1. G.R. No.

L-37331

March 18, 1933

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf
and in that all other stockholders of the Balatoc Mining Company,
etc., plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY,
H. E. RENZ, JOHN W. JAUSSERMANN, and A. W. BEAM, defendants-appellees.

Gibbs and McDonough and Roman Ozaeta for appellants.

DeWitt, Perkins and Brady for appellees.
Ross, Lawrence and Selph for appellee Balatoc Mining Company.
STREET, J.:
This action was originally instituted in the Court of First Instance of the City of Manila
by F. M. Harden, acting in his own behalf and that of all other stockholders of the
Balatoc Mining Co. who might join in the action and contribute to the expense of the
suit. With the plaintiff Harden two others, J. D. Highsmith and John C. Hart,
subsequently associated themselves. The defendants are the Benguet Consolidated
Mining Co., the Balatoc Mining Co., H. E. Renz, John W. Haussermann, and A. W.
Beam. The principal purpose of the original action was to annul a certificate covering
600,000 shares of the stock of the Balatoc Mining Co., which have been issued to the
Benguet Consolidated Mining Co., and to secure to the Balatoc Mining Co., the
restoration of a large sum of money alleged to have been unlawfully collected by the
Benguet Consolidated Mining Co., with legal interest, after deduction therefrom of the
amount expended by the latter company under a contract between the two companies,
bearing date of March 9, 1927. The complaint was afterwards amended so as to include
a prayer for the annulment of this contract. Shortly prior to the institution of this
lawsuit, the Benguet Consolidated Mining Co., transferred to H. E. Renz, as trustee, the
certificate for 600,000 shares of the Balatoc Mining Co. which constitute the principal
subject matter of the action. This was done apparently to facilitate the splitting up to
the shares in the course of the sale or distribution. To prevent this the plaintiffs, upon
filing their original complaint, procured a preliminary injunction restraining the
defendants, their agents and servants, from selling, assigning or transferring the
600,000 shares of the Balatoc Mining Co., or any part thereof, and from removing said
shares from the Philippine Islands. This explains the connection of Renz with the case.
The other individual defendants are made merely as officials of the Benguet
Consolidated Mining Co. Upon hearing the cause the trial court dismissed the complaint
and dissolved the preliminary injunction, with costs against the plaintiffs. From this
judgment the plaintiffs appealed.
The facts which have given rise this lawsuit are simple, as the financial interests involve
are immense. Briefly told these facts are as follows: The Benguet Consolidated Mining

Co. was organized in June, 1903, as a sociedad anonima in conformity with the
provisions of Spanish law; while the Balatoc Mining Co. was organized in December
1925, as a corporation, in conformity with the provisions of the Corporation Law (Act
No. 1459). Both entities were organized for the purpose of engaging in the mining of
gold in the Philippine Islands, and their respective properties are located only a few
miles apart in the subprovince of Benguet. The capital stock of the Balatoc Mining Co.
consists of one million shares of the par value of one peso (P1) each.
When the Balatoc Mining Co. was first organized the properties acquired by it were
largely undeveloped; and the original stockholders were unable to supply the means
needed for profitable operation. For this reason, the board of directors of the
corporation ordered a suspension of all work, effective July 31, 1926. In November of
the same year a general meeting of the company's stockholders appointed a committee
for the purpose of interesting outside capital in the mine. Under the authority of this
resolution the committee approached A. W. Beam, then president and general manager
of the Benguet Company, to secure the capital necessary to the development of the
Balatoc property. As a result of the negotiations thus begun, a contract, formally
authorized by the management of both companies, was executed on March 9, 1927,
the principal features of which were that the Benguet Company was to proceed with the
development and construct a milling plant for the Balatoc mine, of a capacity of 100
tons of ore per day, and with an extraction of at least 85 per cent of the gold content.
The Benguet Company also agreed to erect an appropriate power plant, with the aerial
tramlines and such other surface buildings as might be needed to operate the mine. In
return for this it was agreed that the Benguet Company should receive from the
treasurer of the Balatoc Company shares of a par value of P600,000, in payment for the
first P600,000 be thus advanced to it by the Benguet Company.
The performance of this contract was speedily begun, and by May 31, 1929, the
Benguet Company had spent upon the development the sum of P1,417,952.15. In
compensation for this work a certificate for six hundred thousand shares of the stock of
the Balatoc Company has been delivered to the Benguet Company, and the excess
value of the work in the amount of P817,952.15 has been returned to the Benguet
Company in cash. Meanwhile dividends of the Balatoc Company have been enriching its
stockholders, and at the time of the filing of the complaint the value of its shares had
increased in the market from a nominal valuation to more than eleven pesos per share.
While the Benguet Company was pouring its million and a half into the Balatoc
property, the arrangements made between the two companies appear to have been
viewed by the plaintiff Harden with complacency, he being the owner of many
thousands of the shares of the Balatoc Company. But as soon as the success of the
development had become apparent, he began this litigation in which he has been joined
by two others of the eighty shareholders of the Balatoc Company.
Briefly, the legal point upon which the action is planted is that it is unlawful for the
Benguet Company to hold any interest in a mining corporation and that the contract by

which the interest here in question was acquired must be annulled, with the consequent
obliteration of the certificate issued to the Benguet Company and the corresponding
enrichment of the shareholders of the Balatoc Company.
When the Philippine Islands passed to the sovereignty of the United States, in the
attention of the Philippine Commission was early drawn to the fact that there is no
entity in Spanish law exactly corresponding to the notion of the corporation in English
and American law; and in the Philippine Bill, approved July 1, 1902, the Congress of the
United States inserted certain provisions, under the head of Franchises, which were
intended to control the lawmaking power in the Philippine Islands in the matter of
granting of franchises, privileges and concessions. These provisions are found in section
74 and 75 of the Act. The provisions of section 74 have been superseded by section 28
of the Act of Congress of August 29, 1916, but in section 75 there is a provision
referring to mining corporations, which still remains the law, as amended. This
provisions, in its original form, reads as follows: "... it shall be unlawful for any member
of a corporation engaged in agriculture or mining and for any corporation organized for
any purpose except irrigation to be in any wise interested in any other corporation
engaged in agriculture or in mining."
Under the guidance of this and certain other provisions thus enacted by Congress, the
Philippine Commission entered upon the enactment of a general law authorizing the
creation of corporations in the Philippine Islands. This rather elaborate piece of
legislation is embodied in what is called our Corporation Law (Act No. 1459 of the
Philippine Commission). The evident purpose of the commission was to introduce the
American corporation into the Philippine Islands as the standard commercial entity and
to hasten the day when the sociedad anonima of the Spanish law would be obsolete.
That statute is a sort of codification of American corporate law.
For the purposes general description only, it may be stated that the sociedad
anonima is something very much like the English joint stock company, with features
resembling those of both the partnership is shown in the fact that sociedad, the generic
component of its name in Spanish, is the same word that is used in that language to
designate other forms of partnership, and in its organization it is constructed along the
same general lines as the ordinary partnership. It is therefore not surprising that for
purposes of loose translation the expression sociedad anonima has not infrequently the
other hand, the affinity of this entity to the American corporation has not escaped
notice, and the expression sociedad anonima is now generally translated by the word
corporation. But when the word corporation is used in the sense of sociedad
anonima and close discrimination is necessary, it should be associated with the Spanish
expression sociedad anonima either in a parenthesis or connected by the word "or".
This latter device was adopted in sections 75 and 191 of the Corporation Law.
In drafting the Corporation Law the Philippine Commission inserted bodily, in subsection
(5) of section 13 of that Act (No. 1459) the words which we have already quoted from

section 75 of the Act of Congress of July 1, 1902 (Philippine Bill); and it is of course
obvious that whatever meaning originally attached to this provision in the Act of
Congress, the same significance should be attached to it in section 13 of our
Corporation Law.
As it was the intention of our lawmakers to stimulate the introduction of the American
Corporation into Philippine law in the place of the sociedad anonima, it was necessary
to make certain adjustments resulting from the continued co-existence, for a time, of
the two forms of commercial entities. Accordingly, in section 75 of the Corporation Law,
a provision is found making the sociedad anonima subject to the provisions of the
Corporation Law "so far as such provisions may be applicable", and giving to
the sociedades anonimas previously created in the Islands the option to continue
business as such or to reform and organize under the provisions of the Corporation
Law. Again, in section 191 of the Corporation Law, the Code of Commerce is repealed in
so far as it relates to sociedades anonimas. The purpose of the commission in repealing
this part of the Code of Commerce was to compel commercial entities thereafter
organized to incorporate under the Corporation Law, unless they should prefer to adopt
some form or other of the partnership. To this provision was added another to the
effect that existing sociedades anonimas, which elected to continue their business as
such, instead of reforming and reorganizing under the Corporation Law, should continue
to be governed by the laws that were in force prior to the passage of this Act "in
relation to their organization and method of transacting business and to the rights of
members thereof as between themselves, but their relations to the public and public
officials shall be governed by the provisions of this Act."
As already observed, the provision above quoted from section 75 of the Act Congress of
July 1, 1902 (Philippine Bill), generally prohibiting corporations engaged in mining and
members of such from being interested in any other corporation engaged in mining,
was amended by section 7 of Act No. 3518 of the Philippine Legislature, approved by
Congress March 1, 1929. The change in the law effected by this amendment was in the
direction of liberalization. Thus, the inhibition contained in the original provision against
members of a corporation engaged in agriculture or mining from being interested in
other corporations engaged in agriculture or in mining was so modified as merely to
prohibit any such member from holding more than fifteen per centum of the
outstanding capital stock of another such corporation. Moreover, the explicit prohibition
against the holding by any corporation (except for irrigation) of an interest in any other
corporation engaged in agriculture or in mining was so modified as to limit the
restriction to corporations organized for the purpose of engaging in agriculture or in
mining.
As originally drawn, our Corporation Law (Act No. 1459) did not contain any appropriate
clause directly penalizing the act of a corporation, a member of a corporation , in
acquiring an interest contrary to paragraph (5) of section 13 of the Act. The Philippine
Legislature undertook to remedy this situation in section 3 of Act No. 2792 of the

Philippine Legislature, approved on February 18, 1919, but this provision was declared
invalid by this court inGovernment of the Philippine Islands vs. El Hogar Filipino (50
Phil., 399), for lack of an adequate title to the Act. Subsequently the Legislature
reenacted substantially the same penal provision in section 21 of Act No. 3518, under a
title sufficiently broad to comprehend the subject matter. This part of Act No. 3518
became effective upon approval by the Governor-General, on December 3, 1928, and it
was therefore in full force when the contract now in question was made.
This provision was inserted as a new section in the Corporation Law, forming section
1990 (A) of said Act as it now stands. Omitting the proviso, which seems not to be
pertinent to the present controversy, said provision reads as follows:
SEC. 190 (A). Penalties. The violation of any of the provisions of this Act and
its amendments not otherwise penalized therein, shall be punished by a fine of
not more than five thousand pesos and by imprisonment for not more than five
years, in the discretion of the court. If the violation is committed by a
corporation, the same shall, upon such violation being proved, be dissolved
by quo warranto proceedings instituted by the Attorney-General or by any
provincial fiscal by order of said Attorney-General: . . . .
Upon a survey of the facts sketched above it is obvious that there are two fundamental
questions involved in this controversy. The first is whether the plaintiffs can maintain an
action based upon the violation of law supposedly committed by the Benguet Company
in this case. The second is whether, assuming the first question to be answered in the
affirmative, the Benguet Company, which was organized as a sociedad anonima, is a
corporation within the meaning of the language used by the Congress of the United
States, and later by the Philippine Legislature, prohibiting a mining corporation from
becoming interested in another mining corporation. It is obvious that, if the first
question be answered in the negative, it will be unnecessary to consider the second
question in this lawsuit.
Upon the first point it is at once obvious that the provision referred to was adopted by
the lawmakers with a sole view to the public policy that should control in the granting
of mining rights. Furthermore, the penalties imposed in what is now section 190 (A) of
the Corporation Law for the violation of the prohibition in question are of such nature
that they can be enforced only by a criminal prosecution or by an action of quo
warranto. But these proceedings can be maintained only by the Attorney-General in
representation of the Government.
What room then is left for the private action which the plaintiffs seek to assert in this
case? The defendant Benguet Company has committed no civil wrong against the
plaintiffs, and if a public wrong has been committed, the directors of the Balatoc
Company, and the plaintiff Harden himself, were the active inducers of the commission
of that wrong. The contract, supposing it to have been unlawful in fact, has been

performed on both sides, by the building of the Balatoc plant by the Benguet Company
and the delivery to the latter of the certificate of 600,000 shares of the Balatoc
Company. There is no possibility of really undoing what has been done. Nobody would
suggest the demolition of the mill. The Balatoc Company is secure in the possession of
that improvement, and talk about putting the parties in status quo ante by restoring the
consideration with interest, while the Balatoc Company remains in possession of what it
obtained by the use of that money, does not quite meet the case. Also, to mulct the
Benguet Company in many millions of dollars in favor of individuals who have not the
slightest equitable right to that money in a proposition to which no court can give a
ready assent.
The most plausible presentation of the case of the plaintiffs proceeds on the
assumption that only one of the contracting parties has been guilty of a misdemeanor,
namely, the Benguet Company, and that the other party, the Balatoc Company, is
wholly innocent to participation in that wrong. The plaintiffs would then have us apply
the second paragraph of article 1305 of the Civil Code which declares that an innocent
party to an illegal contract may recover anything he may have given, while he is not
bound to fulfill any promise he may have made. But, supposing that the first hurdle can
be safely vaulted, the general remedy supplied in article 1305 of the Civil Code cannot
be invoked where an adequate special remedy is supplied in a special law. It has been
so held by this court in Go Chioco vs. Martinez (45 Phil., 256, 280), where we refused
to apply that article to a case of nullity arising upon a usurious loan. The reason given
for the decision on this point was that the Usury Act, as amended, contains all the
provisions necessary for the effectuation of its purposes, with the result that the
remedy given in article 1305 of the Civil Code is unnecessary. Much more is that idea
applicable to the situation now before us, where the special provisions give ample
remedies for the enforcement of the law by action in the name of the Government, and
where no civil wrong has been done to the party here seeking redress.
The view of the case presented above rest upon considerations arising upon our own
statutes; and it would seem to be unnecessary to ransack the American decisions for
analogies pertinent to the case. We may observe, however, that the situation involved
is not unlike that which has frequently arisen in the United States under provisions of
the National Bank Act prohibiting banks organized under that law from holding real
property. It has been uniformly held that a trust deed or mortgaged conveying property
of this kind to a bank, by way of security, is valid until the transaction is assailed in a
direct proceeding instituted by the Government against the bank, and the illegality of
such tenure supplies no basis for an action by the former private owner, or his creditor,
to annul the conveyance. (National Bank vs. Matthews, 98 U. S., 621; Kerfoot vs.
Farmers & M. Bank, 218 U. S., 281.) Other analogies point in the same direction. (South
& Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs
Mfg. Co. vs. Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R.
Co., 77 Hun., 332.)

