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G.R. No.

L-15092

May 18, 1962

estipuladas en el presente contrato, entonces esas mejores condiciones


se concederan y por el presente se entenderan concedidas a los
platadores que hayan otorgado este Contrato de Molienda Enmendado.

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,


vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.

Appellants signed and executed the printed Amended Milling Contract on September 10,
1936, but a copy of the resolution of August 10, 1936, signed by the Central's General
Manager, was not attached to the printed contract until April 17, 1937; with the notation

Taada, Teehankee and Carreon for plaintiffs-appellants.


Hilado and Hilado for defendant-appellee.

Las enmiendas arriba transcritas forman parte del contrato de molienda


enmendado, otorgado por y la Bacolod-Murcia Milling Co., Inc.

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


Appeal on points of law from a judgment of the Court of First Instance of Occidental
Negros, in its Civil Case No. 2603, dismissing plaintiff's complaint that sought to compel
the defendant Milling Company to increase plaintiff's share in the sugar produced from
their cane, from 60% to 62.33%, starting from the 1951-1952 crop year.1wph1.t
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and
the Limited co-partnership Gonzaga and Company, had been and are sugar planters
adhered to the defendant-appellee's sugar central mill under identical milling contracts.
Originally executed in 1919, said contracts were stipulated to be in force for 30 years
starting with the 1920-21 crop, and provided that the resulting product should be divided
in the ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it was
proposed to execute amended milling contracts, increasing the planters' share to 60% of
the manufactured sugar and resulting molasses, besides other concessions, but extending
the operation of the milling contract from the original 30 years to 45 years. To this effect,
a printed Amended Milling Contract form was drawn up. On August 20, 1936, the Board of
Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts No.
11, Acuerdo No. 1) granting further concessions to the planters over and above those
contained in the printed Amended Milling Contract. The bone of contention is paragraph 9
of this resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx

xxx

xxx

Acuerdo No. 1. Previa mocion debidamente secundada, la Junta en


consideracion a una peticion de los plantadores hecha por un comite
nombrado por los mismos, acuerda enmendar el contrato de molienda
enmendado medientelas siguentes:
xxx

xxx

xxx

9.a Que si durante la vigencia de este contrato de Molienda


Enmendado, lascentrales azucareras, de Negros Occidental, cuya
produccion anual de azucar centrifugado sea mas de una tercera parte
de la produccion total de todas lascentrales azucareras de Negros
Occidental, concedieren a sus plantadores mejores condiciones que la

In 1953, the appellants initiated the present action, contending that three Negros sugar
centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production
exceeding one-third of the production of all the sugar central mills in the province, had
already granted increased participation (of 62.5%) to their planters, and that under
paragraph 9 of the resolution of August 20, 1936, heretofore quoted, the appellee had
become obligated to grant similar concessions to the plaintiffs (appellants herein). The
appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging that
the stipulations contained in the resolution were made without consideration; that the
resolution in question was, therefore, null and void ab initio, being in effect a donation
that was ultra vires and beyond the powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant
Milling company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this
Court.
We agree with appellants that the appealed decisions can not stand. It must be
remembered that the controverted resolution was adopted by appellee corporation as a
supplement to, or further amendment of, the proposed milling contract, and that it was
approved on August 20, 1936, twenty-one days prior to the signing by appellants on
September 10, of the Amended Milling Contract itself; so that when the Milling Contract
was executed, the concessions granted by the disputed resolution had been already
incorporated into its terms. No reason appears of record why, in the face of such
concessions, the appellants should reject them or consider them as separate and apart
from the main amended milling contract, specially taking into account that appellant
Alfredo Montelibano was, at the time, the President of the Planters Association (Exhibit 4,
p. 11) that had agitated for the concessions embodied in the resolution of August 20,
1936. That the resolution formed an integral part of the amended milling contract, signed
on September 10, and not a separate bargain, is further shown by the fact that a copy of
the resolution was simply attached to the printed contract without special negotiations or
agreement between the parties.
It follows from the foregoing that the terms embodied in the resolution of August 20, 1936
were supported by the same causa or consideration underlying the main amended milling
contract; i.e., the promises and obligations undertaken thereunder by the planters, and,
particularly, the extension of its operative period for an additional 15 years over and
beyond the 30 years stipulated in the original contract. Hence, the conclusion of the court
below that the resolution constituted gratuitous concessions not supported by any
consideration is legally untenable.

All disquisition concerning donations and the lack of power of the directors of the
respondent sugar milling company to make a gift to the planters would be relevant if the
resolution in question had embodied a separate agreement after the appellants had
already bound themselves to the terms of the printed milling contract. But this was not
the case. When the resolution was adopted and the additional concessions were made by
the company, the appellants were not yet obligated by the terms of the printed contract,
since they admittedly did not sign it until twenty-one days later, on September 10, 1936.
Before that date, the printed form was no more than a proposal that either party could
modify at its pleasure, and the appellee actually modified it by adopting the resolution in
question. So that by September 10, 1936 defendant corporation already understood that
the printed terms were not controlling, save as modified by its resolution of August 20,
1936; and we are satisfied that such was also the understanding of appellants herein, and
that the minds of the parties met upon that basis. Otherwise there would have been no
consent or "meeting of the minds", and no binding contract at all. But the conduct of the
parties indicates that they assumed, and they do not now deny, that the signing of the
contract on September 10, 1936, did give rise to a binding agreement. That agreement
had to exist on the basis of the printed terms as modified by the resolution of August 20,
1936, or not at all. Since there is no rational explanation for the company's assenting to
the further concessions asked by the planters before the contracts were signed, except as
further inducement for the planters to agree to the extension of the contract period, to
allow the company now to retract such concessions would be to sanction a fraud upon the
planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There can be
no novation unless two distinct and successive binding contracts take place, with the later
designed to replace the preceding convention. Modifications introduced before a bargain
becomes obligatory can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not
attached to the printed contract until April 17, 1937. But, except in the case of statutory
forms or solemn agreements (and it is not claimed that this is one), it is the assent and
concurrence (the "meeting of the minds") of the parties, and not the setting down of its
terms, that constitutes a binding contract. And the fact that the addendum is only signed
by the General Manager of the milling company emphasizes that the addition was made
solely in order that the memorial of the terms of the agreement should be full and
complete.
Much is made of the circumstance that the report submitted by the Board of Directors of
the appellee company in November 19, 1936 (Exhibit 4) only made mention of 90%, the
planters having agreed to the 60-40 sharing of the sugar set forth in the printed
"amended milling contracts", and did not make any reference at all to the terms of the
resolution of August 20, 1936. But a reading of this report shows that it was not intended
to inventory all the details of the amended contract; numerous provisions of the printed
terms are alao glossed over. The Directors of the appellee Milling Company had no reason
at the time to call attention to the provisions of the resolution in question, since it
contained mostly modifications in detail of the printed terms, and the only major change
was paragraph 9 heretofore quoted; but when the report was made, that paragraph was
not yet in effect, since it was conditioned on other centrals granting better concessions to
their planters, and that did not happen until after 1950. There was no reason in 1936 to
emphasize a concession that was not yet, and might never be, in effective operation.

There can be no doubt that the directors of the appellee company had authority to modify
the proposed terms of the Amended Milling Contract for the purpose of making its terms
more acceptable to the other contracting parties. The rule is that
It is a question, therefore, in each case of the logical relation of the act to the
corporate purpose expressed in the charter. If that act is one which is lawful in
itself, and not otherwise prohibited, is done for the purpose of serving corporate
ends, and is reasonably tributary to the promotion of those ends, in a substantial,
and not in a remote and fanciful sense, it may fairly be considered within charter
powers. The test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation's business, fairly incident to the
express powers and reasonably necessary to their exercise. If so, the corporation
has the power to do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950,
pp. 266-268)
As the resolution in question was passed in good faith by the board of directors, it is valid
and binding, and whether or not it will cause losses or decrease the profits of the central,
the court has no authority to review them.
They hold such office charged with the duty to act for the corporation according
to their best judgment, and in so doing they cannot be controlled in the
reasonable exercise and performance of such duty. Whether the business of a
corporation should be operated at a loss during depression, or close down at a
smaller loss, is a purely business and economic problem to be determined by the
directors of the corporation and not by the court. It is a well-known rule of law
that questions of policy or of management are left solely to the honest decision
of officers and directors of a corporation, and the court is without authority to
substitute its judgment of the board of directors; the board is the business
manager of the corporation, and so long as it acts in good faith its orders are not
reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian
Philippines, San Carlos and Binalbagan (which produce over one-third of the entire annual
sugar production in Occidental Negros) have granted progressively increasing
participations to their adhered planter at an average rate of
62.333%

for the 1951-52 crop year;

64.2%

for 1952-53;

64.3%

for 1953-54;

64.5%

for 1954-55; and

63.5%

for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of
August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is
decreed sentencing the defendant-appellee to pay plaintiffs-appellants the differential or
increase of participation in the milled sugar in accordance with paragraph 9 of the

appellee Resolution of August 20, 1936, over and in addition to the 60% expressed in the
printed Amended Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants
having received an additional 2% corresponding to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all
appellants thereafter
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the time they were
withheld; and the right is reserved to plaintiffs-appellants to sue for such additional
increases as they may be entitled to for the crop years subsequent to those herein
adjudged.

The trial court resolved all the issues raised by the parties in favor of the plaintiffs and,
after considering the evidence, both oral and documentary, arrived at the following
conclusions:
First. - That the contract executed between the plaintiffs and the defendant is a
renumerative donation.chanroblesvirtualawlibrary chanrobles virtual law library
Second. - That said contract or donation is not ultra vires, but an act executed within the
powers of the defendant corporation in accordance with its articles of incorporation and
by laws, sanctioned and approved by its Board of Directors and stockholders; and
subsequently ratified by other subsequent acts of the defendant
company.chanroblesvirtualawlibrary chanrobles virtual law library
Third. - That the said donation is in accordance with the trend of modern and more
enlightened legislation in its treatment of questions between labor and
capital.chanroblesvirtualawlibrary chanrobles virtual law library

Costs against appellee, Bacolod-Murcia Milling Co.

G.R. No. L-5377

vires, and, if valid, the obligation to pay the amount given is not yet due and
demandable.chanroblesvirtualawlibrary chanrobles virtual law library

December 29, 1954

MARIA CLARA PIROVANA ET AL., Plaintiffs-Appellees, v. THE DE LA RAMA


STEAMSHIP CO., Defendant-Appellant.

Fourth. - That the condition mentioned in the donation is null and void because it depends
on the provisions of Article 1115 of the old Civil
Code.chanroblesvirtualawlibrary chanrobles virtual law library
Fifth. - That if the condition is valid, its non-fulfillment is due to the desistance of the
defendant company from obeying and doing the wishes and mandates of the majority of
the stockholders.chanroblesvirtualawlibrary chanrobles virtual law library

Del Rosario and Garcia for appellant.


Vicente J. Francisco for appellees.
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Rizal declaring the
donation made by the defendant in favor of the minor children of the late Enrico Pirovano
of the proceeds of the insurance policies taken on his life valid and binding, and ordering
said defendant to pay to said minor children the sum of P583,813.59, with interest
thereon at the rate of per cent from the date of filing of the complaint, plus an additional
amount equivalent to 20 per cent of said sum of P538,813.59 as damages by way of
attorney's fees and the costs of action.chanroblesvirtualawlibrary chanrobles virtual law
library
Plaintiffs herein are the minor children of the late Enrico Pirovano represented by their
mother and judicial guardian Estefania R. Pirovano. They seek to enforce certain
resolutions adopted by the Board of Directors and stockholders of the defendant company
giving to said minor children of the proceeds of the insurance policies taken on the life of
their deceased father Enrico Pirovano with the company as beneficiary. Defendant's main
defense is: that said resolutions and the contract executed pursuant thereto are ultra

Sixth. - That the non-payment of the debt in favor of the National Development Company
is not due to the lack of funds, nor to lack of authority, but the desire of the President of
the corporation to preserve and continue the Government participation in the
company.chanroblesvirtualawlibrary chanrobles virtual law library
Seventh. - That due demands were made by the plaintiffs and their attorneys and these
demands were rejected for no justifiable or legal grounds.
The important facts which need to be considered for purposes of this appeal may be
briefly stated as follows: Defendant is a corporation duly organized in accordance with law
with an authorized capital of P500,000, divided into 5,000 shares, with a par value of P100
each share. The stockholders were: Esteban de la Rama, 1,800 shares, Leonor de la Rama,
100 shares, Estefania de la Rama, 100 shares, and Eliseo Hervas, Tomas Concepcion,
Antonio G. Juanco, and Gaudencio Volasote with 5 shares each. Leonor and Estefania are
daughters of Don Esteban, while the rest his employees. Estefania de la Rama was
married to the late Enrico Pirovano and to them four children were born who are the
plaintiffs in this case.chanroblesvirtualawlibrary chanrobles virtual law library

Enrico Pirovano became the president of the defendant company and under his
management the company grew and progressed until it became a multi-million
corporation by the time Pirovano was executed by the Japanese during the occupation. On
May 13, 1941, the capital stock of the corporation was increased to P2,000,000, after
which a 100 per cent stock dividend was declared. Subsequently, or before the outbreak
of the war , new stock dividends of 200 per cent and 33 1/3 per cent were again declared.
On December 4, 1941, the capital stock was once more increased to P5,000,000. Under
Pirovano's management, the assets of the company grew and increased from an original
paid up capital of around P240,000 to P15,538,024.37 by September 30, 1941 (Exhibit
HH).chanroblesvirtualawlibrary chanrobles virtual law library
In the meantime, Don Esteban de la Rama, who practically owned and controlled the stock
of the defendant corporation, distributed his shareholding among his five daughters,
namely, Leonor, Estefania, Lourdes, Lolita and Conchita and his wife Natividad Aguilar so
that, at that time, or on July 10, 1946, the stockholding of the corporation stood as
follows: Esteban de la Rama, 869 shares, Leonor de la Rama, 3,375 shares, Estefania de la
Rama, 3,368 shares, Lourdes de la Rama, 3,368 shares, Lolita de la Rama, 3,368 shares,
Conchita de la Rama, 3,376 shares, and Natividad Aguilar, 2,136 shares. The other
stockholders , namely, Eliseo Hervas, Tomas Concepcion, Antonio Juanco, and Jose Aguilar,
who were merely employees of Don Esteban, were given 40 shares each, while Pio
Pedrosa, Marcial P. Lichauco and Rafael Roces, one share each, because they merely
represented the National Development Company. This Company was given representation
in the Board Of Directors of the corporation because at that time the latter had an
outstanding bonded indebtedness to the National Development
Company.chanroblesvirtualawlibrary chanrobles virtual law library
This bonded indebtedness was incurred on February 26, 1940 and was in the amount of
P7,500.00. The bond held by the National Development Company was redeemable within
a period of 20 years from March 1, 1940,. bearing interest at the rate of 5 per cent per
annum. To secure said bonded indebtedness, all the assets of the De la Rama Steamship
Co., Inc., and properties of Don Esteban de la Rama, as well as those of the Hijos de I. de
la Rama and Co., Inc., a sister corporation owned by Don Esteban and his family, were
mortgaged to the National Development Company (Annexes A, B, C, D of Exhibit 3, Deed
of Trust). Payments made by the corporation under the management of Pirovano reduced
this bonded indebtedness to P3,260,855.77.chanroblesvirtualawlibrary chanrobles virtual
law library
Upon arrangement made with the National Development Company, the outstanding
bonded indebtedness was converted into non-voting preferred shares of stock of the De la
Rama company under the express condition that they would bear affixed cumulative
dividend of 6 per cent per annum and would be redeemable within 15 years (Exhibits 5
and 7). This conversion was carried out on September 23, 1949, when the National
Development Company executed a "Deed of Termination of Trust and Release of
Mortgage" in favor of the De la Rama company (Exhibit 6.) The immediate effect of this
conversion was the released from incumbrance of all the properties Of Don Esteban and of
the Hijos de I. de la Rama and Co., Inc., which was apparently favorable to the interests of
the De la Rama company, but, on the other hand, it resulted in the inconvenience that, as

holder of the preferred stock, the National Development Company, was given to the right
to 40 per cent of the membership of the Board of Directors of the De la Rama company,
which meant an increase in the representation of the National Development Company
from 2 to 4 of the 9 members of said Board of
Directors.chanroblesvirtualawlibrary chanrobles virtual law library
The first resolution granting to the Pirovano children the proceeds of the insurance
policies taken on his life by the defendant company was adopted by the Board of Directors
at a meeting held on July 10, 1946, (Exhibit B). This grant was called in the resolution as
"Special Payment to Minor Heirs of the late Enrico Pirovano". Because of its direct hearing
on the issues involved in this case, said resolution is hereunder reproduced in toto:
SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO PIROVANOchanrobles virtual
law library
The President stated that the principal purpose for which the meeting had been called was
to discuss the advisability of making some form of compensation to the minor heirs of the
late Enrico Pirovano, former President and General Manager of the Company. As every
member of the Board knows, said the President, the late Enrico Pirovano who was largely
responsible for the very successful development of the activities of the Company prior to
war was killed by the Japanese in Manila sometime in 1944 leaving as his only heirs four
minor children, Maria Carla, Esteban, Enrico and John Albert. Early in 1941, explained the
President, the Company had insured the life of Mr. Pirovano for a million pesos. Following
the occupation of the Philippines by Japanese forces the Company was unable to pay the
premiums on those policies issued by Filipino companies and these policies had lapsed.
But with regards to the York Office of the De la Rama Steamship Co., Inc. had kept up
payment of the premiums from year to year. The payments made on account of these
premiums, however, are very small compared to the amount which the Company will now
receive as a result of Mr. Pirovano's death. The President proposed therefore that out of
the proceeds of these policies the sum of P400,000 be set aside for the minor children of
the deceased, said sum of money to be convertible into 4,000 shares of the stock of the
Company, at par, or 1,000 shares for each child. This proposal, explained the President as
being made by him upon suggestion of President Roxas, but, he added, that he himself
was very much in favor of it also. On motion of Miss Leonor de la Rama duly seconded by
Mrs. Lourdes de la Rama de Osmea, the following resolution was, thereupon,
unanimously approved:chanrobles virtual law library
Whereas, the late Enrico Pirovano, President and General Manager of the De la Rama
Steamship Company, died in Manila sometime in November, 1944:chanrobles virtual law
library
Whereas, the said Enrico Pirovano was largely responsible for the rapid and very
successful development of the activities of thus company;chanrobles virtual law library

Whereas, early in 1941 this company insured the life of said Enrico Pirovano in various
Philippine and American Life Insurance companies for the total sum of
P1,000,000;chanrobles virtual law library
Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano and four
minor children, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed
Pirovano;chanrobles virtual law library
Whereas, said Enrico Pirovano left practically nothing to his heirs and it is but fit proper
that this company which owes so much to the deceased should make some provision for
his children;chanrobles virtual law library
Whereas, this company paid premium on Mr. Pirovano's life insurance policies for a period
of only 4 years so that it will receive from the insurance companies sums of money greatly
in excess of the premiums paid by this company.chanroblesvirtualawlibrary chanrobles
virtual law library
Be it resolved, That out of the proceeds to be collected from the life insurance policies on
the life of the late Enrico Pirovano, the sum of P400,000 be set aside for equal division
among the 4 minor children of the deceased, to wit: Esteban, Maria Carla, Enrico and John
Albert, all surnamed Pirovano, which sum of money shall be convertible into shares of
stock of the De la Rama Steamship Company, at par and, for that purpose, that the
present registered stockholders of the corporation be requested to waive their preemptive
right to 4,000 shares of the unissued stock of the company in order to enable each of the
4 minor heirs of the deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, all
surnamed Pirovano, to obtain 1,000 shares at par;chanrobles virtual law library
Resolved, further, that in view of the fact that under the provisions of the indenture with
the National Development Company, it is necessary that action herein proposed to be
confirmed by the Board of Directors of that company, the Secretary is hereby instructed to
send a copy of this resolution to the proper officers of the National Development Company
for appropriate action. (Exhibit B)
The above resolution, which was adopted on July 10, 1946, was submitted to the
stockholders of the De la Rama company at a meeting properly convened, and on that
same date, July 10, 1946, the same was duly
approved.chanroblesvirtualawlibrary chanrobles virtual law library
It appears that, although Don Esteban and the Members of his family were agreeable to
giving to the Pirovano children the amount of P400,000 out of the proceeds of the
insurance policies taken on the life of Enrico Pirovano, they did not realize that when they
provided in the above referred two resolutions that said Amount should be paid in the
form of shares of stock, they would be actually giving to the Pirovano children more than
what they intended to give. This came about when Lourdes de la Rama, wife of Sergio
Osmea, Jr., showed to the latter copies of said resolutions and asked him to explain their
import and meaning, and it was value then that Osmea explained that because the value

then of the shares of stock was actually 3.6 times their par value, the donation their
value, the donation, although purporting to be only P400,00, would actually amount to a
total of P1,440,000. He further explained that if the Pirovano children would given shares
of stock in lieu of the amount to be donated, the voting strength of the five daughters of
Don Esteban in the company would be adversely affected in the sense that Mrs. Pirovano
would be adversely affected in the sense that Mrs. Pirovano would have a voting power
twice as much as that of her sisters. This caused Lourdes de la Rama to write to the
secretary of the corporation, Atty. Marcial Lichauco, asking him to cancel the waiver she
supposedly gave of her pre-emptive rights. Osmea elaborated on this matter at the
annual meeting of the stockholders held on December 12, 1946 but at said meeting it was
decided to leave the matter in abeyance pending further action on the part of the
members of the De la Rama family.chanroblesvirtualawlibrary chanrobles virtual law
library
Osmea, in the meantime, took up the matter with Don Esteban and, as consequence, the
latter, on December 30, 1946, addressed to Marcial Lichauco a letter stating, among other
things, that "in view of the total lack of understanding by me and my daughters of the two
Resolutions abovementioned, namely, Directors' and Stockholders' dated July 10, 1946, as
finally resolved by the majority of the Stockholders and Directors present yesterday, that
you consider the abovementioned resolutions nullified." (Exhibit
CC).chanroblesvirtualawlibrary chanrobles virtual law library
On January 6, 1947, the Board of Directors of the De la Rama company, as a consequence
of the change of attitude of Don Esteban, adopted a resolution changing the form of the
donation to the Pirovano children from a donation of 4,000 shares of stock as originally
planned into a renunciation in favor of the children of all the company's "right, title, and
interest as beneficiary in and to the proceeds of the abovementioned life insurance
policies", subject to the express condition that said proceeds should be retained by the
company as a loan drawing interest at the rate of 5 per cent per annum and payable to
the Pirovano children after the company "shall have first settled in full the balance of its
present remaining bonded indebtedness in the sum of approximately P5,000,000" (Exhibit
C). This resolution was concurred in by the representatives of the National Development
Company. The pertinent portion of the resolution reads as follows:
Be resolved, that out of gratitude to the late Enrico Pirovano this Company renounce as it
hereby renounces, all of his right, title, and interest as beneficiary in and to the proceeds
of the abovementioned life insurance policies in favor of Esteban, Maria Carla, Enrico and
John Albert, all surnamed Pirovano, subject to the terms and conditions herein after
provided;chanrobles virtual law library
That the proceeds of said insurance policies shall be retained by the Company in the
nature of a loan drawing interest at the rate of 5 per cent annum from the date of receipt
of payment by the Company from the various insurance companies above-mentioned until
the time the time the same amounts are paid to the minor heirs of Enrico Pirovano
previously mentioned;chanrobles virtual law library

