of Article 1174 of the Civil Code, defines 'caso fortuito' as 'an event that takes place by
accident and could not have been foreseen. Examples of this are destruction of houses,
unexpected fire, shipwreck, violence of robbers.'
In its dissertation of the phrase 'caso fortuito' the Enciclopedia Juridicada Espanola 5 says:
"In a legal sense and, consequently, also in relation to contracts, a 'caso fortuito' presents the
following essential characteristics: (1) the cause of the unforeseen and unexpected
occurrence, or of the failure of the debtor to comply with his obligation, must be independent
of the human will; (2) it must be impossible to foresee the event which constitutes the 'caso
fortuito', or if it can be foreseen, it must be impossible to avoid; (3) the occurrence must be
such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and
(4) the obligor must be free from any participation in the aggravation of the injury resulting to
the creditor." In the case at bar, the burning of the customs warehouse was an extraordinary
event which happened independently of the will of the appellant. The latter could not have
foreseen the event.
There is nothing in the record to show that appellant carrier ,incurred in delay in the
performance of its obligation. It appears that appellant had not only notified appellees of the
arrival of their shipment, but had demanded that the same be withdrawn. In fact, pursuant to
such demand, appellee Uy Bico had taken delivery of 907 cavans of rice before the burning
of the warehouse.
Nor can the appellant or its employees be charged with negligence. The storage of the goods
in the Customs warehouse pending withdrawal thereof by the appellees was undoubtedly
made with their knowledge and consent. Since the warehouse belonged to and was
maintained by the government, it would be unfair to impute negligence to the appellant, the
latter having no control whatsoever over the same.
The lower court in its decision relied on the ruling laid down in Yu Biao Sontua vs. Ossorio 6,
where this Court held the defendant liable for damages arising from a fire caused by the
negligence of the defendant's employees while loading cases of gasoline and petroleon
products. But unlike in the said case, there is not a shred of proof in the present case that the
cause of the fire that broke out in the Custom's warehouse was in any way attributable to the
negligence of the appellant or its employees. Under the circumstances, the appellant is
plainly not responsible.
WHEREFORE, the judgment appealed from is hereby set aside. No costs.
SO ORDERED.

G.R. No. L-50076 September 14, 1990
NORBERTO QUISUMBING, SR., and GUNTHER LOEFFLER petitioners, vs. COURT OF
APPEALS and PHILIPPINE AIR LINES, INC., respondents.
NARVASA, J.:
Having met with no success in the Court of First Instance of Rizal and in the Court of
Appeals, the petitioners are now in this Court in a third and final attempt to recover from the
Philippine Airlines, Inc. (hereafter, simply PAL) the value of jewelry, other valuables and
money taken from them by four (4) armed robbers on board one of the latter's airplanes while
on a flight from Mactan City to Manila, as well as moral and exemplary damages, attorney's
fees and expenses of litigation.
The petitioners accept the correctness of the basic facts adopted by the Court of Appeals
from the judgment of the Court of First Instance, to wit: 1
1. . . . Norberto Quisumbing, Sr. and Gunther Leoffler were among the of ...
(PAL's) Fokker 'Friendship' PIC-536 plane in its flight of November 6,1968
which left Mactan City at about 7:30 in the evening with Manila for its
destination.
2. After the plane had taken off, Florencio O. Villarin, a Senior NBI Agent
who was also a passenger of the said plane, noticed a certain 'Zaldy,' a
suspect in the killing of Judge Valdez, seated at the front seat near the door
leading to the cockpit of the plane. A check by Villarin with the passenger's
ticket in the possession of flight Stewardess Annie Bontigao, who was
seated at the last seat right row, revealed that 'Zaldy' had used the name
'Cardente,' one of his aliases known to Villarin. Villarin also came to know
from the stewardess that 'Zaldy' had three companions on board the plane."
3. Villarin then scribbled a note addressed to the pilot of the plane requesting
the latter to contact NBI duty agents in Manila for the said agents to ask the
Director of the NBI to send about six NBI agents to meet the plane because
the suspect in the killing of Judge Valdez was on board (Exh. 'G'). The said
note was handed by Villarin to the stewardess who in tum gave the same to
the pilot.
4. After receiving the note, which was about 15 minutes after take off, the
pilot of the plane, Capt. Luis Bonnevie, Jr., came out of the cockpit and sat
beside Villarin at the rear portion of the plane and explained that he could
not send the message because it would be heard by all ground aircraft
stations. Villarin, however, told the pilot of the danger of commission of
violent acts on board the plane by the notorious 'Zaldy' and his three
companions.
5. While the pilot and Villarin were talking, 'Zaldy' and one of his companions
walked to the rear and stood behind them. Capt. Bonnevie then stood up
and went back to the cockpit. 'Zaldy' and his companions returned to their
seats, but after a few minutes they moved back to the rear throwing ugly
looks at Villarin who, sensing danger, stood up and went back to his original
seat across the aisle on the second to the last seat near the window. 'Zaldy
and his companion likewise went back to their respective seats in front.
6. Soon thereafter an exchange of gunshots ensued between Villarin and
'Zaldy' and the latter's companions. 'Zaldy' announced to the passengers
and the pilots in the cockpit that it was a hold-up and ordered the pilot not to
send any SOS. The hold-uppers divested passengers of their belongings.
7. Specifically, ... Norberto Quisumbing, Sr. was divested of jewelries and
cash in the total amount of P18,650.00 out of which recoveries were made
amounting to P4,550.00. . . Gunther Leoffler was divested of a wrist watch,
cash and a wallet in the total of P1,700.00. As a result of the incident ...
Quisumbing, Sr.suffered shock, because a gun had been pointed at him by
one of the holduppers.
8. Upon landing at the Manila International Airport. 'Zaldy' and his three
companions succeeded in escaping.
Demands were thereafter made on PAL by Quisumbing and Loeffler "to indemnify ... (them)
on their aforesaid loss, but ... (PAL) refused ... (averring that) it is not liable to (them) in law or
in fact." 2
Contending that the "aforesaid loss is a result of breach of ... (PAL's) contractual obligation to
carry ... (them) and their belongings and effects to their Manila destination without loss or
damage, and constitutes a serious dereliction of ... (PAL's) legal duty to exercise
extraordinary diligence in the vigilance over the same." , Quisumbing and Loeffler brought
suit against PAL in the Court of First Instance of Rizal, as stated in this opinion's opening
paragraph, to recover the value of the property lost by them to the robbers as well as moral
and exemplary damages, attorney's fees and expenses of litigation. 3 The plaintiffs declared
that their suit was instituted "... pursuant to Civil Code articles 1754, 998, 2000 and 2001 and
on the ground that in relation to said Civil Code article 2001 the complained-of act of the
armed robbers is not a force majeure, as the 'use of arms' or 'irresistible force' was not taken
advantage of by said armed robbers in gaining entrance to defendant's ill-fated plane in
questions. And, with respect to said Civil Code article 1998, it is not essential that the lost
effects and belongings of plaintiffs were actually delivered to defendant's plane personnel or
that the latter were notified thereof (De los Santos v. Tamn Khey, [CA] 58 O.G. 7693)." 4
PAL filed answer denying liability, alleging inter alia that the robbery during the flight and after
the aircraft was forcibly landed at the Manila Airport did indeed constitute force majeure, and
neither of the plaintiffs had notified PAL "or its crew or employees that they were in
possession of cash, German marks and valuable jewelries and watches" or surrendered said
items to "the crew or personnel on board the aircraft." 5
After trial, the Court of First Instance rendered judgment 'dismissing plaintiffs' complaint with
costs against ... (them)." 6 The Court opined that since the plaintiffs "did not notify defendant
or its employees that they were in possession of the cash, jewelries, and the wallet they are
now claiming," the very provision of law invoked by them, Article 1998 of the Civil Code,
denies them any recourse against PAL. The Court also pointed out that-
... while it is true that the use of gems was not taken advantage of by the
robbers in gaining entrance to defendant's ill-fated plane, the armed robbery
that took place constitutes force majeure for which defendant is not liable
because the robbers were able to gain entrance to the plane with the guns
they used already in their possession, which fact could not have been
prevented nor avoided by the defendant since it was not authorized to
search its passengers for firearms and deadly weapons as shown in Exhibits
'6', '7', '8,' and '8-A.' As its robbery constitutes force majeure, defendant is
not liable.
The plaintiffs appealed to the Court of Appeals. 7 The Court affirmed the trial court's
judgment. 8 It rejected the argument that "the use of arms or ... irresistible force" referred to
in Article 2001 constitutes force majeure only if resorted to gain entry into the airplane, and
not if it attends "the robbery itself." The Court ruled that under the facts, "the highjacking-
robbery was force majeure," observing that
... hijackers do not board an airplane through a blatant display of firepower
and violent fury. Firearms, hand-grenades, dynamite, and explosives are
introduced into the airplane surreptitiously and with the utmost cunning and
stealth, although there is an occasional use of innocent hostages who will be
coldly murdered unless a plane is given to the hijackers' complete disposal.
The objective of modern-day hijackers is to display the irresistible force
amounting to force majeure only when it is most effective and that is when
the jetliner is winging its way at Himalayan altitudes and ill-advised heroics
by either crew or passengers would send the multi-million peso airplane and
the priceless lives of all its occupants into certain death and destruction. ...
The Appellate Court also ruled that in light of the evidence PAL could not be faulted for want
of diligence, particularly for failing "to take positive measures to implement Civil Aeronautics
Administration regulations prohibiting civilians from carrying firearms on board aircrafts;" and
that "the absence of coded transmissions, the amateurish behaviour of the pilot in dealing
with the NBI agent, the allegedly open cockpit door, and the failure to return to Mactan, in the
light of the circumstances of the case ..., were not negligent acts sufficient to overcome the
force majeure nature of the armed robbery." In fact, the Court went on to says, 9
... it is illusive to assume that had these precautions been taken, the
hijacking or the robbery would not have succeeded. The mandatory use of
the most sophisticated electronic detection devices and magnetometers, the
imposition of severe penalties, the development of screening procedures,
the compilation of hijacker behavioural profiles, the assignment of sky
marshals, and the weight of outraged world opinion may have minimized
hijackings but all these have proved ineffective against truly determined
hijackers. World experience shows that if a group of armed hijackers want to
take over a plane in flight, they can elude the latest combined government
and airline industry measures. And as our own experience in Zamboanga
City illustrates, the use of force to overcome hijackers, results in the death
and injury of innocent passengers and crew members. We are not in the
least bit suggesting that the Philippine Airlines should not do everything
humanly possible to protect passengers from hijackers' acts. We merely
state that where the defendant has faithfully complied with the requirements
of government agencies and adhered to the established procedures and
precautions of the airline industry at any particular time, its failure to take
certain steps that a passenger in hindsight believes should have been taken
is not the negligence or misconduct which mingles with force majeure as an
active and cooperative cause.
Under the circumstance of the instant case, the acts of the airline and its
crew cannot be faulted as negligence. The hijackers had already shown their
willingness to kill. One passenger was in fact killed and another survived
gunshot wounds. The lives of the rest of the passengers and crew were
more important than their properties. Cooperation with the hijackers until
they released their hostages at the runway end near the South
Superhighway was dictated by the circumstances.
Insisting that the evidence demonstrates negligence on the part of the PAL crew "occurring
before and exposing them to hijacking," Quisumbing and Loeffler have come up to this Court
praying that the judgments of the trial Court and the Court of Appeals be reversed and
another rendered in their favor. Once again, the issue will be resolved against them.
A careful analysis of the record in relation to the memoranda and other pleadings of the
parties, convinces this Court of the correctness of the essential conclusion of both the trial
and appellate courts that the evidence does indeed fail to prove any want of diligence on the
part of PAL, or that, more specifically, it had failed to comply with applicable regulations or
universally accepted and observed procedures to preclude hijacking; and that the particular
acts singled out by the petitioners as supposedly demonstrative of negligence were, in the
light of the circumstances of the case, not in truth negligent acts "sufficient to overcome the
force majeure nature of the armed robbery." The Court quite agrees, too, with the Appellate
Tribunal's wry observation that PAL's "failure to take certain steps that a passenger in
hindsight believes should have been taken is not the negligence or misconduct which
mingles with force majeure as an active and cooperative cause."
No success can therefore attend petitioners' appeal, not only because they wish to have a
review and modification of factual conclusions of the Court of Appeals, which established and
uniformly observed axiom proscribes, 10 but also because those factual conclusions have in
this Court's view been correctly drawn from the proofs on record.
WHEREFORE, the petition is DENIED and the appealed Decision of the Court of Appeals is
AFFIRMED, with costs against petitioners.
SO ORDERED.

































G.R. No. 60673 May 19, 1992
PAN AMERICAN WORLD AIRWAYS, INC., petitioner, vs. JOSE K. RAPADAS and THE
COURT OF APPEALS, respondents.
GUTIERREZ, JR., J.:
This is a petition for review assailing the decision of the respondent Court of Appeals which
affirmed in toto the trial court decision on the liability of petitioner Pan American World
Airways for damages due to private respondent. The trial court ruled that the petitioner can
not avail of a limitation of liabilities for lost baggages of a passenger. The dispositive portion
of the trial court decision reads:
WHEREFORE, in view of the foregoing considerations, judgment is hereby
rendered ordering defendant to pay plaintiff by way of actual damages the
equivalent peso value of the amount of $5,228.90 and 100 paengs, nominal
damages in the amount of P20,000.00 and attorney's fees of P5,000.00, and
the costs of the suit. Defendant's counterclaim is dismissed. (Rollo, p. 13)
On January 16, 1975, private respondent Jose K. Rapadas held Passenger Ticket and
Baggage Claim Check No. 026-394830084-5 for petitioner's Flight No. 841 with the route
from Guam to Manila. While standing in line to board the flight at the Guam airport, Rapadas
was ordered by petitioner's handcarry control agent to check-in his Samsonite attache case.
Rapadas protested pointing to the fact that other co-passengers were permitted to handcarry
bulkier baggages. He stepped out of the line only to go back again at the end of it to try if he
can get through without having to register his attache case. However, the same man in
charge of handcarry control did not fail to notice him and ordered him again to register his
baggage. For fear that he would miss the plane if he insisted and argued on personally taking
the valise with him, he acceded to checking it in. He then gave his attache case to his brother
who happened to be around and who checked it in for him, but without declaring its contents
or the value of its contents. He was given a Baggage Claim Tag No. P-749-713. (Exhibit "B"
for the plaintiff-respondent)
Upon arriving in Manila on the same date, January 16, 1975, Rapadas claimed and was
given all his checked-in baggages except the attache case. Since Rapadas felt ill on his
arrival, he sent his son, Jorge Rapadas to request for the search of the missing luggage. The
petitioner exerted efforts to locate the luggage through the Pan American World Airways-
Manila International Airport (PAN AM-MIA) Baggage Service.
On January 30, 1975, the petitioner required the private respondent to put the request in
writing. The respondent filled in a Baggage Claim Blank Form. Thereafter, Rapadas
personally followed up his claim. For several times, he called up Mr. Panuelos, the head of
the Baggage Section of PAN AM. He also sent letters demanding and reminding the
petitioner of his claim.
Rapadas received a letter from the petitioner's counsel dated August 2, 1975 offering to settle
the claim for the sum of one hundred sixty dollars ($160.00) representing the petitioner's
alleged limit of liability for loss or damage to a passenger's personal property under the
contract of carriage between Rapadas and PAN AM. Refusing to accept this kind of
settlement, Rapadas filed the instant action for damages on October 1, 1975. Rapadas
alleged that PAN AM discriminated or singled him out in ordering that his luggage be
checked in. He also alleged that PAN AM neglected its duty in the handling and safekeeping
of his attache case from the point of embarkation in Guam to his destination in Manila. He
placed the value of the lost attache case and its contents at US$42,403.90. According to him,
the loss resulted in his failure to pay certain monetary obligations, failure to remit money sent
through him to relatives, inability to enjoy the fruits of his retirement and vacation pay earned
from working in Tonga Construction Company (he retired in August 1974) and inability to
return to Tonga to comply with then existing contracts.
In its answer, petitioner-defendant PAN AM acknowledged responsibility for the loss of the
attache case but asserted that the claim was subject to the "Notice of Baggage Liability
Limitations" allegedly attached to and forming part of the passenger ticket. The petitioner
argued that the same notice was also conspicuously posted in its offices for the guidance of
the passengers.
At the trial, private respondent showed proof of his retirement award and vacation pay
amounting to $4,750.00. He claimed that the attache case also contained other money
consisting of $1,400 allegedly given to him by his son, Jaime, as a round trip fare of his
(plaintiff-respondent) wife, but which amount was later found to be actually intended by Jaime
as payment for arrears of a lot purchased from Tropical Homes, Inc.; $3,000 allegedly given
by his brothers for payment of taxes and for constructing improvements on the Rapadas
estates; and $300.00 birthday present of the spouses Mr. and Mrs. Ruben Canonizado to
plaintiff-respondent's wife. He also claimed having kept several items in the attache case,
namely (1) contracts and records of employment, letters of commendation, testimonials
and newspaper clippings on his achievement for 13 years in Tonga, New Zealand and
Australia, drafts of manuscripts, photographs and drivers license alleged to be worth
$20,000.00; a Polaroid camera, films, calculator, and other personal items worth $403.90;
memorabilia, autographs personally acquired from Charles Lindberg, Lawrence Rockefeller
and Ryoichi Sasakawa, a commemorative palladium coin worth Tongan 100 paengs and
unused Tongan stamps, all totalling $7,500.00; and a plan worth $5,000.00 drawn by his son
Jaime, who is an architect, for the construction of a residential house and a 6-story
commercial building. Rapadas claimed the amount of the attache case itself to be $25.50.
(See Decision in Civil Case No. 99564 in Amended Record on Appeal, pp. 61-85)
The lower court ruled in favor of complainant Rapadas after finding no stipulation giving
notice to the baggage liability limitation. The court rejected the claim of defendant PANAM
that its liability under the terms of the passenger ticket is only up to $160.00. However, it
scrutinized all the claims of the plaintiff. It discredited insufficient evidence to show
discriminatory acts or bad faith on the part of petitioner PANAM.
On appeal, the Court of Appeals affirmed the trial court decision. Hence, this petition.
The main issue raised in the case at bar is whether or not a passenger is bound by the terms
of a passenger ticket declaring that the limitations of liability set forth in the Warsaw
Convention (October 12, 1929; 137 League of Nations Treaty Series II; See Proclamation
No. 201 [1955], 51 O.G. 4933 [October, 1955]) as amended by the Hague Protocol
(September 28, 1955; 478 UNTS 373; III PTS 515), shall apply in case of loss, damage or
destruction to a registered luggage of a passenger.
The petitioner maintains that its liability for the lost baggage of respondent Rapadas was
limited to $160.00 since the latter did not declare a higher value for his baggage and did not
pay the corresponding additional charges.
The private respondent, on the other hand, insists that he is entitled to as much damages as
those awarded by the court and affirmed by the respondent appellate court.
After a review of the various arguments of the opposing parties as well as the records of the
case, the Court finds sufficient basis under the particular facts of this case for the availment
of the liability limitations under the Warsaw Convention.
There is no dispute, and the courts below admit, that there was such a Notice appearing on
page two (2) of the airline ticket stating that the Warsaw Convention governs in case of death
or injury to a passenger or of loss, damage or destruction to a passenger's luggage.
The Notice states:
If the passenger's journey involves an ultimate destination or stop in a
country other than the country of departure the Warsaw Convention may be
applicable and the Convention governs and in most cases limits the liability
of carriers for death or personal injury and in respect of loss of or damage to
baggage. See also notice headed "Advice to International Passengers on
Limitation of Liability." (The latter notice refers to limited liability for death or
personal injury to passengers with proven damages not exceeding US
$75,000 per passenger; Exhibit "K" for plaintiff respondent, Table of Exhibits,
p. 19)
Furthermore, paragraph 2 of the "Conditions of Contract" also appearing on page 2 of the
ticket states:
2. Carriage hereunder is subject to the rules and limitations relating to
liability established by the Warsaw Convention unless such carriage is not
"international carriage" as defined by that Convention. (Exhibit "K", supra)
We note that plaintiff-respondent Rapadas presented as proof of the Passenger Ticket and
Baggage Check No. 026-394830084-5 a xerox copy of its page 2 which contains the Notice
and Conditions of Contract, and also page 3 which recites the Advice to International
Passengers on Limitation of Liability. He also presented two xerox copies of Flight Coupon
No. 3 of the same passenger ticket showing the fares paid for the trips Honolulu to Guam,
Guam to Manila, and Manila to Honolulu to prove his obligations which remained unpaid
because of the unexpected loss of money allegedly placed inside the missing attache case.
Rapadas explained during the trial that the same passenger ticket was returned by him to
one Mr. S.L. Faupula of the Union Steam Ship Company of New Zealand, Ltd., Tonga who
demanded the payment of the fares or otherwise, the return of the unused plane tickets
(including the subject Passenger Ticket & Baggage Check No. 026-394830084-5). The
issuance of these tickets was facilitated by Mr. Faupula on credit.
Meanwhile, the petitioner offered as evidence Exhibit "1" also showing page 2 of the
passenger ticket to prove the notice and the conditions of the contract of carriage. It likewise
offered Exhibit "1-A", a xerox copy of a "Notice of Baggage Liability Limitations" which the
trial court disregarded and held to be non-existent. The same Exhibit "1-A" contained the
following stipulations:
NOTICE OF BAGGAGE LIABILITY LIMITATIONS Liability for loss, delay,
or damage to baggage is limited as follows unless a higher value is declared
in advance and additional charges are paid: (1) for most international travel
(including domestic portions of international journeys) to approximately $8.16
per pound ($18.00 per kilo; now $20.00 per Exhibit "13") for checked
baggage and $360 (now $400 per Exhibit "13") per passenger for unchecked
baggage; (2) for travel wholly between U.S. points, to $500 per passenger
on most carriers (a few have lower limits). Excess valuation may not be
declared on certain types of valuable articles. Carriers assume no liability for
fragile or perishable articles. Further information may be obtained from the
carrier. (Table of Exhibits, p. 45)
The original of the Passenger Ticket and Baggage Check No. 026-394830084-5 itself was
not presented as evidence as it was among those returned to Mr. Faupula. Thus, apart from
the evidence offered by the defendant airline, the lower court had no other basis for
determining whether or not there was actually a stipulation on the specific amounts the
petitioner had expressed itself to be liable for loss of baggage.
Although the trial court rejected the evidence of the defendant-petitioner of a stipulation
particularly specifying what amounts it had bound itself to pay for loss of luggage, the Notice
and paragraph 2 of the "Conditions of Contract" should be sufficient notice showing the
applicability of the Warsaw limitations.
The Warsaw Convention, as amended, specifically provides that it is applicable
to international carriage which it defines in Article 1, par. 2 as follows:
(2) For the purposes of this Convention, the expression "international
carriage" means any carriage in which, according to the agreement between
the parties, the place of departure and the place of destination, whether or
not there be a breach in the carriage or a transhipment, are situated either
within the territories of two High Contracting Parties or within the territory of a
single High Contracting Party if there is an agreed stopping place within the
territory of another State, even if that State is not a High Contracting Party.
Carriage between two points within the territory of a single High Contracting
Party without an agreed stopping place within the territory of another State is
not international carriage for the purposes of this Convention. ("High
Contracting Party" refers to a state which has ratified or adhered to the
Convention, or which has not effectively denounced the Convention [Article
40A(l)]).
Nowhere in the Warsaw Convention, as amended, is such a detailed notice of baggage
liability limitations required. Nevertheless, it should become a common, safe and practical
custom among air carriers to indicate beforehand the precise sums equivalent to those fixed
by Article 22 (2) of the Convention.
The Convention governs the availment of the liability limitations where the baggage check is
combined with or incorporated in the passenger ticket which complies with the provisions of
Article 3, par. l (c). (Article 4, par. 2) In the case at bar, the baggage check is combined with
the passenger ticket in one document of carriage. The passenger ticket complies with Article
3, par. l (c) which provides:
(l) In respect of the carriage of passengers a ticket shall be delivered
containing:
(a) . . .
(b) . . .
(c) a notice to the effect that, if the passenger's journey
involves an ultimate destination or stop in a country other
than the country of departure, the Warsaw Convention may
be applicable and that the Convention governs and in most
cases limits the liability of carriers for death or personal
injury and in respect of loss of or damage to baggage.
We have held in the case of Ong Yiu v. Court of Appeals, supra, and reiterated in a similar
case where herein petitioner was also sued for damages, Pan American World Airways
v. Intermediate Appellate Court (164 SCRA 268 [1988]) that:
It (plane ticket) is what is known as a contract of "adhesion", in regards
which it has been said that contracts of adhesion wherein one party imposes
a ready made form of contract on the other, as the plane ticket in the case at
bar, are contracts not entirely prohibited. The one who adheres to the
contract is in reality free to reject it entirely; if he adheres, he gives his
consent. (Tolentino, Civil Code, Vol. IV, 1962 ed., p. 462, citing Mr. Justice
J.B.L. Reyes, Lawyer's Journal, January 31, 1951, p. 49) And as held in
Randolph v. American Airlines, 103 Ohio App. 172, 144 N.E. 2d 878;
Rosenchein v. Trans World Airlines, Inc., 349 S.W. 2d 483, "a contract
limiting liability upon an agreed valuation does not offend against the policy
of the law forbidding one from contracting against his own negligence.
Considering, therefore, that petitioner had failed to declare a higher value for
his baggage, he cannot be permitted a recovery in excess of P100.00 . . .
(91 SCRA 223 at page 231)
We hasten to add that while contracts of adhesion are not entirely prohibited, neither is a
blind reliance on them encouraged. In the face of facts and circumstances showing they
should be ignored because of their basically one sided nature, the Court does not hesitate to
rule out blind adherence to their terms. (See Sweet Lines, Inc. v. Teves, 83 SCRA 361, 368-
369[1978])
The arguments of the petitioner do not belie the fact that it was indeed accountable for the
loss of the attache case. What the petitioner is concerned about is whether or not the notice,
which it did not fail to state in the plane ticket and which it deemed to have been read and
accepted by the private respondent will be considered by this Court as adequate under the
circumstances of this case. As earlier stated, the Court finds the provisions in the plane ticket
sufficient to govern the limitations of liabilities of the airline for loss of luggage. The
passenger, upon contracting with the airline and receiving the plane ticket, was expected to
be vigilant insofar as his luggage is concerned. If the passenger fails to adduce evidence to
overcome the stipulations, he cannot avoid the application of the liability limitations.
The facts show that the private respondent actually refused to register the attache case and
chose to take it with him despite having been ordered by the PANAM agent to check it in. In
attempting to avoid registering the luggage by going back to the line, private respondent
manifested a disregard of airline rules on allowable handcarried baggages. Prudence of a
reasonably careful person also dictates that cash and jewelry should be removed from
checked-in-luggage and placed in one's pockets or in a handcarried Manila-paper or plastic
envelope.
The alleged lack of enough time for him to make a declaration of a higher value and to pay
the corresponding supplementary charges cannot justify his failure to comply with the
requirement that will exclude the application of limited liability. Had he not wavered in his
decision to register his luggage, he could have had enough time to disclose the true worth of
the articles in it and to pay the extra charges or remove them from the checked-in-luggage.
Moreover, an airplane will not depart meantime that its own employee is asking a passenger
to comply with a safety regulation.
Passengers are also allowed one handcarried bag each provided it conforms to certain
prescribed dimensions. If Mr. Rapadas was not allowed to handcarry the lost attache case, it
can only mean that he was carrying more than the allowable weight for all his luggages or
more than the allowable number of handcarried items or more than the prescribed
dimensions for the bag or valise. The evidence on any arbitrary behavior of a Pan Am
employee or inexcusable negligence on the part of the carrier is not clear from the petition.
Absent such proof, we cannot hold the carrier liable because of arbitrariness, discrimination,
or mistreatment.
We are not by any means suggesting that passengers are always bound to the stipulated
amounts printed on a ticket, found in a contract of adhesion, or printed elsewhere but referred
to in handouts or forms. We simply recognize that the reasons behind stipulations on liability
limitations arise from the difficulty, if not impossibility, of establishing with a clear
preponderance of evidence the contents of a lost valise or suitcase. Unless the contents are
declared, it will always be the word of a passenger against that of the airline. If the loss of life
or property is caused by the gross negligence or arbitrary acts of the airline or the contents of
the lost luggage are proved by satisfactory evidence other than the self-serving declarations
of one party, the Court will not hesitate to disregard the fine print in a contract of adhesion.
(See Sweet Lines Inc. v. Teves, supra) Otherwise, we are constrained to rule that we have to
enforce the contract as it is the only reasonable basis to arrive at a just award.
We note that the finding on the amount lost is more of a probability than a proved conclusion.
The trial court stated:
xxx xxx xxx
We come now to the actual loss of $4,750.00 which the plaintiff claims was
the amount of his retirement award and vacation pay. According to the
plaintiff, this was in cash of $100 denominations and was placed in an
envelope separate from the other money he was carrying. Plaintiff presented
the memorandum award, Exhibit T-1 and the vouchers of payment, Exhibits
T-2 and T-3. Under the circumstances, recited by the plaintiff in which the
loss occurred, the Court believes that plaintiff could really have placed this
amount in the attache case considering that he was originally handcarrying
said attache case and the same was looked, and he did not expect that he
would be required to check it in. . . . (Amended Record on Appeal, p. 75;
Emphasis ours)
The above conclusion of the trial court does not arise from the facts. That the attache case
was originally handcarried does not beg the conclusion that the amount of $4,750.00 in cash
could have been placed inside. It may be noted that out of a claim for US$42,403.90 as the
amount lost, the trial court found for only US$5,228.90 and 100 paengs. The court had
doubts as to the total claim.
The lost luggage was declared as weighing around 18 pounds or approximately 8 kilograms.
At $20.00 per kilogram, the petitioner offered to pay $160.00 as a higher value was not
declared in advance and additional charges were not paid. We note, however, that an
amount of $400.00 per passenger is allowed for unchecked luggage. Since the checking-in
was against the will of the respondent, we treat the lost bag as partaking of involuntarily and
hurriedly checked-in luggage and continuing its earlier status as unchecked luggage. The fair
liability under the petitioner's own printed terms is $400.00. Since the trial court ruled out
discriminatory acts or bad faith on the part of Pan Am or other reasons warranting damages,
there is no factual basis for the grant of P20,000.00 damages.
As to the question of whether or not private respondent should be paid attorney's fees, the
Court sustains the finding of the trial court and the respondent appellate court that it is just
and equitable for the private respondent to recover expenses for litigation in the amount of
P5,000.00. Article 22(4) of the Warsaw Convention, as amended does not preclude an award
of attorney's fees. That provision states that the limits of liability prescribed in the instrument
"shall not prevent the court from awarding, in accordance with its own law, in addition, the
whole or part of the court costs and other expenses of litigation incurred by the plaintiff." We,
however, raise the award to P10,000.00 considering the resort to the Court of Appeals and
this Court.
WHEREFORE, the petition is hereby GRANTED and the decision of the respondent Court of
Appeals is REVERSED and SET ASIDE. The petitioner is ordered to pay the private
respondent damages in the amount of US$400.00 or its equivalent in Philippine Currency at
the time of actual payment, P10,000.00 in attorney's fees, and costs of the suit.
SO ORDERED.






















G.R. No. 85331 August 25, 1989
KAPALARAN BUS LINE, petitioner, vs. ANGEL CORONADO, LOPE GRAJERA, DIONISIO
SHINYO, and THE COURT OF APPEALS, respondents,
FELICIANO, J.:
Petitioner Kapalaran Bus Line ("Kapalaran") seeks the reversal or modification of the Court of
Appeals' decision in CA G.R. CV No. 12476 and the absolution of petitioner from all liability
arising from the collision between one of petitioner's buses and a jeepney owned by
respondent Coronado, driven by respondent Grajera and in which jeepney respondent
Shinyo was a passenger.
The facts of this case as found by the trial court and adopted by the Court of Appeals, are
summarized in the trial court's decision and quoted in the Court of Appeals' own judgment in
the following terms:
The accident happened on the National Highway at 10:30 A.M. on August 2,
1982. The jeepney driven by Lope Grajera was then corning from Pila,
Laguna on its way towards the direction of Sta. Cruz, traversing the old
highway. As it reached the intersection where there is a traffic sign 'yield,' it
stopped and cautiously treated the intersection as a "Thru Stop' street, which
it is not. The KBL bus was on its way from Sta. Cruz, Laguna, driven by its
regular driver Virgilio Llamoso, on its way towards Manila. The regular
itinerary of the KBL bus is through the town proper of Pila, Laguna, but at
times it avoids this if a bus is already fully loaded with passengers and can
no longer accommodate additional passengers. As the KBL bus neared the
intersection, Virgilio Llamoso inquired from his conductor if they could still
accommodate passengers and learning that they were already full, he
decided to bypass Pila and instead, to proceed along the national highway.
Virgilio Llamoso admitted that there was another motor vehicle ahead of him.
The general rule is that the vehicle on the national highway has the right-of-
way as against a feeder road. Another general rule is that the vehicle coming
from the right has the right-of-way over the vehicle coming from the left. The
general rules on right-of-way may be invoked only if both vehicles approach
the intersection at almost the same time. In the case at bar, both roads are
national roads. Also, the KBL bus was still far from the intersection when the
jeepney reached the same. As testified to by Atty. Conrado L. Manicad who
was driving a Mustang car coming from the direction of Sta. Cruz and
proceeding towards the direction of Manila, he stopped at the intersection to
give way to the jeepney driven by Grajera. Behind Manicad were two
vehicles, a car of his client and another car. A Laguna Transit bus had just
entered the town of Pila ahead of Atty. Manicad.
The sketch marked Exhibit 'E' indicates very clearly that the jeepney had
already traversed the intersection when it met the KBL bus head-on. It is
also obvious that the point of impact was on the right lane of the highway
which is the lane properly belonging to the jeepney. As testified to by Lope
Grajera, the KBL bus ignored the stopped vehicles of Atty. Manicad and the
other vehicles behind Atty. Manicad and overtook both vehicles at the
intersection, therefore, causing the accident.
Judging from the testimony of Atty. Conrado L. Manicad and the sketch
(Exhibit 'E'), the sequence of events shows that the first vehicle to arrive at
the intersection was the jeepney. Seeing that the road was clear, the
jeepney which had stopped at the intersection began to move forward, and
for his part, Atty. Manicad stopped his car at the intersection to give way to
the jeepney. At about this time, the KBL bus was approaching the
intersection and its driver was engaged in determining from his conductor if
they would still pass through the town proper of Pila. Upon learning that they
were already full, he turned his attention to the road and found the stopped
vehicles at the intersection with the jeepney trying to cross the intersection.
The KBL bus had no more room within which to stop without slamming into
the rear of the vehicle behind the car of Atty. Manicad. The KBL driver chose
to gamble on proceeding on its way, unfortunately, the jeepney driven by
Grajera, which had the right-of-way, was about to cross the center of the
highway and was directly on the path of the KBL bus. The gamble made by
Llamoso did not pay off. The impact indicates that the KBL bus was
travelling at a fast rate of speed because, after the collision, it did not stop; it
travelled for another 50 meters and stopped only when it hit an electric post
(pp. 3-4, Decision; pp. 166167, Record). 1
On 14 September 1982, Kapalaran, apparently believing that the best defense was offense,
filed a complaint for damage to property and physical injuries through reckless imprudence
against respondents Angel Coronado and Lope Grajera in the Regional Trial Court, Branch
27, Sta. Cruz, Laguna. Respondents answered with their own claims (counter-claims) for
damages. A third-party complaint and/or a complaint for intervention was also filed in the
same case against Kapalaran by jeepney passenger Dionisio Shinyo.
On 15 October 1986, after trial, the trial court rendered a judgment in favor of private
respondents and ordering Kapalaran
(a) to pay Angel Coronado the sum of P40,000.00 as compensation for the
totally wrecked jeepney, plus the sum of P5,000.00 as attorney's fees and
litigation expenses, and
(b) to Dionisio Shinyo the sum of P35,000.00 representing the expenses
incurred by said intervenor for his treatment including his car-hire, the further
sum of P30,000.00 representing the expenses said defendant will incur for
his second operation to remove the intramedulary nail from his femur, the
additional sum of P50,000.00 to serve as moral damages for the pain and
suffering inflicted on said defendant, plus the sum of P10,000.00 in the
concept of exemplary damages to serve as a deterrent to others who, like
the plaintiff, may be minded to induce accident victims to perjure themselves
in a sworn statement, and the sum of P15,000.00 as attorney's fees and
litigation expenses.
From the above judgment, Kapalaran appealed to the Court of Appeals assailing the trial
court's findings on the issue of fault and the award of damages. The Court of Appeals, on 28
June 1988, affirmed the decision of the trial court but modified the award of damages by
setting aside the grant of exemplary damages as well as the award of attomey's fee and
litigation expenses made to Dionisio Shinyo. 2
This decision of the Court of Appeals is now before us on a Petition for Review, a motion for
reconsideration by Kapalaran having been denied by that court on 13 October 1988.
Kapalaran assails the findings of fact of the Regional Trial Court and of the Court of Appeals,
and insists before this Court that respondent Grajera, driver of the jeepney, was at fault and
not the driver of Kapalaran's bus. It must be remembered that it is not the function of this
Court to analyze and weigh evidence presented by the parties all over again and that our
jurisdiction is in principle limited to reviewing errors of law that might have been committed by
the Court of Appeals. Kapalaran has made no compelling showing of any misapprehension of
facts on the part of the Court of Appeals that would require us to review and overturn the
factual findings of that court. On the contrary, examination of the record shows that not only
are the conclusions of fact of the Court of Appeals and the trial court on who the bus driver
or the jeepney driver had acted negligently and was at fault in the collision of their
vehicles, amply supported by the evidence of record, but also that Kapalaran's bus driver was
grossly negligent and had acted wantonly and in obvious disregard of the applicable rules on
safety on the highway.
Kapalaran's driver had become aware that some vehicles ahead of the bus and travelling in
the same direction had already stopped at the intersection obviously to give way either to
pedestrians or to another vehicle about to enter the intersection. The bus driver, who was
driving at a speed too high to be safe and proper at or near an intersection on the highway,
and in any case too high to be able to slow down and stop behind the cars which had
preceded it and which had stopped at the intersection, chose to swerve to the left lane and
overtake such preceding vehicles, entered the intersection and directly smashed into the
jeepney within the intersection. Immediately before the collision, the bus driver was actually
violating the following traffic rules and regulations, among others, in the Land Transportation
and Traffic Code, Republic Act No. 4136, as amended:
Sec. 35. Restriction as to speed. (a) Any person driving a motor vehicle
on a highway shall drive the same at a careful and prudent speed, not
greater nor less than is reasonable and proper, having due regard for the
traffic, the width of the highway, and or any other condition then and there
existing; and no person shall drive any motor vehicle upon a highway at
such a speed as to endanger the life, limb and property of any person, nor at
a speed greater than will permit him to bring the vehicle to a stop within the
assured clear distance ahead.
xxx xxx xxx
Sec. 41. Restrictions on overtaking and passing. _1 (a) The driver of a
vehicle shall not drive to the left side of the center line of a highway in
overtaking or passing another vehicle, proceeding in the same direction,
unless such left side is clearly visible, and is free of oncoming traffic for a
sufficient distance ahead to permit such overtaking or passing to be made in
safety.
xxx xxx xxx
(c) The driver of a vehicle shall not overtake or pass any other vehicle
proceeding in the same direction, at any railway grade crossing, or at any
intersection of highways, unless such intersection or crossing is controlled by
traffic signal, or unless permitted to do so by a watchman or a peace officer,
except on a highway having two or more lanes for movement of traffic in one
direction where the driver of a vehicle may overtake or pass another vehicle
on the right. Nothing in this section shall be construed to prohibit a driver
overtaking or passing, upon the right, another vehicle which is making or
about to make a left turn.
xxx xxx xxx
(Emphasis supplied)
Thus, a legal presumption arose that the bus driver was negligent 3 a presumption Kapalaran
was unable to overthrow.
Petitioner's contention that the jeepney should have stopped before entering the "Y-
intersection" because of the possibility that another vehicle behind the cars which had
stopped might not similarly stop and might swerve to the left to proceed to the highway en
route to Manila, is more ingenious than substantial. It also offers illustration of the familiar
litigation tactic of shifting blame from one's own shoulders to those of the other party. But the
jeepney driver, seeing the cars closest to the intersection on the opposite side of the highway
come to a stop to give way to him, had the right to assume that other vehicles further away
and behind the stopped cars would similarly come to a stop and not seek illegally to overtake
the stopped vehicles and come careening into the intersection at an unsafe
speed. 4 Petitioner's bus was still relatively far away from the intersection when the jeepney
entered the same; the bus collided head on into the jeepney because the bus had been going
at an excessively high velocity immediately before and at the time of overtaking the stopped
cars, and so caught the jeepney within the intersection. It was also the responsibility of the
bus driver to see to it, when it overtook the two (2) cars ahead which had stopped at the
intersection, that the left lane of the road within the intersection and beyond was clear. The
point of impact was on the left side of the intersection (the light lane so far as concerns the
jeepney coming from the opposite side), which was precisely the lane or side on which the
jeepney had a right to be.
Petitioner Kapalaran also assails the award of moral damages against itself, upon the ground
that its own bus driver, third-party defendant, was apparently not held liable by the trial court
. 5 Hence, Kapalaran argues that there was no justification for holding it, the employer, liable
for damages, considering that such liability was premised upon the bus driver's negligence
and that petitioner "as mere employer" was not guilty of such negligence or
imprudence. 6 This contention in thoroughly unpersuasive. The patent and gross negligence
on the part of the petitioner Kapalaran's driver raised the legal presumption that Kapalaran as
employer was guilty of negligence either in the selection or in the supervision of its bus
driver,7 Where the employer is held liable for damages, it has of course a right of recourse
against its own negligent employee. If petitioner Kapalaran was interested in maintaining its
right of recourse against or reimbursement from its own driver, 8 it should have appealled
from that portion of the trial court's decision which had failed to hold the bus driver is not
"merely subsidiary," and is not limited to cases where the employee "cannot pay his liability"
nor are private respondents compelled frist to proceed against the bus driver. The liability of
the employer under Article 2180 of the Civil Code is direct and immediate; it is not
conditioned upon prior recourse against the negligent employee and a prior showing of the
insolvency of such employee. 9 So far as the record shows, petitioner Kapalaran was unable
to rebut the presumption of negligence on its own part. The award of moral damages against
petitioner Kapalaran is not only entirely in order; it is also quite modest consideirng Dionisio
Shinyo's death during the pendency of this petition, a death hastened by, if not directly due
to, the grievous injuries sustained by him in the violent collision.
The Court of Appeals deleted the award of exemplary damages which the trial court had
granted in order "to serve as a deterrent to others who, like the plaintiff [Kapalaran], may be
minded to induce accident victims to perjure themselves in a sworn statement." The Court of
Appeals held that htere was no basis for this award of exemplary damages, stating that it was
not "such a reprehensible act to try to gather witnesses for one's cause" and that there was
no evidence of use of "presure or influence" to induce the accident victims to perjure
themselves While that might have been so, both the trial court and the Court of Appeals
overlook another and far more compelling basis for the award of exemplary damages against
petitioner Kapalaran in this case. There is no question that petitioner's bus driver was grossly
and very probably criminally negligent in his reckless disregard of the rights of other vehicles
and their pasangers and of pedestrian as well The Court is entitled to take judicial notice of
the gross negligence and the appalling disregard of the physical safety and property of others
so commonly exhibited today by the drivers of passanger bussses and similar vehicles on our
highways. The law requires petitioner as common carrier to exercise extraordinary diligence
incarrying and transporting their passanger safely "as far as human care and foresight can
proved, using the utmost diligence of very cautious persons, with due regard for all
circumstances." 10 In requiring the highest possible degree of diligence from common
carriers and creating a presumption of negligence against them, the law compels them to
curb the recklessness of their drivers. 11 While the immediate beneficiaries of the standard of
extraordinary diligence are, of course, the passengers and owners of cargo carried by a
common carrier, they are not only persons that the law seeks to benefit. For if common
carriers carefully observed the statutory standard of extraordinary diligence in respect of of
their own passengers, they cannot help but simultaneously benefit pedestrians and the
owners and passengers of other vehicles who are equally entitled to the safe and convenient
use of our roads and highways. 12 The law seeks to stop and prevent the slaughter and
maiming of people (whether passengers or not) and the destruction of property (whether
freight or not) on our highways by buses, the very size and power of which seem often to
inflame the minds of their drivers. Article 2231 of the Civil Code explicitly authorizes the
imposition of exemplary damages in cases of quasi-delicts "if the defendant acted with gross
negligence." Thus we believe that the award of exemplary damages by the trial court was
quite proper, although granted for the wrong reason, and should not only be restored but
augmented in the present case. The Court is aware that respondent Shinyo did not file a
separate petition for review to set aside that portion of the Court of Appeals'decision which
deleted the grant by the trial court of exemplary damages. It is settled, however, that issues
which must be resolved if substantial justice is to be rendered to the parties, may and should
be considered and decided by this Court even if those issues had not been explicitly raised
by the party affected. 13 In the instant case, it is not only the demands of substantial justice
but also the compelling considerations of public policy noted above, which impel us to the
conclusion that the trial court's award of exemplary damages was erroneously deleted and
must be restored and brought more nearly to the level which public policy and substantial
justice require.
In much the same vein, we believe that the award by the trial court of P15,000.00 as
attorney's fees and litigation expenses, deleted by the Court of Appeals, should similarly be
restored, being both authorized by law 14 and demanded by substantial justice in the instant
case.
WHEREFORE, the Petition for Review on certiorari is DENIED for lack of merit and the
Decision of the Court of Appeals is hereby AFFIRMED, except (1) that the award of
exemplary damages to Dionisio Shinyo shall be restored and increased from P10,000.00 to
P25,000.00, and (2) that the grant of attorney's fees and litigation expenses in the sum of
P15,000.00 to Dionisio Shinyo shall similarly be restored. Costs against petitioner.
SO ORDERED.




















G.R. No. 88052 December 14, 1989
JOSE P. MECENAS, ROMEO P. MECENAS, LILIA P. MECENAS, ORLANDO P.
MECENAS, VIOLETA M. ACERVO, LUZVIMINDA P. MECENAS; and OFELIA M.
JAVIER, petitioners, vs. HON. COURT OF APPEALS, CAPT. ROGER SANTISTEBAN and
NEGROS NAVIGATION CO., INC., respondents.
FELICIANO, J.:
At 6:20 o'clock in the morning of 22 April 1980, the M/T "Tacloban City," a barge-type oil
tanker of Philippine registry, with a gross tonnage of 1,241,68 tons, owned by the Philippine
National Oil Company (PNOC) and operated by the PNOC Shipping and Transport
Corporation (PNOC Shipping), having unloaded its cargo of petroleum products, left Amlan,
Negros Occidental, and headed towards Bataan. At about 1:00 o'clock in the afternoon of
that same day, the M/V "Don Juan," an interisland vessel, also of Philippine registry, of
2,391.31 tons gross weight, owned and operated by the Negros Navigation Co., Inc. (Negros
Navigation) left Manila bound for Bacolod with seven hundred fifty (750) passengers listed in
its manifest, and a complete set of officers and crew members.
On the evening of that same day, 22 April 1980, at about 10:30 o'clock, the "Tacloban City"
and the "Don Juan" collided at the Talbas Strait near Maestra de Ocampo Island in the
vicinity of the island of Mindoro. When the collision occurred, the sea was calm, the weather
fair and visibility good. As a result of this collision, the M/V "Don Juan" sank and hundreds of
its passengers perished. Among the ill-fated passengers were the parents of petitioners, the
spouses Perfecto Mecenas and Sofia Mecenas, whose bodies were never found despite
intensive search by petitioners.
On 29 December 1980, petitioners filed a complaint in the then Court- of First Instance of
Quezon City, docketed as Civil Case No. Q-31525, against private respondents Negros
Navigation and Capt. Roger Santisteban, the captain of the "Don Juan" without, however,
impleading either PNOC or PNOC Shipping. In their complaint, petitioners alleged that they
were the seven (7) surviving legitimate children of Perfecto Mecenas and Sofia Mecenas and
that the latter spouses perished in the collision which had resulted from the negligence of
Negros Navigation and Capt. Santisteban. Petitioners prayed for actual damages of not less
than P100,000.00 as well as moral and exemplary damages in such amount as the Court
may deem reasonable to award to them.
Another complaint, docketed as Civil Case No. Q-33932, was filed in the same court by Lilia
Ciocon claiming damages against Negros Navigation, PNOC and PNOC Shipping for the
death of her husband Manuel Ciocon, another of the luckless passengers of the "Don Juan."
Manuel Ciocon's body, too, was never found.
The two (2) cases were consolidated and heard jointly by the Regional Trial Court of Quezon
City, Branch 82. On 17 July 1986, after trial, the trial court rendered a decision, the
dispositive of which read as follows:
WHEREFORE, the Court hereby renders judgment ordering:
a) The defendant Negros Navigation Co., Inc. and Capt. Roger Santisteban
jointly and severally liable to pay plaintiffs in Civil Case No Q-31525, the sum
of P400,000.00 for the death of plaintiffs' parents, Perfecto A. Mecenas and
Sofia P. Mecenas; to pay said plaintiff's the sum of P15.000,00 as and for
attorney's fees; plus costs of the suit.
b) Each of the defendants Negros Navigation Co Inc. and Philippine National
Oil Company/PNOC Shipping and Transportation Company, to pay the
plaintiff in Civil Case No. Q-33932, the sum of P100,000.00 for the death of
Manuel Ciocon, to pay said plaintiff jointly and severally, the sum of P1
5,000.00 as and for attorney's fees, plus costs of the suit. 1
Negros Navigation, Capt. Santisteban, PNOC and PNOC Shipping appealed the trial court's
decision to the Court of Appeals. Later, PNOC and PNOC Shipping withdrew their appeal
citing a compromise agreement reached by them with Negros Navigation; the Court of
Appeals granted the motion by a resolution dated 5 September 1988, subject to the
reservation made by Lilia Ciocon that she could not be bound by the compromise agreement
and would enforce the award granted her by the trial court.
In time, the Court of Appeals rendered a decision dated 26 January 1989 which decreed the
following:
WHEREFORE, in view of the foregoing, the decision of the court a quo is hereby affirmed as
modified with respect to Civil Case No. 31525, wherein defendant appellant Negros
Navigation Co. Inc. and Capt. Roger Santisteban are held jointly and severally liable to pay
the plaintiffs the amount of P100,000. 00 as actual and compensatory damages and
P15,000.00 as attorney's fees and the cost of the suit. 2
The issue to be resolved in this Petition for Review is whether or not the Court of Appeals
had erred in reducing the amount of the damages awarded by the trial court to the petitioners
from P400,000.00 to P100,000.00.
We note that the trial court had granted petitioners the sum of P400,000,00 "for the death of
[their parents]" plus P15,000.00 as attorney's fees, while the Court of Appeals awarded them
P100,000.00 "as actual and compensatory damages" and P15,000.00 as attorney's fees. To
determine whether such reduction of the damages awarded was proper, we must first
determine whether petitioners were entitled to an award of damagesother than actual or
compensatory damages, that is, whether they were entitled to award of moral and exemplary
damages.
We begin by noting that both the trial court and the Court of Appeals considered the action
(Civil Case No. Q-31525) brought by the sons and daughters of the deceased Mecenas
spouses against Negros Navigation as based on quasi-delict. We believed that action is more
appropriately regarded as grounded on contract, the contract of carriage between the
Mecenas spouses as regular passengers who paid for their boat tickets and Negros
Navigation; the surviving children while not themselves passengers are in effect suing the
carrier in representation of their deceased parents. 3 Thus, the suit (Civil Case No. Q-33932)
filed by the widow Lilia Ciocon was correctly treated by the trial and appellate courts as
based on contract (vis-a-vis Negros Navigation) and as well on quasi-delict (vis-a-vis PNOC
and PNOC Shipping). In an action based upon a breach of the contract of carriage, the
carrier under our civil law is liable for the death of passengers arising from the negligence or
willful act of the carrier's employees although such employees may have acted beyond the
scope of their authority or even in violation of the instructions of the carrier, 4which liability
may include liability for moral damages. 5 It follows that petitioners would be entitled to moral
damages so long as the collision with the "Tacloban City" and the sinking of the "Don Juan"
were caused or attended by negligence on the part of private respondents.
In respect of the petitioners' claim for exemplary damages, it is only necessary to refer to
Article 2232 of the Civil Code:
Article 2332. In contracts and quasi-contracts, the court may exemplary
damages if the defendant acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. 6
Thus, whether petitioners are entitled to exemplary damages as claimed must depend upon
whether or not private respondents acted recklessly, that is, with gross negligence.
We turn, therefore, to a consideration of whether or not Negros Navigation and Capt.
Santisteban were grossly negligent during the events which culminated in the collision with
"Tacloban City" and the sinking of the "Don Juan" and the resulting heavy loss of lives.
The then Commandant of the Philippine Coast Guard, Commodore B.C. Ochoco, in a
decision dated 2 March 1981, held that the "Tacloban City" was "primarily and solely [sic] at
fault and responsible for the collision." 7Initially, the Minister of National Defense upheld the
decision of Commodore Ochoco. 8 On Motion for Reconsideration, however, the Minister of
National Defense reversed himself and held that both vessels had been at fault:
It is therefore evident from a close and thorough review of the evidence
that fault is imputable to both vessels for the collision. Accordingly, the
decision dated March 12, 1982, subject of the Motion for Reconsideration
filed by counsel of M/T Tacloban City, is hereby reversed. However, the
administrative penalties imposed oil both vessels and their respective crew
concerned are hereby affirmed. 9
The trial court, after a review of the evidence submitted during the trial, arrived at the same
conclusion that the Minister of National Defense had reached that both the "Tacloban City"
and the "Don Juan" were at fault in the collision. The trial court summarized the testimony
and evidence of PNOC and PNOC Shipping as well as of Negros Navigation in the following
terms:
Defendant PNOC's version of the incident:
M/V Don Juan was first sighted at about 5 or 6 miles from Tacloban City
(TSN, January 21, 1985, p. 13); it was on the starboard (right) side of
Tacloban City. This was a visual contact; not picked up by radar (p. 15, Ibid).
Tacloban City was travelling 310 degrees with a speed of 6 knots, estimated
speed of Don Juan of 16 knots (TSN, May 9, pp. 5-6). As Don Juan
approached, Tacloban City gave a leeway of 1 0 degrees to the left. 'The
purpose was to enable Tacloban to see the direction of Don Juan (p. 19,
Ibid). Don Juan switched to green light, signifying that it will pass Tacloban
City's right side; it will be a starboard to starboard passing (p. 21, Ibid)
Tacloban City's purpose in giving a leeway of 10 degrees at this point, is to
give Don Juan more space for her passage (p. 22, Ibid). This was increased
by Tacloban City to an additional 15 degrees towards the left (p. 22, Ibid).
The way was clear and Don Juan has not changed its course (TSN, May
9,1985, p. 39).
When Tacloban City altered its course the second time, from 300 degrees to
285 degrees, Don Juan was about 4.5 miles away (TSN, May 9,1985, p. 7).
Despite executing a hardport maneuver, the collision nonetheless occurred.
Don Juan rammed the Tacloban City near the starboard bow (p. 7, Ibid)."
NENACO's [Negros Navigation] version.
Don Juan first sighted Tacloban City 4 miles away, as shown by radar (p. 13,
May 24, 1983). Tacloban City showed its red and green lights twice; it
proceeded to, and will cross, the path of Don Juan. Tacloban was on the left
side of Don Juan (TSN, April 20,1983, p. 4).
Upon seeing Tacloban's red and green lights, Don Juan executed hard
starboard (TSN, p. 4, Ibid.) This maneuver is in conformity with the rule that
'when both vessels are head on or nearly head on, each vessel must turn to
the right in order to avoid each other. (p. 5, Ibid). Nonetheless, Tacloban
appeared to be heading towards Don Juan (p. 6, Ibid),
When Don Juan executed hard starboard, Tacloban was about 1,500 feet
away (TSN, May 24,1983, p. 6). Don Juan, after execution of hard starboard,
will move forward 200 meters before the vessel will respond to such
maneuver (p. 7, Ibid). The speed of Don Juan at that time was 17 knits;
Tacloban City 6.3 knots. t "Between 9 to 15 seconds from execution of hard
starboard, collision occurred (p. 8, Ibid). (pp. 3-4 Decision). 10
The trial court concluded:
M/ V Don Juan and Tacloban City became aware of each other's presence
in the area by visual contact at a distance of something like 6 miles from
each other. They were fully aware that if they continued on their course, they
will meet head on. Don Juan - steered to the right; Tacloban City continued
its course to the left. There can be no excuse for them not to realize that,
with such maneuvers, they will collide. They executed maneuvers
inadequate, and too late, to avoid collision.
The Court is of the considered view that the defendants are equally
negligent and are liable for damages. (p. 4, decision). 11
The Court of Appeals, for its part, reached the same conclusion. 12
There is, therefore, no question that the "Don Juan" was at least as negligent as the M/T
"Tacloban City" in the events leading up to the collision and the sinking of the "Don Juan."
The remaining question is whether the negligence on the part of the "Don Juan" reached that
level of recklessness or gross negligence that our Civil Code requires for the imposition of
exemplary damages. Our own review of the record in the case at bar requires us to answer
this in the affirmative.
In the first place, the report of the Philippine Coast Guard Commandant (Exhibit "l 0"), while
holding the "Tacloban City" as "primarily and solely [sic] at fault and responsible for the
collision," did itself set out that there had been fault or negligence on the part of Capt.
Santisteban and his officers and crew before the collision and immediately after contact of
the two (2) vessels. The decision of Commodore Ochoco said:
x x x x x x x x x
M/S Don Juan's Master, Capt. Rogelio Santisteban, was playing mahjong
before and up to the time of collision. Moreover, after the collision, he failed
to institute appropriate measures to delay the sinking MS Don Juan and to
supervise properly the execution of his order of abandonship. As regards the
officer on watch, Senior 3rd Mate Rogelio Devera, he admitted that he failed
or did not call or inform Capt. Santisteban of the imminent danger of collision
and of the actual collision itself Also, he failed to assist his master to prevent
the fast sinking of the ship. The record also indicates that Auxiliary Chief
Mate Antonio Labordo displayed laxity in maintaining order among the
passengers after the collision.
x x x x x x x x x. 13
We believe that the behaviour of the captain of the "Don Juan" in tills instance-playing
mahjong "before and up to the time of collision constitutes behaviour that is simply
unacceptable on the part of the master of a vessel to whose hands the lives and welfare of at
least seven hundred fifty (750) passengers had been entrusted. Whether or not Capt.
Santisteban was "off-duty" or "on-duty" at or around the time of actual collision is quite
immaterial; there is, both realistically speaking and in contemplation of law, no such thing as
"off-duty" hours for the master of a vessel at sea that is a common carrier upon whom the law
imposes the duty of extraordinary diligence-
[t]he duty to carry the passengers safely as far as human care and foresight
can provide, using the utmost diligence of very cautious persons, with a due
regard for all the circumstances. 14
The record does not show that was the first or only time that Capt. Santisteban had
entertained himself during a voyage by playing mahjong with his officers and passengers;
Negros Navigation in permitting, or in failing to discover and correct such behaviour, must be
deemed grossly negligent.
Capt. Santisteban was also faulted in the Philippine Coast Guard decision for failing after the
collision, "to institute appropriate measures to delay the sinking of M/V Don Juan." This
appears to us to be a euphemism for failure to maintain the sea-worthiness or the water-tight
integrity of the "Don Juan." The record shows that the "Don Juan" sank within ten (10) to
fifteen (15) minutes after initial contact with the "Tacloban City. 15 While the failure of Capt.
Santisteban to supervise his officers and crew in the process of abandoning the ship and his
failure to avail of measures to prevent the too rapid sinking of his vessel after collision, did
not cause the collision by themselves, such failures doubtless contributed materially to the
consequent loss of life and, moreover, were indicative of the kind and level of diligence
exercised by Capt. Santisteban in respect of his vessel and his officers and men prior to
actual contact between the two (2) vessels. The officer-on-watch in the "Don Juan" admitted
that he had failed to inform Capt. Santisteban not only of the "imminent danger of collision"
but even of "the actual collision itself "
There is also evidence that the "Don Juan" was carrying more passengers than she had
been certified as allowed to carry. The Certificate of Inspection 16 dated 27 August 1979,
issued by the Philippine Coast Guard Commander at Iloilo City, the Don Juan's home port,
states:
Passengers allowed : 810
Total Persons Allowed : 864
The report of the Philippine Coast Guard (Exhibit "10") stated that the "Don Juan" had been
"officially cleared with 878 passengers on board when she sailed from the port of Manila on
April 22, 1980 at about 1:00 p.m." This head-count of the passengers "did not include the 126
crew members, children below three (3) years old and two (2) half-paying passengers" which
had been counted as one adult passenger. 17 Thus, the total number of persons on board
the "Don Juan" on that ill-starred night of 22 April 1 980 was 1,004, or 140 persons more than
the maximum lumber that could be safely carried by the "Don Juan," per its own Certificate of
Inspection. 18 We note in addition, that only 750 passengers had been listed in its
manifest for its final voyage; in other words, at least 128 passengers on board had not even
been entered into the "Don Juan's" manifest. The "Don Juan's" Certificate of Inspection
showed that she carried life boat and life raft accommodations for only 864 persons, the
maximum number of persons she was permitted to carry; in other words, she did not carry
enough boats and life rafts for all the persons actually on board that tragic night of 22 April
1980.
We hold that under these circumstances, a presumption of gross negligence on the part of
the vessel (her officers and crew) and of its ship-owner arises; this presumption was never
rebutted by Negros Navigation.
The grossness of the negligence of the "Don Juan" is underscored when one considers the
foregoing circumstances in the context of the following facts: Firstly, the "Don Juan" was
more than twice as fast as the "Tacloban City." The "Don Juan's" top speed was 17 knots;
while that of the "Tacloban City" was 6.3. knots. 19Secondly, the "Don Juan" carried the full
complement of officers and crew members specified for a passenger vessel of her class.
Thirdly, the "Don Juan" was equipped with radar which was functioning that night. Fourthly,
the "Don Juan's" officer on-watch had sighted the "Tacloban City" on his radar screen while
the latter was still four (4) nautical miles away. Visual confirmation of radar contact was
established by the "Don Juan" while the "Tacloban City" was still 2.7 miles away. 20 In the
total set of circumstances which existed in the instant case, the "Don Juan," had it taken
seriously its duty of extraordinary diligence, could have easily avoided the collision with the
"Tacloban City," Indeed, the "Don Juan" might well have avoided the collision even if it had
exercised ordinary diligence merely.
It is true that the "Tacloban City" failed to follow Rule 18 of the International Rules of the
Road which requires two (2) power- driven vessels meeting end on or nearly end on each to
alter her course to starboard (right) so that each vessel may pass on the port side (left) of the
other. 21 The "Tacloban City," when the two (2) vessels were only three-tenths (0.3) of a mile
apart, turned (for the second time) 150 to port side while the "Don Juan" veered hard to
starboard. This circumstance, while it may have made the collision immediately inevitable,
cannot, however, be viewed in isolation from the rest of the factual circumstances obtaining
before and up to the collision. In any case, Rule 18 like all other International Rules of the
Road, are not to be obeyed and construed without regard to all the circumstances
surrounding a particular encounter between two (2) vessels. 22 In ordinary circumstances, a
vessel discharges her duty to another by a faithful and literal observance of the Rules of
Navigation, 23 and she cannot be held at fault for so doing even though a different course
would have prevented the collision. This rule, however, is not to be applied where it is
apparent, as in the instant case, that her captain was guilty of negligence or of a want of
seamanship in not perceiving the necessity for, or in so acting as to create such necessity
for, a departure from the rule and acting accordingly. 24 In other words, "route observance"
of the International Rules of the Road will not relieve a vessel from responsibility if the
collision could have been avoided by proper care and skill on her part or even by a departure
from the rules. 25
In the petition at bar, the "Don Juan" having sighted the "Tacloban City" when it was still a
long way off was negligent in failing to take early preventive action and in allowing the two (2)
vessels to come to such close quarters as to render the collision inevitable when there was
no necessity for passing so near to the "Tacloban City" as to create that hazard or
inevitability, for the "Don Juan" could choose its own distance. 26, It is noteworthy that the
"Tacloban City," upon turning hard to port shortly before the moment of collision, signalled its
intention to do so by giving two (2) short blasts with horn. 26A The "Don Juan " gave no
answering horn blast to signal its own intention and proceeded to turn hatd to starboard. 26B
We conclude that Capt. Santisteban and Negros Navigation are properly held liable for gross
negligence in connection with the collision of the "Don Juan" and "Tacloban City" and the
sinking of the "Don Juan" leading to the death of hundreds of passengers. We find no
necessity for passing upon the degree of negligence or culpability properly attributable to
PNOC and PNOC Shipping or the master of the "Tacloban City," since they were never
impleaded here.
It will be recalled that the trial court had rendered a lump sum of P400,000.00 to petitioners
for the death of their parents in the "Don Juan" tragedy. Clearly, the trial court should have
included a breakdown of the lump sum award into its component parts: compensatory
damages, moral damages and exemplary damages. On appeal, the Court of Appeals could
have and should have itself broken down the lump sum award of the trial court into its
constituent parts; perhaps, it did, in its own mind. In any case, the Court of Appeals
apparently relying uponManchester Development Corporation V. Court of
Appeals 27 reduced the P400,000.00 lump sum award into a P100,000.00 for actual and
compensatory damages only.
We believe that the Court of Appeals erred in doing so, It is true that the petitioners'
complaint before the trial court had in the body indicated that the petitioner-plaintiffs believed
that moral damages in the amount of at least P1,400,000.00 were properly due to them (not
P12,000,000.00 as the Court of Appeals erroneously stated) as well as exemplary damages
in the sum of P100,000.00 and that in the prayer of their complaint, they did not specify the
amount of moral and exemplary damages sought from the trial court. We do not believe,
however, that the Manchester doctrine, which has been modified and clarified in subsequent
decision by the Court in Sun Insurance Office, Ltd. (SIOL), et al. v. Asuncion, et al. 28 can be
applied in the instant case so as to work a striking out of that portion of the trial court's award
which could be deemed nationally to constitute an award of moral and exemplary
damages. Manchester was promulgated by the Court on 7 May 1987. Circular No. 7 of this
Court, which embodied the doctrine in Manchester, is dated 24 March 1988. Upon the other
hand, the complaint in the case at bar was filed on 29December 1980, that is, long before
either Manchester or Circular No. 7 of 24 March 1988 emerged. The decision of the trial court
was itself promulgated on 17 July 1986, again, before Manchester and Circular No. 7 were
promulgated. We do not believe that Manchester should have been applied retroactively to
this case where a decision on the merits had already been rendered by the trial court, even
though such decision was then under appeal and had not yet reached finality. There is
noindication at all that petitioners here sought simply to evade payment of the court's filing
fees or to mislead the court in the assessment of the filing fees. In any event, we
apply Manchester as clarified and amplified by Sun Insurance Office Ltd. (SIOL), by holding
that the petitioners shall pay the additional filing fee that is properly payable given the award
specified below, and that such additional filing fee shall constitute a lien upon the judgment.
We consider, finally, the amount of damages-compensatory, moral and exemplary-properly
imposable upon private respondents in this case. The original award of the trial court of
P400,000.00 could well have been disaggregated by the trial court and the Court of Appeals
in the following manner:
1. actual or compensatory damages proved in the course of trial consisting of
actual expenses
incurred by petitioners
in their search for their
parents' bodies- -P126,000.00
2. actual or compensatory
damages in case of
wrongful death
(P30,000.00 x 2) -P60,000.00 29
(3) moral damages -P107,000.00
(4) exemplary damages -P107,000.00
Total -P400,000.00
Considering that petitioners, legitimate children of the deceased spouses Mecenas, are
seven (7) in number and that they lost both father and mothe in one fell blow of fate, and
considering the pain and anxiety they doubtless experienced while searching for their parents
among the survivors and the corpses recovered from the sea or washed ashore, we believe
that an additional amount of P200,000.00 for moral damages, making a total of P307,000.00
for moral damages, making a total of P307,000.00 as moral damages, would be quite
reasonable.
Exemplary damages are designed by our civil law to permit the courts to reshape behaviour
that is socially deleterious in its consequence by creating negative incentives or deterrents
against such behaviour. In requiring compliance with the standard which is in fact that of the
highest possible degree of diligence, from common carriers and in creating a presumption of
negligence against them, the law seels to compel them to control their employees, to tame
their reckless instincts and to force them to take adequate care of human beings and their
property. The Court will take judicial notive of the dreadful regularity with which grievous
maritime disasters occur in our waters with massive loss of life. The bulk of our population is
too poor to afford domestic air transportation. So it is that notwithstanding the frequent
sinking of passenger vessels in our waters, crowds of people continue to travel by sea. This
Court is prepared to use the instruments given to it by the law for securing the ends of law
and public policy. One of those instruments is the institution of exemplary damages; one of
those ends, of special importance in an archipelagic state like the Philippines, is the safe and
reliable carriage of people and goods by sea. Considering the foregoing, we believe that an
additional award in the amount of P200,000.00 as exmplary damages, is quite modest.
The Court is aware that petitioners here merely asked for the restoration of the P 400.000.00
award of the trial court. We underscore once more, however, the firmly settled doctrine that
this Court may consider and resolved all issues which must be decided in order to render
substantial justice to the parties, including issues not explicity raised by the party affected. In
the case at bar, as in Kapalaran Bus Line v. Coronado, et al., 30 both the demands of
sustantial justice and the imperious requirements of public policy compel us to the conclusion
that the trial court's implicit award of moral and exemplary damages was erronoeusly
deledted and must be restored and augmented and brought more nearely to the level
required by public policy and substantial justice.
WHEREFORE, the Petition for Review on certiorari is hereby GRANTED and the Decision of
the Court of Appeals insofar as it redurce the amount of damages awarded to petitioners to
P100,000.00 is hereby REVERSED and SET ASIDE. The award granted by the trial court is
hereby RESTORED and AUGMENTED as follows:
(a) P 126,000.00 for actual damages;
(b) P 60,000.00 as compensatory damages for wrongful death;
(c) P 307,000.00 as moral damages;
(d) P 307,000.00 as exemplary damages making a total of P 800,000.00;
and
(e) P 15,000.00 as attorney's fees.
Petitioners shall pay the additional filing fees properly due and payable in view of the award
here made, which fees shall be computed by the Clerks of Court of the trial court, and shall
constitute a lien upon the judgment here awarded. Cost against private respondents.
SO ORDERED.



G.R. No. L-55300 March 15, 1990
FRANKLIN G. GACAL and CORAZON M. GACAL, the latter assisted by her husband,
FRANKLIN G. GACAL,petitioners, vs. PHILIPPINE AIR LINES, INC., and THE
HONORABLE PEDRO SAMSON C. ANIMAS, in his capacity as PRESIDING JUDGE of
the COURT OF FIRST INSTANCE OF SOUTH COTABATO, BRANCH I, respondents.
PARAS, J.:
This is a, petition for review on certiorari of the decision of the Court of First Instance of South
Cotabato, Branch 1,* promulgated on August 26, 1980 dismissing three (3) consolidated
cases for damages: Civil Case No. 1701, Civil Case No. 1773 and Civil Case No. 1797
(Rollo, p. 35).
The facts, as found by respondent court, are as follows:
Plaintiffs Franklin G. Gacal and his wife, Corazon M. Gacal, Bonifacio S.
Anislag and his wife, Mansueta L. Anislag, and the late Elma de Guzman,
were then passengers boarding defendant's BAC 1-11 at Davao Airport for a
flight to Manila, not knowing that on the same flight, Macalinog, Taurac
Pendatum known as Commander Zapata, Nasser Omar, Liling Pusuan
Radia, Dimantong Dimarosing and Mike Randa, all of Marawi City and
members of the Moro National Liberation Front (MNLF), were their co-
passengers, three (3) armed with grenades, two (2) with .45 caliber pistols,
and one with a .22 caliber pistol. Ten (10) minutes after take off at about
2:30 in the afternoon, the hijackers brandishing their respective firearms
announced the hijacking of the aircraft and directed its pilot to fly to Libya.
With the pilot explaining to them especially to its leader, Commander Zapata,
of the inherent fuel limitations of the plane and that they are not rated for
international flights, the hijackers directed the pilot to fly to Sabah. With the
same explanation, they relented and directed the aircraft to land at
Zamboanga Airport, Zamboanga City for refueling. The aircraft landed at
3:00 o'clock in the afternoon of May 21, 1976 at Zamboanga Airport. When
the plane began to taxi at the runway, it was met by two armored cars of the
military with machine guns pointed at the plane, and it stopped there. The
rebels thru its commander demanded that a DC-aircraft take them to Libya
with the President of the defendant company as hostage and that they be
given $375,000 and six (6) armalites, otherwise they will blow up the plane if
their demands will not be met by the government and Philippine Air Lines.
Meanwhile, the passengers were not served any food nor water and it was
only on May 23, a Sunday, at about 1:00 o'clock in the afternoon that they
were served 1/4 slice of a sandwich and 1/10 cup of PAL water. After that,
relatives of the hijackers were allowed to board the plane but immediately
after they alighted therefrom, an armored car bumped the stairs. That
commenced the battle between the military and the hijackers which led
ultimately to the liberation of the surviving crew and the passengers, with the
final score of ten (10) passengers and three (3) hijackers dead on the spot
and three (3) hijackers captured.
City Fiscal Franklin G. Gacal was unhurt. Mrs. Corazon M. Gacal suffered
injuries in the course of her jumping out of the plane when it was peppered
with bullets by the army and after two (2) hand grenades exploded inside the
plane. She was hospitalized at General Santos Doctors Hospital, General
Santos City, for two (2) days, spending P245.60 for hospital and medical
expenses, Assistant City Fiscal Bonifacio S. Anislag also escaped unhurt but
Mrs. Anislag suffered a fracture at the radial bone of her left elbow for which
she was hospitalized and operated on at the San Pedro Hospital, Davao
City, and therefore, at Davao Regional Hospital, Davao City, spending
P4,500.00. Elma de Guzman died because of that battle. Hence, the action
of damages instituted by the plaintiffs demanding the following damages, to
wit:
Civil Case No. 1701
City Fiscal Franklin G. Gacal and Mrs. Corazon M. Gacal
actual damages: P245.60 for hospital and medical
expenses of Mrs Gacal; P8,995.00 for their personal
belongings which were lost and not recovered; P50,000.00
each for moral damages; and P5,000.00 for attorney's fees,
apart from the prayer for an award of exemplary damages
(Record, pp. 4-6, Civil Case No. 1701).
Civil Case No. 1773
xxx xxx xxx
Civil Case No. 1797
xxx xxx xxx
The trial court, on August 26, 1980, dismissed the complaints finding that all the damages
sustained in the premises were attributed to force majeure.
On September 12, 1980 the spouses Franklin G. Gacal and Corazon M. Gacal, plaintiffs in
Civil Case No. 1701, filed a notice of appeal with the lower court on pure questions of law
(Rollo, p. 55) and the petition for review oncertiorari was filed with this Court on October 20,
1980 (Rollo, p. 30).
The Court gave due course to the petition (Rollo, p. 147) and both parties filed their
respective briefs but petitioner failed to file reply brief which was noted by the Court in the
resolution dated May 3, 1982 (Rollo, p. 183).
Petitioners alleged that the main cause of the unfortunate incident is the gross, wanton and
inexcusable negligence of respondent Airline personnel in their failure to frisk the passengers
adequately in order to discover hidden weapons in the bodies of the six (6) hijackers. They
claimed that despite the prevalence of skyjacking, PAL did not use a metal detector which is
the most effective means of discovering potential skyjackers among the passengers (Rollo,
pp. 6-7).
Respondent Airline averred that in the performance of its obligation to safely transport
passengers as far as human care and foresight can provide, it has exercised the utmost
diligence of a very cautious person with due regard to all circumstances, but the security
checks and measures and surveillance precautions in all flights, including the inspection of
baggages and cargo and frisking of passengers at the Davao Airport were performed and
rendered solely by military personnel who under appropriate authority had assumed
exclusive jurisdiction over the same in all airports in the Philippines.
Similarly, the negotiations with the hijackers were a purely government matter and a military
operation, handled by and subject to the absolute and exclusive jurisdiction of the military
authorities. Hence, it concluded that the accident that befell RP-C1161 was caused by
fortuitous event, force majeure and other causes beyond the control of the respondent
Airline.
The determinative issue in this case is whether or not hijacking or air piracy during martial
law and under the circumstances obtaining herein, is a caso fortuito or force majeure which
would exempt an aircraft from payment of damages to its passengers whose lives were put in
jeopardy and whose personal belongings were lost during the incident.
Under the Civil Code, common carriers are required to exercise extraordinary diligence in
their vigilance over the goods and for the safety of passengers transported by them,
according to all the circumstances of each case (Article 1733). They are presumed at fault or
to have acted negligently whenever a passenger dies or is injured (Philippine Airlines, Inc. v.
National Labor Relations Commission, 124 SCRA 583 [1983]) or for the loss, destruction or
deterioration of goods in cases other than those enumerated in Article 1734 of the Civil Code
(Eastern Shipping Lines, Inc. v. Intermediate Appellate Court, 150 SCRA 463 [1987]).
The source of a common carrier's legal liability is the contract of carriage, and by entering
into said contract, it binds itself to carry the passengers safely as far as human care and
foresight can provide. There is breach of this obligation if it fails to exert extraordinary
diligence according to all the circumstances of the case in exercise of the utmost diligence of
a very cautious person (Isaac v. Ammen Transportation Co., 101 Phil. 1046 [1957]; Juntilla v.
Fontanar, 136 SCRA 624 [1985]).
It is the duty of a common carrier to overcome the presumption of negligence (Philippine
National Railways v. Court of Appeals, 139 SCRA 87 [1985]) and it must be shown that the
carrier had observed the required extraordinary diligence of a very cautious person as far as
human care and foresight can provide or that the accident was caused by a fortuitous event
(Estrada v. Consolacion, 71 SCRA 523 [1976]). Thus, as ruled by this Court, no person shall
be responsible for those "events which could not be foreseen or which though foreseen were
inevitable. (Article 1174, Civil Code). The term is synonymous with caso fortuito (Lasam v.
Smith, 45 Phil. 657 [1924]) which is of the same sense as "force majeure" (Words and
Phrases Permanent Edition, Vol. 17, p. 362).
In order to constitute a caso fortuito or force majeure that would exempt a person from
liability under Article 1174 of the Civil Code, it is necessary that the following elements must
concur: (a) the cause of the breach of the obligation must be independent of the human will
(the will of the debtor or the obligor); (b) the event must be either unforeseeable or
unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his
obligation in a normal manner; and (d) the debtor must be free from any participation in, or
aggravation of the injury to the creditor (Lasam v. Smith, 45 Phil. 657 [1924]; Austria v. Court
of Appeals, 39 SCRA 527 [1971]; Estrada v. Consolacion, supra; Vasquez v. Court of
Appeals, 138 SCRA 553 [1985]; Juan F. Nakpil & Sons v. Court of Appeals, 144 SCRA 596
[1986]). Caso fortuito or force majeure, by definition, are extraordinary events not foreseeable
or avoidable, events that could not be foreseen, or which, though foreseen, are inevitable. It
is, therefore, not enough that the event should not have been foreseen or anticipated, as is
commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty
to foresee the happening is not impossibility to foresee the same (Republic v. Luzon
Stevedoring Corporation, 21 SCRA 279 [1967]).
Applying the above guidelines to the case at bar, the failure to transport petitioners safely
from Davao to Manila was due to the skyjacking incident staged by six (6) passengers of the
same plane, all members of the Moro National Liberation Front (MNLF), without any
connection with private respondent, hence, independent of the will of either the PAL or of its
passengers.
Under normal circumstances, PAL might have foreseen the skyjacking incident which could
have been avoided had there been a more thorough frisking of passengers and inspection of
baggages as authorized by R.A. No. 6235. But the incident in question occurred during
Martial Law where there was a military take-over of airport security including the frisking of
passengers and the inspection of their luggage preparatory to boarding domestic and
international flights. In fact military take-over was specifically announced on October 20, 1973
by General Jose L. Rancudo, Commanding General of the Philippine Air Force in a letter to
Brig. Gen. Jesus Singson, then Director of the Civil Aeronautics Administration (Rollo, pp. 71-
72) later confirmed shortly before the hijacking incident of May 21, 1976 by Letter of
Instruction No. 399 issued on April 28, 1976 (Rollo, p. 72).
Otherwise stated, these events rendered it impossible for PAL to perform its obligations in a
nominal manner and obviously it cannot be faulted with negligence in the performance of
duty taken over by the Armed Forces of the Philippines to the exclusion of the former.
Finally, there is no dispute that the fourth element has also been satisfied. Consequently the
existence of force majeure has been established exempting respondent PAL from the
payment of damages to its passengers who suffered death or injuries in their persons and for
loss of their baggages.
PREMISES CONSIDERED, the petition is hereby DISMISSED for lack of merit and the
decision of the Court of First Instance of South Cotabato, Branch I is hereby AFFIRMED.
SO ORDERED.




































G.R. No. 95582 October 7, 1991
DANGWA TRANSPORTATION CO., INC. and THEODORE LARDIZABAL y
MALECDAN, petitioners, vs. COURT OF APPEALS, INOCENCIA CUDIAMAT, EMILIA
CUDIAMAT BANDOY, FERNANDO CUDLAMAT, MARRIETA CUDIAMAT, NORMA
CUDIAMAT, DANTE CUDIAMAT, SAMUEL CUDIAMAT and LIGAYA CUDIAMAT, all
Heirs of the late Pedrito Cudiamat represented by Inocencia Cudiamat, respondents.
REGALADO, J.:p
On May 13, 1985, private respondents filed a complaint 1 for damages against petitioners for
the death of Pedrito Cudiamat as a result of a vehicular accident which occurred on March
25, 1985 at Marivic, Sapid, Mankayan, Benguet. Among others, it was alleged that on said
date, while petitioner Theodore M. Lardizabal was driving a passenger bus belonging to
petitioner corporation in a reckless and imprudent manner and without due regard to traffic
rules and regulations and safety to persons and property, it ran over its passenger, Pedrito
Cudiamat. However, instead of bringing Pedrito immediately to the nearest hospital, the said
driver, in utter bad faith and without regard to the welfare of the victim, first brought his other
passengers and cargo to their respective destinations before banging said victim to the
Lepanto Hospital where he expired.
On the other hand, petitioners alleged that they had observed and continued to observe the
extraordinary diligence required in the operation of the transportation company and the
supervision of the employees, even as they add that they are not absolute insurers of the
safety of the public at large. Further, it was alleged that it was the victim's own carelessness
and negligence which gave rise to the subject incident, hence they prayed for the dismissal of
the complaint plus an award of damages in their favor by way of a counterclaim.
On July 29, 1988, the trial court rendered a decision, effectively in favor of petitioners, with
this decretal portion:
IN VIEW OF ALL THE FOREGOING, judgment is hereby pronounced that
Pedrito Cudiamat was negligent, which negligence was the proximate cause
of his death. Nonetheless, defendants in equity, are hereby ordered to pay
the heirs of Pedrito Cudiamat the sum of P10,000.00 which approximates
the amount defendants initially offered said heirs for the amicable settlement
of the case. No costs.
SO ORDERED. 2
Not satisfied therewith, private respondents appealed to the Court of Appeals which, in a
decision 3 in CA-G.R. CV No. 19504 promulgated on August 14, 1990, set aside the decision
of the lower court, and ordered petitioners to pay private respondents:
1. The sum of Thirty Thousand (P30,000.00) Pesos by way of indemnity for
death of the victim Pedrito Cudiamat;
2. The sum of Twenty Thousand (P20,000.00) by way of moral damages;
3. The sum of Two Hundred Eighty Eight Thousand (P288,000.00) Pesos as
actual and compensatory damages;
4. The costs of this suit. 4
Petitioners' motion for reconsideration was denied by the Court of Appeals in its resolution
dated October 4, 1990,5 hence this petition with the central issue herein being whether
respondent court erred in reversing the decision of the trial court and in finding petitioners
negligent and liable for the damages claimed.
It is an established principle that the factual findings of the Court of Appeals as a rule are final
and may not be reviewed by this Court on appeal. However, this is subject to settled
exceptions, one of which is when the findings of the appellate court are contrary to those of
the trial court, in which case a reexamination of the facts and evidence may be undertaken. 6
In the case at bar, the trial court and the Court of Appeal have discordant positions as to who
between the petitioners an the victim is guilty of negligence. Perforce, we have had to
conduct an evaluation of the evidence in this case for the prope calibration of their conflicting
factual findings and legal conclusions.
The lower court, in declaring that the victim was negligent, made the following findings:
This Court is satisfied that Pedrito Cudiamat was negligent in trying to board
a moving vehicle, especially with one of his hands holding an umbrella. And,
without having given the driver or the conductor any indication that he
wishes to board the bus. But defendants can also be found wanting of the
necessary diligence. In this connection, it is safe to assume that when the
deceased Cudiamat attempted to board defendants' bus, the vehicle's door
was open instead of being closed. This should be so, for it is hard to believe
that one would even attempt to board a vehicle (i)n motion if the door of said
vehicle is closed. Here lies the defendant's lack of diligence. Under such
circumstances, equity demands that there must be something given to the
heirs of the victim to assuage their feelings. This, also considering that
initially, defendant common carrier had made overtures to amicably settle
the case. It did offer a certain monetary consideration to the victim's heirs. 7
However, respondent court, in arriving at a different opinion, declares that:
From the testimony of appellees'own witness in the person of Vitaliano
Safarita, it is evident that the subject bus was at full stop when the victim
Pedrito Cudiamat boarded the same as it was precisely on this instance
where a certain Miss Abenoja alighted from the bus. Moreover, contrary to
the assertion of the appellees, the victim did indicate his intention to board
the bus as can be seen from the testimony of the said witness when he
declared that Pedrito Cudiamat was no longer walking and made a sign to
board the bus when the latter was still at a distance from him. It was at the
instance when Pedrito Cudiamat was closing his umbrella at the platform of
the bus when the latter made a sudden jerk movement (as) the driver
commenced to accelerate the bus.
Evidently, the incident took place due to the gross negligence of the
appellee-driver in prematurely stepping on the accelerator and in not waiting
for the passenger to first secure his seat especially so when we take into
account that the platform of the bus was at the time slippery and wet
because of a drizzle. The defendants-appellees utterly failed to observe their
duty and obligation as common carrier to the end that they should observe
extra-ordinary diligence in the vigilance over the goods and for the safety of
the passengers transported by them according to the circumstances of each
case (Article 1733, New Civil Code). 8
After a careful review of the evidence on record, we find no reason to disturb the above
holding of the Court of Appeals. Its aforesaid findings are supported by the testimony of
petitioners' own witnesses. One of them, Virginia Abalos, testified on cross-examination as
follows:
Q It is not a fact Madam witness, that at bunkhouse 54, that
is before the place of the incident, there is a crossing?
A The way going to the mines but it is not being pass(ed) by
the bus.
Q And the incident happened before bunkhouse 56, is that
not correct?
A It happened between 54 and 53 bunkhouses. 9
The bus conductor, Martin Anglog, also declared:
Q When you arrived at Lepanto on March 25, 1985, will you
please inform this Honorable Court if there was anv unusual
incident that occurred?
A When we delivered a baggage at Marivic because a
person alighted there between Bunkhouse 53 and 54.
Q What happened when you delivered this passenger at
this particular place in Lepanto?
A When we reached the place, a passenger alighted and I
signalled my driver. When we stopped we went out because
I saw an umbrella about a split second and I signalled again
the driver, so the driver stopped and we went down and we
saw Pedrito Cudiamat asking for help because he was lying
down.
Q How far away was this certain person, Pedrito Cudiamat,
when you saw him lying down from the bus how far was
he?
A It is about two to three meters.
Q On what direction of the bus was he found about three
meters from the bus, was it at the front or at the back?
A At the back, sir. 10 (Emphasis supplied.)
The foregoing testimonies show that the place of the accident and the place where one of the
passengers alighted were both between Bunkhouses 53 and 54, hence the finding of the
Court of Appeals that the bus was at full stop when the victim boarded the same is correct.
They further confirm the conclusion that the victim fell from the platform of the bus when it
suddenly accelerated forward and was run over by the rear right tires of the vehicle, as
shown by the physical evidence on where he was thereafter found in relation to the bus when
it stopped. Under such circumstances, it cannot be said that the deceased was guilty of
negligence.
The contention of petitioners that the driver and the conductor had no knowledge that the
victim would ride on the bus, since the latter had supposedly not manifested his intention to
board the same, does not merit consideration. When the bus is not in motion there is no
necessity for a person who wants to ride the same to signal his intention to board. A public
utility bus, once it stops, is in effect making a continuous offer to bus riders. Hence, it
becomes the duty of the driver and the conductor, every time the bus stops, to do no act that
would have the effect of increasing the peril to a passenger while he was attempting to board
the same. The premature acceleration of the bus in this case was a breach of such duty. 11
It is the duty of common carriers of passengers, including common carriers by railroad train,
streetcar, or motorbus, to stop their conveyances a reasonable length of time in order to
afford passengers an opportunity to board and enter, and they are liable for injuries suffered
by boarding passengers resulting from the sudden starting up or jerking of their conveyances
while they are doing so. 12
Further, even assuming that the bus was moving, the act of the victim in boarding the same
cannot be considered negligent under the circumstances. As clearly explained in the
testimony of the aforestated witness for petitioners, Virginia Abalos, th bus had "just started"
and "was still in slow motion" at the point where the victim had boarded and was on its
platform. 13
It is not negligence per se, or as a matter of law, for one attempt to board a train or streetcar
which is moving slowly. 14 An ordinarily prudent person would have made the attempt board
the moving conveyance under the same or similar circumstances. The fact that passengers
board and alight from slowly moving vehicle is a matter of common experience both the
driver and conductor in this case could not have been unaware of such an ordinary practice.
The victim herein, by stepping and standing on the platform of the bus, is already considered
a passenger and is entitled all the rights and protection pertaining to such a contractual
relation. Hence, it has been held that the duty which the carrier passengers owes to its
patrons extends to persons boarding cars as well as to those alighting therefrom. 15
Common carriers, from the nature of their business and reasons of public policy, are bound
to observe extraordina diligence for the safety of the passengers transported by the
according to all the circumstances of each case. 16 A common carrier is bound to carry the
passengers safely as far as human care and foresight can provide, using the utmost
diligence very cautious persons, with a due regard for all the circumstances. 17
It has also been repeatedly held that in an action based on a contract of carriage, the court
need not make an express finding of fault or negligence on the part of the carrier in order to
hold it responsible to pay the damages sought by the passenger. By contract of carriage, the
carrier assumes the express obligation to transport the passenger to his destination safely
and observe extraordinary diligence with a due regard for all the circumstances, and any
injury that might be suffered by the passenger is right away attributable to the fault or
negligence of the carrier. This is an exception to the general rule that negligence must be
proved, and it is therefore incumbent upon the carrier to prove that it has exercised
extraordinary diligence as prescribed in Articles 1733 and 1755 of the Civil Code. 18
Moreover, the circumstances under which the driver and the conductor failed to bring the
gravely injured victim immediately to the hospital for medical treatment is a patent and
incontrovertible proof of their negligence. It defies understanding and can even be
stigmatized as callous indifference. The evidence shows that after the accident the bus could
have forthwith turned at Bunk 56 and thence to the hospital, but its driver instead opted to
first proceed to Bunk 70 to allow a passenger to alight and to deliver a refrigerator, despite
the serious condition of the victim. The vacuous reason given by petitioners that it was the
wife of the deceased who caused the delay was tersely and correctly confuted by respondent
court:
... The pretension of the appellees that the delay was due to the fact that
they had to wait for about twenty minutes for Inocencia Cudiamat to get
dressed deserves scant consideration. It is rather scandalous and
deplorable for a wife whose husband is at the verge of dying to have the
luxury of dressing herself up for about twenty minutes before attending to
help her distressed and helpless husband. 19
Further, it cannot be said that the main intention of petitioner Lardizabal in going to Bunk 70
was to inform the victim's family of the mishap, since it was not said bus driver nor the
conductor but the companion of the victim who informed his family thereof. 20 In fact, it was
only after the refrigerator was unloaded that one of the passengers thought of sending
somebody to the house of the victim, as shown by the testimony of Virginia Abalos again, to
wit:
Q Why, what happened to your refrigerator at that particular
time?
A I asked them to bring it down because that is the nearest
place to our house and when I went down and asked
somebody to bring down the refrigerator, I also asked
somebody to call the family of Mr. Cudiamat.
COURT:
Q Why did you ask somebody to call the family of Mr.
Cudiamat?
A Because Mr. Cudiamat met an accident, so I ask
somebody to call for the family of Mr. Cudiamat.
Q But nobody ask(ed) you to call for the family of Mr.
Cudiamat?
A No sir. 21
With respect to the award of damages, an oversight was, however, committed by respondent
Court of Appeals in computing the actual damages based on the gross income of the victim.
The rule is that the amount recoverable by the heirs of a victim of a tort is not the loss of the
entire earnings, but rather the loss of that portion of the earnings which the beneficiary would
have received. In other words, only net earnings, not gross earnings, are to be considered,
that is, the total of the earnings less expenses necessary in the creation of such earnings or
income and minus living and other incidental expenses. 22
We are of the opinion that the deductible living and other expense of the deceased may fairly
and reasonably be fixed at P500.00 a month or P6,000.00 a year. In adjudicating the actual
or compensatory damages, respondent court found that the deceased was 48 years old, in
good health with a remaining productive life expectancy of 12 years, and then earning
P24,000.00 a year. Using the gross annual income as the basis, and multiplying the same by
12 years, it accordingly awarded P288,000. Applying the aforestated rule on computation
based on the net earnings, said award must be, as it hereby is, rectified and reduced to
P216,000.00. However, in accordance with prevailing jurisprudence, the death indemnity is
hereby increased to P50,000.00. 23
WHEREFORE, subject to the above modifications, the challenged judgment and resolution of
respondent Court of Appeals are hereby AFFIRMED in all other respects.
SO ORDERED.





















G.R. No. 145804 February 6, 2003
LIGHT RAIL TRANSIT AUTHORITY & RODOLFO ROMAN, petitioners, vs. MARJORIE
NAVIDAD, Heirs of the Late NICANOR NAVIDAD & PRUDENT SECURITY
AGENCY, respondents.
D E C I S I O N
VITUG, J.:
The case before the Court is an appeal from the decision and resolution of the Court of
Appeals, promulgated on 27 April 2000 and 10 October 2000, respectively, in CA-G.R. CV
No. 60720, entitled "Marjorie Navidad and Heirs of the Late Nicanor Navidad vs. Rodolfo
Roman, et. al.," which has modified the decision of 11 August 1998 of the Regional Trial
Court, Branch 266, Pasig City, exonerating Prudent Security Agency (Prudent) from liability
and finding Light Rail Transit Authority (LRTA) and Rodolfo Roman liable for damages on
account of the death of Nicanor Navidad.
On 14 October 1993, about half an hour past seven oclock in the evening, Nicanor Navidad,
then drunk, entered the EDSA LRT station after purchasing a "token" (representing payment
of the fare). While Navidad was standing on the platform near the LRT tracks, Junelito
Escartin, the security guard assigned to the area approached Navidad. A misunderstanding
or an altercation between the two apparently ensued that led to a fist fight. No evidence,
however, was adduced to indicate how the fight started or who, between the two, delivered
the first blow or how Navidad later fell on the LRT tracks. At the exact moment that Navidad
fell, an LRT train, operated by petitioner Rodolfo Roman, was coming in. Navidad was struck
by the moving train, and he was killed instantaneously.
On 08 December 1994, the widow of Nicanor, herein respondent Marjorie Navidad, along
with her children, filed a complaint for damages against Junelito Escartin, Rodolfo Roman,
the LRTA, the Metro Transit Organization, Inc. (Metro Transit), and Prudent for the death of
her husband. LRTA and Roman filed a counterclaim against Navidad and a cross-claim
against Escartin and Prudent. Prudent, in its answer, denied liability and averred that it had
exercised due diligence in the selection and supervision of its security guards.
The LRTA and Roman presented their evidence while Prudent and Escartin, instead of
presenting evidence, filed a demurrer contending that Navidad had failed to prove that
Escartin was negligent in his assigned task. On 11 August 1998, the trial court rendered its
decision; it adjudged:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the
defendants Prudent Security and Junelito Escartin ordering the latter to pay jointly and
severally the plaintiffs the following:
"a) 1) Actual damages of P44,830.00;
2) Compensatory damages of P443,520.00;
3) Indemnity for the death of Nicanor Navidad in the sum of P50,000.00;
"b) Moral damages of P50,000.00;
"c) Attorneys fees of P20,000;
"d) Costs of suit.
"The complaint against defendants LRTA and Rodolfo Roman are dismissed for lack of merit.
"The compulsory counterclaim of LRTA and Roman are likewise dismissed."1
Prudent appealed to the Court of Appeals. On 27 August 2000, the appellate court
promulgated its now assailed decision exonerating Prudent from any liability for the death of
Nicanor Navidad and, instead, holding the LRTA and Roman jointly and severally liable
thusly:
"WHEREFORE, the assailed judgment is hereby MODIFIED, by exonerating the appellants
from any liability for the death of Nicanor Navidad, Jr. Instead, appellees Rodolfo Roman and
the Light Rail Transit Authority (LRTA) are held liable for his death and are hereby directed to
pay jointly and severally to the plaintiffs-appellees, the following amounts:
a) P44,830.00 as actual damages;
b) P50,000.00 as nominal damages;
c) P50,000.00 as moral damages;
d) P50,000.00 as indemnity for the death of the deceased; and
e) P20,000.00 as and for attorneys fees."2
The appellate court ratiocinated that while the deceased might not have then as yet boarded
the train, a contract of carriage theretofore had already existed when the victim entered the
place where passengers were supposed to be after paying the fare and getting the
corresponding token therefor. In exempting Prudent from liability, the court stressed that
there was nothing to link the security agency to the death of Navidad. It said that Navidad
failed to show that Escartin inflicted fist blows upon the victim and the evidence merely
established the fact of death of Navidad by reason of his having been hit by the train owned
and managed by the LRTA and operated at the time by Roman. The appellate court faulted
petitioners for their failure to present expert evidence to establish the fact that the application
of emergency brakes could not have stopped the train.
The appellate court denied petitioners motion for reconsideration in its resolution of 10
October 2000.
In their present recourse, petitioners recite alleged errors on the part of the appellate court;
viz:
"I.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED BY DISREGARDING THE
FINDINGS OF FACTS BY THE TRIAL COURT
"II.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN FINDING THAT
PETITIONERS ARE LIABLE FOR THE DEATH OF NICANOR NAVIDAD, JR.
"III.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN FINDING THAT
RODOLFO ROMAN IS AN EMPLOYEE OF LRTA."3
Petitioners would contend that the appellate court ignored the evidence and the factual
findings of the trial court by holding them liable on the basis of a sweeping conclusion that the
presumption of negligence on the part of a common carrier was not overcome. Petitioners
would insist that Escartins assault upon Navidad, which caused the latter to fall on the
tracks, was an act of a stranger that could not have been foreseen or prevented. The LRTA
would add that the appellate courts conclusion on the existence of an employer-employee
relationship between Roman and LRTA lacked basis because Roman himself had testified
being an employee of Metro Transit and not of the LRTA.
Respondents, supporting the decision of the appellate court, contended that a contract of
carriage was deemed created from the moment Navidad paid the fare at the LRT station and
entered the premises of the latter, entitling Navidad to all the rights and protection under a
contractual relation, and that the appellate court had correctly held LRTA and Roman liable
for the death of Navidad in failing to exercise extraordinary diligence imposed upon a
common carrier.
Law and jurisprudence dictate that a common carrier, both from the nature of its business
and for reasons of public policy, is burdened with the duty of exercising utmost diligence in
ensuring the safety of passengers.4 The Civil Code, governing the liability of a common
carrier for death of or injury to its passengers, provides:
"Article 1755. A common carrier is bound to carry the passengers safely as far as human
care and foresight can provide, using the utmost diligence of very cautious persons, with a
due regard for all the circumstances.
"Article 1756. In case of death of or injuries to passengers, common carriers are presumed to
have been at fault or to have acted negligently, unless they prove that they observed
extraordinary diligence as prescribed in articles 1733 and 1755."
"Article 1759. Common carriers are liable for the death of or injuries to passengers through
the negligence or willful acts of the formers employees, although such employees may have
acted beyond the scope of their authority or in violation of the orders of the common carriers.
"This liability of the common carriers does not cease upon proof that they exercised all the
diligence of a good father of a family in the selection and supervision of their employees."
"Article 1763. A common carrier is responsible for injuries suffered by a passenger on
account of the willful acts or negligence of other passengers or of strangers, if the common
carriers employees through the exercise of the diligence of a good father of a family could
have prevented or stopped the act or omission."
The law requires common carriers to carry passengers safely using the utmost diligence of
very cautious persons with due regard for all circumstances.5 Such duty of a common carrier
to provide safety to its passengers so obligates it not only during the course of the trip but for
so long as the passengers are within its premises and where they ought to be in pursuance
to the contract of carriage.6 The statutory provisions render a common carrier liable for death
of or injury to passengers (a) through the negligence or wilful acts of its employees or b) on
account of wilful acts or negligence of other passengers or of strangers if the common
carriers employees through the exercise of due diligence could have prevented or stopped
the act or omission.7 In case of such death or injury, a carrier is presumed to have been at
fault or been negligent, and8 by simple proof of injury, the passenger is relieved of the duty to
still establish the fault or negligence of the carrier or of its employees and the burden shifts
upon the carrier to prove that the injury is due to an unforeseen event or to force majeure.9 In
the absence of satisfactory explanation by the carrier on how the accident occurred, which
petitioners, according to the appellate court, have failed to show, the presumption would be
that it has been at fault,10 an exception from the general rule that negligence must be
proved.11
The foundation of LRTAs liability is the contract of carriage and its obligation to indemnify the
victim arises from the breach of that contract by reason of its failure to exercise the high
diligence required of the common carrier. In the discharge of its commitment to ensure the
safety of passengers, a carrier may choose to hire its own employees or avail itself of the
services of an outsider or an independent firm to undertake the task. In either case, the
common carrier is not relieved of its responsibilities under the contract of carriage.
Should Prudent be made likewise liable? If at all, that liability could only be for tort under the
provisions of Article 217612 and related provisions, in conjunction with Article 2180,13 of the
Civil Code. The premise, however, for the employers liability is negligence or fault on the part
of the employee. Once such fault is established, the employer can then be made liable on the
basis of the presumption juris tantum that the employer failed to exercise diligentissimi patris
families in the selection and supervision of its employees. The liability is primary and can only
be negated by showing due diligence in the selection and supervision of the employee, a
factual matter that has not been shown. Absent such a showing, one might ask further, how
then must the liability of the common carrier, on the one hand, and an independent
contractor, on the other hand, be described? It would be solidary. A contractual obligation
can be breached by tort and when the same act or omission causes the injury, one resulting
in culpa contractual and the other in culpa aquiliana, Article 219414 of the Civil Code can well
apply.15 In fine, a liability for tort may arise even under a contract, where tort is that which
breaches the contract.16 Stated differently, when an act which constitutes a breach of
contract would have itself constituted the source of a quasi-delictual liability had no contract
existed between the parties, the contract can be said to have been breached by tort, thereby
allowing the rules on tort to apply.17
Regrettably for LRT, as well as perhaps the surviving spouse and heirs of the late Nicanor
Navidad, this Court is concluded by the factual finding of the Court of Appeals that "there is
nothing to link (Prudent) to the death of Nicanor (Navidad), for the reason that the negligence
of its employee, Escartin, has not been duly proven x x x." This finding of the appellate court
is not without substantial justification in our own review of the records of the case.
There being, similarly, no showing that petitioner Rodolfo Roman himself is guilty of any
culpable act or omission, he must also be absolved from liability. Needless to say, the
contractual tie between the LRT and Navidad is not itself a juridical relation between the latter
and Roman; thus, Roman can be made liable only for his own fault or negligence.
The award of nominal damages in addition to actual damages is untenable. Nominal
damages are adjudicated in order that a right of the plaintiff, which has been violated or
invaded by the defendant, may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him.18 It is an established rule that nominal
damages cannot co-exist with compensatory damages.19
WHEREFORE, the assailed decision of the appellate court is AFFIRMED with
MODIFICATION but only in that (a) the award of nominal damages is DELETED and (b)
petitioner Rodolfo Roman is absolved from liability. No costs.
SO ORDERED.





G.R. Nos. 66102-04 August 30, 1990
PHILIPPINE RABBIT BUS LINES, INC., petitioner, vs. THE HONORABLE INTERMEDIATE
APPELLATE COURT AND CASIANO PASCUA, ET AL., respondents.
MEDIALDEA, J.:
This is a petition for review on certiorari of the decision of the Intermediate Appellate Court
(now Court of Appeals) dated July 29, 1983 in AC-G.R. Nos. CV-65885, CV-65886 and CV-
65887 which reversed the decision of the Court of First Instance (now Regional Trial Court)
of Pangasinan dated December 27, 1978; and its resolution dated November 28, 1983
denying the motion for reconsideration.
It is an established principle that the factual findings of the Court of Appeals are final and may
not be reviewed by this Court on appeal. However, this principle is subject to certain
exceptions. One of these is when the findings of the appellate court are contrary to those of
the trial court (see Sabinosa v. The Honorable Court of Appeals, et al., G.R. No. L-47981,
July 24, 1989) in which case, a re-examination of the facts and evidence may be undertaken.
This is Our task now.
The antecedent facts are as follows:
About 11:00 o'clock in the morning on December 24, 1966, Catalina Pascua, Caridad
Pascua, Adelaida Estomo, Erlinda Meriales, Mercedes Lorenzo, Alejandro Morales and
Zenaida Parejas boarded the jeepney owned by spouses Isidro Mangune and Guillerma
Carreon and driven by Tranquilino Manalo at Dau, Mabalacat, Pampanga bound for Carmen,
Rosales, Pangasinan to spend Christmas at their respective homes. Although they usually
ride in buses, they had to ride in a jeepney that day because the buses were full. Their
contract with Manalo was for them to pay P24.00 for the trip. The private respondents'
testimonial evidence on this contractual relationship was not controverted by Mangune,
Carreon and Manalo, nor by Filriters Guaranty Assurance Corporation, Inc., the insurer of the
jeepney, with contrary evidence. Purportedly riding on the front seat with Manalo was
Mercedes Lorenzo. On the left rear passenger seat were Caridad Pascua, Alejandro Morales
and Zenaida Parejas. On the right rear passenger seat were Catalina Pascua, Adelaida
Estomo, and Erlinda Meriales. After a brief stopover at Moncada, Tarlac for refreshment, the
jeepney proceeded towards Carmen, Rosales, Pangasinan.
Upon reaching barrio Sinayoan, San Manuel, Tarlac, the right rear wheel of the jeepney was
detached, so it was running in an unbalanced position. Manalo stepped on the brake, as a
result of which, the jeepney which was then running on the eastern lane (its right of way)
made a U-turn, invading and eventually stopping on the western lane of the road in such a
manner that the jeepney's front faced the south (from where it came) and its rear faced the
north (towards where it was going). The jeepney practically occupied and blocked the greater
portion of the western lane, which is the right of way of vehicles coming from the north,
among which was Bus No. 753 of petitioner Philippine Rabbit Bus Lines, Inc. (Rabbit) driven
by Tomas delos Reyes. Almost at the time when the jeepney made a sudden U-turn and
encroached on the western lane of the highway as claimed by Rabbit and delos Reyes, or
after stopping for a couple of minutes as claimed by Mangune, Carreon and Manalo, the bus
bumped from behind the right rear portion of the jeepney. As a result of the collision, three
passengers of the jeepney (Catalina Pascua, Erlinda Meriales and Adelaida Estomo) died
while the other jeepney passengers sustained physical injuries. What could have been a
festive Christmas turned out to be tragic.
The causes of the death of the three jeepney passengers were as follows (p. 101, Record on
Appeal):
The deceased Catalina Pascua suffered the following injuries, to wit: fracture
of the left parietal and temporal regions of the skull; fracture of the left
mandible; fracture of the right humenous; compound fracture of the left
radious and ullma middle third and lower third; fracture of the upper third of
the right tibia and fillnea; avulsion of the head, left internal; and multiple
abrasions. The cause of her death was shock, secondary to fracture and
multiple hemorrhage. The fractures were produced as a result of the hitting
of the victim by a strong force. The abrasions could be produced when a
person falls from a moving vehicles (sic) and rubs parts of her body against
a cement road pavement. . . .
Erlinda Mariles (sic) sustained external lesions such as contusion on the left
parietal region of the skull; hematoma on the right upper lid; and abrasions
(sic) on the left knee. Her internal lesions were: hematoma on the left thorax;
multiple lacerations of the left lower lobe of the lungs; contusions on the left
lower lobe of the lungs; and simple fractures of the 2nd, 3rd, 4th, 5th, 6th,
7th, and 8th ribs, left. The forcible impact of the jeep caused the above
injuries which resulted in her death. . . .
The cause of death of Erlinda or Florida Estomo (also called as per autopsy
of Dr. Panlasiqui was due to shock due to internal hemorrhage, ruptured
spleen and trauma. . . .
Caridad Pascua suffered physical injuries as follows (p. 101, Record on Appeal):
. . . lacerated wound on the forehead and occipital region, hematoma on the
forehead, multiple abrasions on the forearm, right upper arm, back and right
leg. . . .
The police investigators of Tacpal and policemen of San Manuel, Tarlac, Tarlac, upon arrival
at the scene of the mishap, prepared a sketch (common exhibit "K" for private respondents
"19" for Rabbit) showing the relative positions of the two vehicles as well as the alleged point
of impact (p. 100, Record on Appeal):
. . . The point of collision was a cement pave-portion of the Highway, about
six (6) meters wide, with narrow shoulders with grasses beyond which are
canals on both sides. The road was straight and points 200 meters north and
south of the point of collision are visible and unobstructed. Purportedly, the
point of impact or collision (Exh. "K-4", Pascua on the sketch Exh. "K"-
Pascua) was on the western lane of the highway about 3 feet (or one yard)
from the center line as shown by the bedris (sic), dirt and soil (obviously from
the undercarriage of both vehicles) as well as paint, marron (sic) from the
Rabbit bus and greenish from the jeepney. The point of impact encircled and
marked with the letter "X" in Exh. "K"-4 Pascua, had a diameter of two
meters, the center of which was about two meters from the western edge of
cement pavement of the roadway. Pictures taken by witness Bisquera in the
course of the investigation showed the relative positions of the point of
impact and center line (Exh. "P"-Pascua) the back of the Rabbit bus (Exh.
"P"-1-Pascua"), the lifeless body of Catalina Pascua (Exh. "P-2 Pascua"),
and the damaged front part of the Rabbit bus (Exh. "P-3 Pascua"). No skid
marks of the Rabbit bus was found in the vicinity of the collision, before or
after the point of impact. On the other hand, there was a skid mark about 45
meters long purportedly of the jeepney from the eastern shoulder of the road
south of, and extending up to the point of impact.
At the time and in the vicinity of the accident, there were no vehicles following the jeepney,
neither were there oncoming vehicles except the bus. The weather condition of that day was
fair.
After conducting the investigation, the police filed with the Municipal Court of San Manuel,
Tarlac, a criminal complaint against the two drivers for Multiple Homicide. At the preliminary
investigation, a probable cause was found with respect to the case of Manalo, thus, his case
was elevated to the Court of First Instance. However, finding no sufficiency of evidence as
regards the case of delos Reyes, the Court dismissed it. Manalo was convicted and
sentenced to suffer imprisonment. Not having appealed, he served his sentence.
Complaints for recovery of damages were then filed before the Court of First Instance of
Pangasinan. In Civil Case No. 1136, spouses Casiano Pascua and Juana Valdez sued as
heirs of Catalina Pascua while Caridad Pascua sued in her behalf. In Civil Case No. 1139,
spouses Manuel Millares and Fidencia Arcica sued as heirs of Erlinda Meriales. In Civil Case
No. 1140, spouses Mariano Estomo and Dionisia Sarmiento also sued as heirs of Adelaida
Estomo.
In all three cases, spouses Mangune and Carreon, Manalo, Rabbit and delos Reyes were all
impleaded as defendants. Plaintiffs anchored their suits against spouses Mangune and
Carreon and Manalo on their contractual liability. As against Rabbit and delos Reyes,
plaintiffs based their suits on their culpability for a quasi-delict. Filriters Guaranty Assurance
Corporation, Inc. was also impleaded as additional defendant in Civil Case No. 1136 only.
For the death of Catalina Pascua, plaintiffs in Civil Case No. 1136 sought to collect the
aggregate amount of P70,060.00 in damages, itemized as follows: P500.00 for burial
expenses; P12,000.00 for loss of wages for 24 years; P10,000.00 for exemplary damages;
P10,000.00 for moral damages; and P3,000.00 for attorney's fees. In the same case, plaintiff
Caridad Pascua claimed P550.00 for medical expenses; P240.00 for loss of wages for two
months; P2,000.00 for disfigurement of her face; P3,000.00 for physical pain and suffering;
P2,500.00 as exemplary damages and P2,000.00 for attorney's fees and expenses of
litigation.
In Civil Case No. 1139, plaintiffs demanded P500.00 for burial expenses; P6,000.00 for the
death of Erlinda, P63,000.00 for loss of income; P10,000.00 for moral damages and
P3,000.00 for attorney's fees or total of P80,000.00.
In Civil Case No. 1140, plaintiffs claimed P500.00 for burial expenses; P6,000.00 for the
death of Adelaide, P56,160.00 for loss of her income or earning capacity; P10,000.00 for
moral damages; and P3,000.00 for attorney's fees.
Rabbit filed a cross-claim in the amount of P15,000.00 for attorney's fees and expenses of
litigation. On the other hand, spouses Mangune and Carreon filed a cross-claim in the
amount of P6,168.00 for the repair of the jeepney and P3,000.00 for its non-use during the
period of repairs.
On December 27, 1978, the trial court rendered its decision finding Manalo negligent, the
dispositive portion of which reads (pp. 113-114, Record on Appeal):
PREMISES CONSIDERED, this Court is of the opinion and so holds:
1) That defendants Isidro Mangune, Guillerma Carreon and Tranquilino
Manalo thru their negligence, breached contract of carriage with their
passengers the plaintiffs' and/or their heirs, and this Court renders judgment
ordering said defendants, jointly and severally, to pay the plaintiffs
a) In Civil Case No. 1136, for the death of Catalina Pascua, to pay her heirs
the amounts of P12,000.00 for indemnity for loss of her life; P41,760.00 for
loss of earnings; P324.40 for actual expenses and P2,000.00 for moral
damages;
b) In the same Civil Case No.1136 for the injuries of Caridad Pascua, to pay
her the amounts of P240.00 for loss of wages, P328.20 for actual expenses
and P500.00 for moral damages;
c) In Civil Case No.1139 for the death of Erlinda Meriales, to pay her heirs
(the plaintiffs) the amount of P12,000.00 for indemnity for loss of her life;
P622.00 for actual expenses, P60,480.00 for loss of wages or income and
P2,000.00 for moral damages;
d) In Civil Case No. 1140, for the death of Erlinda (also called Florida or
Adelaida Estomo), to pay her heirs (the plaintiff the amount of P12,000.00
for indemnity for the loss of her life; P580.00 for actual expenses;
P53,160.00 for loss of wages or income and P2,000.00 for moral damages.
2) The defendant Filriters Guaranty Insurance Co., having contracted to
ensure and answer for the obligations of defendants Mangune and Carreon
for damages due their passengers, this Court renders judgment against the
said defendants Filriters Guaranty Insurance Co., jointly and severally with
said defendants (Mangune and Carreon) to pay the plaintiffs the amount
herein above adjudicated in their favor in Civil Case No. 1136 only. All the
amounts awarded said plaintiff, as set forth in paragraph one (1)
hereinabove;
3) On the cross claim of Phil. Rabbit Bus Lines, Inc. ordering the defendant,
Isidro Mangune, Guillerma Carreon and Tranquilino Manalo, to pay jointly
and severally, cross-claimant Phil. Rabbit Bus Lines, Inc., the amounts of
P216.27 as actual damages to its Bus No. 753 and P2,173.60 for loss of its
earning.
All of the above amount, shall bear legal interest from the filing of the
complaints.
Costs are adjudged against defendants Mangune, Carreon and Manalo and
Filriters Guaranty.
SO ORDERED
On appeal, the Intermediate Appellate Court reversed the above-quoted decision by finding
delos Reyes negligent, the dispositive portion of which reads (pp. 55-57, Rollo):
WHEREFORE, PREMISES CONSIDERED, the lower court's decision is
hereby REVERSED as to item No. 3 of the decision which reads:
3) On the cross claim of Philippine Rabbit Bus Lines, Inc. ordering the
defendants Isidro Mangune, Guillerma Carreon and Tranquilino Manalo, to
pay jointly and severally, the amounts of P216.27 as actual damages to its
Bus No. 753 and P2,173.60 for loss of its earnings.
and another judgment is hereby rendered in favor of plaintiffs-appellants
Casiana Pascua, Juan Valdez and Caridad Pascua, ordering the Philippine
Rabbit Bus Lines, Inc. and its driver Tomas delos Reyes to pay the former
jointly and severally damages in amounts awarded as follows:
For the death of Catalina Pascua, the parents and/or heirs are awarded
Civil Case No. 1136
a) Indemnity for the loss of life P12,000.00
b) Loss of Salaries or earning capacity 14,000.00
c) Actual damages (burial expenses) 800.00
d) For moral damages 10,000.00
e) Exemplary damages 3,000.00
f) For attorney's fees 3,000.00

Total P38,200.00 (sic)
For the physical injuries suffered by Caridad Pascua:
Civil Case No. 1136
a) Actual damages (hospitalization expenses) P550.00
b) Moral damages (disfigurement of the
face and physical suffering 8,000.00
c) Exemplary damages 2,000.00

Total P10,550.00
For the death of Erlinda Arcega Meriales. the parents and/or heirs:
Civil Case No. 1139
a) Indemnity for loss of life P12,000.00
b) Loss of Salary or Earning Capacity 20,000.00
c) Actual damages (burial expenses) 500.00
d) Moral damages 15,000.00
e) Exemplary damages 15,000.00
f) Attorney's fees 3,000.00

Total P65,500.00
For the death of Florida Sarmiento Estomo:
Civil Case No. 1140
a) Indemnity for loss of life P12,000.00
b) Loss of Salary or Earning capacity 20,000.00
c) Actual damages (burial expenses) 500.00
d) Moral damages 3,000.00
e) Exemplary damages 3,000.00
f) Attorney's fees 3,000.00

Total P41,500.00
With costs against the Philippine Rabbit Bus Lines, Inc.
SO ORDERED.
The motion for reconsideration was denied. Hence, the present petition.
The issue is who is liable for the death and physical injuries suffered by the passengers of
the jeepney?
The trial court, in declaring that Manalo was negligent, considered the following (p. 106,
Record on Appeal):
(1) That the unrebutted testimony of his passenger plaintiff Caridad Pascua
that a long ways (sic) before reaching the point of collision, the Mangune
jeepney was "running fast" that his passengers cautioned driver Manalo to
slow down but did not heed the warning: that the right rear wheel was
detached causing the jeepney to run to the eastern shoulder of the road then
back to the concrete pavement; that driver Manalo applied the brakes after
which the jeepney made a U-turn (half-turn) in such a manner that it inverted
its direction making it face South instead of north; that the jeepney stopped
on the western lane of the road on the right of way of the oncoming Phil.
Rabbit Bus where it was bumped by the latter;
(2) The likewise unrebutted testimony of Police Investigator Tacpal of the
San Manuel (Tarlac) Police who, upon responding to the reported collission,
found the real evidence thereat indicate in his sketch (Exh. K, Pascua ), the
tracks of the jeepney of defendant Mangune and Carreon running on the
Eastern shoulder (outside the concrete paved road) until it returned to the
concrete road at a sharp angle, crossing the Eastern lane and the
(imaginary) center line and encroaching fully into the western lane where the
collision took place as evidenced by the point of impact;
(3) The observation of witness Police Corporal Cacalda also of the San
Manuel Police that the path of the jeepney they found on the road and
indicated in the sketch (Exh. K-Pascua) was shown by skid marks which he
described as "scratches on the road caused by the iron of the jeep, after its
wheel was removed;"
(4) His conviction for the crime of Multiple Homicide and Multiple Serious
Physical Injuries with Damage to Property thru Reckless Imprudence by the
Court of First Instance of Tarlac (Exh. 24-Rabbit) upon the criminal
Information by the Provincial Fiscal of Tarlac (Exh. 23-Rabbit), as a result of
the collision, and his commitment to prison and service of his sentence (Exh.
25-Rabbit) upon the finality of the decision and his failure to appeal
therefrom; and
(5) The application of the doctrine of res-ipsa loquitar (sic) attesting to the
circumstance that the collision occured (sic) on the right of way of the Phil.
Rabbit Bus.
The respondent court had a contrary opinion. Applying primarily (1) the doctrine of last clear
chance, (2) the presumption that drivers who bump the rear of another vehicle guilty and the
cause of the accident unless contradicted by other evidence, and (3) the substantial factor
test. concluded that delos Reyes was negligent.
The misappreciation of the facts and evidence and the misapplication of the laws by the
respondent court warrant a reversal of its questioned decision and resolution.
We reiterate that "[t]he principle about "the last clear" chance, would call for application in a
suit between the owners and drivers of the two colliding vehicles. It does not arise where a
passenger demands responsibility from the carrier to enforce its contractual obligations. For it
would be inequitable to exempt the negligent driver of the jeepney and its owners on the
ground that the other driver was likewise guilty of negligence." This was Our ruling in Anuran,
et al. v. Buo et al., G.R. Nos. L-21353 and L-21354, May 20, 1966, 17 SCRA 224. 1 Thus,
the respondent court erred in applying said doctrine.
On the presumption that drivers who bump the rear of another vehicle guilty and the cause of
the accident, unless contradicted by other evidence, the respondent court said (p. 49, Rollo):
. . . the jeepney had already executed a complete turnabout and at the time
of impact was already facing the western side of the road. Thus the jeepney
assumed a new frontal position vis a vis, the bus, and the bus assumed a
new role of defensive driving. The spirit behind the presumption of guilt on
one who bumps the rear end of another vehicle is for the driver following a
vehicle to be at all times prepared of a pending accident should the driver in
front suddenly come to a full stop, or change its course either through
change of mind of the front driver, mechanical trouble, or to avoid an
accident. The rear vehicle is given the responsibility of avoiding a collision
with the front vehicle for it is the rear vehicle who has full control of the
situation as it is in a position to observe the vehicle in front of it.
The above discussion would have been correct were it not for the undisputed fact that the U-
turn made by the jeepney was abrupt (Exhibit "K," Pascua). The jeepney, which was then
traveling on the eastern shoulder, making a straight, skid mark of approximately 35 meters,
crossed the eastern lane at a sharp angle, making a skid mark of approximately 15 meters
from the eastern shoulder to the point of impact (Exhibit "K" Pascua). Hence, delos Reyes
could not have anticipated the sudden U-turn executed by Manalo. The respondent court did
not realize that the presumption was rebutted by this piece of evidence.
With regard to the substantial factor test, it was the opinion of the respondent court that (p.
52, Rollo):
. . . It is the rule under the substantial factor test that if the actor's conduct is
a substantial factor in bringing about harm to another, the fact that the actor
neither foresaw nor should have foreseen the extent of the harm or the
manner in which it occurred does not prevent him from being liable
(Restatement, Torts, 2d). Here, We find defendant bus running at a fast
speed when the accident occurred and did not even make the slightest effort
to avoid the accident, . . . . The bus driver's conduct is thus a substantial
factor in bringing about harm to the passengers of the jeepney, not only
because he was driving fast and did not even attempt to avoid the mishap
but also because it was the bus which was the physical force which brought
about the injury and death to the passengers of the jeepney.
The speed of the bus was calculated by respondent court as follows (pp. 54-55, Rollo):
According to the record of the case, the bus departed from Laoag, Ilocos
Norte, at 4:00 o'clock A.M. and the accident took place at approximately
around 12:30 P.M., after travelling roughly for 8 hours and 30 minutes.
Deduct from this the actual stopover time of two Hours (computed from the
testimony of the driver that he made three 40-minute stop-overs), We will
have an actual travelling time of 6 hours and 30 minutes.
Under the circumstances, We calculate that the Laoag-Tarlac route (365
kms.) driving at an average of 56 km. per hour would take 6 hours and 30
minutes. Therefore, the average speed of the bus, give and take 10 minutes,
from the point of impact on the highway with excellent visibility factor would
be 80 to 90 kms. per hour, as this is the place where buses would make up
for lost time in traversing busy city streets.
Still, We are not convinced. It cannot be said that the bus was travelling at a fast speed when
the accident occurred because the speed of 80 to 90 kilometers per hour, assuming such
calculation to be correct, is yet within the speed limit allowed in highways. We cannot even
fault delos Reyes for not having avoided the collision. As aforestated, the jeepney left a skid
mark of about 45 meters, measured from the time its right rear wheel was detached up to the
point of collision. Delos Reyes must have noticed the perilous condition of the jeepney from
the time its right rear wheel was detached or some 90 meters away, considering that the road
was straight and points 200 meters north and south of the point of collision, visible and
unobstructed. Delos Reyes admitted that he was running more or less 50 kilometers per hour
at the time of the accident. Using this speed, delos Reyes covered the distance of 45 meters
in 3.24 seconds. If We adopt the speed of 80 kilometers per hour, delos Reyes would have
covered that distance in only 2.025 seconds. Verily, he had little time to react to the situation.
To require delos Reyes to avoid the collision is to ask too much from him. Aside from the time
element involved, there were no options available to him. As the trial court remarked (pp.
107-108, Record on Appeal):
. . . They (plaintiffs) tried to impress this Court that defendant de los Reyes,
could have taken either of two options: (1) to swerve to its right (western
shoulder) or (2) to swerve to its left (eastern lane), and thus steer clear of the
Mangune jeepney. This Court does not so believe, considering the existing
exigencies of space and time.
As to the first option, Phil. Rabbit's evidence is convincing and unrebutted
that the Western shoulder of the road was narrow and had tall grasses which
would indicate that it was not passable. Even plaintiffs own evidence, the
pictures (Exhs. P and P-2, Pascua) are mute confirmation of such fact.
Indeed, it can be noticed in the picture (Exh. P-2, Pascua) after the Rabbit
bus came to a full stop, it was tilted to right front side, its front wheels resting
most probably on a canal on a much lower elevation that of the shoulder or
paved road. It too shows that all of the wheels of the Rabbit bus were clear
of the roadway except the outer left rear wheel. These observation
appearing in said picture (Exh P-2, Pascua) clearly shows coupled with the
finding the Rabbit bus came to a full stop only five meters from the point of
impact (see sketch, Exh. K-Pascua) clearly show that driver de los Reyes
veered his Rabbit bus to the right attempt to avoid hitting the Mangune's
jeepney. That it was not successful in fully clearing the Mangune jeepney as
its (Rabbit's) left front hit said jeepney (see picture Exh. 10-A-Rabbit) must
have been due to limitations of space and time.
Plaintiffs alternatively claim that defendant delos Reyes of the Rabbit bus
could also have swerved to its left (eastern lane) to avoid bumping the
Mangune jeepney which was then on the western lane. Such a claim is
premised on the hypothesis (sic) that the eastern lane was then empty. This
claim would appear to be good copy of it were based alone on the sketch
made after the collision. Nonetheless, it loses force it one were to consider
the time element involved, for moments before that, the Mangune jeepney
was crossing that very eastern lane at a sharp angle. Under such a situation
then, for driver delos Reyes to swerve to the eastern lane, he would run the
greater risk of running smack in the Mangune jeepney either head on or
broadside.
After a minute scrutiny of the factual matters and duly proven evidence, We find that the
proximate cause of the accident was the negligence of Manalo and spouses Mangune and
Carreon. They all failed to exercise the precautions that are needed precisely pro hac vice.
In culpa contractual, the moment a passenger dies or is injured, the carrier is presumed to
have been at fault or to have acted negligently, and this disputable presumption may only be
overcome by evidence that he had observed extra-ordinary diligence as prescribed in Articles
1733, 1755 and 1756 of the New Civil Code 2 or that the death or injury of the passenger
was due to a fortuitous event 3 (Lasam v. Smith, Jr., 45 Phil. 657).
The negligence of Manalo was proven during the trial by the unrebutted testimonies of
Caridad Pascua, Police Investigator Tacpal, Police Corporal Cacalda, his (Manalo's)
conviction for the crime of Multiple Homicide and Multiple Serious Injuries with Damage to
Property thru Reckless Imprudence, and the application of the doctrine ofres ipsa loquitur
supra. The negligence of spouses Mangune and Carreon was likewise proven during the trial
(p. 110, Record on Appeal):
To escape liability, defendants Mangune and Carreon offered to show thru
their witness Natalio Navarro, an alleged mechanic, that he periodically
checks and maintains the jeepney of said defendants, the last on Dec. 23,
the day before the collision, which included the tightening of the bolts. This
notwithstanding the right rear wheel of the vehicle was detached while in
transit. As to the cause thereof no evidence was offered. Said defendant did
not even attempt to explain, much less establish, it to be one caused by
a caso fortuito. . . .
In any event, "[i]n an action for damages against the carrier for his failure to safely
carry his passenger to his destination, an accident caused either by defects in the
automobile or through the negligence of its driver, is not a caso fortuito which would
avoid the carriers liability for damages (Son v. Cebu Autobus Company, 94 Phil. 892
citing Lasam, et al. v. Smith, Jr., 45 Phil. 657; Necesito, etc. v. Paras, et al., 104 Phil.
75).
The trial court was therefore right in finding that Manalo and spouses Mangune and Carreon
were negligent. However, its ruling that spouses Mangune and Carreon are jointly and
severally liable with Manalo is erroneous The driver cannot be held jointly and severally liable
with the carrier in case of breach of the contract of carriage. The rationale behind this is
readily discernible. Firstly, the contract of carriage is between the carrier and the passenger,
and in the event of contractual liability, the carrier is exclusively responsible therefore to the
passenger, even if such breach be due to the negligence of his driver (see Viluan v. The
Court of Appeals, et al., G.R. Nos. L-21477-81, April 29, 1966, 16 SCRA 742). In other
words, the carrier can neither shift his liability on the contract to his driver nor share it with
him, for his driver's negligence is his. 4 Secondly, if We make the driver jointly and severally
liable with the carrier, that would make the carrier's liability personal instead of merely
vicarious and consequently, entitled to recover only the share which corresponds to the
driver, 5 contradictory to the explicit provision of Article 2181 of the New Civil Code. 6
We affirm the amount of damages adjudged by the trial court, except with respect to the
indemnity for loss of life. Under Article 1764 in relation to Article 2206 of the New Civil Code,
the amount of damages for the death of a passenger is at least three thousand pesos
(P3,000.00). The prevailing jurisprudence has increased the amount of P3,000.00 to
P30,000.00 (see Heirs of Amparo delos Santos, et al. v. Honorable Court of Appeals, et al.,
G.R. No. 51165, June 21, 1990 citing De Lima v. Laguna Tayabas Co., G.R. Nos. L-35697-
99, April 15, 1988, 160 SCRA 70).
ACCORDINGLY, the petition is hereby GRANTED. The decision of the Intermediate
Appellate Court dated July 29, 1983 and its resolution dated November 28, 1983 are SET
ASIDE. The decision of the Court of First Instance dated December 27, 1978 is
REINSTATED MODIFICATION that only Isidro Mangune, Guillerma Carreon and Filriters
Guaranty Assurance Corporation, Inc. are liable to the victims or their heirs and that the
amount of indemnity for loss of life is increased to thirty thousand pesos (P30,000.00).
SO ORDERED.
G.R. No. L-9907 June 30, 1958
LOURDES J. LARA, ET AL., plaintiffs-appellants, vs. BRIGIDO R. VALENCIA, defendant-
appellant.
BAUTISTA ANGELO, J.:
This is an action for damages brought by plaintiffs against defendant in the Court of First
Instance of Davao for the death of one Demetrio Lara, Sr. allegedly caused by the negligent
act of defendant. Defendant denied the charge of negligence and set up certain affirmative
defenses and a counterclaim.
The court after hearing rendered judgment ordering defendant to pay the plaintiffs the
following amount: (a) P10,000 as moral damages; (b) P3,000 as exemplary damages; and (c)
P1,000 as attorney's fees, in addition to the costs of action. Both parties appealed to this
Court because the damages claimed in the complaint exceed the sum of P50,000.
In their appeal, plaintiffs claim that the court a quo erred in disregarding their claim of
P41,400 as actual or compensatory damages and in awarding as attorneys' fees only the
sum of P1,000 instead of P3,000 as agreed upon between plaintiffs and their counsel.
Defendant, on the other hand, disputes the finding of the court a quo that the oath of
Demetrio Lara, Sr. was due to the negligence of defendant and the portion of the judgment
which orders dependant to pay to plaintiffs moral and exemplary damages as well as
attorneys' fees, said defendant contending that the court should have declared that the death
of Lara was due to unavoidable accident.
The deceased was an inspector of the Bureau of Forestry stationed in Davao with an annual
salary of P1,800. The defendant is engaged in the business of exporting logs from his lumber
concession in Cotabato. Lara went to said concession upon instructions of his chief to
classify the logs of defendant which were about to be loaded on a ship anchored in the port
of Parang. The work Lara of lasted for six days during which he contracted malaria fever. In
the morning of January 9, 1954, Lara who then in a hurry to return to Davao asked defendant
if he could take him in his pick-up as there was then no other means of transportation, to
which defendant agreed, and in that same morning the pick-up left Parang bound for Davao
taking along six passengers, including Lara.
The pick-up has a front seat where the driver and two passengers can be accommodated
and the back has a steel flooring enclosed with a steel walling of 16 to 17 inches tall on the
sides and with a 19 inches tall walling at the back. Before leaving Parang, the sitting
arrangement was as follows: defendant was at the wheel and seated with him in the front
seat were Mrs. Valencia and Nicanor Quinain; on the back of the pick-up were two
improvised benches placed on each side, and seated on the right bench were Ricardo
Alojipan and Antonio Lagahit, and on the left one Bernardo and Pastor Geronimo. A person
by the name of Leoning was seated on a box located on the left side while in the middle Lara
sat on a bag. Before leaving Parang, defendant invited Lara to sit with him on the front seat
but Lara declined. It was their understanding that upon reaching barrio Samoay, Cotabato,
the passengers were to alight and take a bus bound for Davao, but when they arrived at that
place, only Bernardo alighted and the other passengers requested defendant to allow them to
ride with him up to Davao because there was then no available bus that they could take in
going to that place. Defendant again accommodated the passengers.
When they continued their trip, the sitting arrangement of the passengers remained the
same, Lara being seated on a bag in the middle with his arms on a suitcase and his head
cove red by a jacket. Upon reaching Km. 96, barrio Catidtuan, Lara accidentally fell from the
pick-up and as a result he suffered serious injuries. Valencia stopped the pick-up to see what
happened to Lara. He sought the help of the residents of that place and applied water to Lara
but to no avail. They brought Lara to the nearest place where they could find a doctor and not
having found any they took him to St. Joseph's Clinic of Kidapawan. But when Lara arrived
he was already dead. From there they proceeded to Davao City and immediately notified the
local authorities. An investigation was made regarding the circumstances surrounding the
death of Lara but no criminal action was taken against defendant.
It should be noted that the deceased went to the lumber concession of defendant in Parang,
Cotabato upon instructions of his chief in order to classify the logs of defendant which were
then ready to be exported and to be loaded on a ship anchored in the port of Parang. It took
Lara six days to do his work during which he contracted malaria fever and for that reason he
evinced a desire to return immediately to Davao. At that time, there was no available bus that
could take him back to Davao and so he requested the defendant if he could take him in his
own pick-up. Defendant agreed and, together with Lara, other passengers tagged along,
most of them were employees of the Government. Defendant merely accommodated them
and did not charge them any fee for the service. It was also their understanding that upon
reaching barrio Samoay, the passengers would alight and transfer to a bus that regularly
makes the trip to Davao but unfortunately there was none available at the time and so the
same passengers, including Lara, again requested the defendant to drive them to Davao.
Defendant again accommodated them and upon reaching Km. 96, Lara accidentally fell
suffering fatal injuries.
It therefore appears that the deceased, as well his companions who rode in the pick-up of
defendant, were merely accommodation passengers who paid nothing for the service and so
they can be considered as invited guests within the meaning of the law. As accommodation
passengers or invited guests, defendant as owner and driver of the pick-up owes to them
merely the duty to exercise reasonable care so that they may be transported safely to their
destination. Thus, "The rule is established by the weight of authority that the owner or
operator of an automobile owes the duty to an invited guest to exercise reasonable care in its
operation, and not unreasonably to expose him to danger and injury by increasing the hazard
of travel. This rule, as frequently stated by the courts, is that an owner of an automobile owes
a guest the duty to exercise ordinary or reasonable care to avoid injuring him. Since one
riding in an automobile is no less a guest because he asked for the privilege of doing so, the
same obligation of care is imposed upon the driver as in the case of one expressly invited to
ride" (5 Am. Jur., 626-627). Defendant, therefore, is only required to observe ordinary care,
and is not in duty bound to exercise extraordinary diligence as required of a common carrier
by our law (Articles 1755 and 1756, new Civil Code).
The question that now arises is: Is there enough evidence to show that defendant failed to
observe ordinary care or diligence in transporting the deceased from Parang to Davao on the
date in question?
The trial court answered the question in the affirmative but in so doing it took into account
only the following facts:
No debe perderse de vista el hecho, que los negocios de exportacion de trozos del
demandado tiene un volumen de P1,200. Lara era empleado de la Oficina de
Montes, asalariado por el gobierno, no pagado por el demandado para classificar los
trozos exportados; debido a los trabajos de classificacion que duro 6 dias, en su
ultimo dia Lara no durmio toda la noche, al dia siguiente, Lara fue atacado de
malaria, tenia inflamada la cara y cuerpo, sufria dolores de cabeza con erupciones
en la cara y cuerpo; que en la manana, del dia 2 de enero de 1954, fecha en que
Lara salio de Davao para Parang, en aeroplano para clasificar los trozos del
demandado, el automobil de este condujo a aquel al aerodromo de Davao.
x x x x x x x x x
El viaje de Cotabato a Davao no es menos de 8 horas, su carretera esta en malas
condiciones, desnivelada, con piedras salientes y baches, que hacen del vehiculo no
estable en su marcha. Lara estaba enfermo de cierta gravedad, tenia el cuerpo y
cara inflamados, atacado de malaria, con dolores de cabeza y con erupciones en la
cara y cuerpo.
A la vista de estos hechos, el demandado debia de saber que era sumamente
peligroso llevar 5 pasajeros en la parte trasera del pick-up; particularmente, para la
salud de Lara; el permitirlo, el demandado no ha tomado las precausiones, para
evitar un posible accidente fatal. La negative de Lara de ocupar el asiento delantero
del pick-up no constituye a juicio del Juzgado una defensa, pues el demendado
conociendo el estado delicado de salud de Lara, no debio de haber permitido que
aquel regrese a Davao en su pick-up; si querria prestar a aquel un favor, debio de
haver provisto a Lara de un automobil para su regrese a Davao, ya que el
demendado es un millionario; si no podia prestar a aquel este favor, debio de haver
dejado a Lara en Samuay para coger aquel un camion de pasajero de Cotabato a
Davao.
Even if we admit as true the facts found by the trial court, still we find that the same are not
sufficient to show that defendant has failed to take the precaution necessary to conduct his
passengers safely to their place of destination for there is nothing there to indicate that
defendant has acted with negligence or without taking the precaution that an ordinary prudent
man would have taken under similar circumstances. It should be noted that Lara went to the
lumber concession of defendant in answer to a call of duty which he was bound to perform
because of the requirement of his office and he contracted the malaria fever in the course of
the performance of that duty. It should also be noted that defendant was not in duty bound to
take the deceased in his own pick-up to Davao because from Parang to Cotabato there was
a line of transportation that regularly makes trips for the public, and if defendant agreed to
take the deceased in his own car, it was only to accommodate him considering his feverish
condition and his request that he be so accommodated. It should also be noted that the
passengers who rode in the pick-up of defendant took their respective seats therein at their
own choice and not upon indication of defendant with the particularity that defendant invited
the deceased to sit with him in the front seat but which invitation the deceased declined. The
reason for this can only be attributed to his desire to be at the back so that he could sit on a
bag and travel in a reclining position because such was more convenient for him due to his
feverish condition. All the circumstances therefore clearly indicate that defendant had done
what a reasonable prudent man would have done under the circumstances.
There is every reason to believe that the unfortunate happening was only due to an
unforeseen accident accused by the fact that at the time the deceased was half asleep and
must have fallen from the pick-up when it ran into some stones causing it to jerk considering
that the road was then bumpy, rough and full of stones.
The finding of the trial court that the pick-up was running at more than 40 kilometers per hour
is not supported by the evidence. This is a mere surmise made by the trial court considering
the time the pick-up left barrio Samoay and the time the accident occured in relation to the
distance covered by the pick-up. And even if this is correct, still we say that such speed is not
unreasonable considering that they were traveling on a national road and the traffic then was
not heavy. We may rather attribute the incident to lack of care on the part of the deceased
considering that the pick-up was open and he was then in a crouching position. Indeed, the
law provides that "A passenger must observe the diligence of a good father of a family to
avoid injury to himself" (Article 1761, new Civil Code), which means that if the injury to the
passenger has been proximately caused by his own negligence, the carrier cannot be held
liable.
All things considered, we are persuaded to conclude that the accident occurred not due to
the negligence of defendant but to circumstances beyond his control and so he should be
exempt from liability.
Wherefore, the decision appealed from is reversed, without pronouncement as to costs.







