Most suggestive perhaps of all the cases in Compaia Azucarera de Carolina vs.
Registrar (19 Porto Rico, 143), for the reason that this case arose under a provision of
the Foraker Act, a law analogous to our Philippine Bill. It appears that the registrar had
refused to register two deeds in favor of the Compaia Azucarera on the ground that
the land thereby conveyed was in excess of the area permitted by law to the company.
The Porto Rican court reversed the ruling of the registrar and ordered the registration
of the deeds, saying:
Thus it may be seen that a corporation limited by the law or by its charter has
until the State acts every power and capacity that any other individual capable of
acquiring lands, possesses. The corporation may exercise every act of ownership
over such lands; it may sue in ejectment or unlawful detainer and it may demand
specific performance. It has an absolute title against all the world except the
State after a proper proceeding is begun in a court of law. ... The Attorney
General is the exclusive officer in whom is confided the right to initiate
proceedings for escheat or attack the right of a corporation to hold land.
Having shown that the plaintiffs in this case have no right of action against the Benguet
Company for the infraction of law supposed to have been committed, we forego cny
discussion of the further question whether a sociedad anonima created under Spanish
law, such as the Benguet Company, is a corporation within the meaning of the
prohibitory provision already so many times mentioned. That important question
should, in our opinion, be left until it is raised in an action brought by the Government.
The judgment which is the subject of his appeal will therefore be affirmed, and it is so
ordered, with costs against the appellants.

Avancea, C.J., Villamor, Ostrand, Villa-Real, Abad Santos, Hull, Vickers, Imperial and
Butte, JJ., concur.

2. EXCELLENT QUALITY APPAREL,

INC.,
Petitioner,

G.R. No. 175048

Present:
QUISUMBING, J.,

- versus WIN MULTI RICH BUILDERS, INC.,

represented by its President,
WILSON G. CHUA,
Respondent.

Chairperson,

CARPIO MORALES
TINGA,
VELASCO, JR., and
BRION, JJ.
Promulgated:

February 10, 2009

x ---------------------------------------------------------------------------------x
DECISION
TINGA, J.:

Before us is a Rule 45 petition[1] seeking the reversal of the Decision[2] and

Resolution[3] of the Court of Appeals in CA-G.R. SP No. 84640. The Court of Appeals
had annulled two orders[4] of the Regional Trial Court (RTC), Branch 32, of Manila in
Civil Case No. 04-108940. This case involves a claim for a sum of money which arose
from a construction dispute.
On 26 March 1996, petitioner Excellent Quality Apparel, Inc. (petitioner) then
represented by Max L.F. Ying, Vice-President for Productions, and Alfiero R. Orden,
Treasurer, entered into a contract[5] with Multi-Rich Builders (Multi-Rich) represented by
Wilson G. Chua (Chua), its President and General Manager, for the construction of a
garment factory within the Cavite Philippine Economic Zone Authority (CPEZ).[6] The
duration of the project was for a maximum period of five (5) months or 150 consecutive
calendar days. Included in the contract is an arbitration clause which is as follows:

Article XIX

ARBITRATION CLAUSE

Should there be any dispute, controversy or difference between

the parties arising out of this Contract that may not be resolved by them
to their mutual satisfaction, the matter shall be submitted to an
Arbitration Committee of three (3) members; one (1) chosen by the
OWNER; one (1) chosen by the CONTRACTOR; and the Chairman thereof
to be chosen by two (2) members. The decision of the Arbitration
Committee shall be final and binding on both the parties hereto. The
Arbitration shall be governed by the Arbitration Law (R.A. [No.] 876). The
cost of arbitration shall be borned [sic] jointly by both CONTRACTOR and
OWNER on 50-50 basis.[7]

The construction of the factory building was completed on 27 November 1996.

Respondent Win Multi-Rich Builders, Inc. (Win) was incorporated with the
Securities and Exchange Commission (SEC) on 20 February 1997[8] with Chua as its
President and General Manager. On 26 January 2004, Win filed a complaint for a sum of
money[9] against petitioner and Mr. Ying amounting to P8,634,448.20. It also prayed for
the issuance of a writ of attachment claiming that Mr. Ying was about to abscond and
that petitioner was about to close. Win obtained a surety bond[10] issued by Visayan
Surety & Insurance Corporation. On 10 February 2004, the RTC issued the Writ of
Attachment[11] against the properties of petitioner.
On 16 February 2004, Sheriff Salvador D. Dacumos of the RTC of Manila, Branch
32, went to the office of petitioner in CPEZ to serve the Writ of Attachment,
Summons[12] and the Complaint. Petitioner issued Equitable PCIBank (PEZA Branch)
Check No. 160149, dated 16 February 2004, in the amount of P8,634,448.20, to
prevent the Sheriff from taking possession of its properties.[13] The check was made
payable to the Office of the Clerk of Court of the RTC of Manila as a guarantee for
whatever liability there may be against petitioner.

Petitioner filed an Omnibus Motion[14] claiming that it was neither about to close.
It also denied owing anything to Win, as it had already paid all its obligations to it.
Lastly, it questioned the jurisdiction of the trial court from taking cognizance of the
case. Petitioner pointed to the presence of the Arbitration Clause and it asserted that
the case should be referred to the Construction Industry Arbitration Commission (CIAC)
pursuant to Executive Order (E.O.) No. 1008.
In the hearing held on 10 February 2004, the counsel of Win moved that its
name in the case be changed from Win Multi-Rich Builders, Inc. to Multi-Rich
Builders, Inc. It was only then that petitioner apparently became aware of the variance
in the name of the plaintiff. In the Reply[15] filed by petitioner, it moved to dismiss the
case since Win was not the contractor and neither a party to the contract, thus it
cannot institute the case. Petitioner obtained a Certificate of Non-Registration of
Corporation/Partnership[16] from the SEC which certified that the latter did not have any
records of a Multi-Rich Builders, Inc. Moreover, Win in its Rejoinder[17] did not
oppose the allegations in the Reply. Win admitted that it was only incorporated on 20
February 1997 while the construction contract was executed on 26 March 1996.
Likewise, it admitted that at the time of execution of the contract, Multi-Rich was a
registered sole proprietorship and was issued a business permit[18] by the Office of the
Mayor of Manila.
In an Order[19] dated 12 April 2004, the RTC denied the motion and stated that
the issues can be answered in a full-blown trial. Upon its denial, petitioner filed its
Answer and prayed for the dismissal of the case.[20] Win filed a Motion[21] to deposit the
garnished

amount

to

the

court

to

protect

its

legal

rights.

In

Manifestation,[22] petitioner vehemently opposed the deposit of the garnished amount.

The RTC issued an Order[23] dated 20 April 2004, which granted the motion to deposit
the garnished amount. On the same date, Win filed a motion[24] to release the
garnished amount to it. Petitioner filed its opposition[25] to the motion claiming that the
release of the money does not have legal and factual basis.

On 18 June 2004, petitioner filed a petition for review on certiorari[26] under Rule
65 before the Court of Appeals, which questioned the jurisdiction of the RTC and
challenged the orders issued by the lower court with a prayer for the issuance of a
temporary

retraining

order

and

writ

of

preliminary

injunction.

Subsequently, petitioner filed a Supplemental Manifestation and Motion[27] and alleged

that the money deposited with the RTC was turned over to Win. Win admitted that the
garnished amount had already been released to it. On 14 March 2006, the Court of
Appeals rendered its Decision[28] annulling the 12 April and 20 April 2004 orders of the
RTC. It also ruled that the RTC had jurisdiction over the case since it is a suit for
collection of sum of money. Petitioner filed a Motion for Reconsideration[29] which was
subsequently denied in a resolution.[30]
Hence this petition.
Petitioner raised the following issues to wit: (1) does Win have a legal personality
to institute the present case; (2) does the RTC have jurisdiction over the case
notwithstanding the presence of the arbitration clause; and (3) was the issuance of the
writ of attachment and the subsequent garnishment proper.

A suit may only be instituted by the real party in interest. Section 2, Rule 3 of the
Rules of Court defines parties in interest in this manner:
A real party in interest is the party who stands to be benefited or injured
by the judgment in the suit, or the party entitled to the avails of the suit.
Unless otherwise authorized by law or these Rules, every action must be
prosecuted or defended in the name of the real party in interest.

Is Win a real party in interest? We answer in the negative.

Win admitted that the contract was executed between Multi-Rich and petitioner.
It further admitted that Multi-Rich was a sole proprietorship with a business permit
issued by the Office of the Mayor of Manila. A sole proprietorship is the oldest, simplest,
and most prevalent form of business enterprise.[31] It is an unorganized business owned
by one person. The sole proprietor is personally liable for all the debts and obligations
of the business.[32] In the case of Mangila v. Court of Appeals,[33] we held that:

x x x In fact, there is no law authorizing sole proprietorships to file

a suit in court.
A sole proprietorship does not possess a juridical personality
separate and distinct from the personality of the owner of the enterprise.
The law merely recognizes the existence of a soleproprietorship as a form
of business organization conducted for profit by a single individual and
requires its proprietor or owner to secure licenses and permits, register
its business name, and pay taxes to the national government. The law
does not vest a separate legal personality on the sole proprietorship or
empower it to file or defend an action in court.

The original petition was instituted by Win, which is a SEC-registered

corporation. It filed a collection of sum of money suit which involved a construction
contract entered into by petitioner and Multi-Rich, a sole proprietorship. The counsel of
Win wanted to change the name of the plaintiff in the suit to Multi-Rich. The change
cannot be countenanced. The plaintiff in the collection suit is a corporation. The name
cannot be changed to that of a sole proprietorship. Again, a sole proprietorship is not
vested with juridical personality to file or defend an action.[34]
Petitioner had continuously contested the legal personality of Win to institute the
case. Win was given ample opportunity to adduce evidence to show that it had legal
personality. It failed to do so. Corpus Juris Secundum, notes:
x x x where an individual or sole trader organizes a corporation to take
over his business and all his assets, and it becomes in effect merely an
alter ego of the incorporator, the corporation, either on the grounds of
implied assumption of the debts or on the grounds that the business is
the same and is merely being conducted under a new guise, is liable for
the incorporator's preexisting debts and liabilities. Clearly, where the
corporation assumes or accepts the debt of its predecessor in business it
is liable and if the transfer of assets is in fraud of creditors it will be liable
to the extent of the assets transferred. The corporation is not liable on an
implied assumption of debts from the receipt of assets where the
incorporator retains sufficient assets to pay the indebtedness, or
where none of his assets are transferred to the corporation, or

where, although all the assets of the incorporator have been transferred,
there is a change in the persons carrying on the business and the
corporation is not merely an alter ego of the person to whose business it
succeeded.[35]

In order for a corporation to be able to file suit and claim the receivables of its
predecessor in business, in this case a sole proprietorship, it must show proof that the
corporation had acquired the assets and liabilities of the sole proprietorship. Win could
have easily presented or attached any document e.g., deed of assignment which will
show whether the assets, liabilities and receivables of Multi-Rich were acquired by Win.
Having been given the opportunity to rebut the allegations made by petitioner, Win
failed to use that opportunity. Thus, we cannot presume that Multi-Rich is the
predecessor-in-business of Win and hold that the latter has standing to institute the
collection suit.
Assuming arguendo that Win has legal personality, the petition will still be
granted.
Section 4 of E.O. No. 1008[36] provides for the jurisdiction of the Construction
Industry Arbitration Commission, to wit:

Section 4. Jurisdiction.The CIAC shall have original and

exclusive jurisdiction over disputes arising from, or connected with,
contracts entered into by parties involved in construction in the
Philippines, whether the disputes arises before or after the completion of
the contract, or after the abandonment or breach thereof. These disputes
may involve government or private contracts. For the Board to acquire
jurisdiction, the parties to a dispute must agree to submit the same to
voluntary arbitration.
The jurisdiction of the CIAC may include but is not limited to
violation of specifications for materials and workmanship; violation of the
terms of agreement; interpretation and/or application of contractual time
and delays; amount of damages and penalties; commencement time and

delays; maintenance and defects; payment, default of employer or

contractor and changes in contract cost.
Excluded from the coverage of this law are disputes from
employer-employee relationships which shall continue to be covered by
the Labor Code of the Philippines.

There is nothing in the law which limits the exercise of jurisdiction to complex or
difficult cases. E.O. No. 1008 does not distinguish between claims involving payment of
money or not.[37] The CIAC acquires jurisdiction over a construction contract by the
mere fact that the parties agreed to submit to voluntary arbitration.[38] The law does
not preclude parties from stipulating a preferred forum or arbitral body but they may
not divest the CIAC of jurisdiction as provided by law.[39] Arbitration is an alternative
method of dispute resolution which is highly encouraged.[40] The arbitration clause is a
commitment on the part of the parties to submit to arbitration the disputes covered
since that clause is binding, and they are expected to
abide by it in good faith.[41] Clearly, the RTC should not have taken cognizance of the
collection suit. The presence of the arbitration clause vested jurisdiction to the CIAC
over all construction disputes between Petitioner and Multi-Rich. The RTC does not
have jurisdiction.[42]
Based on the foregoing, there is no need to discuss the propriety of the issuance
of the writ of attachment. However, we cannot allow Win to retain the garnished
amount which was turned over by the RTC. The RTC did not have jurisdiction to issue
the questioned writ of attachment and to order the release of the garnished funds.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals
is hereby MODIFIED. Civil Case No. 04-108940 is DISMISSED. Win Multi-Rich
Builders,
amount of

Inc.

is ORDERED to

return

EIGHT MILLION SIX HUNDRED THIRTY-FOUR

the

garnished

THOUSAND

HUNDRED FORTY-EIGHT PESOS AND FORTY CENTAVOS (P8,634,448.40),

FOUR

which was turned over by the Regional Trial Court, to petitioner with legal interest of 12
percent (12%) per annum upon finality of this Decision until payment.
SO ORDERED.

3. BIENVENIDO EJERCITO and

JOSE MARTINEZ,
Petitioners,

G.R. No. 172595

Present:
QUISUMBING, J.*

Chairperson,

- versus -

CARPIO MORALES,

Acting Chairperson,

M.R. VARGAS CONSTRUCTION, BRION, JJ.

MARCIAL R. VARGAS, Sole Owner,
RENATO AGARAO,*
Project Foreman,
Respondents.

TINGA,
VELASCO, JR., and

Promulgated:

April 10, 2008

x---------------------------------------------------------------------------x
DECISION
TINGA, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, assailing the Court of Appeals Decision[1] and Resolution[2] in CA-G.R. SP
No. 89001. The appellate courts decision dismissed the petition for certiorari, which
sought to set aside the Order[3] dated 08 November 2004 issued by Hon. Marie
Christine Jacob, Presiding Judge of the Regional Trial Court (RTC) of Quezon City,
Branch

100. The

appellate

courts

resolution

denied

petitioners

motion

for

reconsideration of the decision.

As culled from the records, the following factual antecedents appear:
On 5 March 2004, the City Government of Quezon City, represented by Mayor
Feliciano Belmonte, Jr., entered into a construction contract[4] with M.R. Vargas
Construction, represented by Marcial Vargas in his capacity as general manager of the
said

business

enterprise,

for

the

improvement

and

concreting

of Panay Avenue.[5] Pursuant to the contract, the business enterprise commenced its

clearing operations by removing the structures and uprooting the trees along the
thoroughfare. Its foreman, Renato Agarao, supervised the clearing operations.[6]
Claiming that the clearing operations lacked the necessary permit and prior
consultation, petitioners Bienvenido Ejercito and Jose Martinez, as well as a certain
OscarBaria, brought

the

matter to

the

attention

of the barangay authorities,

Mayor Belmonte, Senator Ma. Ana Consuelo A.S. Madrigal, the Department of
Environment and Natural Resources and the Philippine Coconut Authority.[7]
The efforts of petitioners proved unsuccessful. Hence, on 10 September 2004,
they filed a petition for injunction before the Quezon City RTC. The petition named
M.R.

Vargas

Construction

Co.,

represented

by

herein Marcial R.

