1.G.R. No. 108905 October 23, 1997

GRACE CHRISTIAN HIGH SCHOOL, petitioner,

vs.

THE COURT OF APPEALS, GRACE VILLAGE ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and ERNESTO L. GO, respondents.

MENDOZA, J.:

The question for decision in this case is the right of petitioner’s representative to sit in the board of directors of respondent Grace Village Association, Inc. as a permanent member thereof. For fifteen years — from 1975 until 1989 — petitioner’s representative had been recognized as a “permanent director” of the association. But on February 13, 1990, petitioner received notice from the association’s committee on election that the latter was “reexamining” (actually, reconsidering) the right of petitioner’s representative to continue as an unelected member of the board. As the board denied petitioner’s request to be allowed representation without election, petitioner brought an action for mandamus in the Home Insurance and Guaranty Corporation. Its action was dismissed by the hearing officer whose decision was subsequently affirmed by the appeals board. Petitioner appealed to the Court of Appeals, which in turn upheld the decision of the HIGC’s appeals board. Hence this petition for review based on the following contentions:

1. The Petitioner herein has already acquired a vested right to a permanent seat in the Board of Directors of Grace Village Association;

2. The amended By-laws of the Association drafted and promulgated by a Committee on December 20, 1975 is valid and binding; and

3. The Practice of tolerating the automatic inclusion of petitioner as a permanent member of the Board of Directors of the Association without the benefit of election is allowed under the law. 1

Briefly stated, the facts are as follows:

Petitioner Grace Christian High School is an educational institution offering preparatory, kindergarten and secondary courses at the Grace Village in Quezon City. Private respondent Grace Village Association, Inc., on the other hand, is an organization of lot and/or building owners, lessees and residents at Grace Village, while private respondents Alejandro G. Beltran and Ernesto L. Go were its president and chairman of the committee on election, respectively, in 1990, when this suit was brought.

As adopted in 1968, the by-laws of the association provided in Article IV, as follows:

The annual meeting of the members of the Association shall be held on the first Sunday of January in each calendar year at the principal office of the Association at 2:00 P.M. where they shall elect by plurality vote and by secret balloting, the Board of Directors, composed of eleven (11) members to serve for one (1) year until their successors are duly elected and have qualified. 2

It appears, that on December 20, 1975, a committee of the board of directors prepared a draft of an amendment to the by-laws, reading as follows: 3

VI. ANNUAL MEETING

The Annual Meeting of the members of the Association shall be held on the second Thursday of January of each year. Each Charter or Associate Member of the Association is entitled to vote. He shall be entitled to as many votes as he has acquired thru his monthly membership fees only computed on a ratio of TEN (P10.00) PESOS for one vote.

The Charter and Associate Members shall elect the Directors of the Association. The candidates receiving the first fourteen (14) highest number of votes shall be declared and proclaimed elected until their successors are elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.

This draft was never presented to the general membership for approval. Nevertheless, from 1975, after it was presumably submitted to the board, up to 1990, petitioner was given a permanent seat in the board of directors of the association. On February 13, 1990, the association’s committee on election in a letter informed James Tan, principal of the school, that “it was the sentiment that all directors should be elected by members of the association” because “to make a person or entity a permanent Director would deprive the right of voters to vote for fifteen (15) members of the Board,” and “it is undemocratic for a person or entity to hold office in perpetuity.” 4 For this reason, Tan was told that “the proposal to make the Grace Christian High School representative as a permanent director of the association, although previously tolerated in the past elections should be reexamined.” Following this advice, notices were sent to the members of the association that the provision on election of directors of the 1968 by-laws of the association would be observed.

Petitioner requested the chairman of the election committee to change the notice of election by following the procedure in previous elections, claiming that the notice issued for the 1990 elections ran “counter to the practice in previous years” and was “in violation of the by-laws (of 1975)” and “unlawfully deprive[d] Grace Christian High School of its vested right [to] a permanent seat in the board.” 5

As the association denied its request, the school brought suit for mandamus in the Home Insurance and Guaranty Corporation to compel the board of directors of the association to recognize its right to a permanent seat in the board. Petitioner based its claim on the following portion of the proposed amendment which, it contended, had become part of the by-laws of the association as Article VI, paragraph 2, thereof:

The Charter and Associate Members shall elect the Directors of the Association. The candidates receiving the first fourteen (14) highest number of votes shall be declared and proclaimed elected until their successors are elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.

It appears that the opinion of the Securities and Exchange Commission on the validity of this provision was sought by the association and that in reply to the query, the SEC rendered an opinion to the effect that the practice of allowing unelected members in the board was contrary to the existing by-laws of the association and to §92 of the Corporation Code (B.P. Blg. 68).

Private respondent association cited the SEC opinion in its answer. Additionally, the association contended that the basis of the petition for mandamus was merely “a proposed by-laws which has not yet been approved by competent authority nor registered with the SEC or HIGC.” It argued that “the by-laws which was registered with the SEC on January 16, 1969 should be the prevailing by-laws of the association and not the proposed amended by-laws.” 6

In reply, petitioner maintained that the “amended by-laws is valid and binding” and that the association was estopped from questioning the by-laws. 7

A preliminary conference was held on March 29, 1990 but nothing substantial was agreed upon. The parties merely agreed that the board of directors of the association should meet on April 17, 1990 and April 24, 1990 for the purpose of discussing the amendment of the by-laws and a possible amicable settlement of the case. A meeting was held on April 17, 1990, but the parties failed to reach an agreement. Instead, the board adopted a resolution declaring the 1975 provision null and void for lack of approval by members of the association and the 1968 by-laws to be effective.

On June 20, 1990, the hearing officer of the HIGC rendered a decision dismissing petitioner’s action. The hearing officer held that the amended by-laws, upon which petitioner based its claim, “[was] merely a proposed by-laws which, although implemented in the past, had not yet been ratified by the members of the association nor approved by competent authority”; that, on the contrary, in the meeting held on April 17, 1990, the directors of the association declared “the proposed by-law dated December 20, 1975 prepared by the committee on by-laws . . . null and void” and the by-laws

of December 17, 1968 as the “prevailing by-laws under which the association is to operate until such time that the proposed amendments to the by-laws are approved and ratified by a majority of the members of the association and duly filed and approved by the pertinent government agency.” The hearing officer rejected petitioner’s contention that it had acquired a vested right to a permanent seat in the board of directors. He held that past practice in election of directors could not give rise to a vested right and that departure from such practice was justified because it deprived members of association of their right to elect or to be voted in office, not to say that “allowing the automatic inclusion of a member representative of petitioner as permanent director [was] contrary to law and the registered by-laws of respondent association.” 8

The appeals board of the HIGC affirmed the decision of the hearing officer in its resolution dated September 13, 1990. It cited the opinion of the SEC based on §92 of the Corporation Code which reads:

§92. Election and term of trustees. — Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of the number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period.

The HIGC appeals board denied claims that the school “[was] being deprived of its right to be a member of the Board of Directors of respondent association,” because the fact was that “it may nominate as many representatives to the Association’s Board as it may deem appropriate.” It said that “what is merely being upheld is the act of the incumbent directors of the Board of correcting a long standing practice which is not anchored upon any legal basis.” 9

Petitioner appealed to the Court of Appeals but petitioner again lost as the appellate court on February 9, 1993, affirmed the decision of the HIGC. The Court of Appeals held that there was no valid amendment of the association’s by-laws because of failure to comply with the requirement of its existing by-laws, prescribing the affirmative vote of the majority of the members of the association at a regular or special meeting called for the adoption of amendment to the by-laws. Article XIX of the by-laws provides: 10

The members of the Association by an affirmative vote of the majority at any regular or special meeting called for the purpose, may alter, amend, change or adopt any new by-laws.

This provision of the by-laws actually implements §22 of the Corporation Law (Act No. 1459) which provides:

§22. The owners of a majority of the subscribed capital stock, or a majority of the members if there be no capital stock, may, at a regular or special meeting duly called for the purpose, amend or repeal any by-law or adopt new by-laws. The owners of two-thirds of the subscribed capital stock, or two-thirds of the members if there be no capital stock, may delegate to the board of directors the power to amend or repeal any by-law or to adopt new by-laws: Provided, however, That any power delegated to the board of directors to amend or repeal any by-law or adopt new by-laws shall be considered as revoked whenever a majority of the stockholders or of the members of the corporation shall so vote at a regular or special meeting. And provided, further, That the Director of the Bureau of Commerce and Industry shall not hereafter file an amendment to the by-laws of any bank, banking institution or building and loan association, unless accompanied by certificate of the Bank Commissioner to the effect that such amendments are in accordance with law.

The proposed amendment to the by-laws was never approved by the majority of the members of the association as required by these provisions of the law and by-laws. But petitioner contends that the members of the committee which prepared the proposed amendment were duly authorized to do so and that because the members of the association thereafter implemented the provision for fifteen years, the proposed amendment for all intents and purposes should be considered to have been ratified by them. Petitioner contends: 11

Considering, therefore, that the “agents” or committee were duly authorized to draft the amended by-laws and the acts done by the “agents” were in accordance with such authority, the acts of the “agents” from the very beginning were lawful and binding on the homeowners (the principals) per se without need of any ratification or adoption. The more has the amended by-laws become binding on the homeowners when the homeowners followed and implemented the provisions of the amended by-laws. This is not merely tantamount to tacit ratification of the acts done by duly authorized “agents” but express approval and confirmation of what the “agents” did pursuant to the authority granted to them.

Corollarily, petitioner claims that it has acquired a vested right to a permanent seat in the board. Says petitioner:

The right of the petitioner to an automatic membership in the board of the Association was granted by the members of the Association themselves and this grant has been implemented by members of the board themselves all through the years. Outside the present membership of the board, not a single member of the Association has registered any desire to remove the right of herein petitioner to an automatic membership in the board. If there is anybody who has the right to take

away such right of the petitioner, it would be the individual members of the Association through a referendum and not the present board some of the members of which are motivated by personal interest.

Petitioner disputes the ruling that the provision in question, giving petitioner’s representative a permanent seat in the board of the association, is contrary to law. Petitioner claims that that is not so because there is really no provision of law prohibiting unelected members of boards of directors of corporations. Referring to §92 of the present Corporation Code, petitioner says:

It is clear that the above provision of the Corporation Code only provides for the manner of election of the members of the board of trustees of non-stock corporations which may be more than fifteen in number and which manner of election is even subject to what is provided in the articles of incorporation or by-laws of the association thus showing that the above provisions [are] not even mandatory.

Even a careful perusal of the above provision of the Corporation Code would not show that it prohibits a non-stock corporation or association from granting one of its members a permanent seat in its board of directors or trustees. If there is no such legal prohibition then it is allowable provided it is so provided in the Articles of Incorporation or in the by-laws as in the instant case.

xxx xxx xxx

If fact, the truth is that this is allowed and is being practiced by some corporations duly organized and existing under the laws of the Philippines.

One example is the Plus XII Catholic Center, Inc. Under the by-laws of this corporation, that whoever is the Archbishop of Manila is considered a member of the board of trustees without benefit of election. And not only that. He also automatically sits as the Chairman of the Board of Trustees, again without need of any election.

Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It is also provided in the by-laws of this corporation that whoever is the Archbishop of Manila is considered a member of the board of trustees year after year without benefit of any election and he also sits automatically as the Chairman of the Board of Trustees.

It is actually §§28 and 29 of the Corporation Law — not §92 of the present law or §29 of the former one — which require members of the boards of directors of corporations to be elected. These provisions read:

§28. Unless otherwise provided in this Act, the corporate powers of all corporations formed under this Act shall be exercised, all business conducted and all property of such corporations controlled and held by a board of not less than five nor more than eleven directors to be elected from among the holders of stock or, where there

is no stock, from the members of the corporation: Provided, however, That in corporations, other than banks, in which the United States has or may have a vested interest, pursuant to the powers granted or delegated by the Trading with the Enemy Act, as amended, and similar Acts of Congress of the United States relating to the same subject, or by Executive Order No. 9095 of the President of the United States, as heretofore or hereafter amended, or both, the directors need not be elected from among the holders of the stock, or, where there is no stock from the members of the corporation. (emphasis added)

§29. At the meeting for the adoption of the original by-laws, or at such subsequent meeting as may be then determined, directors shall be elected to hold their offices for one year and until their successors are elected and qualified. Thereafter the directors of the corporation shall be elected annually by the stockholders if it be a stock corporation or by the members if it be a nonstock corporation, and if no provision is made in the by-laws for the time of election the same shall be held on the first Tuesday after the first Monday in January. Unless otherwise provided in the by-laws, two weeks’ notice of the election of directors must be given by publication in some newspaper of general circulation devoted to the publication of general news at the place where the principal office of the corporation is established or located, and by written notice deposited in the post-office, postage pre-paid, addressed to each stockholder, or, if there be no stockholders, then to each member, at his last known place of residence. If there be no newspaper published at the place where the principal office of the corporation is established or located, a notice of the election of directors shall be posted for a period of three weeks immediately preceding the election in at least three public places, in the place where the principal office of the corporation is established or located. (Emphasis added)

The present Corporation Code (B.P. Blg. 68), which took effect on May 1, 1980, 12 similarly provides:

§23. The Board of Directors or Trustees. — Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified. (Emphasis added)

These provisions of the former and present corporation law leave no room for doubt as to their meaning: the board of directors of corporations must be elected from among the stockholders or members. There may be corporations in which there are unelected members in the board but it is clear that in the examples cited by petitioner the unelected members sit as ex officio members, i.e., by virtue of and for as long as they hold a

particular office. But in the case of petitioner, there is no reason at all for its representative to be given a seat in the board. Nor does petitioner claim a right to such seat by virtue of an office held. In fact it was not given such seat in the beginning. It was only in 1975 that a proposed amendment to the by-laws sought to give it one.

Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall a later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to law, it is beyond the power of the members of the association to waive its invalidity. For that matter the members of the association may have formally adopted the provision in question, but their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. 13

It is probable that, in allowing petitioner’s representative to sit on the board, the members of the association were not aware that this was contrary to law. It should be noted that they did not actually implement the provision in question except perhaps insofar as it increased the number of directors from 11 to 15, but certainly not the allowance of petitioner’s representative as an unelected member of the board of directors. It is more accurate to say that the members merely tolerated petitioner’s representative and tolerance cannot be considered ratification.

Nor can petitioner claim a vested right to sit in the board on the basis of “practice.” Practice, no matter how long continued, cannot give rise to any vested right if it is contrary to law. Even less tenable is petitioner’s claim that its right is “coterminus with the existence of the association.” 14

Finally, petitioner questions the authority of the SEC to render an opinion on the validity of the provision in question. It contends that jurisdiction over this case is exclusively vested in the HIGC.

But this case was not decided by the SEC but by the HIGC. The HIGC merely cited as authority for its ruling the opinion of the SEC chairman. The HIGC could have cited any other authority for the view that under the law members of the board of directors of a corporation must be elected and it would be none the worse for doing so.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

2. G.R. No. L-45911 April 11, 1979

JOHN GOKONGWEI, JR., petitioner,

vs.

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

ANTONIO, J.:

The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange Commission, as follows:

SEC CASE NO 1375

On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws, cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for a preliminary injunction" against the majority of the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.

As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents amended by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled 30,127,047 with a total par value of P301,270,430.00. It was contended that according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the amendment. Since the amendment was based on the 1961 authorization, petitioner contended that the Board acted without authority and in usurpation of the power of the stockholders.

As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised in 1962 and 1963, after which the authority of the Board ceased to exist.

As a third cause of action, petitioner averred that the membership of the Board of Directors had changed since the authority was given in 1961, there being six (6) new directors.

As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all the qualifications to be a director of respondent corporation, being a Substantial stockholder thereof; that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors; and that in amending the by-laws, respondents purposely provided for petitioner's disqualification and deprived him of his vested right as afore-mentioned hence the amended by-laws are null and void. 1

As additional causes of action, it was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into contracts (specifically a management contract) with respondent corporation, which was allowed because the questioned amendment gave the Board itself the prerogative of determining whether they or other persons are engaged in competitive or antagonistic business; that the portion of the amended bylaws which states that in determining whether or not a person is engaged in competitive business, the Board may consider such factors as business and family relationship, is unreasonable and oppressive and, therefore, void; and that the portion of the amended by-laws which requires that "all nominations for election of directors ... shall be submitted in writing to the Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise unreasonable and oppressive.

It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing thereof be cancelled, and that individual respondents be made to pay damages, in specified amounts, to petitioner.

On October 28, 1976, in connection with the same case, petitioner filed with the Securities and Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of respondent corporation refused to allow him to inspect its records despite request made by petitioner for production of certain documents enumerated in the request, and that respondent corporation had been attempting to suppress information from its stockholders despite a negative reply by the SEC to its query regarding their authority to do so. Among the documents requested to be copied were (a) minutes of the stockholder's meeting field on March 13, 1961, (b) copy of the management contract between San Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d)

authority of the stockholders to invest the funds of respondent corporation in San Miguel International, Inc.; and (e) lists of salaries, allowances, bonuses, and other compensation, if any, received by Andres M. Soriano, Jr. and/or its successor-in-interest.

The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents, alleging, among others that the motion has no legal basis; that the demand is not based on good faith; that the motion is premature since the materiality or relevance of the evidence sought cannot be determined until the issues are joined, that it fails to show good cause and constitutes continued harrasment, and that some of the information sought are not part of the records of the corporation and, therefore, privileged.

During the pendency of the motion for production, respondents San Miguel Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial allegations therein and stating, by way of affirmative defenses that "the action taken by the Board of Directors on September 18, 1976 resulting in the ... amendments is valid and legal because the power to "amend, modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961 and long prior thereto has never been revoked of SMC"; that contrary to petitioner's claim, "the vote requirement for a valid delegation of the power to amend, repeal or adopt new by-laws is determined in relation to the total subscribed capital stock at the time the delegation of said power is made, not when the Board opts to exercise said delegated power"; that petitioner has not availed of his intra-corporate remedy for the nullification of the amendment, which is to secure its repeal by vote of the stockholders representing a majority of the subscribed capital stock at any regular or special meeting, as provided in Article VIII, section I of the by-laws and section 22 of the Corporation law, hence the, petition is premature; that petitioner is estopped from questioning the amendments on the ground of lack of authority of the Board. since he failed, to object to other amendments made on the basis of the same 1961 authorization: that the power of the corporation to amend its by-laws is broad, subject only to the condition that the by-laws adopted should not be respondent corporation inconsistent with any existing law; that respondent corporation should not be precluded from adopting protective measures to minimize or eliminate situations where its directors might be tempted to put their personal interests over t I hat of the corporation; that the questioned amended by-laws is a matter of internal policy and the judgment of the board should not be interfered with: That the by-laws, as amended, are valid and binding and are intended to prevent the possibility of violation of criminal and civil laws prohibiting combinations in restraint of trade; and that the petition states no cause of action. It was, therefore, prayed that the petition be dismissed and that petitioner be ordered to pay damages and attorney's fees to respondents. The application for writ of preliminary injunction was likewise on various grounds.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying the material averments thereof and stating, as part of their affirmative defenses, that in August 1972, the Universal Robina Corporation (Robina), a corporation engaged in business competitive to that of respondent corporation, began acquiring shares therein. until September 1976 when its total holding amounted to 622,987 shares: that in October 1972, the Consolidated Foods Corporation (CFC) likewise began acquiring shares in respondent (corporation. until its total holdings amounted to P543,959.00 in September 1976; that on January 12, 1976, petitioner, who is president and controlling shareholder of Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent corporation, and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious publicity campaign against SMC" to generate support from the stockholder "in his effort to secure for himself and in representation of Robina and CFC interests, a seat in the Board of Directors of SMC", that in the stockholders' meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure a seat in the Board of Directors on the basic issue that petitioner was engaged in a competitive business and his securing a seat would have subjected respondent corporation to grave disadvantages; that "petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting; that thereafter the Board of Directors amended the by-laws as afore-stated.

As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and attorney's fees were presented against petitioner.

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection of documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors and they accordingly filed their oppositions-intervention to the petition.

On December 29, 1976, the Securities and Exchange Commission resolved the motion for production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as follows:

Considering the evidence submitted before the Commission by the petitioner and respondents in the above-entitled case, it is hereby ordered:

1. That respondents produce and permit the inspection, copying and photographing, by or on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the stockholders' meeting of the respondent San Miguel Corporation held on March 13, 1961, which are in the possession, custody and control of the said corporation, it appearing that the same is material and

relevant to the issues involved in the main case. Accordingly, the respondents should allow petitioner-movant entry in the principal office of the respondent Corporation, San Miguel Corporation on January 14, 1977, at 9:30 o'clock in the morning for purposes of enforcing the rights herein granted; it being understood that the inspection, copying and photographing of the said documents shall be undertaken under the direct and strict supervision of this Commission. Provided, however, that other documents and/or papers not heretofore included are not covered by this Order and any inspection thereof shall require the prior permission of this Commission;

2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries, allowances, bonuses, compensation and/or remuneration received by respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its successors-in- interest, the Petition to produce and inspect the same is hereby DENIED, as petitioner-movant is not a stockholder of San Miguel International, Inc. and has, therefore, no inherent right to inspect said documents;

3. In view of the Manifestation of petitioner-movant dated November 29, 1976, withdrawing his request to copy and inspect the management contract between San Miguel Corporation and A. Soriano Corporation and the renewal and amendments thereof for the reason that he had already obtained the same, the Commission takes note thereof; and

4. Finally, the Commission holds in abeyance the resolution on the matter of production and inspection of the authority of the stockholders of San Miguel Corporation to invest the funds of respondent corporation in San Miguel International, Inc., until after the hearing on the merits of the principal issues in the above-entitled case.

This Order is immediately executory upon its approval. 2

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.

Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of the amendment to the By-laws", setting such meeting for February 10, 1977. This prompted petitioner to ask respondent Commission for a summary judgment insofar as the first cause of action is concerned, for the alleged reason that by calling a special stockholders' meeting for the aforesaid purpose, private respondents admitted the invalidity of the amendments of September 18, 1976. The motion for summary judgment was opposed by private respondents. Pending action on the motion, petitioner filed an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that pending the determination of petitioner's application for the issuance

of a preliminary injunction and/or petitioner's motion for summary judgment, a temporary restraining order be issued, restraining respondents from holding the special stockholder's meeting as scheduled. This motion was duly opposed by respondents.