G.R. No. 52159 December 22, 1989
JOSE PILAPIL, petitioner, vs. HON. COURT OF APPEALS and ALATCO
TRANSPORTATION COMPANY, INC., respondents.
PADILLA, J.:
This is a petition to review on certiorari the decision* rendered by the Court of Appeals dated
19 October 1979 in CA-G.R. No. 57354-R entitled "Jose Pilapil, plaintiff-appellee versus
Alatco Transportation Co., Inc., defendant-appellant," which reversed and set aside the
judgment of the Court of First Instance of Camarines Sur in Civil Case No. 7230 ordering
respondent transportation company to pay to petitioner damages in the total sum of sixteen
thousand three hundred pesos (P 16,300.00).
The record discloses the following facts:
Petitioner-plaintiff Jose Pilapil, a paying passenger, boarded respondent-defendant's bus
bearing No. 409 at San Nicolas, Iriga City on 16 September 1971 at about 6:00 P.M. While
said bus No. 409 was in due course negotiating the distance between Iriga City and Naga
City, upon reaching the vicinity of the cemetery of the Municipality of Baao, Camarines Sur,
on the way to Naga City, an unidentified man, a bystander along said national highway,
hurled a stone at the left side of the bus, which hit petitioner above his left eye. Private
respondent's personnel lost no time in bringing the petitioner to the provincial hospital in
Naga City where he was confined and treated.
Considering that the sight of his left eye was impaired, petitioner was taken to Dr. Malabanan
of Iriga City where he was treated for another week. Since there was no improvement in his
left eye's vision, petitioner went to V. Luna Hospital, Quezon City where he was treated by
Dr. Capulong. Despite the treatment accorded to him by Dr. Capulong, petitioner lost partially
his left eye's vision and sustained a permanent scar above the left eye.
Thereupon, petitioner instituted before the Court of First Instance of Camarines Sur, Branch I
an action for recovery of damages sustained as a result of the stone-throwing incident. After
trial, the court a quo rendered judgment with the following dispositive part:
Wherefore, judgment is hereby entered:
1. Ordering defendant transportation company to pay
plaintiff Jose Pilapil the sum of P 10,000.00, Philippine
Currency, representing actual and material damages for
causing a permanent scar on the face and injuring the eye-
sight of the plaintiff;
2. Ordering further defendant transportation company to pay
the sum of P 5,000.00, Philippine Currency, to the plaintiff
as moral and exemplary damages;
3. Ordering furthermore, defendant transportation company
to reimburse plaintiff the sum of P 300.00 for his medical
expenses and attorney's fees in the sum of P 1,000.00,
Philippine Currency; and
4. To pay the costs.
SO ORDERED 1
From the judgment, private respondent appealed to the Court of Appeals where the appeal
was docketed as CA-G.R. No. 57354R. On 19 October 1979, the Court of Appeals, in a
Special Division of Five, rendered judgment reversing and setting aside the judgment of the
court a quo.
Hence the present petition.
In seeking a reversal of the decision of the Court of Appeals, petitioner contends that said
court has decided the issue not in accord with law. Specifically, petitioner argues that the
nature of the business of a transportation company requires the assumption of certain risks,
and the stoning of the bus by a stranger resulting in injury to petitioner-passenger is one such
risk from which the common carrier may not exempt itself from liability.
We do not agree.
In consideration of the right granted to it by the public to engage in the business of
transporting passengers and goods, a common carrier does not give its consent to become
an insurer of any and all risks to passengers and goods. It merely undertakes to perform
certain duties to the public as the law imposes, and holds itself liable for any breach thereof.
Under Article 1733 of the Civil Code, common carriers are required to observe extraordinary
diligence for the safety of the passenger transported by them, according to all the
circumstances of each case. The requirement of extraordinary diligence imposed upon
common carriers is restated in Article 1755: "A common carrier is bound to carry the
passengers safely as far as human care and foresight can provide, using the utmost
diligence of very cautious persons, with due regard for all the circumstances." Further, in
case of death of or injuries to passengers, the law presumes said common carriers to be at
fault or to have acted negligently. 2
While the law requires the highest degree of diligence from common carriers in the safe
transport of their passengers and creates a presumption of negligence against them, it does
not, however, make the carrier an insurer of the absolute safety of its passengers. 3
Article 1755 of the Civil Code qualifies the duty of extraordinary care, vigilance and
precaution in the carriage of passengers by common carriers to only such as human care
and foresight can provide. what constitutes compliance with said duty is adjudged with due
regard to all the circumstances.
Article 1756 of the Civil Code, in creating a presumption of fault or negligence on the part of
the common carrier when its passenger is injured, merely relieves the latter, for the time
being, from introducing evidence to fasten the negligence on the former, because the
presumption stands in the place of evidence. Being a mere presumption, however, the same
is rebuttable by proof that the common carrier had exercised extraordinary diligence as
required by law in the performance of its contractual obligation, or that the injury suffered by
the passenger was solely due to a fortuitous event. 4
In fine, we can only infer from the law the intention of the Code Commission and Congress to
curb the recklessness of drivers and operators of common carriers in the conduct of their
business.
Thus, it is clear that neither the law nor the nature of the business of a transportation
company makes it an insurer of the passenger's safety, but that its liability for personal
injuries sustained by its passenger rests upon its negligence, its failure to exercise the
degree of diligence that the law requires. 5
Petitioner contends that respondent common carrier failed to rebut the presumption of
negligence against it by proof on its part that it exercised extraordinary diligence for the
safety of its passengers.
We do not agree.
First, as stated earlier, the presumption of fault or negligence against the carrier is only a
disputable presumption. It gives in where contrary facts are established proving either that
the carrier had exercised the degree of diligence required by law or the injury suffered by the
passenger was due to a fortuitous event. Where, as in the instant case, the injury sustained
by the petitioner was in no way due to any defect in the means of transport or in the method
of transporting or to the negligent or willful acts of private respondent's employees, and
therefore involving no issue of negligence in its duty to provide safe and suitable cars as well
as competent employees, with the injury arising wholly from causes created by strangers
over which the carrier had no control or even knowledge or could not have prevented, the
presumption is rebutted and the carrier is not and ought not to be held liable. To rule
otherwise would make the common carrier the insurer of the absolute safety of its
passengers which is not the intention of the lawmakers.
Second, while as a general rule, common carriers are bound to exercise extraordinary
diligence in the safe transport of their passengers, it would seem that this is not the standard
by which its liability is to be determined when intervening acts of strangers is to be
determined directly cause the injury, while the contract of carriage Article 1763 governs:
Article 1763. A common carrier is responsible for injuries suffered by a
passenger on account of the wilful acts or negligence of other passengers or
of strangers, if the common carrier's employees through the exercise of the
diligence of a good father of a family could have prevented or stopped the
act or omission.
Clearly under the above provision, a tort committed by a stranger which causes injury to a
passenger does not accord the latter a cause of action against the carrier. The negligence for
which a common carrier is held responsible is the negligent omission by the carrier's
employees to prevent the tort from being committed when the same could have been
foreseen and prevented by them. Further, under the same provision, it is to be noted that
when the violation of the contract is due to the willful acts of strangers, as in the instant case,
the degree of care essential to be exercised by the common carrier for the protection of its
passenger is only that of a good father of a family.
Petitioner has charged respondent carrier of negligence on the ground that the injury
complained of could have been prevented by the common carrier if something like mesh-
work grills had covered the windows of its bus.
We do not agree.
Although the suggested precaution could have prevented the injury complained of, the rule of
ordinary care and prudence is not so exacting as to require one charged with its exercise to
take doubtful or unreasonable precautions to guard against unlawful acts of strangers. The
carrier is not charged with the duty of providing or maintaining vehicles as to absolutely
prevent any and all injuries to passengers. Where the carrier uses cars of the most approved
type, in general use by others engaged in the same occupation, and exercises a high degree
of care in maintaining them in suitable condition, the carrier cannot be charged with
negligence in this respect. 6
Finally, petitioner contends that it is to the greater interest of the State if a carrier were made
liable for such stone-throwing incidents rather than have the bus riding public lose confidence
in the transportation system.
Sad to say, we are not in a position to so hold; such a policy would be better left to the
consideration of Congress which is empowered to enact laws to protect the public from the
increasing risks and dangers of lawlessness in society.
WHEREFORE, the judgment appealed from is hereby AFFIRMED.
SO ORDERED.














































G.R. No. L-20761 July 27, 1966
LA MALLORCA, petitioner, vs. HONORABLE COURT OF APPEALS, MARIANO
BELTRAN, ET AL., respondents.
BARRERA, J.:
La Mallorca seeks the review of the decision of the Court of Appeals in CA-G.R. No. 23267-
R, holding it liable for quasi-delict and ordering it to pay to respondents Mariano Beltran, et
al., P6,000.00 for the death of his minor daughter Raquel Beltran, plus P400.00 as actual
damages.
The facts of the case as found by the Court of Appeals, briefly are:
On December 20, 1953, at about noontime, plaintiffs, husband and wife, together
with their minor daughters, namely, Milagros, 13 years old, Raquel, about 4 years
old, and Fe, over 2 years old, boarded the Pambusco Bus No. 352, bearing plate
TPU No. 757 (1953 Pampanga), owned and operated by the defendant, at San
Fernando, Pampanga, bound for Anao, Mexico, Pampanga. At the time, they were
carrying with them four pieces of baggages containing their personal belonging. The
conductor of the bus, who happened to be a half-brother of plaintiff Mariano Beltran,
issued three tickets (Exhs. A, B, & C) covering the full fares of the plaintiff and their
eldest child, Milagros. No fare was charged on Raquel and Fe, since both were
below the height at which fare is charged in accordance with the appellant's rules
and regulations.
After about an hour's trip, the bus reached Anao whereat it stopped to allow the
passengers bound therefor, among whom were the plaintiffs and their children to get
off. With respect to the group of the plaintiffs, Mariano Beltran, then carrying some of
their baggages, was the first to get down the bus, followed by his wife and his
children. Mariano led his companions to a shaded spot on the left pedestrians side of
the road about four or five meters away from the vehicle. Afterwards, he returned to
the bus in controversy to get his other bayong, which he had left behind, but in so
doing, his daughter Raquel followed him, unnoticed by her father. While said Mariano
Beltran was on the running board of the bus waiting for the conductor to hand him
his bayong which he left under one of its seats near the door, the bus, whose motor
was not shut off while unloading, suddenly started moving forward, evidently to
resume its trip, notwithstanding the fact that the conductor has not given the driver
the customary signal to start, since said conductor was still attending to the baggage
left behind by Mariano Beltran. Incidentally, when the bus was again placed into a
complete stop, it had travelled about ten meters from the point where the plaintiffs
had gotten off.
Sensing that the bus was again in motion, Mariano Beltran immediately jumped from
the running board without getting his bayong from the conductor. He landed on the
side of the road almost in front of the shaded place where he left his wife and
children. At that precise time, he saw people beginning to gather around the body of
a child lying prostrate on the ground, her skull crushed, and without life. The child
was none other than his daughter Raquel, who was run over by the bus in which she
rode earlier together with her parents.
For the death of their said child, the plaintiffs commenced the present suit against the
defendant seeking to recover from the latter an aggregate amount of P16,000 to
cover moral damages and actual damages sustained as a result thereof and
attorney's fees. After trial on the merits, the court below rendered the judgment in
question.
On the basis of these facts, the trial court found defendant liable for breach of contract of
carriage and sentenced it to pay P3,000.00 for the death of the child and P400.00 as
compensatory damages representing burial expenses and costs.
On appeal to the Court of Appeals, La Mallorca claimed that there could not be a breach of
contract in the case, for the reason that when the child met her death, she was no longer a
passenger of the bus involved in the incident and, therefore, the contract of carriage had
already terminated. Although the Court of Appeals sustained this theory, it nevertheless
found the defendant-appellant guilty of quasi-delict and held the latter liable for damages, for
the negligence of its driver, in accordance with Article 2180 of the Civil Code. And, the Court
of Appeals did not only find the petitioner liable, but increased the damages awarded the
plaintiffs-appellees to P6,000.00, instead of P3,000.00 granted by the trial court.
In its brief before us, La Mallorca contends that the Court of Appeals erred (1) in holding it
liable for quasi-delict, considering that respondents complaint was one for breach of contract,
and (2) in raising the award of damages from P3,000.00 to P6,000.00 although respondents
did not appeal from the decision of the lower court.
Under the facts as found by the Court of Appeals, we have to sustain the judgement holding
petitioner liable for damages for the death of the child, Raquel Beltran. It may be pointed out
that although it is true that respondent Mariano Beltran, his wife, and their children (including
the deceased child) had alighted from the bus at a place designated for disembarking or
unloading of passengers, it was also established that the father had to return to the vehicle
(which was still at a stop) to get one of his bags or bayong that was left under one of the
seats of the bus. There can be no controversy that as far as the father is concerned, when he
returned to the bus for hisbayong which was not unloaded, the relation of passenger and
carrier between him and the petitioner remained subsisting. For, the relation of carrier and
passenger does not necessarily cease where the latter, after alighting from the car, aids the
carrier's servant or employee in removing his baggage from the car.1 The issue to be
determined here is whether as to the child, who was already led by the father to a place
about 5 meters away from the bus, the liability of the carrier for her safety under the contract
of carriage also persisted.
It has been recognized as a rule that the relation of carrier and passenger does not cease at
the moment the passenger alights from the carrier's vehicle at a place selected by the carrier
at the point of destination, but continues until the passenger has had a reasonable time or a
reasonable opportunity to leave the carrier's premises. And, what is a reasonable time or a
reasonable delay within this rule is to be determined from all the circumstances. Thus, a
person who, after alighting from a train, walks along the station platform is considered still a
passenger.2 So also, where a passenger has alighted at his destination and is proceeding by
the usual way to leave the company's premises, but before actually doing so is halted by the
report that his brother, a fellow passenger, has been shot, and he in good faith and without
intent of engaging in the difficulty, returns to relieve his brother, he is deemed reasonably and
necessarily delayed and thus continues to be a passenger entitled as such to the protection
of the railroad and company and its agents.3
In the present case, the father returned to the bus to get one of his baggages which was not
unloaded when they alighted from the bus. Raquel, the child that she was, must have
followed the father. However, although the father was still on the running board of the bus
awaiting for the conductor to hand him the bag or bayong, the bus started to run, so that even
he (the father) had to jump down from the moving vehicle. It was at this instance that the
child, who must be near the bus, was run over and killed. In the circumstances, it cannot be
claimed that the carrier's agent had exercised the "utmost diligence" of a "very cautions
person" required by Article 1755 of the Civil Code to be observed by a common carrier in the
discharge of its obligation to transport safely its passengers. In the first place, the driver,
although stopping the bus, nevertheless did not put off the engine. Secondly, he started to
run the bus even before the bus conductor gave him the signal to go and while the latter was
still unloading part of the baggages of the passengers Mariano Beltran and family. The
presence of said passengers near the bus was not unreasonable and they are, therefore, to
be considered still as passengers of the carrier, entitled to the protection under their contract
of carriage.
But even assuming arguendo that the contract of carriage has already terminated, herein
petitioner can be held liable for the negligence of its driver, as ruled by the Court of Appeals,
pursuant to Article 2180 of the Civil Code. Paragraph 7 of the complaint, which reads
That aside from the aforesaid breach of contract, the death of Raquel Beltran,
plaintiffs' daughter, was caused by the negligence and want of exercise of the utmost
diligence of a very cautious person on the part of the defendants and their agent,
necessary to transport plaintiffs and their daughter safely as far as human care and
foresight can provide in the operation of their vehicle.
is clearly an allegation for quasi-delict. The inclusion of this averment for quasi-delict, while
incompatible with the other claim under the contract of carriage, is permissible under Section
2 of Rule 8 of the New Rules of Court, which allows a plaintiff to allege causes of action in the
alternative, be they compatible with each other or not, to the end that the real matter in
controversy may be resolved and determined.4
The plaintiffs sufficiently pleaded the culpa or negligence upon which the claim was
predicated when it was alleged in the complaint that "the death of Raquel Beltran, plaintiffs'
daughter, was caused by the negligence and want of exercise of the utmost diligence of a
very cautious person on the part of the defendants and their agent." This allegation was also
proved when it was established during the trial that the driver, even before receiving the
proper signal from the conductor, and while there were still persons on the running board of
the bus and near it, started to run off the vehicle. The presentation of proof of the negligence
of its employee gave rise to the presumption that the defendant employer did not exercise the
diligence of a good father of the family in the selection and supervision of its employees. And
this presumption, as the Court of Appeals found, petitioner had failed to overcome.
Consequently, petitioner must be adjudged peculiarily liable for the death of the child Raquel
Beltran.
The increase of the award of damages from P3,000.00 to P6,000.00 by the Court of Appeals,
however, cannot be sustained. Generally, the appellate court can only pass upon and
consider questions or issues raised and argued in appellant's brief. Plaintiffs did not appeal
from that portion of the judgment of the trial court awarding them on P3,000.00 damages for
the death of their daughter. Neither does it appear that, as appellees in the Court of Appeals,
plaintiffs have pointed out in their brief the inadequacy of the award, or that the inclusion of
the figure P3,000.00 was merely a clerical error, in order that the matter may be treated as an
exception to the general rule.5Herein petitioner's contention, therefore, that the Court of
Appeals committed error in raising the amount of the award for damages is, evidently,
meritorious.1wph1.t
Wherefore, the decision of the Court of Appeals is hereby modified by sentencing, the
petitioner to pay to the respondents Mariano Beltran, et al., the sum of P3,000.00 for the
death of the child, Raquel Beltran, and the amount of P400.00 as actual damages. No costs
in this instance. So ordered.



















































G.R. No. 84458 November 6, 1989
ABOITIZ SHIPPING CORPORATION, petitioner, vs. HON. COURT OF APPEALS,
ELEVENTH DIVISION, LUCILA C. VIANA, SPS. ANTONIO VIANA and GORGONIA
VIANA, and PIONEER STEVEDORING CORPORATION, respondents.
REGALADO, J.:
In this appeal by certiorari, petitioner Aboitiz Shipping Corporation seeks a review of the
decision 1 of respondent Court of Appeals, dated July 29, 1988, the decretal portion of which
reads:
WHEREFORE, the judgment appealed from as modified by the order of
October 27, 1982, is hereby affirmed with the modification that appellant
Aboitiz Shipping is hereby ordered to pay plaintiff-appellees the amount of
P30,000.00 for the death of Anacleto Viana; actual damages of P9,800.00;
P150,000.00 for unearned income; P7,200.00 as support for deceased's
parents; P20,000.00 as moral damages; P10,000.00 as attorney's fees; and
to pay the costs.
The undisputed facts of the case, as found by the court a quo and adopted by respondent
court, are as follows: .
The evidence disclosed that on May 11, 1975, Anacleto Viana boarded the
vessel M/V Antonia, owned by defendant, at the port at San Jose,
Occidental Mindoro, bound for Manila, having purchased a ticket (No.
117392) in the sum of P23.10 (Exh. 'B'). On May 12, 1975, said vessel
arrived at Pier 4, North Harbor, Manila, and the passengers therein
disembarked, a gangplank having been provided connecting the side of the
vessel to the pier. Instead of using said gangplank Anacleto Viana
disembarked on the third deck which was on the level with the pier. After
said vessel had landed, the Pioneer Stevedoring Corporation took over the
exclusive control of the cargoes loaded on said vessel pursuant to the
Memorandum of Agreement dated July 26, 1975 (Exh. '2') between the third
party defendant Pioneer Stevedoring Corporation and defendant Aboitiz
Shipping Corporation.
The crane owned by the third party defendant and operated by its crane
operator Alejo Figueroa was placed alongside the vessel and one (1) hour
after the passengers of said vessel had disembarked, it started operation by
unloading the cargoes from said vessel. While the crane was being
operated, Anacleto Viana who had already disembarked from said vessel
obviously remembering that some of his cargoes were still loaded in the
vessel, went back to the vessel, and it was while he was pointing to the crew
of the said vessel to the place where his cargoes were loaded that the crane
hit him, pinning him between the side of the vessel and the crane. He was
thereafter brought to the hospital where he later expired three (3) days
thereafter, on May 15, 1975, the cause of his death according to the Death
Certificate (Exh. "C") being "hypostatic pneumonia secondary to traumatic
fracture of the pubic bone lacerating the urinary bladder" (See also Exh. "B").
For his hospitalization, medical, burial and other miscellaneous expenses,
Anacleto's wife, herein plaintiff, spent a total of P9,800.00 (Exhibits "E", "E-
1", to "E-5"). Anacleto Viana who was only forty (40) years old when he met
said fateful accident (Exh. 'E') was in good health. His average annual
income as a farmer or a farm supervisor was 400 cavans of palay annually.
His parents, herein plaintiffs Antonio and Gorgonia Viana, prior to his death
had been recipient of twenty (20) cavans of palay as support or P120.00
monthly. Because of Anacleto's death, plaintiffs suffered mental anguish and
extreme worry or moral damages. For the filing of the instant case, they had
to hire a lawyer for an agreed fee of ten thousand (P10,000.00) pesos. 2
Private respondents Vianas filed a complaint 3 for damages against petitioner corporation
(Aboitiz, for brevity) for breach of contract of carriage.
In its answer. 4 Aboitiz denied responsibility contending that at the time of the accident, the
vessel was completely under the control of respondent Pioneer Stevedoring Corporation
(Pioneer, for short) as the exclusive stevedoring contractor of Aboitiz, which handled the
unloading of cargoes from the vessel of Aboitiz. It is also averred that since the crane
operator was not an employee of Aboitiz, the latter cannot be held liable under the fellow-
servant rule.
Thereafter, Aboitiz, as third-party plaintiff, filed a third-party complaint 5 against Pioneer
imputing liability thereto for Anacleto Viana's death as having been allegedly caused by the
negligence of the crane operator who was an employee of Pioneer under its exclusive control
and supervision.
Pioneer, in its answer to the third-party complaint, 6 raised the defenses that Aboitiz had no
cause of action against Pioneer considering that Aboitiz is being sued by the Vianas for
breach of contract of carriage to which Pioneer is not a party; that Pioneer had observed the
diligence of a good father of a family both in the selection and supervision of its employees
as well as in the prevention of damage or injury to anyone including the victim Anacleto
Viana; that Anacleto Viana's gross negligence was the direct and proximate cause of his
death; and that the filing of the third-party complaint was premature by reason of the
pendency of the criminal case for homicide through reckless imprudence filed against the
crane operator, Alejo Figueroa.
In a decision rendered on April 17, 1980 by the trial court, 7 Aboitiz was ordered to pay the
Vianas for damages incurred, and Pioneer was ordered to reimburse Aboitiz for whatever
amount the latter paid the Vianas. The dispositive portion of said decision provides:
WHEREFORE, judgment is hereby rendered in favor of the plantiffs:
(1) ordering defendant Aboitiz Shipping Corporation to pay to plaintiffs the
sum of P12,000.00 for the death of Anacleto Viana P9,800.00 as actual
damages; P533,200.00 value of the 10,664 cavans of palay computed at
P50.00 per cavan; P10,000.00 as attorney's fees; F 5,000.00, value of the
100 cavans of palay as support for five (5) years for deceased (sic) parents,
herein plaintiffs Antonio and Gorgonia Viana computed at P50.00 per cavan;
P7,200.00 as support for deceased's parents computed at P120.00 a month
for five years pursuant to Art. 2206, Par. 2, of the Civil Code; P20,000.00 as
moral damages, and costs; and
(2) ordering the third party defendant Pioneer Stevedoring Corporation to
reimburse defendant and third party plaintiff Aboitiz Shipping Corporation the
said amounts that it is ordered to pay to herein plaintiffs.
Both Aboitiz and Pioneer filed separate motions for reconsideration wherein they similarly
raised the trial court's failure to declare that Anacleto Viana acted with gross negligence
despite the overwhelming evidence presented in support thereof. In addition, Aboitiz alleged,
in opposition to Pioneer's motion, that under the memorandum of agreement the liability of
Pioneer as contractor is automatic for any damages or losses whatsoever occasioned by and
arising from the operation of its arrastre and stevedoring service.
In an order dated October 27, 1982, 8 the trial court absolved Pioneer from liability for failure
of the Vianas and Aboitiz to preponderantly establish a case of negligence against the crane
operator which the court a quo ruled is never presumed, aside from the fact that the
memorandum of agreement supposedly refers only to Pioneer's liability in case of loss or
damage to goods handled by it but not in the case of personal injuries, and, finally that
Aboitiz cannot properly invoke the fellow-servant rule simply because its liability stems from a
breach of contract of carriage. The dispositive portion of said order reads:
WHEREFORE, judgment is hereby modified insofar as third party defendant
Pioneer Stevedoring Corporation is concerned rendered in favor of the
plaintiffs-,:
(1) Ordering defendant Aboitiz Shipping Corporation to pay the plaintiffs the
sum of P12,000.00 for the death of Anacleto Viana; P9,000.00 (sic) as actual
damages; P533,200.00 value of the 10,664 cavans of palay computed at
P50.00 per cavan; P10,000.00 as attorney's fees; P5,000.00 value of the
100 cavans of palay as support for five (5) years for deceased's parents,
herein plaintiffs Antonio and Gorgonia Viana,computed at P50.00 per cavan;
P7,200.00 as support for deceased's parents computed at P120.00 a month
for five years pursuant to Art. 2206, Par. 2, of the Civil Code; P20,000.00 as
moral damages, and costs; and
(2) Absolving third-party defendant Pioneer Stevedoring Corporation for (sic)
any liability for the death of Anacleto Viana the passenger of M/V Antonia
owned by defendant third party plaintiff Aboitiz Shipping Corporation it
appearing that the negligence of its crane operator has not been established
therein.
Not satisfied with the modified judgment of the trial court, Aboitiz appealed the same to
respondent Court of Appeals which affirmed the findings of of the trial court except as to the
amount of damages awarded to the Vianas.
Hence, this petition wherein petitioner Aboitiz postulates that respondent court erred:
(A) In holding that the doctrine laid down by this honorable Court in La
Mallorca vs. Court of Appeals, et al. (17 SCRA 739, July 27, 1966) is
applicable to the case in the face of the undisputable fact that the factual
situation under the La Mallorca case is radically different from the facts
obtaining in this case;
(B) In holding petitioner liable for damages in the face of the finding of the
court a quo and confirmed by the Honorable respondent court of Appeals
that the deceased, Anacleto Viana was guilty of contributory negligence,
which, We respectfully submit contributory negligence was the proximate
cause of his death; specifically the honorable respondent Court of Appeals
failed to apply Art. 1762 of the New Civil Code;
(C) In the alternative assuming the holding of the Honorable respondent
Court of Appears that petitioner may be legally condemned to pay damages
to the private respondents we respectfully submit that it committed a
reversible error when it dismissed petitioner's third party complaint against
private respondent Pioneer Stevedoring Corporation instead of compelling
the latter to reimburse the petitioner for whatever damages it may be
compelled to pay to the private respondents Vianas. 9
At threshold, it is to be observed that both the trial court and respondent Court of Appeals
found the victim Anacleto Viana guilty of contributory negligence, but holding that it was the
negligence of Aboitiz in prematurely turning over the vessel to the arrastre operator for the
unloading of cargoes which was the direct, immediate and proximate cause of the victim's
death.
I. Petitioner contends that since one (1) hour had already elapsed from the time Anacleto
Viana disembarked from the vessel and that he was given more than ample opportunity to
unload his cargoes prior to the operation of the crane, his presence on the vessel was no
longer reasonable e and he consequently ceased to be a passenger. Corollarily, it insists that
the doctrine in La Mallorca vs. Court of Appeals, et al. 10 is not applicable to the case at bar.
The rule is that the relation of carrier and passenger continues until the passenger has been
landed at the port of destination and has left the vessel owner's dock or premises. 11 Once
created, the relationship will not ordinarily terminate until the passenger has, after reaching
his destination, safely alighted from the carrier's conveyance or had a reasonable opportunity
to leave the carrier's premises. All persons who remain on the premises a reasonable time
after leaving the conveyance are to be deemed passengers, and what is a reasonable time or
a reasonable delay within this rule is to be determined from all the circumstances, and
includes a reasonable time to see after his baggage and prepare for his departure. 12 The
carrier-passenger relationship is not terminated merely by the fact that the person
transported has been carried to his destination if, for example, such person remains in the
carrier's premises to claim his baggage. 13
It was in accordance with this rationale that the doctrine in the aforesaid case of La Mallorca
was enunciated, to wit:
It has been recognized as a rule that the relation of carrier and passenger
does not cease at the moment the passenger alights from the carrier's
vehicle at a place selected by the carrier at the point of destination, but
continues until the passenger has had a reasonable time or a reasonable
opportunity to leave the carrier's premises. And, what is a reasonable time or
a reasonable delay within this rule is to be determined from all the
circumstances. Thus, a person who, after alighting from a train, walks along
the station platform is considered still a passenger. So also, where a
passenger has alighted at his destination and is proceeding by the usual
way to leave the company's premises, but before actually doing so is halted
by the report that his brother, a fellow passenger, has been shot, and he in
good faith and without intent of engaging in the difficulty, returns to relieve
his brother, he is deemed reasonably and necessarily delayed and thus
continues to be a passenger entitled as such to the protection of the railroad
company and its agents.
In the present case, the father returned to the bus to get one of his
baggages which was not unloaded when they alighted from the bus.
Racquel, the child that she was, must have followed the father. However,
although the father was still on the running board of the bus waiting for the
conductor to hand him the bag or bayong, the bus started to run, so that
even he (the father) had to jump down from the moving vehicle. It was at this
instance that the child, who must be near the bus, was run over and killed. In
the circumstances, it cannot be claimed that the carrier's agent had
exercised the 'utmost diligence' of a 'very cautious person' required by Article
1755 of the Civil Code to be observed by a common carrier in the discharge
of its obligation to transport safely its passengers. ... The presence of said
passengers near the bus was not unreasonable and they are, therefore, to
be considered still as passengers of the carrier, entitled to the protection
under their contract of carriage. 14
It is apparent from the foregoing that what prompted the Court to rule as it did in said case is
the fact of the passenger's reasonable presence within the carrier's premises. That
reasonableness of time should be made to depend on the attending circumstances of the
case, such as the kind of common carrier, the nature of its business, the customs of the
place, and so forth, and therefore precludes a consideration of the time element per
se without taking into account such other factors. It is thus of no moment whether in the cited
case of La Mallorcathere was no appreciable interregnum for the passenger therein to leave
the carrier's premises whereas in the case at bar, an interval of one (1) hour had elapsed
before the victim met the accident. The primary factor to be considered is the existence of a
reasonable cause as will justify the presence of the victim on or near the petitioner's vessel.
We believe there exists such a justifiable cause.
It is of common knowledge that, by the very nature of petitioner's business as a shipper, the
passengers of vessels are allotted a longer period of time to disembark from the ship than
other common carriers such as a passenger bus. With respect to the bulk of cargoes and the
number of passengers it can load, such vessels are capable of accommodating a bigger
volume of both as compared to the capacity of a regular commuter bus. Consequently, a ship
passenger will need at least an hour as is the usual practice, to disembark from the vessel
and claim his baggage whereas a bus passenger can easily get off the bus and retrieve his
luggage in a very short period of time. Verily, petitioner cannot categorically claim, through
the bare expedient of comparing the period of time entailed in getting the passenger's
cargoes, that the ruling in La Mallorca is inapplicable to the case at bar. On the contrary, if we
are to apply the doctrine enunciated therein to the instant petition, we cannot in reason doubt
that the victim Anacleto Viana was still a passenger at the time of the incident. When the
accident occurred, the victim was in the act of unloading his cargoes, which he had every
right to do, from petitioner's vessel. As earlier stated, a carrier is duty bound not only to bring
its passengers safely to their destination but also to afford them a reasonable time to claim
their baggage.
It is not definitely shown that one (1) hour prior to the incident, the victim had already
disembarked from the vessel. Petitioner failed to prove this. What is clear to us is that at the
time the victim was taking his cargoes, the vessel had already docked an hour earlier. In
consonance with common shipping procedure as to the minimum time of one (1) hour
allowed for the passengers to disembark, it may be presumed that the victim had just gotten
off the vessel when he went to retrieve his baggage. Yet, even if he had already disembarked
an hour earlier, his presence in petitioner's premises was not without cause. The victim had
to claim his baggage which was possible only one (1) hour after the vessel arrived since it
was admittedly standard procedure in the case of petitioner's vessels that the unloading
operations shall start only after that time. Consequently, under the foregoing circumstances,
the victim Anacleto Viana is still deemed a passenger of said carrier at the time of his tragic
death.
II. Under the law, common carriers are, from the nature of their business and for reasons of
public policy, bound to observe extraordinary diligence in the vigilance over the goods and for
the safety of the passengers transported by them, according to all the circumstances of each
case. 15 More particularly, a common carrier is bound to carry the passengers safely as far
as human care and foresight can provide, using the utmost diligence of very cautious
persons, with a due regard for all the circumstances. 16 Thus, where a passenger dies or is
injured, the common carrier is presumed to have been at fault or to have acted
negligently. 17 This gives rise to an action for breach of contract of carriage where all that is
required of plaintiff is to prove the existence of the contract of carriage and its non-
performance by the carrier, that is, the failure of the carrier to carry the passenger safely to
his destination, 18 which, in the instant case, necessarily includes its failure to safeguard its
passenger with extraordinary diligence while such relation subsists.
The presumption is, therefore, established by law that in case of a passenger's death or
injury the operator of the vessel was at fault or negligent, having failed to exercise
extraordinary diligence, and it is incumbent upon it to rebut the same. This is in consonance
with the avowed policy of the State to afford full protection to the passengers of common
carriers which can be carried out only by imposing a stringent statutory obligation upon the
latter. Concomitantly, this Court has likewise adopted a rigid posture in the application of the
law by exacting the highest degree of care and diligence from common carriers, bearing
utmost in mind the welfare of the passengers who often become hapless victims of indifferent
and profit-oriented carriers. We cannot in reason deny that petitioner failed to rebut the
presumption against it. Under the facts obtaining in the present case, it cannot be gainsaid
that petitioner had inadequately complied with the required degree of diligence to prevent the
accident from happening.
As found by the Court of Appeals, the evidence does not show that there was a cordon of
drums around the perimeter of the crane, as claimed by petitioner. It also adverted to the fact
that the alleged presence of visible warning signs in the vicinity was disputable and not
indubitably established. Thus, we are not inclined to accept petitioner's explanation that the
victim and other passengers were sufficiently warned that merely venturing into the area in
question was fraught with serious peril. Definitely, even assuming the existence of the
supposed cordon of drums loosely placed around the unloading area and the guard's
admonitions against entry therein, these were at most insufficient precautions which pale into
insignificance if considered vis-a-vis the gravity of the danger to which the deceased was
exposed. There is no showing that petitioner was extraordinarily diligent in requiring or seeing
to it that said precautionary measures were strictly and actually enforced to subserve their
purpose of preventing entry into the forbidden area. By no stretch of liberal evaluation can
such perfunctory acts approximate the "utmost diligence of very cautious persons" to be
exercised "as far as human care and foresight can provide" which is required by law of
common carriers with respect to their passengers.
While the victim was admittedly contributorily negligent, still petitioner's aforesaid failure to
exercise extraordinary diligence was the proximate and direct cause of, because it could
definitely have prevented, the former's death. Moreover, in paragraph 5.6 of its petition, at
bar, 19 petitioner has expressly conceded the factual finding of respondent Court of Appeals
that petitioner did not present sufficient evidence in support of its submission that the
deceased Anacleto Viana was guilty of gross negligence. Petitioner cannot now be heard to
claim otherwise.
No excepting circumstance being present, we are likewise bound by respondent court's
declaration that there was no negligence on the part of Pioneer Stevedoring Corporation, a
confirmation of the trial court's finding to that effect, hence our conformity to Pioneer's being
absolved of any liability.
As correctly observed by both courts, Aboitiz joined Pioneer in proving the alleged gross
negligence of the victim, hence its present contention that the death of the passenger was
due to the negligence of the crane operator cannot be sustained both on grounds, of estoppel
and for lack of evidence on its present theory. Even in its answer filed in the court below it
readily alleged that Pioneer had taken the necessary safeguards insofar as its unloading
operations were concerned, a fact which appears to have been accepted by the plaintiff
therein by not impleading Pioneer as a defendant, and likewise inceptively by Aboitiz by filing
its third-party complaint only after ten (10) months from the institution of the suit against it.
Parenthetically, Pioneer is not within the ambit of the rule on extraordinary diligence required
of, and the corresponding presumption of negligence foisted on, common carriers like Aboitiz.
This, of course, does not detract from what we have said that no negligence can be imputed
to Pioneer but, that on the contrary, the failure of Aboitiz to exercise extraordinary diligence
for the safety of its passenger is the rationale for our finding on its liability.
WHEREFORE, the petition is DENIED and the judgment appealed from is hereby
AFFIRMED in toto.
SO ORDERED.




















G.R. No. L-22272 June 26, 1967
ANTONIA MARANAN, plaintiff-appellant, vs. PASCUAL PEREZ, ET AL., defendants.
PASCUAL PEREZ, defendant appellant.
BENGZON, J.P., J.:
Rogelio Corachea, on October 18, 1960, was a passenger in a taxicab owned and operated
by Pascual Perez when he was stabbed and killed by the driver, Simeon Valenzuela.
Valenzuela was prosecuted for homicide in the Court of First Instance of Batangas. Found
guilty, he was sentenced to suffer imprisonment and to indemnify the heirs of the deceased in
the sum of P6,000. Appeal from said conviction was taken to the Court of
Appeals.1wph1.t
On December 6 1961, while appeal was pending in the Court of Appeals, Antonia Maranan,
Rogelio's mother, filed an action in the Court of First Instance of Batangas to recover
damages from Perez and Valenzuela for the death of her son. Defendants asserted that the
deceased was killed in self-defense, since he first assaulted the driver by stabbing him from
behind. Defendant Perez further claimed that the death was a caso fortuito for which the
carrier was not liable.
The court a quo, after trial, found for the plaintiff and awarded her P3,000 as damages
against defendant Perez. The claim against defendant Valenzuela was dismissed. From this
ruling, both plaintiff and defendant Perez appealed to this Court, the former asking for more
damages and the latter insisting on non-liability. Subsequently, the Court of Appeals affirmed
the judgment of conviction earlier mentioned, during the pendency of the herein appeal, and
on May 19, 1964, final judgment was entered therein. (Rollo, p. 33).
Defendant-appellant relies solely on the ruling enunciated in Gillaco v. Manila Railroad Co.,
97 Phil. 884, that the carrier is under no absolute liability for assaults of its employees upon
the passengers. The attendant facts and controlling law of that case and the one at bar are
very different however. In the Gillaco case, the passenger was killed outside the scope and
the course of duty of the guilty employee. As this Court there found:
x x x when the crime took place, the guard Devesa had no duties to discharge in
connection with the transportation of the deceased from Calamba to Manila. The
stipulation of facts is clear that when Devesa shot and killed Gillaco, Devesa was
assigned to guard the Manila-San Fernando (La Union) trains, and he was at Paco
Station awaiting transportation to Tutuban, the starting point of the train that he was
engaged to guard. In fact, his tour of duty was to start at 9:00 two hours after the
commission of the crime. Devesa was therefore under no obligation to safeguard the
passengers of the Calamba-Manila train, where the deceased was riding; and the
killing of Gillaco was not done in line of duty. The position of Devesa at the time was
that of another would be passenger, a stranger also awaiting transportation, and not
that of an employee assigned to discharge any of the duties that the Railroad had
assumed by its contract with the deceased. As a result, Devesa's assault can not be
deemed in law a breach of Gillaco's contract of transportation by a servant or
employee of the carrier. . . . (Emphasis supplied)
Now here, the killing was perpetrated by the driver of the very cab transporting the
passenger, in whose hands the carrier had entrusted the duty of executing the contract of
carriage. In other words, unlike the Gillaco case, the killing of the passenger here took place
in the course of duty of the guilty employee and when the employee was acting within the
scope of his duties.
Moreover, the Gillaco case was decided under the provisions of the Civil Code of 1889
which, unlike the present Civil Code, did not impose upon common carriers absolute liability
for the safety of passengers against wilful assaults or negligent acts committed by their
employees. The death of the passenger in the Gillaco case was truly a fortuitous event which
exempted the carrier from liability. It is true that Art. 1105 of the old Civil Code on fortuitous
events has been substantially reproduced in Art. 1174 of the Civil Code of the Philippines but
both articles clearly remove from their exempting effect the case where the law expressly
provides for liability in spite of the occurrence of force majeure. And herein significantly lies
the statutory difference between the old and present Civil Codes, in the backdrop of the
factual situation before Us, which further accounts for a different result in theGillaco case.
Unlike the old Civil Code, the new Civil Code of the Philippines expressly makes the common
carrier liable for intentional assaults committed by its employees upon its passengers, by the
wording of Art. 1759 which categorically states that
Common carriers are liable for the death of or injuries to passengers through the
negligence or willful acts of the former's employees, although such employees may
have acted beyond the scope of their authority or in violation of the orders of the
common carriers.
The Civil Code provisions on the subject of Common Carriers1 are new and were taken from
Anglo-American Law.2 There, the basis of the carrier's liability for assaults on passengers
committed by its drivers rests either on (1) the doctrine of respondeat superior or (2) the
principle that it is the carrier's implied duty to transport the passenger safely.3
Under the first, which is the minority view, the carrier is liable only when the act of the
employee is within the scope of his authority and duty. It is not sufficient that the act be within
the course of employment only.4
Under the second view, upheld by the majority and also by the later cases, it is enough that
the assault happens within the course of the employee's duty. It is no defense for the carrier
that the act was done in excess of authority or in disobedience of the carrier's orders.5 The
carrier's liability here is absolute in the sense that it practically secures the passengers from
assaults committed by its own employees.6
As can be gleaned from Art. 1759, the Civil Code of the Philippines evidently follows the rule
based on the second view. At least three very cogent reasons underlie this rule. As explained
in Texas Midland R.R. v. Monroe, 110 Tex. 97, 216 S.W. 388, 389-390, and Haver v. Central
Railroad Co., 43 LRA 84, 85: (1) the special undertaking of the carrier requires that it furnish
its passenger that full measure of protection afforded by the exercise of the high degree of
care prescribed by the law, inter alia from violence and insults at the hands of strangers and
other passengers, but above all, from the acts of the carrier's own servants charged with the
passenger's safety; (2) said liability of the carrier for the servant's violation of duty to
passengers, is the result of the formers confiding in the servant's hands the performance of
his contract to safely transport the passenger, delegating therewith the duty of protecting the
passenger with the utmost care prescribed by law; and (3) as between the carrier and the
passenger, the former must bear the risk of wrongful acts or negligence of the carrier's
employees against passengers, since it, and not the passengers, has power to select and
remove them.
Accordingly, it is the carrier's strict obligation to select its drivers and similar employees with
due regard not only to their technical competence and physical ability, but also, no less
important, to their total personality, including their patterns of behavior, moral fibers, and
social attitude.
Applying this stringent norm to the facts in this case, therefore, the lower court rightly
adjudged the defendant carrier liable pursuant to Art. 1759 of the Civil Code. The dismissal of
the claim against the defendant driver was also correct. Plaintiff's action was predicated on
breach of contract of carriage7 and the cab driver was not a party thereto. His civil liability is
covered in the criminal case wherein he was convicted by final judgment.
In connection with the award of damages, the court a quo granted only P3,000 to plaintiff-
appellant. This is the minimum compensatory damages amount recoverable under Art. 1764
in connection with Art. 2206 of the Civil Code when a breach of contract results in the
passenger's death. As has been the policy followed by this Court, this minimal award should
be increased to P6,000. As to other alleged actual damages, the lower court's finding that
plaintiff's evidence thereon was not convincing,8 should not be disturbed. Still, Arts. 2206 and
1764 awardmoral damages in addition to compensatory damages, to the parents of the
passenger killed to compensate for the mental anguish they suffered. A claim therefor,
having been properly made, it becomes the court's duty to award moral damages.9 Plaintiff
demands P5,000 as moral damages; however, in the circumstances, We consider P3,000
moral damages, in addition to the P6,000 damages afore-stated, as sufficient. Interest upon
such damages are also due to plaintiff-appellant. 10
Wherefore, with the modification increasing the award of actual damages in plaintiff's favor to
P6,000, plus P3,000.00 moral damages, with legal interest on both from the filing of the
complaint on December 6, 1961 until the whole amount is paid, the judgment appealed from
is affirmed in all other respects. No costs. So ordered.










G.R. No. L-55347 October 4, 1985
PHILIPPINE NATIONAL RAILWAYS, petitioner, vs. THE HONORABLE COURT OF
APPEALS and ROSARIO TUPANG, respondents.
ESCOLIN, J.:
Invoking the principle of state immunity from suit, the Philippine National Railways, PNR for
short, instituted this petition for review on certiorari to set aside the decision of the
respondent Appellate Court which held petitioner PNR liable for damages for the death of
Winifredo Tupang, a paying passenger who fell off a train operated by the petitioner.
The pertinent facts are summarized by the respondent court as follows:
The facts show that on September 10, 1972, at about 9:00 o'clock in the
evening, Winifredo Tupang, husband of plaintiff Rosario Tupang, boarded
'Train No. 516 of appellant at Libmanan, Camarines Sur, as a paying
passenger bound for Manila. Due to some mechanical defect, the train
stopped at Sipocot, Camarines Sur, for repairs, taking some two hours
before the train could resume its trip to Manila. Unfortunately, upon passing
Iyam Bridge at Lucena, Quezon, Winifredo Tupang fell off the train resulting
in his death.The train did not stop despite the alarm raised by the other
passengers that somebody fell from the train. Instead, the train conductor
Perfecto Abrazado, called the station agent at Candelaria, Quezon, and
requested for verification of the information. Police authorities of Lucena City
were dispatched to the Iyam Bridge where they found the lifeless body of
Winifredo Tupang.
As shown by the autopsy report, Winifredo Tupang died of cardio-respiratory
failure due to massive cerebral hemorrhage due to traumatic injury [Exhibits
B and C, Folder of Exhibits],Tupang was later buried in the public cemetery
of Lucena City by the local police authorities. [Rollo, pp. 91-92]
Upon complaint filed by the deceased's widow, Rosario Tupang, the then Court of First
Instance of Rizal, after trial, held the petitioner PNR liable for damages for breach of contract
of carriage and ordered "to pay the plaintiff the sum of P12,000,00 for the death of Winifredo
Tupang, plus P20,000.00 for loss of his earning capacity and the further sum of P10,000.00
as moral damages, and P2,000.00 as attorney's fees, and costs. 1
On appeal, the Appellate Court sustained the holding of the trial court that the PNR did not
exercise the utmost diligence required by law of a common carrier. It further increased the
amount adjudicated by the trial court by ordering PNR to pay the plaintiff an additional sum of
P5,000.00 as exemplary damages.
Moving for reconsideration of the above decision, the PNR raised for the first time, as a
defense, the doctrine of state immunity from suit. It alleged that it is a mere agency of the
Philippine government without distinct or separate personality of its own, and that its funds
are governmental in character and, therefore, not subject to garnishment or execution. The
motion was denied; the respondent court ruled that the ground advanced could not be raised
for the first time on appeal.
Hence, this petition for review.
The petition is devoid of merit. The PNR was created under Rep. Act 4156, as amended.
Section 4 of the said Act provides:
The Philippine national Railways shall have the following powers:
a. To do all such other things and to transact all such business directly or
indirectly necessary, incidental or conducive to the attainment of the purpose
of the corporation; and
b. Generally, to exercise all powers of a corporation under the Corporation
Law.
Under the foregoing section, the PNR has all the powers, the characteristics and attributes of
a corporation under the Corporation Law. There can be no question then that the PNR may
sue and be sued and may be subjected to court processes just like any other corporation. 2
The petitioner's contention that the funds of the PNR are not subject to garnishment or
execution hardly raises a question of first impression. In Philippine National Railways v.
Union de Maquinistas, et al., 3 then Justice Fernando, later Chief Justice, said. "The main
issue posed in this certiorari proceeding, whether or not the funds of the Philippine National
Railways, could be garnished or levied upon on execution was resolved in two recent
decisions, the Philippine National Bank v. Court of Industrial Relations [81 SCRA 314]
and Philippine National Bank v. Hon. Judge Pabalan [83 SCRA 595]. This Court in both
cases answered the question in the affirmative. There was no legal bar to garnishment or
execution. The argument based on non-suability of a state allegedly because the funds are
governmental in character was unavailing.So it must be again."
In support of the above conclusion, Justice Fernando cited the Court's holding in Philippine
National Bank v. Court of Industrial Relations, to wit: "The premise that the funds could be
spoken of as public in character may be accepted in the sense that the People's Homesite
and Housing Corporation was a government-owned entity. It does not follow though that they
were exempt from garnishment. National Shipyard and Steel Corporation v. Court of
Industrial Relations is squarely in point. As was explicitly stated in the opinion of then Justice,
later Chief Justice, Concepcion: "The allegation to the effect that the funds of the NASSCO
are public funds of the government, and that, as such, the same may not be garnished,
attached or levied upon, is untenable for, as a government- owned and controlled
corporation, the NASSCO has a personality of its own, distinct and separate from that of the
Government. It has-pursuant to Section 2 of Executive Order No. 356, dated October 23,
1950 * * *, pursuant to which the NASSCO has been established- 'all the powers of a
corporation under the Corporation Law * * *. 4
As far back as 1941, this Court in the case of Manila Hotel Employees Association v. Manila
Hotel Co., 5 laid down the rule that "when the government enters into commercial business, it
abandons its sovereign capacity and is to be treated like any other corporation. [Bank of the
U.S. v. Planters' Bank, 9 Waitch 904, 6 L. ed. 244]. By engaging in a particular business
through the instrumentality of a corporation the government divests itself pro hac vice of its
sovereign character, so as to render the corporation subject to the rules of law governing
private corporations. 6 Of Similar import is the pronouncement in Prisco v. CIR,' that "when
the government engages in business, it abdicates part of its sovereign prerogatives and
descends to the level of a citizen, ... . " In fine, the petitioner PNR cannot legally set up the
doctrine of non-suability as a bar to the plaintiff's suit for damages.
The appellate court found, the petitioner does not deny, that the train boarded by the
deceased Winifredo Tupang was so over-crowded that he and many other passengers had
no choice but to sit on the open platforms between the coaches of the train. It is likewise
undisputed that the train did not even slow down when it approached the Iyam Bridge which
was under repair at the time, Neither did the train stop, despite the alarm raised by other
passengers that a person had fallen off the train at lyam Bridge. 7
The petitioner has the obligation to transport its passengers to their destinations and to
observe extraordinary diligence in doing so. Death or any injury suffered by any of its
passengers gives rise to the presumption that it was negligent in the performance of its
obligation under the contract of carriage. Thus, as correctly ruled by the respondent court, the
petitioner failed to overthrow such presumption of negligence with clear and convincing
evidence.
But while petitioner failed to exercise extraordinary diligence as required by law, 8 it appears
that the deceased was chargeable with contributory negligence. Since he opted to sit on the
open platform between the coaches of the train, he should have held tightly and tenaciously
on the upright metal bar found at the side of said platform to avoid falling off from the
speeding train. Such contributory negligence, while not exempting the PNR from liability,
nevertheless justified the deletion of the amount adjudicated as moral damages. By the same
token, the award of exemplary damages must be set aside. Exemplary damages may be
allowed only in cases where the defendant acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. 9 There being no evidence of fraud, malice or bad faith on
the part of petitioner, the grant of exemplary damages should be discarded.
WHEREFORE, the decision of the respondent appellate court is hereby modified by
eliminating therefrom the amounts of P10,000.00 and P5,000.00 adjudicated as moral and
exemplary damages, respectively. No costs.
SO ORDERED.








G.R. No. 71238 March 19, 1992
LUFTHANSA GERMAN AIRLINES, petitioner, vs. INTERMEDIATE APPELLATE COURT
and SPOUSES HENRY H. ALCANTARA and TERESITA ALCANTARA,respondents.
BIDIN, J.:
This is a petition for review on certiorari decision of the then Intermediate Appellate
Court * dated May 31, 1984, affirming with modification the decision of the then Court of First
Instance of Manila, Sixth Judicial District, Branch XXIV, and the resolution dated June 18,
1985 denying the motion for reconsideration of the said decision.
The antecedent facts of this case are as follows:
On January 21, 1979, respondent Henry H. Alcantara shipped thirteen (13) pieces of luggage
through petitioner Lufthansa from Teheran to Manila as evidenced by Lufthansa Air Waybill
No. 220-9776-2733 (Exhibit "A", also Exhibit "1"). The Air Waybill discloses that the actual
gross weight of the thirteen (13) pieces of luggage is 180 kilograms. Respondent Henry H.
Alcantara did not declare an inventory of the contents or the value of the luggages when he
delivered them to Lufthansa.
On March 3, 1979, the thirteen (13) pieces of luggage were boarded in one of Lufthansa's
flights which arrived in Manila on the same date. After the luggages arrived in Manila, the
consignee, respondent Teresita Alcantara, was able to claim from the cargo broker Philippine
Skylanders, Inc. on March 6, 1979 only twelve (12) out of the thirteen (13) pieces of luggage
with a total weight of 174 kilograms (Exhibits "20" and "20-A").
The private respondents advised Lufthansa of the loss of one of the luggages and of the
contents thereof (Exhibits "B", "C" and "D"). Petitioner Lufthansa sent telex tracing messages
to different stations and to the Philippine Airlines which actually carried the cargo (Exhibits
"3", "5", "7", "9", "11", "12", "13" and "14"). But all efforts in tracing the missing luggage were
fruitless (Exhibits "4", "6", "8", "10", "12" and "17").
Since efforts to trace the missing luggage yielded negative results, Lufthansa informed Henry
Alcantara accordingly and advised him to file a claim invoice (Exhibits "18" and "19").
On September 24, 1979, the private respondents wrote the petitioner demanding the
production of the missing luggage within then (10) days from receipt (Exhibit "E"). Since the
petitioner did not comply with said demand, the private respondents filed a complaint dated
May 7, 1980, for breach of contract with damages against the petitioner before the Court of
First Instance of Manila, Sixth Judicial District, Branch XXIV.
The petitioner filed its answer to the complaint alleging that the Warsaw Convention limits the
liability of the carrier, if any, with respect to cargo to a sum of 250 francs per kilo ($20.00 per
kilo or $9.07 per pound), unless a higher value is declared in advance and additional charges
are paid by the passenger and the conditions of the contract as set forth in the air waybill
expressly subject the contract of carriage of cargo to the Warsaw Convention. The petitioner
also alleged that it never acted fraudulently or in bad faith so as to entitle respondent
spouses to moral damages and attorney's fees, nor did it act in a wanton, fraudulent,
reckless, oppressive or malevolent manner as to entitle spouses to exemplary damages.
After trial, on November 18, 1981, the trial court ** rendered its decision, the dispositive
portion of which reads as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiffs, spouses
Henry H. Alcantara and Teresita Alcantara, and against Lufthansa German
Airlines.
(1) Ordering defendant to pay plaintiffs the sum of P200,000.00 for actual
damages, with interest thereon at the legal rate from the date of the filing of
the complaint until the principal sum is fully paid;
(2) Ordering defendant to pay plaintiffs the sum of P20,000.00 as attorney's
fees; and
(3) Ordering defendant to pay the costs of suit.
SO ORDERED. (Rollo, pp. 62-63)
The petitioner appealed to the then Intermediate Appellate Court. On May 31, 1984, the
appellate promulgated its decision, the dispositive portion of which reads:
WHEREFORE, PREMISES CONSIDERED, the decision appealed from is
hereby AFFIRMED with the modification that the amount of P20,000.00
awarded as attorney's fees shall be deleted, the costs to be borne by the
respective parties.
SO ORDERED. (Rollo, p. 39).
Its motion for reconsideration having been denied, the petition filed the instant petition.
The main issue in this case is whether or not the private respondents are entitled to an award
of damages beyond the liability set forth in the Warsaw Convention and in the Airwaybill of
Lading.
The petitioner contends that the Republic of the Philippines is a party to the "Convention for
the Unification of Certain Rules Relating to International Transportation by Air," otherwise
known as the Warsaw Convention. After the Senate of the Republic of the Philippines, by its
Resolution No. 19 of May 16, 1950, concurred in the adherence by the government of the
Philippines to the said Convention, and after the government of the Republic of the
Philippines formally notified the government of the Republic of Poland of such adherence on
November 9, 1950, Presidential Proclamation No. 201 signed by the late President Ramon
Magsaysay on September 23, 1965 made public the adherence of the Republic of the
Philippines to the said Warsaw Convention which applies to all international transportation of
persons, baggage or goods performed by aircraft for hire. Since the contract between the
petitioner and respondent Henry H. Alcantara embodied in Airwaybill No. 220-9776-2733 is
one of international carriage by air, it is subject to the Warsaw Convention, which in Article 22
limits the liability of the carrier with respect to checked baggage to a sum of 250 French
francs per kilo (equivalent to US $20.00/kilo) unless a higher value has been declared in
advance and additional charges are paid by the passenger. Respondent Henry H. Alcantara
having admitted that he did not declare the value or contents of the missing luggage, the
liability of the petitioner is therefore limited by the Warsaw Convention and the Airwaybill to
US$20.00 per kilo.
The petitioner further argues that the award of P200,000.00 as actual damages is not borne
by evidence. It insists that the testimonial and documentary evidence of respondent spouses
failed to indicate the actual value of the alleged contents of the missing luggage and have not
presented actual proof as to the contents, total weight and value of the missing luggage as
well as the actual damage they suffered (Rollo, pp. 88-89, 95).
On the other hand, the private respondents maintain that the petitioner, as found by the trial
and appellate courts, waived the benefits of the Warsaw Convention when it offered a
settlement in the amount of $200.00 which is much higher than what the Convention
prescribes and never raised timely objections during the trial to the introduction of evidence
regarding the actual claims and damages sustained by respondent Alcantara.
The private respondents also claim that in the trial of the case, they proved a loss of
P200,000.00 and an expense of $15,000.00 in vainly trying to locate the missing luggage all
over Europe and the trial court awarded less than what was proven (Rollo, p. 118).
The petition is without merit.
The loss of one luggage belonging to the private respondents while the same was in the
custody of the petitioner is not disputed. The contract of air carriage generates a relation
attended with a public duty. Neglect or malfeasance of the carrier's employees could given
ground for an action for damages (Zulueta v. Pan American World Airways, Inc., 43 SCRA 37
[1972]). Common carriers are liable for the missing goods for failure to comply with its duty
(American Insurance Co., Inc. v. Macondray & Co., Inc., 39 SCRA 494 [171]).
In Alitalia vs. Intermediate Appellate Court (192 SCRA 9 [1990]) where petitioner Alitalia as
carrier failed to deliver a passenger's (Dr. Felipa Pablo's) baggage containing the papers she
was scheduled to read and the materials which would have enabled her to make scientific
presentation (consisting of slides, autoradiograms or films, tables and tabulations ) in a
prestigious international conference in Rome where she was invited to participate in the
conference, extended by the Joint FAO/IAEA Division of Atomic Energy in Food and
Agriculture of the Untied Nations, as a consequence of which she failed to participate in the
conference, this Court held that the Warsaw Convention does not exclude liability for other
breaches of contract by the carrier. Thus:
The Convention does not thus operate as an exclusive enumeration of the
instances of an airline's liability, or as an absolute limit of the extent of that
liability. Such a proposition is not borne out by the language of the
Convention, as this Court has now, and at an earlier time, pointed out.
Moreover, slight reflection readily leads to the conclusion that it should be
deemed a limit of liability only in those cases where the cause of the death
or injury to person, or destruction, loss or damage to property or delay in its
transport is not attributable to or attended by any wilfull misconduct, bad
faith, recklessness, or otherwise improper conduct on the part of any official
or employee for which the carrier is responsible, and there is otherwise no
special or extraordinary form of resulting injury. The Convention's provisions,
in short, do not "regulate or exclude liability for other breaches of contract by
the carrier" or misconduct of its officers and employees, or for some
particular or exceptional type of damage. Otherwise, "an air carrier would be
exempt from any liability for damages in the event of its absolute refusal, in
bad faith, to comply with a contract of carriage, which is absurd." Nor may it
for a moment be supposed that if a member of the aircraft complement
should inflict some physical injury on a passenger, or maliciously destroy or
damage the latter's property, the Convention might successfully be pleaded
as the sole gauge to determine the carrier's liability to the passenger. Neither
may the Convention invoked to justify the disregard of some extraordinary
sort of damage resulting to a passenger and preclude recovery therefor
beyond the limits set by said Convention. It is in this sense that the
Convention has been applied, or ignored, depending on the peculiar facts
presented by each case.
xxx xxx xxx
In the case at bar, no bad faith or otherwise improper conduct may be
ascribed to the employees of petitioner airline; and Dr. Pablo's luggage was
eventually returned to her, belatedly, it is true, but without appreciable
damage. The fact is, nevertheless, that some species of injury was caused
to Dr. Pablo because petitioner ALITALIA misplaced her baggage and failed
to deliver it to her at the time appointed a breach of its contract of
carriage, to be sure with the result that she was unable to read the paper
and make the scientific presentation (consisting of slides, autoradiograms or
films, tables and tabulations) that she had painstakingly labored over, at the
prestigious international conference, to attend which she had traveled
hundreds of miles, to her chagrin and embarrassment and the
disappointment and annoyance of the organizers. She felt, no unreasonably,
that the invitation for her to participate at the conference, extended by the
Joint FAO/IAEA Division of Atomic Energy in Food and Agriculture of the
United Nations, was a singular honor not only to herself, but to the University
of the Philippines and the country as well, an opportunity to make some sort
of impression among her colleagues in that field of scientific activity. The
opportunity to claim this honor or distinction was irretrievably lost to her
because of Alitalia's breach of its contract.
Apart from this, there can be no doubt that Dr. Pablo underwent profound
distress and anxiety, which gradually turned to panic and finally despair,
from the time she learned that her suitcases were missing up to the time
when, having gone to Rome, she finally realized that she would no longer be
able to take part in the conference. As she herself put it, she "was really
shocked and distraught and confused."
Certainly, the compensation for the injury suffered by Dr. Pablo cannot under
the circumstances be restricted to that prescribed by the Warsaw
Convention for delay in the transport of baggage.
She is not, of course, entitled to be compensated for loss or damage to her
luggage. As already mentioned, her baggage was ultimately delivered to her
in Manila, tardily, but safely. She is however entitled to nominal damages
which, as the law says, is adjudicated in order that a right of the plaintiff,
which has been violated or invaded by the defendant, may be vindicated and
recognized, and not for the purpose of indemnifying the plaintiff that for any
loss suffered and this Court agrees that the respondent Court of Appeals
correctly set the amount thereof at P40,000.00.
In the case at bar, the trial court found that: (a) petitioners airline has not successfully refuted
the presumption established by Article 1735 of the Civil Code that the loss of the luggage in
question was due to the negligence or fault of its employees; (b) the contents of the missing
luggage of private respondents could not be replaced and were assessed at P200,000.00 by
the latter;
(c) respondent Henry Alcantara spent about $15,000.00 in trying to locate said luggage in
Frankfurt, Germany, London, United Kingdom and Hongkong;
(d) there being no evidence to the contrary, the foregoing assessments made by private
respondents were fair and reasonable; and (e) private respondents were unable to present
ample evidence to prove fraud and bad faith and are therefore not entitled to moral damages
under Article 2220 of the Civil Code (Rollo, p. 61).
On the other hand, the Court of Appeals found that the lower court's award of P200,000.00
as actual compensatory damages is well based factually and legally (Rollo, p. 37) except as
to the deletion of attorney's fees due to the absence of findings of gross and evident bad faith
(Rollo, p. 39).
Under the circumstances, there appears to be no cogent reason to disturb the factual findings
of both the trial court and the Court of Appeals.
Furthermore, the respondent court found that petitioner waived the applicability of the
Warsaw Convention to the case at bar when it offered private respondent a higher amount
than that which is provided in the said law and failed to raise timely objections during the trial
when questions and answers were brought out regarding the actual claims and damages
sustained by Alcantara which were even subjected to lengthy cross examination by
Lufthansa's counsel. In Abrenica v. Gonda (34 Phil. 739), this Court held:
. . . (I)t has been repeatedly laid down as a rule of evidence that a protest or
objection against the admission of any evidence must be made at the proper
time, and that if not so made it will be understood to have been waived. The
proper time to make a protest or objection is when, from the question
addressed to the witness, or from the answer thereto, or from the
presentation of proof, the inadmissibility of evidence is, or may be inferred.
It is also settled that the court cannot disregard evidence which would ordinarily be
incompetent under the rules but has been rendered admissible by the failure of a party to
object thereto. Thus:
. . . The acceptance of an incompetent witness to testify in a civil suit, as well
as the allowance of improper questions that may be put to him while on the
stand is a matter resting in the discretion of the litigant. He may asset his
right by timely objection or he may waive it, expressly or by silence. In any
case, the option rests with him. Once admitted, the testimony is in the case
for what it is worth and the judge has no power to disregard it for the sole
reason that it could have been excluded, if it had been objected to, nor to
strike it out on its own motion. (Cruz v. CA, et al., 192 SCRA 209 [1990]
citing Marella vs. Reyes, 12 Phil. 1). (Emphasis supplied).
WHEREFORE, the petition is Dismissed and the questioned decision and resolution of the
appellate court are Affirmed. No costs.
SO ORDERED.
































G.R. Nos. 100374-75 November 27, 1992
RUFINO Y. LUNA, RODOLFO J. ALONSO and PORFIRIO RODRIGUEZ, petitioners, vs.
HON. COURT OF APPEALS, HON. CRISTINA M. ESTRADA in her capacity as Presiding
Judge, RTC-Pasig, Br. 69, Metro Manila, HON. TERESITA D. CAPULONG in her
capacity as Presiding Judge, RTC-Valenzuela, Br. 172, Metro Manila, and NORTHWEST
AIRLINES, INC., respondents.
BELLOSILLO, J.:
This joint petition for review on certiorari originated from two (2) separate complaints arising
from an airline's delay in the delivery of the luggage of its passengers at their destination
which respondent courts dismissed for lack of cause of action. The resulting issue is whether
the application of the Warsaw Convention operates to exclude the application of the
provisions of the New Civil Code and the other statutes.
Briefly, the facts: On 19 May 1989, at around 8:00 in the morning, petitioners Rufino Luna,
Rodolfo Alonso and Porfirio Rodriguez boarded Flight 020 of private respondent Northwest
Airlines bound for Seoul, South Korea, to attend the four-day Rotary International Convention
from the 21st to the 24th of May 1992. They checked in one (1) piece of luggage each. After
boarding, however, due to engine trouble, they were asked to disembark and transfer to a
Korean Airlines plane scheduled to depart four (4) hours later. They were assured that their
baggage would be with them in the same flight.
When petitioners arrived in Seoul, they discovered that their personal belongings were
nowhere to be found instead, they were allegedly flown to Seattle, U.S.A. It was not until four
(4) days later, and only after repeated representations with Northwest Airlines personnel at
the airport in Korea were petitioners able to retrieve their luggage. By then the Convention,
which they were hardly able to attend, was almost over.
Petitioners Rufino Y. Luna and Rodolfo J. Alfonso assert that on 6 June 1989, or thirteen (13)
days after they recovered their luggage, they sent a written claim to private respondent's
office along Roxas Blvd., Ermita, Manila. Petitioner Porfirio Rodriquez, on his part,
asserverates that he filed his claim on 13 June 1989. However, private respondent, is a letter
of 21 June 1989, disowned any liability for the delay and averred that it exerted "its best
efforts to carry the passenger and baggage with reasonable dispatch." 1
Thus, on 14 July 1989, petitioners Luna and Alonso jointly filed a complaint for breach of
contract with damages before the Regional Trial Court of Pasig, Metro Manila, docketed as
Civil Case No. 58390, subsequently raffled to Br. 69, 2 while petitioner Rodriquez filed his
own complaint with the Regional Trial Court of Valenzuela, Metro Manila, docketed as Civil
Case No. 3194-V-89, assigned to Br. 172. 3 However, upon motion of private respondent,
both complaints were dismissed 4 for lack of cause of action due to petitioners' failure to state
in their respective complaints that they filed a prior claim with private respondent within the
prescribed period.
Petitioners Luna and Alonso then filed a petition for certiorari before the Court of Appeals to
set aside the order of respondent Judge Cristina M. Estrada granting private respondent's
motion to dismiss, while petitioner Rodriquez proceeded directly to this Court on certiorari for
the same purpose. However, in Our resolution of 26 February 1990, We referred his petition
to the Court of Appeals.
On 26 March 1991, the Third Division of respondent Court of Appeals, applying the
provisions of the Warsaw Convention and ruling that certiorari was not a substitute for a lost
appeal, dismissed the petition of Luna and Alonso, 5 and on 7 June 1991 denied their motion
for reconsideration. 6 Meanwhile, on 28 February 1991 the Seventh Division of respondent
Court of Appeals, ruling that the questioned order of the trial court had already become final,
similarly rejected the petition of Rodriquez, and on 6 June 1991 denied his motion for
reconsideration. 7 Hence, this present recourse by petitioners Luna, Alonso and Rodriguez.
Four (4) grounds are relied upon by petitioners which, nevertheless, may be reduced to
three, namely: (a) that respondent appellate court disregarded Our ruling in Alitalia
v. CA 8 where We said that "[t]he Convention does not thus operate as an exclusive
enumeration of the instances of an airline's liability, or as an absolute limit of the extent of
that liability;" 9 (b) that "petitions to revoke orders and decisions may be entertained even
after the time to appeal had elapsed, in cases wherein the jurisdiction of the court had been
exceeded;" 10 and, (c) that Art. 26 of the Warsaw Convention which prescribes the
reglementary period within which to file a claim cannot be invoked if damage is caused by the
carrier's willful misconduct, as provided by Art. 25 of the same Warsaw Convention.
Private respondent, on the other hand, argues that the dismissal order of respondent courts
had already become final after petitioners failed to either move for reconsideration or appeal
from the orders within the reglementary period, hence, certiorari is no substitute for a lost
appeal.
Private respondent also maintains that it did not receive any demand letter from petitioners
within the 21-day reglementary period, as provided in par. 7 of the Conditions of Contract
appearing in the plane ticket. Since Art. 26. par. (4), of the Warsaw Convention provides that
"[f]ailing complaint within the times aforesaid, no action shall lie against the carrier, save in
the case of fraud on his part," the carrier consequently cannot be held liable for the delay in
the delivery of the baggage. In other words, non-observance of the prescribed period to file a
claim bars claimant's action in court for recovery.
Private respondent, citing foreign jurisprudence, 11 likewise submits that Art. 25, par. (1), of
the Warsaw Convention which excludes or limits liability of common carriers if the damage is
caused by it willful misconduct, refers only to the monetary ceiling on damages found in Art.
22.
We find the appeal impressed with merit.
From the facts, it appears that private respondent Northwest Airlines indeed failed to deliver
petitioners' baggage at the designated time and place. For this, all that respondent carrier
could say was that "[w]e exerted all efforts to comply with this condition of the
contract." 12 Hence, it is evident that petitioners suffered some special specie of injury for
which they should rightly be compensated. Private respondent cannot be allowed to escape
liability by seeking refuge in the argument that the trial courts' orders have attained finality
due to petitioners failure to move for reconsideration or to file a timely appeal therefrom.
Technicalities should be disregarded if only to render to the respective parties that which is
their due. Thus, although We have said that certiorari cannot be a substitute for a lapsed
appeal, We have, time and again, likewise held that where a rigid application of that rule will
result in a manifest failure or miscarriage of justice, the rule may be relaxed. 13 Hence,
considering the broader and primordial interests of justice, particularly when there is grave
abuse of discretion, thus impelling occasional departure from the general rule that the
extraordinary writ of certiorari cannot substitute for a lost appeal, respondent appellate court
may legally entertain the special civil action for certiorari. 14
Previously, We ruled that the Warsaw Convention was a treaty commitment voluntarily
assumed by the Philippine government; consequently, it has the force and effect of law in this
country. 15 But, in the same token, We are also aware of jurisprudence that the Warsaw
Convention does not operate as an exclusive enumeration of the instances for declaring an
airline liable for breach of contract of carriage or as an absolute limit of the extent of that
liability. 16 The Convention merely declares the carrier liable for damages in the enumerated
cases, if the conditions therein specified are present. 17 For sure, it does not regulate the
liability, much less exempt, the carrier for violating the rights of others which must simply be
respected in accordance with their contracts of carriage. The application of the Convention
must not therefore be construed to preclude the operation of the Civil Code and other
pertinent laws. In fact, in Alitalia v. IAC, 18 We awarded Dr. Felipa Pablo nominal damages,
the provisions of the Convention notwithstanding.
Hence, petitioners' alleged failure to file a claim with the common carrier as mandated by the
provisions of the Warsaw Convention should not be a ground for the summary dismissal of
their complaints since private respondent may still be held liable for breach of other relevant
laws which may provide a different period or procedure for filing a claim. Considering that
petitioners indeed filed a claim which private respondent admitted having received on 21
June, 1989, their demand may have very well been filed within the period prescribed by those
applicable laws. Consequently, respondent trial courts, as well as respondent appellate court,
were in error when they limited themselves to the provisions of the Warsaw Convention and
disregarding completely the provisions of the Civil Code.
We are unable to agree however with petitioners that Art. 25 of the Convention operations to
exclude the other provisions of the Convention if damage is caused by the common carrier's
willful misconduct. As correctly pointed out by private respondent, Art. 25 refers only to the
monetary ceiling on damages found in Art. 22 should damage be caused by the carrier's
willful misconduct. Hence, only the provisions of Art. 22 limiting the carrier's liability and
imposing a monetary ceiling in case of willful misconduct on its part that the carrier cannot
invoke. 19 This issue however has become academic in the light of our ruling that the trial
courts erred in dismissing petitioners' respective complaints.
We are not prepared to subscribed to petitioners' argument that the failure of private
respondent to deliver their luggage at the designated time and place amounted ipso facto to
willful misconduct. For willful misconduct to exist, there must be a showing that the acts
complained of were impelled by an intention to violate the law, or were in persistent disregard
of one's rights. It must be evidenced by a flagrantly or shamefully wrong or improper conduct.
WHEREFORE, the assailed decisions and resolutions of respondent Court of Appeals are
REVERSED and SET ASIDE. The complaints for breach of contract of carriage with
damages in Civil Case No. 3194-V-89 and Civil Case No. 58390 dismissed by respondent
Judges Teresita D. Capulong and Cristina M. Estrada, respectively, are ordered
REINSTATED and given due course until terminated. No costs.
SO ORDERED.

G.R. No. L-74811 December 14, 1988
CHUA YEK HONG, petitioner, vs. INTERMEDIATE APPELLATE COURT, MARIANO
GUNO and DOMINADOR OLIT, respondents.
MELENCIO-HERRERA, J.:
Before us is a Motion for Reconsideration of our Decision dated 30 September 1988 affirming
the judgment of the Court of Appeals dismissing the complaint against private respondents
and absolving them from any and all liability arising from the loss of 1000 sacks of copra
shipped by petitioner aboard private respondents' vessel. Private respondents filed an
opposition thereto.
Petitioner argues that this Court failed to consider the Trial Court's finding that the loss of the
vessel with its cargo was due to the fault of the shipowner or to the concurring negligence of
the shipowner and the captain.
The Appellate Court Decision, however, mentions only the ship captain as having been
negligent in the performance of his duties (p. 3, Court of Appeals Decision, p. 15, Rollo). This
is a factual finding binding on this Court. For the exception to the limited liability rule (Article
587, Code of Commerce) to apply, the loss must be due to the fault of the shipowner, or to
the concurring negligence of the shipowner and the captain. As we held, there is nothing in
the records showing such negligence (p. 6, Decision.)
The invocation by petitioners of Articles 1733 and 1735 of the Civil Code is misplaced. As
was stated in the Decision sought to be reconsidered, while the primary law governing the
instant case is the Civil Code, in all matters not regulated by said Code, the Code of
Commerce and other special laws shall govern. Since the Civil Code contains no provisions
regulating liability of shipowners or agents in the event of total loss or destruction of the
vessel, it is the provisions of the Code of Commerce, particularly Article 587, that governs.
Petitioner further contends that the ruling laid down in Eastern Shipping Lines vs. IAC, et al.
(150 SCRA 464 [1987]) should be made to apply in the instant case. That case, however,
involved foreign maritime trade while the present case involves local
inter-island shipping. The environmental set-up in the two cases, therefore, is not on all fours.
ACCORDINGLY, petitioner's Motion for Reconsideration is hereby DENIED and this denial is
FINAL.
SO ORDERED.



















G.R. No. 92735 June 8, 2000
MONARCH INSURANCE CO., INC., TABACALERA INSURANCE CO., INC and Hon.
Judge AMANTE PURISIMA,petitioners, vs. COURT OF APPEALS and ABOITIZ SHIPPING
CORPORATION, respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 94867
ALLIED GUARANTEE INSURANCE COMPANY, petitioner, vs. COURT OF APPEALS,
Presiding Judge, RTC Manila, Br. 24 and ABOITIZ SHIPPING
CORPORATION,respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 95578
EQUITABLE INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS, Former
First Division Composed of Hon. Justices RODOLFO NOCON, PEDRO RAMIREZ, and
JESUS ELBINIAS and ABOITIZ SHIPPING CORPORATION, respondents.
DE LEON, JR., J.:
Before us are three consolidated petitions. G.R. No. 92735 is a petition for review filed under
Rule 45 of the Rules of Court assailing the decision of the Court of Appeals dated March 29,
1990 in CA-G.R. SP. Case No. 17427 which set aside the writ of execution issued by the
lower court for the full indemnification of the claims of the petitioners, Monarch Insurance
Company (hereafter "Monarch") and Tabacalera Insurance Company, Incorporated
(hereafter "Tabacalera") against private respondent, Aboitiz Shipping Corporation (hereafter
"Aboitiz") on the ground that the latter is entitled to the benefit of the limited liability rule in
maritime law; G.R. No. 94867 is a petition for certiorari under Rule 65 of the Rules of Court to
annul and set aside the decision of the Court of Appeals dated August 15, 1990 in CA-G.R.
SP No. 20844 which ordered the lower court to stay the execution of the judgment in favor of
the petitioner, Allied Guarantee Insurance Company (hereafter "Allied") against Aboitiz
insofar as it impairs the rights of the other claimants to their pro-rata share in the insurance
proceeds from the sinking of the M/V P. Aboitiz, in accordance with the rule on limited
liability; and G.R. No. 95578 is a petition for review under Rule 45 of the Rules of Court
seeking a reversal of the decision of the Court of Appeals dated August 24, 1990 and its
resolution dated October 4, 1990 in C.A. G.R. Civil Case No. 15071 which modified the
judgment of the lower court's award of actual damages to petitioner Equitable Insurance
Corporation (hereafter "Equitable") to its pro-rata share in the insurance proceeds from the
sinking of the M/V P. Aboitiz.
All cases arose from the loss of cargoes of various shippers when the M/V P. Aboitiz, a
common carrier owned and operated by Aboitiz, sank on her voyage from Hong Kong to
Manila on October 31, 1980. Seeking indemnification for the loss of their cargoes, the
shippers, their successors-in-interest, and the cargo insurers such as the instant petitioners
filed separate suits against Aboitiz before the Regional Trial Courts. The claims numbered
one hundred and ten (110) for the total amount of P41,230,115.00 which is almost thrice the
amount of the insurance proceeds of P14,500,000.00 plus earned freight of 500,000.00
according to Aboitiz. To this day, some of these claims, including those of herein petitioners,
have not yet been settled.
G.R. No. 92735.
Monarch and Tabacalera are insurance carriers of lost cargoes. They indemnified the
shippers and were consequently subrogated to their rights, interests and actions against
Aboitiz, the cargo carrier. 1 Because Aboitiz refused to compensate Monarch, it filed two
complaints against Aboitiz, docketed as Civil Cases Nos. 82-2767 and 82-2770. For its part,
Tabacalera also filed two complaints against the same defendant, docketed as Civil Cases
Nos. 82-2768 and 82-2769. As these four (4) cases had common causes of action, they were
consolidated and jointly tried. 2
In Civil Case No. 82-2767 where Monarch also named Malaysian International Shipping
Corporation and Litonja Merchant Shipping Agency as Aboitiz's co-defendants, Monarch
sough recovery of P29,719.88 representing the value of three (3) pallets of glass tubing that
sank with the M/V P. Aboitiz, plus attorney's fees of not less than P5,000.00, litigation
expenses, interest at the legal rate on all these amounts, and the cost of suit. 3 Civil Case.
No. 82-2770 was a complaint filed by Monarch against Aboitiz and co-defendants Compagnie
Maritime des Chargeurs Reunis and F.E. Zuellig (M), Inc. for the recovery of P39,597.00
representing the value of the one case motor vehicle parts which was lost when the M/V P.
Aboitiz sank on her way to Manila, plus Attorney's fees of not less than P10,000.00 and cost
of suit. 4
Tabacalera sought against Franco Belgian Services, F.E. Zuellig and Aboitiz in Civil Case
No. 82-2768 the recovery of P284,218.00 corresponding to the value of nine (9) cases of
Renault spare parts, P213,207.00 for the value of twenty-five (25) cases of door closers and
P42,254.00 representing the value of eighteen (18) cases of plastic spangle, plus attorney's
fees of not less than P50,000.00 and cost of suit. 5 In Civil Case No. 82-2769, Tabacalera
claimed from Hong Kong Island Shipping Co., Ltd., Citadel Lines and Aboitiz indemnification
in the amount of P75,058.00 for the value of four (4) cartons of motor vehicle parts foundered
with the M/V P. Aboitiz, plus attorney's fees of not less than P20,000.00 and cost of suit. 6
In its answer with counterclaim, Aboitiz rejected responsibility for the claims on the ground
that the sinking of its cargo vessel was due to force majeure or an act of God. 7 Aboitiz was
subsequently declared as in default for its failure to appear during the pre-trial. Its counsel
fried a motion to set aside the order of default with notice of his withdrawal as such counsel.
Before the motion could be acted upon, Judge Bienvenido Ejercjto, the presiding judge of the
trial court, was promoted to the then intermediate Appellate Court. The cases were thus re-
raffled to Branch VII of the RTC of Manila presided by Judge Amante P. Purisima, the co-
petitioner in G.R. No. 92735. Without resolving the pending motion to set aside the order of
default, the trial court set the cases for hearing. However, since Aboitiz had repeatedly failed
to appear in court, the trial court denied the said motion and allowed Monarch and
Tabacalera to present evidence ex-parte. 8
Monarch and Tabacalera proffered in evidence the survey of Perfect Lambert, a surveyor
commissioned to investigate the possible cause of the sinking of the cargo vessel. The
survey established that on her voyage to Manila from Hong Kong, the vessel did not
encounter weather so inclement that Aboitiz would be exculpated from liability for losses. In
his note of protest, the master of M/V P. Aboitiz described the wind force encountered by the
vessel as from ten (10) to fifteen (15) knots, a weather condition classified as typical and
moderate in the South China Sea at that particular time of the year. The survey added that
the seaworthiness of the vessel was in question especially because the breaches of the hull
and the serious flooding of two (2) cargo holds occurred simultaneously in "seasonal
weather." 9
In due course, the trial court rendered judgment against Aboitiz but the complaint against all
the other defendants was dismissed. Aboitiz was held liable for the following: (a) in Civil Case
No. 82-2767, P29,719.88 with legal interest from the filing of the complaint until fully paid plus
attorney's fees of P30,000.00 and cost of suit; (b) in Civil Case No. 82-2768, P539,679.00
with legal interest of 12% per annum from date of filing of the complaint until fully paid, plus
attorney's fees of P30,000.00, litigation expenses and cost of suit; (c) in Civil Case No. 82-
2769, P75,058.00 with legal interest of 12% per annum from date of filing of the complaint
until-fully paid, plus P5,000.00 attorney's fees, litigation expenses and cost of suit, and (d) in
Civil Case No. 82-2770, P39,579.66 with legal interest of 12% per annum from date of filing
of the complaint until fully paid, plus attorney's fees of P5,000.00, litigation expenses and cost
of suit.
Aboitiz filed a motion for reconsideration of the decision and/or for new trial to lift the order of
default. The court denied the motion on August 27, 1986. 10 Aboitiz appealed to the Court of
Appeals but the appeal was dismissed for its failure to file appellant's brief. It subsequently
filed an urgent motion for reconsideration of the dismissal with prayer for the admission of its
attached appellant's brief. The appellate court denied that motion for lack of merit in a
Resolution dated July 8, 1988. 11
Aboitiz thus filed a petition for review before this Court. Docketed as G.R. No. 84158, the
petition was denied in the Resolution of October 10, 1988 for being filed out of time. Aboitiz's
motion for the reconsideration of said Resolution was similarly denied. 12 Entry of judgment
was made in the case. 13
Consequently, Monarch and Tabacalera moved for execution of judgment. The trial court
granted the motion on April 4, 1989 14 and issued separate writs of execution. However, on
April 12, 1989, Aboitiz, invoking the real and hypothecary nature of liability in maritime law,
filed an urgent motion to quash the writs of execution. 15 According to Aboitiz, since its
liability is limited to the value of the vessel which was insufficient to satisfy the aggregate
claims of all 110 claimants, to indemnify Monarch and Tabacalera ahead of the other
claimants would be prejudicial to the latter. Monarch and Tabacalera opposed the motion to
quash. 16
On April 17, 1989, before the motion to quash could be heard, the sheriff levied upon five (5)
heavy equipment owned by Aboitiz for the public auction sale. At said sale, Monarch was the
highest bidder for one (1) unit FL-151 Fork Lift (big) and one (1) unit FL-25 Fork Lift (small).
Tabacalera was also the highest bidder for one (1) unit TCH TL-251 Hyster Container Lifter,
one (1) unit Hyster Top Lifter (out of order), and one (1) unit ER-353 Crane. The
corresponding certificates of sale 17 were issued to Monarch and Tabacalera.
On April 18, 1989, the day before the hearing of the motion to quash, Aboitiz filed a
supplement to its motion, to add the fact that an auction sale had taken place. On April 19,
1989, Judge Purisima issued an order denying the motion to quash but freezing execution
proceedings for ten (10) days to give Aboitiz time to secure a restraining order from a higher
court. 18 Execution was scheduled to resume to fully satisfy the judgment when the grace
period shall have lapsed without such restraining order having been obtained by Aboitiz.
Aboitiz filed with the Court of Appeals a petition for certiorari and prohibition with prayer for
preliminary injunction and/or temporary restraining order under CA-G.R. No. SP-
17427. 19 On March 29, 1990, the appellate court rendered a Decision the dispositive portion
of which reads:
WHEREFORE, the writ of certiorari is hereby granted, annulling the subject writs of
execution, auction sale, certificates of sale, and the assailed orders of respondent
Judge dated April 4 and April 19, 1989 insofar as the money value of those
properties of Aboitiz, levied on execution and sold at public auction, has exceeded
the pro-rata shares of Monarch and Tabacalera in the insurance proceeds of Aboitiz
in relation to the pro-rata shares of the 106 other claimants.
The writ of prohibition is also granted to enjoin respondent Judge, Monarch and
Tabacalera from proceeding further with execution of the judgments in question
insofar as the execution would satisfy the claims of Monarch and Tabacalera in
excess of their pro-rata shares and in effect reduce the balance of the proceeds for
distribution to the other claimants to their prejudice.
The question of whether or how much of the claims of Monarch and Tabacalera
against the insurance proceeds has already been settled through the writ of
execution and auction sale in question, being factual issues, shall be threshed out
before respondent judge.
The writ of preliminary injunction issued in favor of Aboitiz, having served its
purpose, is hereby lifted. No pronouncement as to costs.
SO ORDERED. 20
Hence, the instant petition for review on certiorari where petitioners Monarch, Tabacalera and
Judge Purisima raise the following assignment of errors:
1. The appellate court grievously erred in re-opening the Purisima decisions, already
final and executory, on the alleged ground that the issue of real and hypothecary
liability had not been previously resolved by Purisima, the appellate court, and this
Hon. Supreme Court;
2. The appellate court erred when it resolved that Aboitiz is entitled to the limited real
and hypothecary liability of a ship owner, considering the facts on record and the law
on the matter.
3. The appellate court erred when it concluded that Aboitiz does not have to present
evidence to prove its entitlement to the limited real and hypothecary liability.
4. The appellate court erred in ignoring the case of "Aboitiz Shipping Corporation v.
CA and Allied Guaranty Insurance Co., Inc. (G.R. No. 88159), decided by this
Honorable Supreme Court as early as November 13, 1989, considering that said
case, now factual and executory, is in pari materia with the instant case.
5. The appellate court erred in not concluding that irrespective of whether Aboitiz is
entitled to limited hypothecary liability or not, there are enough funds to satisfy all the
claimants.
6. The appellate court erred when it concluded that Aboitiz had made an
"abandonment" as envisioned by Art. 587 of the Code of Commerce.
7. The appellate court erred when it concluded that other claimants would suffer if
Tabacalera and Monarch would be fully paid.
8. The appellate court erred in concluding that certiorari was the proper remedy for
Aboitiz. 21
G.R. NOS. 94867 & 95578
Allied as insurer-subrogee of consignee Peak Plastic and Metal Products Limited, filed a
complaint against Aboitiz for the recovery of P278,536.50 representing the value of 676 bags
of PVC compound and 10 bags of ABS plastic lost on board the M/V P. Aboitiz, with legal
interest from the date of filing of the complaint, plus attorney's fees, exemplary damages and
costs. 22 Docketed as Civil Case No. 138643, the case was heard before the Regional Trial
Court of Manila, Branch XXIV, presided by Judge Sergio D. Mabunay.
On the other hand, Equitable, as insurer-subrogee of consignee-assured Axel Manufacturing
Corporation, filed an amended complaint against Franco Belgian Services, F.E. Zuellig, Inc.
and Aboitiz for the recovery of P194,794.85 representing the value of 76 drums of synthetic
organic tanning substances and 1,000 kilograms of optical bleaching agents which were also
lost on board the M/V P. Aboitiz, with legal interest from the date of filing of the complaint,
plus 25% attorney's fees, exemplary damages, litigation expenses and costs of
suit.23 Docketed as Civil Case No. 138396, the complaint was assigned to the Regional Trial
Court of Manila, Branch VIII.
In its answer with counterclaim in the two cases, Aboitiz disclaimed responsibility for the
amounts being recovered, alleging that the loss was due to a fortuitous event or an act of
God. It prayed for the dismissal of the cases and the payment of attorney's fees, litigation
expenses plus costs of suit. It similarly relied on the defenses of force mejeure,
seaworthiness of the vessel and exercise of due diligence in the carriage of goods as regards
the cross-claim of its co-defendants. 24
In support of its position, Aboitiz presented the testimonies of Capt. Gerry N. Racines, master
mariner of the M/V P. Aboitiz, and Justo C. Iglesias, a meteorologist of the Philippine
Atmospheric Geophysical and Astronomical Services Administration (PAGASA). The gist of
the testimony of Capt. Racines in the two cases follows:
The M/V P. Aboitiz left Hong Kong for Manila at about 7:30 in the evening of October 29,
1980 after securing a departure clearance from the Hong Kong Port Authority. The departure
was delayed for two hours because he (Capt. Racines) was observing the direction of the
storm that crossed the Bicol Region. He proceeded with the voyage only after being informed
that the storm had abated. At about 8:00 o'clock in the morning of October 30, 1980, after
more than twelve (12) hours of navigation, the vessel suddenly encountered rough seas with
waves about fifteen to twenty-five feet high. He ordered his chief engineer to check the cargo
holds. The latter found that sea water had entered cargo hold Nos. 1 and 2. He immediately
directed that water be pumped out by means of the vessel's bilge pump, a device capable of
ejecting 180 gallons of water per minute. They were initially successful in pumping out the
water.
At 6:00 a.m. of October 31, 1980, however, Capt. Racines received a report from his chief
engineer that the water level in the cargo holds was rapidly rising. He altered the vessel's
course and veered towards the northern tip of Luzon to prevent the vessel from being
continuously pummeled by the waves. Despite diligent efforts of the officers and crew,
however, the vessel, which was approximately 250 miles away from the eye of the storm,
began to list on starboard side at 27 degrees. Capt. Racines and his crew were not able to
make as much headway as they wanted because by 12:00 noon of the same day, the cargo
holds were already flooded with sea water that rose from three to twelve feet, disabling the
bilge pump from containing the water.
The M/V P. Aboitiz sank at about 7:00 p.m. of October 31, 1980 at latitude 18 degrees North,
longitude 170 degrees East in the South China Sea in between Hong Kong, the Philippines
and Taiwan with the nearest land being the northern tip of Luzon, around 270 miles from
Cape Bojeador, Bangui, Ilocos Norte. Responding to the captain's distress call, the M/V
Kapuas (Capuas) manned by Capt. Virgilio Gonzales rescued the officers and crew of the ill-
fated M/V P. Aboitiz and brought them to Waileen, Taiwan where Capt. Racines lodged his
marine protest dated November 3, 1980.
Justo Iglesias, meteorologist of PAGASA and another witness of Aboitiz, testified in both
cases that during the inclusive dates of October 28-31, 1980, a stormy weather condition
prevailed within the Philippine area of responsibility, particularly along the sea route from
Hong Kong to Manila, because of tropical depression "Yoning."25 PAGASA issued weather
bulletins from October 28-30, 1980 while the storm was still within Philippine territory. No
domestic bulletins were issued the following day when the storm which hit Eastern Samar,
Southern Quezon and Southern Tagalog provinces, had made its exit to the South China Sea
through Bataan.
Allied and Equitable refuted the allegation that the M/V P. Aboitiz and its cargo were lost due
to force majeure, relying mainly on the marine protest filed by Capt. Racines as well as on
the Beaufort Scale of Wind. In his marine protest under oath, Capt. Racines affirmed that the
wind force an October 29-30, 1980 was only ten (10) to fifteen (15) knots. Under the Beaufort
Scale of Wind, said wind velocity falls under scale No. 4 that describes the sea condition as
"moderate breeze," and "small waves becoming longer, fairly frequent white horses." 26
To fortify its position, Equitable presented Rogelio T. Barboza who testified that as claims
supervisor and processor of Equitable, he recommended payment to Axel Manufacturing
Corporation as evidenced by the cash voucher, return check and subrogation receipt.
Barboza also presented a letter of demand to Aboitiz which, however, the latter ignored. 27
On April 24, 1984, the trial court rendered a decision that disposed of Civil Case No. 138643
as follows:
WHEREFORE, judgment is hereby rendered ordering defendant Aboitiz Shipping
Company to pay plaintiff Allied Guarantee Insurance Company, Inc. the sum of
P278,536.50, with legal interest thereon from March 10, 1981, then date of the filing
of the complaint, until fully paid, plus P30,000.00 as attorney's fees, with costs of
suit.
SO ORDERED. 28
A similar decision was arrived at in Civil Case No. 138396, the dispositive portion of which
reads:
WHEREFORE, in view of the foregoing, this Court hereby renders judgment in favor
of plaintiff and against defendant Aboitiz Shipping Corporation, to pay the sum of
P194,794.85 with legal rate of interest thereon from February 27, 1981 until fully
paid; attorney's fees of twenty-five (25%) percent of the total claim, plus litigation
expenses and costs of litigation.
SO ORDERED. 29
In Civil Case No. 138643, Aboitiz appealed to the Court of Appeals under CA-G.R. CV No.
04121. On March 23, 1987, the Court of Appeals affirmed the decision of the lower court. A
motion for reconsideration of the said decision was likewise denied by the Court of Appeals
on May 3, 1989. Aggrieved, Aboitiz then filed a petition for review with this Court docketed as
G.R. No. 88159 which was denied for lack merit. Entry of judgment was made and the lower
court's decision in Civil Case No. 138643 became final and executory. Allied prayed for the
issuance of a writ of execution in the lower court which was granted by the latter on April 4,
1990. To stay the execution of the judgment of the lower court, Aboitiz filed a petition
for certiorari and prohibition with preliminary injunction with the Court of Appeals docketed as
CA-G.R. SP No. 20844. 30 On August 15, 1990, the Court of Appeals rendered the assailed
decision, the dispositive portion of which reads as follows.
WHEREFORE, the challenged order of the respondent Judge dated April 4, 1990
granting the execution is hereby set aside. The respondent Judge is further ordered
to stay the execution of the judgment insofar as it impairs the rights of the 100 other
claimants to the insurance proceeds including the rights of the petitioner to pay more
than the value of the vessel or the insurance proceeds and to desist from executing
the judgment insofar as it prejudices the pro-rata share of all claimants to the
insurance proceeds. No pronouncement as to costs.
SO ORDERED. 31
Hence, Allied filed the instant petition for certiorari, mandamus and injunction with preliminary
injunction and/or restraining order before this Court alleging the following assignment of
errors:
1. Respondent Court of Appeals gravely erred in staying the immediate execution of
the judgment of the lower court as it has no authority nor jurisdiction to directly or
indirectly alter, modify, amend, reverse or invalidate a final judgment as affirmed by
the Honorable Supreme Court in G.R. No. 88159.
2. Respondent Court of Appeals with grave abuse of discretion amounting to lack or
excess of jurisdiction, brushed aside the doctrine in G.R. No. 88159 which is now the
law of the case and observance of time honored principles of stare decisis, res
adjudicata and estoppel by judgment.
3. Real and hypothecary rule under Articles 587, 590 and 837 of the Code of
Commerce which is the basis of the questioned decision (Annex "C" hereof) is
without application in the face of the facts found by the lower court, sustained by the
Court of Appeals in CA-G.R. No. 04121 and affirmed in toto by the Supreme Court in
G.R. No. 88159.
4. Certiorari as a special remedy is unavailing for private respondent as there was no
grave abuse of discretion nor lack or excess of jurisdiction for Judge Mabunay to
issue the order of April 4, 1990 which was in accord with law and jurisprudence, nor
were there intervening facts and/or supervening events that will justify respondent
court to issue a writ of certiorari or a restraining order on a final and executory
judgment of the Honorable Supreme Court. 32
From the decision of the trial court in Civil Case No. 138396 that favored Equitable, Aboitiz
likewise appealed to the Court of Appeals through CA-G.R. CV No. 15071. On August 24,
1990, the Court of Appeals rendered the Decision quoting extensively its Decision in CA-G.R.
No. SP-17427 (now G.R. No. 92735) and disposing of the appeal as follows:
WHEREFORE, we hereby affirm the trial court's awards of actual damages,
attorney's fees and litigation expenses, with the exception of legal interest, in favor of
plaintiff-appellee Equitable Insurance Corporation as subrogee of the consignee for
the loss of its shipment aboard the M/V "P. Aboitiz" and against defendant-appellant
Aboitiz Shipping Corporation. However, the amount and payment of those awards
shall be subject to a determination of the pro-rata share of said appellee in relation to
the pro-rata shares of the 109 other claimants, which determination shall be made by
the trial court. This case is therefore hereby ordered remanded to the trial court
which shall reopen the case and receive evidence to determine appellee's pro-rata
share as aforesaid. No pronouncement as to costs.
SO ORDERED. 33
On September 12, 1990, Equitable moved to reconsider the Court of Appeals' Decision. The
Court of Appeals denied the motion for reconsideration on October 4,
1990. 34 Consequently, Equitable filed with this Court a petition for review alleging the
following assignment of errors:
1. Respondent Court of Appeals, with grave abuse of discretion amounting to lack or
excess of jurisdiction, erroneously brushed aside the doctrine in G.R. No. 88159
which is now the law of the case as held in G.R. No. 89757 involving the same and
identical set of facts and cause of action relative to the sinking of the M/V "P. Aboitiz"
and observance of the time honored principles of stare decisis, and estoppel by
judgment.
2. Real and hypothecary rule under Articles 587, 590 and 837 of the Code of
Commerce which is the basis of the assailed decision and resolution is without
application in the face of the facts found by the trial court which conforms to the
conclusion and finding of facts arrived at in a similar and identical case involving the
same incident and parties similarly situated in G.R. No. 88159 already declared as
the "law of the case" in a subsequent decision of this Honorable Court in G.R. No.
89757 promulgated on August 6, 1990.
3. Respondent Court of Appeals gravely erred in concluding that limited liability rule
applies in case of loss of cargoes when the law itself does not distinguish; fault of the
shipowner or privity thereto constitutes one of the exceptions to the application of
limited liability under Article 587, 590 and 837 of the Code of Commerce, Civil Code
provisions on common carriers for breach of contract of carriage prevails. 35
These three petitions in G.R. Nos. 92735, 94867 and 95578 were consolidated in the
Resolution of August 5, 1991 on the ground that the petitioners "have identical causes of
action against the same respondent and similar reliefs are prayed for." 36
The threshold issue in these consolidated petitions is the applicability of the limited liability
rule in maritime law in favor of Aboitiz in order to stay the execution of the judgments for full
indemnification of the losses suffered by the petitioners as a result of the sinking of the M/V
P. Aboitiz. Before we can address this issue, however, there are procedural matters that
need to be threshed out.
First. At the outset, the Court takes note of the fact that in G.R. No. 92735, Judge Amante
Purisima, whose decision in the Regional Trial Court is sought to be upheld, is named as a
co-petitioner. In Calderon v. Solicitor General, 37 where the petitioner in the special civil
action of certiorari and mandamus was also the judge whose order was being assailed, the
Court held that said judge had no standing to file the petition because he was merely a
nominal or formal party-respondent under Section 5 of Rule 65 of the Rules of Court. He
should not appear as a party seeking the reversal of a decision that is unfavorable to the
action taken by him. The Court there said:
Judge Calderon should be-reminded of the well-known doctrine that a judge should
detach himself from cases where his decision is appealed to a higher court for
review. The raison d'etre for such doctrine is the fact that a judge is not an active
combatant in such proceeding and must leave the opposing parties to contend their
individual positions and for the appellate court to decide the issues without his active
participation. By filing this case, petitioner in a way ceased to be judicial and has
become adversarial instead. 38
While the petition in G.R. No. 92735 does not expressly show whether or not Judge Purisima
himself is personally interested in the disposition of this petition or he was just inadvertently
named as petitioner by the real parties in interest, the fact that Judge Purisima is named as
petitioner has not escaped this Court's notice. Judges and litigants should be reminded of the
basic rule that courts or individual judges are not supposed to be interested "combatants" in
any litigation they resolve.
Second. The petitioners contend that the inapplicability of the limited liability rule to Aboitiz
has already been decided on by no less than this Court in G.R. No. 88159 as early as
November 13, 1989 which was subsequently declared as "law of the case" in G.R. No. 89757
on August 6, 1990. Herein petitioners cite the aforementioned cases in support of their theory
that the limited liability rule based on the real and hypothecary nature of maritime law has no
application in the cases at bar.
The existence of what petitioners insist is already the "law of the case" on the matter of
limited liability is at best illusory. Petitioners are either deliberately misleading this Court or
profoundly confused. As elucidated in the case of Aboitiz Shipping Corporation vs. General
Accident Fire and Life Assurance Corporation, 39
An examination of the November 13, 1989 Resolution in G.R. No. 88159 (pp. 280-
282, Rollo) shows that the same settles two principal matters, first of which is that the
doctrine of primary administrative jurisdiction is not applicable therein; and second is
that a limitation of liability in said case would render inefficacious the extraordinary
diligence required by law of common carriers.
It should be pointed out, however, that the limited liability discussed in said case is
not the same one now in issue at bar, but an altogether different aspect. The limited
liability settled in G.R. No. 88159 is that which attaches to cargo by virtue of
stipulations in the Bill of Lading, popularly known as package limitation clauses,
which in that case was contained in Section 8 of the Bill of Lading and which limited
the carrier's liability to US$500.00 for the cargo whose value was therein sought to
be recovered. Said resolution did not tackle the matter of the Limited Liability Rule
arising out of the real and hypothecary nature of maritime law, which was not raised
therein, and which is the principal bone of contention in this case. While the matters
threshed out in G.R. No. 88159, particularly those dealing with the issues on primary
administrative jurisdiction and the package liability limitation provided in the Bill of
Lading are now settled and should no longer be touched, the instant case raises a
completely different issue. 40
Third. Petitioners asseverate that the judgments of the lower courts, already final and
executory, cannot be directly or indirectly altered, modified, amended, reversed or
invalidated.
The rule that once a decision becomes final and executory, it is the ministerial duty of the
court to order its execution, is not an absolute one: We have allowed the suspension of
execution in cases of special and exceptional nature when it becomes imperative in the
higher interest of justice. 41 The unjust and inequitable effects upon various other claimants
against Aboitiz should we allow the execution of judgments for the full indemnification of
petitioners' claims impel us to uphold the stay of execution as ordered by the respondent
Court of Appeals. We reiterate our pronouncement in Aboitiz Shipping Corporation vs.
General Accident Fire and Life Assurance Corporation on this very same issue.
This brings us to the primary question herein which is whether or not respondent
court erred in granting execution of the full judgment award in Civil Case No. 14425
(G.R. No. 89757), thus effectively denying the application of the limited liability
enunciated under the appropriate articles of the Code of Commerce. . . . .
Collaterally, determination of the question of whether execution of judgments which
have become final and executory may be stayed is also an issue.
We shall tackle the latter issue first. This Court has always been consistent in its
stand that the very purpose for its existence is to see the accomplishment of the
ends of justice. Consistent with this view, a number of decisions have originated
herefrom, the tenor of which is that no procedural consideration is sancrosanct if
such shall result in the subverting of justice. The right to execution after finality of a
decision is certainly no exception to this. Thus, in Cabrias v. Adil (135 SCRA 355
[1885]), this Court ruled that:
x x x x x x x x x
. . . every court having jurisdiction to render a particular judgment has
inherent power to enforce it, and to exercise equitable control over such
enforcement. The court has authority to inquire whether its judgment has
been executed, and will remove obstructions to the enforcement thereof.
Such authority extends not only to such orders and such writs as may be
necessary to prevent an improper enforcement of the judgment. If a
judgment is sought to be perverted and made a medium of consummating a
wrong the court on proper application can prevent it. 42
Fourth. Petitioners in G.R. No. 92735 ever that it was error for the respondent Court of
Appeals to allow Aboitiz the benefit of the limited liability rule despite its failure to present
evidence to prove its entitlement thereto in the court below. Petitioners Monarch and
Tabacalera remind this Court that from the inception of G.R. No. 92735 in the lower court and
all the way to the Supreme Court, Aboitiz had not presented an iota of evidence to exculpate
itself from the charge of negligence for the simple reason that it was declared as in
default. 43
It is true that for having been declared in default, Aboitiz was precluded from presenting
evidence to prove its defenses in the court a quo. We cannot, however, agree with petitioners
that this circumstance prevents the respondent Court of Appeals from taking cognizance of
Aboitiz' defenses on appeal.
It should be noted that Aboitiz was declared as in default not for its failure to file an answer
but for its absence during pre-trial and the trial proper. In Aboitiz' answer with counterclaim, it
claimed that the sinking of the M/V P. Aboitiz was due to an act of God or unforeseen event
and that the said ship had been seaworthy and fit for the voyage. Aboitiz also alleged that it
exercised the due diligence required by law, and that considering the real and hypothecary
nature of maritime trade, the sinking justified the extinguishment of its liability for the lost
shipment. 44
A judgment of default does not imply a waiver of rights except that of being heard and
presenting evidence in defendant's favor. It does not imply admission by the defendant of the
facts and causes of action of the plaintiff, because the codal section 45 requires the latter to
adduce evidence in support of his allegations as an indispensable condition before final
judgment could be given in his favor. Nor could it be interpreted as an admission by the
defendant that the plaintiff's causes of action find support in the law or that the latter is
entitled to the relief prayed for. 46 This is especially true with respect to a defendant who had
filed his answer but had been subsequently declared in default for failing to appear at the trial
since he has had an opportunity to traverse, viahis answer, the material averments contained
in the complaint. Such defendant has a better standing than a defendant who has neither
answered nor appeared at trial. 47 The former should be allowed to reiterate all affirmative
defenses pleaded in his answer before the Court of Appeals. Likewise, the Court of Appeals
may review the correctness of the evaluation of the plaintiffs evidence by the lower court.
It should also be pointed out that Aboitiz is not raising the issue of its entitlement to the
limited liability rule for the first time on appeal thus, the respondent Court of Appeals may
properly rule on the same.
However, whether or not the respondent Court of Appeals erred in finding, upon review, that
Aboitiz is entitled to the benefit of the limited liability rule is an altogether different matter
which shall be discussed below.1awphi1
Rule on Limited Liability. The petitioners assert in common that the vessel M/V P. Aboitiz did
not sink by reason offorce majeure but because of its unseaworthiness and the concurrent
fault and/or negligence of Aboitiz, the captain and its crew, thereby barring Aboitiz from
availing of the benefit of the limited liability rule.
The principle of limited liability is enunciated in the following provisions of the Code of
Commerce:
Art. 587. The shipagent shall also be civilly liable for the indemnities in favor of third
persons which may arise from the conduct of the captain in the care of goods which
he loaded on the vessel; but he may exempt himself therefrom by abandoning the
vessel with all the equipments and the freight it may have earned during the voyage.
Art. 590. The co-owners of a vessel shall be civilly liable in the proportion of their
interests in the common fund for the results of the acts of the captain referred to in
Art. 587.
Each co-owner may exempt himself from his liability by the abandonment, before a
notary, of the part of the vessel belonging to him.
Art. 837. The civil liability incurred by shipowners in the case prescribed in this
section, shall be understood as limited to the value of the vessel with all its
appurtenances and the freightage served during the voyage.
Art. 837 appeals the principle of limited liability in cases of collision hence, Arts. 587 and 590
embody the universal principle of limited liability in all cases. In Yangco v. Laserna, 48 this
Court elucidated on the import of Art. 587 as follows:
The provision accords a shipowner or agent the right of abandonment; and by
necessary implication, his liability is confined to that which he is entitled as of right to
abandon-"the vessel with all her equipments and the freight it may have earned
during the voyage." It is true that the article appears to deal only with the limited
liability of the shipowners or agents for damages arising from the misconduct of the
captain in the care of the goods which the vessel carries, but this is a mere
deficiency of language and in no way indicates the true extent of such liability. The
consensus of authorities is to the effect that notwithstanding the language of the
aforequoted provision, the benefit of limited liability therein provided for, applies in all
cases wherein the shipowner or agent may properly be held liable for the negligent
or illicit acts of the captain. 49
"No vessel, no liability," expresses in a nutshell the limited liability rule. The shipowner's or
agent's liability is merely co-extensive with his interest in the vessel such that a total loss
thereof results in its extinction. The total destruction of the vessel extinguishes maritime liens
because there is no longer any res to which it can attach. 50This doctrine is based on the
real and hypothecary nature of maritime law which has its origin in the prevailing conditions
of the maritime trade and sea voyages during the medieval ages, attended by innumerable
hazards and perils. To offset against these adverse conditions and to encourage shipbuilding
and maritime commerce, it was deemed necessary to confine the liability of the owner or
agent arising from the operation of a ship to the vessel, equipment, and freight, or insurance,
if any. 51
Contrary to the petitioners' theory that the limited liability rule has been rendered obsolete by
the advances in modern technology which considerably lessen the risks involved in maritime
trade, this Court continues to apply the said rule in appropriate cases. This is not to say,
however, that the limited liability rule is without exceptions, namely: (1) where the injury or
death to a passenger is due either to the fault of the shipowner, or to the concurring
negligence of the shipowner and the captain; 52 (2) where the vessel is insured; and (3) in
workmen's compensation claims. 53
We have categorically stated that Article 587 speaks only of situations where the fault or
negligence is committed solely by the captain. In cases where the ship owner is likewise to
be blamed, Article 587 does not apply. Such a situation will be covered by the provisions of
the Civil Code on common carriers. 54
A finding that a fortuitous event was the sole cause of the loss of the M/V P. Aboitiz would
absolve Aboitiz from any and all liability pursuant to Article 1734(1) of the Civil Code which
provides in part that common carriers are responsible for the loss, destruction, or
deterioration of the goods they carry, unless the same is due to flood, storm, earthquake,
lightning, or other natural disaster or calamity. On the other hand, a finding that the M/V P.
Aboitiz sank by reason of fault and/or negligence of Aboitiz, the ship captain and crew of the
M/V P. Aboitiz would render inapplicable the rule on limited liability. These issues are
therefore ultimately questions of fact which have been subject of conflicting determinations by
the trial courts, the Court of Appeals and even this Court.
In Civil Cases Nos. 82-2767-82-2770 (now G.R. No. 92735), after receiving Monarch's and
Tabacalera's evidence, the trial court found that the complete loss of the shipment on board
the M/V P. Aboitiz when it sank was neither due to a fortuitous event nor a storm or natural
cause. For Aboitiz' failure to present controverting evidence, the trial court also upheld
petitioners' allegation that the M/V P. Aboitiz was unseaworthy. 55 However, on appeal,
respondent Court of Appeals exculpated Aboitiz from fault or negligence and ruled that:
. . ., even if she (M/V P. Aboitiz) was found to be unseaworthy,
this fault (distinguished from civil liability) cannot be laid on the shipowner's door.
Such fault was directly attributable to the captain. This is so, because under Art. 612
of the Code of Commerce, among the inherent duties of a captain, are to examine
the vessel before sailing and to comply with the laws on navigation. 56
and that:
. . . although the shipowner may be held civilly liable for the captain's fault . . . having
abandoned the vessel in question, even if the vessel was unseaworthy due to the
captain's fault, Aboitiz is still entitled to the benefit under the rule of limited liability
accorded to shipowners by the Code of Commerce. 57
Civil Case No. 138396 (now G.R. No. 95578) was similarly resolved by the trial court, which
found that the sinking of the M/V P. Aboitiz was not due to an act of God or force majeure. It
added that the evidence presented by the petitioner Equitable demonstrated the negligence
of Aboitiz Shipping Corporation in the management and operation of its, vessel M/V P.
Aboitiz. 58
However, Aboitiz' appeal was favorably acted upon by the respondent Court of Appeals
which reiterated its ruling in G.R. No. 92735 that the unseaworthiness of the M/V P. Aboitiz
was not a fault directly attributable to Aboitiz but to the captain, and that Aboitiz is entitled to
the benefit of the limited liability rule for having abandoned its ship. 59
Finally, in Civil Case No. 138643 (now G.R. No. 94867), the trial court held that the M/V P.
Aboitiz was not lost due to a fortuitous event or force majeure, and that Aboitiz had failed to
satisfactorily establish that it had observed extraordinary diligence in the vigilance over the
goods transported by it. 60
In CA-G.R. CV No. 04121, the Court of Appeals initially ruled against Aboitiz and found that
the sinking of the vessel was due to its unseaworthiness and the failure of its crew and
master to exercise extraordinary diligence. 61Subsequently, however, Aboitiz' petition before
the Court of Appeals, docketed as CA-G.R. SP No. 20844 (now G.R. No. 94867) to annul
and set aside the order of execution issued by the lower court was resolved in favor of
Aboitiz. The Court of Appeals brushed aside the issue of Aboitiz' negligence and/or fault and
proceeded to allow the application of the limited liability rule "to accomplish the aims of
justice." 62 It elaborated thus: "To execute the judgment in this case would prejudice the
substantial right of other claimants who have filed suits to claim their cargoes that was lost in
the vessel that sank and also against the petitioner to be ordered to pay more than what the
law requires." 63
It should be pointed out that the issue of whether or not the M/V P. Aboitiz sank by reason
of force majeure is not a novel one for that question has already been the subject of
conflicting pronouncements by the Supreme Court. InAboitiz Shipping Corporation v. Court of
Appeals, 64 this Court approved the findings of the trial court and the appellate court that the
sinking of the M/V P. Aboitiz was not due to the waves caused by tropical storm "Yoning" but
due to the fault and negligence of Aboitiz, its master and crew. 65 On the other hand, in the
later case ofCountry Bankers Insurance Corporation v. Court of Appeals, 66 this Court issued
a Resolution on August 28, 1991 denying the petition for review on the ground that the Court
of Appeals committed no reversible error, thereby affirming and adopting as its own, the
findings of the Court of Appeals that force majeure had caused the M/V P. Aboitiz to founder.
In view of these conflicting pronouncements, we find that now is the opportune time to settle
once and for all the issue or whether or not force mejeure had indeed caused the M/V P.
Aboitiz to sink. After reviewing the records of the instant cases, we categorically state that by
the facts on record, the M/V P. Aboitiz did not go under water because of the storm "Yoning."
It is true that as testified by Justo Iglesias, meteorologist of Pag-Asa, during the inclusive
dates of October 28-31, 1980, a stormy weather condition prevailed within the Philippine area
of responsibility, particularly along the sea route from Hong Kong to Manila, because of
tropical depression "Yoning". 67 But even Aboitiz' own evidence in the form of the marine
protest filed by Captain Racines affirmed that the wind force when the M/V P. Aboitiz
foundered on October 31, 1980 was only ten (10) to fifteen (15) knots which, under the
Beaufort Scale or Wind, falls within scale No. 4 that describes the wind velocity as "moderate
breeze," and characterizes the waves as "small . . . becoming longer, fairly frequent white
horses." 68 Captain Racines also testified in open court that the ill-fated M/V P. Aboitiz was
two hundred (200) miles away from storm "Yoning" when it sank. 69
The issue of negligence on the part of Aboitiz, and the captain and crew of the M/V P. Aboitiz
has also been subject of conflicting rulings by this Court. In G.R. No. 100373, Country
Bankers Insurance Corporation v. Court of Appeals, this Court found no error in the findings
of the Court of Appeals that the M/V P. Aboitiz sank by reason offorce majeure, and that
there was no negligence on the part of its officers and crew. In direct contradiction is this
Court's categorical declaration in Aboitiz Shipping Corporation v. Court of Appeals," 70 to wit:
The trial court and the appellate court found that the sinking of the M/V P. Aboitiz
was not due to the waves caused by tropical storm "Yoning" but due to the fault and
negligence of petitioner, its master and crew. The court reproduces with approval
said findings . . . . 71
However, in the subsequent case of Aboitiz Shipping Corporation v. General Accident Fire
and Life Assurance Corporation, Ltd., 72 this Court exculpated Aboitiz from fault and/or
negligence while holding that the unseaworthiness of the M/V P. Aboitiz was only attributable
to the negligence of its captain and crew. Thus,
On this point, it should be stressed that unseaworthiness is not a fault that can be
laid squarely on petitioner's lap, absent a factual basis for such conclusion. The
unseaworthiness found in some cases where the same has been ruled to exist is
directly attributable to the vessel's crew and captain, more so on the part of the latter
since Article 612 of the Code of Commerce provides that among the inherent duties
of a captain is to examine a vessel before sailing and to comply with the laws of
navigation. Such a construction would also put matters to rest relative to the decision
of the Board of Marine Inquiry. While the conclusion therein exonerating the captain
and crew of the vessel was not sustained for lack of basis, the finding therein
contained to the effect that the vessel was seaworthy deserves merit. Despite
appearances, it is not totally incompatible with the findings of the trial court and the
Court of Appeals, whose finding of "unseaworthiness" clearly did not pertain to the
structural condition of the vessel which is the basis of the BMI's findings, but to the
condition it was in at the time of the sinking, which condition was a result of the acts
of the captain and the crew. 73
It therefore becomes incumbent upon this Court to answer with finality the nagging question
of whether or not it was the concurrent fault and/or negligence of Aboitiz and the captain and
crew of the ill-fated vessel that had caused it to go under water.
Guided by our previous pronouncements and illuminated by the evidence now on record, we
reiterate our findings in Aboitiz Shipping Corporation v. General Accident Fire and Life
Assurance Corporation, Ltd. 74, that the unseaworthiness of the M/V P. Aboitiz had caused it
to founder. We, however, take exception to the pronouncement therein that said
unseaworthiness could not be attributed to the ship owner but only to the negligent acts of
the captain and crew of the M/V P. Aboitiz. On the matter of Aboitiz' negligence, we adhere to
our ruling in Aboitiz Shipping Corporation v. Court of Appeals, 75 that found Aboitiz, and the
captain and crew of the M/V P. Aboitiz to have been concurrently negligent.
During the trial of Civil Case Nos. 82-2767-82-2770 (now G.R. No. 92735), petitioners
Monarch and Tabacalera presented a survey from Perfect Lambert, a surveyor based in
Hong Kong that conducted an investigation on the possible cause of the sinking of the
vessel. The said survey established that the cause of the sinking of the vessel was the
leakage of water into the M/V P. Aboitiz which probably started in the forward part of the No.
1 hull, although no explanation was proffered as to why the No. 2 hull was likewise flooded.
Perfect Lambert surmised that the flooding was due to a leakage in the shell plating or a
defect in the water tight bulk head between the Nos. 1 and 2 holds which allowed the water
entering hull No. 1 to pass through hull No. 2. The surveyor concluded that whatever the
cause of the leakage of water into these hulls, the seaworthiness of the vessel was definitely
in question because the breaches of the hulls and serious flooding of the two cargo holds
occurred simultaneously in seasonal weather. 76
We agree with the uniform finding of the lower courts that Aboitiz had failed to prove that it
observed the extraordinary diligence required of it as a common carrier. We therefore
reiterate our pronouncement in Aboitiz Corporation v. Court of Appeals 77 on the issue of
Aboitiz' liability in the sinking of its vessel, to wit:
In accordance with Article 1732 of the Civil Code, the defendant common carrier
from the nature of its business and for reasons of public policy, is bound to observe
extraordinary diligence in the vigilance over the goods and for the safety of the
passengers transported by it according to all circumstances of the case. While the
goods are in the possession of the carrier, it is but fair that it exercise extraordinary
diligence in protecting them from loss or damage, and if loss occurs, the law
presumes that it was due to the carrier's fault or negligence; that is necessary to
protect the interest of the shipper which is at the mercy of the carrier . . . In the case
at bar, the defendant failed to prove hat the loss of the subject cargo was not due to
its fault or negligence. 78
The failure of Aboitiz to present sufficient evidence to exculpate itself from fault and/or
negligence in the sinking of its vessel in the face of the foregoing expert testimony constrains
us to hold that Aboitiz was concurrently at fault and/or negligent with the ship captain and
crew of the M/V P. Aboitiz. This is in accordance with the rule that in cases involving the
limited liability of shipowners, the initial burden of proof of negligence or unseaworthiness
rests on the claimants. However, once the vessel owner or any party asserts the right to limit
its liability, the burden of proof as to lack of privity or knowledge on its part with respect to the
matter of negligence or unseaworthiness is shifted to it. 79 This burden, Aboitiz had
unfortunately failed to discharge. That Aboitiz failed to discharge the burden of proving that
the unseaworthiness of its vessel was not due to its fault and/or negligence should not
however mean that the limited liability rule will not be applied to the present cases. The
peculiar circumstances here demand that there should be no strict adherence to procedural
rules on evidence lest the just claims of shippers/insurers be frustrated. The rule on limited
liability should be applied in accordance with the latest ruling inAboitiz Shipping Corporation
v. General Accident Fire and Life Assurance Corporation, Ltd., 80 promulgated on January
21, 1993, that claimants be treated as "creditors in an insolvent corporation whose assets are
not enough to satisfy the totality of claims against it." 81 To do so, the Court set out in that
case the procedural guidelines:
In the instant case, there is, therefore, a need to collate all claims preparatory to their
satisfaction from the insurance proceeds on the vessel M/V P. Aboitiz and its
pending freightage at the time of its loss. No claimant can be given precedence over
the others by the simple expedience of having completed its action earlier than the
rest. Thus, execution of judgment in earlier completed cases, even these already
final and executory must be stayed pending completion of all cases occasioned by
the subject sinking. Then and only then can all such claims be simultaneously
settled, either completely or pro-rata should the insurance proceeds and freightage
be not enough to satisfy all claims.
x x x x x x x x x
In fairness to the claimants and as a matter of equity, the total proceeds of the
insurance and pending freightage should now be deposited in trust. Moreover,
petitioner should institute the necessary limitation and distribution action before the
proper admiralty court within 15 days from finality of this decision, and thereafter
deposit with it the proceeds from the insurance company and pending freightage in
order to safeguard the same pending final resolution of all incidents, for final pro-
rating and settlement thereof. 82(Emphasis supplied.)
There is no record that Aboitiz. has instituted such action or that it has deposited in trust the
insurance proceeds and freightage earned. The pendency of the instant cases before the
Court is not a reason for Aboitiz to disregard the aforementioned order of the Court. In fact,
had Aboitiz complied therewith, even these cases could have been terminated earlier. We
are inclined to believe that instead of filing the suit as directed by this Court, Aboitiz tolerated
the situation of several claimants waiting to gel hold of its insurance proceeds, which, if
correctly handled must have multiplied in amount by now. By its failure to abide by the order
of this Court, it had caused more damage to the claimants over and above that which they
have endured as a direct consequence of the sinking of the M/V P. Aboitiz. It was obvious
that from among the many cases filed against it over the years, Aboitiz was waiting for a
judgment that might prove favorable to it, in blatant violation of the basic provisions of the
Civil Code on abuse of rights.
Well aware of the 110 claimants against it, Aboitiz preferred to litigate the claims singly rather
than exert effort towards the consolidation of all claims. Consequently, courts have arrived at
conflicting decisions while claimants waited over the years for a resolution of any of the cases
that would lead to the eventual resolution of the rest. Aboitiz failed to give the claimants their
due and to observe honesty and good faith in the exercise of its rights. 83
Aboitiz' blatant disregard of the order of this Court in Aboitiz Shipping Corporation v. General
Accident Fire and Life Assurance Corporation, Ltd. 84 cannot be anything but, willful on its
part. An act is considered willful if it is done with knowledge of its injurious effect; it is not
required that the act be done purposely to produce the injury.85 Aboitiz is well aware that by
not instituting the said suit, it caused the delay in the resolution of all claims against it. Having
willfully caused loss or injury to the petitioners in a manner that is contrary to morals, good
customs or public policy, Aboitiz is liable for damages to the latter. 86
Thus, for its contumacious act of defying the order of this Court to file the appropriate action
to consolidate all claims for settlement, Aboitiz must be held liable for moral damages which
may be awarded in appropriate cases under the Chapter on human relations of the Civil
Code (Articles 19 to 36). 87
On account of Aboitiz' refusal to satisfy petitioners' claims in accordance with the directive of
the Court in Aboitiz Shipping Corporation v. General Accident Fire and Life Assurance
Corporation, Ltd., it acted in gross and evident bad faith. Accordingly, pursuant to Article
2208 of the Civil Code, 88 petitioners should be granted attorney's fees.
WHEREFORE, the petitions in G.R. Nos. 92735, 94867, and 95578 are DENIED. The
decisions of the Court of Appeals in CA-G.R. No. SP-17427 dated March 29, 1990, CA-G.R.
SP No. 20844 dated August 15, 1990, and CA-G.R. CV No. 15071 dated August 24, 1990
are AFFIRMED with the MODIFICATION that respondent Aboitiz Shipping Corporation is
ordered to pay each of the respective petitioners the amounts of P100,000.00 as moral
damages and P50,000.00 as attorney's fees, and treble the cost of suit.
Respondent Aboitiz Shipping Corporation is further directed to comply with the Order
promulgated by this Court on January 21, 1993 in Aboitiz Shipping Corporation v. General
Accident Fire and Life Assurance Corporation, Ltd., G.R. No. 100446, January 21, 1993, to
(a) institute the necessary limitation and distribution action before the proper Regional Trial
Court, acting as admiralty court, within fifteen (15) days from the finality of this decision, and
(b) thereafter to deposit with the said court the insurance proceeds from the loss of the
vessel, M/V P. Aboitiz, and the freightage earned in order to safeguard the same pending
final resolution of all incidents relative to the final pro-rating thereof and to the settlement of
all claims.1wphi1.nt
SO ORDERED.





