Vargas

and Renato Agarao, as respondent.[8]

The Petition,[9] docketed as Civil Case No. Q-04-53687, indicated that
Respondent M.R. Vargas Construction, is an entity, with office address at the 4th Floor,
President Tower, Timog Avenue corner Scout Ybardaloza [sic] St., Quezon City,
represented

herein

by

its

President Marcial Vargas

and

its

construction

foreman Renato Agarao, where they may be served with summons and other court
processes.[10]
The petition was accompanied with an application for a temporary restraining
order (TRO) and a writ of preliminary injunction.[11] Thus, the Office of the Clerk of
Court forthwith issued summons and notice of raffle on 10 September 2004.[12] Upon
service

of

the

processes

on

the

aforementioned

address,

they

were

returned unserved on the ground that respondent enterprise was unknown thereat.[13]
The petition was subsequently raffled to the sala of Judge Jacob, before which
petitioners application for a temporary restraining order was heard on 15 September
2004.[14] On the same day, when Agarao was also present in court, Judge Jacob issued

a TRO directing respondent enterprise to desist from cutting, damaging or transferring

the trees found along Panay Avenue.[15]
On 23 September 2004, the Mangoba Tan Agus Law Offices filed a special
appearance on behalf of respondent enterprise and moved for the dismissal of the
petition as well as the quashal of the temporary restraining order on the ground of lack
of jurisdiction over respondent enterprise. The motion also assailed the raffle of the
case for having been conducted in violation of Section 4, Rule 58 of the Rules of Court;
the issuance of the TRO without requiring the posting of a bond; the failure
to implead the Government of Quezon City despite its being the real party-in-interest;
and petitioners application for the injunctive writ which was allegedly grossly defective
in form and substance.[16]
The motion to dismiss the petition and to quash the TRO was heard on 24
September 2004.[17] Before the hearing, a court interpreter showed to respondent
enterprises counsel a copy of the summons and of the notice of raffle in which appear
a signature at the bottom of each copy, apparently indicating the receipt of the
summons.[18] On the mistaken belief that the summons was received by respondent
enterprise, at the hearing of the motion, its counsel withdrew two of the grounds stated
in the motion, to wit, lack of jurisdiction and irregularity in the raffle of the
case.[19]
At the hearing of petitioners application for a writ of preliminary injunction on 1
October 2004, the counsel for respondent enterprise manifested that he was adopting
the arguments in the motion to quash the TRO.[20] On 6 October 2004, the RTC issued
an Order granting petitioners application for a writ of preliminary injunction.[21]
On 7 October 2004, counsel for respondent enterprise filed a manifestation with
urgent omnibus motion to nullify the proceedings and to cite petitioners and the
process server in contempt of court.[22] He argued that respondent enterprise failed to

receive the summons, alleging that it was herein petitioner Jose Martinez who signed as
recipient thereof as well as of the notice of raffle that was served on 10 September
2004.[23]
On 18 October 2004, the writ of preliminary injunction was issued. Subsequently,
petitioners filed a motion for ocular inspection and another motion praying that
respondent enterprise be ordered to
restore the structures damaged by its clearing operations.[24]
On 8 November 2004, the RTC issued the assailed Order,[25] nullifying the
proceedings thus far conducted in the case.[26] Petitioners sought reconsideration, but
the motion was denied in an Order dated 20 December 2004.[27]
Thus, petitioners filed a petition for certiorari before the Court of Appeals
assailing the 8 November 2004 Order issued by Judge Jacob.[28] This time, aside from
Judge Jacob and the enterprise M.R. Vargas Construction itself, the petition also
named Marcial R. Vargas and Renato Agarao, the enterprises owner and foreman,
respectively, as individual respondents. The separate addresses of said respondents
were also indicated in the initial part of the petition.
It was argued in the petition that Judge Jacob committed grave abuse of
direction in nullifying the proceedings on the ground of lack of jurisdiction in view
of Agaraospresence at the hearing on petitioners application for TRO, in failing to act
on petitioners pending motions and in directing instead the issuance of new summons
on respondent enterprise.[29]

On 10 October 2005, the Court of Appeals rendered the assailed Decision

dismissing the petition for certiorari for lack of merit.[30] In its Order dated 28 April
2006, the Court of Appeals denied petitioners motion for reconsideration.
Hence, the instant petition attributes the following errors to the Court of
Appeals:
I.
THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL
TRIAL COURT DID NOT OBTAIN JURISDICTION OVER THE
RESPONDENTS, DEPSITE THE RECEIPT OF COURT PROCESSES AND
VOLUNTARY APPEARANCE BEFORE THE COURTS.
II.
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
WITHDRAWAL BY PRIVATE RESPONDENTS OF THE GROUND OF
ABSENCE OF JURISDICTION OVER ITS PERSON CONSTITUTED A WAIVER
OF SUCH OBJECTION[31]

The instant petition which similarly impleads the enterprise, M.R. Vargas
Construction, Marcial R. Vargas and Renato Agarao as respondents raises two issues,
namely: (1) whether the trial court acquired jurisdiction over respondent enterprise and
(2) whether the defense of lack of jurisdiction had been waived.
Jurisdiction over the defendant is acquired either upon a valid service of
summons or the defendants voluntary appearance in court. When the defendant does
not voluntarily submit to the courts jurisdiction or when there is no valid service of
summons, any judgment of the court, which has no jurisdiction over the person of
the defendantis null and void. In an action strictly in personam, personal service on the
defendant is the preferred mode of service, that is, by handing a copy of the summons
to the defendant in person.[32]

Citing the jurisdictional implications of the failure of service of summons, the

Court of Appeals concluded that no grave abuse of discretion was committed by Judge
Jacob in nullifying the proceedings thus far conducted in the case based on the finding
that the summons had not been served on respondent enterprise and that Agarao,
despite being present at the 15 September 2004 hearing, was not authorized to
represent respondent enterprise in said hearing.
Petitioners take exception. They argue that the trial court acquired jurisdiction
over respondent enterprise, an entity without juridical personality, through the
appearance of its foreman, Agarao, at the 15 September 2004 hearing on the TRO
application. Petitioners theorize that the voluntary appearance of Agarao in said hearing
was equivalent to service of summons binding upon respondent enterprise, following by
analogy, Section 8, Rule 14[33] which allows the service of summons on any of the
defendants associated to an entity without juridical personality. Furthermore, they
contend that the receipt by a certain Rona Adol of the court processes was binding
upon respondent enterprise because the latter did not deny the authority of Adol to
receive communications on its behalf.
Petitioners argument is untenable.
At the outset, it is worthy to note that both the Court of Appeals and the trial
court found that summons was not served on respondent enterprise. The Officers
Return stated essentially that the server failed to serve the summons on respondent
enterprise because it could not be found at the address alleged in the petition. This
factual finding, especially when affirmed by the appellate court, is conclusive upon this
Court and should not be disturbed because this Court is not a trier of facts.
A sole proprietorship does not possess a juridical personality separate and
distinct from the personality of the owner of the enterprise. The law does not vest a
separate legal personality on the sole proprietorship or empower it to file or defend an

action in court.[34] Only natural or juridical persons or entities authorized by law may be
parties to a civil action and every action must be prosecuted and defended in the name
of the real parties-in-interest.[35]

The records show that respondent enterprise, M.R. Vargas Construction Co., is a
sole proprietorship and, therefore, an entity without juridical personality. Clearly, the
real party-in-interest is Marcial R. Vargas who is the owner of the enterprise. Thus, the
petition for injunction should have impleaded him as the party respondent either simply
by mention of his name or by denominating him as doing business under the name and
style of M.R. Vargas Construction Co. It was erroneous to refer to him, as the petition
did in both its caption and body, as representing the enterprise. Petitioners apparently
realized this procedural lapse when in the petition for certiorari filed before the Court of
Appeals and in the instant petition, M.R. Vargas Construction, Marcial R. Vargas
and Renato Agaro were separately named as individual respondents.
Since respondent enterprise is only a sole proprietorship, an entity without
juridical personality, the suit for injunction may be instituted only against its
owner, MarcialVargas. Accordingly summons should have been served on Vargas
himself, following Rule 14, Sections 6[36] and 7[37] of the Rules of Court on personal
service and substituted service. In the instant case, no service of summons, whether
personal or substituted, was effected on Vargas. It is well-established that summons
upon a respondent or a defendant must be served by handing a copy thereof to him in
person or, if he refuses to receive it, by tendering it to him. Personal service of
summons most effectively ensures that the notice desired under the constitutional
requirement of due process is accomplished. If however efforts to find him personally
would make prompt service impossible, service may be completed by substituted
service, i.e., by leaving copies of the summons at his dwelling house or residence with
some person of suitable age and discretion then residing therein or by leaving the

copies at his office or regular place of business with some competent person in charge
thereof.[38]
The modes of service of summons should be strictly followed in order that the
court may acquire jurisdiction over the respondents, and failure to strictly comply with
the requirements of the rules regarding the order of its publication is a fatal defect in
the service of summons. It cannot be overemphasized that the statutory requirements
on service of summons, whether personally, by substituted service or by publication,
must be followed strictly, faithfully and fully, and any mode of service other than that
prescribed by the statute is considered ineffective.[39]
Agarao was not a party respondent in the injunction case before the trial court.
Certainly, he is not a real party-in-interest against whom the injunction suit may be
brought, absent any showing that he is also an owner or he acts as an agent of
respondent enterprise. Agarao is only a foreman, bereft of any authority to defend the
suit on behalf of respondent enterprise. As earlier mentioned, the suit against an entity
without juridical personality like respondent enterprise may be instituted only by or
against its owner.Impleading Agarao as a party-respondent in the suit for injunction
would have no legal consequence. In any event, the petition for injunction
described Agarao only as a representative of M.R. Vargas Construction Co., which is a
mere inconsequentiality considering that only Vargas, as its sole owner, is authorized by
the Rules of Court to defend the suit on behalf of the enterprise.
Despite Agaraos not being a party-respondent, petitioners nevertheless confuse
his presence or attendance at the hearing on the application for TRO with the notion of
voluntary appearance, which interpretation has a legal nuance as far as jurisdiction is
concerned. While it is true that an appearance in whatever form, without explicitly
objecting to the jurisdiction of the court over the person, is a submission to the
jurisdiction of the court over the person, the appearance must constitute a positive act

on the part of the litigant manifesting an intention to submit to the courts

jurisdiction.[40] Thus, in the instances where the Court upheld the jurisdiction of the trial
court over the person of the defendant, the parties showed the intention to participate
or be bound by the proceedings through the filing of a motion, a plea or an answer.[41]
Neither is the service of the notice of hearing on the application for a TRO on a
certain

Rona Adol binding

on

respondent

enterprise.

The

records

show

that

Rona Adolreceived the notice of hearing on behalf of an entity named JCB. More
importantly, for purposes of acquiring jurisdiction over the person of the defendant, the
Rules require the service of summons and not of any other court processes.
Petitioners also contend that respondent enterprise waived the defense of lack of
jurisdiction when its counsel actively demanded positive action on the omnibus motion.
The argument is implausible.
It should be noted that when the defendants appearance is made precisely to
object to the jurisdiction of the court over his person, it cannot be considered as
appearance in court.[42] Such was the purpose of the omnibus motion, as counsel for
respondent enterprise precisely manifested therein that he erroneously believed that
Vargas himself had received the summons when in fact it was petitioner Martinez who
signed as recipient of the summons. Noteworthy is the fact that when the counsel first
appeared in court his appearance was special in character and was only for the
purpose of questioning the courts jurisdiction over Vargas, considering that the latter
never received the summons. However, the counsel was shown a copy of the summons
where a signature appears at the bottom which led him to believe that the summons
was actually received by Vargas when in fact it was petitioner Martinez himself who
affixed his signature as recipient thereof. When the counsel discovered his mistake, he
lost no time pleading that the proceedings be nullified and that petitioners and the
process server be cited for contempt of court. Both the trial and appellate courts

concluded that the improvident withdrawal of the defense of lack of jurisdiction was an
innocuous error, proceeding on the undeniable fact that the summons was not properly
served on Vargas. Thus, the Court of Appeals did not commit a reversible error when it
affirmed the trial courts nullification of the proceedings for lack of jurisdiction.

WHEREFORE, the instant petition for certiorari is DENIED. The Decision and
Resolution of the Court of Appeals in CA-G.R. SP No. 89001 are AFFIRMED in toto.
Costs against petitioners.
The temporary restraining order issued in this case is DISSOLVED.
SO ORDERED.

4. BIENVENIDO EJERCITO and

JOSE MARTINEZ,
Petitioners,

G.R. No. 172595

Present:
QUISUMBING, J.*

Chairperson,

- versus -

CARPIO MORALES,

Acting Chairperson,

M.R. VARGAS CONSTRUCTION, BRION, JJ.

MARCIAL R. VARGAS, Sole Owner,
RENATO AGARAO,*
Project Foreman,
Respondents.

TINGA,
VELASCO, JR., and

Promulgated:

April 10, 2008

x---------------------------------------------------------------------------x
DECISION
TINGA, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, assailing the Court of Appeals Decision[1] and Resolution[2] in CA-G.R. SP
No. 89001. The appellate courts decision dismissed the petition for certiorari, which
sought to set aside the Order[3] dated 08 November 2004 issued by Hon. Marie
Christine Jacob, Presiding Judge of the Regional Trial Court (RTC) of Quezon City,
Branch

100. The

appellate

courts

resolution

denied

petitioners

motion

for

reconsideration of the decision.

As culled from the records, the following factual antecedents appear:
On 5 March 2004, the City Government of Quezon City, represented by Mayor
Feliciano Belmonte, Jr., entered into a construction contract[4] with M.R. Vargas
Construction, represented by Marcial Vargas in his capacity as general manager of the
said

business

enterprise,

for

the

improvement

and

concreting

of Panay Avenue.[5] Pursuant to the contract, the business enterprise commenced its

clearing operations by removing the structures and uprooting the trees along the
thoroughfare. Its foreman, Renato Agarao, supervised the clearing operations.[6]
Claiming that the clearing operations lacked the necessary permit and prior
consultation, petitioners Bienvenido Ejercito and Jose Martinez, as well as a certain
OscarBaria, brought

the

matter to

the

attention

of the barangay authorities,

Mayor Belmonte, Senator Ma. Ana Consuelo A.S. Madrigal, the Department of
Environment and Natural Resources and the Philippine Coconut Authority.[7]
The efforts of petitioners proved unsuccessful. Hence, on 10 September 2004,
they filed a petition for injunction before the Quezon City RTC. The petition named
M.R.

Vargas

Construction

Co.,

represented

by

herein Marcial R.