On February 10, 1977, respondent Commission issued an order denying the motion for issuance of temporary restraining order. After receipt of the order of denial, respondents conducted the special stockholders' meeting wherein the amendments to the by-laws were ratified. On February 14, 1977, petitioner filed a consolidated motion for contempt and for nullification of the special stockholders' meeting.

A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the time of the filing of the instant petition, the said motion had not yet been scheduled for hearing. Likewise, the motion for reconsideration of the order granting in part and denying in part petitioner's motion for production of record had not yet been resolved.

In view of the fact that the annul stockholders' meeting of respondent corporation had been scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that he intended to run for the position of director of respondent corporation. Thereafter, respondents filed a Manifestation with respondent Commission, submitting a Resolution of the Board of Directors of respondent corporation disqualifying and precluding petitioner from being a candidate for director unless he could submit evidence on May 3, 1977 that he does not come within the disqualifications specified in the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason thereof, petitioner filed a manifestation and motion to resolve pending incidents in the case and to issue a writ of injunction, alleging that private respondents were seeking to nullify and render ineffectual the exercise of jurisdiction by the respondent Commission, to petitioner's irreparable damage and prejudice, Allegedly despite a subsequent Manifestation to prod respondent Commission to act, petitioner was not heard prior to the date of the stockholders' meeting.

Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act hence petitioner came to this Court.

SEC. CASE NO. 1423

Petitioner likewise alleges that, having discovered that respondent corporation has been investing corporate funds in other corporations and businesses outside of the primary purpose clause of the corporation, in violation of section 17 1/2 of the Corporation Law, he filed with respondent Commission, on January 20, 1977,

a petition seeking to have private respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation declared guilty of such violation, and ordered to account for such investments and to answer for damages.

On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated motion to strike and to declare individual respondents in default and an opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February 4, 1977, the commission acted thereon only on April 25, 1977, when it denied respondents' motion to dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on April 29 and May 3, 1977.

Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof, the following:

6. Re-affirmation of the authorization to the Board of Directors by the stockholders at the meeting on March 20, 1972 to invest corporate funds in other companies or businesses or for purposes other than the main purpose for which the Corporation has been organized, and ratification of the investments thereafter made pursuant thereto.

By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on May 3, 1977, the date set for the second hearing of the case on the merits. Respondent Commission, however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of urging the Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding, no action has been taken up to the date of the filing of the instant petition.

With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch on the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon his rights as stockholder of respondent corporation, and that respondent are acting oppressively against petitioner, in gross derogation of petitioner's rights to property and due process. He prayed that this Court direct respondent SEC to act on collateral incidents pending before it.

On May 6, 1977, this Court issued a temporary restraining order restraining private respondents from disqualifying or preventing petitioner from running or from being voted as director of respondent corporation and from submitting for ratification or confirmation or

from causing the ratification or confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, or from Making effective the amended by-laws of respondent corporation, until further orders from this Court or until the Securities and Ex-change Commission acts on the matters complained of in the instant petition.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had been issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner copies of the following orders:

(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for reconsideration, with its supplement, of the order of the Commission denying in part petitioner's motion for production of documents, petitioner's motion for reconsideration of the order denying the issuance of a temporary restraining order denying the issuance of a temporary restraining order, and petitioner's consolidated motion to declare respondents in contempt and to nullify the stockholders' meeting;

(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of respondent corporation but stating that he should not sit as such if elected, until such time that the Commission has decided the validity of the bylaws in dispute, and denying deferment of Item 6 of the Agenda for the annual stockholders' meeting; and

(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for reconsideration of the order of respondent Commission denying petitioner's motion for summary judgment;

It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with indecent haste and without circumspection in issuing the aforesaid orders to petitioner's irreparable damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's right to due process when it decided en banc an issue not raised before it and still pending before one of its Commissioners, and without hearing petitioner thereon despite petitioner's request to have the same calendared for hearing , and (3) that the respondents acted oppressively against the petitioner in violation of his rights as a stockholder, warranting immediate judicial intervention.

It is prayed in the supplemental petition that the SEC orders complained of be declared null and void and that respondent Commission be ordered to allow petitioner to undertake discovery proceedings relative to San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits.

On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment, alleging that the petition is without merit for the following reasons:

(1) that the petitioner the interest he represents are engaged in business competitive and antagonistic to that of respondent San Miguel Corporation, it appearing that the owns and controls a greater portion of his SMC stock thru the Universal Robina Corporation and the Consolidated Foods Corporation, which corporations are engaged in business directly and substantially competing with the allied businesses of respondent SMC and of corporations in which SMC has substantial investments. Further, when CFC and Robina had accumulated investments. Further, when CFC and Robina had accumulated shares in SMC, the Board of Directors of SMC realized the clear and present danger that competitors or antagonistic parties may be elected directors and thereby have easy and direct access to SMC's business and trade secrets and plans;

(2) that the amended by law were adopted to preserve and protect respondent SMC from the clear and present danger that business competitors, if allowed to become directors, will illegally and unfairly utilize their direct access to its business secrets and plans for their own private gain to the irreparable prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that membership of a competitor in the Board of Directors is a blatant disregard of no less that the Constitution and pertinent laws against combinations in restraint of trade;

(3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve and protect itself by excluding competitors and antogonistic parties, under the law of self-preservation, and it should be allowed a wide latitude in the selection of means to preserve itself;

(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente lite the amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on May 3, 1977. The instant petition being dated May 4, 1977, it is apparent that respondent Commission was not given a chance to act "with deliberate dispatch", and

(5) that, even assuming that the petition was meritorious was, it has become moot and academic because respondent Commission has acted on the pending incidents, complained of. It was, therefore, prayed that the petition be dismissed.

On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition has become

moot and academic for the reason, among others that the acts of private respondent sought to be enjoined have reference to the annual meeting of the stockholders of respondent San Miguel Corporation, which was held on may 10, 1977; that in said meeting, in compliance with the order of respondent Commission, petitioner was allowed to run and be voted for as director; and that in the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed. Further it was averred that the questions and issues raised by petitioner are pending in the Securities and Exchange Commission which has acquired jurisdiction over the case, and no hearing on the merits has been had; hence the elevation of these issues before the Supreme Court is premature.

Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable questions for the determination of this Court because (1) the respondent Commission acted without circumspection, unfairly and oppresively against petitioner, warranting the intervention of this Court; (2) a derivative suit, such as the instant case, is not rendered academic by the act of a majority of stockholders, such that the discussion, ratification and confirmation of Item 6 of the Agenda of the annual stockholders' meeting of May 10, 1977 did not render the case moot; that the amendment to the bylaws which specifically bars petitioner from being a director is void since it deprives him of his vested rights.

Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after receiving a copy of the restraining order issued by this Court and noting that the restraining order did not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No. 1375.

In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation, took into consideration an urgent manifestation filed with the Commission by petitioner on May 3, 1977 which prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The reason given for denial of deferment was that "such action is within the authority of the corporation as well as falling within the sphere of stockholders' right to know, deliberate upon and/or to express their wishes regarding disposition of corporate funds considering that their investments are the ones directly affected." It was alleged that the main petition has, therefore, become moot and academic.

On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due process, and "that all possible questions on the facts now pending before the respondent Commission are now before this Honorable Court which has the authority and the competence to act on them as it may see fit." (Reno, pp. 927-928.)

Petitioner, in his memorandum, submits the following issues for resolution;

(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a competitor from nomination or election to the Board of Directors are valid and reasonable;

(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation; and

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

I

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

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

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

Honorable Court for final resolution." Respondent Eduardo R. Visaya submits a similar appeal.

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

It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire controversy in a single proceeding, leaving nor root or branch to bear the seeds of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits instead of remanding it to the trial court for further proceedings since the ends of justice would not be subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et al., 6 this Court, finding that the main issue is one of law, resolved to decide the case on the merits "because public interest demands an early disposition of the case", and in Republic v. Central Surety and Insurance Company, 7 this Court denied remand of the third-party complaint to the trial court for further proceedings, citing precedent where this Court, in similar situations resolved to decide the cases on the merits, instead of remanding them to the trial court where (a) the ends of justice would not be subserved by the remand of the case; or (b) where public interest demand an early disposition of the case; or (c) where the trial court had already received all the evidence presented by both parties and the Supreme Court is now in a position, based upon said evidence, to decide the case on its merits. 8 It is settled that the doctrine of primary jurisdiction has no application where only a question of law is involved. 8a Because uniformity may be secured through review by a single Supreme Court, questions of law may appropriately be determined in the first instance by courts. 8b In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in 1948; and that in the stockholders' annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel Corporation were ratified by the stockholders.

II

Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election to the Board of Directors of SMC are valid and reasonable —

The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have exercised their authority. 11

Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to suppress the minority and prevent them from having representation in the Board", at the same time depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as director.

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation content that ex. conclusion of a competitor from the Board is legitimate corporate purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided Loyalty to the corporation; that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of reasonable protective from the unrestrained self-interest of those charged with the promotion of the corporate enterprise; that access to confidential information by a competitor may result either in the promotion of the interest of the competitor at the expense of the San Miguel Corporation, or the promotion of both the interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in a combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free competition to the detriment of the consuming public. It is further argued that there is not vested right of any stockholder under Philippine Law to be voted as director of a corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled by him, control over the following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares; (b) Universal Robina Corporation — 738,647 shares; (c) CFC Corporation — 658,313 shares, or a total of 1,403,285 shares. Since the outstanding capital stock of San Miguel Corporation, as of the present date, is represented by 33,139,749 shares with a par value of P10.00, the total shares owned or controlled by petitioner represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It is also contended that petitioner is the president and substantial stockholder of Universal Robina Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and members of his family. It is also claimed that both the Universal Robina Corporation and the CFC Corporation are engaged in businesses directly and substantially competing with the alleged businesses of San Miguel Corporation, and of corporations in which SMC has substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL CORPORATION

According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:

Product Line Estimated Market Share Total1977 SMC Robina-CFC

Table Eggs 0.6% 10.0% 10.6%Layer Pullets 33.0% 24.0% 57.0%Dressed Chicken 35.0% 14.0% 49.0%Poultry & Hog Feeds 40.0% 12.0% 52.0%Ice Cream 70.0% 13.0% 83.0%Instant Coffee 45.0% 40.0% 85.0% Woven Fabrics 17.5% 9.1% 26.6%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly, the combined market shares of SMC and CFC-Robina in layer pullets dressed chicken, poultry and hog feeds ice cream, instant coffee and woven fabrics would result in a position of such dominance as to affect the prevailing market factors.

It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines which, for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina was directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line represented sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills recently acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million. The areas of competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of more than P849 million.

According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because they "realized the grave dangers to the corporation in the event a competitor gets a board seat in SMC." On September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it by the stockholders," approved the amendment to ' he by-laws in question. At the meeting of February 10, 1977, these amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005 shares, opposed the confirmation and ratification. At the Annual Stockholders' Meeting of May 10, 1977,

11,349 shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected petitioner's candidacy, while 946 stockholders, representing 1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders' Meeting, 12,480 shareholders, owning more than 30 million shares, or more than 90% of the total outstanding shares. voted against petitioner.

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED BY LAW

Private respondents contend that the disputed amended by laws were adopted by the Board of Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the clear and present danger that the election of a business competitor to the Board may cause upon the corporation and the other stockholders inseparable prejudice. Submitted for resolution, therefore, is the issue — whether or not respondent San Miguel Corporation could, as a measure of self- protection, disqualify a competitor from nomination and election to its Board of Directors.

It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs. 12 At common law, the rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its necessary and inseparable legal incidents. And it is settled throughout the United States that in the absence of positive legislative provisions limiting it, every private corporation has this inherent power as one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its charter or in general law, such power of self-government being essential to enable the corporation to accomplish the purposes of its creation. 13

In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and employees ... " This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director ... " In Government v. El Hogar, 14 the Court sustained the validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors must be holders of shares of the paid up value of P5,000.00, which shall be held as security for their action, on the ground that section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualifications of directors and is "highly prudent and in conformity with good practice. "

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law." 15 To this extent, therefore, the stockholder may be considered to have "parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It cannot therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed ... by any act of the former which is authorized by a majority ... ." 16

Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation If the amendment changes, diminishes or restricts the rights of the existing shareholders then the disenting minority has only one right, viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification. 17

It being settled that the corporation has the power to provide for the qualifications of its directors, the next question that must be considered is whether the disqualification of a competitor from being elected to the Board of Directors is a reasonable exercise of corporate authority.

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS SHAREHOLDERS

Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is one of trust." 18 "The ordinary trust relationship of directors of a corporation and stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate

interests and are ultimately the only beneficiaries thereof * * *.

Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation of the directors of corporations, thus:

A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such fiduciary position cannot serve himself first and his cestuis second. ... He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters ... He cannot utilize his inside information and strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot violate rules of fair play by doing indirectly though the corporation what he could not do so directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference or advantage of the fiduciary to the exclusion or detriment of the cestuis.

And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:

... A person cannot serve two hostile and adverse master, without detriment to one of them. A judge cannot be impartial if personally interested in the cause. No more can a director. Human nature is too weak -for this. Take whatever statute provision you please giving power to stockholders to choose directors, and in none will you find any express prohibition against a discretion to select directors having the company's interest at heart, and it would simply be going far to deny by mere implication the existence of such a salutary power

... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from being a director, the same reasoning would apply to disqualify the wife and immediate member of the family of such stockholder, on account of the supposed interest of the wife in her husband's affairs, and his suppose influence over her. It is perhaps true that such stockholders ought not to be condemned as selfish and dangerous to the best interest of the corporation until tried and tested. So it is also true that we cannot condemn as selfish and dangerous and unreasonable the action of the board in passing the by-law. The strife over the matter of control in this corporation as in many others is perhaps carried on not altogether in the spirit of brotherly love and affection. The only test that we can apply is as to whether or not the action of the Board is authorized and sanctioned by law. ... . 22

These principles have been applied by this Court in previous cases. 23

AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID

It is a settled state law in the United States, according to Fletcher, that corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid." 24 This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment "advances the benefit of the corporation and is good." An exception exists in New Jersey, where the Supreme Court held that the Corporation Law in New Jersey prescribed the only qualification, and therefore the corporation was not empowered to add additional qualifications. 25 This is the exact opposite of the situation in the Philippines because as stated heretofore, section 21 of the Corporation Law expressly provides that a corporation may make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under "the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director. 26

It is also well established that corporate officers "are not permitted to use their position of trust and confidence to further their private interests." 27 In a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of its products, the court held that equity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal. 28

The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. 30

It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms.

It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns.

Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and reasonable an amendment to the by-laws of a bank, requiring that its directors should not be directors, officers, employees, agents, nominees or attorneys of any other banking corporation, affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court, thus:

... A bank director has access to a great deal of information concerning the business and plans of a bank which would likely be injurious to the bank if known to another bank, and it was reasonable and prudent to enlarge this minimum disqualification to include any director, officer, employee, agent, nominee, or attorney of any other bank in California. The Ashkins case, supra, specifically recognizes protection against rivals and others who might acquire information which might be used against the interests of the corporation as a legitimate object of by-law protection. With respect to attorneys or persons associated with a firm which is attorney for another bank, in addition to the direct conflict or potential conflict of interest, there is also the danger of inadvertent leakage of confidential information through casual office discussions or accessibility of files. Defendant's directors determined that its welfare was best protected if this opportunity for conflicting loyalties and potential misuse and leakage of confidential information was foreclosed.

In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:

(1) A director shall not be directly or indirectly interested as a stockholder in any other firm, company, or association which competes with the subject corporation.

(2) A director shall not be the immediate member of the family of any stockholder in any other firm, company, or association which competes with the subject corporation,

(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other firm, company, or association which compete with the subject corporation.

(4) A director shall be of good moral character as an essential qualification to holding office.

(5) No person who is an attorney against the corporation in a law suit is eligible for service on the board. (At p. 7.)

These are not based on theorical abstractions but on human experience — that a person cannot serve two hostile masters without detriment to one of them.

The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his position as director of San Miguel Corporation, he would absent himself from meetings at which confidential matters would be discussed, would not detract from the validity and reasonableness of the by-laws here involved. Apart from the impractical results that would ensue from such arrangement, it would be inconsistent with petitioner's primary motive in running for board membership — which is to protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct would be against all accepted principles underlying a director's duty of fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate management. As explained by Oleck: 31 "The law win not tolerate the passive attitude of directors ... without active and conscientious participation in the managerial functions of the company. As directors, it is their duty to control and supervise the day to day business activities of the company or to promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it that these policies are carried out. It is only then that directors may be said to have fulfilled their duty of fealty to the corporation."

Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival. These dangers are enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the competing corporations. It would seem manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director.

Indeed, access by a competitor to confidential information regarding marketing strategies and pricing policies of San Miguel Corporation would subject the

latter to a competitive disadvantage and unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for the development of existing or new markets of existing or new products could enable said competitor to utilize such knowledge to his advantage. 32

There is another important consideration in determining whether or not the amended by-laws are reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate or prohibit private monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be snowed."

Article 186 of the Revised Penal Code also provides:

Art. 186. Monopolies and combinations in restraint of trade. —The penalty of prision correccional in its minimum period or a fine ranging from two hundred to six thousand pesos, or both, shall be imposed upon:

1. Any person who shall enter into any contract or agreement or shall take part in any conspiracy or combination in the form of a trust or otherwise, in restraint of trade or commerce or to prevent by artificial means free competition in the market.

2. Any person who shag monopolize any merchandise or object of trade or commerce, or shall combine with any other person or persons to monopolize said merchandise or object in order to alter the price thereof by spreading false rumors or making use of any other artifice to restrain free competition in the market.

3. Any person who, being a manufacturer, producer, or processor of any merchandise or object of commerce or an importer of any merchandise or object of commerce from any foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire or agree in any manner with any person likewise engaged in the manufacture, production, processing, assembling or importation of such merchandise or object of commerce or with any other persons not so similarly engaged for the purpose of making transactions prejudicial to lawful commerce, or of increasing the market price in any part of the Philippines, or any such merchandise or object of commerce manufactured, produced, processed, assembled in or imported into the Philippines, or of any article in the manufacture of which such manufactured, produced, processed, or imported merchandise or object of commerce is used.

There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint of trade. 33

Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed at raising levels of competition by improving the

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

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

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

The argument for prohibiting competing corporations from sharing even one director is that the interlock

permits the coordination of policies between nominally independent firms to an extent that competition between them may be completely eliminated. Indeed, if a director, for example, is to be faithful to both corporations, some accommodation must result. Suppose X is a director of both Corporation A and Corporation B. X could hardly vote for a policy by A that would injure B without violating his duty of loyalty to B at the same time he could hardly abstain from voting without depriving A of his best judgment. If the firms really do compete — in the sense of vying for economic advantage at the expense of the other — there can hardly be any reason for an interlock between competitors other than the suppression of competition. 43 (Emphasis supplied.)

According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the Clayton Act, it was established that: "By means of the interlocking directorates one man or group of men have been able to dominate and control a great number of corporations ... to the detriment of the small ones dependent upon them and to the injury of the public. 44

Shared information on cost accounting may lead to price fixing. Certainly, shared information on production, orders, shipments, capacity and inventories may lead to control of production for the purpose of controlling prices.

Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest priced goods to the consuming public would be frustrated, The competitor could so manipulate the prices of his products or vary its marketing strategies by region or by brand in order to get the most out of the consumers. Where the two competing firms control a substantial segment of the market this could lead to collusion and combination in restraint of trade. Reason and experience point to the inevitable conclusion that the inherent tendency of interlocking directorates between companies that are related to each other as competitors is to blunt the edge of rivalry between the corporations, to seek out ways of compromising opposing interests, and thus eliminate competition. As respondent SMC aptly observes, knowledge by CFC-Robina of SMC's costs in various industries and regions in the country win enable the former to practice price discrimination. CFC-Robina can segment the entire consuming population by geographical areas or income groups and change varying prices in order to maximize profits from every market segment. CFC-Robina could determine the most profitable volume at which it could produce for every product line in which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect destroy free competition and deprive the consuming public of opportunity to buy goods of the highest possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the election

of petitioner to the Board of SMC may constitute a violation of the prohibition contained in section 13(5) of the Corporation Law. Said section provides in part that "any stockholder of more than one corporation organized for the purpose of engaging in agriculture may hold his stock in such corporations solely for investment and not for the purpose of bringing about or attempting to bring about a combination to exercise control of incorporations ... ."

Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a discriminatory manner. However, the by law, by its terms, applies to all stockholders. The equal protection clause of the Constitution requires only that the by-law operate equally upon all persons of a class. Besides, before petitioner can be declared ineligible to run for director, there must be hearing and evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles of public policy and management, therefore, support the view that a by-law which disqualifies a competition from election to the Board of Directors of another corporation is valid and reasonable.

In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the corporation in adopting measures to protect legitimate corporation interests. Thus, "where the reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have expressed their authority. 45

Although it is asserted that the amended by-laws confer on the present Board powers to perpetua themselves in power such fears appear to be misplaced. This power, but is very nature, is subject to certain well established limitations. One of these is inherent in the very convert and definition of the terms "competition" and "competitor". "Competition" implies a struggle for advantage between two or more forces, each possessing, in substantially similar if not Identical degree, certain characteristics essential to the business sought. It means an independent endeavor of two or more persons to obtain the business patronage of a third by offering more advantageous terms as an inducement to secure trade. 46 The test must be whether the business does in fact compete, not whether it is capable of an indirect and highly unsubstantial duplication of an isolated or non-characteristics activity. 47 It is, therefore, obvious that not every person or entity engaged in business of the same kind is a competitor. Such factors as quantum and place of business, Identity of products and area of competition should be taken into consideration. It is, therefore, necessary to show that petitioner's business covers a substantial portion of the

same markets for similar products to the extent of not less than 10% of respondent corporation's market for competing products. While We here sustain the validity of the amended by-laws, it does not follow as a necessary consequence that petitioner is ipso facto disqualified. Consonant with the requirement of due process, there must be due hearing at which the petitioner must be given the fullest opportunity to show that he is not covered by the disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of directors to act with fairness to the stockholders. 48 Pursuant to this obligation and to remove any suspicion that this power may be utilized by the incumbent members of the Board to perpetuate themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by the Securities behind Exchange Commission en banc and its decision shall be final unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is against public policy, or is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste, dissipation or misapplication of the corporation assets, a court of equity has the power to grant appropriate relief. 50

III

Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel Corporation —

Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was denied inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over a specific period, petitioner had been furnished numerous documents and information," to wit: (1) a complete list of stockholders and their stockholdings; (2) a complete list of proxies given by the stockholders for use at the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million investment in associated companies and other companies as of December 31, 1975; (5) a listing of the salaries, allowances, bonuses and other compensation or remunerations received by the directors and corporate officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings of the Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which deletions were not objected to by petitioner.

Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976; (1) that SMC's foreign investments are handled by San Miguel International, Inc., incorporated in Bermuda and wholly owned by SMC; this was SMC's first venture abroad, having started in 1948 with an initial outlay of ?

500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank under the personal guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of December 31, 1975, the estimated value of SMI would amount to almost P400 million (3) that the total cash dividends received by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4) that from 1972-1975, SMI did not declare cash or stock dividends, all earnings having been used in line with a program for the setting up of breweries by SMI

These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of the afore-mentioned documents. 51

Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours."

The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a ownership. 52 This right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. 53 In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the right to examine the books of the corporation must be exercised in good faith, for specific and honest purpose, and not to gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for speculative or vexatious purposes. The weight of judicial opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder's good faith and his purpose and motives in seeking inspection. 56 Thus, it was held that "the right given by statute is not absolute and may be refused when the information is not sought in good faith or is used to the detriment of the corporation." 57 But the "impropriety of purpose such as will defeat enforcement must be set up the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from the stockholder the burden of showing propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive. 58 It appears to be the general rule that stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds, and to inspection to obtain such information, especially where it appears

that the company is being mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion of others." 59

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

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

On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation is a separate and distinct corporation domiciled and with its books and records in another jurisdiction, and is not legally subject to the control of the parent company, although it owned a vast majority of the stock of the subsidiary. 63 Likewise, inspection of the books of an allied corporation by stockholder of the parent company which owns all the stock of the subsidiary has been refused on the ground that the stockholder was not within the class of "persons having an interest." 64

In the Nash case, 65 The Supreme Court of New York held that the contractual right of former stockholders to inspect books and records of the corporation included the right to inspect corporation's subsidiaries' books and records which were in corporation's possession and control in its office in New York."

In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a controlled subsidiary corporation which used the same offices and had Identical officers and directors.

In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC, petitioner contended that respondent corporation "had been attempting to suppress information for the stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies of some documents which for some reason or another, respondent

corporation is very reluctant in revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the corporation." 67 There is no question that stockholders are entitled to inspect the books and records of a corporation in order to investigate the conduct of the management, determine the financial condition of the corporation, and generally take an account of the stewardship of the officers and directors. 68

In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly subsidiary which are in respondent corporation's possession and control.

IV

Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent corporation to ratify the investment of corporate funds in a foreign corporation

Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the Corporation Law, and alleges that respondent SEC should have investigated the charge, being a statutory offense, instead of allowing ratification of the investment by the stockholders.

Respondent SEC's position is that submission of the investment to the stockholders for ratification is a sound corporate practice and should not be thwarted but encouraged.

Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting power is necessary. 69

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It appears that the original investment was made in 1947-1948, when SMC, then San Miguel

Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization.

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc., supra, appears relevant. In said case, one of the issues was the legality of an investment made by Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar bags. The lower court said that "there is more logic in the stand that if the investment is made in a corporation whose business is important to the investing corporation and would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the power of the Board of Directors." This Court affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:

"j. Power to acquire or dispose of shares or securities. — A private corporation, in order to accomplish is purpose as stated in its articles of incorporation, and subject to the limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidence of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary. In any case, the purchase of such shares or securities must be subject to the limitations established by the Corporations law; namely, (a) that no agricultural or mining corporation shall be restricted to own not more than 15% of the voting stock of nay agricultural or mining corporation; and (c) that such holdings shall be solely for investment and not for the purpose of bringing about a monopoly in any line of commerce of combination in restraint of trade." The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis supplied.)

40. Power to invest corporate funds. — A private corporation has the power to invest its corporate funds "in any other corporation or business, or for any purpose other than the main purpose for which it was organized, provide that 'its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a propose at a stockholders' meeting called for that purpose,' and provided further, that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation. When the investment is necessary to accomplish its purpose or purposes as stated in its articles of incorporation the

approval of the stockholders is not necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).

Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment, there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents. 70 This is true because the questioned investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or contract which is within the corporate powers, but which is defective from a supported failure to observe in its execution the. requirement of the law that the investment must be authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it may have had at the outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders.

Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted the assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977 cannot be construed as an admission that respondent corporation had committed an ultra vires act, considering the common practice of corporations of periodically submitting for the gratification of their stockholders the acts of their directors, officers and managers.

WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine the books and records of San Miguel International, Inc., as specified by him.

On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to sustain the validity per se of the amended by-laws in question and to dismiss the petition without prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as director of respondent San Miguel Corporation being decided, after a new and proper hearing by the Board of Directors of said corporation, whose decision shall be appealable to the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this Court. Unless disqualified in the manner herein provided, the prohibition in the afore-mentioned amended by-laws shall not apply to petitioner.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the validity of the foreign investment of respondent corporation as moot.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise concurs in the result.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a separate opinion, wherein they voted against the validity of the questioned amended bylaws and that this question should properly be resolved first by the SEC as the agency of primary jurisdiction. They concur in the result that petitioner may be allowed to run for and sit as director of respondent SMC in the scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing by the respondent's Board of Directors and petitioner's disqualification shall have been sustained by respondent SEC en banc and ultimately by final judgment of this Court.

In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the petition by allowing petitioner to examine the books and records of San Miguel International, Inc. as specified in the petition. The petition, insofar as it assails the validity of the amended by- laws and the ratification of the foreign investment of respondent corporation, for lack of necessary votes, is hereby DISMISSED. No costs.

3. G.R. No. 117847 October 7, 1998

PEOPLE'S AIRCARGO AND WAREHOUSING CO. INC., petitioner, vs.COURT OF APPEALS and STEFANI SAÑO, respondents.

PANGANIBAN, J.:

Contracts entered into by a corporate president without express prior board approval bind the corporation, when such officer's apparent authority is estabished and when these contracts are ratified by the corporation.

The Case

This principle is stressed by the Court in rejecting the Petition for Review of the February 28, 1994 Decision and the October 28, 1994 Resolution of the Court of Appeals in CA-GR CV No. 30670.

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

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

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

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

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

The Facts

Petitioner is a domestic corporation, which was organized in the middle of 1986 to operate a customs

bonded warehouse at the old Manila International Airport in Pasay City. 6

To obtain a license for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the corporation president, solicited a proposal from private respondent for the preparation of a feasibility study. 7 Private respondent submitted a letter-proposal dated October 17, 1986 ("First Contract" hereafter) to Punsalan, which is reproduced hereunder: 8

Dear Mr. Punsalan:

With reference to your request for professional engineering consultancy services for your proposed MIA Warehousing Project may we offer the following outputs and the corresponding rate and terms of agreement:

=======================================

Project Feasibility Study consisting of

Market Study

Technical Study

Financial Feasibility Study

Preparation of pertinent documentation requirements for the application

_____________________________________________

The above services will be provided for a fee of [p]esos 350,000.00 payable according to the following schedule:

=====================================================

Fifty percent (50%) upon confirmation of the agreement

Twenty-five percent (25%) 15 days after the confirmation of the agreement

Twenty-five percent (25%) upon submission of the specified outputs

The outputs will be completed and submitted within 30 days upon confirmation of the agreement and receipt by us of the first fifty percent payment.

---------------------------------------------------------------------------------

Thank you.

Yours truly, CONFORME:

(S)STEFANI C. SAÑO (S)ANTONIO C. PUNSALAN, JR.

(T)STEFANI C. SAÑO (T)ANTONIO C. PUNSALAN, JR.

Consultant for President, PAIRCARGO

Industrial Engineering

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

On October 17, 1986, pertitioner, through Punsalan, sent private respondent a letter, confirming their agreement as follows:

Dear Mr. Saño:

With regard to the services offered by your company in your letter dated 13 October 1986, for the preparation of the necessary study and documentations to support our Application for Authority to Operate a public Customs Bonded Warehouse located at the old MIA Compound in Pasay City, please be informed that our company is willing to hire your services and will pay the amount of THREE HUNDRED FIFTY THOUSAND PESOS (P350,000.00) as follows:

P100,000.00 — uppon signing of the agreement;

150,000.00 — on or before October 31, 1986, with the favorable Recommendation of the CBW on our application.

100,000.00 — upon receipt of the study in final form.

Very truly yours,

(S)ANTONIO C. PUNSALAN

(T)ANTONIO C. PUNSALAN

President

CONFORME & RECEIVED from PAIRCARGO, the

amount of ONE HUNDRED THOUSAND PESOS

(P100,000.00), this 17th day of October, 1986

as 1st Installment payment of the service agreement

dated October 13, 1986.

(S)STEFANI C. SAÑO

(T)STEFANI C. SAÑO

Accordingly, private respondent prepared a feasibility study for petitioner which eventually paid him the balance of the contract price, although not according to the schedule agreed upon. 11

On December 4, 1986, upon Punsalan's request, private respondent sent petitioner another letter-proposal ("Second Contract" hereafter), which reads:

People's Air Cargo & Warehousing Co., Inc.

Old MIA Compound, Metro Manila

Attention: Mr. ANTONIO PUN[S]ALAN, JR.

President

Dear Mr. Pun[s]alan:

This is to formalize our proposal for consultancy services to your company the scope of which is defined in the attached service description.

The total service you have decided to avail . . . would be available upon signing of the conforme below and would come [in] the amount of FOUR HUNDRED THOUSAND PESOS (P400,000.00) payable at the schedule defined as follows (with the balance covered by post-dated cheques):

Downpayment upon signing conforme P80,000.00

15 January 1987 53,333.00

30 January 1987 53,333.00

15 February 1987 53,333.00

28 February 1987 53,333.00

15 March1987 53,333.00

30 March 1987 53,333.00

With is package, you are assured of the highest service quality as our performance record shows we always deliver no less.

Thank you very much.

Yours truly,

(S)STEFANI C. SAÑO

(T)STEFANI C. SAÑO

Industrial Engineering Consultant

CONFORME:

(S)ANTONIO C. PUNSALAN JR.

(T)PAIRCARGO CO. INC.

During the trial, the lower court observed that the Second Contract bore, at the lower right portion of the letter, the following notations in pencil:

1. Operations Manual

2. Seminar/workshop for your employees

P400,000 — package deal

50% upon completion of seminar/workshop

50% upon approval by the Commissioner

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

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

1st letter — 4 Dec. 1986

2nd letter — 15 June 1987 with

"Hinanakit".

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

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

On February 9, 1988, private respondent filed a collection suit against petitioner. He allege that he had prepared an operations manual for petitioner, conducted a seminar-workshop for its employees and delivered to it a computer program; but that, despite demand, petitioner refused to pay him for his services.

Petitioner, in its answer, denied that private respondent had prepared an operations manual and a computer program or conducted a seminar-workshop for its employees. It further alleged that the letter-agreement was signed by Punsalan without authority, "in collusion

with [private respondent] in order to unlawfully get some money from [petitioner]," and despite his knowledge that a group of employees of the company had been commissioned by the board of directors to prepare an operations manual. 17

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

The Ruling of the Court of Appeals

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

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

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

The Issues

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

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

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

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

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

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

The Court's Ruling

The petition is not meritorious.

First Issue:

Apparent Authority of a Corporate President

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

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

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

Sec. 23. The Board of Directors or Trustees. — Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of

such corporations controlled and held by the board of directors or trustees . . . .

Under this provision, the power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporaration, bylaws, or relevant provisions of law. 24 Howeever, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business, viz.: 25

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

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

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

Petitioner's argument is not persuasive. Apparent authority is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary

powers. 27 It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. 28 It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporale officer with the power to bind the corporation.

In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered into the First Contract without first securing board approval. Despite such lack of board approval, petitioner did not object to or repudiate said contract, thus "clothing" its president with the power to bind the corporation. The grant of apparent authority to Punsalan is evident in the testimony of Yong — senior vice president, treasurer and major stockholder of petitioner. Testifying on the First Contract, he said: 29

A: Mr. [Punsalan] told me that he prefer[s] Mr. Saño because Mr. Saño is very influential with the Collector of Customs[s]. Because the Collector of Custom[s] will be the one to approve our project study and I objected to that, sir. And I said it [was an exorbitant] price. And Mr. Punsalan he is the [p]resident, so he [gets] his way.

Q: And so did the company eventually pay this P350,000.00 to Mr. Saño?

A: Yes, sir.

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

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

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

Inasmuch as a corporate president is often given general supervision and control over corporate operations, the strict rule that said officer has no inherent power to act for the corporation is slowly giving way to the realization

that such officer has certain limited powers in the transaction of the usual and ordinary business of the corporation. 31 In the absence of a charter or bylaw provision to the contrary, the president is presumed to have the authority to act within the domain of the general objectives of its business and within the scope of his or her usual duties. 32

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

Second Issue:Alleged Simulation of the First Contract

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

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

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

2) [There was a delay in the filing of the present suit, more than a year after [private respondent] allegedly completed his services or eight months after

the alleged last verbal demand for payment made on Punsalan in June 1987;

3) Does not Punsalan's writing allegedly in June 1987 on the alleged letter-agreement of "your employees[,]" when it should have been "our employees", as he was then still connected with [petitioner], indicate that the letter-agreement was signed by Punsalan when he was no longer connected with [petitioner] or, as claimed by [petitioner], that Punsalan signed it without [petitioner's] authority and must have been done "in collusion with plaintiff in order to unlawfully get some money from [petitioner]?

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

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

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

7) Why was not Punsalan impleaded in the case?

The issue of whether the contract is simulated or real is factual in nature, and the Court eschews factual examinanon in a petition for review under Rule 45 of the Rules of Court. 35 This rule, however, admits of exceptions, one of which is a conflict between the factual findings of the lower and of the appellate courts 36 as in the case at bar.

After judicious deliberation, the Court agrees with the appellate court that the alleged "badges of fraud" mentioned earlier have not affected in any manner the perfection thereof. First, the lack of payment (whether down, partial or full payment), even after completion of private respondent's obligations, imports only a defect in the performance of the contract on the part of petitioner. Second, the delay in the filing of action was not fatal to private respondent's cause. Despite the lapse of one year after private respondent completed his services or eight months after the alleged last demand for payment in June 1987, the action was still filed within the allowable period, considering that an action based on a written contract prescribes only after ten years from the time the right of action accrues. 37 Third, a misspelling in the contract does not establish vitiation of consent, cause or object of the contract. Fourth, a confirmation letter is not an essential element of a contract, neither is it necessary to perfect one. Fifth, private respondent's failure to implead the corporate president does not

establish collusion between them. Petitioner could have easily filed a third-party claim against Punsalan if it believed that it had recourse against the latter. Lastly, the mere fact that the contract price was six times the alleged going rate does not invalidate it. 38 In short, these "badges" do not establish simulation of said contract.

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

Contemporaneous and subsequent acts are also principal factors in the determination of the will of the contracting parties. 42 The circumstances outlined above do not establish any intention to simulate the contract in dispute. On the contrary, the legal presumption is always on the validity of contracts. A corporation, by accepting benefits of a transaction entered into without authority, has ratified the agreement and is, therefore, bound by it. 43

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

SO ORDERED.

Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.

4. OND DIVISION

[G.R. No. 171993 : December 12, 2011]

MARC II MARKETING, INC. AND LUCILA v. JOSON, PETITIONERS, VS. ALFREDO M. JOSON, RESPONDENT.

D E C I S I O N

PEREZ, J.:

In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, herein petitioners Marc II Marketing, Inc. and Lucila V. Joson assailed the Decision [1] dated 20 June 2005 of the Court of Appeals in CA-G.R. SP No. 76624 for reversing and setting aside the Resolution [2] of the National Labor Relations Commission (NLRC) dated 15 October 2002, thereby affirming the Labor Arbiter's Decision [3] dated 1 October 2001 finding herein respondent Alfredo M. Joson's dismissal from employment as illegal. In the questioned Decision, the Court of Appeals upheld the Labor Arbiter's jurisdiction over the case on the basis that respondent was not an officer but a mere employee of petitioner Marc II Marketing, Inc., thus, totally disregarding the latter's allegation of intra-corporate controversy. Nonetheless, the Court of Appeals remanded the case to the NLRC for further proceedings to determine the proper amount of monetary awards that should be given to respondent.cralaw

Assailed as well is the Court of Appeals Resolution [4] dated 7 March 2006 denying their Motion for Reconsideration.

Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation duly organized and existing under and by virtue of the laws of the Philippines. It is primarily engaged in buying, marketing, selling and distributing in retail or wholesale for export or import household appliances and products and other items. [5] It took over the business operations of Marc Marketing, Inc. which was made non-operational following its incorporation and registration with the Securities and Exchange Commission (SEC). Petitioner Lucila V. Joson (Lucila) is the President and majority stockholder of petitioner corporation. She was also the former President and majority stockholder of the defunct Marc Marketing, Inc.

Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General Manager, incorporator, director and stockholder of petitioner corporation.

The controversy of this case arose from the following factual milieu:

Before petitioner corporation was officially incorporated, [6] respondent has already been engaged by petitioner Lucila, in her capacity as President of Marc Marketing,

Inc., to work as the General Manager of petitioner corporation. It was formalized through the execution of a Management Contract [7] dated 16 January 1994 under the letterhead of Marc Marketing, Inc. [8] as petitioner corporation is yet to be incorporated at the time of its execution. It was explicitly provided therein that respondent shall be entitled to 30% of its net income for his work as General Manager. Respondent will also be granted 30% of its net profit to compensate for the possible loss of opportunity to work overseas. [9]

Pending incorporation of petitioner corporation, respondent was designated as the General Manager of Marc Marketing, Inc., which was then in the process of winding up its business. For occupying the said position, respondent was among its corporate officers by the express provision of Section 1, Article IV [10] of its by-laws. [11]

On 15 August 1994, petitioner corporation was officially incorporated and registered with the SEC. Accordingly, Marc Marketing, Inc. was made non-operational. Respondent continued to discharge his duties as General Manager but this time under petitioner corporation.

Pursuant to Section 1, Article IV [12] of petitioner corporation's by-laws, [13] its corporate officers are as follows: Chairman, President, one or more Vice-President(s), Treasurer and Secretary. Its Board of Directors, however, may, from time to time, appoint such other officers as it may determine to be necessary or proper.

Per an undated Secretary's Certificate, [14] petitioner corporation's Board of Directors conducted a meeting on 29 August 1994 where respondent was appointed as one of its corporate officers with the designation or title of General Manager to function as a managing director with other duties and responsibilities that the Board of Directors may provide and authorized. [15]

Nevertheless, on 30 June 1997, petitioner corporation decided to stop and cease its operations, as evidenced by an Affidavit of Non-Operation [16] dated 31 August 1998, due to poor sales collection aggravated by the inefficient management of its affairs. On the same date, it formally informed respondent of the cessation of its business operation. Concomitantly, respondent was apprised of the termination of his services as General Manager since his services as such would no longer be necessary for the winding up of its affairs. [17]

Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money Claim against petitioners before the Labor Arbiter which was docketed as NLRC NCR Case No. 00-03-04102-99.

In his complaint, respondent averred that petitioner Lucila dismissed him from his employment with petitioner corporation due to the feeling of hatred she harbored towards his family. The same was rooted in

the filing by petitioner Lucila's estranged husband, who happened to be respondent's brother, of a Petition for Declaration of Nullity of their Marriage. [18]

For the parties'™ failure to settle the case amicably, the Labor Arbiter required them to submit their respective position papers. Respondent complied but petitioners opted to file a Motion to Dismiss grounded on the Labor Arbiter's lack of jurisdiction as the case involved an intra-corporate controversy, which jurisdiction belongs to the SEC [now with the Regional Trial Court (RTC)]. [19] Petitioners similarly raised therein the ground of prescription of respondent's monetary claim.

On 5 September 2000, the Labor Arbiter issued an Order [20] deferring the resolution of petitioners' Motion to Dismiss until the final determination of the case. The Labor Arbiter also reiterated his directive for petitioners to submit position paper. Still, petitioners did not comply. Insisting that the Labor Arbiter has no jurisdiction over the case, they instead filed an Urgent Motion to Resolve the Motion to Dismiss and the Motion to Suspend Filing of Position Paper.

In an Order [21] dated 15 February 2001, the Labor Arbiter denied both motions and declared final the Order dated 5 September 2000. The Labor Arbiter then gave petitioners a period of five days from receipt thereof within which to file position paper, otherwise, their Motion to Dismiss will be treated as their position paper and the case will be considered submitted for decision.

Petitioners, through counsel, moved for extension of time to submit position paper. Despite the requested extension, petitioners still failed to submit the same. Accordingly, the case was submitted for resolution.

On 1 October 2001, the Labor Arbiter rendered his Decision in favor of respondent. Its decretal portion reads as follows:

WHEREFORE, premises considered, judgment is hereby rendered declaring [respondent's] dismissal from employment illegal. Accordingly, [petitioners] are hereby ordered:To reinstate [respondent] to his former or equivalent position without loss of seniority rights, benefits, and privileges;Jointly and severally liable to pay [respondent's] unpaid wages in the amount of P450,000.00 per month from [26 March 1996] up to time of dismissal in the total amount of P6,300,000.00;Jointly and severally liable to pay [respondent's] full backwages in the amount of P450,000.00 per month from date of dismissal until actual reinstatement which at the time of promulgation amounted to P21,600,000.00;Jointly and severally liable to pay moral damages in the amount of P100,000.00 and attorney's fees in the amount of 5% of the total monetary award. [22] [Emphasis supplied.In the aforesaid Decision, the Labor Arbiter initially resolved petitioners' Motion to Dismiss by finding the

ground of lack of jurisdiction to be without merit. The Labor Arbiter elucidated that petitioners failed to adduce evidence to prove that the present case involved an intra-corporate controversy. Also, respondent's money claim did not arise from his being a director or stockholder of petitioner corporation but from his position as being its General Manager. The Labor Arbiter likewise held that respondent was not a corporate officer under petitioner corporation's by-laws. As such, respondent's complaint clearly arose from an employer-employee relationship, thus, subject to the Labor Arbiter's jurisdiction.

The Labor Arbiter then declared respondent's dismissal from employment as illegal. Respondent, being a regular employee of petitioner corporation, may only be dismissed for a valid cause and upon proper compliance with the requirements of due process. The records, though, revealed that petitioners failed to present any evidence to justify respondent's dismissal.