That all amounts received from the above-mentioned policies shall be divided equally
among the minors heirs of said Enrico Pirovano;chanrobles virtual law library
That the company shall proceed to pay the proceeds of said insurance policies plus
interests that may have accrued to each of the heirs of the said Enrico Pirovano or their
duly appointed representatives after the Company shall have first settled in full the
balance of its present remaining bonded indebtedness in the sum of the approximately
P5,000,000.
The above resolution was carried out by the company and Mrs. Estefania R. Pirovano, the
latter acting as guardian of her children, by executing a Memorandum Agreement on
January 10, 1947 and June 17, 1947, respectively, stating therein that the De la Rama
Steamship Co., Inc., shall enter in its books as a loan the proceeds of the life insurance
policies taken on the life of Pirovano totalling S321,500, which loan would earn interest at
the rate of 5 per cent per annum. Mrs. Pirovano, in executing the agreement, acted with
the express authority granted to her by the court in an order dated March 26,
1947.chanroblesvirtualawlibrary chanrobles virtual law library
On June 24, 1947, the Board of Directors approved a resolution providing therein that
instead of the interest on the loan being payable, together with the principal, only after
the company shall have first settled in full its bonded indebtedness, said interest may be
paid to the Pirovano children "whenever the company is in a position to met said
obligation" (Exhibit D), and on February 26, 1948, Mrs. Pirovano executed a public
document in which she formally accepted the donation (Exhibit H). The Dela Rama
company took "official notice" of this formal acceptance at a meeting held by its Board of
Directors on February 26, 1948.chanroblesvirtualawlibrary chanrobles virtual law library
In connection with the above negotiations, the Board of Directors took up at its meeting
on July 25, 1949, the proposition of Mrs. Pirovano to buy the house at New Rochelle, New
York, owned by the Demwood Realty, a subsidiary of the De la Rama company at its
original costs of $75,000, which would be paid from the funds held in trust belonging to
her minor children. After a brief discussion relative to the matter, the proposition was
approved in a resolution adopted on the same date.chanroblesvirtualawlibrary chanrobles
virtual law library
The formal transfer was made in an agreement signed on September 5, 1949 by Mrs.
Pirovano, as guardian of her children, and by the De la Rama company, represented by its
new General Manager, Sergio Osmea, Jr. The transfer of this property was approved by
the court in its order of September 20, 1949.chanroblesvirtualawlibrary chanrobles virtual
law library
On September 13, 1949, or two years and 3 months after the donation had been approved
in the various resolutions herein above mentioned, the stockholders of the De la Rama
company formally ratified the donation (Exhibit E), with certain clarifying modifications,
including the resolution approving the transfer of the Demwood property to the Pirovano
children. The clarifying modifications are quoted hereunder:

1. That the payment of the above-mentioned donation shall not be affected until such
time as the Company shall have first duly liquidated its present bonded indebtedness in
the amount of P3,260,855.77 with The National Development Company, or fully redeemed
the preferred shares of stock in the amount which shall be issued to the National
Development Company in lieu thereof;chanrobles virtual law library
2. That any and all taxes, legal fees, and expenses in any way connected with the above
transaction shall be chargeable and deducted from the proceeds of the life insurance
policies mentioned in the resolutions of the Board of Directors. (Exhibit E)
Sometime in March 1950, the President of the corporation, Sergio Osmea, Jr., addressed
an inquiry to the Securities and Exchange Commission asking for opinion regarding the
validity of the donation of the proceeds of the insurance policies to the Pirovano children.
On June 20, 1950 that office rendered its opinion that the donation was void because the
corporation could not dispose of its assets by gift and therefore the corporation acted
beyond the scope of its corporate powers. This opinion was submitted to the Board of
Directors at its meting on July 12, 1950, on which occasion the president recommend that
other legal ways be studied whereby the donation could be carried out. On September 14,
1950, another meeting was held to discuss the propriety of the donation. At this meeting
the president expressed the view that, since the corporation was not authorized by its
charter to make the donation to the Pirovano children and the majority of the stockholders
was in favor of making provision for said children, the manner he believed this could be
done would be to declare a cash dividend in favor of the stockholders in the exact amount
of the insurance proceeds and thereafter have the stockholders make the donation to the
children in their individual capacity. Notwithstanding this proposal of the president, the
board took no action on the matter, and on March 8, 1951, at a stockholders' meeting
convened on that date the majority of the stockholders' voted to revoke the resolution
approving the donation to the Pirovano children. The pertinent portion of the resolution
reads as follows:
Be it resolved, as it is hereby resolved, that in view of the failure of compliance with the
above conditions to which the above donation was made subject, and in view of the
opinion of the Securities and Exchange Commissioner, the stockholders revoke, rescind
and annul, as they do thereby revoke, rescind and annul, its ratification and approval on
September 13, 1949 of the aforementioned resolution of the Board of Directors of January
6, 1947, as amended on June 24, 1947. (Exhibit T)
In view of the resolution declaring that the corporation failed to comply with the condition
set for the effectivity of the donation and revoking at the same time the approval given to
it by the corporation, and considering that the corporation can no longer set aside said
donation because it had no longer set aside said donation because it had long been
perfected and consummated, the minor children of the late Enrico Pirovano, represented
by their mother and guardian, Estefania R. de Pirovano, demanded the payment of the
credit due them as of December 31, 1951, amounting to P564,980.89, and this payment
having been refused, they instituted the present action in the Court of First Instance of
Rizal wherein they prayed that the be granted an alternative relief of the following tenor:
(1) sentencing defendant to pay to the plaintiff the sum of P564,980.89 as of December

31, 1951, with the corresponding interest thereon; (2) as an alternative relief, sentencing
defendant to pay to the plaintiffs the interests on said sum of P564,980.89 at the rate of 5
per cent per annum, and the sum of P564,980.89 after the redemption of the preferred
shares of the corporation held by the National Development Company; and (3) in any
event, sentencing defendant to pay the plaintiffs damages in the amount of not less than
20 per cent of the sum that may be adjudged to the plaintiffs, and the costs of
action.chanroblesvirtualawlibrary chanrobles virtual law library

Directors on July 10, 1946, wherein the reasons for granting the donation to the minor
children of the late Enrico Pirovano were clearly, we find out the following revealing
statements:

The only issues which in the opinion of the court need to be determined in order to reach
a decision in this appeal are: (1) Is the grant of the proceeds of the insurance policies
taken on the life of the late Enrico Pirovano as embodied in the resolution of the Board of
Directors of defendant corporation adopted on January 6, 1947 and June 24, 1947 a
remunerative donation as found by the lower court?; (2) IN the affirmative case, has that
donation been perfected before its rescission or nullification by the stockholders of the
corporation on March 8, 1951?; (3) Can defendant corporation give by way of donation the
proceeds of said insurance policies to the minor children of the late Enrico Pirovano under
the law or its articles of corporation, or is that donation an ultra vires act?; and (4) has the
defendant corporation, by the acts it performed subsequent to the granting of the
donation, deliberately prevented the fulfillment of the condition precedent to the payment
of said donation such that it can be said it has forfeited its right to demand its fulfillment
and has made the donation entirely due and demandable?chanrobles virtual law library

Whereas, the said Enrico Pirovano was largely responsible for the rapid and very
successful development of the activities of this company;chanrobles virtual law library

We will discuss these issues separately.chanroblesvirtualawlibrary chanrobles virtual law


library
1. To determine the nature of the grant made by the defendant corporation to the minor
children of the late Enrico Pirovano, we do not need to go far nor dig into the voluminous
record that lies at the bottom of this case. We do not even need to inquire into the interest
which has allegedly been shown by President Roxas in the welfare of the children of his
good friend Enrico Pirovano. Whether President Roxas has taken the initiative in the move
to give something to said children which later culminated in the donation now in dispute,
is of no moment for the fact is that, from the mass of evidence on hand, such a donation
has been given the full indorsement and encouraging support by Don Esteban de la Rama
who was practically the owner of the corporation. We only need to fall back to accomplish
this purpose on the several resolutions of the Board of Directors of the corporations
containing said grant for they clearly state the reasons and purposes why the donation
has been given.chanroblesvirtualawlibrary chanrobles virtual law library
Before we proceed further, it is convenient to state here in passing that, before the Board
of Directors had approved its resolution of January 6, 1947, as later amended by another
resolution adopted on June 24, 1947, the corporation had already decided to give to the
minor children of the late Enrico Pirovano the sum of P400,000 out of the proceeds of the
insurance policies taken on his life in the form of shares, and that when this form was
considered objectionable because its result and effect would be to give to said children a
much greater amount considering the value then of the stock of the corporation, the
Board of Directors decided to amend the donation in the form and under the terms stated
in the aforesaid resolutions. Thus, in the original resolution approved by the Board of

Whereas, the late Enrico Pirovano President and General Manager of the De la Rama
Steamship Company, died in Manila sometime in November, 1944;chanrobles virtual law
library

Whereas, early in 1941 this company insured the life of said Enrico Pirovano in various
Philippine and American Life Insurance companies for the total sum of
P1,000,000;chanrobles virtual law library
Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano and 4
minor children, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed
Pirovano;chanrobles virtual law library
Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but fit and
proper that this company which owes so much to the deceased should make some
provisions for his children;chanrobles virtual law library
Whereas, this company paid premiums on Mr. Pirovano's life insurance policies for a
period of only 4 years so that it will receive from the insurance companies sums of money
greatly in excess of the premiums paid by the company,
Again, in the resolution approved by the Board of Directors on January 6, 1947, we also
find the following expressive statements which are but a reiteration of those already
expressed in the original resolution:
Whereas, the late Enrico Pirovano, President and General Manager of the De la Rama
Steamship Co., Inc., died in Manila sometime during the latter part of the year
1944;chanrobles virtual law library
Whereas, the said Enrico Pirovano was to a large extent responsible for the rapid and very
successful development and expansion of the activities of this company;chanrobles virtual
law library
Whereas, early in 1941, the life of the said Enrico Pirovano was insured in various life
companies, to wit: chanrobles virtual law library
Whereas, the said Enrico Pirovano is survived by 4 minor children, to wit: Esteban, Maria
Carla, Enrico and John Albert, all surnamed Pirovano; andchanrobles virtual law library

Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but fit and
proper that this Company which owes so much to the deceased should make some
provision for his children;chanrobles virtual law library
Be it resolved, that out of gratitude to the late Enrico Pirovano this Company renounce as
it hereby renounces, . . . .
From the above it clearly appears that the corporation thought of giving the donation to
the children of the late Enrico Pirovano because he "was to a large extent responsible for
the rapid and very successful development and expansion of the activities of this
company"; and also because he "left practically nothing to his heirs and it is but fit and
proper that this company which owes so much to the deceased should make some
provision to his children", and so, the donation was given "out of gratitude to the late
Enrico Pirovano." We do not need to stretch our imagination to see that a grant or
donation given under these circumstances is remunerative in nature in contemplation of
law.
That which is made to a person in consideration of his merits or for services rendered to
the donor, provided they do not constitute recoverable debts, or that in which a burden
less than the value of the thing given is imposed upon the donee, is also a donation." (Art.
619, old Civil Code.)chanrobles virtual law library
In donations made to a person for services rendered to the donor, the donor's will is
moved by acts which directly benefit him. The motivating cause is gratitude,
acknowledgment of a favor, a desire to compensate. A donation made to one who saved
the donor's life, or a lawyer who renounced his fees for services rendered to the donor,
would fall under this class of donations. These donations are called remunerative
donations . (Sinco and Capistrano, The Civil Code, Vol. 1, p. 676; Manresa, 5th ed., pp. 7273.)
2. The next question to be determined is whether the donation has been perfected such
that the corporation can no longer rescind it even if it wanted to. The answer to this
question cannot but be in the affirmative considering that the same has not only been
granted in several resolutions duly adopted by the Board of Directors of the defendant
corporation, and in all these corporate acts the concurrence of the representatives of the
National Development Company, the only creditor whose interest may be affected by the
donation, has been expressly given. The corporation has even gone further. It actually
transferred the ownership of the credit subject of donation to the Pirovano children with
the express understanding that the money would be retained by the corporation subject
to the condition that the latter would pay interest thereon at the rate of 5 per cent per
annum payable whenever said corporation may be in a financial position to do so. Thus,
the following acts of the corporation as reflected from the evidence bear this
out:chanrobles virtual law library
(a) The donation was embodied in a resolution duly approved by the Board of Directors on
January 6, 19437. In this resolution, the representatives of the National Development

Company, have given their concurrence. This is the only creditor which can be considered
as being adversely affected by the donation. The resolution of June 24, 1947 did not
modify the substance of the former resolution for it merely provided that instead of the
interest on the loan being payable, together with the principal, only after the corporation
had first settled in full its bonded indebtedness, said interest would be paid "whenever the
company is in a position to meet said obligation."chanrobles virtual law library
(b) The resolution of January 6, 1947 was actually carried out when the company and Mrs.
Estefania R. Pirovano, executed a memorandum agreement stating therein hat the
proceeds of the insurance policies would be entered in the books of the corporation as a
loan which would bear an interest at the rate of 5 per cent per annum, and said
agreement was signed by Mrs. Pirovano as judicial guardian of her children after she had
been expressly authorized by the court to accept the donation in behalf of her
children.chanroblesvirtualawlibrary chanrobles virtual law library
(c) While the donation can be considered as duly executed by the execution of the
document stated in the preceding paragraph, and by the entry in the books of the
corporation of the donation as a loan, a further record of said execution was made when
Mrs. Pirovano executed a public document on February 26, 1948 making similar
acceptance of the donation. And this acceptance was officially recorded by the
corporation when on the same date its Board of Directors approved a resolution taking
"official notice" of said acceptance.chanroblesvirtualawlibrary chanrobles virtual law
library
(d) On July 25, 1949, the Board of Directors approved the proposal of Mrs. Pirovano to buy
the house at New Rochelle, New York, owned by a subsidiary of the corporation at the
costs of S75,000 which would be paid from the sum held in trust belonging to her minor
children. And this agreement was actually carried out in a document signed by the
general manager of the corporation and by Mrs. Pirovano, who acted on the matter with
the express authority of the court.chanroblesvirtualawlibrary chanrobles virtual law library
(e) And on September 30, 1949, or two years and 3 months after the donation had been
executed, the stockholders of the defendant corporation formally ratified and gave
approval to the donation as embodied in the resolutions above referred to, subject to
certain modifications which did not materially affect the nature of the
donation.chanroblesvirtualawlibrary chanrobles virtual law library
There can be no doubt from the foregoing relation of facts the donation was a corporate
act carried out by the corporation not only with the sanction of its Board of Directors but
also of its stockholders. It is evident that the donation has reached the stage of perfection
which is valid and binding upon the corporation and as such cannot be rescinded unless
there is exists legal grounds for doing so. In this case, we see none. The two reasons given
for the rescission of said donation in the resolution of the corporation adopted on March 8,
1951, to wit: that the corporation failed to comply with the conditions to which the above
donation was made subject, and that in the opinion of the Securities and Exchange
Commission said donation is ultra vires, are not, in our opinion, valid and legal as to justify
the rescission of a perfected donation. These reasons, as we will discuss in the latter part

of this decision, cannot be invoked by the corporation to rescind or set at naught the
donation, and the only way by which this can be done is to show that the donee has been
in default, or that the donation has not been validly executed, or is illegal or ultra vires,
and such is not the case as we will see hereafter. We therefore declare that the resolution
approved by the stockholders of the defendant corporation on March 8, 1951 did not and
cannot have the effect of nullifying the donation in
question.chanroblesvirtualawlibrary chanrobles virtual law library
3. The third question to be determined is: Can defendant corporation give by way of
donation the proceeds of said insurance policies to the minor children of the late Enrico
Pirovano under the law or its articles of corporation, or is that donation an ultra vires act?
To answer this question it is important for us to examine the articles of incorporation of
the De la Rama company to see this question it is important for us to examine the articles
of incorporation of the De la Rama company to see if the act or donation is outside of their
scope. Paragraph second of said articles provides:
Second.- The purposes for which said corporation is formed are:chanrobles virtual law
library
(a) To purchase, charter, hire, build, or otherwise acquire steam or other ships or vessels,
together with equipments and furniture therefor, and to employ the same in conveyance
and carriage of goods, wares and merchandise of every description, and of passengers
upon the high seas.chanroblesvirtualawlibrary chanrobles virtual law library
(b) To sell, let, charter, or otherwise dispose of the said vessels or other property of the
company.chanroblesvirtualawlibrary chanrobles virtual law library
(c) To carry on the business of carriers by water.chanroblesvirtualawlibrary chanrobles
virtual law library
(d) To carry on the business of shipowners in all of its
branches.chanroblesvirtualawlibrary chanrobles virtual law library
(e) To purchase or take on lease, lands, wharves, stores, lighters, barges and other things
which the company may deem necessary or advisable to be purchased or leased for the
necessary and proper purposes of the business of the company, and from time to time to
sell the dispose of the same.chanroblesvirtualawlibrary chanrobles virtual law library
(f) To promote any company or companies for the purposes of acquiring all or any of the
property or liabilities of this company, or both, or for any other purpose which may seem
directly or indirectly calculated to benefit the
company.chanroblesvirtualawlibrary chanrobles virtual law library

(g) To invest and deal with the moneys of the company and immediately required, in such
manner as from time to time may be determined.chanroblesvirtualawlibrary chanrobles
virtual law library
(h) To borrow, or raise, or secure the payment of money in such manner as the company
shall think fit.chanroblesvirtualawlibrary chanrobles virtual law library
(i) Generally, to do all such other thing and to transact all business as may be directly or
indirectly incidental or conducive to the attainment of the above object, or any of them
respectively.chanroblesvirtualawlibrary chanrobles virtual law library
(j) Without in any particular limiting or restricting any of the objects and powers of the
corporation, it is hereby expressly declared and provided that the corporation shall have
power to issue bonds and provided that the corporation shall have power to issue bonds
and other obligations, to mortgage or pledge any stocks, bonds or other obligations or any
property which may be required by said corporations; to secure any bonds, guarantees or
other obligations by it issued or incurred; to lend money or credit to and to aid in any
other manner any person, association, or corporation of which any obligation or in which
any interest is held by this corporation or in the affairs or prosperity of which this
corporation or in the affairs or prosperity of which this corporation has a lawful interest,
and to do such acts and things as may be necessary to protect, preserve, improve, or
enhance the value of any such obligation or interest; and, in general, to do such other
acts in connection with the purposes for which this corporation has been formed which is
calculated to promote the interest of the corporation or to enhance the value of its
property and to exercise all the rights, powers and privileges which are now or may
hereafter be conferred by the laws of the Philippines upon corporations formed under the
Philippine Corporation Act; to execute from time to time general or special powers of
attorney to persons, firms, associations or corporations either in the Philippines, in the
United States, or in any other country and to revoke the same as and when the Directors
may determine and to do any and or all of the things hereinafter set forth and to the same
extent as natural persons might or could do.
After a careful perusal of the provisions above quoted we find that the corporation was
given broad and almost unlimited powers to carry out the purposes for which it was
organized among them, (1) "To invest and deal with the moneys of the company not
immediately required, in such manner as from time to time may be determined" and, (2)
"to aid in any other manner any person, association, or corporation of which any
obligation or in which any interest is held by this corporation or in the affairs or prosperity
of which this corporation has a lawful interest." The world deal is broad enough to include
any manner of disposition, and refers to moneys not immediately required by the
corporation, and such disposition may be made in such manner as from time to time may
be determined by the corporations. The donation in question undoubtedly comes within
the scope of this broad power for it is a fact appearing in the evidence that the insurance
proceeds were not immediately required when they were given away. In fact, the evidence
shows that the corporation declared a 100 per cent cash dividend, or P2,000,000, and
later on another 30 per cent cash dividend. This is clear proof of the solvency of the
corporation. It may be that, as insinuated, Don Esteban wanted to make use of the

insurance money to rehabilitate the central owned by a sister corporation, known as Hijos
de I. de la Rama and Co., Inc., situated in Bago, Negros Occidental, but this, far from
reflecting against the solvency of the De la Rama company, only shows that the funds
were not needed by the corporation.chanroblesvirtualawlibrary chanrobles virtual law
library
Under the second broad power we have the above stated, that is, to aid in any other
manner any person in the affairs and prosperity of whom the corporation has a lawful
interest, the record of this case is replete with instances which clearly show that the
corporation knew well its scope and meaning so much so that, with the exception of the
instant case, no one has lifted a finger to dispute their validity. Thus, under this broad
grant of power, this corporation paid to the heirs of one Florentino Nonato, an engineer of
one of the ships of the company who died in Japan, a gratuity of P7,000, equivalent to one
month salary for each year of service. It also gave to Ramon Pons, a captain of one of its
ships , a retirement gratuity equivalent to one month salary for every year of service, the
same to be based upon his highest salary. And it contributed P2,000 to the fund raised by
the Associated Steamship Lines for the widow of the late Francis Gispert, secretary of said
Association, of which the De la Rama Steamship Co., Inc., was a member along with about
30 other steamship companies. In this instance, Gispert was not even an employee of the
corporation. And invoking this vast power, the corporation even went to the extent of
contributing P100,000 to the Liberal Party campaign funds, apparently in the hope that by
conserving its cordial relations with that party it might continue to retain the patronage of
the administration. All these acts executed before and after the donation in question have
never been questioned and were willingly and actually carried
out.chanroblesvirtualawlibrary chanrobles virtual law library
We don't see much distinction between these acts of generosity or benevolence extended
to some employees of the corporation, and even to some in whom the corporation was
merely interested because of certain moral or political considerations, and the donation
which the corporation has seen fit to give to the children of the late Enrico Pirovano from
the point of view of the power of the corporation as expressed in its articles of
incorporation. And if the former had been sanctioned and had been considered valid
andintra vires, we see no plausible reasons why the latter should now be deemed ultra
vires. It may perhaps be argued that the donation given to the children of the late Enrico
Pirovano is so large and disproportionate that it can hardly be considered a pension of
gratuity that can be placed on a par with the instances above mentioned, but this
argument overlooks one consideration: the gratuity here given was not merely motivated
by pure liberality or act of generosity, but by a deep sense of recognition of the valuable
services rendered by the late Enrico Pirovano which had immensely contributed to the
growth of the corporation to the extent that from its humble capitalization it blossomed
into a multi-million corporation that it is today. In other words of the very resolutions
granting the donation or gratuity, said donation was given not only because the company
was so indebted to him that it saw fit and proper to make provisions for his children, but it
did so out of a sense of gratitude. Another factor that we should bear in mind is that
Enrico Pirovano was not only a high official of the company but was at the same time a
member of the De la Rama family, and the recipient of the donation are the grandchildren
of Don Esteban de la Rama. This we, may say, is the motivating root cause behind the
grant of this bounty.chanroblesvirtualawlibrary chanrobles virtual law library