Vargas

and Renato Agarao, as respondent.[8]

The Petition,[9] docketed as Civil Case No. Q-04-53687, indicated that
Respondent M.R. Vargas Construction, is an entity, with office address at the 4th Floor,
President Tower, Timog Avenue corner Scout Ybardaloza [sic] St., Quezon City,
represented

herein

by

its

President Marcial Vargas

and

its

construction

foreman Renato Agarao, where they may be served with summons and other court
processes.[10]
The petition was accompanied with an application for a temporary restraining
order (TRO) and a writ of preliminary injunction.[11] Thus, the Office of the Clerk of
Court forthwith issued summons and notice of raffle on 10 September 2004.[12] Upon
service

of

the

processes

on

the

aforementioned

address,

they

were

returned unserved on the ground that respondent enterprise was unknown thereat.[13]
The petition was subsequently raffled to the sala of Judge Jacob, before which
petitioners application for a temporary restraining order was heard on 15 September
2004.[14] On the same day, when Agarao was also present in court, Judge Jacob issued

a TRO directing respondent enterprise to desist from cutting, damaging or transferring

the trees found along Panay Avenue.[15]
On 23 September 2004, the Mangoba Tan Agus Law Offices filed a special
appearance on behalf of respondent enterprise and moved for the dismissal of the
petition as well as the quashal of the temporary restraining order on the ground of lack
of jurisdiction over respondent enterprise. The motion also assailed the raffle of the
case for having been conducted in violation of Section 4, Rule 58 of the Rules of Court;
the issuance of the TRO without requiring the posting of a bond; the failure
to implead the Government of Quezon City despite its being the real party-in-interest;
and petitioners application for the injunctive writ which was allegedly grossly defective
in form and substance.[16]
The motion to dismiss the petition and to quash the TRO was heard on 24
September 2004.[17] Before the hearing, a court interpreter showed to respondent
enterprises counsel a copy of the summons and of the notice of raffle in which appear
a signature at the bottom of each copy, apparently indicating the receipt of the
summons.[18] On the mistaken belief that the summons was received by respondent
enterprise, at the hearing of the motion, its counsel withdrew two of the grounds stated
in the motion, to wit, lack of jurisdiction and irregularity in the raffle of the
case.[19]
At the hearing of petitioners application for a writ of preliminary injunction on 1
October 2004, the counsel for respondent enterprise manifested that he was adopting
the arguments in the motion to quash the TRO.[20] On 6 October 2004, the RTC issued
an Order granting petitioners application for a writ of preliminary injunction.[21]
On 7 October 2004, counsel for respondent enterprise filed a manifestation with
urgent omnibus motion to nullify the proceedings and to cite petitioners and the
process server in contempt of court.[22] He argued that respondent enterprise failed to

receive the summons, alleging that it was herein petitioner Jose Martinez who signed as
recipient thereof as well as of the notice of raffle that was served on 10 September
2004.[23]
On 18 October 2004, the writ of preliminary injunction was issued. Subsequently,
petitioners filed a motion for ocular inspection and another motion praying that
respondent enterprise be ordered to
restore the structures damaged by its clearing operations.[24]
On 8 November 2004, the RTC issued the assailed Order,[25] nullifying the
proceedings thus far conducted in the case.[26] Petitioners sought reconsideration, but
the motion was denied in an Order dated 20 December 2004.[27]
Thus, petitioners filed a petition for certiorari before the Court of Appeals
assailing the 8 November 2004 Order issued by Judge Jacob.[28] This time, aside from
Judge Jacob and the enterprise M.R. Vargas Construction itself, the petition also
named Marcial R. Vargas and Renato Agarao, the enterprises owner and foreman,
respectively, as individual respondents. The separate addresses of said respondents
were also indicated in the initial part of the petition.
It was argued in the petition that Judge Jacob committed grave abuse of
direction in nullifying the proceedings on the ground of lack of jurisdiction in view
of Agaraospresence at the hearing on petitioners application for TRO, in failing to act
on petitioners pending motions and in directing instead the issuance of new summons
on respondent enterprise.[29]

On 10 October 2005, the Court of Appeals rendered the assailed Decision

dismissing the petition for certiorari for lack of merit.[30] In its Order dated 28 April
2006, the Court of Appeals denied petitioners motion for reconsideration.
Hence, the instant petition attributes the following errors to the Court of
Appeals:
I.
THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL
TRIAL COURT DID NOT OBTAIN JURISDICTION OVER THE
RESPONDENTS, DEPSITE THE RECEIPT OF COURT PROCESSES AND
VOLUNTARY APPEARANCE BEFORE THE COURTS.
II.
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
WITHDRAWAL BY PRIVATE RESPONDENTS OF THE GROUND OF
ABSENCE OF JURISDICTION OVER ITS PERSON CONSTITUTED A WAIVER
OF SUCH OBJECTION[31]

The instant petition which similarly impleads the enterprise, M.R. Vargas
Construction, Marcial R. Vargas and Renato Agarao as respondents raises two issues,
namely: (1) whether the trial court acquired jurisdiction over respondent enterprise and
(2) whether the defense of lack of jurisdiction had been waived.
Jurisdiction over the defendant is acquired either upon a valid service of
summons or the defendants voluntary appearance in court. When the defendant does
not voluntarily submit to the courts jurisdiction or when there is no valid service of
summons, any judgment of the court, which has no jurisdiction over the person of
the defendantis null and void. In an action strictly in personam, personal service on the
defendant is the preferred mode of service, that is, by handing a copy of the summons
to the defendant in person.[32]

Citing the jurisdictional implications of the failure of service of summons, the

Court of Appeals concluded that no grave abuse of discretion was committed by Judge
Jacob in nullifying the proceedings thus far conducted in the case based on the finding
that the summons had not been served on respondent enterprise and that Agarao,
despite being present at the 15 September 2004 hearing, was not authorized to
represent respondent enterprise in said hearing.
Petitioners take exception. They argue that the trial court acquired jurisdiction
over respondent enterprise, an entity without juridical personality, through the
appearance of its foreman, Agarao, at the 15 September 2004 hearing on the TRO
application. Petitioners theorize that the voluntary appearance of Agarao in said hearing
was equivalent to service of summons binding upon respondent enterprise, following by
analogy, Section 8, Rule 14[33] which allows the service of summons on any of the
defendants associated to an entity without juridical personality. Furthermore, they
contend that the receipt by a certain Rona Adol of the court processes was binding
upon respondent enterprise because the latter did not deny the authority of Adol to
receive communications on its behalf.
Petitioners argument is untenable.
At the outset, it is worthy to note that both the Court of Appeals and the trial
court found that summons was not served on respondent enterprise. The Officers
Return stated essentially that the server failed to serve the summons on respondent
enterprise because it could not be found at the address alleged in the petition. This
factual finding, especially when affirmed by the appellate court, is conclusive upon this
Court and should not be disturbed because this Court is not a trier of facts.
A sole proprietorship does not possess a juridical personality separate and
distinct from the personality of the owner of the enterprise. The law does not vest a
separate legal personality on the sole proprietorship or empower it to file or defend an

action in court.[34] Only natural or juridical persons or entities authorized by law may be
parties to a civil action and every action must be prosecuted and defended in the name
of the real parties-in-interest.[35]

The records show that respondent enterprise, M.R. Vargas Construction Co., is a
sole proprietorship and, therefore, an entity without juridical personality. Clearly, the
real party-in-interest is Marcial R. Vargas who is the owner of the enterprise. Thus, the
petition for injunction should have impleaded him as the party respondent either simply
by mention of his name or by denominating him as doing business under the name and
style of M.R. Vargas Construction Co. It was erroneous to refer to him, as the petition
did in both its caption and body, as representing the enterprise. Petitioners apparently
realized this procedural lapse when in the petition for certiorari filed before the Court of
Appeals and in the instant petition, M.R. Vargas Construction, Marcial R. Vargas
and Renato Agaro were separately named as individual respondents.
Since respondent enterprise is only a sole proprietorship, an entity without
juridical personality, the suit for injunction may be instituted only against its
owner, MarcialVargas. Accordingly summons should have been served on Vargas
himself, following Rule 14, Sections 6[36] and 7[37] of the Rules of Court on personal
service and substituted service. In the instant case, no service of summons, whether
personal or substituted, was effected on Vargas. It is well-established that summons
upon a respondent or a defendant must be served by handing a copy thereof to him in
person or, if he refuses to receive it, by tendering it to him. Personal service of
summons most effectively ensures that the notice desired under the constitutional
requirement of due process is accomplished. If however efforts to find him personally
would make prompt service impossible, service may be completed by substituted
service, i.e., by leaving copies of the summons at his dwelling house or residence with
some person of suitable age and discretion then residing therein or by leaving the

copies at his office or regular place of business with some competent person in charge
thereof.[38]
The modes of service of summons should be strictly followed in order that the
court may acquire jurisdiction over the respondents, and failure to strictly comply with
the requirements of the rules regarding the order of its publication is a fatal defect in
the service of summons. It cannot be overemphasized that the statutory requirements
on service of summons, whether personally, by substituted service or by publication,
must be followed strictly, faithfully and fully, and any mode of service other than that
prescribed by the statute is considered ineffective.[39]
Agarao was not a party respondent in the injunction case before the trial court.
Certainly, he is not a real party-in-interest against whom the injunction suit may be
brought, absent any showing that he is also an owner or he acts as an agent of
respondent enterprise. Agarao is only a foreman, bereft of any authority to defend the
suit on behalf of respondent enterprise. As earlier mentioned, the suit against an entity
without juridical personality like respondent enterprise may be instituted only by or
against its owner.Impleading Agarao as a party-respondent in the suit for injunction
would have no legal consequence. In any event, the petition for injunction
described Agarao only as a representative of M.R. Vargas Construction Co., which is a
mere inconsequentiality considering that only Vargas, as its sole owner, is authorized by
the Rules of Court to defend the suit on behalf of the enterprise.
Despite Agaraos not being a party-respondent, petitioners nevertheless confuse
his presence or attendance at the hearing on the application for TRO with the notion of
voluntary appearance, which interpretation has a legal nuance as far as jurisdiction is
concerned. While it is true that an appearance in whatever form, without explicitly
objecting to the jurisdiction of the court over the person, is a submission to the
jurisdiction of the court over the person, the appearance must constitute a positive act

on the part of the litigant manifesting an intention to submit to the courts

jurisdiction.[40] Thus, in the instances where the Court upheld the jurisdiction of the trial
court over the person of the defendant, the parties showed the intention to participate
or be bound by the proceedings through the filing of a motion, a plea or an answer.[41]
Neither is the service of the notice of hearing on the application for a TRO on a
certain

Rona Adol binding

on

respondent

enterprise.

The

records

show

that

Rona Adolreceived the notice of hearing on behalf of an entity named JCB. More
importantly, for purposes of acquiring jurisdiction over the person of the defendant, the
Rules require the service of summons and not of any other court processes.
Petitioners also contend that respondent enterprise waived the defense of lack of
jurisdiction when its counsel actively demanded positive action on the omnibus motion.
The argument is implausible.
It should be noted that when the defendants appearance is made precisely to
object to the jurisdiction of the court over his person, it cannot be considered as
appearance in court.[42] Such was the purpose of the omnibus motion, as counsel for
respondent enterprise precisely manifested therein that he erroneously believed that
Vargas himself had received the summons when in fact it was petitioner Martinez who
signed as recipient of the summons. Noteworthy is the fact that when the counsel first
appeared in court his appearance was special in character and was only for the
purpose of questioning the courts jurisdiction over Vargas, considering that the latter
never received the summons. However, the counsel was shown a copy of the summons
where a signature appears at the bottom which led him to believe that the summons
was actually received by Vargas when in fact it was petitioner Martinez himself who
affixed his signature as recipient thereof. When the counsel discovered his mistake, he
lost no time pleading that the proceedings be nullified and that petitioners and the
process server be cited for contempt of court. Both the trial and appellate courts

concluded that the improvident withdrawal of the defense of lack of jurisdiction was an
innocuous error, proceeding on the undeniable fact that the summons was not properly
served on Vargas. Thus, the Court of Appeals did not commit a reversible error when it
affirmed the trial courts nullification of the proceedings for lack of jurisdiction.

WHEREFORE, the instant petition for certiorari is DENIED. The Decision and
Resolution of the Court of Appeals in CA-G.R. SP No. 89001 are AFFIRMED in toto.
Costs against petitioners.
The temporary restraining order issued in this case is DISSOLVED.
SO ORDERED.

5. G.R. No. 195580

April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND

DEVELOPMENT,
INC.,
and
MCARTHUR
MINING,
INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
DECISION
VELASCO, JR., J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra
Nickel and Mining Development Corp. (Narra), Tesoro Mining and Development, Inc.
(Tesoro), and McArthur Mining Inc. (McArthur), which seeks to reverse the October 1,
2010 Decision1 and the February 15, 2011 Resolution of the Court of Appeals (CA).
The Facts
Sometime in December 2006, respondent Redmont Consolidated Mines Corp.
(Redmont), a domestic corporation organized and existing under Philippine laws, took
interest in mining and exploring certain areas of the province of Palawan. After inquiring
with the Department of Environment and Natural Resources (DENR), it learned that the
areas where it wanted to undertake exploration and mining activities where already
covered by Mineral Production Sharing Agreement (MPSA) applications of petitioners
Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI),
filed an application for an MPSA and Exploration Permit (EP) with the Mines and GeoSciences Bureau (MGB), Region IV-B, Office of the Department of Environment and
Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782
hectares in Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and EPAIVB-44 which includes an area of 3,720 hectares in Barangay Malatagao, Bataraza,
Palawan. The MPSA and EP were then transferred to Madridejos Mining Corporation
(MMC) and, on November 6, 2006, assigned to petitioner McArthur.2
Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation
and Patricia Louise Mining & Development Corporation (PLMDC) which previously filed
an application for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992.
Through the said application, the DENR issued MPSA-IV-1-12 covering an area of 3.277
hectares in barangays Calategas and San Isidro, Municipality of Narra, Palawan.
Subsequently, PLMDC conveyed, transferred and/or assigned its rights and interests
over the MPSA application in favor of Narra.

Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as
MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao
and Princesa Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently
conveyed, transferred and assigned its rights and interest over the said MPSA
application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR
three (3) separate petitions for the denial of petitioners applications for MPSA
designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.
In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur,
Tesoro and Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100%
Canadian corporation. Redmont reasoned that since MBMI is a considerable stockholder
of petitioners, it was the driving force behind petitioners filing of the MPSAs over the
areas covered by applications since it knows that it can only participate in mining
activities through corporations which are deemed Filipino citizens. Redmont argued that
given that petitioners capital stocks were mostly owned by MBMI, they were likewise
disqualified from engaging in mining activities through MPSAs, which are reserved only
for Filipino citizens.
In their Answers, petitioners averred that they were qualified persons under Section
3(aq) of Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which
provided:
Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms,
whether in singular or plural, shall mean:
xxxx
(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or
a corporation, partnership, association, or cooperative organized or authorized for the
purpose of engaging in mining, with technical and financial capability to undertake
mineral resources development and duly registered in accordance with law at least sixty
per cent (60%) of the capital of which is owned by citizens of the Philippines: Provided,
That a legally organized foreign-owned corporation shall be deemed a qualified person
for purposes of granting an exploration permit, financial or technical assistance
agreement or mineral processing permit.
Additionally, they stated that their nationality as applicants is immaterial because they
also applied for Financial or Technical Assistance Agreements (FTAA) denominated as
AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which
are granted to foreign-owned corporations. Nevertheless, they claimed that the issue on
nationality should not be raised since McArthur, Tesoro and Narra are in fact Philippine
Nationals as 60% of their capital is owned by citizens of the Philippines. They asserted

that though MBMI owns 40% of the shares of PLMC (which owns 5,997 shares of
Narra),3 40% of the shares of MMC (which owns 5,997 shares of McArthur)4and 40% of
the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro),5 the shares of MBMI
will not make it the owner of at least 60% of the capital stock of each of petitioners.
They added that the best tool used in determining the nationality of a corporation is the
"control test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991.
They also claimed that the POA of DENR did not have jurisdiction over the issues in
Redmonts petition since they are not enumerated in Sec. 77 of RA 7942. Finally, they
stressed that Redmont has no personality to sue them because it has no pending claim
or application over the areas applied for by petitioners.
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from
gaining MPSAs. It held:
[I]t is clearly established that respondents are not qualified applicants to engage in
mining activities. On the other hand, [Redmont] having filed its own applications for an
EPA over the areas earlier covered by the MPSA application of respondents may be
considered if and when they are qualified under the law. The violation of the
requirements for the issuance and/or grant of permits over mining areas is clearly
established thus, there is reason to believe that the cancellation and/or revocation of
permits already issued under the premises is in order and open the areas covered to
other qualified applicants.
xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc.,
Tesoro Mining and Development, Inc., and Narra Nickel Mining and Development Corp.
as, DISQUALIFIED for being considered as Foreign Corporations. Their Mineral
Production Sharing Agreement (MPSA) are hereby x x x DECLARED NULL AND VOID.6
The POA considered petitioners as foreign corporations being "effectively controlled" by
MBMI, a 100% Canadian company and declared their MPSAs null and void. In the same
Resolution, it gave due course to Redmonts EPAs. Thereafter, on February 7, 2008, the
POA issued an Order7 denying the Motion for Reconsideration filed by petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint
Notice of Appeal8 and Memorandum of Appeal9 with the Mines Adjudication Board
(MAB) while Narra separately filed its Notice of Appeal10 and Memorandum of Appeal.11
In their respective memorandum, petitioners emphasized that they are qualified
persons under the law. Also, through a letter, they informed the MAB that they had
their individual MPSA applications converted to FTAAs. McArthurs FTAA was
denominated as AFTA-IVB-0912 on May 2007, while Tesoros MPSA application was