Aggrieved, petitioners appealed the aforesaid Labor Arbiter's Decision to the NLRC.

In its Resolution dated 15 October 2002, the NLRC ruled in favor of petitioners by giving credence to the Secretary's Certificate, which evidenced petitioner corporation's Board of Directors'™ meeting in which a resolution was approved appointing respondent as its corporate officer with designation as General Manager. Therefrom, the NLRC reversed and set aside the Labor Arbiter's Decision dated 1 October 2001 and dismissed respondent's Complaint for want of jurisdiction. [23]

The NLRC enunciated that the validity of respondent's appointment and termination from the position of General Manager was made subject to the approval of petitioner corporation's Board of Directors. Had respondent been an ordinary employee, such board action would not have been required. As such, it is clear that respondent was a corporate officer whose dismissal involved a purely intra-corporate controversy. The NLRC went further by stating that respondent's claim for 30% of the net profit of the corporation can only emanate from his right of ownership therein as stockholder, director and/or corporate officer. Dividends or profits are paid only to stockholders or directors of a corporation and not to any ordinary employee in the absence of any profit sharing scheme. In addition, the question of remuneration of a person who is not a mere employee but a stockholder and officer of a corporation is not a simple labor problem. Such matter comes within the ambit of corporate affairs and management and is an intra-corporate controversy in contemplation of the Corporation Code. [24]

When respondent's Motion for Reconsideration was denied in another Resolution [25] dated 23 January 2003, he filed a Petition for Certiorari with the Court of Appeals ascribing grave abuse of discretion on the part of the NLRC.

On 20 June 2005, the Court of Appeals rendered its now assailed Decision declaring that the Labor Arbiter has jurisdiction over the present controversy. It upheld the finding of the Labor Arbiter that respondent was a mere employee of petitioner corporation, who has been illegally dismissed from employment without valid cause and without due process. Nevertheless, it ordered the records of the case remanded to the NLRC for the determination of the appropriate amount of monetary awards to be given to respondent. The Court of Appeals, thus, decreed:

WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor Arbiter is DECLARED to have jurisdiction over the controversy. The records are REMANDED to the NLRC for further proceedings to determine the appropriate amount of monetary awards to be adjudged in favor of [respondent]. Costs against the [petitioners] in solidum. [26]

Petitioners moved for its reconsideration but to no avail. [27]

Petitioners are now before this Court with the following assignment of errors:

I.

THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN DECIDING THAT THE NLRC HAS THE JURISDICTION IN RESOLVING A PURELY INTRA-CORPORATE MATTER WHICH IS COGNIZABLE BY THE SECURITIES AND EXCHANGE COMMISSION/REGIONAL TRIAL COURT.

II.

ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS JURISDICTION OVER THE CASE, STILL THE COURT OF APPEALS SERIOUSLY ERRED IN NOT RULING THAT THERE IS NO EMPLOYER-EMPLOYEE RELATIONSHIP BETWEEN [RESPONDENT] ALFREDO M. JOSON AND MARC II MARKETING, INC. [PETITIONER CORPORATION].

III.

ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS JURISDICTION OVER THE CASE, THE COURT OF APPEALS ERRED IN NOT RULING THAT THE LABOR ARBITER COMMITTED GRAVE ABUSE OF DISCRETION IN AWARDING MULTI-MILLION PESOS IN COMPENSATION AND BACKWAGES BASED ON THE PURPORTED GROSS INCOME OF [PETITIONER CORPORATION].

IV.

THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN NOT MAKING ANY FINDINGS AND RULING THAT [PETITIONER LUCILA] SHOULD NOT BE HELD

SOLIDARILY LIABLE IN THE ABSENCE OF EVIDENCE OF MALICE AND BAD FAITH ON HER PART. [28]

Petitioners fault the Court of Appeals for having sustained the Labor Arbiter's finding that respondent was not a corporate officer under petitioner corporation's by-laws. They insist that there is no need to amend the corporate by-laws to specify who its corporate officers are. The resolution issued by petitioner corporation's Board of Directors appointing respondent as General Manager, coupled with his assumption of the said position, positively made him its corporate officer. More so, respondent's position, being a creation of petitioner corporation's Board of Directors pursuant to its by-laws, is a corporate office sanctioned by the Corporation Code and the doctrines previously laid down by this Court. Thus, respondent's removal as petitioner corporation's General Manager involved a purely intra-corporate controversy over which the RTC has jurisdiction.

Petitioners further contend that respondent's claim for 30% of the net profit of petitioner corporation was anchored on the purported Management Contract dated 16 January 1994. It should be noted, however, that said Management Contract was executed at the time petitioner corporation was still nonexistent and had no juridical personality yet. Such being the case, respondent cannot invoke any legal right therefrom as it has no legal and binding effect on petitioner corporation. Moreover, it is clear from the Articles of Incorporation of petitioner corporation that respondent was its director and stockholder. Indubitably, respondent's claim for his share in the profit of petitioner corporation was based on his capacity as such and not by virtue of any employer-employee relationship.

Petitioners further avow that even if the present case does not pose an intra-corporate controversy, still, the Labor Arbiter's multi-million peso awards in favor of respondent were erroneous. The same was merely based on the latter's self-serving computations without any supporting documents.

Finally, petitioners maintain that petitioner Lucila cannot be held solidarily liable with petitioner corporation. There was neither allegation nor iota of evidence presented to show that she acted with malice and bad faith in her dealings with respondent. Moreover, the Labor Arbiter, in his Decision, simply concluded that petitioner Lucila was jointly and severally liable with petitioner corporation without making any findings thereon. It was, therefore, an error for the Court of Appeals to hold petitioner Lucila solidarily liable with petitioner corporation.

From the foregoing arguments, the initial question is which between the Labor Arbiter or the RTC, has jurisdiction over respondent's dismissal as General Manager of petitioner corporation. Its resolution necessarily entails the determination of whether

respondent as General Manager of petitioner corporation is a corporate officer or a mere employee of the latter.

While Article 217(a)2 [29] of the Labor Code, as amended, provides that it is the Labor Arbiter who has the original and exclusive jurisdiction over cases involving termination or dismissal of workers when the person dismissed or terminated is a corporate officer, the case automatically falls within the province of the RTC. The dismissal of a corporate officer is always regarded as a corporate act and/or an intra-corporate controversy. [30]

Under Section 5 [31] of Presidential Decree No. 902-A, intra-corporate controversies are those controversies arising out of intra-corporate or partnership relations, between and among stockholders, members or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity. It also includes controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations. [32]

Accordingly, in determining whether the SEC (now the RTC) has jurisdiction over the controversy, the status or relationship of the parties and the nature of the question that is the subject of their controversy must be taken into consideration. [33]

In Easycall Communications Phils., Inc. v. King, this Court held that in the context of Presidential Decree No. 902-A, corporate officers are those officers of a corporation who are given that character either by the Corporation Code or by the corporation's by-laws. Section 25 [34] of the Corporation Code specifically enumerated who are these corporate officers, to wit: (1) president; (2) secretary; (3) treasurer; and (4) such other officers as may be provided for in the by-laws. [35]

The aforesaid Section 25 of the Corporation Code, particularly the phrase 'œsuch other officers as may be provided for in the by-laws,' has been clarified and� elaborated in this Court'™s recent pronouncement in Matling Industrial and Commercial Corporation v. Coros, where it held, thus:

Conformably with Section 25, a position must be expressly mentioned in the [b]y-[l]aws in order to be considered as a corporate office. Thus, the creation of an office pursuant to or under a [b]y-[l]aw enabling provision is not enough to make a position a corporate office. [In] Guerrea v. Lezama [citation omitted] the first ruling on the matter, held that the only officers of a corporation were those given that character either by the Corporation Code or by the [b]y-[l]aws; the rest of the corporate officers could be considered only as employees or subordinate officials. Thus, it was held in

Easycall Communications Phils., Inc. v. King [citation omitted]:

An "office" is created by the charter of the corporation and the officer is elected by the directors or stockholders. On the other hand, an employee occupies no office and generally is employed not by the action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee.

x x x x

This interpretation is the correct application of Section 25 of the Corporation Code, which plainly states that the corporate officers are the President, Secretary, Treasurer and such other officers as may be provided for in the [b]y-[l]aws. Accordingly, the corporate officers in the context of PD No. 902-A are exclusively those who are given that character either by the Corporation Code or by the corporation's [b]y[l]aws.

A different interpretation can easily leave the way open for the Board of Directors to circumvent the constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the [b]y-[l]aws of an enabling clause on the creation of just any corporate officer position.

It is relevant to state in this connection that the SEC, the primary agency administering the Corporation Code, adopted a similar interpretation of Section 25 of the Corporation Code in its Opinion dated November 25, 1993 [citation omitted], to wit:

Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the corporate officers enumerated in the by-laws are the exclusive Officers of the corporation and the Board has no power to create other Offices without amending first the corporate [b]y-laws. However, the Board may create appointive positions other than the positions of corporate Officers, but the persons occupying such positions are not considered as corporate officers within the meaning of Section 25 of the Corporation Code and are not empowered to exercise the functions of the corporate Officers, except those functions lawfully delegated to them. Their functions and duties are to be determined by the Board of Directors/Trustees. [36] [Emphasis supplied.]

A careful perusal of petitioner corporation's by-laws, particularly paragraph 1, Section 1, Article IV, [37] would explicitly reveal that its corporate officers are composed only of: (1) Chairman; (2) President; (3) one or more Vice-President; (4) Treasurer; and (5) Secretary. [38] The position of General Manager was not among those enumerated.

Paragraph 2, Section 1, Article IV of petitioner corporation's by-laws, empowered its Board of Directors to appoint such other officers as it may determine

necessary or proper. [39] It is by virtue of this enabling provision that petitioner corporation's Board of Directors allegedly approved a resolution to make the position of General Manager a corporate office, and, thereafter, appointed respondent thereto making him one of its corporate officers. All of these acts were done without first amending its by-laws so as to include the General Manager in its roster of corporate officers.

With the given circumstances and in conformity with Matling Industrial and Commercial Corporation v. Coros, this Court rules that respondent was not a corporate officer of petitioner corporation because his position as General Manager was not specifically mentioned in the roster of corporate officers in its corporate by-laws. The enabling clause in petitioner corporation's by-laws empowering its Board of Directors to create additional officers, i.e., General Manager, and the alleged subsequent passage of a board resolution to that effect cannot make such position a corporate office. Matling clearly enunciated that the board of directors has no power to create other corporate offices without first amending the corporate by-laws so as to include therein the newly created corporate office. Though the board of directors may create appointive positions other than the positions of corporate officers, the persons occupying such positions cannot be viewed as corporate officers under Section 25 of the Corporation Code. [40] In view thereof, this Court holds that unless and until petitioner corporation's by-laws is amended for the inclusion of General Manager in the list of its corporate officers, such position cannot be considered as a corporate office within the realm of Section 25 of the Corporation Code.

This Court considers that the interpretation of Section 25 of the Corporation Code laid down in Matling safeguards the constitutionally enshrined right of every employee to security of tenure. To allow the creation of a corporate officer position by a simple inclusion in the corporate by-laws of an enabling clause empowering the board of directors to do so can result in the circumvention of that constitutionally well-protected right. [41]

It is also of no moment that respondent, being petitioner corporation's General Manager, was given the functions of a managing director by its Board of Directors. As held in Matling, the only officers of a corporation are those given that character either by the Corporation Code or by the corporate by-laws. It follows then that the corporate officers enumerated in the by-laws are the exclusive officers of the corporation while the rest could only be regarded as mere employees or subordinate officials. [42] Respondent, in this case, though occupying a high ranking and vital position in petitioner corporation but which position was not specifically enumerated or mentioned in the latter's by-laws, can only be regarded as its employee or subordinate official. Noticeably, respondent's compensation as petitioner corporation's General Manager was set, fixed and determined not by the latter's Board of Directors but simply by its President, petitioner Lucila. The same was not subject to the approval of petitioner corporation's

Board of Directors. This is an indication that respondent was an employee and not a corporate officer.

To prove that respondent was petitioner corporation's corporate officer, petitioners presented before the NLRC an undated Secretary's Certificate showing that corporation's Board of Directors approved a resolution making respondent's position of General Manager a corporate office. The submission, however, of the said undated Secretary's Certificate will not change the fact that respondent was an employee. The certification does not amount to an amendment of the by-laws which is needed to make the position of General Manager a corporate office.

Moreover, as has been aptly observed by the Court of Appeals, the board resolution mentioned in that undated Secretary's Certificate and the latter itself were obvious fabrications, a mere afterthought. Here we quote with conformity the Court of Appeals findings on this matter stated in this wise:

The board resolution is an obvious fabrication. Firstly, if it had been in existence since [29 August 1994], why did not [herein petitioners] attach it to their [M]otion to [D]ismiss filed on [26 August 1999], when it could have been the best evidence that [herein respondent] was a corporate officer? Secondly, why did they report the [respondent] instead as [herein petitioner corporation's] employee to the Social Security System [(SSS)] on [11 October 1994] or a later date than their [29 August 1994] board resolution? Thirdly, why is there no indication that the [respondent], the person concerned himself, and the [SEC] were furnished with copies of said board resolution? And, lastly, why is the corporate [S]ecretary's [C]ertificate not notarized in keeping with the customary procedure? That is why we called it manipulative evidence as it was a shameless sham meant to be thrown in as a wild card to muddle up the [D]ecision of the Labor Arbiter to the end that it be overturned as the latter had firmly pointed out that [respondent] is not a corporate officer under [petitioner corporation's by-laws]. Regrettably, the [NLRC] swallowed the bait hook-line-and sinker. It failed to see through its nature as a belatedly manufactured evidence. And even on the assumption that it were an authentic board resolution, it did not make [respondent] a corporate officer as the board did not first and properly create the position of a [G]eneral [M]anager by amending its by-laws.

(2) The scope of the term "officer" in the phrase "and� such other officers as may be provided for in the by-laws"] (Sec. 25, par. 1), would naturally depend much on the provisions of the by-laws of the corporation. (SEC Opinion, [4 December 1991.]) If the by-laws enumerate the officers to be elected by the board, the provision is conclusive, and the board is without power to create new offices without amending the by-laws. (SEC Opinion, [19 October 1971.])

(3) If, for example, the general manager of a corporation is not listed as an officer, he is to be classified as an employee although he has always been considered as one of the principal officers of a corporation [citing De Leon, H. S., The Corporation Code of the Philippines Annotated, 1993 Ed., p. 215.] [43] [Emphasis supplied.]

That respondent was also a director and a stockholder of petitioner corporation will not automatically make the case fall within the ambit of intra-corporate controversy and be subjected to RTC's jurisdiction. To reiterate, not all conflicts between the stockholders and the corporation are classified as intra-corporate. Other factors such as the status or relationship of the parties and the nature of the question that is the subject of the controversy [44] must be considered in determining whether the dispute involves corporate matters so as to regard them as intra-corporate controversies. [45] As previously discussed, respondent was not a corporate officer of petitioner corporation but a mere employee thereof so there was no intra-corporate relationship between them. With regard to the subject of the controversy or issue involved herein, i.e., respondent's dismissal as petitioner corporation's General Manager, the same did not present or relate to an intra-corporate dispute. To note, there was no evidence submitted to show that respondent's removal as petitioner corporation's General Manager carried with it his removal as its director and stockholder. Also, petitioners' allegation that respondent's claim of 30% share of petitioner corporation's net profit was by reason of his being its director and stockholder was without basis, thus, self-serving. Such an allegation was tantamount to a mere speculation for petitioners' failure to substantiate the same.

In addition, it was not shown by petitioners that the position of General Manager was offered to respondent on account of his being petitioner corporation's director and stockholder. Also, in contrast to NLRC's findings, neither petitioner corporation's by-laws nor the Management Contract stated that respondent's appointment and termination from the position of General Manager was subject to the approval of petitioner corporation's Board of Directors. If, indeed, respondent was a corporate officer whose termination was subject to the approval of its Board of Directors, why is it that his termination was effected only by petitioner Lucila, President of petitioner corporation? The records are bereft of any evidence to show that respondent's dismissal was done with the conformity of petitioner corporation's Board of Directors or that the latter had a hand on respondent's dismissal. No board resolution whatsoever was ever presented to that effect.

With all the foregoing, this Court is fully convinced that, indeed, respondent, though occupying the General Manager position, was not a corporate officer of petitioner corporation rather he was merely its employee occupying a high-ranking position.

Accordingly, respondent's dismissal as petitioner corporation's General Manager did not amount to an intra-corporate controversy. Jurisdiction therefor properly belongs with the Labor Arbiter and not with the RTC.

Having established that respondent was not petitioner corporation's corporate officer but merely its employee, and that, consequently, jurisdiction belongs to the Labor Arbiter, this Court will now determine if respondent's dismissal from employment is illegal.

It was not disputed that respondent worked as petitioner corporation's General Manager from its incorporation on 15 August 1994 until he was dismissed on 30 June 1997. The cause of his dismissal was petitioner corporation's cessation of business operations due to poor sales collection aggravated by the inefficient management of its affairs.

In termination cases, the burden of proving just and valid cause for dismissing an employee from his employment rests upon the employer. The latter's failure to discharge that burden would necessarily result in a finding that the dismissal is unjustified. [46]

Under Article 283 of the Labor Code, as amended, one of the authorized causes in terminating the employment of an employee is the closing or cessation of operation of the establishment or undertaking. Article 283 of the Labor Code, as amended, reads, thus:

ART. 283. Closure of establishment and reduction of personnel. '“ The employer may also terminate the employment of any employee due to the installation of labor saving-devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the workers and the Department of Labor and Employment at least one (1) month before the intended date thereof. x x x In case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or to at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year. [Emphasis supplied.]

From the afore-quoted provision, the closure or cessation of operations of establishment or undertaking may either be due to serious business losses or financial reverses or otherwise. If the closure or cessation was due to serious business losses or financial reverses, it is incumbent upon the employer to sufficiently and convincingly prove the same. If it is otherwise, the employer can lawfully close shop anytime as long as it was bona fide in character and not impelled by a motive to defeat or circumvent the tenurial rights of employees

and as long as the terminated employees were paid in the amount corresponding to their length of service. [47]

Accordingly, under Article 283 of the Labor Code, as amended, there are three requisites for a valid cessation of business operations: (a) service of a written notice to the employees and to the Department of Labor and Employment (DOLE) at least one month before the intended date thereof; (b) the cessation of business must be bona fide in character; and (c) payment to the employees of termination pay amounting to one month pay or at least one-half month pay for every year of service, whichever is higher.

In this case, it is obvious that petitioner corporation's cessation of business operations was not due to serious business losses. Mere poor sales collection, coupled with mismanagement of its affairs does not amount to serious business losses. Nonetheless, petitioner corporation can still validly cease or close its business operations because such right is legally allowed, so long as it was not done for the purpose of circumventing the provisions on termination of employment embodied in the Labor Code. [48] As has been stressed by this Court in Industrial Timber Corporation v. Ababon, thus:

Just as no law forces anyone to go into business, no law can compel anybody to continue the same. It would be stretching the intent and spirit of the law if a court interferes with management's prerogative to close or cease its business operations just because the business is not suffering from any loss or because of the desire to provide the workers continued employment. [49]cralaw

A careful perusal of the records revealed that, indeed, petitioner corporation has stopped and ceased business operations beginning 30 June 1997. This was evidenced by a notarized Affidavit of Non-Operation dated 31 August 1998. There was also no showing that the cessation of its business operations was done in bad faith or to circumvent the Labor Code. Nevertheless, in doing so, petitioner corporation failed to comply with the one-month prior written notice rule. The records disclosed that respondent, being petitioner corporation's employee, and the DOLE were not given a written notice at least one month before petitioner corporation ceased its business operations. Moreover, the records clearly show that respondent's dismissal was effected on the same date that petitioner corporation decided to stop and cease its operation. Similarly, respondent was not paid separation pay upon termination of his employment.

As respondent's dismissal was not due to serious business losses, respondent is entitled to payment of separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher. The rationale for this was laid down in Reahs Corporation v. National Labor Relations Commission, [50] thus:

The grant of separation pay, as an incidence of termination of employment under Article 283, is a

statutory obligation on the part of the employer and a demandable right on the part of the employee, except only where the closure or cessation of operations was due to serious business losses or financial reverses and there is sufficient proof of this fact or condition. In the absence of such proof of serious business losses or financial reverses, the employer closing his business is obligated to pay his employees and workers their separation pay.

The rule, therefore, is that in all cases of business closure or cessation of operation or undertaking of the employer, the affected employee is entitled to separation pay. This is consistent with the state policy of treating labor as a primary social economic force, affording full protection to its rights as well as its welfare. The exception is when the closure of business or cessation of operations is due to serious business losses or financial reverses duly proved, in which case, the right of affected employees to separation pay is lost for obvious reasons. [51] [Emphasis supplied.]

As previously discussed, respondent's dismissal was due to an authorized cause, however, petitioner corporation failed to observe procedural due process in effecting such dismissal. In Culili v. Eastern Telecommunications Philippines, Inc., [52] this Court made the following pronouncements, thus:

x x x there are two aspects which characterize the concept of due process under the Labor Code: one is substantive '” whether the termination of employment was based on the provision of the Labor Code or in accordance with the prevailing jurisprudence; the other is procedural '” the manner in which the dismissal was effected.

Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code provides:

(d) In all cases of termination of employment, the following standards of due process shall be substantially observed:

x x x x

For termination of employment as defined in Article 283 of the Labor Code, the requirement of due process shall be deemed complied with upon service of a written notice to the employee and the appropriate Regional Office of the Department of Labor and Employment at least thirty days before effectivity of the termination, specifying the ground or grounds for termination.

In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:

The requirement of law mandating the giving of notices was intended not only to enable the employees to look for another employment and therefore ease the impact of the loss of their jobs and the corresponding income, but more importantly, to give the Department of Labor

and Employment (DOLE) the opportunity to ascertain the verity of the alleged authorized cause of termination. [53] [Emphasis supplied].