It may be contended that a donation is different from a gratuity. While technically this may
be so in substance they are the same. They are even similar to a pension. Thus, it was
granted for services previously rendered, and which at the time they were rendered gave
rise to no legal obligation. " (Words and Phrases, Permanent Edition, p. 675; O'Dea vs.
Cook,, 169 Pac., 306, 176 Cal., 659.) Or stated in another way, a "Gratuity is mere bounty
given by the Government in consideration or recognition or meritorious services and
springs from the appreciation an d graciousness of the Government", (Ilagan vs. Ilaya,
G.R. No. 33507, Dec. 20 1930) or "A gratuity is something given freely, or without
recompense, a gift, something voluntarily given in return for a favor or services; a bounty;
a tip." Wood Mercantile Co. vs. Cole, 209 S.W. 2d. 290; Mendoza vs. Dizon, 77 Phil., 533,
43 Off. Gaz. p. 4633. We do not see much difference between this definition of gratuity
and a remunerative donation contemplated in the Civil Code. In essence they are the
same. Such being the case, it may be said that this donation is gratuity in a large sense
for it was given for valuable services rendered an ultra vires act in the light of the
following authorities:
Indeed, some cases seem to hold that the giving of a pure gratuity to directors isultra
vires of corporation, so that it could not be legalized even if the approval of the
shareholders; but this position has no sound reason to support it, and is opposed to the
weight of authority (Suffaker vs. Kierger's Assignee, 53 S.W. Rep. 288; !07 Ky. 200; 46
L.R.A. 384).chanroblesvirtualawlibrary chanrobles virtual law library
But although business corporations cannot contribute to charity or benevolence, yet they
are not required always to insist on the full extent of their legal rights. They are not
forbidden for the recognizing moral obligation of which strict law takes no cognizance.
They are not prohibited from establishing a reputation for board, liberal, equitable dealing
which may stand them in good stead in competition with less fair rivals. Thus, an
incorporated fire insurance company which policies except losses from explosions may
nevertheless pay a loss from that cause when other companies are accustomed to do so,
such liberal dealing being deemed conducive to the prosperity of the corporation."
(Modern Law of Corporations, Machen, Vol. 1, p. 81).chanroblesvirtualawlibrary chanrobles
virtual law library
So, a bank may grant a five years pension to the family at one of its officers. In all cases in
this sorts, the amount of the gratuity rests entirely within the discretion of the company,
unless indeed it be all together out of the reason and fitness. But where the company has
ceased to be going concerned, this power to make gifts or present it at the end. (Modern
Law of Corporations, Machen, Vol. 1, p. 82.).chanroblesvirtualawlibrary chanrobles virtual
law library
Payment of Gratitude out of Capital.- There seems on principle no reason to doubt that
gifts or gratuities wherever they are lawful may be paid out of capital as well as out of
profits. (Modern Law of corporations, Machen, Vol. 1 p.
83.).chanroblesvirtualawlibrarychanrobles virtual law library
Whether desirable to supplement implied powers of this kind by express provisions.Enough has been said to show that the implied powers of a corporation to give gratuities

to its servants and officers, as well as to strangers, are ample, so that there is therefore
no need to supplement them by express provisions." (modern Law of Corporations,
Machen, Vol. 1, p. 83.) 1
Granting arguendo that the donation given by Pirovano children is outside the scope of
the powers of the defendant corporation, or the scope of the powers that it may exercise
under the law, or it is an ultra vires act, still it may said that the same can not be
invalidated, or declared legally ineffective for the reason alone, it appearing that the
donation represents not only the act of the Board of Directors but of the stockholders
themselves as shown by the fact that the same has been expressly ratified in a resolution
duly approved by the latter. By this ratification, the infirmity of the corporate act, it may
has been obliterated thereby making the cat perfectly valid and enforceable. This is
specially so if the donation is not merely executory but executed and consummated and
no creditors are prejudice, or if there are creditors affected, the latter has expressly given
their confirmity.chanroblesvirtualawlibrary chanrobles virtual law library
In making this pronouncement, advertence should made of the nature of the ultra
vires act that is in question. A little digression needs be made on this matter to show the
different legal effect that may result consequent upon the performance of a
particular ultra vires act on the part of the corporation. may authorities may be cited
interpreting or defining, extent, and scope of an ultra vires act, but all of them are uniform
and unanimous that the same may be either an act performed merely outside the scope
of the powers granted to it by it articles of incorporation, or one which is contrary to law
or violative of any principle which will void any contract whether done individually or
collectively. In other words, a distinction should be made between corporate acts or
contracts which are illegal and those which are merely ultra vires. The former
contemplates the doing of an act which is contrary to law, morals, or public policy or
public duty, and are, like similar transactions between the individuals void. They cannot
serve as basis of a court action, nor require validity ultra vires acts on the other hand, or
those which are not illegal and void ab initio, but are merely within 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.
Strictly speaking, an ultra vires act is one outside the scope of the power conferred by the
legislature, and although the term has been used indiscriminately, it is properly
distinguishable from acts which are illegal, in excess or abuse of power, or executed in an
unauthorized manner, or acts within corporate powers but outside the authority of
particular officers or agents (19 C. J. S. 419).chanroblesvirtualawlibrary chanrobles virtual
law library
Corporate transactions which are illegal because prohibited by statute or against public
policy are ordinarily void and unenforceable regardless of the part performance,
ratification, or estoppel; but general prohibitions against exceeding corporate powers and
prohibitions intended to protect a particular class or specifying the consequences of
violation may not preclude enforcement of the transaction and an action may be had for

the part unaffected by the illegality or for equitable restitution. (19 C.J.S. 421.)chanrobles
virtual law library
Generally, a transaction within corporate powers but executed in an irregular or
unauthorized manner is voidable only, and may become enforceable by reason of
ratification or express or implied assent by the stockholders or by reason of estoppel of
the corporation or the other party to the transaction to raise the objection, particularly
where the benefits are retainedchanrobles virtual law library
As appears in paragraphs 960-964 supra, the general rule is that a corporation must act in
the manner and with the formalities, if any, prescribed by its character or by the general
law. However, a corporation transaction or contract which is within the corporation
powers, which is neither wrong in itself nor against public policy, but which is defective
from a failure to observe in its execution a requirement of law enacted for the benefit or
protection of a certain class, is voidable and is valid until avoided, not void until validated;
the parties for whose benefit the requirement was enacted may ratify it or be estoppel to
assert its invalidity, and third persons acting in good faith are not usually affected by an
irregularity on the part of the corporation in the exercise of its granted powers. (19 C.J.S.,
423-24.)
It is true that there are authorities which told that ultra vires acts, or those performed
beyond the powers conferred upon the corporation either by law or by its articles of
incorporation, are not only voidable, but wholly void and of no legal effect, and that such
acts cannot be validated by ratification or be the basis of any action in court; but such
ruling does not constitute the weight of authority, the reason being that they fail to make
the important distinction we have above adverted to. Because rule has been rejected by
most of the state courts and even by the modern treaties or corporations (7 Flethcer, Cyc.
Corps., 563-564). And now it can be said that the majority of the cases hold that acts
which are merely ultra vires, or acts which are not illegal, may be ratified by the
stockholders of a corporation (Brooklyn Heights R. Co. vs. Brooklyn City R. Co., 135 N.Y.
Supp. 1001).
Strictly speaking, an act of a corporation outside of its character powers is just as
such ultra vires where all the stockholders consent thereto as in a case where none of the
stockholders expressly or cannot be ratified so as to make it valid, even though all the
stockholders consent thereto; but inasmuch as the stockholders in reality constitute the
corporation, it should , it would seem, be estopped to allege ultra vires, and it is generally
so held where there are no creditors, or the creditors are not injured thereby, and where
the rights of the state or the public are not involved, unless the act is not only ultra vires
but in addition illegal and void. of course, such consent of all the stockholders cannot
adversely affect creditors of the corporation nor preclude a proper attack by the state
because of such ultra vires act. (7 Fletcher Corp., Sec. 3432, p. 585)
Since it is not contended that the donation under consideration is illegal, or contrary to
any of the express provision of the articles of incorporation, nor prejudicial to the creditors
of the defendant corporation, we cannot but logically conclude, on the strength of the
authorities we have quoted above, that said donation, even if ultra vires in the supposition

we have adverted to, is not void, and if voidable its infirmity has been cured by ratification
and subsequent acts of the defendant corporation. The defendant corporation, therefore,
is now prevented or estopped from contesting the validity of the donation. This is specially
so in this case when the very directors who conceived the idea of granting said donation
are practically the stockholders themselves, with few nominal exception. This applies to
the new stockholder Jose Cojuangco who acquired his interest after the donation has been
made because of the rule that a "purchaser of shares of stock cannot avoid ultra
vires acts of the corporation authorized by its vendor, except those done after the
purchase" (7 Fletcher, Cyc. Corps. section 3456, p. 603; Pascual vs. Del Saz Orozco, 19
Phil., 82.) Indeed, how can the stockholders now pretend to revoke the donation which has
been partly consummated? How can the corporation now set at naught the transfer made
to Mrs. Pirovano of the property in New York, U.S.A., the price of which was paid by her but
of the proceeds of the insurance policies given as donation. To allow the corporation to
undo what it has done would only be most unfair but would contravene the well-settled
doctrine that the defense of ultra vires cannot be set up or availed of in completed
transactions (7 Fletcher, Cyc. Corps. Section 3497, p. 652; 19 C.J.S.,
431).chanroblesvirtualawlibrary chanrobles virtual law library
4. We now come to the fourth and last question that the defendant corporation, by the
acts it has performed subsequent to the granting of the donation, deliberately prevented
the fulfillment of the condition precedent to the payment of said donation such that it can
be said it has forfeited entirely due and
demandable.chanroblesvirtualawlibrary chanrobles virtual law library
It should be recalled that the original resolution of the Board of Directors adopted on July
10, 1946 which provided for the donation of P400,000 out of the proceeds which the De la
Rama company would collect on the insurance policies taken on the life of the late Enrico
Pirovano was, as already stated above, amended on January 6, 1947 to include, among
the conditions therein provided, that the corporation shall proceed to pay said amount, as
well as the interest due thereon, after it shall have settled in full balance of its bonded
indebtedness in the sum of P5,000,000. It should be recalled that on September 13, 1949,
or more than 2 years after the last amendment referred too above, the stockholders
adopted another resolution whereby they formally ratified said donation but subject to the
following clarifications: (1) that the amount of the donation shall not be effected until such
time as the company shall have first duly liquidated its present bonded indebtedness in
the amount of P3,260,855.77 to the National Development Company, or shall have first
fully redeemed the preferred shares of stock in the amount to be issued to said company
in lieu thereof, and (2) that any and all taxes, legal fees, and expenses connected with the
transaction shall be chargeable from the proceeds of said insurance
policies.chanroblesvirtualawlibrary chanrobles virtual law library
The trial court, in considering these conditions in the light of the acts subsequently
performed by the corporation in connection with the proceeds of the insurance policies,
considered said conditions null and void, or at most not written because in its pinion their
non-fulfillment was due to a deliberate desistance of the corporation and not to lack of
funds to redeem the preferred shares of the National Development Company. The
conclusions arrived at by the trial court on this point are as follows:

Fourth. - that the condition mentioned in the donation is null and void because it depends
on the exclusive will of the donor, in accordance with the provisions of Article 1115 of the
Old Civil Code.chanroblesvirtualawlibrary chanrobles virtual law library
Fifth. - That if the condition is valid, its non-fulfillment is due to the desistance of the
defendant company from obeying and doing the wishes and mandate of the majority of
the stockholders.chanroblesvirtualawlibrary chanrobles virtual law library
Sixth. - That the non-payment of the debt in favor of the National Development Company
is due to the lack of funds, nor to lack of authority, but to the desire of the President of the
corporation to preserve and continue the Government participation in the company.
To this views of the trial court, we fail to agree. There are many factors we can consider
why the failure to immediately redeem the preferred shares issued to the National
Development Company as desired by the minor children of the late Enrico Pirovano
cannot or should not be attributed to a mere desire on the part of the corporation to delay
the redemption, or to prejudice the interest of the minors, but rather to protect the
interest of the corporation itself. One of them is the text of the very resolution approved
by the National Development Company on February 18, 1949 which prescribed the terms
and conditions under which it expressed its conformity to the conversion of the bonded
indebtedness into preferred shares of stock. The text of the resolution above mentioned
reads:
Resolved: That the outstanding bonded indebtedness of the Dela Rama Steamship Co.,
Inc., in the approximate amount of P3,260,855.77 be converted into non-voting preferred
shares of stock of said company, said shares to bear a fixed dividend of 6 percent per
annum which shall be cumulative and redeemable within 15 years. Said shares shall be
preferred as to assets in the event of liquidation or dissolution of said company but shall
be non-participating.
It is plain from the text of the above resolution that the defendant corporation had 15
years from February 18, 1949, or until 1964, within which to effect the redemption of the
preferred shares issued to the National Development Company. This condition cannot but
be binding and obligatory upon the donees, if they desire to maintain the validity of the
donation, for it is not only the basis upon which the stockholders of the defendant
corporation expressed their willingness to ratify the donation, but it is also by way which
its creditor, the National Development Company, would want it to be. If the defendant
corporation is given 15 years within which to redeem the preferred shares, and that period
would expire in 1964, one cannot blame the corporation for availing itself of this period if
in its opinion it would redound to its best interest. It cannot therefore be said that the
fulfillment of the condition for the payment of the donation is one that wholly depends on
the exclusive will of the donor, as the lower court has concluded, simply because it failed
to meet the redemption of said shares in her manner desired by the donees. While it may
be admitted that because of the disposition of the assets of the corporation upon the
suggestion of its general manager more than enough funds had been raised to effect the
immediate redemption of the above shares, it is not correct to say that the management
has completely failed in its duty to pay its obligations for, according to the evidence, a

substantial portion of the indebtedness has been paid and only a balance of about
P1,805,169.98 was outstanding when the stockholders of the corporation decided to
revoke or cancel the donation. (Exhibit P.)chanrobles virtual law library
But there are other good reasons why all the available funds have not been actually
applied to the redemption of the preferred shares, one of them being the "desire of the
president of the corporation to preserve and continue the government participation in the
company" which even the lower court found it to be meritorious, which is one way by
which it could continue receiving the patronage and protection of the government.
Another reason is that the redemption of the shares does not depend on the will of the
corporation alone but to a great extent on the will of a third party, the National
Development Company. In fact, as the evidence shows, this Company had pledged these
shares to the Philippine National Bank and the Rehabilitation Finance Corporation as a
security to obtain certain loans to finance the purchase of certain ships to be built for the
use of the company under management contract entered into between the corporation
and the National Development Company, and this was what prevented the corporation
from carrying out its offer to pay the sum P1,956,513.07 on April 5, 1951. Had this offer
been accepted, or favorably acted upon by the National Development Company, the
indebtedness would have been practically liquidated, leaving outstanding only one
certificate worth P217,390.45. Of course, the corporation could have insisted in
redeeming the shares if it wanted to even to the extent of taking a court action if
necessary to force its creditor to relinquish the shares that may be necessary to
accomplish the redemption, but such would be a drastic step which would have not been
advisable considering the policy right along maintained by the corporation to preserve its
cordial and smooth relation with the government. At any rate, whether such attitude be
considered as a mere excuse to justify the delay in effecting the redemption of the shares,
or a mere desire on the part of the corporation to retain in its possession more funds
available to attend to other pressing need as demanded by the interest of the corporation,
we fail to see in such an attitude an improper motive to circumvent the early realization of
the desire of the minors to obtain the immediate payment of the donation which was
made dependent upon the redemption of said shares there being no clear evidence that
may justify such design. Anyway, a great portion of the funds went to the stockholders
themselves by way of dividends to offset, so it appears, the huge advances that the
corporation had made to them which were entered in the books of the corporation as
loans and, therefore, they were invested for their own benefit. As General Manager
Osmea said, "we were first confronted with the problem of the withdrawals of the family
which had to be repaid back to the National Development Company and one of the most
practical solutions to that was to declare dividends and reduce the amounts of their
withdrawals", which then totalled about P3,000,000.chanroblesvirtualawlibrary chanrobles
virtual law library
All things considered, we are of the opinion that the finding of the lower court that the
failure of the defendant corporation to comply with the condition of the donation is merely
due to its desistance from obeying the mandate of the majority of the stockholders and
not to lack of funds, or to lack of authority, has no foundation in law or in fact, and,
therefore, its conclusion that because of such desistance that condition should be deemed
as fulfilled and the payment of the donation due and demandable, is not justified. In this

respect, the decision of the lower court should be


reversed.chanroblesvirtualawlibrary chanrobles virtual law library
Having reached the foregoing conclusion, we deem it unnecessary to discuss the other
issues raised by the parties in their briefs.chanroblesvirtualawlibrary chanrobles virtual
law library
The lower court adjudicated to plaintiff an additional amount equivalent to 20 per cent of
the amount claimed as damages by way of attorney's fees, and in our opinion, this award
can be justified under Article 2208, paragraph 2, of the new Civil Code, which provides:
"When the defendant's act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest", attorney's fees nay be awarded as
damages. However, the majority believes that this award should be reduced to 10 per
cent.chanroblesvirtualawlibrary chanrobles virtual law library
Wherefore, the decision appealed from should be modified as follows: (a) that the
donation made in favor of the children of the late Enrico Pirovano of the proceeds of the
insurance policies taken on his life is valid and binding on the defendant corporation, (b)
that said donation, which amounts to a total of P583,813.59, including interest, as it
appears in the books of the corporation as of August 31, 1951, plus interest thereon at the
rate of 5 per cent per annum from the filing of the complaint, should be paid to the
plaintiffs after the defendant corporation shall have fully redeemed the preferred shares
issued to the National Development Company under the terms and conditions stated in
the resolutions of the Board of Directors of January 6, 1947 and June 24, 1947, as
amended by the resolution of the stockholders adopted on September 13,1949; and (c)
defendant shall pay to plaintiffs an additional amount equivalent to 10 per cent of said
amount of P583,813.59 as damages by way of attorney's fees, and to pay the costs of
action.chanroblesvirtualawlibrary chan

G.R. No. L-17716

July 31, 1962

LUNETA MOTOR COMPANY, petitioner,


vs.
A.D. SANTOS, INC., ET AL., respondents.
Jose Agbulos for petitioner.
Graciano C. Regala and Angel A. Sison for respondents.
DIZON, J.:
Appeal from the decision of the Public Service Commission in case No. 123401 dismissing
petitioner's application for the approval of the sale in its favor, made by the Sheriff of the
City of Manila, of the certificate of public convenience granted before the war to Nicolas
Concepcion (Commission Cases Nos. 60604 and 60605, reconstituted after the war in
Commission Case No. 1470) to operate a taxicab service of 27 units in the City of Manila
and therefrom to any point in Luzon.
It appears that on December 31, 1941, to secure payment of a loan evidenced by a
promissory note executed by Nicolas Concepcion and guaranteed by one Placido Esteban
in favor of petitioner, Concepcion executed a chattel mortgage covering the above
mentioned certificate in favor of petitioner.
To secure payment of a subsequent loan obtained by Concepcion from the Rehabilitation
Finance Corporation (now Development Bank of the Philippines) he constituted a second
mortgage on the same certificate. This second mortgage was approved by the respondent
Commission, subject to the mortgage lien in favor of petitioner.
The certificate was later sold to Francisco Benitez, Jr., who resold it to Rodi Taxicab
Company. Both sales were made with assumption of the mortgage in favor of the RFC, and
were also approved provisionally by the Commission, subject to petitioner's lien.
On October 10, 1953 petitioner filed an action to foreclose the chattel mortgage executed
in its favor by Concepcion (Civil Case No. 20853 of the Court of First Instance of Manila) in
view of the failure of the latter and his guarantor, Placido Esteban, to pay their overdue
account.
While the above case was pending, the RFC also instituted foreclosure proceedings on its
second chattel mortgage, and as a result of the decision in its favor therein rendered, the
certificate of public convenience was sold at public auction in favor of Amador D. Santos
for P24,010.00 on August 31, 1956. Santos immediately applied with the Commission for
the approval of the sale, and the same was approved on January 26, 1957, subject to the
mortgage lien in favor of petitioner.

On June 9, 1958 the Court of First Instance of Manila rendered judgment in Civil Case No.
20853, amended on August 1, 1958, adjudging Concepcion indebted to petitioner in the
sum of P15,197.84, with 12% interest thereon from December 2, 1941 until full payment,
plus other assessments, and ordered that the certificate of public convenience subject
matter of the chattel mortgage be sold at public auction in accordance with law.
Accordingly, on March 3, 1959 said certificate was sold at public auction to petitioner, and
six days thereafter the Sheriff of the City of Manila issued in its favor the corresponding
certificate of sale. Thereupon petitioner filed the application mentioned heretofore for the
approval of the sale. In the meantime and before his death, Amador D. Santos sold and
transferred (Commission Case No. 1272231) all his rights and interests in the certificate of
public convenience in question in favor of the now respondent A.D. Santos, Inc., who
opposed petitioner's application.
The record discloses that in the course of the hearing on said application and after
petitioner had rested its case, the respondent A. D. Santos, Inc., with leave of court, filed a
motion to dismiss based on the following grounds:
a) under the petitioner's Articles of Incorporation, it was not authorized to
engage in the taxicab business or operate as a common carrier;
b) the decision in Civil Case No. 20853 of the Court of First Instance of Manila did
not affect the oppositor nor its predecessor Amador D. Santos inasmuch as
neither of them had been impleaded into the case;
c) that what was sold to the petitioner were only the "rights, interests and
participation" of Nicolas Concepcion in the certificate that had been granted to
him which were no longer existing at the time of the sale.
On October 18, 1960, the respondent Commission, after considering the memoranda
submitted by the parties, rendered the appealed decision sustaining the first ground relied
upon in support thereof, namely, that under petitioner's articles of incorporation it had no
authority to engage in the taxicab business or operate as a common carrier, and that, is a
result, it could not acquire by purchase the certificate of public convenience referred to
above. Hence, the present appeal interposed by petitioner who claims that, in accordance
with the Corporation Law and its articles of incorporation, it can acquire by purchase the
certificate of public convenience in question, maintaining inferentially that, after acquiring
said certificate, it could make use of it by operating a taxicab business or operate is a
common carrier by land.
There is no question that a certificate of public convenience granted to the public operator
is liable to execution (Raymundo vs. Luneta Motor Co., 58 Phil. 889) and may be acquired
by purchase. The question involved in the present appeal, however, is not only whether,
under the Corporation Law and petitioner's articles of incorporation, it may acquire by
purchase a certificate of public convenience, such as the one in question, but also
whether, after its acquisition, petitioner may hold the certificate and thereunder operate
as a common carrier by land.
It is not denied that under Section 13 (5) of the Corporation Law, a corporation created
thereunder may purchase, hold, etc., and otherwise deal in such real and personal
property is the purpose for which the corporation was formed may permit, and the
transaction of its lawful business may reasonably and necessarily require. The issue here
is precisely whether the purpose for which petitioner was organized and the transaction of

its lawful business reasonably and necessarily require the purchase and holding by it of a
certificate of public convenience like the one in question and thus give it additional
authority to operate thereunder as a common carrier by land.
Petitioner claims in this regard that its corporate purposes are to carry on a general
mercantile and commercial business, etc., and that it is authorized in its articles of
incorporation to operate and otherwise deal in and concerning automobiles and
automobile accessories' business in all its multifarious ramification (petitioner's brief p. 7)
and to operate, etc., and otherwise dispose of vessels and boats, etc., and to own and
operate steamship and sailing ships and other floating craft and deal in the same and
engage in the Philippine Islands and elsewhere in the transportation of persons,
merchandise and chattels by water; all this incidental to the transportation of automobiles
(id. pp. 7-8 and Exhibit B).
We find nothing in the legal provision and the provisions of petitioner's articles of
incorporation relied upon that could justify petitioner's contention in this case. To the
contrary, they are precisely the best evidence that it has no authority at all to engage in
the business of land transportation and operate a taxicab service. That it may operate and
otherwise deal in automobiles and automobile accessories; that it may engage in the
transportation of persons by water does not mean that it may engage in the business of
land transportation an entirely different line of business. If it could not thus engage in
the line of business, it follows that it may not acquire an certificate of public convenience
to operate a taxicab service, such as the one in question, because such acquisition would
be without purpose and would have no necessary connection with petitioner's legitimate
business.
In view of the conclusion we have arrived at on the decisive issue involved in this appeal,
we deem it unnecessary to resolve the other incidental questions raised by petitioner.
WHEREFORE, the appealed decision is affirmed, with costs.