converted to AFTA-IVB-0813 on May 28, 2007, and Narras FTAA was converted to
AFTA-IVB-0714 on March 30, 2006.
Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a
Complaint15 with the Securities and Exchange Commission (SEC), seeking the
revocation of the certificates for registration of petitioners on the ground that they are
foreign-owned or controlled corporations engaged in mining in violation of Philippine
laws. Thereafter, Redmont filed on September 1, 2008 a Manifestation and Motion to
Suspend Proceeding before the MAB praying for the suspension of the proceedings on
the appeals filed by McArthur, Tesoro and Narra.
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of
Quezon City, Branch 92 (RTC) a Complaint16 for injunction with application for issuance
of a temporary restraining order (TRO) and/or writ of preliminary injunction, docketed
as Civil Case No. 08-63379. Redmont prayed for the deferral of the MAB proceedings
pending the resolution of the Complaint before the SEC.
But before the RTC can resolve Redmonts Complaint and applications for injunctive
reliefs, the MAB issued an Order on September 10, 2008, finding the appeal
meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES
and SETS ASIDE the Resolution dated 14 December 2007 of the Panel of Arbitrators of
Region IV-B (MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and
its Order dated 07 February 2008 denying the Motions for Reconsideration of the
Appellants. The Petition filed by Redmont Consolidated Mines Corporation on 02
January 2007 is hereby ordered DISMISSED.17
Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmonts
application for a TRO and setting the case for hearing the prayer for the issuance of a
writ of preliminary injunction on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration 19 of
the September 10, 2008 Order of the MAB. Subsequently, it filed a Supplemental Motion
for Reconsideration20 on September 29, 2008.
Before the MAB could resolve Redmonts Motion for Reconsideration and Supplemental
Motion for Reconsideration, Redmont filed before the RTC a Supplemental
Complaint21 in Civil Case No. 08-63379.
On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of
preliminary injunction enjoining the MAB from finally disposing of the appeals of
petitioners and from resolving Redmonts Motion for Reconsideration and Supplement
Motion for Reconsideration of the MABs September 10, 2008 Resolution.

On July 1, 2009, however, the MAB issued a second Order denying Redmonts Motion
for Reconsideration and Supplemental Motion for Reconsideration and resolving the
appeals filed by petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the Orders
issued by the MAB. On October 1, 2010, the CA rendered a Decision, the dispositive of
which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated
September 10, 2008 and July 1, 2009 of the Mining Adjudication Board are reversed
and set aside. The findings of the Panel of Arbitrators of the Department of
Environment and Natural Resources that respondents McArthur, Tesoro and Narra are
foreign corporations is upheld and, therefore, the rejection of their applications for
Mineral Product Sharing Agreement should be recommended to the Secretary of the
DENR.
With respect to the applications of respondents McArthur, Tesoro and Narra for
Financial or Technical Assistance Agreement (FTAA) or conversion of their MPSA
applications to FTAA, the matter for its rejection or approval is left for determination by
the Secretary of the DENR and the President of the Republic of the Philippines.
SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration
filed by petitioners.
After a careful review of the records, the CA found that there was doubt as to the
nationality of petitioners when it realized that petitioners had a common major investor,
MBMI, a corporation composed of 100% Canadians. Pursuant to the first sentence of
paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of 2005, adopting
the 1967 SEC Rules which implemented the requirement of the Constitution and other
laws pertaining to the exploitation of natural resources, the CA used the "grandfather
rule" to determine the nationality of petitioners. It provided:
Shares belonging to corporations or partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or partnership is less than 60%,
only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a
corporation or partnership at least 60% of the capital stock or capital, respectively, of
which belong to Filipino citizens, all of the shares shall be recorded as owned by
Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares
shall be recorded as belonging to aliens.24 (emphasis supplied)

In determining the nationality of petitioners, the CA looked into their corporate

structures and their corresponding common shareholders. Using the grandfather rule,
the CA discovered that MBMI in effect owned majority of the common stocks of the
petitioners as well as at least 60% equity interest of other majority shareholders of
petitioners through joint venture agreements. The CA found that through a "web of
corporate layering, it is clear that one common controlling investor in all mining
corporations involved x x x is MBMI."25 Thus, it concluded that petitioners McArthur,
Tesoro and Narra are also in partnership with, or privies-in-interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into
FTAA applications suspicious in nature and, as a consequence, it recommended the
rejection of petitioners MPSA applications by the Secretary of the DENR.
With regard to the settlement of disputes over rights to mining areas, the CA pointed
out that the POA has jurisdiction over them and that it also has the power to determine
the of nationality of petitioners as a prerequisite of the Constitution prior the conferring
of rights to "co-production, joint venture or production-sharing agreements" of the state
to mining rights. However, it also stated that the POAs jurisdiction is limited only to the
resolution of the dispute and not on the approval or rejection of the MPSAs. It
stipulated that only the Secretary of the DENR is vested with the power to approve or
reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution
which considered petitioners McArthur, Tesoro and Narra as foreign corporations.
Nevertheless, the CA determined that the POAs declaration that the MPSAs of
McArthur, Tesoro and Narra are void is highly improper.
While the petition was pending with the CA, Redmont filed with the Office of the
President (OP) a petition dated May 7, 2010 seeking the cancellation of petitioners
FTAAs. The OP rendered a Decision26 on April 6, 2011, wherein it canceled and revoked
petitioners FTAAs for violating and circumventing the "Constitution x x x[,] the Small
Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8
of the Foreign Investment Act and E.O. 584."27 The OP, in affirming the cancellation of
the issued FTAAs, agreed with Redmont stating that petitioners committed violations
against the abovementioned laws and failed to submit evidence to negate them. The
Decision further quoted the December 14, 2007 Order of the POA focusing on the
alleged misrepresentation and claims made by petitioners of being domestic or Filipino
corporations and the admitted continued mining operation of PMDC using their locally
secured Small Scale Mining Permit inside the area earlier applied for an MPSA
application which was eventually transferred to Narra. It also agreed with the POAs
estimation that the filing of the FTAA applications by petitioners is a clear admission
that they are "not capable of conducting a large scale mining operation and that they
need the financial and technical assistance of a foreign entity in their operation, that is

why they sought the participation of MBMI Resources, Inc."28 The Decision further
quoted:
The filing of the FTAA application on June 15, 2007, during the pendency of the case
only demonstrate the violations and lack of qualification of the respondent corporations
to engage in mining. The filing of the FTAA application conversion which is allowed
foreign corporation of the earlier MPSA is an admission that indeed the respondent is
not Filipino but rather of foreign nationality who is disqualified under the laws.
Corporate documents of MBMI Resources, Inc. furnished its stockholders in their head
office in Canada suggest that they are conducting operation only through their local
counterparts.29
The Motion for Reconsideration of the Decision was further denied by the OP in a
Resolution30 dated July 6, 2011. Petitioners then filed a Petition for Review on Certiorari
of the OPs Decision and Resolution with the CA, docketed as CA-G.R. SP No. 120409.
In the CA Decision dated February 29, 2012, the CA affirmed the Decision and
Resolution of the OP. Thereafter, petitioners appealed the same CA decision to this
Court which is now pending with a different division.
Thus, the instant petition for review against the October 1, 2010 Decision of the CA.
Petitioners put forth the following errors of the CA:
I.
The Court of Appeals erred when it did not dismiss the case for mootness despite
the fact that the subject matter of the controversy, the MPSA Applications, have
already been converted into FTAA applications and that the same have already
been granted.
II.
The Court of Appeals erred when it did not dismiss the case for lack of
jurisdiction considering that the Panel of Arbitrators has no jurisdiction to
determine the nationality of Narra, Tesoro and McArthur.
III.
The Court of Appeals erred when it did not dismiss the case on account of
Redmonts willful forum shopping.
IV.
The Court of Appeals ruling that Narra, Tesoro and McArthur are foreign
corporations based on the "Grandfather Rule" is contrary to law, particularly the

express mandate of the Foreign Investments Act of 1991, as amended, and the
FIA Rules.
V.
The Court of Appeals erred when it applied the exceptions to the res inter alios
acta rule.
VI.
The Court of Appeals erred when it concluded that the conversion of the MPSA
Applications into FTAA Applications were of "suspicious nature" as the same is
based on mere conjectures and surmises without any shred of evidence to show
the same.31
We find the petition to be without merit.
This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant case as moot is
without merit.
Basically, a case is said to be moot and/or academic when it "ceases to present a
justiciable controversy by virtue of supervening events, so that a declaration thereon
would be of no practical use or value."32 Thus, the courts "generally decline jurisdiction
over the case or dismiss it on the ground of mootness."33
The "mootness" principle, however, does accept certain exceptions and the mere
raising of an issue of "mootness" will not deter the courts from trying a case when there
is a valid reason to do so. In David v. Macapagal-Arroyo (David), the Court provided
four instances where courts can decide an otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and paramount public interest is
involved;
3.) When constitutional issue raised requires formulation of controlling principles
to guide the bench, the bar, and the public; and
4.) The case is capable of repetition yet evading review.34
All of the exceptions stated above are present in the instant case. We of this Court note
that a grave violation of the Constitution, specifically Section 2 of Article XII, is being
committed by a foreign corporation right under our countrys nose through a myriad of

corporate layering under different, allegedly, Filipino corporations. The intricate

corporate layering utilized by the Canadian company, MBMI, is of exceptional character
and involves paramount public interest since it undeniably affects the exploitation of our
Countrys natural resources. The corresponding actions of petitioners during the lifetime
and existence of the instant case raise questions as what principle is to be applied to
cases with similar issues. No definite ruling on such principle has been pronounced by
the Court; hence, the disposition of the issues or errors in the instant case will serve as
a guide "to the bench, the bar and the public."35 Finally, the instant case is capable of
repetition yet evading review, since the Canadian company, MBMI, can keep on utilizing
dummy Filipino corporations through various schemes of corporate layering and
conversion of applications to skirt the constitutional prohibition against foreign mining in
Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error presented by
petitioners since both involve the conversion of MPSA applications to FTAA applications.
Petitioners propound that the CA erred in ruling against them since the questioned
MPSA applications were already converted into FTAA applications; thus, the issue on the
prohibition relating to MPSA applications of foreign mining corporations is academic.
Also, petitioners would want us to correct the CAs finding which deemed the
aforementioned conversions of applications as suspicious in nature, since it is based on
mere conjectures and surmises and not supported with evidence.
We disagree.
The CAs analysis of the actions of petitioners after the case was filed against them by
respondent is on point. The changing of applications by petitioners from one type to
another just because a case was filed against them, in truth, would raise not a few
sceptics eyebrows. What is the reason for such conversion? Did the said conversion not
stem from the case challenging their citizenship and to have the case dismissed against
them for being "moot"? It is quite obvious that it is petitioners strategy to have the
case dismissed against them for being "moot."
Consider the history of this case and how petitioners responded to every action done by
the court or appropriate government agency: on January 2, 2007, Redmont filed three
separate petitions for denial of the MPSA applications of petitioners before the POA. On
June 15, 2007, petitioners filed a conversion of their MPSA applications to FTAAs. The
POA, in its December 14, 2007 Resolution, observed this suspect change of applications
while the case was pending before it and held:
The filing of the Financial or Technical Assistance Agreement application is a clear
admission that the respondents are not capable of conducting a large scale mining
operation and that they need the financial and technical assistance of a foreign entity in

their operation that is why they sought the participation of MBMI Resources, Inc. The
participation of MBMI in the corporation only proves the fact that it is the Canadian
company that will provide the finances and the resources to operate the mining areas
for the greater benefit and interest of the same and not the Filipino stockholders who
only have a less substantial financial stake in the corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007, during the pendency of the
case only demonstrate the violations and lack of qualification of the respondent
corporations to engage in mining. The filing of the FTAA application conversion which is
allowed foreign corporation of the earlier MPSA is an admission that indeed the
respondent is not Filipino but rather of foreign nationality who is disqualified under the
laws. Corporate documents of MBMI Resources, Inc. furnished its stockholders in their
head office in Canada suggest that they are conducting operation only through their
local counterparts.36
On October 1, 2010, the CA rendered a Decision which partially granted the petition,
reversing and setting aside the September 10, 2008 and July 1, 2009 Orders of the
MAB. In the said Decision, the CA upheld the findings of the POA of the DENR that the
herein petitioners are in fact foreign corporations thus a recommendation of the
rejection of their MPSA applications were recommended to the Secretary of the DENR.
With respect to the FTAA applications or conversion of the MPSA applications to FTAAs,
the CA deferred the matter for the determination of the Secretary of the DENR and the
President of the Republic of the Philippines.37
In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the
dismissal of the petition asserting that on April 5, 2010, then President Gloria
Macapagal-Arroyo signed and issued in their favor FTAA No. 05-2010-IVB, which
rendered the petition moot and academic. However, the CA, in a Resolution dated
February 15, 2011 denied their motion for being a mere "rehash of their claims and
defenses."38 Standing firm on its Decision, the CA affirmed the ruling that petitioners
are, in fact, foreign corporations. On April 5, 2011, petitioners elevated the case to us
via a Petition for Review on Certiorari under Rule 45, questioning the Decision of the
CA. Interestingly, the OP rendered a Decision dated April 6, 2011, a day after this
petition for review was filed, cancelling and revoking the FTAAs, quoting the Order of
the POA and stating that petitioners are foreign corporations since they needed the
financial strength of MBMI, Inc. in order to conduct large scale mining operations. The
OP Decision also based the cancellation on the misrepresentation of facts and the
violation of the "Small Scale Mining Law and Environmental Compliance Certificate as
well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584." 39 On July 6,
2011, the OP issued a Resolution, denying the Motion for Reconsideration filed by the
petitioners.