G.R. No. 100446 January 21, 1993
ABOITIZ SHIPPING CORPORATION, petitioner, vs. GENERAL ACCIDENT FIRE AND
LIFE ASSURANCE CORPORATION, LTD., respondent.
MELO, J.:
This refers to a petition for review which seeks to annul and set aside the decision of the
Court of Appeals dated June 21, 1991, in CA G.R. SP No. 24918. The appellate court
dismissed the petition for certiorari filed by herein petitioner, Aboitiz Shipping Corporation,
questioning the Order of April 30, 1991 issued by the Regional Trial Court of the National
Capital Judicial Region (Manila, Branch IV) in its Civil Case No. 144425 granting private
respondent's prayer for execution for the full amount of the judgment award. The trial court in
so doing swept aside petitioner's opposition which was grounded on the real and hypothecary
nature of petitioner's liability as ship owner. The application of this established principle of
maritime law would necessarily result in a probable reduction of the amount to be recovered
by private respondent, since it would have to share with a number of other parties similarly
situated in the insurance proceeds on the vessel that sank.
The basic facts are not disputed.
Petitioner is a corporation organized and operating under Philippine laws and engaged in the
business of maritime trade as a carrier. As such, it owned and operated the ill-fated "M/V P.
ABOITIZ," a common carrier which sank on a voyage from Hongkong to the Philippines on
October 31, 1980. Private respondent General Accident Fire and Life Assurance Corporation,
Ltd. (GAFLAC), on the other hand, is a foreign insurance company pursuing its remedies as
a subrogee of several cargo consignees whose respective cargo sank with the said vessel
and for which it has priorly paid.
The incident of said vessel's sinking gave rise to the filing of suits for recovery of lost cargo
either by the shippers, their successor-in-interest, or the cargo insurers like GAFLAC as
subrogees. The sinking was initially investigated by the Board of Marine Inquiry (BMI Case
No. 466, December 26, 1984), which found that such sinking was due toforce majeure and
that subject vessel, at the time of the sinking was seaworthy. This administrative finding
notwithstanding, the trial court in said Civil Case No. 144425 found against the carrier on the
basis that the loss subject matter therein did not occur as a result of force majeure. Thus, in
said case, plaintiff GAFLAC was allowed to prove, and. was later awarded, its claim. This
decision in favor of GAFLAC was elevated all the way up to this Court in G.R. No. 89757
(Aboitiz v. Court of Appeals, 188 SCRA 387 [1990]), with Aboitiz, like its ill-fated vessel,
encountering rough sailing. The attempted execution of the judgment award in said case in
the amount of P1,072,611.20 plus legal interest has given rise to the instant petition.
On the other hand, other cases have resulted in findings upholding the conclusion of the BMI
that the vessel was seaworthy at the time of the sinking, and that such sinking was due
to force majeure. One such ruling was likewise elevated to this Court in G.R. No.
100373, Country Bankers Insurance Corporation v. Court of Appeals, et al., August 28, 1991
and was sustained. Part of the task resting upon this Court, therefore, is to reconcile the
resulting apparent contrary findings in cases originating out of a single set of facts.
It is in this factual milieu that the instant petition seeks a pronouncement as to the
applicability of the doctrine of limited liability on the totality of the claims vis a vis the losses
brought about by the sinking of the vessel M/V P. ABOITIZ, as based on the real and
hypothecary nature of maritime law. This is an issue which begs to be resolved considering
that a number of suits alleged in the petition number about 110 (p. 10 and pp. 175 to
183, Rollo) still pend and whose resolution shall well-nigh result in more confusion than
presently attends the instant case.
In support of the instant petition, the following arguments are submitted by the petitioner:
1. The Limited Liability Rule warrants immediate stay of execution of
judgment to prevent impairment of other creditors' shares;
2. The finding of unseaworthiness of a vessel is not necessarily attributable
to the shipowner; and
3 The principle of "Law of the Case" is not applicable to the present petition.
(pp. 2-26, Rollo.)
On the other hand, private respondent opposes the foregoing contentions, arguing that:
1. There is no limited liability to speak of or applicable real and hypothecary
rule under Article 587, 590, and 837 of the Code of Commerce in the face of
the facts found by the lower court (Civil Case No. 144425), upheld by the
Appellate Court (CA G.R. No. 10609), and affirmed in toto by the Supreme
Court in G.R. No. 89757 which cited G.R. No. 88159 as the Law of the Case;
and
2. Under the doctrine of the Law of the Case, cases involving the same
incident, parties similarly situated and the same issues litigated should be
decided in conformity therewith following the maximstare decisis et non
quieta movere. (pp. 225 to 279, Rollo.)
Before proceeding to the main bone of contention, it is important to determine first whether or
not the Resolution of this Court in G.R. No. 88159, Aboitiz Shipping, Corporation vs. The
Honorable Court of Appeals and Allied Guaranty Insurance Company, Inc., dated November
13, 1989 effectively bars and precludes the instant petition as argued by respondent
GAFLAC.
An examination of the November 13, 1989 Resolution in G.R. No. 88159 (pp. 280 to
282, Rollo) shows that the same settles two principal matters, first of which is that the
doctrine of primary administrative jurisdiction is not applicable therein; and second is that a
limitation of liability in said case would render inefficacious the extraordinary diligence
required by law of common carriers.
It should be pointed out, however, that the limited liability discussed in said case is not the
same one now in issue at bar, but an altogether different aspect. The limited liability settled in
G.R. No. 88159 is that which attaches to cargo by virtue of stipulations in the Bill of Lading,
popularly known as package limitation clauses, which in that case was contained in Section 8
of the Bill of Lading and which limited the carrier's liability to US$500.00 for the cargo whose
value was therein sought to be recovered. Said resolution did not tackle the matter of the
Limited Liability Rule arising out of the real and hypothecary nature of maritime law, which
was not raised therein, and which is the principal bone of contention in this case. While the
matters threshed out in G.R. No. 88159, particularly those dealing with the issues on primary
administrative jurisdiction and the package liability limitation provided in the Bill of Lading are
now settled and should no longer be touched, the instant case raises a completely different
issue. It appears, therefore, that the resolution in G.R. 88159 adverted to has no bearing
other than factual to the instant case.
This brings us to the primary question herein which is whether or not respondent court erred
in granting execution of the full judgment award in Civil Case No. 14425 (G.R. No. 89757),
thus effectively denying the application of the limited liability enunciated under the
appropriate articles of the Code of Commerce. The articles may be ancient, but they are
timeless and have remained to be good law. Collaterally, determination of the question of
whether execution of judgments which have become final and executory may be stayed is
also an issue.
We shall tackle the latter issue first. This Court has always been consistent in its stand that
the very purpose for its existence is to see to the accomplishment of the ends of justice.
Consistent with this view, a number of decisions have originated herefrom, the tenor of which
is that no procedural consideration is sacrosanct if such shall result in the subverting of
substantial justice. The right to an execution after finality of a decision is certainly no
exception to this. Thus, in Cabrias v. Adil (135 SCRA 355 [1985]), this Court ruled that:
. . . It is a truism that every court has the power "to control, in the furtherance
of justice, the conduct of its ministerial officers, and of all other persons in
any manner connected with a case before it, in every manner appertaining
thereto. It has also been said that:
. . . every court having jurisdiction to render a particular
judgment has inherent power to enforce it, and to exercise
equitable control over such enforcement. The court has
authority to inquire whether its judgment has been
executed, and will remove obstructions to the enforcement
thereof. Such authority extends not only to such orders and
such writs as may be necessary to carry out the judgment
into effect and render it binding and operative, but also to
such orders and such writs as may be necessary to prevent
an improper enforcement of the judgment. If a judgment is
sought to be perverted and made a medium of
consummating a wrong the court on proper application can
prevent it. (at p. 359)
and again in the case of Lipana v. Development Bank of Rizal (154 SCRA 257 [1987]), this
Court found that:
The rule that once a decision becomes final and executory, it is the
ministerial duty of the court to order its execution, admits of certain
exceptions as in cases of special and exceptional nature where it becomes
the imperative in the higher interest of justice to direct the suspension of its
execution (Vecine v. Geronimo, 59 OG 579); whenever it is necessary to
accomplish the aims of justice (Pascual v Tan, 85 Phil. 164); or when certain
facts and circumstances transpired after the judgment became final which
would render the execution of the judgment unjust (Cabrias v. Adil, 135
SCRA 354). (at p. 201)
We now come to the determination of the principal issue as to whether the Limited Liability
Rule arising out of the real and hypothecary nature of maritime law should apply in this and
related cases. We rule in the affirmative.
In deciding the instant case below, the Court of Appeals took refuge in this Court's decision in
G.R. No. 89757 upholding private respondent's claims in that particular case, which the Court
of Appeals took to mean that this Court has "considered, passed upon and resolved Aboitiz's
contention that all claims for the losses should first be determined before GAFLAC's
judgment may be satisfied," and that such ruling "in effect necessarily negated the application
of the limited liability principle" (p. 175, Rollo). Such conclusion is not accurate. The decision
in G.R. No. 89757 considered only the circumstances peculiar to that particular case, and
was not meant to traverse the larger picture herein brought to fore, the circumstances of
which heretofore were not relevant. We must stress that the matter of the Limited Liability
Rule as discussed was never in issue in all prior cases, including those before the RTCs and
the Court of Appeals. As discussed earlier, the "limited liability" in issue before the trial courts
referred to the package limitation clauses in the bills of lading and not the limited liability
doctrine arising from the real and hypothecary nature of maritime trade. The latter rule was
never made a matter of defense in any of the cases a quo, as properly it could not have been
made so since it was not relevant in said cases. The only time it could come into play is when
any of the cases involving the mishap were to be executed, as in this case. Then, and only
then, could the matter have been raised, as it has now been brought before the Court.
The real and hypothecary nature of maritime law simply means that the liability of the carrier
in connection with losses related to maritime contracts is confined to the vessel, which is
hypothecated for such obligations or which stands as the guaranty for their settlement. It has
its origin by reason of the conditions and risks attending maritime trade in its earliest years
when such trade was replete with innumerable and unknown hazards since vessels had to go
through largely uncharted waters to ply their trade. It was designed to offset such adverse
conditions and to encourage people and entities to venture into maritime commerce despite
the risks and the prohibitive cost of shipbuilding. Thus, the liability of the vessel owner and
agent arising from the operation of such vessel were confined to the vessel itself, its
equipment, freight, and insurance, if any, which limitation served to induce capitalists into
effectively wagering their resources against the consideration of the large profits attainable in
the trade.
It might be noteworthy to add in passing that despite the modernization of the shipping
industry and the development of high-technology safety devices designed to reduce the risks
therein, the limitation has not only persisted, but is even practically absolute in well-
developed maritime countries such as the United States and England where it covers almost
all maritime casualties. Philippine maritime law is of Anglo-American extraction, and is
governed by adherence to both international maritime conventions and generally accepted
practices relative to maritime trade and travel. This is highlighted by the following excerpts on
the limited liability of vessel owners and/or agents;
Sec. 183. The liability of the owner of any vessel, whether American or
foreign, for any embezzlement, loss, or destruction by any person of any
person or any property, goods, or merchandise shipped or put on board
such vessel, or for any loss, damage, or forfeiture, done, occasioned, or
incurred, without the privity or knowledge of such owner or owners shall not
exceed the amount or value of the interest of such owner in such vessel, and
her freight then pending. (Section 183 of the US Federal Limitation of
Liability Act).
and
1. The owner of a sea-going ship may limit his liability in accordance with
Article 3 of this Convention in respect of claims arising, from any of the
following occurrences, unless the occurrence giving rise to the claim resulted
from the actual fault or privity of the owner;
(a) loss of life of, or personal injury to, any person being carried in the ship,
and loss of, or damage to, any property on board the ship.
(b) loss of life of, or personal injury to, any other person, whether on land or
on water, loss of or damage to any other property or infringement of any
rights caused by the act, neglect or default the owner is responsible for, or
any person not on board the ship for whose act, neglect or default the owner
is responsible: Provided, however, that in regard to the act, neglect or
default of this last class of person, the owner shall only be entitled to limit his
liability when the act, neglect or default is one which occurs in the navigation
or the management of the ship or in the loading, carriage or discharge of its
cargo or in the embarkation, carriage or disembarkation of its passengers.
(c) any obligation or liability imposed by any law relating to the removal of
wreck and arising from or in connection with the raising, removal or
destruction of any ship which is sunk, stranded or abandoned (including
anything which may be on board such ship) and any obligation or liability
arising out of damage caused to harbor works, basins and navigable
waterways. (Section 1, Article I of the Brussels International Convention of
1957)
In this jurisdiction, on the other hand, its application has been well-nigh constricted by the
very statute from which it originates. The Limited Liability Rule in the Philippines is taken up
in Book III of the Code of Commerce, particularly in Articles 587, 590, and 837, hereunder
quoted in toto:
Art. 587. The ship agent shall also be civilly liable for the indemnities in favor
of third persons which may arise from the conduct of the captain in the care
of the goods which he loaded on the vessel; but he may exempt himself
therefrom by abandoning the vessel with all her equipment and the freight it
may have earned during the voyage.
Art. 590. The co-owners of a vessel shall be civilly liable in the proportion of
their interests in the common fund for the results of the acts of the captain
referred to in Art. 587.
Each co-owner may exempt himself from this liability by the abandonment,
before a notary, of the part of the vessel belonging to him.
Art. 837. The civil liability incurred by shipowners in the case prescribed in
this section (on collisions), shall be understood as limited to the value of the
vessel with all its appurtenances and freightage served during the voyage.
(Emphasis supplied)
Taken together with related articles, the foregoing cover only liability for injuries to third
parties (Art. 587), acts of the captain (Art. 590) and collisions (Art. 837).
In view of the foregoing, this Court shall not take the application of such limited liability rule,
which is a matter of near absolute application in other jurisdictions, so lightly as to merely
"imply" its inapplicability, because as could be seen, the reasons for its being are still
apparently much in existence and highly regarded.
We now come to its applicability in the instant case. In the few instances when the matter
was considered by this Court, we have been consistent in this jurisdiction in holding that
the only time the Limited Liability Rule does not apply is when there is an actual finding of
negligence on the part of the vessel owner or agent (Yango v. Laserna, 73 Phil. 330 [1941];
Manila Steamship Co., Inc. v. Abdulhanan, 101 Phil. 32 [1957]; Heirs of Amparo delos
Santos v. Court of Appeals, 186 SCRA 649 [1967]). The pivotal question, thus, is whether
there is a finding of such negligence on the part of the owner in the instant case.
A careful reading of the decision rendered by the trial court in Civil Case No. 144425 (pp. 27-
33, Rollo) as well as the entirety of the records in the instant case will show that there has
been no actual finding of negligence on the part of petitioner. In its Decision, the trial court
merely held that:
. . . Considering the foregoing reasons, the Court holds that the vessel M/V
"Aboitiz" and its cargo were not lost due to fortuitous event or force
majeure." (p. 32, Rollo)
The same is true of the decision of this Court in G.R. No. 89757 (pp. 71-86, Rollo) affirming
the decision of the Court of Appeals in CA-G.R. CV No. 10609 (pp. 34-50, Rollo) since both
decisions did not make any new and additional finding of fact. Both merely affirmed the
factual findings of the trial court, adding that the cause of the sinking of the vessel was
because of unseaworthiness due to the failure of the crew and the master to exercise
extraordinary diligence. Indeed, there appears to have been no evidence presented sufficient
to form a conclusion that petitioner shipowner itself was negligent, and no tribunal, including
this Court will add or subtract to such evidence to justify a conclusion to the contrary.
The qualified nature of the meaning of "unseaworthiness," under the peculiar circumstances
of this case is underscored by the fact that in the Country Banker's case, supra, arising from
the same sinking, the Court sustained the decision of the Court of Appeals that the sinking of
the M/V P. Aboitiz was due to force majeure.
On this point, it should be stressed that unseaworthiness is not a fault that can be laid
squarely on petitioner's lap, absent a factual basis for such a conclusion. The
unseaworthiness found in some cases where the same has been ruled to exist is directly
attributable to the vessel's crew and captain, more so on the part of the latter since Article
612 of the Code of Commerce provides that among the inherent duties of a captain is to
examine a vessel before sailing and to comply with the laws of navigation. Such a
construction would also put matters to rest relative to the decision of the Board of Marine
Inquiry. While the conclusion therein exonerating the captain and crew of the vessel was not
sustained for lack of basis, the finding therein contained to the effect that the vessel was
seaworthy deserves merit. Despite appearances, it is not totally incompatible with the
findings of the trial court and the Court of Appeals, whose finding of "unseaworthiness"
clearly did not pertain to the structural condition of the vessel which is the basis of the BMI's
findings, but to the condition it was in at the time of the sinking, which condition was a result
of the acts of the captain and the crew.
The rights of a vessel owner or agent under the Limited Liability Rule are akin to those of the
rights of shareholders to limited liability under our corporation law. Both are privileges granted
by statute, and while not absolute, must be swept aside only in the established existence of
the most compelling of reasons. In the absence of such reasons, this Court chooses to
exercise prudence and shall not sweep such rights aside on mere whim or surmise, for even
in the existence of cause to do so, such incursion is definitely punitive in nature and must
never be taken lightly.
More to the point, the rights of parties to claim against an agent or owner of a vessel may be
compared to those of creditors against an insolvent corporation whose assets are not enough
to satisfy the totality of claims as against it. While each individual creditor may, and in fact
shall, be allowed to prove the actual amounts of their respective claims, this does not mean
that they shall all be allowed to recover fully thus favoring those who filed and proved their
claims sooner to the prejudice of those who come later. In such an instance, such creditors
too would not also be able to gain access to the assets of the individual shareholders, but
must limit their recovery to what is left in the name of the corporation. Thus, in the case
of Lipana v. Development Bank of Rizal earlier cited, We held that:
In the instant case, the stay of execution of judgment is warranted by the fact
that the respondent bank was placed under receivership. To execute the
judgment would unduly deplete the assets of respondent bank to the obvious
prejudice of other depositors and creditors, since, as aptly stated in Central
Bank v. Morfe (63 SCRA 114), after the Monetary Board has declared that a
bank is insolvent and has ordered it to cease operations, the Board becomes
the trustee of its assets for the equal benefit of all creditors, and after its
insolvency, one cannot obtain an advantage or preference over another by
an attachment, execution or otherwise. (at p. 261).
In both insolvency of a corporation and the sinking of a vessel, the claimants or creditors are
limited in their recovery to the remaining value of accessible assets. In the case of an
insolvent corporation, these are the residual assets of the corporation left over from its
operations. In the case of a lost vessel, these are the insurance proceeds and pending
freightage for the particular voyage.
In the instant case, there is, therefore, a need to collate all claims preparatory to their
satisfaction from the insurance proceeds on the vessel M/V P. Aboitiz and its pending
freightage at the time of its loss. No claimant can be given precedence over the others by the
simple expedience of having filed or completed its action earlier than the rest. Thus,
execution of judgment in earlier completed cases, even those already final and executory,
must be stayed pending completion of all cases occasioned by the subject sinking. Then and
only then can all such claims be simultaneously settled, either completely or pro-rata should
the insurance proceeds and freightage be not enough to satisfy all claims.
Finally, the Court notes that petitioner has provided this Court with a list of all pending cases
(pp. 175 to 183,Rollo), together with the corresponding claims and the pro-rated share of
each. We likewise note that some of these cases are still with the Court of Appeals, and
some still with the trial courts and which probably are still undergoing trial. It would not,
therefore, be entirely correct to preclude the trial courts from making their own findings of fact
in those cases and deciding the same by allotting shares for these claims, some of which,
after all, might not prevail, depending on the evidence presented in each. We, therefore, rule
that the pro-rated share of each claim can only be found after all the cases shall have been
decided.
In fairness to the claimants, and as a matter of equity, the total proceeds of the insurance and
pending freightage should now be deposited in trust. Moreover, petitioner should institute the
necessary limitation and distribution action before the proper admiralty court within 15 days
from the finality of this decision, and thereafter deposit with it the proceeds from the
insurance company and pending freightage in order to safeguard the same pending final
resolution of all incidents, for final pro-rating and settlement thereof.
ACCORDINGLY, the petition is hereby GRANTED, and the Orders of the Regional Trial
Court of Manila, Branch IV dated April 30, 1991 and the Court of Appeals dated June 21,
1991 are hereby set aside. The trial court is hereby directed to desist from proceeding with
the execution of the judgment rendered in Civil Case No. 144425 pending determination of
the totality of claims recoverable from the petitioner as the owner of the M/V P. Aboitiz.
Petitioner is directed to institute the necessary action and to deposit the proceeds of the
insurance of subject vessel as above-described within fifteen (15) days from finality of this
decision. The temporary restraining order issued in this case dated August 7, 1991 is hereby
made permanent. SO ORDERED.
G.R. No. 101503 September 15, 1993
PLANTERS PRODUCTS, INC., petitioner, vs. COURT OF APPEALS, SORIAMONT
STEAMSHIP AGENCIES AND KYOSEI KISEN KABUSHIKI KAISHA,respondents.
BELLOSILLO, J.:
Does a charter-party 1 between a shipowner and a charterer transform a common carrier into
a private one as to negate the civil law presumption of negligence in case of loss or damage
to its cargo?
Planters Products, Inc. (PPI), purchased from Mitsubishi International Corporation
(MITSUBISHI) of New York, U.S.A., 9,329.7069 metric tons (M/T) of Urea 46% fertilizer
which the latter shipped in bulk on 16 June 1974 aboard the cargo vessel M/V "Sun Plum"
owned by private respondent Kyosei Kisen Kabushiki Kaisha (KKKK) from Kenai, Alaska,
U.S.A., to Poro Point, San Fernando, La Union, Philippines, as evidenced by Bill of Lading
No. KP-1 signed by the master of the vessel and issued on the date of departure.
On 17 May 1974, or prior to its voyage, a time charter-party on the vessel M/V "Sun Plum"
pursuant to the Uniform General Charter 2 was entered into between Mitsubishi as
shipper/charterer and KKKK as shipowner, in Tokyo, Japan. 3Riders to the aforesaid charter-
party starting from par. 16 to 40 were attached to the pre-printed agreement. Addenda Nos.
1, 2, 3 and 4 to the charter-party were also subsequently entered into on the 18th, 20th, 21st
and 27th of May 1974, respectively.
Before loading the fertilizer aboard the vessel, four (4) of her holds 4 were all presumably
inspected by the charterer's representative and found fit to take a load of urea in bulk
pursuant to par. 16 of the charter-party which reads:
16. . . . At loading port, notice of readiness to be accomplished by certificate
from National Cargo Bureau inspector or substitute appointed by charterers
for his account certifying the vessel's readiness to receive cargo spaces. The
vessel's hold to be properly swept, cleaned and dried at the vessel's
expense and the vessel to be presented clean for use in bulk to the
satisfaction of the inspector before daytime commences. (emphasis
supplied)
After the Urea fertilizer was loaded in bulk by stevedores hired by and under the supervision
of the shipper, the steel hatches were closed with heavy iron lids, covered with three (3)
layers of tarpaulin, then tied with steel bonds. The hatches remained closed and tightly
sealed throughout the entire voyage. 5
Upon arrival of the vessel at her port of call on 3 July 1974, the steel pontoon hatches were
opened with the use of the vessel's boom. Petitioner unloaded the cargo from the holds into
its steelbodied dump trucks which were parked alongside the berth, using metal scoops
attached to the ship, pursuant to the terms and conditions of the charter-partly (which
provided for an F.I.O.S. clause). 6 The hatches remained open throughout the duration of the
discharge. 7
Each time a dump truck was filled up, its load of Urea was covered with tarpaulin before it
was transported to the consignee's warehouse located some fifty (50) meters from the wharf.
Midway to the warehouse, the trucks were made to pass through a weighing scale where
they were individually weighed for the purpose of ascertaining the net weight of the cargo.
The port area was windy, certain portions of the route to the warehouse were sandy and the
weather was variable, raining occasionally while the discharge was in progress. 8 The
petitioner's warehouse was made of corrugated galvanized iron (GI) sheets, with an opening
at the front where the dump trucks entered and unloaded the fertilizer on the warehouse
floor. Tarpaulins and GI sheets were placed in-between and alongside the trucks to contain
spillages of the ferilizer. 9
It took eleven (11) days for PPI to unload the cargo, from 5 July to 18 July 1974 (except July
12th, 14th and 18th).10 A private marine and cargo surveyor, Cargo Superintendents
Company Inc. (CSCI), was hired by PPI to determine the "outturn" of the cargo shipped, by
taking draft readings of the vessel prior to and after discharge. 11 The survey report
submitted by CSCI to the consignee (PPI) dated 19 July 1974 revealed a shortage in the
cargo of 106.726 M/T and that a portion of the Urea fertilizer approximating 18 M/T was
contaminated with dirt. The same results were contained in a Certificate of
Shortage/Damaged Cargo dated 18 July 1974 prepared by PPI which showed that the cargo
delivered was indeed short of 94.839 M/T and about 23 M/T were rendered unfit for
commerce, having been polluted with sand, rust and dirt. 12
Consequently, PPI sent a claim letter dated 18 December 1974 to Soriamont Steamship
Agencies (SSA), the resident agent of the carrier, KKKK, for P245,969.31 representing the
cost of the alleged shortage in the goods shipped and the diminution in value of that portion
said to have been contaminated with dirt. 13
Respondent SSA explained that they were not able to respond to the consignee's claim for
payment because, according to them, what they received was just a request for shortlanded
certificate and not a formal claim, and that this "request" was denied by them because they
"had nothing to do with the discharge of the shipment." 14Hence, on 18 July 1975, PPI filed
an action for damages with the Court of First Instance of Manila. The defendant carrier
argued that the strict public policy governing common carriers does not apply to them
because they have become private carriers by reason of the provisions of the charter-party.
The court a quo however sustained the claim of the plaintiff against the defendant carrier for
the value of the goods lost or damaged when it ruled thus: 15
. . . Prescinding from the provision of the law that a common carrier is
presumed negligent in case of loss or damage of the goods it contracts to
transport, all that a shipper has to do in a suit to recover for loss or damage
is to show receipt by the carrier of the goods and to delivery by it of less than
what it received. After that, the burden of proving that the loss or damage
was due to any of the causes which exempt him from liability is shipted to
the carrier, common or private he may be. Even if the provisions of the
charter-party aforequoted are deemed valid, and the defendants considered
private carriers, it was still incumbent upon them to prove that the shortage
or contamination sustained by the cargo is attributable to the fault or
negligence on the part of the shipper or consignee in the loading, stowing,
trimming and discharge of the cargo. This they failed to do. By this omission,
coupled with their failure to destroy the presumption of negligence against
them, the defendants are liable (emphasis supplied).
On appeal, respondent Court of Appeals reversed the lower court and absolved the carrier
from liability for the value of the cargo that was lost or damaged. 16 Relying on the 1968 case
of Home Insurance Co. v. American Steamship Agencies, Inc., 17 the appellate court ruled
that the cargo vessel M/V "Sun Plum" owned by private respondent KKKK was a private
carrier and not a common carrier by reason of the time charterer-party. Accordingly, the Civil
Code provisions on common carriers which set forth a presumption of negligence do not find
application in the case at bar. Thus
. . . In the absence of such presumption, it was incumbent upon the plaintiff-
appellee to adduce sufficient evidence to prove the negligence of the
defendant carrier as alleged in its complaint. It is an old and well settled rule
that if the plaintiff, upon whom rests the burden of proving his cause of
action, fails to show in a satisfactory manner the facts upon which he bases
his claim, the defendant is under no obligation to prove his exception or
defense (Moran, Commentaries on the Rules of Court, Volume 6, p. 2, citing
Belen v. Belen, 13 Phil. 202).
But, the record shows that the plaintiff-appellee dismally failed to prove the
basis of its cause of action, i.e. the alleged negligence of defendant carrier. It
appears that the plaintiff was under the impression that it did not have to
establish defendant's negligence. Be that as it may, contrary to the trial
court's finding, the record of the instant case discloses ample evidence
showing that defendant carrier was not negligent in performing its obligation .
. . 18 (emphasis supplied).
Petitioner PPI appeals to us by way of a petition for review assailing the decision of the Court
of Appeals. Petitioner theorizes that the Home Insurance case has no bearing on the present
controversy because the issue raised therein is the validity of a stipulation in the charter-party
delimiting the liability of the shipowner for loss or damage to goods cause by want of due
deligence on its part or that of its manager to make the vessel seaworthy in all respects, and
not whether the presumption of negligence provided under the Civil Code applies only to
common carriers and not to private carriers. 19 Petitioner further argues that since the
possession and control of the vessel remain with the shipowner, absent any stipulation to the
contrary, such shipowner should made liable for the negligence of the captain and crew. In
fine, PPI faults the appellate court in not applying the presumption of negligence against
respondent carrier, and instead shifting the onus probandi on the shipper to show want of
due deligence on the part of the carrier, when he was not even at hand to witness what
transpired during the entire voyage.
As earlier stated, the primordial issue here is whether a common carrier becomes a private
carrier by reason of a charter-party; in the negative, whether the shipowner in the instant
case was able to prove that he had exercised that degree of diligence required of him under
the law.
It is said that etymology is the basis of reliable judicial decisions in commercial cases. This
being so, we find it fitting to first define important terms which are relevant to our discussion.
A "charter-party" is defined as a contract by which an entire ship, or some principal part
thereof, is let by the owner to another person for a specified time or use; 20 a contract of
affreightment by which the owner of a ship or other vessel lets the whole or a part of her to a
merchant or other person for the conveyance of goods, on a particular voyage, in
consideration of the payment of freight; 21 Charter parties are of two types: (a) contract of
affreightment which involves the use of shipping space on vessels leased by the owner in
part or as a whole, to carry goods for others; and, (b) charter by demise or bareboat charter,
by the terms of which the whole vessel is let to the charterer with a transfer to him of its entire
command and possession and consequent control over its navigation, including the master
and the crew, who are his servants. Contract of affreightment may either be time charter,
wherein the vessel is leased to the charterer for a fixed period of time, or voyage charter,
wherein the ship is leased for a single voyage. 22 In both cases, the charter-party provides
for the hire of vessel only, either for a determinate period of time or for a single or
consecutive voyage, the shipowner to supply the ship's stores, pay for the wages of the
master and the crew, and defray the expenses for the maintenance of the ship.
Upon the other hand, the term "common or public carrier" is defined in Art. 1732 of the Civil
Code. 23 The definition extends to carriers either by land, air or water which hold themselves
out as ready to engage in carrying goods or transporting passengers or both for
compensation as a public employment and not as a casual occupation. The distinction
between a "common or public carrier" and a "private or special carrier" lies in the character of
the business, such that if the undertaking is a single transaction, not a part of the general
business or occupation, although involving the carriage of goods for a fee, the person or
corporation offering such service is a private carrier. 24
Article 1733 of the New Civil Code mandates that common carriers, by reason of the nature
of their business, should observe extraordinary diligence in the vigilance over the goods they
carry. 25 In the case of private carriers, however, the exercise of ordinary diligence in the
carriage of goods will suffice. Moreover, in the case of loss, destruction or deterioration of the
goods, common carriers are presumed to have been at fault or to have acted negligently, and
the burden of proving otherwise rests on them. 26 On the contrary, no such presumption
applies to private carriers, for whosoever alleges damage to or deterioration of the goods
carried has the onus of proving that the cause was the negligence of the carrier.
It is not disputed that respondent carrier, in the ordinary course of business, operates as a
common carrier, transporting goods indiscriminately for all persons. When petitioner
chartered the vessel M/V "Sun Plum", the ship captain, its officers and compliment were
under the employ of the shipowner and therefore continued to be under its direct supervision
and control. Hardly then can we charge the charterer, a stranger to the crew and to the ship,
with the duty of caring for his cargo when the charterer did not have any control of the means
in doing so. This is evident in the present case considering that the steering of the ship, the
manning of the decks, the determination of the course of the voyage and other technical
incidents of maritime navigation were all consigned to the officers and crew who were
screened, chosen and hired by the shipowner. 27
It is therefore imperative that a public carrier shall remain as such, notwithstanding the
charter of the whole or portion of a vessel by one or more persons, provided the charter is
limited to the ship only, as in the case of a time-charter or voyage-charter. It is only when the
charter includes both the vessel and its crew, as in a bareboat or demise that a common
carrier becomes private, at least insofar as the particular voyage covering the charter-party is
concerned. Indubitably, a shipowner in a time or voyage charter retains possession and
control of the ship, although her holds may, for the moment, be the property of the
charterer. 28
Respondent carrier's heavy reliance on the case of Home Insurance Co. v. American
Steamship Agencies, supra, is misplaced for the reason that the meat of the controversy
therein was the validity of a stipulation in the charter-party exempting the shipowners from
liability for loss due to the negligence of its agent, and not the effects of a special charter on
common carriers. At any rate, the rule in the United States that a ship chartered by a single
shipper to carry special cargo is not a common carrier, 29 does not find application in our
jurisdiction, for we have observed that the growing concern for safety in the transportation of
passengers and /or carriage of goods by sea requires a more exacting interpretation of
admiralty laws, more particularly, the rules governing common carriers.
We quote with approval the observations of Raoul Colinvaux, the learned barrister-at-
law 30
As a matter of principle, it is difficult to find a valid distinction between cases
in which a ship is used to convey the goods of one and of several persons.
Where the ship herself is let to a charterer, so that he takes over the charge
and control of her, the case is different; the shipowner is not then a carrier.
But where her services only are let, the same grounds for imposing a strict
responsibility exist, whether he is employed by one or many. The master and
the crew are in each case his servants, the freighter in each case is usually
without any representative on board the ship; the same opportunities for
fraud or collusion occur; and the same difficulty in discovering the truth as to
what has taken place arises . . .
In an action for recovery of damages against a common carrier on the goods shipped, the
shipper or consignee should first prove the fact of shipment and its consequent loss or
damage while the same was in the possession, actual or constructive, of the carrier.
Thereafter, the burden of proof shifts to respondent to prove that he has exercised
extraordinary diligence required by law or that the loss, damage or deterioration of the cargo
was due to fortuitous event, or some other circumstances inconsistent with its liability. 31
To our mind, respondent carrier has sufficiently overcome, by clear and convincing proof,
the prima faciepresumption of negligence.
The master of the carrying vessel, Captain Lee Tae Bo, in his deposition taken on 19 April
1977 before the Philippine Consul and Legal Attache in the Philippine Embassy in Tokyo,
Japan, testified that before the fertilizer was loaded, the four (4) hatches of the vessel were
cleaned, dried and fumigated. After completing the loading of the cargo in bulk in the ship's
holds, the steel pontoon hatches were closed and sealed with iron lids, then covered with
three (3) layers of serviceable tarpaulins which were tied with steel bonds. The hatches
remained close and tightly sealed while the ship was in transit as the weight of the steel
covers made it impossible for a person to open without the use of the ship's boom. 32
It was also shown during the trial that the hull of the vessel was in good condition, foreclosing
the possibility of spillage of the cargo into the sea or seepage of water inside the hull of the
vessel. 33 When M/V "Sun Plum" docked at its berthing place, representatives of the
consignee boarded, and in the presence of a representative of the shipowner, the foreman,
the stevedores, and a cargo surveyor representing CSCI, opened the hatches and inspected
the condition of the hull of the vessel. The stevedores unloaded the cargo under the watchful
eyes of the shipmates who were overseeing the whole operation on rotation basis. 34
Verily, the presumption of negligence on the part of the respondent carrier has been
efficaciously overcome by the showing of extraordinary zeal and assiduity exercised by the
carrier in the care of the cargo. This was confirmed by respondent appellate court thus
. . . Be that as it may, contrary to the trial court's finding, the record of the
instant case discloses ample evidence showing that defendant carrier was
not negligent in performing its obligations. Particularly, the following
testimonies of plaintiff-appellee's own witnesses clearly show absence of
negligence by the defendant carrier; that the hull of the vessel at the time of
the discharge of the cargo was sealed and nobody could open the same
except in the presence of the owner of the cargo and the representatives of
the vessel (TSN, 20 July 1977, p. 14); that the cover of the hatches was
made of steel and it was overlaid with tarpaulins, three layers of tarpaulins
and therefore their contents were protected from the weather (TSN, 5 April
1978, p. 24); and, that to open these hatches, the seals would have to be
broken, all the seals were found to be intact (TSN, 20 July 1977, pp. 15-16)
(emphasis supplied).
The period during which private respondent was to observe the degree of diligence required
of it as a public carrier began from the time the cargo was unconditionally placed in its charge
after the vessel's holds were duly inspected and passed scrutiny by the shipper, up to and
until the vessel reached its destination and its hull was reexamined by the consignee, but
prior to unloading. This is clear from the limitation clause agreed upon by the parties in the
Addendum to the standard "GENCON" time charter-party which provided for an F.I.O.S.,
meaning, that the loading, stowing, trimming and discharge of the cargo was to be done by
the charterer, free from all risk and expense to the carrier. 35 Moreover, a shipowner is liable
for damage to the cargo resulting from improper stowage only when the stowing is done by
stevedores employed by him, and therefore under his control and supervision, not when the
same is done by the consignee or stevedores under the employ of the latter. 36
Article 1734 of the New Civil Code provides that common carriers are not responsible for the
loss, destruction or deterioration of the goods if caused by the charterer of the goods or
defects in the packaging or in the containers. The Code of Commerce also provides that all
losses and deterioration which the goods may suffer during the transportation by reason of
fortuitous event, force majeure, or the inherent defect of the goods, shall be for the account
and risk of the shipper, and that proof of these accidents is incumbent upon the
carrier. 37 The carrier, nonetheless, shall be liable for the loss and damage resulting from the
preceding causes if it is proved, as against him, that they arose through his negligence or by
reason of his having failed to take the precautions which usage has established among
careful persons. 38
Respondent carrier presented a witness who testified on the characteristics of the fertilizer
shipped and the expected risks of bulk shipping. Mr. Estanislao Chupungco, a chemical
engineer working with Atlas Fertilizer, described Urea as a chemical compound consisting
mostly of ammonia and carbon monoxide compounds which are used as fertilizer. Urea also
contains 46% nitrogen and is highly soluble in water. However, during storage, nitrogen and
ammonia do not normally evaporate even on a long voyage, provided that the temperature
inside the hull does not exceed eighty (80) degrees centigrade. Mr. Chupungco further added
that in unloading fertilizer in bulk with the use of a clamped shell, losses due to spillage
during such operation amounting to one percent (1%) against the bill of lading is deemed
"normal" or "tolerable." The primary cause of these spillages is the clamped shell which does
not seal very tightly. Also, the wind tends to blow away some of the materials during the
unloading process.
The dissipation of quantities of fertilizer, or its daterioration in value, is caused either by an
extremely high temperature in its place of storage, or when it comes in contact with water.
When Urea is drenched in water, either fresh or saline, some of its particles dissolve. But the
salvaged portion which is in liquid form still remains potent and usable although no longer
saleable in its original market value.
The probability of the cargo being damaged or getting mixed or contaminated with foreign
particles was made greater by the fact that the fertilizer was transported in "bulk," thereby
exposing it to the inimical effects of the elements and the grimy condition of the various
pieces of equipment used in transporting and hauling it.
The evidence of respondent carrier also showed that it was highly improbable for sea water
to seep into the vessel's holds during the voyage since the hull of the vessel was in good
condition and her hatches were tightly closed and firmly sealed, making the M/V "Sun Plum"
in all respects seaworthy to carry the cargo she was chartered for. If there was loss or
contamination of the cargo, it was more likely to have occurred while the same was being
transported from the ship to the dump trucks and finally to the consignee's warehouse. This
may be gleaned from the testimony of the marine and cargo surveyor of CSCI who
supervised the unloading. He explained that the 18 M/T of alleged "bar order cargo" as
contained in their report to PPI was just an approximation or estimate made by them after the
fertilizer was discharged from the vessel and segregated from the rest of the cargo.
The Court notes that it was in the month of July when the vessel arrived port and unloaded
her cargo. It rained from time to time at the harbor area while the cargo was being discharged
according to the supply officer of PPI, who also testified that it was windy at the waterfront
and along the shoreline where the dump trucks passed enroute to the consignee's
warehouse.
Indeed, we agree with respondent carrier that bulk shipment of highly soluble goods like
fertilizer carries with it the risk of loss or damage. More so, with a variable weather condition
prevalent during its unloading, as was the case at bar. This is a risk the shipper or the owner
of the goods has to face. Clearly, respondent carrier has sufficiently proved the inherent
character of the goods which makes it highly vulnerable to deterioration; as well as the
inadequacy of its packaging which further contributed to the loss. On the other hand, no proof
was adduced by the petitioner showing that the carrier was remise in the exercise of due
diligence in order to minimize the loss or damage to the goods it carried.
WHEREFORE, the petition is DISMISSED. The assailed decision of the Court of Appeals,
which reversed the trial court, is AFFIRMED. Consequently, Civil Case No. 98623 of the then
Court of the First Instance, now Regional Trial Court, of Manila should be, as it is
hereby DISMISSED.
Costs against petitioner.
SO ORDERED.













G.R. No. L-47447-47449 October 29, 1941
TEODORO R. YANGCO, ETC., petitioner, vs. MANUEL LASERNA, ET AL., respondents.
MORAN, J.:
At about one o'clock in the afternoon of May 26, 1927, the steamer S.S. Negros, belonging to
petitioner here, Teodoro R. Yangco, left the port of Romblon on its retun trip to Manila.
Typhoon signal No. 2 was then up, of which fact the captain was duly advised and his
attention thereto called by the passengers themselves before the vessel set sail. The boat
was overloaded as indicated by the loadline which was 6 to 7 inches below the surface of the
water. Baggage, trunks and other equipments were heaped on the upper deck, the hold
being packed to capacity. In addition, the vessel carried thirty sacks of crushed marble and
about one hundred sacks of copra and some lumber. The passengers, numbering about 180,
were overcrowded, the vessel's capacity being limited to only 123 passengers. After two
hours of sailing, the boat encountered strong winds and rough seas between the islands of
Banton and Simara, and as the waves splashed the ladies' dresses, the awnings were
lowered. As the sea became increasingly violent, the captain ordered the vessel to turn left,
evidently to return to port, but in the manuever, the vessel was caught sidewise by a big
wave which caused it to capsize and sink. Many of the passengers died in the mishap,
among them being Antolin Aldaa and his son Victorioso, husband and son, respectively, of
Emilia Bienvenida who, together with her other children and a brother-in-law, are
respondents in G.R. No. 47447; Casiana Laserna, the daughter of respondents Manuel
Laserna and P.A. de Laserna in G.R. 47448; and Genaro Basaa, son of Filomeno Basaa,
respondent in G.R. No. 47449. These respondents instituted in the Court of First Instance of
Capiz separate civil actions against petitioner here to recover damages for the death of the
passengers aforementioned. The court awarded the heirs of Antolin and Victorioso Aldana
the sum of P2,000; the heirs of Casiana Laserna, P590; and those of Genaro Basana, also
P590. After the rendition of the judgment to this effcet, petitioner, by a verified pleading,
sought to abandon th evessel to the plainitffs in the three cases, together with all its
equipments, without prejudice to his right to appeal. The abandonment having been denied,
an appeal was taken to the Court of Appeals, wherein all the judgmnets were affirmed except
that which sums was increased to P4,000. Petitioner, now deceased, appealed and is here
represented by his legal representative.
Brushing aside the incidental issues, the fundamental question here raised is: May the
shipowner or agent, notwithstanding the total loss of the vessel as a result of the negligence
of its captain, be properly held liable in damages for the consequent death of its passengers?
We are of the opinion and so hold that this question is controlled by the provisions of article
587 of the Code of Commerce. Said article reads:
The agent shall also be civilly liable for the indemnities in favor of third persons which
arise from the conduct of the captain in the care of the goods which the vessel
carried; but he may exempt himself therefrom by abandoning the vessel with all her
equipments and the freight he may have earned during the voyage.
The provisions accords a shipowner or agent the right of abandonment; and by necessary
implication, his liability is confined to that which he is entitled as of right to abandon "the
vessel with all her equipments and the freight it may have earned during the voyage." It is
true that the article appears to deal only with the limited liability of shipowners or agents for
damages arising from the misconduct of the captain in the care of the goods which the vessel
carries, but this is a mere deficiency of language and in no way indicates the true extent of
such liability. The consensus of authorities is to the effect that notwithstanding the language
of the aforequoted provision, the benefit of limited liability therein provided for, applies in all
cases wherein the shipowner or agent may properly be held liable for the negligent or illicit
acts of the captain. Dr. Jose Ma. Gonzalez de Echavarri y Vivanco, commenting on said
article, said:
La letra del Codigo, en el articulo 587, presenta una gravisima cuestion. El derecho
de abandono, si se atiende a lo escrito, solo se refiere a las indemnizaciones a que
dierQe lugar la conducta del Capitan en la custodia de los efectos que cargo en el
buque.
Es ese el espiritu del legislador? No; habra derecho de abandono en las
responsabilidades nacidas de obligaciones contraidas por el Capitan y de otros
actos de este? Lo reputamos evidente y, para fortalecer nuestra opinion, basta
copiar el siguiente parrafo de la Exposicion de motivos:
"El proyecto, al aplicar estos principios, se inspira tambien en los intereses
del comercio maritimo, que quedaran mas asegurados ofreciendo a todo el
que contrata con el naviero o Capitan del buque, la garantia real del mismo,
cualesquiera que sean las facultades o atribuciones de que se hallen
investidos." (Echavarri, Codigo de Comercio, Tomo 4, 2. a ed., pags. 483-
484.)
A cursory examination will disclose that the principle of liomited liability of a shipowner or
agent is provided for in but three articles of the Code of Commerce article 587 aforequoted
and article 590 and 837. Article 590 merely reiterates the principle embodied in article 587,
applies the same principle in cases of collision, and it has been observed that said article is
but "a necessary consequences of the right to abandon the vessel given to the shipowner in
article 587 of the Code, and it is one of the many superfluities contained in the Code."
(Lorenzo Benito, Lecciones 352, quoted in Philippine Shipping Co. vs. Garcia, 6 Phil. 281,
282.) In effect, therefore, only articles 587 and 590 are the provisions conatined in our Code
of Commerce on the matter, and the framers of said code had intended those provisions to
embody the universal principle of limited liability in all cases. Thus, in the "Exposicon de
Motivos" of the Code of Commerce, we read:
The present code (1829) does not determine the juridical status of the agent where
such agent is not himself the owner of the vessel. This omission is supplied by the
proposed code, which provides in accordance with the principles of maritime law that
by agent it is to be understood the person intrusted with the provisioning of the
vessel, or the one who represents her in the port in which she happens to be. This
person is the only one who represents the vessel that is to say, the only one who
represents the interests of the owner of the vessel. This provision has therefore
cleared the doubt which existed as to the extent of the liability, both of the agent and
of the owner of the vessel. Such liability is limited by the proposed code to the value
of the vessel and other things appertaining thereto.
In Philippine Shipping Co. vs. Garcia (6 Phil., 281, 284-286), we have expressed ourselves in
such a comprehensive manner as to leave no room for doubt on the applicability of our ratio
decidendi not only to cases of collision but also to those of shipwrecks, etc. We said:
This is the difference which exists between the lawful acts and lawful obligations of
the captain and the liability which he incurs on account of any unlawful act committed
by him. In the first case, the lawful acts and obligations of the captain beneficial to
the vessel may be enforced as against the agent for the reason that such obligations
arise from te the contract of agency (provided, however, that the captain does not
exceed his authority), while as to any liability incurred by the captain through his
unlawful acts, the ship agent is simply subsidiarily civilly liable. This liability of the
agent is limited to the vessel and it does not extend further. For this reason the Code
of Commerce makes the agent liable to the extent of the value of the vessel, as the
codes of the principal maritime nations provide with the vessel, and not individually.
Such is also the spirit of our Code.
The spirit of our code s accurately set forth in a treatise on maritime law, from which
we deem proper to quote the following as the basis of this decision:lawphil.net
"That which distinguishes the maritime from the civil law and even from the
mercantile law in general is the real and hypothecary nature of the former,
and the many securities of a real nature that maritime customs from time
immemorial, the laws, the codes, and the later jurisprudence, have provided
for the protection of the various and conflicting interests which are ventured
and risked in maritime expeditions, such as the interests of the vessel and of
the agent, those of the owners of the cargo and consignees, those who
salvage the ship, those who make loans upon the cargo, those of the sailors
and members of the crew as to their wages, and those of a constructor as to
repairs made to the vessel.
"As evidence of this real nature of the maritime law we have (1) the limitation
of the liability of the agents to the actual value of the vessel and the freight
money, and (2) the right to retain the cargo and the embargo and detention
of the vessel even in cases where the ordinary civil law would not allow more
than a personal action against the debtor or person liable. It will be observed
that these rights are correlative, and naturally so, because if the agent can
exempt himself from liability by abandoning the vessel and freight money,
thus avoiding the possibility of risking his whole fortune in the business, it is
also just that his maritime creditor may for any reason attach the vessel itself
to secure his claim without waiting for a settlement of his rights by a final
judgment, even to the prejudice of a third person.
"This repeals the civil law to such an extent that, in certain cases, where
the mortgaged property islost no personal action lies against the owner or
agent of the vessel. For instance, where the vessel is lost the sailors and
members of the crew cannot recover their wages; in case of collision, the
liability of the agent is limited as aforesaid, and in case of shipwreck, those
who loan their money on the vessel and cargo lose all their rights and cannot
claim reimbursement under the law.
"There are two reasons why it is impossible to do away with these privileges,
to wit: (1) The risk to which the thing is exposed, and (2) the real nature of
the maritime law, exclusively real, according to which the liability of the
parties is limited to a thing which is at the mercy of the waves. If the agent is
only liable with the vessel and freight money and both may be lost through
the accidents of navigation it is only just that the maritime creditor have
some means to obviating this precarious nature of his rights by detaining the
ship, his only security, before it is lost.
"The liens, tacit or legal, which may exist upon the vessel and which a
purchaser of the same would be obliged to respect and recognize are in
addition to those existing in favor of the State by virtue of the privileges
which are granted to it by all the laws pilot, tonnate, and port dues and
other similar charges, the wages of the crew earned during the last voyage
as provided in article 646 of the Code of Commerce, salvage dues under
article 842, the indemnification due to the captain of the vessel in case his
contract is terminated on account of the voluntary sale of the ship and the
insolvency of the owner as provided in article 608, and all other liabilities
arising from collisions under articles 837 and 838."
We are shared in this conclusion by the eminent commentators on the subject. Agustin
Vicente y Gella, asserting, in his "Introduccion al Derecho Mercantil Comparado" 1929
(pages 374-375), the like principle of limited liability of shipowners or agent in cases of
accidents, collisions, shipwrecks, etc., said:
De las responsabilities que pueden resultar como consequencia del comercio
maritimo, y no solo por hechos propios sino tambien por las que se ocasionen por
los del capitan y la tripulacion, responde frente a tercero el naviero que representa el
buque; pero el derecho maritimo es sobre todo tradicional y siguiendo un viejo
principio de la Edad Media la responsabilidad del naviero se organiza de un modo
especifico y particularisimo que no encuentra similar en el derecho general de las
obligaciones.
Una forma corrientisima de verificarse el comercio maritimo durante la epoca
medieval, era prestar un propietario su navio para que cargase en el mercancias
determinada persona, y se hiciese a la mar, yendo al frente de la expedicion un
patron del buque, que llegado al puerto de destino se encargaba de venderlas y
retornaba al de salida despues de adquirir en aquel otros efectos que igualmente
revendia a su regreso, verificado lo cual los beneficios de la expedicion se repartian
entre el dueo del buque, el cargador y el capitan y tripulantes en la proporcion
estipulada. El derecho maritimo empezo a considerar la asociacion asi formada
como una verdadera sociedad mercantil, de responsabilidad limitada, y de acuerdo
con los principios que gobiernan aquella en los casos de accidentes, abordajes,
naufragios, etc., se resolvia que el dueo del buque perdia la nave, el cargador las
mercancias embarcadas y el capitan y la tripulacion su trabajo, sin que en ningun
caso el tercer acreedor pudiese reclamar mayor cantidad de ninguno de ellos,
porque su responsabilidad quedaba limitada a lo que cada uno aporto a la sociedad.
Recogidas estas ideas en el derecho comercial de tiempos posteriores, la
responsabilidad del naviero se edifico sobre aquellos principios, y derogando la
norma general civil de que del cumplimiento de sus obligaciones responde el deudor
con todos sus bienes presentes y futuros, la responsabilidad maritima se considero
siempre limitada ipso jure al patrimonio de mar. Y este es el origen de la regla
trascendental de derecho maritimo segun la cual el naviero se libera de toda
responsabilidad abandonando el buque y el flete a favor de los acreedores.
From the Enciclopedia Juridica Espaola, Vol. 23, p. 347, we read:
Ahora bien: hasta donde se extiende esta responsabilidad del naviero? sobre que
bienes pueden los acreedores resarcirse? Esta es otra especialidad del Derecho
maritimo; en el Derecho comun la responsabilidad es limitada; tambien lo era en el
antiguo Derecho maritimo romano; es daba la actio exercitoria contra el exercitor
navis sin ninguna restriccion, pero en la Edad Media una idea nueva se introdujo en
los usos maritimos. Las cargas resultantes de las expediciones maritimas se
consideraron limitadas por los propietarios de las naves a los valores
comprometidos por ellos en cada expedicion; se separo ficticiamente el patrimonio
de los navieros en dos partes que todavia se designan de una manera bastante
exacta; fortuna de tierra y fortuna de mar o flotante; y se admitio la teoria de que
esta era la que respondia solo de las deudas provinientes de los actos del capitan o
de la tripulacion, es decir, que el conjunto del patrimonio del naviero escaparia a
estas cargas desde el momento en que abandonara la nave y los fletes a los
acreedores. . . .
Escriche in his Diccionario de la Legislacion y Jurisprudencia, Vol. 1, p. 38, observes:
La responsabilidad del naviero, en el caso expuesto, se funda en el principio de
derecho comun de ser responsable todo el que pone al frente de un establecimiento
a una persona, de los daos o perjuicios que ocasionare esta desempeando su
cometido, y en que estando facultado el naviero para la eleccion de capitan de la
nave, viene a tener indirectamente culpa en la negligencia o actos de este que o
casionaron daos o perjuicios, puesto que no se aseguro de su pericia o buena fe.
Limitase, sin embargo, la responsabilidad del naviero a la perdida de la nave, sus
aparejos, y fletes devengados durante el viaje; porque no pudiendo vigilar de un
modo directo e inmediato la conducta del capitan, hubiera sido duro hacerla
extensiva a todos sus bienes que podria comprometer el capitan con sus faltas o
delitos.
The views of these learned commentators, including those of Estasen (Derecho Mercantil,
Vol. 4, 259) and Supino (Derecho Mercantil, pp. 463-464), leave nothing to be desired and
nothing to be doubted on the principle. It only remains to be noted that the rule of limited
liability provided for in our Code of Commerce reflects merely, or is but a restatement,
imperfect though it is, of the almost universal principle on the subject. While previously under
the civil or common law, the owner of a vessel was liable to the full amount for damages
caused by the misconduct of the master, by the general maritime law of modern Europe, the
liability of the shipowner was subsequently limited to his interest in the vessel. (Norwich & N.
Y. Trans. Co. v. Wright, 80 U. S. 104, 20 Law. ed. 585.) A similar limitation was placed by the
British Parliament upon the liability of Englosh shipowners through a series of statutes
beginning in 1734 with the Act of 7 George II, chapter 15. The legislatures of Massachusetts
and Maine followed suit in 1818 and 1821, and finally, Congress enacted the Limited Liability
Act of March 3, 1851, embodying most of the provisions contained in the British Statutes (see
24 R. C. L. pp. 1387-1389). Section 4283 of the Revised Statutes (sec. 183, Tit. 46, Code of
Laws of U. S. A.) reads:
LIABILITY OF OWNER NOT TO EXCEED INTEREST. The liability of the owner
of any vessel, for any embezzlement, loss, or destruction, by any person, of any
property, goods, or merchandise, shipped or put on board of such vessel, or for any
loss, damage, or injury by collision, or for any act, matter or thing, loss, damage, or
forfeiture, done, occasioned, or incurred without the privity, or knowledge of such
owner or owners, shall in no case exceed the amount or value of the interest of such
owner in such vessel, and her freight then pending.
The policy which the rule is designed to promote is the encouragement of shipbuilding and
investment in maritime commerce. (Vide: Norwich & N. Y. Trans. Co. v. Wright, supra; The
Main v. Williams, 152 U. S. 122; 58 C. J. 634.) And it is in that spirit that the American courts
construed the Limited Liability Act of Congress whereby the immunities of the Act were
applied to claims not only for lost goods but also for injuries and "loss of life of passengers,
whether arising under the general law of admiralty, or under Federal or State statutes."
(The City of Columbus, 22 Fed. 460; The Longfellow, 104 Fed. 360; Butler v. Boston &
Savannah Steamship Co., 32 Law. ed. 1017; Craig v. Continental Insurance Co., 35 Law. ed.
836.) The Supreme Court of the United States in Norwich & N. Y. Trans. Co. v. Wright, 80 U.
S. 104, 20 Law. ed. 585, 589-590, accounting for the history of the principle, clinches our
exposition of the supporting authorities:
The history of the limitation of liability of shipowners is matter of common knowledge.
The learned opinion ofJudge Ware in the case of The Rebecca, 1 Ware, 187-194,
leaves little to be desired on the subject. He shows that it originated in the maritime
law of modern Europe; that whilst the civil, as well as the common law, made the
owner responsible to the whole extent of damage caused by the wrongful act or
negligence of the matter or crew, the maritime law only made then liable (if
personally free from blame) to the amount of their interest in the ship. So that, if they
surrendered the ship, they were discharged.
Grotius, in his law of War and Peace, says that men would be deterred from
investing in ships if they thereby incurred the apprehension of being rendered liable
to an indefinite amount by the acts of the master and, therefore, in Holland, they had
never observed the Roman Law on that subject, but had a regulation that the ship
owners should be bound no farther than the value of their ship and freight. His words
are: Navis et eorum quae in navi sunt," "the ship and goods therein." But he is
speaking of the owner's interest; and this, as to the cargo, is the freight thereon, and
in that sense he is understood by the commentators. Boulay Paty, Droit Maritime, tit.
3, sec. 1, p. 276; Book II, c. XI, sec. XIII. The maritime law, as codified in the
celebrated French Ordonance de la Marine, in 1681, expressed the rule thus: 'The
proprietors of vessels shall be responsible for the acts of the master, but they shall
be discharged by abandoning the ship and freight.' Valin, in his commentary on this
passage, lib. 2, tit. 8, art. 2, after specifying certain engagements of the master which
are binding on the owners, without any limit of responsibility, such as contracts for
the benefit of the vessel, made during the voyage (except contracts of bottomry)
says: "With these exceptions it is just that the owner should not be bound for the acts
of the master, except to the amount of the ship and freight. Otherwise he would run
the risk of being ruined by the bad faith or negligence of his captain, and the
apprehension of this would be fatal to the interests of navigation. It is quite sufficient
that he be exposed to the loss of his ship and of the freight, to make it his interest,
independently of any goods he may have on board to select a reliable captain."
Pardessus says: 'The owner is bound civilly for all delinquencies committed by the
captain within the scope of his authority, but he may discharge himself therefrom by
abandoning the ship and freight; and, if they are lost, it suffices for his discharge, to
surrender all claims in respect of the ship and its freight," such as insurance, etc.
Droit Commercial, part 3, tit. 2, c. 3, sec. 2.
The same general doctrine is laid down by many other writers on maritime law. So
that it is evident that, by this law, the owner's liability was coextensive with his
interest in the vessel and its freight, and ceased by his abandonment and surrender
of these to the parties sustaining loss.
In the light of all the foregoing, we therefore hold that if the shipowner or agent may in any
way be held civilly liable at all for injury to or death of passengers arising from the negligence
of the captain in cases of collisions or shipwrecks, his liability is merely co-extensive with his
interest in the vessel such that a total loss thereof results in its extinction. In arriving at this
conclusion, we have not been unmindful of the fact that the ill-fated steamshipNegros, as a
vessel engaged in interisland trade, is a common carrier (De Villata v. Stanely, 32 Phil., 541),
and that the as a vessel engaged in interisland trade, is a common carrier (De
Villata v. Stanely, 32 Phil., 541), and that the relationship between the petitioner and the
passengers who died in the mishap rests on a contract of carriage. But assuming that
petitioner is liable for a breach of contract of carriage, the exclusively "real and hypothecary
nature" of maritime law operates to limit such liability to the value of the vessel, or to the
insurance thereon, if any. In the instant case it does not appear that the vessel was insured.
Whether the abandonment of the vessel sought by the petitioner in the instant case was in
accordance with law of not, is immaterial. The vessel having totally perished, any act of
abandonment would be an idle ceremony.
Judgement is reversed and petitioner is hereby absolved of all the complaints, without costs.


























G.R. No. L-30805 December 26, 1984
DOMINGO ANG, plaintiff-appellant, vs. COMPANIA MARITIMA, MARITIME COMPANY OF
THE PHILIPPINES and C.L. DIOKNO, defendants-appellees.
AQUINO, J.:
This case involves the recovery of damages by the consignee from the carrier in case
of misdelivery of the cargo which action was dismissed by the trial court on the grounds of
lack of cause of action and prescription.
It should be noted that that legal point is already res judicata. In 1967 it was decided in favor
of plaintiff-appellant Domingo Ang in Ang vs. American Steamship Agencies, Inc., 125 Phil.
543 and 125 Phil. 1040, three cases. As observed by Ang's counsel, the facts of those cases
and the instant case are the same mutatis mutandis. It was held that Ang has a cause of
action against the carrier which has not prescribed
In the instant case, Ang on September 26, 1963, as the assignee of a bill of lading held by
Yau Yue Commercial Bank, Ltd. of Hongkong, sued Compania Maritima, Maritime Company
of the Philippines and C.L. Diokno. He prayed that the defendants be ordered to pay him
solidarily the sum of US$130,539.68 with interest from February 9, 1963 plus attorney's fees
and damages.
Ang alleged that Yau Yue Commercial Bank agreed to sell to Herminio G. Teves under
certain conditions 559 packages of galvanized steel, Durzinc sheets. The merchandise was
loaded on May 25, 1961 at Yawata, Japan in the M/S Luzon a vessel owned and operated by
the defendants, to be transported to Manila and consigned "to order" of the shipper, Tokyo
Boeki, Ltd., which indorsed the bill of lading issued by Compania Maritima to the order of Yau
Yue Commercial Bank.
Ang further alleged that the defendants, by means of a permit to deliver imported articles,
authorized the delivery of the cargo to Teves who obtained delivery from the Bureau of
Customs without the surrender of the bill of lading and in violation of the terms thereof. Teves
dishonored the draft drawn by Yau Yue against him.
The Hongkong and Shanghai Banking Corporation made the corresponding protest for the
draft's dishonor and returned the bill of lading to Yau Yue. The bill of lading was indorsed to
Ang.
The defendants filed a motion to dismiss Ang's complaint on the ground of lack of cause of
action. Ang opposed the motion. As already stated, the trial court on May 22, 1964 dismissed
the complaint on the grounds of lack of cause of action and prescription since the action was
filed beyond the one-year period provided in the Carriage of Goods by Sea Act.
In the American Steamship Agencies cases, it was held that the action of Ang is based
on misdelivery of the cargo which should be distinguished from loss thereof. The one-year
period provided for in section 3 (6) of the Carriage of Goods by Sea Act refers to loss of the
cargo. What is applicable is the four-year period of prescription for quasi-delicts prescribed in
article 1146 (2) of the Civil Code or ten years for violation of a written contract as provided for
in article 1144 (1) of the same Code.
As Ang filed the action less than three years from the date of the alleged misdelivery of the
cargo, it has not yet prescribed. Ang, as indorsee of the bill of lading, is a real party in interest
with a cause of action for damages.
WHEREFORE, the order of dismissal is reversed and set aside. The case is remanded to the
trial court for further proceedings. Costs against the defendants.
SO ORDERED.








G.R. No. 77638 July 12, 1990
MARITIME AGENCIES & SERVICES, INC., petitioner, vs. COURT OF APPEALS, and
UNION INSURANCE SOCIETY OF CANTON, LTD., respondents.
G.R. No. 77674 July 12, 1990
UNION INSURANCE SOCIETY OF CANTON, LTD., petitioner, vs. COURT OF APPEALS,
HONGKONG ISLAND CO., LTD., MARITIME AGENCIES & SERVICES, INC., and/or VIVA
CUSTOMS BROKERAGE, respondents.
CRUZ, J.:
Transcontinental Fertilizer Company of London chartered from Hongkong Island Shipping
Company of Hongkong the motor vessel named "Hongkong Island" for the shipment of
8073.35 MT (gross) bagged urea from Novorossisk, Odessa, USSR to the Philippines, the
parties signing for this purpose a Uniform General Charter dated August 9, 1979. 1
Of the total shipment, 5,400.04 MT was for the account of Atlas Fertilizer Company as
consignee, 3,400.04 to be discharged in Manila and the remaining 2,000 MT in Cebu. 2 The
goods were insured by the consignee with the Union Insurance Society of Canton, Ltd. for
P6,779,214.00 against all risks. 3
Maritime Agencies & Services, Inc. was appointed as the charterer's agent and Macondray
Company, Inc. as the owner's agent. 4
The vessel arrived in Manila on October 3, 1979, and unloaded part of the consignee's
goods, then proceeded to Cebu on October 19, 1979, to discharge the rest of the cargo. On
October 31, 1979, the consignee filed a formal claim against Maritime, copy furnished
Macondray, for the amount of P87,163.54, representing C & F value of the 1,383 shortlanded
bags. 5 On January 12, 1980, the consignee filed another formal claim, this time against Viva
Customs Brokerage, for the amount of P36,030.23, representing the value of 574 bags of net
unrecovered spillage. 6
These claims having been rejected, the consignee then went to Union, which on demand
paid the total indemnity of P113,123.86 pursuant to the insurance contract. As subrogee of
the consignee, Union then filed on September 19, 1980, a complaint for reimbursement of
this amount, with legal interest and attorney's fees, against Hongkong Island Company, Ltd.,
Maritime Agencies & Services, Inc. and/or Viva Customs Brokerage. 7 On April 20, 1981, the
complaint was amended to drop Viva and implead Macondray Company, Inc. as a new
defendant. 8
On January 4, 1984, after trial, the trial court rendered judgment holding the defendants liable
as follows:
(a) defendants Hongkong Island Co., Ltd., and its local agent Macondray &
Co., Inc. to pay the plaintiff the sum of P87,163.54 plus 12% interest from
April 20, 1981 until the whole amount is fully paid, P1,000.00 as attorney's
fees and to pay one-half (1/2) of the costs; and
(b) defendant Maritime Agencies & Services, Inc., to pay the plaintiff the sum
of P36,030.23, plus 12% interest from April 20, 1981 until the whole amount
is fully paid, P600.00 as attorney's fees and to pay one-half (1/2) of the
costs. 9
Petitioner appealed the decision to the Court of Appeals, which rendered a decision on
November 28, 1986, the dispositive portion of which reads:
WHEREFORE, the decision appealed from is modified, finding the charterer
Transcontinental Fertilizer Co., Ltd. represented by its agent Maritime
Agencies & Services, Inc. liable for the amount of P87,163.54 plus interest at
12% plus attorney's fees of P1,000.00. Defendant Hongkong Island Co., Ltd.
represented by Macondray Co., Inc. are accordingly exempted from any
liability. 10
Maritime and Union filed separate motions for reconsideration which were both denied. The
movants are now before us to question the decision of the respondent court.
In G.R. No. 77638, Maritime pleads non-liability on the ground that it was only the charterer's
agent and should not answer for whatever responsibility might have attached to the principal.
It also argues that the respondent court erred in applying Articles 1734 and 1735 of the Civil
Code in determining the charterer's liability.
In G.R. No. 77674, Union asks for the modification of the decision of the respondent court so
as to make Maritime solidarily and solely liable, its principal not having been impleaded and
so not subject to the jurisdiction of our courts.
These two cases were consolidated and given due course, the parties being required to
submit simultaneous memoranda. All complied, including Hongkong Island Company, Ltd.,
and Macondray Company, Inc., although they pointed out that they were not involved in the
petitions.
There are three general categories of charters, to wit, the demise or "bareboat charter," the
time charter and the voyage charter.
A demise involves the transfer of full possession and control of the vessel for the period
covered by the contract, the charterer obtaining the right to use the vessel and carry
whatever cargo it chooses, while manning and supplying the ship as well. 11
A time charter is a contract to use a vessel for a particular period of time, the charterer
obtaining the right to direct the movements of the vessel during the chartering period,
although the owner retains possession and control. 12
A voyage charter is a contract for the hire of a vessel for one or a series of voyages usually
for the purpose of transporting goods for the charterer. The voyage charter is a contract of
affreightment and is considered a private carriage. 13
Tested by those definitions, the agreement entered into in the cases at bar should be
considered. This brings us to the basic question of who, in this kind of charter, shall be liable
for the cargo.
A voyage charter being a private carriage, the parties may freely contract respecting liability
for damage to the goods and other matters. The basic principle is that "the responsibility for
cargo loss falls on the one who agreed to perform the duty involved" in accordance with the
terms of most voyage charters. 14
This is true in the present cases where the charterer was responsible for loading, stowage
and discharging at the ports visited, while the owner was responsible for the care of the cargo
during the voyage. Thus, Par. 2 of the Uniform General Charter read:
2. Owners are to be responsible for loss of or damage to the goods or for
delay in delivery of the goods only in case the loss, damage or delay has
been caused by the improper or negligent stowage of the goods or by
personal want of due diligence on the part of the Owners or their Manager to
make the vessel in all respects seaworthy and to secure that she is properly
manned, equipped and supplied or by the personal act or default of the
Owners or their Manager.
And the Owners are responsible for no loss or damage or delay arising from
any other cause whatsoever, even from the neglect or default of the Captain
or crew or some other person employed by the Owners onboard or ashore
for whose acts they would, but for this clause, be responsible, or from
unseaworthiness of the vessel on loading or commencement of the voyage
or at any time whatsoever.
Damage caused by contact with or leakage, smell or evaporation from other
goods or by the inflammable or explosive nature or insufficient package of
other goods not to be considered as caused by improper or negligent
stowage, even if in fact so caused.
while Clause 17 of Additional Clauses to Charter party provided:
The cargo shall be loaded, stowed and discharged free of expense to the
vessel under the Master's supervision. However, if required at loading and
discharging ports the vessel is to give free use of winches and power to drive
them gear, runners and ropes. Also slings, as on board. Shore winchmen
are to be employed and they are to be for Charterers' or Shippers' or
Receivers' account as the case may be. Vessel is also to give free use of
sufficient light, as on board, if required for night work. Time lost through
breakdown of winches or derricks is not to count as laytime.
In Home Insurance Co. v. American Steamship Agencies, Inc., 15 the trial court rejected
similar stipulations as contrary to public policy and, applying the provisions of the Civil Code
on common carriers and of the Code of Commerce on the duties of the ship captain, held the
vessel liable in damages for loss of part of the cargo it was carrying. This Court reversed,
declaring as follows:
The provisions of our Civil Code on common carriers were taken from Anglo-
American law. Under American jurisprudence, a common carrier undertaking
to carry a special cargo or chartered to a special person only, becomes a
private carrier. As a private carrier, a stipulation exempting the owner from
liability for the negligence of its agent is not against public policy, and is
deemed valid.
Such doctrine we find reasonable. The Civil Code provisions on common
carriers should not be applied where the carrier is not acting as such but as
a private carrier. The stipulation in the charter party absolving the owner
from liability for loss due to the negligence of its agent would be void only if
the strict public policy governing common carriers is applied. Such policy has
no force where the public at large is not involved, as in the case of a ship
totally chartered for the use of a single party.
Nevertheless, this ruling cannot benefit Hongkong, because there was no showing in that
case that the vessel was at fault. In the cases at bar, the trial court found that 1,383 bags
were shortlanded, which could only mean that they were damaged or lost on board the
vessel before unloading of the shipment. It is not denied that the entire cargo shipped by the
charterer in Odessa was covered by a clean bill of lading. 16 As the bags were in good order
when received in the vessel, the presumption is that they were damaged or lost during the
voyage as a result of their negligent improper stowage. For this the ship owner should be
held liable.
But we do agree that the period for filing the claim is one year, in accordance with the
Carriage of Goods by Sea Act. This was adopted and embodied by our legislature in Com.
Act No. 65 which, as a special law, prevails over the general provisions of the Civil Code on
prescription of actions. Section 3(6) of that Act provides as follows:
In any event, the carrier and the ship shall be discharged from all liability in
respect of loss or damage unless suit is brought within one year after
delivery of the goods or the date when the goods should have been
delivered; Provided, that if a notice of loss for damage; either apparent or
concealed, is not given as provided for in this section, that fact shall not
effect or prejudice the right of the shipper to bring suit within one year after
the delivery of the goods or the date when the goods should have been
delivered.
This period was applied by the Court in the case of Union Carbide, Philippines, Inc. v. Manila
Railroad Co., 17where it was held:
Under the facts of this case, we held that the one-year period was correctly
reckoned by the trial court from December 19, 1961, when, as agreed upon
by the parties and as shown in the tally sheets, the cargo was discharged
from the carrying vessel and delivered to the Manila Port Service. That one-
year period expired on December 19, 1962. Inasmuch as the action was filed
on December 21, 1962, it was barred by the statute of limitations.
The one-year period in the cases at bar should commence on October 20, 1979, when the
last item was delivered to the consignee. 18 Union's complaint was filed against Hongkong
on September 19, 1980, but tardily against Macondray on April 20, 1981. The consequence
is that the action is considered prescribed as far as Macondray is concerned but not against
its principal, which is what matters anyway.
As regards the goods damaged or lost during unloading, the charterer is liable therefor,
having assumed this activity under the charter party "free of expense to the vessel." The
difficulty is that Transcontinental has not been impleaded in these cases and so is beyond
our jurisdiction. The liability imposable upon it cannot be borne by Maritime which, as a mere
agent, is not answerable for injury caused by its principal. It is a well-settled principle that the
agent shall be liable for the act or omission of the principal only if the latter is undisclosed. 19
Union seeks to hold Maritime liable as ship agent on the basis of the ruling of this Court in the
case of Switzerland General Insurance Co., Ltd. v. Ramirez. 20 However, we do not find that
case is applicable.
In that case, the charterer represented itself on the face of the bill of lading as the carrier. The
vessel owner and the charterer did not stipulate in the Charter party on their separate
respective liabilities for the cargo. The loss/damage to the cargo was sustained while it was
still on board or under the custody of the vessel. As the charterer was itself the carrier, it was
made liable for the acts of the ship captain who was responsible for the cargo while under the
custody of the vessel.
As for the charterer's agent, the evidence showed that it represented the vessel when it took
charge of the unloading of the cargo and issued cargo receipts (or tally sheets) in its own
name. Claims against the vessel for the losses/damages sustained by that cargo were also
received and processed by it. As a result, the charterer's agent was also considered a ship
agent and so was held to be solidarily liable with its principal.
The facts in the cases at bar are different. The charterer did not represent itself as a carrier
and indeed assumed responsibility ability only for the unloading of the cargo, i.e, after the
goods were already outside the custody of the vessel. In supervising the unloading of the
cargo and issuing Daily Operations Report and Statement of Facts indicating and describing
the day-to-day discharge of the cargo, Maritime acted in representation of the charterer and
not of the vessel. It thus cannot be considered a ship agent. As a mere charterer's agent, it
cannot be held solidarily liable with Transcontinental for the losses/damages to the cargo
outside the custody of the vessel. Notably, Transcontinental was disclosed as the charterer's
principal and there is no question that Maritime acted within the scope of its authority.
Hongkong and Macondray point out in their memorandum that the appealed decision is not
assailed insofar as it favors them and so has become final as to them. We do not think so.
First of all, we note that they were formally impleaded as respondents in G.R No. 77674 and
submitted their comment and later their memorandum, where they discussed at length their
position vis-a-vis the claims of the other parties. Secondly, we reiterate the rule that even if
issues are not formally and specifically raised on appeal, they may nevertheless be
considered in the interest of justice for a proper decision of the case.itc-asl Thus, we have
held that:
Besides, an unassigned error closely related to the error properly assigned,
or upon which the determination of the question raised by the error properly
assigned is dependent, will be considered by the appellate court
notwithstanding the failure to assign it as error.
At any rate, the Court is clothed with ample authority to review matters, even
if they are not assigned as errors in their appeal, if it finds that their
consideration is necessary in arriving at a just decision of the case. 21
xxx xxx xxx
Issues, though not specifically raised in the pleadings in the appellate court,
may, in the interest of justice, be properly considered by said court in
deciding a case, if they are questions raised in the trial court and are matters
of record having some bearing on the issue submitted which the parties
failed to raise or the lower court ignore(d). 22
xxx xxx xxx
While an assignment of error which is required by law or rule of court has
been held essential to appellate review, and only those assigned will be
considered, there are a number of cases which appear to accord to the
appellate court a broad discretionary power to waive this lack of proper
assignment of errors and consider errors not assigned. 23
In his decision dated January 4, 1984, Judge Artemon de Luna of the Regional Trial Court of
Manila held:
The Court, on the basis of the evidence, finds nothing to disprove the finding
of the marine and cargo surveyors that of the 66,390 bags of urea fertilizer,
65,547 bags were "discharged ex-vessel" and there were "shortlanded"
"1,383 bags", valued at P87,163.54. This sum should be the principal and
primary liability and responsibility of the carrying vessel. Under the contract
for the transportation of goods, the vessel's responsibility commence upon
the actual delivery to, and receipt by the carrier or its authorized agent, until
its final discharge at the port of Manila. Defendant Hongkong Island Co.,
Ltd., as "shipowner" and represented by the defendant Macondray & Co.,
Inc., as its local agent in the Philippines, should be responsible for the value
of the bags of urea fertilizer which were shortlanded.
The remainder of the claim in the amount of P36,030.23, representing the
value of the 574 bags of unrecovered spillages having occurred after the
shipment was discharged from the vessel unto the ex-lighters as well as
during the discharge from the lighters to the truck which transported the
shipment to the consignee's warehouses should be for the account of the
defendant Maritime Agencies & Services, Inc.
We affirm the factual findings but must modify the legal conclusions. As previously discussed,
the liability of Macondray can no longer be enforced because the claim against it has
prescribed; and as for Maritime, it cannot be held liable for the acts of its known principal
resulting in injury to Union. The interest must also be reduced to the legal rate of 6%,
conformably to our ruling in Reformina v. Tomol 24 and Article 2209 of the Civil Code, and
should commence, not on April 20, 1981, but on September 19, 1980, date of the filing of the
original complaint.
WHEREFORE, the decision of the respondent court is SET ASIDE and that of the trial court
is REINSTATED as above modified. The parties shall bear their respective costs.
SO ORDERED.


G.R. No. L-34978 February 26, 1988
ANGELES C. VDA. DE LAT, CAROLINA LAT PEREZ DE TAGLE, and PEDRO C. LAT,
JR., petitioners, vs. THE PUBLIC SERVICE COMMISSION and ROBERTO C.
DIAZ, respondents.
GANCAYCO, J.:
This is a petition for the review of a Decision of the Public Service Commission, dated
February 24, 1972, granting the application of the herein private respondent, Roberto C.
Diaz, for a Certificate of Public Convenience.
The facts of the case are as follows:
On May 11, 1970, the herein private respondent Roberto C. Diaz filed an application with the
respondent Public Service Commission for a Certificate of Public Convenience and Necessity
to operate and maintain an ice plant service in Davao City alleging among others that he is
financially capable to operate and maintain the proposed service, and that public necessity
and convenience will be promoted in a proper and suitable manner with the approval of his
application. 1 Said application was published in two newspapers of general circulation
namely: El Debate and The Philippine Herald, and copies thereof were sent to affected
operators including the herein petitioners Angeles C. Vda. de Lat Carolina Lat, Perez de
Tagle and Pedro C. Lat, Jr. Only the petitioners filed an Opposition to the Application and the
same was submitted on July 3,1970.
By agreement of the parties, the hearing of the Application and the Opposition was set by the
respondent Commission for August 17,1970 at 9 o'clock in the morning. However, when the
case was called for hearing as late as 10 o'clock in the morning on the said date, neither the
oppositors nor their counsel was present. Hence, the respondent Commission declared the
case uncontested and received the evidence of the private respondent.
In this petition, the petitioners contend that they filed an Urgent Motion for Postponement and
of Hearing on August 17, 1970, with the respondent Commission on the ground that their
counsel made the mistake of noting down in his calendar the hearing on August 6, 1970, a
Sunday and that it was already too late when he discovered the said mistake. 2 On August
18,1970,the petitioners filed a motion for reopening of the case and allowance to present
evidence but unfortunately, on the same date respondent Commission issued an Order
granting the private respondent provisional authority to operate the ice plant for six (6)
months. This was based on the findings of the Commission that there was indeed an urgent
need for an ice plant in Davao City as its population has increased tremendously. Petitioners
then filed a motion for reconsideration but this was denied in a Resolution signed by all the
members of the respondent Commission, said motion having been heard by the
Commission en banc. 3
The above-mentioned provisional authority granted to the private respondent was extended
twice. The first extension was given on February 12, 1971 and the second, on December 10,
1971. Finally on February 24, 1972, the respondent Commission handed down a Decision
approving the Application of the private respondent and granting him a Certificate of Public
Convenience to operate a 2-ton ice plant in Davao City.
In this petition for review, the petitioners are asking that the Decision rendered by the
respondent Commission on February 24, 1972 be set aside and declared null and void, as it
has been rendered without due process. Their claim is that they were deprived of their day in
court when they were not allowed to cross-examine the witnesses of the private respondent
and to present their evidence in support of their Opposition. 4 Furthermore, they submit that
the decision awarding the Certificate of Public Convenience to the private respondent was
based merely on the latter's uncorroborated testimony and would amount to competition that
would damage their business. 5
Two issues are raised in this petition. The first is whether or not the petitioners were deprived
of their day in Court to make the proceeding in the respondent Public Service Commission
nun and void. And the other is whether or not the private respondent was validly awarded the
questioned Certificate of Public Convenience to operate an ice plant in Davao City.
As regards the first issue, We reject the petitioners' assertion that their right to due process
was violated. It is very clear from the records that the petitioners were given notice and
opportunity to be heard negating the petitioners' declaration that they were deprived of their
day in court.
Going back to the facts of this Case, We find, as the respondent Commission did, 6 that the
private respondent duly complied with the required notice of hearing. There was
publication. 7 The petitioners could not have been denied the right to be heard because as
their counsel even admits, he agreed to the setting of the hearing of the case for August 19,
1970 at 9 o'clock in the morning. 8
The Petitioners should have known about the date of the hearing. Yet, when the case was
called, neither they nor their counsel showed up. There was not even any word from them.
Their lame excuse that their lawyer made the mistake of noting down the healing on a
Sunday instead of a Monday is unacceptable. There were three of them who presented
themselves as oppositors. It is unbelievable that no one of them found out about the mistake
of their counsel had they shown any slight interest in the case. Their negligence cannot now
be passed on to the respondent Commission which only did the right thing of proceeding with
the case, which had become uncontested.
Nor can it be said that the Decision of the respondent Commission is arbitrary. The
application was not outrightly approved upon reception of the evidence of the private
respondent. On the contrary, the respondent Commission took time to consider and weigh
such evidence as can be seen from the fact that the private respondent was granted only a
provisional authority on August 18, 1970, which was twice extended, before the case was
finally determined on February 24, 1972.
We are convinced that the private respondent deserves to be awarded the Certificate of
Public Convenience. He was able to fully satisfy the requisites before such a certificate may
be granted, namely: (1) the applicant must be a citizen of the Philippines, or a corporation or
co-partnership, association or joint stock company constituted and organized under the laws
of the Philippines, 60 per centum at least of the stock or paid-up capital of which belong
entirely to citizens of the Philippines; (2) the applicant must be financially capable of
undertaking the proposed service and meeting the responsibilities incident to its operations;
and (3) the applicant must prove that the operation of the public service proposed and the
authorization to do business wig promote the public interest in a proper and suitable
manner. 9
There is no question that the private respondent is a Filipino Citizen. Regarding his financial
capacity and public necessity for the ice plant, the finding of the Public Service Commission
on these are relevant, to wit:
It appears from the evidence adduced by the applicant, that he is a co-owner
of a parcel of land situated at Barrio Magugpo, Tagum, Davao (Exhibit "F" &
"F-l") with an area of 15,738 square meters and having a present market
value of P25,000.00 (Exhibits "G" & "G-1") with the Bank of the Philippine
Islands; and that, he is engaged in the fishing business with an investment of
P10,000.00 to P15,000.00 and from which he earns a monthly income of
P2,000.00 to P3,000.00. As regards the necessity for the service applied for,
applicant testified that the only oppositors here are serving almost 1/3 of the
population of Davao; that Davao City is a tourist belt and the population has
increased from 225.7 in 1960 to 389.3 in 1970, as evidenced by Exhibit "1";
that there are two (2) or (3) three barrios in said city; that being a fishing
ground, there are plenty of fish wherein ice is very much needed in order to
preserve them; that he received a request from the Barrio Captain of Bo.
Buhangin, Davao City (Exhibit "J") clamoring for ice in behalf of its 9,431
inhabitants; and that there is an urgent need for an ice plant in Davao City,
to serve the requirements for ice in the said city. 10
Before We end, it is apt to stress the principle that nobody has the exclusive right to secure a
franchise or a Certificate of Public Convenience. The paramount consideration should always
be the public interest and public convenience. 11
Furthermore, the allegation of the petitioners that the grant of Certificate of Public
Convenience to the private respondent would result in ruinous competition amounting to
damage of their business 12 is unconvincing. The grant is for the operation of a mere 2-ton
ice plant and only in Davao City whereas the petitioners are big operators producing no less
than 63 tons of ice daily and who are authorized to operate ice plants not only in the City of
Davao but also in the three Davao provinces. And We have held before, in order that the
opposition based on ruinous competition may prosper, it must be shown that the opponent
would be deprived of their profits on the capital invested in its business. The mere possibility
of reduction in the earnings of a business is not sufficient to prove ruinous competition. It
must be shown that the business would not have sufficient gains to pay a fair rate of interest
on its capital investments. 13
WHEREFORE, the decision of the Public Service Commission appealed from is hereby
AFFIRMED, with costs against the petitioners.
SO ORDERED.





G.R. No. 100727 March 18, 1992
COGEO-CUBAO OPERATORS AND DRIVERS ASSOCIATION, petitioner, vs. THE COURT
OF APPEALS, LUNGSOD SILANGAN TRANSPORT SERVICES, CORP.,
INC., respondents.
MEDIALDEA, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals which
affirmed with modification the decision of the Regional Trial Court awarding damages in favor
of respondent Lungsod Silangan Transport Services Corp., Inc. (Lungsod Corp. for brevity).
The antecedents facts of this case are as follows:
It appears that a certificate of public convenience to operate a jeepney
service was ordered to be issued in favor of Lungsod Silangan to ply the
Cogeo-Cubao route sometime in 1983 on the justification that public
necessity and convenience will best be served, and in the absence of
existing authorized operators on the lined apply for . . . On the other hand,
defendant-Association was registered as a non-stock, non-profit organization
with the Securities and Exchange Commission on October 30, 1985 . . . with
the main purpose of representing plaintiff-appellee for whatever contract
and/or agreement it will have regarding the ownership of units, and the like,
of the members of the Association . . .
Perturbed by plaintiffs' Board Resolution No. 9 . . . adopting a Bandera'
System under which a member of the cooperative is permitted to queue for
passenger at the disputed pathway in exchange for the ticket worth twenty
pesos, the proceeds of which shall be utilized for Christmas programs of the
drivers and other benefits, and on the strength of defendants' registration as
a collective body with the Securities and Exchange Commission,
defendants-appellants, led by Romeo Oliva decided to form a human
barricade on November 11, 1985 and assumed the dispatching of passenger
jeepneys . . . This development as initiated by defendants-appellants gave
rise to the suit for damages.
Defendant-Association's Answer contained vehement denials to the
insinuation of take over and at the same time raised as a defense the
circumstance that the organization was formed not to compete with plaintiff-
cooperative. It, however, admitted that it is not authorized to transport
passengers . . . (pp. 15-16, Rollo)
On July 31, 1989, the trial court rendered a decision in favor of respondent Lungsod Corp.,
the dispositive portion of which states:
WHEREFORE FROM THE FOREGOING CONSIDERATION, the Court
hereby renders judgment in favor of the plaintiff and against the defendants
as follows:
1. Ordering defendants to pay plaintiff the amount of P50,000.00 as actual
damages;
2. Ordering the defendants to pay the plaintiffs the amount of P10,000.00 as
attorney's fees.
SO ORDERED. (P. 39, Rollo)
Not satisfied with the decision, petitioner Association appealed with the Court of Appeals. On
May 27, 1991, respondent appellate court rendered its decision affirming the findings of the
trial court except with regard to the award of actual damages in the amount of P50,000.00
and attorney's fees in the amount of P10,000.00. The Court of Appeals however, awarded
nominal damages to petitioner in the amount of P10,000.00.
Hence, this petition was filed with the petitioner assigning the following errors of the appellate
court:
I. THE RESPONDENT COURT ERRED IN MERELY MODIFYING THE
JUDGMENT OF THE TRIAL COURT.
II. THE RESPONDENT COURT ERRED IN HOLDING THAT THE
PETITIONER USURPED THE PROPERTY RIGHT OF THE PRIVATE
RESPONDENT.
III. AND THE RESPONDENT COURT ERRED IN DENYING THE MOTION
FOR RECONSIDERATION.
Since the assigned errors are interrelated, this Court shall discuss them jointly. The main
issue raised by the petitioner is whether or not the petitioner usurped the property right of the
respondent which shall entitle the latter to the award of nominal damages.
Petitioner contends that the association was formed not to complete with the respondent
corporation in the latter's operation as a common carrier; that the same was organized for the
common protection of drivers from abusive traffic officers who extort money from them, and
for the elimination of the practice of respondent corporation of requiring jeepney owners to
execute deed of sale in favor of the corporation to show that the latter is the owner of the
jeeps under its certificate of public convenience. Petitioner also argues that in organizing the
association, the members thereof are merely exercising their freedom or right to redress their
grievances.
We find the petition devoid of merit.
Under the Public Service Law, a certificate of public convenience is an authorization issued
by the Public Service Commission for the operation of public services for which no franchise
is required by law. In the instant case, a certificate of public convenience was issued to
respondent corporation on January 24, 1983 to operate a public utility jeepney service on the
Cogeo-Cubao route. As found by the trial court, the certificate was issued pursuant to a
decision passed by the Board of Transportation in BOT Case No. 82-565.
A certification of public convenience is included in the term "property" in the broad sense of
the term. Under the Public Service Law, a certificate of public convenience can be sold by the
holder thereof because it has considerable material value and is considered as valuable
asset (Raymundo v. Luneta Motor Co., et al., 58 Phil. 889). Although there is no doubt that it
is private property, it is affected with a public interest and must be submitted to the control of
the government for the common good (Pangasinan Transportation Co. v. PSC, 70 Phil 221).
Hence, insofar as the interest of the State is involved, a certificate of public convenience
does not confer upon the holder any proprietary right or interest or franchise in the route
covered thereby and in the public highways (Lugue v. Villegas, L-22545, Nov . 28, 1969, 30
SCRA 409). However, with respect to other persons and other public utilities, a certificate of
public convenience as property, which represents the right and authority to operate its
facilities for public service, cannot be taken or interfered with without due process of law.
Appropriate actions may be maintained in courts by the holder of the certificate against those
who have not been authorized to operate in competition with the former and those who
invade the rights which the former has pursuant to the authority granted by the Public Service
Commission (A.L. Ammen Transportation Co. v. Golingco. 43 Phil. 280).
In the case at bar, the trial court found that petitioner association forcibly took over the
operation of the jeepney service in the Cogeo-Cubao route without any authorization from the
Public Service Commission and in violation of the right of respondent corporation to operate
its services in the said route under its certificate of public convenience. These were its
findings which were affirmed by the appellate court:
The Court from the testimony of plaintiff's witnesses as well as the
documentary evidences presented is convinced that the actions taken by
defendant herein though it admit that it did not have the authority to transport
passenger did in fact assume the role as a common carrier engaged in the
transport of passengers within that span of ten days beginning November
11, 1985 when it unilaterally took upon itself the operation and dispatching of
jeepneys at St. Mary's St. The president of the defendant corporation.
Romeo Oliva himself in his testimony confirmed that there was indeed a
takeover of the operations at St. Mary's St. . . . (p. 36, Rollo)
The findings of the trial court especially if affirmed by the appellate court bear great weight
and will not be disturbed on appeal before this Court. Although there is no question that
petitioner can exercise their constitutional right to redress their grievances with respondent
Lungsod Corp., the manner by which this constitutional right is to be, exercised should not
undermine public peace and order nor should it violate the legal rights of other persons.
Article 21 of the Civil Code provides that any person who wilfully causes loss or injury to
another in a manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage. The provision covers a situation where a person has a
legal right which was violated by another in a manner contrary to morals, good customs or
public policy. It presupposes loss or injury, material or otherwise, which one may suffer as a
result of such violation. It is clear form the facts of this case that petitioner formed a barricade
and forcibly took over the motor units and personnel of the respondent corporation. This
paralyzed the usual activities and earnings of the latter during the period of ten days and
violated the right of respondent Lungsod Corp. To conduct its operations thru its authorized
officers.
As to the propriety of damages in favor of respondent Lungsod Corp., the respondent
appellate court stated:
. . . it does not necessarily follow that plaintiff-appellee is entitled
to actual damages and attorney's fees. While there may have been
allegations from plaintiff-cooperative showing that it did in fact suffer some
from of injury . . . it is legally unprecise to order the payment of P50,000.00
as actual damages for lack of concrete proof therefor. There is, however, no
denying of the act of usurpation by defendants-appellants which constituted
an invasion of plaintiffs'-appellees' property right. For this, nominal damages
in the amount of P10,000.00 may be granted. (Article 2221, Civil Code). (p.
18,Rollo)
No compelling reason exists to justify the reversal of the ruling of the respondent appellate
court in the case at bar. Article 2222 of the Civil Code states that the court may award
nominal damages in every obligation arising from any source enumerated in Article 1157, or
in every case where any property right has been invaded. Considering the circumstances of
the case, the respondent corporation is entitled to the award of nominal damages.
ACCORDINGLY, the petition is DENIED and the assailed decision of the respondent
appellate court dated May 27, 1991 is AFFIRMED.
SO ORDERED.












































G.R. No. 126204 November 20, 2001
NATIONAL POWER CORPORATION, petitioner, vs. PHILIPP BROTHERS OCEANIC,
INC., respondent.
SANDOVAL-GUTIERREZ, J.:
Where a person merely uses a right pertaining to him, without bad faith or intent to injure, the
fact that damages are thereby suffered by another will not make him liable.1
This principle finds useful application to the present case.
Before us is a petition for review of the Decision2 dated August 27, 1996 of the Court of
Appeals affirming in toto the Decision3 dated January 16, 1992 of the Regional Trial Court,
Branch 57, Makati City.
The facts are:
On May 14, 1987, the National Power Corporation (NAPOCOR) issued invitations to bid for
the supply and delivery of 120,000 metric tons of imported coal for its Batangas Coal-Fired
Thermal Power Plant in Calaca, Batangas. The Philipp Brothers Oceanic, Inc. (PHIBRO)
prequalified and was allowed to participate as one of the bidders. After the public bidding was
conducted, PHIBRO's bid was accepted. NAPOCOR's acceptance was conveyed in a letter
dated July 8, 1987, which was received by PHIBRO on July 15, 1987.The "Bidding Terms
and Specifications"4provide for the manner of shipment of coals, thus:
"SECTION V
SHIPMENT
The winning TENDERER who then becomes the SELLER shall arrange and provide
gearless bulk carrier for the shipment of coal to arrive at discharging port on or
before thirty (30) calendar days after receipt of the Letter of Credit by the SELLER or
its nominee as per Section XIV hereof to meet the vessel arrival schedules at
Calaca, Batangas, Philippines as follows:
60,000 +/ - 10 % July 20, 1987
60,000 +/ - 10% September 4, 1987"5
On July 10, 1987, PHIBRO sent word to NAPOCOR that industrial disputes might soon
plague Australia, the shipment's point of origin, which could seriously hamper PHIBRO's
ability to supply the needed coal.6 From July 23 to July 31, 1987, PHIBRO again apprised
NAPOCOR of the situation in Australia, particularly informing the latter that the ship owners
therein are not willing to load cargo unless a "strike-free" clause is incorporated in the charter
party or the contract of carriage.7 In order to hasten the transfer of coal, PHIBRO proposed
to NAPOCOR that they equally share the burden of a "strike-free" clause. NAPOCOR
refused.
On August 6, 1987, PHIBRO received from NAPOCOR a confirmed and workable letter of
credit. Instead of delivering the coal on or before the thirtieth day after receipt of the Letter of
Credit, as agreed upon by the parties in the July contract, PHIBRO effected its first shipment
only on November 17, 1987.
Consequently, in October 1987, NAPOCOR once more advertised for the delivery of coal to
its Calaca thermal plant. PHIBRO participated anew in this subsequent bidding. On
November 24, 1987, NAPOCOR disapproved PHIBRO's application for pre-qualification to
bid for not meeting the minimum requirements.8 Upon further inquiry, PHIBRO found that the
real reason for the disapproval was its purported failure to satisfy NAPOCOR's demand for
damages due to the delay in the delivery of the first coal shipment.
This prompted PHIBRO to file an action for damages with application for injunction against
NAPOCOR with the Regional Trial Court, Branch 57, Makati City.9 In its complaint, PHIBRO
alleged that NAPOCOR's act of disqualifying it in the October 1987 bidding and in all
subsequent biddings was tainted with malice and bad faith. PHIBRO prayed for actual, moral
and exemplary damages and attorney's fees.
In its answer, NAPOCOR averred that the strikes in Australia could not be invoked as reason
for the delay in the delivery of coal because PHIBRO itself admitted that as of July 28, 1987
those strikes had already ceased. And, even assuming that the strikes were still ongoing,
PHIBRO should have shouldered the burden of a "strike-free" clause because their contract
was "C and F Calaca, Batangas, Philippines," meaning, the cost and freight from the point of
origin until the point of destination would be for the account of PHIBRO. Furthermore,
NAPOCOR claimed that due to PHIBRO's failure to deliver the coal on time, it was compelled
to purchase coal from ASEA at a higher price. NAPOCOR claimed for actual damages in the
amount of P12,436,185.73, representing the increase in the price of coal, and a claim of
P500,000.00 as litigation expenses.10
Thereafter, trial on the merits ensued.
On January 16, 1992, the trial court rendered a decision in favor of PHIBRO, the dispositive
portion of which reads:
"WHEREFORE, judgment is hereby rendered in favor of plaintiff Philipp Brothers
Oceanic Inc. (PHIBRO) and against the defendant National Power Corporation
(NAPOCOR) ordering the said defendant NAPOCOR:
1. To reinstate Philipp Brothers Oceanic, Inc. (PHIBRO) in the defendant National
Power Corporation's list of accredited bidders and allow PHIBRO to participate in any
and all future tenders of National Power Corporation for the supply and delivery of
imported steam coal;
2. To pay Philipp Brothers Oceanic, Inc. (PHIBRO);
a. The peso equivalent at the time of payment of $864,000 as actual
damages,
b. The peso equivalent at the time of payment of $100,000 as moral
damages;
c. The peso equivalent at the time of payment of $50,000 as exemplary
damages;
d. The peso equivalent at the time of payment of $73,231.91 as
reimbursement for expenses, cost of litigation and attorney's fees;
3. To pay the costs of suit;
4. The counterclaims of defendant NAPOCOR are dismissed for lack of merit.
SO ORDERED."11
Unsatisfied, NAPOCOR, through the Solicitor General, elevated the case to the Court of
Appeals. On August 27, 1996, the Court of Appeals rendered a Decision affirming in toto the
Decision of the Regional Trial Court. It ratiocinated that:
"There is ample evidence to show that although PHIBRO's delivery of the shipment
of coal was delayed, the delay was in fact caused by a) Napocor's own delay in
opening a workable letter of credit; and b) the strikes which plaqued the Australian
coal industry from the first week of July to the third week of September 1987. Strikes
are included in the definition of force majeure in Section XVII of the Bidding Terms
and Specifications, (supra), so Phibro is not liable for any delay caused thereby.
Phibro was informed of the acceptance of its bid on July 8, 1987. Delivery of coal
was to be effected thirty (30) days from Napocor's opening of a confirmed and
workable letter of credit. Napocor was only able to do so on August 6, 1987.
By that time, Australia's coal industry was in the middle of a seething controversy
and unrest, occasioned by strikes, overtime bans, mine stoppages. The origin, the
scope and the effects of this industrial unrest are lucidly described in the
uncontroverted testimony of James Archibald, an employee of Phibro and member of
the Export Committee of the Australian Coal Association during the time these
events transpired.
xxx xxx xxx
The records also attest that Phibro periodically informed Napocor of these
developments as early as July 1, 1987, even before the bid was approved. Yet,
Napocor did not forthwith open the letter of credit in order to avoid delay which might
be caused by the strikes and their after-effects.
"Strikes" are undoubtedly included in the force majeure clause of the Bidding Terms
and Specifications (supra). The renowned civilist, Prof. Arturo Tolentino, defines
force majeure as "an event which takes place by accident and could not have been
foreseen." (Civil Code of the Philippines, Volume IV, Obligations and Contracts, 126,
[1991]) He further states:
"Fortuitous events may be produced by two general causes: (1) by Nature,
such as earthquakes, storms, floods, epidemics, fires, etc., and (2) by the act
of man, such as an armed invasion, attack by bandits, governmental
prohibitions, robbery, etc."
Tolentino adds that the term generally applies, broadly speaking, to natural
accidents. In order that acts of man such as a strike, may constitute fortuitous event,
it is necessary that they have the force of an imposition which the debtor could not
have resisted. He cites a parallel example in the case of Philippine National Bank v.
Court of Appeals, 94 SCRA 357 (1979), wherein the Supreme Court said that the
outbreak of war which prevents performance exempts a party from liability.
Hence, by law and by stipulation of the parties, the strikes which took place in
Australia from the first week of July to the third week of September, 1987, exempted
Phibro from the effects of delay of the delivery of the shipment of coal."12
Twice thwarted, NAPOCOR comes to us via a petition for review ascribing to the Court of
Appeals the following errors:
I
"Respondent Court of Appeals gravely and seriously erred in concluding and so holding that
PHIBRO's delay in the delivery of imported coal was due to NAPOCOR's alleged delay in
opening a letter of credit and to forcemajeure, and not to PHIBRO's own deliberate acts and
faults."13
II
"Respondent Court of Appeals gravely and seriously erred in concluding and so holding that
NAPOCOR acted maliciously and unjustifiably in disqualifying PHIBRO from participating in
the December 8, 1987 and future biddings for the supply of imported coal despite the
existence of valid grounds therefor such as serious impairment of its track record."14
III
"Respondent Court of Appeals gravely and seriously erred in concluding and so holding that
PHIBRO was entitled to injunctive relief, to actual or compensatory, moral and exemplary
damages, attorney's fees and litigation expenses despite the clear absence of legal and
factual bases for such award."15
IV
"Respondent Court of Appeals gravely and seriously erred in absolving PHIBRO from any
liability for damages to NAPOCOR for its unjustified and deliberate refusal and/or failure to
deliver the contracted imported coal within the stipulated period."16
V
"Respondent Court of Appeals gravely and seriously erred in dismissing NAPOCOR's
counterclaims for damages and litigation expenses."17
It is axiomatic that only questions of law, not questions of fact, may be raised before this
Court in a petition for review under Rule 45 of the Rules of Court.18 The findings of facts of
the Court of Appeals are conclusive and binding on this Court19 and they carry even more
weight when the said court affirms the factual findings of the trial court.20 Stated differently,
the findings of the Court of .Appeals, by itself, which are supported by substantial evidence,
are almost beyond the power of review by this Court.21
With the foregoing settled jurisprudence, we find it pointless to delve lengthily on the factual
issues raised by petitioner. The existence of strikes in Australia having been duly established
in the lower courts, we are left only with the burden of determining whether or not NAPOCOR
acted wrongfully or with bad faith in disqualifying PHIBRO from participating in the
subsequent public bidding.
Let us consider the case in its proper perspective.
The Court of Appeals is justified in sustaining the Regional Trial Court's decision exonerating
PHIBRO from any liability for damages to NAPOCOR as it was clearly established from the
evidence, testimonial and documentary, that what prevented PHIBRO from complying with its
obligation under the July 1987 contract was the industrial disputes which besieged Australia
during that time. Extant in our Civil Code is the rule that no person shall be responsible for
those events which could not be foreseen, or which, though foreseen, were inevitable.22 This
means that when an obligor is unable to fulfill his obligation because of a fortuitous event or
force majeure, he cannot be held liable for damages for non-performance.23
In addition to the above legal precept, it is worthy to note that PHIBRO and NAPOCOR
explicitly agreed in Section XVII of the "Bidding Terms and Specifications"24 that "neither
seller (PHIBRO) nor buyer (NAPOCOR) shall be liable for any delay in or failure of the
performance of its obligations, other than the payment of money due, if any such delay or
failure is due to Force Majeure." Specifically, they defined force majeure as "any disabling
cause beyond the control of and without fault or negligence of the party, which causes may
include but are not restricted to Acts of God or of the public enemy; acts of the Government
in either its sovereign or contractual capacity; governmental restrictions; strikes, fires, floods,
wars, typhoons, storms, epidemics and quarantine restrictions."
The law is clear and so is the contract between NAPOCOR and PHIBRO. Therefore, we
have no reason to rule otherwise.
However, proceeding from the premise that PHIBRO was prevented by force majeure from
complying with its obligation, does it necessarily follow that NAPOCOR acted unjustly,
capriciously, and unfairly in disapproving PHIBRO's application for pre-qualification to bid?
First, it must be stressed that NAPOCOR was not bound under any contract to approve
PHIBRO's pre-qualification requirements. In fact, NAPOCOR had expressly reserved its right
to reject bids. The Instruction to Bidders found in the "Post-Qualification
Documents/Specifications for the Supply and Delivery of Coal for the Batangas Coal-Fired
Thermal Power Plant I at Calaca, Batangas Philippines,"25 is explicit, thus:
"IB-17 RESERVATION OF NAPOCOR TO REJECT BIDS
NAPOCOR reserves the right to reject any or all bids, to waive any minor informality
in the bids received.The right is also reserved to reject the bids of any bidder who
has previously failed to properly perform or complete on time any and all contracts
for delivery of coal or any supply undertaken by a bidder."26(Emphasis supplied)
This Court has held that where the right to reject is so reserved, the lowest bid or any bid for
that matter may be rejected on a mere technicality.27 And where the government as
advertiser, availing itself of that right, makes its choice in rejecting any or all bids, the losing
bidder has no cause to complain nor right to dispute that choice unless an unfairness or
injustice is shown. Accordingly, a bidder has no ground of action to compel the Government
to award the contract in his favor, nor to compel it to accept his bid. Even the lowest bid or
any bid may be rejected.28 In Celeste v. Court of Appeals,29 we had the occasion to rule:
"Moreover, paragraph 15 of the Instructions to Bidders states that 'the Government
hereby reserves the right to reject any or all bids submitted.' In the case of A.C.
Esguerra and Sons v. Aytona, 4 SCRA 1245, 1249 (1962), we held:
'x x x [I]n the invitation to bid, there is a condition imposed upon the bidders
to the effect that the bidders shall be subject to the right of the government
to reject any and all bids subject to its discretion. Here the government has
made its choice, and unless an unfairness or injustice is shown, the losing
bidders have no cause to complain, nor right to dispute that choice.'
Since there is no evidence to prove bad faith and arbitrariness on the part of the
petitioners in evaluating the bids, we rule that the private respondents are not entitled
to damages representing lost profits." (Emphasis supplied)
Verily, a reservation of the government of its right to reject any bid, generally vests in the
authorities a wide discretion as to who is the best and most advantageous bidder. The
exercise of such discretion involves inquiry, investigation, comparison, deliberation and
decision, which are quasi-judicial functions, and when honestly exercised, may not be
reviewed by the court.30 In Bureau Veritas v. Office of the President,31 we decreed:
"The discretion to accept or reject a bid and award contracts is vested in the
Government agencies entrusted with that function. The discretion given to the
authorities on this matter is of such wide latitude that the Courts will not interfere
therewith, unless it is apparent that it is used as a shield to a fraudulent award.
(Jalandoni v. NARRA, 108 Phil. 486 [1960]) x x x. The exercise of this discretion is a
policy decision that necessitates prior inquiry, investigation, comparison, evaluation,
and deliberation. This task can best be discharged by the Government agencies
concerned, not by the Courts. The role of the Courts is to ascertain whether a branch
or instrumentality of the Government has transgresses its constitutional boundaries.
But the Courts will not interfere with executive or legislative discretion exercised
within those boundaries. Otherwise, it strays into the realm of policy decision-making.
x x x." (Emphasis supplied)
Owing to the discretionary character of the right involved in this case, the propriety of
NAPOCOR's act should therefore be judged on the basis of the general principles regulating
human relations, the forefront provision of which is Article 19 of the Civil Code which provides
that "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."32Accordingly, a
person will be protected only when he acts in the legitimate exercise of his right, that is, when
he acts with prudence and in good faith; but not when he acts with negligence or abuse.33
Did NAPOCOR abuse its right or act unjustly in disqualifying PHIBRO from the public
bidding?
We rule in the negative.
In practice, courts, in the sound exercise of their discretion, will have to determine under all
the facts and circumstances when the exercise of a right is unjust, or when there has been an
abuse of right.34
We went over the record of the case with painstaking solicitude and we are convinced that
NAPOCOR's act of disapproving PHIBRO's application for pre-qualification to bid was without
any intent to injure or a purposive motive to perpetrate damage. Apparently, NAPOCOR
acted on the strong conviction that PHIBRO had a "seriously-impaired" track record.
NAPOCOR cannot be faulted from believing so. At this juncture, it is worth mentioning that at
the time NAPOCOR issued its subsequent Invitation to Bid, i.e., October 1987, PHIBRO had
not yet delivered the first shipment of coal under the July 1987 contract, which was due on or
before September 5, 1987. Naturally, NAPOCOR is justified in entertaining doubts on
PHIBRO's qualification or capability to assume an obligation under a new contract.
Moreover, PHIBRO's actuation in 1987 raised doubts as to the real situation of the coal
industry in Australia. It appears from the records that when NAPOCOR was constrained to
consider an offer from another coal supplier (ASEA) at a price of US$33.44 per metric ton,
PHIBRO unexpectedly offered the immediate delivery of 60,000 metric tons of Ulan steam
coal at US$31.00 per metric ton for arrival at Calaca, Batangas on September 20-21,
1987."35 Of course, NAPOCOR had reason to ponder how come PHIBRO could assure
the immediate delivery of 60,000 metric tons of coal from the same source to arrive at Calaca
not later than September 20/21, 1987 but it could not deliver the coal it had undertaken under
its contract?
Significantly, one characteristic of a fortuitous event, in a legal sense, and consequently in
relations to contracts, is that "the concurrence must be such as to render it impossible for the
debtor to fulfill his obligation in a normal manner."36 Faced with the above circumstance,
NAPOCOR is justified in assuming that, may be, there was really no fortuitous event or
force majeure which could render it impossible for PHIBRO to effect the delivery of coal.
Correspondingly, it is also justified in treating PHIBRO's failure to deliver a serious
impairment of its track record. That the trial court, thereafter, found PHIBRO's unexpected
offer actually a result of its desire to minimize losses on the part of NAPOCOR is
inconsequential. In determining the existence of good faith, the yardstick is the frame of mind
of the actor at the time he committed the act, disregarding actualities or facts outside his
knowledge. We cannot fault NAPOCOR if it mistook PHIBRO's unexpected offer a mere
attempt on the latter's part to undercut ASEA or an indication of PHIBRO's inconsistency.
The circumstances warrant such contemplation.
That NAPOCOR believed all along that PHIBRO's failure to deliver on time was unfounded is
manifest from its letters37 reminding PHIBRO that it was bound to deliver the coal within 30
days from its (PHIBRO's) receipt of the Letter of Credit, otherwise it would be constrained to
take legal action. The same honest belief can be deduced from NAPOCOR's Board
Resolution, thus:
"On the legal aspect, Management stressed that failure of PBO to deliver under the
contract makes them liable for damages, considering that the reasons invoked were
not valid. The measure of the damages will be limited to actual and compensatory
damages. However, it was reported that Philipp Brothers advised they would like to
have continuous business relation with NPC so they are willing to sit down or even
proposed that the case be submitted to the Department of Justice as to avoid a court
action or arbitration.
xxx xxx xxx
On the technical-economic aspect, Management claims that if PBO delivers in
November 1987 and January 1988, there are some advantages. If PBO reacts to any
legal action and fails to deliver, the options are: one, to use 100% Semirara and
second, to go into urgent coal order. The first option will result in a 75 MW derating
and oil will be needed as supplement. We will stand to lose around P30 M. On the
other hand, if NPC goes into an urgent coal order, there will be an additional
expense of $786,000 or P16.11 M, considering the price of the latest purchase with
ASEA. On both points, reliability is decreased."38
The very purpose of requiring a bidder to furnish the awarding authority its pre-qualification
documents is to ensure that only those "responsible" and "qualified" bidders could bid and be
awarded with government contracts. It bears stressing that the award of a contract is
measured not solely by the smallest amount of bid for its performance, but also by the
"responsibility" of the bidder. Consequently, the integrity, honesty, and trustworthiness of the
bidder is to be considered. An awarding official is justified in considering a bidder not
qualified or not responsible if he has previously defrauded the public in such contracts or if,
on the evidence before him, the official bona fide believes the bidder has committed such
fraud, despite the fact that there is yet no judicial determination to that effect.39 Otherwise
stated, if the awarding body bona fide believes that a bidder has seriously impaired its track
record because of a particular conduct, it is justified in disqualifying the bidder. This policy is
necessary to protect the interest of the awarding body against irresponsible bidders.
Thus, one who acted pursuant to the sincere belief that another willfully committed an act
prejudicial to the interest of the government cannot be considered to have acted in bad faith.
Bad faith has always been a question of intention. It is that corrupt motive that operates in the
mind. As understood in law, it contemplates a state of mind affirmatively operating with furtive
design or with some motive of self-interest or ill-will or for ulterior purpose.40While confined
in the realm of thought, its presence may be ascertained through the party's actuation or
through circumstantial evidence.41 The circumstances under which NAPOCOR disapproved
PHIBRO's pre-qualification to bid do not show an intention to cause damage to the latter. The
measure it adopted was one of self-protection. Consequently, we cannot penalize
NAPOCOR for the course of action it took. NAPOCOR cannot be made liable for actual,
moral and exemplary damages.
Corollarily, in awarding to PHIBRO actual damages in the amount of $864,000, the Regional
Trial Court computed what could have been the profits of PHIBRO had NAPOCOR allowed it
to participate in the subsequent public bidding. It ruled that "PHIBRO would have won the
tenders for the supply of about 960,000 metric tons out of at least 1,200,000 metric tons"
from the public bidding of December 1987 to 1990. We quote the trial court's ruling, thus:
". . . PHIBRO was unjustly excluded from participating in at least five (5) tenders
beginning December 1987 to 1990, for the supply and delivery of imported coal with
a total volume of about 1,200,000 metric tons valued at no less than US$32 Million.
(Exhs. "AA," "AA-1-1," to "AA-2"). The price of imported coal for delivery in 1988 was
quoted in June 1988 by bidders at US$41.35 to US$43.95 per metric ton (Exh. "JJ");
in September 1988 at US$41.50 to US$49.50 per metric ton (Exh. "J-1"); in
November 1988 at US$39.00 to US$48.50 per metric ton (Exh. "J-2") and for the
1989 deliveries, at US$44.35 to US$47.35 per metric ton (Exh. "J-3") and US$38.00
to US$48.25 per metric ton in September 1990 (Exh. "JJ-6" and "JJ-7"). PHIBRO
would have won the tenders for the supply and delivery of about 960,000 metric tons
of coal out of at least 1,200,000 metric tons awarded during said period based on its
proven track record of 80%. The Court, therefore finds that as a result of its
disqualification, PHIBRO suffered damages equivalent to its standard 3% margin in
960,000 metric tons of coal at the most conservative price of US$30,000 per metric
ton, or the total of US$864,000 which PHIBRO would have earned had it been
allowed to participate in biddings in which it was disqualified and in subsequent
tenders for supply and delivery of imported coal."
We find this to be erroneous.
Basic is the rule that to recover actual damages, the amount of loss must not only be capable
of proof but must actually be proven with reasonable degree of certainty, premised upon
competent proof or best evidence obtainable of the actual amount thereof.42 A court cannot
merely rely on speculations, conjectures, or guesswork as to the fact and amount of
damages. Thus, while indemnification for damages shall comprehend not only the value of
the loss suffered, but also that of the profits which the obligee failed to obtain,43 it is
imperative that the basis of the alleged unearned profits is not too speculative and conjectural
as to show the actual damages which may be suffered on a future period.
In Pantranco North Express, Inc. v. Court of Appeals,44 this Court denied the plaintiff's claim
for actual damages which was premised on a contract he was about to negotiate on the
ground that there was still the requisite public bidding to be complied with, thus:
"As to the alleged contract he was about to negotiate with Minister Hipolito, there is
no showing that the same has been awarded to him. If Tandoc was about to
negotiate a contract with Minister Hipolito, there was no assurance that the former
would get it or that the latter would award the contract to him since there was the
requisite public bidding. The claimed loss of profit arising out of that alleged contract
which was still to be negotiated is a mere expectancy. Tandoc's claim that he could
have earned P2 million in profits is highly speculative and no concrete evidence was
presented to prove the same. The only unearned income to which Tandoc is entitled
to from the evidence presented is that for the one-month period, during which his
business was interrupted, which is P6,125.00, considering that his annual net income
was P73,500.00."
In Lufthansa German Airlines v. Court of Appeals,45 this Court likewise disallowed the trial
court's award of actual damages for unrealized profits in the amount of US$75,000.00 for
being highly speculative. It was held that "the realization of profits by respondent . . . was not
a certainty, but depended on a number of factors, foremost of which was his ability to invite
investors and to win the bid." This Court went further saying that actual or compensatory
damages cannot be presumed, but must be duly proved, and proved with reasonable degree
of certainty.
And in National Power Corporation v. Court of Appeals,46 the Court, in denying the bidder's
claim for unrealized commissions, ruled that even if NAPOCOR does not deny its (bidder's)
claims for unrealized commissions, and that these claims have been transmuted into judicial
admissions, these admissions cannot prevail over the rules and regulations governing the
bidding for NAPOCOR contracts, which necessarily and inherently include the reservation by
the NAPOCOR of its right to reject any or all bids.
The award of moral damages is likewise improper. To reiterate, NAPOCOR did not act in bad
faith. Moreover, moral damages are not, as a general rule, granted to a corporation.47 While
it is true that besmirched reputation is included in moral damages, it cannot cause mental
anguish to a corporation, unlike in the case of a natural person, for a corporation has no
reputation in the sense that an individual has, and besides, it is inherently impossible for a
corporation to suffer mental anguish.48 In LBC Express, Inc. v. Court of Appeals,49 we ruled:
"Moral damages are granted in recompense for physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. A corporation, being an artificial person and having
existence only in legal contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only by one having a nervous system and it flows from
real ills, sorrows, and griefs of life all of which cannot be suffered by respondent
bank as an artificial person."
Neither can we award exemplary damages under Article 2234 of the Civil Code. Before the
court may consider the question of whether or not exemplary damages should be awarded,
the plaintiff must show that he is entitled to moral, temperate, or compensatory damages.
NAPOCOR, in this petition, likewise contests the judgment of the lower courts awarding
PHIBRO the amount of $73,231.91 as reimbursement for expenses, cost of litigation and
attorney's fees.
We agree with NAPOCOR.
This Court has laid down the rule that in the absence of stipulation, a winning party may be
awarded attorney's fees only in case plaintiff's action or defendant's stand is so untenable as
to amount to gross and evident bad faith.50 This cannot be said of the case at bar.
NAPOCOR is justified in resisting PHIBRO's claim for damages. As a matter of fact, we
partially grant the prayer of NAPOCOR as we find that it did not act in bad faith in
disapproving PHIBRO's pre-qualification to bid.
Trial courts must be reminded that attorney's fees may not be awarded to a party simply
because the judgment is favorable to him, for it may amount to imposing a premium on the
right to redress grievances in court. We adopt the same policy with respect to the expenses
of litigation. A winning party may be entitled to expenses of litigation only where he, by
reason of plaintiff's clearly unjustifiable claims or defendant's unreasonable refusal to his
demands, was compelled to incur said expenditures. Evidently, the facts of this case do not
warrant the granting of such litigation expenses to PHIBRO.
At this point, we believe that, in the interest of fairness, NAPOCOR should give PHIBRO
another opportunity to participate in future public bidding. As earlier mentioned, the delay on
its part was due to a fortuitous event.
But before we dispose of this case, we take this occasion to remind PHIBRO of the
indispensability of coal to a coal-fired thermal plant. With households and businesses being
entirely dependent on the electricity supplied by NAPOCOR, the delivery of coal cannot be
venturesome. Indeed, public interest demands that one who offers to deliver coal at an
appointed time must give a reasonable assurance that it can carry through. With the
deleterious possible consequences that may result from failure to deliver the needed coal, we
believe there is greater strain of commitment in this kind of obligation.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 126204 dated August
27, 1996 is hereby MODIFIED. The award, in favor of PHIBRO, of actual, moral and
exemplary damages, reimbursement for expenses, cost of litigation and attorney's fees, and
costs of suit, is DELETED.
SO ORDERED.