G.R. No. L-18062

February 28, 1963

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,


vs.
ACOJE MINING COMPANY, INC., defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
Jalandoni & Jamir for defendant-appellant.
BAUTISTA ANGELO, J.:
On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of Posts requesting
the opening of a post, telegraph and money order offices at its mining camp at Sta. Cruz,
Zambales, to service its employees and their families that were living in said camp. Acting
on the request, the Director of Posts wrote in reply stating that if aside from free quarters
the company would provide for all essential equipment and assign a responsible
employee to perform the duties of a postmaster without compensation from his office
until such time as funds therefor may be available he would agree to put up the offices
requested. The company in turn replied signifying its willingness to comply with all the
requirements outlined in the letter of the Director of Posts requesting at the same time
that it be furnished with the necessary forms for the early establishment of a post office
branch.
On April 11, 1949, the Director of Posts again wrote a letter to the company stating
among other things that "In cases where a post office will be opened under circumstances
similar to the present, it is the policy of this office to have the company assume direct
responsibility for whatever pecuniary loss may be suffered by the Bureau of Posts by
reason of any act of dishonesty, carelessness or negligence on the part of the employee of
the company who is assigned to take charge of the post office," thereby suggesting that a
resolution be adopted by the board of directors of the company expressing conformity to
the above condition relative to the responsibility to be assumed buy it in the event a post
office branch is opened as requested. On September 2, 1949, the company informed the
Director of Posts of the passage by its board of directors of a resolution of the following
tenor: "That the requirement of the Bureau of Posts that the Company should accept full
responsibility for all cash received by the Postmaster be complied with, and that a copy of
this resolution be forwarded to the Bureau of Posts." The letter further states that the
company feels that that resolution fulfills the last condition imposed by the Director of

Posts and that, therefore, it would request that an inspector be sent to the camp for the
purpose of acquainting the postmaster with the details of the operation of the branch
office.
The post office branch was opened at the camp on October 13, 1949 with one Hilario M.
Sanchez as postmaster. He is an employee of the company. On May 11, 1954, the
postmaster went on a three-day leave but never returned. The company immediately
informed the officials of the Manila Post Office and the provincial auditor of Zambales of
Sanchez' disappearance with the result that the accounts of the postmaster were checked
and a shortage was found in the amount of P13,867.24.
The several demands made upon the company for the payment of the shortage in line
with the liability it has assumed having failed, the government commenced the present
action on September 10, 1954 before the Court of First Instance of Manila seeking to
recover the amount of Pl3,867.24. The company in its answer denied liability for said
amount contending that the resolution of the board of directors wherein it assumed
responsibility for the act of the postmaster is ultra vires, and in any event its liability
under said resolution is only that of a guarantor who answers only after the exhaustion of
the properties of the principal, aside from the fact that the loss claimed by the plaintiff is
not supported by the office record.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted
and approved by this Honorable Court, without prejudice to the parties adducing other
evidence to prove their case not covered by this stipulation of facts. 1wph1.t
After trial, the court a quo found that, of the amount claimed by plaintiff totalling
P13,867.24, only the sum of P9,515.25 was supported by the evidence, and so it rendered
judgment for the plaintiff only for the amount last mentioned. The court rejected the
contention that the resolution adopted by the company is ultra vires and that the
obligation it has assumed is merely that of a guarantor.
Defendant took the present appeal.
The contention that the resolution adopted by the company dated August 31, 1949 is ultra
vires in the sense that it has no authority to act on a matter which may render the
company liable as a guarantor has no factual or legal basis. In the first place, it should be
noted that the opening of a post office branch at the mining camp of appellant
corporation was undertaken because of a request submitted by it to promote the
convenience and benefit of its employees. The idea did not come from the government,
and the Director of Posts was prevailed upon to agree to the request only after studying
the necessity for its establishment and after imposing upon the company certain
requirements intended to safeguard and protect the interest of the government. Thus,
after the company had signified its willingness to comply with the requirement of the
government that it furnish free quarters and all the essential equipment that may be
necessary for the operation of the office including the assignment of an employee who will
perform the duties of a postmaster, the Director of Posts agreed to the opening of the post
office stating that "In cases where a post office will be opened under circumstances
similar to the present, it is the policy of this office to have the company assume direct
responsibility for whatever pecuniary loss may be suffered by the Bureau of Posts by
reason of any act of dishonesty, carelessness or negligence on the part of the employee of
the company who is assigned to take charge of the post office," and accepting this
condition, the company, thru its board of directors, adopted forthwith a resolution of the

following tenor: "That the requirement of the Bureau of Posts that the company should
accept full responsibility for all cash received by the Postmaster, be complied with, and
that a copy of this resolution be forwarded to the Bureau of Posts." On the basis of the
foregoing facts, it is evident that the company cannot now be heard to complain that it is
not liable for the irregularity committed by its employee upon the technical plea that the
resolution approved by its board of directors is ultra vires. The least that can be said is
that it cannot now go back on its plighted word on the ground of estoppel.
The claim that the resolution adopted by the board of directors of appellant company is
an ultra vires act cannot also be entertained it appearing that the same covers a subject
which concerns the benefit, convenience and welfare of its employees and their families.
While as a rule an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore beyond the
powers conferred upon it by law (19 C.J.S., Section 965, p. 419), there are however certain
corporate acts that may be performed outside of the scope of the powers expressly
conferred if they are necessary to promote the interest or welfare of the corporation.
Thus, it has been held that "although not expressly authorized to do so a corporation may
become a surety where the particular transaction is reasonably necessary or proper to the
conduct of its business,"1 and here it is undisputed that the establishment of the local post
office is a reasonable and proper adjunct to the conduct of the business of appellant
company. Indeed, such post office is a vital improvement in the living condition of its
employees and laborers who came to settle in its mining camp which is far removed from
the postal facilities or means of communication accorded to people living in a city or
municipality..
Even assuming arguendo that the resolution in question constitutes an ultra vires act, the
same however is not void for it was approved not in contravention of law, customs, public
order or public policy. The term ultra viresshould be distinguished from an illegal act for
the former is merely voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated.2 It being merely voidable, an
ultra vires act can be enforced or validated if there are equitable grounds for taking such
action. Here it is fair that the resolution be upheld at least on the ground of estoppel. On
this point, the authorities are overwhelming:
The weight of authority in the state courts is to the effect that a transaction
which is merely ultra vires and not malum in se or malum prohibitum, is, if
performed by one party, not void as between the parties to all intents and
purposes, and that an action may be brought directly on the transaction and
relief had according to its terms. (19 C.J.S., Section 976, p. 432, citing Nettles v.
Rhett, C.C.A.S.C., 94 F. 2d, reversing, D.C., 20 F. Supp. 48)
This rule is based on the consideration that as between private corporations, one
party cannot receive the benefits which are embraced in total performance of a
contract made with it by another party and then set up the invalidity of the
transaction as a defense." (London & Lancashire Indemnity Co. of America v.
Fairbanks Steam Shovel Co., 147 N.E. 329, 332, 112 Ohio St. 136.)
The defense of ultra vires rests on violation of trust or duty toward stockholders,
and should not be entertained where its allowance will do greater wrong to
innocent parties dealing with corporation..

The acceptance of benefits arising from the performance by the other party may
give rise to an estoppel precluding repudiation of the transaction. (19 C.J.S.,
Section 976, p. 433.)
The current of modern authorities favors the rule that where the ultra vires
transaction has been executed by the other party and the corporation has
received the benefit of it, the law interposes an estoppel, and will not permit the
validity of the transaction or contract to be questioned, and this is especially true
where there is nothing in the circumstances to put the other party to the
transaction on notice that the corporation has exceeded its powers in entering
into it and has in so doing overstepped the line of corporate privileges. (19 C.J.S.,
Section 977, pp. 435-437, citing Williams v. Peoples Building & Loan Ass'n, 97
S.W. 2d 930, 193 Ark. 118; Hays v. Galion Gas Light Co., 29 Ohio St. 330)
Neither can we entertain the claim of appellant that its liability is only that of a guarantor.
On this point, we agree with the following comment of the court a quo: "A mere reading of
the resolution of the Board of Directors dated August 31, 1949, upon which the plaintiff
based its claim would show that the responsibility of the defendant company is not just
that of a guarantor. Notice that the phraseology and the terms employed are so clear and
sweeping and that the defendant assumed 'full responsibility for all cash received by the
Postmaster.' Here the responsibility of the defendant is not just that of a guarantor. It is
clearly that of a principal."
WHEREFORE, the decision appealed from is affirmed. No costs.

G.R. No. 80599 September 15, 1989


ERNESTINA CRISOLOGO-JOSE, petitioner,
vs.
COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own behalf and as VicePresident for Sales of Mover Enterprises, Inc., respondents.
Melquiades P. de Leon for petitioner.
Rogelio A. Ajes for private respondent.

REGALADO, J.:

Petitioner seeks the annulment of the decision 1 of respondent Court of Appeals,


promulgated on September 8, 1987, which reversed the decision of the trial
Court 2 dismissing the complaint for consignation filed by therein plaintiff Ricardo S.
Santos, Jr.
The parties are substantially agreed on the following facts as found by both lower courts:
In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover
Enterprises, Inc. in-charge of marketing and sales; and the president of
the said corporation was Atty. Oscar Z. Benares. On April 30, 1980, Atty.
Benares, in accommodation of his clients, the spouses Jaime and Clarita
Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated
June 14, 1980, in the amount of P45,000.00 (Exh- 'I') payable to
defendant Ernestina Crisologo-Jose. Since the check was under the
account of Mover Enterprises, Inc., the same was to be signed by its
president, Atty. Oscar Z. Benares, and the treasurer of the said
corporation. However, since at that time, the treasurer of Mover
Enterprises was not available, Atty. Benares prevailed upon the plaintiff,
Ricardo S. Santos, Jr., to sign the aforesaid chEck as an alternate story.
Plaintiff Ricardo S. Santos, Jr. did sign the check.
It appears that the check (Exh. '1') was issued to defendant Ernestina
Crisologo-Jose in consideration of the waiver or quitclaim by said
defendant over a certain property which the Government Service
Insurance System (GSIS) agreed to sell to the clients of Atty. Oscar
Benares, the spouses Jaime and Clarita Ong, with the understanding
that upon approval by the GSIS of the compromise agreement with the
spouses Ong, the check will be encashed accordingly. However, since
the compromise agreement was not approved within the expected
period of time, the aforesaid check for P45,000.00 (Exh. '1') was
replaced by Atty. Benares with another Traders Royal Bank cheek
bearing No. 379299 dated August 10, 1980, in the same amount of
P45,000.00 (Exhs. 'A' and '2'), also payable to the defendant Jose. This
replacement check was also signed by Atty. Oscar Z. Benares and by the
plaintiff Ricardo S. Santos, Jr. When defendant deposited this
replacement check (Exhs. 'A' and '2') with her account at Family Savings
Bank, Mayon Branch, it was dishonored for insufficiency of funds. A
subsequent redepositing of the said check was likewise dishonored by
the bank for the same reason. Hence, defendant through counsel was
constrained to file a criminal complaint for violation of Batas Pambansa
Blg. 22 with the Quezon City Fiscal's Office against Atty. Oscar Z.
Benares and plaintiff Ricardo S. Santos, Jr. The investigating Assistant
City Fiscal, Alfonso Llamas, accordingly filed an amended information
with the court charging both Oscar Benares and Ricardo S. Santos, Jr.,
for violation of Batas Pambansa Blg. 22 docketed as Criminal Case No.
Q-14867 of then Court of First Instance of Rizal, Quezon City.
Meanwhile, during the preliminary investigation of the criminal charge
against Benares and the plaintiff herein, before Assistant City Fiscal
Alfonso T. Llamas, plaintiff Ricardo S. Santos, Jr. tendered cashier's
check No. CC 160152 for P45,000.00 dated April 10, 1981 to the
defendant Ernestina Crisologo-Jose, the complainant in that criminal
case. The defendant refused to receive the cashier's check in payment

of the dishonored check in the amount of P45,000.00. Hence, plaintiff


encashed the aforesaid cashier's check and subsequently deposited said
amount of P45,000.00 with the Clerk of Court on August 14, 1981 (Exhs.
'D' and 'E'). Incidentally, the cashier's check adverted to above was
purchased by Atty. Oscar Z. Benares and given to the plaintiff herein to
be applied in payment of the dishonored check. 3
After trial, the court a quo, holding that it was "not persuaded to believe that consignation
referred to in Article 1256 of the Civil Code is applicable to this case," rendered judgment
dismissing plaintiff s complaint and defendant's counterclaim. 4
As earlier stated, respondent court reversed and set aside said judgment of dismissal and
revived the complaint for consignation, directing the trial court to give due course thereto.
Hence, the instant petition, the assignment of errors wherein are prefatorily stated and
discussed seriatim.
1. Petitioner contends that respondent Court of Appeals erred in holding
that private respondent, one of the signatories of the check issued
under the account of Mover Enterprises, Inc., is an accommodation
party under the Negotiable Instruments Law and a debtor of petitioner
to the extent of the amount of said check.
Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and
not private respondent who merely signed the check in question in a representative
capacity, that is, as vice-president of said corporation, hence he is not liable thereon
under the Negotiable Instruments Law.
The pertinent provision of said law referred to provides:
Sec. 29. Liability of accommodation party an accommodation party is
one who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of
lending his name to some other person. Such a person is liable on the
instrument to a holder for value, notwithstanding such holder, at the
time of taking the instrument, knew him to be only an accommodation
party.
Consequently, to be considered an accommodation party, a person must (1) be a party to
the instrument, signing as maker, drawer, acceptor, or indorser, (2) not receive value
therefor, and (3) sign for the purpose of lending his name for the credit of some other
person.
Based on the foregoing requisites, it is not a valid defense that the accommodation party
did not receive any valuable consideration when he executed the instrument. From the
standpoint of contract law, he differs from the ordinary concept of a debtor therein in the
sense that he has not received any valuable consideration for the instrument he signs.
Nevertheless, he is liable to a holder for value as if the contract was not for
accommodation 5in whatever capacity such accommodation party signed the instrument,
whether primarily or secondarily. Thus, it has been held that in lending his name to the
accommodated party, the accommodation party is in effect a surety for the latter. 6

Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this case,
as petitioner suggests, the inevitable question is whether or not it may be held liable on
the accommodation instrument, that is, the check issued in favor of herein petitioner.
We hold in the negative.
The aforequoted provision of the Negotiable Instruments Law which holds an
accommodation party liable on the instrument to a holder for value, although such holder
at the time of taking the instrument knew him to be only an accommodation party, does
not include nor apply to corporations which are accommodation parties. 7 This is because
the issue or indorsement of negotiable paper by a corporation without consideration and
for the accommodation of another is ultra vires. 8 Hence, one who has taken the
instrument with knowledge of the accommodation nature thereof cannot recover against
a corporation where it is only an accommodation party. If the form of the instrument, or
the nature of the transaction, is such as to charge the indorsee with knowledge that the
issue or indorsement of the instrument by the corporation is for the accommodation of
another, he cannot recover against the corporation thereon. 9
By way of exception, an officer or agent of a corporation shall have the power to execute
or indorse a negotiable paper in the name of the corporation for the accommodation of a
third person only if specifically authorized to do so. 10 Corollarily, corporate officers, such
as the president and vice-president, have no power to execute for mere accommodation a
negotiable instrument of the corporation for their individual debts or transactions arising
from or in relation to matters in which the corporation has no legitimate concern. Since
such accommodation paper cannot thus be enforced against the corporation, especially
since it is not involved in any aspect of the corporate business or operations, the
inescapable conclusion in law and in logic is that the signatories thereof shall be
personally liable therefor, as well as the consequences arising from their acts in
connection therewith.
The instant case falls squarely within the purview of the aforesaid decisional rules. If we
indulge petitioner in her aforesaid postulation, then she is effectively barred from
recovering from Mover Enterprises, Inc. the value of the check. Be that as it may,
petitioner is not without recourse.
The fact that for lack of capacity the corporation is not bound by an accommodation paper
does not thereby absolve, but should render personally liable, the signatories of said
instrument where the facts show that the accommodation involved was for their personal
account, undertaking or purpose and the creditor was aware thereof.
Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the
cheek was issued at the instance and for the personal account of Atty. Benares who
merely prevailed upon respondent Santos to act as co-signatory in accordance with the
arrangement of the corporation with its depository bank. That it was a personal
undertaking of said corporate officers was apparent to petitioner by reason of her
personal involvement in the financial arrangement and the fact that, while it was the
corporation's check which was issued to her for the amount involved, she actually had no
transaction directly with said corporation.
There should be no legal obstacle, therefore, to petitioner's claims being directed
personally against Atty. Oscar Z. Benares and respondent Ricardo S. Santos, Jr., president
and vice-president, respectively, of Mover Enterprises, Inc.

2. On her second assignment of error, petitioner argues that the Court


of Appeals erred in holding that the consignation of the sum of
P45,000.00, made by private respondent after his tender of payment
was refused by petitioner, was proper under Article 1256 of the Civil
Code.
Petitioner's submission is that no creditor-debtor relationship exists between the parties,
hence consignation is not proper. Concomitantly, this argument was premised on the
assumption that private respondent Santos is not an accommodation party.
As previously discussed, however, respondent Santos is an accommodation party and is,
therefore, liable for the value of the check. The fact that he was only a co-signatory does
not detract from his personal liability. A co-maker or co-drawer under the circumstances in
this case is as much an accommodation party as the other co-signatory or, for that
matter, as a lone signatory in an accommodation instrument. Under the doctrine
in Philippine Bank of Commerce vs. Aruego, supra, he is in effect a co-surety for the
accommodated party with whom he and his co-signatory, as the other co-surety, assume
solidary liability ex lege for the debt involved. With the dishonor of the check, there was
created a debtor-creditor relationship, as between Atty. Benares and respondent Santos,
on the one hand, and petitioner, on the other. This circumstance enables respondent
Santos to resort to an action of consignation where his tender of payment had been
refused by petitioner.
We interpose the caveat, however, that by holding that the remedy of consignation is
proper under the given circumstances, we do not thereby rule that all the operative facts
for consignation which would produce the effect of payment are present in this case.
Those are factual issues that are not clear in the records before us and which are for the
Regional Trial Court of Quezon City to ascertain in Civil Case No. Q-33160, for which
reason it has advisedly been directed by respondent court to give due course to the
complaint for consignation, and which would be subject to such issues or claims as may
be raised by defendant and the counterclaim filed therein which is hereby ordered
similarly revived.
3. That respondent court virtually prejudged Criminal Case No. Q-14687
of the Regional Trial Court of Quezon City filed against private
respondent for violation of Batas Pambansa Blg. 22, by holding that no
criminal liability had yet attached to private respondent when he
deposited with the court the amount of P45,000.00 is the final plaint of
petitioner.
We sustain petitioner on this score.
Indeed, respondent court went beyond the ratiocination called for in the appeal to it in CAG.R. CV. No. 05464. In its own decision therein, it declared that "(t)he lone issue dwells in
the question of whether an accommodation party can validly consign the amount of the
debt due with the court after his tender of payment was refused by the creditor." Yet, from
the commercial and civil law aspects determinative of said issue, it digressed into the
merits of the aforesaid Criminal Case No. Q-14867, thus:
Section 2 of B.P. 22 establishes the prima facie evidence of knowledge
of such insufficiency of funds or credit. Thus, the making, drawing and
issuance of a check, payment of which is refused by the drawee

because of insufficient funds in or credit with such bank is prima facie


evidence of knowledge of insufficiency of funds or credit, when the
check is presented within 90 days from the date of the check.
It will be noted that the last part of Section 2 of B.P. 22 provides that the
element of knowledge of insufficiency of funds or credit is not present
and, therefore, the crime does not exist, when the drawer pays the
holder the amount due or makes arrangements for payment in full by
the drawee of such check within five (5) banking days after receiving
notice that such check has not been paid by the drawee.
Based on the foregoing consideration, this Court finds that the plaintiffappellant acted within Ms legal rights when he consigned the amount of
P45,000.00 on August 14, 1981, between August 7, 1981, the date
when plaintiff-appellant receive (sic) the notice of non-payment, and
August 14, 1981, the date when the debt due was deposited with the
Clerk of Court (a Saturday and a Sunday which are not banking days)
intervened. The fifth banking day fell on August 14, 1981. Hence, no
criminal liability has yet attached to plaintiff-appellant when he
deposited the amount of P45,000.00 with the Court a quo on August 14,
1981. 11
That said observations made in the civil case at bar and the intrusion into the merits of
the criminal case pending in another court are improper do not have to be belabored. In
the latter case, the criminal trial court has to grapple with such factual issues as, for
instance, whether or not the period of five banking days had expired, in the process
determining whether notice of dishonor should be reckoned from any prior notice if any
has been given or from receipt by private respondents of the subpoena therein with
supporting affidavits, if any, or from the first day of actual preliminary investigation; and
whether there was a justification for not making the requisite arrangements for payment
in full of such check by the drawee bank within the said period. These are matters alien to
the present controversy on tender and consignation of payment, where no such period
and its legal effects are involved.
These are aside from the considerations that the disputed period involved in the criminal
case is only a presumptive rule, juris tantum at that, to determine whether or not there
was knowledge of insufficiency of funds in or credit with the drawee bank; that payment
of civil liability is not a mode for extinguishment of criminal liability; and that the requisite
quantum of evidence in the two types of cases are not the same.
To repeat, the foregoing matters are properly addressed to the trial court in Criminal Case
No. Q-14867, the resolution of which should not be interfered with by respondent Court of
Appeals at the present posture of said case, much less preempted by the inappropriate
and unnecessary holdings in the aforequoted portion of the decision of said respondent
court. Consequently, we modify the decision of respondent court in CA-G.R. CV No. 05464
by setting aside and declaring without force and effect its pronouncements and findings
insofar as the merits of Criminal Case No. Q-14867 and the liability of the accused therein
are concerned.
WHEREFORE, subject to the aforesaid modifications, the judgment of respondent Court of
Appeals is AFFIRMED.

SO ORDERED.

The facts which have given rise this lawsuit are simple, as the financial interests involve
are immense. Briefly told these facts are as follows: The Benguet Consolidated Mining Co.
was organized in June, 1903, as a sociedad anonima in conformity with the provisions of
Spanish law; while the Balatoc Mining Co. was organized in December 1925, as a
corporation, in conformity with the provisions of the Corporation Law (Act No. 1459). Both
entities were organized for the purpose of engaging in the mining of gold in the Philippine
Islands, and their respective properties are located only a few miles apart in the
subprovince of Benguet. The capital stock of the Balatoc Mining Co. consists of one million
shares of the par value of one peso (P1) each.

G.R. No. L-37331

March 18, 1933

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

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

American law; and in the Philippine Bill, approved July 1, 1902, the Congress of the United
States inserted certain provisions, under the head of Franchises, which were intended to
control the lawmaking power in the Philippine Islands in the matter of granting of
franchises, privileges and concessions. These provisions are found in section 74 and 75 of
the Act. The provisions of section 74 have been superseded by section 28 of the Act of
Congress of August 29, 1916, but in section 75 there is a provision referring to mining
corporations, which still remains the law, as amended. This provisions, in its original form,
reads as follows: "... it shall be unlawful for any member of a corporation engaged in
agriculture or mining and for any corporation organized for any purpose except irrigation
to be in any wise interested in any other corporation engaged in agriculture or in mining."
Under the guidance of this and certain other provisions thus enacted by Congress, the
Philippine Commission entered upon the enactment of a general law authorizing the
creation of corporations in the Philippine Islands. This rather elaborate piece of legislation
is embodied in what is called our Corporation Law (Act No. 1459 of the Philippine
Commission). The evident purpose of the commission was to introduce the American
corporation into the Philippine Islands as the standard commercial entity and to hasten
the day when the sociedad anonima of the Spanish law would be obsolete. That statute is
a sort of codification of American corporate law.
For the purposes general description only, it may be stated that the sociedad anonima is
something very much like the English joint stock company, with features resembling those
of both the partnership is shown in the fact that sociedad, the generic component of its
name in Spanish, is the same word that is used in that language to designate other forms
of partnership, and in its organization it is constructed along the same general lines as the
ordinary partnership. It is therefore not surprising that for purposes of loose translation
the expression sociedad anonima has not infrequently the other hand, the affinity of this
entity to the American corporation has not escaped notice, and the expression sociedad
anonima is now generally translated by the word corporation. But when the word
corporation is used in the sense of sociedad anonima and close discrimination is
necessary, it should be associated with the Spanish expression sociedad anonima either in
a parenthesis or connected by the word "or". This latter device was adopted in sections 75
and 191 of the Corporation Law.
In drafting the Corporation Law the Philippine Commission inserted bodily, in subsection
(5) of section 13 of that Act (No. 1459) the words which we have already quoted from
section 75 of the Act of Congress of July 1, 1902 (Philippine Bill); and it is of course
obvious that whatever meaning originally attached to this provision in the Act of
Congress, the same significance should be attached to it in section 13 of our Corporation
Law.
As it was the intention of our lawmakers to stimulate the introduction of the American
Corporation into Philippine law in the place of the sociedad anonima, it was necessary to
make certain adjustments resulting from the continued co-existence, for a time, of the two
forms of commercial entities. Accordingly, in section 75 of the Corporation Law, a
provision is found making the sociedad anonima subject to the provisions of the
Corporation Law "so far as such provisions may be applicable", and giving to
the sociedades anonimas previously created in the Islands the option to continue business
as such or to reform and organize under the provisions of the Corporation Law. Again, in
section 191 of the Corporation Law, the Code of Commerce is repealed in so far as it
relates to sociedades anonimas. The purpose of the commission in repealing this part of
the Code of Commerce was to compel commercial entities thereafter organized to
incorporate under the Corporation Law, unless they should prefer to adopt some form or