Respondent Redmont, in its Comment dated October 10, 2011, made known to the
Court the fact of the OPs Decision and Resolution. In their Reply, petitioners chose to
ignore the OP Decision and continued to reuse their old arguments claiming that they
were granted FTAAs and, thus, the case was moot. Petitioners filed a Manifestation and
Submission dated October 19, 2012,40 wherein they asserted that the present petition is
moot since, in a remarkable turn of events, MBMI was able to sell/assign all its
shares/interest in the "holding companies" to DMCI Mining Corporation (DMCI), a
Filipino corporation and, in effect, making their respective corporations fully-Filipino
owned.
Again, it is quite evident that petitioners have been trying to have this case dismissed
for being "moot." Their final act, wherein MBMI was able to allegedly sell/assign all its
shares and interest in the petitioner "holding companies" to DMCI, only proves that they
were in fact not Filipino corporations from the start. The recent divesting of interest by
MBMI will not change the stand of this Court with respect to the nationality of
petitioners prior the suspicious change in their corporate structures. The new
documents filed by petitioners are factual evidence that this Court has no power to
verify.
The only thing clear and proved in this Court is the fact that the OP declared that
petitioner corporations have violated several mining laws and made misrepresentations
and falsehood in their applications for FTAA which lead to the revocation of the said
FTAAs, demonstrating that petitioners are not beyond going against or around the law
using shifty actions and strategies. Thus, in this instance, we can say that their claim of
mootness is moot in itself because their defense of conversion of MPSAs to FTAAs has
been discredited by the OP Decision.
Grandfather test
The main issue in this case is centered on the issue of petitioners nationality, whether
Filipino or foreign. In their previous petitions, they had been adamant in insisting that
they were Filipino corporations, until they submitted their Manifestation and Submission
dated October 19, 2012 where they stated the alleged change of corporate ownership
to reflect their Filipino ownership. Thus, there is a need to determine the nationality of
petitioner corporations.
Basically, there are two acknowledged tests in determining the nationality of a
corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion No.
020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement
of the Constitution and other laws pertaining to the controlling interests in enterprises
engaged in the exploitation of natural resources owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of Philippine nationality, but if the

percentage of Filipino ownership in the corporation or partnership is less than 60%,

only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a
corporation or partnership at least 60% of the capital stock or capital, respectively, of
which belong to Filipino citizens, all of the shares shall be recorded as owned by
Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares
shall be counted as owned by Filipinos and the other 50,000 shall be recorded as
belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to
corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality," pertains to the control test or
the liberal rule. On the other hand, the second part of the DOJ Opinion which provides,
"if the percentage of the Filipino ownership in the corporation or partnership is less than
60%, only the number of shares corresponding to such percentage shall be counted as
Philippine nationality," pertains to the stricter, more stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the
application of the "control test" under RA 7042, as amended by RA 8179, otherwise
known as the Foreign Investments Act (FIA), rather than using the stricter grandfather
rule. The pertinent provision under Sec. 3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by the citizens of the Philippines; a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee
of funds for pension or other employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue
to the benefit of Philippine nationals: Provided, That were a corporation and its nonFilipino stockholders own stocks in a Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors,
in order that the corporation shall be considered a Philippine national. (emphasis
supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case
since the definition of a "Philippine National" under Sec. 3 of the FIA does not provide
for it. They further claim that the grandfather rule "has been abandoned and is no
longer the applicable rule."41 They also opined that the last portion of Sec. 3 of the FIA
admits the application of a "corporate layering" scheme of corporations. Petitioners

claim that the clear and unambiguous wordings of the statute preclude the court from
construing it and prevent the courts use of discretion in applying the law. They said
that the plain, literal meaning of the statute meant the application of the control test is
obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to
circumvent the Constitution and pertinent laws, then it becomes illegal. Further, the
pronouncement of petitioners that the grandfather rule has already been abandoned
must be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other
mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and
fauna, and other natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be alienated. The exploration,
development, and utilization of natural resources shall be under the full control and
supervision of the State. The State may directly undertake such activities, or it may
enter into co-production, joint venture or production-sharing agreements with Filipino
citizens, or corporations or associations at least sixty per centum of whose capital is
owned by such citizens. Such agreements may be for a period not exceeding twentyfive years, renewable for not more than twenty-five years, and under such terms and
conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreign-owned corporations involving
either technical or financial assistance for large-scale exploration, development, and
utilization of minerals, petroleum, and other mineral oils according to the general terms
and conditions provided by law, based on real contributions to the economic growth
and general welfare of the country. In such agreements, the State shall promote the
development and use of local scientific and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into different
types of agreements for the exploration, development, and utilization of natural
resources with entities who are deemed Filipino due to 60 percent ownership of capital
is pertinent to this case, since the issues are centered on the utilization of our countrys
natural resources or specifically, mining. Thus, there is a need to ascertain the
nationality of petitioners since, as the Constitution so provides, such agreements are
only allowed corporations or associations "at least 60 percent of such capital is owned
by such citizens." The deliberations in the Records of the 1986 Constitutional
Commission shed light on how a citizenship of a corporation will be determined:

Mr. BENNAGEN: Did I hear right that the Chairmans interpretation of an independent
national economy is freedom from undue foreign control? What is the meaning of
undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national
sovereignty and the welfare of the Filipino in the economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not
simply freedom from foreign control? I think that is the meaning of independence,
because as phrased, it still allows for foreign control.
MR. VILLEGAS: It will now depend on the interpretation because if, for example, we
retain the 60/40 possibility in the cultivation of natural resources, 40 percent involves
some control; not total control, but some control.
MR. BENNAGEN: In any case, I think in due time we will propose some amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity
and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in
Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with the question: Where do we
base the equity requirement, is it on the authorized capital stock, on the subscribed
capital stock, or on the paid-up capital stock of a corporation? Will the Committee
please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the members of the team from
the UP Law Center who provided us with a draft. The phrase that is contained here
which we adopted from the UP draft is 60 percent of the voting stock.
MR. NOLLEDO: That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a
corporation with 60-40 percent equity invests in another corporation which is permitted
by the Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
MR. VILLEGAS: Yes.42 (emphasis supplied)
It is apparent that it is the intention of the framers of the Constitution to apply the
grandfather rule in cases where corporate layering is present.
Elementary in statutory construction is when there is conflict between the Constitution
and a statute, the Constitution will prevail. In this instance, specifically pertaining to the
provisions under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3
of the FIA will have no place of application. As decreed by the honorable framers of our
Constitution, the grandfather rule prevails and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino interest
in a corporation for purposes, among others, of determining compliance with nationality
requirements (the Investee Corporation). Such manner of computation is necessary
since the shares in the Investee Corporation may be owned both by individual
stockholders (Investing Individuals) and by corporations and partnerships (Investing
Corporation). The said rules thus provide for the determination of nationality depending
on the ownership of the Investee Corporation and, in certain instances, the Investing
Corporation.
Under the above-quoted SEC Rules, there are two cases in determining the nationality
of the Investee Corporation. The first case is the liberal rule, later coined by the SEC as
the Control Test in its 30 May 1990 Opinion, and pertains to the portion in said
Paragraph 7 of the 1967 SEC Rules which states, (s)hares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality. Under the liberal Control Test, there is no need
to further trace the ownership of the 60% (or more) Filipino stockholdings of the
Investing Corporation since a corporation which is at least 60% Filipino-owned is
considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the
portion in said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage
of Filipino ownership in the corporation or partnership is less than 60%, only the

number of shares corresponding to such percentage shall be counted as of Philippine

nationality." Under the Strict Rule or Grandfather Rule Proper, the combined totals in
the Investing Corporation and the Investee Corporation must be traced (i.e.,
"grandfathered") to determine the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to the level
of the Investing Corporation and added to the shares directly owned in the Investee
Corporation x x x.
xxxx
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or
the second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity
ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino
and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in
other joint venture corporation which is either 60-40% Filipino-alien or the 59% less
Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in
doubt, the Grandfather Rule will not apply. (emphasis supplied)
After a scrutiny of the evidence extant on record, the Court finds that this case calls for
the application of the grandfather rule since, as ruled by the POA and affirmed by the
OP, doubt prevails and persists in the corporate ownership of petitioners. Also, as found
by the CA, doubt is present in the 60-40 Filipino equity ownership of petitioners Narra,
McArthur and Tesoro, since their common investor, the 100% Canadian corporation
MBMI, funded them. However, petitioners also claim that there is "doubt" only when
the stockholdings of Filipinos are less than 60%.43
The assertion of petitioners that "doubt" only exists when the stockholdings are less
than 60% fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted in
their petition, only made an example of an instance where "doubt" as to the ownership
of the corporation exists. It would be ludicrous to limit the application of the said word
only to the instances where the stockholdings of non-Filipino stockholders are more
than 40% of the total stockholdings in a corporation. The corporations interested in
circumventing our laws would clearly strive to have "60% Filipino Ownership" at face
value. It would be senseless for these applying corporations to state in their respective
articles of incorporation that they have less than 60% Filipino stockholders since the
applications will be denied instantly. Thus, various corporate schemes and layerings are
utilized to circumvent the application of the Constitution.
Obviously, the instant case presents a situation which exhibits a scheme employed by
stockholders to circumvent the law, creating a cloud of doubt in the Courts mind. To
determine, therefore, the actual participation, direct or indirect, of MBMI, the
grandfather rule must be used.

McArthur Mining, Inc.

To establish the actual ownership, interest or participation of MBMI in each of
petitioners corporate structure, they have to be "grandfathered."
As previously discussed, McArthur acquired its MPSA application from MMC, which
acquired its application from SMMI. McArthur has a capital stock of ten million pesos
(PhP 10,000,000) divided into 10,000 common shares at one thousand pesos (PhP
1,000) per share, subscribed to by the following:44
Name

Nationality Number of Amount

Shares
Subscribed

Amount Paid

Madridejos
Mining
Corporation

Filipino

5,997

PhP
5,997,000.00

PhP 825,000.00

MBMI
Resources,
Inc.

Canadian

3,998

PhP 3,998,000.0 PhP 1,878,174.60

Lauro L. Salazar Filipino

PhP 1,000.00

PhP 1,000.00

Fernando
Esguerra

B. Filipino

PhP 1,000.00

PhP 1,000.00

Manuel
Agcaoili

A. Filipino

PhP 1,000.00

PhP 1,000.00

Michael
Mason

T. American

PhP 1,000.00

PhP 1,000.00

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP 2,708,174.60
(emphasis
supplied)

Kenneth
Cawkell

Interestingly, looking at the corporate structure of MMC, we take note that it has a
similar structure and composition as McArthur. In fact, it would seem that MBMI is also
a major investor and "controls"45 MBMI and also, similar nominal shareholders were
present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T.
Mason (Mason) and Kenneth Cawkell (Cawkell):
Madridejos Mining Corporation

Name

Nationality Number of Amount

Shares
Subscribed

Olympic Mines Filipino

&

Amount Paid

6,663

PhP
6,663,000.00

PhP 0

Canadian

3,331

PhP
3,331,000.00

PhP 2,803,900.00

Amanti Limson

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B.

Filipino

PhP 1,000.00

PhP 1,000.00

Lauro Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Emmanuel G.

Filipino

PhP 1,000.00

PhP 1,000.00

T. American

PhP 1,000.00

PhP 1,000.00

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP 2,809,900.00

Development
Corp.
MBMI
Resources,
Inc.

Esguerra

Hernando
Michael
Mason
Kenneth
Cawkell

(emphasis
supplied)

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any
amount with respect to the number of shares they subscribed to in the corporation,
which is quite absurd since Olympic is the major stockholder in MMC. MBMIs 2006
Annual Report sheds light on why Olympic failed to pay any amount with respect to the
number of shares it subscribed to. It states that Olympic entered into joint venture
agreements with several Philippine companies, wherein it holds directly and indirectly a
60% effective equity interest in the Olympic Properties.46 Quoting the said Annual
report:

On September 9, 2004, the Company and Olympic Mines & Development Corporation
("Olympic") entered into a series of agreements including a Property Purchase and
Development Agreement (the Transaction Documents) with respect to three nickel
laterite properties in Palawan, Philippines (the "Olympic Properties"). The Transaction
Documents effectively establish a joint venture between the Company and Olympic for
purposes of developing the Olympic Properties. The Company holds directly and
indirectly an initial 60% interest in the joint venture. Under certain circumstances and
upon achieving certain milestones, the Company may earn up to a 100% interest,
subject to a 2.5% net revenue royalty.47 (emphasis supplied)
Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered,"
company layering was utilized by MBMI to gain control over McArthur. It is apparent
that MBMI has more than 60% or more equity interest in McArthur, making the latter a
foreign corporation.
Tesoro Mining and Development, Inc.
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten
million pesos (PhP 10,000,000) divided into ten thousand (10,000) common shares at
PhP 1,000 per share, as demonstrated below:
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/1
95580.pdf]]
Name

Nationality Number
of

Amount

Amount Paid

Subscribed

Shares
Sara Marie

Filipino

5,997

PhP
5,997,000.00

PhP 825,000.00

Canadian

3,998

PhP
3,998,000.00

PhP 1,878,174.60

L. Filipino

PhP 1,000.00

PhP 1,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

Mining, Inc.
MBMI
Resources,
Inc.
Lauro
Salazar
Fernando B.
Esguerra

Manuel A.

Filipino

PhP 1,000.00

PhP 1,000.00

T. American

PhP 1,000.00

PhP 1,000.00

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP 2,708,174.60

Agcaoili
Michael
Mason
Kenneth
Cawkell

(emphasis
supplied)

Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same
figures as the corporate structure of petitioner McArthur, down to the last centavo. All
the other shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and
Cawkell. The figures under "Nationality," "Number of Shares," "Amount Subscribed,"
and "Amount Paid" are exactly the same. Delving deeper, we scrutinize SMMIs
corporate structure:
Sara Marie Mining, Inc.
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/1
95580.pdf]]
Name

Nationality Number
of
Shares

Olympic
Mines &

Amount

Amount Paid

Subscribed

Filipino

6,663

PhP
6,663,000.00

PhP 0

Canadian

3,331

PhP
3,331,000.00

PhP 2,794,000.00

Development
Corp.
MBMI
Resources,
Inc.

Amanti Limson

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B.

Filipino

PhP 1,000.00

PhP 1,000.00

Lauro Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Emmanuel G.

Filipino

PhP 1,000.00

PhP 1,000.00

T. American

PhP 1,000.00

PhP 1,000.00

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP 2,809,900.00

Esguerra

Hernando
Michael
Mason
Kenneth
Cawkell

(emphasis
supplied)

After subsequently studying SMMIs corporate structure, it is not farfetched for us to

spot the glaring similarity between SMMI and MMCs corporate structure. Again, the
presence of identical stockholders, namely: Olympic, MBMI, Amanti Limson (Limson),
Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the headings
"Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly
the same except for the amount paid by MBMI which now reflects the amount of two
million seven hundred ninety four thousand pesos (PhP 2,794,000). Oddly, the total
value of the amount paid is two million eight hundred nine thousand nine hundred
pesos (PhP 2,809,900).
Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympics
participation in SMMIs corporate structure, it is clear that MBMI is in control of Tesoro
and owns 60% or more equity interest in Tesoro. This makes petitioner Tesoro a nonFilipino corporation and, thus, disqualifies it to participate in the exploitation, utilization
and development of our natural resources.
Narra Nickel Mining and Development Corporation
Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDCs
MPSA application, whose corporate structures arrangement is similar to that of the first
two petitioners discussed. The capital stock of Narra is ten million pesos (PhP

10,000,000), which is divided into ten thousand common shares (10,000) at one
thousand pesos (PhP 1,000) per share, shown as follows:
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/1
95580.pdf]]
Name

Nationality Number
of

Amount

Amount Paid

Subscribed

Shares
Patricia Louise

Filipino

5,997

PhP
5,997,000.00

PhP 1,677,000.00

Canadian

3,998

PhP
3,996,000.00

PhP 1,116,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

H. Filipino

PhP 1,000.00

PhP 1,000.00

PhP 1,000.00

PhP 1,000.00

Mining &
Development
Corp.
MBMI
Resources,
Inc.
Higinio C.
Mendoza, Jr.
Henry E.
Fernandez
Manuel A.
Agcaoili
Ma. Elena A.
Bocalan
Bayani
Agabin
Robert L.

American

McCurdy
Kenneth
Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP 2,800,000.00
(emphasis
supplied)

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra,
is present in this corporate structure.
Patricia Louise Mining & Development Corporation
Using the grandfather method, we further look and examine PLMDCs corporate
structure:
Name

Nationality Number
of Shares

Amount
Subscribed

Amount Paid

Palawan Alpha South Filipino

Resources
Development
Corporation

6,596

PhP
6,596,000.00

PhP 0

MBMI Resources,

3,396

PhP
3,396,000.00

PhP
2,796,000.00

Higinio C. Mendoza, Filipino

Jr.