G.R. No. 141994 January 17, 2005
FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO MEDICAL AND
EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM)
and ANGELITA F. AGO, respondents.
D E C I S I O N
CARPIO, J.:
The Case
This petition for review1 assails the 4 January 1999 Decision2 and 26 January 2000
Resolution of the Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed
with modification the 14 December 1992 Decision3 of the Regional Trial Court of Legazpi
City, Branch 10, in Civil Case No. 8236. The Court of Appeals held Filipinas Broadcasting
Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima liable for libel and
ordered them to solidarily pay Ago Medical and Educational Center-Bicol Christian College of
Medicine moral damages, attorneys fees and costs of suit.
The Antecedents
"Expos" is a radio documentary4 program hosted by Carmelo Mel Rima ("Rima") and
Hermogenes Jun Alegre ("Alegre").5 Expos is aired every morning over DZRC-AM which is
owned by Filipinas Broadcasting Network, Inc. ("FBNI"). "Expos" is heard over Legazpi City,
the Albay municipalities and other Bicol areas.6
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged
complaints from students, teachers and parents against Ago Medical and Educational
Center-Bicol Christian College of Medicine ("AMEC") and its administrators. Claiming that the
broadcasts were defamatory, AMEC and Angelita Ago ("Ago"), as Dean of AMECs College
of Medicine, filed a complaint for damages7 against FBNI, Rima and Alegre on 27 February
1990. Quoted are portions of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking medical course at
AMEC-BCCM, advise them to pass all subjects because if they fail in any subject they
will repeat their year level, taking up all subjects including those they have passed
already. Several students had approached me stating that they had consulted with the DECS
which told them that there is no such regulation. If [there] is no such regulation why is AMEC
doing the same?
xxx
Second: Earlier AMEC students in Physical Therapy had complained that the course is
not recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if the subject does
not have an instructor - such greed for money on the part of AMECs administration.
Take the subject Anatomy: students would pay for the subject upon enrolment because it is
offered by the school. However there would be no instructor for such subject. Students would
be informed that course would be moved to a later date because the school is still searching
for the appropriate instructor.
xxx
It is a public knowledge that the Ago Medical and Educational Center has survived and has
been surviving for the past few years since its inception because of funds support from
foreign foundations. If you will take a look at the AMEC premises youll find out that the
names of the buildings there are foreign soundings. There is a McDonald Hall. Why not Jose
Rizal or Bonifacio Hall? That is a very concrete and undeniable evidence that the support of
foreign foundations for AMEC is substantial, isnt it? With the report which is the basis of the
expose in DZRC today, it would be very easy for detractors and enemies of the Ago family to
stop the flow of support of foreign foundations who assist the medical school on the basis of
the latters purpose. But if the purpose of the institution (AMEC) is to deceive students at
cross purpose with its reason for being it is possible for these foreign foundations to lift or
suspend their donations temporarily.8
xxx
On the other hand, the administrators of AMEC-BCCM, AMEC Science High School
and the AMEC-Institute of Mass Communication in their effort to minimize expenses in
terms of salary are absorbing or continues to accept "rejects". For example how many
teachers in AMEC are former teachers of Aquinas University but were removed because of
immorality? Does it mean that the present administration of AMEC have the total definite
moral foundation from catholic administrator of Aquinas University. I will prove to you my
friends, that AMEC is a dumping ground, garbage, not merely of moral and physical
misfits. Probably they only qualify in terms of intellect. The Dean of Student Affairs of AMEC
is Justita Lola, as the family name implies. She is too old to work, being an old woman. Is the
AMEC administration exploiting the very [e]nterprising or compromising and undemanding
Lola? Could it be that AMEC is just patiently making use of Dean Justita Lola were if she is
very old. As in atmospheric situation zero visibility the plane cannot land, meaning she is
very old, low pay follows. By the way, Dean Justita Lola is also the chairman of the
committee on scholarship in AMEC. She had retired from Bicol University a long time ago but
AMEC has patiently made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and physically
misfit people. What does this mean? Immoral and physically misfits as teachers.
May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no
longer fit to teach. You are too old. As an aviation, your case is zero visibility. Dont insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship
committee at that. The reason is practical cost saving in salaries, because an old person is
not fastidious, so long as she has money to buy the ingredient of beetle juice. The elderly can
get by thats why she (Lola) was taken in as Dean.
xxx
xxx On our end our task is to attend to the interests of students. It is likely that the students
would be influenced by evil. When they become members of society outside of campus
will be liabilities rather than assets.What do you expect from a doctor who while studying
at AMEC is so much burdened with unreasonable imposition? What do you expect from a
student who aside from peculiar problems because not all students are rich in their
struggle to improve their social status are even more burdened with false regulations.
xxx9(Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning institution. With the
supposed exposs, FBNI, Rima and Alegre "transmitted malicious imputations, and as such,
destroyed plaintiffs (AMEC and Ago) reputation." AMEC and Ago included FBNI as
defendant for allegedly failing to exercise due diligence in the selection and supervision of its
employees, particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an
Answer10 alleging that the broadcasts against AMEC were fair and true. FBNI, Rima and
Alegre claimed that they were plainly impelled by a sense of public duty to report the "goings-
on in AMEC, [which is] an institution imbued with public interest."
Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty.
Edmundo Cea, collaborating counsel of Atty. Lozares, filed a Motion to Dismiss11 on FBNIs
behalf. The trial court denied the motion to dismiss. Consequently, FBNI filed a separate
Answer claiming that it exercised due diligence in the selection and supervision of Rima and
Alegre. FBNI claimed that before hiring a broadcaster, the broadcaster should (1) file an
application; (2) be interviewed; and (3) undergo an apprenticeship and training program after
passing the interview. FBNI likewise claimed that it always reminds its broadcasters to
"observe truth, fairness and objectivity in their broadcasts and to refrain from using libelous
and indecent language." Moreover, FBNI requires all broadcasters to pass the Kapisanan ng
mga Brodkaster sa Pilipinas ("KBP") accreditation test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a Decision12 finding FBNI and Alegre liable
for libel except Rima. The trial court held that the broadcasts are libelous per se. The trial
court rejected the broadcasters claim that their utterances were the result of straight
reporting because it had no factual basis. The broadcasters did not even verify their reports
before airing them to show good faith. In holding FBNI liable for libel, the trial court found that
FBNI failed to exercise diligence in the selection and supervision of its employees.
In absolving Rima from the charge, the trial court ruled that Rimas only participation was
when he agreed with Alegres expos. The trial court found Rimas statement within the
"bounds of freedom of speech, expression, and of the press." The dispositive portion of the
decision reads:
WHEREFORE, premises considered, this court finds for the plaintiff. Considering the
degree of damages caused by the controversial utterances, which are not found by
this court to be really very serious and damaging, and there being no showing that
indeed the enrollment of plaintiff school dropped,defendants Hermogenes "Jun" Alegre,
Jr. and Filipinas Broadcasting Network (owner of the radio station DZRC), are hereby jointly
and severally ordered to pay plaintiff Ago Medical and Educational Center-Bicol Christian
College of Medicine (AMEC-BCCM) the amount of P300,000.00 moral damages,
plus P30,000.00 reimbursement of attorneys fees, and to pay the costs of suit.
SO ORDERED. 13 (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the
other, appealed the decision to the Court of Appeals. The Court of Appeals affirmed the trial
courts judgment with modification. The appellate court made Rima solidarily liable with FBNI
and Alegre. The appellate court denied Agos claim for damages and attorneys fees because
the broadcasts were directed against AMEC, and not against her. The dispositive portion of
the Court of Appeals decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification
that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes
Alegre.
SO ORDERED.14
FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals denied
in its 26 January 2000 Resolution.
Hence, FBNI filed this petition.15
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial courts ruling that the questioned broadcasts are
libelous per se and that FBNI, Rima and Alegre failed to overcome the legal presumption of
malice. The Court of Appeals found Rima and Alegres claim that they were actuated by their
moral and social duty to inform the public of the students gripes as insufficient to justify the
utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the Court of
Appeals ruled that the broadcasts were made "with reckless disregard as to whether they
were true or false." The appellate court pointed out that FBNI, Rima and Alegre failed to
present in court any of the students who allegedly complained against AMEC. Rima and
Alegre merely gave a single name when asked to identify the students. According to the
Court of Appeals, these circumstances cast doubt on the veracity of the broadcasters claim
that they were "impelled by their moral and social duty to inform the public about the
students gripes."
The Court of Appeals found Rima also liable for libel since he remarked that "(1) AMEC-
BCCM is a dumping ground for morally and physically misfit teachers; (2) AMEC obtained the
services of Dean Justita Lola to minimize expenses on its employees salaries; and (3) AMEC
burdened the students with unreasonable imposition and false regulations."16
The Court of Appeals held that FBNI failed to exercise due diligence in the selection and
supervision of its employees for allowing Rima and Alegre to make the radio broadcasts
without the proper KBP accreditation. The Court of Appeals denied Agos claim for damages
and attorneys fees because the libelous remarks were directed against AMEC, and not
against her. The Court of Appeals adjudged FBNI, Rima and Alegre solidarily liable to pay
AMEC moral damages, attorneys fees and costs of suit.1awphi1.nt
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR
PAYMENT OF MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.
The Courts Ruling
We deny the petition.
This is a civil action for damages as a result of the allegedly defamatory remarks of Rima and
Alegre against AMEC.17 While AMEC did not point out clearly the legal basis for its
complaint, a reading of the complaint reveals that AMECs cause of action is based on
Articles 30 and 33 of the Civil Code. Article 3018 authorizes a separate civil action to recover
civil liability arising from a criminal offense. On the other hand, Article 3319 particularly
provides that the injured party may bring a separate civil action for damages in cases of
defamation, fraud, and physical injuries. AMEC also invokes Article 1920 of the Civil Code to
justify its claim for damages. AMEC cites Articles 217621 and 218022 of the Civil Code to
hold FBNI solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel23 is a public and malicious imputation of a crime, or of a vice or defect, real or
imaginary, or any act or omission, condition, status, or circumstance tending to cause the
dishonor, discredit, or contempt of a natural or juridical person, or to blacken the memory of
one who is dead.24
There is no question that the broadcasts were made public and imputed to AMEC defects or
circumstances tending to cause it dishonor, discredit and contempt. Rima and Alegres
remarks such as "greed for money on the part of AMECs administrators"; "AMEC is a
dumping ground, garbage of xxx moral and physical misfits"; and AMEC students who
graduate "will be liabilities rather than assets" of the society are libelous per se. Taken as a
whole, the broadcasts suggest that AMEC is a money-making institution where physically
and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and
Alegre were plainly impelled by their civic duty to air the students gripes. FBNI alleges that
there is no evidence that ill will or spite motivated Rima and Alegre in making the broadcasts.
FBNI further points out that Rima and Alegre exerted efforts to obtain AMECs side and gave
Ago the opportunity to defend AMEC and its administrators. FBNI concludes that since there
is no malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious.25 Rima and Alegre failed to show
adequately their good intention and justifiable motive in airing the supposed gripes of the
students. As hosts of a documentary or public affairs program, Rima and Alegre should have
presented the public issues "free from inaccurate and misleading information."26 Hearing the
students alleged complaints a month before the expos,27 they had sufficient time to verify
their sources and information. However, Rima and Alegre hardly made a thorough
investigation of the students alleged gripes. Neither did they inquire about nor confirm the
purported irregularities in AMEC from the Department of Education, Culture and Sports.
Alegre testified that he merely went to AMEC to verify his report from an alleged AMEC
official who refused to disclose any information. Alegre simply relied on the words of the
students "because they were many and not because there is proof that what they are saying
is true."28 This plainly shows Rima and Alegres reckless disregard of whether their report
was true or not.
Contrary to FBNIs claim, the broadcasts were not "the result of straight reporting."
Significantly, some courts in the United States apply the privilege of "neutral reportage" in
libel cases involving matters of public interest or public figures. Under this privilege, a
republisher who accurately and disinterestedly reports certain defamatory statements made
against public figures is shielded from liability, regardless of the republishers subjective
awareness of the truth or falsity of the accusation.29 Rima and Alegre cannot invoke the
privilege of neutral reportage because unfounded comments abound in the broadcasts.
Moreover, there is no existing controversy involving AMEC when the broadcasts were made.
The privilege of neutral reportage applies where the defamed person is a public figure who is
involved in an existing controversy, and a party to that controversy makes the defamatory
statement.30
However, FBNI argues vigorously that malice in law does not apply to this case. Citing Borjal
v. Court of Appeals,31 FBNI contends that the broadcasts "fall within the coverage of
qualifiedly privileged communications" for being commentaries on matters of public interest.
Such being the case, AMEC should prove malice in fact or actual malice. Since AMEC
allegedly failed to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the "doctrine of fair
comment," thus:
[F]air commentaries on matters of public interest are privileged and constitute a valid defense
in an action for libel or slander. The doctrine of fair comment means that while in general
every discreditable imputation publicly made is deemed false, because every man is
presumed innocent until his guilt is judicially proved, and every false imputation is deemed
malicious, nevertheless, when the discreditable imputation is directed against a public person
in his public capacity, it is not necessarily actionable. In order that such discreditable
imputation to a public official may be actionable, it must either be a false allegation of
fact or a comment based on a false supposition. If the comment is an expression of
opinion, based on established facts, then it is immaterial that the opinion happens to be
mistaken, as long as it might reasonably be inferred from the facts.32(Emphasis supplied)
True, AMEC is a private learning institution whose business of educating students is
"genuinely imbued with public interest." The welfare of the youth in general and AMECs
students in particular is a matter which the public has the right to know. Thus, similar to the
newspaper articles in Borjal, the subject broadcasts dealt with matters of public interest.
However, unlike in Borjal, the questioned broadcasts are not based on established facts.
The record supports the following findings of the trial court:
xxx Although defendants claim that they were motivated by consistent reports of students
and parents against plaintiff, yet, defendants have not presented in court, nor even gave
name of a single student who made the complaint to them, much less present written
complaint or petition to that effect. To accept this defense of defendants is too dangerous
because it could easily give license to the media to malign people and establishments based
on flimsy excuses that there were reports to them although they could not satisfactorily
establish it. Such laxity would encourage careless and irresponsible broadcasting which is
inimical to public interests.
Secondly, there is reason to believe that defendant radio broadcasters, contrary to the
mandates of their duties, did not verify and analyze the truth of the reports before they aired
it, in order to prove that they are in good faith.
Alegre contended that plaintiff school had no permit and is not accredited to offer Physical
Therapy courses. Yet, plaintiff produced a certificate coming from DECS that as of Sept. 22,
1987 or more than 2 years before the controversial broadcast, accreditation to offer Physical
Therapy course had already been given the plaintiff, which certificate is signed by no less
than the Secretary of Education and Culture herself, Lourdes R. Quisumbing (Exh. C-
rebuttal). Defendants could have easily known this were they careful enough to verify. And
yet, defendants were very categorical and sounded too positive when they made the
erroneous report that plaintiff had no permit to offer Physical Therapy courses which they
were offering.
The allegation that plaintiff was getting tremendous aids from foreign foundations like
Mcdonald Foundation prove not to be true also. The truth is there is no Mcdonald Foundation
existing. Although a big building of plaintiff school was given the name Mcdonald building,
that was only in order to honor the first missionary in Bicol of plaintiffs religion, as explained
by Dr. Lita Ago. Contrary to the claim of defendants over the air, not a single centavo
appears to be received by plaintiff school from the aforementioned McDonald Foundation
which does not exist.
Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that
when medical students fail in one subject, they are made to repeat all the other subject[s],
even those they have already passed, nor their claim that the school charges laboratory fees
even if there are no laboratories in the school. No evidence was presented to prove the
bases for these claims, at least in order to give semblance of good faith.
As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers,
defendant[s] singled out Dean Justita Lola who is said to be so old, with zero visibility
already. Dean Lola testified in court last Jan. 21, 1991, and was found to be 75 years old. xxx
Even older people prove to be effective teachers like Supreme Court Justices who are still
very much in demand as law professors in their late years. Counsel for defendants is past 75
but is found by this court to be still very sharp and effective.l^vvphi1.net So is plaintiffs
counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally infirmed,
but is still alert and docile.
The contention that plaintiffs graduates become liabilities rather than assets of our society is
a mere conclusion. Being from the place himself, this court is aware that majority of the
medical graduates of plaintiffs pass the board examination easily and become prosperous
and responsible professionals.33
Had the comments been an expression of opinion based on established facts, it is immaterial
that the opinion happens to be mistaken, as long as it might reasonably be inferred from the
facts.34 However, the comments of Rima and Alegre were not backed up by facts. Therefore,
the broadcasts are not privileged and remain libelousper se.
The broadcasts also violate the Radio Code35 of the Kapisanan ng mga Brodkaster sa
Pilipinas, Ink. ("Radio Code"). Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues free from personal bias,
prejudice andinaccurate and misleading information. x x x Furthermore, the
station shall strive to present balanced discussion of issues. x x x.
x x x
7. The station shall be responsible at all times in the supervision of public affairs,
public issues and commentary programs so that they conform to the provisions and
standards of this code.
8. It shall be the responsibility of the newscaster, commentator, host and announcer
to protect public interest, general welfare and good order in the presentation of public
affairs and public issues.36 (Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the
code of ethical conduct governing practitioners in the radio broadcast industry. The Radio
Code is a voluntary code of conduct imposed by the radio broadcast industry on its own
members. The Radio Code is a public warranty by the radio broadcast industry that radio
broadcast practitioners are subject to a code by which their conduct are measured for lapses,
liability and sanctions.
The public has a right to expect and demand that radio broadcast practitioners live up to the
code of conduct of their profession, just like other professionals. A professional code of
conduct provides the standards for determining whether a person has acted justly, honestly
and with good faith in the exercise of his rights and performance of his duties as required by
Article 1937 of the Civil Code. A professional code of conduct also provides the standards for
determining whether a person who willfully causes loss or injury to another has acted in a
manner contrary to morals or good customs under Article 2138 of the Civil Code.
II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages because it is a corporation.39
A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock.40 The Court of Appeals cites Mambulao
Lumber Co. v. PNB, et al.41 to justify the award of moral damages. However, the Courts
statement in Mambulao that "a corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral damages" is an obiter dictum.42
Nevertheless, AMECs claim for moral damages falls under item 7 of Article 221943 of the
Civil Code. This provision expressly authorizes the recovery of moral damages in cases of
libel, slander or any other form of defamation. Article 2219(7) does not qualify whether the
plaintiff is a natural or juridical person. Therefore, a juridical person such as a corporation can
validly complain for libel or any other form of defamation and claim for moral damages.44
Moreover, where the broadcast is libelous per se, the law implies damages.45 In such a
case, evidence of an honest mistake or the want of character or reputation of the party libeled
goes only in mitigation of damages.46Neither in such a case is the plaintiff required to
introduce evidence of actual damages as a condition precedent to the recovery of some
damages.47 In this case, the broadcasts are libelous per se. Thus, AMEC is entitled to moral
damages.
However, we find the award of P300,000 moral damages unreasonable. The record shows
that even though the broadcasts were libelous per se, AMEC has not suffered any substantial
or material damage to its reputation. Therefore, we reduce the award of moral damages
from P300,000 to P150,000.
III.
Whether the award of attorneys fees is proper
FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the
award of attorneys fees. FBNI adds that the instant case does not fall under the enumeration
in Article 220848 of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify satisfactorily its
claim for attorneys fees. AMEC did not adduce evidence to warrant the award of attorneys
fees. Moreover, both the trial and appellate courts failed to explicitly state in their respective
decisions the rationale for the award of attorneys fees.49 In Inter-Asia Investment
Industries, Inc. v. Court of Appeals ,50 we held that:
[I]t is an accepted doctrine that the award thereof as an item of damages is the exception
rather than the rule, and counsels fees are not to be awarded every time a party wins a
suit. The power of the court to award attorneys fees under Article 2208 of the Civil
Code demands factual, legal and equitable justification, without which the award is a
conclusion without a premise, its basis being improperly left to speculation and
conjecture. In all events, the court must explicitly state in the text of the decision, and not
only in the decretal portion thereof, the legal reason for the award of attorneys
fees.51 (Emphasis supplied)
While it mentioned about the award of attorneys fees by stating that it "lies within the
discretion of the court and depends upon the circumstances of each case," the Court of
Appeals failed to point out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre for moral damages, attorneys fees
and costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages
and attorneys fees because it exercised due diligence in the selection and supervision of its
employees, particularly Rima and Alegre. FBNI maintains that its broadcasters, including
Rima and Alegre, undergo a "very regimented process" before they are allowed to go on air.
"Those who apply for broadcaster are subjected to interviews, examinations and an
apprenticeship program."
FBNI further argues that Alegres age and lack of training are irrelevant to his competence as
a broadcaster. FBNI points out that the "minor deficiencies in the KBP accreditation of Rima
and Alegre do not in any way prove that FBNI did not exercise the diligence of a good father
of a family in selecting and supervising them." Rimas accreditation lapsed due to his non-
payment of the KBP annual fees while Alegres accreditation card was delayed allegedly for
reasons attributable to the KBP Manila Office. FBNI claims that membership in the KBP is
merely voluntary and not required by any law or government regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and severally liable for
the tort which they commit.52 Joint tort feasors are all the persons who command, instigate,
promote, encourage, advise, countenance, cooperate in, aid or abet the commission of a tort,
or who approve of it after it is done, if done for their benefit.53 Thus, AMEC correctly
anchored its cause of action against FBNI on Articles 2176 and 2180 of the Civil
Code.1a\^/phi1.net
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay
for damages arising from the libelous broadcasts. As stated by the Court of Appeals,
"recovery for defamatory statements published by radio or television may be had from
the owner of the station, a licensee, the operator of the station, or a person who
procures, or participates in, the making of the defamatory statements."54 An employer and
employee are solidarily liable for a defamatory statement by the employee within the course
and scope of his or her employment, at least when the employer authorizes or ratifies the
defamation.55 In this case, Rima and Alegre were clearly performing their official duties as
hosts of FBNIs radio program Expos when they aired the broadcasts. FBNI neither alleged
nor proved that Rima and Alegre went beyond the scope of their work at that time. There was
likewise no showing that FBNI did not authorize and ratify the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence in
the selection andsupervision of its employees, particularly Rima and Alegre. FBNI merely
showed that it exercised diligence in theselection of its broadcasters without introducing any
evidence to prove that it observed the same diligence in thesupervision of Rima and Alegre.
FBNI did not show how it exercised diligence in supervising its broadcasters. FBNIs alleged
constant reminder to its broadcasters to "observe truth, fairness and objectivity and to refrain
from using libelous and indecent language" is not enough to prove due diligence in the
supervision of its broadcasters. Adequate training of the broadcasters on the industrys code
of conduct, sufficient information on libel laws, and continuous evaluation of the broadcasters
performance are but a few of the many ways of showing diligence in the supervision of
broadcasters.
FBNI claims that it "has taken all the precaution in the selection of Rima and Alegre as
broadcasters, bearing in mind their qualifications." However, no clear and convincing
evidence shows that Rima and Alegre underwent FBNIs "regimented process" of application.
Furthermore, FBNI admits that Rima and Alegre had deficiencies in their KBP
accreditation,56 which is one of FBNIs requirements before it hires a broadcaster.
Significantly, membership in the KBP, while voluntary, indicates the broadcasters strong
commitment to observe the broadcast industrys rules and regulations. Clearly, these
circumstances show FBNIs lack of diligence in selecting andsupervising Rima and Alegre.
Hence, FBNI is solidarily liable to pay damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999
and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with
the MODIFICATION that the award of moral damages is reduced from P300,000 to P150,000
and the award of attorneys fees is deleted. Costs against petitioner.
SO ORDERED.
G.R. No. 128690 January 21, 1999
ABS-CBN BROADCASTING CORPORATION, petitioner, vs. HONORABLE COURT OF
APPEALS, REPUBLIC BROADCASTING CORP, VIVA PRODUCTION, INC., and
VICENTE DEL ROSARIO, respondents.
DAVIDE, JR., CJ.:
In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter
ABS-CBN) seeks to reverse and set aside the decision 1 of 31 October 1996 and the
resolution 2 of 10 March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former
affirmed with modification the decision 3 of 28 April 1993 of the Regional Trial Court (RTC) of
Quezon City, Branch 80, in Civil Case No. Q-92-12309. The latter denied the motion to
reconsider the decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh.
"A") whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva
films. Sometime in December 1991, in accordance with paragraph 2.4 [sic]
of said agreement stating that .
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24)
Viva films for TV telecast under such terms as may be agreed upon by the
parties hereto, provided, however, that such right shall be exercised by ABS-
CBN from the actual offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-
president Charo Santos-Concio, a list of three(3) film packages (36 title) from
which ABS-CBN may exercise its right of first refusal under the afore-said
agreement (Exhs. "1" par, 2, "2," "2-A'' and "2-B"-Viva). ABS-CBN, however
through Mrs. Concio, "can tick off only ten (10) titles" (from the list) "we can
purchase" (Exh. "3" - Viva) and therefore did not accept said list (TSN, June
8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio are not the subject of
the case at bar except the film ''Maging Sino Ka Man."
For further enlightenment, this rejection letter dated January 06, 1992 (Exh
"3" - Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I would like to
express my difficulty in recommending the purchase of the three film
packages you are offering ABS-CBN.
From among the three packages I can only tick off 10 titles we can
purchase. Please see attached. I hope you will understand my position. Most
of the action pictures in the list do not have big action stars in the cast. They
are not for primetime. In line with this I wish to mention that I have not
scheduled for telecast several action pictures in out very first contract
because of the cheap production value of these movies as well as the lack of
big action stars. As a film producer, I am sure you understand what I am
trying to say as Viva produces only big action pictures.
In fact, I would like to request two (2) additional runs for these movies as I
can only schedule them in our non-primetime slots. We have to cover the
amount that was paid for these movies because as you very well know that
non-primetime advertising rates are very low. These are the unaired titles in
the first contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us before and have been
rejected because of the ruling of MTRCB to have them aired at 9:00 p.m.
due to their very adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages please consider
including all the other Viva movies produced last year. I have quite an
attractive offer to make.
Thanking you and with my warmest regards.
(Signed)
Charo Santos-Concio
On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms.
Concio, with a list consisting of 52 original movie titles (i.e. not yet aired on
television) including the 14 titles subject of the present case, as well as 104
re-runs (previously aired on television) from which ABS-CBN may choose
another 52 titles, as a total of 156 titles, proposing to sell to ABS-CBN airing
rights over this package of 52 originals and 52 re-runs for P60,000,000.00 of
which P30,000,000.00 will be in cash and P30,000,000.00 worth of television
spots (Exh. "4" to "4-C" Viva; "9" -Viva).
On April 2, 1992, defendant Del Rosario and ABS-CBN general manager,
Eugenio Lopez III, met at the Tamarind Grill Restaurant in Quezon City to
discuss the package proposal of Viva. What transpired in that lunch meeting
is the subject of conflicting versions. Mr. Lopez testified that he and Mr. Del
Rosario allegedly agreed that ABS-CRN was granted exclusive film rights to
fourteen (14) films for a total consideration of P36 million; that he allegedly
put this agreement as to the price and number of films in a "napkin'' and
signed it and gave it to Mr. Del Rosario (Exh. D; TSN, pp. 24-26, 77-78, June
8, 1992). On the other hand, Del Rosario denied having made any
agreement with Lopez regarding the 14 Viva films; denied the existence of a
napkin in which Lopez wrote something; and insisted that what he and
Lopez discussed at the lunch meeting was Viva's film package offer of 104
films (52 originals and 52 re-runs) for a total price of P60 million. Mr. Lopez
promising [sic]to make a counter proposal which came in the form of a
proposal contract Annex "C" of the complaint (Exh. "1"- Viva; Exh. "C" -
ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-
president for Finance discussed the terms and conditions of Viva's offer to
sell the 104 films, after the rejection of the same package by ABS-CBN.
On April 07, 1992, defendant Del Rosario received through his secretary, a
handwritten note from Ms. Concio, (Exh. "5" - Viva), which reads: "Here's the
draft of the contract. I hope you find everything in order," to which was
attached a draft exhibition agreement (Exh. "C''- ABS-CBN; Exh. "9" - Viva,
p. 3) a counter-proposal covering 53 films, 52 of which came from the list
sent by defendant Del Rosario and one film was added by Ms. Concio, for a
consideration of P35 million. Exhibit "C" provides that ABS-CBN is granted
films right to 53 films and contains a right of first refusal to "1992 Viva Films."
The said counter proposal was however rejected by Viva's Board of
Directors [in the] evening of the same day, April 7, 1992, as Viva would not
sell anything less than the package of 104 films for P60 million pesos (Exh.
"9" - Viva), and such rejection was relayed to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN and following several
negotiations and meetings defendant Del Rosario and Viva's President
Teresita Cruz, in consideration of P60 million, signed a letter of agreement
dated April 24, 1992. granting RBS the exclusive right to air 104 Viva-
produced and/or acquired films (Exh. "7-A" - RBS; Exh. "4" - RBS) including
the fourteen (14) films subject of the present case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a
prayer for a writ of preliminary injunction and/or temporary restraining order against private
respondents Republic Broadcasting Corporation 5 (hereafter RBS ), Viva Production
(hereafter VIVA), and Vicente Del Rosario. The complaint was docketed as Civil Case No. Q-
92-12309.
On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private respondents
from proceeding with the airing, broadcasting, and televising of the fourteen VIVA films
subject of the controversy, starting with the film Maging Sino Ka Man, which was scheduled
to be shown on private respondents RBS' channel 7 at seven o'clock in the evening of said
date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of
P35 million bond. ABS-CBN moved for the reduction of the bond, 8 while private respondents
moved for reconsideration of the order and offered to put up a counterbound. 9
In the meantime, private respondents filed separate answers with counterclaim. 10 RBS also
set up a cross-claim against VIVA..
On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary injunction
upon the posting by RBS of a P30 million counterbond to answer for whatever damages
ABS-CBN might suffer by virtue of such dissolution. However, it reduced petitioner's
injunction bond to P15 million as a condition precedent for the reinstatement of the writ of
preliminary injunction should private respondents be unable to post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed to
explore the possibility of an amicable settlement. In the meantime, RBS prayed for and was
granted reasonable time within which to put up a P30 million counterbond in the event that no
settlement would be reached.
As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a
counterbond, which the RTC approved in its Order of 15 October 1992. 13
On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August and 15
October 1992 Orders, which RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial. 16
Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals
a petition 17challenging the RTC's Orders of 3 August and 15 October 1992 and praying for
the issuance of a writ of preliminary injunction to enjoin the RTC from enforcing said orders.
The case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary restraining order 18 to enjoin
the airing, broadcasting, and televising of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the
petition in CA -G.R. No. 29300 for being premature. ABS-CBN challenged the dismissal in a
petition for review filed with this Court on 19 January 1993, which was docketed as G.R. No.
108363.
In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-1209.
Thereafter, on 28 April 1993, it rendered a decision 20 in favor of RBS and VIVA and against
ABS-CBN disposing as follows:
WHEREFORE, under cool reflection and prescinding from the foregoing,
judgments is rendered in favor of defendants and against the plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the
following:
a) P107,727.00, the amount of premium
paid by RBS to the surety which issued
defendant RBS's bond to lift the injunction;
b) P191,843.00 for the amount of print
advertisement for "Maging Sino Ka Man" in
various newspapers;
c) Attorney's fees in the amount of P1
million;
d) P5 million as and by way of moral
damages;
e) P5 million as and by way of exemplary
damages;
(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay
P212,000.00 by way of reasonable attorney's fees.
(4) The cross-claim of defendant RBS against defendant
VIVA is dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price and terms of the offer. The
alleged agreement between Lopez III and Del Rosario was subject to the approval of the
VIVA Board of Directors, and said agreement was disapproved during the meeting of the
Board on 7 April 1992. Hence, there was no basis for ABS-CBN's demand that VIVA signed
the 1992 Film Exhibition Agreement. Furthermore, the right of first refusal under the 1990
Film Exhibition Agreement had previously been exercised per Ms. Concio's letter to Del
Rosario ticking off ten titles acceptable to them, which would have made the 1992 agreement
an entirely new contract.
On 21 June 1993, this Court denied 21 ABS-CBN's petition for review in G.R. No. 108363, as
no reversible error was committed by the Court of Appeals in its challenged decision and the
case had "become moot and academic in view of the dismissal of the main action by the
court a quo in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that
there was a perfected contract between ABS-CBN and VIVA granting ABS-CBN the
exclusive right to exhibit the subject films. Private respondents VIVA and Del Rosario also
appealed seeking moral and exemplary damages and additional attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the
contract between ABS-CBN and VIVA had not been perfected, absent the approval by the
VIVA Board of Directors of whatever Del Rosario, it's agent, might have agreed with Lopez
III. The appellate court did not even believe ABS-CBN's evidence that Lopez III actually wrote
down such an agreement on a "napkin," as the same was never produced in court. It likewise
rejected ABS-CBN's insistence on its right of first refusal and ratiocinated as follows:
As regards the matter of right of first refusal, it may be true that a Film
Exhibition Agreement was entered into between Appellant ABS-CBN and
appellant VIVA under Exhibit "A" in 1990, and that parag. 1.4 thereof
provides:
1.4 ABS-CBN shall have the right of first refusal to the next
twenty-four (24) VIVA films for TV telecast under such terms
as may be agreed upon by the parties hereto, provided,
however, that such right shall be exercised by ABS-CBN
within a period of fifteen (15) days from the actual offer in
writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN
shall still be subject to such terms as may be agreed upon by the parties
thereto, and that the said right shall be exercised by ABS-CBN within fifteen
(15) days from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did
not fix the price of the film right to the twenty-four (24) films, nor did it specify
the terms thereof. The same are still left to be agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89)
stated that it can only tick off ten (10) films, and the draft contract Exhibit "C"
accepted only fourteen (14) films, while parag. 1.4 of Exhibit "A'' speaks of
the next twenty-four (24) films.
The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B;
Records, pp. 86-88; Decision, p. 11, Records, p. 1150), when the first list of
VIVA films was sent by Mr. Del Rosario to ABS-CBN. The Vice President of
ABS-CBN, Ms. Charo Santos-Concio, sent a letter dated January 6, 1992
(Exhibit 3, Records, p. 89) where ABS-CBN exercised its right of refusal by
rejecting the offer of VIVA.. As aptly observed by the trial court, with the said
letter of Mrs. Concio of January 6, 1992, ABS-CBN had lost its right of first
refusal. And even if We reckon the fifteen (15) day period from February 27,
1992 (Exhibit 4 to 4-C) when another list was sent to ABS-CBN after the
letter of Mrs. Concio, still the fifteen (15) day period within which ABS-CBN
shall exercise its right of first refusal has already expired. 22
Accordingly, respondent court sustained the award of actual damages consisting in the cost
of print advertisements and the premium payments for the counterbond, there being
adequate proof of the pecuniary loss which RBS had suffered as a result of the filing of the
complaint by ABS-CBN. As to the award of moral damages, the Court of Appeals found
reasonable basis therefor, holding that RBS's reputation was debased by the filing of the
complaint in Civil Case No. Q-92-12309 and by the non-showing of the film "Maging Sino Ka
Man." Respondent court also held that exemplary damages were correctly imposed by way of
example or correction for the public good in view of the filing of the complaint despite
petitioner's knowledge that the contract with VIVA had not been perfected, It also upheld the
award of attorney's fees, reasoning that with ABS-CBN's act of instituting Civil Case No, Q-
92-1209, RBS was "unnecessarily forced to litigate." The appellate court, however, reduced
the awards of moral damages to P2 million, exemplary damages to P2 million, and attorney's
fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal
because it was "RBS and not VIVA which was actually prejudiced when the complaint was
filed by ABS-CBN."
Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case,
contending that the Court of Appeals gravely erred in
I
. . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN
PETITIONER AND PRIVATE RESPONDENT VIVA NOTWITHSTANDING
PREPONDERANCE OF EVIDENCE ADDUCED BY PETITIONER TO THE
CONTRARY.
II
. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN
FAVOR OF PRIVATE RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF
PRIVATE RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles
under the 1990 Film Exhibition Agreement, as it had chosen only ten titles from the first list. It
insists that we give credence to Lopez's testimony that he and Del Rosario met at the
Tamarind Grill Restaurant, discussed the terms and conditions of the second list (the 1992
Film Exhibition Agreement) and upon agreement thereon, wrote the same on a paper napkin.
It also asserts that the contract has already been effective, as the elements thereof, namely,
consent, object, and consideration were established. It then concludes that the Court of
Appeals' pronouncements were not supported by law and jurisprudence, as per our decision
of 1 December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals, 23 which
cited Toyota Shaw, Inc. v. Court of Appeals, 24 Ang Yu Asuncion v. Court of
Appeals, 25 and Villonco Realty Company v. Bormaheco. Inc. 26
Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent
for the premium on the counterbond of its own volition in order to negate the injunction issued
by the trial court after the parties had ventilated their respective positions during the hearings
for the purpose. The filing of the counterbond was an option available to RBS, but it can
hardly be argued that ABS-CBN compelled RBS to incur such expense. Besides, RBS had
another available option, i.e., move for the dissolution or the injunction; or if it was determined
to put up a counterbond, it could have presented a cash bond. Furthermore under Article
2203 of the Civil Code, the party suffering loss or injury is also required to exercise the
diligence of a good father of a family to minimize the damages resulting from the act or
omission. As regards the cost of print advertisements, RBS had not convincingly established
that this was a loss attributable to the non showing "Maging Sino Ka Man"; on the contrary, it
was brought out during trial that with or without the case or the injunction, RBS would have
spent such an amount to generate interest in the film.
ABS-CBN further contends that there was no clear basis for the awards of moral and
exemplary damages. The controversy involving ABS-CBN and RBS did not in any way
originate from business transaction between them. The claims for such damages did not
arise from any contractual dealings or from specific acts committed by ABS-CBN against
RBS that may be characterized as wanton, fraudulent, or reckless; they arose by virtue only
of the filing of the complaint, An award of moral and exemplary damages is not warranted
where the record is bereft of any proof that a party acted maliciously or in bad faith in filing an
action. 27 In any case, free resort to courts for redress of wrongs is a matter of public policy.
The law recognizes the right of every one to sue for that which he honestly believes to be his
right without fear of standing trial for damages where by lack of sufficient evidence, legal
technicalities, or a different interpretation of the laws on the matter, the case would lose
ground. 28 One who makes use of his own legal right does no injury. 29 If damage results
front the filing of the complaint, it is damnum absque injuria. 30 Besides, moral damages are
generally not awarded in favor of a juridical person, unless it enjoys a good reputation that
was debased by the offending party resulting in social humiliation. 31
As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual,
legal, or equitable justification. In sustaining the trial court's award, the Court of Appeals
acted in clear disregard of the doctrines laid down in Buan v. Camaganacan 32 that the text
of the decision should state the reason why attorney's fees are being awarded; otherwise, the
award should be disallowed. Besides, no bad faith has been imputed on, much less proved
as having been committed by, ABS-CBN. It has been held that "where no sufficient showing
of bad faith would be reflected in a party' s persistence in a case other than an erroneous
conviction of the righteousness of his cause, attorney's fees shall not be recovered as
cost." 33
On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and
VIVA absent any meeting of minds between them regarding the object and consideration of
the alleged contract. It affirms that the ABS-CBN's claim of a right of first refusal was correctly
rejected by the trial court. RBS insist the premium it had paid for the counterbond constituted
a pecuniary loss upon which it may recover. It was obliged to put up the counterbound due to
the injunction procured by ABS-CBN. Since the trial court found that ABS-CBN had no cause
of action or valid claim against RBS and, therefore not entitled to the writ of injunction, RBS
could recover from ABS-CBN the premium paid on the counterbond. Contrary to the claim of
ABS-CBN, the cash bond would prove to be more expensive, as the loss would be equivalent
to the cost of money RBS would forego in case the P30 million came from its funds or was
borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled
showing of the film "Maging Sino Ka Man" because the print advertisements were put out to
announce the showing on a particular day and hour on Channel 7, i.e., in its entirety at one
time, not a series to be shown on a periodic basis. Hence, the print advertisement were good
and relevant for the particular date showing, and since the film could not be shown on that
particular date and hour because of the injunction, the expenses for the advertisements had
gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and
secured injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant then
to Article 19 and 21 of the Civil Code, ABS-CBN must be held liable for such
damages. Citing Tolentino, 34 damages may be awarded in cases of abuse of rights even if
the act done is not illicit and there is abuse of rights were plaintiff institutes and action purely
for the purpose of harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and exemplary damages,
private respondents RBScited People v. Manero, 35 where it was stated that such entity may
recover moral and exemplary damages if it has a good reputation that is debased resulting in
social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has been debased by ABS-
CBN's acts in this case. When RBS was not able to fulfill its commitment to
the viewing public to show the film "Maging Sino Ka Man" on the scheduled
dates and times (and on two occasions that RBS advertised), it suffered
serious embarrassment and social humiliation. When the showing was
canceled, late viewers called up RBS' offices and subjected RBS to verbal
abuse ("Announce kayo nang announce, hindi ninyo naman ilalabas,"
"nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone was not something
RBS brought upon itself. it was exactly what ABS-CBN had planned to
happen.
The amount of moral and exemplary damages cannot be said to be
excessive. Two reasons justify the amount of the award.
The first is that the humiliation suffered by RBS is national extent. RBS
operations as a broadcasting company is [sic] nationwide. Its clientele, like
that of ABS-CBN, consists of those who own and watch television. It is not
an exaggeration to state, and it is a matter of judicial notice that almost every
other person in the country watches television. The humiliation suffered by
RBS is multiplied by the number of televiewers who had anticipated the
showing of the film "Maging Sino Ka Man" on May 28 and November 3, 1992
but did not see it owing to the cancellation. Added to this are the advertisers
who had placed commercial spots for the telecast and to whom RBS had a
commitment in consideration of the placement to show the film in the dates
and times specified.
The second is that it is a competitor that caused RBS to suffer the
humiliation. The humiliation and injury are far greater in degree when caused
by an entity whose ultimate business objective is to lure customers (viewers
in this case) away from the competition. 36
For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court
and the Court of Appeals do not support ABS-CBN's claim that there was a perfected
contract. Such factual findings can no longer be disturbed in this petition for review under
Rule 45, as only questions of law can be raised, not questions of fact. On the issue of
damages and attorneys fees, they adopted the arguments of RBS.
The key issues for our consideration are (1) whether there was a perfected contract between
VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and attorney's fees. It may
be noted that the award of attorney's fees of P212,000 in favor of VIVA is not assigned as
another error.
I.
The first issue should be resolved against ABS-CBN. A contract is a meeting of minds
between two persons whereby one binds himself to give something or to render some service
to another 37 for a consideration. there is no contract unless the following requisites concur:
(1) consent of the contracting parties; (2) object certain which is the subject of the contract;
and (3) cause of the obligation, which is established. 38 A contract undergoes three stages:
(a) preparation, conception, or generation, which is the period of negotiation
and bargaining, ending at the moment of agreement of the parties;
(b) perfection or birth of the contract, which is the moment when the parties
come to agree on the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of the
terms agreed upon in the contract. 39
Contracts that are consensual in nature are perfected upon mere meeting of the minds, Once
there is concurrence between the offer and the acceptance upon the subject matter,
consideration, and terms of payment a contract is produced. The offer must be certain. To
convert the offer into a contract, the acceptance must be absolute and must not qualify the
terms of the offer; it must be plain, unequivocal, unconditional, and without variance of any
sort from the proposal. A qualified acceptance, or one that involves a new proposal,
constitutes a counter-offer and is a rejection of the original offer. Consequently, when
something is desired which is not exactly what is proposed in the offer, such acceptance is
not sufficient to generate consent because any modification or variation from the terms of the
offer annuls the offer. 40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2
April 1992 to discuss the package of films, said package of 104 VIVA films was VIVA's offer
to ABS-CBN to enter into a new Film Exhibition Agreement. But ABS-CBN, sent, through Ms.
Concio, a counter-proposal in the form of a draft contract proposing exhibition of 53 films for
a consideration of P35 million. This counter-proposal could be nothing less than the counter-
offer of Mr. Lopez during his conference with Del Rosario at Tamarind Grill Restaurant.
Clearly, there was no acceptance of VIVA's offer, for it was met by a counter-offer which
substantially varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of Appeals 41 and Villonco Realty
Company v. Bormaheco, Inc., 42 is misplaced. In these cases, it was held that an
acceptance may contain a request for certain changes in the terms of the offer and yet be a
binding acceptance as long as "it is clear that the meaning of the acceptance is positively and
unequivocally to accept the offer, whether such request is granted or not." This ruling was,
however, reversed in the resolution of 29 March 1996, 43 which ruled that the acceptance of
all offer must be unqualified and absolute, i.e., it "must be identical in all respects with that of
the offer so as to produce consent or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-
offer were not material but merely clarificatory of what had previously been agreed upon.
It cited the statement in Stuart v.Franklin Life Insurance Co. 44 that "a vendor's change in a
phrase of the offer to purchase, which change does not essentially change the terms of the
offer, does not amount to a rejection of the offer and the tender of a counter-
offer." 45However, when any of the elements of the contract is modified upon acceptance,
such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they
underwent a period of bargaining. ABS-CBN then formalized its counter-proposals or
counter-offer in a draft contract, VIVA through its Board of Directors, rejected such counter-
offer, Even if it be conceded arguendo that Del Rosario had accepted the counter-offer, the
acceptance did not bind VIVA, as there was no proof whatsoever that Del Rosario had the
specific authority to do so.
Under Corporation Code, 46 unless otherwise provided by said Code, corporate powers,
such as the power; to enter into contracts; are exercised by the Board of Directors. However,
the Board may delegate such powers to either an executive committee or officials or
contracted managers. The delegation, except for the executive committee, must be for
specific purposes, 47 Delegation to officers makes the latter agents of the corporation;
accordingly, the general rules of agency as to the bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a power
of the Board, the latter must specially authorize them to do so. That Del Rosario did not have
the authority to accept ABS-CBN's counter-offer was best evidenced by his submission of the
draft contract to VIVA's Board of Directors for the latter's approval. In any event, there was
between Del Rosario and Lopez III no meeting of minds. The following findings of the trial
court are instructive:
A number of considerations militate against ABS-CBN's claim that a contract
was perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill
referred to the price and the number of films, which he wrote on a napkin.
However, Exhibit "C" contains numerous provisions which, were not
discussed at the Tamarind Grill, if Lopez testimony was to be believed nor
could they have been physically written on a napkin. There was even doubt
as to whether it was a paper napkin or a cloth napkin. In short what were
written in Exhibit "C'' were not discussed, and therefore could not have been
agreed upon, by the parties. How then could this court compel the parties to
sign Exhibit "C" when the provisions thereof were not previously agreed
upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the subject
matter of the contract was 14 films. The complaint in fact prays for delivery of
14 films. But Exhibit "C" mentions 53 films as its subject matter. Which is
which If Exhibits "C" reflected the true intent of the parties, then ABS-CBN's
claim for 14 films in its complaint is false or if what it alleged in the complaint
is true, then Exhibit "C" did not reflect what was agreed upon by the parties.
This underscores the fact that there was no meeting of the minds as to the
subject matter of the contracts, so as to preclude perfection thereof. For
settled is the rule that there can be no contract where there is no object
which is its subject matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh.
"D") states:
We were able to reach an agreement. VIVA gave us the
exclusive license to show these fourteen (14) films, and we
agreed to pay Viva the amount of P16,050,000.00 as well
as grant Viva commercial slots worth P19,950,000.00. We
had already earmarked this P16, 050,000.00.
which gives a total consideration of P36 million (P19,950,000.00 plus
P16,050,000.00. equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q. What was written in this napkin?
A. The total price, the breakdown the known Viva movies,
the 7 blockbuster movies and the other 7 Viva movies
because the price was broken down accordingly. The none
[sic] Viva and the seven other Viva movies and the sharing
between the cash portion and the concerned spot portion in
the total amount of P35 million pesos.
Now, which is which? P36 million or P35 million? This weakens ABS-CBN's
claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted
Exhibit "C" to Mr. Del Rosario with a handwritten note, describing said
Exhibit "C" as a "draft." (Exh. "5" - Viva; tsn pp. 23-24 June 08, 1992). The
said draft has a well defined meaning.
Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory
writing prepared for discussion, the terms and conditions thereof could not
have been previously agreed upon by ABS-CBN and Viva Exhibit "C'' could
not therefore legally bind Viva, not having agreed thereto. In fact, Ms. Concio
admitted that the terms and conditions embodied in Exhibit "C" were
prepared by ABS-CBN's lawyers and there was no discussion on said terms
and conditions. . . .
As the parties had not yet discussed the proposed terms and conditions in
Exhibit "C," and there was no evidence whatsoever that Viva agreed to the
terms and conditions thereof, said document cannot be a binding contract.
The fact that Viva refused to sign Exhibit "C" reveals only two [sic] well that it
did not agree on its terms and conditions, and this court has no authority to
compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed
upon at the Tamarind Grill was only provisional, in the sense that it was
subject to approval by the Board of Directors of Viva. He testified:
Q. Now, Mr. Witness, and after that Tamarind meeting ...
the second meeting wherein you claimed that you have the
meeting of the minds between you and Mr. Vic del Rosario,
what happened?
A. Vic Del Rosario was supposed to call us up and tell us
specifically the result of the discussion with the Board of
Directors.
Q. And you are referring to the so-called agreement which
you wrote in [sic] a piece of paper?
A. Yes, sir.
Q. So, he was going to forward that to the board of Directors
for approval?
A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)
Q. Did Mr. Del Rosario tell you that he will submit it to his
Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del
Rosario had no authority to bind Viva to a contract with ABS-CBN until and
unless its Board of Directors approved it. The complaint, in fact, alleges that
Mr. Del Rosario "is the Executive Producer of defendant Viva" which "is a
corporation." (par. 2, complaint). As a mere agent of Viva, Del Rosario could
not bind Viva unless what he did is ratified by its Board of Directors. (Vicente
vs. Geraldez, 52 SCRA 210; Arnold vs. Willets and Paterson, 44 Phil. 634).
As a mere agent, recognized as such by plaintiff, Del Rosario could not be
held liable jointly and severally with Viva and his inclusion as party
defendant has no legal basis. (Salonga vs. Warner Barner [sic] , COLTA , 88
Phil. 125; Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in the complaint are clear
admissions that what was supposed to have been agreed upon at the
Tamarind Grill between Mr. Lopez and Del Rosario was not a binding
agreement. It is as it should be because corporate power to enter into a
contract is lodged in the Board of Directors. (Sec. 23, Corporation Code).
Without such board approval by the Viva board, whatever agreement Lopez
and Del Rosario arrived at could not ripen into a valid contract binding upon
Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA 763). The
evidence adduced shows that the Board of Directors of Viva rejected Exhibit
"C" and insisted that the film package for 140 films be maintained (Exh. "7-1"
- Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four
films under the 1990 Film Exhibition Agreement and that the meeting between Lopez and Del
Rosario was a continuation of said previous contract is untenable. As observed by the trial
court, ABS-CBN right of first refusal had already been exercised when Ms. Concio wrote to
VIVA ticking off ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after this letter
was sent, was for an entirely different package. Ms. Concio herself admitted
on cross-examination to having used or exercised the right of first refusal.
She stated that the list was not acceptable and was indeed not accepted by
ABS-CBN, (TSN, June 8, 1992, pp. 8-10). Even Mr. Lopez himself admitted
that the right of the first refusal may have been already exercised by Ms.
Concio (as she had). (TSN, June 8, 1992, pp. 71-75). Del Rosario himself
knew and understand [sic] that ABS-CBN has lost its rights of the first refusal
when his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11) 50
II
However, we find for ABS-CBN on the issue of damages. We shall first take up actual
damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or
compensatory damages. Except as provided by law or by stipulation, one is entitled to
compensation for actual damages only for such pecuniary loss suffered by him as he has
duly proved. 51 The indemnification shall comprehend not only the value of the loss suffered,
but also that of the profits that the obligee failed to obtain. 52 In contracts and quasi-contracts
the damages which may be awarded are dependent on whether the obligor acted with good
faith or otherwise, It case of good faith, the damages recoverable are those which are the
natural and probable consequences of the breach of the obligation and which the parties
have foreseen or could have reasonably foreseen at the time of the constitution of the
obligation. If the obligor acted with fraud, bad faith, malice, or wanton attitude, he shall be
responsible for all damages which may be reasonably attributed to the non-performance of
the obligation. 53 In crimes and quasi-delicts, the defendant shall be liable for all damages
which are the natural and probable consequences of the act or omission complained of,
whether or not such damages has been foreseen or could have reasonably been foreseen by
the defendant. 54
Actual damages may likewise be recovered for loss or impairment of earning capacity in
cases of temporary or permanent personal injury, or for injury to the plaintiff's business
standing or commercial credit. 55
The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or
quasi-delict. It arose from the fact of filing of the complaint despite ABS-CBN's alleged
knowledge of lack of cause of action. Thus paragraph 12 of RBS's Answer with Counterclaim
and Cross-claim under the heading COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has no cause of
action RBS. As a result thereof, RBS suffered actual damages in the amount
of P6,621,195.32. 56
Needless to state the award of actual damages cannot be comprehended under the above
law on actual damages. RBS could only probably take refuge under Articles 19, 20, and 21 of
the Civil Code, which read as follows:
Art. 19. 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. 20. Every person who, contrary to law, wilfully or negligently causes
damage to another, shall indemnify the latter for tile same.
Art. 21. Any person who wilfully causes loss or injury to another in a manner
that is contrary to morals, good customs or public policy shall compensate
the latter for the damage.
It may further be observed that in cases where a writ of preliminary injunction is issued, the
damages which the defendant may suffer by reason of the writ are recoverable from the
injunctive bond. 57 In this case, ABS-CBN had not yet filed the required bond; as a matter of
fact, it asked for reduction of the bond and even went to the Court of Appeals to challenge
the order on the matter, Clearly then, it was not necessary for RBS to file a counterbond.
Hence, ABS-CBN cannot be held responsible for the premium RBS paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for
lack of sufficient legal basis. The RTC issued a temporary restraining order and later, a writ of
preliminary injunction on the basis of its determination that there existed sufficient ground for
the issuance thereof. Notably, the RTC did not dissolve the injunction on the ground of lack of
legal and factual basis, but because of the plea of RBS that it be allowed to put up a
counterbond.
As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees
may be recovered as actual or compensatory damages under any of the circumstances
provided for in Article 2208 of the Civil Code. 58
The general rule is that attorney's fees cannot be recovered as part of damages because of
the policy that no premium should be placed on the right to litigate. 59 They are not to be
awarded every time a party wins a suit. The power of the court to award attorney's fees under
Article 2208 demands factual, legal, and equitable justification. 60 Even when claimant is
compelled to litigate with third persons or to incur expenses to protect his rights, still
attorney's fees may not be awarded where no sufficient showing of bad faith could be
reflected in a party's persistence in a case other than erroneous conviction of the
righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code.
Article 2217 thereof defines what are included in moral damages, while Article 2219
enumerates the cases where they may be recovered, Article 2220 provides that moral
damages may be recovered in breaches of contract where the defendant acted fraudulently
or in bad faith. RBS's claim for moral damages could possibly fall only under item (10) of
Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34,
and 35.
Moral damages are in the category of an award designed to compensate the claimant for
actual injury suffered. and not to impose a penalty on the wrongdoer. 62 The award is not
meant to enrich the complainant at the expense of the defendant, but to enable the injured
party to obtain means, diversion, or amusements that will serve to obviate then moral
suffering he has undergone. It is aimed at the restoration, within the limits of the possible, of
the spiritual status quo ante, and should be proportionate to the suffering inflicted. 63 Trial
courts must then guard against the award of exorbitant damages; they should exercise
balanced restrained and measured objectivity to avoid suspicion that it was due to passion,
prejudice, or corruption on the part of the trial court. 64
The award of moral damages cannot be granted in favor of a corporation because, being an
artificial person and having existence only in legal contemplation, it has no feelings, no
emotions, no senses, It cannot, therefore, experience physical suffering and mental anguish,
which call be experienced only by one having a nervous system. 65 The statement in People
v. Manero 66 and Mambulao Lumber Co. v. PNB 67 that a corporation may recover moral
damages if it "has a good reputation that is debased, resulting in social humiliation" is
an obiter dictum. On this score alone the award for damages must be set aside, since RBS is
a corporation.
The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil
Code. These are imposed by way of example or correction for the public good, in addition to
moral, temperate, liquidated or compensatory damages. 68 They are recoverable in criminal
cases as part of the civil liability when the crime was committed with one or more aggravating
circumstances; 69 in quasi-contracts, if the defendant acted with gross negligence;70 and in
contracts and quasi-contracts, if the defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner. 71
It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-
contract, delict, or quasi-delict, Hence, the claims for moral and exemplary damages can only
be based on Articles 19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following: (1) the existence of a legal
right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or
injuring another. Article 20 speaks of the general sanction for all other provisions of law which
do not especially provide for their own sanction; while Article 21 deals with acts contra bonus
mores, and has the following elements; (1) there is an act which is legal, (2) but which is
contrary to morals, good custom, public order, or public policy, and (3) and it is done with
intent to injure.72
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith
implies a conscious and intentional design to do a wrongful act for a dishonest purpose or
moral obliquity. 73 Such must be substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was
honestly convinced of the merits of its cause after it had undergone serious negotiations
culminating in its formal submission of a draft contract. Settled is the rule that the adverse
result of an action does not per se make the action wrongful and subject the actor to
damages, for the law could not have meant to impose a penalty on the right to litigate. If
damages result from a person's exercise of a right, it is damnum absque injuria. 75
WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of
Appeals in CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed award of
attorney's fees in favor of VIVA Productions, Inc.1wphi1.nt
No pronouncement as to costs.
SO ORDERED.







G.R. No. L-22973 January 30, 1968
MAMBULAO LUMBER COMPANY, plaintiff-appellant, vs. PHILIPPINE NATIONAL BANK
and ANACLETO HERALDO Deputy Provincial Sheriff of Camarines Norte,defendants-
appellees.
ANGELES, J.:
An appeal from a decision, dated April 2, 1964, of the Court of First Instance of Manila in Civil
Case No. 52089, entitled "Mambulao Lumber Company, plaintiff, versus Philippine National
Bank and Anacleto Heraldo, defendants", dismissing the complaint against both defendants
and sentencing the plaintiff to pay to defendant Philippine National Bank (PNB for short) the
sum of P3,582.52 with interest thereon at the rate of 6% per annum from December 22, 1961
until fully paid, and the costs of suit.
In seeking the reversal of the decision, the plaintiff advances several propositions in its brief
which may be restated as follows:
1. That its total indebtedness to the PNB as of November 21, 1961, was only
P56,485.87 and not P58,213.51 as concluded by the court a quo; hence, the
proceeds of the foreclosure sale of its real property alone in the amount of
P56,908.00 on that date, added to the sum of P738.59 it remitted to the PNB
thereafter was more than sufficient to liquidate its obligation, thereby rendering the
subsequent foreclosure sale of its chattels unlawful;
2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and the
additional sum of P298.54 as expenses of the foreclosure sale;
3. That the subsequent foreclosure sale of its chattels is null and void, not only
because it had already settled its indebtedness to the PNB at the time the sale was
effected, but also for the reason that the said sale was not conducted in accordance
with the provisions of the Chattel Mortgage Law and the venue agreed upon by the
parties in the mortgage contract;
4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its value;
and
5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter
disregard of plaintiff's vigorous opposition thereto, and in taking possession thereof
after the sale thru force, intimidation, coercion, and by detaining its "man-in-charge"
of said properties, the PNB is liable to plaintiff for damages and attorney's fees.
The antecedent facts of the case, as found by the trial court, are as follows:
On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga
Branch of defendant PNB and the former offered real estate, machinery, logging and
transportation equipments as collaterals. The application, however, was approved for
a loan of P100,000 only. To secure the payment of the loan, the plaintiff mortgaged
to defendant PNB a parcel of land, together with the buildings and improvements
existing thereon, situated in the poblacion of Jose Panganiban (formerly Mambulao),
province of Camarines Norte, and covered by Transfer Certificate of Title No. 381 of
the land records of said province, as well as various sawmill equipment, rolling unit
and other fixed assets of the plaintiff, all situated in its compound in the
aforementioned municipality.
On August 2, 1956, the PNB released from the approved loan the sum of P27,500,
for which the plaintiff signed a promissory note wherein it promised to pay to the PNB
the said sum in five equal yearly installments at the rate of P6,528.40 beginning July
31, 1957, and every year thereafter, the last of which would be on July 31, 1961.
On October 19, 1956, the PNB made another release of P15,500 as part of the
approved loan granted to the plaintiff and so on the said date, the latter executed
another promissory note wherein it agreed to pay to the former the said sum in five
equal yearly installments at the rate of P3,679.64 beginning July 31, 1957, and
ending on July 31, 1961.
The plaintiff failed to pay the amortization on the amounts released to and received
by it. Repeated demands were made upon the plaintiff to pay its obligation but it
failed or otherwise refused to do so. Upon inspection and verification made by
employees of the PNB, it was found that the plaintiff had already stopped operation
about the end of 1957 or early part of 1958.
On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines
Norte requesting him to take possession of the parcel of land, together with the
improvements existing thereon, covered by Transfer Certificate of Title No. 381 of
the land records of Camarines Norte, and to sell it at public auction in accordance
with the provisions of Act No. 3135, as amended, for the satisfaction of the unpaid
obligation of the plaintiff, which as of September 22, 1961, amounted to P57,646.59,
excluding attorney's fees. In compliance with the request, on October 16, 1961, the
Provincial Sheriff of Camarines Norte issued the corresponding notice of extra-
judicial sale and sent a copy thereof to the plaintiff. According to the notice, the
mortgaged property would be sold at public auction at 10:00 a.m. on November 21,
1961, at the ground floor of the Court House in Daet, Camarines Norte.
On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines
Norte requesting him to take possession of the chattels mortgaged to it by the
plaintiff and sell them at public auction also on November 21, 1961, for the
satisfaction of the sum of P57,646.59, plus 6% annual interest therefore from
September 23, 1961, attorney's fees equivalent to 10% of the amount due and the
costs and expenses of the sale. On the same day, the PNB sent notice to the plaintiff
that the former was foreclosing extrajudicially the chattels mortgaged by the latter
and that the auction sale thereof would be held on November 21, 1961, between
9:00 and 12:00 a.m., in Mambulao, Camarines Norte, where the mortgaged chattels
were situated.
On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession
of the chattels mortgaged by the plaintiff and made an inventory thereof in the
presence of a PC Sergeant and a policeman of the municipality of Jose Panganiban.
On November 9, 1961, the said Deputy Sheriff issued the corresponding notice of
public auction sale of the mortgaged chattels to be held on November 21, 1961, at
10:00 a.m., at the plaintiff's compound situated in the municipality of Jose
Panganiban, Province of Camarines Norte.
On November 19, 1961, the plaintiff sent separate letters, posted as registered air
mail matter, one to the Naga Branch of the PNB and another to the Provincial Sheriff
of Camarines Norte, protesting against the foreclosure of the real estate and chattel
mortgages on the grounds that they could not be effected unless a Court's order was
issued against it (plaintiff) for said purpose and that the foreclosure proceedings,
according to the terms of the mortgage contracts, should be made in Manila. In said
letter to the Naga Branch of the PNB, it was intimated that if the public auction sale
would be suspended and the plaintiff would be given an extension of ninety (90)
days, its obligation would be settled satisfactorily because an important negotiation
was then going on for the sale of its "whole interest" for an amount more than
sufficient to liquidate said obligation.
The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter
as a request for extension of the foreclosure sale of the mortgaged chattels and so it
advised the Sheriff of Camarines Norte to defer it to December 21, 1961, at the same
time and place. A copy of said advice was sent to the plaintiff for its information and
guidance.
The foreclosure sale of the parcel of land, together with the buildings and
improvements thereon, covered by Transfer Certificate of Title No. 381, was,
however, held on November 21, 1961, and the said property was sold to the PNB for
the sum of P56,908.00, subject to the right of the plaintiff to redeem the same within
a period of one year. On the same date, Deputy Provincial Sheriff Heraldo executed
a certificate of sale in favor of the PNB and a copy thereof was sent to the plaintiff.
In a letter dated December 14, 1961 (but apparently posted several days later), the
plaintiff sent a bank draft for P738.59 to the Naga Branch of the PNB, allegedly in full
settlement of the balance of the obligation of the plaintiff after the application thereto
of the sum of P56,908.00 representing the proceeds of the foreclosure sale of parcel
of land described in Transfer Certificate of Title No. 381. In the said letter, the plaintiff
reiterated its request that the foreclosure sale of the mortgaged chattels be
discontinued on the grounds that the mortgaged indebtedness had been fully paid
and that it could not be legally effected at a place other than the City of Manila.
In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of
Camarines Norte that it had fully paid its obligation to the PNB, and enclosed
therewith a copy of its letter to the latter dated December 14, 1961.
On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the
plaintiff acknowledging the remittance of P738.59 with the advice, however, that as
of that date the balance of the account of the plaintiff was P9,161.76, to which should
be added the expenses of guarding the mortgaged chattels at the rate of P4.00 a day
beginning December 19, 1961. It was further explained in said letter that the sum of
P57,646.59, which was stated in the request for the foreclosure of the real estate
mortgage, did not include the 10% attorney's fees and expenses of the sale.
Accordingly, the plaintiff was advised that the foreclosure sale scheduled on the 21st
of said month would be stopped if a remittance of P9,161.76, plus interest thereon
and guarding fees, would be made.
On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at
10:00 a.m. and they were awarded to the PNB for the sum of P4,200 and the
corresponding bill of sale was issued in its favor by Deputy Provincial Sheriff
Heraldo.
In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB
advised the plaintiff giving it priority to repurchase the chattels acquired by the former
at public auction. This offer was reiterated in a letter dated January 3, 1962, of the
Attorney of the Naga Branch of the PNB to the plaintiff, with the suggestion that it
exercise its right of redemption and that it apply for the condonation of the attorney's
fees. The plaintiff did not follow the advice but on the contrary it made known of its
intention to file appropriate action or actions for the protection of its interests.
On May 24, 1962, several employees of the PNB arrived in the compound of the
plaintiff in Jose Panganiban, Camarines Norte, and they informed Luis Salgado,
Chief Security Guard of the premises, that the properties therein had been auctioned
and bought by the PNB, which in turn sold them to Mariano Bundok. Upon being
advised that the purchaser would take delivery of the things he bought, Salgado was
at first reluctant to allow any piece of property to be taken out of the compound of the
plaintiff. The employees of the PNB explained that should Salgado refuse, he would
be exposing himself to a litigation wherein he could be held liable to pay big sum of
money by way of damages. Apprehensive of the risk that he would take, Salgado
immediately sent a wire to the President of the plaintiff in Manila, asking advice as to
what he should do. In the meantime, Mariano Bundok was able to take out from the
plaintiff's compound two truckloads of equipment.
In the afternoon of the same day, Salgado received a telegram from plaintiff's
President directing him not to deliver the "chattels" without court order, with the
information that the company was then filing an action for damages against the PNB.
On the following day, May 25, 1962, two trucks and men of Mariano Bundok arrived
but Salgado did not permit them to take out any equipment from inside the
compound of the plaintiff. Thru the intervention, however, of the local police and PC
soldiers, the trucks of Mariano Bundok were able finally to haul the properties
originally mortgaged by the plaintiff to the PNB, which were bought by it at the
foreclosure sale and subsequently sold to Mariano Bundok.
Upon the foregoing facts, the trial court rendered the decision appealed from which, as stated
in the first paragraph of this opinion, sentenced the Mambulao Lumber Company to pay to
the defendant PNB the sum of P3,582.52 with interest thereon at the rate of 6% per annum
from December 22, 1961 (day following the date of the questioned foreclosure of plaintiff's
chattels) until fully paid, and the costs. Mambulao Lumber Company interposed the instant
appeal.
We shall discuss the various points raised in appellant's brief in seriatim.
The first question Mambulao Lumber Company poses is that which relates to the amount of
its indebtedness to the PNB arising out of the principal loans and the accrued interest
thereon. It is contended that its obligation under the terms of the two promissory notes it had
executed in favor of the PNB amounts only to P56,485.87 as of November 21, 1961, when
the sale of real property was effected, and not P58,213.51 as found by the trial court.
There is merit to this claim. Examining the terms of the promissory note executed by the
appellant in favor of the PNB, we find that the agreed interest on the loan of P43,000.00
P27,500.00 released on August 2, 1956 as per promissory note of even date (Exhibit C-3),
and P15,500.00 released on October 19, 1956, as per promissory note of the same date
(Exhibit C-4) was six per cent (6%) per annum from the respective date of said notes "until
paid". In the statement of account of the appellant as of September 22, 1961, submitted by
the PNB, it appears that in arriving at the total indebtedness of P57,646.59 as of that date,
the PNB had compounded the principal of the loan and the accrued 6% interest thereon each
time the yearly amortizations became due, and on the basis of these compounded amounts
charged additional delinquency interest on them up to September 22, 1961; and to this
erroneously computed total of P57,646.59, the trial court added 6% interest per annum from
September 23, 1961 to November 21 of the same year. In effect, the PNB has claimed, and
the trial court has adjudicated to it, interest on accrued interests from the time the various
amortizations of the loan became due until the real estate mortgage executed to secure the
loan was extra-judicially foreclosed on November 21, 1961. This is an error. Section 5 of Act
No. 2655 expressly provides that in computing the interest on any obligation, promissory note
or other instrument or contract, compound interest shall not be reckoned, except by
agreement, or in default thereof, whenever the debt is judicially claimed. This is also the clear
mandate of Article 2212 of the new Civil Code which provides that interest due shall earn
legal interest only from the time it is judicially demanded, and of Article 1959 of the same
code which ordains that interest due and unpaid shall not earn interest. Of course, the parties
may, by stipulation, capitalize the interest due and unpaid, which as added principal shall
earn new interest; but such stipulation is nowhere to be found in the terms of the promissory
notes involved in this case. Clearly therefore, the trial court fell into error when it awarded
interest on accrued interests, without any agreement to that effect and before they had been
judicially demanded.
Appellant next assails the award of attorney's fees and the expenses of the foreclosure sale
in favor of the PNB. With respect to the amount of P298.54 allowed as expenses of the extra-
judicial sale of the real property, appellant maintains that the same has no basis, factual or
legal, and should not have been awarded. It likewise decries the award of attorney's fees
which, according to the appellant, should not be deducted from the proceeds of the sale of
the real property, not only because there is no express agreement in the real estate
mortgage contract to pay attorney's fees in case the same is extra-judicially foreclosed, but
also for the reason that the PNB neither spent nor incurred any obligation to pay attorney's
fees in connection with the said extra-judicial foreclosure under consideration.
There is reason for the appellant to assail the award of P298.54 as expenses of the sale. In
this respect, the trial court said:
The parcel of land, together with the buildings and improvements existing thereon
covered by Transfer Certificate of Title No. 381, was sold for P56,908. There was,
however, no evidence how much was the expenses of the foreclosure sale although
from the pertinent provisions of the Rules of Court, the Sheriff's fees would be P1 for
advertising the sale (par. k, Sec. 7, Rule 130 of the Old Rules) and P297.54 as his
commission for the sale (par. n, Sec. 7, Rule 130 of the Old Rules) or a total of
P298.54.
There is really no evidence of record to support the conclusion that the PNB is entitled to the
amount awarded as expenses of the extra-judicial foreclosure sale. The court below
committed error in applying the provisions of the Rules of Court for purposes of arriving at the
amount awarded. It is to be borne in mind that the fees enumerated under paragraphs k and
n, Section 7, of Rule 130 (now Rule 141) are demandable, only by a sheriff serving
processes of the court in connection with judicial foreclosure of mortgages under Rule 68 of
the new Rules, and not in cases of extra-judicial foreclosure of mortgages under Act 3135.
The law applicable is Section 4 of Act 3135 which provides that the officer conducting the
sale is entitled to collect a fee of P5.00 for each day of actual work performed in addition to
his expenses in connection with the foreclosure sale. Admittedly, the PNB failed to prove
during the trial of the case, that it actually spent any amount in connection with the said
foreclosure sale. Neither may expenses for publication of the notice be legally allowed in the
absence of evidence on record to support it. 1It is true, as pointed out by the appellee bank,
that courts should take judicial notice of the fees provided for by law which need not be
proved; but in the absence of evidence to show at least the number of working days the
sheriff concerned actually spent in connection with the extra-judicial foreclosure sale, the
most that he may be entitled to, would be the amount of P10.00 as a reasonable allowance
for two day's work one for the preparation of the necessary notices of sale, and the other
for conducting the auction sale and issuance of the corresponding certificate of sale in favor
of the buyer. Obviously, therefore, the award of P298.54 as expenses of the sale should be
set aside.
But the claim of the appellant that the real estate mortgage does not provide for attorney's
fees in case the same is extra-judicially foreclosed, cannot be favorably considered, as would
readily be revealed by an examination of the pertinent provision of the mortgage contract.
The parties to the mortgage appear to have stipulated under paragraph (c) thereof, inter alia:
. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the
Mortgagee his attorney-in-fact to sell the property mortgaged under Act 3135, as
amended, to sign all documents and to perform all acts requisite and necessary to
accomplish said purpose and to appoint its substitute as such attorney-in-fact with
the same powers as above specified. In case of judicial foreclosure, the Mortgagor
hereby consents to the appointment of the Mortgagee or any of its employees as
receiver, without any bond, to take charge of the mortgaged property at once, and to
hold possession of the same and the rents, benefits and profits derived from the
mortgaged property before the sale, less the costs and expenses of the receivership;
the Mortgagor hereby agrees further that in all cases, attorney's fees hereby fixed at
Ten Per cent (10%) of the total indebtedness then unpaid which in no case shall be
less than P100.00 exclusive of all fees allowed by law, and the expenses of
collection shall be the obligation of the Mortgagor and shall with priority, be paid to
the Mortgagee out of any sums realized as rents and profits derived from the
mortgaged property or from the proceeds realized from the sale of the said property
and this mortgage shall likewise stand as security therefor. . . .
We find the above stipulation to pay attorney's fees clear enough to cover both cases of
foreclosure sale mentioned thereunder, i.e., judicially or extra-judicially. While the phrase "in
all cases" appears to be part of the second sentence, a reading of the whole context of the
stipulation would readily show that it logically refers to extra-judicial foreclosure found in the
first sentence and to judicial foreclosure mentioned in the next sentence. And the ambiguity
in the stipulation suggested and pointed out by the appellant by reason of the faulty sentence
construction should not be made to defeat the otherwise clear intention of the parties in the
agreement.
It is suggested by the appellant, however, that even if the above stipulation to pay attorney's
fees were applicable to the extra-judicial foreclosure sale of its real properties, still, the award
of P5,821.35 for attorney's fees has no legal justification, considering the circumstance that
the PNB did not actually spend anything by way of attorney's fees in connection with the sale.
In support of this proposition, appellant cites authorities to the effect: (1) that when the
mortgagee has neither paid nor incurred any obligation to pay an attorney in connection with
the foreclosure sale, the claim for such fees should be denied; 2 and (2) that attorney's fees
will not be allowed when the attorney conducting the foreclosure proceedings is an officer of
the corporation (mortgagee) who receives a salary for all the legal services performed by him
for the corporation. 3 These authorities are indeed enlightening; but they should not be
applied in this case. The very same authority first cited suggests that said principle is not
absolute, for there is authority to the contrary. As to the fact that the foreclosure proceeding's
were handled by an attorney of the legal staff of the PNB, we are reluctant to exonerate
herein appellant from the payment of the stipulated attorney's fees on this ground alone,
considering the express agreement between the parties in the mortgage contract under
which appellant became liable to pay the same. At any rate, we find merit in the contention of
the appellant that the award of P5,821.35 in favor of the PNB as attorney's fees is
unconscionable and unreasonable, considering that all that the branch attorney of the said
bank did in connection with the foreclosure sale of the real property was to file a petition with
the provincial sheriff of Camarines Norte requesting the latter to sell the same in accordance
with the provisions of Act 3135.
The principle that courts should reduce stipulated attorney's fees whenever it is found under
the circumstances of the case that the same is unreasonable, is now deeply rooted in this
jurisdiction to entertain any serious objection to it. Thus, this Court has explained:
But the principle that it may be lawfully stipulated that the legal expenses involved in
the collection of a debt shall be defrayed by the debtor does not imply that such
stipulations must be enforced in accordance with the terms, no matter how injurious
or oppressive they may be. The lawful purpose to be accomplished by such a
stipulation is to permit the creditor to receive the amount due him under his contract
without a deduction of the expenses caused by the delinquency of the debtor. It
should not be permitted for him to convert such a stipulation into a source of
speculative profit at the expense of the debtor.
Contracts for attorney's services in this jurisdiction stands upon an entirely different
footing from contracts for the payment of compensation for any other services. By
express provision of section 29 of the Code of Civil Procedure, an attorney is not
entitled in the absence of express contract to recover more than a reasonable
compensation for his services; and even when an express contract is made the court
can ignore it and limit the recovery to reasonable compensation if the amount of the
stipulated fee is found by the court to be unreasonable. This is a very different rule
from that announced in section 1091 of the Civil Code with reference to the
obligation of contracts in general, where it is said that such obligation has the force of
law between the contracting parties. Had the plaintiff herein made an express
contract to pay his attorney an uncontingent fee of P2,115.25 for the services to be
rendered in reducing the note here in suit to judgment, it would not have been
enforced against him had he seen fit to oppose it, as such a fee is obviously far
greater than is necessary to remunerate the attorney for the work involved and is
therefore unreasonable. In order to enable the court to ignore an express contract for
an attorney's fees, it is not necessary to show, as in other contracts, that it is contrary
to morality or public policy (Art. 1255, Civil Code). It is enough that it is unreasonable
or unconscionable. 4
Since then this Court has invariably fixed counsel fees on a quantum meruit basis whenever
the fees stipulated appear excessive, unconscionable, or unreasonable, because a lawyer is
primarily a court officer charged with the duty of assisting the court in administering impartial
justice between the parties, and hence, the fees should be subject to judicial control. Nor
should it be ignored that sound public policy demands that courts disregard stipulations for
counsel fees, whenever they appear to be a source of speculative profit at the expense of the
debtor or mortgagor. 5 And it is not material that the present action is between the debtor and
the creditor, and not between attorney and client. As court have power to fix the fee as
between attorney and client, it must necessarily have the right to say whether a stipulation
like this, inserted in a mortgage contract, is valid. 6
In determining the compensation of an attorney, the following circumstances should be
considered: the amount and character of the services rendered; the responsibility imposed;
the amount of money or the value of the property affected by the controversy, or involved in
the employment; the skill and experience called for in the performance of the service; the
professional standing of the attorney; the results secured; and whether or not the fee is
contingent or absolute, it being a recognized rule that an attorney may properly charge a
much larger fee when it is to be contingent than when it is not. 7 From the stipulation in the
mortgage contract earlier quoted, it appears that the agreed fee is 10% of the total
indebtedness, irrespective of the manner the foreclosure of the mortgage is to be effected.
The agreement is perhaps fair enough in case the foreclosure proceedings is prosecuted
judicially but, surely, it is unreasonable when, as in this case, the mortgage was foreclosed
extra-judicially, and all that the attorney did was to file a petition for foreclosure with the
sheriff concerned. It is to be assumed though, that the said branch attorney of the PNB made
a study of the case before deciding to file the petition for foreclosure; but even with this in
mind, we believe the amount of P5,821.35 is far too excessive a fee for such services.
Considering the above circumstances mentioned, it is our considered opinion that the amount
of P1,000.00 would be more than sufficient to compensate the work aforementioned.
The next issue raised deals with the claim that the proceeds of the sale of the real properties
alone together with the amount it remitted to the PNB later was more than sufficient to
liquidate its total obligation to herein appellee bank. Again, we find merit in this claim. From
the foregoing discussion of the first two errors assigned, and for purposes of determining the
total obligation of herein appellant to the PNB as of November 21, 1961 when the real estate
mortgage was foreclosed, we have the following illustration in support of this
conclusion:1wph1.t
A. -
I. Principal Loan
(a) Promissory note dated August 2, 1956 P27,500.00
(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961 8,751.78
(b) Promissory note dated October 19, 1956 P15,500.00
(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961 4,734.08
II. Sheriff's fees [for two (2) day's work] 10.00
III. Attorney's fee 1,000.00

Total obligation as of Nov. 21, 1961

P57,495.86
B. -
I.
Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21,
1961
P56,908.00
II. Additional amount remitted to the PNB on Dec. 18, 1961 738.59

Total amount of Payment made to PNB as of Dec. 18, 1961

P57,646.59

Deduct: Total obligation to the PNB

P57,495.86
Excess Payment to the PNB

P 150.73
========
From the foregoing illustration or computation, it is clear that there was no further necessity to
foreclose the mortgage of herein appellant's chattels on December 21, 1961; and on this
ground alone, we may declare the sale of appellant's chattels on the said date, illegal and
void. But we take into consideration the fact that the PNB must have been led to believe that
the stipulated 10% of the unpaid loan for attorney's fees in the real estate mortgage was
legally maintainable, and in accordance with such belief, herein appellee bank insisted that
the proceeds of the sale of appellant's real property was deficient to liquidate the latter's total
indebtedness. Be that as it may, however, we still find the subsequent sale of herein
appellant's chattels illegal and objectionable on other grounds.
That appellant vigorously objected to the foreclosure of its chattel mortgage after the
foreclosure of its real estate mortgage on November 21, 1961, can not be doubted, as shown
not only by its letter to the PNB on November 19, 1961, but also in its letter to the provincial
sheriff of Camarines Norte on the same date. These letters were followed by another letter to
the appellee bank on December 14, 1961, wherein herein appellant, in no uncertain terms,
reiterated its objection to the scheduled sale of its chattels on December 21, 1961 at Jose
Panganiban, Camarines Norte for the reasons therein stated that: (1) it had settled in full its
total obligation to the PNB by the sale of the real estate and its subsequent remittance of the
amount of P738.59; and (2) that the contemplated sale at Jose Panganiban would violate
their agreement embodied under paragraph (i) in the Chattel Mortgage which provides as
follows:
(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as amended,
the parties hereto agree that the corresponding complaint for foreclosure or the
petition for sale should be filed with the courts or the sheriff of the City of Manila, as
the case may be; and that the Mortgagor shall pay attorney's fees hereby fixed at ten
per cent (10%) of the total indebtedness then unpaid but in no case shall it be less
than P100.00, exclusive of all costs and fees allowed by law and of other expenses
incurred in connection with the said foreclosure. [Emphasis supplied]
Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in utter
disregard of the objection of herein appellant to the sale of its chattels at Jose Panganiban,
Camarines Norte and not in the City of Manila as agreed upon, the PNB proceeded with the
foreclosure sale of said chattels. The trial court, however, justified said action of the PNB in
the decision appealed from in the following rationale:
While it is true that it was stipulated in the chattel mortgage contract that a petition for
the extra-judicial foreclosure thereof should be filed with the Sheriff of the City of
Manila, nevertheless, the effect thereof was merely to provide another place where
the mortgage chattel could be sold in addition to those specified in the Chattel
Mortgage Law. Indeed, a stipulation in a contract cannot abrogate much less
impliedly repeal a specific provision of the statute. Considering that Section 14 of Act
No. 1508 vests in the mortgagee the choice where the foreclosure sale should be
held, hence, in the case under consideration, the PNB had three places from which
to select, namely: (1) the place of residence of the mortgagor; (2) the place of the
mortgaged chattels were situated; and (3) the place stipulated in the contract. The
PNB selected the second and, accordingly, the foreclosure sale held in Jose
Panganiban, Camarines Norte, was legal and valid.
To the foregoing conclusion, We disagree. While the law grants power and authority to the
mortgagee to sell the mortgaged property at a public place in the municipality where the
mortgagor resides or where the property is situated, 8 this Court has held that the sale of a
mortgaged chattel may be made in a place other than that where it is found, provided that the
owner thereof consents thereto; or that there is an agreement to this effect between the
mortgagor and the mortgagee. 9 But when, as in this case, the parties agreed to have the
sale of the mortgaged chattels in the City of Manila, which, any way, is the residence of the
mortgagor, it cannot be rightly said that mortgagee still retained the power and authority to
select from among the places provided for in the law and the place designated in their
agreement over the objection of the mortgagor. In providing that the mortgaged chattel may
be sold at the place of residence of the mortgagor or the place where it is situated, at the
option of the mortgagee, the law clearly contemplated benefits not only to the mortgagor but
to the mortgagee as well. Their right arising thereunder, however, are personal to them; they
do not affect either public policy or the rights of third persons. They may validly be waived.
So, when herein mortgagor and mortgagee agreed in the mortgage contract that in cases of
both judicial and extra-judicial foreclosure under Act 1508, as amended, the corresponding
complaint for foreclosure or the petition for sale should be filed with the courts or the Sheriff
of Manila, as the case may be, they waived their corresponding rights under the law. The
correlative obligation arising from that agreement have the force of law between them and
should be complied with in good faith. 10
By said agreement the parties waived the legal venue, and such waiver is valid and
legally effective, because it, was merely a personal privilege they waived, which is
not contrary, to public policy or to the prejudice of third persons. It is a general
principle that a person may renounce any right which the law gives unless such
renunciation is expressly prohibited or the right conferred is of such nature that its
renunciation would be against public policy. 11
On the other hand, if a place of sale is specified in the mortgage and statutory
requirements in regard thereto are complied with, a sale is properly conducted in that
place. Indeed, in the absence of a statute to the contrary, a sale conducted at a
place other than that stipulated for in the mortgage is invalid, unless the mortgagor
consents to such sale. 12
Moreover, Section 14 of Act 1508, as amended, provides that the officer making the sale
should make a return of his doings which shall particularly describe the articles sold and the
amount received from each article. From this, it is clear that the law requires that sale be
made article by article, otherwise, it would be impossible for him to state the amount received
for each item. This requirement was totally disregarded by the Deputy Sheriff of Camarines
Norte when he sold the chattels in question in bulk, notwithstanding the fact that the said
chattels consisted of no less than twenty different items as shown in the bill of sale. 13 This
makes the sale of the chattels manifestly objectionable. And in the absence of any evidence
to show that the mortgagor had agreed or consented to such sale in gross, the same should
be set aside.
It is said that the mortgagee is guilty of conversion when he sells under the mortgage but not
in accordance with its terms, or where the proceedings as to the sale of foreclosure do not
comply with the statute. 14 This rule applies squarely to the facts of this case where, as
earlier shown, herein appellee bank insisted, and the appellee deputy sheriff of Camarines
Norte proceeded with the sale of the mortgaged chattels at Jose Panganiban, Camarines
Norte, in utter disregard of the valid objection of the mortgagor thereto for the reason that it is
not the place of sale agreed upon in the mortgage contract; and the said deputy sheriff sold
all the chattels (among which were a skagit with caterpillar engine, three GMC 6 x 6 trucks, a
Herring Hall Safe, and Sawmill equipment consisting of a 150 HP Murphy Engine, plainer,
large circular saws etc.) as a single lot in violation of the requirement of the law to sell the
same article by article. The PNB has resold the chattels to another buyer with whom it
appears to have actively cooperated in subsequently taking possession of and removing the
chattels from appellant compound by force, as shown by the circumstance that they had to
take along PC soldiers and municipal policemen of Jose Panganiban who placed the chief
security officer of the premises in jail to deprive herein appellant of its possession thereof. To
exonerate itself of any liability for the breach of peace thus committed, the PNB would want
us to believe that it was the subsequent buyer alone, who is not a party to this case, that was
responsible for the forcible taking of the property; but assuming this to be so, still the PNB
cannot escape liability for the conversion of the mortgaged chattels by parting with its interest
in the property. Neither would its claim that it afterwards gave a chance to herein appellant to
repurchase or redeem the chattels, improve its position, for the mortgagor is not under
obligation to take affirmative steps to repossess the chattels that were converted by the
mortgagee. 15 As a consequence of the said wrongful acts of the PNB and the Deputy
Sheriff of Camarines Norte, therefore, We have to declare that herein appellant is entitled to
collect from them, jointly and severally, the full value of the chattels in question at the time
they were illegally sold by them. To this effect was the holding of this Court in a similar
situation. 16
The effect of this irregularity was, in our opinion to make the plaintiff liable to the
defendant for the full value of the truck at the time the plaintiff thus carried it off to be
sold; and of course, the burden is on the defendant to prove the damage to which he
was thus subjected. . . .
This brings us to the problem of determining the value of the mortgaged chattels at the time
of their sale in 1961. The trial court did not make any finding on the value of the chattels in
the decision appealed from and denied altogether the right of the appellant to recover the
same. We find enough evidence of record, however, which may be used as a guide to
ascertain their value. The record shows that at the time herein appellant applied for its loan
with the PNB in 1956, for which the chattels in question were mortgaged as part of the
security therefore, herein appellant submitted a list of the chattels together with its application
for the loan with a stated value of P107,115.85. An official of the PNB made an inspection of
the chattels in the same year giving it an appraised value of P42,850.00 and a market value
of P85,700.00. 17 The same chattels with some additional equipment acquired by herein
appellant with part of the proceeds of the loan were reappraised in a re-inspection conducted
by the same official in 1958, in the report of which he gave all the chattels an appraised value
of P26,850.00 and a market value of P48,200.00. 18 Another re-inspection report in 1959
gave the appraised value as P19,400.00 and the market value at P25,600.00. 19 The said
official of the PNB who made the foregoing reports of inspection and re-inspections testified
in court that in giving the values appearing in the reports, he used a conservative method of
appraisal which, of course, is to be expected of an official of the appellee bank. And it
appears that the values were considerably reduced in all the re-inspection reports for the
reason that when he went to herein appellant's premises at the time, he found the chattels no
longer in use with some of the heavier equipments dismantled with parts thereof kept in the
bodega; and finding it difficult to ascertain the value of the dismantled chattels in such
condition, he did not give them anymore any value in his reports. Noteworthy is the fact,
however, that in the last re-inspection report he made of the chattels in 1961, just a few
months before the foreclosure sale, the same inspector of the PNB reported that the heavy
equipment of herein appellant were "lying idle and rusty" but were "with a shed free from
rains" 20 showing that although they were no longer in use at the time, they were kept in a
proper place and not exposed to the elements. The President of the appellant company, on
the other hand, testified that its caterpillar (tractor) alone is worth P35,000.00 in the market,
and that the value of its two trucks acquired by it with part of the proceeds of the loan and
included as additional items in the mortgaged chattels were worth no less than P14,000.00.
He likewise appraised the worth of its Murphy engine at P16,000.00 which, according to him,
when taken together with the heavy equipments he mentioned, the sawmill itself and all other
equipment forming part of the chattels under consideration, and bearing in mind the current
cost of equipments these days which he alleged to have increased by about five (5) times,
could safely be estimated at P120,000.00. This testimony, except for the appraised and
market values appearing in the inspection and re-inspection reports of the PNB official earlier
mentioned, stand uncontroverted in the record; but We are not inclined to accept such
testimony at its par value, knowing that the equipments of herein appellant had been idle and
unused since it stopped operating its sawmill in 1958 up to the time of the sale of the chattels
in 1961. We have no doubt that the value of chattels was depreciated after all those years of
inoperation, although from the evidence aforementioned, We may also safely conclude that
the amount of P4,200.00 for which the chattels were sold in the foreclosure sale in question
was grossly unfair to the mortgagor. Considering, however, the facts that the appraised value
of P42,850.00 and the market value of P85,700.00 originally given by the PNB official were
admittedly conservative; that two 6 x 6 trucks subsequently bought by the appellant company
had thereafter been added to the chattels; and that the real value thereof, although
depreciated after several years of inoperation, was in a way maintained because the
depreciation is off-set by the marked increase in the cost of heavy equipment in the market, it
is our opinion that the market value of the chattels at the time of the sale should be fixed at
the original appraised value of P42,850.00.
Herein appellant's claim for moral damages, however, seems to have no legal or factual
basis. Obviously, an artificial person like herein appellant corporation cannot experience
physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or
social humiliation which are basis of moral damages. 21 A corporation may have a good
reputation which, if besmirched, may also be a ground for the award of moral damages. The
same cannot be considered under the facts of this case, however, not only because it is
admitted that herein appellant had already ceased in its business operation at the time of the
foreclosure sale of the chattels, but also for the reason that whatever adverse effects of the
foreclosure sale of the chattels could have upon its reputation or business standing would
undoubtedly be the same whether the sale was conducted at Jose Panganiban, Camarines
Norte, or in Manila which is the place agreed upon by the parties in the mortgage contract.
But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines Norte
in proceeding with the sale in utter disregard of the agreement to have the chattels sold in
Manila as provided for in the mortgage contract, to which their attentions were timely called
by herein appellant, and in disposing of the chattels in gross for the miserable amount of
P4,200.00, herein appellant should be awarded exemplary damages in the sum of
P10,000.00. The circumstances of the case also warrant the award of P3,000.00 as
attorney's fees for herein appellant.
WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from
should be, as hereby, it is set aside. The Philippine National Bank and the Deputy Sheriff of
the province of Camarines Norte are ordered to pay, jointly and severally, to Mambulao
Lumber Company the total amount of P56,000.73, broken as follows: P150.73 overpaid by
the latter to the PNB, P42,850.00 the value of the chattels at the time of the sale with interest
at the rate of 6% per annum from December 21, 1961, until fully paid, P10,000.00 in
exemplary damages, and P3,000.00 as attorney's fees. Costs against both appellees.
























G.R. No. 100812 June 25, 1999
FRANCISCO MOTORS CORPORATION, petitioner, vs. COURT OF APPEALS and
SPOUSES GREGORIO and LIBRADA MANUEL, respondents.
QUISUMBING, J.:
This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to annul the
decision 1 of the Court of Appeals in C.A. G.R. CV No. 10014 affirming the decision rendered
by Branch 135, Regional Trial Court of Makati, Metro Manila. The procedural antecedents of
this petition are as follows:
On January 23, 1985, petitioner filed a complaint 2 against private respondents to recover
three thousand four hundred twelve and six centavos (P3,412.06), representing the balance
of the jeep body purchased by the Manuels from petitioner; an additional sum of twenty
thousand four hundred fifty-four and eighty centavos (P20,454.80) representing the unpaid
balance on the cost of repair of the vehicle; and six thousand pesos (P6,000.00) for cost of
suit and attorney's fees. 3 To the original balance on the price of jeep body were added the
costs of repair. 4 In their answer, private respondents interposed a counterclaim for unpaid
legal services by Gregorio Manuel in the amount of fifty thousand pesos (P50,000) which was
not paid by the incorporators, directors and officers of the petitioner. The trial court decided
the case on June 26, 1985, in favor of petitioner in regard to the petitioner's claim for money,
but also allowed the counter-claim of private respondents. Both parties appealed. On April
15, 1991, the Court of Appeals sustained the trial court's decision. 5 Hence, the present
petition.
For our review in particular is the propriety of the permissive counterclaim which private
respondents filed together with their answer to petitioner's complaint for a sum of money.
Private respondent Gregorio Manuel alleged as an affirmative defense that, while he was
petitioner's Assistant Legal Officer, he represented members of the Francisco family in the
intestate estate proceedings of the late Benita Trinidad. However, even after the termination
of the proceedings, his services were not paid. Said family members, he said, were also
incorporators, directors and officers of petitioner. Hence to petitioner's collection suit, he filed
a counter permissive counterclaim for the unpaid attorney's fees. 6
For failure of petitioner to answer the counterclaim, the trial court declared petitioner in
default on this score, and evidence ex-parte was presented on the counterclaim. The trial
court ruled in favor of private respondents and found that Gregorio Manuel indeed rendered
legal services to the Francisco family in Special Proceedings Number 7803 "In the Matter
of Intestate Estate of Benita Trinidad". Said court also found that his legal services were not
compensated despite repeated demands, and thus ordered petitioner to pay him the amount
of fifty thousand (P50,000.00) pesos. 7
Dissatisfied with the trial court's order, petitioner elevated the matter to the Court of Appeals,
posing the following issues:
I.
WHETHER OR NOT THE DECISION RENDERED BY THE LOWER
COURT IS NULL AND VOID AS IT NEVER ACQUIRED JURISDICTION
OVER THE PERSON OF THE DEFENDANT.
II.
WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY
IN THE ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD
LIABLE TO THE CLAIM OF DEFENDANT-APPELLEES.
III.
WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-
APPELLANT TO ANSWER THE ALLEGED PERMISSIVE
COUNTERCLAIM. 8
Petitioner contended that the trial court did not acquire jurisdiction over it because no
summons was validly served on it together with the copy of the answer containing the
permissive counterclaim. Further, petitioner questions the propriety of its being made party to
the case because it was not the real party in interest but the individual members of the
Francisco family concerned with the intestate case.
In its assailed decision now before us for review, respondent Court of Appeals held that a
counterclaim must be answered in ten (10) days, pursuant to Section 4, Rule 11, of the Rules
of Court; and nowhere does it state in the Rules that a party still needed to be summoned
anew if a counterclaim was set up against him. Failure to serve summons, said respondent
court, did not effectively negate trial court's jurisdiction over petitioner in the matter of the
counterclaim. It likewise pointed out that there was no reason for petitioner to be excused
from answering the counterclaim. Court records showed that its former counsel, Nicanor G.
Alvarez, received the copy of the answer with counterclaim two (2) days prior to his
withdrawal as counsel for petitioner. Moreover when petitioner's new counsel, Jose N.
Aquino, entered his appearance, three (3) days still remained within the period to file an
answer to the counterclaim. Having failed to answer, petitioner was correctly considered in
default by the trial
court. 9 Even assuming that the trial court acquired no jurisdiction over petitioner, respondent
court also said, but having filed a motion for reconsideration seeking relief from the said order
of default, petitioner was estopped from further questioning the trial court's jurisdiction. 10
On the question of its liability for attorney's fees owing to private respondent Gregorio
Manuel, petitioner argued that being a corporation, it should not be held liable therefor
because these fees were owed by the incorporators, directors and officers of the corporation
in their personal capacity as heirs of Benita Trinidad. Petitioner stressed that the personality
of the corporation, vis-a-vis the individual persons who hired the services of private
respondent, is separate and distinct, 11 hence, the liability of said individuals did not become
an obligation chargeable against petitioner.
Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:
However, this distinct and separate personality is merely a fiction created by
law for convenience and to promote justice. Accordingly, this separate
personality of the corporation may be disregarded, or the veil of corporate
fiction pierced, in cases where it is used as a cloak or cover for found (sic)
illegality, or to work an injustice, or where necessary to achieve equity or
when necessary for the protection of creditors. (Sulo ng Bayan, Inc. vs.
Araneta, Inc., 72 SCRA 347) Corporations are composed of natural persons
and the legal fiction of a separate corporate personality is not a shield for the
commission of injustice and inequity. (Chemplex Philippines, Inc. vs.
Pamatian, 57 SCRA 408).
In the instant case, evidence shows that the plaintiff-appellant Francisco
Motors Corporation is composed of the heirs of the late Benita Trinidad as
directors and incorporators for whom defendant Gregorio Manuel rendered
legal services in the intestate estate case of their deceased mother.
Considering the aforestated principles and circumstances established in this
case, equity and justice demands plaintiff-appellant's veil of corporate
identity should be pierced and the defendant be compensated for legal
services rendered to the heirs, who are directors of the plaintiff-appellant
corporation. 12
Now before us, petitioner assigns the following errors:
I.
THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF
PIERCING THE VEIL OF CORPORATE ENTITY.
II.
THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS
JURISDICTION OVER PETITIONER WITH RESPECT TO THE
COUNTERCLAIM. 13
Petitioner submits that respondent court should not have resorted to piercing the veil of
corporate fiction because the transaction concerned only respondent Gregorio Manuel and
the heirs of the late Benita Trinidad. According to petitioner, there was no cause of action by
said respondent against petitioner; personal concerns of the heirs should be distinguished
from those involving corporate affairs. Petitioner further contends that the present case does
not fall among the instances wherein the courts may look beyond the distinct personality of a
corporation. According to petitioner, the services for which respondent Gregorio Manuel
seeks to collect fees from petitioner are personal in nature. Hence, it avers the heirs should
have been sued in their personal capacity, and not involve the corporation. 14
With regard to the permissive counterclaim, petitioner also insists that there was no proper
service of the answer containing the permissive counterclaim. It claims that the counterclaim
is a separate case which can only be properly served upon the opposing party through
summons. Further petitioner states that by nature, a permissive counterclaim is one which
does not arise out of nor is necessarily connected with the subject of the opposing party's
claim. Petitioner avers that since there was no service of summons upon it with regard to the
counterclaim, then the court did not acquire jurisdiction over petitioner. Since a counterclaim
is considered an action independent from the answer, according to petitioner, then in effect
there should be two simultaneous actions between the same parties: each party is at the
same time both plaintiff and defendant with respect to the other, 15requiring in each case
separate summonses.
In their Comment, private respondents focus on the two questions raised by petitioner. They
defend the propriety of piercing the veil of corporate fiction, but deny the necessity of serving
separate summonses on petitioner in regard to their permissive counterclaim contained in the
answer.
Private respondents maintain both trial and appellate courts found that respondent Gregorio
Manuel was employed as assistant legal officer of petitioner corporation, and that his
services were solicited by the incorporators, directors and members to handle and represent
them in Special Proceedings No. 7803, concerning the Intestate Estate of the late Benita
Trinidad. They assert that the members of petitioner corporation took advantage of their
positions by not compensating respondent Gregorio Manuel after the termination of the
estate proceedings despite his repeated demands for payment of his services. They cite
findings of the appellate court that support piercing the veil of corporate identity in this
particular case. They assert that the corporate veil may be disregarded when it is used to
defeat public convenience, justify wrong, protect fraud, and defend crime. It may also be
pierced, according to them, where the corporate entity is being used as an alter ego, adjunct,
or business conduit for the sole benefit of the stockholders or of another corporate entity. In
these instances, they aver, the corporation should be treated merely as an association of
individual persons. 16
Private respondents dispute petitioner's claim that its right to due process was violated when
respondents' counterclaim was granted due course, although no summons was served upon
it. They claim that no provision in the Rules of Court requires service of summons upon a
defendant in a counterclaim. Private respondents argue that when the petitioner filed its
complaint before the trial court it voluntarily submitted itself to the jurisdiction of the court. As
a consequence, the issuance of summons on it was no longer necessary. Private
respondents say they served a copy of their answer with affirmative defenses and
counterclaim on petitioner's former counsel, Nicanor G. Alvarez. While petitioner would have
the Court believe that respondents served said copy upon Alvarez after he had withdrawn his
appearance as counsel for the petitioner, private respondents assert that this contention is
utterly baseless. Records disclose that the answer was received two (2) days before the
former counsel for petitioner withdrew his appearance, according to private respondents.
They maintain that the present petition is but a form of dilatory appeal, to set off petitioner's
obligations to the respondents by running up more interest it could recover from them. Private
respondents therefore claim damages against petitioner. 17
To resolve the issues in this case, we must first determine the propriety of piercing the veil of
corporate fiction.
Basic in corporation law is the principle that a corporation has a separate personality distinct
from its stockholders and from other corporations to which it may be connected. 18 However,
under the doctrine of piercing the veil of corporate entity, the corporation's separate juridical
personality may be disregarded, for example, when the corporate identity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime. Also, where the corporation
is a 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, then its distinct personality may be
ignored. 19 In these circumstances, the courts will treat the corporation as a mere
aggrupation of persons and the liability will directly attach to them. The legal fiction of a
separate corporate personality in those cited instances, for reasons of public policy and in the
interest of justice, will be justifiably set aside.
In our view, however, given the facts and circumstances of this case, the doctrine of piercing
the corporate veil has no relevant application here. Respondent court erred in permitting the
trial court's resort to this doctrine. The rationale behind piercing a corporation's identity in a
given case is to remove the barrier between the corporation from the persons comprising it to
thwart the fraudulent and illegal schemes of those who use the corporate personality as a
shield for undertaking certain proscribed activities. However, in the case at bar, instead of
holding certain individuals or persons responsible for an alleged corporate act, the situation
has been reversed. It is the petitioner as a corporation which is being ordered to answer for
the personal liability of certain individual directors, officers and incorporators concerned.
Hence, it appears to us that the doctrine has been turned upside down because of its
erroneous invocation. Note that according to private respondent Gregorio Manuel his
services were solicited as counsel for members of the Francisco family to represent them in
the intestate proceedings over Benita Trinidad's estate. These estate proceedings did not
involve any business of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco family members
but also from petitioner corporation on the claims that its management had requested his
services and he acceded thereto as an employee of petitioner from whom it could be
deduced he was also receiving a salary. His move to recover unpaid legal fees through a
counterclaim against Francisco Motors Corporation, to offset the unpaid balance of the
purchase and repair of a jeep body could only result from an obvious misapprehension that
petitioner's corporate assets could be used to answer for the liabilities of its individual
directors, officers, and incorporators. Such result if permitted could easily prejudice the
corporation, its own creditors, and even other stockholders; hence, clearly inequitous to
petitioner.
Furthermore, considering the nature of the legal services involved, whatever obligation said
incorporators, directors and officers of the corporation had incurred, it was incurred in their
personal capacity. When directors and officers of a corporation are unable to compensate a
party for a personal obligation, it is far-fetched to allege that the corporation is perpetuating
fraud or promoting injustice, and be thereby held liable therefor by piercing its corporate veil.
While there are no hard and fast rules on disregarding separate corporate identity, we must
always be mindful of its function and purpose. A court should be careful in assessing the
milieu where the doctrine of piercing the corporate veil may be applied. Otherwise an
injustice, although unintended, may result from its erroneous application.
The personality of the corporation and those of its incorporators, directors and officers in their
personal capacities ought to be kept separate in this case. The claim for legal fees against
the concerned individual incorporators, officers and directors could not be properly directed
against the corporation without violating basic principles governing corporations. Moreover,
every action including a counterclaim must be prosecuted or defended in the name of
the real party in interest. 20 It is plainly an error to lay the claim for legal fees of private
respondent Gregorio Manuel at the door of petitioner (FMC) rather than individual members
of the Francisco family.
However, with regard to the procedural issue raised by petitioner's allegation, that it needed
to be summoned anew in order for the court to acquire jurisdiction over it, we agree with
respondent court's view to the contrary. Section 4, Rule 11 of the Rules of Court provides that
a counterclaim or cross-claim must be answered within ten (10) days from service. Nothing in
the Rules of Court says that summons should first be served on the defendant before an
answer to counterclaim must be made. The purpose of a summons is to enable the court to
acquire jurisdiction over the person of the defendant. Although a counterclaim is treated as
an entirely distinct and independent action, the defendant in the counterclaim, being the
plaintiff in the original complaint, has already submitted to the jurisdiction of the court.
Following Rule 9, Section 3 of the 1997 Rules of Civil Procedure, 21 if a defendant (herein
petitioner) fails to answer the counterclaim, then upon motion of plaintiff, the defendant may
be declared in default. This is what happened to petitioner in this case, and this Court finds
no procedural error in the disposition of the appellate court on this particular issue. Moreover,
as noted by the respondent court, when petitioner filed its motion seeking to set aside the
order of default, in effect it submitted itself to the jurisdiction of the court. As well said by
respondent court:
Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he
records show that upon its request, plaintiff-appellant was granted time to file
a motion for reconsideration of the disputed decision. Plaintiff-appellant did
file its motion for reconsideration to set aside the order of default and the
judgment rendered on the counterclaim.
Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the
counterclaim, as it vigorously insists, plaintiff-appellant is considered to have
submitted to the court's jurisdiction when it filed the motion for
reconsideration seeking relief from the court. (Soriano vs. Palacio, 12 SCRA
447). A party is estopped from assailing the jurisdiction of a court after
voluntarily submitting himself to its jurisdiction. (Tejones vs. Gironella, 159
SCRA 100). Estoppel is a bar against any claims of lack of jurisdiction.
(Balais vs. Balais, 159 SCRA 37). 22
WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby
REVERSED insofar only as it held Francisco Motors Corporation liable for the legal obligation
owing to private respondent Gregorio Manuel; but this decision is without prejudice to his
filing the proper suit against the concerned members of the Francisco family in their personal
capacity. No pronouncement as to costs.1wphi1.nt
SO ORDERED.








G.R. No. 142616 July 31, 2001
PHILIPPINE NATIONAL BANK, petitioner, vs. RITRATTO GROUP INC., RIATTO
INTERNATIONAL, INC., and DADASAN GENERAL MERCHANDISE,respondents.
KAPUNAN, J.:
In a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner
seeks to annul and set aside the Court of Appeals' decision in C.A. CV G.R. S.P. No. 55374
dated March 27, 2000, affirming the Order issuing a writ of preliminary injunction of the
Regional Trial Court of Makati, Branch 147 dated June 30, 1999, and its Order dated October
4, 1999, which denied petitioner's motion to dismiss.
The antecedents of this case are as follows:
Petitioner Philippine National Bank is a domestic corporation organized and existing under
Philippine law. Meanwhile, respondents Ritratto Group, Inc., Riatto International, Inc. and
Dadasan General Merchandise are domestic corporations, likewise, organized and existing
under Philippine law.
On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB,
organized and doing business in Hong Kong, extended a letter of credit in favor of the
respondents in the amount of US$300,000.00 secured by real estate mortgages constituted
over four (4) parcels of land in Makati City. This credit facility was later increased
successively to US$1,140,000.00 in September 1996; to US$1,290,000.00 in November
1996; to US$1,425,000.00 in February 1997; and decreased to US$1,421,316.18 in April
1998. Respondents made repayments of the loan incurred by remitting those amounts to
their loan account with PNB-IFL in Hong Kong.
However, as of April 30, 1998, their outstanding obligations stood at US$1,497,274.70.
Pursuant to the terms of the real estate mortgages, PNB-IFL, through its attorney-in-fact
PNB, notified the respondents of the foreclosure of all the real estate mortgages and that the
properties subject thereof were to be sold at a public auction on May 27, 1999 at the Makati
City Hall.
On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of
a writ of preliminary injunction and/or temporary restraining order before the Regional Trial
Court of Makati. The Executive Judge of the Regional Trial Court of Makati issued a 72-hour
temporary restraining order. On May 28, 1999, the case was raffled to Branch 147 of the
Regional Trial Court of Makati. The trial judge then set a hearing on June 8, 1999. At the
hearing of the application for preliminary injunction, petitioner was given a period of seven
days to file its written opposition to the application. On June 15, 1999, petitioner filed an
opposition to the application for a writ of preliminary injunction to which the respondents filed
a reply. On June 25, 1999, petitioner filed a motion to dismiss on the grounds of failure to
state a cause of action and the absence of any privity between the petitioner and
respondents. On June 30, 1999, the trial court judge issued an Order for the issuance of a
writ of preliminary injunction, which writ was correspondingly issued on July 14, 1999. On
October 4, 1999, the motion to dismiss was denied by the trial court judge for lack of merit.
Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of the
writ of preliminary injunction before the Court of Appeals. In the impugned decision,1 the
appellate court dismissed the petition. Petitioner thus seeks recourse to this Court and raises
the following errors:
1.
THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE
COMPLAINT A QUO, CONSIDERING THAT BY THE ALLEGATIONS OF THE
COMPLAINT, NO CAUSE OF ACTION EXISTS AGAINST PETITIONER, WHICH IS
NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-FACT
AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.
2.
THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT
TO ISSUE IN EXCESS OR LACK OF JURISDICTION A WRIT OF PRELIMINARY
INJUNCTION OVER AND BEYOND WHAT WAS PRAYED FOR IN THE
COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS. GUADIZ JR.,
101 SCRA 827.2
Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000 and the
trial court's Orders dated June 30, 1999 and October 4, 1999 be set aside and the dismissal
of the complaint in the instant case.3
In their Comment, respondents argue that even assuming arguendo that petitioner and PNB-
IFL are two separate entities, petitioner is still the party-in-interest in the application for
preliminary injunction because it is tasked to commit acts of foreclosing respondents'
properties.4 Respondents maintain that the entire credit facility is void as it contains
stipulations in violation of the principle of mutuality of contracts.5 In addition, respondents
justified the act of the court a quo in applying the doctrine of "Piercing the Veil of Corporate
Identity" by stating that petitioner is merely an alter ego or a business conduit of PNB-IFL.6
The petition is impressed with merit.
Respondents, in their complaint, anchor their prayer for injunction on alleged invalid
provisions of the contract:
GROUNDS
I
THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE
DISCRETION OF THE DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF
MUTUALITY OF CONTRACTS.
II
THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF
INTEREST AGREED UPON MAY BE UNILATERALLY MODIFIED BY
DEFENDANT, THERE WAS NO STIPULATION THAT THE RATE OF INTEREST
SHALL BE REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM RATE
OF INTEREST IS REDUCED BY LAW OR BY THE MONETARY BOARD.7
Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB from
the foreclosure and eventual sale of the property in order to protect their rights to said
property by reason of void credit facilities as bases for the real estate mortgage over the said
property.8
The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In
their complaint, respondents admit that petitioner is a mere attorney-in-fact for the PNB-IFL
with full power and authority to, inter alia, foreclose on the properties mortgaged to secure
their loan obligations with PNB-IFL. In other words, herein petitioner is an agent with limited
authority and specific duties under a special power of attorney incorporated in the real estate
mortgage. It is not privy to the loan contracts entered into by respondents and PNB-IFL.
The issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner's
principal and the party to the loan contracts, and the respondents. Yet, despite the
recognition that petitioner is a mere agent, the respondents in their complaint prayed that the
petitioner PNB be ordered to re-compute the rescheduling of the interest to be paid by them
in accordance with the terms and conditions in the documents evidencing the credit facilities,
and crediting the amount previously paid to PNB by herein respondents.9
Clearly, petitioner not being a part to the contract has no power to re-compute the interest
rates set forth in the contract. Respondents, therefore, do not have any cause of action
against petitioner.
The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL, is a
wholly owned subsidiary of defendant Philippine National Bank, the suit against the
defendant PNB is a suit against PNB-IFL.10 In justifying its ruling, the trial court, citing the
case of Koppel Phil. Inc. vs. Yatco,11 reasoned that the corporate entity may be disregarded
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.12
We disagree.
The general rule is that as a legal entity, a corporation has a personality distinct and separate
from its individual stockholders or members, and is not affected by the personal rights,
obligations and transactions of the latter.13The mere fact that a corporation owns all of the
stocks of another corporation, taken alone is not sufficient to justify their being treated as one
entity. If used to perform legitimate functions, a subsidiary's separate existence may be
respected, and the liability of the parent corporation as well as the subsidiary will be confined
to those arising in their respective business. The courts may in the exercise of judicial
discretion step in to prevent the abuses of separate entity privilege and pierce the veil of
corporate entity.
We find, however, that the ruling in Koppel finds no application in the case at bar. In said
case, this Court disregarded the separate existence of the parent and the subsidiary on the
ground that the latter was formed merely for the purpose of evading the payment of higher
taxes. In the case at bar, respondents fail to show any cogent reason why the separate
entities of the PNB and PNB-IFL should be disregarded.
While there exists no definite test of general application in determining when a subsidiary
may be treated as a mere instrumentality of the parent corporation, some factors have been
identified that will justify the application of the treatment of the doctrine of the piercing of the
corporate veil. The case of Garrett vs. Southern Railway Co.14is enlightening. The case
involved a suit against the Southern Railway Company. Plaintiff was employed by Lenoir Car
Works and alleged that he sustained injuries while working for Lenoir. He, however, filed a
suit against Southern Railway Company on the ground that Southern had acquired the entire
capital stock of Lenoir Car Works, hence, the latter corporation was but a mere
instrumentality of the former. The Tennessee Supreme Court stated that as a general rule the
stock ownership alone by one corporation of the stock of another does not thereby render the
dominant corporation liable for the torts of the subsidiary unless the separate corporate
existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such
that it is but an instrumentality or adjunct of the dominant corporation. Said Court then
outlined the circumstances which may be useful in the determination of whether the
subsidiary is but a mere instrumentality of the parent-corporation:
The Circumstance rendering the subsidiary an instrumentality. It is manifestly
impossible to catalogue the infinite variations of fact that can arise but there are
certain common circumstances which are important and which, if present in the
proper combination, are controlling.
These are as follows:
(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the
subsidiary.
(g) The subsidiary has substantially no business except with the parent corporation
or no assets except those conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the
subsidiary is described as a department or division of the parent corporation, or its
business or financial responsibility is referred to as the parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in the
interest of the subsidiary but take their orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.
The Tennessee Supreme Court thus ruled:
In the case at bar only two of the eleven listed indicia occur, namely, the ownership
of most of the capital stock of Lenoir by Southern, and possibly subscription to the
capital stock of Lenoir. . . The complaint must be dismissed.
Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate veil is an
equitable doctrine developed to address situations where the separate corporate personality
of a corporation is abused or used for wrongful purposes. The doctrine applies when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend
crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation
is the mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.15
In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining the applicability of
the doctrine of piercing the veil of corporate fiction, to wit:
1. Control, not mere majority or complete control, but complete domination, not only
of finances but of policy and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at the time no separate mind,
will or existence of its own.
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and,
unjust act in contravention of plaintiffs legal rights; and,
3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate veil." In
applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual defendant's
relationship to the operation.17
Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no
showing of the indicative factors that the former corporation is a mere instrumentality of the
latter are present. Neither is there a demonstration that any of the evils sought to be
prevented by the doctrine of piercing the corporate veil exists. Inescapably, therefore, the
doctrine of piercing the corporate veil based on the alter ego or instrumentality doctrine finds
no application in the case at bar.
In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the
significant legal relationship involved in this case since the petitioner was not sued because it
is the parent company of PNB-IFL. Rather, the petitioner was sued because it acted as an
attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A suit against an agent
cannot without compelling reasons be considered a suit against the principal. Under the
Rules of Court, every action must be prosecuted or defended in the name of the real party-in-
interest, unless otherwise authorized by law or these Rules.18 In mandatory terms, the Rules
require that "parties-in-interest without whom no final determination can be had, an action
shall be joined either as plaintiffs or defendants."19 In the case at bar, the injunction suit is
directed only against the agent, not the principal.
Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere
provisional remedy but adjunct to the main suit.20 A writ of preliminary injunction is an
ancillary or preventive remedy that may only be resorted to by a litigant to protect or preserve
his rights or interests and for no other purpose during the pendency of the principal action.
The dismissal of the principal action thus results in the denial of the prayer for the issuance of
the writ. Further, there is no showing that respondents are entitled to the issuance of the writ.
Section 3, Rule 58, of the 1997 Rules of Civil Procedure provides:
SECTION 3. Grounds for issuance of preliminary injunction. A preliminary
injunction may be granted when it is established:
(a) That the applicant is entitled to the relief demanded, and the whole or part of such
relief consists in restraining the commission or continuance of the act or acts
complained of, or in requiring the performance of an act or acts, either for a limited
period or perpetually,
(b) That the commission, continuance or non-performance of the acts or acts
complained of during the litigation would probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is attempting to
do, or is procuring or suffering to be done, some act or acts probably in violation of
the rights of the applicant respecting the subject of the action or proceeding, and
tending to render the judgment ineffectual.
Thus, an injunctive remedy may only be resorted to when there is a pressing necessity to
avoid injurious consequences which cannot be remedied under any standard
compensation.21 Respondents do not deny their indebtedness. Their properties are by their
own choice encumbered by real estate mortgages. Upon the non-payment of the loans,
which were secured by the mortgages sought to be foreclosed, the mortgaged properties are
properly subject to a foreclosure sale. Moreover, respondents questioned the alleged void
stipulations in the contract only when petitioner initiated the foreclosure proceedings. Clearly,
respondents have failed to prove that they have a right protected and that the acts against
which the writ is to be directed are violative of said right.22The Court is not unmindful of the
findings of both the trial court and the appellate court that there may be serious grounds to
nullify the provisions of the loan agreement. However, as earlier discussed, respondents
committed the mistake of filing the case against the wrong party, thus, they must suffer the
consequences of their error.
All told, respondents do not have a cause of action against the petitioner as the latter is not
privy to the contract the provisions of which respondents seek to declare void. Accordingly,
the case before the Regional Trial Court must be dismissed and the preliminary injunction
issued in connection therewith, must be lifted.
IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed decision of
the Court of Appeals is hereby REVERSED. The Orders dated June 30, 1999 and October 4,
1999 of the Regional Trial Court of Makati, Branch 147 in Civil Case No. 99-1037 are hereby
ANNULLED and SET ASIDE and the complaint in said case DISMISSED.
SO ORDERED.



































G.R. No. 127181 September 4, 2001
LAND BANK OF THE PHILIPPINES, petitioner, vs. THE COURT OF APPEALS, ECO
MANAGEMENT CORPORATION and EMMANUEL C. OATE, respondents.
QUISUMBING, J.:
This petition for review on certiorari seeks to reverse and set aside the
decision1 promulgated on June 17, 1996 in CA-GR No. CV-43239 of public respondent and
its resolution2 dated November 29, 1996 denying petitioners motion for reconsideration.3
The facts of this case as found by the Court of Appeals and which we find supported by the
records are as follows:
On various dates in September, October, and November, 1980, appellant Land Bank
of the Philippines (LBP) extended a series of credit accommodations to appellee
ECO, using the trust funds of the Philippine Virginia Tobacco Administration (PVTA)
in the aggregate amount of P26,109,000.00. The proceeds of the credit
accommodations were received on behalf of ECO by appellee Oate.
On the respective maturity dates of the loans, ECO failed to pay the same. Oral and
written demands were made, but ECO was unable to pay. ECO claims that the
company was in financial difficulty for it was unable to collect its investments with
companies which were affected by the financial crisis brought about by the Dewey
Dee scandal.
x x x
On October 20, 1981, ECO proposed and submitted to LBP a "Plan of Payment"
whereby the former would set up a financing company which would absorb the loan
obligations. It was proposed that LBP would participate in the scheme through the
conversion of P9,000,000.00 which was part of the total loan, into equity.
On March 4, 1982, LBP informed ECO of the action taken by the formers Trust
Committee concerning the "Plan of Payment" which reads in part, as follows:
x x x
Please be informed that the Banks Trust Committee has deliberated on the
plan of payment during its meetings on November 6, 1981 and February 23,
1982. The Committee arrived at a decision that you may proceed with your
Plan of Payment provided Land Bank shall not participate in the undertaking
in any manner whatsoever.
In view thereof, may we advise you to make necessary revision in the
proposed Plan of Payment and submit the same to us as soon as possible.
(Records, p. 428)
On May 5, 1982, ECO submitted to LBP a "Revised Plan of Payment" deleting the
latters participation in the proposed financing company. The Trust Committee
deliberated on the "Revised Plan of Payment" and resolved to reject it. LBP then sent
a letter to the PVTA for the latters comments. The letter stated that if LBP did not
hear from PVTA within five (5) days from the latters receipt of the letter, such silence
would be construed to be an approval of LBPs intention to file suit against ECO and
its corporate officers. PVTA did not respond to the letter.
On June 28, 1982, Landbank filed a complaint for Collection of Sum of Money
against ECO and Emmanuel C. Oate before the Regional Trial Court of Manila,
Branch 50.
After trial on the merits, a judgment was rendered in favor of LBP; however, appellee
Oate was absolved from personal liability for insufficiency of evidence.
Dissatisfied, both parties filed their respective Motions for Reconsideration. LBP
claimed that there was an error in computation in the amounts to be paid. LBP also
questioned the dismissal of the case with regard to Oate.
On the other hand, ECO questioned its being held liable for the amount of the loan.
Upon order of the court, both parties submitted Supplemental Motions for
Reconsideration and their respective Oppositions to each others Motions.
On February 3, 1993, the trial court rendered an Amended Decision, the dispositive
portion of which reads as follows:
ACCORDINGLY, the Decision, dated December 3, 1990, is hereby modified
to read as follows:
WHEREFORE, judgment is rendered ordering defendant Eco Management
Corporation to pay plaintiff Land Bank of the Philippines:
A. The sum of P26,109,000.00 representing the total amount of the ten (10)
loan accommodations plus 16% interest per annum computed from the
dates of their respective maturities until fully paid, broken down as follows:
1. the principal amount of P4,000,000.00 with interest at 16%
computed from September 18, 1981;
2. the principal amount of P5,000,000.00 with interest at 16%
computed from September 21, 1981;
3. the principal amount of P1,000,000.00 with interest rate at 16%
computed from September 28, 1981;
4. the principal amount of P1,000,000.00 with interest at 15%
computed from October 5, 1981;
5. the principal amount of P2,000,000.00 with interest rate at of 16%
computed from October 8, 1981;
6. the principal amount of P2,000,000.00 with interest rate at of 16%
from October 23, 1981;
7. the principal amount of P814,000.00 with interest rate at of 16%
computed from November 1, 1981;
8. the principal amount of P2,295,000.00 with interest rate at of 16%
computed from November 6, 1981;
9. the principal amount of P3,000,000.00 with interest rate at of 16%
computed from November 7, 1981;
10. the principal amount of P5,000,000.00 with interest rate at 16%
computed from November 9, 1981;
B. The sum of P260,000.00 as attorneys fees; and
C. The costs of the suit.
The case as against defendant Emmanuel Oate is dismissed for
insufficiency of evidence.
SO ORDERED. (Records, p. 608)4
The Court of Appeals affirmed in toto the amended decision of the trial court.5
On June 9, 1996, petitioner filed a motion for reconsideration, which was denied in a
resolution dated November 29, 1996. Hence, this present petition, assigning the following
errors allegedly committed by the Court of Appeals:
A
THE COURT OF APPEALS GRAVELY ERRED IN NOT RULING THAT BASED ON
THE FACTS AS ESTABLISHED BY EVIDENCE, THERE EXISTS A SUBSTANTIAL
AND JUSTIFIABLE GROUND UPON WHICH THE LEGAL NOTION OF THE
CORPORATE FICTION OF RESPONDENT ECO MANAGEMENT CORPORATION
MAY BE PIERCED.
B
THE COURT OF APPEALS GRAVELY ERRED IN NOT A[T]TACHING LIABILITY
TO RESPONDENT EMMANUEL C. OATE JOINTLY AND SEVERALLY WITH
RESPONDENT ECO MANAGEMENT CORPORATION FOR THE PRINCIPAL SUM
OF P26 M PLUS INTEREST THEREON.
C
THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE RULING OF
THE LOWER COURT THE SAME NOT BEING SUPPORTED BY THE EVIDENCE
AND APPLICABLE LAWS AND JURISPRUDENCE.6
The primary issues for resolution here are (1) whether or not the corporate veil of ECO
Management Corporation should be pierced; and (2) whether or not Emmanuel C. Oate
should be held jointly and severally liable with ECO Management Corporation for the loans
incurred from Land Bank.
Petitioner contends that the personalities of Emmanuel Oate and of ECO Management
Corporation should be treated as one, for the particular purpose of holding respondent Oate
liable for the loans incurred by corporate respondent ECO from Land Bank. According to
petitioner, the said corporation was formed ostensibly to allow Oate to acquire loans from
Land Bank which he used for his personal advantage.
Petitioner submits the following arguments to support its stand: (1) Respondent Oate owns
the majority of the interest holdings in respondent corporation, specifically during the crucial
time when appellees applied for and obtained the loan from LANDBANK, sometime in
September to November, 1980. (2) The acronym ECO stands for the initials of Emmanuel C.
Oate, which is the logical, sensible and concrete explanation for the name ECO, in the
absence of evidence to the contrary. (3) Respondent Oate has always referred to himself as
the debtor, not merely as an officer or a representative of respondent corporation. (4)
Respondent Oate personally paid P1 Million taken from trust accounts in his name. (5)
Respondent Oate made a personal offering to pay his personal obligation. (6) Respondent
Oate controlled respondent corporation by simultaneously holding two (2) corporate
positions, viz., as Chairman and as treasurer, beginning from the time of respondent
corporations incorporation and continuously thereafter without benefit of election. (7)
Respondent corporation had not held any meeting of the stockholders or of the Board of
Directors, as shown by the fact that no proceeding of such corporate activities was filed with
or borne by the record of the Securities and Exchange Commission (SEC). The only
corporate records respondent corporation filed with the SEC were the following: Articles of
Incorporation, Treasurers Affidavit, Undertaking to Change Corporate Name, Statement of
Assets and Liabilities.7
Private respondents, in turn, contend that Oates only participation in the transaction
between petitioner and respondent ECO was his execution of the loan agreements and
promissory notes as Chairman of the corporations Board of Directors. There was nothing in
the loan agreement nor in the promissory notes which would indicate that Oate was binding
himself jointly and severally with ECO. Respondents likewise deny that ECO stands for
Emmanuel C. Oate. Respondents also note that Oate is no longer a majority stockholder
of ECO and that the payment by a third person of the debt of another is allowed under the
Civil Code. They also alleged that there was no fraud and/or bad faith in the transactions
between them and Land Bank. Hence, private respondents conclude, there is no legal
ground to pierce the veil of respondent corporations personality.8
At the outset, we find the matters raised by petitioner in his argumentation are mainly
questions of fact which are not proper in a petition of this nature.9 Petitioner is basically
questioning the evaluation made by the Court of Appeals of the evidence submitted at the
trial. The Court of Appeals had found that petitioners evidence was not sufficient to justify the
piercing of ECOs corporate personality.10 Petitioner contended otherwise. It is basic that
where what is being questioned is the sufficiency of evidence, it is a question of
fact.11 Nevertheless, even if we regard these matters as tendering an issue of law, we still
find no reason to reverse the findings of the Court of Appeals.
A corporation, upon coming into existence, is invested by law with a personality separate and
distinct from those persons composing it as well as from any other legal entity to which it may
be related.12 By this attribute, a stockholder may not, generally, be made to answer for acts
or liabilities of the said corporation, and vice versa.13This separate and distinct personality is,
however, merely a fiction created by law for convenience and to promote the ends of
justice.14 For this reason, it may not be used or invoked for ends subversive to the policy and
purpose behind its creation15 or which could not have been intended by law to which it owes
its being.16 This is particularly true when the fiction is used to defeat public convenience,
justify wrong, protect fraud, defend crime,17 confuse legitimate legal or judicial
issues,18 perpetrate deception or otherwise circumvent the law.19 This is likewise true where
the corporate entity is being used as an alter ego, adjunct, or business conduit for the sole
benefit of the stockholders or of another corporate entity.20 In all these cases, the notion of
corporate entity will be pierced or disregarded with reference to the particular transaction
involved.21
The burden is on petitioner to prove that the corporation and its stockholders are, in fact,
using the personality of the corporation as a means to perpetrate fraud and/or escape a
liability and responsibility demanded by law. In order to disregard the separate juridical
personality of a corporation, the wrongdoing must be clearly and convincingly
established.22 In the absence of any malice or bad faith, a stockholder or an officer of a
corporation cannot be made personally liable for corporate liabilities.23
The mere fact that Oate owned the majority of the shares of ECO is not a ground to
conclude that Oate and ECO is one and the same. Mere ownership by a single stockholder
of all or nearly all of the capital stock of a corporation is not by itself sufficient reason for
disregarding the fiction of separate corporate personalities.24Neither is the fact that the name
"ECO" represents the first three letters of Oates name sufficient reason to pierce the veil.
Even if it did, it does not mean that the said corporation is merely a dummy of Oate. A
corporation may assume any name provided it is lawful. There is nothing illegal in a
corporation acquiring the name or as in this case, the initials of one of its shareholders.
That respondent corporation in this case was being used as a mere alter ego of Oate to
obtain the loans had not been shown. Bad faith or fraud on the part of ECO and Oate was
not also shown. As the Court of Appeals observed, if shareholders of ECO meant to defraud
petitioner, then they could have just easily absconded instead of going out of their way to
propose "Plans of Payment."25 Likewise, Oate volunteered to pay a portion of the
corporations debt.26 This offer demonstrated good faith on his part to ease the debt of the
corporation of which he was a part. It is understandable that a shareholder would want to
help his corporation and in the process, assure that his stakes in the said corporation are
secured. In this case, it was established that the P1 Million did not come solely from Oate. It
was taken from a trust account which was owned by Oate and other investors.27 It was
likewise proved that the P1 Million was a loan granted by Oate and his co-depositors to
alleviate the plight of ECO.28 This circumstance should not be construed as an admission
that he was really the debtor and not ECO.
In sum, we agree with the Court of Appeals conclusion that the evidence presented by the
petitioner does not suffice to hold respondent Oate personally liable for the debt of co-
respondent ECO. No reversible error could be attributed to respondent courts decision and
resolution which petitioner assails.
WHEREFORE, the petition is DENIED for lack of merit. The decision and resolution of the
Court of Appeals in CA-G.R. CV No. 43239 are AFFIRMED. Costs against petitioner.
SO ORDERED.


































G.R. No. 141617 August 14, 2001
ADALIA B. FRANCISCO and MERRYLAND DEVELOPMENT
CORPORATION, petitioners, vs. RITA C. MEJIA, as Executrix of Testate Estate of
ANDREA CORDOVA VDA. DE GUTERREZ, respondent.
GONZAGA-REYES,J.:
In this petition for review by certiorari, petitioners pray for the setting aside of the Decision of
the Court Appeals promulgated on 13 April 1999 and its 15 December 1999 Resolution in
CA-G.R. CV No. 19281.
As culled from the decisions of the lower courts and the pleadings of the parties, the factual
background of this case is as set out herein:
Andrea Cordova Vda. de Gutierrez (Gutierrez) was the registered owner of a parcel of land in
Camarin, Caloocan City known as Lot 861 of the Tala Estate. The land had an aggregate
area of twenty-five (25) hectares and was covered by Transfer Certificate of Title (TCT) No.
5779 of the Registry of Deeds of Caloocan City. The property was later subdivided into five
lots with an area of five hectares each and pursuant thereto, TCT No. 5779 was cancelled
and five new transfer certificates of title were issued in the name of Gutierrez, namely TCT
No. 7123 covering Lot 861-A, TCT No. 7124 covering Lot 861-B, TCT No. 7125 covering Lot
861-C, TCT No. 7126 covering Lot 861-D and TCT No. 7127 covering Lot 861-E.
On 21 December 1964, Gutierrez and Cardale Financing and Realty Corporation (Cardale)
executed a Deed of Sale with Mortgage relating to the lots covered by TCT Nos. 7124, 7125,
7126 and 7127, for the consideration of P800,000.00. Upon the execution of the deed,
Cardale paid Gutierrez P171,000.00. It was agreed that the balance of P629,000.00 would be
paid in several installments within five years from the date of the deed, at an interest of nine
percent per annum "based on the successive unpaid principal balances." Thereafter, the
titles of Gutierrez were cancelled and in lieu thereof TCT Nos. 7531 to 7534 were issued in
favor of Cardale.
To secure payment of the balance of the purchase price, Cardale constituted a mortgage on
three of the four parcels of land covered by TCT Nos. 7531, 7532 and 7533, encompassing
fifteen hectares of land.1 The encumbrance was annotated upon the certificates of title and
the owner's duplicate certificates. The owner's duplicates were retained by Gutierrez.
On 26 August 1968, owing to Cardale's failure to settle its mortgage obligation, Gutierrez filed
a complaint for rescission of the contract with the Quezon City Regional Trial Court (RTC),
which was docketed as Civil Case No. Q-12366.2 On 20 October 1969, during the pendency
of the rescission case, Gutierrez died and was substituted by her executrix, respondent Rita
C. Mejia (Mejia). In 1971, plaintiff's presentation of evidence was terminated. However,
Cardale, which was represented by petitioner Adalia B. Francisco (Francisco) in her capacity
as Vice-President and Treasurer of Cardale, lost interest in proceeding with the presentation
of its evidence and the case lapsed into inactive status for a period of about fourteen years.
In the meantime, the mortgaged parcels of land covered by TCT Nos. 7532 and 7533
became delinquent in the payment of real estate taxes in the amount of P102,300.00, while
the other mortgaged property covered by TCT No. 7531 became delinquent in the amount of
P89,231.37, which culminated in their levy and auction sale on 1 and 12 September 1983, in
satisfaction of the tax arrears. The highest bidder for the three parcels of land was petitioner
Merryland Development Corporation (Merryland), whose President and majority stockholder
is Francisco. A memorandum based upon the certificate of sale was then made upon the
original copies of TCT Nos. 7531 to 7533.
On 13 August 1984, before the expiration of the one year redemption period, Mejia filed a
Motion for Decision with the trial court. The hearing of said motion was deferred, however,
due to a Motion for Postponement filed by Cardale through Francisco, who signed the motion
in her capacity as "officer-in-charge," claiming that Cardale needed time to hire new counsel.
However, Francisco did not mention the tax delinquencies and sale in favor of Merryland.
Subsequently, the redemption period expired and Merryland, acting through Francisco, filed
petitions for consolidation of title,3 which culminated in the issuance of certain
orders4 decreeing the cancellation of Cardales' TCT Nos. 7531 to 7533 and the issuance of
new transfer certificates of title "free from any encumbrance or third-party claim whatsoever"
in favor of Merryland. Pursuant to such orders, the Register of Deeds of Caloocan City issued
new transfer certificates of title in the name of Merryland which did not bear a memorandum
of the mortgage liens in favor of Gutierrez.
Thereafter, sometime in June 1985, Francisco filed in Civil Case No. Q-12366 an undated
Manifestation to the effect that the properties subject of the mortgage and covered by TCT
Nos. 7531 to 7533 had been levied upon by the local government of Caloocan City and sold
at a tax delinquency sale. Francisco further claimed that the delinquency sale had rendered
the issues in Civil Case No. Q-12366 moot and academic. Agreeing with Francisco, the trial
court dismissed the case, explaining that since the properties mortgaged to Cardale had
been transferred to Merryland which was not a party to the case for rescission, it would be
more appropriate for the parties to resolve their controversy in another action.
On 14 January 1987, Mejia, in her capacity as executrix of the Estate of Gutierrez, filed with
the RTC of Quezon City a complaint for damages with prayer for preliminary attachment
against Francisco, Merryland and the Register of Deeds of Caloocan City. The case was
docketed as Civil Case No. Q-49766. On 15 April 1988, the trial court rendered a decision5 in
favor of the defendants, dismissing the complaint for damages filed by Mejia. It was held that
plaintiff Mejia, as executrix of Gutierrez's estate, failed to establish by clear and convincing
evidence her allegations that Francisco controlled Cardale and Merryland and that she had
employed fraud by intentionally causing Cardale to default in its payment of real property
taxes on the mortgaged properties so that Merryland could purchase the same by means of a
tax delinquency sale. Moreover, according to the trial court, the failure to recover the property
subject of the Deed of Sale with Mortgage was due to Mejia's failure to actively pursue the
action for rescission (Civil Case No. 12366), allowing the case to drag on for eighteen years.
Thus, it ruled that
xxx xxx xxx
The act of not paying or failing to pay taxes due the government by the defendant
Adalia B. Francisco, as treasurer of Cardale Financing and Realty Corporation do
not, per se, constitute perpetration of fraud or an illegal act. It do [sic] not also
constitute an act of evasion of an existing obligation (to plaintiff) if there is no clear
showing that such an act of non-payment of taxes was deliberately made despite its
(Cardale's) solvency and capability to pay. There is no evidence showing that
Cardale Financing and Realty Corporation was financially capable of paying said
taxes at the time.
"There are times when the corporate fiction will be disregarded: (1) where all the
members or stockholders commit illegal act; (2) where the corporation is used as
dummy to commit fraud or wrong; (3) where the corporation is an agency for a parent
corporation; and (4) where the stock of a corporation is owned by one person." (I,
Fletcher, 58, 59, 61 and 63). None of the foregoing reasons can be applied to the
incidents in this case: (1) there appears no illegal act committed by the stockholders
of defendant Merryland Development Corporation and Cardale Financing and Realty
Corporation; (2) the incidents proven by evidence of the plaintiff as well as that of the
defendants do not show that either or both corporations were used as dummies by
defendant Adalia B. Francisco to commit fraud or wrong. To be used as [a] dummy,
there has to be a showing that the dummy corporation is controlled by the person
using it. The evidence of plaintiff failed to prove that defendant Adalia B. Francisco
has controlling interest in either or both corporations. On the other hand, the
evidence of defendants clearly show that defendant Francisco has no control over
either of the two corporations; (3) none of the two corporations appears to be an
agency for a parent (the other) corporation; and (4) the stock of either of the two
corporation [sic] is not owned by one person (defendant Adalia B. Francisco). Except
for defendant Adalia B. Francisco, the incorporators and stockholders of one
corporation are different from the other.
xxx xxx xxx
The said case (Civil Case No. 12366) remained pending for almost 18 years before
the then Court of First Instance, now the Regional Trial Court. Even if the trial of the
said case became protracted on account of the retirement and/or promotion of the
presiding judge, as well as the transfer of the case from one sala to another, and as
claimed by the plaintiff "that the defendant lost interest", (which allegation is unusual,
so to speak), the court believe [sic] that it would not have taken that long to dispose
[of] said case had plaintiff not slept on her rights, and her duty and obligation to see
to it that the case is always set for hearing so that it may be adjudicated [at] the
earliest possible time. This duty pertains to both parties, but plaintiff should have
been more assertive, as it was her obligation, similar to the obligation of plaintiff
relative to the service of summons in other cases. The fact that Cardale Financing
and Realty Corporation did not perform its obligation as provided in the said "Deed of
Sale with Mortgage" (Exhibit"A") is very clear. Likewise, the fact that Andrea
Cordova, the contracting party, represented by the plaintiff in this case, did not also
perform her duties and/or obligation provided in the said contract is also clear. This
could have been the reason why the plaintiff in said case (Exhibit "E") slept on her
rights and allowed the same to remain pending for almost 18 years. However, and
irrespective of any other reason behind the same, the court believes that plaintiff,
indeed, is the one to blame for the failure of the testate estate of the late Andrea
Cordova Vda. de Gutierrez to recover the money or property due it on the basis of
Exhibit "A".
xxx xxx xxx
. . . Had the plaintiff not slept on her rights and had it not been for her failure to
perform her commensurate duty to pursue vigorously her case against Cardale
Financing and Realty Corporation in said Civil Case No. 12366, she could have
easily known said non-payment of realty taxes on the said properties by said Cardale
Financing and Realty Corporation, or, at least the auction sales that followed, and
from which she could have redeemed said properties within the one year period
provided by law, or, have availed of remedies at the time to protect the interest of the
testate estate of the late Andrea Cordova Vda. de Gutierrez.
xxx xxx xxx
The dispositive portion of the trial court's decision states
WHEREFORE, in view of all the foregoing consideration, the court hereby renders
judgment in favor of the defendants Register of Deeds of Caloocan City, Merryland
Development Corporation and Adalia B. Francisco, and against plaintiff Rita C.
Mejia, as Executrix of the Testate Estate of Andrea Cordova Vda. De Gutierrez, and
hereby orders:
1. That this case for damages be dismissed, at the same time, plaintiffs motion for
reconsideration dated September 23, 1987 is denied;
2. Plaintiff pay the defendants Merryland Development Corporation and the Register
of Deeds the sum of P20,000.00, and another sum of P20,000.00 to the defendant
Adalia B. Francisco, as and for attorney's fees and litigation expenses, and pay the
costs of the proceedings.
SO ORDERED.
The Court of Appeals,6 in its decision7 promulgated on 13 April 1999, reversed the trial court,
holding that the corporate veil of Cardale and Merryland must be pierced in order to hold
Francisco and Merryland solidarily liable since these two corporations were used as dummies
by Francisco, who employed fraud in allowing Cardale to default on the realty taxes for the
properties mortgaged to Gutierrez so that Merryland could acquire the same free from all
liens and encumbrances in the tax delinquency sale and, as a consequence thereof,
frustrating Gutierrez's rights as a mortgagee over the subject properties. Thus, the Court of
Appeals premised its findings of fraud on the following circumstances
xxx xxx xxx
. . . Appellee Francisco knew that Cardale of which she was vice-president and
treasurer had an outstanding obligation to Gutierrez for the unpaid balance of the
real properties covered by TCT Nos. 7531 to 7533, which Cardale purchased from
Gutierrez which account, as of December 1988, already amounted to P4,414,271.43
(Exh. K, pp. 39-44, record); she also knew that Gutierrez had a mortgage lien on the
said properties to secure payment of the aforesaid obligation; she likewise knew that
the said mortgaged properties were under litigation in Civil Case No. Q-12366 which
was an action filed by Gutierrez against Cardale for rescission of the sale and/or
recovery of said properties (Exh. E). Despite such knowledge, appellee Francisco did
not inform Gutierrez's Estate or the Executrix (herein appellant) as well as the trial
court that the mortgaged properties had incurred tax delinquencies, and that Final
Notices dated July 9, 1982 had been sent by the City Treasurer of Caloocan
demanding payment of such tax arrears within ten (10) days from receipt thereof
(Exhs. J & J-1, pp. 37-38, record). Both notices which were addressed to
Cardale Financing & Realty Corporation c/o Merryland Development Corporation
and sent to appellee Francisco's address at 83 Katipunan Road, White Plains, Quezon City,
gave warning that if the taxes were not paid within the aforesaid period, the properties would
be sold at public auction to satisfy the tax delinquencies.
To reiterate, notwithstanding receipt of the aforesaid notices, appellee Francisco did not
inform the Estate of Gutierrez or her executrix about the tax delinquencies and of the
impending auction sale of the said properties. Even a modicum of good faith and fair play
should have encouraged appellee Francisco to at least advise Gutierrez's Estate through her
executrix (herein appellant) and the trial court which was hearing the complaint for rescission
and recovery of said properties of such fact, so that the Estate of Gutierrez, which had a real
interest on the properties as mortgagee and as plaintiff in the rescission and recovery suit,
could at least take steps to forestall the auction sale and thereby preserve the properties and
protect its interests thereon. And not only did appellee Francisco allow the auction sale to
take place, but she used her other corporation (Merryland) in participating in the auction sale
and in acquiring the very properties which her first corporation (Cardale) had mortgaged to
Gutierrez. Again, appellee Francisco did not thereafter inform the Estate of Gutierrez or its
executrix (herein appellant) about the auction sale, thus precluding the Estate from exercising
its right of redemption. And it was only after the expiration of the redemption period that
appellee Francisco filed a Manifestation in Civil Case No. Q-12366 (Exh. 1, p. 36, record), in
which she disclosed for the first time to the trial court and appellant that the properties subject
of the case and on which Gutierrez or her Estate had a mortgage lien, had been sold in a tax
delinquency sale. And in order to further conceal her deceptive maneuver, appellee
Francisco did not divulge in her aforesaid Manifestation that it was her other corporation
(Merryland) that acquired the properties in the auction sale.
We are not impressed by appellee's submission that no evidence was adduced to
prove that Cardale had the capacity to pay the tax arrears and therefore she or
Cardale may not be faulted for the tax delinquency sale of the properties in question.
Appellee Francisco's bad faith or deception did not necessarily lie in Cardale's or her
failure to settle the tax deliquencies in question, but in not disclosing to Gutierrez's
estate or its executrix (herein appellant) which had a mortgage lien on said
properties the tax delinquencies and the impending auction sale of the encumbered
properties.
Appellee Francisco's deception is further shown by her concealment of the tax
delinquency sale of the properties from the estate or its executrix, thus preventing
the latter from availing of the right of redemption of said properties. That appellee
Francisco divulged the auction sale of the properties only after such redemption
period had lapsed clearly betrays her intention to keep Gutierrez's Estate or its
Executrix from availing of such right. And as the evidence would further show,
appellee Francisco had a hand in securing for Merryland consolidation of its
ownership of the properties and in seeing to it that Merryland's torrens certificates for
the properties were free from liens and encumbrances. All these appellee Francisco
did even as she was fully aware that Gutierrez or her estate had a valid and
subsisting mortgage lien on the said properties.
It is likewise worthy of note that early on appellee Francisco had testified in the
action for rescission of sale and recovery of possession and ownership of the
properties which Gutierrez filed against Cardale (Civil Case No. Q-12366) in her
capacity as defendant Cardale's vice-president and treasurer. But then, for no
plausible reason whatsoever, she lost interest in continuing with the presentation of
evidence for defendant Cardale. And then, when appellant Mejia as executrix of
Gutierrez's Estate filed on August 13, 1984 a Motion for Decision in the aforesaid
case, appellee Francisco moved to defer consideration of appellant's Motion on the
pretext that defendant Cardale needed time to employ another counsel. Significantly,
in her aforesaid Motion for Postponement dated August 16, 1984 which appellee
Francisco personally signed as Officer-in-Charge of Cardale, she also did not
disclose the fact that the properties subject matter of the case had long been sold at
a tax delinquency sale and acquired by her other corporation Merryland.
And as if what she had already accomplished were not enough fraudulence, appellee
Francisco, acting in behalf of Merryland, caused the issuance of new transfer
certificates of title in the name of Merryland, which did not anymore bear the
mortgage lien in favor of Gutierrez. In the meantime, to further avoid payment of the
mortgage indebtedness owing to Gutierrez's estate, Cardale corporation was
dissolved. Finally, to put the properties beyond the reach of the mortgagee,
Gutierrez's estate, Merryland caused the subdivision of such properties, which were
subsequently sold on installment basis.
In its petition for certiorari, petitioners argue that there is no law requiring the mortgagor to
inform the mortgagee of the tax delinquencies, if any, of the mortgaged properties. Moreover,
petitioners claim that Cardale's failure to pay the realty taxes, per se, does not constitute
fraud since it was not proven that Cardale was capable of paying the taxes' Petitioners also
contend that if Mejia, as executrix of Gutierrez's estate, was not remiss in her duty to pursue
Civil Case No. 12366, she could have easily learned of the non-payment of realty taxes on
the subject properties and of the auction sale that followed and thus, have redeemed the
properties or availed of some other remedy to conserve the estate of Gutierrez. In addition,
Mejia could have annotated a notice oflis pendens on the titles of the mortgaged properties,
but she failed to do so. It is the stand of petitioners that respondent has not adduced any
proof that Francisco controlled both Cardale and Merryland and that she used these two
corporations to perpetuate a fraud upon Gutierrez or her estate. Petitioners maintain that the
"evidence shows that, apart form the meager share of petitioner Francisco, the stockholdings
of both corporations comprise other shareholders, and the stockholders of either of them,
aside from petitioner Francisco, are composed of different persons." As to Civil Case No.
12366, petitioners insist that the decision of the trial court in that case constitutesres
judicata to the instant case.8
It is dicta in corporation law that a corporation is a juridical person with a separate and
distinct personality from mat of the stockholders or members who compose it9 However,
when the legal fiction of the separate corporate personality is abused, such as when the
same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the
corporate veil. One of the earliest formulations of this doctrine of piercing the corporate veil
was made in the American case ofUnited States v. Milwaukee Refrigerator Transit Co.10
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 convenience, justify wrong, protect fraud, or defend crime, the law will regard
the corporation as an association of persons.
Since then a good number of cases have firmly implanted this doctrine in Philippine
jurisprudence.11 One such case isUmali v. Court of Appeals12 wherein the Court declared
that
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.
The doctrine applies when the corporate fiction is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, or when it is made as a shield to
confuse the legitimate issues, or where a corporation is the merealter 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.
With specific regard to corporate officers, the general rule is that the officer cannot be held
personally liable with the corporation, whether civilly or otherwise, for the consequences of
his acts, if he acted for and in behalf of the corporation, within the scope of his authority and
in good faith. In such cases, the officer's acts are properly attributed to the
corporation.13 However, if it is proven that the officer has used the corporate fiction to
defraud a third party,14 or that he has acted negligently, maliciously or in bad faith,15 then
the corporate veil shall be lifted and he shall be held personally liable for the particular
corporate obligation involved.
The Court, after an assiduous study of this case, is convinced that the totality of the
circumstances appertaining conduce to the inevitable conclusion that petitioner Francisco
acted in bad faith. The events leading up to the loss by the Gutierrez estate of its mortgage
security attest to this. It has been established that Cardale failed to comply with its obligation
to pay the balance of the purchase price for the four parcels of land it bought from Gutierrez
covered by TCT Nos. 7531 to 7534, which obligation was secured by a mortgage upon the
lands covered by TCT Nos. 7531, 7532 and 7533. This prompted Gutierrez to file an action
for rescission of the Deed of Sale with Mortgage (Civil Case No. Q-12366), but the case
dragged on for about fourteen years when Cardale, as represented by Francisco, who was
Vice-President and Treasurer of the same,16 lost interest in completing its presentation of
evidence.
Even before 1984 when Mejia, in her capacity as executrix of Gutierrez's estate, filed a
Motion for Decision with the trial court, there is no question that Francisco knew that the
properties subject of the mortgage had become tax delinquent. In fact, as treasurer of
Cardale, Francisco herself was the officer charged with the responsibility of paying the realty
taxes on the corporation's properties. This was admitted by the trial court in its decision.17 In
addition, notices dated 9 July 1982 from the City Treasurer of Caloocan demanding payment
of the tax arrears on the subject properties and giving warning that if the realty taxes were not
paid within the given period then such properties would be sold at public auction to satisfy the
tax delinquencies were sent directly to Francisco's address in White Plains, Quezon
City.18 Thus, as early as 1982, Francisco could have informed the Gutierrez estate or the
trial court in Civil Case No. Q-12366 of the tax arrears and of the notice from the City
Treasurer so that the estate could have taken the necessary steps to prevent the auction sale
and to protect its interests in the mortgaged properties, but she did no such thing. Finally, in
1983, the properties were levied upon and sold at public auction wherein Merryland a
corporation where Francisco is a stockholder19 and concurrently acts as President and
director20 was the highest bidder.
When Mejia filed the Motion for Decision in Civil Case No. Q-12366,21 the period for
redeeming the properties subject of the tax sale had not yet expired.22 Under the Realty
Property Tax Code,23 pursuant to which the tax levy and sale were prosecuted,24 both the
delinquent taxpayer and in his absence, any person holding a lien or claim over the property
shall have the right to redeem the property within one year from the date of registration of the
sale.25 However, if these persons fail to redeem the property within the time provided, then
the purchaser acquires the property "free from any encumbrance or third party claim
whatsoever."26 Cardale made no attempts to redeem the mortgaged property during this
time. Moreover, instead of informing Mejia or the trial court in Q-12366 about the tax sale, the
records show that Francisco filed a Motion for Postponement27 in behalf of Cardale even
signing the motion in her capacity as "officer-in-charge" which worked to defer the hearing
of Mejia's Motion for Decision. No mention was made by Francisco of the tax sale in the
motion for postponement. Only after the redemption period had expired did Francisco decide
to reveal what had transpired by filing a Manifestation stating that the properties subject of
the mortgage in favor of Gutierrez had been sold at a tax delinquency sale; however,
Francisco failed to mention that it was Merryland that acquired the properties since she was
probably afraid that if she did so the court would see behind her fraudulent scheme. In this
regard, it is also significant to note that it was Francisco herself who filed the petitions for
consolidation of title and who helped secure for Merryland titles over the subject properties
"free from any encumbrance or third-party claim whatsoever."
It is exceedingly apparent to the Court that the totality of Francisco's actions clearly betray an
intention to conceal the tax delinquencies, levy and public auction of the subject properties
from the estate of Gutierrez and the trial court in Civil Case No. Q-12366 until after the
expiration of the redemption period when the remotest possibility for the recovery of the
properties would be extinguished.28 Consequently, Francisco had effectively deprived the
estate of Gutierrez of its rights as mortgagee over the three parcels of land which were sold
to Cardale. If Francisco was acting in good faith, then she should have disclosed the status of
the mortgaged properties to the trial court in Civil Case No. Q-12366 especially after Mejia
had filed a Motion for Decision, in response to which she filed a motion for postponement
wherein she could easily have mentioned the tax sale since this action directly affected
such properties which were the subject of both the sale and mortgage.
That Merryland acquired the property at the public auction only serves to shed more light
upon Francisco's fraudulent purposes. Based on the findings of the Court of Appeals,
Francisco is the controlling stockholder and President of Merryland.29 Thus, aside from the
instrumental role she played as an officer of Cardale, in evading that corporation's legitimate
obligations to Gutierrez, it appears that Francisco's actions were also oriented towards
securing advantages for another corporation in which she had a substantial interest. We
cannot agree, however, with the Court of Appeals' decision to hold Merryland solidarily liable
with Francisco. The only act imputable to Merryland in relation to the mortgaged properties is
that it purchased the same and this by itself is not a fraudulent or wrongful act. No evidence
has been adduced to establish that Merryland was a mere alter ego or business conduit of
Francisco. Time and again it has been reiterated that mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality.30 Neither has it been
alleged or proven that Merryland is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
Cardale.31 Even assuming that the businesses of Cardale and Merryland are interrelated,
this alone is not justification for disregarding their separate personalities, absent any showing
that Merryland was purposely used as a shield to defraud creditors and third persons of their
rights.32 Thus, Merryland's separate juridical personality must be upheld.
Based on a statement of account submitted by Mejia, the Court of Appeals awarded
P4,314,271.43 in favor of the estate of Gutierrez which represents the unpaid balance of the
purchase price in the amount of P629,000.00 with an interest rate of nine percent (9% ) per
annum, in accordance with the agreement of the parties under the Deed of Sale with
Mortgage,33 as of December 1988.34 Therefore, in addition to the amount awarded by the
appellate court, Francisco should pay the estate of Gutierrez interest on the unpaid balance
of the purchase price (in the amount of P629,000.00) at the rate of nine percent (9%) per
annum computed from January, 1989 until fully satisfied.
Finally, contrary to petitioner's assertions, we agree with the Court of Appeals that the
decision of the trial court in Civil Case No. Q-12366 does not constituteres judicata insofar as
the present case is concerned because the decision in the first case was not a judgment on
the merits. Rather, it was merely based upon the premise that since Cardale had been
dissolved and the property acquired by another corporation, the action for rescission would
not prosper. As a matter of fact, it was even expressly stated by the trial court that the parties
should ventilate their issues in another action.
WHEREFORE, the 13 April 1999 Decision of the Court of Appeals is hereby accordingly
MODIFIED so as to hold ADALIA FRANCISCO solely liable to the estate of Gutierrez for the
amount of P4,314,271.43 and for interest on the unpaid balance of the purchase price (in the
amount of P629,000.00) at the rate of nine percent (9%) per annum computed from January,
1989 until fully satisfied. MERRYLAND is hereby absolved from all liability.
SO ORDERED.