The records of this case disclosed that there was absolutely no written notice given by petitioner corporation to the respondent and to the DOLE prior to the cessation of its business operations. This is evident from the fact that petitioner corporation effected respondent's dismissal on the same date that it decided to stop and cease its business operations. The necessary consequence of such failure to comply with the one-month prior written notice rule, which constitutes a violation of an employee's right to statutory due process, is the payment of indemnity in the form of nominal damages. [54] In Culili v. Eastern Telecommunications Philippines, Inc., this Court further held:

In Serrano v. National Labor Relations Commission [citation omitted], we noted that 'œa job is more than the salary that it carries.' There is a psychological effect or a� stigma in immediately finding one'™s self laid off from work. This is exactly why our labor laws have provided for mandating procedural due process clauses. Our laws, while recognizing the right of employers to terminate employees it cannot sustain, also recognize the employee's right to be properly informed of the impending severance of his ties with the company he is working for. x x x.

x x x Over the years, this Court has had the opportunity to reexamine the sanctions imposed upon employers who fail to comply with the procedural due process requirements in terminating its employees. In Agabon v. National Labor Relations Commission [citation omitted], this Court reverted back to the doctrine in Wenphil Corporation v. National Labor Relations Commission [citation omitted] and held that where the dismissal is due to a just or authorized cause, but without observance of the due process requirements, the dismissal may be upheld but the employer must pay an indemnity to the employee. The sanctions to be imposed however, must be stiffer than those imposed in Wenphil to achieve a result fair to both the employers and the employees.

In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court, taking a cue from Agabon, held that since there is a clear-cut distinction between a dismissal due to a just cause and a dismissal due to an authorized cause, the legal implications for employers who fail to comply with the notice requirements must also be treated differently:

Accordingly, it is wise to hold that: (1) if the dismissal is based on a just cause under Article 282 but the employer failed to comply with the notice requirement, the sanction to be imposed upon him should be tempered because the dismissal process was, in effect, initiated by an act imputable to the employee; and (2) if the dismissal is based on an authorized cause under

Article 283 but the employer failed to comply with the notice requirement, the sanction should be stiffer because the dismissal process was initiated by the employer's exercise of his management prerogative. [55] [Emphasis supplied.]

Thus, in addition to separation pay, respondent is also entitled to an award of nominal damages. In conformity with this Court's ruling in Culili v. Eastern Telecommunications Philippines, Inc. and Shimizu Phils. Contractors, Inc. v. Callanta, both citing Jaka Food Processing Corporation v. Pacot, [56] this Court fixed the amount of nominal damages to P50,000.00.

With respect to petitioners' contention that the Management Contract executed between respondent and petitioner Lucila has no binding effect on petitioner corporation for having been executed way before its incorporation, this Court finds the same meritorious.

Section 19 of the Corporation Code expressly provides:

Sec. 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. [Emphasis supplied.]

Logically, there is no corporation to speak of prior to an entity'™s incorporation. And no contract entered into before incorporation can bind the corporation.

As can be gleaned from the records, the Management Contract dated 16 January 1994 was executed between respondent and petitioner Lucila months before petitioner corporation's incorporation on 15 August 1994. Similarly, it was done when petitioner Lucila was still the President of Marc Marketing, Inc. Undeniably, it cannot have any binding and legal effect on petitioner corporation. Also, there was no evidence presented to prove that petitioner corporation adopted, ratified or confirmed the Management Contract. It is for the same reason that petitioner corporation cannot be considered estopped from questioning its binding effect now that respondent was invoking the same against it. In no way, then, can it be enforced against petitioner corporation, much less, its provisions fixing respondent's compensation as General Manager to 30% of petitioner corporation's net profit. Consequently, such percentage cannot be the basis for the computation of respondent's separation pay. This finding, however, will not affect the undisputed fact that respondent was, indeed, the General Manager of petitioner corporation from its incorporation up to the time of his dismissal.

Accordingly, this Court finds it necessary to still remand the present case to the Labor Arbiter to conduct further proceedings for the sole purpose of determining the compensation that respondent was actually receiving during the period that he was the General Manager of petitioner corporation, this, for the proper computation of his separation pay.

As regards petitioner Lucila's solidary liability, this Court affirms the same.

As a rule, corporation has a personality separate and distinct from its officers, stockholders and members such that corporate officers are not personally liable for their official acts unless it is shown that they have exceeded their authority. However, this corporate veil can be pierced when the notion of the legal entity is used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation, and to confuse legitimate issues. Under the Labor Code, for instance, when a corporation violates a provision declared to be penal in nature, the penalty shall be imposed upon the guilty officer or officers of the corporation. [57]

Based on the prevailing circumstances in this case, petitioner Lucila, being the President of petitioner corporation, acted in bad faith and with malice in effecting respondent's dismissal from employment. Although petitioner corporation has a valid cause for dismissing respondent due to cessation of business operations, however, the latter's dismissal therefrom was done abruptly by its President, petitioner Lucila. Respondent was not given the required one-month prior written notice that petitioner corporation will already cease its business operations. As can be gleaned from the records, respondent was dismissed outright by petitioner Lucila on the same day that petitioner corporation decided to stop and cease its business operations. Worse, respondent was not given separation pay considering that petitioner corporation's cessation of business was not due to business losses or financial reverses.cralaw

WHEREFORE, premises considered, the Decision and Resolution dated 20 June 2005 and 7 March 2006, respectively, of the Court of Appeals in CA-G.R. SP No. 76624 are hereby AFFIRMED with the MODIFICATION finding respondent's dismissal from employment legal but without proper observance of due process. Accordingly, petitioner corporation, jointly and solidarily liable with petitioner Lucila, is hereby ordered to pay respondent the following; (1) separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher, to be computed from the commencement of employment until termination; and (2) nominal damages in the amount of P50,000.00.

This Court, however, finds it proper to still remand the records to the Labor Arbiter to conduct further proceedings for the sole purpose of determining the

compensation that respondent was actually receiving during the period that he was the General Manager of petitioner corporation for the proper computation of his separation pay.

Costs against petitioners.

SO ORDERED.

5. SECOND DIVISION

[G.R. NO. 159795. July 30, 2004]

SPOUSES ROBERTO & EVELYN DAVID and COORDINATED GROUP, INC., Petitioners, v. CONSTRUCTION INDUSTRY AND ARBITRATION COMMISSION and SPS. NARCISO & AIDA QUIAMBAO, Respondents.

D E C I S I O N

PUNO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, assailing the Decision and Resolution of the Court of Appeals, dated June 30, 2003 and August 27, 2003, respectively, in CA-G.R. SP No. 72736.

Petitioner COORDINATED GROUP, INC. (CGI) is a corporation engaged in the construction business, with petitioner-spouses ROBERTO and EVELYN DAVID as its President and Treasurer, respectively.

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

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

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

Respondents filed a case for breach of contract against petitioners before the Regional Trial Court (RTC) of Manila. At the pre-trial conference, the parties agreed to

submit the case for arbitration to the CONSTRUCTION INDUSTRY ARBITRATION COMMISSION (CIAC). Respondents filed a request2 for arbitration with the CIAC and nominated Atty. Custodio O. Parlade as arbitrator. Atty. Parlade was appointed by the CIAC as sole arbitrator to resolve the dispute. With the agreement of the parties, Atty. Parlade designated Engr. Loreto C. Aquino to assist him in assessing the technical aspect of the case. The RTC of Manila then dismissed the case and transmitted its records to the CIAC.3 cralawred

After conducting hearings and two (2) ocular inspections of the construction site, the arbitrator rendered judgment against Petitioners, thus:chanroblesvirtua1awlibrary

AWARD

In summary, award is hereby made in favor of the Quiambaos against the Respondents, jointly and severally, as follows:chanroblesvirtua1awlibrary

Lost Rentals-P1,680,000.00

Cost to Complete, Rectification, etc.- 2,281,028.71

Damages due to erroneous staking - 117,000.00

Professional fees for geodetic

surveys, etc. -72,500.00

Misc. expenses/ professional

fees of engineers - 118,642.50

Bills for water and electricity, PLDT -15,247.68

Attorneys Fees - 100,000.00

Moral Damages - 250,000.00

Exemplary Damages - 250,000.00

-----------------

TOTAL P4,884,418.89

There is likewise an award in favor of the Respondents (petitioners herein) and against the Claimants (respondents herein) for the value of the materials and equipment left at (the) site (in) the amount of P238,372.75. Respondent CGI is likewise credited with an 80% accomplishment having a total value of P5,847,857.20.

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

To recapitulate: Payments already

made to CGI - P5,275,041.00

Amount awarded

above to Claimants- 4,864,418.89

---------------------

Total 10,159,459.89

Payments due CGI for 80%

work accomplishment - P5,847,857.20

Cost of materials and

equipment >- 238,372.75

--------------------

Total : P6,086,299.95

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

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

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

SO ORDERED.4 cralawred

Petitioners appealed to the Court of Appeals which affirmed the arbitrators Decision but deleted the award for lost rentals.5 cralawred

Unsatisfied, petitioners filed this Petition for Review on Certiorari , raising the following issues:

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

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

We find no merit in the petition.

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

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

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

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

x x x

(A) s the Building was taking shape, they noticed deviations from the approved plans and specifications for the Building. Most noticeable were two (2) concrete columns in the middle of the basement which effectively and permanently obstructed the basement for the parking of vehicles x x x. In addition, three (3) additional concrete columns were constructed from the ground floor to the roof deck x x x which affected the overall dimension of the building such as altering the specified beam depths, passageways and windows. In addition, Mrs. Quiambao provided a virtual litany of alleged defects, to wit: (a) the Building was not vertically plumbed xxx; (b) provisions for many architectural members were not provided for, such as, (i) the recesses for window plant boxes are lacking xxx, (ii) provisions for precast molding are lacking xxx, (iii) canopies are also lacking x x x; (c) misaligned walls, ugly discrepancies and gaps; (d) skewed walls to floors/landings; (e) low head clearances and truncated beams x x x; (f) narrow and disproportionate stairs

xxxone (1) instead of two (2) windows at the fire exit x x x, (g) absence of water-proofing along the basement wall x x xand at the roof deck which caused leaks that damages the mezzanine floor x x x; (h) the use of smaller diagonal steel trusses at the penthouse. x x x There were others which were shown during the site inspection such as: (1) L-shaped kitchen counters instead of the required U-shaped counters x x x; (2) failure to provide marble tops for the kitchen counters; (3) installation of single-tub sinks where the plans called for double-type stainless kitchen sinks x x x; (4) installation of much smaller windows than those required; (5) misaligned window easements to wall, (6) floors were damaged by roof leaks, (6) poor floor finish, misaligned tiles, floors with kapak and disproportionate drawers and cabinets. A more comprehensive list of alleged defects, deviations and complaints of the Quiambaos is found in a report marked Exhibit C-144. Many of these defects were seen during the site inspection and the only defense and comment of CGI was that these were punch-list items which could have been corrected prior to completion and turn-over of the Building had the Contract not been terminated by the Claimants (respondents here). x x x Thus, x x x (petitioner) CGI argued that: In any construction work, before a contractor turns-over the project to the owner, punchlisting of defects is done so as to ensure compliance and satisfaction of both the contractor and the owner. Punch listing means that the contractor will list all major and minor defects and rectifies them before the turnover of the project to the owner.After all defects had been arranged, the project is now turned over to the owner. For this particular project, no turn over was made by the contractor to the owner yet. Actually, we were already pinpointing these defects for punch listing before we were terminated illegally. As alleged by the owner, the deficiencies mentioned are stubouts of water closets at toilets, roofing and framing, doors, cabinets, ceiling and stairs and other were not yet completed and rectified by us. In fact we were counting on our project engineer in charge x x x to do this in as much as this is one of his duties to do for the company. x x x Confirmatory of this assertion of CGI that it was willing to undertake the appropriate corrective works (whether or not the items are punch-list items) is Exhibit C-88 which is a letter prepared by CGIs Windell F. Vizconde, checked by CGIs Gary M. Garcia and noted by CGIs Benjie Lipardo, addressed to the Quiambaos which stated that:chanroblesvirtua1awlibrary

As per our discussion during the last meeting dated Sept. 28, 1998 the following items was (sic) confirmed and clarified. These are described as follows:

1. All ceiling cornices shall be installed as per plan specification which is 1 x 4 in size.

2. All baseboards shall be installed as per plan specification which is wood 1 x 4 in size.

3. Electrical Meter center and main panel breaker should be retained to its present location.

4. Elevation of office, dining and stair lobby of ground floor shall be 4 higher than the elevation of parking area (subject for verification).

5. All door jambs at C.R. has (sic) to be replaced with concrete framing jambs.

6. All ceilings mailers should be 2 x 2 in size.

7. All plywood ceiling that was damaged by rain water shall be replaced.

8. Provide a pipe chase for the enclosure of soil stack pipe and water line pipe at the ground floor level between grid line 3-4 along the light well area.

9. Front side elevation view shall be follow (sic) as per plan specialy (sic) at 4th flr.

10. One column at basement floor along grid line 2# B has to be verified by the structural designer if ever it is safe to removed (sic) the column and what will be their (sic) recommendation to support the load.

11. Existing doors D-2 and D-3 shall be replaced a (sic) new one.

While Mrs. Quiambao appeared not to have given her conformity, this document from CGI is an admission by CGI of the deficiencies in the construction of the Building which needed to be corrected.

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

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

x x x

Regarding the additional columns at the basement and at the first floor to the roof deck of the Building, which effectively restricted the use of the basement as a parking area, and likewise reduced the area which could be used by the Quiambaos in the different floors of the Building, Engr. Roberto J. David admitted that these represented a design change which was made and implemented by CGI without the conformnity of the Claimants. The Contract specifically provided in Article II that the CONTRACTOR shall submit to the OWNER all designs for the OWNERS approval. This implies necessarily that all changes in the approved design shall likewise be submitted to the OWNER for approval. This change, in my view, is the single most serious breach of the Contract committed by CGI which justified the decision of the Claimants to terminate the Contract. x x x (T) here is no evidence to show that the Quiambaos approved the revision of the structural plans to provide for the construction of the additional columns. x x x

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

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

A third major contested issue concerned the construction of the cistern. x x x A cistern is an underground tank used to collect water for drinking purposes. The contentious points regarding the construction of the

cistern are: first, that the cistern was designed to accumulate up to 10,000 gallons of water; as constructed, its capacity was less than the design capacity. Second, there is no internal partition separating the cistern from the sump pit. x x x

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

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

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

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

At first glance, the issue may appear to be a question of law as it would call for application of the law on the separate liability of a corporation. However, the law can be applied only after establishing a factual basis, i.e., whether petitioner-spouses as corporate officers were grossly negligent in ordering the revisions on the construction plan without the knowledge and consent of the respondent-spouses. On this issue, the Court of Appeals again affirmed the factual findings of the arbitrator, thus:chanroblesvirtua1awlibrary

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

The following findings of public respondent (CIAC) would support its ruling in holding petitioners severally and jointly liable with the Corporation:chanroblesvirtua1awlibrary

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

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

Finally, it bears to remind petitioners of this Courts ruling in the 1993 case of Hi-Precision Steel Center, Inc. v. Lim Kim Steel Builders, Inc. 13 which emphasized the rationale for limiting appeal to legal questions in construction cases resolved through arbitration, thus:chanroblesvirtua1awlibrary

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

Voluntary arbitration involves the reference of a dispute to an impartial body, the members of which are chosen by the parties themselves, which parties freely consent in advance to abide by the arbitral award issued after proceedings where both parties had the opportunity to be heard. The basic objective is to provide a speedy and inexpensive method of settling disputes by allowing the parties to avoid the formalities, delay, expense and

aggravation which commonly accompany ordinary litigation, especially litigation which goes through the entire hierarchy of courts. Executive Order No. 1008 created an arbitration facility to which the construction industry in the Philippines can have recourse. The Executive Order was enacted to encourage the early and expeditious settlement of disputes in the construction industry, a public policy the implementation of which is necessary and important for the realization of the national development goals.

Aware of the objective of voluntary arbitration in the labor field, in the construction industry, and in other area for that matter, the Court will not assist one or the other or even both parties in any effort to subvert or defeat that objective for their private purposes.The Court will not review the factual findings of an arbitral tribunal upon the artful allegation that such body had misapprehended facts and will not pass upon issues which are, at bottom, issues of fact, no matter how cleverly disguised they might be as legal questions. The parties here had recourse to arbitration and chose the arbitrators themselves; they must have had confidence in such arbitrators. The Court will not, therefore, permit the parties to relitigate before it the issues of facts previously presented and argued before the Arbitral Tribunal, save only where a clear showing is made that, in reaching its factual conclusions, the Arbitral Tribunal committed an error so egregious and hurtful to one party as to constitute a grave abuse of discretion resulting in lack or loss of jurisdiction. Prototypical examples would be factual conclusions of the Tribunal which resulted in deprivation of one or the other party of a fair opportunity to present its position before the Arbitral Tribunal, and an award obtained through fraud or the corruption of arbitrators. Any other more relaxed rule would result in setting at naught the basic objective of a voluntary arbitration and would reduce arbitration to a largely inutile institution. (emphases supplied)cralawlibrary

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

SO ORDERED.

Austria-Martinez, Callejo, Sr., TINGA, and Chico-Nazario, JJ., concur.

Endnotes:

6. THIRD DIVISION

[G.R. No. 125778. June 10, 2003.]

INTER-ASIA INVESTMENTS INDUSTRIES, INC., Petitioner, v. COURT OF APPEALS and ASIA INDUSTRIES, INC., Respondents.

D E C I S I O N

CARPIO MORALES, J.:

The present petition for review on certiorari assails the Court of Appeals Decision 1 of January 25, 1996 and Resolution 2 of July 11, 1996.cralaw : red

The material facts of the case are as follows:chanrob1es virtual 1aw library

On September 1, 1978, Inter-Asia Industries, Inc. (petitioner), by a Stock Purchase Agreement 3 (the Agreement), sold to Asia Industries, Inc. (private respondent) for and in consideration of the sum of P19,500,000.00 all its right, title and interest in and to all the outstanding shares of stock of FARMACOR, INC. (FARMACOR). 4 The Agreement was signed by Leonides P. Gonzales and Jesus J. Vergara, presidents of petitioner and private respondent, respectively. 5

Under paragraph 7 of the Agreement, petitioner as seller made warranties and representations among which were" (iv.) [t]he audited financial statements of FARMACOR at and for the year ended December 31, 1977 . . . and the audited financial statements of FARMACOR as of September 30, 1978 being prepared by S[ycip,] G[orres,] V[elayo and Co.] . . . fairly present or will present the financial position of FARMACOR and the results of its operations as of said respective dates; said financial statements show or will show all liabilities and commitments of FARMACOR, direct or contingent, as of said respective dates . . ." ; and" (v.) [t]he Minimum Guaranteed Net Worth of FARMACOR as of September 30, 1978 shall be Twelve Million Pesos (P12,000,000.00)." 6

The Agreement was later amended with respect to the "Closing Date," originally set up at 10:00 a.m. of September 30, 1978, which was moved to October 31, 1978, and to the mode of payment of the purchase price. 7

The Agreement, as amended, provided that pending submission by SGV of FARMACOR’s audited financial statements as of October 31, 1978, private respondent may retain the sum of P7,500,000.00 out of the stipulated purchase price of P19,500,000.00; that from this retained amount of P7,500,000.00, private respondent may deduct any shortfall on the Minimum Guaranteed Net Worth of P12,000,000.00; 8 and that if the amount retained is not sufficient to make up for the

deficiency in the Minimum Guaranteed Net Worth, petitioner shall pay the difference within 5 days from date of receipt of the audited financial statements. 9

Respondent paid petitioner a total amount of P12,000,000.00: P5,000,000.00 upon the signing of the Agreement, and P7,000,000.00 on November 2, 1978. 10

From the STATEMENT OF INCOME AND DEFICIT attached to the financial report 11 dated November 28, 1978 submitted by SGV, it appears that FARMACOR had, for the ten months ended October 31, 1978, a deficit of P11,244,225.00. 12 Since the stockholder’s equity amounted to P10,000,000.00, FARMACOR had a net worth deficiency of P1,244,225.00. The guaranteed net worth shortfall thus amounted to P13,244,225.00 after adding the net worth deficiency of P1,244,225.00 to the Minimum Guaranteed Net Worth of P12,000,000.00.

The adjusted contract price, therefore, amounted to P6,225,775.00 which is the difference between the contract price of P19,500,000.00 and the shortfall in the guaranteed net worth of P13,224,225.00. Private respondent having already paid petitioner P12,000,000.00, it was entitled to a refund of P5,744,225.00.chanrob1es virtua1 1aw 1ibrary

Petitioner thereafter proposed, by letter 13 of January 24, 1980, signed by its president, that private respondent’s claim for refund be reduced to P4,093,993.00, it promising to pay the cost of the Northern Cotabato Industries, Inc. (NOCOSII) superstructures in the amount of P759,570.00. To the proposal respondent agreed. Petitioner, however, welched on its promise. Petitioner’s total liability thus stood at P4,853,503.00 (P4,093,993.00 plus P759,570.00) 14 exclusive of interest. 15

On April 5, 1983, private respondent filed a complaint 16 against petitioner with the Regional Trial Court of Makati, one of two causes of action of which was for the recovery of above-said amount of P4,853,503.00 17 plus interest.

Denying private respondent’s claim, petitioner countered that private respondent failed to pay the balance of the purchase price and accordingly set up a counterclaim.

Finding for private respondent, the trial court rendered on November 27, 1991 a Decision, 18 the dispositive portion of which reads:chanrob1es virtual 1aw library

WHEREFORE, judgment is rendered in favor of plaintiff and against defendant (a) ordering the latter to pay to the former the sum of P4,853,503.00 19 plus interest thereon at the legal rate from the filing of the complaint until fully paid, the sum of P30,000.00 as attorney’s fees and the costs of suit; and (b) dismissing the counterclaim.

SO ORDERED.

On appeal to the Court of Appeals, petitioner raised the following errors:chanrob1es virtual 1aw library

THE TRIAL COURT ERRED IN HOLDING THE DEFENDANT LIABLE UNDER THE FIRST CAUSE OF ACTION PLEADED BY THE PLAINTIFF.

THE TRIAL COURT ERRED IN AWARDING ATTORNEY’S FEES AND IN DISMISSING THE COUNTERCLAIM.

THE TRIAL COURT ERRED IN RENDERING JUDGMENT IN FAVOR OF THE PLAINTIFF, THE ALLEGED BREACH OF WARRANTIES AND REPRESENTATION NOT HAVING BEEN SHOWN, MUCH LESS ESTABLISHED BY THE PLAINTIFF. 20

By Decision of January 25, 1996, the Court of Appeals affirmed the trial court’s decision. Petitioner’s motion for reconsideration of the decision having been denied by the Court of Appeals by Resolution of July 11, 1996, the present petition for review on certiorari was filed, assigning the following errors:chanrob1es virtual 1aw library

I

THE RESPONDENT COURT ERRED IN NOT HOLDING THAT THE LETTER OF THE PRESIDENT OF THE PETITIONER IS NOT BINDING ON THE PETITIONER BEING ULTRA VIRES.