PhP 1,000.00

PhP 1,000.00

Fernando B. Esguerra

Filipino

PhP 1,000.00

PhP 1,000.00

Henry E. Fernandez

Filipino

PhP 1,000.00

PhP 1,000.00

Lauro L. Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Manuel A. Agcaoili

Filipino

PhP 1,000.00

PhP 1,000.00

Bayani H. Agabin

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP
2,708,174.60

Canadian

Inc.

(emphasis
supplied)
Yet again, the usual players in petitioners corporate structures are present. Similarly,
the amount of money paid by the 2nd tier majority stock holder, in this case, Palawan
Alpha South Resources and Development Corp. (PASRDC), is zero.
Studying MBMIs Summary of Significant Accounting Policies dated October 31, 2005
explains the reason behind the intricate corporate layering that MBMI immersed itself
in:
JOINT VENTURES The Companys ownership interests in various mining ventures
engaged in the acquisition, exploration and development of mineral properties in the
Philippines is described as follows:
(a) Olympic Group
The Philippine companies holding the Olympic Property, and the ownership and
interests therein, are as follows:
Olympic- Philippines (the "Olympic Group")
Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
Pursuant to the Olympic joint venture agreement the Company holds directly and
indirectly an effective equity interest in the Olympic Property of 60.0%. Pursuant to a
shareholders agreement, the Company exercises joint control over the companies in
the Olympic Group.
(b) Alpha Group
The Philippine companies holding the Alpha Property, and the ownership interests
therein, are as follows:
Alpha- Philippines (the "Alpha Group")
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Narra Nickel Mining & Development Corporation (Narra) 60.4%
Under a joint venture agreement the Company holds directly and indirectly an effective
equity interest in the Alpha Property of 60.4%. Pursuant to a shareholders agreement,

the Company exercises joint

Group.48 (emphasis supplied)

control

over

the

companies

in

the

Alpha

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur,
Tesoro and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60%
or more of their equity interests. Such conclusion is derived from grandfathering
petitioners corporate owners, namely: MMI, SMMI and PLMDC. Going further and
adding to the picture, MBMIs Summary of Significant Accounting Policies statement
regarding the "joint venture" agreements that it entered into with the "Olympic" and
"Alpha" groupsinvolves SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership
of the "layered" corporations boils down to MBMI, Olympic or corporations under the
"Alpha" group wherein MBMI has joint venture agreements with, practically exercising
majority control over the corporations mentioned. In effect, whether looking at the
capital structure or the underlying relationships between and among the corporations,
petitioners are NOT Filipino nationals and must be considered foreign since 60% or
more of their capital stocks or equity interests are owned by MBMI.
Application of the res inter alios acta rule
Petitioners question the CAs use of the exception of the res inter alios acta or the
"admission by co-partner or agent" rule and "admission by privies" under the Rules of
Court in the instant case, by pointing out that statements made by MBMI should not be
admitted in this case since it is not a party to the case and that it is not a "partner" of
petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent
of the party within the scope of his authority and during the existence of the
partnership or agency, may be given in evidence against such party after the
partnership or agency is shown by evidence other than such act or declaration itself.
The same rule applies to the act or declaration of a joint owner, joint debtor, or other
person jointly interested with the party.
Sec. 31. Admission by privies.- Where one derives title to property from another, the
act, declaration, or omission of the latter, while holding the title, in relation to the
property, is evidence against the former.
Petitioners claim that before the above-mentioned Rule can be applied to a case, "the
partnership relation must be shown, and that proof of the fact must be made by
evidence other than the admission itself."49 Thus, petitioners assert that the CA erred in
finding that a partnership relationship exists between them and MBMI because, in fact,
no such partnership exists.
Partnerships vs. joint venture agreements

Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating
that "by entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro
and McArthur. They challenged the conclusion of the CA which pertains to the close
characteristics of
"partnerships" and "joint venture agreements." Further, they asserted that before this
particular partnership can be formed, it should have been formally reduced into writing
since the capital involved is more than three thousand pesos (PhP 3,000). Being that
there is no evidence of written agreement to form a partnership between petitioners
and MBMI, no partnership was created.
We disagree.
A partnership is defined as two or more persons who bind themselves to contribute
money, property, or industry to a common fund with the intention of dividing the profits
among themselves.50 On the other hand, joint ventures have been deemed to be "akin"
to partnerships since it is difficult to distinguish between joint ventures and
partnerships. Thus:
[T]he relations of the parties to a joint venture and the nature of their association are
so similar and closely akin to a partnership that it is ordinarily held that their rights,
duties, and liabilities are to be tested by rules which are closely analogous to and
substantially the same, if not exactly the same, as those which govern partnership. In
fact, it has been said that the trend in the law has been to blur the distinctions between
a partnership and a joint venture, very little law being found applicable to one that does
not apply to the other.51
Though some claim that partnerships and joint ventures are totally different animals,
there are very few rules that differentiate one from the other; thus, joint ventures are
deemed "akin" or similar to a partnership. In fact, in joint venture agreements, rules
and legal incidents governing partnerships are applied.52
Accordingly, culled from the incidents and records of this case, it can be assumed that
the relationships entered between and among petitioners and MBMI are no simple "joint
venture agreements." As a rule, corporations are prohibited from entering into
partnership agreements; consequently, corporations enter into joint venture
agreements with other corporations or partnerships for certain transactions in order to
form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by and among petitioners and
MBMI was executed to circumvent the legal prohibition against corporations entering
into partnerships, then the relationship created should be deemed as "partnerships,"
and the laws on partnership should be applied. Thus, a joint venture agreement

between and among corporations may be seen as similar to partnerships since the
elements of partnership are present.
Considering that the relationships found between petitioners and MBMI are considered
to be partnerships, then the CA is justified in applying Sec. 29, Rule 130 of the Rules by
stating that "by entering into a joint venture, MBMI have a joint interest" with Narra,
Tesoro and McArthur.
Panel of Arbitrators jurisdiction
We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant
case. The POA has jurisdiction to settle disputes over rights to mining areas which
definitely involve the petitions filed by Redmont against petitioners Narra, McArthur and
Tesoro. Redmont, by filing its petition against petitioners, is asserting the right of
Filipinos over mining areas in the Philippines against alleged foreign-owned mining
corporations. Such claim constitutes a "dispute" found in Sec. 77 of RA 7942:
Within thirty (30) days, after the submission of the case by the parties for the decision,
the panel shall have exclusive and original jurisdiction to hear and decide the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits
We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:53
The phrase "disputes involving rights to mining areas" refers to any adverse claim,
protest, or opposition to an application for mineral agreement. The POA therefore has
the jurisdiction to resolve any adverse claim, protest, or opposition to a pending
application for a mineral agreement filed with the concerned Regional Office of the
MGB. This is clear from Secs. 38 and 41 of the DENR AO 96-40, which provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of publication/posting/radio
announcements, the authorized officer(s) of the concerned office(s) shall issue a
certification(s) that the publication/posting/radio announcement have been complied
with. Any adverse claim, protest, opposition shall be filed directly, within thirty (30)
calendar days from the last date of publication/posting/radio announcement, with the
concerned Regional Office or through any concerned PENRO or CENRO for filing in the
concerned Regional Office for purposes of its resolution by the Panel of Arbitrators
pursuant to the provisions of this Act and these implementing rules and regulations.
Upon final resolution of any adverse claim, protest or opposition, the Panel of

Arbitrators shall likewise issue a certification to that effect within five (5) working days
from the date of finality of resolution thereof. Where there is no adverse claim, protest
or opposition, the Panel of Arbitrators shall likewise issue a Certification to that effect
within five working days therefrom.
xxxx
No Mineral Agreement shall be approved unless the requirements under this Section are
fully complied with and any adverse claim/protest/opposition is finally resolved by the
Panel of Arbitrators.
Sec. 41.
xxxx
Within fifteen (15) working days form the receipt of the Certification issued by the Panel
of Arbitrators as provided in Section 38 hereof, the concerned Regional Director shall
initially evaluate the Mineral Agreement applications in areas outside Mineral
reservations. He/She shall thereafter endorse his/her findings to the Bureau for further
evaluation by the Director within fifteen (15) working days from receipt of forwarded
documents. Thereafter, the Director shall endorse the same to the secretary for
consideration/approval within fifteen working days from receipt of such endorsement.
In case of Mineral Agreement applications in areas with Mineral Reservations, within
fifteen (15) working days from receipt of the Certification issued by the Panel of
Arbitrators as provided for in Section 38 hereof, the same shall be evaluated and
endorsed by the Director to the Secretary for consideration/approval within fifteen days
from receipt of such endorsement. (emphasis supplied)
It has been made clear from the aforecited provisions that the "disputes involving rights
to mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining
right application is further elucidated by Secs. 219 and 43 of DENR AO 95-936, which
read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the
provisions of Sections 28, 43 and 57 above, any adverse claim, protest or opposition
specified in said sections may also be filed directly with the Panel of Arbitrators within
the concerned periods for filing such claim, protest or opposition as specified in said
Sections.
Sec. 43. Publication/Posting of Mineral Agreement.-

xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the
proposed contract area is located once a week for two (2) consecutive weeks in a
language generally understood in the locality. After forty-five (45) days from the last
date of publication/posting has been made and no adverse claim, protest or opposition
was filed within the said forty-five (45) days, the concerned offices shall issue a
certification that publication/posting has been made and that no adverse claim, protest
or opposition of whatever nature has been filed. On the other hand, if there be any
adverse claim, protest or opposition, the same shall be filed within forty-five (45) days
from the last date of publication/posting, with the Regional Offices concerned, or
through the Departments Community Environment and Natural Resources Officers
(CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to be filed
at the Regional Office for resolution of the Panel of Arbitrators. However previously
published valid and subsisting mining claims are exempted from posted/posting
required under this Section.
No mineral agreement shall be approved unless the requirements under this section are
fully complied with and any opposition/adverse claim is dealt with in writing by the
Director and resolved by the Panel of Arbitrators. (Emphasis supplied.)
It has been made clear from the aforecited provisions that the "disputes involving rights
to mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining
right application is further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which
reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the
provisions of Sections 28, 43 and 57 above, any adverse claim, protest or opposition
specified in said sections may also be filed directly with the Panel of Arbitrators within
the concerned periods for filing such claim, protest or opposition as specified in said
Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the
proposed contract area is located once a week for two (2) consecutive weeks in a

language generally understood in the locality. After forty-five (45) days from the last
date of publication/posting has been made and no adverse claim, protest or opposition
was filed within the said forty-five (45) days, the concerned offices shall issue a
certification that publication/posting has been made and that no adverse claim, protest
or opposition of whatever nature has been filed. On the other hand, if there be any
adverse claim, protest or opposition, the same shall be filed within forty-five (45) days
from the last date of publication/posting, with the Regional offices concerned, or
through the Departments Community Environment and Natural Resources Officers
(CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to be filed
at the Regional Office for resolution of the Panel of Arbitrators. However, previously
published valid and subsisting mining claims are exempted from posted/posting
required under this Section.
No mineral agreement shall be approved unless the requirements under this section are
fully complied with and any opposition/adverse claim is dealt with in writing by the
Director and resolved by the Panel of Arbitrators. (Emphasis supplied.)
These provisions lead us to conclude that the power of the POA to resolve any adverse
claim, opposition, or protest relative to mining rights under Sec. 77(a) of RA 7942 is
confined only to adverse claims, conflicts and oppositions relating to applications for the
grant of mineral rights.
POAs jurisdiction is confined only to resolutions of such adverse claims, conflicts and
oppositions and it has no authority to approve or reject said applications. Such power is
vested in the DENR Secretary upon recommendation of the MGB Director. Clearly,
POAs jurisdiction over "disputes involving rights to mining areas" has nothing to do
with the cancellation of existing mineral agreements. (emphasis ours)
Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to
resolve disputes over MPSA applications subject of Redmonts petitions. However, said
jurisdiction does not include either the approval or rejection of the MPSA applications,
which is vested only upon the Secretary of the DENR. Thus, the finding of the POA, with
respect to the rejection of petitioners MPSA applications being that they are foreign
corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts,
not the POA, that has jurisdiction over the MPSA applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the statute in force at the
time of the commencement of the action.54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization

Act of 1980" reads:

Sec. 19. Jurisdiction in Civil Cases.Regional Trial Courts shall exercise exclusive
original jurisdiction:
1. In all civil actions in which the subject of the litigation is incapable of pecuniary
estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.
x x x Within thirty (30) days, after the submission of the case by the parties for
the decision, the panel shall have exclusive and original jurisdiction to hear and
decide the following:
(c) Disputes involving rights to mining areas
(d) Disputes involving mineral agreements or permits
It is clear that POA has exclusive and original jurisdiction over any and all disputes
involving rights to mining areas. One such dispute is an MPSA application to which an
adverse claim, protest or opposition is filed by another interested applicant.1wphi1 In
the case at bar, the dispute arose or originated from MPSA applications where
petitioners are asserting their rights to mining areas subject of their respective MPSA
applications. Since respondent filed 3 separate petitions for the denial of said
applications, then a controversy has developed between the parties and it is POAs
jurisdiction to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed
with the DENR Regional Office or any concerned DENRE or CENRO are MPSA
applications. Thus POA has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of
primary jurisdiction. Euro-med Laboratories v. Province of Batangas55 elucidates:
The doctrine of primary jurisdiction holds that if a case is such that its determination
requires the expertise, specialized training and knowledge of an administrative body,
relief must first be obtained in an administrative proceeding before resort to the courts
is had even if the matter may well be within their proper jurisdiction.
Whatever may be the decision of the POA will eventually reach the court system via a
resort to the CA and to this Court as a last recourse.
Selling of MBMIs shares to DMCI

As stated before, petitioners Manifestation and Submission dated October 19, 2012
would want us to declare the instant petition moot and academic due to the transfer
and conveyance of all the shareholdings and interests of MBMI to DMCI, a corporation
duly organized and existing under Philippine laws and is at least 60% Philippineowned.56 Petitioners reasoned that they now cannot be considered as foreign-owned;
the transfer of their shares supposedly cured the "defect" of their previous nationality.
They claimed that their current FTAA contract with the State should stand since "even
wholly-owned foreign corporations can enter into an FTAA with the State."57Petitioners
stress that there should no longer be any issue left as regards their qualification to
enter into FTAA contracts since they are qualified to engage in mining activities in the
Philippines. Thus, whether the "grandfather rule" or the "control test" is used, the
nationalities of petitioners cannot be doubted since it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant
case and said fact should be disregarded. The manifestation can no longer be
considered by us since it is being tackled in G.R. No. 202877 pending before this
Court.1wphi1 Thus, the question of whether petitioners, allegedly a Philippine-owned
corporation due to the sale of MBMI's shareholdings to DMCI, are allowed to enter into
FTAAs with the State is a non-issue in this case.
In ending, the "control test" is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987
Constitution, entitled to undertake the exploration, development and utilization of the
natural resources of the Philippines. When in the mind of the Court there is doubt,
based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity
ownership in the corporation, then it may apply the "grandfather rule."
WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court
of Appeals Decision dated October 1, 2010 and Resolution dated February 15, 2011 are
hereby AFFIRMED.
SO ORDERED.
PRESBITERO
Associate Justice

J.

VELASCO,

JR.