G.R. No. 142936 April 17, 2002
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT
CORPORATION, petitioners, vs. ANDRADA ELECTRIC & ENGINEERING
COMPANY, respondent.
PANGANIBAN, J.:
Basic is the rule that a corporation has a legal personality distinct and separate from the
persons and entities owning it. The corporate veil may be lifted only if it has been used to
shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or
perpetuate injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired
ownership or management of some assets of the Pampanga Sugar Mill (PASUMIL), which
had earlier been foreclosed and purchased at the resulting public auction by the
Development Bank of the Philippines (DBP), will not make PNB liable for the PASUMILs
contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000 Decision1 of the Court of
Appeals (CA) in CA-GR CV No. 57610. The decretal portion of the challenged Decision reads
as follows:
"WHEREFORE, the judgment appealed from is hereby AFFIRMED."2
The Facts
The factual antecedents of the case are summarized by the Court of Appeals as follows:
"In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly
organized, existing, and operating under the laws of the Philippines, with office and
principal place of business at Nos. 794-812 Del Monte [A]venue, Quezon City, while
the defendant [herein petitioner] Philippine National Bank (herein referred to as
PNB), is a semi-government corporation duly organized, existing and operating
under the laws of the Philippines, with office and principal place of business at
Escolta Street, Sta. Cruz, Manila; whereas, the other defendant, the National Sugar
Development Corporation (NASUDECO in brief), is also a semi-government
corporation and the sugar arm of the PNB, with office and principal place of business
at the 2nd Floor, Sampaguita Building, Cubao, Quezon City; and the defendant
Pampanga Sugar Mills (PASUMIL in short), is a corporation organized, existing and
operating under the 1975 laws of the Philippines, and had its business office before
1975 at Del Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in the
business of general construction for the repairs and/or construction of different kinds
of machineries and buildings; that on August 26, 1975, the defendant PNB acquired
the assets of the defendant PASUMIL that were earlier foreclosed by the
Development Bank of the Philippines (DBP) under LOI No. 311; that the defendant
PNB organized the defendant NASUDECO in September, 1975, to take ownership
and possession of the assets and ultimately to nationalize and consolidate its interest
in other PNB controlled sugar mills; that prior to October 29, 1971, the defendant
PASUMIL engaged the services of plaintiff for electrical rewinding and repair, most of
which were partially paid by the defendant PASUMIL, leaving several unpaid
accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and the
defendant PASUMIL entered into a contract for the plaintiff to perform the following,
to wit
(a) Construction of one (1) power house building;
(b) Construction of three (3) reinforced concrete foundation for three (3)
units 350 KW diesel engine generating set[s];
(c) Construction of three (3) reinforced concrete foundation for the 5,000 KW
and 1,250 KW turbo generator sets;
(d) Complete overhauling and reconditioning tests sum for three (3) 350 KW
diesel engine generating set[s];
(e) Installation of turbine and diesel generating sets including transformer,
switchboard, electrical wirings and pipe provided those stated units are
completely supplied with their accessories;
(f) Relocating of 2,400 V transmission line, demolition of all existing concrete
foundation and drainage canals, excavation, and earth fillings all for the
total amount of P543,500.00 as evidenced by a contract, [a] xerox copy of
which is hereto attached as Annex A and made an integral part of this
complaint;
that aside from the work contract mentioned-above, the defendant PASUMIL
required the plaintiff to perform extra work, and provide electrical equipment and
spare parts, such as:
(a) Supply of electrical devices;
(b) Extra mechanical works;
(c) Extra fabrication works;
(d) Supply of materials and consumable items;
(e) Electrical shop repair;
(f) Supply of parts and related works for turbine generator;
(g) Supply of electrical equipment for machinery;
(h) Supply of diesel engine parts and other related works including
fabrication of parts.
that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only
P250,000.00, leaving an unpaid balance, as of June 27, 1973, amounting to
P527,263.80, as shown in the Certification of the chief accountant of the PNB, a
machine copy of which is appended as Annex C of the complaint; that out of said
unpaid balance of P527,263.80, the defendant PASUMIL made a partial payment to
the plaintiff of P14,000.00, in broken amounts, covering the period from January 5,
1974 up to May 23, 1974, leaving an unpaid balance of P513,263.80; that the
defendant PASUMIL and the defendant PNB, and now the defendant NASUDECO,
failed and refused to pay the plaintiff their just, valid and demandable obligation; that
the President of the NASUDECO is also the Vice-President of the PNB, and this
official holds office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff
besought this official to pay the outstanding obligation of the defendant PASUMIL,
inasmuch as the defendant PNB and NASUDECO now owned and possessed the
assets of the defendant PASUMIL, and these defendants all benefited from the
works, and the electrical, as well as the engineering and repairs, performed by the
plaintiff; that because of the failure and refusal of the defendants to pay their just,
valid, and demandable obligations, plaintiff suffered actual damages in the total
amount of P513,263.80; and that in order to recover these sums, the plaintiff was
compelled to engage the professional services of counsel, to whom the plaintiff
agreed to pay a sum equivalent to 25% of the amount of the obligation due by way of
attorneys fees. Accordingly, the plaintiff prayed that judgment be rendered against
the defendants PNB, NASUDECO, and PASUMIL, jointly and severally to wit:
(1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80,
with annual interest of 14% from the time the obligation falls due and
demandable;
(2) Condemning the defendants to pay attorneys fees amounting to 25% of
the amount claim;
(3) Ordering the defendants to pay the costs of the suit.
"The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint
chiefly on the ground that the complaint failed to state sufficient allegations to
establish a cause of action against both defendants, inasmuch as there is lack or
want of privity of contract between the plaintiff and the two defendants, the PNB and
NASUDECO, said defendants citing Article 1311 of the New Civil Code, and the case
law ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service,
et al. v. Court of Appeals, et al., 20 SCRA 1214.
"The motion to dismiss was by the court a quo denied in its Order of November 27,
1980; in the same order, that court directed the defendants to file their answer to the
complaint within 15 days.
"In their answer, the defendant NASUDECO reiterated the grounds of its motion to
dismiss, to wit:
That the complaint does not state a sufficient cause of action against the
defendant NASUDECO because: (a) NASUDECO is not x x x privy to the
various electrical construction jobs being sued upon by the plaintiff under the
present complaint; (b) the taking over by NASUDECO of the assets of
defendant PASUMIL was solely for the purpose of reconditioning the sugar
central of defendant PASUMIL pursuant to martial law powers of the
President under the Constitution; (c) nothing in the LOI No. 189-A (as well as
in LOI No. 311) authorized or commanded the PNB or its subsidiary
corporation, the NASUDECO, to assume the corporate obligations of
PASUMIL as that being involved in the present case; and, (d) all that was
mentioned by the said letter of instruction insofar as the PASUMIL liabilities
[were] concerned [was] for the PNB, or its subsidiary corporation the
NASUDECO, to make a study of, and submit [a] recommendation on the
problems concerning the same.
"By way of counterclaim, the NASUDECO averred that by reason of the filing by the
plaintiff of the present suit, which it [labeled] as unfounded or baseless, the
defendant NASUDECO was constrained to litigate and incur litigation expenses in
the amount of P50,000.00, which plaintiff should be sentenced to pay. Accordingly,
NASUDECO prayed that the complaint be dismissed and on its counterclaim, that
the plaintiff be condemned to pay P50,000.00 in concept of attorneys fees as well as
exemplary damages.
"In its answer, the defendant PNB likewise reiterated the grounds of its motion to
dismiss, namely: (1) the complaint states no cause of action against the defendant
PNB; (2) that PNB is not a party to the contract alleged in par. 6 of the complaint and
that the alleged services rendered by the plaintiff to the defendant PASUMIL upon
which plaintiffs suit is erected, was rendered long before PNB took possession of the
assets of the defendant PASUMIL under LOI No. 189-A; (3) that the PNB take-over
of the assets of the defendant PASUMIL under LOI 189-A was solely for the purpose
of reconditioning the sugar central so that PASUMIL may resume its operations in
time for the 1974-75 milling season, and that nothing in the said LOI No. 189-A, as
well as in LOI No. 311, authorized or directed PNB to assume the corporate
obligation/s of PASUMIL, let alone that for which the present action is brought; (4)
that PNBs management and operation under LOI No. 311 did not refer to any asset
of PASUMIL which the PNB had to acquire and thereafter [manage], but only to
those which were foreclosed by the DBP and were in turn redeemed by the PNB
from the DBP; (5) that conformably to LOI No. 311, on August 15, 1975, the PNB
and the Development Bank of the Philippines (DBP) entered into a Redemption
Agreement whereby DBP sold, transferred and conveyed in favor of the PNB, by
way of redemption, all its (DBP) rights and interest in and over the foreclosed real
and/or personal properties of PASUMIL, as shown in Annex C which is made an
integral part of the answer; (6) that again, conformably with LOI No. 311, PNB
pursuant to a Deed of Assignment dated October 21, 1975, conveyed, transferred,
and assigned for valuable consideration, in favor of NASUDECO, a distinct and
independent corporation, all its (PNB) rights and interest in and under the above
Redemption Agreement. This is shown in Annex D which is also made an integral
part of the answer; [7] that as a consequence of the said Deed of Assignment, PNB
on October 21, 1975 ceased to managed and operate the above-mentioned assets
of PASUMIL, which function was now actually transferred to NASUDECO. In other
words, so asserted PNB, the complaint as to PNB, had become moot and academic
because of the execution of the said Deed of Assignment; [8] that moreover, LOI No.
311 did not authorize or direct PNB to assume the corporate obligations of
PASUMIL, including the alleged obligation upon which this present suit was brought;
and [9] that, at most, what was granted to PNB in this respect was the authority to
make a study of and submit recommendation on the problems concerning the claims
of PASUMIL creditors, under sub-par. 5 LOI No. 311.
"In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate
and to incur expenses in this case, hence it is entitled to claim attorneys fees in the
amount of at least P50,000.00. Accordingly, PNB prayed that the complaint be
dismissed; and that on its counterclaim, that the plaintiff be sentenced to pay
defendant PNB the sum of P50,000.00 as attorneys fees, aside from exemplary
damages in such amount that the court may seem just and equitable in the premises.
"Summons by publication was made via the Philippines Daily Express, a newspaper
with editorial office at 371 Bonifacio Drive, Port Area, Manila, against the defendant
PASUMIL, which was thereafter declared in default as shown in the August 7, 1981
Order issued by the Trial Court.
"After due proceedings, the Trial Court rendered judgment, the decretal portion of
which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
the defendant Corporation, Philippine National Bank (PNB) NATIONAL
SUGAR DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA
SUGAR MILLS (PASUMIL), ordering the latter to pay jointly and severally
the former the following:
1. The sum of P513,623.80 plus interest thereon at the rate of 14%
per annum as claimed from September 25, 1980 until fully paid;
2. The sum of P102,724.76 as attorneys fees; and,
3. Costs.
SO ORDERED.
Manila, Philippines, September 4, 1986.
'(SGD) ERNESTO S. TENGCO
Judge"3
Ruling of the Court of Appeals
Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and
equity for a corporation to take over and operate the business of another corporation, while
disavowing or repudiating any responsibility, obligation or liability arising therefrom.4
Hence, this Petition.5
Issues
In their Memorandum, petitioners raise the following errors for the Courts consideration:
"I
The Court of Appeals gravely erred in law in holding the herein petitioners liable for
the unpaid corporate debts of PASUMIL, a corporation whose corporate existence
has not been legally extinguished or terminated, simply because of petitioners[]
take-over of the management and operation of PASUMIL pursuant to the mandates
of LOI No. 189-A, as amended by LOI No. 311.
"II
The Court of Appeals gravely erred in law in not applying [to] the case at bench the
ruling enunciated in Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415."6
Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable
for the unpaid debts of PASUMIL to respondent.
This Courts Ruling
The Petition is meritorious.
Main Issue:
Liability for Corporate Debts
As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of
the Rules of Court.7To this rule, however, there are some exceptions enumerated in Fuentes
v. Court of Appeals.8 After a careful scrutiny of the records and the pleadings submitted by
the parties, we find that the lower courts misappreciated the evidence
presented.9 Overlooked by the CA were certain relevant facts that would justify a conclusion
different from that reached in the assailed Decision.10
Petitioners posit that they should not be held liable for the corporate debts of PASUMIL,
because their takeover of the latters foreclosed assets did not make them assignees. On the
other hand, respondent asserts that petitioners and PASUMIL should be treated as one entity
and, as such, jointly and severally held liable for PASUMILs unpaid obligation.1wphi1.nt
As a rule, a corporation that purchases the assets of another will not be liable for the debts of
the selling corporation, provided the former acted in good faith and paid adequate
consideration for such assets, except when any of the following circumstances is present: (1)
where the purchaser expressly or impliedly agrees to assume the debts, (2) where the
transaction amounts to a consolidation or merger of the corporations, (3) where the
purchasing corporation is merely a continuation of the selling corporation, and (4) where the
transaction is fraudulently entered into in order to escape liability for those debts.11
Piercing the Corporate
Veil Not Warranted
A corporation is an artificial being created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly authorized by law or
incident to its existence.12 It has a personality separate and distinct from the persons
composing it, as well as from any other legal entity to which it may be related.13 This is
basic.
Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another
corporation.14 For reasons of public policy and in the interest of justice, the corporate veil will
justifiably be impaled15 only when it becomes a shield for fraud, illegality or inequity
committed against third persons.16
Hence, any application of the doctrine of piercing the corporate veil should be done with
caution.17 A court should be mindful of the milieu where it is to be applied.18 It must be
certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime
was committed against another, in disregard of its rights.19 The wrongdoing must be clearly
and convincingly established; it cannot be presumed.20 Otherwise, an injustice that was
never unintended may result from an erroneous application.21
This Court has pierced the corporate veil to ward off a judgment credit,22 to avoid inclusion
of corporate assets as part of the estate of the decedent,23 to escape liability arising from a
debt,24 or to perpetuate fraud and/or confuse legitimate issues25 either to promote or to
shield unfair objectives26 or to cover up an otherwise blatant violation of the prohibition
against forum-shopping.27 Only in these and similar instances may the veil be pierced and
disregarded.28
The question of whether a corporation is a mere alter ego is one of fact.29 Piercing the veil of
corporate fiction may be allowed only if the following elements concur: (1) control -- not mere
stock control, but complete domination -- not only of finances, but of policy and business
practice in respect to the transaction attacked, must have been such that the corporate entity
as to this transaction had at the time no separate mind, will or existence of its own; (2) such
control must have been used by the defendant to commit a fraud or a wrong to perpetuate
the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in
contravention of plaintiffs legal right; and (3) the said control and breach of duty must have
proximately caused the injury or unjust loss complained of.30
We believe that the absence of the foregoing elements in the present case precludes the
piercing of the corporate veil. First, other than the fact that petitioners acquired the assets of
PASUMIL, there is no showing that their control over it warrants the disregard of corporate
personalities.31 Second, there is no evidence that their juridical personality was used to
commit a fraud or to do a wrong; or that the separate corporate entity was farcically used as
a mere alter ego, business conduit or instrumentality of another entity or person.32 Third,
respondent was not defrauded or injured when petitioners acquired the assets of
PASUMIL.33
Being the party that asked for the piercing of the corporate veil, respondent had the burden of
presenting clear and convincing evidence to justify the setting aside of the separate corporate
personality rule.34 However, it utterly failed to discharge this burden;35 it failed to establish
by competent evidence that petitioners separate corporate veil had been used to conceal
fraud, illegality or inequity.36
While we agree with respondents claim that the assets of the National Sugar Development
Corporation (NASUDECO) can be easily traced to PASUMIL,37 we are not convinced that
the transfer of the latters assets to petitioners was fraudulently entered into in order to
escape liability for its debt to respondent.38
A careful review of the records reveals that DBP foreclosed the mortgage executed by
PASUMIL and acquired the assets as the highest bidder at the public auction
conducted.39 The bank was justified in foreclosing the mortgage, because the PASUMIL
account had incurred arrearages of more than 20 percent of the total outstanding
obligation.40 Thus, DBP had not only a right, but also a duty under the law to foreclose the
subject properties.41
Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB acquired PASUMILs
assets that DBP had foreclosed and purchased in the normal course. Petitioner bank was
likewise tasked to manage temporarily the operation of such assets either by itself or through
a subsidiary corporation.44
PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets
pursuant to Section 6 of Act No. 3135.45 These assets were later conveyed to PNB for a
consideration, the terms of which were embodied in the Redemption Agreement.46 PNB, as
successor-in-interest, stepped into the shoes of DBP as PASUMILs creditor.47 By way of a
Deed of Assignment,48 PNB then transferred to NASUDECO all its rights under the
Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals,49 we had the occasion to
resolve a similar issue. We ruled that PNB, DBP and their transferees were not liable for
Marinduque Minings unpaid obligations to Remington Industrial Sales Corporation
(Remington) after the two banks had foreclosed the assets of Marinduque Mining. We
likewise held that Remington failed to discharge its burden of proving bad faith on the part of
Marinduque Mining to justify the piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial courts lifting of the corporate
mask.50 The CA did not point to any fact evidencing bad faith on the part of PNB and its
transferee.51 The corporate fiction was not used to defeat public convenience, justify a
wrong, protect fraud or defend crime.52 None of the foregoing exceptions was shown to exist
in the present case.53 On the contrary, the lifting of the corporate veil would result in
manifest injustice. This we cannot allow.
No Merger or Consolidation
Respondent further claims that petitioners should be held liable for the unpaid obligations of
PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly authorized PASUMIL and
PNB to merge or consolidate. On the other hand, petitioners contend that their takeover of
the operations of PASUMIL did not involve any corporate merger or consolidation, because
the latter had never lost its separate identity as a corporation.
A consolidation is the union of two or more existing entities to form a new entity called the
consolidated corporation. A merger, on the other hand, is a union whereby one or more
existing corporations are absorbed by another corporation that survives and continues the
combined business.54
The merger, however, does not become effective upon the mere agreement of the
constituent corporations.55Since a merger or consolidation involves fundamental changes in
the corporation, as well as in the rights of stockholders and creditors, there must be an
express provision of law authorizing them.56 For a valid merger or consolidation, the
approval by the Securities and Exchange Commission (SEC) of the articles of merger or
consolidation is required.57 These articles must likewise be duly approved by a majority of
the respective stockholders of the constituent corporations.58
In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL
and PNB. The procedure prescribed under Title IX of the Corporation Code59 was not
followed.
In fact, PASUMILs corporate existence, as correctly found by the CA, had not been legally
extinguished or terminated.60 Further, prior to PNBs acquisition of the foreclosed assets,
PASUMIL had previously made partial payments to respondent for the formers obligation in
the amount of P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to
respondent and, from January 5, 1974 to May 23, 1974, another P14,000.
Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to
respondent.61 LOI No. 11 explicitly provides that PNB shall study and submit
recommendations on the claims of PASUMILs creditors.62Clearly, the corporate
separateness between PASUMIL and PNB remains, despite respondents insistence to the
contrary.63
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No
pronouncement as to costs.
SO ORDERED.













G.R. No. 142435 April 30, 2003
ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners, vs. PACIFIC BANKING
CORPORATION, REGISTER OF DEEDS, RTC EX-OFFICIO SHERIFF OF QUEZON CITY
and the Heirs of EUGENIO D. TRINIDAD, respondents.
QUISUMBING, J.:
This petition for review on certiorari seeks the reversal of the Decision1 dated October 21,
1999 of the Court of Appeals in CA-G.R. CV No. 41536 which dismissed herein petitioners'
appeal from the Decision2 dated February 10, 1993 of the Regional Trial Court (RTC) of
Quezon City, Branch 84, in Civil Case No. Q-89-4152. The trial court had dismissed
petitioners' complaint for annulment of real estate mortgage and the extra-judicial foreclosure
thereof. Likewise brought for our review is the Resolution3 dated February 23, 2000 of the
Court of Appeals which denied petitioners' motion for reconsideration.
The facts, as culled from records, are as follows:
Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned "Bela's Export
Trading" (BET), a single proprietorship with principal office at No. 814 Aurora Boulevard,
Cubao, Quezon City. BET was engaged in the manufacture of garments for domestic and
foreign consumption. The Lipats also owned the "Mystical Fashions" in the United States,
which sells goods imported from the Philippines through BET. Mrs. Lipat designated her
daughter, Teresita B. Lipat, to manage BET in the Philippines while she was managing
"Mystical Fashions" in the United States.
In order to facilitate the convenient operation of BET, Estelita Lipat executed on December
14, 1978, a special power of attorney appointing Teresita Lipat as her attorney-in-fact to
obtain loans and other credit accommodations from respondent Pacific Banking Corporation
(Pacific Bank). She likewise authorized Teresita to execute mortgage contracts on properties
owned or co-owned by her as security for the obligations to be extended by Pacific Bank
including any extension or renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to
secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank
amounting to P583,854.00 to buy fabrics to be manufactured by BET and exported to
"Mystical Fashions" in the United States. As security therefor, the Lipat spouses, as
represented by Teresita, executed a Real Estate Mortgage over their property located at No.
814 Aurora Blvd., Cubao, Quezon City. Said property was likewise made to secure "other
additional or new loans, discounting lines, overdrafts and credit accommodations, of
whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from the
Mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of the whole
or part of said original, additional or new loans, discounting lines, overdrafts and other credit
accommodations, including interest and expenses or other obligations of the Mortgagor
and/or Debtor owing to the Mortgagee, whether directly, or indirectly, principal or secondary,
as appears in the accounts, books and records of the Mortgagee."4
On September 5, 1979, BET was incorporated into a family corporation named Bela's Export
Corporation (BEC) in order to facilitate the management of the business. BEC was engaged
in the business of manufacturing and exportation of all kinds of garments of whatever kind
and description5 and utilized the same machineries and equipment previously used by BET.
Its incorporators and directors included the Lipat spouses who owned a combined 300
shares out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and other
close relatives and friends of the Lipats.6 Estelita Lipat was named president of BEC, while
Teresita became the vice-president and general manager.
Eventually, the loan was later restructured in the name of BEC and subsequent loans were
obtained by BEC with the corresponding promissory notes duly executed by Teresita on
behalf of the corporation. A letter of credit was also opened by Pacific Bank in favor of A. O.
Knitting Manufacturing Co., Inc., upon the request of BEC after BEC executed the
corresponding trust receipt therefor. Export bills were also executed in favor of Pacific Bank
for additional finances. These transactions were all secured by the real estate mortgage over
the Lipats' property.
The promissory notes, export bills, and trust receipt eventually became due and demandable.
Unfortunately, BEC defaulted in its payments. After receipt of Pacific Bank's demand letters,
Estelita Lipat went to the office of the bank's liquidator and asked for additional time to enable
her to personally settle BEC's obligations. The bank acceded to her request but Estelita failed
to fulfill her promise.
Consequently, the real estate mortgage was foreclosed and after compliance with the
requirements of the law the mortgaged property was sold at public auction. On January 31,
1989, a certificate of sale was issued to respondent Eugenio D. Trinidad as the highest
bidder.
On November 28, 1989, the spouses Lipat filed before the Quezon City RTC a complaint for
annulment of the real estate mortgage, extrajudicial foreclosure and the certificate of sale
issued over the property against Pacific Bank and Eugenio D. Trinidad. The complaint, which
was docketed as Civil Case No. Q-89-4152, alleged, among others, that the promissory
notes, trust receipt, and export bills were all ultra vires acts of Teresita as they were executed
without the requisite board resolution of the Board of Directors of BEC. The Lipats also
averred that assuming said acts were valid and binding on BEC, the same were the
corporation's sole obligation, it having a personality distinct and separate from spouses Lipat.
It was likewise pointed out that Teresita's authority to secure a loan from Pacific Bank was
specifically limited to Mrs. Lipat's sole use and benefit and that the real estate mortgage was
executed to secure the Lipats' and BET's P583,854.00 loan only.
In their respective answers, Pacific Bank and Trinidad alleged in common that petitioners
Lipat cannot evade payments of the value of the promissory notes, trust receipt, and export
bills with their property because they and the BEC are one and the same, the latter being a
family corporation. Respondent Trinidad further claimed that he was a buyer in good faith and
for value and that petitioners are estopped from denying BEC's existence after holding
themselves out as a corporation.
After trial on the merits, the RTC dismissed the complaint, thus:
WHEREFORE, this Court holds that in view of the facts contained in the record, the
complaint filed in this case must be, as is hereby, dismissed. Plaintiffs however has
five (5) months and seventeen (17) days reckoned from the finality of this decision
within which to exercise their right of redemption. The writ of injunction issued is
automatically dissolved if no redemption is effected within that period.
The counterclaims and cross-claim are likewise dismissed for lack of legal and
factual basis.
No costs.
IT IS SO ORDERED.7
The trial court ruled that there was convincing and conclusive evidence proving that BEC was
a family corporation of the Lipats. As such, it was a mere extension of petitioners' personality
and business and a mere alter ego or business conduit of the Lipats established for their own
benefit. Hence, to allow petitioners to invoke the theory of separate corporate personality
would sanction its use as a shield to further an end subversive of justice.8 Thus, the trial
court pierced the veil of corporate fiction and held that Bela's Export Corporation and
petitioners (Lipats) are one and the same. Pacific Bank had transacted business with both
BET and BEC on the supposition that both are one and the same. Hence, the Lipats were
estopped from disclaiming any obligations on the theory of separate personality of
corporations, which is contrary to principles of reason and good faith.
The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R. CV No.
41536. Said appeal, however, was dismissed by the appellate court for lack of merit. The
Court of Appeals found that there was ample evidence on record to support the application of
the doctrine of piercing the veil of corporate fiction. In affirming the findings of the RTC, the
appellate court noted that Mrs. Lipat had full control over the activities of the corporation and
used the same to further her business interests.9 In fact, she had benefited from the loans
obtained by the corporation to finance her business. It also found unnecessary a board
resolution authorizing Teresita Lipat to secure loans from Pacific Bank on behalf of BEC
because the corporation's by-laws allowed such conduct even without a board resolution.
Finally, the Court of Appeals ruled that the mortgage property was not only liable for the
original loan of P583,854.00 but likewise for the value of the promissory notes, trust receipt,
and export bills as the mortgage contract equally applies to additional or new loans,
discounting lines, overdrafts, and credit accommodations which petitioners subsequently
obtained from Pacific Bank.
The Lipats then moved for reconsideration, but this was denied by the appellate court in its
Resolution of February 23, 2000.10
Hence, this petition, with petitioners submitting that the court a quo erred
1) . . . IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF
CORPORATE FICTION APPLIES IN THIS CASE.
2) . . . IN HOLDING THAT PETITIONERS' PROPERTY CAN BE HELD LIABLE
UNDER THE REAL ESTATE MORTGAGE NOT ONLY FOR THE AMOUNT OF
P583,854.00 BUT ALSO FOR THE FULL VALUE OF PROMISSORY NOTES,
TRUST RECEIPTS AND EXPORT BILLS OF BELA'S EXPORT CORPORATION.
3) . . . IN HOLDING THAT "THE IMPOSITION OF 15% ATTORNEY'S FEES IN THE
EXTRA-JUDICIAL FORECLOSURE IS BEYOND THIS COURT'S JURISDICTION
FOR IT IS BEING RAISED FOR THE FIRST TIME IN THIS APPEAL."
4) . . . IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE
DISPUTED PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS AND
TRUST RECEIPTS DESPITE THE EVIDENT FACT THAT THEY WERE NOT
SIGNED BY HIM AND THEREFORE ARE NOT VALID OR ARE NOT BINDING TO
HIM.
5) . . . IN DENYING PETITIONERS' MOTION FOR RECONSIDERATION AND IN
HOLDING THAT SAID MOTION FOR RECONSIDERATION IS "AN
UNAUTHORIZED MOTION, A MERE SCRAP OF PAPER WHICH CAN NEITHER
BIND NOR BE OF ANY CONSEQUENCE TO APPELLANTS."11
In sum, the following are the relevant issues for our resolution:
1. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in this
case;
2. Whether or not petitioners' property under the real estate mortgage is liable not only for the
amount of P583,854.00 but also for the value of the promissory notes, trust receipt, and
export bills subsequently incurred by BEC; and
3. Whether or not petitioners are liable to pay the 15% attorney's fees stipulated in the deed
of real estate mortgage.
On the first issue, petitioners contend that both the appellate and trial courts erred in holding
them liable for the obligations incurred by BEC through the application of the doctrine of
piercing the veil of corporate fiction absent any clear showing of fraud on their part.
Respondents counter that there is clear and convincing evidence to show fraud on part of
petitioners given the findings of the trial court, as affirmed by the Court of Appeals, that BEC
was organized as a business conduit for the benefit of petitioners.
Petitioners' contentions fail to persuade this Court. A careful reading of the judgment of the
RTC and the resolution of the appellate court show that in finding petitioners' mortgaged
property liable for the obligations of BEC, both courts below relied upon the alter ego doctrine
or instrumentality rule, rather than fraud in piercing the veil of corporate fiction. When the
corporation is the mere alter ego or business conduit of a person, the separate personality of
the corporation may be disregarded.12 This is commonly referred to as the "instrumentality
rule" or the alter ego doctrine, which the courts have applied in disregarding the separate
juridical personality of corporations. As held in one case,
Where one corporation is so organized and controlled and its affairs are conducted
so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the 'instrumentality' may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but such domination of
finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its principal. x x x
.13
We find that the evidence on record demolishes, rather than buttresses, petitioners'
contention that BET and BEC are separate business entities. Note that Estelita Lipat
admitted that she and her husband, Alfredo, were the owners of BET14 and were two of the
incorporators and majority stockholders of BEC.15 It is also undisputed that Estelita Lipat
executed a special power of attorney in favor of her daughter, Teresita, to obtain loans and
credit lines from Pacific Bank on her behalf.16 Incidentally, Teresita was designated as
executive-vice president and general manager of both BET and BEC, respectively.17 We
note further that: (1) Estelita and Alfredo Lipat are the owners and majority shareholders of
BET and BEC, respectively;18 (2) both firms were managed by their daughter,
Teresita;19 (3) both firms were engaged in the garment business, supplying products to
"Mystical Fashion," a U.S. firm established by Estelita Lipat; (4) both firms held office in the
same building owned by the Lipats;20 (5) BEC is a family corporation with the Lipats as its
majority stockholders; (6) the business operations of the BEC were so merged with those of
Mrs. Lipat such that they were practically indistinguishable; (7) the corporate funds were held
by Estelita Lipat and the corporation itself had no visible assets; (8) the board of directors of
BEC was composed of the Burgos and Lipat family members;21 (9) Estelita had full control
over the activities of and decided business matters of the corporation;22 and that (10)
Estelita Lipat had benefited from the loans secured from Pacific Bank to finance her business
abroad23 and from the export bills secured by BEC for the account of "Mystical
Fashion."24 It could not have been coincidental that BET and BEC are so intertwined with
each other in terms of ownership, business purpose, and management. Apparently, BET and
BEC are one and the same and the latter is a conduit of and merely succeeded the former.
Petitioners' attempt to isolate themselves from and hide behind the corporate personality of
BEC so as to evade their liabilities to Pacific Bank is precisely what the classical doctrine of
piercing the veil of corporate entity seeks to prevent and remedy. In our view, BEC is a mere
continuation and successor of BET, and petitioners cannot evade their obligations in the
mortgage contract secured under the name of BEC on the pretext that it was signed for the
benefit and under the name of BET. We are thus constrained to rule that the Court of
Appeals did not err when it applied the instrumentality doctrine in piercing the corporate veil
of BEC.
On the second issue, petitioners contend that their mortgaged property should not be made
liable for the subsequent credit lines and loans incurred by BEC because, first, it was not
covered by the mortgage contract of BET which only covered the loan of P583,854.00 and
which allegedly had already been paid; and, second, it was secured by Teresita Lipat without
any authorization or board resolution of BEC.
We find petitioners' contention untenable. As found by the Court of Appeals, the mortgaged
property is not limited to answer for the loan of P583,854.00. Thus:
Finally, the extent to which the Lipats' property can be held liable under the real
estate mortgage is not limited to P583,854.00. It can be held liable for the value of
the promissory notes, trust receipt and export bills as well. For the mortgage was
executed not only for the purpose of securing the Bela's Export Trading's original
loan of P583,854.00, but also for "other additional or new loans, discounting lines,
overdrafts and credit accommodations, of whatever amount, which the Mortgagor
and/or Debtor may subsequently obtain from the mortgagee as well as any renewal
or extension by the Mortgagor and/or Debtor of the whole or part of said original,
additional or new loans, discounting lines, overdrafts and other credit
accommodations, including interest and expenses or other obligations of the
Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or indirectly
principal or secondary, as appears in the accounts, books and records of the
mortgagee.25
As a general rule, findings of fact of the Court of Appeals are final and conclusive, and cannot
be reviewed on appeal by the Supreme Court, provided they are borne out by the record or
based on substantial evidence.26 As noted earlier, BEC merely succeeded BET as
petitioners' alter ego; hence, petitioners' mortgaged property must be held liable for the
subsequent loans and credit lines of BEC.
Further, petitioners' contention that the original loan had already been paid, hence, the
mortgaged property should not be made liable to the loans of BEC, is unsupported by any
substantial evidence other than Estelita Lipat's self-serving testimony. Two disputable
presumptions under the rules on evidence weigh against petitioners, namely: (a) that a
person takes ordinary care of his concerns;27 and (b) that things have happened according
to the ordinary course of nature and the ordinary habits of life.28 Here, if the original loan had
indeed been paid, then logically, petitioners would have asked from Pacific Bank for the
required documents evidencing receipt and payment of the loans and, as owners of the
mortgaged property, would have immediately asked for the cancellation of the mortgage in
the ordinary course of things. However, the records are bereft of any evidence contradicting
or overcoming said disputable presumptions.
Petitioners contend further that the mortgaged property should not bind the loans and credit
lines obtained by BEC as they were secured without any proper authorization or board
resolution. They also blame the bank for its laxity and complacency in not requiring a board
resolution as a requisite for approving the loans.
Such contentions deserve scant consideration.
Firstly, it could not have been possible for BEC to release a board resolution since per
admissions by both petitioner Estelita Lipat and Alice Burgos, petitioners' rebuttal witness, no
business or stockholder's meetings were conducted nor were there election of officers held
since its incorporation. In fact, not a single board resolution was passed by the corporate
board29 and it was Estelita Lipat and/or Teresita Lipat who decided business matters.30
Secondly, the principle of estoppel precludes petitioners from denying the validity of the
transactions entered into by Teresita Lipat with Pacific Bank, who in good faith, relied on the
authority of the former as manager to act on behalf of petitioner Estelita Lipat and both BET
and BEC. While the power and responsibility to decide whether the corporation should enter
into a contract that will bind the corporation is lodged in its board of directors, subject to the
articles of incorporation, by-laws, or relevant provisions of law, yet, just as a natural person
may authorize another to do certain acts for and on his behalf, the board of directors may
validly delegate some of its functions and powers to officers, committees, or agents. The
authority of such individuals to bind the corporation is generally derived from law, corporate
by-laws, or authorization from the board, either expressly or impliedly by habit, custom, or
acquiescence in the general course of business.31 Apparent authority, is derived not merely
from practice. Its existence may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his
acts of a particular nature, with actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers.32
In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue of a
special power of attorney executed by Estelita Lipat. Recall that Teresita Lipat acted as the
manager of both BEC and BET and had been deciding business matters in the absence of
Estelita Lipat. Further, the export bills secured by BEC were for the benefit of "Mystical
Fashion" owned by Estelita Lipat.33 Hence, Pacific Bank cannot be faulted for relying on the
same authority granted to Teresita Lipat by Estelita Lipat by virtue of a special power of
attorney. It is a familiar doctrine that if a corporation knowingly permits one of its officers or
any other agent to act within the scope of an apparent authority, it holds him out to the public
as possessing the power to do those acts; thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be estopped from denying the agent's
authority.34
We find no necessity to extensively deal with the liability of Alfredo Lipat for the subsequent
credit lines of BEC. Suffice it to state that Alfredo Lipat never disputed the validity of the real
estate mortgage of the original loan; hence, he cannot now dispute the subsequent loans
obtained using the same mortgage contract since it is, by its very terms, a continuing
mortgage contract.
On the third and final issue, petitioners assail the decision of the Court of Appeals for not
taking cognizance of the issue on attorney's fees on the ground that it was raised for the first
time on appeal. We find the conclusion of the Court of Appeals to be in accord with settled
jurisprudence. Basic is the rule that matters not raised in the complaint cannot be raised for
the first time on appeal.35 A close perusal of the complaint yields no allegations disputing the
attorney's fees imposed under the real estate mortgage and petitioners cannot now allege
that they have impliedly disputed the same when they sought the annulment of the contract.
In sum, we find no reversible error of law committed by the Court of Appeals in rendering the
decision and resolution herein assailed by petitioners.
WHEREFORE, the petition is DENIED. The Decision dated October 21, 1999 and the
Resolution dated February 23, 2000 of the Court of Appeals in CA-G.R. CV No. 41536 are
AFFIRMED. Costs against petitioners.
SO ORDERED.























G.R. No. 109491 February 28, 2001
ATRIUM MANAGEMENT CORPORATION, petitioner, vs. COURT OF APPEALS, E.T.
HENRY AND CO., LOURDES VICTORIA M. DE LEON, RAFAEL DE LEON, JR., AND HI-
CEMENT CORPORATION, respondents.
----------------------------------------
G.R. No. 121794 February 28, 2001
LOURDES M. DE LEON, petitioner, vs. COURT OF APPEALS, ATRIUM MANAGEMENT
CORPORATION, AND HI-CEMENT CORPORATION,respondents.
PARDO, J.:
What is before the Court are separate appeals from the decision of the Court of
Appeals,1 ruling that Hi-Cement Corporation is not liable for four checks amounting to P2
million issued to E.T. Henry and Co. and discounted to Atrium Management Corporation.
On January 3, 1983, Atrium Management Corporation filed with the Regional Trial Court,
Manila an action for collection of the proceeds of four postdated checks in the total amount of
P2 million. Hi-Cement Corporation through its corporate signatories, petitioner Lourdes M. de
Leon,2 treasurer, and the late Antonio de las Alas, Chairman, issued checks in favor of E.T.
Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to
petitioner Atrium Management Corporation for valuable consideration. Upon presentment for
payment, the drawee bank dishonored all four checks for the common reason "payment
stopped". Atrium, thus, instituted this action after its demand for payment of the value of the
checks was denied.3
After due proceedings, on July 20, 1989, the trial court rendered a decision ordering Lourdes
M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement
Corporation to pay petitioner Atrium, jointly and severally, the amount of P2 million
corresponding to the value of the four checks, plus interest and attorney's fees.4
On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals promulgated its
decision modifying the decision of the trial court, absolving Hi-Cement Corporation from
liability and dismissing the complaint as against it. The appellate court ruled that: (1) Lourdes
M. de Leon was not authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2)
The issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas
constituted ultra vires acts; and (3) The subject checks were not issued for valuable
consideration.5
At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February
1981, Enrique Tan of E.T. Henry approached Atrium for financial assistance, offering to
discount four RCBC checks in the total amount of P2 million, issued by Hi-Cement in favor of
E.T. Henry. Atrium agreed to discount the checks, provided it be allowed to confirm with Hi-
Cement the fact that the checks represented payment for petroleum products which E.T.
Henry delivered to Hi-Cement. Carlos C. Syquia identified two letters, dated February 6, 1981
and February 9, 1981 issued by Hi-Cement through Lourdes M. de Leon, as treasurer,
confirming the issuance of the four checks in favor of E.T. Henry in payment for petroleum
products.6
Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she was
once a secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was
familiar with the four RCBC checks as the postdated checks issued by Hi-Cement to E.T.
Henry upon instructions of Ms. de Leon. She testified that E.T. Henry offered to give Hi-
Cement a loan which the subject checks would secure as collateral.7
On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the
dispositive portion of which reads:
"WHEREFORE, in view of the foregoing considerations, and plaintiff having proved
its cause of action by preponderance of evidence, judgment is hereby rendered
ordering all the defendants except defendant Antonio de las Alas to pay plaintiff
jointly and severally the amount of TWO MILLION (P2,000,000.00) PESOS with the
legal rate of interest from the filling of the complaint until fully paid, plus the sum of
TWENTY THOUSAND (P20,000.00) PESOS as and for attorney's fees and the cost
of suit."
All other claims are, for lack of merit dismissed.
SO ORDERED."8
In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals.9
Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarilly liable
with Hi-Cement for the amount of the check. Also, that the trial court erred in ruling that
Atrium was an ordinary holder, not a holder in due course of the rediscounted checks.10
Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-Cement did
not authorize the issuance of the checks, it could still be held liable for the checks. And
assuming that the checks were issued with its authorization, the same was without any
consideration, which is a defense against a holder in due course and that the liability shall be
borne alone by E.T. Henry.11
On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling of the
trial court, the dispositive portion of which reads:
"Judgement is hereby rendered:
(1) dismissing the plaintiff's complaint as against defendants Hi-Cement Corporation
and Antonio De las Alas;
(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly
and severally to pay the plaintiff the sum of TWO MILLION PESOS (P2,000,000.00)
with interest at the legal rate from the filling of the complaint until fully paid, plus
P20,000.00 for attorney's fees.
(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de
Leon, jointly and severally to pay defendant Hi-Cement Corporation, the sum of
P20,000.00 as and for attorney's fees.
With cost in this instance against the appellee Atrium Management Corporation and
appellant Lourdes Victoria M. de Leon.
So ordered."12
Hence, the recourse to this Court.13
The issues raised are the following:
In G. R. No. 109491 (Atrium, petitioner):
1. Whether the issuance of the questioned checks was an ultra vires act;
2. Whether Atrium was not a holder in due course and for value; and
3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement and
ordering it to pay P20,000.00 as attorney's fees.14
In G. R. No. 121794 (de Leon, petitioner):
1. Whether the Court of Appeals erred in holding petitioner personally liable for the
Hi-Cement checks issued to E.T. Henry;
2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course;
3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as
signatory of the checks was personally liable for the value of the checks, which were
declared to be issued without consideration;
4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement
attorney's fees and costs.15
We affirm the decision of the Court of Appeals.
We first resolve the issue of whether the issuance of the checks was an ultra vires act. The
record reveals that Hi-Cement Corporation issued the four (4) checks to extend financial
assistance to E.T. Henry, not as payment of the balance of the P30 million pesos cost of
hydro oil delivered by E.T. Henry to Hi-Cement. Why else would petitioner de Leon ask for
counterpart checks from E.T. Henry if the checks were in payment for hydro oil delivered by
E.T. Henry to Hi-Cement?
Hi-Cement, however, maintains that the checks were not issued for consideration and that
Lourdes and E.T. Henry engaged in a "kiting operation" to raise funds for E.T. Henry, who
admittedly was in need of financial assistance. The Court finds that there was no sufficient
evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the
corporation and is authorized to sign checks for the corporation. At the time of the issuance
of the checks, there were sufficient funds in the bank to cover payment of the amount of P2
million pesos.
It is, however, our view that there is basis to rule that the act of issuing the checks was well
within the ambit of a valid corporate act, for it was for securing a loan to finance the activities
of the corporation, hence, not an ultra vires act.
"An ultra vires act is one committed outside the object for which a corporation is created as
defined by the law of its organization and therefore beyond the power conferred upon it by
law"16 The term "ultra vires" is "distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or estoppel, while the latter is
void and cannot be validated."17
The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas were
personally liable for the checks issued as corporate officers and authorized signatories of the
check.
"Personal liability of a corporate director, trustee or officer along (although not necessarily)
with the corporation may so validly attach, as a rule, only when:
"1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or
gross negligence in directing its affairs, or (c) for conflict of interest, resulting in
damages to the corporation, its stockholders or other persons;
"2. He consents to the issuance of watered down stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;
"3. He agrees to hold himself personally and solidarily liable with the corporation; or
"4. He is made, by a specific provision of law, to personally answer for his corporate
action."18
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of
Hi-Cement were authorized to issue the checks. However, Ms. de Leon was negligent when
she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T.
Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was
aware that the checks were strictly endorsed for deposit only to the payee's account and not
to be further negotiated. What is more, the confirmation letter contained a clause that was not
true, that is, "that the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-
Cement from E.T. Henry". Her negligence resulted in damage to the corporation. Hence, Ms.
de Leon may be held personally liable therefor.1wphi1.nt
The next issue is whether or not petitioner Atrium was a holder of the checks in due course.
The Negotiable Instruments Law, Section 52 defines a holder in due course, thus:
"A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice
that it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it."
In the instant case, the checks were crossed checks and specifically indorsed for deposit to
payee's account only. From the beginning, Atrium was aware of the fact that the checks were
all for deposit only to payee's account, meaning E.T. Henry. Clearly, then, Atrium could not
be considered a holder in due course.
However, it does not follow as a legal proposition that simply because petitioner Atrium was
not a holder in due course for having taken the instruments in question with notice that the
same was for deposit only to the account of payee E.T. Henry that it was altogether
precluded from recovering on the instrument. The Negotiable Instruments Law does not
provide that a holder not in due course can not recover on the instrument.19
The disadvantage of Atrium in not being a holder in due course is that the negotiable
instrument is subject to defenses as if it were non-negotiable.20 One such defense is
absence or failure of consideration.21
We need not rule on the other issues raised, as they merely follow as a consequence of the
foregoing resolutions.
WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the Court of
Appeals in CA-G. R. CV No. 26686, are hereby AFFIRMED in toto.
No costs.
SO ORDERED.
G.R. No. 111448 January 16, 2002
AF REALTY & DEVELOPMENT, INC. and ZENAIDA R. RANULLO, petitioners, vs.
DIESELMAN FREIGHT SERVICES, CO., MANUEL C. CRUZ, JR. and MIDAS
DEVELOPMENT CORPORATION,respondents.
SANDOVAL-GUTIERREZ, J.:
Petition for review on certiorari assailing the Decision dated December 10, 1992 and the
Resolution (Amending Decision) dated August 5, 1993 of the Court of Appeals in CA-G.R.
CV No. 30133.
Dieselman Freight Service Co. (Dieselman for brevity) is a domestic corporation and a
registered owner of a parcel of commercial lot consisting of 2,094 square meters, located at
104 E. Rodriguez Avenue, Barrio Ugong, Pasig City, Metro Manila. The property is covered
by Transfer Certificate of Title No. 39849 issued by the Registry of Deeds of the Province of
Rizal.1
On May 10, 1988, Manuel C. Cruz, Jr., a member of the board of directors of Dieselman,
issued a letter denominated as "Authority To Sell Real Estate"2 to Cristeta N. Polintan, a real
estate broker of the CNP Real Estate Brokerage. Cruz, Jr. authorized Polintan "to look for a
buyer/buyers and negotiate the sale" of the lot at P3,000.00 per square meter, or a total of
P6,282,000.00. Cruz, Jr. has no written authority from Dieselman to sell the lot.
In turn, Cristeta Polintan, through a letter3 dated May 19, 1988, authorized Felicisima
("Mimi") Noble4 to sell the same lot.
Felicisima Noble then offered for sale the property to AF Realty & Development, Inc. (AF
Realty) at P2,500.00 per square meter.5 Zenaida Ranullo, board member and vice-president
of AF Realty, accepted the offer and issued a check in the amount of P300,000.00 payable to
the order of Dieselman. Polintan received the check and signed an "Acknowledgement
Receipt"6 indicating that the amount of P300,000.00 represents the partial payment of the
property but refundable within two weeks should AF Realty disapprove Ranullo's action on
the matter.
On June 29, 1988, AF Realty confirmed its intention to buy the lot. Hence, Ranullo asked
Polintan for the board resolution of Dieselman authorizing the sale of the property. However,
Polintan could only give Ranullo the original copy of TCT No. 39849, the tax declaration and
tax receipt for the lot, and a photocopy of the Articles of Incorporation of Dieselman.7
On August 2, 1988, Manuel F. Cruz, Sr., president of Dieselman, acknowledged receipt of
the said P300,000.00 as "earnest money" but required AF Realty to finalize the sale
at P4,000.00 per square meter.8 AF Realty replied that it has paid an initial down payment of
P300,000.00 and is willing to pay the balance.9
However, on August 13, 1988, Mr. Cruz, Sr. terminated the offer and demanded from AF
Realty the return of the title of the lot earlier delivered by Polintan.10
Claiming that there was a perfected contract of sale between them, AF Realty filed with the
Regional Trial Court, Branch 160, Pasig City a complaint for specific performance (Civil Case
No. 56278) against Dieselman and Cruz, Jr.. The complaint prays that Dieselman be ordered
to execute and deliver a final deed of sale in favor of AF Realty.11 In its amended
complaint,12 AF Realty asked for payment of P1,500,000.00 as compensatory damages;
P400,000.00 as attorney's fees; and P500,000.00 as exemplary damages.
In its answer, Dieselman alleged that there was no meeting of the minds between the parties
in the sale of the property and that it did not authorize any person to enter into such
transaction on its behalf.
Meanwhile, on July 30, 1988, Dieselman and Midas Development Corporation (Midas)
executed a Deed of Absolute Sale13 of the same property. The agreed price was P2,800.00
per square meter. Midas delivered to Dieselman P500,000.00 as down payment and
deposited the balance of P5,300,000.00 in escrow account with the PCIBank.
Constrained to protect its interest in the property, Midas filed on April 3, 1989 a Motion for
Leave to Intervene in Civil Case No. 56278. Midas alleged that it has purchased the property
and took possession thereof, hence Dieselman cannot be compelled to sell and convey it to
AF Realty. The trial court granted Midas' motion.
After trial, the lower court rendered the challenged Decision holding that the acts of Cruz, Jr.
bound Dieselman in the sale of the lot to AF Realty.14 Consequently, the perfected contract
of sale between Dieselman and AF Realty bars Midas' intervention. The trial court also held
that Midas acted in bad faith when it initially paid Dieselman P500,000.00 even without
seeing the latter's title to the property. Moreover, the notarial report of the sale was not
submitted to the Clerk of Court of the Quezon City RTC and the balance of P5,300,000.00
purportedly deposited in escrow by Midas with a bank was not established.1wphi1.nt
The dispositive portion of the trial court's Decision reads:
"WHEREFORE, foregoing considered, judgment is hereby rendered ordering
defendant to execute and deliver to plaintiffs the final deed of sale of the property
covered by the Transfer Certificate of Title No. 39849 of the Registry of Deed of
Rizal, Metro Manila District II, including the improvements thereon, and ordering
defendants to pay plaintiffs attorney's fees in the amount of P50,000.00 and to pay
the costs.
"The counterclaim of defendants is necessarily dismissed.
"The counterclaim and/or the complaint in intervention are likewise dismissed
"SO ORDERED."15
Dissatisfied, all the parties appealed to the Court of Appeals.
AF Realty alleged that the trial court erred in not holding Dieselman liable for moral,
compensatory and exemplary damages, and in dismissing its counterclaim against Midas.
Upon the other hand, Dieselman and Midas claimed that the trial court erred in finding that a
contract of sale between Dieselman and AF Realty was perfected. Midas further averred that
there was no bad faith on its part when it purchased the lot from Dieselman.
In its Decision dated December 10, 1992, the Court of Appeals reversed the judgment of the
trial court holding that since Cruz, Jr. was not authorized in writing by Dieselman to sell the
subject property to AF Realty, the sale was not perfected; and that the Deed of Absolute Sale
between Dieselman and Midas is valid, there being no bad faith on the part of the latter. The
Court of Appeals then declared Dieselman and Cruz, Jr. jointly and severally liable to AF
Realty for P100,000.00 as moral damages; P100,000.00 as exemplary damages; and
P100,000.00 as attorney's fees.16
On August 5, 1993, the Court of Appeals, upon motions for reconsideration filed by the
parties, promulgated an Amending Decision, the dispositive portion of which reads:
"WHEREFORE, The Decision promulgated on October 10, 1992, is hereby
AMENDED in the sense that only defendant Mr. Manuel Cruz, Jr. should be made
liable to pay the plaintiffs the damages and attorney's fees awarded therein, plus the
amount of P300,000.00 unless, in the case of the said P300,000.00, the same is still
deposited with the Court which should be restituted to plaintiffs.
"SO ORDERED."17
AF Realty now comes to this Court via the instant petition alleging that the Court of Appeals
committed errors of law.
The focal issue for consideration by this Court is who between petitioner AF Realty and
respondent Midas has a right over the subject lot.
The Court of Appeals, in reversing the judgment of the trial court, made the following
ratiocination:
"From the foregoing scenario, the fact that the board of directors of Dieselman never
authorized, verbally and in writing, Cruz, Jr. to sell the property in question or to look
for buyers and negotiate the sale of the subject property is undeniable.
"While Cristeta Polintan was actually authorized by Cruz, Jr. to look for buyers and
negotiate the sale of the subject property, it should be noted that Cruz, Jr. could not
confer on Polintan any authority which he himself did not have. Nemo dat quod non
habet. In the same manner, Felicisima Noble could not have possessed authority
broader in scope, being a mere extension of Polintan's purported authority, for it is a
legal truism in our jurisdiction that a spring cannot rise higher than its source.
Succinctly stated, the alleged sale of the subject property was effected through
persons who were absolutely without any authority whatsoever from Dieselman.
"The argument that Dieselman ratified the contract by accepting the P300,000.00 as
partial payment of the purchase price of the subject property is equally untenable.
The sale of land through an agent without any written authority is void.
x x x x x x x x x
"On the contrary, anent the sale of the subject property by Dieselman to intervenor
Midas, the records bear out that Midas purchased the same from Dieselman on 30
July 1988. The notice of lis pendens was subsequently annotated on the title of the
property by plaintiffs on 15 August 1988. However, this subsequent annotation of the
notice of lis pendens certainly operated prospectively and did not retroact to make
the previous sale of the property to Midas a conveyance in bad faith. A subsequently
registered notice of lis pendens surely is not proof of bad faith. It must therefore be
borne in mind that the 30 July 1988 deed of sale between Midas and Dieselman is a
document duly certified by notary public under his hand and seal. x x x. Such a deed
of sale being public document acknowledged before a notary public is admissible as
to the date and fact of its execution without further proof of its due execution and
delivery (Bael vs. Intermediate Appellate Court, 169 SCRA617; Joson vs. Baltazar,
194 SCRA 114) and to prove the defects and lack of consent in the execution
thereof, the evidence must be strong and not merely preponderant x x x."18
We agree with the Court of Appeals.
Section 23 of the Corporation Code expressly provides that the corporate powers of all
corporations shall be exercised by the board of directors. Just as a natural person may
authorize another to do certain acts in his behalf, so may the board of directors of a
corporation validly delegate some of its functions to individual officers or agents appointed by
it.19 Thus, contracts or acts of a corporation must be made either by the board of directors or
by a corporate agent duly authorized by the board.20 Absent such valid
delegation/authorization, the rule is that the declarations of an individual director relating to
the affairs of the corporation, but not in the course of, or connected with, the performance of
authorized duties of such director, are held not binding on the corporation.21
In the instant case, it is undisputed that respondent Cruz, Jr. has no written authority from the
board of directors of respondent Dieselman to sell or to negotiate the sale of the lot, much
less to appoint other persons for the same purpose. Respondent Cruz, Jr.'s lack of such
authority precludes him from conferring any authority to Polintan involving the subject realty.
Necessarily, neither could Polintan authorize Felicisima Noble. Clearly, the collective acts of
respondent Cruz, Jr., Polintan and Noble cannot bind Dieselman in the purported contract of
sale.
Petitioner AF Realty maintains that the sale of land by an unauthorized agent may be ratified
where, as here, there is acceptance of the benefits involved. In this case the receipt by
respondent Cruz, Jr. from AF Realty of the P300,000.00 as partial payment of the lot
effectively binds respondent Dieselman.22
We are not persuaded.
Involved in this case is a sale of land through an agent. Thus, the law on agency under the
Civil Code takes precedence. This is well stressed in Yao Ka Sin Trading vs. Court of
Appeals:23
"Since a corporation, such as the private respondent, can act only through its officers
and agents, all acts within the powers of said corporation may be performed by
agents of its selection; and, except so far as limitations or restrictions may be
imposed by special charter, by-law, or statutory provisions, the same general
principles of law which govern the relation of agency for a natural person
govern the officer or agent of a corporation, of whatever status or rank, in
respect to his power to act for the corporation; and agents when once
appointed, or members acting in their stead, are subject to the same rules,
liabilities, and incapacities as are agents of individuals and private persons."
(Emphasis supplied)
Pertinently, Article 1874 of the same Code provides:
"ART. 1874. When a sale of piece of land or any interest therein is through an
agent, the authority of the latter shall be in writing; otherwise, the sale shall be
void." (Emphasis supplied)
Considering that respondent Cruz, Jr., Cristeta Polintan and Felicisima Ranullo were not
authorized by respondent Dieselman to sell its lot, the supposed contract is void. Being a
void contract, it is not susceptible of ratification by clear mandate of Article 1409 of the Civil
Code, thus:
"ART. 1409. The following contracts are inexistent and void from the very
beginning:
x x x
(7) Those expressly prohibited or declared void by law.
"These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived." (Emphasis supplied)
Upon the other hand, the validity of the sale of the subject lot to respondent Midas is
unquestionable. As aptly noted by the Court of Appeals,24 the sale was authorized by a
board resolution of respondent Dieselman dated May 27, 1988.1wphi1.nt
The Court of Appeals awarded attorney's fees and moral and exemplary damages in favor of
petitioner AF Realty and against respondent Cruz, Jr.. The award was made by reason of a
breach of contract imputable to respondent Cruz, Jr. for having acted in bad faith. We are no
persuaded. It bears stressing that petitioner Zenaida Ranullo, board member and vice-
president of petitioner AF Realty who accepted the offer to sell the property, admitted in her
testimony25that a board resolution from respondent Dieselman authorizing the sale is
necessary to bind the latter in the transaction; and that respondent Cruz, Jr. has no such
written authority. In fact, despite demand, such written authority was not presented to
her.26 This notwithstanding, petitioner Ranullo tendered a partial payment for the
unauthorized transaction. Clearly, respondent Cruz, Jr. should not be held liable for damages
and attorney's fees.
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are
hereby AFFIRMED withMODIFICATION in the sense that the award of damages and
attorney's fees is deleted. Respondent Dieselman is ordered to return to petitioner AF Realty
its partial payment of P300,000.00. Costs against petitioners.
SO ORDERED.








































G.R. No. 125778 June 10, 2003
INTER-ASIA INVESTMENTS INDUSTRIES, INC., Petitioner, vs. COURT OF APPEALS and
ASIA INDUSTRIES, INC., Respondents.
D E C I S I O N
CARPIO-MORALES, J.:
The present petition for review on certiorari assails the Court of Appeals Decision1 of
January 25, 1996 and Resolution2 of July 11, 1996.
The material facts of the case are as follows:
On September 1, 1978, Inter-Asia Industries, Inc. (petitioner), by a Stock Purchase
Agreement3 (the Agreement), sold to Asia Industries, Inc. (private respondent) for and in
consideration of the sum of P19,500,000.00 all its right, title and interest in and to all the
outstanding shares of stock of FARMACOR, INC. (FARMACOR).4 The Agreement was
signed by Leonides P. Gonzales and Jesus J. Vergara, presidents of petitioner and private
respondent, respectively.5
Under paragraph 7 of the Agreement, petitioner as seller made warranties and
representations among which were "(iv.) [t]he audited financial statements of FARMACOR at
and for the year ended December 31, 1977... and the audited financial statements of
FARMACOR as of September 30, 1978 being prepared by S[ycip,] G[orres,] V[elayo and
Co.]... fairly present or will present the financial position of FARMACOR and the results of its
operations as of said respective dates; said financial statements show or will show all
liabilities and commitments of FARMACOR, direct or contingent, as of said respective dates .
. ."; and "(v.) [t]he Minimum Guaranteed Net Worth of FARMACOR as of September 30, 1978
shall be Twelve Million Pesos (P12,000,000.00)."6
The Agreement was later amended with respect to the "Closing Date," originally set up at
10:00 a.m. of September 30, 1978, which was moved to October 31, 1978, and to the mode
of payment of the purchase price.7
The Agreement, as amended, provided that pending submission by SGV of FARMACORs
audited financial statements as of October 31, 1978, private respondent may retain the sum
of P7,500,000.00 out of the stipulated purchase price of P19,500,000.00; that from this
retained amount of P7,500,000.00, private respondent may deduct any shortfall on the
Minimum Guaranteed Net Worth of P12,000,000.00;8 and that if the amount retained is not
sufficient to make up for the deficiency in the Minimum Guaranteed Net Worth, petitioner
shall pay the difference within 5 days from date of receipt of the audited financial
statements.9
Respondent paid petitioner a total amount of P 12,000,000.00: P5,000,000.00 upon the
signing of the Agreement, and P7,000,000.00 on November 2, 1978.10
From the STATEMENT OF INCOME AND DEFICIT attached to the financial report11 dated
November 28, 1978 submitted by SGV, it appears that FARMACOR had, for the ten months
ended October 31, 1978, a deficit of P11,244,225.00.12 Since the stockholders equity
amounted to P10,000,000.00, FARMACOR had a net worth deficiency of P1,244,225.00. The
guaranteed net worth shortfall thus amounted to P13,244,225.00 after adding the net worth
deficiency of P1,244,225.00 to the Minimum Guaranteed Net Worth of P12,000,000.00.
The adjusted contract price, therefore, amounted to P6,225,775.00 which is the difference
between the contract price of P19,500,000.00 and the shortfall in the guaranteed net worth of
P13,224,225.00. Private respondent having already paid petitioner P12,000,000.00, it was
entitled to a refund of P5,744,225.00.
Petitioner thereafter proposed, by letter13 of January 24, 1980, signed by its president, that
private respondents claim for refund be reduced to P4,093,993.00, it promising to pay the
cost of the Northern Cotabato Industries, Inc. (NOCOSII) superstructures in the amount of
P759,570.00. To the proposal respondent agreed. Petitioner, however, weiched on its
promise. Petitioners total liability thus stood at P4,853,503.00 (P4,093,993.00 plus
P759,570.00)14 exclusive of interest.15
On April 5, 1983, private respondent filed a complaint16 against petitioner with the Regional
Trial Court of Makati, one of two causes of action of which was for the recovery of above-said
amount of P4,853,503.0017 plus interest.
Denying private respondents claim, petitioner countered that private respondent failed to pay
the balance of the purchase price and accordingly set up a counterclaim.
Finding for private respondent, the trial court rendered on November 27, 1991 a
Decision,18 the dispositive portion of which reads:
WHEREFORE, judgment is rendered in favor of plaintiff and against defendant (a) ordering
the latter to pay to the former the sum of P4,853,503.0019 plus interest thereon at the legal
rate from the filing of the complaint until fully paid, the sum of P30,000.00 as attorneys fees
and the costs of suit; and (b) dismissing the counterclaim.
SO ORDERED.
On appeal to the Court of Appeals, petitioner raised the following errors:
THE TRIAL COURT ERRED IN HOLDING THE DEFENDANT LIABLE UNDER THE
FIRST CAUSE OF ACTION PLEADED BY THE PLAINTIFF.
THE TRIAL COURT ERRED IN AWARDING ATTORNEYS FEES AND IN
DISMISSING THE COUNTERCLAIM.
THE TRIAL COURT ERRED IN RENDERING JUDGMENT IN FAVOR OF THE
PLAINTIFF, THE ALLEGED BREACH OF WARRANTIES AND REPRESENTATION
NOT HAVING BEEN SHOWN, MUCH LESS ESTABLISHED BY THE PLAINTIFF.20
By Decision of January 25, 1996, the Court of Appeals affirmed the trial courts decision.
Petitioners motion for reconsideration of the decision having been denied by the Court of
Appeals by Resolution of July 11, 1996, the present petition for review on certiorari was filed,
assigning the following errors:
I
THE RESPONDENT COURT ERRED IN NOT HOLDING THAT THE LETTER OF THE
PRESIDENT OF THE PETITIONER IS NOT BINDING ON THE PETITIONER
BEING ULTRA VIRES.
II
THE LETTER CAN NOT BE AN ADMISSION AND WAIVER OF THE PETITIONER AS A
CORPORATION.
III
THE RESPONDENT COURT ERRED IN NOT DECLARING THAT THERE IS NO BREACH
OF WARRANTIES AND REPRESENTATION AS ALLEGED BY THE PRIVATE
RESPONDENT.
IV
THE RESPONDENT COURT ERRED IN ORDERING THE PETITIONER TO PAY
ATTORNEYS FEES AND IN SUSTAINING THE DISMISSAL OF THE COUNTERCLAIM.18
(Underscoring in the original)
Petitioner argues that the January 24, 1980 letter-proposal (for the reduction of private
respondents claim for refund upon petitioners promise to pay the cost of NOCOSII
superstructures in the amount of P759,570.00) which was signed by its president has no
legal force and effect against it as it was not authorized by its board of directors, it citing the
Corporation Law which provides that unless the act of the president is authorized by the
board of directors, the same is not binding on it.
This Court is not persuaded.
The January 24, 1980 letter signed by petitioners president is valid and binding. The case
of Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals19 instructs:
The general rule is that, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation. A corporation is a juridical
person, separate and distinct from its stockholders and members, "having x x x powers,
attributes and properties expressly authorized by law or incident to its existence."
Being a juridical entity, a corporation may act through its board of directors, which exercises
almost all corporate powers, lays down all corporate business policies and is responsible for
the efficiency of management, as provided in Section 23 of the Corporation Code of the
Philippines:
SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors
or trustees x x x.
Under this provision, the power and responsibility to decide whether the corporation should
enter into a contract that will bind the corporation is lodged in the board, subject to the
articles of incorporation, bylaws, or relevant provisions of law. However, just as a natural
person may authorize another to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and powers to officers,
committees or agents. The authority of such individuals to bind the corporation is
generally derived from law, corporate bylaws or authorization from the board, either
expressly or impliedly by habit, custom or acquiescence in the general course of
business, viz:
A corporate officer or agent may represent and bind the corporation in transactions with third
persons to the extent that [the] authority to do so has been conferred upon him, and this
includes powers as, in the usual course of the particular business, are incidental to, or may
be implied from, the powers intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused person dealing with the officer or agent to believe that it has
conferred.
x x x
[A]pparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an officer or
agent as having the power to act or, in other words the apparent authority to act in general,
with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, within or beyond the scope of his ordinary
powers. It requires presentation of evidence of similar act(s) executed either in
its favor or infavor of other parties. It is not
the quantity of similar acts which establishes apparent authority, but thevesting of
a corporate officer with power to bind the corporation.
x x x (Emphasis and underscoring supplied)
As correctly argued by private respondent, an officer of a corporation who is authorized to
purchase the stock of another corporation has the implied power to perform all other
obligations arising therefrom, such as payment of the shares of stock. By allowing its
president to sign the Agreement on its behalf, petitioner clothed him with apparent capacity to
perform all acts which are expressly, impliedly and inherently stated therein.21
Petitioner further argues that when the Agreement was executed on September 1, 1978, its
financial statements were extensively examined and accepted as correct by private
respondent, hence, it cannot later be disproved "by resorting to some scheme such as future
financial auditing;"22 and that it should not be bound by the SGV Report because it is self-
serving and biased, SGV having been hired solely by private respondent, and the alleged
shortfall of FARMACOR occurred only after the execution of the Agreement.
This Court is not persuaded either.
The pertinent provisions of the Agreement read:
7. Warranties and Representations - (a) SELLER warrants and represents as follows:
x x x
(iv) The audited financial statements of FARMACOR as at and for the year ended December
31, 1977 and
theaudited financial statements of FARMACOR as at September 30, 1978 being prepare
d by SGV pursuantto paragraph 6(b) fairly present or will present the financial position
of FARMACOR and the results of its operations as of said respective dates; said
financial statements show or will show all liabilities and commitments of FARMACOR,
direct or contingent, as of said respective dates; and the receivables set forth in said
financial statements are fully due and collectible, free and clear of any set-offs, defenses,
claims and other impediments to their collectibility.
(v) The Minimum Guaranteed Net Worth of FARMACOR as of September 30, 1978 shall
be Twelve Million Pesos (P12,000,000.00), Philippine Currency.1wphi1
x x x (Underscoring in the original; emphasis supplied)23
True, private respondent accepted as correct the financial statements submitted to it when
the Agreement was executed on September 1, 1978. But petitioner expressly warranted that
the SGV Reports "fairly present or will present the financial position of FARMACOR." By such
warranty, petitioner is estopped from claiming that the SGV Reports are self-serving and
biased.1wphi1
As to the claim that the shortfall occurred after the execution of the Agreement, the
declaration of Emmanuel de Asis, supervisor in the Accounting Division of SGV and head of
the team which conducted the auditing of FARMACOR, that the period covered by the audit
was from January to October 1978 shows that the periodbefore the Agreement was entered
into (on September 1, 1978) was covered.24
As to petitioners assigned error on the award of attorneys fees which, it argues, is bereft of
factual, legal and equitable justification, this Court finds the same well-taken.
On the matter of attorneys fees, it is an accepted doctrine that the award thereof as an item
of damages is the exception rather than the rule, and counsels fees are not to be awarded
every time a party wins a suit. Thepower of the court to award
attorneys fees under Article 2208 of the Civil Code demands
factual, legaland equitable justification, without which the award is
a conclusion without a premise, its basis being improperly left
to speculation and conjecture. In all events, the court must explicitly state in the text
of the decision, and not only in the decretal portion thereof, the legal reason for the
award of attorneys fees.25
x x x (Emphasis and underscoring supplied; citations omitted)
WHEREFORE, the instant petition is PARTLY GRANTED. The assailed decision of the Court
of Appeals affirming that of the trial court is modified in that the award of attorneys fees in
favor of private respondent is deleted. The decision is affirmed in other respects.
SO ORDERED.


































G.R. No. 125469 October 27, 1997
PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs. THE HONORABLE COURT OF
APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL LAND,
INC., respondents.
TORRES, JR., J.:
The Securities and Exchange Commission is the government agency, under the direct
general supervision of the Office of the President, 1 with the immense task of enforcing the
Revised Securities Act, and all other duties assigned to it by pertinent laws. Among its
inumerable functions, and one of the most important, is the supervision of all corporations,
partnerships or associations, who are grantees of primary franchise and/or a license or
permit issued by the government to operate in the Philippines. 2 Just how far this regulatory
authority extends, particularly, with regard to the Petitioner Philippine Stock Exchange, Inc. is
the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner assails the resolution of the respondent
Court of Appeals, dated June 27, 1996, which affirmed the decision of the Securities and
Exchange Commission ordering the petitioner Philippine Stock Exchange, Inc. to allow the
private respondent Puerto Azul Land, Inc. to be listed in its stock market, thus paving the way
for the public offering of PALI's shares.
The facts of the case are undisputed, and are hereby restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its
shares to the public in order to raise funds allegedly to develop its properties and pay its
loans with several banking institutions. In January, 1995, PALI was issued a Permit to Sell its
shares to the public by the Securities and Exchange Commission (SEC). To facilitate the
trading of its shares among investors, PALI sought to course the trading of its shares through
the Philippine Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock
exchange an application to list its shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's application,
recommended to the PSE's Board of Governors the approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application, the Board of Governors of
the PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that the late
President Marcos was the legal and beneficial owner of certain properties forming part of the
Puerto Azul Beach Hotel and Resort Complex which PALI claims to be among its assets and
that the Ternate Development Corporation, which is among the stockholders of PALI,
likewise appears to have been held and continue to be held in trust by one Rebecco Panlilio
for then President Marcos and now, effectively for his estate, and requested PALI's
application to be deferred. PALI was requested to comment upon the said letter.
PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and
Resort Complex were not claimed by PALI as its assets. On the contrary, the resort is
actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities
distinct from PALI. Furthermore, the Ternate Development Corporation owns only 1.20% of
PALI. The Marcoses responded that their claim is not confined to the facilities forming part of
the Puerto Azul Hotel and Resort Complex, thereby implying that they are also asserting
legal and beneficial ownership of other properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential
Commission on Good Government (PCGG) requesting for comments on the letters of the
PALI and the Marcoses. On March 4, 1996, the PSE was informed that the Marcoses
received a Temporary Restraining Order on the same date, enjoining the Marcoses from,
among others, "further impeding, obstructing, delaying or interfering in any manner by or any
means with the consideration, processing and approval by the PSE of the initial public
offering of PALI." The TRO was issued by Judge Martin S. Villarama, Executive Judge of the
RTC of Pasig City in Civil Case No. 65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its
decision to reject PALI's application, citing the existence of serious claims, issues and
circumstances surrounding PALI's ownership over its assets that adversely affect the
suitability of listing PALI's shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman,
Perfecto R. Yasay, Jr., bringing to the SEC's attention the action taken by the PSE in the
application of PALI for the listing of its shares with the PSE, and requesting that the SEC, in
the exercise of its supervisory and regulatory powers over stock exchanges under Section
6(j) of P.D. No. 902-A, review the PSE's action on PALI's listing application and institute such
measures as are just and proper under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the
letter of PALI and directing the PSE to file its comments thereto within five days from its
receipt and for its authorized representative to appear for an "inquiry" on the matter. On April
22, 1996, the PSE submitted a letter to the SEC containing its comments to the April 11,
1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The dispositive
portion of the said order reads:
WHEREFORE, premises considered, and invoking the Commissioner's
authority and jurisdiction under Section 3 of the Revised Securities Act, in
conjunction with Section 3, 6(j) and 6(m) of Presidential Decree No. 902-A,
the decision of the Board of Governors of the Philippine Stock Exchange
denying the listing of shares of Puerto Azul Land, Inc., is hereby set aside,
and the PSE is hereby ordered to immediately cause the listing of the PALI
shares in the Exchange, without prejudice to its authority to require PALI to
disclose such other material information it deems necessary for the
protection of the investigating public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29, 1996, which was,
however denied by the Commission in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the Commission finds no compelling
reason to reconsider its order dated April 24, 1996, and in the light of recent
developments on the adverse claim against the PALI properties, PSE should
require PALI to submit full disclosure of material facts and information to
protect the investing public. In this regard, PALI is hereby ordered to amend
its registration statements filed with the Commission to incorporate the full
disclosure of these material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a
Petition for Review (with Application for Writ of Preliminary Injunction and Temporary
Restraining Order), assailing the above mentioned orders of the SEC, submitting the
following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN ISSUING THE ASSAILED
ORDERS WITHOUT POWER, JURISDICTION, OR
AUTHORITY; SEC HAS NO POWER TO ORDER THE
LISTING AND SALE OF SHARES OF PALI WHOSE
ASSETS ARE SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN FINDING THAT PSE ACTED
IN AN ARBITRARY AND ABUSIVE MANNER IN
DISAPPROVING PALI'S LISTING APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND
VOID FOR ALLOWING FURTHER DISPOSITION OF
PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM
PART OF NAVAL/MILITARY RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT
PROPERLY PROMULGATED AND ITS
IMPLEMENTATION AND APPLICATION IN THIS CASE
VIOLATES THE DUE PROCESS CLAUSE OF THE
CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a
Comment and Motion to Dismiss. On June 10, 1996, PSE fled its Reply to Comment and
Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's
Petition for Review. Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction and authority to look into the
decision of the petitioner PSE, pursuant to Section 3 3 of the Revised Securities Act in
relation to Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section 38(b) 5 of the Revised
Securities Act, and for the purpose of ensuring fair administration of the exchange. Both as a
corporation and as a stock exchange, the petitioner is subject to public respondent's
jurisdiction, regulation and control. Accepting the argument that the public respondent has
the authority merely to supervise or regulate, would amount to serious consequences,
considering that the petitioner is a stock exchange whose business is impressed with public
interest. Abuse is not remote if the public respondent is left without any system of control. If
the securities act vested the public respondent with jurisdiction and control over all
corporations; the power to authorize the establishment of stock exchanges; the right to
supervise and regulate the same; and the power to alter and supplement rules of the
exchange in the listing or delisting of securities, then the law certainly granted to the public
respondent the plenary authority over the petitioner; and the power of review necessarily
comes within its authority.
All in all, the court held that PALI complied with all the requirements for public listing,
affirming the SEC's ruling to the effect that:
. . . the Philippine Stock Exchange has acted in an arbitrary and abusive
manner in disapproving the application of PALI for listing of its shares in the
face of the following considerations:
1. PALI has clearly and admittedly complied with the Listing Rules and full
disclosure requirements of the Exchange;
2. In applying its clear and reasonable standards on the suitability for listing
of shares, PSE has failed to justify why it acted differently on the application
of PALI, as compared to the IPOs of other companies similarly situated that
were allowed listing in the Exchange;
3. It appears that the claims and issues on the title to PALI's properties were
even less serious than the claims against the assets of the other companies
in that, the assertions of the Marcoses that they are owners of the disputed
properties were not substantiated enough to overcome the strength of a title
to properties issued under the Torrens System as evidence of ownership
thereof;
4. No action has been filed in any court of competent jurisdiction seeking to
nullify PALI's ownership over the disputed properties, neither has the
government instituted recovery proceedings against these properties. Yet
the import of PSE's decision in denying PALI's application is that it would be
PALI, not the Marcoses, that must go to court to prove the legality of its
ownership on these properties before its shares can be listed.
In addition, the argument that the PALI properties belong to the Military/Naval Reservation
does not inspire belief. The point is, the PALI properties are now titled. A property losses its
public character the moment it is covered by a title. As a matter of fact, the titles have long
been settled by a final judgment; and the final decree having been registered, they can no
longer be re-opened considering that the one year period has already passed. Lastly, the
determination of what standard to apply in allowing PALI's application for listing, whether the
discretion method or the system of public disclosure adhered to by the SEC, should be
addressed to the Securities Commission, it being the government agency that exercises both
supervisory and regulatory authority over all corporations.
On August 15, 19961 the PSE, after it was granted an extension, filed the instant Petition for
Review on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals.
Respondent PALI filed its Comment to the petition on October 17, 1996. On the same date,
the PCGG filed a Motion for Leave to file a Petition for Intervention. This was followed up by
the PCGG's Petition for Intervention on October 21, 1996. A supplemental Comment was
filed by PALI on October 25, 1997. The Office of the Solicitor General, representing the SEC
and the Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to the
PCGG's motion for leave to file petition for intervention, PALI filed its Comment thereto on
January 17, 1997, whereas the PSE filed its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent
PALI (October 17, 1996) and the Solicitor General (December 26, 1996). On May 16, 1997,
PALI filed its Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the
PSE to list the shares of PALI in the stock exchange. Under presidential decree No. 902-A,
the powers of the SEC over stock exchanges are more limited as compared to its authority
over ordinary corporations. In connection with this, the powers of the SEC over stock
exchanges under the Revised Securities Act are specifically enumerated, and these do not
include the power to reverse the decisions of the stock exchange. Authorities are in
abundance even in the United States, from which the country's security policies are
patterned, to the effect of giving the Securities Commission less control over stock
exchanges, which in turn are given more lee-way in making the decision whether or not to
allow corporations to offer their stock to the public through the stock exchange. This is in
accord with the "business judgment rule" whereby the SEC and the courts are barred from
intruding into business judgments of corporations, when the same are made in good faith. the
said rule precludes the reversal of the decision of the PSE to deny PALI's listing application,
absent a showing of bad faith on the part of the PSE. Under the listing rules of the PSE, to
which PALI had previously agreed to comply, the PSE retains the discretion to accept or
reject applications for listing. Thus, even if an issuer has complied with the PSE listing rules
and requirements, PSE retains the discretion to accept or reject the issuer's listing application
if the PSE determines that the listing shall not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor
with corporations whose properties are under sequestration. A reading of Republic of
the Philippines vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the
properties of PALI, which were derived from the Ternate Development Corporation (TDC)
and the Monte del Sol Development Corporation (MSDC). are under sequestration by the
PCGG, and subject of forfeiture proceedings in the Sandiganbayan. This ruling of the Court is
the "law of the case" between the Republic and TDC and MSDC. It categorically declares
that the assets of these corporations were sequestered by the PCGG on March 10, 1986 and
April 4, 1988.
It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership over its
properties can no longer be questioned, since certificates of title have been issued to PALI
and more than one year has since lapsed, is erroneous and ignores well settled
jurisprudence on land titles. That a certificate of title issued under the Torrens System is a
conclusive evidence of ownership is not an absolute rule and admits certain exceptions. It is
fundamental that forest lands or military reservations are non-alienable. Thus, when a title
covers a forest reserve or a government reservation, such title is void.
PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy of
"full disclosure" to uphold the listing of PALI's shares with the PSE, in the absence of a clear
mandate for the effectivity of such policy. As it is, the case records reveal the truth that PALI
did not comply with the listing rules and disclosure requirements. In fact, PALI's documents
supporting its application contained misrepresentations and misleading statements, and
concealed material information. The matter of sequestration of PALI's properties and the fact
that the same form part of military/naval/forest reservations were not reflected in PALI's
application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is
clothed with the markings of a corporate entity, it functions as the primary channel through
which the vessels of capital trade ply. The PSE's relevance to the continued operation and
filtration of the securities transactions in the country gives it a distinct color of importance
such that government intervention in its affairs becomes justified, if not necessarily. Indeed,
as the only operational stock exchange in the country today, the PSE enjoys a monopoly of
securities transactions, and as such, it yields an immense influence upon the country's
economy.
Due to this special nature of stock exchanges, the country's lawmakers has seen it wise to
give special treatment to the administration and regulation of stock exchanges. 6
These provisions, read together with the general grant of jurisdiction, and right of supervision
and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC the special
mandate to be vigilant in the supervision of the affairs of stock exchanges so that the
interests of the investing public may be fully safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the
SEC's challenged control authority over the petitioner PSE even as it provides that "the
Commission shall have absolute jurisdiction, supervision, and control over all corporations,
partnerships or associations, who are the grantees of primary franchises and/or a license or
permit issued by the government to operate in the Philippines. . ." The SEC's regulatory
authority over private corporations encompasses a wide margin of areas, touching nearly all
of a corporation's concerns. This authority springs from the fact that a corporation owes its
existence to the concession of its corporate franchise from the state.
The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from or
be considered as necessary or incidental to the carrying out of the SEC's express power to
insure fair dealing in securities traded upon a stock exchange or to ensure the fair
administration of such exchange. 7 It is, likewise, observed that the principal function of the
SEC is the supervision and control over corporations, partnerships and associations with the
end in view that investment in these entities may be encouraged and protected, and their
activities for the promotion of economic development. 8
Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of the
PSE to deny the application for listing in the stock exchange of the private respondent PALI.
The SEC's action was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to whether or not securities,
including shares of stock of a corporation, may be traded or not in the stock exchange. This
is in line with the SEC's mission to ensure proper compliance with the laws, such as the
Revised Securities Act and to regulate the sale and disposition of securities in the
country. 9 As the appellate court explains:
Paramount policy also supports the authority of the public respondent to
review petitioner's denial of the listing. Being a stock exchange, the
petitioner performs a function that is vital to the national economy, as the
business is affected with public interest. As a matter of fact, it has often been
said that the economy moves on the basis of the rise and fall of stocks being
traded. By its economic power, the petitioner certainly can dictate which and
how many users are allowed to sell securities thru the facilities of a stock
exchange, if allowed to interpret its own rules liberally as it may please.
Petitioner can either allow or deny the entry to the market of securities. To
repeat, the monopoly, unless accompanied by control, becomes subject to
abuse; hence, considering public interest, then it should be subject to
government regulation.
The role of the SEC in our national economy cannot be minimized. The legislature, through
the Revised Securities Act, Presidential Decree No. 902-A, and other pertinent laws, has
entrusted to it the serious responsibility of enforcing all laws affecting corporations and other
forms of associations not otherwise vested in some other government office. 10
This is not to say, however, that the PSE's management prerogatives are under the absolute
control of the SEC. The PSE is, alter all, a corporation authorized by its corporate franchise
to engage in its proposed and duly approved business. One of the PSE's main concerns, as
such, is still the generation of profit for its stockholders. Moreover, the PSE has all the rights
pertaining to corporations, including the right to sue and be sued, to hold property in its own
name, to enter (or not to enter) into contracts with third persons, and to perform all other legal
acts within its allocated express or implied powers.
A corporation is but an association of individuals, allowed to transact under an assumed
corporate name, and with a distinct legal personality. In organizing itself as a collective body,
it waives no constitutional immunities and perquisites appropriate to such a body. 11 As to its
corporate and management decisions, therefore, the state will generally not interfere with the
same. Questions of policy and of management are left to the honest decision of the officers
and directors of a corporation, and the courts are without authority to substitute their
judgment for the judgment of the board of directors. The board is the business manager of
the corporation, and so long as it acts in good faith, its orders are not reviewable by the
courts. 12
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant
authority to reverse the PSE's decision in matters of application for listing in the market, the
SEC may exercise such power only if the PSE's judgment is attended by bad faith. In Board
of Liquidators vs. Kalaw, 13 it was held that bad faith does not simply connote bad judgment
or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of
wrong. It means a breach of a known duty through some motive or interest of ill will, partaking
of the nature of fraud.
In reaching its decision to deny the application for listing of PALI, the PSE considered
important facts, which, in the general scheme, brings to serious question the qualification of
PALI to sell its shares to the public through the stock exchange. During the time for receiving
objections to the application, the PSE heard from the representative of the late President
Ferdinand E. Marcos and his family who claim the properties of the private respondent to be
part of the Marcos estate. In time, the PCGG confirmed this claim. In fact, an order of
sequestration has been issued covering the properties of PALI, and suit for reconveyance to
the state has been filed in the Sandiganbayan Court. How the properties were effectively
transferred, despite the sequestration order, from the TDC and MSDC to Rebecco Panlilio,
and to the private respondent PALI, in only a short span of time, are not yet explained to the
Court, but it is clear that such circumstances give rise to serious doubt as to the integrity of
PALI as a stock issuer. The petitioner was in the right when it refused application of PALI, for
a contrary ruling was not to the best interest of the general public. The purpose of the
Revised Securities Act, after all, is to give adequate and effective protection to the investing
public against fraudulent representations, or false promises, and the imposition of worthless
ventures. 14
It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts
detrimental to legitimate business, thus:
The Securities Act, often referred to as the "truth in securities" Act, was
designed not only to provide investors with adequate information upon which
to base their decisions to buy and sell securities, but also to protect
legitimate business seeking to obtain capital through honest presentation
against competition from crooked promoters and to prevent fraud in the sale
of securities. (Tenth Annual Report, U.S. Securities & Exchange
Commission, p. 14).
As has been pointed out, the effects of such an act are chiefly (1) prevention
of excesses and fraudulent transactions, merely by requirement of that their
details be revealed; (2) placing the market during the early stages of the
offering of a security a body of information, which operating indirectly
through investment services and expert investors, will tend to produce a
more accurate appraisal of a security, . . . Thus, the Commission may refuse
to permit a registration statement to become effective if it appears on its face
to be incomplete or inaccurate in any material respect, and empower the
Commission to issue a stop order suspending the effectiveness of any
registration statement which is found to include any untrue statement of a
material fact or to omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. (Idem).
Also, as the primary market for securities, the PSE has established its name and goodwill,
and it has the right to protect such goodwill by maintaining a reasonable standard of propriety
in the entities who choose to transact through its facilities. It was reasonable for the PSE,
therefore, to exercise its judgment in the manner it deems appropriate for its business
identity, as long as no rights are trampled upon, and public welfare is safeguarded.
In this connection, it is proper to observe that the concept of government absolutism is a
thing of the past, and should remain so.
The observation that the title of PALI over its properties is absolute and can no longer be
assailed is of no moment. At this juncture, there is the claim that the properties were owned
by TDC and MSDC and were transferred in violation of sequestration orders, to Rebecco
Panlilio and later on to PALI, besides the claim of the Marcoses that such properties belong
to the Marcos estate, and were held only in trust by Rebecco Panlilio. It is also alleged by the
petitioner that these properties belong to naval and forest reserves, and therefore beyond
private dominion. If any of these claims is established to be true, the certificates of title over
the subject properties now held by PALI map be disregarded, as it is an established rule that
a registration of a certificate of title does not confer ownership over the properties described
therein to the person named as owner. The inscription in the registry, to be effective, must be
made in good faith. The defense of indefeasibility of a Torrens Title does not extend to a
transferee who takes the certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted correctly in refusing the
application of PALI, the true ownership of the properties of PALI need not be determined as
an absolute fact. What is material is that the uncertainty of the properties' ownership and
alienability exists, and this puts to question the qualification of PALI's public offering. In sum,
the Court finds that the SEC had acted arbitrarily in arrogating unto itself the discretion of
approving the application for listing in the PSE of the private respondent PALI, since this is a
matter addressed to the sound discretion of the PSE, a corporation entity, whose business
judgments are respected in the absence of bad faith.
The question as to what policy is, or should be relied upon in approving the registration and
sale of securities in the SEC is not for the Court to determine, but is left to the sound
discretion of the Securities and Exchange Commission. In mandating the SEC to administer
the Revised Securities Act, and in performing its other functions under pertinent laws, the
Revised Securities Act, under Section 3 thereof, gives the SEC the power to promulgate such
rules and regulations as it may consider appropriate in the public interest for the enforcement
of the said laws. The second paragraph of Section 4 of the said law, on the other hand,
provides that no security, unless exempt by law, shall be issued, endorsed, sold, transferred
or in any other manner conveyed to the public, unless registered in accordance with the rules
and regulations that shall be promulgated in the public interest and for the protection of
investors by the Commission. Presidential Decree No. 902-A, on the other hand, provides
that the SEC, as regulatory agency, has supervision and control over all corporations and
over the securities market as a whole, and as such, is given ample authority in determining
appropriate policies. Pursuant to this regulatory authority, the SEC has manifested that it has
adopted the policy of "full material disclosure" where all companies, listed or applying for
listing, are required to divulge truthfully and accurately, all material information about
themselves and the securities they sell, for the protection of the investing public, and under
pain of administrative, criminal and civil sanctions. In connection with this, a fact is deemed
material if it tends to induce or otherwise effect the sale or purchase of its securities. 15 While
the employment of this policy is recognized and sanctioned by the laws, nonetheless, the
Revised Securities Act sets substantial and procedural standards which a proposed issuer of
securities must satisfy. 16 Pertinently, Section 9 of the Revised Securities Act sets forth the
possible Grounds for the Rejection of the registration of a security:
The Commission may reject a registration statement and refuse to issue a
permit to sell the securities included in such registration statement if it finds
that
(1) The registration statement is on its face incomplete or inaccurate in any
material respect or includes any untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading; or
(2) The issuer or registrant
(i) is not solvent or not in sound financial condition;
(ii) has violated or has not complied with the provisions of
this Act, or the rules promulgated pursuant thereto, or any
order of the Commission;
(iii) has failed to comply with any of the applicable
requirements and conditions that the Commission may, in
the public interest and for the protection of investors,
impose before the security can be registered;
(iv) has been engaged or is engaged or is about to engage
in fraudulent transaction;
(v) is in any way dishonest or is not of good repute; or
(vi) does not conduct its business in accordance with law or
is engaged in a business that is illegal or contrary to
government rules and regulations.
(3) The enterprise or the business of the issuer is not shown to be sound or
to be based on sound business principles;
(4) An officer, member of the board of directors, or principal stockholder of
the issuer is disqualified to be such officer, director or principal stockholder;
or
(5) The issuer or registrant has not shown to the satisfaction of the
Commission that the sale of its security would not work to the prejudice of
the public interest or as a fraud upon the purchasers or investors. (Emphasis
Ours)
A reading of the foregoing grounds reveals the intention of the lawmakers to make the
registration and issuance of securities dependent, to a certain extent, on the merits of the
securities themselves, and of the issuer, to be determined by the Securities and Exchange
Commission. This measure was meant to protect the interests of the investing public against
fraudulent and worthless securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The absolute reliance on the full
disclosure method in the registration of securities is, therefore, untenable. As it is, the Court
finds that the private respondent PALI, on at least two points (nos. 1 and 5) has failed to
support the propriety of the issue of its shares with unfailing clarity, thereby lending support to
the conclusion that the PSE acted correctly in refusing the listing of PALI in its stock
exchange. This does not discount the effectivity of whatever method the SEC, in the exercise
of its vested authority, chooses in setting the standard for public offerings of corporations
wishing to do so. However, the SEC must recognize and implement the mandate of the law,
particularly the Revised Securities Act, the provisions of which cannot be amended or
supplanted by mere administrative issuance.
In resume, the Court finds that the PSE has acted with justified circumspection, discounting,
therefore, any imputation of arbitrariness and whimsical animation on its part. Its action in
refusing to allow the listing of PALI in the stock exchange is justified by the law and by the
circumstances attendant to this case.
ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the
Petition for Review onCertiorari. The Decisions of the Court of Appeals and the Securities
and Exchange Commission dated July 27, 1996 and April 24, 1996 respectively, are hereby
REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED, affirming the
decision of the Philippine Stock Exchange to deny the application for listing of the private
respondent Puerto Azul Land, Inc.
SO ORDERED.












G.R. No. 108576 January 20, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS,
COURT OF TAX APPEALS and A. SORIANO CORP., respondents.
MARTINEZ, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the
Court of Appeals (CA)1 which affirmed the ruling of the Court of Tax Appeals (CTA) 2 that
private respondent A. Soriano Corporation's (hereinafter ANSCOR) redemption and
exchange of the stocks of its foreign stockholders cannot be considered as "essentially
equivalent to a distribution of taxable dividends" under, Section 83(b) of the 1939 Internal
Revenue Act. 3
The undisputed facts are as follows:
Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States,
formed the corporation "A. Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00
capitalization divided into 10,000 common shares at a par value of P100/share. ANSCOR is
wholly owned and controlled by the family of Don Andres, who are all non-resident
aliens. 4 In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally
issued. 5
On September 12, 1945, ANSCOR's authorized capital stock was increased to
P2,500,000.00 divided into 25,000 common shares with the same par value of the additional
15,000 shares, only 10,000 was issued which were all subscribed by Don Andres, after the
other stockholders waived in favor of the former their pre-emptive rights to subscribe to the
new issues. 6 This increased his subscription to 14,963 common shares. 7 A month
later, 8 Don Andres transferred 1,250 shares each to his two sons, Jose and Andres, Jr., as
their initial investments in ANSCOR. 9 Both sons are foreigners. 10
By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made
between 1949 and December 20, 1963. 11 On December 30, 1964 Don Andres died. As of
that date, the records revealed that he has a total shareholdings of 185,154 shares 12
50,495 of which are original issues and the balance of 134.659 shares as stock dividend
declarations. 13Correspondingly, one-half of that shareholdings or 92,577 14 shares were
transferred to his wife, Doa Carmen Soriano, as her conjugal share. The other half formed
part of his estate. 15
A day after Don Andres died, ANSCOR increased its capital stock to P20M 16 and in 1966
further increased it to P30M. 17 In the same year (December 1966), stock dividends worth
46,290 and 46,287 shares were respectively received by the Don Andres estate 18 and Doa
Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and
138,864 19 common shares each. 20
On December 28, 1967, Doa Carmen requested a ruling from the United States Internal
Revenue Service (IRS), inquiring if an exchange of common with preferred shares may be
considered as a tax avoidance scheme 21under Section 367 of the 1954 U.S. Revenue
Act. 22 By January 2, 1968, ANSCOR reclassified its existing 300,000 common shares into
150,000 common and 150,000 preferred shares. 23
In a letter-reply dated February 1968, the IRS opined that the exchange is only a
recapitalization scheme and not tax avoidance. 24 Consequently, 25 on March 31, 1968
Doa Carmen exchanged her whole 138,864 common shares for 138,860 of the newly
reclassified preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its
common shares, for the remaining 11,140 preferred shares, thus reducing its (the estate)
common shares to 127,727. 26
On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common
shares from the Don Andres' estate. By November 1968, the Board further increased
ANSCOR's capital stock to P75M divided into 150,000 preferred shares and 600,000
common shares. 27 About a year later, ANSCOR again redeemed 80,000 common shares
from the Don Andres' estate, 28 further reducing the latter's common shareholdings to
19,727. As stated in the Board Resolutions, ANSCOR's business purpose for both
redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce
the company's foreign exchange remittances in case cash dividends are declared. 29
In 1973, after examining ANSCOR's books of account and records, Revenue examiners
issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-
source, pursuant to Sections 53 and 54 of the 1939 Revenue Code, 30 for the year 1968 and
the second quarter of 1969 based on the transactions of exchange 31 and redemption of
stocks. 31The Bureau of Internal Revenue (BIR) made the corresponding assessments
despite the claim of ANSCOR that it availed of the tax amnesty under Presidential Decree
(P.D.) 23 32 which were amended by P.D.'s 67 and 157. 33 However, petitioner ruled that the
invoked decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939
Revenue Act under which ANSCOR was assessed. 34ANSCOR's subsequent protest on the
assessments was denied in 1983 by petitioner. 35
Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax
assessments on the redemptions and exchange of stocks. In its decision, the Tax Court
reversed petitioner's ruling, after finding sufficient evidence to overcome the prima
facie correctness of the questioned assessments. 36 In a petition for review the CA as
mentioned, affirmed the ruling of the CTA. 37 Hence, this petition.
The bone of contention is the interpretation and application of Section 83(b) of the 1939
Revenue Act 38 which provides:
Sec. 83. Distribution of dividends or assets by corporations.
(b) Stock dividends A stock dividend representing the transfer of surplus
to capital account shall not be subject to tax. However, if a
corporation cancels or redeems stock issued as a dividend at such time and
in such manner as to make the distribution and cancellation or redemption,
in whole or in part, essentially equivalent to the distribution of a taxable
dividend, the amount so distributed in redemption or cancellation of the stock
shall be considered as taxable income to the extent it represents a
distribution of earnings or profits accumulated after March first, nineteen
hundred and thirteen. (Emphasis supplied)
Specifically, the issue is whether ANSCOR's redemption of stocks from its
stockholder as well as the exchange of common with preferred shares can be
considered as "essentially equivalent to the distribution of taxable dividend" making
the proceeds thereof taxable under the provisions of the above-quoted law.
Petitioner contends that the exchange transaction a tantamount to "cancellation" under
Section 83(b) making the proceeds thereof taxable. It also argues that the Section applies to
stock dividends which is the bulk of stocks that ANSCOR redeemed. Further, petitioner
claims that under the "net effect test," the estate of Don Andres gained from the redemption.
Accordingly, it was the duty of ANSCOR to withhold the tax-at-source arising from the two
transactions, pursuant to Section 53 and 54 of the 1939 Revenue Act. 39
ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres
estate or from Doa Carmen based on the two transactions, because the same were done
for legitimate business purposes which are (a) to reduce its foreign exchange remittances in
the event the company would declare cash dividends, 40 and to (b) subsequently "filipinized"
ownership of ANSCOR, as allegedly, envisioned by Don Andres. 41 It likewise invoked the
amnesty provisions of P.D. 67.
We must emphasize that the application of Sec. 83(b) depends on the special factual
circumstances of each case.42 The findings of facts of a special court (CTA) exercising
particular expertise on the subject of tax, generally binds this Court, 43 considering that it is
substantially similar to the findings of the CA which is the final arbiter of questions of
facts. 44 The issue in this case does not only deal with facts but whether the law applies to a
particular set of facts. Moreover, this Court is not necessarily bound by the lower courts'
conclusions of law drawn from such facts. 45
AMNESTY:
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67 46 provides:
1. In all cases of voluntary disclosures of previously untaxed income and/or
wealth such as earnings, receipts, gifts, bequests or any other acquisitions
from any source whatsoever which are taxable under the National Internal
Revenue Code, as amended, realized here or abroad by any taxpayer,
natural or judicial; the collection of all internal revenue taxes including the
increments or penalties or account of non-payment as well as all civil,
criminal or administrative liabilities arising from or incident to such
disclosures under the National Internal Revenue Code, the Revised Penal
Code, the Anti-Graft and Corrupt Practices Act, the Revised Administrative
Code, the Civil Service laws and regulations, laws and regulations on
Immigration and Deportation, or any other applicable law or proclamation,
are hereby condoned and, in lieu thereof, a tax of ten (10%) per centum on
such previously untaxed income or wealth, is hereby imposed, subject to the
following conditions: (conditions omitted) [Emphasis supplied].
The decree condones "the collection of all internal revenue taxes including the
increments or penalties or account of non-payment as well as all civil, criminal or
administrative liable arising from or incident to" (voluntary) disclosures under the
NIRC of previously untaxed income and/or wealth "realized here or abroad by any
taxpayer, natural or juridical."
May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the
amnesty? An income taxpayer covers all persons who derive taxable income. 47 ANSCOR
was assessed by petitioner for deficiency withholding tax under Section 53 and 54 of the
1939 Code. As such, it is being held liable in its capacity as a withholding agent and not its
personality as a taxpayer.
In the operation of the withholding tax system, the withholding agent is the payor, a separate
entity acting no more than an agent of the government for the collection of the tax 48 in order
to ensure its payments; 49 the payer is the taxpayer he is the person subject to tax impose
by law; 50 and the payee is the taxing authority. 51 In other words, the withholding agent is
merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-
payor becomes a payee by fiction of law. His (agent) liability is direct and independent from
the taxpayer, 52 because the income tax is still impose on and due from the latter. The agent
is not liable for the tax as no wealth flowed into him he earned no income. The Tax Code
only makes the agent personally liable for the tax 53 arising from the breach of its legal duty
to withhold as distinguish from its duty to pay tax since:
the government's cause of action against the withholding is not for the
collection of income tax, but for the enforcement of the withholding provision
of Section 53 of the Tax Code, compliance with which is imposed on the
withholding agent and not upon the taxpayer. 54
Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not
protected by the amnesty under the decree.
Codal provisions on withholding tax are mandatory and must be complied with by the
withholding agent. 55 The taxpayer should not answer for the non-performance by the
withholding agent of its legal duty to withhold unless there is collusion or bad faith. The
former could not be deemed to have evaded the tax had the withholding agent performed its
duty. This could be the situation for which the amnesty decree was intended. Thus, to curtail
tax evasion and give tax evaders a chance to reform, 56 it was deemed administratively
feasible to grant tax amnesty in certain instances. In addition, a "tax amnesty, much like a tax
exemption, is never favored nor presumed in law and if granted by a statute, the term of the
amnesty like that of a tax exemption must be construed strictly against the taxpayer and
liberally in favor of the taxing authority. 57 The rule on strictissimi juris equally applies. 58 So
that, any doubt in the application of an amnesty law/decree should be resolved in favor of the
taxing authority.
Furthermore, ANSCOR's claim of amnesty cannot prosper. The
implementing rules of P.D. 370 which expanded amnesty on previously
untaxed income under P.D. 23 is very explicit, to wit:
Sec. 4. Cases not covered by amnesty. The following cases are not
covered by the amnesty subject of these regulations:
xxx xxx xxx
(2) Tax liabilities with or without assessments, on withholding tax at source
provided under Section 53 and 54 of the National Internal Revenue Code, as
amended; 59
ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by
specific provision of law, it is not covered by the amnesty.
TAX ON STOCK DIVIDENDS
General Rule
Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code
of 1928. 60 It laid down the general rule known as the proportionate test 61 wherein stock
dividends once issued form part of the capital and, thus, subject to income
tax. 62 Specifically, the general rule states that:
A stock dividend representing the transfer of surplus to capital account shall
not be subject to tax.
Having been derived from a foreign law, resort to the jurisprudence of its origin may shed
light. Under the US Revenue Code, this provision originally referred to "stock dividends" only,
without any exception. Stock dividends, strictly speaking, represent capital and do not
constitute income to its
recipient. 63 So that the mere issuance thereof is not yet subject to income tax 64 as they are
nothing but an "enrichment through increase in value of capital
investment." 65 As capital, the stock dividends postpone the realization of profits because the
"fund represented by the new stock has been transferred from surplus to capital and no
longer available for actual distribution." 66 Income in tax law is "an amount of money coming
to a person within a specified time, whether as payment for services, interest, or profit from
investment." 67 It means cash or its equivalent. 68 It is gain derived and severed from
capital, 69 from labor or from both combined 70 so that to tax a stock dividend would be to
tax a capital increase rather than the income. 71 In a loose sense, stock dividends issued by
the corporation, are considered unrealized gain, and cannot be subjected to income tax until
that gain has been realized. Before the realization, stock dividends are nothing but a
representation of an interest in the corporate properties. 72 As capital, it is not yet subject to
income tax. It should be noted that capital and income are different. Capital is wealth or fund;
whereas income is profit or gain or the flow of wealth.73 The determining factor for the
imposition of income tax is whether any gain or profit was derived from a transaction. 74
The Exception
However, if a corporation cancels or redeems stock issued as a dividend at
such time and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to the distribution of
a taxable dividend, the amount so distributed in redemption or cancellation
of the stock shall be considered as taxable income to the extent it represents
a distribution of earnings or profits accumulated after March first, nineteen
hundred and thirteen. (Emphasis supplied).
In a response to the ruling of the American Supreme Court in the case of Eisner v.
Macomber 75 (that pro rata stock dividends are not taxable income), the exempting clause
above quoted was added because provision corporation found a loophole in the original
provision. They resorted to devious means to circumvent the law and evade the tax.
Corporate earnings would be distributed under the guise of its initial capitalization by
declaring the stock dividends previously issued and later redeem said dividends by paying
cash to the stockholder. This process of issuance-redemption amounts to a distribution of
taxable cash dividends which was lust delayed so as to escape the tax. It becomes a
convenient technical strategy to avoid the effects of taxation.
Thus, to plug the loophole the exempting clause was added. It provides that the
redemption or cancellation of stock dividends, depending on the "time" and "manner" it was
made, is essentially equivalent to a distribution of taxable dividends," making the proceeds
thereof "taxable income" "to the extent it represents profits". The exception was designed to
prevent the issuance and cancellation or redemption of stock dividends, which is
fundamentally not taxable, from being made use of as a device for the actual distribution of
cash dividends, which is taxable. 76 Thus,
the provision had the obvious purpose of preventing a corporation from
avoiding dividend tax treatment by distributing earnings to its shareholders in
two transactions a pro rata stock dividend followed by a pro
rata redemption that would have the same economic consequences as a
simple dividend. 77
Although redemption and cancellation are generally considered capital transactions,
as such. they are not subject to tax. However, it does not necessarily mean that a
shareholder may not realize a taxable gain from such transactions. 78 Simply put,
depending on the circumstances, the proceeds of redemption of stock dividends are
essentially distribution of cash dividends, which when paid becomes the absolute
property of the stockholder. Thereafter, the latter becomes the exclusive owner
thereof and can exercise the freedom of choice. 79Having realized gain from that
redemption, the income earner cannot escape income tax. 80
As qualified by the phrase "such time and in such manner," the exception was not intended to
characterize as taxable dividend every distribution of earnings arising from the redemption of
stock dividend. 81 So that, whether the amount distributed in the redemption should be
treated as the equivalent of a "taxable dividend" is a question of fact, 82 which is
determinable on "the basis of the particular facts of the transaction in question. 83 No
decisive test can be used to determine the application of the exemption under Section 83(b).
The use of the words "such manner" and "essentially equivalent" negative any idea that a
weighted formula can resolve a crucial issue Should the distribution be treated as taxable
dividend. 84 On this aspect, American courts developed certain recognized criteria, which
includes the following: 85
1) the presence or absence of real business purpose,
2) the amount of earnings and profits available for the declaration of a
regular dividends and the corporation's past record with respect to the
declaration of dividends,
3) the effect of the distribution, as compared with the declaration of
regular dividend,
4) the lapse of time between issuance and redemption, 86
5) the presence of a substantial surplus 87 and a generous supply of
cash which invites suspicion as does a meager policy in relation both to
current earnings and accumulated surplus, 88
REDEMPTION AND CANCELLATION
For the exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there
is redemption or cancellation; (b) the transaction involves stock dividends and (c) the
"time and manner" of the transaction makes it "essentially equivalent to a distribution
of taxable dividends." Of these, the most important is the third.
Redemption is repurchase, a reacquisition of stock by a corporation which issued the
stock 89 in exchange for property, whether or not the acquired stock is cancelled, retired or
held in the treasury.90 Essentially, the corporation gets back some of its stock, distributes
cash or property to the shareholder in payment for the stock, and continues in business as
before. The redemption of stock dividends previously issued is used as a veil for the
constructive distribution of cash dividends. In the instant case, there is no dispute that
ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice (28,000 and
80,000 common shares). But where did the shares redeemed come from? If its source is the
original capital subscriptions upon establishment of the corporation or from initial capital
investment in an existing enterprise, its redemption to the concurrent value of acquisition may
not invite the application of Sec. 83(b) under the 1939 Tax Code, as it is not income but a
mere return of capital. On the contrary, if the redeemed shares are from stock dividend
declarations other than as initial capital investment, the proceeds of the redemption is
additional wealth, for it is not merely a return of capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that may be deemed as
taxable dividends. Here, it is undisputed that at the time of the last redemption, the original
common shares owned by the estate were only 25,247.5 91 This means that from the total of
108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5)
must have come from stock dividends. Besides, in the absence of evidence to the contrary,
the Tax Code presumes that every distribution of corporate property, in whole or in part, is
made out of corporate profits 92such as stock dividends. The capital cannot be distributed in
the form of redemption of stock dividends without violating the trust fund doctrine wherein
the capital stock, property and other assets of the corporation are regarded as equity in trust
for the payment of the corporate creditors. 93 Once capital, it is always capital. 94 That
doctrine was intended for the protection of corporate creditors. 95
With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3
years earlier. The time alone that lapsed from the issuance to the redemption is not a
sufficient indicator to determine taxability. It is a must to consider the factual circumstances
as to the manner of both the issuance and the redemption. The "time" element is a factor to
show a device to evade tax and the scheme of cancelling or redeeming the same shares is a
method usually adopted to accomplish the end sought. 96 Was this transaction used as a
"continuing plan," "device" or "artifice" to evade payment of tax? It is necessary to determine
the "net effect" of the transaction between the shareholder-income taxpayer and the
acquiring (redeeming) corporation. 97 The "net effect" test is not evidence or testimony to be
considered; it is rather an inference to be drawn or a conclusion to be reached. 98 It is also
important to know whether the issuance of stock dividends was dictated by legitimate
business reasons, the presence of which might negate a tax evasion plan. 99
The issuance of stock dividends and its subsequent redemption must be separate, distinct,
and not related, for the redemption to be considered a legitimate tax
scheme. 100 Redemption cannot be used as a cloak to distribute corporate
earnings. 101 Otherwise, the apparent intention to avoid tax becomes doubtful as the
intention to evade becomes manifest. It has been ruled that:
[A]n operation with no business or corporate purpose is a mere devise
which put on the form of a corporate reorganization as a disguise for
concealing its real character, and the sole object and accomplishment of
which was the consummation of a preconceived plan, not to reorganize a
business or any part of a business, but to transfer a parcel of corporate
shares to a stockholder. 102
Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not
be applicable if the redeemed shares were issued with bona fide business
purpose, 103 which is judged after each and every step of the transaction have been
considered and the whole transaction does not amount to a tax evasion scheme.
ANSCOR invoked two reasons to justify the redemptions (1) the alleged "filipinization"
program and (2) the reduction of foreign exchange remittances in case cash dividends are
declared. The Court is not concerned with the wisdom of these purposes but on their
relevance to the whole transaction which can be inferred from the outcome thereof. Again, it
is the "net effect rather than the motives and plans of the taxpayer or his corporation"104 that
is the fundamental guide in administering Sec. 83(b). This tax provision is aimed at the
result. 105 It also applies even if at the time of the issuance of the stock dividend, there was
no intention to redeem it as a means of distributing profit or avoiding tax on
dividends. 106 The existence of legitimate business purposes in support of the redemption of
stock dividends is immaterial in income taxation. It has no relevance in determining "dividend
equivalence". 107 Such purposes may be material only upon the issuance of the stock
dividends. The test of taxability under the exempting clause, when it provides "such time and
manner" as would make the redemption "essentially equivalent to the distribution of a taxable
dividend", is whether the redemption resulted into a flow of wealth. If no wealth is realized
from the redemption, there may not be a dividend equivalence treatment. In the metaphor
of Eisner v. Macomber, income is not deemed "realize" until the fruit has fallen or been
plucked from the tree.
The three elements in the imposition of income tax are: (1) there must be gain or and profit,
(2) that the gain or profit is realized or received, actually or constructively, 108 and (3) it is not
exempted by law or treaty from income tax. Any business purpose as to why or how the
income was earned by the taxpayer is not a requirement. Income tax is assessed on income
received from any property, activity or service that produces the income because the Tax
Code stands as an indifferent neutral party on the matter of where income comes
from. 109
As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether
income was realized through the redemption of stock dividends. The redemption converts
into money the stock dividends which become a realized profit or gain and consequently, the
stockholder's separate property. 110 Profits derived from the capital invested cannot escape
income tax. As realized income, the proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the existence of any business purpose for the
redemption. Otherwise, to rule that the said proceeds are exempt from income tax when the
redemption is supported by legitimate business reasons would defeat the very purpose of
imposing tax on income. Such argument would open the door for income earners not to pay
tax so long as the person from whom the income was derived has legitimate business
reasons. In other words, the payment of tax under the exempting clause of Section 83(b)
would be made to depend not on the income of the taxpayer, but on the business purposes
of a third party (the corporation herein) from whom the income was earned. This is absurd,
illogical and impractical considering that the Bureau of Internal Revenue (BIR) would be
pestered with instances in determining the legitimacy of business reasons that every income
earner may interposed. It is not administratively feasible and cannot therefore be allowed.
The ruling in the American cases cited and relied upon by ANSCOR that "the redeemed
shares are the equivalent of dividend only if the shares were not issued for genuine business
purposes", 111 or the "redeemed shares have been issued by a corporation bona
fide" 112 bears no relevance in determining the non-taxability of the proceeds of redemption
ANSCOR, relying heavily and applying said cases, argued that so long as the redemption is
supported by valid corporate purposes the proceeds are not subject to tax. 113 The adoption
by the courts below 114 of such argument is misleading if not misplaced. A review of the
cited American cases shows that the presence or absence of "genuine business purposes"
may be material with respect to the issuance or declaration of stock dividends but not on its
subsequent redemption. The issuance and the redemption of stocks are two different
transactions. Although the existence of legitimate corporate purposes may justify a
corporation's acquisition of its own shares under Section 41 of the Corporation
Code, 115 such purposes cannot excuse the stockholder from the effects of taxation arising
from the redemption. If the issuance of stock dividends is part of a tax evasion plan and thus,
without legitimate business reasons, the redemption becomes suspicious which exempting
clause. The substance of the whole transaction, not its form, usually controls the tax
consequences. 116
The two purposes invoked by ANSCOR, under the facts of this case are no excuse for its tax
liability. First, the alleged "filipinization" plan cannot be considered legitimate as it was not
implemented until the BIR started making assessments on the proceeds of the redemption.
Such corporate plan was not stated in nor supported by any Board Resolution but a mere
afterthought interposed by the counsel of ANSCOR. Being a separate entity, the corporation
can act only through its Board of Directors. 117 The Board Resolutions authorizing the
redemptions state only one purpose reduction of foreign exchange remittances in case
cash dividends are declared. Not even this purpose can be given credence. Records show
that despite the existence of enormous corporate profits no cash dividend was ever declared
by ANSCOR from 1945 until the BIR started making assessments in the early 1970's.
Although a corporation under certain exceptions, has the prerogative when to issue
dividends, yet when no cash dividends was issued for about three decades, this
circumstance negates the legitimacy of ANSCOR's alleged purposes. Moreover, to issue
stock dividends is to increase the shareholdings of ANSCOR's foreign stockholders contrary
to its "filipinization" plan. This would also increase rather than reduce their need for foreign
exchange remittances in case of cash dividend declaration, considering that ANSCOR is a
family corporation where the majority shares at the time of redemptions were held by Don
Andres' foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot
be a valid excuse for the imposition of tax. Otherwise, the taxpayer's liability to pay income
tax would be made to depend upon a third person who did not earn the income being taxed.
Furthermore, even if the said purposes support the redemption and justify the issuance of
stock dividends, the same has no bearing whatsoever on the imposition of the tax herein
assessed because the proceeds of the redemption are deemed taxable dividends since it
was shown that income was generated therefrom.
Thirdly, ANSCOR argued that to treat as "taxable dividend" the proceeds of the redeemed
stock dividends would be to impose on such stock an undisclosed lien and would be
extremely unfair to intervening purchase, i.e. those who buys the stock dividends after their
issuance. 118 Such argument, however, bears no relevance in this case as no intervening
buyer is involved. And even if there is an intervening buyer, it is necessary to look into the
factual milieu of the case if income was realized from the transaction. Again, we reiterate that
the dividend equivalence test depends on such "time and manner" of the transaction and its
net effect. The undisclosed lien 119 may be unfair to a subsequent stock buyer who has no
capital interest in the company. But the unfairness may not be true to an original subscriber
like Don Andres, who holds stock dividends as gains from his investments. The subsequent
buyer who buys stock dividends is investing capital. It just so happen that what he bought is
stock dividends. The effect of its (stock dividends) redemption from that subsequent buyer is
merely to return his capital subscription, which is income if redeemed from the original
subscriber.
After considering the manner and the circumstances by which the issuance and redemption
of stock dividends were made, there is no other conclusion but that the proceeds thereof are
essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend"
under Section 83(b), it is part of the "entire income" subject to tax under Section 22 in relation
to Section 21 120 of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends
are included in "gross income". As income, it is subject to income tax which is required to be
withheld at source. The 1997 Tax Code may have altered the situation but it does not change
this disposition.
EXCHANGE OF COMMON WITH PREFERRED SHARES 121
Exchange is an act of taking or giving one thing for another involving 122 reciprocal
transfer 123 and is generally considered as a taxable transaction. The exchange of common
stocks with preferred stocks, or preferred for common or a combination of either for both,
may not produce a recognized gain or loss, so long as the provisions of Section 83(b) is not
applicable. This is true in a trade between two (2) persons as well as a trade between a
stockholder and a corporation. In general, this trade must be parts of merger, transfer to
controlled corporation, corporate acquisitions or corporate reorganizations. No taxable gain
or loss may be recognized on exchange of property, stock or securities related to
reorganizations. 124
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into
common and preferred, and that parts of the common shares of the Don Andres estate and
all of Doa Carmen's shares were exchanged for the whole 150.000 preferred shares.
Thereafter, both the Don Andres estate and Doa Carmen remained as corporate
subscribers except that their subscriptions now include preferred shares. There was no
change in their proportional interest after the exchange. There was no cash flow. Both stocks
had the same par value. Under the facts herein, any difference in their market value would be
immaterial at the time of exchange because no income is yet realized it was a mere
corporate paper transaction. It would have been different, if the exchange transaction
resulted into a flow of wealth, in which case income tax may be imposed. 125
Reclassification of shares does not always bring any substantial alteration in the subscriber's
proportional interest. But the exchange is different there would be a shifting of the balance
of stock features, like priority in dividend declarations or absence of voting rights. Yet neither
the reclassification nor exchange per se, yields realize income for tax purposes. A common
stock represents the residual ownership interest in the corporation. It is a basic class of stock
ordinarily and usually issued without extraordinary rights or privileges and entitles the
shareholder to apro rata division of profits. 126 Preferred stocks are those which entitle the
shareholder to some priority on dividends and asset distribution. 127
Both shares are part of the corporation's capital stock. Both stockholders are no different
from ordinary investors who take on the same investment risks. Preferred and common
shareholders participate in the same venture, willing to share in the profits and losses of the
enterprise. 128 Moreover, under the doctrine of equality of shares all stocks issued by the
corporation are presumed equal with the same privileges and liabilities, provided that the
Articles of Incorporation is silent on such differences. 129
In this case, the exchange of shares, without more, produces no realized income to the
subscriber. There is only a modification of the subscriber's rights and privileges which is
not a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a
subscriber disposes of his entire interest and not when there is still maintenance of
proprietary interest. 130
WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in
that ANSCOR's redemption of 82,752.5 stock dividends is herein considered as essentially
equivalent to a distribution of taxable dividends for which it is LIABLE for the withholding tax-
at-source. The decision is AFFIRMED in all other respects.
SO ORDERED.




































G.R. No. 104102 August 7, 1996
CENTRAL TEXTILE MILLS, INC., petitioner, vs. NATIONAL WAGES AND PRODUCTIVITY
COMMISSION, REGIONAL TRIPARTITE WAGES AND PRODUCTIVITY BOARD-
NATIONAL CAPITAL REGION, and UNITED CMC TEXTILE WORKERS
UNION, respondents.
ROMERO, J.:p
On December 20, 1990, respondent Regional Tripartite Wages and Productivity Board-
National Capital Region (the Board) issued Wage Order No. NCR-02 (WO No. NCR-02),
which took effect on January 9, 1991. Said wage order mandated a P12.00 increase in the
minimum daily wage of all employees and workers in the private sector in the NCR, but
exempted from its application distressed employers whose capital has been impaired by at
least twenty-five percent (25%) in the preceding year.
The "Guidelines on Exemption From Compliance With the Prescribed Wage/Cost of Living
Allowance Increase Granted by the Regional Tripartite Wage and Productivity Boards,"
issued on February 25, 1991, defined "capital" as the "paid-up capital at the end of the last
full accounting period (in case of corporations)." Under said guidelines, "(a)n applicant firm
may be granted exemption from payment of the prescribed increase in wage/cost-of-living
allowance for a period not to exceed one (1) year from effectivity of the order . . . when
accumulated losses at the end of the period under review have impaired by at least 25
percent the paid-up capital at the end of the last full accounting period preceding the
application."
By virtue of these provisions, petitioner filed on April 11, 1991 its application for exemption
from compliance with WO No. NCR-02 due to financial losses.
In an order dated October 22, 1991, the Board's Vice-Chairman, Ernesto Gorospe,
disapproved petitioner's application for exemption after concluding from the documents
submitted that petitioner sustained an impairment of only 22.41%.
On February 4, 1992, petitioner's motion for reconsideration was dismissed by the Board for
lack of merit. The Board, except for Vice-Chairman Gorospe who took no part in resolving the
said motion for reconsideration, opined that according to the audited financial statements
submitted by petitioner to them, to the Securities and Exchange Commission and to the
Bureau of Internal Revenue, petitioner had a total paid-up capital of P305,767,900.00 as of
December 31, 1990, which amount should be the basis for determining the capital
impairment of petitioner, instead of the authorized capital stock of P128,000,000.00 which it
insists should be the basis of computation.
The Board also noted that petitioner did not file with the SEC the August 15, 1990 resolution
of its Board of Directors, concurred in by its stockholders representing at least two-thirds of
its outstanding capital stock, approving an increase in petitioner's authorized capital stock
from P128,000,000.00 to P640,000,000.00. Neither did it file any petition to amend its Articles
of Incorporation brought about by such increase in its capitalization.
Petitioner maintains in the instant action that its authorized capital stock, not its unauthorized
paid-up capital, should be used in arriving at its capital impairment for 1990. Citing two SEC
Opinions dated August 10, 1971, and July 28, 1978, interpreting Section 38 of the
Corporation Code, it claims that "the capital stock of a corporation stand(s) increased or
decreased only from and after approval and the issuance of the certificate of filing of increase
of capital stock."
We agree.
The guidelines on exemption specifically refer to paid-up capital, not authorized capital stock,
as the basis of capital impairment for exemption from WO No. NCR-02. The records reveal,
however, that petitioner included in its total paid-up capital payments on advance
subscriptions, although the proposed increase in its capitalization had not yet been approved
by, let alone presented for the approval of, the SEC. As observed by the Board in its order of
February 4, 1992, "the aforementioned (r)esolution (of August 15, 1990) has not been filed by
the corporation with the SEC, nor was a petition to amend its Articles of Incorporation by
reason of the increase in its capitalization filed by the same."
It is undisputed that petitioner incurred a net loss of P68,844,222.49 in 1990, and its
authorized capital stock as of that time stood at P128,000,000.00. 1 On August 15, 1990, a
Board resolution increasing the capital stock of the corporation was affirmed by the requisite
number of stockholders. Although no petition to that effect was ever submitted to the SEC for
its approval, petitioner already started receiving subscriptions and payments on the proposed
increase, which it allegedly held conditionally, that is, pending approval of the same by the
SEC. In its Memorandum, however, petitioner admitted, without giving any reason therefor,
that it indeed "received 'subscriptions' and 'payments' to the said proposed increase in capital
stock, even in the absence of SEC approval of the increase as required by the Corporation
Code." 2 Thus, by the end of 1990, the corporation had a subscribed capital stock of
P482,748,900.00 and, after deducting P176,981,000.00 in subscriptions receivables, a total
paid-up capital of P305,767,900.00. 3 P177,767,900.00 of this sum constituted the
unauthorized increase in its subscribed capital stock, which are actually payments on future
issues of shares.
These payments cannot as yet be deemed part of petitioner's paid-up capital, technically
speaking, because its capital stock has not yet been legally increased. Thus, its authorized
capital stock in the year when exemption from WO No. NCR-02 was sought stood at
P128,000,000.00, which was impaired by losses of nearly 50%. Such payments constitute
deposits on future subscriptions, money which the corporation will hold in trust for the
subscribers until it files a petition to increase its capitalization and a certificate of filing of
increase of capital stock is approved and issued by the SEC. 4 As a trust fund, this money is
still withdrawable by any of the subscribers at any time before the issuance of the
corresponding shares of stock, unless there is a pre-subscription agreement to the contrary,
which apparently is not present in the instant case. Consequently, if a certificate of increase
has not yet been issued by the SEC, the subscribers to the unauthorized issuance are not to
be deemed as stockholders possessed of such legal rights as the rights to vote and
dividends. 5
The Court observes that the subject wage order exempts from its coverage employers whose
capital has been impaired by at least 25% because if impairment is less than this percentage,
the employer can still absorb the wage increase. In the case at hand, petitioner's capital held
answerable for the additional wages would include funds it only holds in trust, which to
reiterate may not be deemed par of its paid-up capital, the losses of which shall be the basis
of the 25% referred to above. To include such funds in the paid-up capital would be
prejudicial to the corporation as an employer considering that the records clearly show that it
is entitled to exemption, even as the anomaly was brought about by an auditing error.
Another issue, raised late in the proceedings by respondents, is the alleged non-exhaustion
of administrative remedies by petitioner. They claim that the questioned order of the Board
should have first been appealed to the National Wages and Productivity Commission (the
Commission), as provided for under Section 9 of the "Revised Guidelines on Exemption From
Compliance With the Prescribed Wage/Cost of Living Allowance Increases Granted by the
Regional Tripartite Wages and Productivity Boards."
Petitioner explained that at the time it filed the instant petition for certiorari on March 6, 1992,
the procedure governing applications for exemption from compliance with wage orders was
the original guidelines, which took effect on February 25, 1991. Under Section 6 of said
guidelines, the denial by the Board of a request for reconsideration shall be final and
immediately executory. Appeal to the Commission as an optional remedy 6 was only made
available after the issuance of the revised guidelines on September 25, 1992. Hence,
petitioner cannot be faulted for not having first appealed the questioned orders. It must be
added that since no order, resolution or decision of the Commission is being assailed in this
petition, it should be dropped as party respondent, as prayed for in its manifestation and
motion dated June 22, 1992. 7
In order to avoid any similar controversy, petitioner is reminded to adopt a more systematic
and precise accounting procedure keeping in mind the various principles and nuances
surrounding corporate practice.
WHEREFORE, the petition is hereby GRANTED. The assailed orders of the Regional
Tripartite Wages and Productivity Board-National Capital Region, dated October 22, 1991
and February 4, 1992, are ANNULLED and SET ASIDE. Said Board is also hereby mandated
to issue another order granting the application of petitioner Central Textile Mills, Inc. for
exemption from Wage Order No. NCR-02 fro the year ending December 31, 1990. No
pronouncement as to cost.
SO ORDERED.