II

THE LETTER CAN NOT BE AN ADMISSION AND WAIVER OF THE PETITIONER AS A CORPORATION.

III

THE RESPONDENT COURT ERRED IN NOT DECLARING THAT THERE IS NO BREACH OF WARRANTIES AND REPRESENTATION AS ALLEGED BY THE PRIVATE RESPONDENT.

IV

THE RESPONDENT COURT ERRED IN ORDERING THE PETITIONER TO PAY ATTORNEY’S FEES AND IN SUSTAINING THE DISMISSAL OF THE COUNTERCLAIM. 18 (Emphasis in the original)chanrob1es virtua1 1aw 1ibrary

Petitioner argues that the January 24, 1980 letter-proposal (for the reduction of private respondent’s claim for refund upon petitioner’s promise to pay the cost of NOCOSII superstructures in the amount of P759,570.00) which was signed by its president has no legal force and

effect against it as it was not authorized by its board of directors, it citing the Corporation Law which provides that unless the act of the president is authorized by the board of directors, the same is not binding on it.

This Court is not persuaded.

The January 24, 1980 letter signed by petitioner’s president is valid and binding. The case of People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals 19 instructs:chanrob1es virtual 1aw library

The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. A corporation is a juridical person, separate and distinct from its stockholders and members, "having . . . powers, attributes and properties expressly authorized by law or incident to its existence."cralaw virtua1aw library

Being a juridical entity, a corporation may act through its board of directors, which exercises almost all corporate powers, lays down all corporate business policies and is responsible for the efficiency of management, as provided in Section 23 of the Corporation Code of the Philippines:chanrob1es virtual 1aw library

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

Under this provision, the power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporation, bylaws, or relevant provisions of law. However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business, viz:chanrob1es virtual 1aw library

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

x x x

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

. . . (Emphasis and Italics supplied)

As correctly argued by private respondent, an officer of a corporation who is authorized to purchase the stock of another corporation has the implied power to perform all other obligations arising therefrom, such as payment of the shares of stock. By allowing its president to sign the Agreement on its behalf, petitioner clothed him with apparent capacity to perform all acts which are expressly, impliedly and inherently stated therein. 21

Petitioner further argues that when the Agreement was executed on September 1, 1978, its financial statements were extensively examined and accepted as correct by private respondent, hence, it cannot later be disproved "by resorting to some scheme such as future financial auditing;" 22 and that it should not be bound by the SGV Report because it is self-serving and biased, SGV having been hired solely by private respondent, and the alleged shortfall of FARMACOR occurred only after the execution of the Agreement.chanrob1es virtua1 1aw 1ibrary

This Court is not persuaded either.

The pertinent provisions of the Agreement read:chanrob1es virtual 1aw library

7. Warranties and Representations — (a) SELLER warrants and represents as follows:chanrob1es virtual 1aw library

x x x

(iv) The audited financial statements of FARMACOR as at and for the year ended December 31, 1977 and the audited financial statements of FARMACOR as at September 30, 1978 being prepared by SGV pursuant to paragraph 6(b) fairly present or will present the financial position of FARMACOR and the results of its operations as of said respective dates; said financial statements show or will show all liabilities and commitments of FARMACOR, direct or contingent, as of said respective dates; and the receivables set forth in said financial statements are fully due and collectible, free and clear of

any set-offs, defenses, claims and other impediments to their collectibility.

(v) The Minimum Guaranteed Net Worth of FARMACOR as of September 30, 1978 shall be Twelve Million Pesos (P12,000,000.00), Philippine Currency.

. . . (Emphasis in the original; Emphasis supplied) 23

True, private respondent accepted as correct the financial statements submitted to it when the Agreement was executed on September 1, 1978. But petitioner expressly warranted that the SGV Reports "fairly present or will present the financial position of FARMACOR." By such warranty, petitioner is estopped from claiming that the SGV Reports are self-serving and biased.

As to the claim that the shortfall occurred after the execution of the Agreement, the declaration of Emmanuel de Asis, supervisor in the Accounting Division of SGV and head of the team which conducted the auditing of FARMACOR, that the period covered by the audit was from January to October 1978 shows that the period before the Agreement was entered into (on September 1, 1978) was covered. 24

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

On the matter of attorney’s fees, it is an accepted doctrine that the award thereof as an item of damages is the exception rather than the rule, and counsel’s fees are not to be awarded every time a party wins a suit. The power of the court to award attorney’s fees under Article 2208 of the Civil Code demands factual, legal and equitable justification, without which the award is a conclusion without a premise, its basis being improperly left to speculation and conjecture. In all events, the court must explicitly state in the text of the decision, and not only in the decretal portion thereof, the legal reason for the award of attorney’s fees.25cralaw:red

. . . (Emphasis and Italics supplied; Citations omitted)

WHEREFORE, the instant petition is PARTLY GRANTED. The assailed decision of the Court of Appeals affirming that of the trial court is modified in that the award of attorney’s fees in favor of private respondent is deleted. The decision is affirmed in other respects.chanrob1es virtua1 1aw 1ibrary

SO ORDERED.

Puno, Panganiban, Sandoval-Gutierrez and Corona, JJ., concur.

Endnotes:

7. SECOND DIVISION

[G.R. No. 126006 : January 29, 2004]

LAPULAPU FOUNDATION, INC. and ELIAS Q. TAN, Petitioners, v. COURT OF APPEALS (Seventeenth Division) and ALLIED BANKING CORP., Respondents

D E C I S I O N

CALLEJO, SR., J.:

Before the Court is the petition for review on certiorari filed by the Lapulapu Foundation, Inc. and Elias Q. Tan seeking to reverse and set aside the Decision1 dated June 26, 1996 of the Court of Appeals (CA) in CA-G.R. CV No. 37162 ordering the Petitioners, jointly and solidarily, to pay the respondent Allied Banking Corporation the amount of P493,566.61 plus interests and other charges. Likewise, sought to be reversed and set aside is the appellate courts Resolution dated August 19, 1996 denying the petitioners motion for reconsideration.

The case stemmed from the following facts:

Sometime in 1977, petitioner Elias Q. Tan, then President of the co-petitioner Lapulapu Foundation, Inc., obtained four loans from the respondent Allied Banking Corporation covered by four promissory notes in the amounts of P100,000 each. The details of the promissory notes are as follows:

P/N No.Date of P/NMaturity DateAmount as of 1/23/79

BD No. 504Nov. 7, 1977Feb. 5, 1978P123,377.76

BD No. 621Nov. 28, 1977Mar. 28, 1978P123,411.10

BD No. 716Dec. 12, 1977Apr. 11, 1978P122,322.21

BD No. 839Jan. 5, 1978May 5, 1978P120,455.542

As of January 23, 1979, the entire obligation amounted to P493,566.61 and despite demands made on them by the respondent Bank, the petitioners failed to pay the same. The respondent Bank was constrained to file with the Regional Trial Court of Cebu City, Branch 15, a complaint seeking payment by the Petitioners, jointly and solidarily, of the sum of P493,566.61 representing their loan obligation, exclusive of interests, penalty charges, attorneys fees and costs.

In its answer to the complaint, the petitioner Foundation denied incurring indebtedness from the respondent Bank alleging that the loans were obtained by petitioner Tan in his personal capacity, for his own use and benefit and on the strength of the personal information he furnished the respondent Bank. The petitioner Foundation maintained that it never authorized petitioner Tan to co-sign in his capacity as its President any promissory note and that

the respondent Bank fully knew that the loans contracted were made in petitioner Tans personal capacity and for his own use and that the petitioner Foundation never benefited, directly or indirectly, therefrom. The petitioner Foundation then interposed a cross-claim against petitioner Tan alleging that he, having exceeded his authority, should be solely liable for said loans, and a counterclaim against the respondent Bank for damages and attorneys fees.

For his part, petitioner Tan admitted that he contracted the loans from the respondent Bank in his personal capacity. The parties, however, agreed that the loans were to be paid from the proceeds of petitioner Tans shares of common stocks in the Lapulapu Industries Corporation, a real estate firm. The loans were covered by promissory notes which were automatically renewable (rolled-over) every year at an amount including unpaid interests, until such time as petitioner Tan was able to pay the same from the proceeds of his aforesaid shares.

According to petitioner Tan, the respondent Banks employee required him to affix two signatures on every promissory note, assuring him that the loan documents would be filled out in accordance with their agreement. However, after he signed and delivered the loan documents to the respondent Bank, these were filled out in a manner not in accord with their agreement, such that the petitioner Foundation was included as party thereto. Further, prior to its filing of the complaint, the respondent Bank made no demand on him.

After due trial, the court a quo rendered judgment the dispositive portion of which reads:

WHEREFORE, in view of the foregoing evidences [sic], arguments and considerations, this court hereby finds the preponderance of evidence in favor of the plaintiff and hereby renders judgment as follows:

1. Requiring the defendants Elias Q. Tan and Lapulapu Foundation, Inc. [the petitioners herein] to pay jointly and solidarily to the plaintiff Allied Banking Corporation [the respondent herein] the amount of P493,566.61 as principal obligation for the four promissory notes, including all other charges included in the same, with interest at 14% per annum, computed from January 24, 1979, until the same are fully paid, plus 2% service charges and 1% monthly penalty charges.

2. Requiring the defendants Elias Q. Tan and Lapulapu Foundation, Inc., to pay jointly and solidarily, attorneys fees in the equivalent amount of 25% of the total amount due from the defendants on the promissory notes, including all charges;

3. Requiring the defendants Elias Q. Tan and Lapulapu Foundation, Inc., to pay jointly and solidarily litigation expenses of P1,000.00 plus costs of the suit.3

On appeal, the CA affirmed with modification the judgment of the court a quo by deleting the award of attorneys fees in favor of the respondent Bank for being without basis.

The appellate court disbelieved petitioner Tans claim that the loans were his personal loans as the promissory notes evidencing them showed upon their faces that these were obligations of the petitioner Foundation, as contracted by petitioner Tan himself in his official and personal character. Applying the parol evidence rule, the CA likewise rejected petitioner Tans assertion that there was an unwritten agreement between him and the respondent Bank that he would pay the loans from the proceeds of his shares of stocks in the Lapulapu Industries Corp.

Further, the CA found that demand had been made by the respondent Bank on the petitioners prior to the filing of the complaint a quo. It noted that the two letters of demand dated January 3, 19794 and January 30, 19795 asking settlement of the obligation were sent by the respondent Bank. These were received by the petitioners as shown by the registry return cards6 presented during trial in the court a quo.

Finally, like the court a quo, the CA applied the doctrine of piercing the veil of corporate entity in holding the petitioners jointly and solidarily liable. The evidence showed that petitioner Tan had represented himself as the President of the petitioner Foundation, opened savings and current accounts in its behalf, and signed the loan documents for and in behalf of the latter. The CA, likewise, found that the petitioner Foundation had allowed petitioner Tan to act as though he had the authority to contract the loans in its behalf. On the other hand, petitioner Tan could not escape liability as he had used the petitioner Foundation for his benefit.

Aggrieved, the petitioners now come to the Court alleging that:

I.THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE LOANS SUBJECT MATTER OF THE INSTANT PETITION ARE ALREADY DUE AND DEMANDABLE DESPITE ABSENCE OF PRIOR DEMAND.

II.THE COURT OF APPEALS GRAVELY ERRED IN APPLYING THE PAROL EVIDENCE RULE AND THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY AS BASIS FOR ADJUDGING JOINT AND SOLIDARY LIABILITY ON THE PART OF PETITIONERS ELIAS Q. TAN AND LAPULAPU FOUNDATION, INC.7

The petitioners assail the appellate courts finding that the loans had become due and demandable in view of the two demand letters sent to them by the respondent Bank. The petitioners insist that there was no prior demand as they vigorously deny receiving those letters.

According to petitioner Tan, the signatures on the registry return cards were not his.

The petitioners denial of receipt of the demand letters was rightfully given scant consideration by the CA as it held:

Exhibits R and S are two letters of demand, respectively dated January 3, 1979 and January 30, 1979, asking settlement of the obligations covered by the promissory notes. The first letter was written by Ben Tio Peng Seng, Vice-President of the bank, and addressed to Lapulapu Foundation, Inc., attention of Mr. Elias Q. Tan, President, while the second was a final demand written by the appellees counsel, addressed to both defendants-appellants, and giving them five (5) days from receipt within which to settle or judicial action would be instituted against them. Both letters were duly received by the defendants, as shown by the registry return cards, marked as Exhibits R-2 and S-1, respectively. The allegation of Tan that he does not know who signed the said registry return receipts merits scant consideration, for there is no showing that the addresses thereon were wrong. Hence, the disputable presumption that a letter duly directed and mailed was received in the regular course of mail (per par. V, Section 3, Rule 131 of the Revised Rules on Evidence) still holds.8

There is no dispute that the promissory notes had already matured. However, the petitioners insist that the loans had not become due and demandable as they deny receipt of the respondent Banks demand letters. When presented the registry return cards during the trial, petitioner Tan claimed that he did not recognize the signatures thereon.The petitioners allegation and denial are self-serving. They cannot prevail over the registry return cards which constitute documentary evidence and which enjoy the presumption that, absent clear and convincing evidence to the contrary, these were regularly issued by the postal officials in the performance of their official duty and that they acted in good faith.9 Further, as the CA correctly opined, mails are presumed to have been properly delivered and received by the addressee in the regular course of the mail.10 As the CA noted, there is no showing that the addresses on the registry return cards were wrong. It is the petitioners burden to overcome the presumptions by sufficient evidence, and other than their barefaced denial, the petitioners failed to support their claim that they did not receive the demand letters; therefore, no prior demand was made on them by the respondent Bank.

Having established that the loans had become due and demandable, the Court shall now resolve the issue of whether the CA correctly held the petitioners jointly and solidarily liable therefor.

In disclaiming any liability for the loans, the petitioner Foundation maintains that these were contracted by petitioner Tan in his personal capacity and that it did not benefit therefrom. On the other hand, while admitting that the loans were his personal obligation, petitioner

Tan avers that he had an unwritten agreement with the respondent Bank that these loans would be renewed on a year-to-year basis and paid from the proceeds of his shares of stock in the Lapulapu Industries Corp.

These contentions are untenable.

The Court particularly finds as incredulous petitioner Tans allegation that he was made to sign blank loan documents and that the phrase IN MY OFFICIAL/PERSONAL CAPACITY was superimposed by the respondent Banks employee despite petitioner Tans protestation. The Court is hard pressed to believe that a businessman of petitioner Tans stature could have been so careless as to sign blank loan documents.

In contrast, as found by the CA, the promissory notes11 clearly showed upon their faces that they are the obligation of the petitioner Foundation, as contracted by petitioner Tan in his official and personal capacity.12 Moreover, the application for credit accommodation,13 the signature cards of the two accounts in the name of petitioner Foundation,14 as well as New Current Account Record,15 all accompanying the promissory notes, were signed by petitioner Tan for and in the name of the petitioner Foundation.16 These documentary evidence unequivocally and categorically establish that the loans were solidarily contracted by the petitioner Foundation and petitioner Tan.

As a corollary, the parol evidence rule likewise constrains this Court to reject petitioner Tans claim regarding the purported unwritten agreement between him and the respondent Bank on the payment of the obligation. Section 9, Rule 130 of the of the Revised Rules of Court provides that [w]hen the terms of an agreement have been reduced to writing, it is to be considered as containing all the terms agreed upon and there can be, between the parties and their successors-in-interest, no evidence of such terms other than the contents of the written agreement.17

In this case, the promissory notes are the law between the petitioners and the respondent Bank. These promissory notes contained maturity dates as follows: February 5, 1978, March 28, 1978, April 11, 1978 and May 5, 1978, respectively. That these notes were to be paid on these dates is clear and explicit. Nowhere was it stated therein that they would be renewed on a year-to-year basis or rolled-over annually until paid from the proceeds of petitioner Tans shares in the Lapulapu Industries Corp. Accordingly, this purported unwritten agreement could not be made to vary or contradict the terms and conditions in the promissory notes.

Evidence of a prior or contemporaneous verbal agreement is generally not admissible to vary, contradict or defeat the operation of a valid contract.18 While parol evidence is admissible to explain the meaning of written contracts, it cannot serve the purpose of incorporating into the contract additional contemporaneous conditions which are not mentioned at all in writing, unless there

has been fraud or mistake.19 No such allegation had been made by the petitioners in this case.

Finally, the appellate court did not err in holding the petitioners jointly and solidarily liable as it applied the doctrine of piercing the veil of corporate entity. The petitioner Foundation asserts that it has a personality separate and distinct from that of its President, petitioner Tan, and that it cannot be held solidarily liable for the loans of the latter.

The Court agrees with the CA that the petitioners cannot hide behind the corporate veil under the following circumstances:

The evidence shows that Tan has been representing himself as the President of Lapulapu Foundation, Inc. He opened a savings account and a current account in the names of the corporation, and signed the application form as well as the necessary specimen signature cards (Exhibits A, B and C) twice, for himself and for the foundation. He submitted a notarized Secretarys Certificate (Exhibit G) from the corporation, attesting that he has been authorized, inter alia, to sign for and in behalf of the Lapulapu Foundation any and all checks, drafts or other orders with respect to the bank; to transact business with the Bank, negotiate loans, agreements, obligations, promissory notes and other commercial documents; and to initially obtain a loan for P100,000.00 from any bank (Exhibits G-1 and G-2). Under these circumstances, the defendant corporation is liable for the transactions entered into by Tan on its behalf.20

Per its Secretarys Certificate, the petitioner Foundation had given its President, petitioner Tan, ostensible and apparent authority to inter alia deal with the respondent Bank. Accordingly, the petitioner Foundation is estopped from questioning petitioner Tans authority to obtain the subject loans from the respondent Bank. It is a familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority.21

In fine, there is no cogent reason to deviate from the CAs ruling that the petitioners are jointly and solidarily liable for the loans contracted with the respondent Bank.

WHEREFORE, premises considered, the petition is DENIED and the Decision dated June 26, 1996 and Resolution dated August 19, 1996 of the Court of Appeals in CA-G.R. CV No. 37162 are AFFIRMED in toto.

SO ORDERED.

Puno, (Chairman) Quisumbing, Austria-Martinez, and Tinga, JJ., concur.

8. SECOND DIVISION

[G.R. NO. 146667 : January 23, 2007]

JOHN F. McLEOD, Petitioner, v. NATIONAL LABOR RELATIONS COMMISSION (First Division), FILIPINAS SYNTHETIC FIBER CORPORATION (FILSYN), FAR EASTERN TEXTILE MILLS, INC., STA. ROSA TEXTILES, INC., (PEGGY MILLS, INC.), PATRICIO L. LIM, and ERIC HU, Respondents.

D E C I S I O N

CARPIO, J.:

The Case

This is a Petition for Review 1 to set aside the Decision2 dated 15 June 2000 and the Resolution3 dated 27 December 2000 of the Court of Appeals in CA-G.R. SP No. 55130. The Court of Appeals affirmed with modification the 29 December 1998 Decision4 of the National Labor Relations Commission (NLRC) in NLRC NCR 02-00949-95.

The Facts

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

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

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

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

On the other hand, respondents in their Position Paper alleged that complainant was the former Vice-President and Plant Manager of Peggy Mills, Inc.; that he was hired in June 1980 and Peggy Mills closed operations due to irreversible losses at the end of July 1992 but the corporation still exists at present; that its assets were acquired by Sta. Rosa Textile Corporation which was established in April 1992 but still remains non-operational at present; that complainant was hired as consultant by Sta. Rosa Textile in November 1992 but he resigned on November 30, 1993; that Filsyn and Far Eastern Textiles are separate legal entities and have no employer relationship with complainant; that respondent Patricio Lim is the President and Board Chairman of Sta. Rosa Textile Corporation; that respondent Eric Hu is a Taiwanese and is Director of Sta. Rosa Textiles, Inc.; that complainant has no cause of action against Filsyn, Far Eastern Textile Ltd., Sta. Rosa Textile Corporation and Eric Hu; that Sta. Rosa only acquired the assets and not the liabilities of Peggy Mills, Inc.; that Patricio Lim was only impleaded as Board Chairman of Sta. Rosa Textile and not as private individual; that while complainant was Vice President and Plant Manager of Peggy Mills, the union staged a strike up to July 1992 resulting in closure of operations due to irreversible losses as per Notice (Annex "1"); that complainant was relied upon to settle the labor problem but due to his lack of attention and absence the strike continued resulting in closure of the company; and losses to Sta. Rosa which

acquired its assets as per their financial statements (Annexes "2" and "3"); that the attendance records of complainant from April 1992 to November 1993 (Annexes "4" and "5") show that he was either absent or worked at most two hours a day; that Sta. Rosa and Peggy Mills are interposing counterclaims for damages in the total amount of P36,757.00 against complainant; that complainant's monthly salary at Peggy Mills was P50,495.00 and not P60,000.00; that Peggy Mills, does not have a retirement program; that whatever amount complainant is entitled should be offset with the counterclaims; that complainant worked only for 12 years from 1980 to 1992; that complainant was only hired as a consultant and not an employee by Sta. Rosa Textile; that complainant's attendance record of absence and two hours daily work during the period of the strike wipes out any vacation/sick leave he may have accumulated; that there is no basis for complainant's claim of two (2) business class airline tickets; that complainant's pay already included the holiday pay; that he is entitled to holiday pay as consultant by Sta. Rosa; that he has waived this benefit in his 12 years of work with Peggy Mills; that he is not entitled to 13th month pay as consultant; and that he is not entitled to moral and exemplary damages and attorney's fees.