6. [G.R. Nos. 155217 & 156393. July 30, 2003]

GATEWAY ELECTRONICS CORPORATION, petitioner, vs. LAND BANK OF THE

PHILIPPINES, respondent.
DECISION
YNARES-SANTIAGO, J.:
Before the Court are consolidated petitions (1) for review of the decision of the
Court of Appeals in CA-G.R. SP No. 62658,[1] which set aside the Order dated October
18, 2000 of the Regional Trial Court of Makati City, Branch 133, in Civil Case No. 98782;[2] and (2) to cite Landbank President Margarito Teves, and Landbanks counsel, in
contempt of Court.
The undisputed facts are as follows: In 1995, petitioner Gateway Electronics
Corporation applied for a loan in the amount of one billion pesos with respondent
Landbank to finance the construction and acquisition of machineries and equipment for
a semi-conductor plant at Gateway Business Park in Javalera, General Trias,
Cavite. However, Landbank was only able to extend petitioner a loan in the amount of
six hundred million pesos (P600,000,000.00). Hence, it offered to assist petitioner in
securing additional funding through its investment banking services, which offer
petitioner accepted. Thereafter, Landbank released to petitioner the initial amount of
P250,000,000.00, with the balance of P350,000,000.00 to be released in June 1996. As
security for the said loans, petitioner mortgaged in favor of Landbank two parcels of
land[3] located in Barangay Jalavera, General Trias, Cavite, the movable properties as
well as the machineries to be installed therein.[4]
After petitioners acceptance of Landbanks financial banking services, the latter
prepared an Information Memorandum which it disseminated to various banks to attract
them into providing additional funding for petitioner. The Information Memorandum
stated that the security for the proposed loan syndication will be the Mortgage Trust
Indenture (MTI) on the project assets including land, building and equipment.[5] In a
letter dated July 30, 1996, Landbank informed petitioner of its willingness to share the
loan collateral which the latter constituted in its favor as part of the collateral for the
syndicated loan from the other banks.[6] On August 20, 1996, Landbank confirmed its
undertaking to share the said collateral with the other creditor banks, to wit:
In case of failure of syndication of the loan, allow the banks that have granted loans to
GEC [Gateway Electronics Corporation] in anticipation of the loan syndication to have a
registered pari passu mortgage with you over the property, the intention being that all
banks, including Landbank, shall be on equal footing where the aforesaid collateral is
concerned.[7]

Consequently, Philippine Commercial International Bank (PCIB), Union Bank of the

Philippines, (UBP), Rizal Commercial Banking Corporation-Trust Investment Division
(RCBC), and Asia Trust Bank (Asia Trust) joined the loan syndication and released
various loans to petitioner. On October 10, 1996, a Memorandum of Understanding
(MOU)[8] was executed by Landbank, PCIB, UBP, RCBC, Asiatrust and the petitioner,
with RCBC as the trustee of the loan syndication. Under the Memorandum of
Understanding, the said signatories agreed to
enter into a Mortgage Trust Indenture (herein, the MTI), under which GEC will
constitute a mortgage over the land, building, other land improvements, machinery and
equipment of GEC located within Gateway Business Park, Crisanto de Los Reyes
Avenue, Javalera, General Trias, Cavite as well as the assets to be acquired by GEC
under the Project (as hereinafter defined) in favor of RCBC-TID as trustee, for the
benefit of the Creditors (as defined in the MTI), to secure the payment by GEC of its
loan obligations.[9]
Meanwhile, the negotiations for the execution of an MTI failed because Landbank
and the petitioner were unable to agree on the valuation of the equipment and
machineries to be acquired by the latter. The petitioner insisted on a 70% valuation,
while the former wanted a 50% valuation. To break the impasse, PCIB, RCBC, UBP,
and Asiatrust proposed, subject to the approval of their respective Executive
Committees or Board of Directors, to execute a Joint Real Estate Mortgage (JREM) [10] as
the new mode to secure [their] respective loan vis--vis [petitioners]
collaterals.[11] Under the proposed JREM, the six hundred million peso-loan granted by
Land Bank shall be secured up to 94.42%, while the loans granted by PCIB, RCBC, and
UBP would be similarly secured up to 75.22%.[12] Land Bank, however, refused to
agree to the said proposal unless 100% of its loan exposure is secured, pursuant to the
Loan Agreement it executed with petitioner.[13]
On February 27, 1998, Land Bank informed petitioner of its intention not to share
collaterals with the other banks. In the meantime, petitioners loan with PCIB became
due because of its failure to comply with the collateral requirement under the MTI or
JREM, or to provide acceptable substitute collaterals. Hence, petitioner filed with the
Regional Trial Court of Makati City, Branch 133, a complaint against Land Bank for
specific performance and damages with prayer for the issuance of preliminary
mandatory injunction.
After hearing, the trial court issued an order on October 18, 2000 granting
petitioners prayer for the issuance of a writ of preliminary mandatory injunction, the
dispositive portion of which reads:
Wherefore, in view of the foregoing, the application for a writ of preliminary mandatory
injunction is granted, conditioned upon the filing of a bond in the amount of three
hundred thousand pesos (P300,000.00).

Defendant is hereby directed to accede to the terms of the draft MTI and/or to agree to
share collaterals under a joint real estate mortgage [JREM] with long-term creditors of
plaintiff (including PCIB) as joint mortgagees and with defendant as custodian of the
titles.
SO ORDERED.[14]
With the denial of its motion for reconsideration, respondent filed a petition for
certiorari with the Court of Appeals, on the ground that the trial court gravely abused its
discretion in issuing the assailed writ of preliminary mandatory injunction. On March
23, 2001, the Court of Appeals, on motion of Landbank, issued a temporary restraining
order enjoining the trial court from enforcing the October 18, 2000 Order.[15]
In a decision rendered on April 12, 2002, the Court of Appeals annulled the assailed
order of the trial court.[16] It ruled that petitioner failed to prove the requisite clear and
legal right that would justify the issuance of the writ of preliminary mandatory
injunction; and that respondent cannot be compelled to accede to the terms of the MTI
and/or JREM which was supposed to cover the syndicated loan of petitioner inasmuch
as the said schemes were never executed nor approved by the petitioner and the
participating banks.
Hence, the instant petition for review filed by petitioner which was docketed as G.R.
No. 155217. On December 10, 2002, petitioner filed an omnibus motion seeking, inter
alia, the issuance of a temporary restraining order enjoining Landbank from proceeding
and completing the foreclosure proceedings over its mortgaged properties.[17] On
January 22, 2003, the Court denied said motion for lack of merit.[18] Petitioners motion
for reconsideration was likewise denied on March 26, 2003.[19]
Meanwhile, on January 10, 2003, petitioner filed a petition to cite Landbank
President Margarito Teves and Landbanks lawyer in contempt of Court for proceeding
and concluding the foreclosure proceedings and public auction sale.[20] Petitioner
contended that Landbanks acts constitute improper conduct which directly or indirectly
impede, obstruct, or degrade the administration of justice. The petition was docketed
as G.R. No. 156393.
On March 12, 2003, the consolidation of G.R. No. 156393 and G.R. No. 155217 was
ordered.[21]
The issues to be resolved in this petition are as follows: (1) Is Landbank bound to
share the properties mortgaged to it by respondent with the other creditor banks in the
loan syndication? (2) If the answer is in the affirmative, can Landbank be compelled at
this point to agree with the terms of the MTI or JREM?
Anent the first issue, the Court finds that Landbank is bound by a perfected
contract to share petitioners collateral with the participating banks in the loan
syndication. Article 1305 of the Civil Code defines a contract as a meeting of minds
between two persons whereby one binds himself, with respect to the other, to give

something or to render some service. A contract undergoes three distinct stages (1)
preparation or negotiation; (2) perfection; and (3) consummation. Negotiation begins
from the time the prospective contracting parties manifest their interest in the contract
and ends at the moment of agreement of the parties. The perfection or birth of the
contract takes place when the parties agree upon the essential elements of the
contract. The last stage is the consummation of the contract wherein the parties fulfill
or perform the terms agreed upon in the contract, culminating in the extinguishment
thereof. Article 1315 of the Civil Code, on the other hand, provides that a contract is
perfected by mere consent, which is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract.[22]
In the case at bar, a perfected contract for the sharing of collaterals is evident from
the exchange of communications between Landbank and petitioner and the
participating banks, as well as in the Memorandum of Understanding executed by
petitioner and the participating banks, including Landbank. In its July 31, 1996 letter to
petitioner, Landbank stated that it is willing to submit the properties covered by the
real estate mortgage (REM) in its favor as part of [petitioners] assets that will be
covered by a Mortgage Trust Indenture (MTI). Thus, the Information Memorandum
distributed by Landbank to entice other banks to participate in the loan syndication,
expressly stated that the security for the syndicated loan will be the MTI on project
assets including land, building and equipment.[23] Finally, on October 10, 1996,
petitioner, Landbank, PCIB, RCBC, UBP, and Asiatrust executed a Memorandum of
Understanding confirming the said collateral sharing agreement. To effect said sharing,
they decided to enter into a Mortgage Trust Indenture (MTI) which will be secured by
the same properties previously mortgaged by petitioner to Landbank, or more
specifically, to
enter into a Mortgage Trust Indenture (herein, the MTI), under which GEC will
constitute a mortgage over the land, building, other land improvements, machinery and
equipment of GEC located within Gateway Business Park, Crisanto de Los Reyes
Avenue, Javalera, General Trias, Cavite as well as the assets to be acquired by GEC
under the Project (as hereinafter defined) in favor of RCBC-TID as trustee, for the
benefit of the Creditors (as defined in the MTI), to secure the payment by GEC of its
loan obligations.[24]
Clearly, there was an acceptance by petitioner and by PCIB, RCBC, UBP, and
Asiatrust of Lanbanks offer to share collaterals, culminating in the execution of the
Memorandum of Understanding. We agree with petitioner that the MTI and/or the
JREM belong to the realm of consummation of said Memorandum of Understanding,
being the proposed vehicles or modes to effect the sharing agreement. Thus, in the
JREM which was approved by Landbank, except for its loan security coverage, the
participating banks expressly acknowledged that [t]he Joint Real Estate Mortgage [is]
pursued by [them] as a new mode to secure [their] respective loans vis--vis GECs
collateral.[25] Verily, the perfection of the collateral sharing agreement is not

dependent upon the execution of the MTI or the JREM. The failure to execute said
schemes did not affect the perfected and binding collateral sharing contract.
With respect, however, to the second issue, we find that the issuance by the trial
court of the writ of preliminary mandatory injunction directing Landbank to agree with
the terms of the MTI or JREM was premature. This is so because the MTI and/or JREM
that were supposed to consummate the perfected collateral sharing agreement have
not yet come into existence. As correctly held by the Court of Appeals, Landbank
cannot be compelled to agree with the terms of the MTI considering that no such terms
were finalized and approved by the petitioner and the participating banks. Simply
stated, Landbank cannot be forced to give its conformity to an inexistent contract. So,
also, the proposed JREM was never approved by the petitioner and the participating
banks. Notably, the JREM expressly stated that we hereby appeal to the GECs senior
management to decide swiftly and to favorably approve our humble requests so that, in
turn, we can seek respective approvals from our senior management to culminate this
long term project financing deal of ours.[26] No such approval, however, appears in the
records.
As to the questioned security coverage under the JREM, Landbank cannot be
compelled to agree to the proposed 94.42% loan security coverage over its six hundred
million peso-loan to petitioner. The security coverage of the participating banks on the
collaterals of petitioner was not agreed upon in the Memorandum of
Understanding. While it is true that Landbank informed petitioner in its letter dated July
30, 1996 that the participating banks in the loan syndication will have equal security
position,[27] and that on August 20, 1996, Landbank confirmed to PCIB that the
participating banks, shall be on equal footing where the aforesaid collateral is
concerned,[28] no such stipulation was embodied in the Memorandum of Understanding
executed by petitioner, Landbank, PCIB, RCBC, UBP, and Asiatrust on October 10,
1996. As the repository of the terms and conditions agreed upon by the parties, the
Memorandum of Understanding is considered as containing all their stipulations and
there can be no evidence of such terms other than the contents thereof.[29] Inasmuch
as the parties to the Memorandum of Understanding did not agree on the terms of the
security coverage of the participating banks in the MTI or JREM, we can neither add
such a stipulation nor direct Landbank to agree to the security coverage stated in the
JREM. Furthermore, the reasonableness of the terms of the MTI and JREM, as well as
the good faith or bad faith of the parties in negotiating the terms of the said schemes,
are matters that should be determined at the trial, and cannot at this point be passed
upon by this Court.
Furthermore, the other participating banks, namely PCIB, RCBC, UBP, and Asiatrust,
are not parties to the instant case and cannot, therefore, be bound by an order
directing Landbank to accede to the terms of the MTI or the JREM. We are not even
aware if said banks are amenable to the said schemes or pursuing other modes to
effect the sharing agreement. Indeed, the scheme or mode and the terms that would
consummate the collateral sharing agreement are matters that the signatories of the
Memorandum of Understanding have yet to come up with. The rule in this jurisdiction

is that the contracting parties may establish any agreement, term, and condition they
may deem advisable, provided they are not contrary to law, morals or public
policy. The right to enter into lawful contracts constitutes one of the liberties
guaranteed by the Constitution. It cannot be struck down or arbitrarily interfered with
without violating the freedom to enter into lawful contracts.[30]
A writ of mandatory injunction requires the performance of a particular act and is
granted only upon a showing of the following requisites (1) the invasion of the right is
material and substantial; (2) the right of a complainant is clear and unmistakable; and
(3) there is an urgent and permanent necessity for the writ to prevent serious
damage. Since it commands the performance of an act, a mandatory injunction does
not preserve the status quo and is thus more cautiously regarded than a mere
prohibitive injunction. Accordingly, the issuance of the former is justified only in a clear
case, free from doubt and dispute. [31]
While it is true that petitioner has a right to compel Landbank to comply with the
collateral sharing agreement, its right to enforce the same by way of an inexistent MTI
or JREM is certainly not clear and unmistakable. At this stage, Landbank cannot be
compelled to agree to the terms of the MTI and/or JREM. At the most, Landbank can
be compelled to comply with its obligation to share with the other participating banks of
the loan syndication the properties mortgaged to it by petitioner and to execute the
necessary contract that would implement said collateral sharing agreement.
Coming now to the petition for contempt, we find that Landbanks acts of
foreclosing and selling at public auction the lots mortgaged by petitioner were not
contumacious. Landbank instituted the foreclosure proceedings upon an honest belief
that petitioner had defaulted in the payment of its obligation. Having acted in good
faith, the officers of the bank cannot be held in contempt of court. However, in order
not to render this decision moot and ineffectual, the sale at public auction should be
annulled.
WHEREFORE, in view of all the foregoing, the petition in G.R. No. 155217
is GRANTED. The decision of the Court of Appeals dated April 12, 2002 in CA-G.R. SP.
No. 62658 is SET ASIDE. The assailed Order dated October 18, 2000 of the Regional
Trial Court of Makati City, Branch 133, in Civil Case No. 98-782 is MODIFIED as follows:
respondent Landbank is directed to implement its agreement under the Memorandum
of Understanding dated October 10, 1996 to share with Philippine Commercial
International Bank (PCIB), Union Bank of the Philippines, (UBP), Rizal Commercial
Banking Corporation-Trust Investment Division (RCBC), and Asia Trust Bank (Asia
Trust) the properties mortgaged to it by petitioner Gateway Electronics Corporation, as
collaterals for the syndicated loan.
In G.R. No. 156393, the petition to cite Landbank President Margarito Teves and
Landbanks lawyer in contempt of Court is DENIED for lack of merit.
SO ORDERED.

Davide, Jr., C.J., (Chairman), Vitug, Carpio, and Azcuna, JJ., concur.