G.R. No. 144476 April 8, 2003
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG,
WILLIE T. ONG, and JULIE ONG ALONZO, petitioners, vs. DAVID S. TIU, CELY Y. TIU,
MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU,
INTRALAND RESOURCES DEVELOPMENT CORP., MASAGANA TELAMART, INC.,
REGISTER OF DEEDS OF PASAY CITY, and the SECURITIES AND EXCHANGE
COMMISSION, respondents.
x-----------------------------x
G.R. No. 144629 April 8, 2003
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN
YU, LOURDES C. TIU, and INTRALAND RESOURCES DEVELOPMENT
CORP., petitioners, vs. ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L.
ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG ALONZO, respondents.
R E S O L U T I O N
CORONA, J.:
Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner movants
Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julia Ong
Alonzo (the Ongs); (2) motion for partial reconsideration, dated March 15, 2002, of petitioner
movant Willie Ong seeking a reversal of this Court's Decision,1 dated February 1, 2002, in
G.R. Nos. 144476 and 144629 affirming with modification the decision2 of the Court of
Appeals, dated October 5, 1999, which in turn upheld, likewise with modification, the decision
of the SEC en banc, dated September 11, 1998; and (3) motion for issuance of writ of
execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence
Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened with
stoppage and incompletion when its owner, the First Landlink Asia Development
Corporation (FLADC), which was owned by the Tius, encountered dire financial
difficulties. It was heavily indebted to the Philippine National Bank (PNB) for P190
million. To stave off foreclosure of the mortgage on the two lots where the mall was
being built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L.
Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the
Pre-Subscription Agreement they entered into, the Ongs and the Tius agreed to
maintain equal shareholdings in FLADC: the Ongs were to subscribe to 1,000,000
shares at a par value of P100.00 each while the Tius were to subscribe to an
additional 549,800 shares at P100.00 each in addition to their already existing
subscription of 450,200 shares. Furthermore, they agreed that the Tius were entitled
to nominate the Vice-President and the Treasurer plus five directors while the Ongs
were entitled to nominate the President, the Secretary and six directors (including the
chairman) to the board of directors of FLADC. Moreover, the Ongs were given the
right to manage and operate the mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of
stock while the Tius committed to contribute to FLADC a four-storey building and two parcels
of land respectively valued at P20 million (for 200,000 shares), P30 million (for 300,000
shares) and P49.8 million (for 49,800 shares) to cover their additional 549,800 stock
subscription therein. The Ongs paid in another P70 million3 to FLADC and P20 million to the
Tius over and above their P100 million investment, the total sum of which (P190 million) was
used to settle the P190 million mortgage indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC, however, was shortlived
because the Tius, on February 23, 1996, rescinded the Pre-Subscription Agreement. The
Tius accused the Ongs of (1) refusing to credit to them the FLADC shares covering their real
property contributions; (2) preventing David S. Tiu and Cely Y. Tiu from assuming the
positions of and performing their duties as Vice-President and Treasurer, respectively, and
(3) refusing to give them the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume the
positions and perform the duties of Vice-President and Treasurer, respectively, but the Ongs
prevented them from doing so. Furthermore, the Ongs refused to provide them the space for
their executive offices as Vice-President and Treasurer. Finally, and most serious of all, the
Ongs refused to give them the shares corresponding to their property contributions of a four-
story building, a 1,902.30 square-meter lot and a 151 square-meter lot. Hence, they felt they
were justified in setting aside their Pre-Subscription Agreement with the Ongs who allegedly
refused to comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed the
positions of Vice-President and Treasurer of FLADC but that it was they who refused to
comply with the corporate duties assigned to them. It was the contention of the Ongs that
they wanted the Tius to sign the checks of the corporation and undertake their management
duties but that the Tius shied away from helping them manage the corporation. On the issue
of office space, the Ongs pointed out that the Tius did in fact already have existing executive
offices in the mall since they owned it 100% before the Ongs came in. What the Tius really
wanted were new offices which were anyway subsequently provided to them. On the most
important issue of their alleged failure to credit the Tius with the FLADC shares
commensurate to the Tius' property contributions, the Ongs asserted that, although the Tius
executed a deed of assignment for the 1,902.30 square-meter lot in favor of FLADC, they
(the Tius) refused to pay P 570,690 for capital gains tax and documentary stamp tax. Without
the payment thereof, the SEC would not approve the valuation of the Tius' property
contribution (as opposed to cash contribution). This, in turn, would make it impossible to
secure a new Transfer Certificate of Title (TCT) over the property in FLADC's name. In any
event, it was easy for the Tius to simply pay the said transfer taxes and, after the new TCT
was issued in FLADC's name, they could then be given the corresponding shares of stocks.
On the 151 square-meter property, the Tius never executed a deed of assignment in favor of
FLADC. The Tius initially claimed that they could not as yet surrender the TCT because it
was "still being reconstituted" by the Lichaucos from whom the Tius bought it. The Ongs later
on discovered that FLADC had in reality owned the property all along, even before their Pre-
Subscription Agreement was executed in 1994. This meant that the 151 square-meter
property was at that time already the corporate property of FLADC for which the Tius were
not entitled to the issuance of new shares of stock.
The controversy finally came to a head when this case was commenced4 by the Tius on
February 27, 1996 at the Securities and Exchange Commission (SEC), seeking confirmation
of their rescission of the Pre-Subscription Agreement. After hearing, the SEC, through then
Hearing Officer Rolando G. Andaya, Jr., issued a decision on May 19, 1997 confirming the
rescission sought by the Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-
Subscription Agreement, and consequently ordering:
(a) The cancellation of the 1,000,000 shares subscription of the individual defendants
in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants
representing the return of their contribution for 1,000,000 shares of FLADC;
(c) The plaintiffs to submit with (sic) the Securities and Exchange Commission
amended articles of incorporation of FLADC to conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066
(formerly 15587), 135325 and 134204 and any other title or deed in the name of
FLADC, failing in which said titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs
and to cancel the annotation of the Pre-Subscription Agreement dated 15 August
1994 on TCT No. 134066 (formerly 15587);
(f) The individual defendants, individually and collectively, their agents and
representatives, to desist from exercising or performing any and all acts pertaining to
stockholder, director or officer of FLADC or in any manner intervene in the
management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to FLADC interest
payment in the amount of P8,866,669.00 and all interest payments as well as any
payments on principal received from the P70,000,000.00 inexistent loan, plus the
legal rate of interest thereon from the date of their receipt of such payment until fully
paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00
representing his loan from said defendants plus legal interest from the date of receipt
of such amount.
SO ORDERED.5
On motion of both parties, the above decision was partially reconsidered but only insofar as
the Ongs' P70 million was declared not as a premium on capital stock but an advance (loan)
by the Ongs to FLADC and that the imposition of interest on it was correct.6
Both parties appealed7 to the SEC en banc which rendered a decision on September 11,
1998, affirming the May 19, 1997 decision of the Hearing Officer. The SEC en
banc confirmed the rescission of the Pre-Subscription Agreement but reverted to classifying
the P70 million paid by the Ongs as premium on capital and not as a loan or advance to
FLADC, hence, not entitled to earn interest.8
On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:
WHEREFORE, the Order dated September 11, 1998 issued by the Securities and
Exchange Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the
rescission of the Pre-Subscription Agreement dated August 15, 1994 is hereby
AFFIRMED, subject to the following MODIFICATIONS:
1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia Development
Corporation in accordance with the following cash and property contributions of the
parties therein.
(a) Ong Group P100,000,000.00 cash contribution for one (1) million
shares in First Landlink Asia Development Corporation at a par value of
P100.00 per share;
(b) Tiu Group:
1) P45,020,000.00 original cash contribution for 450,200 shares in
First Landlink Asia Development Corporation at a par value of
P100.00 per share;
2) A four-storey building described in Transfer Certificate of Title No.
15587 in the name of Intraland Resources and Development
Corporation valued at P20,000,000.00 for 200,000 shares in First
Landlink Asia Development Corporation at a par value of P100.00
per share;
3) A 1,902.30 square-meter parcel of land covered by Transfer
Certificate of Title No. 15587 in the name of Masagana Telamart,
Inc. valued at P30,000,000.00 for 300,000 shares in First Landlink
Asia Development Corporation at a par value of P100.00 per share.
2) Whatever remains of the assets of the First Landlink Asia Development
Corporation and the management thereof is (sic) hereby ordered transferred to the
Tiu Group.
3) First Landlink Asia Development Corporation is hereby ordered to pay the amount
of P70,000,000.00 that was advanced to it by the Ong Group upon the finality of this
decision. Should the former incur in delay in the payment thereof, it shall pay the
legal interest thereon pursuant to Article 2209 of the New Civil Code.
4) The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned them
by the Ongs upon the finality of this decision. Should the former incur in delay in the
payment thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the
New Civil Code.
SO ORDERED.9
An interesting sidelight of the CA decision was its description of the rescission made by the
Tius as the "height of ingratitude" and as "pulling a fast one" on the Ongs. The CA moreover
found the Tius guilty of withholding FLADC funds from the Ongs and diverting corporate
income to their own MATTERCO account.10 These were findings later on affirmed in our
own February 1, 2002 Decision which is the subject of the instant motion for
reconsideration.11
But there was also a strange aspect of the CA decision. The CA concluded that both the
Ongs and the Tius were in pari delicto (which would not have legally entitled them to
rescission) but, "for practical considerations," that is, their inability to work together, it was
best to separate the two groups by rescinding the Pre-Subscription Agreement, returning the
original investment of the Ongs and awarding practically everything else to the Tius.
Their motions for reconsideration having been denied, both parties filed separate petitions for
review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued that
the Tius may not properly avail of rescission under Article 1191 of the Civil Code considering
that the Pre-Subscription Agreement did not provide for reciprocity of obligations; that the
rights over the subject matter of the rescission (capital assets and properties) had been
acquired by a third party (FLADC); that they did not commit a substantial and fundamental
breach of their agreement since they did not prevent the Tius from assuming the positions of
Vice-President and Treasurer of FLADC, and that the failure to credit the 300,000 shares
corresponding to the 1,902.30 square-meter property covered by TCT No. 134066 (formerly
15587) was due to the refusal of the Tius to pay the required transfer taxes to secure the
approval of the SEC for the property contribution and, thereafter, the issuance of title in
FLADC's name. They also argued that the liquidation of FLADC may not legally be ordered
by the appellate court even for so called "practical considerations" or even to prevent "further
squabbles and numerous litigations," since the same are not valid grounds under the
Corporation Code. Moreover, the Ongs bewailed the failure of the CA to grant interest on
their P70 million and P20 million advances to FLADC and David S. Tiu, respectively, and to
award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the other
hand, contended that the rescission should have been limited to the restitution of the parties'
respective investments and not the liquidation of FLADC based on the erroneous perception
by the court that: the Masagana Citimall was threatened with incompletion since FLADC was
in financial distress; that the Tius invited the Ongs to invest in FLADC to settle its P190
million loan from PNB; that they violated the Pre-Subscription Agreement when it was the
Lichaucos and not the Tius who executed the deed of assignment over the 151 square-meter
property commensurate to 49,800 shares in FLADC thereby failing to pay the price for the
said shares; that they did not turn over to the Ongs the entire amount of FLADC funds; that
they were diverting rentals from lease contracts due to FLADC to their own MATTERCO
account; that the P70 million paid by the Ongs was an advance and not a premium on
capital; and that, by rescinding the Pre-Subscription Agreement, they wanted to wrestle away
the management of the mall and prevent the Ongs from enjoying the profits of their P190
million investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject of the instant motions),
affirming the assailed decision of the Court of Appeals but with the following modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn interest at twelve
percent (12%) per annum to be computed from the time of judicial demand which is
from April 23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten
percent (10%) per annum to be computed from the date of the FLADC Board
Resolution which is June 19, 1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their property
contribution, specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated their respective
obligations under the Pre-Subscription Agreement. The Ongs prevented the Tius from
assuming the positions of Vice-President and Treasurer of the corporation. On the other
hand, the Decision established that the Tius failed to turn over FLADC funds to the Ongs and
that the Tius diverted rentals due to FLADC to their MATTERCO account. Consequently, it
held that rescission was not possible since both parties were in pari delicto. However, this
Court agreed with the Court of Appeals that the remedy of specific performance, as
espoused by the Ongs, was not practical and sound either and would only lead to further
"squabbles and numerous litigations" between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of
Execution on the grounds that: (a) the SEC order had become executory as early as
September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of the Rules of Court; (b) any
further delay would be injurious to the rights of the Tius since the case had been pending for
more than six years; and (c) the SEC no longer had quasi-judicial jurisdiction under RA 8799
(Securities Regulation Code). The Ongs filed their opposition, contending that the Decision
dated February 1, 2002 was not yet final and executory; that no good reason existed to issue
a warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the SEC retained
jurisdiction over pending cases involving intra-corporate disputes already submitted for final
resolution upon the effectivity of the said law.
Aside from their opposition to the Tius' Motion for Issuance of Writ of Execution, the Ongs
filed their own "Motion for Reconsideration; Alternatively, Motion for Modification (of the
February 1, 2002 Decision)" on March 15, 2002, raising two main points: (a) that specific
performance and not rescission was the proper remedy under the premises; and (b) that,
assuming rescission to be proper, the subject decision of this Court should be modified to
entitle movants to their proportionate share in the mall.
On their first point (specific performance and not rescission was the proper remedy), movants
Ong argue that their alleged breach of the Pre-Subscription Agreement was, at most, casual
which did not justify the rescission of the contract. They stress that providing appropriate
offices for David S. Tiu and Cely Y. Tiu as Vice-President and Treasurer, respectively, had no
bearing on their obligations under the Pre-Subscription Agreement since the said obligation
(to provide executive offices) pertained to FLADC itself. Such obligation arose from the
relations between the said officers and the corporation and not any of the individual parties
such as the Ongs. Likewise, the alleged failure of the Ongs to credit shares of stock in favor
of the Tius for their property contributions also pertained to the corporation and not to the
Ongs. Just the same, it could not be done in view of the Tius' refusal to pay the necessary
transfer taxes which in turn resulted in the inability to secure SEC approval for the property
contributions and the issuance of a new TCT in the name of FLADC.
Besides, according to the Ongs, the principal objective of both parties in entering into the
Pre-Subscription Agreement in 1994 was to raise the P190 million desperately needed for the
payment of FLADC's loan to PNB. Hence, in this light, the alleged failure to provide office
space for the two corporate officers was no more than an inconsequential infringement. For
rescission to be justified, the law requires that the breach of contract should be so
"substantial or fundamental" as to defeat the primary objective of the parties in making the
agreement. At any rate, the Ongs claim that it was the Tius who were guilty of fundamental
violations in failing to remit funds due to FLADC and diverting the same to their MATTERCO
account.
The Ongs also allege that, in view of the findings of the Court that both parties were guilty of
violating the Pre-Subscription Agreement, neither of them could resort to rescission under the
principle of pari delicto. In addition, since the cash and other contributions now sought to be
returned already belong to FLADC, an innocent third party, said remedy may no longer be
availed of under the law.
On their second point (assuming rescission to be proper, the Ongs should be given their
proportionate share of the mall), movants Ong vehemently take exception to the second item
in the dispositive portion of the questioned Decision insofar as it decreed that whatever
remains of the assets of FLADC and the management thereof (after liquidation) shall be
transferred to the Tius. They point out that the mall itself, which would have been foreclosed
by PNB if not for their timely investment of P190 million in 1994 and which is now worth about
P1 billion mainly because of their efforts, should be included in any partition and distribution.
They (the Ongs) should not merely be given interest on their capital investments. The said
portion of our Decision, according to them, amounted to the unjust enrichment of the Tius
and ran contrary to our own pronouncement that the act of the Tius in unilaterally rescinding
the agreement was "the height of ingratitude" and an attempt "to pull a fast one" as it would
prevent the Ongs from enjoying the fruits of their P190 million investment in FLADC. It also
contravenes this Court's assurance in the questioned Decision that the Ongs and Tius "will
have a bountiful return of their respective investments derived from the profits of the
corporation."
Willie Ong filed a separate "Motion for Partial Reconsideration" dated March 8, 2002, pointing
out that there was no violation of the Pre-Subscription Agreement on the part of the Ongs;
that, after more than seven years since the mall began its operations, rescission had become
not only impractical but would also adversely affect the rights of innocent parties; and that it
would be highly inequitable and unfair to simply return the P100 million investment of the
Ongs and give the remaining assets now amounting to about P1 billion to the Tius.
The Tius, in their opposition to the Ongs' motion for reconsideration, counter that the
arguments therein are a mere re-hash of the contentions in the Ongs' petition for review and
previous motion for reconsideration of the Court of Appeals' decision. The Tius compare the
arguments in said pleadings to prove that the Ongs do not raise new issues, and, based on
well-settled jurisprudence,12 the Ongs' present motion is therefore pro-forma and did not
prevent the Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held oral arguments on the
respective positions of the parties. On February 27, 2003, Dr. Willie Ong and the rest of the
movants Ong filed their respective memoranda. On February 28, 2003, the Tius submitted
their memorandum.
We grant the Ongs' motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for reconsideration.
In Philippine Consumers Foundation, Inc. vs. National Telecommunications
Commission,13 this Court, through then Chief Justice Felix V. Makasiar, said that its
members may and do change their minds, after a re-study of the facts and the law,
illuminated by a mutual exchange of views.14 After a thorough re-examination of the case,
we find that our Decision of February 1, 2002 overlooked certain aspects which, if not
corrected, will cause extreme and irreparable damage and prejudice to the Ongs, FLADC
and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius should not be blindly
applied to meritorious motions for reconsideration. As long as the same adequately raises a
valid ground15 (i.e., the decision or final order is contrary to law), this Court has to evaluate
the merits of the arguments to prevent an unjust decision from attaining finality. In Security
Bank and Trust Company vs. Cuenca,16 we ruled that a motion for reconsideration is
not pro-forma for the reason alone that it reiterates the arguments earlier passed upon and
rejected by the appellate court. We explained there that a movant may raise the same
arguments, if only to convince this Court that its ruling was erroneous. Moreover, the rule
(that a motion is pro-forma if it only repeats the arguments in the previous pleadings) will not
apply if said arguments were not squarely passed upon and answered in the decision sought
to be reconsidered. In the case at bar, no ruling was made on some of the petitioner Ongs'
arguments. For instance, no clear ruling was made on why an order distributing corporate
assets and property to the stockholders would not violate the statutory preconditions for
corporate dissolution or decrease of authorized capital stock. Thus, it would serve the ends of
justice to entertain the subject motion for reconsideration since some important issues
therein, although mere repetitions, were not considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally rescind the Pre-
Subscription Agreement. We rule that they could not.
FLADC was originally incorporated with an authorized capital stock of 500,000 shares with
the Tius owning 450,200 shares representing the paid-up capital. When the Tius invited the
Ongs to invest in FLADC as stockholders, an increase of the authorized capital stock became
necessary to give each group equal (50-50) shareholdings as agreed upon in the Pre-
Subscription Agreement. The authorized capital stock was thus increased from 500,000
shares to 2,000,000 shares with a par value of P100 each, with the Ongs subscribing to
1,000,000 shares and the Tius to 549,800 more shares in addition to their 450,200 shares to
complete 1,000,000 shares. Thus, the subject matter of the contract was the
1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these were
unissued shares, the parties' Pre-Subscription Agreement was in fact a subscription contract
as defined under Section 60, Title VII of the Corporation Code:
Any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription within the meaning of
this Title, notwithstanding the fact that theparties refer to it as a purchase or some
other contract (Italics supplied).
A subscription contract necessarily involves the corporation as one of the contracting parties
since the subject matter of the transaction is property owned by the corporation its shares
of stock. Thus, the subscription contract (denominated by the parties as a Pre-Subscription
Agreement) whereby the Ongs invested P100 million for 1,000,000 shares of stock was, from
the viewpoint of the law, one between the Ongs and FLADC, not between the Ongs and the
Tius. Otherwise stated, the Tius did not contract in their personal capacities with the Ongs
since they were not selling any of their own shares to them. It was FLADC that did.
Considering therefore that the real contracting parties to the subscription agreement were
FLADC and the Ongs alone, a civil case for rescission on the ground of breach of contract
filed by the Tius in their personal capacities will not prosper. Assuming it had valid reasons to
do so, only FLADC (and certainly not the Tius) had the legal personality to file suit rescinding
the subscription agreement with the Ongs inasmuch as it was the real party in interest
therein. Article 1311 of the Civil Code provides that "contracts take effect only between the
parties, their assigns and heirs" Therefore, a party who has not taken part in the
transaction cannot sue or be sued for performance or for cancellation thereof, unless he
shows that he has a real interest affected thereby.17
In their February 28, 2003 Memorandum, the Tius claim that there are two contracts
embodied in the Pre-Subscription Agreement: a shareholder's agreement between the Tius
and the Ongs defining and governing their relationship and a subscription contract between
the Tius, the Ongs and FLADC regarding the subscription of the parties to the corporation.
They point out that these two component parts form one whole agreement and that their
terms and conditions are intrinsically related and dependent on each other. Thus, the breach
of the shareholders' agreement, which was allegedly the consideration for the subscription
contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in any of their previous
pleadings until after the oral arguments on January 29, 2003, we find this argument too
strained for comfort. It is obviously intended to remedy and cover up the Tius' lack of legal
personality to rescind an agreement in which they were personally not parties-in-interest.
Assuming arguendo that there were two "sub-agreements" embodied in the Pre-Subscription
Agreement, this Court fails to see how the shareholders agreement between the Ongs and
Tius can, within the bounds of reason, be interpreted as the consideration of the subscription
contract between FLADC and the Ongs. There was nothing in the Pre-Subscription
Agreement even remotely suggesting such alleged interdependence. Be that as it may,
however, the Tius are nevertheless not the proper parties to raise this point because they
were not parties to the subscription contract between FLADC and the Ongs. Thus, they are
not in a position to claim that the shareholders agreement between them and the Ongs was
what induced FLADC and the Ongs to enter into the subscription contract. It is the Ongs
alone who can say that. Though FLADC was represented by the Tius in the subscription
contract, FLADC had a separate juridical personality from the Tius. The case before us does
not warrant piercing the veil of corporate fiction since there is no proof that the corporation is
being used "as a cloak or cover for fraud or illegality, or to work injustice."18
The Tius also argue that, since the Ongs represent FLADC as its management, breach by
the Ongs is breach by FLADC. This must also fail because such an argument disregards the
separate juridical personality of FLADC.
The Tius allege that they were prevented from participating in the management of the
corporation. There is evidence that the Ongs did prevent the rightfully elected Treasurer, Cely
Tiu, from exercising her function as such. The records show that the President, Wilson Ong,
supervised the collection and receipt of rentals in the Masagana Citimall;19 that he ordered
the same to be deposited in the bank;20 and that he held on to the cash and properties of the
corporation.21 Section 25 of the Corporation Code prohibits the President from acting
concurrently as Treasurer of the corporation. The rationale behind the provision is to ensure
the effective monitoring of each officer's separate functions.
However, although the Tius were adversely affected by the Ongs' unwillingness to let them
assume their positions, rescission due to breach of contract is definitely the wrong remedy for
their personal grievances. The Corporation Code, SEC rules and even the Rules of Court
provide for appropriate and adequate intra-corporate remedies, other than rescission,
in situations like this. Rescission is certainly not one of them, specially if the party asking
for it has no legal personality to do so and the requirements of the law therefor have not been
met. A contrary doctrine will tread on extremely dangerous ground because it will allow just
any stockholder, for just about any real or imagined offense, to demand rescission of his
subscription and call for the distribution of some part of the corporate assets to him without
complying with the requirements of the Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinary
remedy of rescission of the subject agreement based on a less than substantial breach of
subscription contract. Not only are they not parties to the subscription contract between the
Ongs and FLADC; they also have other available and effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius possess the legal standing
to sue for rescission based on breach of contract, said action will nevertheless still not
prosper since rescission will violate the Trust Fund Doctrine and the procedures for the valid
distribution of assets and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust
Co. vs. Rivera,22provides that subscriptions to the capital stock of a corporation constitute a
fund to which the creditors have a right to look for the satisfaction of their claims.23 This
doctrine is the underlying principle in the procedure for the distribution of capital assets,
embodied in the Corporation Code, which allows the distribution of corporate capital only in
three instances: (1) amendment of the Articles of Incorporation to reduce the authorized
capital stock,24 (2) purchase of redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings,25 and (3) dissolution and eventual liquidation of
the corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a
corporation to acquire its own shares26 and in Section 122 on the prohibition against the
distribution of corporate assets and property unless the stringent requirements therefor are
complied with.27
The distribution of corporate assets and property cannot be made to depend on the whims
and caprices of the stockholders, officers or directors of the corporation, or even, for that
matter, on the earnest desire of the court a quo "to prevent further squabbles and future
litigations" unless the indispensable conditions and procedures for the protection of corporate
creditors are followed. Otherwise, the "corporate peace" laudably hoped for by the court will
remain nothing but a dream because this time, it will be the creditors' turn to engage in
"squabbles and litigations" should the court order an unlawful distribution in blatant disregard
of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in
the unauthorized distribution of the capital assets and property of the corporation, thereby
violating the Trust Fund Doctrine and the Corporation Code, since rescission of a
subscription agreement is not one of the instances when distribution of capital assets and
property of the corporation is allowed.
Contrary to the Tius' allegation, rescission will, in the final analysis, result in the premature
liquidation of the corporation without the benefit of prior dissolution in accordance with
Sections 117, 118, 119 and 120 of the Corporation Code.28 The Tius maintain that
rescinding the subscription contract is not synonymous to corporate liquidation because all
rescission will entail would be the simple restoration of the status quo ante and a return to the
two groups of their cash and property contributions. We wish it were that simple. Very
noticeable is the fact that the Tius do not explain why rescission in the instant case will not
effectively result in liquidation. The Tius merely refer in cavalier fashion to the end-result of
rescission (which incidentally is 100% favorable to them) but turn a blind eye to its unfair,
inequitable and disastrous effect on the corporation, its creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that rescission of the
agreement will not result in an unauthorized liquidation of the corporation because their case
is actually a petition to decrease capital stock pursuant to Section 38 of the Corporation
Code. Section 122 of the law provides that "(e)xcept by decrease of capital stock, no
corporation shall distribute any of its assets or property except upon lawful dissolution and
after payment of all its debts and liabilities." The Tius claim that their case for rescission,
being a petition to decrease capital stock, does not violate the liquidation procedures under
our laws. All that needs to be done, according to them, is for this Court to order (1) FLADC to
file with the SEC a petition to issue a certificate of decrease of capital stock and (2) the SEC
to approve said decrease. This new argument has no merit.
The Tius' case for rescission cannot validly be deemed a petition to decrease capital stock
because such action never complied with the formal requirements for decrease of capital
stock under Section 33 of the Corporation Code. No majority vote of the board of directors
was ever taken. Neither was there any stockholders meeting at which the approval of
stockholders owning at least two-thirds of the outstanding capital stock was secured. There
was no revised treasurer's affidavit and no proof that said decrease will not prejudice the
creditors' rights. On the contrary, all their pleadings contained were alleged acts of violations
by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation to
compel FLADC to file at the SEC a petition for the issuance of a certificate of decrease of
stock. Decreasing a corporation's authorized capital stock is an amendment of the Articles of
Incorporation. It is a decision that only the stockholders and the directors can make,
considering that they are the contracting parties thereto. In this case, the Tius are actually not
just asking for a review of the legality and fairness of a corporate decision. They want this
Court to make a corporate decision for FLADC. We decline to intervene and order corporate
structural changes not voluntarily agreed upon by its stockholders and directors.
Truth to tell, a judicial order to decrease capital stock without the assent of FLADC's directors
and stockholders is a violation of the "business judgment rule" which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding
upon the corporation and courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to wanton destruction to the rights of
the minority, as when plaintiffs aver that the defendants (members of the board),
have concluded a transaction among themselves as will result in serious injury to the
plaintiffs stockholders.29
The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemed
author in corporate law, thus:
Courts and other tribunals are wont to override the business judgment of the board
mainly because, courts are not in the business of business, and the laissez faire rule
or the free enterprise system prevailing in our social and economic set-up dictates
that it is better for the State and its organs to leave business to the businessmen;
especially so, when courts are ill-equipped to make business decisions. More
importantly, the social contract in the corporate family to decide the course of the
corporate business has been vested in the board and not with courts.30
Apparently, the Tius do not realize the illegal consequences of seeking rescission and control
of the corporation to the exclusion of the Ongs. Such an act infringes on the law on reduction
of capital stock. Ordering the return and distribution of the Ongs' capital contribution without
dissolving the corporation or decreasing its authorized capital stock is not only against the
law but is also prejudicial to corporate creditors who enjoy absolute priority of payment over
and above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is not difficult to
understand. If rescission is denied, will injustice be inflicted on any of the parties? The
answer is no because the financial interests of both the Tius and the Ongs will remain intact
and safe within FLADC. On the other hand, if rescission is granted, will any of the parties
suffer an injustice? Definitely yes because the Ongs will find themselves out in the streets
with nothing but the money they had in 1994 while the Tius will not only enjoy a windfall
estimated to be anywhere from P450 million to P900 million31 but will also take over an
extremely profitable business without much effort at all.
Another very important point follows. The Court of Appeals and, later on, our Decision dated
February 1, 2002, stated that both groups were in pari delicto, meaning, that both the Tius
and the Ongs committed breaches of the Pre-Subscription Agreement. This may be true to a
certain extent but, judging from the comparative gravity of the acts separately committed by
each group, we find that the Ongs' acts were relatively tame vis--vis those committed by the
Tius in not surrendering FLADC funds to the corporation and diverting corporate income to
their own MATTERCO account. The Ongs were right in not issuing to the Tius the shares
corresponding to the four-story building and the 1,902.30 square-meter lot because no title
for it could be issued in FLADC's name, owing to the Tius' refusal to pay the transfer taxes.
And as far as the 151 square-meter lot was concerned, why should FLADC issue additional
shares to the Tius for property already owned by the corporation and which, in the final
analysis, was already factored into the shareholdings of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to "pull a
fast one" on the Ongs because that was where the problem precisely started. It is clear that,
when the finances of FLADC improved considerably after the equity infusion of the Ongs, the
Tius started planning to take over the corporation again and exclude the Ongs from it. It
appears that the Tius' refusal to pay transfer taxes might not have really been at all
unintentional because, by failing to pay that relatively small amount which they could easily
afford, the Tius should have expected that they were not going to be given the corresponding
shares. It was, from every angle, the perfect excuse for blackballing the Ongs. In other
words, the Tius created a problem then used that same problem as their pretext for showing
their partners the door. In the process, they stood to be rewarded with a bonanza of
anywhere between P450 million to P900 million in assets (from an investment of only P45
million which was nearly foreclosed by PNB), to the extreme and irreparable damage of the
Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that the Masagana Citimall
would not be what it has become today were it not for the timely infusion of P190 million by
the Ongs in 1994. There are no ifs or buts about it.
Without the Ongs, the Tius would have lost everything they originally invested in said mall. If
only for this and the fact that this Resolution can truly pave the way for both groups to enjoy
the fruits of their investments assuming good faith and honest intentions we cannot
allow the rescission of the subject subscription agreement. The Ongs' shortcomings were far
from serious and certainly less than substantial; they were in fact remediable and correctable
under the law. It would be totally against all rules of justice, fairness and equity to deprive the
Ongs of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners Ong
Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie Ong
Alonzo and the motion for partial reconsideration, dated March 15, 2002, of petitioner Willie
Ong are hereby GRANTED. The Petition for Confirmation of the Rescission of the Pre-
Subscription Agreement docketed as SEC Case No. 02-96-5269 is hereby DISMISSED for
lack of merit. The unilateral rescission by the Tius of the subject Pre-Subscription Agreement,
dated August 15, 1994, is hereby declared as null and void.
The motion for the issuance of a writ of execution, dated March 15, 2002, of petitioners David
S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C.
Tiu is hereby DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with modification
the decision of the Court of Appeals, dated October 5, 1999, and the SEC en banc, dated
September 11, 1998, is hereby REVERSED.
Costs against the petitioner Tius.
SO ORDERED.




















G.R. Nos. 112438-39 December 12, 1995
CHEMPHIL EXPORT & IMPORT CORPORATION (CEIC), petitioner, vs. THE
HONORABLE COURT OF APPEALS JAIME Y. GONZALES, as Assignee of the Bank of
the Philippine Islands (BPI), RIZAL COMMERCIAL BANKING CORPORATION (RCBC),
LAND BANK OF THE PHILIPPINES (LBP), PHILIPPINE COMMERCIAL &
INTERNATIONAL BANK (PCIB) and THE PHILIPPINE INVESTMENT SYSTEM
ORGANIZATION (PISO), respondents.
G.R. No. 113394 December 12, 1995
PHILIPPINE COMMERCIAL INDUSTRIAL BANK (AND ITS ASSIGNEE JAIME Y.
GONZALES) petitioner, vs. HONORABLE COURT OR APPEALS and CHEMPHIL
EXPORT AND IMPORT CORPORATION (CEIC),respondents.
KAPUNAN, J.:
Before us is a legal tug-of-war between the Chemphil Export and Import Corporation
(hereinafter referred to as CEIC), on one side, and the PISO and Jaime Gonzales as
assignee of the Bank of the Philippine Islands (BPI), Rizal Commercial Banking Corporation
(RCBC), Land Bank of the Philippines (LBP) and Philippine Commercial International Bank
(PCIB), on the other (hereinafter referred to as the consortium), over 1,717,678 shares of
stock (hereinafter referred to as the "disputed shares") in the Chemical Industries of the
Philippines (Chemphil/CIP).
Our task is to determine who is the rightful owner of the disputed shares.
Pursuant to our resolution dated 30 May 1994, the instant case is a consolidation of two
petitions for review filed before us as follows:
In G.R. Nos. 112438-39, CEIC seeks the reversal of the decision of the Court of Appeals
(former Twelfth Division) promulgated on 30 June 1993 and its resolution of 29 October
1993, denying petitioner's motion for reconsideration in the consolidated cases entitled
"Dynetics, Inc., et al. v. PISO, et al." (CA-G.R. No. 20467) and "Dynetics, Inc., et al. v. PISO,
et al.; CEIC, Intervenor-Appellee" (CA-G.R. CV No. 26511).
The dispositive portion of the assailed decision reads, thus:
WHEREFORE, this Court resolves in these consolidated cases as follows:
1. The Orders of the Regional Trial Court, dated March 25, 1988, and May
20, 1988, subject of CA-G.R. CV No. 10467, are SET ASIDE and judgment
is hereby rendered in favor of the consortium and against appellee Dynetics,
Inc., the amount of the judgment, to be determined by Regional Trial Court,
taking into account the value of assets that the consortium may have already
recovered and shall have recovered in accordance with the other portions of
this decision.
2. The Orders of the Regional Trial Court dated December 19, 1989 and
March 5, 1990 are hereby REVERSED and SET ASIDE and judgment is
hereby rendered confirming the ownership of the consortium over the
Chemphil shares of stock, subject of CA-G.R. CV No. 26511, and the Order
dated September 4, 1989, is reinstated.
No pronouncement as to costs.
SO ORDERED. 1
In G.R. No. 113394, PCIB and its assignee, Jaime Gonzales, ask for the annulment of the
Court of Appeals' decision (former Special Ninth Division) promulgated on 26 March 1993 in
"PCIB v. Hon. Job B. Madayag & CEIC" (CA-G.R. SP NO. 20474) dismissing the petition
for certiorari, prohibition and mandamus filed by PCIB and of said court's resolution dated 11
January 1994 denying their motion for reconsideration of its decision. 2
The antecedent facts leading to the aforementioned controversies are as follows:
On September 25, 1984, Dynetics, Inc. and Antonio M. Garcia filed a complaint for
declaratory relief and/or injunction against the PISO, BPI, LBP, PCIB and RCBC or the
consortium with the Regional Trial Court of Makati, Branch 45 (Civil Case No. 8527), seeking
judicial declaration, construction and interpretation of the validity of the surety agreement that
Dynetics and Garcia had entered into with the consortium and to perpetually enjoin the latter
from claiming, collecting and enforcing any purported obligations which Dynetics and Garcia
might have undertaken in said agreement. 3
The consortium filed their respective answers with counterclaims alleging that the surety
agreement in question was valid and binding and that Dynetics and Garcia were liable under
the terms of the said agreement. It likewise applied for the issuance of a writ of preliminary
attachment against Dynetics and Garcia. 4
Seven months later, or on 23 April 1985, Dynetics, Antonio Garcia and Matrix Management &
Trading Corporation filed a complaint for declaratory relief and/or injunction against the
Security Bank & Trust Co. (SBTC case) before the Regional Trial Court of Makati, Branch
135 docketed as Civil Case No. 10398. 5
On 2 July 1985, the trial court granted SBTC's prayer for the issuance of a writ of preliminary
attachment and on 9 July 1985, a notice of garnishment covering Garcia's shares in
CIP/Chemphil (including the disputed shares) was served on Chemphil through its then
President. The notice of garnishment was duly annotated in the stock and transfer books of
Chemphil on the same date. 6
On 6 September 1985, the writ of attachment in favor of SBTC was lifted. However, the same
was reinstated on 30 October 1985. 7
In the meantime, on 12 July 1985, the Regional Trial Court in Civil Case No. 8527 (the
consortium case) denied the application of Dynetics and Garcia for preliminary injunction and
instead granted the consortium's prayer for a consolidated writ of preliminary attachment.
Hence, on 19 July 1985, after the consortium had filed the required bond, a writ of
attachment was issued and various real and personal properties of Dynetics and Garcia were
garnished, including the disputed shares. 8 This garnishment, however, was not annotated in
Chemphil's stock and transfer book.
On 8 September 1987, PCIB filed a motion to dismiss the complaint of Dynetics and Garcia
for lack of interest to prosecute and to submit its counterclaims for decision, adopting the
evidence it had adduced at the hearing of its application for preliminary attachment. 9
On 25 March 1988, the Regional Trial Court dismissed the complaint of Dynetics and Garcia
in Civil Case No. 8527, as well as the counterclaims of the consortium, thus:
Resolving defendant's, Philippine Commercial International Bank, MOTION
TO DISMISS WITH MOTION TO SUBMIT DEFENDANT PCIBANK's
COUNTERCLAIM FOR DECISION, dated September 7, 1987:
(1) The motion to dismiss is granted; and the instant case is hereby ordered
dismissed pursuant to Sec. 3, Rule 17 of the Revised Rules of Court, plaintiff
having failed to comply with the order dated July 16, 1987, and having not
taken further steps to prosecute the case; and
(2) The motion to submit said defendant's counterclaim for decision is
denied; there is no need; said counterclaim is likewise dismissed under the
authority of Dalman vs. City Court of Dipolog City, L-63194, January 21,
1985, wherein the Supreme Court stated that if the civil case is dismissed,
so also is the counterclaim filed therein. "A person cannot eat his cake and
have it at the same time" (p. 645, record, Vol. I). 10
The motions for reconsideration filed by the consortium were, likewise, denied by the trial
court in its order dated 20 May 1988:
The Court could have stood pat on its order dated 25 March 1988, in regard
to which the defendants-banks concerned filed motions for reconsideration.
However, inasmuch as plaintiffs commented on said motions that: "3). In any
event, so as not to unduly foreclose on the rights of the respective parties to
refile and prosecute their respective causes of action, plaintiffs manifest their
conformity to the modification of this Honorable Court's order to indicate that
the dismissal of the complaint and the counterclaims is without prejudice."
(p. 2, plaintiffs' COMMENT etc. dated May 20, 1988). The Court is inclined to
so modify the said order.
WHEREFORE , the order issued on March 25, 1988, is hereby modified in
the sense that the dismissal of the complaint as well as of the counterclaims
of defendants RCBC, LBP, PCIB and BPI shall be considered as without
prejudice (p. 675, record, Vol. I). 11
Unsatisfied with the aforementioned order, the consortium appealed to the Court of Appeals,
docketed as CA-G.R. CV No. 20467.
On 17 January 1989 during the pendency of consortium's appeal in CA-G.R. CV No. 20467,
Antonio Garcia and the consortium entered into a Compromise Agreement which the Court of
Appeals approved on 22 May 1989 and became the basis of its judgment by compromise.
Antonio Garcia was dropped as a party to the appeal leaving the consortium to proceed
solely against Dynetics, Inc. 12 On 27 June 1989, entry of judgment was made by the Clerk
of Court. 13
Hereunder quoted are the salient portions of said compromise agreement:
xxx xxx xxx
3. Defendants, in consideration of avoiding an extended litigation, having
agreed to limit their claim against plaintiff Antonio M. Garcia to a principal
sum of P145 Million immediately demandable and to waive all other claims
to interest, penalties, attorney's fees and other charges. The aforesaid
compromise amount of indebtedness of P145 Million shall earn interest of
eighteen percent (18%) from the date of this Compromise.
4. Plaintiff Antonio M. Garcia and herein defendants have no further claims
against each other.
5. This Compromise shall be without prejudice to such claims as the parties
herein may have against plaintiff Dynetics, Inc.
6. Plaintiff Antonio M. Garcia shall have two (2) months from date of this
Compromise within which to work for the entry and participation of his other
creditor, Security Bank and Trust Co., into this Compromise. Upon the
expiration of this period, without Security Bank and Trust Co. having joined,
this Compromise shall be submitted to the Court for its information and
approval (pp. 27, 28-31, rollo, CA-G.R. CV No. 10467). 14
It appears that on 15 July 1988, Antonio Garcia under a Deed of Sale transferred to Ferro
Chemicals, Inc. (FCI) the disputed shares and other properties for P79,207,331.28. It was
agreed upon that part of the purchase price shall be paid by FCI directly to SBTC for
whatever judgment credits that may be adjudged in the latter's favor and against Antonio
Garcia in the aforementioned SBTC case. 15
On 6 March 1989, FCI, through its President Antonio M. Garcia, issued a Bank of America
Check No. 860114 in favor of SBTC in the amount of P35,462,869.62. 16 SBTC refused to
accept the check claiming that the amount was not sufficient to discharge the debt. The
check was thus consigned by Antonio Garcia and Dynetics with the Regional Trial Court as
payment of their judgment debt in the SBTC case. 17
On 26 June 1989, FCI assigned its 4,119,614 shares in Chemphil, which included the
disputed shares, to petitioner CEIC. The shares were registered and recorded in the
corporate books of Chemphil in CEIC's name and the corresponding stock certificates were
issued to it. 18
Meanwhile, Antonio Garcia, in the consortium case, failed to comply with the terms of the
compromise agreement he entered into with the consortium on 17 January 1989. As a result,
on 18 July 1989, the consortium filed a motion for execution which was granted by the trial
court on 11 August 1989. Among Garcia's properties that were levied upon on execution
were his 1,717,678 shares in Chemphil (the disputed shares) previously garnished on 19 July
1985. 19
On 22 August 1989, the consortium acquired the disputed shares of stock at the public
auction sale conducted by the sheriff for P85,000,000.00. 20 On same day, a Certificate of
Sale covering the disputed shares was issued to it.
On 30 August 1989, 21 the consortium filed a motion (dated 29 August 1989) to order the
corporate secretary of Chemphil to enter in its stock and transfer books the sheriff's certificate
of sale dated 22 August 1989, and to issue new certificates of stock in the name of the banks
concerned. The trial court granted said motion in its order dated 4 September 1989, thus:
For being legally proper, defendant's MOTION TO ORDER THE
CORPORATE SECRETARY OF CHEMICAL INDUSTRIES OF THE PHILS.,
INC. (CHEMPIL) TO ENTER IN THE STOCK AND TRANSFER BOOKS OF
CHEMPHIL THE SHERIFF'S CERTIFICATE OF SALE DATED AUGUST 22,
1989 AND TO ISSUE NEW CERTIFICATES OF STOCK IN THE NAME OF
THE DEFENDANT BANKS, dated August 29, 1989, is hereby granted.
WHEREFORE, the corporate secretary of the aforesaid corporation, or
whoever is acting for and in his behalf, is hereby ordered to (1) record and/or
register the Certificate of Sale dated August 22, 1989 issued by Deputy
Sheriff Cristobal S. Jabson of this Court; (2) to cancel the certificates of stock
of plaintiff Antonio M. Garcia and all those which may have subsequently
been issued in replacement and/or in substitution thereof; and (3) to issue in
lieu of the said shares new shares of stock in the name of the defendant
Banks, namely, PCIB, BPI, RCBC, LBP and PISO bank in such proportion
as their respective claims would appear in this suit (p. 82, record, Vol. II). 22
On 26 September 1989, CEIC filed a motion to intervene (dated 25 September 1989) in the
consortium case seeking the recall of the abovementioned order on grounds that it is the
rightful owner of the disputed shares. 23 It further alleged that the disputed shares were
previously owned by Antonio M. Garcia but subsequently sold by him on 15 July 1988 to
Ferro Chemicals, Inc. (FCI) which in turn assigned the same to CEIC in an agreement dated
26 June 1989.
On 27 September 1989, the trial court granted CEIC's motion allowing it to intervene, but
limited only to the incidents covered by the order dated 4 September 1989. In the same
order, the trial court directed Chemphil's corporate secretary to temporarily refrain from
implementing the 4 September 1989 order. 24
On 2 October 1989, the consortium filed their opposition to CEIC's motion for intervention
alleging that their attachment lien over the disputed shares of stocks must prevail over the
private sale in favor of the CEIC considering that said shares of stock were garnished in the
consortium's favor as early as 19 July 1985. 25
On 4 October 1989, the consortium filed their opposition to CEIC's motion to set aside the 4
September 1989 order and moved to lift the 27 September 1989 order. 26
On 12 October 1989, the consortium filed a manifestation and motion to lift the 27 September
1989 order, to reinstate the 4 September 1989 order and to direct CEIC to surrender the
disputed stock certificates of Chemphil in its possession within twenty-four (24) hours, failing
in which the President, Corporate Secretary and stock and transfer agent of Chemphil be
directed to register the names of the banks making up the consortium as owners of said
shares, sign the new certificates of stocks evidencing their ownership over said shares and to
immediately deliver the stock certificates to them. 27
Resolving the foregoing motions, the trial court rendered an order dated 19 December 1989,
the dispositive portion of which reads as follows:
WHEREFORE, premises considered, the Urgent Motion dated September
25, 1989 filed by CEIC is hereby GRANTED. Accordingly, the Order of
September 4, 1989, is hereby SET ASIDE, and any and all acts of the
Corporate Secretary of CHEMPHIL and/or whoever is acting for and in his
behalf, as may have already been done, carried out or implemented
pursuant to the Order of September 4, 1989, are hereby nullified.
PERFORCE, the CONSORTIUM'S Motions dated October 3, 1989 and
October 11, 1989, are both hereby denied for lack of merit.
The Cease and Desist Order dated September 27, 1989, is hereby
AFFIRMED and made PERMANENT.
SO ORDERED. 28
In so ruling, the trial court ratiocinated in this wise:
xxx xxx xxx
After careful and assiduous consideration of the facts and applicable law and
jurisprudence, the Court holds that CEIC's Urgent Motion to Set Aside the
Order of September 4, 1989 is impressed with merit. The CONSORTIUM
has admitted that the writ of attachment/garnishment issued on July 19,
1985 on the shares of stock belonging to plaintiff Antonio M. Garcia was not
annotated and registered in the stock and transfer books of CHEMPHIL. On
the other hand, the prior attachment issued in favor of SBTC on July 2, 1985
by Branch 135 of this Court in Civil Case No. 10398, against the same
CHEMPHIL shares of Antonio M. Garcia, was duly registered and annotated
in the stock and transfer books of CHEMPHIL. The matter of non-recording
of the Consortium's attachment in Chemphil's stock and transfer book on the
shares of Antonio M. Garcia assumes significance considering CEIC's
position that FCI and later CEIC acquired the CHEMPHIL shares of Antonio
M. Garcia without knowledge of the attachment of the CONSORTIUM. This
is also important as CEIC claims that it has been subrogated to the rights of
SBTC since CEIC's predecessor-in-interest, the FCI, had paid SBTC the
amount of P35,462,869.12 pursuant to the Deed of Sale and Purchase of
Shares of Stock executed by Antonio M. Garcia on July 15, 1988. By reason
of such payment, sale with the knowledge and consent of Antonio M. Garcia,
FCI and CEIC, as party-in-interest to FCI, are subrogated by operation of law
to the rights of SBTC. The Court is not unaware of the citation in CEIC's
reply that "as between two (2) attaching creditors, the one whose claims was
first registered on the books of the corporation enjoy priority." (Samahang
Magsasaka, Inc. vs. Chua Gan, 96 Phil. 974.)
The Court holds that a levy on the shares of corporate stock to be valid and
binding on third persons, the notice of attachment or garnishment must be
registered and annotated in the stock and transfer books of the corporation,
more so when the shares of the corporation are listed and traded in the
stock exchange, as in this case. As a matter of fact, in the CONSORTIUM's
motion of August 30, 1989, they specifically move to "order the Corporate
Secretary of CHEMPHIL to enter in the stock and transfer books of
CHEMPHIL the Sheriff's Certificate of Sale dated August 22, 1989." This
goes to show that, contrary to the arguments of the CONSORTIUM, in order
that attachment, garnishment and/or encumbrances affecting rights and
ownership on shares of a corporation to be valid and binding, the same has
to be recorded in the stock and transfer books.
Since neither CEIC nor FCI had notice of the CONSORTIUM's attachment of
July 19, 1985, CEIC's shares of stock in CHEMPHIL, legally acquired from
Antonio M. Garcia, cannot be levied upon in execution to satisfy his
judgment debts. At the time of the Sheriff's levy on execution, Antonio M.
Garcia has no more in CHEMPHIL which could be levied upon. 29
xxx xxx xxx
On 23 January 1990, the consortium and PCIB filed separate motions for reconsideration of
the aforestated order which were opposed by petitioner CEIC. 30
On 5 March 1990, the trial court denied the motions for reconsideration. 31
On 16 March 1990, the consortium appealed to the Court of Appeals (CA-G.R. No. 26511). In
its Resolution dated 9 August 1990, the Court of Appeals consolidated CA-G.R. No. 26511
with CA-G.R. No. 20467. 32
The issues raised in the two cases, as formulated by the Court of Appeals, are as follows:
I
WHETHER OR NOT, UNDER THE PECULIAR CIRCUMSTANCES OF THE
CASE, THE TRIAL COURT ERRED IN DISMISSING THE
COUNTERCLAIMS OF THE CONSORTIUM IN CIVIL CASE NO. 8527;
II
WHETHER OR NOT THE DISMISSAL OF CIVIL CASE NO. 8527
RESULTED IN THE DISCHARGE OF THE WRIT OF ATTACHMENT
ISSUED THEREIN EVEN AS THE CONSORTIUM APPEALED THE
ORDER DISMISSING CIVIL CASE NO. 8527;
III
WHETHER OR NOT THE JUDGMENT BASED ON COMPROMISE
RENDERED BY THIS COURT ON MAY 22, 1989 HAD THE EFFECT OF
DISCHARGING THE ATTACHMENTS ISSUED IN CIVIL CASE NO. 8527;
IV
WHETHER OR NOT THE ATTACHMENT OF SHARES OF STOCK, IN
ORDER TO BIND THIRD PERSONS, MUST BE RECORDED IN THE
STOCK AND TRANSFER BOOK OF THE CORPORATION; AND
V
WHETHER OR NOT FERRO CHEMICALS, INC. (FCI), AND ITS
SUCCESSOR-IN-INTEREST, CEIC, WERE SUBROGATED TO THE
RIGHTS OF SECURITY BANK & TRUST COMPANY (SBTC) IN A
SEPARATE CIVIL ACTION. (This issue appears to be material as SBTC is
alleged to have obtained an earlier attachment over the same Chemphil
shares that the consortium seeks to recover in the case at bar). 33
On 6 April 1990, the PCIB separately filed with the Court of Appeals a petition for certiorari,
prohibition andmandamus with a prayer for the issuance of a writ of preliminary injunction
(CA-G.R. No. SP-20474), likewise, assailing the very same orders dated 19 December 1989
and 5 March 1990, subject of CA-G.R. No. 26511. 34
On 30 June 1993, the Court of Appeals (Twelfth Division) in CA-G.R. No. 26511 and CA-G.R.
No. 20467 rendered a decision reversing the orders of the trial court and confirming the
ownership of the consortium over the disputed shares. CEIC's motion for reconsideration was
denied on 29 October 1993. 35
In ruling for the consortium, the Court of Appeals made the following ratiocination: 36
On the first issue, it ruled that the evidence offered by the consortium in
support of its counterclaims, coupled with the failure of Dynetics and Garcia
to prosecute their case, was sufficient basis for the RTC to pass upon and
determine the consortium's counterclaims.
The Court of Appeals found no application for the ruling in Dalman v. City
Court of Dipolog, 134 SCRA 243 (1985) that "a person cannot eat his cake
and have it at the same time. If the civil case is dismissed, so also is the
counterclaim filed therein" because the factual background of the present
action is different. In the instant case, both Dynetics and Garcia and the
consortium presented testimonial and documentary evidence which clearly
should have supported a judgment on the merits in favor of the consortium.
As the consortium correctly argued, the net atrocious effect of the Regional
Trial Court's ruling is that it allows a situation where a party litigant is forced
to plead and prove compulsory counterclaims only to be denied those
counterclaims on account of the adverse party's failure to prosecute his
case. Verily, the consortium had no alternative but to present its
counterclaims in Civil Case No. 8527 since its counterclaims are compulsory
in nature.
On the second issue, the Court of Appeals opined that unless a writ of
attachment is lifted by a special order specifically providing for the discharge
thereof, or unless a case has been finally dismissed against the party in
whose favor the attachment has been issued, the attachment lien subsists.
When the consortium, therefore, took an appeal from the Regional Trial
Court's orders of March 25, 1988 and May 20, 1988, such appeal had the
effect of preserving the consortium's attachment liens secured at the
inception of Civil Case No. 8527, invoking the rule in Olib v. Pastoral,188
SCRA 692 (1988) that where the main action is appealed, the attachment
issued in the said main case is also considered appealed.
Anent the third issue, the compromise agreement between the consortium
and Garcia dated 17 January 1989 did not result in the abandonment of its
attachment lien over his properties. Said agreement was approved by the
Court of Appeals in a Resolution dated 22 May 1989. The judgment based
on the compromise agreement had the effect of preserving the said
attachment lien as security for the satisfaction of said judgment (citing BF
Homes, Inc. v. CA, 190 SCRA 262, [1990]).
As to the fourth issue, the Court of Appeals agreed with the consortium's
position that the attachment of shares of stock in a corporation need not be
recorded in the corporation's stock and transfer book in order to bind third
persons.
Section 7(d), Rule 57 of the Rules of Court was complied with by the
consortium (through the Sheriff of the trial court) when the notice of
garnishment over the Chemphil shares of Garcia was served on the
president of Chemphil on July 19, 1985. Indeed, to bind third persons, no
law requires that an attachment of shares of stock be recorded in the stock
and transfer book of a corporation. The statement attributed by the Regional
Trial Court to the Supreme Court in Samahang Magsasaka, Inc.vs. Gonzalo
Chua Guan, G.R. No. L-7252, February 25, 1955 (unreported), to the effect
that "as between two attaching creditors, the one whose claim was
registered first on the books of the corporation enjoys priority," is an obiter
dictum that does not modify the procedure laid down in Section 7(d), Rule 57
of the Rules of Court.
Therefore, ruled the Court of Appeals, the attachment made over the
Chemphil shares in the name of Garcia on July 19, 1985 was made in
accordance with law and the lien created thereby remained valid and
subsisting at the time Garcia sold those shares to FCI (predecessor-in-
interest of appellee CEIC) in 1988.
Anent the last issue, the Court of Appeals rejected CEIC's subrogation
theory based on Art. 1302 (2) of the New Civil Code stating that the
obligation to SBTC was paid by Garcia himself and not by a third party (FCI).
The Court of Appeals further opined that while the check used to pay SBTC
was a FCI corporate check, it was funds of Garcia in FCI that was used to
pay off SBTC. That the funds used to pay off SBTC were funds of Garcia
has not been refuted by FCI or CEIC. It is clear, therefore, that there was an
attempt on the part of Garcia to use FCI and CEIC as convenient vehicles to
deny the consortium its right to make itself whole through an execution sale
of the Chemphil shares attached by the consortium at the inception of Civil
Case No. 8527. The consortium, therefore, is entitled to the issuance of the
Chemphil shares of stock in its favor. The Regional Trial Court's order of
September 4, 1989, should, therefore, be reinstated in toto.
Accordingly, the question of whether or not the attachment lien in favor of
SBTC in the SBTC case is superior to the attachment lien in favor of the
consortium in Civil Case No. 8527 becomes immaterial with respect to the
right of intervenor-appellee CEIC. The said issue would have been relevant
had CEIC established its subrogation to the rights of SBTC.
On 26 March 1993, the Court of Appeals (Special Ninth Division) in CA-G.R. No. SP 20474
rendered a decision denying due course to and dismissing PCIB's petition for certiorari on
grounds that PCIB violated the rule against forum-shopping and that no grave abuse of
discretion was committed by respondent Regional Trial Court in issuing its assailed orders
dated 19 December 1989 and 5 March 1990. PCIB's motion for reconsideration was denied
on 11 January 1994. 37
On 7 July 1993, the consortium, with the exception of PISO, assigned without recourse all its
rights and interests in the disputed shares to Jaime Gonzales. 38
On 3 January 1994, CEIC filed the instant petition for review docketed as G.R. Nos. 112438-
39 and assigned the following errors:
I.
THE RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
SETTING ASIDE AND REVERSING THE ORDERS OF THE REGIONAL
TRIAL COURT DATED DECEMBER 5, 1989 AND MARCH 5, 1990 AND IN
NOT CONFIRMING PETITIONER'S OWNERSHIP OVER THE DISPUTED
CHEMPHIL SHARES AGAINST THE FRIVOLOUS AND UNFOUNDED
CLAIMS OF THE CONSORTIUM.
II.
THE RESPONDENT COURT OF APPEALS GRAVELY ERRED:
(1) In not holding that the Consortium's attachment over the
disputed Chemphil shares did not vest any priority right in its
favor and cannot bind third parties since admittedly its
attachment on 19 July 1985 was not recorded in the stock
and transfer books of Chemphil, and subordinate to the
attachment of SBTC which SBTC registered and annotated
in the stock and transfer books of Chemphil on 2 July 1985,
and that the Consortium's attachment failed to comply with
Sec. 7(d), Rule 57 of the Rules as evidenced by the notice
of garnishment of the deputy sheriff of the trial court dated
19 July 1985 (annex "D") which the sheriff served on a
certain Thelly Ruiz who was neither President nor managing
agent of Chemphil;
(2) In not applying the case law enunciated by this
Honorable Supreme Court inSamahang Magsasaka,
Inc. vs. Gonzalo Chua Guan, 96 Phil. 974 that as between
two attaching creditors, the one whose claim was registered
first in the books of the corporation enjoys priority, and
which respondent Court erroneously characterized as
mere obiter dictum;
(3) In not holding that the dismissal of the appeal of the
Consortium from the order of the trial court dismissing its
counterclaim against Antonio M. Garcia and the finality of
the compromise agreement which ended the litigation
between the Consortium and Antonio M. Garcia in
the Dynetics case had ipso jure discharged the
Consortium's purported attachment over the disputed
shares.
III.
THE RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT
HOLDING THAT CEIC HAD BEEN SUBROGATED TO THE RIGHTS OF
SBTC SINCE CEIC'S PREDECESSOR IN INTEREST HAD PAID SBTC
PURSUANT TO THE DEED OF SALE AND PURCHASE OF STOCK
EXECUTED BY ANTONIO M. GARCIA ON JULY 15, 1988, AND THAT BY
REASON OF SUCH PAYMENT, WITH THE CONSENT AND KNOWLEDGE
OF ANTONIO M. GARCIA, FCI AND CEIC, AS PARTY IN INTEREST TO
FCI, WERE SUBROGATED BY OPERATION OF LAW TO THE RIGHTS OF
SBTC.
IV.
THE RESPONDENT COURT OF APPEALS GRAVELY ERRED AND MADE
UNWARRANTED INFERENCES AND CONCLUSIONS, WITHOUT ANY
SUPPORTING EVIDENCE, THAT THERE WAS AN ATTEMPT ON THE
PART OF ANTONIO M. GARCIA TO USE FCI AND CEIC AS
CONVENIENT VEHICLES TO DENY THE CONSORTIUM ITS RIGHTS TO
MAKE ITSELF WHOLE THROUGH AN EXECUTION OF THE CHEMPHIL
SHARES PURPORTEDLY ATTACHED BY THE CONSORTIUM ON 19
JULY 1985. 39
On 2 March 1994, PCIB filed its own petition for review docketed as G.R. No. 113394
wherein it raised the following issues:
I. RESPONDENT COURT OF APPEALS COMMITTED SERIOUS ERROR
IN RENDERING THE DECISION AND RESOLUTION IN QUESTION
(ANNEXES A AND B) IN DEFIANCE OF LAW AND JURISPRUDENCE BY
FINDING RESPONDENT CEIC AS HAVING BEEN SUBROGATED TO THE
RIGHTS OF SBTC BY THE PAYMENT BY FCI OF GARCIA'S DEBTS TO
THE LATTER DESPITE THE FACT THAT
A. FCI PAID THE SBTC DEBT BY VIRTUE OF A
CONTRACT BETWEEN FCI AND GARCIA, THUS, LEGAL
SUBROGATION DOES NOT ARISE;
B. THE SBTC DEBT WAS PAID BY GARCIA HIMSELF
AND NOT BY FCI, HENCE, SUBROGATION BY
PAYMENT COULD NOT HAVE OCCURRED;
C. FCI DID NOT ACQUIRE ANY RIGHT OVER THE
DISPUTED SHARES AS SBTC HAD NOT YET LEVIED
UPON NOR BOUGHT THOSE SHARES ON EXECUTION.
ACCORDINGLY, WHAT FCI ACQUIRED FROM SBTC
WAS SIMPLY A JUDGMENT CREDIT AND AN
ATTACHMENT LIEN TO SECURE ITS SATISFACTION.
II. RESPONDENT COURT OF APPEALS COMMITTED SERIOUS ERROR
IN SUSTAINING THE ORDERS OF THE TRIAL COURT DATED
DECEMBER 19, 1989 AND MARCH 5, 1990 WHICH DENIED
PETITIONER'S OWNERSHIP OVER THE DISPUTED SHARES
NOTWITHSTANDING PROVISIONS OF LAW AND EXTANT
JURISPRUDENCE ON THE MATTER THAT PETITIONER AND THE
CONSORTIUM HAVE PREFERRED SENIOR RIGHTS THEREOVER.
III. RESPONDENT COURT OF APPEAL COMMITTED SERIOUS ERROR
IN CONCLUDING THAT THE DISMISSAL OF THE COMPLAINT AND THE
COUNTERCLAIM IN CIVIL CASE NO. 8527 ALSO RESULTED IN THE
DISCHARGE OF THE WRIT OF ATTACHMENT DESPITE THE RULINGS
OF THIS HONORABLE COURT IN BF HOMES VS. COURT OF
APPEALS, G.R. NOS. 76879 AND 77143, OCTOBER 3, 1990, 190 SCRA
262, AND IN OLIB VS. PASTORAL, G.R. NO. 81120, AUGUST 20, 1990,
188 SCRA 692 TO THE CONTRARY.
IV. RESPONDENT COURT OF APPEALS EXCEEDED ITS JURISDICTION
IN RULING ON THE MERITS OF THE MAIN CASE NOTWITHSTANDING
THAT THOSE MATTERS WERE NOT ON APPEAL BEFORE IT.
V. RESPONDENT COURT OF APPEALS COMMITTED SERIOUS ERROR
IN HOLDING THAT PETITIONER IS GUILTY OF FORUM SHOPPING
DESPITE THE FACT THAT SC CIRCULAR NO. 28-91 WAS NOT YET IN
FORCE AND EFFECT AT THE TIME THE PETITION WAS FILED BEFORE
RESPONDENT APPELLATE COURT, AND THAT ITS COUNSEL AT THAT
TIME HAD ADEQUATE BASIS TO BELIEVE THAT CERTIORARI AND NOT
AN APPEAL OF THE TRIAL COURT'S ORDERS WAS THE
APPROPRIATE RELIEF. 40
As previously stated, the issue boils down to who is legally entitled to the disputed shares of
Chemphil. We shall resolve this controversy by examining the validity of the claims of each
party and, thus, determine whose claim has priority.
CEIC's claim
CEIC traces its claim over the disputed shares to the attachment lien obtained by SBTC on 2
July 1985 against Antonio Garcia in Civil Case No. 10398. It avers that when FCI, CEIC's
predecessor-in-interest, paid SBTC the due obligations of Garcia to the said bank pursuant to
the Deed of Absolute Sale and Purchase of Shares of Stock, 41FCI, and later CEIC, was
subrogated to the rights of SBTC, particularly to the latter's aforementioned attachment lien
over the disputed shares.
CEIC argues that SBTC's attachment lien is superior as it was obtained on 2 July 1985,
ahead of the consortium's purported attachment on 19 July 1985. More importantly, said
CEIC lien was duly recorded in the stock and transfer books of Chemphil.
CEIC's subrogation theory is unavailing.
By definition, subrogation is "the transfer of all the rights of the creditor to a third person, who
substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is
that which takes place without agreement but by operation of law because of certain acts;
this is the subrogation referred to in article 1302. Conventional subrogation is that which
takes place by agreement of the parties . . ." 42
CEIC's theory is premised on Art. 1302 (2) of the Civil Code which states:
Art. 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without the
debtor's knowledge;
(2) When a third person, not interested in the obligation, pays with the
express or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in
the fulfillment of the obligation pays, without prejudice to the effects of
confusion as to the latter's share. (Emphasis ours.)
Despite, however, its multitudinous arguments, CEIC presents an erroneous interpretation of
the concept of subrogation. An analysis of the situations involved would reveal the clear
inapplicability of Art. 1302 (2).
Antonio Garcia sold the disputed shares to FCI for a consideration of P79,207,331.28. FCI,
however, did not pay the entire amount to Garcia as it was obligated to deliver part of the
purchase price directly to SBTC pursuant to the following stipulation in the Deed of Sale:
Manner of Payment
Payment of the Purchase Price shall be made in accordance with the
following order of preferenceprovided that in no instance shall the total
amount paid by the Buyer exceed the Purchase Price:
a. Buyer shall pay directly to the Security Bank and Trust Co. the amount
determined by the Supreme Court as due and owing in favor of the said
bank by the Seller.
The foregoing amount shall be paid within fifteen (15) days from the date the
decision of the Supreme Court in the case entitled "Antonio M. Garcia, et al.
vs. Court of Appeals, et al." G.R. Nos. 82282-83 becomes final and
executory. 43 (Emphasis ours.)
Hence, when FCI issued the BA check to SBTC in the amount of P35,462,869.62 to pay
Garcia's indebtedness to the said bank, it was in effect paying with Garcia's money, no longer
with its own, because said amount was part of the purchase price which FCI owed Garcia in
payment for the sale of the disputed shares by the latter to the former. The money "paid" by
FCI to SBTC, thus properly belonged to Garcia. It is as if Garcia himself paid his own debt to
SBTC but through a third party FCI.
It is, therefore, of no consequence that what was used to pay SBTC was a corporate check of
FCI. As we have earlier stated, said check no longer represented FCI funds but Garcia's
money, being as it was part of FCI's payment for the acquisition of the disputed shares. The
FCI check should not be taken at face value, the attendant circumstances must also be
considered.
The aforequoted contractual stipulation in the Deed of Sale dated 15 July 1988 between
Antonio Garcia and FCI is nothing more but an arrangement for the sake of convenience.
Payment was to be effected in the aforesaid manner so as to prevent money from changing
hands needlessly. Besides, the very purpose of Garcia in selling the disputed shares and his
other properties was to "settle certain civil suits filed against him." 44
Since the money used to discharge Garcia's debt rightfully belonged to him, FCI cannot be
considered a third party payor under Art. 1302 (2). It was but a conduit, or as aptly
categorized by respondents, merely an agent as defined in Art. 1868 of the Civil Code:
Art. 1868. By the contract of agency a person binds himself to render some
service or to do something in representation or on behalf of another, with the
consent or authority of the latter.
FCI was merely fulfilling its obligation under the aforementioned Deed of Sale.
Additionally, FCI is not a disinterested party as required by Art. 1302 (2) since the benefits of
the extinguishment of the obligation would redound to none other but itself. 45 Payment of
the judgment debt to SBTC resulted in the discharge of the attachment lien on the disputed
shares purchased by FCI. The latter would then have a free and "clean" title to said shares.
In sum, CEIC, for its failure to fulfill the requirements of Art. 1302 (2), was not subrogated to
the rights of SBTC against Antonio Garcia and did not acquire SBTC's attachment lien over
the disputed shares which, in turn, had already been lifted or discharged upon satisfaction by
Garcia, through FCI, of his debt to the said bank. 46
The rule laid down in the case of Samahang Magsasaka, Inc. v. Chua Guan, 47 that as
between two attaching creditors the one whose claim was registered ahead on the books of
the corporation enjoys priority, clearly has no application in the case at bench. As we have
amply discussed, since CEIC was not subrogated to SBTC's right as attaching creditor, which
right in turn, had already terminated after Garcia paid his debt to SBTC, it cannot, therefore,
be categorized as an attaching creditor in the present controversy. CEIC cannot resurrect
and claim a right which no longer exists. The issue in the instant case, then, is priority
between an attaching creditor (the consortium) and a purchaser (FCI/CEIC) of the disputed
shares of stock and not between two attaching creditors the subject matter of the
aforestated Samahang Magsasaka case.
CEIC, likewise, argues that the consortium's attachment lien over the disputed Chemphil
shares is null and void and not binding on third parties due to the latter's failure to register
said lien in the stock and transfer books of Chemphil as mandated by the rule laid down by
the Samahang Magsasaka v. Chua Guan. 48
The attachment lien acquired by the consortium is valid and effective. Both the Revised
Rules of Court and the Corporation Code do not require annotation in the corporation's stock
and transfer books for the attachment of shares of stock to be valid and binding on the
corporation and third party.
Section 74 of the Corporation Code which enumerates the instances where registration in the
stock and transfer books of a corporation provides:
Sec. 74. Books to be kept; stock transfer agent.
xxx xxx xxx
Stock corporations must also keep a book to be known as the stock and
transfer book, in which must be kept a record of all stocks in the names of
the stockholders alphabetically arranged; the installments paid and unpaid
on all stock for which subscription has been made, and the date of payment
of any settlement; a statement of every alienation, sale or transfer of stock
made, the date thereof, and by and to whom made; and such other entries
as the by-laws may prescribe. The stock and transfer book shall be kept in
the principal office of the corporation or in the office of its stock transfer
agent and shall be open for inspection by any director or stockholder of the
corporation at reasonable hours on business days. (Emphasis ours.)
xxx xxx xxx
Section 63 of the same Code states:
Sec. 63. Certificate of stock and transfer of shares. The capital stock of
stock corporations shall be divided into shares for which certificates signed
by the president or vice-president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the corporation shall be
issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of
the corporation so as to show the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the
number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation. (Emphasis ours.)
Are attachments of shares of stock included in the term "transfer" as provided in Sec. 63 of
the Corporation Code? We rule in the negative. As succinctly declared in the case
of Monserrat v. Ceron, 49 "chattel mortgage over shares of stock need not be registered in
the corporation's stock and transfer book inasmuch as chattel mortgage over shares of stock
does not involve a "transfer of shares," and that only absolute transfers of shares of stock are
required to be recorded in the corporation's stock and transfer book in order to have "force
and effect as against third persons."
xxx xxx xxx
The word "transferencia" (transfer) is defined by the "Diccionario de la
Academia de la Lengua Castellana" as "accion y efecto de transfeir" (the act
and effect of transferring); and the verb "transferir", as "ceder or renunciar en
otro el derecho o dominio que se tiene sobre una cosa, haciendole dueno de
ella" (to assign or waive the right in, or absolute ownership of, a thing in
favor of another, making him the owner thereof).
In the Law Dictionary of "Words and Phrases", third series, volume 7, p.
5867, the word "transfer" is defined as follows:
"Transfer" means any act by which property of one person
is vested in another, and "transfer of shares", as used in
Uniform Stock Transfer Act (Comp. St. Supp. 690), implies
any means whereby one may be divested of and another
acquire ownership of stock. (Wallach vs. Stein [N.J.], 136
A., 209, 210.)
xxx xxx xxx
In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127 Pac., 14, 17;
34 Okl., 662; 46 L.R.A. [N.S.], 455), cited in Words and Phrases, second
series, vol. 4, p. 978, the following appears:
A "transfer" is the act by which the owner of a thing delivers
it to another with the intent of passing the rights which he
has in it to the latter, and a chattel mortgage is not within the
meaning of such term.
xxx xxx xxx. 50
Although the Monserrat case refers to a chattel mortgage over shares of stock, the same
may be applied to the attachment of the disputed shares of stock in the present controversy
since an attachment does not constitute an absolute conveyance of property but is primarily
used as a means "to seize the debtor's property in order to secure the debt or claim of the
creditor in the event that a judgment is rendered." 51
Known commentators on the Corporation Code expound, thus:
xxx xxx xxx
Shares of stock being personal property, may be the subject matter of
pledge and chattel mortgage. Such collateral transfers are however not
covered by the registration requirement of Section 63, since our Supreme
Court has held that such provision applies only to absolute transfers thus,
the registration in the corporate books of pledges and chattel mortgages of
shares cannot have any legal effect. 52 (Emphasis ours.)
xxx xxx xxx
The requirement that the transfer shall be recorded in the books of the
corporation to be valid as against third persons has reference only to
absolute transfers or absolute conveyance of the ownership or title to a
share.
Consequently, the entry or notation on the books of the corporation of
pledges and chattel mortgages on shares is not necessary to their validity
(although it is advisable to do so) since they do not involve absolute
alienation of ownership of stock (Monserrat vs. Ceron, 58 Phil. 469 [1933];
Chua Guan vs. Samahang Magsasaka, Inc., 62 Phil. 472 [1935].) To affect
third persons, it is enough that the date and description of the shares
pledged appear in a public instrument. (Art. 2096, Civil Code.) With respect
to a chattel mortgage constituted on shares of stock, what is necessary is its
registration in the Chattel Mortgage Registry. (Act No. 1508 and Art. 2140,
Civil Code.) 53
CEIC's reliance on the Samahang Magsasaka case is misplaced. Nowhere in the said
decision was it categorically stated that annotation of the attachment in the corporate books
is mandatory for its validity and for the purpose of giving notice to third persons.
The only basis, then, for petitioner CEIC's claim is the Deed of Sale under which it purchased
the disputed shares. It is, however, a settled rule that a purchaser of attached property
acquires it subject to an attachment legally and validly levied thereon. 54
Our corollary inquiry is whether or not the consortium has indeed a prior valid and existing
attachment lien over the disputed shares.
Jaime Gonzales' /Consortium's Claim
Is the consortium's attachment lien over the disputed shares valid?
CEIC vigorously argues that the consortium's writ of attachment over the disputed shares of
Chemphil is null and void, insisting as it does, that the notice of garnishment was not validly
served on the designated officers on 19 July 1985.
To support its contention, CEIC presented the sheriff's notice of garnishment 55 dated 19
July 1985 which showed on its face that said notice was received by one Thelly Ruiz who
was neither the president nor managing agent of Chemphil. It makes no difference, CEIC
further avers, that Thelly Ruiz was the secretary of the President of Chemphil, for under the
above-quoted provision she is not among the officers so authorized or designated to be
served with the notice of garnishment.
We cannot subscribe to such a narrow view of the rule on proper service of writs of
attachment.
A secretary's major function is to assist his or her superior. He/she is in effect an extension of
the latter. Obviously, as such, one of her duties is to receive letters and notices for and in
behalf of her superior, as in the case at bench. The notice of garnishment was addressed to
and was actually received by Chemphil's president through his secretary who formally
received it for him. Thus, in one case, 56 we ruled that the secretary of the president may be
considered an "agent" of the corporation and held that service of summons on him is binding
on the corporation.
Moreover, the service and receipt of the notice of garnishment on 19 July 1985 was duly
acknowledged and confirmed by the corporate secretary of Chemphil, Rolando Navarro and
his successor Avelino Cruz through their respective certifications dated 15 August
1989 57 and 21 August 1989. 58
We rule, therefore, that there was substantial compliance with Sec. 7(d), Rule 57 of the Rules
of Court.
Did the compromise agreement between Antonio Garcia and the consortium discharge the
latter's attachment lien over the disputed shares?
CEIC argues that a writ of attachment is a mere auxiliary remedy which, upon the dismissal
of the case, dies a natural death. Thus, when the consortium entered into a compromise
agreement, 59 which resulted in the termination of their case, the disputed shares were
released from garnishment.
We disagree. To subscribe to CEIC's contentions would be to totally disregard the concept
and purpose of a preliminary attachment.
A writ of preliminary attachment is a provisional remedy issued upon order of
the court where an action is pending to be levied upon the property or
properties of the defendant therein, the same to be held thereafter by the
Sheriff as security for the satisfaction of whatever judgment might be
secured in said action by the attaching creditor against the
defendant. 60 (Emphasis ours.)
Attachment is a juridical institution which has for its purpose to secure the
outcome of the trial, that is, the satisfaction of the pecuniary obligation really
contracted by a person or believed to have been contracted by him, either by
virtue of a civil obligation emanating from contract or from law, or by virtue of
some crime or misdemeanor that he might have committed, and the writ
issued, granted it, is executed by attaching and safely keeping all the
movable property of the defendant, or so much thereof may be sufficient to
satisfy the plaintiff's demands . . . 61 (Emphasis ours.)
The chief purpose of the remedy of attachment is to secure a contingent lien
on defendant's property until plaintiff can, by appropriate proceedings, obtain
a judgment and have such property applied to its satisfaction, or to make
some provision for unsecured debts in cases where the means of
satisfaction thereof are liable to be removed beyond the jurisdiction, or
improperly disposed of or concealed, or otherwise placed beyond the reach
of creditors. 62 (Emphasis ours.)
We reiterate the rule laid down in BF Homes, Inc. v. CA 63 that an attachment lien continues
until the debt is paid, or sale is had under execution issued on the judgment or until judgment
is satisfied, or the attachment discharged or vacated in the same manner provided by law.
We expounded in said case that:
The appointment of a rehabilitation receiver who took control and custody of
BF has not necessarily secured the claims of Roa and Mendoza. In the
event that the receivership is terminated with such claims not having been
satisfied, the creditors may also find themselves without security therefor in
the civil action because of the dissolution of the attachment. This should not
be permitted. Having previously obtained the issuance of the writ in good
faith, they should not be deprived of its protection if the rehabilitation plan
does not succeed and the civil action is resumed.
xxx xxx xxx
As we ruled in Government of the Philippine Islands v. Mercado:
Attachment is in the nature of a proceeding in rem. It is
against the particular property. The attaching creditor
thereby acquires specific lien upon the attached property
which ripens into a judgment against the res when the order
of sale is made. Such a proceeding is in effect a finding that
the property attached is an indebted thing and a virtual
condemnation of it to pay the owner's debt. The law does
not provide the length of time an attachment lien shall
continue after the rendition of judgment, and it must
therefore necessarily continue until the debt is paid, or sale
is had under execution issued on the judgment or until
judgment is satisfied, or the attachment discharged or
vacated in some manner provided by law.
It has been held that the lien obtained by attachment stands
upon as high equitable grounds as a mortgage lien:
The lien or security obtained by an attachment even before
judgment, is a fixed and positive security, a specific lien,
and, although whether it will ever be made available to the
creditor depends on contingencies, its existence is in no
way contingent, conditioned or inchoate. It is a vested
interest, an actual and substantial security, affording specific
security for satisfaction of the debt put in suit, which
constitutes a cloud on the legal title, and is as specific as if
created by virtue of a voluntary act of the debtor and stands
upon as high equitable grounds as a mortgage. (Corpus
Juris Secundum, 433, and authorities therein cited.)
xxx xxx xxx
The case at bench admits of a peculiar character in the sense that it involves a compromise
agreement. Nonetheless, the rule established in the aforequoted cases still applies, even
more so since the terms of the agreement have to be complied with in full by the parties
thereto. The parties to the compromise agreement should not be deprived of the protection
provided by an attachment lien especially in an instance where one reneges on his
obligations under the agreement, as in the case at bench, where Antonio Garcia failed to hold
up his own end of the deal, so to speak.
Moreover, a violation of the terms and conditions of a compromise agreement entitles the
aggrieved party to a writ of execution.
In Abenojar & Tana v. CA, et al., 64 we held:
The non-fulfillment of the terms and conditions of a compromise agreement
approved by the Court justifies execution thereof and the issuance of the writ
for said purpose is the Court's ministerial duty enforceable by mandamus.
Likewise we ruled in Canonizado v. Benitez: 65
A judicial compromise may be enforced by a writ of execution. If a party fails
or refuses to abide by the compromise, the other party may enforce the
compromise or regard it as rescinded and insist upon his original demand.
If we were to rule otherwise, we would in effect create a back door by which a debtor can
easily escape his creditors. Consequently, we would be faced with an anomalous situation
where a debtor, in order to buy time to dispose of his properties, would enter into a
compromise agreement he has no intention of honoring in the first place. The purpose of the
provisional remedy of attachment would thus be lost. It would become, in analogy, a
declawed and toothless tiger.
From the foregoing, it is clear that the consortium and/or its assignee Jaime Gonzales have
the better right over the disputed shares. When CEIC purchased the disputed shares from
Antonio Garcia on 15 July 1988, it took the shares subject to the prior, valid and existing
attachment lien in favor of and obtained by the consortium.
Forum Shopping in G.R. No. 113394
We uphold the decision of the Court of Appeals finding PCIB guilty of forum-shopping. 66
The Court of Appeals opined:
True it is, that petitioner PCIB was not a party to the appeal made by the four
other banks belonging to the consortium, but equally true is the rule that
where the rights and liabilities of the parties appealing are so interwoven and
dependent on each other as to be inseparable, a reversal of the appealed
decision as to those who appealed, operates as a reversal to all and will
inure to the benefit of those who did not join the appeal (Tropical Homes vs.
Fortun, 169 SCRA 80, p. 90, citing Alling vs. Wenzel, 133 111. 264-278; 4
C.J. 1206). Such principal, premised upon communality of interest of the
parties, is recognized in this jurisdiction (Director of Lands vs. Reyes, 69
SCRA 415). The four other banks which were part of the consortium, filed
their notice of appeal under date of March 16, 1990, furnishing a copy
thereof upon the lawyers of petitioner. The petition for certiorari in the
present case was filed on April 10, 1990, long after the other members of the
consortium had appealed from the assailed order of December 19, 1989.
We view with skepticism PCIB's contention that it did not join the consortium because it
"honestly believed thatcertiorari was the more efficacious and speedy relief available under
the circumstances." 67 Rule 65 of the Revised Rules of Court is not difficult to
understand. Certiorari is available only if there is no appeal or other plain, speedy and
adequate remedy in the ordinary course of law. Hence, in instituting a separate petition
for certiorari, PCIB has deliberately resorted to forum-shopping.
PCIB cannot hide behind the subterfuge that Supreme Court Circular 28-91 was not yet in
force when it filed thecertiorari proceedings in the Court of Appeals. The rule against forum-
shopping has long been established. 68Supreme Court Circular 28-91 merely formalized the
prohibition and provided the appropriate penalties against transgressors.
It alarms us to realize that we have to constantly repeat our warning against forum-shopping.
We cannot over-emphasize its ill-effects, one of which is aptly demonstrated in the case at
bench where we are confronted with two divisions of the Court of Appeals issuing
contradictory decisions 69 one in favor of CEIC and the other in favor of the
consortium/Jaime Gonzales.
Forum-shopping or the act of a party against whom an adverse judgment has been rendered
in one forum, of seeking another (and possibly favorable) opinion in another forum (other
than by appeal or the special civil action of certiorari), or the institution of two (2) or more
actions or proceedings grounded on the same cause on the supposition that one or the other
court would make a favorable disposition, 70 has been characterized as an act of malpractice
that is prohibited and condemned as trifling with the Courts and abusing their processes. It
constitutes improper conduct which tends to degrade the administration of justice. It has also
been aptly described as deplorable because it adds to the congestion of the already heavily
burdened dockets of the courts. 71
WHEREFORE, premises considered the appealed decision in G.R. Nos. 112438-39 is
hereby AFFIRMED and the appealed decision in G.R. No. 113394, insofar as it adjudged the
CEIC the rightful owner of the disputed shares, is hereby REVERSED. Moreover, for
wantonly resorting to forum-shopping, PCIB is hereby REPRIMANDED and WARNED that a
repetition of the same or similar acts in the future shall be dealt with more severely.
SO ORDERED.

G.R. NO. 139802 December 10, 2002
VICENTE C. PONCE, petitioner, vs. ALSONS CEMENT CORPORATION, and FRANCISCO
M. GIRON, JR., respondents.
D E C I S I O N
QUISUMBING, J.:
This petition for review seeks to annul the decision1 of the Court of Appeals, in CA-G.R. SP
No. 46692, which set aside the decision2 of the Securities and Exchange Commission (SEC)
En Banc in SEC-AC No. 545 and reinstated the order3 of the Hearing Officer dismissing
herein petitioners complaint. Also assailed is the CAs resolution4 of August 10, 1999,
denying petitioners motion for reconsideration.
On January 25, 1996, plaintiff (now petitioner) Vicente C. Ponce, filed a complaint5 with the
SEC for mandamus and damages against defendants (now respondents) Alsons Cement
Corporation and its corporate secretary Francisco M. Giron, Jr. In his complaint, petitioner
alleged, among others, that:
x x x
5. The late Fausto G. Gaid was an incorporator of Victory Cement Corporation
(VCC), having subscribed to and fully paid 239,500 shares of said corporation.
6. On February 8, 1968, plaintiff and Fausto Gaid executed a "Deed of Undertaking"
and "Indorsement" whereby the latter acknowledges that the former is the owner of
said shares and he was therefore assigning/endorsing the same to the plaintiff. A
copy of the said deed/indorsement is attached as Annex "A".
7. On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC for brevity).
8. On October 22, 1990, FCC was renamed Alsons Cement Corporation (ACC for
brevity) as shown by the Amended Articles of Incorporation of ACC, a copy of which
is attached as Annex "B".
9. From the time of incorporation of VCC up to the present, no certificates of stock
corresponding to the 239,500 subscribed and fully paid shares of Gaid were issued
in the name of Fausto G. Gaid and/or the plaintiff.
10. Despite repeated demands, the defendants refused and continue to refuse
without any justifiable reason to issue to plaintiff the certificates of stocks
corresponding to the 239,500 shares of Gaid, in violation of plaintiffs right to secure
the corresponding certificate of stock in his name.6
Attached to the complaint was the Deed of Undertaking and Indorsement7 upon which
petitioner based his petition for mandamus. Said deed and indorsement read as follows:
DEED OF UNDERTAKING
KNOW ALL MEN BY THESE PRESENTS:
I, VICENTE C. PONCE, is the owner of the total subscription of Fausto Gaid with Victory
Cement Corporation in the total amount of TWO HUNDRED THIRTY NINE THOUSAND
FIVE HUNDRED (P239,500.00) PESOS and that Fausto Gaid does not have any liability
whatsoever on the subscription agreement in favor of Victory Cement Corporation.
(SGD.) VICENTE C. PONCE
February 8, 1968
CONFORME:
(SGD.) FAUSTO GAID
INDORSEMENT
I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY NINE
THOUSAND FIVE HUNDRED (239,500.00) stocks of Victory Cement Corporation to
VICENTE C. PONCE.
(SGD.) FAUSTO GAID
With these allegations, petitioner prayed that judgment be rendered ordering respondents (a)
to issue in his name certificates of stocks covering the 239,500 shares of stocks and its legal
increments and (b) to pay him damages.8
Instead of filing an answer, respondents moved to dismiss the complaint on the grounds that:
(a) the complaint states no cause of action; mandamus is improper and not available to
petitioner; (b) the petitioner is not the real party in interest; (c) the cause of action is barred by
the statute of limitations; and (d) in any case, the petitioners cause of action is barred by
laches.9 They argued, inter alia, that there being no allegation that the alleged
"INDORSEMENT" was recorded in the books of the corporation, said indorsement by Gaid to
the plaintiff of the shares of stock in questionassuming that the indorsement was in fact a
transfer of stockswas not valid against third persons such as ALSONS under Section 63 of
the Corporation Code.10 There was, therefore, no specific legal duty on the part of the
respondents to issue the corresponding certificates of stock, and mandamus will not lie.11
Petitioner filed his opposition to the motion to dismiss on February 19, 1996 contending that:
(1) mandamus is the proper remedy when a corporation and its corporate secretary
wrongfully refuse to record a transfer of shares and issue the corresponding certificates of
stocks; (2) he is the proper party in interest since he stands to be benefited or injured by a
judgment in the case; (3) the statute of limitations did not begin to run until defendant refused
to issue the certificates of stock in favor of the plaintiff on April 13, 1992.
After respondents filed their reply, SEC Hearing Officer Enrique L. Flores, Jr. granted the
motion to dismiss in an Order dated February 29, 1996, which held that:
x x x
Insofar as the issuance of certificates of stock is concerned, the real party in interest is
Fausto G. Gaid, or his estate or his heirs. Gaid was an incorporator and an original
stockholder of the defendant corporation who subscribed and fully paid for 239,500 shares of
stock (Annex "B"). In accordance with Section 37 of the old Corporation Law (Act No. 1459)
obtaining in 1968 when the defendant corporation was incorporated, as well as Section 64 of
the present Corporation Code (Batas Pambansa Blg. 68), a stockholder who has fully paid for
his subscription together with interest and expenses in case of delinquent shares, is entitled
to the issuance of a certificate of stock for his shares. According to paragraph 9 of the
Complaint, no stock certificate was issued to Gaid.
Comes now the plaintiff who seeks to step into the shoes of Gaid and thereby become a
stockholder of the defendant corporation by demanding issuance of the certificates of stock in
his name. This he cannot do, for two reasons: there is no record of any assignment or
transfer in the books of the defendant corporation, and there is no instruction or authority
from the transferor (Gaid) for such assignment or transfer. Indeed, nothing is alleged in the
complaint on these two points.
x x x
In the present case, there is not even any indorsement of any stock certificate to speak of.
What the plaintiff possesses is a document by which Gaid supposedly transferred the shares
to him. Assuming the document has this effect, nevertheless there is neither any allegation
nor any showing that it is recorded in the books of the defendant corporation, such recording
being a prerequisite to the issuance of a stock certificate in favor of the transferee.12
Petitioner appealed the Order of dismissal. On January 6, 1997, the Commission En Banc
reversed the appealed Order and directed the Hearing Officer to proceed with the case. In
ruling that a transfer or assignment of stocks need not be registered first before it can take
cognizance of the case to enforce the petitioners rights as a stockholder, the Commission En
Banc cited our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987) to the effect that:
xxx As the SEC maintains, "There is no requirement that a stockholder of a corporation must
be a registered one in order that the Securities and Exchange Commission may take
cognizance of a suit seeking to enforce his rights as such stockholder". This is because the
SEC by express mandate has "absolute jurisdiction, supervision and control over all
corporations" and is called upon to enforce the provisions of the Corporation Code, among
which is the stock purchasers right to secure the corresponding certificate in his name under
the provisions of Section 63 of the Code. Needless to say, any problem encountered in
securing the certificates of stock representing the investment made by the buyer must be
expeditiously dealt with through administrative mandamus proceedings with the SEC, rather
than through the usual tedious regular court procedure. xxx
Applying this principle in the case on hand, a transfer or assignment of stocks need not be
registered first before the Commission can take cognizance of the case to enforce his rights
as a stockholder. Also, the problem encountered in securing the certificates of stock made by
the buyer must be expeditiously taken up through the so-called administrative mandamus
proceedings with the SEC than in the regular courts.13
The Commission En Banc also found that the Hearing Officer erred in holding that petitioner
is not the real party in interest.
x x x
As appearing in the allegations of the complaint, plaintiff-appellant is the transferee of the
shares of stock of Gaid and is therefore entitled to avail of the suit to obtain the proper
remedy to make him the rightful owner and holder of a stock certificate to be issued in his
name. Moreover, defendant-appellees failed to show that the transferor nor his heirs have
refuted the ownership of the transferee. Assuming these allegations to be true, the
corporation has a mere ministerial duty to register in its stock and transfer book the shares of
stock in the name of the plaintiff-appellant subject to the determination of the validity of the
deed of assignment in the proper tribunal. 14
Their motion for reconsideration having been denied, herein respondents appealed the
decision15 of the SEC En Banc and the resolution16 denying their motion for reconsideration
to the Court of Appeals.
In its decision, the Court of Appeals held that in the absence of any allegation that the
transfer of the shares between Fausto Gaid and Vicente C. Ponce was registered in the stock
and transfer book of ALSONS, Ponce failed to state a cause of action. Thus, said the CA,
"the complaint for mandamus should be dismissed for failure to state a cause of
action."17 petitioners motion for reconsideration was likewise denied in a resolution18 dated
August 10, 1999.
Hence, the instant petition for review on certiorari alleging that:
I. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE
COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK FILED BY
PETITIONER FAILED TO STATE A CAUSE OF ACTION BECAUSE IT DID NOT
ALLEGE THAT THE TRANSFER OF THE SHARES (SUBJECT MATTER OF THE
COMPLAINT) WAS REGISTERED IN THE STOCK AND TRANSFER BOOK OF
THE CORPORATION, CITING SECTION 63 OF THE CORPORATION CODE.
II. THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE
CASES OF "ABEJO VS. DE LA CRUZ", 149 SCRA 654 AND "RURAL BANK OF
SALINAS, INC., ET AL VS. COURT OF APPEALS, ET AL.", G.R. NO. 96674, JUNE
26, 1992.
III. THE HONORABLE COURT OF APPEALS ERRED IN APPLYING A 1911
CASE, "HAGER VS. BRYAN", 19 PHIL. 138, TO DISMISS THE COMPLAINT FOR
ISSUANCE OF A CERTIFICATE OF STOCK.19
At issue is whether the Court of Appeals erred in holding that herein petitioner has no cause
of action for a writ of mandamus.
Petitioner first contends that the act of recording the transfer of shares in the stock and
transfer book and that of issuing a certificate of stock for the transferred shares involves only
one continuous process. Thus, when a corporate secretary is presented with a document of
transfer of fully paid shares, it is his duty to record the transfer in the stock and transfer book
of the corporation, issue a new stock certificate in the name of the transferee, and cancel the
old one. A transferee who requests for the issuance of a stock certificate need not spell out
each and every act that needs to be done by the corporate secretary, as a request for
issuance of stock certificates necessarily includes a request for the recording of the transfer.
Ergo, the failure to record the transfer does not mean that the transferee cannot ask for the
issuance of stock certificates.
Secondly, according to petitioner, there is no law, rule or regulation requiring a transferor of
shares of stock to first issue express instructions or execute a power of attorney for the
transfer of said shares before a certificate of stock is issued in the name of the transferee and
the transfer registered in the books of the corporation. He contends that Hager vs. Bryan, 19
Phil. 138 (1911), and Rivera vs. Florendo, 144 SCRA 643 (1986), cited by respondents, do
not apply to this case. These cases contemplate a situation where a certificate of stock has
been issued by the company whereas in this case at bar, no stock certificates have been
issued even in the name of the original stockholder, Fausto Gaid.
Finally, petitioner maintains that since he is under no compulsion to register the transfer or to
secure stock certificates in his name, his cause of action is deemed not to have accrued until
respondent ALSONS denied his request.
Respondents, in their comment, maintain that the transfer of shares of stock not recorded in
the stock and transfer book of the corporation is non-existent insofar as the corporation is
concerned and no certificate of stock can be issued in the name of the transferee. Until the
recording is made, the transfer cannot be the basis of issuance of a certificate of stock. They
add that petitioner is not the real party in interest, the real party in interest being Fausto Gaid
since it is his name that appears in the records of the corporation. They conclude that
petitioners cause of action is barred by prescription and laches since 24 years elapsed
before he made any demand upon ALSONS.
We find the instant petition without merit. The Court of Appeals did not err in ruling that
petitioner had no cause of action, and that his petition for mandamus was properly dismissed.
There is no question that Fausto Gaid was an original subscriber of respondent corporations
239,500 shares. This is clear from the numerous pleadings filed by either party. It is also
clear from the Amended Articles of Incorporation20 approved on August 9, 199521 that each
share had a par value of P1.00 per share. And, it is undisputed that petitioner had not made a
previous request upon the corporate secretary of ALSONS, respondent Francisco M. Giron
Jr., to record the alleged transfer of stocks.
The Corporation Code states that:
SEC. 63. Certificate of stock and transfer of shares.The capital stock of stock corporations
shall be divided into shares for which certificates signed by the president or vice-president,
countersigned by the secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates indorsed
by the owner or his attorney-in-fact or other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates and the
number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable
in the books of the corporation.
Pursuant to the foregoing provision, a transfer of shares of stock not recorded in the stock
and transfer book of the corporation is non-existent as far as the corporation is
concerned.22 As between the corporation on the one hand, and its shareholders and third
persons on the other, the corporation looks only to its books for the purpose of determining
who its shareholders are.23 It is only when the transfer has been recorded in the stock and
transfer book that a corporation may rightfully regard the transferee as one of its
stockholders. From this time, the consequent obligation on the part of the corporation to
recognize such rights as it is mandated by law to recognize arises.
Hence, without such recording, the transferee may not be regarded by the corporation as one
among its stockholders and the corporation may legally refuse the issuance of stock
certificates in the name of the transferee even when there has been compliance with the
requirements of Section 6424 of the Corporation Code. This is the import of Section 63 which
states that "No transfer, however, shall be valid, except between the parties, until the transfer
is recorded in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates and the
number of shares transferred." The situation would be different if the petitioner was himself
the registered owner of the stock which he sought to transfer to a third party, for then he
would be entitled to the remedy of mandamus.25
From the corporations point of view, the transfer is not effective until it is recorded. Unless
and until such recording is made the demand for the issuance of stock certificates to the
alleged transferee has no legal basis. As between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for the
purpose of determining who its shareholders are.26 In other words, the stock and transfer
book is the basis for ascertaining the persons entitled to the rights and subject to the liabilities
of a stockholder. Where a transferee is not yet recognized as a stockholder, the corporation
is under no specific legal duty to issue stock certificates in the transferees name.
It follows that, as held by the Court of Appeals:
x x x until registration is accomplished, the transfer, though valid between the parties, cannot
be effective as against the corporation. Thus, in the absence of any allegation that the
transfer of the shares between Gaid and the private respondent [herein petitioner] was
registered in the stock and transfer book of the petitioner corporation, the private respondent
has failed to state a cause of action.27
Petitioner insists that it is precisely the duty of the corporate secretary, when presented with
the document of fully paid shares, to effect the transfer by recording the transfer in the stock
and transfer book of the corporation and to issue stock certificates in the name of the
transferee. On this point, the SEC En Banc cited Rural Bank of Salinas, Inc. vs. Court of
Appeals, 28 where we held that:
For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its
stock and transfer book, which duty is ministerial on its part, is to render nugatory and
ineffectual the spirit and intent of Section 63 of the Corporation Code. Thus, respondent
Court of Appeals did not err in upholding the decision of respondent SEC affirming the
Decision of its Hearing Officer directing the registration of the 473 shares in the stock and
transfer book in the names of private respondents. At all events, the registration is without
prejudice to the proceedings in court to determine the validity of the Deeds of Assignment of
the shares of stock in question.
In Rural Bank of Salinas, Inc., however, private respondent Melania Guerrero had a Special
Power of Attorney executed in her favor by Clemente Guerrero, the registered stockholder. It
gave Guerrero full authority to sell or otherwise dispose of the 473 shares of stock registered
in Clementes name and to execute the proper documents therefor. Pursuant to the authority
so given, Melania assigned the 473 shares of stock owned by Guerrero and presented to the
Rural Bank of Salinas the deeds of assignment covering the assigned shares. Melania
Guerrero prayed for the transfer of the stocks in the stock and transfer book and the issuance
of stock certificates in the name of the new owners thereof. Based on those circumstances,
there was a clear duty on the part of the corporate secretary to register the 473 shares in
favor of the new owners, since the person who sought the transfer of shares had express
instructions from and specific authority given by the registered stockholder to cause the
disposition of stocks registered in his name.
That cannot be said of this case. The deed of undertaking with indorsement presented by
petitioner does not establish, on its face, his right to demand for the registration of the
transfer and the issuance of certificates of stocks. In Hager vs. Bryan, 19 Phil. 138 (1911),
this Court held that a petition for mandamus fails to state a cause of action where it appears
that the petitioner is not the registered stockholder and there is no allegation that he holds
any power of attorney from the registered stockholder, from whom he obtained the stocks, to
make the transfer, thus:
It appears, however, from the original as well as the amended petition, that this petitioner is
not the registered owner of the stock which he seeks to have transferred, and except in so far
as he alleges that he is the owner of the stock and that it was "indorsed" to him on February
5 by the Bryan-Landon Company, in whose name it is registered on the books of the Visayan
Electric Company, there is no allegation that the petitioner holds any power of attorney from
the Bryan-Landon Company authorizing him to make demand on the secretary of the
Visayan Electric Company to make the transfer which petitioner seeks to have made through
the medium of the mandamus of this court.
Without discussing or deciding the respective rights of the parties which might be properly
asserted in an ordinary action or an action in the nature of an equitable suit, we are all
agreed that in a case such as that at bar, a mandamus should not issue to compel the
secretary of a corporation to make a transfer of the stock on the books of the company,
unless it affirmatively appears that he has failed or refused so to do, upon the demand either
of the person in whose name the stock is registered, or of some person holding a power of
attorney for that purpose from the registered owner of the stock. There is no allegation in the
petition that the petitioner or anyone else holds a power of attorney from the Bryan-Landon
Company authorizing a demand for the transfer of the stock, or that the Bryan-Landon
Company has ever itself made such demand upon the Visayan Electric Company, and in the
absence of such allegation we are not able to say that there was such a clear indisputable
duty, such a clear legal obligation upon the respondent, as to justify the issuance of the writ
to compel him to perform it.
Under the provisions of our statute touching the transfer of stock (secs. 35 and 36 of Act No.
1459),29 the mere indorsement of stock certificates does not in itself give to the indorsee
such a right to have a transfer of the shares of stock on the books of the company as will
entitle him to the writ of mandamus to compel the company and its officers to make such
transfer at his demand, because, under such circumstances the duty, the legal obligation, is
not so clear and indisputable as to justify the issuance of the writ. As a general rule and
especially under the above-cited statute, as between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for the
purpose of determining who its shareholders are, so that a mere indorsee of a stock
certificate, claiming to be the owner, will not necessarily be recognized as such by the
corporation and its officers, in the absence of express instructions of the registered owner to
make such transfer to the indorsee, or a power of attorney authorizing such transfer.30
In Rivera vs. Florendo, 144 SCRA 643, 657 (1986), we reiterated that a mere indorsement by
the supposed owners of the stock, in the absence of express instructions from them, cannot
be the basis of an action for mandamus and that the rights of the parties have to be threshed
out in an ordinary action. That Hager and Rivera involved petitions for mandamus to compel
the registration of the transfer, while this case is one for issuance of stock, is of no moment. It
has been made clear, thus far, that before a transferee may ask for the issuance of stock
certificates, he must first cause the registration of the transfer and thereby enjoy the status of
a stockholder insofar as the corporation is concerned. A corporate secretary may not be
compelled to register transfers of shares on the basis merely of an indorsement of stock
certificates. With more reason, in our view, a corporate secretary may not be compelled to
issue stock certificates without such registration.31
Petitioners reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987), that notice
given to the corporation of the sale of the shares and presentation of the certificates for
transfer is equivalent to registration is misplaced. In this case there is no allegation in the
complaint that petitioner ever gave notice to respondents of the alleged transfer in his favor.
Moreover, that case arose between and among the principal stockholders of the corporation,
Pocket Bell, due to the refusal of the corporate secretary to record the transfers in favor of
Telectronics of the corporations controlling 56% shares of stock which were covered by duly
endorsed stock certificates. As aforesaid, the request for the recording of a transfer is
different from the request for the issuance of stock certificates in the transferees name.
Finally, in Abejo we did not say that transfer of shares need not be recorded in the books of
the corporation before the transferee may ask for the issuance of stock certificates. The
Courts statement, that "there is no requirement that a stockholder of a corporation must be a
registered one in order that the Securities and Exchange Commission may take cognizance
of a suit seeking to enforce his rights as such stockholder among which is the stock
purchasers right to secure the corresponding certificate in his name,"32 was addressed to
the issue of jurisdiction, which is not pertinent to the issue at hand.
Absent an allegation that the transfer of shares is recorded in the stock and transfer book of
respondent ALSONS, there appears no basis for a clear and indisputable duty or clear legal
obligation that can be imposed upon the respondent corporate secretary, so as to justify the
issuance of the writ of mandamus to compel him to perform the transfer of the shares to
petitioner. The test of sufficiency of the facts alleged in a petition is whether or not, admitting
the facts alleged, the court could render a valid judgment thereon in accordance with the
prayer of the petition.33 This test would not be satisfied if, as in this case, not all the
elements of a cause of action are alleged in the complaint.34 Where the corporate secretary
is under no clear legal duty to issue stock certificates because of the petitioners failure to
record earlier the transfer of shares, one of the elements of the cause of action for
mandamus is clearly missing.
That petitioner was under no obligation to request for the registration of the transfer is not in
issue. It has no pertinence in this controversy. One may own shares of corporate stock
without possessing a stock certificate. In Tan vs. SEC, 206 SCRA 740 (1992), we had
occasion to declare that a certificate of stock is not necessary to render one a stockholder in
a corporation. But a certificate of stock is the tangible evidence of the stock itself and of the
various interests therein. The certificate is the evidence of the holders interest and status in
the corporation, his ownership of the share represented thereby. The certificate is in law, so
to speak, an equivalent of such ownership. It expresses the contract between the corporation
and the stockholder, but it is not essential to the existence of a share in stock or the creation
of the relation of shareholder to the corporation.35 In fact, it rests on the will of the
stockholder whether he wants to be issued stock certificates, and a stockholder may opt not
to be issued a certificate. In Won vs. Wack Wack Golf and Country Club, Inc., 104 Phil. 466
(1958), we held that considering that the law does not prescribe a period within which the
registration should be effected, the action to enforce the right does not accrue until there has
been a demand and a refusal concerning the transfer. In the present case, petitioners
complaint for mandamus must fail, not because of laches or estoppel, but because he had
alleged no cause of action sufficient for the issuance of the writ.
WHEREFORE, the petition is DENIED for lack of merit. The decision of the Court of Appeals,
in CA-G.R. SP No. 46692, which set aside that of the Securities and Exchange Commission
En Banc in SEC-AC No. 545 and reinstated the order of the Hearing Officer, is hereby
AFFIRMED.
No pronouncement as to costs.
SO ORDERED.













G.R. No. L-56655 July 25, 1983
DATU TAGORANAO BENITO, petitioner, vs. SECURITIES AND EXCHANGE
COMMISSION and JAMIATUL PHILIPPINE-AL ISLAMIA, INC., respondents.
RELOVA, J.:
On February 6, 1959, the Articles of Incorporation of respondent Jamiatul Philippine-Al
Islamia, Inc. (originally Kamilol Islam Institute, Inc.) were filed with the Securities and
Exchange Commission (SEC) and were approved on December 14, 1962. The corporation
had an authorized capital stock of P200,000.00 divided into 20,000 shares at a par value of
P10.00 each. Of the authorized capital stock, 8,058 shares worth P80,580.00 were
subscribed and fully paid for. Herein petitioner Datu Tagoranao Benito subscribed to 460
shares worth P4,600.00.
On October 28, 1975, the respondent corporation filed a certificate of increase of its capital
stock from P200,000.00 to P1,000,000.00. It was shown in said certificate that P191,560.00
worth of shares were represented in the stockholders' meeting held on November 25, 1975 at
which time the increase was approved. Thus, P110,980.00 worth of shares were
subsequently issued by the corporation from the unissued portion of the authorized capital
stock of P200,000.00. Of the increased capital stock of P1,000,000.00, P160,000.00 worth of
shares were subscribed by Mrs. Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in
Alonto.
On November 18, 1976, petitioner Datu Tagoranao filed with respondent Securities and
Exchange Commission a petition alleging that the additional issue (worth P110,980.00) of
previously subscribed shares of the corporation was made in violation of his pre-emptive right
to said additional issue and that the increase in the authorized capital stock of the corporation
from P200,000.00 to P1,000,000.00 was illegal considering that the stockholders of record
were not notified of the meeting wherein the proposed increase was in the agenda. Petitioner
prayed that the additional issue of shares of previously authorized capital stock as well as the
shares issued from the increase in capital stock of respondent corporation be cancelled; that
the secretary of respondent corporation be ordered to register the 2,540 shares acquired by
him (petitioner) from Domocao Alonto and Moki-in Alonto; and that the corporation be
ordered to render an accounting of funds to the stockholders.
In their answer, respondents denied the material allegations of the petition and, by way of
special defense, claimed that petitioner has no cause of action and that the stock certificates
covering the shares alleged to have been sold to petitioner were only given to him as
collateral for the loan of Domocao Alonto and Moki-in Alonto.
On July 11, 1980, Hearing Officer Ledor E. Macalalag of the Securities and Exchange
Commission, after due proceedings, rendered a decision which was affirmed by the
Commission En Banc during its executive session held on March 9, 1981, as follows:
RESOLVED, That the decision of the hearing Officer in SEC Case No. 1392,
dated July 11, 1980, the dispositive portion of which reads as follows:
WHEREFORE, in view of the foregoing considerations, this
Commission hereby rules: (a) That the issuance by the corporation
of its unissued shares was validly made and was not subject to the
pre-emptive rights of stockholders, including the petitioner, herein;
(b) That there is no sufficient legal basis to set aside the certificate
issued by this Commission authorizing the increase in capital stock
of respondent corporation from P200,000.00 to Pl,000,000.00.
Considering, however, that petitioner has not waived his pre-emptive
right to subscribe to the increased capitalization, respondent
corporation is hereby directed to allow petitioner to subscribe
thereto, at par value, proportionate to his present shareholdings,
adding thereto the 2,540 shares transferred to him by Mr. Domocao
Alonto and Mrs. Moki-in Alonto; (c) To direct as it hereby directs, the
respondent corporation to immediately cancel Certificates of Stock
Nos. 216, 223, 302, all in the name of Domocao Alonto, and
Certificate of Stock No. 217, in the name of Moki-in Alonto, upon
their presentation by the petitioner and to issue new certificates
corresponding thereto in the name of petitioner herein; (d) To direct,
as it hereby directs, respondent corporation to religiously comply
with the requirement of filing annual financial statements under pain
of a more drastic action; (e) To declare, as it hereby declares, as
irregular, the election of the nine (9) members of the Board of
Trustees of respondent corporation on October 30, 1976, for which
reason, respondent corporation is hereby ordered to call a
stockholders' meeting to elect a new set of five (5) members of the
Board of Trustees, unless in the meantime the said number is
accordingly increased and the requirement of law to make such
increase effective have been complied with. It is understood that the
said stockholders' meeting be called within thirty (30) days from the
time petitioner shall have subscribed to the increased capitalization.'
be, as the same is hereby AFFIRMED, the same being in accordance with
law and the facts of the case. (pp. 28-29, Reno)
Hence, this petition for review by way of appeal from the aforementioned decision of the
Securities and Exchange Commission, petitioner contending that (1) the issuance of the
11,098 shares without the consent of the stockholders or of the Board of Directors, and in the
absence of consideration, is null and void; (2) the increase in the authorized capital stock
from P200,000.00 to P1,000,000.00 without the consent or express waiver of the
stockholders, is null and void; (3) he is entitled to attorneys' fees, damages and expenses of
litigation in filing this suit against the directors of respondent corporation.
We are not persuaded. As aptly stated by the Securities and Exchange Commission in its
decision:
xxx xxx xxx
... the questioned issuance of the unsubscribed portion of the capital stock
worth P110,980.00 is ' not invalid even if assuming that it was made without
notice to the stockholders as claimed by petitioner. The power to issue
shares of stocks in a corporation is lodged in the board of directors and no
stockholders' meeting is necessary to consider it because additional
issuance of shares of stocks does not need approval of the stockholders.
The by-laws of the corporation itself states that 'the Board of Trustees shall,
in accordance with law, provide for the issue and transfer of shares of stock
of the Institute and shall prescribe the form of the certificate of stock of the
Institute. (Art. V, Sec. 1).
Petitioner bewails the fact that in view of the lack of notice to him of such
subsequent issuance, he was not able to exercise his right of pre-emption
over the unissued shares. However, the general rule is that pre-emptive right
is recognized only with respect to new issue of shares, and not with respect
to additional issues of originally authorized shares. This is on the theory that
when a corporation at its inception offers its first shares, it is presumed to
have offered all of those which it is authorized to issue. An original
subscriber is deemed to have taken his shares knowing that they form a
definite proportionate part of the whole number of authorized shares. When
the shares left unsubscribed are later re-offered, he cannot therefore claim a
dilution of interest. (Campos and Lopez-Campos Selected Notes and Cases
on Corporation Law, p. 855, citing Yasik V. Wachtel 25 Del. Ch. 247,17A. 2d
308 (1941). (pp. 33-34, Rollo)
With respect to the claim that the increase in the authorized capital stock was without the
consent, expressed or implied, of the stockholders, it was the finding of the Securities and
Exchange Commission that a stockholders' meeting was held on November 25,1975,
presided over by Mr. Ahmad Domocao Alonto, Chairman of the Board of Trustees and,
among the many items taken up then were the change of name of the corporation from
Kamilol Islam Institute Inc. to Jamiatul Philippine-Al Islamia, Inc., the increase of its capital
stock from P200,000.00 to P1,000,000.00, and the increase of the number of its Board of
Trustees from five to nine. "Despite the insistence of petitioner, this Commission is inclined to
believe that there was a stockholders' meeting on November 25, 1975 which approved the
increase. The petitioner had not sufficiently overcome the evidence of respondents that such
meeting was in fact held. What petitioner successfully proved, however, was the fact that he
was not notified of said meeting and that he never attended the same as he was out of the
country at the time. The documentary evidence of petitioner conclusively proved that he was
attending the Mecca pilgrimage when the meeting was held on November 25, 1975. (Exhs.
'Q', 'Q-14', 'R', 'S' and 'S-l'). While petitioner doubts the authenticity of the alleged minutes of
the proceedings (Exh. '4'), the Commission notes with significance that said minutes contain
numerous details of various items taken up therein that would negate any claim that it was
not authentic. Another thing that petitioner was able to disprove was the allegation in the
certificate of increase (Exh. 'E-l') that all stockholders who did not subscribe to the increase of
capital stock have waived their pre-emptive right to do so. As far as the petitioner is
concerned, he had not waived his pre-emptive right to subscribe as he could not have done
so for the reason that he was not present at the meeting and had not executed a waiver,
thereof. Not having waived such right and for reasons of equity, he may still be allowed to
subscribe to the increased capital stock proportionate to his present shareholdings." (pp. 36-
37, Rollo)
Well-settled is the rule that the findings of facts of administrative bodies will not be interfered
with by the courts in the absence of grave abuse of discretion on the part of said agencies, or
unless the aforementioned findings are not supported by substantial evidence. (Gokongwei,
Jr. vs. SEC, 97 SCRA 78). In a long string of cases, the Supreme Court has consistently
adhered to the rule that decisions of administrative officers are not to be disturbed by the
courts except when the former have acted without or in excess of their jurisdiction or with
grave abuse of discretion (Sichangco vs. Board of Commissioners of Immigration, 94 SCRA
61). Thus, in the case ofDeluao vs. Casteel ( L-21906, Dec. 24, 1968, 26 SCRA 475, 496,
citing Pajo vs. Ago, et al., L-15414, June 30, 1960) and Genitano vs. Secretary of Agriculture
and Natural Resources, et al. (L-2ll67, March 31, 1966), the Supreme Court held that:
... Findings of fact by an administrative board or official, following a hearing,
are binding upon the courts and win not be disturbed except where the
board or official has gone beyond his statutory authority, exercised
unconstitutional powers or clearly acted arbitrarily and without regard to his
duty or with grave abuse of discretion. ...
ACCORDINGLY, this petition is hereby dismissed for lack of merit.
SO ORDERED.

















































G.R. No. 117604 March 26, 1997
CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, and VALLEY
GOLF and COUNTRY CLUB, INC., respondents.
KAPUNAN, J.:
Through a petition for review on certiorari under Rule 45 of the Revised Rules of Court,
petitioner China Banking Corporation seeks the reversal of the decision of the Court of
Appeals dated 15 August 1994 nullifying the Securities and Exchange Commission's order
and resolution dated 4 June 1993 and 7 December 1993, respectively, for lack of jurisdiction.
Similarly impugned is the Court of Appeals' resolution dated 4 September 1994 which denied
petitioner's motion for reconsideration.
The case unfolds thus:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder of private
respondent Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged his Stock
Certificate No. 1219 to petitioner China Banking Corporation (CBC, for brevity). 1
On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned pledge
agreement be recorded in its books. 2
In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by
Calapatia in petitioner's favor was duly noted in its corporate books. 3
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment of
which was secured by the aforestated pledge agreement still existing between Calapatia and
petitioner. 4
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a petition for
extrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the
latter to conduct a public auction sale of the pledged stock. 5
On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure
proceedings and requested that the pledged stock be transferred to its (petitioner's) name
and the same be recorded in the corporate books. However, on 15 July 1985, VGCCI wrote
petitioner expressing its inability to accede to petitioner's request in view of Calapatia's
unsettled accounts with the club. 6
Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985
and petitioner emerged as the highest bidder at P20,000.00 for the pledged stock.
Consequently, petitioner was issued the corresponding certificate of sale. 7
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his
overdue account in the amount of P18,783.24. 8 Said notice was followed by a demand letter
dated 12 December 1985 for the same amount 9 and another notice dated 22 November
1986 for P23,483.24. 10
On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a
notice of auction sale of a number of its stock certificates, to be held on 10 December 1986 at
10:00 a.m. Included therein was Calapatia's own share of stock (Stock Certificate No. 1219).
Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of
his membership due to the sale of his share of stock in the 10 December 1986 auction. 11
On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock
Certificate No. 1219 by virtue of being the highest bidder in the 17 September 1985 auction
and requested that a new certificate of stock be issued in its name. 12
On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold
at the public auction held on 10 December 1986 for P25,000.00. 13
On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock and
thereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10
December 1986 auction and for the issuance of a new stock certificate in its name. 14
On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of
jurisdiction over the subject matter on the theory that it involves an intra-corporate dispute
and on 27 August 1990 denied petitioner's motion for reconsideration.
On 20 September 1990, petitioner filed a complaint with the Securities and Exchange
Commission (SEC) for the nullification of the sale of Calapatia's stock by VGCCI; the
cancellation of any new stock certificate issued pursuant thereto; for the issuance of a new
certificate in petitioner's name; and for damages, attorney's fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of
VGCCI, stating in the main that "(c)onsidering that the said share is delinquent, (VGCCI) had
valid reason not to transfer the share in the name of the petitioner in the books of (VGCCI)
until liquidation of
delinquency." 15 Consequently, the case was dismissed. 16
On 14 April 1992, Hearing Officer Perea denied petitioner's motion for reconsideration. 17
Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an
order reversing the decision of its hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner has a prior right
over the pledged share and because of pledgor's failure to pay the principal
debt upon maturity, appellant-petitioner can proceed with the foreclosure of
the pledged share.
WHEREFORE, premises considered, the Orders of January 3, 1992 and
April 14, 1992 are hereby SET ASIDE. The auction sale conducted by
appellee-respondent Club on December 10, 1986 is declared NULL and
VOID. Finally, appellee-respondent Club is ordered to issue another
membership certificate in the name of appellant-petitioner bank.
SO ORDERED. 18
VGCCI sought reconsideration of the abovecited order. However, the SEC denied the same
in its resolution dated 7 December 1993. 19
The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15
August 1994, the Court of Appeals rendered its decision nullifying and setting aside the
orders of the SEC and its hearing officer on ground of lack of jurisdiction over the subject
matter and, consequently, dismissed petitioner's original complaint. The Court of Appeals
declared that the controversy between CBC and VGCCI is not intra-corporate. It ruled as
follows:
In order that the respondent Commission can take cognizance of a case, the
controversy must pertain to any of the following relationships: (a) between
the corporation, partnership or association and the public; (b) between the
corporation, partnership or association and its stockholders, partners,
members, or officers; (c) between the corporation, partnership or association
and the state in so far as its franchise, permit or license to operate is
concerned, and (d) among the stockholders, partners or associates
themselves (Union Glass and Container Corporation vs. SEC, November 28,
1983, 126 SCRA 31). The establishment of any of the relationship
mentioned will not necessarily always confer jurisdiction over the dispute on
the Securities and Exchange Commission to the exclusion of the regular
courts. The statement made in Philex Mining Corp. vs. Reyes, 118 SCRA
602, that the rule admits of no exceptions or distinctions is not that absolute.
The better policy in determining which body has jurisdiction over a case
would be to consider not only the status or relationship of the parties but also
the nature of the question that is the subject of their controversy (Viray vs.
Court of Appeals, November 9, 1990, 191 SCRA 308, 322-323).
Indeed, the controversy between petitioner and respondent bank which
involves ownership of the stock that used to belong to Calapatia, Jr. is not
within the competence of respondent Commission to decide. It is not any of
those mentioned in the aforecited case.
WHEREFORE, the decision dated June 4, 1993, and order dated December
7, 1993 of respondent Securities and Exchange Commission (Annexes Y
and BB, petition) and of its hearing officer dated January 3, 1992 and April
14, 1992 (Annexes S and W, petition) are all nullified and set aside for lack
of jurisdiction over the subject matter of the case. Accordingly, the complaint
of respondent China Banking Corporation (Annex Q, petition) is
DISMISSED. No pronouncement as to costs in this instance.
SO ORDERED. 20
Petitioner moved for reconsideration but the same was denied by the Court of Appeals in its
resolution dated 5 October 1994. 21
Hence, this petition wherein the following issues were raised:
II
ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth
Division) GRAVELY ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993
AND ORDER DATED DECEMBER 07, 1993 OF THE SECURITIES AND
EXCHANGE COMMISSION EN BANC, AND WHEN IT DISMISSED THE
COMPLAINT OF PETITIONER AGAINST RESPONDENT VALLEY GOLF
ALL FOR LACK OF JURISDICTION OVER THE SUBJECT MATTER OF
THE CASE;
2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND
EXCHANGE COMMISSION EN BANC DATED JUNE 04, 1993 DESPITE
PREPONDERANT EVIDENCE SHOWING THAT PETITIONER IS THE
LAWFUL OWNER OF MEMBERSHIP CERTIFICATE NO. 1219 FOR ONE
SHARE OF RESPONDENT VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has jurisdiction over the controversy, the
regular courts or the SEC.
P. D. No. 902-A conferred upon the SEC the following pertinent powers:
Sec. 3. The Commission shall have absolute jurisdiction, supervision and
control over all corporations, partnerships or associations, who are the
grantees of primary franchises and/or a license or permit issued by the
government to operate in the Philippines, and in the exercise of its authority,
it shall have the power to enlist the aid and support of and to deputize any
and all enforcement agencies of the government, civil or military as well as
any private institution, corporation, firm, association or person.
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corporations, partnerships and
other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
a) Devices or schemes employed by or any acts of the board of
directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners, members
of associations or organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members
or associates, respectively; and between such corporation,
partnership or association and the State insofar as it concerns their
individual franchise or right to exist as such entity;
c) Controversies in the election or appointment of directors, trustees,
officers, or managers of such corporations, partnerships or
associations.
d) Petitions of corporations, partnerships or associations to be
declared in the state of suspension of payments in cases where the
corporation, partnership or association possesses property to cover
all of its debts but foresees the impossibility of meeting them when
they respectively fall due or in cases where the corporation,
partnership or association has no sufficient assets to cover its
liabilities, but is under the Management Committee created pursuant
to this Decree.
The aforecited law was expounded upon in Viray v. CA 22 and in the recent cases
of Mainland Construction Co., Inc. v.Movilla 23 and Bernardo v. CA, 24 thus:
. . . .The better policy in determining which body has jurisdiction over a case
would be to consider not only the status or relationship of the parties but also
the nature of the question that is the subject of their controversy.
Applying the foregoing principles in the case at bar, to ascertain which tribunal has
jurisdiction we have to determine therefore whether or not petitioner is a stockholder of
VGCCI and whether or not the nature of the controversy between petitioner and private
respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase of the subject share or
membership certificate at public auction by petitioner (and the issuance to it of the
corresponding Certificate of Sale) transferred ownership of the same to the latter and thus
entitled petitioner to have the said share registered in its name as a member of VGCCI. It is
readily observed that VGCCI did not assail the transfer directly and has in fact, in its letter of
27 September 1974, expressly recognized the pledge agreement executed by the original
owner, Calapatia, in favor of petitioner and has even noted said agreement in its corporate
books. 25 In addition, Calapatia, the original owner of the subject share, has not contested
the said transfer.
By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of VGCCI
and, therefore, the conflict that arose between petitioner and VGCCI aptly exemplies an intra-
corporate controversy between a corporation and its stockholder under Sec. 5(b) of P.D. 902-
A.
An important consideration, moreover, is the nature of the controversy between petitioner
and private respondent corporation. VGCCI claims a prior right over the subject share
anchored mainly on Sec. 3, Art VIII of its by-laws which provides that "after a member shall
have been posted as delinquent, the Board may order his/her/its share sold to satisfy the
claims of the Club. . ." 26 It is pursuant to this provision that VGCCI also sold the subject
share at public auction, of which it was the highest bidder. VGCCI caps its argument by
asserting that its corporate by-laws should prevail. The bone of contention, thus, is the proper
interpretation and application of VGCCI's aforequoted by-laws, a subject which irrefutably
calls for the special competence of the SEC.
We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz 27:
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in
administrative commissions and boards the power to resolve specialized
disputes in the field of labor (as in corporations, public transportation and
public utilities) ruled that Congress in requiring the Industrial Court's
intervention in the resolution of labor-management controversies likely to
cause strikes or lockouts meant such jurisdiction to be exclusive, although it
did not so expressly state in the law. The Court held that under the "sense-
making and expeditious doctrine of primary jurisdiction . . . the courts cannot
or will not determine a controversy involving a question which is within the
jurisdiction of an administrative tribunal, where the question demands the
exercise of sound administrative discretion requiring the special knowledge,
experience, and services of the administrative tribunal to determine technical
and intricate matters of fact, and a uniformity of ruling is essential to comply
with the purposes of the regulatory statute administered.
In this era of clogged court dockets, the need for specialized administrative
boards or commissions with the special knowledge, experience and
capability to hear and determine promptly disputes on technical matters or
essentially factual matters, subject to judicial review in case of grave abuse
of discretion, has become well nigh indispensable. Thus, in 1984, the Court
noted that "between the power lodged in an administrative body and a court,
the unmistakable trend has been to refer it to the former. 'Increasingly, this
Court has been committed to the view that unless the law speaks clearly and
unequivocably, the choice should fall on [an administrative agency.]'" The
Court in the earlier case of Ebon v. De Guzman, noted that the lawmaking
authority, in restoring to the labor arbiters and the NLRC their jurisdiction to
award all kinds of damages in labor cases, as against the previous P.D.
amendment splitting their jurisdiction with the regular courts, "evidently, . . .
had second thoughts about depriving the Labor Arbiters and the NLRC of
the jurisdiction to award damages in labor cases because that setup would
mean duplicity of suits, splitting the cause of action and possible conflicting
findings and conclusions by two tribunals on one and the same claim."
In this case, the need for the SEC's technical expertise cannot be over-emphasized involving
as it does the meticulous analysis and correct interpretation of a corporation's by-laws as well
as the applicable provisions of the Corporation Code in order to determine the validity of
VGCCI's claims. The SEC, therefore, took proper cognizance of the instant case.
VGCCI further contends that petitioner is estopped from denying its earlier position, in the
first complaint it filed with the RTC of Makati (Civil Case No. 90-1112) that there is no intra-
corporate relations between itself and VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals, 28 this Court, through Mr. Justice Isagani A. Cruz, declared
that:
It follows that as a rule the filing of a complaint with one court which has no
jurisdiction over it does not prevent the plaintiff from filing the same
complaint later with the competent court. The plaintiff is not estopped from
doing so simply because it made a mistake before in the choice of the
proper forum. . . .
We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically
stated (in its motion to dismiss) that the case between itself and petitioner is intra-corporate
and insisted that it is the SEC and not the regular courts which has jurisdiction. This is
precisely the reason why the said court dismissed petitioner's complaint and led to
petitioner's recourse to the SEC.
Having resolved the issue on jurisdiction, instead of remanding the whole case to the Court of
Appeals, this Court likewise deems it procedurally sound to proceed and rule on its merits in
the same proceedings.
It must be underscored that petitioner did not confine the instant petition for review
on certiorari on the issue of jurisdiction. In its assignment of errors, petitioner specifically
raised questions on the merits of the case. In turn, in its responsive pleadings, private
respondent duly answered and countered all the issues raised by petitioner.
Applicable to this case is the principle succinctly enunciated in the case of Heirs of Crisanta
Y. Gabriel-Almoradie v. Court of Appeals, 29 citing Escudero v. Dulay 30 and The Roman
Catholic Archbishop of Manila v. Court of Appeals. 31
In the interest of the public and for the expeditious administration of justice
the issue on infringement shall be resolved by the court considering that this
case has dragged on for years and has gone from one forum to another.
It is a rule of procedure for the Supreme Court to strive to settle the entire
controversy in a single proceeding leaving no root or branch to bear the
seeds of future litigation. No useful purpose will be served if a case or the
determination of an issue in a case is remanded to the trial court only to
have its decision raised again to the Court of Appeals and from there to the
Supreme Court.
We have laid down the rule that the remand of the case or of an issue to the
lower court for further reception of evidence is not necessary where the
Court is in position to resolve the dispute based on the records before it and
particularly where the ends of justice would not be subserved by the remand
thereof. Moreover, the Supreme Court is clothed with ample authority to
review matters, even those not raised on appeal if it finds that their
consideration is necessary in arriving at a just disposition of the case.
In the recent case of China Banking Corp., et al. v. Court of Appeals, et al., 32 this Court,
through Mr. Justice Ricardo J. Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that since the filing of
this suit before the trial court, none of the substantial issues have been
resolved. To avoid and gloss over the issues raised by the parties, as what
the trial court and respondent Court of Appeals did, would unduly prolong
this litigation involving a rather simple case of foreclosure of mortgage.
Undoubtedly, this will run counter to the avowed purpose of the rules, i.e., to
assist the parties in obtaining just, speedy and inexpensive determination of
every action or proceeding. The Court, therefore, feels that the central issues
of the case, albeit unresolved by the courts below, should now be settled
specially as they involved pure questions of law. Furthermore, the pleadings
of the respective parties on file have amply ventilated their various positions
and arguments on the matter necessitating prompt adjudication.
In the case at bar, since we already have the records of the case (from the proceedings
before the SEC) sufficient to enable us to render a sound judgment and since only questions
of law were raised (the proper jurisdiction for Supreme Court review), we can, therefore,
unerringly take cognizance of and rule on the merits of the case.
The procedural niceties settled, we proceed to the merits.
VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's
favor. It contends that the same was null and void for lack of consideration because the
pledge agreement was entered into on 21 August
1974 33 but the loan or promissory note which it secured was obtained by Calapatia much
later or only on 3 August 1983.34
VGCCI's contention is unmeritorious.
A careful perusal of the pledge agreement will readily reveal that the contracting parties
explicitly stipulated therein that the said pledge will also stand as security for any future
advancements (or renewals thereof) that Calapatia (the pledgor) may procure from petitioner:
xxx xxx xxx
This pledge is given as security for the prompt payment when due of all
loans, overdrafts, promissory notes, drafts, bills or exchange, discounts, and
all other obligations of every kind which have heretofore been contracted, or
which may hereafter be contracted, by the PLEDGOR(S) and/or DEBTOR(S)
or any one of them, in favor of the PLEDGEE, including discounts of
Chinese drafts, bills of exchange, promissory notes, etc., without any further
endorsement by the PLEDGOR(S) and/or Debtor(s) up to the sum of
TWENTY THOUSAND (P20,000.00) PESOS, together with the accrued
interest thereon, as hereinafter provided, plus the costs, losses, damages
and expenses (including attorney's fees) which PLEDGEE may incur in
connection with the collection thereof. 35 (Emphasis ours.)
The validity of the pledge agreement between petitioner and Calapatia cannot thus be held
suspect by VGCCI. As candidly explained by petitioner, the promissory note of 3 August
1983 in the amount of P20,000.00 was but a renewal of the first promissory note covered by
the same pledge agreement.
VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had
the right to sell the share in question in accordance with the express provision found in its by-
laws.
Private respondent's insistence comes to naught. It is significant to note that VGCCI began
sending notices of delinquency to Calapatia after it was informed by petitioner (through its
letter dated 14 May 1985) of the foreclosure proceedings initiated against Calapatia's
pledged share, although Calapatia has been delinquent in paying his monthly dues to the
club since 1975. Stranger still, petitioner, whom VGCCI had officially recognized as the
pledgee of Calapatia's share, was neither informed nor furnished copies of these letters of
overdue accounts until VGCCI itself sold the pledged share at another public auction. By
doing so, VGCCI completely disregarded petitioner's rights as pledgee. It even failed to give
petitioner notice of said auction sale. Such actuations of VGCCI thus belie its claim of good
faith.
In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It
argues in this wise:
The general rule really is that third persons are not bound by the by-laws of a
corporation since they are not privy thereto (Fleischer v. Botica Nolasco, 47
Phil. 584). The exception to this is when third persons have actual or
constructive knowledge of the same. In the case at bar, petitioner had actual
knowledge of the by-laws of private respondent when petitioner foreclosed
the pledge made by Calapatia and when petitioner purchased the share
foreclosed on September 17, 1985. This is proven by the fact that prior
thereto, i.e., on May 14, 1985 petitioner even quoted a portion of private
respondent's by-laws which is material to the issue herein in a letter it wrote
to private respondent. Because of this actual knowledge of such by-laws
then the same bound the petitioner as of the time when petitioner purchased
the share. Since the by-laws was already binding upon petitioner when the
latter purchased the share of Calapatia on September 17, 1985 then the
petitioner purchased the said share subject to the right of the private
respondent to sell the said share for reasons of delinquency and the right of
private respondent to have a first lien on said shares as these rights are
provided for in the by-laws very very clearly. 36
VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.: 37
And moreover, the by-law now in question cannot have any effect on the
appellee. He had no knowledge of such by-law when the shares were
assigned to him. He obtained them in good faith and for a valuable
consideration. He was not a privy to the contract created by said by-law
between the shareholder Manuel Gonzales and the Botica Nolasco, Inc.
Said by-law cannot operate to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares without
first offering them to the corporation for a period of thirty days is not binding
upon an assignee of the stock as a personal contract, although his assignor
knew of the by-law and took part in its adoption. (10 Cyc., 579; Ireland vs.
Globe Milling Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer of corporate
stock, a purchaser is not affected by any contractual restriction of which he
had no notice. (Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber
Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one who has
assented to an unauthorized by-law has only the effect of a contract by, and
enforceable against, the assignor; the assignee is not bound by such by-law
by virtue of the assignment alone. (Ireland vs. Globe Milling Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers of stock shall not be
valid unless approved by the board of directors, while it may be enforced as
a reasonable regulation for the protection of the corporation against
worthless stockholders, cannot be made available to defeat the rights of third
persons. (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa,
336.) (Emphasis ours.)
In order to be bound, the third party must have acquired knowledge of the pertinent by-laws
at the time the transaction or agreement between said third party and the shareholder was
entered into, in this case, at the time the pledge agreement was executed. VGCCI could have
easily informed petitioner of its by-laws when it sent notice formally recognizing petitioner as
pledgee of one of its shares registered in Calapatia's name. Petitioner's belated notice of said
by-laws at the time of foreclosure will not suffice. The ruling of the SEC en banc is particularly
instructive:
By-laws signifies the rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions, affairs and
concerns and its stockholders or members and directors and officers with
relation thereto and among themselves in their relation to it. In other words,
by-laws are the relatively permanent and continuing rules of action adopted
by the corporation for its own government and that of the individuals
composing it and having the direction, management and control of its affairs,
in whole or in part, in the management and control of its affairs and activities.
(9 Fletcher 4166, 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define the duties of
the members towards the corporation and among themselves. They are self-
imposed and, although adopted pursuant to statutory authority, have no
status as public law. (Ibid.)
Therefore, it is the generally accepted rule that third persons are not bound
by by-laws, except when they have knowledge of the provisions either
actually or constructively. In the case of Fleisher v.Botica Nolasco, 47 Phil.
584, the Supreme Court held that the by-law restricting the transfer of shares
cannot have any effect on the transferee of the shares in question as he
"had no knowledge of such by-law when the shares were assigned to him.
He obtained them in good faith and for a valuable consideration. He was not
a privy to the contract created by the by-law between the shareholder . . .and
the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a
purchaser. (Emphasis supplied.)
By analogy of the above-cited case, the Commission en banc is of the
opinion that said case is applicable to the present controversy. Appellant-
petitioner bank as a third party can not be bound by appellee-respondent's
by-laws. It must be recalled that when appellee-respondent communicated to
appellant-petitioner bank that the pledge agreement was duly noted in the
club's books there was no mention of the shareholder-pledgor's unpaid
accounts. The transcript of stenographic notes of the June 25, 1991 Hearing
reveals that the pledgor became delinquent only in 1975. Thus, appellant-
petitioner was in good faith when the pledge agreement was contracted.
The Commission en banc also believes that for the exception to the general
accepted rule that third persons are not bound by by-laws to be applicable
and binding upon the pledgee, knowledge of the provisions of the VGCI By-
laws must be acquired at the time the pledge agreement was contracted.
Knowledge of said provisions, either actual or constructive, at the time of
foreclosure will not affect pledgee's right over the pledged share. Art. 2087 of
the Civil Code provides that it is also of the essence of these contracts that
when the principal obligation becomes due, the things in which the pledge or
mortgage consists maybe alienated for the payment to the creditor.
In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the
Commission issued an opinion to the effect that:
According to the weight of authority, the pledgee's right is
entitled to full protection without surrender of the certificate,
their cancellation, and the issuance to him of new ones, and
when done, the pledgee will be fully protected against a
subsequent purchaser who would be charged with
constructive notice that the certificate is covered by the
pledge. (12-A Fletcher 502)
The pledgee is entitled to retain possession of the stock
until the pledgor pays or tenders to him the amount due on
the debt secured. In other words, the pledgee has the right
to resort to its collateral for the payment of the debts. (Ibid,
502)
To cancel the pledged certificate outright and the issuance
of new certificate to a third person who purchased the same
certificate covered by the pledge, will certainly defeat the
right of the pledgee to resort to its collateral for the payment
of the debt. The pledgor or his representative or registered
stockholders has no right to require a return of the pledged
stock until the debt for which it was given as security is paid
and satisfied, regardless of the length of time which have
elapsed since debt was created. (12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities or liens in
favor either of the corporation or of third persons, if he has no notice thereof,
but not otherwise. He also takes it free of liens or claims that may
subsequently arise in favor of the corporation if it has notice of the pledge,
although no demand for a transfer of the stock to the pledgee on the
corporate books has been made. (12-A Fletcher 5634, 1982 ed., citing
Snyder v. Eagle Fruit Co., 75 F2d739) 38
Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws because of
Art. 2099 of the Civil Code which stipulates that the creditor must take care of the thing
pledged with the diligence of a good father of a family, fails to convince. The case of Cruz &
Serrano v. Chua A. H. Lee, 39 is clearly not applicable:
In applying this provision to the situation before us it must be borne in mind
that the ordinary pawn ticket is a document by virtue of which the property in
the thing pledged passes from hand to hand by mere delivery of the ticket;
and the contract of the pledge is, therefore, absolvable to bearer. It results
that one who takes a pawn ticket in pledge acquires domination over the
pledge; and it is the holder who must renew the pledge, if it is to be kept
alive.
It is quite obvious from the aforequoted case that a membership share is quite
different in character from a pawn ticket and to reiterate, petitioner was never
informed of Calapatia's unpaid accounts and the restrictive provisions in VGCCI's by-
laws.
Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against
which the corporation holds any unpaid claim shall be transferable in the books of the
corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid
claim arising from unpaid subscription, and not to any indebtedness which a subscriber or
stockholder may owe the corporation arising from any other transaction." 40 In the case at
bar, the subscription for the share in question has been fully paid as evidenced by the
issuance of Membership Certificate No. 1219. 41 What Calapatia owed the corporation were
merely the monthly dues. Hence, the aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court of Appeals is
REVERSED and the order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.
SO ORDERED.


