In his Reply, complainant alleged that all respondents being one and the same entities are solidarily liable for all salaries and benefits and complainant is entitled to; that all respondents have the same address at 12/F B.A. Lepanto Building, Makati City; that their counsel holds office in the same address; that all respondents have the same offices and key personnel such as Patricio Lim and Eric Hu; that respondents' Position Paper is verified by Marialen C. Corpuz who knows all the corporate officers of all respondents; that the veil of corporate fiction may be pierced if it is used as a shield to perpetuate fraud and confuse legitimate issues; that complainant never accepted the change in his position from Vice-President and Plant Manger to consultant and it is incumbent upon respondents to prove that he was only a consultant; that the Deed of Dation in Payment with Lease (Annex "C") proves that Sta. Rosa took over the assets of Peggy Mills as early as June 15, 1992 and not 1995 as alleged by respondents; that complainant never resigned from his job but applied for retirement as per letters (Annexes "E-1", "E-2" and "F"); that documents "G", "H" and "I" show that Eric Hu is a top official of Peggy Mills that the closure of Peggy Mills cannot be the fault of complainant; that the strike was staged on the issue of CBA negotiations which is not part of the usual duties and responsibilities as Plant Manager; that complainant is a British national and is prohibited by law in engaging in union activities; that as per Resolution (Annex "3") of the NLRC in the proper case, complainant testified in favor of management; that the alleged attendance record of complainant was lifted from the logbook of a security agency and is hearsay evidence; that in the other attendance record it shows that complainant was reporting daily and even on Saturdays; that his limited hours was due to the strike and cessation of operations; that as plant manager

complainant was on call 24 hours a day; that respondents must pay complainant the unpaid portion of his salaries and his retirement benefits that cash voucher No. 17015 (Annex "K") shows that complainant drew the monthly salary of P60,000.00 which was reduced to P50,495.00 in August 1990 and therefore without the consent of complainant; that complainant was assured that he will be paid the deduction as soon as the company improved its financial standing but this assurance was never fulfilled; that Patricio Lim promised complainant his retirement pay as per the latter's letters (Annexes "E-1", "E-2" and "F"); that the law itself provides for retirement benefits; that Patricio Lim by way of Memorandum (Annex "M") approved vacation and sick leave benefits of 22 days per year effective 1986; that Peggy Mills required monthly paid employees to sign an acknowledgement that their monthly compensation includes holiday pay; that complainant was not made to sign this undertaking precisely because he is entitled to holiday pay over and above his monthly pay; that the company paid for complainant's two (2) round trip tickets to London in 1983 and 1986 as reflected in the complainant's passport (Annex "N"); that respondents claim that complainant is not entitled to 13th month pay but paid in 1993 and all the past 13 years; that complainant is entitled to moral and exemplary damages and attorney's fees; that all doubts must be resolved in favor of complainant; and that complainant reserved the right to file perjury cases against those concerned.

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

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

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

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

Retirement Benefits (one month salary for every year of service)

6/80 - 11/30/93 = 14 years

P60,000 x 14.0 mos. - P840,000.00

Vacation and Sick Leave (3 yrs.)

P2,000.00 x 22 days x 3 yrs. 132,000.00

Underpayment of Salaries (3 yrs.)

P60,000 - P50,495 = P9,505

P 9,505 x 36.0 mos. '. .. 342,180.00

Holiday Pay (3 yrs.)

P2,000 x 30 days - '. 60,000.00

Underpayment of 13th month pay (1993) ''. .. 15,816.87

Moral Damages '. . 3,000,000.00

Exemplary Damages '. . 1,000,000.00

10% Attorney's Fees '. 138,999.68

TOTAL P5,528,996.55

Unused Airline Tickets (3 yrs.)

(To be converted in Peso upon payment)

$2,450.00 x 3.0 [yrs.]..' $7,350.00

SO ORDERED.6

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

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

All other claims are DISMISSED for lack of merit.

SO ORDERED.7

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

The Ruling of the Court of Appeals

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

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

1. retirement pay equivalent to 22.5 days for every year of service for his twelve (12) years of service from 1980 to 1992 based on a salary rate of P50,495, a month;

2. moral damages in the amount of one hundred thousand (P100,000.00) Pesos;

3. exemplary damages in the amount of fifty thousand (P50,000.00) Pesos; andcralawlibrary

4. attorney's fees equivalent to 10% of the total award.

No costs is awarded.

SO ORDERED.10

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

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

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

The Court of Appeals pointed out that the Articles of Incorporation of PMI show that it has six incorporators, namely, Patricio, Jose Yulo, Jr., Carlos Palanca, Jr., Cesar R. Concio, Jr., E. A. Picasso, and Walter Euyang. On the other hand, the Articles of Incorporation of Filsyn

show that it has 10 incorporators, namely, Jesus Y. Yujuico, Carlos Palanca, Jr., Patricio, Ang Beng Uh, Ramon A. Yulo, Honorio Poblador, Jr., Cipriano Azada, Manuel Tomacruz, Ismael Maningas, and Benigno Zialcita, Jr.

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

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

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

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

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

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

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

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

The Court of Appeals also ruled that since PMI did not have a retirement program providing for retirement benefits of its employees, Article 287 of the Labor Code must be followed. The Court of Appeals thus upheld the NLRC's finding that McLeod was entitled to retirement pay equivalent to 22.5 days for every year of service

from 1980 to 1992 based on a salary rate of P50,495 a month.

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

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

Moreover, the Court of Appeals rejected McLeod's argument that since PMI paid for his two round-trip tickets Manila-London in 1983 and 1986, he was also "entitled to unused airline tickets." The Court of Appeals stated that the fact that PMI granted McLeod "free transport to and from Manila and London for the year 1983 and 1986 does not ipso facto characterize it as regular that would establish a prevailing company policy."

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

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

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

Hence, this petition.

The Issues

McLeod submits the following issues for our consideration:

1. Whether the challenged Decision and Resolution of the 14th Division of the Court of Appeals promulgated on 15 June 2000 and 27 December 2000, respectively, in CA-G.R. SP No. 55130 are in accord with law and jurisprudence;

2. Whether an employer-employee relationship exists between the private respondents and the petitioner for purposes of determining employer liability to the petitioner;

3. Whether the private respondents may avoid their financial obligations to the petitioner by invoking the veil of corporate fiction;

4. Whether petitioner is entitled to the relief he seeks against the private respondents;

5. Whether the ruling of [this] Court in Special Police and Watchman Association (PLUM) Federation v. National Labor Relations Commission cited by the Office of the Solicitor General is applicable to the case of petitioner; andcralawlibrary

6. Whether the appeal taken by the private respondents from the Decision of the labor arbiter meets the mandatory requirements recited in the Labor Code of the Philippines, as amended.13

The Court's Ruling

The petition must fail.

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

These assertions do not deserve serious consideration.

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

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

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

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

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

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

These assertions deserve scant consideration.

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

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

WHEREAS, by virtue of an inter-governmental agency arrangement, DBP transferred the Obligations, including the Assets, to the Asset Privatization Trust ("APT") and the latter has received payment for the Obligations from PMI, under APT's Direct Debt Buy-Out ("DDBO") program thereby causing APT to completely discharge and cancel the mortgage in the Assets and to release the titles of the Assets back to PMI;

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

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

x x x

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

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

As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and

paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the selling corporation fraudulently enters into the transaction to escape liability for those debts.26

None of the foregoing exceptions is present in this case.

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

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

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

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

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

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

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

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

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

x x x

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

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

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

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

ATTY. ESCANO:

Do you have any employment contract with Far Eastern Textile?cralaw library

WITNESS:

It is my belief up the present time.

ATTY. AVECILLA:

May I request that the witness be allowed to go through his Annexes, Your Honor.

ATTY. ESCANO:

Yes, but I want a precise answer to that question. If he has an employment contract with Far Eastern Textile?cralaw library

WITNESS:

Can I answer it this way, sir? There is not a valid contract but I was under the impression taking into consideration that the closeness that I had at Far Eastern Textile is enough during that period of time of the development of Peggy Mills to reorganize a staff. I was under the basic impression that they might still retain my status as Vice President and Plant Manager of the company.

ATTY. ESCANO:

But the answer is still, there is no employment contract in your possession appointing you in any capacity by Far Eastern?cralaw library

WITNESS:

There was no written contract, sir.

x x x

ATTY. ESCANO:

So, there is proof that you were in fact really employed by Peggy Mills?cralaw library

WITNESS:

Yes, sir.

ATTY. ESCANO:

Of course, my interest now is to whether or not there is a similar document to present that you were employed by the other respondents like Filsyn Corporation?cralaw library

WITNESS:

I have no document, sir.

ATTY. ESCANO:

What about Far Eastern Textile Mills?cralaw library

WITNESS:

I have no document, sir.

ATTY. ESCANO:

And Sta. Rosa Textile Mills?cralaw library

WITNESS:

There is no document, sir.31

x x x

ATTY. ESCANO:

Q Yes. Let me be more specific, Mr. McLeod. Do you have a contract of employment from Far Eastern Textiles, Inc.?cralaw library

A No, sir.

Q What about Sta. Rosa Textile Mills, do you have an employment contract from this company?cralaw library

A No, sir.

x x x

Q And what about respondent Eric Hu. Have you had any contract of employment from Mr. Eric Hu?cralaw library

A Not a direct contract but I was taken in and I told to take over this from Mr. Eric Hu. Automatically, it confirms that Mr. Eric Hu, in other words, was under the control of Mr. Patricio Lim at that period of time.

Q No documents to show, Mr. McLeod?cralaw library

A No. No documents, sir.32

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

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

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

This assertion is untenable.

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

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

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

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

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

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

In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the creation of the corporation is a devise to evade the application of the CBA between petitioner Union and private respondent Company. While we do not discount the possibility of the similarities of the businesses of private respondent and Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in granting the relief sought. The fact that the businesses of private respondent and Acrylic are related, that some of the employees of the private respondent are the same persons manning and providing for auxiliary services to the units of Acrylic, and that the physical plants, offices and facilities are situated in the same compound, it is our considered opinion that these facts are not sufficient to justify the piercing of the corporate veil of Acrylic.42 (Emphasis supplied)cralawlibrary

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

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

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

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

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

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

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

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

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

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

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

To reiterate, a corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The rule is that obligations incurred by the corporation, acting through its directors, officers, and employees, are its sole liabilities.56

Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) they consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (3) they agree to hold themselves personally and solidarily liable with the corporation; or (4) they are made by specific provision of law personally answerable for their corporate action.57

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

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

In the present case, there is nothing substantial on record to show that Patricio acted in bad faith in terminating McLeod's services to warrant Patricio's personal liability. PMI had no other choice but to stop plant operations. The work stoppage therefore was by necessity. The company could no longer continue with its plant operations because of the serious business

losses that it had suffered. The mere fact that Patricio was president and director of PMI is not a ground to conclude that he should be held solidarily liable with PMI for McLeod's money claims.

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

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

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

Article 273 of the Code provides that:

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

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

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

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

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

x x x

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

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

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

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

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

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

Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of petitioner corporation. There appears to be no evidence on record that he acted maliciously or in bad faith in terminating the

services of private respondents. His act, therefore, was within the scope of his authority and was a corporate act.

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

Thus, the rule is still that the doctrine of piercing the corporate veil applies only when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime. In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities. Neither Article 212(c) nor Article 273 (now 272) of the Labor Code expressly makes any corporate officer personally liable for the debts of the corporation. As this Court ruled in H.L. Carlos Construction, Inc. v. Marina Properties Corporation:63

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

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

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

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

McLeod is not entitled to payment of vacation leave and sick leave as well as to holiday pay. Article 82, Title I,

Book Three of the Labor Code, on Working Conditions and Rest Periods, provides:

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

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

As Vice President/Plant Manager, McLeod is a managerial employee who is excluded from the coverage of Title I, Book Three of the Labor Code. McLeod is entitled to payment of vacation leave and sick leave only if he and PMI had agreed on it. The payment of vacation leave and sick leave depends on the policy of the employer or the agreement between the employer and employee.65 In the present case, there is no showing that McLeod and PMI had an agreement concerning payment of these benefits.

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

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

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

amount and had been a long and regular practice on the part of the employer.

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

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

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

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

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

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

Q You also stated that before the period of the strike as shown by annex "K" of the reply filed by the complainant which was I think a voucher, the salary of Mr. McLeod was roughly P60,000.00 a month?cralaw library

A Yes, sir.

Q And as shown by their annex "L" to their reply, that this was reduced to roughly P50,000.00 a month?cralaw library

A Yes, sir.

Q You stated that this was indeed upon the instruction by the Vice-President of Peggy Mills at that time and that was Mr. Philip Lim, would you not?cralaw library

A Yes, sir.

Q Of your own personal knowledge, can you say if this was, in fact, by agreement between Mr. Philip Lim or any other officers of Peggy Mills and Mr. McLeod?cralaw library

A If I recall it correctly, I assume it was an agreement, verbal agreement with, between Mr. Philip Lim and Mr. McLeod, because the voucher that we prepared was actually acknowledged by Mr. McLeod, the reduced amount was acknowledged by Mr. McLeod thru the voucher that we prepared.

Q In other words, Mr. Witness, you mean to tell us that Mr. McLeod continuously received the reduced amount of P50,000.00 by signing the voucher and receiving the amount in question?cralaw library

A Yes, sir.

Q As far as you remember, Mr. Posio, was there any complaint by Mr. McLeod because of this reduced amount of his salary at that time?cralaw library

A I don't have any personal knowledge of any complaint, sir.

Q At least, that is in so far as you were concerned, he said nothing when he signed the voucher in question?cralaw library

A Yes, sir.

Q Now, you also stated that the reason for what appears to be an agreement between Peggy Mills and Mr. McLeod in so far as the reduction of his salary from P60,000.00 to P50,000.00 a month was because he would have a reduced number of working days in view of the strike at Peggy Mills, is that right?cralaw library

A Yes, sir.

Q And that this was so because on account of the strike, there was no work to be done in the company?cralaw library

A Yes, sir.78

x x x

Q Now, you also stated if you remember during the first time that you testified that in the beginning, the monthly salary of the complainant was P60,000.00, is that correct?cralaw library

A Yes, sir.

Q And because of the long period of the strike, when there was no work to be done, by agreement with the complainant, his monthly salary was adjusted to only P50,495 because he would not have to report for work

on Saturday. Do you remember having made that explanation?cralaw library

A Yes, sir.

Q You also stated that the complainant continuously received his monthly salary in the adjusted amount of P50,495.00 monthly signing the necessary vouchers or pay slips for that without complaining, is that not right, Mr. Posio?cralaw library

A Yes, sir.79

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

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

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

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

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

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

There is no basis for the award of moral damages.

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

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

McLeod admitted at the hearing before the Labor Arbiter that PMI has made this offer ─

ATTY. ESCANO:

x x x According to your own statement in your Position Paper and I am referring to page 8, your unpaid retirement benefit for fourteen (14) years of service at P60,000.00 per year is P840,000.00, is that correct?cralaw library

WITNESS:

That is correct, sir.

ATTY. ESCANO:

And this amount is correct P840,000.00, according to your Position Paper?cralaw library

WITNESS:

That is correct, sir.

ATTY. ESCANO:

The question I want to ask is, are you aware that this amount was offered to you sometime last year through your own lawyer, my good friend, Atty. Avecilla, who is right here with us?cralaw library

WITNESS:

I was aware, sir.

ATTY. ESCANO:

So this was offered to you, is that correct?cralaw library

WITNESS:

I was told that a fixed sum of P840,000.00 was offered.

ATTY. ESCANO:

And, of course, the reason, if I may assume, that you declined this offer was that, according to you, there are other claims which you would like to raise against the Respondents which, by your impression, they were not willing to pay in addition to this particular amount?cralaw library

WITNESS:

Yes, sir.

ATTY. ESCANO:

The question now is, if the same amount is offered to you by way of retirement which is exactly what you stated in your own Position Paper, would you accept it or not?cralaw library

WITNESS:

Not on the concept without all the basic benefits due me, I will refuse.82

x x x

ATTY. ROXAS:

Q You mentioned in the cross-examination of Atty. Escano that you were offered the separation pay in 1994, is that correct, Mr. Witness?cralaw library

WITNESS:

A I was offered a settlement of P300,000.00 for complete settlement and that was I think in January or February 1994, sir.

ATTY. ESCANO:

No. What was mentioned was the amount of P840,000.00.

WITNESS:

What did you say, Atty. Escano?cralaw library

ATTY. ESCANO:

The amount that I mentioned was P840,000.00 corresponding to the . . . . . . .

WITNESS:

May I ask that the question be clarified, your Honor?cralaw library

ATTY. ROXAS:

Q You mentioned that you were offered for the settlement of your claims in 1994 for P840,000.00, is that right, Mr. Witness?cralaw library

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

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

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

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

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

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

SO ORDERED.

9. [G.R. NO. 147590 : April 2, 2007]

ANTONIO C. CARAG, Petitioner, v. NATIONAL LABOR RELATIONS COMMISSION, ISABEL G. PANGANIBAN-ORTIGUERRA, as Executive Labor Arbiter, NAFLU, and MARIVELES APPAREL CORPORATION LABOR UNION, Respondents.

D E C I S I O N

CARPIO, J.:

The Case

This is a Petition for Review on Certiorari 1 assailing the Decision dated 29 February 20002 and the Resolution dated 27 March 20013 of the Court of Appeals (appellate court) in CA-G.R. SP Nos. 54404-06. The appellate court affirmed the decision dated 17 June 19944 of Labor Arbiter Isabel Panganiban-Ortiguerra (Arbiter Ortiguerra) in RAB-III-08-5198-93 and the resolution dated 5 January 19955 of the National Labor Relations Commission (NLRC) in NLRC CA No. L-007731-94.

Arbiter Ortiguerra held that Mariveles Apparel Corporation (MAC), MAC's Chairman of the Board Antonio Carag (Carag), and MAC's President Armando David (David) (collectively, respondents) are guilty of illegal closure and are solidarily liable for the separation pay of MAC's rank and file employees. The NLRC denied the motion to reduce bond filed by MAC and Carag.

The Facts

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

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

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

4. That at the time of closure, employees who have rendered one to two weeks work were not paid their

corresponding salaries/wages, which remain unpaid until time [sic] of this writing.

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

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

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

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

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

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

The provision was culled from Section 2, Republic Act 602, the Minimum Wage Act. If the employer is an artificial person, it must have an officer who can be presumed to be the employer, being "the person acting in the interest of the employer." The corporation is the employer, only in the technical sense. (A.C. Ransom Labor Union CCLU v. NLRC, G.R. 69494, June 10, 1986). Where the employer-corporation, AS IN THE PRESENT CASE, is no longer existing and unable to satisfy the judgment in favor of the employee, the officer should be held liable for acting on behalf of the corporation. (Gudez v. NLRC, G.R. 83023, March 22, 1990). Also in the recent celebrated case of Camelcraft Corporation v. NLRC, G.R. 90634-35 (June 6, 1990), Carmen contends that she is not liable for the acts of the company, assuming it had [acted] illegally, because Camelcraft in a distinct and separate entity with a legal personality of its own. She claims that she is only an agent of the company carrying out the decisions of its board of directors, "We do not agree," said the Supreme Court. "She is, in fact and legal effect, the corporation, being not only its president and general manager but also its owner." The responsible officer of an employer can be held personally liable not to say even criminally liable for nonpayment of backwages. This is the policy of the law. If it were otherwise, corporate employers would have devious ways to evade paying backwages. (A.C. Ransom Labor Union-CCLU V. NLRC, G.R. 69494, June 10, 1986). If no definite proof exists as to who is the responsible officer, the president of the corporation who can be deemed to be its chief operation officer shall be presumed to be the responsible officer. In Republic Act 602, for example, criminal responsibility is with the "manager" or in his default, the person acting as such (Ibid.)7 (Emphasis supplied)cralawlibrary

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

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

The Ruling of the Labor Arbiter

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

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

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

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

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

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

The complainants pray that they be allowed to implead Atty. Antonio Carag and Mr. Armando David[,] owners and responsible officer[s] of respondent company to assure the satisfaction of the judgment, should a decision favorable to them be rendered. In support of their claims, the complainants invoked the ruling laid down by the Supreme Court in the case of A.C. Ransom Labor Union CCLU v. NLRC, G.R. No. 69494, June 10, 1986 where it was held that [a] corporate officer can be held liable for acting on behalf of the corporation when the latter is no longer in existence and there are valid claims of workers that must be satisfied.

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

The respondents on the other hand by way of controversion maintain that the present complaint was filed prematurely. The respondents deny having totally closed and insist that respondent company is only on a

temporary shut-down occasioned by the pending labor unrest. There being no permanent closure any claim for separation pay must not be given due course.

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

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

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

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

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

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

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

The respondents described the cessation of operations in its premises as a temporary shut-down. While such posturing may have been initially true, it is not so anymore. The cessation of operations has clearly exceeded the six months period fixed in Article 286 of the Labor Code. The temporary shutdown has ripened into a closure or cessation of operations for causes not due to serious business losses or financial reverses. Consequently, the respondents must pay the displaced employees separation pay in accordance with the computation prescribed in the CBA, to wit, one month pay for every year of service. It must be stressed that respondents did not controvert the verity of the CBA provided computation.

The complainants claim that Atty. Antonio Carag and Mr. Armando David should be held jointly and severally liable with respondent corporation. This bid is premised on the belief that the impleader of the aforesaid officers will guarantee payment of whatever may be adjudged in complainants' favor by virtue of this case. It is a basic principle in law that corporations have personality distinct and separate from the stockholders. This concept is known as corporate fiction. Normally, officers acting for and in behalf of a corporation are not held personally liable for the obligation of the corporation. In instances where corporate officers dismissed employees in bad faith or wantonly violate labor standard laws or when the company had already ceased operations and

there is no way by which a judgment in favor of employees could be satisfied, corporate officers can be held jointly and severally liable with the company. This Office after a careful consideration of the factual backdrop of the case is inclined to grant complainants' prayer for the impleader of Atty. Antonio Carag and Mr. Armando David, to assure that valid claims of employees would not be defeated by the closure of respondent company.

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

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

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

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

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

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

SO ORDERED.8 (Emphasis supplied)cralawlibrary

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

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

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

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

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

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

Respondents also filed separate motions to reduce bond.

The Ruling of the NLRC

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

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

No further Motions for Reconsideration shall be entertained.

SO ORDERED.10

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

The Ruling of the Appellate Court

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

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

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

SO ORDERED.12 (Emphasis in the original)

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

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

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

The Issues

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

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

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

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

The Ruling of the Court

We find the petition meritorious.

On Denial of Due Process to Carag and David

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

It is clear from the narration in Arbiter Ortiguerra's Decision that she only summoned complainants and MAC, and not Carag, to a conference for possible settlement. In her Decision, Arbiter Ortiguerra stated that she scheduled the conference "upon receipt of the record of the case." At the time of the conference, complainants had not yet submitted their position paper which contained the motion to implead Carag. Complainants could not have submitted their position paper before the conference since procedurally the Arbiter directs the submission of position papers only after the conference.21 Complainants submitted their position paper only on 10 January 1994, five months after filing the complaint. In short, at the time of the conference, Carag was not yet a party to the case. Thus,

Arbiter Ortiguerra could not have possibly summoned Carag to the conference.