other of the partnership. To this provision was added another to the effect that
existing sociedades anonimas, which elected to continue their business as such, instead
of reforming and reorganizing under the Corporation Law, should continue to be governed
by the laws that were in force prior to the passage of this Act "in relation to their
organization and method of transacting business and to the rights of members thereof as
between themselves, but their relations to the public and public officials shall be governed
by the provisions of this Act."
As already observed, the provision above quoted from section 75 of the Act Congress of
July 1, 1902 (Philippine Bill), generally prohibiting corporations engaged in mining and
members of such from being interested in any other corporation engaged in mining, was
amended by section 7 of Act No. 3518 of the Philippine Legislature, approved by Congress
March 1, 1929. The change in the law effected by this amendment was in the direction of
liberalization. Thus, the inhibition contained in the original provision against members of a
corporation engaged in agriculture or mining from being interested in other corporations
engaged in agriculture or in mining was so modified as merely to prohibit any such
member from holding more than fifteen per centum of the outstanding capital stock of
another such corporation. Moreover, the explicit prohibition against the holding
by any corporation (except for irrigation) of an interest in any other corporation engaged
in agriculture or in mining was so modified as to limit the restriction to corporations
organized for the purpose of engaging in agriculture or in mining.
As originally drawn, our Corporation Law (Act No. 1459) did not contain any appropriate
clause directly penalizing the act of a corporation, a member of a corporation , in
acquiring an interest contrary to paragraph (5) of section 13 of the Act. The Philippine
Legislature undertook to remedy this situation in section 3 of Act No. 2792 of the
Philippine Legislature, approved on February 18, 1919, but this provision was declared
invalid by this court inGovernment of the Philippine Islands vs. El Hogar Filipino (50 Phil.,
399), for lack of an adequate title to the Act. Subsequently the Legislature reenacted
substantially the same penal provision in section 21 of Act No. 3518, under a title
sufficiently broad to comprehend the subject matter. This part of Act No. 3518 became
effective upon approval by the Governor-General, on December 3, 1928, and it was
therefore in full force when the contract now in question was made.
This provision was inserted as a new section in the Corporation Law, forming section 1990
(A) of said Act as it now stands. Omitting the proviso, which seems not to be pertinent to
the present controversy, said provision reads as follows:
SEC. 190 (A). Penalties. The violation of any of the provisions of this Act and its
amendments not otherwise penalized therein, shall be punished by a fine of not
more than five thousand pesos and by imprisonment for not more than five
years, in the discretion of the court. If the violation is committed by a
corporation, the same shall, upon such violation being proved, be dissolved
by quo warranto proceedings instituted by the Attorney-General or by any
provincial fiscal by order of said Attorney-General: . . . .
Upon a survey of the facts sketched above it is obvious that there are two fundamental
questions involved in this controversy. The first is whether the plaintiffs can maintain an
action based upon the violation of law supposedly committed by the Benguet Company in
this case. The second is whether, assuming the first question to be answered in the
affirmative, the Benguet Company, which was organized as a sociedad anonima, is a
corporation within the meaning of the language used by the Congress of the United
States, and later by the Philippine Legislature, prohibiting a mining corporation from

becoming interested in another mining corporation. It is obvious that, if the first question
be answered in the negative, it will be unnecessary to consider the second question in this
lawsuit.
Upon the first point it is at once obvious that the provision referred to was adopted by the
lawmakers with a sole view to the public policy that should control in the granting of
mining rights. Furthermore, the penalties imposed in what is now section 190 (A) of the
Corporation Law for the violation of the prohibition in question are of such nature that
they can be enforced only by a criminal prosecution or by an action of quo warranto. But
these proceedings can be maintained only by the Attorney-General in representation of
the Government.
What room then is left for the private action which the plaintiffs seek to assert in this
case? The defendant Benguet Company has committed no civil wrong against the
plaintiffs, and if a public wrong has been committed, the directors of the Balatoc
Company, and the plaintiff Harden himself, were the active inducers of the commission of
that wrong. The contract, supposing it to have been unlawful in fact, has been performed
on both sides, by the building of the Balatoc plant by the Benguet Company and the
delivery to the latter of the certificate of 600,000 shares of the Balatoc Company. There is
no possibility of really undoing what has been done. Nobody would suggest the demolition
of the mill. The Balatoc Company is secure in the possession of that improvement, and
talk about putting the parties in status quo ante by restoring the consideration with
interest, while the Balatoc Company remains in possession of what it obtained by the use
of that money, does not quite meet the case. Also, to mulct the Benguet Company in
many millions of dollars in favor of individuals who have not the slightest equitable right
to that money in a proposition to which no court can give a ready assent.
The most plausible presentation of the case of the plaintiffs proceeds on the assumption
that only one of the contracting parties has been guilty of a misdemeanor, namely, the
Benguet Company, and that the other party, the Balatoc Company, is wholly innocent to
participation in that wrong. The plaintiffs would then have us apply the second paragraph
of article 1305 of the Civil Code which declares that an innocent party to an illegal
contract may recover anything he may have given, while he is not bound to fulfill any
promise he may have made. But, supposing that the first hurdle can be safely vaulted, the
general remedy supplied in article 1305 of the Civil Code cannot be invoked where an
adequate special remedy is supplied in a special law. It has been so held by this court
in Go Chioco vs. Martinez (45 Phil., 256, 280), where we refused to apply that article to a
case of nullity arising upon a usurious loan. The reason given for the decision on this point
was that the Usury Act, as amended, contains all the provisions necessary for the
effectuation of its purposes, with the result that the remedy given in article 1305 of the
Civil Code is unnecessary. Much more is that idea applicable to the situation now before
us, where the special provisions give ample remedies for the enforcement of the law by
action in the name of the Government, and where no civil wrong has been done to the
party here seeking redress.
The view of the case presented above rest upon considerations arising upon our own
statutes; and it would seem to be unnecessary to ransack the American decisions for
analogies pertinent to the case. We may observe, however, that the situation involved is
not unlike that which has frequently arisen in the United States under provisions of the
National Bank Act prohibiting banks organized under that law from holding real property. It
has been uniformly held that a trust deed or mortgaged conveying property of this kind to
a bank, by way of security, is valid until the transaction is assailed in a direct proceeding
instituted by the Government against the bank, and the illegality of such tenure supplies

no basis for an action by the former private owner, or his creditor, to annul the
conveyance. (National Bank vs. Matthews, 98 U. S., 621; Kerfoot vs. Farmers & M. Bank,
218 U. S., 281.) Other analogies point in the same direction. (South & Ala. R. Ginniss vs. B.
& M. Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co. vs. Holmes &
Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77 Hun., 332.)
Most suggestive perhaps of all the cases in Compaia Azucarera de Carolina vs. Registrar
(19 Porto Rico, 143), for the reason that this case arose under a provision of the Foraker
Act, a law analogous to our Philippine Bill. It appears that the registrar had refused to
register two deeds in favor of the Compaia Azucarera on the ground that the land
thereby conveyed was in excess of the area permitted by law to the company. The Porto
Rican court reversed the ruling of the registrar and ordered the registration of the deeds,
saying:
Thus it may be seen that a corporation limited by the law or by its charter has
until the State acts every power and capacity that any other individual capable of
acquiring lands, possesses. The corporation may exercise every act of ownership
over such lands; it may sue in ejectment or unlawful detainer and it may demand
specific performance. It has an absolute title against all the world except the
State after a proper proceeding is begun in a court of law. ... The Attorney
General is the exclusive officer in whom is confided the right to initiate
proceedings for escheat or attack the right of a corporation to hold land.
Having shown that the plaintiffs in this case have no right of action against the Benguet
Company for the infraction of law supposed to have been committed, we forego cny
discussion of the further question whether a sociedad anonima created under Spanish
law, such as the Benguet Company, is a corporation within the meaning of the prohibitory
provision already so many times mentioned. That important question should, in our
opinion, be left until it is raised in an action brought by the Government.
The judgment which is the subject of his appeal will therefore be affirmed, and it is so
ordered, with costs against the appellants.

IRINEO G. CARLOS, plaintiff-appellant,


vs.
MINDORO SUGAR CO., ET AL., defendants-appellees.
Jose Ayala for appellant.
Ross, Lawrence & Selph for appellees.

IMPERIAL, J.:
The plaintiff brought this action to recover from the defendants the value of four bonds,
Nos. 1219, 1220, 1221, and 1222, with due and unpaid interest thereon, issued by the
Mindoro Sugar Company and placed in trust with the Philippine Trust Company which, in
turn, guaranteed them for value received. Said plaintiff appealed from the judgment
rendered by the Court of First Instance of Manila absolving the defendants from the
complaint, excepting the Mindoro Sugar Company, which was sentenced to pay the value
of the four bonds with interest at 8 per cent per annum, plus costs.
The Mindoro Sugar Company is a corporation constituted in accordance with the laws of
the country and registered on July 30, 1917. According to its articles of incorporation,
Exhibit 5, one of its principal purposes was to acquire and exercise the franchise granted
by Act No. 2720 to George H. Fairchild, to substitute the organized corporation, the
Mindoro Company, and to acquire all the rights and obligations of the latter and of Horace
Havemeyer and Charles J. Welch in the so-called San Jose Estate in the Province of
Mindoro.
The Philippine Trust Company is another domestic corporation, registered on October 21,
1917. In its articles of incorporation, Exhibit A, some of its purposes are expressed thus:
"To acquire by purchase, subscription, or otherwise, and to invest in, hold, sell, or
otherwise dispose of stocks, bonds, mortgages, and other securities, or any interest in
either, or any obligations or evidences of indebtedness, of any other corporation or
corporations, domestic or foreign. . . . Without in any particular limiting any of the powers
of the corporation, it is hereby expressly declared that the corporation shall have power to
make any guaranty respecting the dividends, interest, stock, bonds, mortgages, notes,
contracts or other obligations of any corporation, so far as the same may be permitted by
the laws of the Philippine Islands now or hereafter in force." Its principal purpose, then, as
its name indicates, is to engage in the trust business.
On November 17, 1917, the board of directors of the Philippine Trust Company, composed
of Phil, C. Whitaker, chairman, and James Ross, Otto Vorster, Charles D. Ayton, and William
J. O'Donovan, members, adopted a resolution authorizing its president, among other
things, to purchase at par and in the name and for the use of the trust corporation all or
such part as he may deem expedient, of the bonds in the value of P3,000,000 that the
Mindoro Sugar Company was about to issue, and to resell them, with or without the
guarantee of said trust corporation, at a price not less than par, and to guarantee to the
Philippine National Bank the payment of the indebtedness to said bank by the Mindoro
Sugar Company or Charles J. Welch and Horace Havemeyer, up to P2,000,000. The
relevant part of the resolution, Exhibit 3, reads as follows:
G.R. No. L-36207

October 26, 1932

Resolved that Mr. Phil. C. Whitaker, president of this company, be and he hereby
is authorized to purchase at par in the name and for the use of this company all,
or such part as he may deem expedient, of the said P3,000,000 of 20-year 8 per
cent coupon bonds of the said Mindoro Sugar Company, and to resell or
otherwise dispose of the said bonds, with or without this company's guaranty, at
a price not less than par; and it was further
Resolved that Mr. Phil. C. Whitaker, president of the company be and he hereby is
authorized in the name of this company alone or in connection with others, by
joint and several obligations, to guarantee to the Philippine National Bank the
due and punctual payment of any and all indebtedness owing to the said Bank by
either the Mindoro Sugar Company, the Mindoro Company, or Charles J. Welch
and Horace Havemeyer, up to P2,000,000; and it was further
Resolved that the said president, Mr. Phil. C. Whitaker, be and he hereby is
authorized to execute in the name of this company any and all notes, mortgages,
bonds, guaranties, or instruments in writing whatever necessary for the carrying
into effect of the authority hereby granted.
In pursuance of this resolution, on December 21, 1917, the Mindoro Sugar Company
executed in favor of the Philippine Trust Company the deed of trust, Exhibit 6, transferring
all of its property to it in consideration of the bonds it had issued to the value of
P3,000,000, the value of each bond being $1,000, which par value, with interest at 8 per
cent per annum, the Philippine Trust Company had guaranteed to the holders, and in
consideration, furthermore, of said trust corporation having guaranteed to the Philippine
National Bank all the obligations contracted by the Mindoro Sugar Company, Charles J.
Welch and Horace Havemeyer up to the aforesaid amount of P2,000,000. The
aforementioned deed was approved by his Excellency, the Governor-General, upon
recommendation of the Secretary of Agriculture and Natural Resources, and in accordance
with the provisions of Act No. 2720 of the Philippine Legislature. Following are the clauses
of said Exhibit 6 material to this decision:
Whereas, for the purposes aforesaid, and in further pursuance of said resolutions
of its board of directors and of its stockholders, the company, in order to secure
the payment of said First Mortgage, Twenty Year, Eight Per Cent, Gold Bonds, has
determined to execute and deliver to said Philippine Trust Company, as trustee, a
deed of trust of its properties hereinafter described, and the board of directors of
the Company has approved the form of this indenture and directed that the same
be executed and delivered to said trustee; and
Whereas, all things necessary to make said bonds, when certified by said trustee
as in this indenture provided, valid, binding, legal and negotiable obligations of
the company and this indenture a valid deed of trust to secure the payment of
said bonds, have been done and performed, and the creation and issue of said
bonds, and the execution, acknowledgment and delivery of this deed of trust
have been duly authorized;
Now, therefore, in order to secure the payment of the principal and interest of all
such bonds at any time issued and outstanding under this indenture, according
to their tenor, purport and effect, and to secure the performance and observance
of all the covenants and conditions herein contained and to declare the terms
and conditions upon which said bonds are issued, received and held, and for and

in consideration of the premises, and of the purchase or acceptance of such


bonds by the holders thereof, and of the sum of one dollar, United States
currency, to it duly paid at or before the ensealing and delivery of these
presents, the receipt whereof is hereby acknowledged, the Mindoro Sugar
Company, party of the first part, has sold and conveyed, and by these presents
does sell and convey to the Philippine Trust Company, party of the second part,
its successors and assigns forever;
(Description of the property.)
In consequence of this transaction, the bonds, with their coupons were placed on the
market and sold by the Philippine Trust Company, all endorsed as follows:
This is to certify that the within bond is one of the series described in
the trust deed therein mentioned.
PHILIPPINE TRUST COMPANY
by: (Sgd.) PHIL. C. WHITAKER
President
For values received, the Philippine Trust Company hereby guarantees
the payment of principal and interest of the within bond.
Manila, Jan.2, 1918
PHILIPPINE TRUST COMPANY
by: (Sgd.)
PHIL. C. WHITAKER
President
The Philippine Trust Company sold thirteen bonds, Nos. 1219 to 1231, to Ramon Diaz for
P27,300, at a net profit of P100 per bond. The four bonds Nos. 1219, 1220, 1221, and
1222, here in litigation, are included in the thirteen sold to Diaz.
The Philippine Trust Company paid the appellant, upon presentation of the coupons, the
stipulated interest from the date of their maturity until the 1st of July, 1928, when it
stopped payments; and thenceforth it alleged that it did not deem itself bound to pay
such interest or to redeem the obligation because the guarantee given for the bonds was
illegal and void.
The appellant now contends that the judgment appealed from is untenable, assigning the
following errors:
FIRST ERROR
The lower court erred in sustaining the demurrer against the amended complaint,
filed by defendant J. S. Reis (Reese) and consequently in dismissing the same
with regard to this defendant.
SECOND ERROR

The lower court, without a proof to support it or an averment in defense by the


defendant Philippine Trust Company, erred in finding hypothetically that if the
guarantee made by this company be held valid, the trust funds and deposits in
its hands would probably be endangered.
THIRD ERROR
The lower court erred in holding that the Philippine Trust Company has no power
to guarantee the obligation of another juridical personality, for value received.
FOURTH ERROR
The lower court erred in not recognizing the validity and effect of the guarantee
subscribed by the Philippine Trust Company for the payment of the four bonds
claimed in the complaint, endorsed upon them, and in absolving said institution
from the complaint.
FIFTH ERROR
The lower court erred in absolving the ex-directors of the Philippine Trust
Company, Phil. C. Whitaker, O. Vorster, and Charles D. Ayton, from the complaint.
We shall not follow the order of the appellant's argument, deeming it unnecessary, but
shall decide only the third and fourth assignments of error upon which the merits of the
case depend. For the clear understanding of this decision and to avoid erroneous
interpretations, however, we wish to state that in this decision we shall decide only the
rights of the parties with regard to the four bonds in question and whatever we say in no
wise affects or applies to the rest of the bonds.
We shall begin by saying that the majority of the justices of this court who took part in the
case are of opinion that the only point of law to be decided is whether the Philippine Trust
Company acquired the four bonds in question, and whether as such it bound itself legally
and acted within its corporate powers in guaranteeing them. This question was answered
in the affirmative.1awphil.net

marketable, indorse or guarantee their payment. (7 R. C. L., p. 604 and cases


cited.)
"Whenever a corporation has the power to take and dispose of the securities of another
corporation, of whatsoever kind, it may, for the purpose of giving them a marketable
quality, guarantee their payment, even though the amount involved in the guaranty may
subject the corporation to liabilities in excess of the limit of indebtedness which it is
authorized to incur. A corporation which has power by its charter to issue its own bonds
has power to guarantee the bonds of another corporation, which has been taken in
payment of a debt due to it, and which it sells or transfers in payment of its own debt, the
guaranty being given to enable it to dispose of the bond to better advantage. And so
guaranties of payment of bonds taken by a loan and trust company in the ordinary course
of its business, made in connection with their sale, are not ultra vires, and are binding."
(14-A C. J., pp. 742-743 and cases cited); thirdly, that although it does not clearly appear
in the deed of trust (Exhibit 6) that the Mindoro Sugar Company transferred the bonds
therein referred to, to the Philippine Trust Company, nevertheless, in the resolution of the
board of directors (Exhibit 3), the president of the Philippine Trust Company was expressly
authorized to purchase all or some of the bonds and to guarantee them; whence it may be
inferred that subsequent purchasers of the bonds in the market relied upon the belief that
they were acquiring securities of the Philippine Trust Company, guaranteed by this
corporation; fourthly, that as soon as P3,000,000 worth of bonds was issued, and by the
deed of trust the Mindoro, Sugar Company transferred all its real property to the Philippine
Trust Company, the cause or consideration of the transfer being, (1) the guarantee given
by the purchaser to the bonds, and (2) its having likewise guaranteed its obligations and
those of Welch and Havemeyer in favor of the Philippine National Bank up to the amount
of P2,000,000; fifthly, that in transferring its real property as aforesaid the Mindoro Sugar
Company was reduced to a real state of bankruptcy, as the parties specifically agreed
during the hearing of the case, to the point of having become a nominal corporation
without any assets whatsoever; sixthly, that such operation or transaction cannot mean
anything other than that the real intention of the parties was that the Philippine Trust
Company acquired the bonds issued and at the same time guaranteed the payment of
their par value with interest, because otherwise the transaction would be fraudulent,
inasmuch as nobody would be answerable to the bond-holders for their value and interest;
seventhly, that the Philippine Trust Company had been paying the appellant the interest
accrued upon the four bonds from the date of their issuance until July 1, 1928, such
payment of interest being another proof that said corporation had really become the
owner of the aforesaid bonds; and, eightly, that the Philippine Trust Company has not
adduced any evidence to show any other conclusions.

In adopting this conclusion we have relied principally upon the following facts and
circumstances: Firstly, that the Philippine Trust Company, although secondarily engaged in
banking, was primarily organized as a trust corporation with full power to acquire personal
property such as the bonds in question according to both section 13 (par. 5) of the
Corporation Law and its duly registered by-laws and articles of incorporation; secondly,
that being thus authorized to acquire the bonds, it was given implied power to guarantee
them in order to place them upon the market under better, more advantageous
conditions, and thereby secure the profit derived from their sale:

There are other considerations leading to the same result even in the supposition that the
Philippine Trust Company did not acquire the bonds in question, but only guaranteed
them. In such a case the guarantee of these bonds would at any rate, be valid and the
said corporation would be bound to pay the appellant their value with the accrued interest
in view of the fact that they become due on account of the lapse of sixty (60) days,
without the accrued interest due having been paid; and the reason is that it is estopped
from denying the validity of its guarantee.

It is not, however, ultra vires for a corporation to enter into contracts of guaranty
or suretyship where it does so in the legitimate furtherance of its purposes and
business. And it is well settled that where a corporation acquires commercial
paper or bonds in the legitimate transaction of its business it may sell them, and
in furtherance of such a sale it may, in order to make them the more readily

. . . On the other hand, according to the view taken by other courts, which it must
be acknowledged are in the majority, a recovery directly upon the contract is
permitted, on the ground that the corporation, having received money or
property by virtue of a contract not immoral or illegal of itself, is estopped to
deny liability; and that the only remedy is one on behalf of the state to punish
the corporation for violating the law. (7 R. C. L., pp. 680-681 and cases cited.)

. . . The doctrine of ultra vires has been declared to be entirely the creation of the
courts and is of comparatively modern origin. The defense is by some courts
regarded as an ungracious and odious one, to be sustained only where the most
persuasive considerations of public policy are involved, and there are numerous
decisions and dicta to the effect that the plea should not as a general rule prevail
whether interposed for or against the corporation, where it will not advance
justice but on the contrary will accomplish a legal wrong. (14-A C. J., pp. 314315.)
The doctrine of the Supreme Court of the United States together with the English
courts and some of the state courts is that no performance upon either side can
validate an ultra vires transaction or authorize an action to be maintained
directly upon it. However, the great weight of authority in the state courts is to
the effect that a transaction which is merely ultra vires and not malum in se or
malum prohibitum although it may be made by the state a basis for the forfeiture
of the corporate charter or the dissolution of the corporation, is, if performed by
one party, not void as between the parties to all intents and purposes, and that
an action may be brought directly upon the transaction and relief had according
to its terms. ( 14-A C. J., pp. 319-320.)

trust business, and that the prohibition of the law is not applicable to the Philippine Trust
Company, for the evidence shows that Mindoro Sugar Company transferred all its real
property, with the improvements, to it, and the value of both, which surely could not be
less than the value of the obligation guaranteed, became a part of its capital and assets;
in other words, with the value of the real property transferred to it, the Philippine Trust
Company had enough capital and assets to meet the amount of the bonds guaranteed
with interest thereon.
Wherefore, the decision appealed from is reversed and the Philippine Trust Company is
sentenced to pay to the appellant the sum of four thousand dollars ($4,000) with interest
at eight per cent (8%) per annum from July 1, 1928 until fully paid, and the costs of both
instances. So ordered.

When a contract is not on its face necessarily beyond the scope of the power of
the corporation by which it was made, it will, in the absence of proof to the
contrary, be presumed to be valid. Corporations are presumed to contract within
their powers. The doctrine of ultra vires, when invoked for or against a
corporation, should not be allowed to prevail where it would defeat the ends of
justice or work a legal wrong. (Coleman vs. Hotel de France Co., 29 Phil., 323.)
Guaranties of payment of bonds taken by a loan and trust company in the
ordinary course of its business, made in connection with their sale, are not ultra
vires, and are binding. (Broadway Nat. Bank vs. Baker, 57 N. E., p. 603.)
It has been intimated according to section 121 of the Corporation Law, the Philippine Trust
Company, as a banking institution, could not guarantee the bonds to the value of
P3,000,000 because this amount far exceeds its capital of P1,000,000 of which only onehalf has been subscribed and paid. Section 121 reads as follows:
SEC. 212. No such bank shall at any time be indebted or in any way liable to an
amount exceeding the amount of its capital stock at such time actually paid in
and remaining undiminished by losses or otherwise, except on account of
demands of the following nature:
(1) Moneys deposited with or collected by the bank;

G.R. No. L-27155 May 18, 1978


PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO GUECO and THE
PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., respondents.
Medina, Locsin, Corua, & Sumbillo for petitioner.
Manuel Lim & Associates for private respondents.