[G.R. No. L-28398. August 6, 1975.]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN L. MANNING, W.D.
McDONALD, E.E. SIMMONS and THE COURT OF TAX APPEALS, Respondents.
SYNOPSIS

Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common
shares of MANTRASCO, and the three private respondents who owned the rest, at 100
shares each, deposited all their shares with the Trustees. The trust agreement provided that
upon Reeses death MANTRASCO shall purchase Reeses shares. The trust agreement was
executed in view of Reeses desire that upon his death the Company would continue under
the management of respondents. Upon Reeses death and partial payment by the company
of Reesess share, a new certificate was issued in the name of MANTRASCO, and the
certificate indorsed to the Trustees. Subsequently, the stockholders reverted the 24,700
shares in the Treasury to the capital account of the company as stock dividends to be
distributed to the stockholders. When the entire purchase price of Reeses interest in the
company was paid in full by the latter, the trust agreement was terminated, and the shares
held in trust were delivered to the company.

The Bureau of Internal Revenue concluded that the distribution of the 24,700 shares of
Reese as stock dividends was in effect a distribution of the "assets or property of the
corporation." It therefore assessed respondents for deficiency income taxes as well as for
fraud penalty and interest charges. The Court of Tax Appeals absolved respondent from any
liability for receiving the questioned stock dividends on the ground that their respective one-
third interest in the Company remained the same before and after the declaration of the stock
dividends and only the number of shares held by each of them had changed.

On a petition for review, the Supreme Court held that the newly acquired shares were not
treasury shares; their declaration as treasury stock dividends was a complete nullity and that
the assessment by the Commissioner of fraud penalty and the imposition of interest charges
pursuant to the provision of the Tax Code were made in accordance with law.

Judgment of the Court of Tax Appeals se aside.

SYLLABUS

1. PRIVATE CORPORATIONS; SHARES OF STOCKS; TREASURY; SHARES. Treasury
shares are stocks issued and fully paid for and re-acquired by the corporation either by
purchase, donation, forfeiture or other means. They are therefore issued shares, but being in
the treasury they do not have the status of outstanding shares. Consequently, although a
treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or
sold again, such share, as long as it is held by the corporation as a treasury share,
participates neither in dividends, because dividends cannot be declared by the corporation to
itself, nor in the meetings of the corporations as voting stock, for otherwise equal distribution
of voting powers among stockholders will be effectively lost and the directors will be able to
perpetuate their control of the corporation though it still represent a paid for interest in the
property of the corporation.

2. ID.; ID.; ID.; DECLARATION OF QUESTIONED SHARES AS TREASURY STOCK
DIVIDENDS, A NULLITY. Where the manifest intention of the parties to the trust
agreement was, in sum and substance, to treat the shares of a deceased stockholder as
absolutely outstanding shares of said stockholders estate until they were fully paid. the
declaration of said shares as treasury stock dividend was a complete nullity and plainly
violative of public policy.


3. ID.; ID.; STOCK DIVIDEND PAYABLE ONLY FROM RETAINED EARNINGS. A stock
dividend, being one payable in capital stock, cannot be declared out of outstanding corporate
stock, but only from retained earnings.

4. ID.; ID.; PURCHASE OF HOLDING RESULTING IN DISTRIBUTION OF EARNINGS
TAXABLE. Where by the use of a trust instrument as a convenient technical device,
respondents bestowed unto themselves the full worth and value of a deceased stockholders
corporate holding acquired with the very earnings of the companies, such package device
which obviously is not designed to carry out the usual stock dividend purpose of corporate
expansion reinvestment, e.g., the acquisition of additional facilities and other capital budget
items, but exclusively for expanding the capital base of the surviving stockholders in the
company, cannot be allowed to deflect the latters responsibilities toward our income tax
laws. The conclusion is ineluctable that whenever the company parted with a portion of its
earnings "to buy" the corporate holdings of the deceased stockholders, it was in ultimate
effect and result making a distribution of such earnings to the surviving stockholders. All
these amounts are consequently subject to income tax as being, in truth and in fact, a flow of
cash benefits to the surviving stockholders.

5. ID.; ID.; ID.; COMMISSIONER ASSESSMENT BASED ON THE TOTAL ACQUISITION
COST OF THE ALLEGED TREASURY STOCK DIVIDENDS, ERROR. Where the
surviving stockholders, by resolution, partitioned among themselves, as treasury stock
dividends, the deceased stockholders interest, and earnings of the corporation over a period
of years were used to gradually wipe out the holdings therein of said deceased stockholder,
the earnings (which in effect have been distributed to the surviving stockholders when they
appropriated among themselves the deceased stockholders interest), should be taxed for
each of the corresponding years when payments were made to the deceaseds estate on
account of his shares. In other words, the Tax Commissioner may not asses the surviving
stockholders, for income tax purposes, the total acquisition cost of the alleged treasury stock
dividends in one lump sum. However, with regard to payment made with the corporations
earnings before the passage of the resolution declaring as stock dividends the deceased
stockholders interest (while indeed those earnings were utilized in those years to gradually
pay off the value of the deceased stockholders holdings), the surviving stockholders should
be liable (in the absence of evidence that prior to the passage of the stockholders resolution
the contributed of each of the surviving stockholder rose corresponding), for income tax
purposes, to the extent of the aggregate amount paid by the corporation (prior to such
resolution) to buy off the deceased stockholders shares. The reason is that it was only by
virtue of the authority contained in said resolution that the surviving stockholders actually,
albeit illegally, appropriated and petitioned among themselves the stockholders equity
representing the deceased stockholders interest.

6. TAXATION; INCOME TAX; ASSESSMENT OF FRAUD PENALTY AND IMPOSITION OF
INTEREST CHARGES IN ACCORDANCE WITH LAW DESPITE NULLITY OF
RESOLUTION AUTHORIZING DISTRIBUTION OF EARNINGS. The fact that the
resolution authorizing the distribution of earnings is null and void is of no moment. Under the
National Internal Revenue Code, income tax is assessed on income received from any
property, activity or service that produces income. The Tax Code stands as an indifferent,
neutral party on the matter of where the income comes from. The action taken by the
Commissioner of assessing fraud penalty and imposing interest charges pursuant to the
provisions of the Tax Code is in accordance with law.

D E C I S I O N

CASTRO, J.:

This is a petition for review of the decision of the Court of Tax Appeals, in CTA case 1626,
which set aside the income tax assessments issued by the Commissioner of Internal
Revenue against John L. Manning, W.D. McDonald and E.E. Simmons (hereinafter referred
to as the respondents), for alleged undeclared stock dividends received in 1958 from the
Manila Trading and Supply Co. (hereinafter referred to as the MANTRASCO) valued at
P7,973,660.
In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000
common shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares
each, by the three respondents.
On February 29, 1952, in view of Reeses desire that upon his death MANTRASCO and its
two subsidiaries, MANTRASCO (Guam), Inc. and the Port Motors, Inc., would continue under
the management of the respondents, a trust agreement on his and the respondents interests
in MANTRASCO was executed by and among Reese (therein referred to as OWNER),
MANTRASCO (therein referred to as COMPANY), the law firm of Ross, Selph, Carrascoso
and Janda (therein referred to as TRUSTEES), and the respondents (therein referred to as
MANAGERS).
The trust agreement pertinently provides as follows:
"1. Upon the execution of this agreement the OWNER shall deposit with the TRUSTEES,
duly endorsed and ready for transfer Twenty-Four Thousand Seven Hundred (24,700) shares
of the capital stock of the COMPANY, these shares being all shares of the capital stock of the
COMPANIES belonging to him . . .
"2. Upon the execution of this Agreement the MANAGERS shall deposit with the TRUSTEES,
duly endorsed and ready for transfer, all shares of the capital stock of the COMPANIES
belonging to any of them.
"3. (a) The OWNER and the MANAGERS, and each of them, agree that if any of them shall
at any time during the life of this trust acquire any additional shares of stock of any of the
COMPANIES, or of any successor company, or any shares in substitution, exchange or
replacement of the shares subject to this agreement, they shall forthwith endorse and deposit
such shares with the TRUSTEES hereunder and such additional or other shares shall
become subject to this agreement; shares deposited by the OWNER and shares received by
the TRUSTEES as stock dividends on, or in substitution, exchange or replacement of, such
shares so deposited under this agreement being MANAGERS SHARES.
"(b) All shares deposited under paragraphs 1, 2 and 3(a) hereof shall, during the life of the
OWNER, remain in the name of and shall be voted by the respective parties making the
deposit ...
"4. (a) Upon the death of the OWNER and the receipt by the TRUSTEES of the initial
payment from the company purchasing the OWNERS SHARES, the TRUSTEES shall cause
the OWNERS SHARES to be transferred into the name of such company and such company
shall thereupon transfer such shares into the name of the TRUSTEES and the TRUSTEES
shall hold such shares until payment for all such shares shall have been made by the
company as provided in this agreement.
x x x

"(c) The TRUSTEES shall vote all stock standing in their name or the name of their nominees
at all meetings and shall be in all respects entitled to all the rights as owners of said shares,
subject, however, to the provisions of this agreement of trust.
"(d) Any and all dividends paid on said shares after the death of the OWNER shall be subject
to the provisions of this agreement.
x x x

"5. (b) It is expressly agreed and understood, however, that the declaration of dividends and
amount of earnings transferred to surplus shall be subject to the approval of the TRUSTEES
and the TRUSTEES shall participate to such extent in the affairs of the COMPANIES as they
deem necessary to insure the carrying out of this agreement and the discharge of the
obligations of the COMPANIES and each of them and of the MANAGERS hereunder.
"(c) The TRUSTEES shall designate one or more directors of each of the COMPANIES as
they shall consider advisable and corresponding shares shall be transferred to such directors
to qualify them to act.
x x x

"8. (a) Upon the death of the OWNER, the COMPANIES or any one or more of them shall
purchase the OWNERS SHARES; it being the intent that any of the COMPANIES shall
purchase all or a proportionate part of the OWNERS SHARES . . .

"(b) The purchase price of such shares shall be the book value of such share computed in
United States dollars . . .
x x x
"(d) All dividends paid on stock that had been OWNERS SHARES, from the time of the
transfer of such shares by one or more of the COMPANIES to the TRUSTEES as provided in
Article 4 until payment in full for such OWNERS SHARES shall have been made by each of
the COMPANIES which shall have purchased the same, shall be credited as payments on
account of the purchase price of such shares and shall be a prepayment on account of the
next due installment or installments of such purchase price.
x x x

"12. The TRUSTEES may from time to time increase or decrease the unpaid balance of the
purchase price of the shares being purchased by any COMPANY or COMPANIES should
they in their exclusive discretion determine that such increase or decrease would be
necessary to carry out the intention of the parties that the Estate and heirs of the OWNER
shall receive the fair value of the shares deposited in Trust as such value existed at the date
of the death of the OWNER. . .
"13. Should the said COMPANIES or any of them be unable or unwilling to comply with their
obligations hereunder when due, the TRUSTEES may terminate this agreement and dispose
of all the shares of stock deposited hereunder, whether or not payment shall have been
made for part of such stock, applying the proceeds of such sale or disposition to the unpaid
balance of the purchase price:jgc:
"(a) If, upon any such sale or disposition of the stock, the TRUSTEES shall receive an
amount in excess of the unpaid balance of the purchase price agreed to be paid by the
COMPANIES for the OWNERS SHARES such excess, after deducting all expenses,
charges and taxes, shall be paid to the then MANAGERS.
x x x

"17. Until the delivery to him of the shares purchased by him, no MANAGER, shall sell,
assign, mortgage, pledge, transfer or in anywise encumber or hypothecate such shares or his
interest in this agreement.
x x x

"19. After the death of the OWNER and during the period of this trust the COMPANIES shall
pay no dividends except as may be authorized by the TRUSTEES. Dividends on
MANAGERS SHARES shall, so long as they shall not be in default under this agreement, be
paid over by the TRUSTEES to the MANAGERS. Dividends on OWNERS SHARES shall be
applied in liquidation of the COMPANIES liabilities hereunder as provided in Article 8(d).
x x x

"26. The TRUSTEES may, after the death of the OWNER and during the life of this trust, vote
any and all shares held in trust, at any general and special meeting of stockholders for all
purposes, including but not limited to wholly or partially liquidating or reducing the capital of
any COMPANY or COMPANIES, authorizing the sale of any or all assets, and election of
directors . . .
x x x

"28. The COMPANIES and each of them undertake and agree by proper corporate act to
reduce their capitalization, sell or encumber their assets, amend their articles of
incorporation, reorganize, liquidate, dissolve and do all other things the TRUSTEES in their
discretion determine to be necessary to enable them to comply with their obligations
hereunder and the TRUSTEES are hereby irrevocably authorized to vote all shares of the
COMPANIES and each of them at any general or special meeting for the accomplishment of
such purposes. . . ."cralaw virtua1aw library

On October 19, 1954 Reese died. The projected transfer of his shares in the name of
MANTRASCO could not, however, be immediately effected for lack of sufficient funds to
cover initial payment on the shares.

On February 2, 1955, after MANTRASCO made a partial payment of Reeses shares, the
certificate for the 24,700 shares in Reeses name was cancelled and a new certificate was
issued in the name of MANTRASCO. On the same date, and in the meantime that Reeses
interest had not been fully paid, the new certificate was endorsed to the law firm of Ross,
Selph, Carrascoso and Janda, as trustees for and in behalf of MANTRASCO.

On December 22, 1958, at a special meeting of MANTRASCO stockholders, the following
resolution was passed:jgc:

"RESOLVED, that the 24,700 shares in the Treasury be reverted back to the capital account
of the company as a stock dividend to be distributed to shareholders of record at the close of
business on December 22, 1958, in accordance with the action of the Board of Directors at
its meeting on December 19, 1958 which action is hereby approved and confirmed."
On November 25, 1963 the entire purchase price of Reeses interest in MANTRASCO was
finally paid in full by the latter, On May 4, 1964 the trust agreement was terminated and the
trustees delivered to MANTRASCO all the shares which they were holding in trust.

Meanwhile, on September 14, 1962, an examination of MANTRASCOs books was ordered
by the Bureau of Internal Revenue. The examination disclosed that (a) as of December 31,
1958 the 24,700 shares declared as dividends had been proportionately distributed to the
respondents, representing a total book value or acquisition cost of P7,973,660; (b) the
respondents failed to declare the said stock dividends as part of their taxable income for the
year 1958; and (c) from 1956 to 1961 the following amounts were paid by MANTRASCO to
Reeses estate by virtue of the trust agreement, to wit:

Amounts

Year Liabilities Paid

1956 P5,830,587.86 P 2,143,073.00

1957 5,317,137.86 513,450.00

1958 4,824,059.28 493,078.58

1959 4,319,420.14 504,639.14

1960 3,849,720.14 469,700.00

1961 3,811,387.69 38,332.45

On the basis of their examination, the BIR examiners concluded that the distribution of
Reeses shares as stock dividends was in effect a distribution of the "asset or property of the
corporation as may be gleaned from the payment of cash for the redemption of said stock
and distributing the same as stock dividend." On April 14, 1965 the Commissioner of Internal
Revenue issued notices of assessment for deficiency income taxes to the respondents for
the year 1958, as follows:

J.L. Manning W.D. McDonald E.E. Simmons

Deficiency Income Tax P1,416,469.00 P1,442,719.00 P1,450,434.00
Add 50% surcharge* 723,234.50 721,359.507 25,217.00

1/2% monthly interest from

6-20-59 to 6-20-62 260,364.42 259,689.42 261,078.12



TOTAL AMOUNT DUE

& COLLECTIBLE P2,430,067.92 P2,423,767.92 2,436,729.12

The respondents unsuccessfully challenged the foregoing assessments and, failing to secure
a favorable reconsideration, appealed to the Court of Tax Appeals.

On October 30, 1967 the CTA rendered judgment absolving the respondents from any
liability for receiving the questioned stock dividends on the ground that their respective one-
third interest in MANTRASCO remained the same before and after the declaration of stock
dividends and only the number of shares held by each of them had changed.

Hence, the present recourse.

All the parties rely upon the same provisions of the Tax Code and internal revenue
regulations to bolster their respective positions. These are:chanrob1es virtual 1aw library

A. National Internal Revenue Code

"SEC. 83. Distribution of dividends or assets by corporations (a) Definition of Dividends
The term dividends when used in this Title means any distribution made by a corporation to
its shareholders out of its earnings or profits accrued since March first, nineteen hundred and
thirteen, and payable to its shareholders, whether in money or in other property.

"Where a corporation distributes all of its assets in complete liquidation or dissolution the gain
realized or loss sustained by the stockholder, whether individual or corporate, is a taxable
income or deductible loss, as the case may be.

"(b) Stock dividend. A stock dividend representing the transfer of surplus to capital account
shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend,
the amount so distributed in redemption or cancellation of the stock shall be considered as
taxable income to the extent that it represents a distribution of earnings or profits
accumulated after March first, nineteen hundred and thirteen."

B. B.I.R. Regulations

"SEC. 251. Dividends paid in property. Dividends paid in securities or other property (other
than its own stock), in which the earnings of the corporation have been invested, are income
to the recipients to the amount of the full market value of such property when receivable by
individual stockholders . . .

"SEC. 252. Stock dividend. A stock dividend which represents the transfer of surplus to
capital account is not subject to income tax. However, a dividend in stock may constitute
taxable income to the recipients thereof notwithstanding the fact that the officers or directors
of the corporation (as defined in section 84) choose to call such distribution as a stock
dividend. The distinction between a stock dividend which does not, and one which does,
constitute income taxable to the shareholders is the distinction between a stock dividend
which works no change in the corporate entity, the same interest in the same corporation
being represented after the distribution by more shares of precisely the same character, and
a stock dividend where there either has been change of corporate identity or a change in the
nature of the shares issued as dividends whereby the proportional interest of the shareholder
after the distribution is essentially different from the former interest. A stock dividend
constitutes income if it gives the shareholder an interest different from that which his former
stockholdings represented. A stock dividend does not constitute income if the new shares
confer no different rights or interests than did the old the new certificate plus the old
representing the same proportionate interest in the net assets of the corporation as did the
old."

The parties differ, however, on the taxability of the "treasury" stock dividends received by the
respondents.

The respondents anchor their argument on the same basis as the Court of Tax Appeals;
whereas the Commissioner maintains that the full value (P7,973,660) of the shares
redeemed from Reese by MANTRASCO which were subsequently distributed to the
respondents as stock dividends in 1958 should be taxed as income of the respondents for
that year, the said distribution being in effect a distribution of cash. The respondents
interests in MANTRASCO, he further argues, were only .4% prior to the declaration of the
stock dividends in 1958, but rose to 33 1/3% each after the said declaration.

In submitting their respective contentions, it is the assumption of both parties that the 24,700
shares declared as stock dividends were treasury shares. We are however convinced, after a
careful study of the trust agreement, that the said shares were not, on December 22, 1958 or
at anytime before or after that date, treasury shares. The reasons are quite plain.

Although authorities may differ on the exact legal and accounting status of so-called "treasury
shares," 1 they are more or less in agreement that treasury shares are stocks issued and
fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or
other means. 2 Treasury shares are therefore issued shares, but being in the treasury they
do not have the status of outstanding shares. 3 Consequently, although a treasury share, not
having been retired by the corporation re-acquiring it, may be re-issued or sold again, such
share, as long as it is held by the corporation as a treasury share, participates neither in
dividends, because dividends cannot be declared by the corporation to itself, 4 nor in the
meetings of the corporation as voting stock, for otherwise equal distribution of voting powers
among stockholders will be effectively lost and the directors will be able to perpetuate their
control of the corporation, 5 though it still represents a paid-for interest in the property of the
corporation. 6 The foregoing essential features of a treasury stock are lacking in the
questioned shares. Thus,

(a) under paragraph 4(c) of the trust agreement, the trustees were authorized to vote all stock
standing in their names at all meetings and to exercise all rights "as owners of said shares"
this authority is reiterated in paragraphs 26 and 28 of the trust agreement;

(b) under paragraph 4(d), "Any and all dividends paid on said shares after the death of the
OWNER shall be subject to the provisions of this agreement;"

(c) under paragraph 5(b), the amount of retained earnings to be declared as dividends was
made subject to the approval of the trustees of the 24,700 shares;

(d) under paragraph 5(c), the choice of corporate directors was delegated exclusively to the
trustees who were also given the authority to transfer qualifying shares to such directors; and

(e) under paragraph 19, MANTRASCO and its two subsidiaries were expressly prohibited
from paying "dividends except as may be authorized by the TRUSTEES;" in the same
paragraph mention was also made of "dividends on OWNERS SHARES" which shall be
applied to the liquidation of the liabilities of the three companies for the price of Reeses
shares.

The manifest intention of the parties to the trust agreement was, in sum and substance, to
treat the 24,700 shares of Reese as absolutely outstanding shares of Reeses estate until
they were fully paid. Such being the true nature of the 24,700 shares, their declaration as
treasury stock dividend in 1958 was a complete nullity and plainly violative of public policy. A
stock dividend, being one payable in capital stock, cannot be declared out of outstanding
corporate stock, but only from retained earnings: 7

Of pointed relevance is this useful discussion of the nature of a stock dividend: 8

"A stock dividend always involves a transfer of surplus (or profit) to capital stock. Graham
and Katz, Accounting in Law Practice, 2d ed. 1938, No. 70. As the court said in United States
v. Siegel, 8 Cir., 1931, 52 F 2d 63, 65, 78 ALR 672: A stock dividend is a conversion of
surplus or undivided profits into capital stock, which is distributed to stockholders in lieu of a
cash dividend. Congress itself has defined the term dividend in No. 115(a) of the Act as
meaning any distribution made by a corporation to its shareholders, whether in money or in
other property, out of its earnings or profits. In Eisner v. Macomber, 1920, 252 US 189, 40 S
Ct 189, 64 L Ed 521, 9 ALR 1570, both the prevailing and the dissenting opinions recognized
that within the meaning of the revenue acts the essence of a stock dividend was the
segregation out of surplus account of a definite portion of the corporate earnings as part of
the permanent capital resources of the corporation by the device of capitalizing the same,
and the issuance to the stockholders of additional shares of stock representing the profits so
capitalized."cralaw virtua1aw library

The declaration by the respondents and Reeses trustees of MANTRASCOs alleged treasury
stock dividends in favor of the former, brings, however, into clear focus the ultimate purpose
which the parties to the trust instrument aimed to realize: to make the respondents the sole
owners of Reeses interest in MANTRASCO by utilizing the periodic earnings of that
company and its subsidiaries to directly subsidize their purchase of the said interests, and by
making it appear outwardly, through the formal declaration of non-existent stock dividends in
the treasury, that they have not received any income from those firms when, in fact, by that
declaration they secured to themselves the means to turn around as full owners of Reeses
shares. In other words, the respondents, using the trust instrument as a convenient technical
device, bestowed unto themselves the full worth and value of Reeses corporate holdings
with the use of the very earnings of the companies. Such package device, obviously not
designed to carry out the usual stock dividend purpose of corporate expansion reinvestment,
e.g. the acquisition of additional facilities and other capital budget items, but exclusively for
expanding the capital base of the respondents in MANTRASCO, cannot be allowed to deflect
the respondents responsibilities toward our income tax laws. The conclusion is thus
ineluctable that whenever the companies involved herein parted with a portion of their
earnings "to buy" the corporate holdings of Reese, they were in ultimate effect and result
making a distribution of such earnings to the respondents. All these amounts are
consequently subject to income tax as being, in truth and in fact, a flow of cash benefits to
the respondents.

We are of the opinion, however, that the Commissioner erred in assessing the respondents
the total acquisition cost (P7,973,660) of the alleged treasury stock dividends in one lump
sum. The record shows that the earnings of MANTRASCO over a period of years were used
to gradually wipe out the holdings therein of Reese. Consequently, those earnings, which we
hold, under the facts disclosed in the case at bar, as in effect having been distributed to the
respondents, should be taxed for each of the corresponding years when payments were
made to Reeses estate on account of his 24,700 shares. With regard to payments made with
MANTRASCO earnings in 1958 and the years before, while indeed those earnings were
utilized in those years to gradually pay off the value of Reeses holdings in MANTRASCO,
there is no evidence from which it can be inferred that prior to the passage of the
stockholders resolution of December 22, 1958 the contributed equity of each of the
respondents rose correspondingly. It was only by virtue of the authority contained in the said
resolution that the respondents actually, albeit illegally, appropriated and partitioned among
themselves the stockholders equity representing Reeses interests in MANTRASCO. As
those payments accrued in favor of the respondents in 1958 they are and should be liable,
for income tax purposes, to the extent of the aggregate amount paid, from 1955 to 1958, by
MANTRASCO to buy off Reeses shares.

The fact that the resolution authorizing the distribution of the said earnings is null and void is
of no moment. Under the National Internal Revenue Code, income tax is assessed on
income received from any property, activity or service that produces income. 9 The Tax Code
stands as an indifferent, neutral party on the matter of where the income comes from. 10

Subject to the foregoing qualifications, we find the action taken by the Commissioner in all
other respects that is, the assessment of a fraud penalty and imposition of interest
charges pursuant to the provisions of the Tax Code to be in accordance with law.

ACCORDINGLY, the judgment of the Court of Tax Appeals absolving the respondents from
any deficiency income tax liability is set aside, and this case is hereby remanded to the Court
of Tax Appeals for further proceedings. More specifically, the Court of Tax Appeals shall
recompute the income tax liabilities of the respondents in accordance with this decision and
with the Tax Code, and thereafter pronounce and enter judgment accordingly. No costs.

















G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner, vs. SECURITIES AND EXCHANGE COMMISSION,
ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS,
EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO,
SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R.
VISAYA, respondents.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of
preliminary injunction, arose out of two cases filed by petitioner with the Securities and
Exchange Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed
with the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of
amended by-laws, cancellation of certificate of filing of amended by- laws, injunction and
damages with prayer for a preliminary injunction" against the majority of the members of the
Board of Directors and San Miguel Corporation as an unwilling petitioner. The petition,
entitled "John Gokongwei Jr. vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel,
Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and
San Miguel Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual
respondents amended by bylaws of the corporation, basing their authority to do so on a
resolution of the stockholders adopted on March 13, 1961, when the outstanding capital
stock of respondent corporation was only P70,139.740.00, divided into 5,513,974 common
shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time
of the amendment, the outstanding and paid up shares totalled 30,127,047 with a total par
value of P301,270,430.00. It was contended that according to section 22 of the Corporation
Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal or
adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the
corporation, which 2/3 should have been computed on the basis of the capitalization at the
time of the amendment. Since the amendment was based on the 1961 authorization,
petitioner contended that the Board acted without authority and in usurpation of the power of
the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had already
been exercised in 1962 and 1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of Directors
had changed since the authority was given in 1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner
had all the qualifications to be a director of respondent corporation, being a Substantial
stockholder thereof; that as a stockholder, petitioner had acquired rights inherent in stock
ownership, such as the rights to vote and to be voted upon in the election of directors; and
that in amending the by-laws, respondents purposely provided for petitioner's disqualification
and deprived him of his vested right as afore-mentioned hence the amended by-laws are null
and void. 1
As additional causes of action, it was alleged that corporations have no inherent power to
disqualify a stockholder from being elected as a director and, therefore, the questioned act
is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing
other corporations, entered into contracts (specifically a management contract) with
respondent corporation, which was allowed because the questioned amendment gave the
Board itself the prerogative of determining whether they or other persons are engaged in
competitive or antagonistic business; that the portion of the amended bylaws which states
that in determining whether or not a person is engaged in competitive business, the Board
may consider such factors as business and family relationship, is unreasonable and
oppressive and, therefore, void; and that the portion of the amended by-laws which requires
that "all nominations for election of directors ... shall be submitted in writing to the Board of
Directors at least five (5) working days before the date of the Annual Meeting" is likewise
unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void and the
certificate of filing thereof be cancelled, and that individual respondents be made to pay
damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the Securities
and Exchange Commission an "Urgent Motion for Production and Inspection of Documents",
alleging that the Secretary of respondent corporation refused to allow him to inspect its
records despite request made by petitioner for production of certain documents enumerated
in the request, and that respondent corporation had been attempting to suppress information
from its stockholders despite a negative reply by the SEC to its query regarding their
authority to do so. Among the documents requested to be copied were (a) minutes of the
stockholder's meeting field on March 13, 1961, (b) copy of the management contract between
San Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of
San Miguel International, Inc.; (d) authority of the stockholders to invest the funds of
respondent corporation in San Miguel International, Inc.; and (e) lists of salaries, allowances,
bonuses, and other compensation, if any, received by Andres M. Soriano, Jr. and/or its
successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was opposed by
respondents, alleging, among others that the motion has no legal basis; that the demand is
not based on good faith; that the motion is premature since the materiality or relevance of the
evidence sought cannot be determined until the issues are joined, that it fails to show good
cause and constitutes continued harrasment, and that some of the information sought are not
part of the records of the corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel Corporation,
Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying
the substantial allegations therein and stating, by way of affirmative defenses that "the action
taken by the Board of Directors on September 18, 1976 resulting in the ... amendments is
valid and legal because the power to "amend, modify, repeal or adopt new By-laws"
delegated to said Board on March 13, 1961 and long prior thereto has never been revoked of
SMC"; that contrary to petitioner's claim, "the vote requirement for a valid delegation of the
power to amend, repeal or adopt new by-laws is determined in relation to the total subscribed
capital stock at the time the delegation of said power is made, not when the Board opts to
exercise said delegated power"; that petitioner has not availed of his intra-corporate remedy
for the nullification of the amendment, which is to secure its repeal by vote of the
stockholders representing a majority of the subscribed capital stock at any regular or special
meeting, as provided in Article VIII, section I of the by-laws and section 22 of the Corporation
law, hence the, petition is premature; that petitioner is estopped from questioning the
amendments on the ground of lack of authority of the Board. since he failed, to object to other
amendments made on the basis of the same 1961 authorization: that the power of the
corporation to amend its by-laws is broad, subject only to the condition that the by-laws
adopted should not be respondent corporation inconsistent with any existing law; that
respondent corporation should not be precluded from adopting protective measures to
minimize or eliminate situations where its directors might be tempted to put their personal
interests over t I hat of the corporation; that the questioned amended by-laws is a matter of
internal policy and the judgment of the board should not be interfered with: That the by-laws,
as amended, are valid and binding and are intended to prevent the possibility of violation of
criminal and civil laws prohibiting combinations in restraint of trade; and that the petition
states no cause of action. It was, therefore, prayed that the petition be dismissed and that
petitioner be ordered to pay damages and attorney's fees to respondents. The application for
writ of preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition,
denying the material averments thereof and stating, as part of their affirmative defenses, that
in August 1972, the Universal Robina Corporation (Robina), a corporation engaged in
business competitive to that of respondent corporation, began acquiring shares therein. until
September 1976 when its total holding amounted to 622,987 shares: that in October 1972,
the Consolidated Foods Corporation (CFC) likewise began acquiring shares in respondent
(corporation. until its total holdings amounted to P543,959.00 in September 1976; that on
January 12, 1976, petitioner, who is president and controlling shareholder of Robina and
CFC (both closed corporations) purchased 5,000 shares of stock of respondent corporation,
and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious
publicity campaign against SMC" to generate support from the stockholder "in his effort to
secure for himself and in representation of Robina and CFC interests, a seat in the Board of
Directors of SMC", that in the stockholders' meeting of March 18, 1976, petitioner was
rejected by the stockholders in his bid to secure a seat in the Board of Directors on the basic
issue that petitioner was engaged in a competitive business and his securing a seat would
have subjected respondent corporation to grave disadvantages; that "petitioner nevertheless
vowed to secure a seat in the Board of Directors at the next annual meeting; that thereafter
the Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages, expenses of
litigation and attorney's fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and
inspection of documents was filed by all the respondents. This was duly opposed by
petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were
allowed to intervene as oppositors and they accordingly filed their oppositions-intervention to
the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion for
production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in
part as follows:
Considering the evidence submitted before the Commission by the petitioner
and respondents in the above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection, copying and
photographing, by or on behalf of the petitioner-movant, John Gokongwei,
Jr., of the minutes of the stockholders' meeting of the respondent San Miguel
Corporation held on March 13, 1961, which are in the possession, custody
and control of the said corporation, it appearing that the same is material
and relevant to the issues involved in the main case. Accordingly, the
respondents should allow petitioner-movant entry in the principal office of the
respondent Corporation, San Miguel Corporation on January 14, 1977, at
9:30 o'clock in the morning for purposes of enforcing the rights herein
granted; it being understood that the inspection, copying and photographing
of the said documents shall be undertaken under the direct and strict
supervision of this Commission. Provided, however, that other documents
and/or papers not heretofore included are not covered by this Order and any
inspection thereof shall require the prior permission of this Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as the
list of salaries, allowances, bonuses, compensation and/or remuneration
received by respondent Jose M. Soriano, Jr. and Andres Soriano from San
Miguel International, Inc. and/or its successors-in- interest, the Petition to
produce and inspect the same is hereby DENIED, as petitioner-movant is
not a stockholder of San Miguel International, Inc. and has, therefore, no
inherent right to inspect said documents;
3. In view of the Manifestation of petitioner-movant dated November 29,
1976, withdrawing his request to copy and inspect the management contract
between San Miguel Corporation and A. Soriano Corporation and the
renewal and amendments thereof for the reason that he had already
obtained the same, the Commission takes note thereof; and
4. Finally, the Commission holds in abeyance the resolution on the matter of
production and inspection of the authority of the stockholders of San Miguel
Corporation to invest the funds of respondent corporation in San Miguel
International, Inc., until after the hearing on the merits of the principal issues
in the above-entitled case.
This Order is immediately executory upon its approval. 2
Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent
corporation issued a notice of special stockholders' meeting for the purpose of "ratification
and confirmation of the amendment to the By-laws", setting such meeting for February 10,
1977. This prompted petitioner to ask respondent Commission for a summary judgment
insofar as the first cause of action is concerned, for the alleged reason that by calling a
special stockholders' meeting for the aforesaid purpose, private respondents admitted the
invalidity of the amendments of September 18, 1976. The motion for summary judgment was
opposed by private respondents. Pending action on the motion, petitioner filed an "Urgent
Motion for the Issuance of a Temporary Restraining Order", praying that pending the
determination of petitioner's application for the issuance of a preliminary injunction and/or
petitioner's motion for summary judgment, a temporary restraining order be issued,
restraining respondents from holding the special stockholder's meeting as scheduled. This
motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion for
issuance of temporary restraining order. After receipt of the order of denial, respondents
conducted the special stockholders' meeting wherein the amendments to the by-laws were
ratified. On February 14, 1977, petitioner filed a consolidated motion for contempt and for
nullification of the special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's motion for summary judgment
was filed by petitioner before respondent Commission on March 10, 1977. Petitioner alleges
that up to the time of the filing of the instant petition, the said motion had not yet been
scheduled for hearing. Likewise, the motion for reconsideration of the order granting in part
and denying in part petitioner's motion for production of record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent corporation had been
scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation
stating that he intended to run for the position of director of respondent corporation.
Thereafter, respondents filed a Manifestation with respondent Commission, submitting a
Resolution of the Board of Directors of respondent corporation disqualifying and precluding
petitioner from being a candidate for director unless he could submit evidence on May 3,
1977 that he does not come within the disqualifications specified in the amendment to the by-
laws, subject matter of SEC Case No. 1375. By reason thereof, petitioner filed a
manifestation and motion to resolve pending incidents in the case and to issue a writ of
injunction, alleging that private respondents were seeking to nullify and render ineffectual the
exercise of jurisdiction by the respondent Commission, to petitioner's irreparable damage and
prejudice, Allegedly despite a subsequent Manifestation to prod respondent Commission to
act, petitioner was not heard prior to the date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part of the
SEC to act hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has been
investing corporate funds in other corporations and businesses outside of the primary
purpose clause of the corporation, in violation of section 17 1/2 of the Corporation Law, he
filed with respondent Commission, on January 20, 1977, a petition seeking to have private
respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the respondent
corporation declared guilty of such violation, and ordered to account for such investments
and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to which a
consolidated motion to strike and to declare individual respondents in default and an
opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact that said
motions were filed as early as February 4, 1977, the commission acted thereon only on April
25, 1977, when it denied respondents' motion to dismiss and gave them two (2) days within
which to file their answer, and set the case for hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting, including in the Agenda
thereof, the following:
6. Re-affirmation of the authorization to the Board of Directors by the
stockholders at the meeting on March 20, 1972 to invest corporate funds in
other companies or businesses or for purposes other than the main purpose
for which the Corporation has been organized, and ratification of the
investments thereafter made pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion
for the issuance of a writ of preliminary injunction to restrain private respondents from taking
up Item 6 of the Agenda at the annual stockholders' meeting, requesting that the same be set
for hearing on May 3, 1977, the date set for the second hearing of the case on the merits.
Respondent Commission, however, cancelled the dates of hearing originally scheduled and
reset the same to May 16 and 17, 1977, or after the scheduled annual stockholders' meeting.
For the purpose of urging the Commission to act, petitioner filed an urgent manifestation on
May 3, 1977, but this notwithstanding, no action has been taken up to the date of the filing of
the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court
that respondent Commission gravely abused its discretion when it failed to act with deliberate
dispatch on the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or
limitations upon his rights as stockholder of respondent corporation, and that respondent are
acting oppressively against petitioner, in gross derogation of petitioner's rights to property
and due process. He prayed that this Court direct respondent SEC to act on collateral
incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private
respondents from disqualifying or preventing petitioner from running or from being voted as
director of respondent corporation and from submitting for ratification or confirmation or from
causing the ratification or confirmation of Item 6 of the Agenda of the annual stockholders'
meeting on May 10, 1977, or from Making effective the amended by-laws of respondent
corporation, until further orders from this Court or until the Securities and Ex-change
Commission acts on the matters complained of in the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining
order had been issued by this Court, or on May 9, 1977, the respondent Commission served
upon petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for
reconsideration, with its supplement, of the order of the Commission denying in part
petitioner's motion for production of documents, petitioner's motion for reconsideration of the
order denying the issuance of a temporary restraining order denying the issuance of a
temporary restraining order, and petitioner's consolidated motion to declare respondents in
contempt and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a
director of respondent corporation but stating that he should not sit as such if elected, until
such time that the Commission has decided the validity of the bylaws in dispute, and denying
deferment of Item 6 of the Agenda for the annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for
reconsideration of the order of respondent Commission denying petitioner's motion for
summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted
with indecent haste and without circumspection in issuing the aforesaid orders to petitioner's
irreparable damage and injury; (2) that it acted without jurisdiction and in violation of
petitioner's right to due process when it decided en banc an issue not raised before it and still
pending before one of its Commissioners, and without hearing petitioner thereon despite
petitioner's request to have the same calendared for hearing , and (3) that the respondents
acted oppressively against the petitioner in violation of his rights as a stockholder, warranting
immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be declared null
and void and that respondent Commission be ordered to allow petitioner to undertake
discovery proceedings relative to San Miguel International. Inc. and thereafter to decide SEC
Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their
comment, alleging that the petition is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in business competitive and
antagonistic to that of respondent San Miguel Corporation, it appearing that the owns and
controls a greater portion of his SMC stock thru the Universal Robina Corporation and the
Consolidated Foods Corporation, which corporations are engaged in business directly and
substantially competing with the allied businesses of respondent SMC and of corporations in
which SMC has substantial investments. Further, when CFC and Robina had accumulated
investments. Further, when CFC and Robina had accumulated shares in SMC, the Board of
Directors of SMC realized the clear and present danger that competitors or antagonistic
parties may be elected directors and thereby have easy and direct access to SMC's business
and trade secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC from the
clear and present danger that business competitors, if allowed to become directors, will
illegally and unfairly utilize their direct access to its business secrets and plans for their own
private gain to the irreparable prejudice of respondent SMC, and, ultimately, its stockholders.
Further, it is asserted that membership of a competitor in the Board of Directors is a blatant
disregard of no less that the Constitution and pertinent laws against combinations in restraint
of trade;
(3) that by laws are valid and binding since a corporation has the inherent right and duty to
preserve and protect itself by excluding competitors and antogonistic parties, under the law of
self-preservation, and it should be allowed a wide latitude in the selection of means to
preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was
due to petitioner's own acts or omissions, since he failed to have the petition to
suspend, pendente lite the amended by-laws calendared for hearing. It was emphasized that
it was only on April 29, 1977 that petitioner calendared the aforesaid petition for suspension
(preliminary injunction) for hearing on May 3, 1977. The instant petition being dated May 4,
1977, it is apparent that respondent Commission was not given a chance to act "with
deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot and
academic because respondent Commission has acted on the pending incidents, complained
of. It was, therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the
petition has become moot and academic for the reason, among others that the acts of private
respondent sought to be enjoined have reference to the annual meeting of the stockholders
of respondent San Miguel Corporation, which was held on may 10, 1977; that in said
meeting, in compliance with the order of respondent Commission, petitioner was allowed to
run and be voted for as director; and that in the same meeting, Item 6 of the Agenda was
discussed, voted upon, ratified and confirmed. Further it was averred that the questions and
issues raised by petitioner are pending in the Securities and Exchange Commission which
has acquired jurisdiction over the case, and no hearing on the merits has been had; hence
the elevation of these issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable
questions for the determination of this Court because (1) the respondent Commission acted
without circumspection, unfairly and oppresively against petitioner, warranting the
intervention of this Court; (2) a derivative suit, such as the instant case, is not rendered
academic by the act of a majority of stockholders, such that the discussion, ratification and
confirmation of Item 6 of the Agenda of the annual stockholders' meeting of May 10, 1977 did
not render the case moot; that the amendment to the bylaws which specifically bars petitioner
from being a director is void since it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that
after receiving a copy of the restraining order issued by this Court and noting that the
restraining order did not foreclose action by it, the Commission en banc issued Orders Nos.
449, 450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450 which
denied deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent
corporation, took into consideration an urgent manifestation filed with the Commission by
petitioner on May 3, 1977 which prayed, among others, that the discussion of Item 6 of the
Agenda be deferred. The reason given for denial of deferment was that "such action is within
the authority of the corporation as well as falling within the sphere of stockholders' right to
know, deliberate upon and/or to express their wishes regarding disposition of corporate funds
considering that their investments are the ones directly affected." It was alleged that the main
petition has, therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer for
preliminary injunction, alleging that the actuations of respondent SEC tended to deprive him
of his right to due process, and "that all possible questions on the facts now pending before
the respondent Commission are now before this Honorable Court which has the authority and
the competence to act on them as it may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation,
disqualifying a competitor from nomination or election to the Board of Directors are valid and
reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International, Inc., a fully owned
subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing
discussion of Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977,
and the ratification of the investment in a foreign corporation of the corporate funds, allegedly
in violation of section 17-1/2 of the Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal question which public interest
requires to be resolved
It is the position of the petitioner that "it is not necessary to remand the case to respondent
SEC for an appropriate ruling on the intrinsic validity of the amended by-laws in compliance
with the principle of exhaustion of administrative remedies", considering that: first: "whether
or not the provisions of the amended by-laws are intrinsically valid ... is purely a legal
question. There is no factual dispute as to what the provisions are and evidence is not
necessary to determine whether such amended by-laws are valid as framed and approved ...
"; second: "it is for the interest and guidance of the public that an immediate and final ruling
on the question be made ... "; third: "petitioner was denied due process by SEC" when
"Commissioner de Guzman had openly shown prejudice against petitioner ... ", and
"Commissioner Sulit ... approved the amended by-laws ex-parte and obviously found the
same intrinsically valid; and finally: "to remand the case to SEC would only entail delay rather
than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court
resolve the legal issues raised by the parties in keeping with the "cherished rules of
procedure" that "a court should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future ligiation", citingGayong v.
Gayos. 3 To the same effect is the prayer of San Miguel Corporation that this Court resolve
on the merits the validity of its amended by laws and the rights and obligations of the parties
thereunder, otherwise "the time spent and effort exerted by the parties concerned and, more
importantly, by this Honorable Court, would have been for naught because the main question
will come back to this Honorable Court for final resolution." Respondent Eduardo R. Visaya
submits a similar appeal.
It is only the Solicitor General who contends that the case should be remanded to the SEC
for hearing and decision of the issues involved, invoking the latter's primary jurisdiction to
hear and decide case involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle the
entire controversy in a single proceeding, leaving nor root or branch to bear the seeds of
future litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the
case on the merits instead of remanding it to the trial court for further proceedings since the
ends of justice would not be subserved by the remand of the case. In Republic v. Security
Credit and Acceptance Corporation, et al., 6 this Court, finding that the main issue is one of
law, resolved to decide the case on the merits "because public interest demands an early
disposition of the case", and in Republic v. Central Surety and Insurance Company, 7 this
Court denied remand of the third-party complaint to the trial court for further proceedings,
citing precedent where this Court, in similar situations resolved to decide the cases on the
merits, instead of remanding them to the trial court where (a) the ends of justice would not be
subserved by the remand of the case; or (b) where public interest demand an early
disposition of the case; or (c) where the trial court had already received all the evidence
presented by both parties and the Supreme Court is now in a position, based upon said
evidence, to decide the case on its merits. 8 It is settled that the doctrine of primary
jurisdiction has no application where only a question of law is involved. 8a Because
uniformity may be secured through review by a single Supreme Court, questions of law may
appropriately be determined in the first instance by courts. 8b In the case at bar, there are
facts which cannot be denied, viz.: that the amended by-laws were adopted by the Board of
Directors of the San Miguel Corporation in the exercise of the power delegated by the
stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special
meeting on February 10, 1977 held specially for that purpose, the amended by-laws were
ratified by more than 80% of the stockholders of record; that the foreign investment in the
Hongkong Brewery and Distellery, a beer manufacturing company in Hongkong, was made
by the San Miguel Corporation in 1948; and that in the stockholders' annual meeting held in
1972 and 1977, all foreign investments and operations of San Miguel Corporation were
ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or
election to the Board of Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation in purely a question of
law. 9 Whether the by-law is in conflict with the law of the land, or with the charter of the
corporation, or is in a legal sense unreasonable and therefore unlawful is a question of
law. 10 This rule is subject, however, to the limitation that where the reasonableness of a by-
law is a mere matter of judgment, and one upon which reasonable minds must necessarily
differ, a court would not be warranted in substituting its judgment instead of the judgment of
those who are authorized to make by-laws and who have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because they were
tailored to suppress the minority and prevent them from having representation in the Board",
at the same time depriving petitioner of his "vested right" to be voted for and to vote for a
person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel
Corporation content that ex. conclusion of a competitor from the Board is legitimate corporate
purpose, considering that being a competitor, petitioner cannot devote an unselfish and
undivided Loyalty to the corporation; that it is essentially a preventive measure to assure
stockholders of San Miguel Corporation of reasonable protective from the unrestrained self-
interest of those charged with the promotion of the corporate enterprise; that access to
confidential information by a competitor may result either in the promotion of the interest of
the competitor at the expense of the San Miguel Corporation, or the promotion of both the
interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in
a combination or agreement in violation of Article 186 of the Revised Penal Code by
destroying free competition to the detriment of the consuming public. It is further argued that
there is not vested right of any stockholder under Philippine Law to be voted as director of a
corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally or thru
two corporations owned or controlled by him, control over the following shareholdings in San
Miguel Corporation, vis.: (a) John Gokongwei, Jr. 6,325 shares; (b) Universal Robina
Corporation 738,647 shares; (c) CFC Corporation 658,313 shares, or a total of
1,403,285 shares. Since the outstanding capital stock of San Miguel Corporation, as of the
present date, is represented by 33,139,749 shares with a par value of P10.00, the total
shares owned or controlled by petitioner represents 4.2344% of the total outstanding capital
stock of San Miguel Corporation. It is also contended that petitioner is the president and
substantial stockholder of Universal Robina Corporation and CFC Corporation, both of which
are allegedly controlled by petitioner and members of his family. It is also claimed that both
the Universal Robina Corporation and the CFC Corporation are engaged in businesses
directly and substantially competing with the alleged businesses of San Miguel Corporation,
and of corporations in which SMC has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND
SAN MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are enumerated
in its Board the areas of competition are enumerated in its Board Resolution dated April 28,
1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC
involved product sales of over P400 million or more than 20% of the P2 billion total product
sales of SMC. Significantly, the combined market shares of SMC and CFC-Robina in layer
pullets dressed chicken, poultry and hog feeds ice cream, instant coffee and woven fabrics
would result in a position of such dominance as to affect the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on product
lines which, for SMC, represented sales amounting to more than ?478 million. In addition,
CFC-Robina was directly competing in the sale of coffee with Filipro, a subsidiary of SMC,
which product line represented sales for SMC amounting to more than P275 million. The
CFC-Robina group (Robitex, excluding Litton Mills recently acquired by petitioner) is
purportedly also in direct competition with Ramie Textile, Inc., subsidiary of SMC, in product
sales amounting to more than P95 million. The areas of competition between SMC and CFC-
Robina in 1977 represented, therefore, for SMC, product sales of more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976,
9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than
90% of the total outstanding shares of SMC, rejected petitioner's candidacy for the Board of
Directors because they "realized the grave dangers to the corporation in the event a
competitor gets a board seat in SMC." On September 18, 1978, the Board of Directors of
SMC, by "virtue of powers delegated to it by the stockholders," approved the amendment to '
he by-laws in question. At the meeting of February 10, 1977, these amendments were
confirmed and ratified by 5,716 shareholders owning 24,283,945 shares, or more than 80%
of the total outstanding shares. Only 12 shareholders, representing 7,005 shares, opposed
the confirmation and ratification. At the Annual Stockholders' Meeting of May 10, 1977,
11,349 shareholders, owning 27,257.014 shares, or more than 90% of the outstanding
shares, rejected petitioner's candidacy, while 946 stockholders, representing 1,648,801
shares voted for him. On the May 9, 1978 Annual Stockholders' Meeting, 12,480
shareholders, owning more than 30 million shares, or more than 90% of the total outstanding
shares. voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS
EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were adopted by the Board
of Directors of San Miguel Corporation a-, a measure of self-defense to protect the
corporation from the clear and present danger that the election of a business competitor to
the Board may cause upon the corporation and the other stockholders inseparable prejudice.
Submitted for resolution, therefore, is the issue whether or not respondent San Miguel
Corporation could, as a measure of self- protection, disqualify a competitor from nomination
and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent power to adopt by-
laws 'for its internal government, and to regulate the conduct and prescribe the rights and
duties of its members towards itself and among themselves in reference to the management
of its affairs. 12 At common law, the rule was "that the power to make and adopt by-laws
was inherent in every corporation as one of its necessary and inseparable legal incidents.
And it is settled throughout the United States that in the absence of positive legislative
provisions limiting it, every private corporation has this inherent power as one of its
necessary and inseparable legal incidents, independent of any specific enabling provision in
its charter or in general law, such power of self-government being essential to enable the
corporation to accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its
by-laws "the qualifications, duties and compensation of directors, officers and employees ... "
This must necessarily refer to a qualification in addition to that specified by section 30 of the
Corporation Law, which provides that "every director must own in his right at least one share
of the capital stock of the stock corporation of which he is a director ... " InGovernment v. El
Hogar, 14 the Court sustained the validity of a provision in the corporate by-law requiring that
persons elected to the Board of Directors must be holders of shares of the paid up value of
P5,000.00, which shall be held as security for their action, on the ground that section 21 of
the Corporation Law expressly gives the power to the corporation to provide in its by-laws for
the qualifications of directors and is "highly prudent and in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that its affairs
are dominated by a majority of the stockholders and that he impliedly contracts that the will of
the majority shall govern in all matters within the limits of the act of incorporation and lawfully
enacted by-laws and not forbidden by law." 15 To this extent, therefore, the stockholder may
be considered to have "parted with his personal right or privilege to regulate the disposition of
his property which he has invested in the capital stock of the corporation, and surrendered it
to the will of the majority of his fellow incorporators. ... It cannot therefore be justly said that
the contract, express or implied, between the corporation and the stockholders is infringed ...
by any act of the former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of
incorporation by a vote or written assent of the stockholders representing at least two-thirds
of the subscribed capital stock of the corporation If the amendment changes, diminishes or
restricts the rights of the existing shareholders then the disenting minority has only one right,
viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the
same law, the owners of the majority of the subscribed capital stock may amend or repeal
any by-law or adopt new by-laws. It cannot be said, therefore, that petitioner has a vested
right to be elected director, in the face of the fact that the law at the time such right as
stockholder was acquired contained the prescription that the corporate charter and the by-law
shall be subject to amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the qualifications of its
directors, the next question that must be considered is whether the disqualification of a
competitor from being elected to the Board of Directors is a reasonable exercise of corporate
authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not regarded
as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the
corporation and the stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the stockholders, "they occupy a
fiduciary relation, and in this sense the relation is one of trust." 18 "The ordinary trust
relationship of directors of a corporation and stockholders", according to Ashaman v.
Miller, 19 "is not a matter of statutory or technical law. It springs from the fact that directors
have the control and guidance of corporate affairs and property and hence of the property
interests of the stockholders. Equity recognizes that stockholders are the proprietors of the
corporate interests and are ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary
obligation of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who is in
such fiduciary position cannot serve himself first and his cestuis second. ...
He cannot manipulate the affairs of his corporation to their detriment and in
disregard of the standards of common decency. He cannot by the
intervention of a corporate entity violate the ancient precept against serving
two masters ... He cannot utilize his inside information and strategic position
for his own preferment. He cannot violate rules of fair play by doing indirectly
through the corporation what he could not do so directly. He cannot violate
rules of fair play by doing indirectly though the corporation what he could not
do so directly. He cannot use his power for his personal advantage and to
the detriment of the stockholders and creditors no matter how absolute in
terms that power may be and no matter how meticulous he is to satisfy
technical requirements. For that power is at all times subject to the equitable
limitation that it may not be exercised for the aggrandizement, preference or
advantage of the fiduciary to the exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without detriment
to one of them. A judge cannot be impartial if personally interested in the
cause. No more can a director. Human nature is too weak -for this. Take
whatever statute provision you please giving power to stockholders to
choose directors, and in none will you find any express prohibition against a
discretion to select directors having the company's interest at heart, and it
would simply be going far to deny by mere implication the existence of such
a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing
company from being a director, the same reasoning would apply to disqualify the wife and
immediate member of the family of such stockholder, on account of the supposed interest of
the wife in her husband's affairs, and his suppose influence over her. It is perhaps true that
such stockholders ought not to be condemned as selfish and dangerous to the best interest
of the corporation until tried and tested. So it is also true that we cannot condemn as selfish
and dangerous and unreasonable the action of the board in passing the by-law. The strife
over the matter of control in this corporation as in many others is perhaps carried on not
altogether in the spirit of brotherly love and affection. The only test that we can apply is as to
whether or not the action of the Board is authorized and sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases. 23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A
STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A
CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER
CORPORATION, HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations have the
power to make by-laws declaring a person employed in the service of a rival company to be
ineligible for the corporation's Board of Directors. ... (A)n amendment which renders
ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation
whose business is in competition with or is antagonistic to the other corporation is
valid."24 This is based upon the principle that where the director is so employed in the
service of a rival company, he cannot serve both, but must betray one or the other. Such an
amendment "advances the benefit of the corporation and is good." An exception exists in
New Jersey, where the Supreme Court held that the Corporation Law in New Jersey
prescribed the only qualification, and therefore the corporation was not empowered to add
additional qualifications. 25 This is the exact opposite of the situation in the Philippines
because as stated heretofore, section 21 of the Corporation Law expressly provides that a
corporation may make by-laws for the qualifications of directors. Thus, it has been held that
an officer of a corporation cannot engage in a business in direct competition with that of the
corporation where he is a director by utilizing information he has received as such officer,
under "the established law that a director or officer of a corporation may not enter into a
competing enterprise which cripples or injures the business of the corporation of which he is
an officer or director. 26
It is also well established that corporate officers "are not permitted to use their position of
trust and confidence to further their private interests." 27 In a case where directors of a
corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors entered into a new contract
themselves with the foreign firm for exclusive sale of its products, the court held that equity
would regard the new contract as an offshoot of the old contract and, therefore, for the
benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to
the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the
fiduciary standards could not be upheld where the fiduciary was acting for two entities with
competing interests. This doctrine rests fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of an opportunity for his own
personal profit when the interest of the corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel Corporation has
access to sensitive and highly confidential information, such as: (a) marketing strategies and
pricing structure; (b) budget for expansion and diversification; (c) research and development;
and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups with
other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing corporation, from taking
advantage of the information which he acquires as director to promote his individual or
corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made. Certainly, where two corporations are
competitive in a substantial sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations
and place the performance of his corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid
and reasonable an amendment to the by-laws of a bank, requiring that its directors should
not be directors, officers, employees, agents, nominees or attorneys of any other banking
corporation, affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained the
reasons of the court, thus:
... A bank director has access to a great deal of information concerning the
business and plans of a bank which would likely be injurious to the bank if
known to another bank, and it was reasonable and prudent to enlarge this
minimum disqualification to include any director, officer, employee, agent,
nominee, or attorney of any other bank in California. The Ashkins case,
supra, specifically recognizes protection against rivals and others who might
acquire information which might be used against the interests of the
corporation as a legitimate object of by-law protection. With respect to
attorneys or persons associated with a firm which is attorney for another
bank, in addition to the direct conflict or potential conflict of interest, there is
also the danger of inadvertent leakage of confidential information through
casual office discussions or accessibility of files. Defendant's directors
determined that its welfare was best protected if this opportunity for
conflicting loyalties and potential misuse and leakage of confidential
information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:
(1) A director shall not be directly or indirectly interested as a stockholder in
any other firm, company, or association which competes with the subject
corporation.
(2) A director shall not be the immediate member of the family of any
stockholder in any other firm, company, or association which competes with
the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or trustee in
any other firm, company, or association which compete with the subject
corporation.
(4) A director shall be of good moral character as an essential qualification to
holding office.
(5) No person who is an attorney against the corporation in a law suit is
eligible for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience that a person
cannot serve two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair
advantage of his position as director of San Miguel Corporation, he would absent himself
from meetings at which confidential matters would be discussed, would not detract from the
validity and reasonableness of the by-laws here involved. Apart from the impractical results
that would ensue from such arrangement, it would be inconsistent with petitioner's primary
motive in running for board membership which is to protect his investments in San Miguel
Corporation. More important, such a proposed norm of conduct would be against all accepted
principles underlying a director's duty of fidelity to the corporation, for the policy of the law is
to encourage and enforce responsible corporate management. As explained by
Oleck: 31 "The law win not tolerate the passive attitude of directors ... without active and
conscientious participation in the managerial functions of the company. As directors, it is their
duty to control and supervise the day to day business activities of the company or to
promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it that
these policies are carried out. It is only then that directors may be said to have fulfilled their
duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing sensitive information
with a director whose fiduciary duty of loyalty may well require that he disclose this
information to a competitive arrival. These dangers are enhanced considerably where the
common director such as the petitioner is a controlling stockholder of two of the competing
corporations. It would seem manifest that in such situations, the director has an economic
incentive to appropriate for the benefit of his own corporation the corporate plans and policies
of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing strategies and
pricing policies of San Miguel Corporation would subject the latter to a competitive
disadvantage and unjustly enrich the competitor, for advance knowledge by the competitor of
the strategies for the development of existing or new markets of existing or new products
could enable said competitor to utilize such knowledge to his advantage. 32
There is another important consideration in determining whether or not the amended by-laws
are reasonable. The Constitution and the law prohibit combinations in restraint of trade or
unfair competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall
regulate or prohibit private monopolies when the public interest so requires. No combinations
in restraint of trade or unfair competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. The penalty of
prision correccional in its minimum period or a fine ranging from two hundred
to six thousand pesos, or both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement or shall take
part in any conspiracy or combination in the form of a trust or otherwise, in
restraint of trade or commerce or to prevent by artificial means free
competition in the market.
2. Any person who shag monopolize any merchandise or object of trade or
commerce, or shall combine with any other person or persons to monopolize
said merchandise or object in order to alter the price thereof by spreading
false rumors or making use of any other artifice to restrain free competition in
the market.
3. Any person who, being a manufacturer, producer, or processor of any
merchandise or object of commerce or an importer of any merchandise or
object of commerce from any foreign country, either as principal or agent,
wholesale or retailer, shall combine, conspire or agree in any manner with
any person likewise engaged in the manufacture, production, processing,
assembling or importation of such merchandise or object of commerce or
with any other persons not so similarly engaged for the purpose of making
transactions prejudicial to lawful commerce, or of increasing the market price
in any part of the Philippines, or any such merchandise or object of
commerce manufactured, produced, processed, assembled in or imported
into the Philippines, or of any article in the manufacture of which such
manufactured, produced, processed, or imported merchandise or object of
commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and combinations in
restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in restraint of
trade are aimed at raising levels of competition by improving the consumers' effectiveness as
the final arbiter in free markets. These laws are designed to preserve free and unfettered
competition as the rule of trade. "It rests on the premise that the unrestrained interaction of
competitive forces will yield the best allocation of our economic resources, the lowest prices
and the highest quality ... ." 34 they operate to forestall concentration of economic
power. 35 The law against monopolies and combinations in restraint of trade is aimed at
contracts and combinations that, by reason of the inherent nature of the contemplated acts,
prejudice the public interest by unduly restraining competition or unduly obstructing the
course of trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to
have a well defined meaning in other jurisdictions. A "monopoly" embraces any combination
the tendency of which is to prevent competition in the broad and general sense, or to control
prices to the detriment of the public. 37 In short, it is the concentration of business in the
hands of a few. The material consideration in determining its existence is not that prices are
raised and competition actually excluded, but that power exists to raise prices or exclude
competition when desired. 38Further, it must be considered that the Idea of monopoly is now
understood to include a condition produced by the mere act of individuals. Its dominant
thought is the notion of exclusiveness or unity, or the suppression of competition by the
qualification of interest or management, or it may be thru agreement and concert of action. It
is, in brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are not in
accord with reality. The election of petitioner to the Board of respondent Corporation can
bring about an illegal situation. This is because an express agreement is not necessary for
the existence of a combination or conspiracy in restraint of trade. 40 It is enough that a
concert of action is contemplated and that the defendants conformed to the
arrangements, 41 and what is to be considered is what the parties actually did and not the
words they used. For instance, the Clayton Act prohibits a person from serving at the same
time as a director in any two or more corporations, if such corporations are, by virtue of their
business and location of operation, competitors so that the elimination of competition
between them would constitute violation of any provision of the anti-trust laws. 42 There is
here a statutory recognition of the anti-competitive dangers which may arise when an
individual simultaneously acts as a director of two or more competing corporations. A
common director of two or more competing corporations would have access to confidential
sales, pricing and marketing information and would be in a position to coordinate policies or
to aid one corporation at the expense of another, thereby stifling competition. This situation
has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing even one
director is that theinterlock permits the coordination of policies between
nominally independent firms to an extent that competition between them
may be completely eliminated. Indeed, if a director, for example, is to be
faithful to both corporations, some accommodation must result. Suppose X is
a director of both Corporation A and Corporation B. X could hardly vote for a
policy by A that would injure B without violating his duty of loyalty to B at the
same time he could hardly abstain from voting without depriving A of his best
judgment. If the firms really do compete in the sense of vying for
economic advantage at the expense of the other there can hardly be any
reason for an interlock between competitors other than the suppression of
competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on section 9
of the Clayton Act, it was established that: "By means of the interlocking directorates one
man or group of men have been able to dominate and control a great number of corporations
... to the detriment of the small ones dependent upon them and to the injury of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared information
on production, orders, shipments, capacity and inventories may lead to control of production
for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the products
of San Miguel Corporation, the essence of competition in a free market for the purpose of
serving the lowest priced goods to the consuming public would be frustrated, The competitor
could so manipulate the prices of his products or vary its marketing strategies by region or by
brand in order to get the most out of the consumers. Where the two competing firms control a
substantial segment of the market this could lead to collusion and combination in restraint of
trade. Reason and experience point to the inevitable conclusion that the inherent tendency of
interlocking directorates between companies that are related to each other as competitors is
to blunt the edge of rivalry between the corporations, to seek out ways of compromising
opposing interests, and thus eliminate competition. As respondent SMC aptly observes,
knowledge by CFC-Robina of SMC's costs in various industries and regions in the country
win enable the former to practice price discrimination. CFC-Robina can segment the entire
consuming population by geographical areas or income groups and change varying prices in
order to maximize profits from every market segment. CFC-Robina could determine the most
profitable volume at which it could produce for every product line in which it competes with
SMC. Access to SMC pricing policy by CFC-Robina would in effect destroy free competition
and deprive the consuming public of opportunity to buy goods of the highest possible quality
at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in
agriculture, then the election of petitioner to the Board of SMC may constitute a violation of
the prohibition contained in section 13(5) of the Corporation Law. Said section provides in
part that "any stockholder of more than one corporation organized for the purpose of
engaging in agriculture may hold his stock in such corporations solely for investment and not
for the purpose of bringing about or attempting to bring about a combination to exercise
control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent the
candidacy of petitioner for election to the Board. If the by-law were to be applied in the case
of one stockholder but waived in the case of another, then it could be reasonably claimed that
the by-law was being applied in a discriminatory manner. However, the by law, by its terms,
applies to all stockholders. The equal protection clause of the Constitution requires only that
the by-law operate equally upon all persons of a class. Besides, before petitioner can be
declared ineligible to run for director, there must be hearing and evidence must be submitted
to bring his case within the ambit of the disqualification. Sound principles of public policy and
management, therefore, support the view that a by-law which disqualifies a competition from
election to the Board of Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may be
accorded to the corporation in adopting measures to protect legitimate corporation interests.
Thus, "where the reasonableness of a by-law is a mere matter of judgment, and upon which
reasonable minds must necessarily differ, a court would not be warranted in substituting its
judgment instead of the judgment of those who are authorized to make by-laws and who
have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board powers to
perpetua themselves in power such fears appear to be misplaced. This power, but is very
nature, is subject to certain well established limitations. One of these is inherent in the very
convert and definition of the terms "competition" and "competitor". "Competition" implies a
struggle for advantage between two or more forces, each possessing, in substantially similar
if not Identical degree, certain characteristics essential to the business sought. It means an
independent endeavor of two or more persons to obtain the business patronage of a third by
offering more advantageous terms as an inducement to secure trade. 46 The test must be
whether the business does in fact compete, not whether it is capable of an indirect and highly
unsubstantial duplication of an isolated or non-characteristics activity. 47 It is, therefore,
obvious that not every person or entity engaged in business of the same kind is a competitor.
Such factors as quantum and place of business, Identity of products and area of competition
should be taken into consideration. It is, therefore, necessary to show that petitioner's
business covers a substantial portion of the same markets for similar products to the extent
of not less than 10% of respondent corporation's market for competing products. While We
here sustain the validity of the amended by-laws, it does not follow as a necessary
consequence that petitioner is ipso facto disqualified. Consonant with the requirement of due
process, there must be due hearing at which the petitioner must be given the fullest
opportunity to show that he is not covered by the disqualification. As trustees of the
corporation and of the stockholders, it is the responsibility of directors to act with fairness to
the stockholders. 48 Pursuant to this obligation and to remove any suspicion that this power
may be utilized by the incumbent members of the Board to perpetuate themselves in power,
any decision of the Board to disqualify a candidate for the Board of Directors should be
reviewed by the Securities behind Exchange Commission en banc and its decision shall be
final unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where
the action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is
against public policy, or is ultra vires, or is a fraud upon minority stockholders or creditors, or
will result in waste, dissipation or misapplication of the corporation assets, a court of equity
has the power to grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in denying petitioner's request
for an examination of the records of San Miguel International Inc., a fully owned subsidiary of
San Miguel Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he
was denied inspection rights as stockholder of SMC "was made in the teeth of undisputed
facts that, over a specific period, petitioner had been furnished numerous documents and
information," to wit: (1) a complete list of stockholders and their stockholdings; (2) a complete
list of proxies given by the stockholders for use at the annual stockholders' meeting of May
18, 1975; (3) a copy of the minutes of the stockholders' meeting of March 18,1976; (4) a
breakdown of SMC's P186.6 million investment in associated companies and other
companies as of December 31, 1975; (5) a listing of the salaries, allowances, bonuses and
other compensation or remunerations received by the directors and corporate officers of
SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies
of the minutes of all meetings of the Board of Directors from January 1975 to May 1976, with
deletions of sensitive data, which deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on September
18, 1976; (1) that SMC's foreign investments are handled by San Miguel International, Inc.,
incorporated in Bermuda and wholly owned by SMC; this was SMC's first venture abroad,
having started in 1948 with an initial outlay of ?500,000.00, augmented by a loan of
Hongkong $6 million from a foreign bank under the personal guaranty of SMC's former
President, the late Col. Andres Soriano; (2) that as of December 31, 1975, the estimated
value of SMI would amount to almost P400 million (3) that the total cash dividends received
by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4) that from 1972-1975,
SMI did not declare cash or stock dividends, all earnings having been used in line with a
program for the setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary, enclosing
photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all
business transactions of the corporation and minutes of any meeting shall be open to the
inspection of any director, member or stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is based upon
their ownership of the assets and property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership, or a ownership. 52 This right is predicated upon
the necessity of self-protection. It is generally held by majority of the courts that where the
right is granted by statute to the stockholder, it is given to him as such and must be exercised
by him with respect to his interest as a stockholder and for some purpose germane thereto or
in the interest of the corporation. 53 In other words, the inspection has to be germane to the
petitioner's interest as a stockholder, and has to be proper and lawful in character and not
inimical to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held that
"the right to examine the books of the corporation must be exercised in good faith, for specific
and honest purpose, and not to gratify curiosity, or for specific and honest purpose, and not
to gratify curiosity, or for speculative or vexatious purposes. The weight of judicial opinion
appears to be, that on application for mandamus to enforce the right, it is proper for the court
to inquire into and consider the stockholder's good faith and his purpose and motives in
seeking inspection. 56 Thus, it was held that "the right given by statute is not absolute and
may be refused when the information is not sought in good faith or is used to the detriment of
the corporation." 57 But the "impropriety of purpose such as will defeat enforcement must be
set up the corporation defensively if the Court is to take cognizance of it as a qualification. In
other words, the specific provisions take from the stockholder the burden of showing
propriety of purpose and place upon the corporation the burden of showing impropriety of
purpose or motive. 58 It appears to be the general rule that stockholders are entitled to full
information as to the management of the corporation and the manner of expenditure of its
funds, and to inspection to obtain such information, especially where it appears that the
company is being mismanaged or that it is being managed for the personal benefit of officers
or directors or certain of the stockholders to the exclusion of others." 59
While the right of a stockholder to examine the books and records of a corporation for a
lawful purpose is a matter of law, the right of such stockholder to examine the books and
records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a
different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus, it
has been held that where a corporation owns approximately no property except the shares of
stock of subsidiary corporations which are merely agents or instrumentalities of the holding
company, the legal fiction of distinct corporate entities may be disregarded and the books,
papers and documents of all the corporations may be required to be produced for
examination, 60 and that a writ of mandamus, may be granted, as the records of the
subsidiary were, to all incontents and purposes, the records of the parent even though
subsidiary was not named as a party. 61 mandamus was likewise held proper to inspect both
the subsidiary's and the parent corporation's books upon proof of sufficient control or
dominion by the parent showing the relation of principal or agent or something similar
thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary
corporation is a separate and distinct corporation domiciled and with its books and records in
another jurisdiction, and is not legally subject to the control of the parent company, although it
owned a vast majority of the stock of the subsidiary. 63Likewise, inspection of the books of
an allied corporation by stockholder of the parent company which owns all the stock of the
subsidiary has been refused on the ground that the stockholder was not within the class of
"persons having an interest."64
In the Nash case, 65 The Supreme Court of New York held that the contractual right of
former stockholders to inspect books and records of the corporation included the right to
inspect corporation's subsidiaries' books and records which were in corporation's possession
and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records
of a controlled subsidiary corporation which used the same offices and had Identical officers
and directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC,
petitioner contended that respondent corporation "had been attempting to suppress
information for the stockholders" and that petitioner, "as stockholder of respondent
corporation, is entitled to copies of some documents which for some reason or another,
respondent corporation is very reluctant in revealing to the petitioner notwithstanding the fact
that no harm would be caused thereby to the corporation." 67 There is no question that
stockholders are entitled to inspect the books and records of a corporation in order to
investigate the conduct of the management, determine the financial condition of the
corporation, and generally take an account of the stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San
Miguel Corporation and, therefore, under its control, it would be more in accord with equity,
good faith and fair dealing to construe the statutory right of petitioner as stockholder to
inspect the books and records of the corporation as extending to books and records of such
wholly subsidiary which are in respondent corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of
respondent corporation to ratify the investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation
invested corporate funds in SMI without prior authority of the stockholders, thus violating
section 17-1/2 of the Corporation Law, and alleges that respondent SEC should have
investigated the charge, being a statutory offense, instead of allowing ratification of the
investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders for
ratification is a sound corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it was
organized" provided that its Board of Directors has been so authorized by the affirmative vote
of stockholders holding shares entitling them to exercise at least two-thirds of the voting
power. If the investment is made in pursuance of the corporate purpose, it does not need the
approval of the stockholders. It is only when the purchase of shares is done solely for
investment and not to accomplish the purpose of its incorporation that the vote of approval of
the stockholders holding shares entitling them to exercise at least two-thirds of the voting
power is necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC
was an investment in the same business stated as its main purpose in its Articles of
Incorporation, which is to manufacture and market beer. It appears that the original
investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a
beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and
marketing of San Miguel beer thereat. Restructuring of the investment was made in 1970-
1971 thru the organization of SMI in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc.,
supra, appears relevant. In said case, one of the issues was the legality of an investment
made by Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative
vote of 2/3 of the stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a
company engaged in the manufacture of sugar bags. The lower court said that "there is more
logic in the stand that if the investment is made in a corporation whose business is important
to the investing corporation and would aid it in its purpose, to require authority of the
stockholders would be to unduly curtail the power of the Board of Directors." This Court
affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara,
said:
"j. Power to acquire or dispose of shares or securities. A private
corporation, in order to accomplish is purpose as stated in its articles of
incorporation, and subject to the limitations imposed by the Corporation Law,
has the power to acquire, hold, mortgage, pledge or dispose of shares,
bonds, securities, and other evidence of indebtedness of any domestic or
foreign corporation. Such an act, if done in pursuance of the corporate
purpose, does not need the approval of stockholders; but when the purchase
of shares of another corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of approval of the
stockholders is necessary. In any case, the purchase of such shares or
securities must be subject to the limitations established by the Corporations
law; namely, (a) that no agricultural or mining corporation shall be restricted
to own not more than 15% of the voting stock of nay agricultural or mining
corporation; and (c) that such holdings shall be solely for investment and not
for the purpose of bringing about a monopoly in any line of commerce of
combination in restraint of trade." The Philippine Corporation Law by Sulpicio
S. Guevara, 1967 Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. A private corporation has the power
to invest its corporate funds "in any other corporation or business, or for any
purpose other than the main purpose for which it was organized, provide that
'its board of directors has been so authorized in a resolution by the
affirmative vote of stockholders holding shares in the corporation entitling
them to exercise at least two-thirds of the voting power on such a propose at
a stockholders' meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in any other
agricultural or mining corporation. When the investment is necessary to
accomplish its purpose or purposes as stated in its articles of incorporation
the approval of the stockholders is not necessary."" (Id., p. 108) (Emphasis
ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no authority to make the
assailed investment, there is no question that a corporation, like an individual, may ratify and
thereby render binding upon it the originally unauthorized acts of its officers or other
agents. 70 This is true because the questioned investment is neither contrary to law, morals,
public order or public policy. It is a corporate transaction or contract which is within the
corporate powers, but which is defective from a supported failure to observe in its execution
the. requirement of the law that the investment must be authorized by the affirmative vote of
the stockholders holding two-thirds of the voting power. This requirement is for the benefit of
the stockholders. The stockholders for whose benefit the requirement was enacted may,
therefore, ratify the investment and its ratification by said stockholders obliterates any defect
which it may have had at the outset. "Mere ultra vires acts", said this Court in
Pirovano, 71 "or those which are not illegal and void ab initio, but are not merely within the
scope of the articles of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing facilities
which is apparently relevant to the corporate purpose. The mere fact that respondent
corporation submitted the assailed investment to the stockholders for ratification at the
annual meeting of May 10, 1977 cannot be construed as an admission that respondent
corporation had committed an ultra vires act, considering the common practice of
corporations of periodically submitting for the gratification of their stockholders the acts of
their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that petitioner be
allowed to examine the books and records of San Miguel International, Inc., as specified by
him.
On the matter of the validity of the amended by-laws of respondent San Miguel Corporation,
six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De
Castro, voted to sustain the validity per se of the amended by-laws in question and to dismiss
the petition without prejudice to the question of the actual disqualification of petitioner John
Gokongwei, Jr. to run and if elected to sit as director of respondent San Miguel Corporation
being decided, after a new and proper hearing by the Board of Directors of said corporation,
whose decision shall be appealable to the respondent Securities and Exchange Commission
deliberating and acting en banc and ultimately to this Court. Unless disqualified in the manner
herein provided, the prohibition in the afore-mentioned amended by-laws shall not apply to
petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the
issue on the validity of the foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws,
pending hearing by this Court on the applicability of section 13(5) of the Corporation Law to
petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but
otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero
filed a separate opinion, wherein they voted against the validity of the questioned amended
bylaws and that this question should properly be resolved first by the SEC as the agency of
primary jurisdiction. They concur in the result that petitioner may be allowed to run for and sit
as director of respondent SMC in the scheduled May 6, 1979 election and subsequent
elections until disqualified after proper hearing by the respondent's Board of Directors and
petitioner's disqualification shall have been sustained by respondent SEC en banc and
ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING
the petition by allowing petitioner to examine the books and records of San Miguel
International, Inc. as specified in the petition. The petition, insofar as it assails the validity of
the amended by- laws and the ratification of the foreign investment of respondent
corporation, for lack of necessary votes, is hereby DISMISSED. No costs.











































G.R. No. L-52129 April 21, 1980
JOHN GOKONGWEI, JR., petitioner, vs. SECURITIES AND EXCHANGE COMMISSION,
SAN MIGUEL CORPORATION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE
ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, EMIGDIO TANJUATCO and EDUARDO VISAYA, respondents.
ANTONIO, J.:
In this petition for review, petitioner seeks to nullify and set aside the resolution en banc
dated May 7, 1979 of respondent Securities and Exchange Commission in SEC Case No.
1375, sustaining the findings of the San Miguel Corporation's Board of Directors that
petitioner is engaged in a business competitive with or antagonistic to that of the San Miguel
Corporation and, therefore, ineligible for election as director, pursuant to Section 3, Article III
of the amended by-laws. Petitioner alleges that the matter of petitioner's disqualification
should not have been heard in view of the pendency of petitioner's motion for reconsideration
with this Court; that when respondent Commission sustained the disqualification of petitioner,
it failed to consider that private respondents are precluded from disqualifying petitioner
because of the rule of pari delicto; and that the resolution of disqualification of the respondent
Board of Directors was an "over exertion of corporate power" because by this act the afore-
mentioned Board of Directors intended to perpetuate themselves in power. Considering the
afore-mentioned allegations and the comments thereto, We find no merit in the petition.
Aside from the presumptive validity of the amended by-laws at the time the questioned
resolution was rendered by respondent Securities and Exchange Commission, the Chief
Justice and six (6) Justices of this Court had already promulgated their opinions that the
validity of the amended by-laws insofar and only insofar as the parties herein are concerned,
can no longer be relitigated on the basis of the "law of the. case" doctrine and, therefore, the
enforcement of the amended by-laws could not have been ipso factor stayed by the motion
for reconsideration. Petitioner's allegation that respondent Commission (Securities and
Exchange Commission) could not have validly sustained the resolution of the San Miguel
Corporation Board because some members of the Board were also disqualified as they were
situated like petitioner appears inapposite. The alleged disqualification of some members of
the Board was never in issue during the hearing of the disqualification case, and petitioner
has not submitted any evidence in support of his contention. Petitioner's assertion that the
order of respondent Commission disqualifying him is based on evidence which are "at the
most, contingent and flimsy" appears unsupported by the records. The order of respondent
Commission was based principally on the affidavits of Nazario Avendao, Ruperto Sarandi,
Jr., Fernando Constantino, Jose Picornell and Mabini Antonio and documentary evidence
showing that petitioner is engaged in agricultural and poultry business competitive with that of
San Miguel Corporation. Petitioner did not adduce any evidence to rebut the evidence of his
disqualification. It is well-settled that findings of fact of administrative bodies will not be
interferred with by the courts in the absence of grave abuse of discretion on the part of said
agencies, or unless the afore-mentioned findings are not supported by substantial evidence
(Central Bank V. Cloribel, 44 SCRA 307 [1972]).
WHEREFORE, in view of the foregoing, the Court resolves to DISMISS the petition for lack of
merit.
SO ORDERED.













G.R. No. L-39050 February 24, 1981
CARLOS GELANO and GUILLERMINA MENDOZA DE GELANO, petitioners, vs. THE
HONORABLE COURT OF APPEALS and INSULAR SAWMILL, INC., respondents.
DE CASTRO, J.:
Private respondent Insular Sawmill, Inc. is a corporation organized on September 17, 1945
with a corporate life of fifty (50) years, or up to September 17, 1995, with the primary purpose
of carrying on a general lumber and sawmill business. To carry on this business, private
respondent leased the paraphernal property of petitioner-wife Guillermina M. Gelano at the
corner of Canonigo and Otis, Paco, Manila for P1,200.00 a month. It was while private
respondent was leasing the aforesaid property that its officers and directors had come to
know petitioner-husband Carlos Gelano who received from the corporation cash advances on
account of rentals to be paid by the corporation on the land.
Between November 19, 1947 to December 26, 1950 petitioner Carlos Gelano obtained from
private respondent cash advances of P25,950.00. The said sum was taken and received by
petitioner Carlos Gelano on the agreement that private respondent could deduct the same
from the monthly rentals of the leased premises until said cash advances are fully paid. Out
of the aforementioned cash advances in the total sum of P25,950.00, petitioner Carlos
Gelano was able to pay only P5,950.00 thereby leaving an unpaid balance of P20,000.00
which he refused to pay despite repeated demands by private respondent. Petitioner
Guillermina M. Gelano refused to pay on the ground that said amount was for the personal
account of her husband asked for by, and given to him, without her knowledge and consent
and did not benefit the family.
On various occasions from May 4, 1948 to September 11, 1949 petitioners husband and wife
also made credit purchases of lumber materials from private respondent with a total price of
P1,120.46 in connection with the repair and improvement of petitioners' residence. On
November 9, 1949 partial payment was made by petitioners in the amount of P91.00 and in
view of the cash discount in favor of petitioners in the amount of P83.00, the amount due
private respondent on account of credit purchases of lumber materials is P946.46 which
petitioners failed to pay.
On July 14, 1952, in order to accommodate and help petitioners renew previous loans
obtained by them from the China Banking Corporation, private respondent, through Joseph
Tan Yoc Su, executed a joint and several promissory note with Carlos Gelano in favor of said
bank in the amount of P8,000.00 payable in sixty (60) days. For failure of Carlos Gelano to
pay the promissory note upon maturity, the bank collected from the respondent corporation
the amount of P9,106.00 including interests, by debiting it from the corporation's current
account with the bank. Petitioner Carlos Gelano was able to pay private respondent the
amount of P5,000.00 but the balance of P4,106.00 remained unsettled. Guillermina M.
Gelano refused to pay on the ground that she had no knowledge about the accommodation
made by the corporation in favor of her husband.
On May 29, 1959 the corporation, thru Atty. German Lee, filed a complaint for collection
against herein petitioners before the Court of First Instance of Manila. Trial was held and
when the case was at the stage of submitting memorandum, Atty. Lee retired from active law
practice and Atty. Eduardo F. Elizalde took over and prepared the memorandum.
In the meantime, private respondent amended its Articles of Incorporation to shorten its term
of existence up to December 31, 1960 only. The amended Articles of Incorporation was filed
with, and approved by the Securities and Exchange Commission, but the trial court was not
notified of the amendment shortening the corporate existence and no substitution of party
was ever made. On November 20, 1964 and almost four (4) years after the dissolution of the
corporation, the trial court rendered a decision in favor of private respondent the dispositive
portion of which reads as follows:
WHEREFORE, judgment is rendered, ordering:
1. Defendant Carlos Gelano to pay plaintiff the sum of:
(a) P19,650.00 with interest thereon at the legal rate from
the date of the filing of the complaint on May 29, 1959, until
said sum is fully paid;
(b) P4,106.00, with interest thereon at the legal rate from
the date of the filing of the complaint until said sum is fully
paid;
2. Defendants Carlos Gelano and Guillermina Mendoza to pay jointly and
severally the sum of:
(a) P946.46, with interest thereon, at the agreed rate of 12%
per annum from October 6, 1946, until said sum is fully paid;
(b) P550.00, with interest thereon at the legal rate from the
date of the filing of the complaint until the said sum is fully
paid;
(c) Costs of the suit; and
3. Defendant Carlos Gelano to pay the plaintiff the sum of P2,000.00
attorney's fees.
The Countered of defendants are dismissed.
SO ORDERED. 1
Both parties appealed to the Court of Appeals, private respondent also appealing because it
insisted that both Carlos Gelano and Guillermina Gelano should be held liable for the
substantial portion of the claim.
On August 23, 1973, the Court of Appeals rendered a decision modifying the judgment of the
trial court by holding petitioner spouses jointly and severally liable on private respondent's
claim and increasing the award of P4,106.00. The dispositive portion of the decision reads as
follows:
WHEREFORE, modified in the sense that the amount of P4,160.00 under
paragraph 1 (b) is raised to P8,160.00 and the clarification that the conjugal
partnership of the spouses is jointly and severally liable for the obligations
adjudged against defendant Carlos Gelano, the judgment appealed from is
affirmed in all other respects. 2
After petitioners received a copy of the decision on August 24, 1973, they came to know that
the Insular Sawmill Inc. was dissolved way back on December 31, 1960. Hence, petitioners
filed a motion to dismiss the case and/or reconsideration of the decision of the Court of
Appeals on grounds that the case was prosecuted even after dissolution of private
respondent as a corporation and that a defunct corporation cannot maintain any suit for or
against it without first complying with the requirements of the winding up of the affairs of the
corporation and the assignment of its property rights within the required period.
Incidentally, after receipt of petitioners' motion to dismiss and/or reconsideration or on
October 28, 1973, private respondent thru its former directors filed a Petition for Receivership
before the Court of First Instance of Manila, docketed as Special Proceedings No.
92303, 3 which petition is still pending before said court.
On November 5, 1973, private respondent filed comment on the motion to dismiss and or
reconsideration and after the parties have filed reply and rejoinder, the Court of Appeals on
July 5, 1974 issued a resolution 4 denying the aforesaid motion.
Hence, the present petition for review, petitioners assigning the following errors:
I
THE "RESPONDENT COURT" ERRED IN DENYING PETlTIONERS
MOTION TO DISMISS THIS CASE DESPITE THE CLEAR FINDING THAT
"RESPONDENT" HAD ALREADY CEASED TO EXIST AS A
CORPORATION SINCE DECEMBER 31, 1960 YET.
II
THE "RESPONDENT COURT" ERRED IN NOT HOLDING THAT ACTIONS
PENDING FOR OR AGAINST A DEFUNCT CORPORATION ARE DEEMED
ABATED.
III
THE "RESPONDENT COURT" ERRED IN HOLDING INSTEAD THAT
EVEN IF THERE WAS NO COMPLIANCE WITH SECTIONS 77 AND 78 OF
THE CORPORATION LAW FOR THE WINDING UP OF THE AFFAIRS OF
THE CORPORATION BY THE CONVEYANCE OF CORPORATE
PROPERTY AND PROPERTY RIGHTS TO AN ASSIGNEE, OR TRUSTEE
OR THE APPOINTMENT OF A RECEIVER WITHIN THREE YEARS FROM
THE DISSOLUTION OF SUCH CORPORATION, ANY LITIGATION FILED
BY OR AGAINST THE DISSOLVED CORPORATION, INSTITUTED
WITHIN THREE YEARS AFTER SUCH DISSOLUTION BUT WHICH
COULD NOT BE TERMINATED WITHIN SAID PERIOD, MAY STILL BE
CONTINUED AS IT IS NOT DEEMED ABATED.
IV
THE "RESPONDENT COURT" ERRED IN THE APPLICATION TO THIS
CASE OF ITS RULING IN PASAY CREDIT AND FINANCE
CORPORATION, VERSUS LAZARO, ET AL., 46 O.G. (11) 5528, AND IN
OVERLOOKING THE DISTINCTION LAID DOWN BY THIS HONORABLE
COURT IN NUMEROUS DECIDED CASES THAT ONLY CASES FILED IN
THE NAME OF ASSIGNEES, TRUSTEES OR RECEIVERS (FOR A
DEFUNCT CORPORATION), AI)POINTED WITHIN THREE YEARS FROM
ITS DISSOLUTION, MAY BE PROSECUTED BEYOND THE SAID THREE
YEAR PERIOD, AND THAT, ALL OTHERS ARE DEEMED ABATED.
V
THE "RESPONDENT COURT" ERRED IN HOLDING THAT WITH THE
FILING OF SPECIAL PROCEEDINGS NO. 92303 IN THE COURT OF
FIRST INSTANCE OF MANILA BY FORMER DIRECTORS OF "PRIVATE
RESPONDENT" ON OCTOBER 23,1973, OR, THIRTEEN YEARS AFTER
ITS DISSOLUTION, A LEGAL, PERSONALITY WILL BE APPOINTED TO
REPRESENT THE CORPORATION.
VI
THE "RESPONDENT COURT" ERRED IN PRACTICALLY RULING THAT
THE THREE-YEAR PERIOD PROVIDED FOR BY THE CORPORATION
LAW WITHIN WHICH ASSIGNEES, TRUSTEES FOR RECEIVERS MAY
BE APPOINTED MAY BE EXTENDED.
VII
THE "RESPONDENT COURT" ERRED IN NOT HOLDING THAT THE
FAILURE OF "PRIVATE RESPONDENT" OR ITS AUTHORIZED COUNSEL
TO NOTIFY THE TRIAL COURT OF ITS DISSOLUTION OR OF ITS "CIVIL
DEATH" MAY BE CONSIDERED AS AN ABANDONMENT OF ITS CAUSE
OF ACTION AMOUNTING TO A FAILURE TO PROSECUTE AND
RESULTING IN THE ABATEMENT OF THE SUIT.
VIII
THE "RESPONDENT COURT" ERRED IN RECOGNIZING THE
PERSONALITY OF COUNSEL APPEARING FOR PRIVATE
RESPONDENT' DESPITE HIS ADMISSION THAT HE DOES NOT KNOW
THE "PRIVATE RESPONDENT" NOR HAS HE MET ANY OF ITS
DIRECTORS AND OFFICERS.
IX
THE "RESPONDENT COURT" ERRED IN AFFIRMING THE DECISION OF
THE TRIAL COURT HOLDING IN FAVOR OF "PRIVATE RESPONDENT".
X
THE "RESPONDENT COURT" ERRED IN MODIFYING THE TRIAL
COURT'S DECISION AND HOLDING EVEN THE CONJUGAL
PARTNERSHIP OF PETITIONERS JOINTLY AND SEVERALLY LIABLE
FOR THE OBLIGATION ADJUDGED AGAINST PETITIONER-HUSBAND,
CARLOS GELANO.
The main issue raised by petitioner is whether a corporation, whose corporate life had
ceased by the expiration of its term of existence, could still continue prosecuting and
defending suits after its dissolution and beyond the period of three years provided for under
Act No. 1459, otherwise known as the Corporation law, to wind up its affairs, without having
undertaken any step to transfer its assets to a trustee or assignee.
The complaint in this case was filed on May 29, 1959 when private respondent Insular
Sawmill, Inc. was still existing. While the case was being tried, the stockholders amended its
Articles of Incorporation by shortening the term of its existence from December 31, 1995 to
December 31, 1960, which was approved by the Securities and Exchange Commission.
In American corporate law, upon which our Corporation Law was patterned, it is well settled
that, unless the statutes otherwise provide, all pending suits and actions by and against a
corporation are abated by a dissolution of the corporation. 5 Section 77 of the Corporation
Law provides that the corporation shall "be continued as a body corporate for three (3) years
after the time when it would have been ... dissolved, for the purpose of prosecuting and
defending suits By or against it ...," so that, thereafter, it shall no longer enjoy corporate
existence for such purpose. For this reason, Section 78 of the same law authorizes the
corporation, "at any time during said three years ... to convey all of its property to trustees for
the benefit of members, Stockholders, creditors and other interested," evidently for the
purpose, among others, of enabling said trustees to prosecute and defend suits by or against
the corporation begun before the expiration of said period.6 Commenting on said sections,
Justice Fisher said:
It is to be noted that the time during which the corporation, through its own
officers, may conduct the liquidation of its assets and sue and be sued as a
corporation is limited to three years from the time the period of dissolution
commences; but that there is no time limited within which the trustees must
complete a liquidation placed in their hands. It is provided only (Corp. Law,
Sec. 78) that the conveyance to the trustees must be made within the three-
year period. It may be found impossible to complete the work of liquidation
within the three-year period or to reduce disputed claims to judgment. The
authorities are to the effect that suits by or against a corporation abate when
it ceased to be an entity capable of suing or being sued (7 R.C.L. Corps.,
Par. 750); but trustees to whom the corporate assets have been conveyed
pursuant to the authority of Section 78 may sue and be sued as such in all
matters connected with the liquidation. By the terms of the statute the effect
of the conveyance is to make the trustees the legal owners of the property
conveyed, subject to the beneficial interest therein of creditors and
stockholders. 7
When Insular Sawmill, Inc. was dissolved on December 31, 1960, under Section 77 of the
Corporation Law, it stin has the right until December 31, 1963 to prosecute in its name the
present case. After the expiration of said period, the corporation ceased to exist for all
purposes and it can no longer sue or be sued. 8
However, a corporation that has a pending action and which cannot be terminated within the
three-year period after its dissolution is authorized under Section 78 to convey all its property
to trustees to enable it to prosecute and defend suits by or against the corporation beyond
the Three-year period although private respondent (did not appoint any trustee, yet the
counsel who prosecuted and defended the interest of the corporation in the instant case and
who in fact appeared in behalf of the corporation may be considered a trustee of the
corporation at least with respect to the matter in litigation only. Said counsel had been
handling the case when the same was pending before the trial court until it was appealed
before the Court of Appeals and finally to this Court. We therefore hold that there was a
substantial compliance with Section 78 of the Corporation Law and as such, private
respondent Insular Sawmill, Inc. could still continue prosecuting the present case even
beyond the period of three (3) years from the time of its dissolution.
From the above quoted commentary of Justice Fisher, the trustee may commence a suit
which can proceed to final judgment even beyond the three-year period. No reason can be
conceived why a suit already commenced By the corporation itself during its existence, not
by a mere trustee who, by fiction, merely continues the legal personality of the dissolved
corporation should not be accorded similar treatment allowed to proceed to final judgment
and execution thereof.
The word "trustee" as sued in the corporation statute must be understood in its general
concept which could include the counsel to whom was entrusted in the instant case, the
prosecution of the suit filed by the corporation. The purpose in the transfer of the assets of
the corporation to a trustee upon its dissolution is more for the protection of its creditor and
stockholders. Debtors like the petitioners herein may not take advantage of the failure of the
corporation to transfer its assets to a trustee, assuming it has any to transfer which petitioner
has failed to show, in the first place. To sustain petitioners' contention would be to allow them
to enrich themselves at the expense of another, which all enlightened legal systems
condemn.
The observation of the Court of Appeals on the issue now before Us that:
Under Section 77 of the Corporation Law, when the corporate existence is
terminated in any legal manner, the corporation shall nevertheless continue
as a body corporate for three (3) years after the time when it would have
been dissolved, for the purpose of prosecuting and defending suits by or
against it. According to authorities, the corporation "becomes incapable of
making contracts or receiving a grant. It does not, however, cease to be a
body corporate for all purposes." In the case ofPasay Credit and Finance
Corp. vs. Isidro Lazaro and others, 46 OG (11) 5528, this Court held that "a
corporation may continue a pending 'litigation even after the lapse of the 3-
year period granted by Section 77 of Act 1459 to corporation subsequent to
their dissolution to continue its corporate existence for the purpose of
winding up their affairs and settling all the claims by and against same." We
note that the plaintiff Insular Sawmill, Inc. ceased as a corporation on
December 30, 1960 but the case at bar was instituted on May 29, 1959,
during the time when the corporation was still very much alive. Accordingly, it
is our view that "any litigation filed by or against it instituted within the period,
but which could not be terminated, must necessarily prolong that period until
the final termination of said litigation as otherwise corporations in liquidation
would lose what should justly belong to them or would be exempt from the
payment of just obligations through a mere technicality, something that
courts should prevent" (Philippine Commercial Laws by Martin, 1962 Ed.,
Vol. 2, p. 1716).
merits the approval of this Court.
The last two assigned errors refer to the disposition of the main case. Petitioners contend
that the obligations contracted by petitioner Carlos Gelano from November 19, 1947 until
August 18, 1950 (before the effectivity of the New Civil Code) and from December 26, 1950
until July 14, 1952 (during the effectivity of the New Civil Code) were his personal obligations,
hence, petitioners should not be held jointly and severally liable. As regards the said issues,
suffice it to say that with the findings of the Court of Appeals that the obligation contracted by
petitioner-husband Carlos Gelano redounded to the benefit of the family, the inevitable
conclusion is that the conjugal property is liable for his debt pursuant to paragraph 1, Article
1408, Civil Code of 1889 9 which provision incidentally can still be found in paragraph 1,
Article 161 of the New Civil Code. 10 Only the conjugal partnership is liable, not joint and
several as erroneously described by the Court of Appeals, the conjugal partnership being
only a single entity.
WHEREFORE, with the modification that only the conjugal partnership is liable, the appealed
decision is hereby affirmed in all other respects. Without pronouncement as to costs.
SO ORDERED.

























G.R. No. L-1721 May 19, 1950
JUAN D. EVANGELISTA ET AL., plaintiffs-appellants, vs. RAFAEL SANTOS, defendant-
appellee.
REYES, J.:
This is an action by the minority stockholders of a corporation against its principal officer for
damages resulting from his mismanagement of its affairs and misuse of its assets.
The complaint alleges that plaintiffs are minority stockholders of the Vitali Lumber Company,
Inc., a Philippine corporation organized for the exploitation of a lumber concession in
Zamboanga, Philippines; that defendant holds more than 50 per cent of the stocks of said
corporation and also is and always has been the president, manager, and treasurer thereof;
and that defendant, in such triple capacity, through fault, neglect, and abandonment allowed
its lumber concession to lapse and its properties and assets, among them machineries,
buildings, warehouses, trucks, etc., to disappear, thus causing the complete ruin of the
corporation and total depreciation of its stocks. The complaint therefore prays for judgment
requiring defendant: (1) to render an account of his administration of the corporate affairs and
assets: (2) to pay plaintiffs the value of t heir respective participation in said assets on the
basis of the value of the stocks held by each of them; and (3) to pay the costs of suit.
Plaintiffs also ask for such other remedy as may be and equitable.
The complaint does not give plaintiffs' residence, but, but purposes of venue, alleges that
defendant resides at 2112 Dewey Boulevard, corner Libertad Street, Pasay, province of
Rizal. Having been served with summons at that place, defendant filed a motion for the
dismissal of the complaint on the ground of improper venue and also on the ground that the
complaint did not state a cause of action in favor of plaintiffs.
In support of the objection to the venue, the motion, which is under oath, states that
defendant is a resident of Iloilo City and not of Pasay, and at the hearing of the motion
defendant also presented further affidavit to the effect that while he has a house in Pasay,
where members of his family who are studying in Manila live and where he himself is
sojourning for the purpose of attending to his interests in Manila, yet he has permanent
residence in the City of Iloilo where he is registered as a voter for election purposes and has
been paying his residence certificate. Plaintiffs opposed the motion for dismissal but
presented no counter proof and merely called attention to the Sheriff's return showing service
of summons on defendant personally at his alleged residence at No. 2112 Dewey Boulevard,
Pasay.
After hearing, the lower court rendered its order, granting the motion for dismissal upon the
two grounds alleged by defendant, and reconsideration of this order having been denied,
plaintiffs have appealed to this Court.
The appeal presents two questions. The first refers to venue and the second, to the right of
the plaintiffs to bring this action for their benefit.
As to the first question, it is important to remember that the laying of the venue of an action is
not left to plaintiff's caprice. The matter is regulated by the Rules of Court. And in actions like
the present, which is one in personam, the regulation applicable is that contained in section 1
of Rule 5, which provides:
Civil actions in Courts of First Instance may be commenced and tried where the
defendant or any of the defendant resides or may be found, or where the plaintiff or
any of the plaintiffs resides, at the election of the plaintiff.
Objection to improper venue may be interposed at any time prior to the trial. (Moran's
Comments on the Rules of Court, Vol. I, 2nd ed., p. 108.)
Believing that defendant resided in the province of Rizal, herein plaintiffs brought their action
in the Court of First Instance of that province. But that belief proved erroneous, for the lower
court found after hearing that defendant had his residence in Iloilo. The finding is based on
defendant's sworn statement not rebutted by any proof to the contrary.
There is nothing to the contention that defendant's motion to dismiss necessarily
presupposes a hypothetical admission of the allegations of the complaint, among them the
averment that defendant is a resident of Rizal province, for the motion precisely denies that
averment and alleges that his real residence is in Iloilo City. This, defendant had the right to
do in objecting to the court's jurisdiction on the ground of improper venue.
Section 1 of Rule 5 may seem, at first blush, to authorize the laying of the venue in the
province where the defendant "may be found." But this phrase has already been held to have
a limited application. It is the same phrase used in section 377 of Act 190 from which section
1 of Rule 5 was taken, and as construed by this Court it applies only to cases where
defendant has no residence in the Philippine Islands. This was the construction adopted in
the case of Cohen vs. Benguet Commercial Co., Ltd., 34 Phil. 526, which was an action
brought in Manila by a nonresident against a corporation which had its residence for legal
purposes in Baguio but whose President was found in Manila and there served with
summons. This Court there said:
Section 377 provides that actions of this character "may be brought in any province
where the defendants or any necessary party defendant may reside or be found, or
in any province where the plaintiff or one of the plaintiffs resides, at the election of
the plaintiff." The plaintiff in this action has no residence in the Philippine Islands.
Only one of the parties to the action resides here. There can be, therefore, no
election by plaintiff as to the trial. It must be in the province where the defendant
resides. The defendant resides, in the eye of the law, in Baguio. Was it "found" in the
city of Manila under section 377, its president being in that city where the service of
summons was made? We think not. The word "found" as used section 377 has a
different meaning that belongs to it as used in section 394, which refers exclusively
to the place where the summons may be served. As we have said a summons may
be legally served on a defendant wherever he may be "found," i. e., wherever he may
be, provided he be in the Philippine Islands; but the venue cannot be laid wherever
the defendant may be "found." There is an element entering in section 377 which is
not present in section 394, that is a residence. Residence of the plaintiff or defendant
does not affect the place where a summons may be served; but residence is the vital
thing when we deal with venue. The venue must be laid in the province where one of
the parties resides. If the plaintiff is a nonresident the venue must laid in the province
of the defendant's residence. The venue can be laid in the province where defendant
is "found" only when defendant has no residence in the Philippine Islands. A
defendant can not have a residence in one province and be "found" in another. As
long as he has a residence in the Philippine Islands he can be "found," for the
purposes of section 377, only in the province of his residence. In such case the
words "residence" and "found" are synonymous. If he is a nonresident then the
venue may laid in the province where he is "found" at the time venue the action is
commenced or in the province of plaintiff's residence. This applies also to a domestic
corporation.
While the service of the summons was good in either Baguio or Manila we are of the
opinion that the objection of the defendant to the place of trial was proper in both
cases and that the trial court should have held that the venue was improperly laid.
And elaborating on the point when the case came up for reconsideration, the Court further
said:
The moving party contends that the venue was properly laid under section 377 in
that was laid in the province where the defendant was found at the time summons
was served on its president, he having been found and served with process in the
city of Manila. for the purpose of the discussion we assumed in the main case, as the
plaintiff claimed, that the defendant was in fact and in law found in the city of Manila;
and proceeded to decide the cause upon the theory that, even if the defendant were
found in the city of Manila, that did not justify, under the facts of the case, the laying
of the venue in the city of Manila.
We do not believe that the moving party's objection that our construction deprives the
word "found" of all significance and results, in effect, in eliminating it from the statue,
is sound. We do not deprive it of all significance and effect and do not eliminate it
from the statue. We give it the only effect which can be given it and still accord with
the other provisions of the section which give defendant the right to have the venue
laid in the province of his residence, the effect which it was intended by the
legislature they should have. We held that the word "found" was applicable in certain
cases, and in such cases gave it full significance and effect. We declared that it was
applicable and effective in cases where the defendant is a nonresident. In such
cases where the defendant is a nonresident. In such cases the venue may be laid
wherever he may be found in the Philippine Islands at the time of the service of the
process, but we also held that where he is a resident of the Philippine Islands the
word "found" has no application and the venue must be laid in the province where he
resides.
The construction which the moving party asks us to place on that provision of section
377 above quoted would result in the destruction of the privilege conferred by the
section upon a resident defendant which requires the venue to be laid in the province
where he resides. This is clear; for, if the venue may be laid in any province where
the defendant, although a resident of some other province, any be found at the time
process is served on him, then the provision that it shall be laid in the province where
he resides is no value to him. If a defendant residing in the province of Rizal is
helpless when the venue is laid in the province of Mindoro in an action in which the
plaintiff is a nonresident or resides in Manila, what is the value of a residence in
Rizal? If a defendant residing in Jolo is without remedy when a nonresident plaintiff
or a plaintiff residing in Jolo lays the venue in Bontoc because the defendant
happens to be found there, of what significance is a residence in Jolo? The phrases
"where the defendant ... may reside" and "or be found" must be construed together
and in such manner that both may be given effect. The construction asked for by the
moving party would deprive the phrase "where the defendant ... may reside" of all
significance, as the plaintiff could always elect to lay the venue in the province where
the defendant was "found" and not where he resided; whereas the construction
which we place upon these phrases permits both to have effect. We declare that,
when the defendant is a resident of the Philippine Islands, the venue must be laid
either in the province where the plaintiff resides or in the province where the
defendant resides, and in no other province. Where, however, the defendant is a
nonresident the venue may be laid wherever defendant may be found in the
Philippine Islands. This construction gives both phrases their proper and legitimate
effect without doing violence to the spirit which informs all laws relating to venue and
which insists always that the action shall tried in the place where the greater
convenience of the parties will be served. Ordinarily a defendant's witness are found
where the defendant resides; and plaintiff's witnesses are generally found where he
resides or where the defendant resides. It is, therefore, generally desirable to have
the action tried where on of the resides. Where the plaintiff is a nonresident and the
contract upon which suit is brought was made in the Philippine Islands it may safely
be asserted that the convenience of the defendant would be best served by a trial in
the province where he resides.
The fact that defendant was sojourning in Pasay t the time he was served with summons
does not make him a resident of that place for purposes of venue. Residence is "the
permanent home, the place to which, whenever absent for business or pleasure, one intends
to return, ..." (67 C.J., pp. 123-124.) A man can have but one domicile at a time (Alcantara vs.
Secretary of Interior, 61 Phil., 459), and residence is anonymous with domicile under section
1 of Rule 5 (Moran's Comments, supra, p. 104).
In view of the foregoing, we hold that the objection to the venue was correctly sustained by
the lower court.
As to the second question, the complaint shows that the action is for damages resulting from
mismanagement of the affairs and assets of the corporation by its principal officer, it being
alleged that defendant's maladministration has brought about the ruin of the corporation and
the consequent loss of value of its stocks. The injury complained of is thus primarily to the
corporation, so that the suit for the damages claimed should be by the corporation rather than
by the stockholders (3 Fletcher, Cyclopedia of Corporation pp. 977-980). The stockholders
may not directly claim those damages for themselves for that would result in the
appropriation by, and the distribution among them of part of the corporate assets before the
dissolution of the corporation and the liquidation of its debts and liabilities, something which
cannot be legally done in view of section 16 of the Corporation Law, which provides:
No shall corporation shall make or declare any stock or bond dividend or any
dividend whatsoever from the profits arising from its business, or divide or distribute
its capital stock or property other than actual profits among its members or
stockholders until after the payment of its debts and the termination of its existence
by limitation or lawful dissolution.
But while it is to the corporation that the action should pertain in cases of this nature,
however, if the officers of the corporation, who are the ones called upon to protect their
rights, refuse to sue, or where a demand upon them to file the necessary suit would be futile
because they are the very ones to be sued or because they hold the controlling interest in the
corporation, then in that case any one of the stockholders is allowed to bring suit (3 Fletcher's
Cyclopedia of Corporations, pp. 977-980). But in that case it is the corporation itself and not
the plaintiff stockholder that is the real property in interest, so that such damages as may be
recovered shall pertain to the corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In
other words, it is a derivative suit brought by a stockholder as the nominal party plaintiff for
the benefit of the corporation, which is the real property in interest (13 Fletcher, Cyclopedia of
Corporations, p. 295).
In the present case, the plaintiff stockholders have brought the action not for the benefit of
the corporation but for their own benefit, since they ask that the defendant make good the
losses occasioned by his mismanagement and pay to them the value of their respective
participation in the corporate assets on the basis of their respective holdings. Clearly, this
cannot be done until all corporate debts, if there be any, are paid and the existence of the
corporation terminated by the limitation of its charter or by lawful dissolution in view of the
provisions of section 16 of the Corporation Law.
It results that plaintiff's complaint shows no cause of action in their favor so that the lower
court did not err in dismissing the complaint on that ground.
While plaintiffs ask for remedy to which they are not entitled unless the requirement of
section 16 of the Corporation Law be first complied with, we note that the action stated in
their complaint is susceptible of being converted into a derivative suit for the benefit of the
corporation by a mere change in the prayer. Such amendment, however, is not possible now,
since the complaint has been filed in the wrong court, so that the same last to be dismissed.
The order appealed from is therefore affirmed, but without prejudice to the filing of the proper
action in which the venue shall be laid in the proper province. Appellant's shall pay costs. So
ordered.








































G.R. No. 129459 September 29, 1998
SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner, vs. COURT OF
APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL
DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents.
PANGANIBAN, J.:
May corporate treasurer, by herself and without any authorization from he board of directors,
validly sell a parcel of land owned by the corporation?. May the veil of corporate fiction be
pierced on the mere ground that almost all of the shares of stock of the corporation are
owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this Court in resolving the Petition for
Review on Certioraribefore us, assailing the March 18, 1997 Decision 1 of the Court of
Appeals 2 in CA GR CV No. 46801 which, in turn, modified the July 18, 1994 Decision of the
Regional Trial Court of Makati, Metro Manila, Branch 63 3 in Civil Case No. 89-3511. The
RTC dismissed both the Complaint and the Counterclaim filed by the parties. On the other
hand, the Court of Appeals ruled:
WHEREFORE, premises considered, the appealed decision is AFFIRMED
WITH MODIFICATION ordering defendant-appellee Nenita Lee Gruenberg
to REFUND or return to plaintiff-appellant the downpayment of P100,000.00
which she received from plaintiff-appellant. There is no pronouncement as to
costs. 4
The petition also challenges the June 10, 1997 CA Resolution denying reconsideration. 5
The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.'s amended
complaint alleged that on 14 February 1989, plaintiff-appellant entered into an
agreement with defendant-appellee Motorich Sales Corporation for the transfer to it
of a parcel of land identified as Lot 30, Block 1 of the Acropolis Greens Subdivision
located in the District of Murphy, Quezon City. Metro Manila, containing an area of
Four Hundred Fourteen (414) square meters, covered by TCT No. (362909) 2876:
that as stipulated in the Agreement of 14 February 1989, plaintiff-appellant paid the
downpayment in the sum of One Hundred Thousand (P100,000.00) Pesos, the
balance to be paid on or before March 2, 1989; that on March 1, 1989. Mr. Andres T.
Co, president of plaintiff-appellant corporation, wrote a letter to defendant-appellee
Motorich Sales Corporation requesting for a computation of the balance to be paid:
that said letter was coursed through defendant-appellee's broker. Linda Aduca, who
wrote the computation of the balance: that on March 2, 1989, plaintiff-appellant was
ready with the amount corresponding to the balance, covered by Metrobank
Cashier's Check No. 004223, payable to defendant-appellee Motorich Sales
Corporation; that plaintiff-appellant and defendant-appellee Motorich Sales
Corporation were supposed to meet in the office of plaintiff-appellant but defendant-
appellee's treasurer, Nenita Lee Gruenberg, did not appear; that defendant-appellee
Motorich Sales Corporation despite repeated demands and in utter disregard of its
commitments had refused to execute the Transfer of Rights/Deed of Assignment
which is necessary to transfer the certificate of title; that defendant ACL
Development Corp. is impleaded as a necessary party since Transfer Certificate of
Title No. (362909) 2876 is still in the name of said defendant; while defendant JNM
Realty & Development Corp. is likewise impleaded as a necessary party in view of
the fact that it is the transferor of right in favor of defendant-appellee Motorich Sales
Corporation: that on April 6, 1989, defendant ACL Development Corporation and
Motorich Sales Corporation entered into a Deed of Absolute Sale whereby the former
transferred to the latter the subject property; that by reason of said transfer, the
Registry of Deeds of Quezon City issued a new title in the name of Motorich Sales
Corporation, represented by defendant-appellee Nenita Lee Gruenberg and
Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571; that as a result
of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's
bad faith in refusing to execute a formal Transfer of Rights/Deed of Assignment,
plaintiff-appellant suffered moral and nominal damages which may be assessed
against defendants-appellees in the sum of Five Hundred Thousand (500,000.00)
Pesos; that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich
Sales Corporation's unjustified and unwarranted failure to execute the required
Transfer of Rights/Deed of Assignment or formal deed of sale in favor of plaintiff-
appellant, defendants-appellees should be assessed exemplary damages in the sum
of One Hundred Thousand (P100,000.00) Pesos; that by reason of defendants-
appellees' bad faith in refusing to execute a Transfer of Rights/Deed of Assignment
in favor of plaintiff-appellant, the latter lost the opportunity to construct a residential
building in the sum of One Hundred Thousand (P100,000.00) Pesos; and that as a
consequence of defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporation's bad faith in refusing to execute a deed of sale in favor of plaintiff-
appellant, it has been constrained to obtain the services of counsel at an agreed fee
of One Hundred Thousand (P100,000.00) Pesos plus appearance fee for every
appearance in court hearings.
In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee
Gruenberg interposed as affirmative defense that the President and Chairman of
Motorich did not sign the agreement adverted to in par. 3 of the amended complaint;
that Mrs. Gruenberg's signature on the agreement (ref: par. 3 of Amended
Complaint) is inadequate to bind Motorich. The other signature, that of Mr. Reynaldo
Gruenberg, President and Chairman of Motorich, is required: that plaintiff knew this
from the very beginning as it was presented a copy of the Transfer of Rights (Annex
B of amended complaint) at the time the Agreement (Annex B of amended
complaint) was signed; that plaintiff-appellant itself drafted the Agreement and
insisted that Mrs. Gruenberg accept the P100,000.00 as earnest money; that
granting, without admitting, the enforceability of the agreement, plaintiff-appellant
nonetheless failed to pay in legal tender within the stipulated period (up to March 2,
1989); that it was the understanding between Mrs. Gruenberg and plaintiff-appellant
that the Transfer of Rights/Deed of Assignment will be signed only upon receipt of
cash payment; thus they agreed that if the payment be in check, they will meet at a
bank designated by plaintiff-appellant where they will encash the check and sign the
Transfer of Rights/Deed. However, plaintiff-appellant informed Mrs. Gruenberg of the
alleged availability of the check, by phone, only after banking hours.
On the basis of the evidence, the court a quo rendered the judgment appealed
from[,] dismissing plaintiff-appellant's complaint, ruling that:
The issue to be resolved is: whether plaintiff had the right to compel
defendants to execute a deed of absolute sale in accordance with the
agreement of February 14, 1989: and if so, whether plaintiff is entitled to
damage.
As to the first question, there is no evidence to show that defendant Nenita
Lee Gruenberg was indeed authorized by defendant corporation. Motorich
Sales, to dispose of that property covered by T.C.T. No. (362909) 2876.
Since the property is clearly owned by the corporation. Motorich Sales, then
its disposition should be governed by the requirement laid down in Sec. 40.
of the Corporation Code of the Philippines, to wit:
Sec. 40, Sale or other disposition of assets. Subject
to the provisions of existing laws on illegal
combination and monopolies, a corporation may by
a majority vote of its board of directors . . . sell,
lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and
assets including its goodwill . . . when authorized by
the vote of the stockholders representing at least
two third (2/3) of the outstanding capital stock . . .
No such vote was obtained by defendant Nenita Lee Gruenberg for
that proposed sale[;] neither was there evidence to show that the
supposed transaction was ratified by the corporation. Plaintiff should
have been on the look out under these circumstances. More so,
plaintiff himself [owns] several corporations (tsn dated August 16,
1993, p. 3) which makes him knowledgeable on corporation matters.
Regarding the question of damages, the Court likewise, does not
find substantial evidence to hold defendant Nenita Lee Gruenberg
liable considering that she did not in anyway misrepresent herself to
be authorized by the corporation to sell the property to plaintiff (tsn
dated September 27, 1991, p. 8).
In the light of the foregoing, the Court hereby renders judgment
DISMISSING the complaint at instance for lack of merit.
"Defendants" counterclaim is also DISMISSED for lack of basis.
(Decision, pp. 7-8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by and between:
MOTORICH SALES CORPORATION, a corporation duly
organized and existing under and by virtue of Philippine
Laws, with principal office address at 5510 South Super Hi-
way cor. Balderama St., Pio del Pilar. Makati, Metro Manila,
represented herein by its Treasurer, NENITA LEE
GRUENBERG, hereinafter referred to as the
TRANSFEROR;
and
SAN JUAN STRUCTURAL & STEEL FABRICATORS, a
corporation duly organized and existing under and by virtue
of the laws of the Philippines, with principal office address at
Sumulong Highway, Barrio Mambungan, Antipolo, Rizal,
represented herein by its President, ANDRES T. CO,
hereinafter referred to as the TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as
Lot 30 Block 1 of the ACROPOLIS GREENS SUBDIVISION located at the
District of Murphy, Quezon City, Metro Manila, containing an area of FOUR
HUNDRED FOURTEEN (414) SQUARE METERS, covered by a
TRANSFER OF RIGHTS between JNM Realty & Dev. Corp. as the
Transferor and Motorich Sales Corp. as the Transferee;
NOW, THEREFORE, for and in consideration of the foregoing premises, the
parties have agreed as follows:
1. That the purchase price shall be at FIVE THOUSAND
TWO HUNDRED PESOS (P5,200.00) per square meter;
subject to the following terms:
a. Earnest money amounting to ONE
HUNDRED THOUSAND PESOS
(P100,000.00), will be paid upon the
execution of this agreement and shall form
part of the total purchase price;
b. Balance shall be payable on or before
March 2, 1989;
2. That the monthly amortization for the month of February
1989 shall be for the account of the Transferor; and that the
monthly amortization starting March 21, 1989 shall be for
the account of the Transferee;
The transferor warrants that he [sic] is the lawful owner of the above-
described property and that there [are] no existing liens and/or
encumbrances of whatsoever nature;
In case of failure by the Transferee to pay the balance on the date specified
on 1, (b), the earnest money shall be forfeited in favor of the Transferor.
That upon full payment of the balance, the TRANSFEROR agrees to
execute a TRANSFER OF RIGHTS/DEED OF ASSIGNMENT in favor of the
TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th
day of February, 1989 at Greenhills, San Juan, Metro Manila, Philippines.
MOTORICH SALES CORPORATION SAN JUAN STRUCTURAL & STEEL
FABRICATORS
TRANSFEROR TRANSFEREE
[SGD.] [SGD.]
By. NENITA LEE GRUENBERG By: ANDRES T. CO
Treasurer President
Signed In the presence of:
[SGD.] [SGD.]
6
In its recourse before the Court of Appeals, petitioner insisted:
1. Appellant is entitled to compel the appellees to execute a
Deed of Absolute Sale in accordance with the Agreement of
February 14, 1989,
2. Plaintiff is entitled to damages. 7
As stated earlier, the Court of Appeals debunked petitioner's arguments and affirmed the
Decision of the RTC with the modification that Respondent Nenita Lee Gruenberg was
ordered to refund P100,000 to petitioner, the amount remitted as "downpayment" or "earnest
money." Hence, this petition before us. 8
The Issues
Before this Court, petitioner raises the following issues:
I. Whether or not the doctrine of piercing the veil of
corporate fiction is applicable in the instant case
II. Whether or not the appellate court may consider matters
which the parties failed to raise in the lower court
III. Whether or not there is a valid and enforceable contract
between the petitioner and the respondent corporation
IV. Whether or not the Court of Appeals erred in holding that
there is a valid correction/substitution of answer in the
transcript of stenographic note[s].
V. Whether or not respondents are liable for damages and
attorney's fees 9
The Court synthesized the foregoing and will thus discuss them seriatim as follows:
1. Was there a valid contract of sale between petitioner and
Motorich?
2. May the doctrine of piercing the veil of corporate fiction
be applied to Motorich?
3. Is the alleged alteration of Gruenberg's testimony as
recorded in the transcript of stenographic notes material to
the disposition of this case?
4. Are respondents liable for damages and attorney's fees?
The Court's Ruling
The petition is devoid of merit.
First Issue: Validity of Agreement
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989,
it entered through its president, Andres Co, into the disputed Agreement with Respondent
Motorich Sales Corporation, which was in turn allegedly represented by its treasurer, Nenita
Lee Gruenberg. Petitioner insists that "[w]hen Gruenberg and Co affixed their signatures on
the contract they both consented to be bound by the terms thereof." Ergo, petitioner contends
that the contract is binding on the two corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the Agreement, according to which a
lot owned by Motorich Sales Corporation was purportedly sold. Such contract, however,
cannot bind Motorich, because it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its stockholders or members.
Accordingly, the property of the corporation is not the property of its stockholders or members
and may not be sold by the stockholders or members without express authorization from the
corporation's board of directors. 10 Section 23 of BP 68, otherwise known as the Corporation
Code of the Philippines, provides;
Sec. 23. The Board of Directors or Trustees. Unless otherwise provided in
this Code, the corporate powers of all corporations formed under this Code
shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year
and until their successors are elected and qualified.
Indubitably, a corporation may act only through its board of directors or, when authorized
either by its bylaws or by its board resolution, through its officers or agents in the normal
course of business. The general principles of agency govern the relation between the
corporation and its officers or agents, subject to the articles of incorporation, bylaws, or
relevant provisions of law. 11 Thus, this Court has held that "a corporate officer or agent may
represent and bind the corporation in transactions with third persons to the extent that the
authority to do so has been conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the powers intentionally conferred,
powers added by custom and usage, as usually pertaining to the particular officer or agent,
and such apparent powers as the corporation has caused persons dealing with the officer or
agent to believe that it has conferred." 12
Furthermore, the Court has also recognized the rule that "persons dealing with an assumed
agent, whether the assumed agency be a general or special one bound at their peril, if they
would hold the principal liable, to ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the burden of proof is upon them to
establish it (Harry Keeler v. Rodriguez, 4 Phil. 19)." 13 Unless duly authorized, a treasurer,
whose powers are limited, cannot bind the corporation in a sale of its assets. 14
In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita
Gruenberg, its treasurer, to sell the subject parcel of land. 15 Consequently, petitioner had
the burden of proving that Nenita Gruenberg was in fact authorized to represent and bind
Motorich in the transaction. Petitioner failed to discharge this burden. Its offer of evidence
before the trial court contained no proof of such authority. 16 It has not shown any provision
of said respondent's articles of incorporation, bylaws or board resolution to prove that Nenita
Gruenberg possessed such power.
That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the
responsibility of ascertaining the extent of her authority to represent the corporation.
Petitioner cannot assume that she, by virtue of her position, was authorized to sell the
property of the corporation. Selling is obviously foreign to a corporate treasurer's function,
which generally has been described as "to receive and keep the funds of the corporation, and
to disburse them in accordance with the authority given him by the board or the properly
authorized officers." 17
Neither was such real estate sale shown to be a normal business activity of Motorich. The
primary purpose of Motorich is marketing, distribution, export and import in relation to a
general merchandising business. 18 Unmistakably, its treasurer is not cloaked with actual or
apparent authority to buy or sell real property, an activity which falls way beyond the scope of
her general authority.
Art. 1874 and 1878 of the Civil Code of the Philippines provides:
Art. 1874. When a sale of a piece of land or any interest therein is through
an agent, the authority of the latter shall be in writing: otherwise, the sale
shall be void.
Art. 1878. Special powers of attorney are necessary in the following case:
xxx xxx xxx
(5) To enter any contract by which the ownership of an immovable is
transmitted or acquired either gratuitously or for a valuable consideration;
xxx xxx xxx.
Petitioner further contends that Respondent Motorich has ratified said contract of sale
because of its "acceptance of benefits," as evidenced by the receipt issued by Respondent
Gruenberg. 19 Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope of their authority are binding
on the corporation. But when these officers exceed their authority, their actions "cannot bind
the corporation, unless it has ratified such acts or is estopped from disclaiming them." 20
In this case, there is a clear absence of proof that Motorich ever authorized Nenita
Gruenberg, or made it appear to any third person that she had the authority, to sell its land or
to receive the earnest money. Neither was there any proof that Motorich ratified, expressly or
impliedly, the contract. Petitioner rests its argument on the receipt which, however, does not
prove the fact of ratification. The document is a hand-written one, not a corporate receipt, and
it bears only Nenita Gruenberg's signature. Certainly, this document alone does not prove
that her acts were authorized or ratified by Motorich.
Art. 1318 of the Civil Code lists the requisites of a valid and perfected contract: "(1) consent
of the contracting parties; (2) object certain which is the subject matter of the contract; (3)
cause of the obligation which is established." As found by the trial court 21 and affirmed by
the Court of Appeals, 22 there is no evidence that Gruenberg was authorized to enter into the
contract of sale, or that the said contract was ratified by Motorich. This factual finding of the
two courts is binding on this Court. 23 As the consent of the seller was not obtained, no
contract to bind the obligor was perfected. Therefore, there can be no valid contract of sale
between petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg to sell
its parcel of land, we hold that the February 14, 1989 Agreement entered into by the latter
with petitioner is void under Article 1874 of the Civil Code. Being inexistent and void from the
beginning, said contract cannot be ratified. 24
Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because
the latter is a close corporation. Since "Spouses Reynaldo L. Gruenberg and Nenita R.
Gruenberg owned all or almost all or 99.866% to be accurate, of the subscribed capital
stock" 25 of Motorich, petitioner argues that Gruenberg needed no authorization from the
board to enter into the subject contract. 26 It adds that, being solely owned by the Spouses
Gruenberg, the company can treated as a close corporation which can be bound by the acts
of its principal stockholder who needs no specific authority. The Court is not persuaded.
First, petitioner itself concedes having raised the issue belatedly, 27 not having done so
during the trial, but only when it filed its sur-rejoinder before the Court of Appeals. 28 Thus,
this Court cannot entertain said issue at this late stage of the proceedings. It is well-settled
the points of law, theories and arguments not brought to the attention of the trial court need
not be, and ordinarily will not be, considered by a reviewing court, as they cannot be raised
for the first time on appeal. 29Allowing petitioner to change horses in midstream, as it were,
is to run roughshod over the basic principles of fair play, justice and due process.
Second, even if the above mentioned argument were to be addressed at this time, the Court
still finds no reason to uphold it. True, one of the advantages of a corporate form of business
organization is the limitation of an investor's liability to the amount of the investment. 30 This
feature flows from the legal theory that a corporate entity is separate and distinct from its
stockholders. However, the statutorily granted privilege of a corporate veil may be used only
for legitimate purposes. 31 On equitable considerations, the veil can be disregarded when it
is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience;
confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an
instrumentality, agency or adjunct of another corporation. 32
Thus, the Court has consistently ruled that "[w]hen the fiction is used as a means of
perpetrating a fraud or an illegal act or as vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a monopoly or generally the
perpetration of knavery or crime, the veil with which the law covers and isolates the
corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals."33
We stress that the corporate fiction should be set aside when it becomes a shield against
liability for fraud, illegality or inequity committed on third persons. The question of piercing the
veil of corporate fiction is essentially, then, a matter of proof. In the present case, however,
the Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner
utterly failed to establish that said corporation was formed, or that it is operated, for the
purpose of shielding any alleged fraudulent or illegal activities of its officers or stockholders;
or that the said veil was used to conceal fraud, illegality or inequity at the expense of third
persons like petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the
Corporation Code defines a close corporation as follows:
Sec. 96. Definition and Applicability of Title. A close corporation, within
the meaning of this Code, is one whose articles of incorporation provide that:
(1) All of the corporation's issued stock of all classes, exclusive of treasury
shares, shall be held of record by not more than a specified number of
persons, not exceeding twenty (20); (2) All of the issued stock of all classes
shall be subject to one or more specified restrictions on transfer permitted by
this Title; and (3) The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class. Notwithstanding the
foregoing, a corporation shall be deemed not a close corporation when at
least two-thirds (2/3) of its voting stock or voting rights is owned or controlled
by another corporation which is not a close corporation within the meaning of
this Code. . . . .
The articles of incorporation 34 of Motorich Sales Corporation does not contain any provision
stating that (1) the number of stockholders shall not exceed 20, or (2) a preemption of shares
is restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in any
stock exchange or making a public offering of such stocks is prohibited. From its articles, it is
clear that Respondent Motorich is not a close corporation. 35 Motorich does not become one
either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its
subscribed capital stock. The "[m]ere ownership by a single stockholder or by another
corporation of all or capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personalities." 36 So, too, a narrow distribution of
ownership does not, by itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals 37 wherein the Court
ruled that ". . . petitioner corporation is classified as a close corporation and, consequently, a
board resolution authorizing the sale or mortgage of the subject property is not necessary to
bind the corporation for the action of its president." 38 But the factual milieu in Dulay is not on
all fours with the present case. In Dulay, the sale of real property was contracted by the
president of a close corporation with the knowledge and acquiescence of its board of
directors. 39 In the present case, Motorich is not a close corporation, as previously
discussed, and the agreement was entered into by the corporate treasurer without the
knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where "an action by a director,
who singly is the controlling stockholder, may be considered as a binding corporate act and a
board action as nothing more than a mere formality." 40 The present case, however, is not
one of them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own "almost 99.866%" of
Respondent Motorich.41 Since Nenita is not the sole controlling stockholder of Motorich, the
aforementioned exception does not apply. Grantingarguendo that the corporate veil of
Motorich is to be disregarded, the subject parcel of land would then be treated as conjugal
property of Spouses Gruenberg, because the same was acquired during their marriage.
There being no indication that said spouses, who appear to have been married before the
effectivity of the Family Code, have agreed to a different property regime, their property
relations would be governed by conjugal partnership of gains. 42 As a consequence, Nenita
Gruenberg could not have effected a sale of the subject lot because "[t]here is no co-
ownership between the spouses in the properties of the conjugal partnership of gains. Hence,
neither spouse can alienate in favor of another his or interest in the partnership or in any
property belonging to it; neither spouse can ask for a partition of the properties before the
partnership has been legally dissolved." 43
Assuming further, for the sake of argument, that the spouses' property regime is the absolute
community of property, the sale would still be invalid. Under this regime, "alienation of
community property must have the written consent of the other spouse or he authority of the
court without which the disposition or encumbrance is void." 44 Both requirements are
manifestly absent in the instant case.
Third Issue: Challenged Portion of TSN Immaterial
Petitioner calls our attention to the following excerpt of the transcript of stenographic notes
(TSN):
Q Did you ever represent to Mr. Co that you were
authorized by the corporation to sell the property?
A Yes, sir. 45
Petitioner claims that the answer "Yes" was crossed out, and, in its place was written a "No"
with an initial scribbled above it. 46 This, however, is insufficient to prove that Nenita
Gruenberg was authorized to represent Respondent Motorich in the sale of its immovable
property. Said excerpt be understood in the context of her whole testimony. During her cross-
examination. Respondent Gruenberg testified:
Q So, you signed in your capacity as the treasurer?
[A] Yes, sir.
Q Even then you kn[e]w all along that you [were] not
authorized?
A Yes, sir.
Q You stated on direct examination that you did not
represent that you were authorized to sell the property?
A Yes, sir.
Q But you also did not say that you were not authorized to
sell the property, you did not tell that to Mr. Co, is that
correct?
A That was not asked of me.
Q Yes, just answer it.
A I just told them that I was the treasurer of the corporation
and it [was] also the president who [was] also authorized to
sign on behalf of the corporation.
Q You did not say that you were not authorized nor did you
say that you were authorized?
A Mr. Co was very interested to purchase the property and
he offered to put up a P100,000.00 earnest money at that
time. That was our first meeting. 47
Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its
property. On the other hand, her testimony demonstrates that the president of Petitioner
Corporation, in his great desire to buy the property, threw caution to the wind by offering and
paying the earnest money without first verifying Gruenberg's authority to sell the lot.
Fourth Issue:
Damages and Attorney's Fees
Finally, petitioner prays for damages and attorney's fees, alleging that "[i]n an utter display of
malice and bad faith, respondents attempted and succeeded in impressing on the trial court
and [the] Court of Appeals that Gruenberg did not represent herself as authorized by
Respondent Motorich despite the receipt issued by the former specifically indicating that she
was signing on behalf of Motorich Sales Corporation. Respondent Motorich likewise acted in
bad faith when it claimed it did not authorize Respondent Gruenberg and that the contract
[was] not binding, [insofar] as it [was] concerned, despite receipt and enjoyment of the
proceeds of Gruenberg's act." 48Assuming that Respondent Motorich was not a party to the
alleged fraud, petitioner maintains that Respondent Gruenberg should be held liable because
she "acted fraudulently and in bad faith [in] representing herself as duly authorized by
[R]espondent [C]orporation." 49
As already stated, we sustain the findings of both the trial and the appellate courts that the
foregoing allegations lack factual bases. Hence, an award of damages or attorney's fees
cannot be justified. The amount paid as "earnest money" was not proven to have redounded
to the benefit of Respondent Motorich. Petitioner claims that said amount was deposited to
the account of Respondent Motorich, because "it was deposited with the account of Aren
Commercial c/o Motorich Sales Corporation." 50 Respondent Gruenberg, however, disputes
the allegations of petitioner. She testified as follows:
Q You voluntarily accepted the P100,000.00, as a matter of
fact, that was encashed, the check was encashed.
A Yes. sir, the check was paid in my name and I deposit[ed]
it.
Q In your account?
A Yes, sir. 51
In any event, Gruenberg offered to return the amount to petitioner ". . . since the sale
did not push through." 52
Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He
has been the president of Petitioner Corporation for more than ten years and has also served
as chief executive of two other corporate entities. 53 Co cannot feign ignorance of the scope
of the authority of a corporate treasurer such as Gruenberg. Neither can he be oblivious to
his duty to ascertain the scope of Gruenberg's authorization to enter into a contract to sell a
parcel of land belonging to Motorich.
Indeed, petitioner's claim of fraud and bad faith is unsubstantiated and fails to persuade the
Court. Indubitably, petitioner appears to be the victim of its own officer's negligence in
entering into a contract with and paying an unauthorized officer of another corporation.
As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered to
return to petitioner the amount she received as earnest money, as "no one shall enrich
himself at the expense of another." 54 a principle embodied in Article 2154 of Civil
Code. 55 Although there was no binding relation between them, petitioner paid Gruenberg on
the mistaken belief that she had the authority to sell the property of Motorich. 56 Article 2155
of Civil Code provides that "[p]ayment by reason of a mistake in the contruction or application
of a difficult question of law may come within the scope of the preceding article."
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.
SO ORDERED.













































G.R. No. 74125 July 31, 1990
UNIVERSAL SHIPPING LINES, INC., petitioner, vs. INTERMEDIATE APPELATE COURT
and ALLIANCE ASSURANCE COMPANY, LTD., respondents.
GRIO-AQUINO, J.:
In this appeal by certiorari, the petitioner seeks to set aside the decision of the then
Intermediate Appellate Court, now Court of Appeals, promulgated on March 25, 1986 in AC-
G.R. CV No. 69824, affirming with modification the decision of the former Court of First
Instance of Manila dated February 4, 1981, against the herein petitioner, Universal Shipping
Lines, Inc., the defendant in the trial court.
On or about March 22,1974, SEVALCO Limited, owned and operated by the petitioner,
shipped from Rotterdam Netherlands, to Bangkok, Thailand, aboard its M/V "TAIWAN", two
(2) cargoes of 50 palletized cartons consisting of 2,000 units of 25-kilogram bags of State R
Brand carton black, with a declared gross weight of 53,000 kilos each. They were
respectively consigned to S. Lersen Company, Ltd. and Muang Ngarm Retreads,Ltd., per
Bills of Lading Nos. RB-15 (Exh. A) and RB-16 (Exh. B). Both shipments were insured with
the private respondent, Alliance Assurance Company, Ltd., a foreign insurance company
domiciled in London, England, which had withdrawn from the Philippine market on June 30,
1951 yet.
Despite the arrival of the vessel on June 28, 1974 at Bangkok, the cargo covered by Bill of
Lading No. RB-15 was not unloaded nor delivered to the consignee, S. Lersen Company,
Ltd. The shipment under Bill of Lading No. RB-16 was delivered to Muang Ngarm Retreads,
Ltd. with a total weight shortage of 11,070 kilos because the cargoes had been either totally
or partially dissolved in saltwater which flooded Hatch No. 2 of the vessel where they had
been stored.
Upon arrival in Manila on July 4, 1974, Arturo C. Saavedra, master of M/V "TAIWAN" filed a
marine protest (Exh. H), pertinent portions of which read:
By investigation, the source of the water could not be definitely ascertained
where it comes from. However, the bilge pump was employed to pump out
continue working for almost 12 hours No. 2. The bilge pump was employed
every other day to pump out the water, but it was seems to be almost same
soundings. Suspecting of some leakage of suction pipes.
That the hold No. 2 cannot be inspected on account of the full cargoes inside
the hold, rendering it to be inaccessible.
Suspecting that the water comes from outside passing through some loosen
rivets on starboard side of the ship. (sic.)
That the pumping out the water from the hold was done by shore help upon
arrival at Bangkok. (sic.) (pp. 23-24, Rollo.)
The consignees, S. Lersen Co., Ltd. and Muang Ngarm Retreads, Inc., filed their respective
formal claims for loss and damage to their cargoes on August 7, 1974 (Exhs. N and N-1) and
on November 12,1974 (Exh. M). (p. 24, Rollo.) The insurer paid both claims in the amounts of
I2,180 and 2,547.18 for the loss and damage to their cargoes.
On June 25, 1976, private respondent, as insurer-subrogee, filed an action in the Court of
First Instance of Manila to recover from the petitioner and its Manila agent, Carlos Go Thong
& Company, what it paid the consignees of the cargo.
After trial, the court a quo rendered judgment for the private respondent, the dispositive
portion of which reads:
PREMISES CONSIDERED, judgment is hereby rendered ordering
defendants Universal Shipping Lines, Inc. and Carlos Go Thong & Co.,
jointly and severally, to pay plaintiff Alliance Asurance Co., Ltd., under the
first cause of action, the sum of 12,180.00 or the peso equivalent thereof,
and under the second cause of action, the sum of 2,547.18 or the peso
equivalent thereof, both with legal interest thereon from June 25, 1976, the
date of the filing of the present action, until said obligations are fully paid,
plus attorney's fees in the sum of P10,000.00, with costs. (pp. 24-25, Rollo.)
On appeal to the Court of Appeals, the decision was affirmed after exculpating petitioner's
ship-agents in Manila (Go Thong) from any liability on the ground that it had no participation
in the shipment of the cargo which had been loaded and discharged in places other than
Manila (p. 28, Rollo).itc-asl
In this appeal by certiorari, petitioner alleges that respondent court erred:
1. in holding petitioner liable for the damage/loss suffered by the subject
shipments;
2. in holding that private respondent has capacity to sue in this jurisdiction;
3. in finding that private respondent's cause of action has not yet prescribed;
and
4. in awarding attorney's fees without stating any factual, legal and equitable
justification.
The petition is not meritorious.
The first assignment of error raises a factual issue which we decline to review as this Court
may review only legal issues which must be distinctly set forth in the petition (Sec. 2, Rule 45,
Rules of Court). In any event, the Court of Appeals committed no reversible error in holding,
as the trial court did, that:
... It was incumbent upon the defendants to prove that the losses and
damages were due to causes other than the negligence or fault of their
employees. Said defendants have not adduced proof on this point. It having
been shown that the losses and damages were incurred while the shipments
were in the custody of the M/V' Taiwan' the liability of its owner/operator and
shipping agent is clear-they must pay for the losses and damages sustained
by the consignees as a consequence of the breach of contract of water
transportation. (pp. 27-28, Rollo.)
On the issue of jurisdiction, we uphold the appellate court's ruling that the private respondent
may sue in Philippine courts upon the marine insurance policies issued by it abroad to cover
international-bound cargoes shipped by a Philippine carrier, even if it has no license to do
business in this country, for it is not the lack of the prescribed license (to do business in the
Philippines) but doing business without such license, which bars a foreign corporation from
access to our courts. (Pacific Vegetable Oil Corporation vs. Singzon L-7919, April 29, 1955;
Eastboard Navigation, Ltd. vs. J. Ysmael & Co., Inc.,
L-9090, Sept. 10, 1957.)
Anent the issue of prescription of the action under Section 3(6), Title I, of the Carriage of
Goods by Sea Act (Commonwealth Act No. 65) which provides that:
... the carrier and the ship shall be discharged from all liability in respect of
loss or damage unless suit is brought within one year after delivery of the
goods or the date when the goods should have been delivered. ...
This provision of the law admits of an xception: if the one-year period is suspended by
express agreement of the parties (Chua Kay vs. Everett Steamship Corporation, L-5554, May
27,1953; Tan Liao vs. American President Lines, Ltd., L-7280, January 20, 1956) for in such
a case, their agreement becomes the law for them. (Phoenix Assurance Co., Ltd. vs. United
States Lines, 22 SCRA 674; Baluyot vs. Venegas, 22 SCRA 412; Lazo vs. Republic Surety &
Insurance, Co., Inc., 31 SCRA 329; Philippine American General Insurance Co., Inc. vs.
Mutuc, 61 SCRA 22-23).
The exchange of correspondence between the parties and/or their
associates/representatives (Exhs. R, S, S-1, T, T-1 and T-2) shows that the parties had
mutually agreed to extend the time within which the plaintiff or its predecessors-in-interest
may file suit until December 27,1976. When the complaint was filed on June 25, 1976, that
deadline had not yet expired.
An award of attorney's fees lies within the discretion of the court and depends upon the
circumstances of each case (Medco Industrial Corp., et al. vs. Court of Appeals, et al., 167
SCRA 838).itc-asl In this case, the award of P10,000 as attorney's fees was reasonable
and justified because the defendant's rejection of the private respondent's demand,
compelled the latter to litigate and incur expenses to protect and enforce its just and valid
claim.
WHEREFORE, the petition for review is denied for lack of merit. Costs against the petitioner.
SO ORDERED.