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

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

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

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

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

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

Second, the parties agreed to submit their respective motions - petitioner's motion to declare respondents in default and private respondents' motion for bill of particulars - for the consideration of the Labor Arbiter. The Labor Arbitration Associate, one Ms. Gloria Vivar,

then informed the parties that they would be notified of the action of the Labor Arbiter on the pending motions.

x x x

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

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

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

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

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

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

On the Liability of Directors for Corporate Debts

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

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

x x x

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

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

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

Arbiter Ortiguerra stated in her Decision that:

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

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

To hold a director personally liable for debts of the corporation, and thus pierce the veil of corporate fiction,

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

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

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

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

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

In this case, Article 28328 of the Labor Code, requiring a one-month prior notice to employees and the Department of Labor and Employment before any

permanent closure of a company, does not state that non-compliance with the notice is an unlawful act punishable under the Code. There is no provision in any other Article of the Labor Code declaring failure to give such notice an unlawful act and providing for its penalty.

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

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

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

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

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

Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) they consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (3) they agree to hold themselves personally and solidarily liable with the corporation; or (4) they are made by specific provision of law personally answerable for their corporate action. http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm -

x x x

The ruling in A.C. Ransom Labor Union-CCLU v. NLRC,http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm - which the Court of Appeals cited, does not apply to this case. We quote pertinent portions of the ruling, thus:

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

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

Article 273 of the Code provides that:

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

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

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

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

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

x x x

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

Clearly, in A.C. Ransom, RANSOM, through its President, organized ROSARIO to evade payment of backwages to the 22 strikers. This situation, or anything similar showing malice or bad faith on the part of Patricio, does not obtain in the present case. In Santos v. NLRC, http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm - the Court held, thus:

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

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

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

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

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

It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Petitioner Sunio, therefore, should not have been made personally answerable for the payment of private respondents' back salaries.http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm -

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

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

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

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

Thus, it was error for Arbiter Ortiguerra, the NLRC, and the Court of Appeals to hold Carag personally liable for the separation pay owed by MAC to complainants based alone on Article 212(e) of the Labor Code. Article 212(e) does not state that corporate officers are personally

liable for the unpaid salaries or separation pay of employees of the corporation. The liability of corporate officers for corporate debts remains governed by Section 31 of the Corporation Code.

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

SO ORDERED.

10. SECOND DIVISION

[G.R. No. 170352, June 01 : 2011]

MEGAN SUGAR CORPORATION, PETITIONER, VS. REGIONAL TRIAL COURT OF ILOILO, BRANCH 68, DUMANGAS, ILOILO; NEW FRONTIER SUGAR CORPORATION AND EQUITABLE PCI BANK, RESPONDENTS.D E C I S I O N

PERALTA, J.:

Before this Court is a petition for review on certiorari,[1] under Rule 45 of the Rules of Court, seeking to set aside the August 23, 2004 Decision[2] and October 12, 2005 Resolution[3] of the Court of Appeals (CA), in CA-G.R. SP No. 75789.

The facts of the case are as follows:

On July 23, 1993, respondent New Frontier Sugar Corporation (NFSC) obtained a loan from respondent Equitable PCI Bank (EPCIB). Said loan was secured by a real estate mortgage over NFSC's land consisting of ninety-two (92) hectares located in Passi City, Iloilo, and a chattel mortgage over NFSC's sugar mill.

On November 17, 2000, because of liquidity problems and continued indebtedness to EPCIB, NFSC entered into a Memorandum of Agreement[4] (MOA) with Central Iloilo Milling Corporation (CIMICO), whereby the latter agreed to take-over the operation and management of the NFSC raw sugar factory and facilities for the period covering crop years 2000 to 2003.

On April 19, 2002, NFSC filed a compliant for specific performance and collection[5] against CIMICO for the latter's failure to pay its obligations under the MOA.

In response, CIMICO filed with the Regional Trial Court (RTC) of Dumangas, Iloilo, Branch 68, a case against NFSC for sum of money and/or breach of contract.[6] The case was docketed as Civil Case No. 02-243.

On May 10, 2002, because of NFSC's failure to pay its debt, EPCIB instituted extra-judicial foreclosure proceedings over NFSC's land and sugar mill. During public auction, EPCIB was the sole bidder and was thus able to buy the entire property and consolidate the titles in its name. EPCIB then employed the services of Philippine Industrial Security Agency (PISA) to help it in its effort to secure the land and the sugar mill.

On September 16, 2002, CIMICO filed with the RTC an Amended Complaint[7] where it impleaded PISA and EPCIB. As a result, on September 25, 2002, upon the motion of CIMICO, the RTC issued a restraining order, directing EPCIB and PISA to desist from taking possession over the property in dispute. Hence, CIMICO was able to continue its possession over the property.

On October 3, 2002, CIMICO and petitioner Megan Sugar Corporation (MEGAN) entered into a MOA[8] whereby MEGAN assumed CIMICO's rights, interests and obligations over the property. As a result of the foregoing undertaking, MEGAN started operating the sugar mill on November 18, 2002.

On November 22, 2002, Passi Iloilo Sugar Central, Inc. (Passi Sugar) filed with the RTC a Motion for Intervention claiming to be the vendee of EPCIB. Passi Sugar claimed that it had entered into a Contract to Sell[9] with EPCIB after the latter foreclosed NFSC's land and sugar mill.

On November 29, 2002, during the hearing on the motion for intervention, Atty. Reuben Mikhail Sabig (Atty. Sabig) appeared before the RTC and entered his appearance as counsel for MEGAN. Several counsels objected to Atty. Sabig's appearance since MEGAN was not a party to the proceedings; however, Atty. Sabig explained to the court that MEGAN had purchased the interest of CIMICO and manifested that his statements would bind MEGAN.

On December 10, 2002, EPCIB filed a Motion for Delivery/Deposit of Mill Shares/Rentals.[10]

On December 11, 2002, Passi Sugar filed a Motion to Order Deposit of Mill Share Production of "MEGAN" and/or CIMICO.[11] On the same day, NFSC filed a Motion to Order Deposit of Miller's Share (37%) or the Lease Consideration under the MOA between NFSC and CIMICO.[12]

On December 27, 2002, NFSC filed another Motion to Hold in Escrow Sugar Quedans or Proceeds of Sugar Sales Equivalent to Miller's Shares.[13]

On January 16, 2003, the RTC issued an Order[14] granting EPCIB's motion for the placement of millers' share in escrow. The dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the motions to place the mill's share in escrow to the court is hereby GRANTED.

Megan Sugar Corporation or its director-officer, Mr. Joey Concha, who is General Manager of Megan, is ordered to deposit in escrow within five (5) days upon receipt of this order, the sugar quedans representing the miller's share to the Court starting from December 19, 2002 and thereafter, in every Friday of the week pursuant to the Memorandum of Agreement executed by plaintiff CIMICO and defendant NFSC.

SO ORDERED. [15]

On January 29, 2003, Atty. Sabig filed an Omnibus Motion for Reconsideration and Clarification.[16] On February 19, 2003, the RTC issued an Order[17] denying said motion.

On February 27, 2003, EPCIB filed an Urgent Ex-Parte Motion for Execution,[18] which was granted by the RTC in an Order[19] dated February 28, 2003.

Aggrieved by the orders issued by the RTC, MEGAN filed before the CA a petition for certiorari,[20] dated March 5, 2003. In said petition, MEGAN argued mainly on two points; first, that the RTC erred when it determined that MEGAN was subrogated to the obligations of CIMICO and; second, that the RTC had no jurisdiction over MEGAN.

On August 23, 2004, the CA issued a Decision dismissing MEGAN's petition, the dispositive portion of which reads:

WHEREFORE, premises considered, the Petition for Certiorari is hereby DENIED and forthwith DISMISSED for lack of merit. Cost against petitioner.

SO ORDERED.[21]

In denying MEGAN's petition, the CA ruled that since Atty. Sabig had actively participated before the RTC, MEGAN was already estopped from assailing the RTC's jurisdiction.

Aggrieved, MEGAN then filed a Motion for Reconsideration,[22] which was, however, denied by the CA in Resolution dated October 12, 2005.

Hence, herein petition, with MEGAN raising the following issues for this Court's consideration, to wit:

I.

WHETHER OR NOT THE PETITIONER IS ESTOPPED FROM QUESTIONING THE ASSAILED ORDERS BECAUSE OF THE ACTS OF ATTY. REUBEN MIKHAIL SABIG.

II.

WHETHER OR NOT THE REGIONAL TRIAL COURT HAD JURISDICTION TO ISSUE THE ORDERS DATED JANUARY 16, 2003, FEBRUARY 19, 2003 AND FEBRUARY 28, 2003.[23]

The petition is not meritorious.

MEGAN points out that its board of directors did not issue a resolution authorizing Atty. Sabig to represent the corporation before the RTC. It contends that Atty. Sabig was an unauthorized agent and as such his actions should not bind the corporation. In addition, MEGAN argues that the counsels of the different parties were aware of Atty. Sabig's lack of authority because he declared in court that he was still in the process of taking over the case and that his voluntary appearance was just for the hearing of the motion for intervention of Passi Sugar.

Both EPCIB and NFSC, however, claim that MEGAN is already estopped from assailing the authority of Atty. Sabig. They contend that Atty. Sabig had actively participated in the proceedings before the RTC and had even filed a number of motions asking for affirmative relief. They also point out that Jose Concha (Concha), who was a member of the Board of Directors of MEGAN, accompanied Atty. Sabig during the hearing. Lastly, EPCIB and NFSC contend that all the motions, pleadings and court orders were sent to the office of MEGAN; yet, despite the same, MEGAN never repudiated the authority of Atty. Sabig.

After a judicial examination of the records pertinent to the case at bar, this Court agrees with the finding of the CA that MEGAN is already estopped from assailing the jurisdiction of the RTC.

Relevant to the discussion herein is the transcript surrounding the events of the November 29, 2002 hearing of Passi Sugar's motion for intervention, to wit:

ATTY. ARNOLD LEBRILLA:

Appearing as counsel for defendant PCI Equitable Bank, your Honor.

ATTY. CORNELIO PANES:

Also appearing as counsel for defendant New Frontier Sugar Corporation.

ATTY. ANTONIO SINGSON:

I am appearing, your Honor, as counsel for Passisugar.

ATTY. REUBEN MIKHAIL SABIG:

Appearing your Honor, for Megan Sugar, Inc.

ATTY. LEBRILLA: Your Honor, the counsel for the plaintiff CIMICO has not yet arrived.

ATTY. SABIG: Your Honor, we have been furnished of a copy of the motion. I've talked to Atty. [Leonardo] Jiz and he informed me that he cannot attend this hearing because we are in the process of taking over this case. However, the Passisugar had intervened and we have to appear because we have been copy furnished of the motion, and also, your Honor, since the motion will directly affect Megan and we are appearing in this hearing despite the fact that we had not officially received the copy of the motion. Anyway, your Honor, since we are in the process of taking over this case, Atty. Jiz told me that he cannot appear today.

COURT: Here is the representative from CIMICO.

ATTY. PANES: Yes, your Honor, Atty. Gonzales is here.

ATTY. NELIA JESUSA GONZALES:

I am appearing in behalf of the plaintiff CIMICO, your Honor.

x x x x

COURT: Shall we tackle first your motion for intervention?

ATTY. SINGSON: Yes, your Honor.

ATTY. PANES: Yes, your Honor, and I would like to make a manifestation in relation to the appearance made by Atty. Sabig. Megan is not, in anyway, a party [to] this case and if he must join, he can file a motion for intervention. We would like to reiterate our stand that he cannot participate in any proceeding before this Court particularly in this case.

COURT: Yes, that is right.

ATTY. SINGSON: Yes, your Honor, unless there is a substitution of the plaintiff.

ATTY. SABIG: I understand, your Honor, that we have been served a copy of this motion.

ATTY. PANES: A service copy of the motion is only a notice and it is not, in anyway, [a] right for him to appear as a party.

COURT: Just a moment, Atty. Panes. Shall we allow Atty. Sabig to finish first?

ATTY. SABIG: This motion directly affects us and that's why we're voluntarily appearing, just for this hearing on the motion and not for the case itself, specifically for the hearing [on] this motion. That's our appearance for today because we have been served and we have to protect our interest. We are not saying that we are taking over the case but there is a hearing for the motion in intervention and we have been served a copy, that's why we appear voluntarily.

ATTY. LEBRILLA: Your Honor, please, for the defendant, we do not object to the appearance of the counsel for Megan provided that the counsel could assure us that whatever he says [all through] in this proceeding will [bind] his client, your Honor, as he is duly authorized by the corporation, under oath, your Honor, that whatever he says here is binding upon the corporation.

ATTY. SABIG: Yes, your Honor.

COURT: But I thought all the while that your motion for intervention will implead Megan.

ATTY. SINGSON: We will not yet implead them, your Honor.

COURT: Why will you not implead them because they are now in possession of the mill?

ATTY. SINGSON: That's why we want to be clarified. In what capacity is Megan entering into the picture? That's the point now that we would like to ask them. So, whatever statement you'll be making here will bind Megan?

ATTY. SABIG: Yes, your Honor. Specifically for the hearing because apparently, we have to voluntarily appear since they furnished us a copy that would directly affect our rights.

x x x x

COURT: Are you saying that you are appearing now in behalf of Megan?

ATTY. SABIG: Yes, your Honor.

COURT: And whatever statement you made here will bind Megan?

ATTY. SABIG: Yes, your Honor.

x x x x

COURT: That's why you're being asked now what interest [does] Megan have here?

ATTY. SABIG: We are already in possession of the mill, your Honor.

ATTY. SINGSON: You are in possession of the mill. [On] what authority are you in possession, this Megan group?

ATTY. SABIG: We have a Memorandum of Agreement which we entered, your Honor, and they transferred their [referring to CIMICO] rights to us.[24]

The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and justice, and its purpose is to forbid one to speak against his own act, representations, or commitments to the injury of one to whom they were directed and who reasonably relied thereon. The doctrine of estoppel springs from equitable principles and the equities in the case. It is designed to aid the law in the administration of justice where without its aid injustice might result. It has been applied by this Court wherever and whenever special circumstances of a case so demand.[25]

Based on the events and circumstances surrounding the issuance of the assailed orders, this Court rules that MEGAN is estopped from assailing both the authority of Atty. Sabig and the jurisdiction of the RTC. While it is true, as claimed by MEGAN, that Atty. Sabig said in court that he was only appearing for the hearing of Passi Sugar's motion for intervention and not for the case itself, his subsequent acts, coupled with MEGAN's

inaction and negligence to repudiate his authority, effectively bars MEGAN from assailing the validity of the RTC proceedings under the principle of estoppel.

In the first place, Atty. Sabig is not a complete stranger to MEGAN. As a matter of fact, as manifested by EPCIB, Atty. Sabig and his law firm SABIG SABIG & VINGCO Law Office has represented MEGAN in other cases[26] where the opposing parties involved were also CIMICO and EPCIB. As such, contrary to MEGAN's claim, such manifestation is neither immaterial nor irrelevant,[27] because at the very least, such fact shows that MEGAN knew Atty. Sabig.

MEGAN can no longer deny the authority of Atty. Sabig as they have already clothed him with apparent authority to act in their behalf. It must be remembered that when Atty. Sabig entered his appearance, he was accompanied by Concha, MEGAN's director and general manager. Concha himself attended several court hearings, and on December 17, 2002, even sent a letter[28] to the RTC asking for the status of the case. A corporation may be held in estoppel from denying as against innocent third persons the authority of its officers or agents who have been clothed by it with ostensible or apparent authority.[29]Atty. Sabig may not have been armed with a board resolution, but the appearance of Concha made the parties assume that MEGAN had knowledge of Atty. Sabig's actions and, thus, clothed Atty. Sabig with apparent authority such that the parties were made to believe that the proper person and entity to address was Atty. Sabig. Apparent authority, or what is sometimes referred to as the "holding out" theory, or doctrine of ostensible agency, imposes liability, not as the result of the reality of a contractual relationship, but rather because of the actions of a principal or an employer in somehow misleading the public into believing that the relationship or the authority exists.[30]

Like the CA, this Court notes that MEGAN never repudiated the authority of Atty. Sabig when all the motions, pleadings and court orders were sent not to the office of Atty. Sabig but to the office of MEGAN, who in turn, would forward all of the same to Atty. Sabig, to wit:

x x x All the motions, pleadings and other notices in the civil case were mailed to Atty. Reuben Mikhail P. Sabig, Counsel for Megan Sugar, NFSC Compound, Barangay Man-it, Passi, Iloilo City which is the address of the Sugar Central being operated by Megan Sugar. The said address is not the real office address of Atty. Sabig. As pointed out by private respondent Equitable PCI Bank, the office address of Atty. Sabig is in Bacolod City. All orders, pleadings or motions filed in Civil Case 02-243 were received in the sugar central being operated by Megan Central and later forwarded by Megan Sugar to Atty. Sabig who is based in Bacolod City. We find it incredible that, granting that there was no authority given to said counsel, the record shows that it was received in the sugar mill operated by Megan and passed on to Atty. Sabig. At any stage, petitioner could have repudiated

Atty. Sabig when it received the court pleadings addressed to Atty. Sabig as their counsel.[31]

One of the instances of estoppel is when the principal has clothed the agent with indicia of authority as to lead a reasonably prudent person to believe that the agent actually has such authority.[32] With the case of MEGAN, it had all the opportunity to repudiate the authority of Atty. Sabig since all motions, pleadings and court orders were sent to MEGAN's office. However, MEGAN never questioned the acts of Atty. Sabig and even took time and effort to forward all the court documents to him.

To this Court's mind, MEGAN cannot feign knowledge of the acts of Atty. Sabig, as MEGAN was aware from the very beginning that CIMICO was involved in an on-going litigation. Such fact is clearly spelled out in MEGAN's MOA with CIMICO, to wit:

WHEREAS, CIMICO had filed a 2nd Amended Complaint for Sum of Money, Breach of Contract and Damages with Preliminary Injunction with a Prayer for a Writ of Temporary Restraining Order against the NEW FRONTIER SUGAR CORPORATION, pending before Branch 68 of the Regional Trial Court, based in Dumangas, Iloilo, Philippines, entitled CENTRAL ILOILO MILLING CORPORATION (CIMICO) versus NEW FRONTIER SUGAR CORPORATION (NFSC), EQUITABLE PCI BANK and PHILIPPINE INDUSTRIAL SECURITY AGENCY docketed as CIVIL CASE NO. 02-243;[33]

Considering that MEGAN's rights stemmed from CIMICO and that MEGAN was only to assume the last crop period of 2002-2003 under CIMICO's contract with NFSC,[34] it becomes improbable that MEGAN would just wait idly by for the final resolution of the case and not send a lawyer to protect its interest.

In addition, it bears to point out that MEGAN was negligent when it did not assail the authority of Atty. Sabig within a reasonable time from the moment when the first adverse order was issued. To restate, the January 16, 2003 RTC Order directed MEGAN to deposit a sizable number of sugar quedans. With such an order that directly affects the disposition of MEGAN's assets and one that involves a substantial amount, it is inconceivable for Atty. Sabig or for Concha not to inform MEGAN's board of such an order or for one of the directors not to hear of such order thru other sources. As manifested by NFSC, MEGAN is a family corporation and Concha is the son-in-law of Eduardo Jose Q. Miranda (Eduardo), the President of MEGAN. Elizabeth Miranda, one of the directors, is the daughter of Eduardo. MEGAN's treasurer, Ramon Ortiz is a cousin of the Mirandas.[35] Thus, given the nature and structure of MEGAN's board, it is unimaginable that not a single director was aware of the January 16, 2003 RTC Order. However, far from repudiating the authority of Atty. Sabig, Atty. Sabig even filed a Manifestation[36] that

MEGAN will deposit the quedans, as directed by the RTC, every "Friday of the week."

MEGAN had all the opportunity to assail the jurisdiction of the RTC and yet far from doing so, it even complied with the RTC Order. With the amount of money involved, it is beyond belief for MEGAN to claim that it had no knowledge of the events that transpired. Moreover, it bears to stress that Atty. Sabig even filed subsequent motions asking for affirmative relief, more important of which is his March 27, 2003 Urgent Ex-Parte Motion[37] asking the RTC to direct the Sugar Regulatory Administration (SRA) to release certain quedans in favor of MEGAN on the premise that the same were not covered by the RTC Orders. Atty. Sabig manifested that 30% of the value of the quedans will be deposited in court as payment for accrued rentals. Noteworthy is the fact that Atty. Sabig's motion was favorably acted upon by the RTC. Like the CA, this Court finds that estoppel has already set in. It is not right for a party who has affirmed and invoked the jurisdiction of a court in a particular matter to secure an affirmative relief to afterwards deny that same jurisdiction to escape a penalty.[38] The party is barred from such conduct not because the judgment or order of the court is valid but because such a practice cannot be tolerated for reasons of public policy.[39]

Lastly, this Court also notes that on April 2, 2003, Atty. Sabig again filed an Urgent Ex-Parte Motion[40] asking the RTC to direct the SRA to release certain quedans not covered by the RTC Orders. The same was granted by the RTC in an Order[41] dated April 2, 2003. Curiously, however, Rene Imperial, the Plant Manager of MEGAN, also signed the April 2, 2003 RTC Order and agreed to the terms embodied therein. If Atty. Sabig was not authorized to act in behalf of MEGAN, then why would MEGAN's plant manager sign an official document assuring the RTC that he would deliver 30% of the value of the quedans earlier released to MEGAN pursuant to the March 27, 2003 Order?

The rule is that the active participation of the party against whom the action was brought, coupled with his failure to object to the jurisdiction of the court or administrative body where the action is pending, is tantamount to an invocation of that jurisdiction and a willingness to abide by the resolution of the case and will bar said party from later on impugning the court or body's jurisdiction.[42] Based on the preceding discussion, this Court holds that MEGAN's challenge to Atty. Sabig's authority and the RTC's jurisdiction was a mere afterthought after having received an unfavorable decision from the RTC. Certainly, it would be unjust and inequitable to the other parties if this Court were to grant such a belated jurisdictional challenge.

WHEREFORE, premises considered, the petition is DENIED. The August 23, 2004 Decision and October 12, 2005 Resolution of the Court of Appeals, in CA-G.R. SP No. 75789, are AFFIRMED.

SO ORDERED.

Carpio, (Chairperson), Nachura, Peralta, Abad, and Mendoza, JJ.