(2) Bills of exchange or drafts drawn against money actually on deposit


to the credit of the bank or due thereto;
(3) Liabilities to the stockholders of the bank for dividends and reserve
profits.
This difficulty is easily obviated by bearing in mind that, as we stated above, the banking
operations are not the primary aim of said corporation, which is engaged essentially in the

ANTONIO, J.:
Certiorari to review the decision of the Court of Appeals which affirmed the judgment of
the Court of First Instance of Manila in Civil Case No. 34185, ordering petitioner, as thirdparty defendant, to pay respondent Rita Gueco Tapnio, as third-party plaintiff, the sum of

P2,379.71, plus 12% interest per annum from September 19, 1957 until the same is fully
paid, P200.00 attorney's fees and costs, the same amounts which Rita Gueco Tapnio was
ordered to pay the Philippine American General Insurance Co., Inc., to be paid directly to
the Philippine American General Insurance Co., Inc. in full satisfaction of the judgment
rendered against Rita Gueco Tapnio in favor of the former; plus P500.00 attorney's fees for
Rita Gueco Tapnio and costs. The basic action is the complaint filed by Philamgen
(Philippine American General Insurance Co., Inc.) as surety against Rita Gueco Tapnio and
Cecilio Gueco, for the recovery of the sum of P2,379.71 paid by Philamgen to the
Philippine National Bank on behalf of respondents Tapnio and Gueco, pursuant to an
indemnity agreement. Petitioner Bank was made third-party defendant by Tapnio and
Gueco on the theory that their failure to pay the debt was due to the fault or negligence of
petitioner.
The facts as found by the respondent Court of Appeals, in affirming the decision of the
Court of First Instance of Manila, are quoted hereunder:
Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco Tapnio as
principal, in favor of the Philippine National Bank Branch at San
Fernando, Pampanga, to guarantee the payment of defendant Rita
Gueco Tapnio's account with said Bank. In turn, to guarantee the
payment of whatever amount the bonding company would pay to the
Philippine National Bank, both defendants executed the indemnity
agreement, Exh. B. Under the terms and conditions of this indemnity
agreement, whatever amount the plaintiff would pay would earn interest
at the rate of 12% per annum, plus attorney's fees in the amount of 15
% of the whole amount due in case of court litigation.
The original amount of the bond was for P4,000.00; but the amount was
later reduced to P2,000.00.
It is not disputed that defendant Rita Gueco Tapnio was indebted to the
bank in the sum of P2,000.00, plus accumulated interests unpaid, which
she failed to pay despite demands. The Bank wrote a letter of demand
to plaintiff, as per Exh. C; whereupon, plaintiff paid the bank on
September 18, 1957, the full amount due and owing in the sum of
P2,379.91, for and on account of defendant Rita Gueco's obligation
(Exhs. D and D-1).
Plaintiff, in turn, made several demands, both verbal and written, upon
defendants (Exhs. E and F), but to no avail.
Defendant Rita Gueco Tapnio admitted all the foregoing facts. She
claims, however, when demand was made upon her by plaintiff for her
to pay her debt to the Bank, that she told the Plaintiff that she did not
consider herself to be indebted to the Bank at all because she had an
agreement with one Jacobo-Nazon whereby she had leased to the latter
her unused export sugar quota for the 1956-1957 agricultural year,
consisting of 1,000 piculs at the rate of P2.80 per picul, or for a total of
P2,800.00, which was already in excess of her obligation guaranteed by
plaintiff's bond, Exh. A. This lease agreement, according to her, was with
the knowledge of the bank. But the Bank has placed obstacles to the
consummation of the lease, and the delay caused by said obstacles

forced 'Nazon to rescind the lease contract. Thus, Rita Gueco Tapnio
filed her third-party complaint against the Bank to recover from the
latter any and all sums of money which may be adjudged against her
and in favor of the plaitiff plus moral damages, attorney's fees and
costs.
Insofar as the contentions of the parties herein are concerned, we quote
with approval the following findings of the lower court based on the
evidence presented at the trial of the case:
It has been established during the trial that Mrs.
Tapnio had an export sugar quota of 1,000 piculs for
the agricultural year 1956-1957 which she did not
need. She agreed to allow Mr. Jacobo C. Tuazon to use
said quota for the consideration of P2,500.00 (Exh.
"4"-Gueco). This agreement was called a contract of
lease of sugar allotment.
At the time of the agreement, Mrs. Tapnio was
indebted to the Philippine National Bank at San
Fernando, Pampanga. Her indebtedness was known as
a crop loan and was secured by a mortgage on her
standing crop including her sugar quota allocation for
the agricultural year corresponding to said standing
crop. This arrangement was necessary in order that
when Mrs. Tapnio harvests, the P.N.B., having a lien on
the crop, may effectively enforce collection against
her. Her sugar cannot be exported without sugar
quota allotment Sometimes, however, a planter
harvest less sugar than her quota, so her excess
quota is utilized by another who pays her for its use.
This is the arrangement entered into between Mrs.
Tapnio and Mr. Tuazon regarding the former's excess
quota for 1956-1957 (Exh. "4"-Gueco).
Since the quota was mortgaged to the P.N.B., the
contract of lease had to be approved by said Bank,
The same was submitted to the branch manager at
San Fernando, Pampanga. The latter required the
parties to raise the consideration of P2.80 per picul or
a total of P2,800.00 (Exh. "2-Gueco") informing them
that "the minimum lease rental acceptable to the
Bank, is P2.80 per picul." In a letter addressed to the
branch manager on August 10, 1956, Mr. Tuazon
informed the manager that he was agreeable to
raising the consideration to P2.80 per picul. He further
informed the manager that he was ready to pay said
amount as the funds were in his folder which was kept
in the bank.
Explaining the meaning of Tuazon's statement as to
the funds, it was stated by him that he had an
approved loan from the bank but he had not yet

utilized it as he was intending to use it to pay for the


quota. Hence, when he said the amount needed to
pay Mrs. Tapnio was in his folder which was in the
bank, he meant and the manager understood and
knew he had an approved loan available to be used in
payment of the quota. In said Exh. "6-Gueco", Tuazon
also informed the manager that he would want for a
notice from the manager as to the time when the bank
needed the money so that Tuazon could sign the
corresponding promissory note.
Further Consideration of the evidence discloses that when the branch
manager of the Philippine National Bank at San Fernando recommended
the approval of the contract of lease at the price of P2.80 per picul (Exh.
1 1-Bank), whose recommendation was concurred in by the Vicepresident of said Bank, J. V. Buenaventura, the board of directors
required that the amount be raised to 13.00 per picul. This act of the
board of directors was communicated to Tuazon, who in turn asked for a
reconsideration thereof. On November 19, 1956, the branch manager
submitted Tuazon's request for reconsideration to the board of directors
with another recommendation for the approval of the lease at P2.80 per
picul, but the board returned the recommendation unacted upon,
considering that the current price prevailing at the time was P3.00 per
picul (Exh. 9-Bank).
The parties were notified of the refusal on the part of the board of
directors of the Bank to grant the motion for reconsideration. The
matter stood as it was until February 22, 1957, when Tuazon wrote a
letter (Exh. 10-Bank informing the Bank that he was no longer interested
to continue the deal, referring to the lease of sugar quota allotment in
favor of defendant Rita Gueco Tapnio. The result is that the latter lost
the sum of P2,800.00 which she should have received from Tuazon and
which she could have paid the Bank to cancel off her indebtedness,
The court below held, and in this holding we concur that failure of the
negotiation for the lease of the sugar quota allocation of Rita Gueco
Tapnio to Tuazon was due to the fault of the directors of the Philippine
National Bank, The refusal on the part of the bank to approve the lease
at the rate of P2.80 per picul which, as stated above, would have
enabled Rita Gueco Tapnio to realize the amount of P2,800.00 which
was more than sufficient to pay off her indebtedness to the Bank, and
its insistence on the rental price of P3.00 per picul thus unnecessarily
increasing the value by only a difference of P200.00. inevitably brought
about the rescission of the lease contract to the damage and prejudice
of Rita Gueco Tapnio in the aforesaid sum of P2,800.00. The
unreasonableness of the position adopted by the board of directors of
the Philippine National Bank in refusing to approve the lease at the rate
of P2.80 per picul and insisting on the rate of P3.00 per picul, if only to
increase the retail value by only P200.00 is shown by the fact that all
the accounts of Rita Gueco Tapnio with the Bank were secured by
chattel mortgage on standing crops, assignment of leasehold rights and
interests on her properties, and surety bonds, aside from the fact that
from Exh. 8-Bank, it appears that she was offering to execute a real
estate mortgage in favor of the Bank to replace the surety bond This

statement is further bolstered by the fact that Rita Gueco Tapnio


apparently had the means to pay her obligation fact that she has been
granted several value of almost P80,000.00 for the agricultural years
from 1952 to 56. 1
Its motion for the reconsideration of the decision of the Court of Appeals having been
denied, petitioner filed the present petition.
The petitioner contends that the Court of Appeals erred:
(1) In finding that the rescission of the lease contract of the 1,000 piculs of sugar quota
allocation of respondent Rita Gueco Tapnio by Jacobo C. Tuazon was due to the unjustified
refusal of petitioner to approve said lease contract, and its unreasonable insistence on the
rental price of P3.00 instead of P2.80 per picul; and
(2) In not holding that based on the statistics of sugar price and prices of sugar quota in
the possession of the petitioner, the latter's Board of Directors correctly fixed the rental of
price per picul of 1,000 piculs of sugar quota leased by respondent Rita Gueco Tapnio to
Jacobo C. Tuazon at P3.00 per picul.
Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the right, both
under its own Charter and under the Corporation Law, to safeguard and protect its rights
and interests under the deed of assignment, which include the right to approve or
disapprove the said lease of sugar quota and in the exercise of that authority, its
Board of Directors necessarily had authority to determine and fix the rental price per picul
of the sugar quota subject of the lease between private respondents and Jacobo C.
Tuazon. It argued further that both under its Charter and the Corporation Law, petitioner,
acting thru its Board of Directors, has the perfect right to adopt a policy with respect to
fixing of rental prices of export sugar quota allocations, and in fixing the rentals at P3.00
per picul, it did not act arbitrarily since the said Board was guided by statistics of sugar
price and prices of sugar quotas prevailing at the time. Since the fixing of the rental of the
sugar quota is a function lodged with petitioner's Board of Directors and is a matter of
policy, the respondent Court of Appeals could not substitute its own judgment for that of
said Board of Directors, which acted in good faith, making as its basis therefore the
prevailing market price as shown by statistics which were then in their possession.
Finally, petitioner emphasized that under the appealed judgment, it shall suffer a great
injustice because as a creditor, it shall be deprived of a just claim against its debtor
(respondent Rita Gueco Tapnio) as it would be required to return to respondent Philamgen
the sum of P2,379.71, plus interest, which amount had been previously paid to petitioner
by said insurance company in behalf of the principal debtor, herein respondent Rita Gueco
Tapnio, and without recourse against respondent Rita Gueco Tapnio.
We must advert to the rule that this Court's appellate jurisdiction in proceedings of this
nature is limited to reviewing only errors of law, accepting as conclusive the factual fin
dings of the Court of Appeals upon its own assessment of the evidence. 2
The contract of lease of sugar quota allotment at P2.50 per picul between Rita Gueco
Tapnio and Jacobo C. Tuazon was executed on April 17, 1956. This contract was submitted
to the Branch Manager of the Philippine National Bank at San Fernando, Pampanga. This

arrangement was necessary because Tapnio's indebtedness to petitioner was secured by


a mortgage on her standing crop including her sugar quota allocation for the agricultural
year corresponding to said standing crop. The latter required the parties to raise the
consideration to P2.80 per picul, the minimum lease rental acceptable to the Bank, or a
total of P2,800.00. Tuazon informed the Branch Manager, thru a letter dated August 10,
1956, that he was agreeable to raising the consideration to P2.80 per picul. He further
informed the manager that he was ready to pay the said sum of P2,800.00 as the funds
were in his folder which was kept in the said Bank. This referred to the approved loan of
Tuazon from the Bank which he intended to use in paying for the use of the sugar quota.
The Branch Manager submitted the contract of lease of sugar quota allocation to the Head
Office on September 7, 1956, with a recommendation for approval, which
recommendation was concurred in by the Vice-President of the Bank, Mr. J. V.
Buenaventura. This notwithstanding, the Board of Directors of petitioner required that the
consideration be raised to P3.00 per picul.
Tuazon, after being informed of the action of the Board of Directors, asked for a
reconsideration thereof. On November 19, 1956, the Branch Manager submitted the
request for reconsideration and again recommended the approval of the lease at P2.80
per picul, but the Board returned the recommendation unacted, stating that the current
price prevailing at that time was P3.00 per picul.
On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was no longer
interested in continuing the lease of sugar quota allotment. The crop year 1956-1957
ended and Mrs. Tapnio failed to utilize her sugar quota, resulting in her loss in the sum of
P2,800.00 which she should have received had the lease in favor of Tuazon been
implemented.
It has been clearly shown that when the Branch Manager of petitioner required the parties
to raise the consideration of the lease from P2.50 to P2.80 per picul, or a total of P2,80000, they readily agreed. Hence, in his letter to the Branch Manager of the Bank on August
10, 1956, Tuazon informed him that the minimum lease rental of P2.80 per picul was
acceptable to him and that he even offered to use the loan secured by him from petitioner
to pay in full the sum of P2,800.00 which was the total consideration of the lease. This
arrangement was not only satisfactory to the Branch Manager but it was also approves by
Vice-President J. V. Buenaventura of the PNB. Under that arrangement, Rita Gueco Tapnio
could have realized the amount of P2,800.00, which was more than enough to pay the
balance of her indebtedness to the Bank which was secured by the bond of Philamgen.
There is no question that Tapnio's failure to utilize her sugar quota for the crop year 19561957 was due to the disapproval of the lease by the Board of Directors of petitioner. The
issue, therefore, is whether or not petitioner is liable for the damage caused.
As observed by the trial court, time is of the essence in the approval of the lease of sugar
quota allotments, since the same must be utilized during the milling season, because any
allotment which is not filled during such milling season may be reallocated by the Sugar
Quota Administration to other holders of allotments. 3 There was no proof that there was
any other person at that time willing to lease the sugar quota allotment of private
respondents for a price higher than P2.80 per picul. "The fact that there were isolated
transactions wherein the consideration for the lease was P3.00 a picul", according to the
trial court, "does not necessarily mean that there are always ready takers of said price. "
The unreasonableness of the position adopted by the petitioner's Board of Directors is
shown by the fact that the difference between the amount of P2.80 per picul offered by
Tuazon and the P3.00 per picul demanded by the Board amounted only to a total sum of

P200.00. Considering that all the accounts of Rita Gueco Tapnio with the Bank were
secured by chattel mortgage on standing crops, assignment of leasehold rights and
interests on her properties, and surety bonds and that she had apparently "the means to
pay her obligation to the Bank, as shown by the fact that she has been granted several
sugar crop loans of the total value of almost P80,000.00 for the agricultural years from
1952 to 1956", there was no reasonable basis for the Board of Directors of petitioner to
have rejected the lease agreement because of a measly sum of P200.00.
While petitioner had the ultimate authority of approving or disapproving the proposed
lease since the quota was mortgaged to the Bank, the latter certainly cannot escape its
responsibility of observing, for the protection of the interest of private respondents, that
degree of care, precaution and vigilance which the circumstances justly demand in
approving or disapproving the lease of said sugar quota. The law makes it imperative that
every person "must in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due, and observe honesty and good faith, 4 This petitioner
failed to do. Certainly, it knew that the agricultural year was about to expire, that by its
disapproval of the lease private respondents would be unable to utilize the sugar quota in
question. In failing to observe the reasonable degree of care and vigilance which the
surrounding circumstances reasonably impose, petitioner is consequently liable for the
damages caused on private respondents. Under Article 21 of the New Civil Code, "any
person who wilfully causes loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the damage." The aforecited provisions on human relations were intended to expand the concept of torts in this
jurisdiction by granting adequate legal remedy for the untold number of moral wrongs
which is impossible for human foresight to specifically provide in the statutes. 5
A corporation is civilly liable in the same manner as natural persons for torts, because
"generally speaking, the rules governing the liability of a principal or master for a tort
committed by an agent or servant are the same whether the principal or master be a
natural person or a corporation, and whether the servant or agent be a natural or artificial
person. All of the authorities agree that a principal or master is liable for every tort which
he expressly directs or authorizes, and this is just as true of a corporation as of a natural
person, A corporation is liable, therefore, whenever a tortious act is committed by an
officer or agent under express direction or authority from the stockholders or members
acting as a body, or, generally, from the directors as the governing body." 6
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby
AFFIRMED.

quarterly installments of the fixed taxes without penalty, to make a true and
complete return of the amount of the receipts or earnings of his business during
the preceeding quarter and pay the tax due thereon. . . . (Act No. 2711.)
SEC. 2723. Failure to make true return of receipts and sales. Any person who,
being required by law to make a return of the amount of his receipts, sales, or
business, shall fail or neglect to make such return within the time required, shall
be punished by a fine not exceeding two thousand pesos or by imprisonment for
a term not exceeding one year, or both.

G.R. No. L-35262

March 15, 1930

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellant,


vs.
TAN BOON KONG, defendant-appellee.
Attorney-General Jaranilla for appellant.
Alejandro de Aboitiz Pinaga for appellee.
OSTRAND, J.:
This is an appeal from an order of the Judge of the Twenty-third Judicial District sustaining
to demurrer to an information charging the defendant Tan Boon Kong with the violation of
section 1458 of Act No. 2711 as amended. The information reads as follows:
That on and during the four quarters of the year 1924, in the municipality of
Iloilo, Province of Iloilo, Philippine Islands, the said accused, as corporation
organized under the laws of the Philippine Islands and engaged in the purchase
and the sale of sugar, "bayon," coprax, and other native products and as such
object to the payment of internal-revenue taxes upon its sales, did then and
there voluntarily, illegally, and criminally declare in 1924 for the purpose of
taxation only the sum of P2,352,761.94, when in truth and in fact, and the
accused well knew that the total gross sales of said corporation during that year
amounted to P2543,303.44, thereby failing to declare for the purpose of taxation
the amount of P190,541.50, and voluntarily and illegally not paying the
Government as internal-revenue percentage taxes the sum of P2,960.12,
corresponding to 1 per cent of said undeclared sales.
The question to be decided is whether the information sets forth facts rendering the
defendant, as manager of the corporation liable criminally under section 2723 of Act No.
2711 for violation of section 1458 of the same act for the benefit of said corporation.
Section 1458 and 2723 read as follows:
SEC. 1458. Payment of percentage taxes Quarterly reports of earnings. The
percentage taxes on business shall be payable at the end of each calendar
quarter in the amount lawfully due on the business transacted during each
quarter; and it shall be on the duty of every person conducting a business
subject to such tax, within the same period as is allowed for the payment of the

And any such person who shall make a false or fraudulent return shall be
punished by a fine not exceeding ten thousand pesos or by imprisonment for a
term not exceeding two years, or both. (Act No. 2711.)
Apparently, the court below based the appealed ruling on the ground that the offense
charged must be regarded as committed by the corporation and not by its officials or
agents. This view is in direct conflict with the great weight of authority. a corporation can
act only through its officers and agent s, and where the business itself involves a violation
of the law, the correct rule is that all who participate in it are liable (Grall and Ostrand's
Case, 103 Va., 855, and authorities there cited.)
In case of State vs. Burnam (17 Wash., 199), the court went so far as to hold that the
manager of a diary corporation was criminally liable for the violation of a statute by the
corporation through he was not present when the offense was committed.
In the present case the information or complaint alleges that he defendant was the
manager of a corporation which was engaged in business as a merchant, and as such
manager, he made a false return, for purposes of taxation, of the total amount of sale
made by said false return constitutes a violation of law, the defendant, as the author of
the illegal act, must necessarily answer for its consequences, provided that the allegation
are proven.
The ruling of the court below sustaining the demurrer to the complaint is therefore
reversed, and the case will be returned to said court for further proceedings not
inconsistent with our view as hereinafter stated. Without costs. So ordered.

the value of the said goods, in the said sum of P71,023.60. (Original Records, p.
1).
In reviewing the evidence, the Court of Appeals came up with the following findings of
facts which the Solicitor General alleges should be conclusive upon this Court:

G.R. No. L-30896 April 28, 1983


JOSE O. SIA, petitioner,
vs.
THE PEOPLE OF THE PHILIPPINES, respondent.
DE CASTRO, J.:
Petition for review of the decision of the Court of Appeals affirming the decision of the
Court of First Instance of Manila convicting the appellant of estafa, under an information
which reads:
That in, about or during the period comprised' between July 24, 1963 and
December 31, 1963, both dates inclusive, in the City of Manila, Philippines, the
said accused did then and there willfully, unlawfully and feloniously defraud the
Continental Bank, a banking institution duly organized and doing business in the
City of Manila, in the following manner, to wit: the said accused, in his capacity
as president and general manager of the Metal Manufacturing of the Philippines,
Inc. (MEMAP) and on behalf of said company, obtained delivery of 150 M/T Cold
Rolled Steel Sheets valued at P 71,023.60 under a trust receipt agreement under
L/C No. 63/109, which cold rolled steel sheets were consigned to the Continental
Bank, under the express obligation on the part of said accused of holding the
said steel sheets in trust and selling them and turning over the proceeds of the
sale to the Continental Bank; but the said accused, once in possession of the said
goods, far from complying with his aforesaid obligation and despite demands
made upon him to do so, with intent to defraud, failed and refused to return the
said cold rolled sheets or account for the proceeds thereof, if sold, which the said
accused willfully, unlawfully and feloniously misappropriated, misapplied and
converted to his own personal use and benefit, to the damage and prejudice of
the said Continental Bank in the total amount of P146,818.68, that is the balance
including the interest after deducting the sum of P28,736.47 deposited by the
said accused with the bank as marginal deposit and forfeited by the said from

There is no debate on certain antecedents: Accused Jose 0. Sia sometime prior to


24 May, 1963, was General Manager of the Metal Manufacturing Company of the
Philippines, Inc. engaged in the manufacture of steel office equipment; on 31
May, 1963, because his company was in need of raw materials to be imported
from abroad, he applied for a letter of credit to import steel sheets from Mitsui
Bussan Kaisha, Ltd. of Tokyo, Japan, the application being directed to the
Continental Bank, herein complainant, Exhibit B and his application having been
approved, the letter of credit was opened on 5 June, 1963 in the amount of
$18,300, Exhibit D; and the goods arrived sometime in July, 1963 according to
accused himself, tsn. II:7; now from here on there is some debate on the
evidence; according to Complainant Bank, there was permitted delivery of the
steel sheets only upon execution of a trust receipt, Exhibit A; while according to
the accused, the goods were delivered to him sometime before he executed that
trust receipt in fact they had already been converted into steel office equipment
by the time he signed said trust receipt, tsn. II:8; but there is no question - and
this is not debated - that the bill of exchange issued for the purpose of collecting
the unpaid account thereon having fallen due (see Exh. B) neither accused nor
his company having made payment thereon notwithstanding demands, Exh. C
and C-1, dated 17 and 27 December, 1963, and the accounts having reached the
sum in pesos of P46,818.68 after deducting his deposit valued at P28,736.47;
that was the reason why upon complaint by Continental Bank, the Fiscal filed the
information after preliminary investigation as has been said on 22 October, 1964.
(Rollo [CA], pp. 103- 104).
The first issue raised, which in effect combines the first three errors assigned, is whether
petitioner Jose O. Sia, having only acted for and in behalf of the Metal Manufacturing
Company of the Philippines (Metal Company, for short) as President thereof in dealing with
the complainant, the Continental Bank, (Bank for short) he may be liable for the crime
charged.
In discussing this question, petitioner proceeds, in the meantime, on the assumption that
the acts imputed to him would constitute the crime of estafa, which he also disputes, but
seeks to avoid liability on his theory that the Bank knew all along that petitioner was
dealing with him only as an officer of the Metal Company which was the true and actual
applicant for the letter of credit (Exhibit B) and which, accordingly, assumed sole
obligation under the trust receipt (Exhibit A). In disputing the theory of petitioner, the
Solicitor General relies on the general principle that when a corporation commits an act
which would constitute a punishable offense under the law, it is the responsible officers
thereof, acting for the corporation, who would be punished for the crime, The Court of
Appeals has subscribed to this view when it quoted approvingly from the decision of the
trial court the following:
A corporation is an artificial person, an abstract being. If the defense theory is
followed unscrupulously legions would form corporations to commit swindle right
and left where nobody could be convicted, for it would be futile and ridiculous to
convict an abstract being that can not be pinched and confined in jail like a