Pacific Vegetable Oil Corporation v. Angel Singzon
GR. No. L-7917 (Unreported Case)
Facts:
This is an action instituted by the plaintiff, a foreign corporation, against the defendant to
recover the sum of P157,760 as damages suffered by plaintiff as a consequence of the
failure of the defendant to deliver 300 tons of copra which he sold and bound himself to
deliver to the plaintiff.
Singzon in August 1947, acting through a broker in San Francisco, sold to Pacific 500 tons of
copra for shipment in September and October 1947. The agreed price to be covered by an
irrevocable letter of credit for the contract price. Thus, pursuant to this, the Bank of California,
on behalf of Pacific, opened an irrevocable letter of credit with China Bank in the Philippines.
Singzon failed to ship the 500 tons of copra, but upon negotiation through the broker, a
conditional amicable settlement was arrived at under which Singzon promised to ship on
February 1948, the amount of 300 tons of copra with the understanding that if he effectually
ship said 300 tons of copra not later than February, the original contract would be considered
cancelled. But that should he fail to ship said 300 tons, Singzon shall pay Pacific $10,000 as
damages and shall furthermore be obliged to fulfill all his obligations under original contract.
Singzon failed to ship and deliver the 300 tons of copra to Pacific according to their
agreement. Thereafter, Pacific demanded from Singzon the payment of $10,000 but he failed
and refused to ship the 500 tons of copra. As a result of the default, Pacific was forced to
purchase copra from the world marker and thus incurred additional expenses.
Hence, this action is filed by Pacific. Singzon, in defense, filed a motion to dismiss on the
ground that Pacific Vegetable Oil Corp. (Pacific) failed to obtain license to transact business
in the Philippines and consequently, it had no personality to file the action. RTC denied the
motion. It also denied MR. However, the Court of Appeals reversed and dismissed the case
holding that Pacific had no personality to institute the present case even if it afterwards
obtained a license to transact business upon the theory that this belated act did not have the
effect of curing the defect.
Issue: W/N appellant transacted business in the Philippines in contemplation of law?
Decision: No, it was transacted in the US.
It appears from the facts that the copra in question was actually sold by the defendant to the
plaintiff in the US. It also appears that the contract was entered into in the US by appellees
broker and appellants representatives. It further appears that the payment of the price was to
be made at San Francisco, California, through a letter of credit to be opened at the Bank of
California. And with respect to the delivery of copra, it likewise appears that the price agreed
upon was $142 per 2,000 lbs., c.i.f. Pacific Coast. This means that the vendor was to pay not
only the cost of the goods, but also the freight and insurance expenses, and, it was judicially
interpreted, this is taken to indicate that the delivery is to be made at the port of destination. It
is therefore cleat that the contract covering the copra has not only entered into in the US but
it was agreed to be consummated there. It follows that Pacific has not transacted business in
the Philippines in contemplation of Sections 68 and 69 of the Corporation Law which require
any foreign corporation to obtain a license before it could transact business, or before it could
have personality to file suit in the Philippines.
It appearing that Pacific has not transacted business in the Philippines and as such it is not
required to obtain a license before acquiring personality to bring court action, it may be stated
that the appellant, even if a foreign corporation, can maintain the present action because, as
aptly said by this Court, it was never the purpose of the Legislature to exclude a foreign
corporation which happens to obtain an isolated order for business in the Philippines, from
securing redress in the Philippine courts, and thus, in effect, to permit persons to avoid their
contracts made with such foreign corporation. Wherefore, the decision appealed from is
reversed. Pacific is entitled to prosecute its claim in the Philippine courts against Singzon.





G.R. No. L-26809 December 29, 1977
AETNA CASUALTY & SURETY COMPANY, plaintiff-appellant, vs.
PACIFIC STAR LINE, THE BRADMAN CO. INC., MANILA PORT SERVICE and/or
MANILA RAILROAD COMPANY, INC., defendants-appellees.
FERNANDEZ, J.:
This is an appeal from the decision of the Court of First Instance of Manila, Branch XVI, in
Civil Case No. 53074 entitled Aetna Casualty & Surety Company vs. Pacific Star Line, The
Bradman Co. Inc., Manila Port Service and/or Manila Railroad Company, Inc." dismissing the
complaint on the ground that the plaintiff has no legal capacity to bring this suit and making
no finding as to the liability of the defendants. 1
On February 11, 1963, Smith Bell & Co. (Philippines), Inc. and Aetna Surety Casualty &
Surety Co. Inc., as subrogee, instituted Civil Case No. 53074 in the Court of First Instance of
Manila against Pacific Star Line, The Bradman Co. Inc., Manila Port Service and/or Manila
Railroad Company, Inc. to recover the amount of US $2,300.00 representing the value of the
stolen and damaged cargo plus litigation expenses and exemplary damages in the amounts
of P1,000.00 and P2,000.00, respectively, with legal interest thereon from the filing of the suit
and costs.
The complaint stated that during the time material to the action, the defendant Pacific Star
Line, as a common carrier, was operating the vessel SS Ampal on a commercial run between
United States and Philippine Ports including Manila; that the defendant, The Bradman Co.
Inc., was the ship agent in the Philippines for the SS Ampal and/or Pacific Star Line; that the
Manila Railroad Co. Inc. and Manila Port Service were the arrastre operators in the port of
Manila and were authorized to delivery cargoes discharged into their custody on presentation
of release papers from the Bureau of Customs and the steamship carrier and/or its agents;
that on December 2, 1961, the SS Ampal took on board at New York, N.Y., U.S.A., a
consignment or cargo including 33 packages of Linen & Cotton Piece Goods for shipment to
Manila for which defendant Pacific Star Line issued Bill of Lading No. 18 in the name of I.
Shalom & Co., Inc., as shipper, consigned to the order of Judy Philippines, Inc., Manila; that
the SS Ampal arrived in Manila on February 10, 1962 and in due course, discharged her
cargo into the custody of Manila Port Service; that due to the negligence of the defendants,
the shipment sustained damages valued at US $2,300.00 representing pilferage and
seawater damage; that I. Shalom & Co., Inc. immediately filed claim for the undelivered land
damaged cargo with defendant Pacific Star Line in New York, N.Y., but said defendant
refused and still refuses to pay the said claim; that the cargo was insured by I. Shalom & Co.,
Inc. with plaintiff Aetna Casualty & Surety Company for loss and/or damage; that upon
demand, plaintiff Aetna Casualty & Surety Company indemnified I. Shalom & Co., Inc. the
amount of US $2,300.00; that in addition to this, the plaintiffs had obligated themselves to
pay attorney's fees and they further anticipated incurring litigation expenses which may be
assessed at P1,000.00; that plaintiffs and/or their predecessor-in-interest sustained losses
due to the negligence of Pacific Star Line prior to delivery of the cargo to Manila or, in the
alternative, due to the negligence of Manila Port Service after delivery of the cargo to it by the
SS Ampal; that despite repeated demands, none of the defendants has been willing to accept
liability for the claim of the plaintiffs and/or I. Shalom & Co., Inc.; and that by reason of
defendants' evident bad faith, they should consequently be liable to pay exemplary damages
in the amount of P2,000.00. 2
On motion of the defendants Pacific Star Line and The Bradman Co. Inc. and with the
conformity of the plaintiff Aetna Casualty & Surety Company, the plaintiff Smith Bell & Co.
(Philippines), Inc. was dropped and the complaint was dismiss as to said plaintiff. 3
In their answer filed on February 28, 1963, the defendants Manila Port Service and Manila
Railroad Company, Inc. alleged that they have exercised due care and diligence in handling
and delivering the cargoes consigned to Judy Philippines, Inc.; that, in fact, they had
delivered the merchandise to the consignee thereof in the same quantity, order and condition
as when the same was actually received from the carrying vessel; that a portion of the
shipment in question was discharged from the carrying vessel in bad order and condition and
consequently, any loss or shortage incurred thereto, is the sole responsibility of the said
carrying vessel and not that of the arrastre operator; that they have delivered to the
consignee thereof the same quantity of merchandise and in the same order or condition as
when received from the carrying vessel; that since no claim of the value of the goods in
question was filed by the plaintiff or any of its representative within 15 days from the
discharge of the last package from the carrying vessel, the claim has become time-barred
and/or prescribed pursuant to the management contract under which said defendants were
appointed as arrastre operator at the Port of Manila; that consequently, they are completely
relieved or released from any or all liability therefor and that they do not in any manner act as
agent of the carrying vessel in the discharge of the goods at the piers. 4
The Pacific Star Line and The Bradman Co. Inc. alleged in their answer as special defenses
that the plaintiff's cause of action, if any, against the answering defendants had prescribed
under the provisions of the Carriage of Goods by Sea Act and/or the terms of the covering bill
of lading that the entire shipment covered by the bill of lading issued by answering defendant
Pacific Star Line was discharged complete and in good order condition into the custody of the
other defendant, Manila Port Service, which was the operator of the arrastre service at the
Port of Manila; that any damage which may have occurred to the cargo while it was in the
custody of the other defendant, Manila Port Service was caused solely by the negligence of
said arrastre operator and is, therefore, its sole responsibility, the defendant Manila Port
Service is not the vessel agent in the receiving, handling, custody and/or delivery of the cargo
purchased: that the vessel responsibility ceased upon removal of the cargo from the ship's
tackle; that defendant Manila Port Service is not the vessel's or answering defendant's agent
in the receiving, handling, custody and/or delivery of the cargo consignee; that the vessel's
responsibility ceased upon removal of the cargo from the ship's tackles; that the vessel's
liability, if any, for one case cannot exceed the sum of P 500.00 under the Carriage of Goods
by Sea Act. 5
The defendants Manila Port Service and Manila Railroad Company, Inc. amended their
answer to allege that the plaintiff, Aetna casualty & Surety Company, is a foreign corporation
not duly licensed to do business in the Philippines and, therefore. without capacity to sue and
be sued. 6 The parties submitted on November 23, 1965 the following partial stipulation of
facts-.
PARTIAL STIPULATION OF FACTS
COME NOW the parties, through their undersigned counsel, and to this
Honorable Court respectfully submit the following Partial Stipulation of Facts:
A. - On their part, defendants admit:
1. - Paragraphs 2, 3, and 4 of the complaint;
2. - That the S/S Ampal arrived in Manila, on February 10, 1962 and in due
course discharged her cargoes into the custody of the defendant Manila Port
Service, including the subject shipment complete and in good order, except
two (2) cases Nos. 5804 and 16705 which were discharged under B.O. Tally
Sheets Nos. 2721 and 2722 and turned over to the custody of the defendant
Manila Port Service by the vessel S/S Ampal. The shipping Documents
covering the cargo were indorsed and sent to Judy's Philippines, Inc. for
processing and eventual return thereof to the owner, and which cleared the
documents with the defendants and the Bureau of Customs;
3 - That the I. Shalom & Co., Inc. filed claim for undelivered and damaged
portion of subject cargo with defendant Pacific Star Line in New York, New
York, but said defendant refused and still refuses to pay the said claim, for
the reason stated in said defendant's letter to Smith, Bell & Co. (Philippines,
Inc. dated June 1, 1962, copy of which letter is hereto attached and marked
Annex A;
4 - That Judy's Philippines, Inc. through its customs broker filed provisional
claims with defendant The Bradman Co., Inc. and defendant Manila Port
Service on February 13, 1962.
B. - Defendants admit the genuineness and due execution of the following
documents:
1 - Bill of Lading No. 18 dated December 22, 1961, ex S/S Ampal, attached
hereto and marked as Annex B;
2 - Invoice dated December 26, 1961 of I. Shalom & Co., Inc. attached
hereto and marked as Annex B;
3 - Provisional Claim filed with The Bradman Co., Inc. on February 13, 1962,
attached hereto and marked as Annex E;
4 - Provisional Claim filed with the Manila Port Service on February 13,
1962, attached hereto and marked as Annex E;
5 - Request for Bad Order Examination No. 1073 dated march 6, 1962
covering Cases Nos. 16705 and 5804, attached hereto and marked as
Annex F;
6 - Request for Bad Order Examination No. 1177 dated March 5, 1962
covering Cases Nos. 14913 and 15043, attached 'hereto and marked as
Annex G;
7 - Formal Claim dated April 10,1962 addressed to defendant Pacific Star
Line filed by I. Shalom & co. Inc. attached hereto and marked as Annex H;
8 - Letter dated May 3, 1962 addressed to defendant Manila Port Service by
Smith, Bell & co. (Philippines) Inc., attached hereto and marked as Annex I;
9 - Letter dated August 8, 1962 addressed to the defendant Manila Port
Service by Smith Bell & Co. (Philippines) Inc., attached hereto and marked
as Annex J;
10 - Certification of Insurance, authenticated by the Philippine Consul, New
York, U.S.A. attached hereto and marked as Annex K;
11. Subrogation Receipt dated June 1, 1962, attached hereto and marked as
Annex L;
C. - On their part, plaintiff and defendant Pacific Star Line and The Bradman
Company, Inc. admit:
1. - Having knowledge and being bound by the provisions of the
Management Contract entered into by and between the Manila Port Service
and the Bureau of customs on February 29, 1956, covering the operation of
the arrastre service in the Port of Manila, a copy of which is attached hereto
and marked as Annex M;
2. - The genuineness and due execution of Gate Pass No. 34582 which,
aiming others, covers Case NO. 14915, attached hereto and marked as
Annex N;
3. - The genuineness and due execution of Gate Pass No. 34837, which,
among others, cover Cases No. 16706 and 16707, attached hereto and
marked as Annex O;
4. - The genuineness and due execution of a Certification issued by the
Office of the Insurance Commissioner dated December 19, 1964, a
photostat copy of which is attached hereto and marked as Annex P;
5. - The genuineness and due execution of a Certification issued by the
Securities and Exchange Commission dated November 10, 1964, a
photostat copy of which is attached hereto and marked as Annex Q;
6. - That the value of the shipment in question was not specified or
manifested in the bill of lading and that the arrastre charges thereon were
paid on the basis of weight and/or measurement and not on the value
thereof.
D. On other part, plaintiff and defendant Manila Port Service admit:
1. - That the shipment in question was discharged complete and in good
order condition into the custody of the Manila Port Service except Cases
Nos. 5804 and 16705 covered by Tally Sheets Nos. 2721 and 2722;
2. - That as per signed copies of Survey Report and Turnover Receipt both
dated February 26, 1962, all goods contained in Case No. 5804 were
received in good order condition by the consignee who waived all claims
thereon and that the contents of Case No. 16705 were turned over to the
defendant Manila Port Service in the condition shown in said Turnover
Receipt;
3. - The genuineness and due execution of the following documents:
(a) Tally Sheet No. 2721 dated November 2, 1962 attached
hereto and marked as Annex R;
(b) Tally Sheet No. 2722, dated November 2, 1962,
attached thereto and marked as Annex S;
mark as Annex T;
(d) Turnover Receipt dated February 26, 1962, attached
hereto and marked as Annex U.
WHEREFORE, it is respectfully prayed that the following Partial Stipulation
of Facts be approved, and the parties be allowed to present evidence on the
remaining controverted issues.
Manila, Philippines, September, 1965.
ROSS, SELPH, SALCEDO, DEL
ROSARIO,
BITO AND MISA
By:
(Sgd.) MARIANO LOZADA
( T. ) MARIANO LOZADA
Counsel for the defendants
PACIFIC STAR LINE and
THE BRADMAN COMPANY, INC.
405 FNCB Building Manila
OZAETA, GIBBS & OZAETA
By:
(Sgd.) JESUS S. J. SAYOC
( T. ) JESUS S. J. SAYOC
Counsel for the Plaintiffs
7th Floor, Magsaysay Bldg.
520 T. M. Kalaw Street
Ermita, Manila
D. F. MACARANAS &
A. M. ABRENICA
By:
(Sgd.) ALIPIO M. ABRENICA
( T. ) ALIPIO M. ABRENICA
Counsel for the Defendants
MANILA PORT SERVICE and
MANILA RAILROAD COMPANY, INC.
Terminal Bldg., Port Area Manila. 7
The case was submitted for decision on the basis of the partial stipulation of facts and three
(3) documents submitted in evidence by the defendants consisting of (a) a certification issued
by the Office of the Insurance Commission to the effect that there is no record in said office
showing that Aetna Casualty & Surety Company has been licensed to transact insurance
business in the Philippines; (b) a certification issued by the Securities and Exchange
Commission that its records do not show the registration of the Aetna Casualty & Surety
Company either as a corporation or a partnership nor that it has been used to transact
business in the Philippines as a foreign corporation; (c) a certification of the Clerk of Court of
the Court of First Instance of Manila issued on August 5, 1965 to the effect that thirteen (13)
civil cases appear to have been filed by and/or against the Aetna Casualty & Surety
Company in said court. 8
The trial court dismissed the complaint because:
There has been a ruling that foreign corporation may file a suit in the
Philippines in isolated cases. But the case of the plaintiff here is not that.
The evidence shows that the plaintiff has been filing actions in the
Philippines not just in isolated instances, but in numerous cases and
therefore, has been doing business in this country, contrary to Philippine
laws. 9
The plaintiff Aetna Casualty & Surety Company appealed to this Court assigning the following
errors:
I
THE LOWER COURT ERRED IN RULING THAT APPELLANT INSURANCE
COMPANY IS SUBJECT TO THE REQUIREMENTS OF SECTIONS 68
AND 69 OF ACT 1459, AS AMENDED, AND FAILING TO COMPLY
THEREWITH, HAS NO LEGAL CAPACITY TO BRING SUIT IN THIS
JURISDICTION.
II
THE LOWER COURT ERRED IN DISMISSING THE COMPLAINT. 10
The main issue involved in this appeal is whether or not the appellant, Aetna Casualty &
Surety Company, has been doing business in the Philippines. It is a fact that said appellant
has no license to transact business in the Philippines as a foreign corporation.
Section 68 of the Corporation Law provides that "No foreign corporation or corporation
formed, organized, or existing under any laws other than those of the Philippines shall be
permitted to transact business in the Philippines until after it shall have obtained a license for
that purpose from the Securities and Exchange Commissioners . . . ." And according to
Section 69 of said Corporation Law "No foreign corporation or corporation formed, organized,
or existing under any laws other than those of the Philippines shall be permitted to transact
business in the Philippines or maintain by itself or assignee any suit for the recovery of any
debt, claim, or demand whatever, unless it shall have the license prescribed in the section
immediately preceding ..."
It is settled that if a foreign corporation is not engaged in business in the Philippines, it may
not be denied the right to file an action in Philippine courts for isolated transactions. 11
The object of Sections 68 and 69 of the Corporation Law was not to prevent the foreign
corporation from performing single acts, but to prevent it from acquiring a domicile for the
purpose of business without taking the steps necessary to render it amenable to suit in the
local courts. It was never the purpose of the Legislature to exclude a foreign corporation
which happens to obtain an isolated order for business from the Philippines, from securing
redress in the Philippine courts. 12
In Mentholatum Co., Inc. et al. vs. Mangaliman, et al., this Court ruled that:
No general rule or governing principle can be laid down as to what
constitutes 'doing' or 'engaging in' or 'transacting' business. Indeed, each
case must be judged in the light of its peculiar environmental circumstances.
The true test, however, seems to be whether the foreign corporation is
continuing the body or substance of the business or enterprise. for which it
was organized or whether it has substantially retired from it and turned it
over to another. (Traction Cos. Collectors of Int. Revenue [C. C. A. Ohio],
223 F. 984, 987.) The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its organization.
(Griffin v. Implement Dealers Mut. Fire Ins. Co., 241 N. W. 75, 77; Pauline
Oil & Gas Co. vs. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl. 111;
Automotive Material Co. vs, American Standard Metal Products Corp., 158
N. E. 698, 703, 327 I11. 367.) 13
And in Eastboard Navigation, Ltd., et al. vs. Juan Ysmael & Co., Inc., this Court held that:
(d) While plaintiff is a foreign corporation without license to transact business
in the Philippines, it does not follow that it has no to bring the present action.
Such license is not necessary because it is not engaged in business in the
Philippines. In fact, the transaction herein involved is the first business
undertaken by plaintiff the Philippines, although on a previous occasion
plaintiff's vessel was chartered by the National Rice and Corn Corporation to
carry cargo from abroad to the Philippines. These two isolated transactions
do not constitute engaging in business in the Philippines within the Purview
of Sections 68 and 69 of the Corporation Law so as to plaintiff from seeking
redress in our courts. (Marshall-Wells Co. vs. Henry W. Elser & Co. 49 Phil.,
70; Pacific Vegetable Oil Corporation vs. Angle O. Singson, G.R. No. L-
7917, April 29,1955.) 14
Based on the rulings laid down in the foregoing cases, it cannot be said that the Aetna
Casualty & Surety Company is transacting business of insurance in the P ' Philippines for
which it must have a license. The contract of insurance was entered into in New York, U.S.A.,
and payment was made to the consignee in its New York branch. It appears from the list of
cases issued by the Clerk of Court of the Court of First Instance of Manila that all the actions,
except two (2) cases filed by Smith, Bell & Co., Inc. against the Aetna Casualty & Surety
Company, are claims against the shipper and the arrastre operators just like the case at bar.
Consequently, since the appellant Aetna Casualty & Surety Company is not engaged in the
business of insurance in the Philippines but is merely collecting a claim assigned to it by the
consignee, it is not barred from filing the instant case although it has not secured a license to
transact insurance business in the Philippines.
WHEREFORE, the decision appealed from is hereby set aside and the case is remanded to
the trial court for further proceedings to determine the liability of the defendants-appellees,
without pronouncements as to costs.
SO ORDERED.





G.R. No. L-38649 March 26, 1979
FACILITIES MANAGEMENT CORPORATION, J. S. DREYER, and J. V.
CATUIRA, petitioners, vs. LEONARDO DE LA ROSA AND THE HONORABLE COURT OF
INDUSTRIAL RELATIONS, respondents.
MAKASIAR, J:
Petition for review on certiorari of the decision of the Court of Industrial Relations, dated
February 14, 1972, ordering petitioners herein to pay private respondent Leonardo de la Osa
his overtime compensation, as wen as his swing shift and graveyard shift premiums at the
rate of fifty (50%) per cent of his basic sa (Annex E, p. 31, rollo).
The aforesaid decision was based on a report submitted by the Hearing Examiner, CIR
(Dagupan City Branch), the pertinent portions of which are quoted hereinbelow:::
In a petition filed on July 1, 1967, Leonardo dela Osa sought his
reinstatement. with full backwages, as well as the recovery of his overtime
compensation, swing shift and graveyard shift differentials. Petitioner alleged
that he was employed by respondents as follows: (1) painter with an hourly
rate of $1.25 from March, 1964 to November, 1964, inclusive; (2) houseboy
with an hourly rate of $1.26 from December, 1964 to November, 1965,
inclusive; (3) houseboy with an hourly rate of $1.33 from December, 1965 to
August, 1966, inclusive; and (4) cashier with an hourly rate of $1.40 from
August, 1966 to March 27, 1967, inclusive. He further averred that from
December, 1965 to August, 1966, inclusive, he rendered overtime services
daily and that this entire period was divided into swing and graveyard shifts
to which he was assigned, but he was not paid both overtime and night shift
premiums despite his repeated demands from respondents.
Respondents filed on August 7, 1967 their letter- answer without
substantially denying the material allegations of the basic petition but
interposed the following special defenses, namely: That respondents
Facilities Management Corporation and J. S. Dreyer are domiciled in Wake
Island which is beyond the territorial jurisdiction of the Philippine
Government; that respondent J. V. Catuira, though an employee of
respondent corporation presently stationed in Manila, is without power and
authority of legal representation; and that the employment contract between
petitioner and respondent corporation carries -the approval of the
Department of Labor of the Philippines.
Subsequently on May 3, 1968. respondents filed a motion to dismiss the
subject petition on the ground that this Court has no Jurisdiction over the
instant case, and on May 24, 1968, petitioner interposed an opposition
thereto. Said motion was denied by this Court in its Order issued on July 12,
1968 sustaining jurisdiction in accordance with the prevailing doctrine of the
Supreme Court in similar cases.
xxx xxx xxx
But before we consider and discuss the foregoing issues, let us first
ascertain if this Court could acquire jurisdiction over the case at bar, it having
been contended by respondents that they are domiciled in Wake Island
which is beyond the territorial jurisdiction of the Philippine Government. To
this incidental question, it may be stated that while it is true the site of work is
Identified as Wake Island, it is equally true the place of hire is established in
Manila (See Section B, Filipino Employment Contract, Exhibit '1'). Moreover,
what is important is the fact that the contract of employment between the
parties litigant was shown to have been originally executed and
subsequently renewed in Manila, as asserted by petitioner and not denied by
respondents. Hence, any dispute arising therefrom should necessarily be
determined in the place or venue where it was contracted.
xxx xxx xxx
From the evidence on hand, it has been proven beyond doubt that petitioner
canvas assigned to and performed work in respondent company at slight
time which consisted of two different schedules, namely, swing shift and
graveyard shifts, particularly during his tenure as houseboy for the second
period and as cashier. Petitioner's testimony to this effect was not
contradicted, much less rebutted, by respondents, as revealed by the
records. Since petitioner actually rendered night time services as required by
respondents, and considering the physical, moral and sociological effects
arising from the performance of such nocturnal duties, we think and honestly
believe that petitioner should be compensated at least fifty percent (50%)
more than his basic wage rate. This night shift premium pay would indeed be
at par with the overtime compensation stipulated at one and one-half (1 )
times of the straight time rate.
xxx xxx xxx (pp. 31-36, rollo).
Apropos before this Court were filed three (3) other cases involving the same petitioner, all of
which had been finally dispoded of, as follows:
G.R. No Date of Filing Disposition
1. L-37117 July 30, 1973 Petition denied for
lack of merit on Sept.
13, 1973. Motion for
Reconsideration
denied lack of
merit, Nov. 20,1973.
2. L-38781 June 17,1974 Petition denied for
lack of merit on June
21,1974.
3. L-39111-12 Sept. 2,1974 Case dismissed on Feb.
6, 1976, pursuant to
voluntary manifesta
tion of private respon
dent Inocente R. Riel
that his claims had all
been settled to his entire
satisfaction.
Incidentally, in connection with G.R. No. L-39111-12 (No. 3 above), WE found strong
evidence that petitioner therein, which is also the petitioner in the case at bar, "twisted the
arm" of private respondent, when the latter in his Manifestation dated July 3, 1975, stated:
3. ... Furthermore, since petitioner FMC is a foreign corporation domiciled in
California, U.S.A. and has never been engaged in business in the
Philippines, nor does it have an agent or an office in this country, there
exists no valid reason for me to participate in the continuation and/or
prosecution of this case (p. 194, rollo).
as if jurisdiction depends on the will of the parties to a case. At any rate, considering that
petitioner paid the claims of private respondent, the case had become moot and academic.
Besides, the fact of such payment amounts to an acknowledgment on the part of petitioner of
the jurisdiction of the court over it.
WE have also noted that the principal question involved in each of the above-numbered three
(3) cases is more or less Identical, to wit: Is the mere act by a non-resident foreign
corporation of recruiting Filipino workers for its own use abroad, in law doing business in the
Philippines?
In the case at bar, which was filed with this Court on June 3, 1974, petitioners
presented, inter alia, the following issue: ... can the CIR validly affirm a judgment against
persons domiciled outside and not doing business in the Philippines, and over whom it did
not acquire jurisdiction')
While it is true that the issues presented in the decided cases are worded differently from the
principal issue raised in the case at bar, the fact remains that they all boil down to one and
the same issue, which was aptly formulated and ably resolved by Mr. Justice Ramon C.
Fernandez, then with the Court of Appeals and now a member of this Court, in CA-G.R. No.
SP-01485-R, later elevated to this Court on appeal by certiorari in Case G.R. No. L-37117
this case, the majority opinion of the Court of Appeals, which was penned by Justice
Fernandez and which WE hereby adopt, runs as follows:
The principal issue presented in this special civil action is whether petitioner
has been 'doing business in the Philippines' so that the service of summons
upon its agent in the Philippines vested the Court of First Instance of Manila
with jurisdiction.
From the facts of record, the petitioner may be considered as doing
busuness un the Philippines within the the scope of Section 14, Rule 14 of
the Rules of the Court which provide:
SEC 14. Service upon private foreign corporations. If the
defendant is a foreign corporation or a non-resident joint
stock company or association: doing business in the
Philippines, service may be made on its resident agent
designated in accordance with law for that purpose or, if
there be no such agent, on the government official
designated by law to that effect, or on any of its officers or
agents within the Philippines.
Indeed, the petitioner, in compliance with Act 2486 as implemented by
Department of Labor Order No. IV dated May 20, 1968 had to appoint Jaime
V. Catuira, 1322 A. Mabini, Ermita, Manila as agent for FMC with authority to
execute Employment Contracts and receive, in behalf of that corporation,
legal services from and be bound by processes of the Philippine Courts of
Justice, for as long as he remains an employee of FMC (Annex 'I', rollo, p.
56). It is a fact that when the summons for the petitioner was served on
Jaime V. Catuira he was still in the employ of the FMC.
In his motion to dismiss Annex B', p. 19, Rollo), petitioner admits that Mr.
Catuira represented it in this country 'for the purpose of making
arrangements for the approval by the Department of Labor of the
employment of Filipinos who are recruited by the Company as its own
employees for assignment abroad.' In effect, Mr. Catuira was a on officer
representing petitioner in the Philippines.
Under the rules and regulations promulgated by the Board of Investments
which took effect Feb. 3, 1969, implementing Rep. Act No. 5455, which took
effect Sept. 30, 1968, the phrase 'doing business' has been exemption with
illustrations, among them being as follows:
xxx xxx xxx
(f) the performance within the Philippines of any act or
combination of acts enumerated in section l(l) of the Act
shall constitute 'doing business' therein. in particular, 'doing
business includes:
(1) Soliciting orders, purchases (sales) or service contracts.
Concrete and specific solicitations by a foreign firm, not
acting independently of the foreign firm amounting to
negotiation or fixing of the terms and conditions of sales or
service contracts, regardless of whether the contracts are
actually reduced to writing, shall constitute doing business
even if the enterprise has no office or fixed place of
business in the Philippines. xxx
(2) Appointing a representative or distributor who is dociled
in the Philippines, unless said representative or distributor
has an independent status, i.e., it transacts business in its
name and for its own account, and not in the name or for
the account of the principal.
xxx xxx xxx
(4) Opening offices, whether called 'liaison'offices, agencies
or branches, unless proved otherwise.
xxx xxx xxx
(10) Any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to
that extent the performance of acts or works, or the exercise
of some of the functions normally incident to, or in the
progressive prosecution of, commercial gain or of the
purpose and objective of the business organization (54 O.G.
53).
Recently decided by this Court again thru Mr. Justice Ramon C. Fernandez which is
similar to the case at bar, is G.R. No. L-26809, entitled Aetna Casualty & Curety Company,
plaintiff- appellant versus Pacific Star Line, the Bradman Co., Inc., Manila Port Service
and/or Manila Railroad Company, Inc., defendants-appellees." The case is an appeal from
the decision of the Court of First Instance of Manila, Branch XVI, in its Civil Case No. 53074,
entitled Aetna Casualty & Surety Company vs. Pacific Star Lines, The Bradman Co., Inc.,
Manila Port Service and/or Manila Railroad Company, Inc." dismissing the complaint on the
ground that the plaintiff has no legal capacity to bring the suit.
It appears that on February 11, 1963, Smith Bell & Co. (Philippines), Inc. and Aetna Casualty
& Surety Co., Inc., as subrogee instituted Civil Case No. 53074 in the Court of First Instance
of Manila against Pacific Star Line, The Bradman Co., Inc., Manila Port Service and/or Manila
Railroad Company, Inc. to recover the amount of US$2,300.00 representing the value of
stolen and damaged cargo plus litigation expenses and exemplary damages in the amounts
of P1,000.00 and P2,000.00, respectively, with legal interest thereon from the filing of the suit
and costs.
After all the defendants had filed their answer, the defendants Manila Port Service and
Manila Railroad Company, Inc. amended their answer to allege that the plaintiff, Aetna
Casualty & Surety Company, is a foreign corporation not duly licensed to do business in the
Philippines and, therefore, without capacity to sue and be sued.
After the parties submitted a partial stipulation of facts and additional documentary evidence,
the case was submitted for decision of the trial court, which dismissed the complaint on the
ground that the plaintiff insurance company is subject to the requirements of Sections 68 and
69 of Act 1459, as amended, and for its failure to comply therewith, it has no legal capacity to
bring suit in this jurisdiction. Plaintiff appealed to this Court.
The main issue involved in the appeal is whether or not the plaintiff appellant has been doing
business in the Philippines, considering the fact that it has no license to transact business in
the Philippines as a foreign corporation. WE ruled:
The object of Sections 68 and 69 of the Corporation Law was not to prevent
the foreign corporation from performing single acts, but to prevent it from
acquiring a domicile for the purpose of business without taking the steps
necessary to render it amenable to suit in the local courts. It was never the
purpose of the Legislature to exclude a foreign corporation which happens to
obtain an isolated order for business from the Philippines, from securing
redress in the Philippine courts (Marshall Co. vs. Elser & Co., 46 Phil 70,75).
In Mentholatum Co., Inc., et al vs- M Court rules that-
No general rule or governing principle can be laid down as
to what constitutes 'doing' or 'engaging in' or 'transacting'
business. Indeed, each case must be judged in the light of
its peculiar environmental circumstances. The true test,
however, seems to be whether the foreign corporation is
continuing the body or substance of the business or
enterprise for which it was organized or whether it has
substantially retired from it and turned it over to another.
(Traction Cos. v. Collectors of Int Revenue [C.C.A Ohio],
223 F. 984, 987). The term implies a continuity of
commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the
exercise of some of the functions normally incident to, and
in progressive prosecution of, the purpose and object of its
organization (Griffin v. Implement Dealers' Mut. Fire Ins.
Co., 241 N.W. 75, 77; Pauline Oil & Gas Co. v. Mutual Tank
Line Co., 246 P. 851, 852, 118 Okl. III; Automotive Material
Co. vs. American Standard Metal Products Corp., 158 N.E.
698, 703, 327 III. 367)'. 72 Phil. 524, 528-529.
And in Eastboard Navigation, Ltd., et al. vs. Juan Ysmael & Co., Inc., this
Court held:
(d) While plaintiff is a foreign corporation without license to
transact business in the Philippines, it does not follow that it
has no capacity to bring the present action. Such license is
not necessary because it is not engaged in business in the
Philippines. In fact, the transaction herein involved is the
first business undertaken by plaintiff in the Philippines,
although on a previous occasion plaintiff's vessel was
chartered by the National Rice and Corn Corporation to
carry rice cargo from abroad to the Philippines. These two
isolated transactions do not constitute engaging in business
in the Philippines within the purview of Sections 68 and 69
of the Corporation Law so as to bar plaintiff from seeking
redress in our courts. (Marshall Wens Co. vs. Henry W.
Elser & Co. 49 Phil., 70; Pacific Vegetable Oil Corporation
vs. Angel O. Singson, G.R. No. L-7917, April 29, 1955)'. 102
Phil., pp. 1, 18.
Based on the rulings laid down in the foregoing cases, it cannot be said that
the Aetna Casualty & Surety Company is transacting business of insurance
in the Philippines for which it must have a license. The Contract of insurance
was entered into in New York, U.S.A., and payment was made to the
consignee in its New York branch. It appears from the list of cases issued by
the Clerk of Court of the Court of First Instance of Manila that all the actions,
except two (2) cases filed by Smith, Beer & Co., Inc. against the Aetna
Casualty & Surety Company, are claims against the shipper and the arrastre
operators just like the case at bar.
Consequently, since the appellant Aetna Casualty & Surety Company is not
engaged in the business of insurance in the Philippines but is merely
collecting a claim assigned to it by the consignee, it is not barred from filing
the instant case although it has not secured a license to transact insurance
business in the Philippines.
Indeed, if a foreign corporation, not engaged in business in the Philippines, is not banned
from seeking redress from courts in the Philippines, a fortiori, that same corporation cannot
claim exemption from being sued in Philippine courts for acts done against a person or
persons in the Philippines.
WHEREFORE, THE PETITION IS HEREBY DENIED WITH COSTS AGAINST THE
PETITIONERS.
SO ORDERED.




























G.R. No. L-44944 August 9, 1985
TOP-WELD MANUFACTURING, INC., petitioner, vs. ECED, S.A., IRTI, S.A., EUTECTIC
CORPORATION, VICTOR C. GAERLAN, and THE HON. COURT OF
APPEALS, respondents.
GUTIERREZ, JR., J.:
This is a petition to review the decision of the Court of Appeals now Intermediate Appellate
Court annulling portions of the orders issued by Judge Gregorio Pineda of the Court of First
Instance of Rizal.
Petitioner Top-weld Manufacturing, Inc. (Top-weld) is a Philippine corporation engaged in the
business of manufacturing and selling welding supplies and equipment.
In pursuance of its business, the petitioner entered into separate contracts with two different
foreign entities. One contract, entitled a "LICENSE AND TECHNICAL ASSISTANCE
AGREEMENT" and dated January 2, 1972 was entered into with IRTI, S.A., (IRTI), a
corporation organized and existing under the laws of Switzerland with principal office at
Fribourg, Switzerland. By virtue of this agreement, the petitioner was constituted a licensee of
IRTI to manufacture welding products under certain specifications, with raw materials to be
purchased by the former from suppliers designated by IRTI, for a period of three (3) years or
up to January 1, 1975. This contract was later extended up to December 31, 1975 in a
subsequent agreement.
The other contract was a "DISTRIBUTOR AGREEMENT" dated January 1, 1975 entered into
with ECED, S.A., (ECED), a company organized and existing under the laws of Panama with
principal office at Apartado 1903, Panama I, City of Panama. Under this agreement, the
petitioner was designated as ECED's distributor in the Philippines of certain welding products
and equipment. By its terms, the contract was to remain effective until terminated by either
party upon giving six (6) months or 180 days written notice to the other.
Upon learning that the two foreign entities were negotiating with another group to replace the
petitioner as their licensee and distributor, the latter instituted on June 16, 1975, Civil Case
No. 21409 against IRTI, ECED another corporation named EUTECTIC Corporation,
organized under the laws of the State of New York, U.S.A., and an individual named Victor C.
Gaerlan, a Filipino citizen alleged to be the representative and employee of these three
corporations.
In its complaint, the petitioner sought the issuance of a writ of preliminary injunction to
restrain the corporations from negotiating with third persons or from actually carrying out the
transfer of its distributorship and franchising rights, It also asked the court to prohibit the
defendants from terminating their contracts with the petitioner, and if said termination had
already been accomplished, from putting into effect and carrying out the terms and the
consequences of said termination until after good faith negotiations on existing contracts
between them had been carried out and completed.
On June 17, 1975, the lower court issued a restraining order against the corporation pending
the hearing on the issuance of a writ of preliminary injunction.
On July 25,1975, IRTI and ECED wrote Top-weld separate notices about the termination of
their respective contracts.
On September 3,1975, Top-weld filed an amended complaint together with a supplemental
complaint which embodied a new application for a preliminary mandatory injunction to
compel ECED to ship and deliver various items covered by the distributorship contract, and
to prohibit the corporations from importing into the Philippines directly or indirectly any
EUTECTIC materials, supplies or equipment except to and/or through the petitioner.
Among others, the petitioner invoked the provisions of No. 9. Section 4 of Republic Act 5455
on alien firms doing business in the Philippines.
The corporations filed their answers setting up as affirmative defenses violations of the
contracts allegedly committed by the petitioner consisting of the following:
a) Failure to pay respondent IRTI the stipulated 3% royalties;
b) The use of other wrong materials in the manufacture of welding products
bearing the Eutectic label;
c) The use of the wrong core wire in the manufacture of Eutectic 680;
d) The use of obsolete and antiquated equipment;
e) Rebranding of other manufactured welding products or non-Eutectic
products with the Eutectic label;
f) The manufacture and sale of inferior and substandard quality products
bearing the Eutectic label resulting in numerous complaints from customers
such as Saulog Transit and Manila Mining Corporation;
g) The falsification of ECED pro-forma invoices in order to procure Eutectic
goods at lower prices;
h) The illegal channeling of sales of Eutectic products through the Que Pe
Hardware Store; and
i) The sale of welding products bearing brands other than Eutectic, such as
Fujiweld, and even Eutectic products not included in its authority and for
which it has never been supplied by respondent EUTECTIC with the raw
materials for its manufacture nor with finished products thereof.
The respondent corporation further alleged that Section 4 (9) of R.A. No. 5455 cannot
possibly apply to the instant case because:
a) With the violations of the contracts by the plaintiff and "other just causes"
earlier mentioned, the defendants IRTI and ECED are fully justified in
terminating them without being obliged to pay any compensation nor to
reimburse plaintiff of investment or other expenses;
b) In fact, the defendants have sent written notices dated July 25, 1975 of
the termination of their respective agreements with plaintiffs; and
c) Since no written certificate was applied for nor obtained by defendant
entities from the Board of Investments, the latter cannot legally require of
them compliance with No. 9, Section 4, R.A. No, 5455.
On October 9, 1975, the trial court issued an order granting the petitioner's application for
preliminary injunction embodied in the amended complaint and its application for a writ of
mandatory preliminary injunction embodied in the supplemental complaint,
The corporations filed with the trial court a motion for reconsideration.
On December 18, 1975, the trial court issued another order denying the said motion for
reconsideration with respect to the lifting of the writ of preliminary injunction but granting the
prayer for the lifting of the writ of preliminary mandatory injunction.
The case was elevated to the Court of Appeals on a petition for certiorari with preliminary
injunction filed by the corporations. In setting aside the questioned orders, the appelate court
held that:
The determinative question defined by the contentions of the parties in this
case is, whether or not TOP-WELD may rightfully invoke the provisions of
Sec. 4, Republic Act No. 5455 to enjoin petitioner corporations from
terminating the subject licensing and distributorship contracts they have with
TOP-WELD. The pertinent portion of the provision reads:
Section 4. Licenses to do business.-No alien, and no firm,
association, partnership, corporation, or any other form of
business organization formed, organized, chartered or
existing under any laws other than those of the Philippines,
or which is not a Philippine National, or more than thirty per
cent of the outstanding capital of which is owned or
controlled by aliens shall do business or engage in any
economic activity in alien the Philippines, or be registered,
licensed, or permitted by the Securities and Exchange
Commission, or by any other bureau, office, agency,
political subdivision, or instrumentality of the government, to
do business, or engage in an economic activity in the
Philippines without first securing a written certificate from
the Board of Investments to the effect ... .
Upon granting said certificate, the Board shall impose the
following requirements on the alien or the firm, association,
partnership, corporation, or other form of business
organization that is not organized or existing under the laws
of the Philippines. ... .
(9) Not to terminate any franchise, licensing or other
agreement that applicant may have with a resident of the
Philippines, authorizing the latter to assemble, manufacture
or sell within the Philippines the products of the applicant,
except for violation thereof or other just cause and upon
payment of compensation and reimbursement and other
expenses incurred by the licensee in developing a market
for the said products; Provided. however, That in case of
disagreement, the amount of compensation or
reimbursement shall be determined by the court where the
licensee is domiciled or has its principal office who shall
require the applicant to file a bond in such amount as, in its
opinion, is sufficient for this purpose.
By the licensing and distributorship arrangements had with TOPWELD, there
is no doubt that IRTI and ECED were doing business and engaging in
economic activity in the Philippines (see Sections 1 and 4, R.A. No. 5455),
as a prerequisite to which they should have first secured a written certificate
from the Board of Investments. It is not disputed, however, that IRTI and
ECED have not secured such written certificate in consequence of which
there was no occasion for the Board of Investments to impose the
requirements prescribed in the aforequoted provisions of Sec. 4, R.A. No.
5455, among which is that the grantee of the certificate shall not terminate
any franchise, licensing or other agreement it may have with a resident of
the Philippines for the assembly, manufacture or sale within the country of
the products of said grantee, except for violation thereof or other just cause
and upon payment of compensation and reimbursement and other expenses
incurred by the resident licensee in developing a market for said products. In
this case, while the parties are in dispute as to the existence of a violation of
the contracts involved or of other just cause, there is no quarrel over the fact
that IRTI and ECED have not paid, and do not intend to pay, such
compensation or reimbursement contemplated in the law, maintaining that
TOPWELD is not entitled to the same.
Under the particular situation obtaining in this case, this Court is of the
opinion that petitioner corporations are not bound by the requirement on
termination, and TOPWELD cannot invoke the same against the former. The
reason is not simply because IRTI and ECED, by failing to get the required
certificate from the Board of Investment, were not made subject by the said
Board to the requirement on termination, as maintained by petitioners. To
impose such requirement on petitioners would be to perpetuate, and force
them to remain in, an unlawful business operation. Moreover, it was
incumbent upon TOPWELD to know whether or not IRTI and ECED were
properly authorized to engage into the licensing and distributorship
agreements. At the very least TOPWELD has not come to court with clear
hands, and cannot be heard to invoke the equitable remedy of injunction to
perpetuate an illegal situation it voluntarily helped bring about.
If only for the foregoing considerations, there appears a grave abuse of
discretion on the part of respondent Judge in issuing the orders complained
of.
Petitioner, TOP-WELD filed this present petition putting in issue the following assignments of
errors:
I
Respondent Court of Appeals committed a grave error when it held that a
foreign corporation, which is admittedly 'doing business in the Philippines'
but which has failed to secure the required certificate and license to do
business in the Philippines, is not subject to the stricture imposed by Sec. 4
(9) of Republic Act No. 5455.
II
Respondent Court of Appeals committed a grave error when it held that the
failure of petitioner to know at the outset whether or not respondents were
properly authorized to engage in business in the Philippines stops petitioner
to invoke the protection of Sec. 4 (9) of Republic Act No. 5455.
III
Respondent Court of Appeals committed a grave error when it held that
petitioner cannot invoke the remedy of injunction against respondents.
At the vortex of the controversy is the issue whether or not respondent corporations can be
considered as "doing business" in the Philippines and, therefore, subject to the provisions of
R.A. No. 5455. There is no dispute that respondents are foreign corporations not licensed to
do business in the Philippines. More important, however, there is no serious objection
interposed by the respondents as to their amenability to the jurisdiction of our courts.
There is no general rule or governing principle laid down as to what constitutes "doing" or
engaging in" or "transacting" business in the Philippines. Each case must be judged in the
light of its peculiar circumstances. (Mentholatum Co. V. Mangaliman, 72 Phil. 524). Thus, a
foreign corporation with a settling agent in the Philippines which issued twelve marine
policies covering different shipments to the Philippines (General Corporation of the
Philippines v. Union Insurance Society of Canton, Ltd., 87 Phil. 313) and a foreign
corporation which had been collecting premiums on outstanding policies (Manufacturing Life
Insurance Co. v. Meer, 89 Phil. 351) were regarded as doing business here. The acts of
these corporations should be distinguished from a single or isolated business transaction or
occasional, incidental and casual transactions which do not come within the meaning of the
law. Where a single act or transaction, however, is not merely incidental or casual but
indicates the foreign corporation's intention to do other business in the Philippines, said
single act or transaction constitutes "doing" or "engaging in" or "transacting" business in the
Philippines. (Far East International Import and Export Corporation v. Nankai Kogyo, Co., 6
SCRA 725).
In the Mentholatum Co. v. Mangaliman case earlier cited, this Court held:
xxx xxx xxx
... The true test, however, seems to be whether the foreign corporation is
continuing the body or substance of the business or enterprise for which it
was organized or whether it has substantially retired from it and turned it
over to another. (Traction Cos. v. Collectors of Int. Revenue [C.C.A. Ohio],
223 F. 984, 987.) The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its organization.
(Griffin v. Implement Dealers' Mut. Fire Ins. Co., 241 N.W. 75, 77, Pauline
Oil & Gas Co. v. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl. 111
Automotive Material Co. v. American Standard Metal Products Corp., 158
N.E. 698, 703, 327 111. 367.)
Judged by the foregoing standards, we agree with the Court of Appeals in considering the
respondents as "doing business" in the Philippines. When the respondents entered into the
disputed contracts with the petitioner, they were carrying out the purposes for which they
were created, i.e. to manufacture and market welding products and equipment. The terms
and conditions of the contracts as well as the respondents' conduct indicate that they
established within our country a continuous business, and not merely one of a temporary
character. This fact is even more strengthened by the admission of the respondents that they
are negotiating with another group for the transfer of the distributorship and franchising rights
from the petitioner.
Respondents' acts enabled them to enter into the mainstream of our economic life in
competition with our local business interests. This necessarily brings them under the
provisions of R.A. No. 5455.
The respondents contend that they should be exempted from the requirements of R.A. 5455
because the petitioner maintained an independent status during the existence of the disputed
contracts.
This may be true if the petitioner is an independent entity which buys and distributes products
not only of the petitioner but also of other manufacturers or transacts business in its name
and for its account and not in the name or for the account of the foreign principal.
A perusal of the agreements between the petitioner and the respondents shows that they are
highly restrictive in nature. The agreements provide in part the following terms:
xxx xxx xxx
10. No Sales in Territory by IRTI
IRTI shall not solicitor or cause or permit its employees, licensees or agents
to solicit or make any sales, directly or indirectly, of WELDING PRODUCTS
within or to the Philippines. IRTI agrees to refer to LICENSEE all product
inquiries received by IRTI for WELDING PRODUCTS destined for
Philippines.
xxx xxx xxx
16. x x x x x x x x x
Restrictive Covenant
LICENSEE will not, directly or indirectly, without the written consent of IRTI
at any time during the continuance of this Agreement and for a period of two
years after the date of the termination of this Agreement, engage either
directly or indirectly in the business of selling products similar to said
WELDING PRODUCTS, either as principal, agent, employee or through
stock or proprietary interests in a third part entity.
xxx xxx xxx
RESTRICTI
VE COVENANT
6. DISTRIBUTOR shall not during the continuance of this agreement
distribute products of any other manufacturer or supplier in the Territory
assigned to him, which are similar to the Products.
Upon the termination of this agreement by either party, DISTRIBUTOR
agrees not to engage, directly or indirectly, in the commercialization,
distribution and/or manufacture of products competing with any EUTECTIC +
CASTOLIN products covered by this agreement, or of products likely to
affect the sale of any EUTECTIC + CASTOLIN products, either as principal,
agent or employee in the Territory, this prohibition to extend for a period of
two (2) years from the date of termination, except for the explicit purpose of
selling any remaining Products still in DISTRIBUTOR's possession on the
date of termination of this agreement which sales shall not be below the
DISTRIBUTOR's pretermination selling price for such Products unless such
sale is to ECED or its nominee in which case Clause 19 hereof shall govern.
xxx xxx xxx
We can conclude that assuming the petitioner maintains an independent status, in essence it
merely extends to the Philippines the business of the foreign corporations.
On the basis of the foregoing, we uphold the appellate court's finding that "IRTI AND ECED
were doing business and engaging in economic activity in the Philippines ... as a prerequisite
to which they should have first secured a written certificate from the Board of Investments."
The respondent court, however, erred in holding that "IRTI and ECED have not secured such
written certificate in consequence of which there is no occasion for the Board of Investments
to impose the requirements prescribed in the aforequoted provisions of Sec. 4, R.A. No. 5455
... ." To accept this view would open the way for an interpretation that by doing business in
the country without first securing the required written certificate from the Board of
Investments, a foreign corporation may violate or disregard the safeguards which the law, by
its provisions, seeks to establish.
We agree, however, that there is a more compelling reason behind the finding that the
"corporations are not bound by the requirement on termination, and TOP-WELD cannot
invoke the same against the former."
As between the parties themselves, R.A. No. 5455 does not declare as void or invalid the
contracts entered into without first securing a license or certificate to do business in the
Philippines. Neither does it appear to intend to prevent the courts from enforcing contracts
made in contravention of its licensing provisions. There is no denying, though, that an "illegal
situation," as the appellate court has put it, was created when the parties voluntarily
contracted without such license.
The parties are charged with knowledge of the existing law at the time they enter into the
contract and at the time it is to become operative. (Twiehaus v. Rosner, 245 SW 2d 107; Hall
v. Bucher, 227 SW 2d 98). Moreover, a person is presumed to be more knowledgeable about
his own state law than his alien or foreign contemporary. In this case, the record shows that,
at least, petitioner had actual knowledge of the applicability of R.A. No. 5455 at the time the
contract was executed and at all times thereafter. This conclusion is compelled by the fact
that the same statute is now being propounded by the petitioner to bolster its claim. We,
therefore, sustain the appellate court's view that "it was incumbent upon TOP-WELD to know
whether or not IRTI and ECED were properly authorized to engage in business in the
Philippines when they entered into the licensing and distributorship agreements." The very
purpose of the law was circumvented and evaded when the petitioner entered into said
agreements despite the prohibition of R.A. No. 5455. The parties in this case being equally
guilty of violating R.A, No. 5455, they are in pari delicto, in which case it follows as a
consequence that petitioner is not entitled to the relief prayed for in this case.
In Bough v. Cantiveros (40 Phil. 210), the principle is laid down in these words: "The rule of
pari delicto is expressed in the maxims "ex dolo malo non eritur actio" and "in pari delicto
potior est conditio defedentis." The law will not aid either party to an illegal agreement. It
leaves the parties where it finds them."
No remedy could be afforded to the parties because of their presumptive knowledge that the
transaction was tainted with illegality. (Soriano v. Ong Hoo, 103 Phil. 829). Equity cannot lend
its aid to the enforcement of an alleged right claimed by virtue of an agreement entered into
in contravention of law.
Lastly, we come to the issue of "just cause" for the termination of the contracts or the alleged
violations of the contracts made by petitioner. Though properly ventilated below, this factual
issue was not determined by both the trial court and the appellate court.
The record shows that respondents, in opposing the injunction suit and alleging the violations
of the contracts, submitted and relied on their affidavits. The petitioner, however, to refute
these charges, submitted a "Reply to Opposition" which is neither verified nor supported by
counter-affidavits. There is no showing in the records before us whether oral testimony was
presented by any of the parties or whether the affiants were subjected to the test of cross-
examination and if any, what was stated during the oral testimony.
The burden of overcoming the responsive effect of the answer is upon the petitioner. He who
alleges a fact has the burden of proving it and a mere allegation is not evidence. (Legasca v.
De Vera, 79 Phil. 376) Hearsay evidence alone may be insufficient to establish a fact in an
injunction suit (Parker v. Furlong, 62 P. 490) but, when no objection is made thereto, it is, like
any other evidence, to be considered and given the importance it deserves. (Smith v.
Delaware & Atlantic Telegraph & Telephone Co., 51 A 464). Although we should warn of the
undesirability of issuing judgments solely on the basis of the affidavits submitted, where as
here, said affidavits are overwhelming, uncontroverted by competent evidence and not
inherently improbable, we are constrained to uphold the allegations of the respondents
regarding the multifarious violations of the contracts made by the petitioner. Accordingly, we
rule that there exists a just cause for respondents to move for the termination of their
contracts with the petitioner.
Moreover, the facts on record show that the "License and Technical Assistance Agreement"
between petitioner and respondent IRTI was extended only for a period of one year or to be
precise, from January 1, 1975 to December 31, 1975. The original injunction suit was brought
in the court a quo in June1975, the purpose being to stop the respondent from terminating
the contract. This purpose was realized when the court granted the injunction. By the time
respondents' appeal was decided by the Court of Appeals, it was already past the extended
period. The dispute between the parties had been rendered moot and academic. It should be
stated that the courts be it the original trial court or the appellate court have no power to
make contracts for the parties. No court would be justified in extending the life of the
contracts, subject of this controversy, since that would do violence to the basic principle that
contracts must be the voluntary agreements of parties,
Parties can not be coerced to enter into a contract where no agreement is had between them
as to the principal terms and condition of the contract (Republic v. Philippine Long Distance
Telephone Co., 26 SCRA 620).
With the above observations, there is nothing more for this Court to do except to dismiss the
petition.
ACCORDINGLY, the petition is hereby dismissed. The appealed decision of the Court of
Appeals is AFFIRMED,
SO ORDERED.











G.R. No. L-30266 June 29, 1984
UNIVERSAL RUBBER PRODUCTS, INC., petitioner, vs. HON. COURT OF APPEALS,
CONVERSE RUBBER CORPORARION, EDWARDSON MANUFACTURING CO., INC.
AND HON. PEDRO C. NAVARRO, respondents.
GUERRERO, J.:
This petition for review concerns a "subpoena duces tecum which was issued by the trial
court against the treasurer of the herein petitioner, the propriety of which was upheld by the
defunct Court of Appeals (now Intermediate Appellate Court).
The facts of this case as stated in the decision of the then Court of Appeals are as follows:
Records disclose that the two respondent corporations herein sued the
present petitioner before the Court of First Instance of Rizal for unfair
competition with damages and attorney's fees. In due time herein petitioner,
who was the defendant in that court suit, answered the complaint and joined
issues with the plaintiffs therein, forthwith respondent Judge, to whom that
lawsuit was assigned, proceeded with the trial thereof.
After they have presented about nine witnesses and various pieces of
documentary evidence, herein private respondents made a request to the
respondent Judge to issue a subpoena duces tecumagainst the treasurer of
herein petitioner. Acting favorably on that request, said respondent Judge
issued a subpoena duces tecum on February 13, 1968, directing the
treasurer of the present petitioner to bring with him to the lower court on
February 26, 1968 and March 8, 1968 at 2:30 p.m. "all sales invoices, sales
books and ledgers wherein are recorded the sales of Plymouth Star Player
rubber shoes from the time the corporation started manufacturing and selling
said shoes up to the present.
On March 4, 1968, petitioner filed a motion in the court below praying that
the subpoena duces tecumdated February 13, 1968 be quashed on the
grounds that: (1) the said subpoena is both Unreasonable and oppressive as
the books and documents caned for are numerous and voluminous; (2) there
is no good cause shown for the issuance thereof; and (3) the books and
documents are not relevant to the case pending below. The private
respondents herein opposed that motion of the petitioner. Acting on the said
motion and on the opposition thereto, respondent Judge issued the first
controverted order on May 6, 1968, denying the motion to quash the
subpoena duces tecum.
On May 15, 1968, herein petitioner filed in the court a quo a motion for
reconsideration seeking the said court to reconsider its order denying the
motion to quash the subpoena duces tecum. This, too, was opposed by the
private respondents. Acting on this motion, as well as on the opposition
thereto, respondent Judge. issued the second controverted order on June
28, 1968, denying the motion for reconsideration.
Consequently, on August 6, 1968, petitioner Universal Rubber Products, Inc.
filed its present petition for certiorari with preliminary injunction, alleging that
in so denying its motion to quash the subpoenaduces tecum and its
subsequent motion for reconsideration, respondent Judge acted with grave
abuse of discretion amounting to an excess of jurisdiction. 1
Pending the resolution of the appealed case, the Court of Appeals issued on September 25,
1968 a temporary restraining order directing the respondent Judge of the trial court to refrain
from implementing his order dated May 6, 1968 in Civil Case No. 9686. 2
On November 12, 1968, the respondent Court rendered its decision denying the petition for
certiorari filed by petitioner for lack of merit. The dispositive portion of the said decision
reads: 3
WHEREFORE, for lack of merit, the present petition for certiorari with
preliminary injunction is hereby denied and the temporary restraining order
issued by this Court on September 25, 1968 is now lifted, with costs against
the petitioner.
SO ORDERED.
Petitioner argues three errors to support his petition, to wit: 4
I
The respondent court erred when it found the fact of the petition and its
annexes as not demonstrating clear abuse of discretion by respondent
Judge.
II
The respondent court erred when it refused to sustain the contention of
petitioner that the issuance by the respondent judge of the subpoena duces
tecum was an arbitrary exercise of judicial power.
III
The respondent court erred when it did not consider the subpoena duces
tecum issued by the respondent judge as a fishing bill when it refused to
order its quashal.
The issues summarized, We are called upon to answer whether the issuance of the
"subpoena duces tecum" is proper in a suit for unfair competition.
Private respondent claims the affirmative because (1) the subpoena duces tecum in question
specifically designates the books and documents that should be produced in court and they
are 4 sales invoices, sales books and ledgers where are recorded the sales of Plymouth Star
Player Rubber Shoes from the time the corporation started manufacturing and selling shoes
(that is from April 1, 1963) up to the present; and (2) the relevancy of the books subject to the
controverted subpoena duces tecum cannot be seriously denied, because if and when herein
respondent corporations are ultimately adjudged to be entitled to recover compensatory
damages from the petitioner, there would be no factual basis for the amount of such
damages unless those books and documents are laid open for the court's scrutiny.
On the other hand, petitioner submits a contrary opinion and insists that the question of
liability of petitioner should be determined first before discovery by means of a
subpoena duces tecum is allowed: that respondent Converse is a foreign corporation not
licensed to do business in the Philippines and that Edwardson is merely its licensee that
respondent Converse has no goodwill to speak of and that it has no registrable right over its
own names; that the questioned subpoena duces tecum issued by respondent judge was
merely a "Fishing Bill."
In the meantime, while this present petition remains pending before this Court, petitioner
manifested on April 2, 1977 5 that their establishment was totally burned together with all the
records which is sought to be produced in court by the questioned "subpoena duces tecum"
on May 3, 1970. In effect, it renders the present petition moot and academic. However, the
legal principles arising from the issues deserve Our discussion and resolution.
As a general rule, on obtaining an injunction for infringement of a trademark, complainant is
entitled to an accounting and recovery of defendant's profits on the goods sold under that
mark, as incident to, and a part of, his property right, and this rule applies in cases of unfair
competition. In such case, the infringer or unfair trader is required in equity to account for and
yield up his gains on a principle analogous to that which charges as trustee with the profits
acquired by the wrongful use of the property of the cestuique trust, and defendant's profits
are regarded as an equitable measure of the compensation plaintiff should receive for the
past harm suffered by him.6
Well-settled is Our jurisprudence that, in order to entitle a party to the issuance of a
"subpoena duces tecum ", it must appear, by clear and unequivocal proof, that the book or
document sought to be produced contains evidence relevant and material to the issue before
the court, and that the precise book, paper or document containing such evidence has been
so designated or described that it may be identified. 7 A "subpoena duces tecum once issued
by the court may be quashed upon motion if the issuance thereof is unreasonable and
oppressive or the relevancy of the books, documents or things does not appear, or if the
persons in whose behalf the subpoena is issued fails to advance the reasonable cost of
production thereof. 8
In the instant case, in determining whether the books subject to the subpoena duces
tecum are relevant and reasonable in relation to the complaint of private respondent for unfair
competition, We have to examine Republic Act No. 166,' which provides:
CHAPTER V.Rights and Remedies
xxx xxx xxx
Sec. 23. Actions, and damages and injunction for infringement. Any
person entitled to the exclusive use of a registered mark or trade name may
recover damages in a civil action from any person who infringes his rights
and the measure of the damages suffered shag be either the reasonable
profit which the complaining party would have made, had the defendant not
infringed his said rights, or the profit which the defendant actually made out
of the infringment management, or in the event such measure of damages
cannot be readily ascertained with reasonable certainty, their the court may
award as damages a reasonable percentage based upon the amount of
gross sales of the defendant of the value of the services in connection with
which the mark or trade name was used in the infringement of the rights of
the complaining party. In cases where actual intent to mislead the public or
to defraud the complaining party shall be shown in the discretion of the
court, the damages may be doubled.
The complaining party, upon proper showing may also be granted injunction.
In recovering the loss suffered by the aggrieved party due to unfair competition," Sec. 23 of
R.A. 166 grants the complainant three options within which to ascertain the amount of
damages recoverable, either (1) the reasonable profit which the complaining party would
have made, had the defendant not infringed his said rights; or (2) the profit which the
defendant actually made out of the infringement; or (3) the court may award as damages a
reasonable percentage based upon the amount of gross sales of the defendant of the value
of the services in connection with which the mark or tradename was issued in the
infringement of the rights of the complaining party.
In giving life to this remedial statute, We must uphold the order of the court a quo denying the
motion. of the petitioner to quash the "subpoena duces tecum" previously issued against the
petitioner. In a suit for unfair competition, it is only through the issuance of the questioned
"subpoena duces tecum " that the complaining party is afforded his full rights of redress.
The argument that the petitioner should first be found guilty unfair competition before an
accounting for purposes of ascertaining the amount of damages recoverable can proceed,
stands without merit.. The complaint for unfair competition is basically a suit for "injunction
and damages". 10 Injunction, for the purpose of enjoining the unlawful competitor from
proceeding further with the unlawful competition, and damages, in order to allow the
aggrieved party to recover the damage he has suffered by virtue of the said unlawful
competition. Hence, the election of the complainant (private respondent herein) for the
accounting of petitioner's (defendant below) gross sales as damages per R.A. 166, appears
most relevant. For Us, to determine the amount of damages allowable after the final
determination of the unfair labor case would not only render nugatory the rights of
complainant under Sec. 23 of R.A. 166, but would be a repetitious process causing only
unnecessary delay.
The sufficiency in the description of the books sought to be produced in court by the
questioned "subpoena duces tecum is not disputed in this case, hence, We hold that the
same has passed the test of sufficient description.
Petitioner also assails that private respondent is a foreign corporation not licensed to do
business in the Philippines and that respondent Edwardson is merely its licensee; that
respondent Converse has no goodwill to speak of and that it has no registrable right over its
own name. We have already answered this issue squarely in Our decision of the case of
Converse Rubber Corporation vs. Jacinto Rubber & Plastic Co., Inc., 11 where We
explained:
The disability of a foreign corporation from suing in the Philippines is limited
to suits to enforce any legal of contract rights arising from, or growing out, of
any business which it has transacted in the Philippine Islands ... On the
other hand, where the purpose of the suit is "to protect its reputation, its
corporate name, its goodwill, whenever that reputation, corporate name or
goodwill have, through the natural development of its trade, established
themselves", an unlicensed foreign corporation may sue in the Philippines.
So interpreted by the Supreme Court, it is clear that Section 29 of the
Corporation Law does not disqualify plaintiff-appellee Converse Rubber,
which does not have a branch office in any part of the Philippines and is not
"doing business" in the Philippines, from filing and prosecuting this action for
unfair competition.
As We said earlier, the establishment of the petitioner burned down together with all the
records sought to be produced by the questioned "subpoena duces tecum," hence this case
has become moot and academic. We have no recourse but to dismiss the same.
WHEREFORE, the instant petition is DISMISSED for becoming moot and academic. No
costs.
SO ORDERED.



G.R. No. 146698. September 24, 2002
PHILIPPINE AIRLINES, petitioner, vs. SPOUSES SADIC AND AISHA KURANGKING and
SPOUSES ABDUL SAMAD T. DIANALAN AND MORSHIDA L.
DIANALAN, respondents.
D E C I S I O N
VITUG, J.:
In April 1997, respondents, all Muslim Filipinos, returned to Manila from their pilgrimage
to the Holy City of Mecca, Saudi Arabia, on board a Philippines Airlines (PAL) flight.
Respondents claimed that they were unable to retrieve their checked-in luggages. On 05
January 1998, respondents filed a complaint with the Regional Trial Court (RTC) of Marawi
City against PAL for breach of contract resulting in damages due to negligence in the custody
of the missing luggages.
On 02 March 1998, PAL filed its answer invoking, among its defenses, the limitations
under the Warsaw Convention. On 19 June 1998, before the case could be heard on pre-
trial, PAL, claiming to have suffered serious business losses due to the Asian economic
crisis, followed by a massive strike by its employees, filed a petition for the approval of a
rehabilitation plan and the appointment of a rehabilitation receiver before the Securities and
Exchange Commission (SEC). On 23 June 1998, the SEC issued an order granting the
prayer for an appointment of a rehabilitation receiver, and it constituted a three-man panel to
oversee PALs rehabilitation. On 25 September 1998, the SEC created a management
committee conformably with Section 6(d) of Presidential Decree (P.D.) 902, as amended,
declaring the suspension of all actions for money claims against PAL pending before any
court, tribunal, board or body. Thereupon, PAL moved for the suspension of the proceedings
before the Marawi City RTC. On 11 January 1999, the trial court issued an order denying the
motion for suspension of the proceedings on the ground that the claim of respondents was
only yet to be established. PALs motion for reconsideration was denied by the trial court.
PAL went to the Court of Appeals via a petition for certiorari. On 16 April 1999, the
appellate court dismissed the petition for the failure of PAL to serve a copy of the petition on
respondents. PAL moved for a reconsideration. In its resolution, dated 08 October 1999, the
appellate court denied the motion but added that a second motion for reconsideration before
the trial court could still be feasible inasmuch as the assailed orders of the trial court were
merely interlocutory in nature. Consonantly, PAL filed before the trial court a motion for leave
to file a second motion for reconsideration. The trial court, however, denied leave of court to
admit the second motion for reconsideration. Again, PAL filed a motion for reconsideration
which sought reconsideration of the denial of the prayed leave to file a second motion for
reconsideration. In an order, dated 28 December 2000, the trial court denied the motion.
On the thesis that there was no other plain, speedy and adequate remedy available to it,
PAL went to this Court via a petition for review on certiorari under Rule 45 of the Rules of
Court, raising the question of -
"Whether or not the proceedings before the trial court should have been suspended after the
court was informed that a rehabilitation receiver was appointed over the petitioner by the
Securities and Exchange Commission under Section 6(c) of Presidential Decree No. 902-
A.[1]
In their comment to the petition, private respondents posited (a) that the instant petition
under Rule 45 would not lie, the assailed orders of the court a quo being merely interlocutory;
(b) that PAL was already operational and thus claims and actions against it should no longer
be suspended; (c) that the SEC, not the RTC, should have the prerogative to determine the
necessity of suspending the proceedings; and (d) that the only claims or actions that could be
suspended under P.D. 902-A were those pending with the SEC.
While a petition for review on certiorari under Rule 45 would ordinarily be inappropriate
to assail an interlocutory order, in the interest, however, of arresting the perpetuation of an
apparent error committed below that could only serve to unnecessarily burden the parties,
the Court has resolved to ignore the technical flaw and, also, to treat the petition, there being
no other plain, speedy and adequate remedy, as a special civil action for certiorari. Not much,
after all, can be gained if the Court were to refrain from now making a pronouncement on an
issue so basic as that submitted by the parties.
On 15 December 2000, the Supreme Court, in A.M. No. 00-8-10-SC, adopted the
Interim Rules of Procedure on Corporate Rehabilitation and directed to be transferred from
the SEC to Regional Trial Courts,[2] all petitions for rehabilitation filed by corporations,
partnerships, and associations under P.D. 902-A in accordance with the amendatory
provisions of Republic Act No. 8799. The rules require trial courts to issue, among other
things, a stay order in the enforcement of all claims, whether for money or otherwise, and
whether such enforcement is by court action or otherwise, against the corporation under
rehabilitation, its guarantors and sureties not solidarily liable with it. Specifically, Section 6,
Rule 4, of the Interim Rules of Procedure On Corporate Rehabilitation, provides:
SEC. 6. Stay Order. - If the court finds the petition to be sufficient in form and substance, it
shall, not later than five (5) days from the filing of the petition, issue an Order (a) appointing a
Rehabilitation Receiver and fixing his bond; (b) staying enforcement of all claims, whether for
money or otherwise and whether such enforcement is by court action or otherwise, against
the debtor, its guarantors and sureties not solidarily liable with the debtor; (c) prohibiting the
debtor from selling, encumbering, transferring, or disposing in any manner any of its
properties except in the ordinary course of business; (d) prohibiting the debtor from making
any payment of its liabilities outstanding as at the date of filing of the petition; (e) prohibiting
the debtors suppliers of goods or services from withholding supply of goods and services in
the ordinary course of business for as long as the debtor makes payments for the services
and goods supplied after the issuance of the stay order; (f) directing the payment in full of all
administrative expenses incurred after the issuance of the stay order; (g) fixing the initial
hearing on the petition not earlier than forty-five (45) days but not later than sixty (60) days
from the filing thereof; (h) directing the petitioner to publish the Order in a newspaper of
general circulation in the Philippines once a week for two (2) consecutive weeks; (I) directing
all creditors and all interested parties (including the Securities and Exchange Commission) to
file and serve on the debtor a verified comment on or opposition to the petition, with
supporting affidavits and documents, not later than ten (10) days before the date of the initial
hearing and putting them on notice that their failure to do so will bar them from participating in
the proceedings; and (j) directing the creditors and interested parties to secure from the court
copies of the petition and its annexes within such time as to enable themselves to file their
comment on or opposition to the petition and to prepare for the initial hearing of the petition.
The stay order is effective from the date of its issuance until the dismissal of the petition or
the termination of the rehabilitation proceedings.[3]
The interim rules must likewise be read and applied along with Section 6(c) of P.D. 902-
A, as so amended, directing that upon the appointment of a management committee,
rehabilitation receiver, board or body pursuant to the decree, all actions for claims against
the distressed corporation pending before any court, tribunal, board or body shall be
suspended accordingly. Paragraph (c) of Section 6 of the law reads:
Section 6. In order to effectively exercise such jurisdiction, the Commission shall possess
the following powers:
xxx xxx xxx.
c) To appoint one or more receivers of the property, real or personal, which is the subject of
the action pending before the Commission in accordance with the pertinent provisions of the
Rules of Court in such other cases whenever necessary in order to preserve the rights of the
parties-litigants and/or protect the interest of the investing public and creditors: x x x
Provided, finally, That upon appointment of a management committee, the rehabilitation
receiver, board or body, pursuant to this Decree, all actions for claims against corporations,
partnerships, or associations under management or receivership pending before any court,
tribunal, board or body shall be suspended accordingly.
A claim is said to be a right to payment, whether or not It is reduced to judgment,
liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed,
legal or equitable, and secured or unsecured.[4] In Finasia Investments and Finance
Corporation[5] this Court has defined the word claim, contemplated in Section 6(c) of P.D.
902-A, as referring to debts or demands of a pecuniary nature and the assertion of a right to
have money paid as well.
Verily, the claim of private respondents against petitioner PAL is a money claim for the
missing luggages, a financial demand, that the law requires to be suspended pending the
rehabilitation proceedings.[6] In B.F. Homes, Inc. vs. Court of Appeals,[7] the Court has
ratiocinated:
x x x (T)he reason for suspending actions for claims against the corporation should not be
difficult to discover. it is not really to enable the management committee or the rehabilitation
receiver to substitute the defendant in any pending action against it before any court, tribunal,
board or body. Obviously, the real justification is to enable the management committee or
rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra-
judicial interference that might unduly hinder or prevent the rescue of the debtor company.
To allow such other action to continue would only add to the burden of the management
committee or rehabilitation receiver, whose time, effort and resources would be wasted in
defending claims against the corporation instead of being directed toward its restructuring
and rehabilitation.[8]
WHEREFORE, the petition is GRANTED. The assailed orders of the Regional Trial
Court, Branch 9, of Marawi City, are SET ASIDE. No costs.
SO ORDERED.

G.R. No. 74851 December 9, 1999
RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. INTERMEDIATE
APPELLATE COURT AND BF HOMES, INC., respondents.
R E S O L U T I O N
MELO, J.:
On September 14, 1992, the Court passed upon the case at bar and rendered its decision,
dismissing the petition of Rizal Commercial Banking Corporation (RCBC), thereby affirming
the decision of the Court of Appeals which canceled the transfer certificate of title issued in
favor of RCBC, and reinstating that of respondent BF Homes.
This will now resolve petitioner's motion for reconsideration which, although filed in 1992 was
not deemed submitted for resolution until in late 1998. The delay was occasioned by
exchange of pleadings, the submission of supplemental papers, withdrawal and change of
lawyers, not to speak of the case having been passed from one departing to another retiring
justice. It was not until May 3, 1999, when the case was re-raffled to herein ponente, but the
record was given to him only sometime in the late October 1999.
By way of review, the pertinent facts as stated in our decision are reproduced herein, to wit:
On September 28, 1984, BF Homes filed a "Petition for Rehabilitation and
for Declaration of Suspension of Payments" (SEC Case No. 002693) with
the Securities and Exchange Commission (SEC).
One of the creditors listed in its inventory of creditors and liabilities was
RCBC.
On October 26, 1984, RCBC requested the Provincial Sheriff of Rizal to
extra-judicially foreclose its real estate mortgage on some properties of BF
Homes. A notice of extra-judicial foreclosure sale was issued by the Sheriff
on October 29, 1984, scheduled on November 29, 1984, copies furnished
both BF Homes (mortgagor) and RCBC (mortgagee).
On motion of BF Homes, the SEC issued on November 28, 1984 in SEC
Case No. 002693 a temporary restraining order (TRO), effective for 20 days,
enjoining RCBC and the sheriff from proceeding with the public auction sale.
The sale was rescheduled to January 29, 1985.
On January 25, 1985, the SEC ordered the issuance of a writ of preliminary
injunction upon petitioner's filing of a bond. However, petitioner did not file a
bond until January 29, 1985, the very day of the auction sale, so no writ of
preliminary injunction was issued by the SEC. Presumably, unaware of the
filing of the bond, the sheriffs proceeded with the public auction sale on
January 29, 1985, in which RCBC was the highest bidder for the properties
auctioned.
On February 5, 1985, BF Homes filed in the SEC a consolidated motion to
annul the auction sale and to cite RCBC and the sheriff for contempt. RCBC
opposed the motion
Because of the proceedings in the SEC, the sheriff withheld the delivery to
RCBC of a certificate of sale covering the auctioned properties.
On February 13, 1985, the SEC in Case No. 002693 belatedly issued a writ
of preliminary injunction stopping the auction sale which had been
conducted by the sheriff two weeks earlier.
On March 13, 1985, despite SEC Case No. 002693, RCBC filed with the
Regional Trial Court, Br. 140, Rizal (CC 10042) an action
for mandamus against the provincial sheriff of Rizal and his deputy to
compel them to execute in its favor a certificate of sale of the auctioned
properties.
In answer, the sheriffs alleged that they proceeded with the auction sale on
January 29, 1985 because no writ of preliminary injunction had been issued
by SEC as of that date, but they informed the SEC that they would suspend
the issuance of a certificate of sale to RCBC.
On March 18, 1985, the SEC appointed a Management Committee for BF
Homes.
On RCBC's motion in the mandamus case, the trial court issued on May 8,
1985 a judgment on the pleadings, the dispositive portion of which states:
WHEREFORE, petitioner's Motion for Judgment on the
pleadings is granted and judgment is hereby rendered
ordering respondents to execute and deliver to petitioner the
Certificate of the Auction Sale of January 29, 1985,
involving the properties sold therein, more particularly those
described in Annex "C" of their Answer." (p. 87, Rollo.)
On June 4, 1985, B.F. Homes filed an original complaint with the IAC
pursuant to Section 9 of B.P. 129 praying for the annulment of the judgment,
premised on the following:
. . .: (1) even before RCBC asked the sheriff to extra-
judicially foreclose its mortgage on petitioner's properties,
the SEC had already assumed exclusive jurisdiction over
those assets, and (2) that there was extrinsic fraud in
procuring the judgment because the petitioner was not
impleaded as a party in the mandamus case, respondent
court did not acquire jurisdiction over it, and it was deprived
of its right to be heard. (CA Decision, p. 88, Rollo).
On April 8, 1986, the IAC rendered a decision, setting aside the decision of
the trial court, dismissing the mandamus case and suspending issuance to
RCBC of new land titles, "until the resolution of case by SEC in Case No.
002693," disposing as follows:
WHEREFORE, the judgment dated May 8, 1985 in Civil
Case No. 10042 is hereby annulled and set aside and the
case is hereby dismissed. In view of the admission of
respondent Rizal Commercial Banking Corporation that the
sheriff's certificate of sale has been registered on BF
Homes' TCT's . . . (here the TCTs were enumerated) the
Register of Deeds for Pasay City is hereby ordered to
suspend the issuance to the mortgagee-purchaser, Rizal
Commercial Banking Corporation, of the owner's copies of
the new land titles replacing them until the matter shall have
been resolved by the Securities and Exchange Commission
in SEC Case No. 002693. (p. 257-260, Rollo; also pp. 832-
834, 213 SCRA 830 [1992]; Emphasis in the original.)
On June 18, 1986, RCBC appealed the decision of the then Intermediate Appellate Court
(now, back to its old revered name, the Court of Appeals) to this Court, arguing that:
1. Petitioner did not commit extrinsic fraud in excluding
private respondent as party defendant in Special Civil Case
No. 10042 as private respondent was not indispensable
party thereto, its participation not being necessary for the
full resolution of the issues raised in said case.
2. SEC Case No. 2693 cannot be invoked to suspend
Special Civil Case No. 10042, and for that matter, the extra-
judicial foreclosure of the real estate mortgage in petitioner's
favor, as these do not constitute actions against private
respondent contemplated under Section 6(c) of Presidential
Decree No. 902-A.
3. Even assuming arguendo that the extra-judicial sale
constitute an action that may be suspended under Section
6(c) of Presidential Decree No. 902-A, the basis for the
suspension thereof did not exist so as to adversely affect
the validity and regularity thereof.
4. The Regional Trial court had jurisdiction to take
cognizable of Special Civil Case No. 10042.
5. The Regional Trial court had jurisdiction over Special Civil
Case No. 10042. (p. 5, Rollo.)
On November 12, 1986, the Court gave due course to the petition. During the pendency of
the case, RCBC brought to the attention of the Court an order issued by the SEC on October
16, 1986 in Case No. 002693, denying the consolidated Motion to Annul the Auction Sale
and to cite RCBC and the Sheriff for Contempt, and ruling as follows:
WHEREFORE, the petitioner's "Consolidated Motion to Cite
Sheriff and Rizal Commercial Banking Corporation for
Contempt and to Annul Proceedings and Sale," dated
February 5, 1985, should be as is, hereby DENIED.
While we cannot direct the Register of Deeds to allow the
consolidation of the titles subject of the Omnibus Motion
dated September 18, 1986 filed by the Rizal Commercial
Banking Corporation, and therefore, denies said Motion,
neither can this Commission restrain the said bank and the
Register of Deeds from effecting the said consolidation.
SO ORDERED. (p. 143, Rollo.)
By virtue of the aforesaid order, the Register of Deeds of Pasay City effected the transfer of
title over subject pieces of property to petitioner RCBC, and the issuance of new titles in its
name. Thereafter, RCBC presented a motion for the dismissal of the petition, theorizing that
the issuance of said new transfer certificates of title in its name rendered the petition moot
and academic.
In the decision sought to be reconsidered, a greatly divided Court (Justices Gutierrez, Nocon,
and Melo concurred with the ponente, Justice Medialdea; Chief Justice Narvasa, Justices
Bidin, Regalado, and Bellosillo concurred only in the result; while Justice Feliciano dissented
and was joined by Justice Padilla, then Justice, now Chief Justice Davide, and Justice
Romero; Justices Grio-Aquino and Campos took no part) denied petitioner's motion to
dismiss, finding basis for nullifying and setting aside the TCTs in the name of RCBC. Ruling
on the merits, the Court upheld the decision of the Intermediate Appellate Court which
dismissed the mandamus case filed by RCBC and suspended the issuance of new titles to
RCBC. Setting aside RCBC's acquisition of title and nullifying the TCTs issued to it, the Court
held that:
. . . whenever a distressed corporation asks the SEC for
rehabilitation and suspension of payments, preferred
creditors may no longer assert such preference, but . . .
stand on equal footing with other creditors. Foreclosure
shall be disallowed so as not to prejudice other creditors, or
cause discrimination among them. If foreclosure is
undertaken despite the fact that a petition, for rehabilitation
has been filed, the certificate of sale shall not be delivered
pending rehabilitation. Likewise, if this has also been done,
no transfer of title shall be effected also, within the period of
rehabilitation. The rationale behind PD 902-A, as amended
to effect a feasible and viable rehabilitation. This cannot be
achieved if one creditor is preferred over the others.
In this connection, the prohibition against foreclosure
attaches as soon as a petition for rehabilitation is filed. Were
it otherwise, what is to prevent the petitioner from delaying
the creation of a Management Committee and in the
meantime dissipate all its assets. The sooner the SEC takes
over and imposes a freeze on all the assets, the better for
all concerned. (pp. 265-266, Rollo; also p. 838, 213 SCRA
830 [1992].)
Then Justice Feliciano (joined by three other Justices), dissented and voted to grant the
petition. He opined that the SEC acted prematurely and without jurisdiction or legal authority
in enjoining RCBC and the sheriff from proceeding with the public auction sale. The dissent
maintain that Section 6 (c) of Presidential Decree 902-A is clear and unequivocal that, claims
against the corporations, partnerships, or associations shall be suspended only upon the
appointment of a management committee, rehabilitation receiver, board or body. Thus, in the
case under consideration, only upon the appointment of the Management Committee for BF
Homes on March 18, 1985, should the suspension of actions for claims against BF Homes
have taken effect and not earlier.
In support of its motion for reconsideration, RCBC contends:
The restraining order and the writ of preliminary injunction issued by the
Securities and Exchange Commission enjoining the foreclosure sale of the
properties of respondent BF Homes were issued without or in excess of its
jurisdiction because it was violative of the clear provision of Presidential
Decree No. 902-A, and are therefore null and void; and
Petitioner, being a mortgage creditor, is entitled to rely solely on its security
and to refrain from joining the unsecured creditors in SEC Case No. 002693,
the petition for rehabilitation filed by private respondent.
We find the motion for reconsideration meritorious.
The issue of whether or not preferred creditors of distressed corporations stand on equal
footing with all other creditors gains relevance and materiality only upon the appointment of a
management committee, rehabilitation receiver, board, or body. Insofar as petitioner RCBC is
concerned, the provisions of Presidential Decree No. 902-A are not yet applicable and it may
still be allowed to assert its preferred status because it foreclosed on the mortgage prior to
the appointment of the management committee on March 18, 1985. The Court, therefore,
grants the motion for reconsideration on this score.
The law on the matter, Paragraph (c), Section 6 of Presidential Decree 902-A, provides:
Sec. 6. In order to effectively exercise such jurisdiction, the Commission
shall posses the following powers:
c) To appoint one or more receivers of the property, real and personal, which
is the subject of the action pending before the Commission in accordance
with the pertinent provisions of the Rules of Court in such other cases
whenever necessary to preserve the rights of the parties litigants to and/or
protect the interest of the investing public and creditors; Provided, however,
that the Commission may, in appropriate cases, appoint a rehabilitation
receiver of corporations, partnerships or other associations not supervised or
regulated by other government agencies who shall have, in addition to the
powers of a regular receiver under the provisions of the Rules of Court, such
functions and powers as are provided for in the succeeding paragraph (d)
hereof: Provided, finally, That upon appointment of a management
committee rehabilitation receiver, board or body, pursuant to this Decree, all
actions for claims against corporations, partnerships or associations under
management or receivership, pending before any court, tribunal, board or
body shall be suspended accordingly. (As amended by PDs No. 1673, 1758
and by PD No. 1799. Emphasis supplied.)
It is thus adequately clear that suspension of claims against a corporation under rehabilitation
is counted or figured up only upon the appointment of a management committee or a
rehabilitation receiver. The holding that suspension of actions for claims against a corporation
under rehabilitation takes effect as soon as the application or a petition for rehabilitation is
filed with the SEC may, to some, be more logical and wise but unfortunately, such is
incongruent with the clear language of the law. To insist on such ruling, no matter how
practical and noble, would be to encroach upon legislative prerogative to define the wisdom
of the law plainly judicial legislation.
It bears stressing that the first and fundamental duty of the Court is to apply the law. When
the law is clear and free from any doubt or ambiguity, there is no room for construction or
interpretation. As has been our consistent ruling, where the law speaks in clear and
categorical language, there is no occasion for interpretation; there is only room for application
(Cebu Portland Cement Co. vs. Municipality of Naga, 24 SCRA-708 [1968]).
Where the law is clear and unambiguous, it must be taken to mean exactly
what it says and the court has no choice but to see to it that its mandate is
obeyed (Chartered Bank Employees Association vs. Ople, 138 SCRA 273
[1985]; Luzon Surety Co., Inc. vs. De Garcia, 30 SCRA 111 [1969]; Quijano
vs. Development Bank of the Philippines, 35 SCRA 270 [1970]).
Only when the law is ambiguous or of doubtful meaning may the court interpret or construe
its true intent. Ambiguity is a condition of admitting two or more meanings, of being
understood in more than one way, or of referring to two or more things at the same time. A
statute is ambiguous if it is admissible of two or more possible meanings, in which case, the
Court is called upon to exercise one of its judicial functions, which is to interpret the law
according to its true intent.
Furthermore, as relevantly pointed out in the dissenting opinion, a petition for rehabilitation
does nor always result in the appointment of a receiver or the creation of a management
committee. The SEC has to initially determine whether such appointment is appropriate and
necessary under the circumstances. Under Paragraph (d), Section 6 of Presidential Decree
No. 902-A, certain situations must be shown to exist before a management committee may
be created or appointed, such as;
1. when there is imminent danger of dissipation, loss,
wastage or destruction of assets or other properties; or
2. when there is paralization of business operations of such
corporations or entities which may be prejudicial to the
interest of minority stockholders, parties-litigants or to the
general public.
On the other hand, receivers may be appointed whenever:
1. necessary in order to preserve the rights of the parties-
litigants; and/or
2. protect the interest of the investing public and creditors.
(Section 6 (c), P.D. 902-A.)
These situations are rather serious in nature, requiring the appointment of a management
committee or a receiver to preserve the existing assets and property of the corporation in
order to protect the interests of its investors and creditors. Thus, in such situations,
suspension of actions for claims against a corporation as provided in Paragraph (c) of
Section 6, of Presidential Decree No. 902-A is necessary, and here we borrow the words of
the late Justice Medialdea, "so as not to render the SEC management Committee irrelevant
and inutile and to give it unhampered "rescue efforts" over the distressed firm" (Rollo, p. 265).
Otherwise, when such circumstances are not obtaining or when the SEC finds no such
imminent danger of losing the corporate assets, a management committee or rehabilitation
receiver need not be appointed and suspension of actions for claims may not be ordered by
the SEC. When the SEC does not deem it necessary to appoint a receiver or to create a
management committee, it may be assumed, that there are sufficient assets to sustain the
rehabilitation plan and, that the creditors and investors are amply protected.
Petitioner additionally argues in its motion for reconsideration that, being a mortgage creditor,
it is entitled to rely on its security and that it need not join the unsecured creditors in filing
their claims before the SEC appointed receiver. To support its position, petitioner cites the
Court's ruling in the case of Philippine Commercial International Bank vs. Court of Appeals,
(172 SCRA 436 [1989]) that an order of suspension of payments as well as actions for claims
applies only to claims of unsecured creditors and cannot extend to creditors holding a
mortgage, pledge, or any lien on the property.
Ordinarily, the Court would refrain from discussing additional matters such as that presented
in RCBC's second ground, and would rather limit itself only to the relevant issues by which
the controversy may be settled with finality.
In view, however, of the significance of such issue, and the conflicting decisions of this Court
on the matter, coupled with the fact that our decision of September 14, 1992, if not clarified,
might mislead the Bench and the Bar, the Court resolved to discuss further.
It may be recalled that in the herein en banc majority opinion (pp. 256-275, Rollo, also
published as RCBC vs. IAC, 213 SCRA 830 [1992]), we held that:
. . . whenever a distressed corporation asks the SEC for rehabilitation and
suspension of payments, preferred creditors may no longer assert such
preference, but . . . stand on equal footing with other creditors. Foreclosure
shall be disallowed so as not to prejudice other creditors, or cause
discrimination among them. If foreclosure is undertaken despite the fact that
a petition for rehabilitation has been filed, the certificate of sale shall not be
delivered pending rehabilitation. Likewise, if this has also, been done, no
transfer of title shall be effected also, within the period of rehabilitation. The
rationale behind PD 902-A, as amended, is to effect a feasible and viable
rehabilitation. This cannot be achieved if one creditor is preferred over the
others.
In this connection, the prohibition against foreclosure attaches as soon as a
petition for rehabilitation is filed. Were it otherwise, what is to prevent the
petitioner from delaying the creation of a Management Committee and in the
meantime dissipate all its assets. The sooner the SEC takes over and
imposes a freeze on all the assets, the better for all concerned. (pp. 265-
266, Rollo; also p. 838, 213 SCRA 830 [1992] Emphasis supplied)
The foregoing majority opinion relied upon BF Homes, Inc. vs. Court of Appeals (190 SCRA
262 [1990] per Cruz, J.: First Division) where it held that "when a corporation threatened
by bankruptcy is taken over by a receiver, all the creditors should stand on an equal footing.
Not anyone of them should be given preference by paying one or some of them ahead of the
others. This is precisely the reason for the suspension of all pending claims against the
corporation under receivership. Instead of creditors vexing the courts with suits against the
distressed firm, they are directed to file their claims with the receiver who is a duly appointed
officer of the SEC(pp. 269-270; emphasis in the original). This ruling is a reiteration
of Alemar's Sibal & Sons, Inc. vs. Hon. Jesus M. Elbinias (pp. 99-100; 186 SCRA 94 [1991]
per Fernan, C.J.: Third Division).
Taking the lead from Alemar's Sibal & Sons, the Court also applied this same ruling
in Araneta vs. Court of Appeals (211 SCRA 390 [1992] per Nocon, J.: Second Division).
All the foregoing cases departed from the ruling of the Court in the much earlier case of PCIB
vs. Court of Appeals(172 SCRA 436 [1989] per Medialdea, J.: First Division) where the
Court categorically ruled that:
SEC's order for suspension of payments of Philfinance as well as for all
actions of claims against Philfinance could only be applied to claims of
unsecured creditors. Such order can not extend to creditors holding a
mortgage, pledge or any lien on the property unless they give up the
property, security or lien in favor of all the creditors of Philfinance . . .
(p. 440. Emphasis
supplied)
Thus, in BPI vs. Court of Appeals (229 SCRA 223 [1994] per Bellosilio, J.: First Division)
the Court explicitly stared that ". . . the doctrine in the PCIB Case has since been abrogated.
In Alemar's Sibal & Sons v. Elbinias, BF Homes, Inc. v. Court of Appeals, Araneta v. Court of
Appeals and RCBC v. Court of Appeals, we already ruled that whenever a distressed
corporation asks SEC for rehabilitation and suspension of payments, preferred creditorsmay
no longer assert such preference, but shall stand on equal footing with other creditors . . ."
(pp. 227-228).
It may be stressed, however, that of all the cases cited by Justice Bellosillo in BPI, which
abandoned the Court's ruling in PCIB, only the present case satisfies the constitutional
requirement that "no doctrine or principle of law laid down by the court in a decision
rendered en banc or in division may be modified or reversed except by the court sitting en
banc" (Sec 4, Article VIII, 1987 Constitution). The rest were division decisions.
It behooves the Court, therefore, to settle the issue in this present resolution once and for all,
and for the guidance of the Bench and the Bar, the following rules of thumb shall are laid
down:
1. All claims against corporations, partnerships, or associations that are pending before any
court, tribunal, or board, without distinction as to whether or not a creditor is secured or
unsecured, shall be suspended effective upon the appointment of a management committee,
rehabilitation receiver, board, or body in accordance which the provisions of Presidential
Decree No. 902-A.
2. Secured creditors retain their preference over unsecured creditors, but enforcement of
such preference is equally suspended upon the appointment of a management committee,
rehabilitation receiver, board, or body. In the event that the assets of the corporation,
partnership, or association are finally liquidated, however, secured and preferred credits
under the applicable provisions of the Civil Code will definitely have preference over
unsecured ones.
In other words, once a management committee, rehabilitation receiver, board or body is
appointed pursuant to P.D. 902-A, all actions for claims against a distressed corporation
pending before any court, tribunal, board or body shall be suspended accordingly.
This suspension shall not prejudice or render ineffective the status of a secured creditor as
compared totally unsecured creditor P.D. 902-A does not state anything to this effect. What it
merely provides is that all actions for claims against the corporation, partnership or
association shall be suspended. This should give the receiver a chance to rehabilitate the
corporation if there should still be a possibility of doing so. (This will be in consonance with
Alemar's BF Homes, Araneta, and RCBC insofar as enforcing liens by preferred creditors are
concerned.)
However, in the event that rehabilitation is no longer feasible and claims against the
distressed corporation would eventually have to be settled, the secured creditors shall enjoy
preference over the unsecured creditors (still maintaining PCIB ruling), subject only to the
provisions of the Civil Code on Concurrence and Preferences of Credit (our ruling in State
Investment House, Inc. vs. Court of Appeals, 277 SCRA 209 [1997]).
The Majority ruling in our 1992 decision that preferred creditors of distressed corporations
shall, in a way, stand an equal footing with all other creditors, must be read and understood
in the light of the foregoing rulings. All claims of both a secured or unsecured creditors,
without distinction on this score, are suspended once a management committee is appointed.
Secured creditors, in the meantime, shall not be allowed to assert such preference before the
Securities and Exchange Commission. It may be stressed, however, that this shall only take
effect upon the appointment of a management committee, rehabilitation receiver, board, or
body, as opined in the dissent.
In fine, the Court grants the motion for reconsideration for the cogent reason that suspension
of actions for claims commences only from the time a management committee or receiver is
appointed by the SEC. Petitioner RCBC, therefore, could have rightfully, as it did, move for
the extrajudicial foreclosure of its mortgage on October 26, 1984 because a management
committee was not appointed by the SEC until March 18, 1985.
WHEREFORE, petitioner's motion for reconsideration is hereby GRANTED. The decision,
dated September 14, 1992 is vacated, the decision of Intermediate Appellate Court in AC-
G.R. No. SP-06313 REVERSED and SET ASIDE, and the judgment of the Regional Trial
Court National Capital Judicial Region, Branch 140, in Civil Case No. 10042 REINSTATED.
SO ORDERED.
























































G.R. No. 126773 April 14, 1999
RUBBERWORLD (PHILS.), INC., or JULIE YAP ONG, petitioner, vs. NATIONAL LABOR
RELATIONS COMMISSION, MARILYN F. ARELLANO, EMILY S. LEGASPI, MYRNA S.
GALGANA, MERCEDITA R. SONGCO, WILFREDO V. SANTOS, JOSEPHINE S. RAMOS,
REDENTOR G. HONA, LUZ B. HONA, ROLANDO B. CRUZ, GUILLERMA R. MUZONES,
CARMELITA V. HALILI, SUSAN A. REYES, EMILY A. ROBILLOS, PLACIDO REYES,
MANOLITO DELA CRUZ, VICTORINO C. FRANCISCO, ROGER B. MARIAS, VIOLETA
ALEJO, RICARDO T. TORRES, EMMA DELA TORRE, PERLA N. MANZANERO,
FRANCISCO D. SERDONCILLO, LUISITO P. HERNANDEZ, RAYMOND PEREA,
EDITHA A. SERDONCILLO, FRANCISCO GENER, MARIO B. REYES, VALERIANO A.
HERRERA, JORGE S. SEERES, ELENA S. IGNACIO, EMERITA S. CACHERO, NERIZA
G. ENRIQUEZ, LOLITA M. FABULAR, NORMITA M. HERNANDEZ, DOMINADOR P.
ENRIQUEZ, respondents.
PANGANIBAN, J
Presidential Decree 902-A, as amended, provides that "upon the appointment of a
management committee, rehabilitation receiver, board or body pursuant to this Decree, all
actions for claims against corporations, partnerships, or associations under management or
receivership pending before any court, tribunal, board or body shall be suspended
accordingly. 1 Such suspension is intended to give enough breathing space for the
management committee or rehabilitation receiver to make the business viable again, without
having to divert attention and resources to litigations in various fora. Among the actions
suspended are those for money claims before labor tribunals, like the National Labor
Relations Commission (NLRC) and the labor arbiters.
Statement of the Case
The foregoing summarizes this Court's grant of the Petition for Certiorari under Rule 65 of the
Rules of Court, assailing the April 26, 1996 Resolution 2 promulgated by the NLRC 3 which
upheld the labor arbiter's refusal to suspend proceedings involving monetary claims of the
petitioner's employees.
Petitioner likewise assails the June 20, 1996 NLRC Resolution 4 which denied its Motion for
Reconsideration.
On November 20, 1996, this Court issued a temporary restraining order, signed by then Chief
Justice Andres R. Narvasa, "restraining the public respondents from further conducting
proceedings in the aforesaid cases effective immediately . . .
The Facts
The facts are undisputed. They are narrated by the Office of the Solicitor general as follows:
Petitioner . . . is a domestic corporation which used to be in the business of
manufacturing footwear, bags and garments. It filed with the Securities and
Exchange Commission on November 24, 1994 a petition for suspension of
payments praying that it be declared in a state of suspension of payments
and that the SEC accordingly issue an order restraining its creditors from
enforcing their claims against petitioner corporation. It further prayed for the
creation of a management committee as well as for the approval of the
proposed rehabilitation plan and memorandum of agreement between
petitioner corporation and its creditors.
In an order dated December 28, 1994, the SEC favorably ruled on the
petition for suspension of payments thusly:
Accordingly, with the creation of the Management
Committee, all actions for claims against Rubberworld
Philippines, Inc. pending before any court, tribunal, office,
board, body Commission of Sheriff are hereby deemed
SUSPENDED.
Consequently, all pending incidents for preliminary
injunctions, writ of attachments (sic), foreclosures and the
like are hereby rendered moot and academic.
Private respondents, who claim to be employees of petitioner corporation,
filed against petitioners [from] April to July 1995 their respective complaints
for illegal dismissal, unfair labor practice, damages and payment of
separation pay, retirement benefits, 13th month pay and service incentive
pay.
Petitioners moved to suspend the proceedings in the above labor cases on
the strength of the SEC Order dated December 28, 1994. Likewise,
petitioners cited the rulings of BF Homes vs. Court of Appeals (190 SCRA
262), Alemar's Sibal & Sons. Inc., vs. Elbinias (186 SCRA 94) and Bank of
Philippine Islands vs. Court of Appeals (229 SCRA 223) to support their
motion to suspend the proceedings in the labor cases.
In an Order dated September 25, 1995, the Labor Arbiter denied the
aforesaid motion holding that the injunction contained in the SEC Order
applied only to the enforcement of established rights and did not include the
suspension of proceedings involving claims against petitioner which have yet
to be ascertained. The Labor Arbiter further held that the order of the SEC
suspending all actions for claims against petitioners does not cover the
claims of private respondents in the labor cases because said claims and
the concomitant liability of petitioners still had to be determined, thus
carrying no dissipation of the assets of petitioners.1wphi1.nt
Petitioners appealed the adverse order of the Labor Arbiter to public
respondent which, in a Resolution dated April 26, 1996, dismissed the
appeal for lack of merit and, instead, sustained the rulings of the Labor
Arbiter.
The motion for reconsideration of petitioners fared no better and was denied
by public respondent in a Resolution dated June 20, 1996. 5
Hence, this petition. 6
The Issue
Petitioner raises only one issue:
Whether or not the Respondent NLRC acted without or in excess of
jurisdiction or with grave abuse of discretion amounting to lack of jurisdiction
in affirming the order of Labor Arbiter Voltaire A. Balitaan denying petitioners'
motion to suspend proceedings despite the Order of the Securities and
Exchange Commission under Sec. 6 (c) of P.D. 902-A directing the
suspension of all actions against a company under the first stages of
insolvency proceedings. 7
This Court's Ruling
The petition is meritorious.
Sole Issue:
Suspension of Proceedings
Jurisprudence teaches us:
. . . where the petition filed is one for declaration of a state of suspension of
payments due to a recognition of the inability to pay one's debts and
liabilities, and where the petitioning corporation either: (a) has sufficient
property to cover all its debts but foresees the impossibility of meeting them
when they fall due (solvent but illiquid) or (b) has no sufficient property
(insolvent) but is under the management of a rehabilitation receiver or a
management committee, the applicable law is P.D. 902-A pursuant to Sec. 5
par. (d) thereof. However, if the petitioning corporation has no sufficient
assists to cover its liabilities and is not under a rehabilitation receiver or a
management committee created under P.D. 902-A and does not seek
merely to have the payments of its debts suspended, but seeks a declaration
of insolvency . . . the applicable law is Act 1956 [The Insolvency Law] on
voluntary Insolvency, . . . 8
In the case at bar, Petitioner Rubberworld filed before the SEC a Petition for Declaration of
Suspension of Payments, as well as a proposed rehabilitation plan. On December 28, 1994,
the SEC ordered the creation of a management committee and the suspension of all actions
for claims against Rubberworld. Clearly, the applicable law is PD 902-A, as amended, the
relevant provisions of which read:
Sec. 5. In addition to the regulatory adjudicative functions of the Commission
over corporations, partnerships and other forms of associations registered
with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:
xxx xxx xxx
d) Petitions of corporations, partnerships or associations to be declared in
the state of payments in cases where the corporation, partnership or
association possesses sufficient property to cover all its debts regulatory but
foresees the impossibility of meeting them when they respectively fall due or
in cases where the corporation, partnership or association has no sufficient
assets to cover its liabilities, but is under the management of a rehabilitation
receiver or management committee created pursuant to this Decree.
Sec. 6. In order to effectively exercise such jurisdiction, the Commission
shall possess the following powers:
xxx xxx xxx
c) To appoint one or more receivers of the property, real or personal, which
is the subject of the action pending before the Commission in accordance
with the pertinent provisions of the Rules of Court in such other cases
whenever necessary in order to preserve the rights of the parties-litigants
and/or protect the interest of the investing public and creditors: . .
. Provided, finally, That upon appointment of a management committee, the
rehabilitation receiver, board or body, pursuant to this Decree, all actions for
claims against corporations, partnerships, or associations under
management or receivership pending before any court, tribunal, board or
body shall be suspended accordingly.
It is plain from the foregoing provisions of law that "upon the appointment [by the SEC] of a
management committee or a rehabilitation receiver," all actions for claims against the
corporation pending before any court, tribunal or board shall ipso jure be suspended. 9 The
justification for the automatic stay of all pending actions for claims "is to enable the
management committee or the rehabilitation receiver to effectively exercise its/his powers
free from any judicial or extra-judicial interference that might unduly hinder or prevent the
"rescue" of the debtor company. To allow such other actions to continue would only add to
the burden of the management committee or rehabilitation receiver, whose time, effort and
resources would be wasted in defending claims against the corporation instead of being
directed toward its restructuring and rehabilitation. 10
Parenthetically, the rehabilitation of a financially distressed corporation benefits its
employees, creditors, stockholders and, in a larger sense, the general public, And in
considering whether to rehabilitate or not, the SEC gives preference to the interest of
creditors, including employees. The reason its that shareholders can recover their
investments only upon liquidation of the corporation, and only if there are assets remaining
after all corporate creditors are paid. 11
Labor Claims Included
in Suspension Order
The solicitor general, representing Public Respondent NLRC, argues that the rationale for an
automatic stay will not be frustrated even if the NLRC proceeds with the disposition of these
labor cases, because any favorable obtained by the private respondents would only establish
their rights as creditors. The solicitor general also contends that the assailed Resolutions of
the NLRC will not result in an undue preference for the assets of Rubberworld, as the private
respondents will still present their claims before the management committee. 12
We disagree. The law is clear: upon the creation of a management committee or the
appointment of a rehabilitation receiver, all claims for actions "shall be suspended
accordingly." No exception in favor of labor claims is mentioned in the law. Since the law
makes no distinction or exemptions, neither should this Court. Ubi lex non distinguit nec nos
distinguere debemos. 13 Allowing labor cases to proceed clearly defeats the purpose of the
automatic stays and severally encumbers the management committee's and resources. The
said committee would need to defend against these suits, to the detriment of its primary and
urgent duty to work towards rehabilitating the corporation and making it viable again. The rule
otherwise would open the floodgates to other similarly situated claimants and forestall if not
defeat the rescue efforts. Besides, even if the NLRC awards the claims of private
respondents, as it did, its ruling could not be enforced as long as the petitioner is under the
management committee. 14
In Chua v. National Labor Relations Commission, 15 we ruled that labor claims cannot
proceed independently of a bankruptcy liquidation proceeding, since these claims "would
spawn needless controversy, delays, and confusion." 16 With more reason, allowing labor
claims to continue in spite of a SEC suspension order in a rehabilitation case would merely
lead to such results.
The solicitor general insists that since Article 217 of the Labor Code 17 vested [public
respondent with jurisdiction to hear and decide these labor cases, the NLRC did not exceed
its jurisdiction when it refused to suspend the proceeding therein. 18 The Court is not
persuaded.
Article 217 of the Labor Code should be construed not in isolation but in harmony with PD
902-A, according to the basic rule in statutory construction that implied repeals are not
favored. 19 Indeed, it is axiomatic that each and every statute must be construed in a way
that would avoid conflict with existing laws. 20 true, the NLRC has the power to hear and
decide labor disputes, but such authority is deemed suspended when PD 902-A is put into
effect by the Securities and Exchange Commission.
Preference in Favor of Workers in
Case of Bankruptcy or Liquidation
The private respondents contend that automatic stay under PD 902-A is not applicable to the
instant case; otherwise, the preference granted to workers by Article 110 of the Labor Code
would be rendered ineffective. 21This contention is misleading.
The preferential right of workers and employees under Article 110 of the Labor code may be
invoked only upon the institution of insolvency or judicial liquidation proceeding. 22 Indeed, it
is well-settled that "a declaration of bankruptcy or a judicial liquidation must be present before
preferences over various money claims may be enforced." 23 But debtors resort to
preference of credit giving preferred creditors the rights to have their claims paid ahead of
those of other claimants only when their assets are insufficient to pay their debts
fully. 24 The purpose of rehabilitation proceedings is precisely to enable the company to gain
a new lease on life and thereby allow creditors to be paid their claims from its earnings. In
insolvency proceedings, on the other hand, the company stops operating, and the claims of
creditors are satisfied from the assets of the insolvent corporation. The present case involves
the rehabilitation, not the liquidation, of petitioner-corporation. Hence, the preference of credit
granted to workers or employees under Article 110 of the Labor Code is not applicable.
Duration of Automatic
Stay Under PD 902-A
Finally, private respondents posit that under Section 6 of the Insolvency Law, the December
28, 1994 Order of the SEC suspending all actions for claims against Rubberworld should
have expired after three months, in the absence of an agreement between the company and
the corporate creditors. 25 Private respondents also accuse the SEC of abusing its power by
"allowing said suspension order to remain pending for many years without resolving and
approving any rehabilitation plan." 26 They contend that "[t]his is fatal to the instant petition
for it had been a party to the abuse by the SEC of its suspension order." 27
This Court notes that PD 902-A itself does not provide for the duration of the automatic stay.
Neither does the Order 28 of the SEC. Hence, the suspensive effect has no time limit and
remains in force as long as reasonably necessary to accomplish the purpose of the
Order. 29 On the other hand, the attack against the SEC's alleged "abuse of power" is
misplaced. Under review in this Petition for Certiorari are Resolutions of the NLRC, nor of the
SEC. The scope of this review is thus limited to whether the NLRC gravely abused or
exceeded its jurisdiction in refusing to heed the SEC Order of Suspension and in issuing its
challenged Resolutions. In any event, the bare allegation of inaction is insufficient to
condemn the Securities and Exchange Commission and the management committee where,
it should be noted, all affected parties, including the labor union in the company, are
represented.
WHEREFORE, the petition is hereby GRANTED. The assailed Resolutions of the NLRC
dated April 26, 1996, and June 20, 1996, are REVERSED and SET ASIDE. No
costs.1wphi1.nt
SO ORDERED.
















G.R. No. 97178 January 10, 1994
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. COURT OF APPEALS AND RUBY
INDUSTRIAL CORPORATION, respondents.
BELLOSILLO, J.:
BANK OF PHILIPPINE ISLANDS, in this petition for review on certiorari, seeks the reversal
of the decision of the Court of Appeals in CA-G.R. SP No. 23676 1 dismissing its petition
for certiorari and mandamus against respondent Presiding Judge and respondent Ruby
Industrial Corporation.
On 16 February 1984, petitioner Bank of Philippine Islands (BPI, for brevity), filed with the
Regional Trial Court of Pasig a complaint against respondent Ruby Industrial Corporation
(RUBY, for short), for foreclosure of real estate mortgage. After filing its answer with
counterclaim on 8 November 1984, respondent RUBY submitted to the trial court a motion for
suspension of the proceedings on the ground that on 10 August 1984 the Securities and
Exchange Commission (SEC) issued an Order placing RUBY under a rehabilitation plan
pursuant to Sec. 6, par. (c), of P.D. 902-A. In that Order, SEC declared that "(a)ccordingly,
with the creation of the Management Committee all actions or claims against Ruby Industrial
Corporation pending before any court, tribunal, branch or body are hereby deemed
suspended." On 19 December 1984, the trial court issued an order granting the motion of
RUBY and suspended the proceedings.
On 31 July 1990, petitioner BPI filed a motion for reopening of the proceedings, invoking our
ruling in Philippine Commercial International Bank v. Court of Appeals 2 which states that
"SEC's order of suspension of payments of Philfinance as well as for all actions or claims
against Philfinance could only be applied to claims of unsecured creditors. Such order can
not extend to creditors holding a mortgage, pledge or any lien on the property unless they
give up the property, security or lien in favor of all the creditors of Philfinance."
However, on 22 August 1990, the trial court denied the motion of BPI on the basis of our
decision in Alemar's Sibal & Sons, Inc. v. Elbinias 3 holding that the suspension of payment
applies to all creditors, whether secured or unsecured, in order to place them on equal
footing. On 19 October 1990, petitioner's motion to reconsider the Order of 22 August 1990
was denied by the trial court.
Petitioner then filed with the Court of Appeals a petition for certiorari and mandamus to set
aside the Orders of 22 August 1990 and 19 October 1990, alleging grave abuse of discretion
on the part of the trial judge in refusing to reopen the case. But, on 31 January 1991, the
Court of Appeals dismissed the petition and held that under Sec. 5, P.D. No. 902-A, and the
case of Alemar's Sibal & Sons, Inc. v. Elbinias, 4 a creditor, whether secured or unsecured,
cannot enforce his credit against a distressed firm which had been placed by SEC under
receivership or rehabilitation; that during rehabilitation or receivership, the assets are held in
trust for the equal benefit of all creditors to preclude one from obtaining an advantage or
preference over the others by the expediency of an attachment, execution or otherwise; that
instead of vexing the courts with suits against the distressed firm, they are directed to file
their claims with the duly appointed receiver of SEC.
In the instant petition, it is alleged that the Court of Appeals has decided a question of
substance not in accord with the applicable decision of this Court and/or sanctioned a
departure by the trial court from the accepted and usual course of judicial proceedings as to
call for the exercise by this Court of its power of supervision.
The issue now before us is whether petitioner, which is a secured creditor of respondent
RUBY, may still judicially enforce its claim against the latter which has already been placed
by SEC under rehabilitation pursuant to Sec. 5 and Sec. 6, pars. (c) and (d), P.D. 902-A,
following our ruling in Philippine Commercial International Bank v. Court of Appeals (PCIB v.
CA for brevity). 5
Petitioner alleges that it holds a real estate mortgage over three (3) parcels of land of private
respondent which it did not give up in favor of other creditors of private respondent, and that
the PCIB v. CA ruling explicitly states that the order of SEC for suspension of payments of
the distressed firm, as well as for all actions or claims against it, could only be applied to
unsecured claims of creditors and could not extend to creditors holding a mortgage, pledge
or any lien on the property unless they give up their interests therein in favor of all the
creditors. The thrust of petitioner is that since it is a secured creditor, it is not affected by the
suspension order of SEC and may therefore enforce its credit against the distressed firm.
We do not agree with petitioner. The facts in PCIB v. CA, relied upon heavily by petitioner,
are different from those in the instant case. In PCIB v. CA, SEC ordered the dissolution and
liquidation of Philfinance on the basis of the findings of the receivership committee appointed
by SEC. After the order of dissolution, Philfinance failed to satisfy its obligation with Philippine
Commercial International Bank (PCIB), prompting the latter to put up for auction sale the
pledged shares of stocks and bonds of Philfinance in the possession of PCIB. By then the
proceedings before the SEC had already been terminated and an order of dissolution already
issued when the bank moved for the sale of the pledged stocks and bonds. The pledged
properties being still in PCIB's possession, the receiver could not possess the same for
equitable distribution to the creditors of Philfinance.
In the instant case, the action of petitioner for foreclosure of real estate mortgage had been
filed against respondent RUBY and was pending with the trial court when RUBY was placed
by SEC under rehabilitation through the creation of a management committee pursuant to
Sec. 6, par. (d), P.D. 902-A. In its order of 10 August 1984, SEC directed that all actions or
claims against RUBY pending before any court, tribunal, branch or body be deemed
suspended. On the basis of this order, the jurisdiction of this trial court over the case was
also considered suspended. As a result, SEC acquired jurisdiction, which is bolstered by the
fact that it had already appointed a rehabilitation receiver for the distressed corporation and
had directed that all proceedings or claims against it be suspended. 6
More importantly, the doctrine in the PCIB case has since been abrogated. In Alemar's Sibal
& Sons v. Elbinias, 7BF Homes, Inc. v. Court of Appeals, 8 Araneta v. Court of
Appeals, 9 and RCBC v. Court of Appeals, 10 we already ruled that whenever a distressed
corporation asks SEC for rehabilitation and suspension of payments, preferred creditors may
no longer assert such preference, but shall stand on equal footing with other creditors.
Foreclosure shall be disallowed so as not to prejudice other creditors or cause discrimination
among them. If foreclosure is undertaken despite the fact that a petition for rehabilitation has
been filed, the certificate of sale shall not be delivered pending rehabilitation. If this has
already been done, no transfer certificate of title shall likewise be effected within the period of
rehabilitation. The rationale behind PD 902-A, as amended, is to effect a feasible and viable
rehabilitation. This cannot be achieved if one creditor is preferred over the others. 11
While it is recognized that petitioner is a preferred creditor whose claim is secured by real
estate mortgage on the properties of respondent RUBY, its right to enforce its claim in court
is suspended with the placing by SEC of respondent under rehabilitation. This rule will enable
the management committee or rehabilitation receiver to effectively exercise his/its power free
from any judicial or extrajudicial interference that might unduly hinder the rescue of the
distressed company. 12
WHEREFORE, the petition is DENIED and the assailed decision of the Court of Appeals
dated 31 January 1991 is AFFIRMED. Costs against petitioner.
SO ORDERED.