natural, living person, hence the result of the defense theory would be hopeless
chose in business and finance. It is completely untenable. (Rollo [CA], p. 108.)
The above-quoted observation of the trial court would seem to be merely restating a
general principle that for crimes committed by a corporation, the responsible officers
thereof would personally bear the criminal liability. (People vs. Tan Boon Kong, 54 Phil.
607. See also Tolentino, Commercial Laws of the Philippines, p. 625, citing cases.)
The case cited by the Court of Appeals in support of its stand-Tan Boon Kong case, supramay however not be squarely applicable to the instant case in that the corporation was
directly required by law to do an act in a given manner, and the same law makes the
person who fails to perform the act in the prescribed manner expressly liable criminally.
The performance of the act is an obligation directly imposed by the law on the
corporation. Since it is a responsible officer or officers of the corporation who actually
perform the act for the corporation, they must of necessity be the ones to assume the
criminal liability; otherwise this liability as created by the law would be illusory, and the
deterrent effect of the law, negated.
In the present case, a distinction is to be found with the Tan Boon Kong case in that the
act alleged to be a crime is not in the performance of an act directly ordained by law to be
performed by the corporation. The act is imposed by agreement of parties, as a practice
observed in the usual pursuit of a business or a commercial transaction. The offense may
arise, if at all, from the peculiar terms and condition agreed upon by the parties to the
transaction, not by direct provision of the law. The intention of the parties, therefore, is a
factor determinant of whether a crime was committed or whether a civil obligation alone
intended by the parties. With this explanation, the distinction adverted to between the Tan
Boon Kong case and the case at bar should come out clear and meaningful. In the
absence of an express provision of law making the petitioner liable for the criminal offense
committed by the corporation of which he is a president as in fact there is no such
provisions in the Revised Penal Code under which petitioner is being prosecuted, the
existence of a criminal liability on his part may not be said to be beyond any doubt. In all
criminal prosecutions, the existence of criminal liability for which the accused is made
answerable must be clear and certain. The maxim that all doubts must be resolved in
favor of the accused is always of compelling force in the prosecution of offenses. This
Court has thus far not ruled on the criminal liability of an officer of a corporation signing in
behalf of said corporation a trust receipt of the same nature as that involved herein. In the
case of Samo vs. People, L-17603-04, May 31, 1962, the accused was not clearly shown to
be acting other than in his own behalf, not in behalf of a corporation.
The next question is whether the violation of a trust receipt constitutes estafa under Art.
315 (1-[2]) of the Revised Penal Code, as also raised by the petitioner. We now entertain
grave doubts, in the light of the promulgation of P.D. 115 providing for the regulation of
trust receipts transaction, which is a very comprehensive piece of legislation, and includes
an express provision that if the violation or offense is committed by a corporation,
partnership, association or other juridical entities the penalty provided for in this Decree
shall be imposed upon the directors, officers, employees or other officials or persons
therein responsible for the offense, without prejudice to civil liabilities arising from the
criminal offense. The question that suggests itself is, therefore, whether the provisions of
the Revised Penal Code, Article 315, par. 1 (b) are not adequate to justify the punishment
of the act made punishable by P.D. 115, that the necessity was felt for the promulgation of
the decree. To answer this question, it is imperative to make an indepth analysis of the
conditions usually embodied in a trust receipt to best their legal sufficiency to constitute

the basis for holding the violation of said conditions as estafa under Article 315 of the
Revised Penal Code which P.D. 115 now seeks to punish expressly.
As executed, the trust receipt in question reads:
I/WE HEREBY AGREE TO HOLD SAID GOODS IN TRUST FOR THE SAID BANK as its
property with liberty to sell the same for its account but without authority to
make any other disposition whatsoever of the said goods or any part thereof (or
the proceeds thereof) either way of conditional sale, pledge or otherwise;
In case of sale I/we further agree to hand the proceeds as soon as received to the
BANK to apply against the relative acceptance (as described above) and for the
payment of any other indebtedness of mine/ours to CONTINENTAL BANK.
(Original Records, p. 108)
One view is to consider the transaction as merely that of a security of a loan, and that the
trust element is but and inherent feature of the security aspect of the arrangement where
the goods are placed in the possession of the "entrustee," to use the term used in P.D.
115, violation of the element of trust not being intended to be in the same concept as how
it is understood in the criminal sense. The other view is that the bank as the owner and
"entrustor" delivers the goods to the "entrustee, " with the authority to sell the goods, but
with the obligation to give the proceeds to the "entrustor" or return the goods themselves
if not sold, a trust being thus created in the full sense as contemplated by Art. 315, par. 1
(b).
We consider the view that the trust receipt arrangement gives rise only to civil liability as
the more feasible, before the promulgation of P.D. 115. The transaction being contractual,
the intent of the parties should govern. Since the trust receipt has, by its nature, to be
executed upon the arrival of the goods imported, and acquires legal standing as such
receipt only upon acceptance by the "entrustee," the trust receipt transaction itself, the
antecedent acts consisting of the application of the L/C, the approval of the L/C and the
making of the marginal deposit and the effective importation of the goods, all through the
efforts of the importer who has to find his supplier, arrange for the payment and shipment
of the imported goods-all these circumstances would negate any intent of subjecting the
importer to criminal prosecution, which could possibly give rise to a case of imprisonment
for non-payment of a debt. The parties, therefore, are deemed to have consciously
entered into a purely commercial transaction that could give rise only to civil liability,
never to subject the "entrustee" to criminal prosecution. Unlike, for instance, when
several pieces of jewelry are received by a person from the owner for sale on commission,
and the former misappropriates for his personal use and benefit, either the jewelries or
the proceeds of the sale, instead of returning them to the owner as is his obligation, the
bank is not in the same concept as the jewelry owner with full power of disposition of the
goods, which the bank does not have, for the bank has previously extended a loan which
the L/C represents to the importer, and by that loan, the importer should be the real
owner of the goods. If under the trust receipt the bank is made to appear as the owner, it
was but an artificial expedient, more of a legal fiction than fact, for if it were really so, it
could dispose of the goods in any manner it wants, which it cannot do, just to give
consistency with the purpose of the trust receipt of giving a stronger security for the loan
obtained by the importer. To consider the bank as the true owner from the inception of the
transaction would be to disregard the loan feature thereof, a feature totally absent in the
case of the transaction between the jewel-owner and his agent.

Consequently, if only from the fact that the trust receipt transaction is susceptible to two
reasonable interpretation, one as giving rise only to civil liability for the violation of the
condition thereof, and the other, as generating also criminal liability, the former should be
adopted as more favorable to the supposed offender. (Duran vs. CA, L-39758, May 7,
1976, 71 SCRA 68; People vs. Parayno, L-24804, July 5, 1968, 24 SCRA 3; People vs.
Abendan, L-1481, January 28,1949,82 Phil. 711; People vs. Bautista, L-1502, May 24,
1948, 81 Phil. 78; People vs. Abana, L-39, February 1, 1946, 76 Phil. 1.)
There is, moreover, one circumstance appearing on record, the significance of which
should be properly evaluated. As stated in petitioner's brief (page 2), not denied by the
People, "before the Continental Bank approved the application for a letter of credit
(Exhibit 'D'), subsequently covered by the trust receipt, the Continental Bank examined
the financial capabilities of the applicant, Metal Manufacturing Company of the Philippines
because that was the bank's standard procedure (Testimony of Mr. Ernesto Garlit, Asst.
Manager of the Foreign Department, Continental Bank, t.s.n., August 30, 1965). The
Continental Bank did not examine the financial capabilities of herein petitioner, Jose O.
Sia, in connection with the same letter of credit. (Ibid). " From this fact, it would appear as
positively established that the intention of the parties in entering into the "trust receipt"
agreement is merely to afford a stronger security for the loan evidenced by the letter of
credit, may be not as an ordinary pledge as observed in P.N.B. vs. Viuda e Hijos de Angel
Jose, et al., 63 Phil. 814, citing In re Dunlap C (206 Fed. 726) but neither as a transaction
falling under Article 315-1 (b) of the Revised Penal Code giving rise to criminal liability, as
previously explained and demonstrated.
It is worthy of note that the civil liability imposed by the trust receipt is exclusively on the
Metal Company. Speaking of such liability alone, as one arising from the contract, as
distinguished from the civil liability arising out of a crime, the petitioner was never
intended to be equally liable as the corporation. Without being made so liable personally
as the corporation is, there would then be no basis for holding him criminally liable, for
any violation of the trust receipt. This is made clearly so upon consideration of the fact
that in the violation of the trust agreement and in the absence of positive evidence to the
contrary, only the corporation benefited, not the petitioner personally, yet, the allegation
of the information is to effect that the misappropriation or conversion was for the personal
use and benefit of the petitioner, with respect to which there is variance between the
allegation and the evidence.
It is also worthy of note that while the trust receipt speaks of authority to sell, the fact is
undisputed that the imported goods were to be manufactured into finished products first
before they could be sold, as the Bank had full knowledge of. This fact is, however, not
embodied in the trust agreement, thus impressing on the trust receipt vagueness and
ambiguity which should not be the basis for criminal prosecution, in the event of a
violation of the terms of the trust receipt. Again, P.D. 115 has express provision relative to
the "manufacture or process of the good with the purpose of ultimate sale," as a distinct
condition from that of "to sell the goods or procure their sale" (Section 4, (1). Note that
what is embodied in the receipt in question is the sale of imported goods, the
manufacture thereof not having been mentioned. The requirement in criminal prosecution,
that there must be strict harmony, not variance, between the allegation and the evidence,
may therefore, not be said to have been satisfied in the instance case. FOR ALL THE
FOREGOING, We reverse the decision of the Court of Appeals and hereby acquit the
petitioner, with costs de oficio.
G.R. No. 128690 January 21, 1999

ABS-CBN BROADCASTING CORPORATION, petitioner,


vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA
PRODUCTION, INC., and VICENTE DEL ROSARIO, respondents.

DAVIDE, JR., CJ.:


In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter
ABS-CBN) seeks to reverse and set aside the decision 1 of 31 October 1996 and the
resolution 2 of 10 March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former
affirmed with modification the decision 3 of 28 April 1993 of the Regional Trial Court (RTC)
of Quezon City, Branch 80, in Civil Case No. Q-92-12309. The latter denied the motion to
reconsider the decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of Appeals, are as
follows:
In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh.
"A") whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva
films. Sometime in December 1991, in accordance with paragraph 2.4
[sic] of said agreement stating that .
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four
(24) Viva films for TV telecast under such terms as may be agreed upon
by the parties hereto, provided, however, that such right shall be
exercised by ABS-CBN from the actual offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through its vicepresident Charo Santos-Concio, a list of three(3) film packages (36 title)
from which ABS-CBN may exercise its right of first refusal under the
afore-said agreement (Exhs. "1" par, 2, "2," "2-A'' and "2-B"-Viva). ABSCBN, however through Mrs. Concio, "can tick off only ten (10) titles"
(from the list) "we can purchase" (Exh. "3" - Viva) and therefore did not
accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by
Mrs. Concio are not the subject of the case at bar except the film
''Maging Sino Ka Man."
For further enlightenment, this rejection letter dated January 06, 1992
(Exh "3" - Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I would
like to express my difficulty in recommending the purchase of the three
film packages you are offering ABS-CBN.

From among the three packages I can only tick off 10 titles we can
purchase. Please see attached. I hope you will understand my position.
Most of the action pictures in the list do not have big action stars in the
cast. They are not for primetime. In line with this I wish to mention that I
have not scheduled for telecast several action pictures in out very first
contract because of the cheap production value of these movies as well
as the lack of big action stars. As a film producer, I am sure you
understand what I am trying to say as Viva produces only big action
pictures.

On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms.


Concio, with a list consisting of 52 original movie titles (i.e. not yet aired
on television) including the 14 titles subject of the present case, as well
as 104 re-runs (previously aired on television) from which ABS-CBN may
choose another 52 titles, as a total of 156 titles, proposing to sell to
ABS-CBN airing rights over this package of 52 originals and 52 re-runs
for P60,000,000.00 of which P30,000,000.00 will be in cash and
P30,000,000.00 worth of television spots (Exh. "4" to "4-C" Viva; "9"
-Viva).

In fact, I would like to request two (2) additional runs for these movies
as I can only schedule them in our non-primetime slots. We have to
cover the amount that was paid for these movies because as you very
well know that non-primetime advertising rates are very low. These are
the unaired titles in the first contract.

On April 2, 1992, defendant Del Rosario and ABS-CBN general manager,


Eugenio Lopez III, met at the Tamarind Grill Restaurant in Quezon City to
discuss the package proposal of Viva. What transpired in that lunch
meeting is the subject of conflicting versions. Mr. Lopez testified that he
and Mr. Del Rosario allegedly agreed that ABS-CRN was granted
exclusive film rights to fourteen (14) films for a total consideration of
P36 million; that he allegedly put this agreement as to the price and
number of films in a "napkin'' and signed it and gave it to Mr. Del
Rosario (Exh. D; TSN, pp. 24-26, 77-78, June 8, 1992). On the other
hand, Del Rosario denied having made any agreement with Lopez
regarding the 14 Viva films; denied the existence of a napkin in which
Lopez wrote something; and insisted that what he and Lopez discussed
at the lunch meeting was Viva's film package offer of 104 films (52
originals and 52 re-runs) for a total price of P60 million. Mr. Lopez
promising [sic]to make a counter proposal which came in the form of a
proposal contract Annex "C" of the complaint (Exh. "1"- Viva; Exh. "C" ABS-CBN).

1. Kontra Persa [sic].


2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog

On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior
vice-president for Finance discussed the terms and conditions of Viva's
offer to sell the 104 films, after the rejection of the same package by
ABS-CBN.

6. Lady Commando
7. Batang Matadero
8. Rebelyon

On April 07, 1992, defendant Del Rosario received through his secretary,
a handwritten note from Ms. Concio, (Exh. "5" - Viva), which reads:
"Here's the draft of the contract. I hope you find everything in order," to
which was attached a draft exhibition agreement (Exh. "C''- ABS-CBN;
Exh. "9" - Viva, p. 3) a counter-proposal covering 53 films, 52 of which
came from the list sent by defendant Del Rosario and one film was
added by Ms. Concio, for a consideration of P35 million. Exhibit "C"
provides that ABS-CBN is granted films right to 53 films and contains a
right of first refusal to "1992 Viva Films." The said counter proposal was
however rejected by Viva's Board of Directors [in the] evening of the
same day, April 7, 1992, as Viva would not sell anything less than the
package of 104 films for P60 million pesos (Exh. "9" - Viva), and such
rejection was relayed to Ms. Concio.

I hope you will consider this request of mine.


The other dramatic films have been offered to us before and have been
rejected because of the ruling of MTRCB to have them aired at 9:00 p.m.
due to their very adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages please
consider including all the other Viva movies produced last year. I have
quite an attractive offer to make.
Thanking you and with my warmest regards.

Charo Santos-

On April 29, 1992, after the rejection of ABS-CBN and following several
negotiations and meetings defendant Del Rosario and Viva's President
Teresita Cruz, in consideration of P60 million, signed a letter of
agreement dated April 24, 1992. granting RBS the exclusive right to air
104 Viva-produced and/or acquired films (Exh. "7-A" - RBS; Exh. "4" RBS) including the fourteen (14) films subject of the present case. 4

On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with
a prayer for a writ of preliminary injunction and/or temporary restraining order against
private respondents Republic Broadcasting Corporation 5 (hereafter RBS ), Viva Production
(hereafter VIVA), and Vicente Del Rosario. The complaint was docketed as Civil Case No.
Q-92-12309.
On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private respondents
from proceeding with the airing, broadcasting, and televising of the fourteen VIVA films
subject of the controversy, starting with the film Maging Sino Ka Man, which was
scheduled to be shown on private respondents RBS' channel 7 at seven o'clock in the
evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of
P35 million bond. ABS-CBN moved for the reduction of the bond, 8 while private
respondents moved for reconsideration of the order and offered to put up a
counterbound. 9
In the meantime, private respondents filed separate answers with counterclaim.
also set up a cross-claim against VIVA..

10

RBS

On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary injunction
upon the posting by RBS of a P30 million counterbond to answer for whatever damages
ABS-CBN might suffer by virtue of such dissolution. However, it reduced petitioner's
injunction bond to P15 million as a condition precedent for the reinstatement of the writ of
preliminary injunction should private respondents be unable to post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed to
explore the possibility of an amicable settlement. In the meantime, RBS prayed for and
was granted reasonable time within which to put up a P30 million counterbond in the
event that no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a
counterbond, which the RTC approved in its Order of 15 October 1992. 13
On 19 October 1992, ABS-CBN filed a motion for reconsideration
October 1992 Orders, which RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial.

14

On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the


petition in CA -G.R. No. 29300 for being premature. ABS-CBN challenged the dismissal in a
petition for review filed with this Court on 19 January 1993, which was docketed as G.R.
No. 108363.
In the meantime the RTC received the evidence for the parties in Civil Case No. Q-1921209. Thereafter, on 28 April 1993, it rendered a decision 20 in favor of RBS and VIVA and
against ABS-CBN disposing as follows:
WHEREFORE, under cool reflection and prescinding from the foregoing,
judgments is rendered in favor of defendants and against the plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay defendant RBS
the following:
a) P107,727.00, the amount of
premium paid by RBS to the surety
which issued defendant RBS's bond
to lift the injunction;
b) P191,843.00 for the amount of
print advertisement for "Maging Sino
Ka Man" in various newspapers;
c) Attorney's fees in the amount of
P1 million;
d) P5 million as and by way of moral
damages;
e) P5 million as and by way of
exemplary damages;

of the 3 August and 15


(3) For defendant VIVA, plaintiff ABS-CBN is ordered to
pay P212,000.00 by way of reasonable attorney's
fees.

16

Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of
Appeals a petition 17challenging the RTC's Orders of 3 August and 15 October 1992 and
praying for the issuance of a writ of preliminary injunction to enjoin the RTC from
enforcing said orders. The case was docketed as CA-G.R. SP No. 29300.
18

On 3 November 1992, the Court of Appeals issued a temporary restraining order to


enjoin the airing, broadcasting, and televising of any or all of the films involved in the
controversy.

(4) The cross-claim of defendant RBS against


defendant VIVA is dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price and terms of the offer.
The alleged agreement between Lopez III and Del Rosario was subject to the approval of
the VIVA Board of Directors, and said agreement was disapproved during the meeting of
the Board on 7 April 1992. Hence, there was no basis for ABS-CBN's demand that VIVA
signed the 1992 Film Exhibition Agreement. Furthermore, the right of first refusal under

the 1990 Film Exhibition Agreement had previously been exercised per Ms. Concio's letter
to Del Rosario ticking off ten titles acceptable to them, which would have made the 1992
agreement an entirely new contract.
On 21 June 1993, this Court denied 21 ABS-CBN's petition for review in G.R. No. 108363, as
no reversible error was committed by the Court of Appeals in its challenged decision and
the case had "become moot and academic in view of the dismissal of the main action by
the court a quo in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that
there was a perfected contract between ABS-CBN and VIVA granting ABS-CBN the
exclusive right to exhibit the subject films. Private respondents VIVA and Del Rosario also
appealed seeking moral and exemplary damages and additional attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the
contract between ABS-CBN and VIVA had not been perfected, absent the approval by the
VIVA Board of Directors of whatever Del Rosario, it's agent, might have agreed with Lopez
III. The appellate court did not even believe ABS-CBN's evidence that Lopez III actually
wrote down such an agreement on a "napkin," as the same was never produced in court.
It likewise rejected ABS-CBN's insistence on its right of first refusal and ratiocinated as
follows:
As regards the matter of right of first refusal, it may be true that a Film
Exhibition Agreement was entered into between Appellant ABS-CBN and
appellant VIVA under Exhibit "A" in 1990, and that parag. 1.4 thereof
provides:
1.4 ABS-CBN shall have the right of first refusal to the
next twenty-four (24) VIVA films for TV telecast under
such terms as may be agreed upon by the parties
hereto, provided, however, that such right shall be
exercised by ABS-CBN within a period of fifteen (15)
days from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of ABSCBN shall still be subject to such terms as may be agreed upon by the
parties thereto, and that the said right shall be exercised by ABS-CBN
within fifteen (15) days from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal
did not fix the price of the film right to the twenty-four (24) films, nor did
it specify the terms thereof. The same are still left to be agreed upon by
the parties.
In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p.
89) stated that it can only tick off ten (10) films, and the draft contract
Exhibit "C" accepted only fourteen (14) films, while parag. 1.4 of Exhibit
"A'' speaks of the next twenty-four (24) films.
The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B;
Records, pp. 86-88; Decision, p. 11, Records, p. 1150), when the first list

of VIVA films was sent by Mr. Del Rosario to ABS-CBN. The Vice President
of ABS-CBN, Ms. Charo Santos-Concio, sent a letter dated January 6,
1992 (Exhibit 3, Records, p. 89) where ABS-CBN exercised its right of
refusal by rejecting the offer of VIVA.. As aptly observed by the trial
court, with the said letter of Mrs. Concio of January 6, 1992, ABS-CBN
had lost its right of first refusal. And even if We reckon the fifteen (15)
day period from February 27, 1992 (Exhibit 4 to 4-C) when another list
was sent to ABS-CBN after the letter of Mrs. Concio, still the fifteen (15)
day period within which ABS-CBN shall exercise its right of first refusal
has already expired. 22
Accordingly, respondent court sustained the award of actual damages consisting in the
cost of print advertisements and the premium payments for the counterbond, there being
adequate proof of the pecuniary loss which RBS had suffered as a result of the filing of the
complaint by ABS-CBN. As to the award of moral damages, the Court of Appeals found
reasonable basis therefor, holding that RBS's reputation was debased by the filing of the
complaint in Civil Case No. Q-92-12309 and by the non-showing of the film "Maging Sino
Ka Man." Respondent court also held that exemplary damages were correctly imposed by
way of example or correction for the public good in view of the filing of the complaint
despite petitioner's knowledge that the contract with VIVA had not been perfected, It also
upheld the award of attorney's fees, reasoning that with ABS-CBN's act of instituting Civil
Case No, Q-92-1209, RBS was "unnecessarily forced to litigate." The appellate court,
however, reduced the awards of moral damages to P2 million, exemplary damages to P2
million, and attorney's fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal
because it was "RBS and not VIVA which was actually prejudiced when the complaint was
filed by ABS-CBN."
Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case,
contending that the Court of Appeals gravely erred in
I
. . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN
PETITIONER AND PRIVATE RESPONDENT VIVA NOTWITHSTANDING
PREPONDERANCE OF EVIDENCE ADDUCED BY PETITIONER TO THE
CONTRARY.
II
. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF
PRIVATE RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF
PRIVATE RESPONDENT RBS.
IV

. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.


ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four
titles under the 1990 Film Exhibition Agreement, as it had chosen only ten titles from the
first list. It insists that we give credence to Lopez's testimony that he and Del Rosario met
at the Tamarind Grill Restaurant, discussed the terms and conditions of the second list
(the 1992 Film Exhibition Agreement) and upon agreement thereon, wrote the same on a
paper napkin. It also asserts that the contract has already been effective, as the elements
thereof, namely, consent, object, and consideration were established. It then concludes
that the Court of Appeals' pronouncements were not supported by law and jurisprudence,
as per our decision of 1 December 1995 in Limketkai Sons Milling, Inc. v. Court of
Appeals, 23 which cited Toyota Shaw, Inc. v. Court of Appeals, 24 Ang Yu Asuncion v. Court
of Appeals, 25 andVillonco Realty Company v. Bormaheco. Inc. 26
Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent
for the premium on the counterbond of its own volition in order to negate the injunction
issued by the trial court after the parties had ventilated their respective positions during
the hearings for the purpose. The filing of the counterbond was an option available to
RBS, but it can hardly be argued that ABS-CBN compelled RBS to incur such expense.
Besides, RBS had another available option, i.e., move for the dissolution or the injunction;
or if it was determined to put up a counterbond, it could have presented a cash bond.
Furthermore under Article 2203 of the Civil Code, the party suffering loss or injury is also
required to exercise the diligence of a good father of a family to minimize the damages
resulting from the act or omission. As regards the cost of print advertisements, RBS had
not convincingly established that this was a loss attributable to the non showing "Maging
Sino Ka Man"; on the contrary, it was brought out during trial that with or without the case
or the injunction, RBS would have spent such an amount to generate interest in the film.
ABS-CBN further contends that there was no clear basis for the awards of moral and
exemplary damages. The controversy involving ABS-CBN and RBS did not in any way
originate from business transaction between them. The claims for such damages did not
arise from any contractual dealings or from specific acts committed by ABS-CBN against
RBS that may be characterized as wanton, fraudulent, or reckless; they arose by virtue
only of the filing of the complaint, An award of moral and exemplary damages is not
warranted where the record is bereft of any proof that a party acted maliciously or in bad
faith in filing an action. 27 In any case, free resort to courts for redress of wrongs is a
matter of public policy. The law recognizes the right of every one to sue for that which he
honestly believes to be his right without fear of standing trial for damages where by lack
of sufficient evidence, legal technicalities, or a different interpretation of the laws on the
matter, the case would lose ground. 28 One who makes use of his own legal right does no
injury. 29 If damage results front the filing of the complaint, it is damnum absque
injuria. 30 Besides, moral damages are generally not awarded in favor of a juridical person,
unless it enjoys a good reputation that was debased by the offending party resulting in
social humiliation. 31
As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual,
legal, or equitable justification. In sustaining the trial court's award, the Court of Appeals
acted in clear disregard of the doctrines laid down in Buan v. Camaganacan 32 that the
text of the decision should state the reason why attorney's fees are being awarded;
otherwise, the award should be disallowed. Besides, no bad faith has been imputed on,
much less proved as having been committed by, ABS-CBN. It has been held that "where
no sufficient showing of bad faith would be reflected in a party' s persistence in a case

other than an erroneous conviction of the righteousness of his cause, attorney's fees shall
not be recovered as cost." 33
On the other hand, RBS asserts that there was no perfected contract between ABS-CBN
and VIVA absent any meeting of minds between them regarding the object and
consideration of the alleged contract. It affirms that the ABS-CBN's claim of a right of first
refusal was correctly rejected by the trial court. RBS insist the premium it had paid for the
counterbond constituted a pecuniary loss upon which it may recover. It was obliged to put
up the counterbound due to the injunction procured by ABS-CBN. Since the trial court
found that ABS-CBN had no cause of action or valid claim against RBS and, therefore not
entitled to the writ of injunction, RBS could recover from ABS-CBN the premium paid on
the counterbond. Contrary to the claim of ABS-CBN, the cash bond would prove to be
more expensive, as the loss would be equivalent to the cost of money RBS would forego in
case the P30 million came from its funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled
showing of the film "Maging Sino Ka Man" because the print advertisements were put out
to announce the showing on a particular day and hour on Channel 7, i.e., in its entirety at
one time, not a series to be shown on a periodic basis. Hence, the print advertisement
were good and relevant for the particular date showing, and since the film could not be
shown on that particular date and hour because of the injunction, the expenses for the
advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and
secured injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant
then to Article 19 and 21 of the Civil Code, ABS-CBN must be held liable for such
damages. Citing Tolentino, 34 damages may be awarded in cases of abuse of rights even if
the act done is not illicit and there is abuse of rights were plaintiff institutes and action
purely for the purpose of harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and exemplary damages,
private respondents RBScited People v. Manero, 35 where it was stated that such entity
may recover moral and exemplary damages if it has a good reputation that is debased
resulting in social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has been debased by ABSCBN's acts in this case. When RBS was not able to fulfill its commitment
to the viewing public to show the film "Maging Sino Ka Man" on the
scheduled dates and times (and on two occasions that RBS advertised),
it suffered serious embarrassment and social humiliation. When the
showing was canceled, late viewers called up RBS' offices and subjected
RBS to verbal abuse ("Announce kayo nang announce, hindi ninyo
naman ilalabas," "nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone
was not something RBS brought upon itself. it was exactly what ABSCBN had planned to happen.
The amount of moral and exemplary damages cannot be said to be
excessive. Two reasons justify the amount of the award.
The first is that the humiliation suffered by RBS is national extent. RBS
operations as a broadcasting company is [sic] nationwide. Its clientele,
like that of ABS-CBN, consists of those who own and watch television. It

is not an exaggeration to state, and it is a matter of judicial notice that


almost every other person in the country watches television. The
humiliation suffered by RBS is multiplied by the number of televiewers
who had anticipated the showing of the film "Maging Sino Ka Man" on
May 28 and November 3, 1992 but did not see it owing to the
cancellation. Added to this are the advertisers who had placed
commercial spots for the telecast and to whom RBS had a commitment
in consideration of the placement to show the film in the dates and
times specified.
The second is that it is a competitor that caused RBS to suffer the
humiliation. The humiliation and injury are far greater in degree when
caused by an entity whose ultimate business objective is to lure
customers (viewers in this case) away from the competition. 36
For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial
court and the Court of Appeals do not support ABS-CBN's claim that there was a perfected
contract. Such factual findings can no longer be disturbed in this petition for review under
Rule 45, as only questions of law can be raised, not questions of fact. On the issue of
damages and attorneys fees, they adopted the arguments of RBS.
The key issues for our consideration are (1) whether there was a perfected contract
between VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and attorney's
fees. It may be noted that the award of attorney's fees of P212,000 in favor of VIVA is not
assigned as another error.
I.
The first issue should be resolved against ABS-CBN. A contract is a meeting of minds
between two persons whereby one binds himself to give something or to render some
service to another 37 for a consideration. there is no contract unless the following
requisites concur: (1) consent of the contracting parties; (2) object certain which is the
subject of the contract; and (3) cause of the obligation, which is established. 38 A contract
undergoes three stages:
(a) preparation, conception, or generation, which is the period of
negotiation and bargaining, ending at the moment of agreement of the
parties;
(b) perfection or birth of the contract, which is the moment when the
parties come to agree on the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of
the terms agreed upon in the contract. 39
Contracts that are consensual in nature are perfected upon mere meeting of the minds,
Once there is concurrence between the offer and the acceptance upon the subject matter,
consideration, and terms of payment a contract is produced. The offer must be certain. To
convert the offer into a contract, the acceptance must be absolute and must not qualify
the terms of the offer; it must be plain, unequivocal, unconditional, and without variance
of any sort from the proposal. A qualified acceptance, or one that involves a new proposal,

constitutes a counter-offer and is a rejection of the original offer. Consequently, when


something is desired which is not exactly what is proposed in the offer, such acceptance is
not sufficient to generate consent because any modification or variation from the terms of
the offer annuls the offer. 40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2
April 1992 to discuss the package of films, said package of 104 VIVA films was VIVA's offer
to ABS-CBN to enter into a new Film Exhibition Agreement. But ABS-CBN, sent, through
Ms. Concio, a counter-proposal in the form of a draft contract proposing exhibition of 53
films for a consideration of P35 million. This counter-proposal could be nothing less than
the counter-offer of Mr. Lopez during his conference with Del Rosario at Tamarind Grill
Restaurant. Clearly, there was no acceptance of VIVA's offer, for it was met by a counteroffer which substantially varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In these
cases, it was held that an acceptance may contain a request for certain changes in the
terms of the offer and yet be a binding acceptance as long as "it is clear that the meaning
of the acceptance is positively and unequivocally to accept the offer, whether such
request is granted or not." This ruling was, however, reversed in the resolution of 29
March 1996, 43 which ruled that the acceptance of all offer must be unqualified and
absolute, i.e., it "must be identical in all respects with that of the offer so as to produce
consent or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised
counter-offer were not material but merely clarificatory of what had previously been
agreed upon. It cited the statement in Stuart v.Franklin Life Insurance Co. 44 that "a
vendor's change in a phrase of the offer to purchase, which change does not essentially
change the terms of the offer, does not amount to a rejection of the offer and the tender
of a counter-offer." 45However, when any of the elements of the contract is modified upon
acceptance, such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they
underwent a period of bargaining. ABS-CBN then formalized its counter-proposals or
counter-offer in a draft contract, VIVA through its Board of Directors, rejected such
counter-offer, Even if it be conceded arguendo that Del Rosario had accepted the counteroffer, the acceptance did not bind VIVA, as there was no proof whatsoever that Del
Rosario had the specific authority to do so.
Under Corporation Code, 46 unless otherwise provided by said Code, corporate powers,
such as the power; to enter into contracts; are exercised by the Board of Directors.
However, the Board may delegate such powers to either an executive committee or
officials or contracted managers. The delegation, except for the executive committee,
must be for specific purposes, 47 Delegation to officers makes the latter agents of the
corporation; accordingly, the general rules of agency as to the bindings effects of their
acts would
apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a
power of the Board, the latter must specially authorize them to do so. That Del Rosario did
not have the authority to accept ABS-CBN's counter-offer was best evidenced by his
submission of the draft contract to VIVA's Board of Directors for the latter's approval. In
any event, there was between Del Rosario and Lopez III no meeting of minds. The
following findings of the trial court are instructive:

A number of considerations militate against ABS-CBN's claim that a


contract was perfected at that lunch meeting on April 02, 1992 at the
Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind
Grill referred to the price and the number of films, which he wrote on a
napkin. However, Exhibit "C" contains numerous provisions which, were
not discussed at the Tamarind Grill, if Lopez testimony was to be
believed nor could they have been physically written on a napkin. There
was even doubt as to whether it was a paper napkin or a cloth napkin. In
short what were written in Exhibit "C'' were not discussed, and therefore
could not have been agreed upon, by the parties. How then could this
court compel the parties to sign Exhibit "C" when the provisions thereof
were not previously agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the subject
matter of the contract was 14 films. The complaint in fact prays for
delivery of 14 films. But Exhibit "C" mentions 53 films as its subject
matter. Which is which If Exhibits "C" reflected the true intent of the
parties, then ABS-CBN's claim for 14 films in its complaint is false or if
what it alleged in the complaint is true, then Exhibit "C" did not reflect
what was agreed upon by the parties. This underscores the fact that
there was no meeting of the minds as to the subject matter of the
contracts, so as to preclude perfection thereof. For settled is the rule
that there can be no contract where there is no object which is its
subject matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony
(Exh. "D") states:
We were able to reach an agreement. VIVA gave us
the exclusive license to show these fourteen (14)
films, and we agreed to pay Viva the amount of
P16,050,000.00 as well as grant Viva commercial slots
worth P19,950,000.00. We had already earmarked this
P16, 050,000.00.

Now, which is which? P36 million or P35 million? This weakens ABSCBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted
Exhibit "C" to Mr. Del Rosario with a handwritten note, describing said
Exhibit "C" as a "draft." (Exh. "5" - Viva; tsn pp. 23-24 June 08, 1992).
The said draft has a well defined meaning.
Since Exhibit "C" is only a draft, or a tentative, provisional or
preparatory writing prepared for discussion, the terms and conditions
thereof could not have been previously agreed upon by ABS-CBN and
Viva Exhibit "C'' could not therefore legally bind Viva, not having agreed
thereto. In fact, Ms. Concio admitted that the terms and conditions
embodied in Exhibit "C" were prepared by ABS-CBN's lawyers and there
was no discussion on said terms and conditions. . . .
As the parties had not yet discussed the proposed terms and conditions
in Exhibit "C," and there was no evidence whatsoever that Viva agreed
to the terms and conditions thereof, said document cannot be a binding
contract. The fact that Viva refused to sign Exhibit "C" reveals only two
[sic] well that it did not agree on its terms and conditions, and this court
has no authority to compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario
agreed upon at the Tamarind Grill was only provisional, in the sense that
it was subject to approval by the Board of Directors of Viva. He testified:
Q. Now, Mr. Witness, and after that Tamarind
meeting ... the second meeting wherein you claimed
that you have the meeting of the minds between you
and Mr. Vic del Rosario, what happened?
A. Vic Del Rosario was supposed to call us up and tell
us specifically the result of the discussion with the
Board of Directors.

which gives a total consideration of P36 million (P19,950,000.00 plus


P16,050,000.00. equals P36,000,000.00).

Q. And you are referring to the so-called agreement


which you wrote in [sic] a piece of paper?

On cross-examination Mr. Lopez testified:

A. Yes, sir.

Q. What was written in this napkin?


A. The total price, the breakdown the known Viva
movies, the 7 blockbuster movies and the other 7 Viva
movies because the price was broken down
accordingly. The none [sic] Viva and the seven other
Viva movies and the sharing between the cash portion
and the concerned spot portion in the total amount of
P35 million pesos.

Q. So, he was going to forward that to the board of


Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)
Q. Did Mr. Del Rosario tell you that he will submit it to
his Board for approval?

A. Yes, sir. (Tsn, p. 69, June 8, 1992).


The above testimony of Mr. Lopez shows beyond doubt that he knew Mr.
Del Rosario had no authority to bind Viva to a contract with ABS-CBN
until and unless its Board of Directors approved it. The complaint, in
fact, alleges that Mr. Del Rosario "is the Executive Producer of defendant
Viva" which "is a corporation." (par. 2, complaint). As a mere agent of
Viva, Del Rosario could not bind Viva unless what he did is ratified by its
Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold
vs. Willets and Paterson, 44 Phil. 634). As a mere agent, recognized as
such by plaintiff, Del Rosario could not be held liable jointly and
severally with Viva and his inclusion as party defendant has no legal
basis. (Salonga vs. Warner Barner [sic] , COLTA , 88 Phil. 125; Salmon vs.
Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in the complaint are
clear admissions that what was supposed to have been agreed upon at
the Tamarind Grill between Mr. Lopez and Del Rosario was not a binding
agreement. It is as it should be because corporate power to enter into a
contract is lodged in the Board of Directors. (Sec. 23, Corporation Code).
Without such board approval by the Viva board, whatever agreement
Lopez and Del Rosario arrived at could not ripen into a valid contract
binding upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA
763). The evidence adduced shows that the Board of Directors of Viva
rejected Exhibit "C" and insisted that the film package for 140 films be
maintained (Exh. "7-1" - Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of first refusal over twentyfour films under the 1990 Film Exhibition Agreement and that the meeting between Lopez
and Del Rosario was a continuation of said previous contract is untenable. As observed by
the trial court, ABS-CBN right of first refusal had already been exercised when Ms. Concio
wrote to VIVA ticking off ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after this
letter was sent, was for an entirely different package. Ms. Concio herself
admitted on cross-examination to having used or exercised the right of
first refusal. She stated that the list was not acceptable and was indeed
not accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-10). Even Mr. Lopez
himself admitted that the right of the first refusal may have been
already exercised by Ms. Concio (as she had). (TSN, June 8, 1992, pp.
71-75). Del Rosario himself knew and understand [sic] that ABS-CBN has
lost its rights of the first refusal when his list of 36 titles were rejected
(Tsn, June 9, 1992, pp. 10-11) 50
II
However, we find for ABS-CBN on the issue of damages. We shall first take up actual
damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or
compensatory damages. Except as provided by law or by stipulation, one is entitled to
compensation for actual damages only for such pecuniary loss suffered by him as he has
duly proved. 51 The indemnification shall comprehend not only the value of the loss
suffered, but also that of the profits that the obligee failed to obtain. 52 In contracts and

quasi-contracts the damages which may be awarded are dependent on whether the
obligor acted with good faith or otherwise, It case of good faith, the damages recoverable
are those which are the natural and probable consequences of the breach of the
obligation and which the parties have foreseen or could have reasonably foreseen at the
time of the constitution of the obligation. If the obligor acted with fraud, bad faith, malice,
or wanton attitude, he shall be responsible for all damages which may be reasonably
attributed to the non-performance of the obligation. 53 In crimes and quasi-delicts, the
defendant shall be liable for all damages which are the natural and probable
consequences of the act or omission complained of, whether or not such damages has
been foreseen or could have reasonably been foreseen by the defendant. 54
Actual damages may likewise be recovered for loss or impairment of earning capacity in
cases of temporary or permanent personal injury, or for injury to the plaintiff's business
standing or commercial credit. 55
The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or
quasi-delict. It arose from the fact of filing of the complaint despite ABS-CBN's alleged
knowledge of lack of cause of action. Thus paragraph 12 of RBS's Answer with
Counterclaim and Cross-claim under the heading COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has no cause
of action RBS. As a result thereof, RBS suffered actual damages in the
amount of P6,621,195.32. 56
Needless to state the award of actual damages cannot be comprehended under the above
law on actual damages. RBS could only probably take refuge under Articles 19, 20, and 21
of the Civil Code, which read as follows:
Art. 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.
Art. 20. Every person who, contrary to law, wilfully or negligently causes
damage to another, shall indemnify the latter for tile same.
Art. 21. Any person who wilfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
It may further be observed that in cases where a writ of preliminary injunction is issued,
the damages which the defendant may suffer by reason of the writ are recoverable from
the injunctive bond. 57 In this case, ABS-CBN had not yet filed the required bond; as a
matter of fact, it asked for reduction of the bond and even went to the Court of Appeals to
challenge the order on the matter, Clearly then, it was not necessary for RBS to file a
counterbond. Hence, ABS-CBN cannot be held responsible for the premium RBS paid for
the counterbond.
Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for
lack of sufficient legal basis. The RTC issued a temporary restraining order and later, a writ
of preliminary injunction on the basis of its determination that there existed sufficient
ground for the issuance thereof. Notably, the RTC did not dissolve the injunction on the

ground of lack of legal and factual basis, but because of the plea of RBS that it be allowed
to put up a counterbond.
As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's
fees may be recovered as actual or compensatory damages under any of the
circumstances provided for in Article 2208 of the Civil Code. 58
The general rule is that attorney's fees cannot be recovered as part of damages because
of the policy that no premium should be placed on the right to litigate. 59 They are not to
be awarded every time a party wins a suit. The power of the court to award attorney's
fees under Article 2208 demands factual, legal, and equitable justification. 60 Even when
claimant is compelled to litigate with third persons or to incur expenses to protect his
rights, still attorney's fees may not be awarded where no sufficient showing of bad faith
could be reflected in a party's persistence in a case other than erroneous conviction of the
righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code.
Article 2217 thereof defines what are included in moral damages, while Article 2219
enumerates the cases where they may be recovered, Article 2220 provides that moral
damages may be recovered in breaches of contract where the defendant acted
fraudulently or in bad faith. RBS's claim for moral damages could possibly fall only under
item (10) of Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32,
34, and 35.
Moral damages are in the category of an award designed to compensate the claimant for
actual injury suffered. and not to impose a penalty on the wrongdoer. 62 The award is not
meant to enrich the complainant at the expense of the defendant, but to enable the
injured party to obtain means, diversion, or amusements that will serve to obviate then
moral suffering he has undergone. It is aimed at the restoration, within the limits of the
possible, of the spiritual status quo ante, and should be proportionate to the suffering
inflicted. 63 Trial courts must then guard against the award of exorbitant damages; they
should exercise balanced restrained and measured objectivity to avoid suspicion that it
was due to passion, prejudice, or corruption on the part of the trial court. 64
The award of moral damages cannot be granted in favor of a corporation because, being
an artificial person and having existence only in legal contemplation, it has no feelings, no
emotions, no senses, It cannot, therefore, experience physical suffering and mental
anguish, which call be experienced only by one having a nervous system. 65 The
statement in People v. Manero 66 and Mambulao Lumber Co. v. PNB 67 that a corporation
may recover moral damages if it "has a good reputation that is debased, resulting in
social humiliation" is an obiter dictum. On this score alone the award for damages must
be set aside, since RBS is a corporation.
The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the
Civil Code. These are imposed by way of example or correction for the public good, in
addition to moral, temperate, liquidated or compensatory damages. 68 They are
recoverable in criminal cases as part of the civil liability when the crime was committed
with one or more aggravating circumstances; 69 in quasi-contracts, if the defendant acted
with gross negligence;70 and in contracts and quasi-contracts, if the defendant acted in a
wanton, fraudulent, reckless, oppressive, or malevolent manner. 71

It may be reiterated that the claim of RBS against ABS-CBN is not based on contract,
quasi-contract, delict, or quasi-delict, Hence, the claims for moral and exemplary damages
can only be based on Articles 19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following: (1) the existence of a
legal right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of
prejudicing or injuring another. Article 20 speaks of the general sanction for all other
provisions of law which do not especially provide for their own sanction; while Article 21
deals with acts contra bonus mores, and has the following elements; (1) there is an act
which is legal, (2) but which is contrary to morals, good custom, public order, or public
policy, and (3) and it is done with intent to injure. 72
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith
implies a conscious and intentional design to do a wrongful act for a dishonest purpose or
moral obliquity. 73 Such must be substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was
honestly convinced of the merits of its cause after it had undergone serious negotiations
culminating in its formal submission of a draft contract. Settled is the rule that the
adverse result of an action does not per se make the action wrongful and subject the actor
to damages, for the law could not have meant to impose a penalty on the right to litigate.
If damages result from a person's exercise of a right, it is damnum absque injuria. 75
WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of
Appeals in CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed award of
attorney's fees in favor of VIVA Productions, Inc.1wphi1.nt
No pronouncement as to costs.
SO ORDERED.

they will repeat their year level, taking up all subjects including those they
have passed already. Several students had approached me stating that they had
consulted with the DECS which told them that there is no such regulation. If [there] is no
such regulation why is AMEC doing the same?

G.R. No. 141994

January 17, 2005

FILIPINAS BROADCASTING NETWORK, INC., petitioner,


vs.
AGO MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF
MEDICINE, (AMEC-BCCM) and ANGELITA F. AGO, respondents.
DECISION
CARPIO, J.:

xxx
Second: Earlier AMEC students in Physical Therapy had complained that the
course is not recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if the subject
does not have an instructor - such greed for money on the part of AMECs
administration. Take the subject Anatomy: students would pay for the subject upon
enrolment because it is offered by the school. However there would be no instructor for
such subject. Students would be informed that course would be moved to a later date
because the school is still searching for the appropriate instructor.

The Case

xxx

This petition for review1 assails the 4 January 1999 Decision2 and 26 January 2000
Resolution of the Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed
with modification the 14 December 1992 Decision3 of the Regional Trial Court of Legazpi
City, Branch 10, in Civil Case No. 8236. The Court of Appeals held Filipinas Broadcasting
Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima liable for libel
and ordered them to solidarily pay Ago Medical and Educational Center-Bicol Christian
College of Medicine moral damages, attorneys fees and costs of suit.

It is a public knowledge that the Ago Medical and Educational Center has survived and has
been surviving for the past few years since its inception because of funds support from
foreign foundations. If you will take a look at the AMEC premises youll find out that the
names of the buildings there are foreign soundings. There is a McDonald Hall. Why not
Jose Rizal or Bonifacio Hall? That is a very concrete and undeniable evidence that the
support of foreign foundations for AMEC is substantial, isnt it? With the report which is the
basis of the expose in DZRC today, it would be very easy for detractors and enemies of
the Ago family to stop the flow of support of foreign foundations who assist the medical
school on the basis of the latters purpose. But if the purpose of the institution (AMEC) is
to deceive students at cross purpose with its reason for being it is possible for these
foreign foundations to lift or suspend their donations temporarily. 8

The Antecedents
"Expos" is a radio documentary4 program hosted by Carmelo Mel Rima ("Rima") and
Hermogenes Jun Alegre ("Alegre").5 Expos is aired every morning over DZRC-AM which
is owned by Filipinas Broadcasting Network, Inc. ("FBNI"). "Expos" is heard over Legazpi
City, the Albay municipalities and other Bicol areas.6
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged
complaints from students, teachers and parents against Ago Medical and Educational
Center-Bicol Christian College of Medicine ("AMEC") and its administrators. Claiming that
the broadcasts were defamatory, AMEC and Angelita Ago ("Ago"), as Dean of AMECs
College of Medicine, filed a complaint for damages7 against FBNI, Rima and Alegre on 27
February 1990. Quoted are portions of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking medical course at
AMEC-BCCM, advise them to pass all subjects because if they fail in any subject

xxx
On the other hand, the administrators of AMEC-BCCM, AMEC Science High
School and the AMEC-Institute of Mass Communication in their effort to
minimize expenses in terms of salary are absorbing or continues to accept
"rejects". For example how many teachers in AMEC are former teachers of Aquinas
University but were removed because of immorality? Does it mean that the present
administration of AMEC have the total definite moral foundation from catholic
administrator of Aquinas University. I will prove to you my friends, that AMEC is a
dumping ground, garbage, not merely of moral and physical misfits. Probably
they only qualify in terms of intellect. The Dean of Student Affairs of AMEC is Justita Lola,
as the family name implies. She is too old to work, being an old woman. Is the AMEC
administration exploiting the very [e]nterprising or compromising and undemanding Lola?
Could it be that AMEC is just patiently making use of Dean Justita Lola were if she is very
old. As in atmospheric situation zero visibility the plane cannot land, meaning she is

very old, low pay follows. By the way, Dean Justita Lola is also the chairman of the
committee on scholarship in AMEC. She had retired from Bicol University a long time ago
but AMEC has patiently made use of her.
xxx
MEL RIMA:

and Alegre. FBNI claimed that before hiring a broadcaster, the broadcaster should (1) file
an application; (2) be interviewed; and (3) undergo an apprenticeship and training
program after passing the interview. FBNI likewise claimed that it always reminds its
broadcasters to "observe truth, fairness and objectivity in their broadcasts and to refrain
from using libelous and indecent language." Moreover, FBNI requires all broadcasters to
pass the Kapisanan ng mga Brodkaster sa Pilipinas ("KBP") accreditation test and to
secure a KBP permit.

May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your
are no longer fit to teach. You are too old. As an aviation, your case is zero visibility. Dont
insist.

On 14 December 1992, the trial court rendered a Decision 12 finding FBNI and Alegre liable
for libel except Rima. The trial court held that the broadcasts are libelous per se. The trial
court rejected the broadcasters claim that their utterances were the result of straight
reporting because it had no factual basis. The broadcasters did not even verify their
reports before airing them to show good faith. In holding FBNI liable for libel, the trial
court found that FBNI failed to exercise diligence in the selection and supervision of its
employees.

xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship
committee at that. The reason is practical cost saving in salaries, because an old person is
not fastidious, so long as she has money to buy the ingredient of beetle juice. The elderly
can get by thats why she (Lola) was taken in as Dean.

In absolving Rima from the charge, the trial court ruled that Rimas only participation was
when he agreed with Alegres expos. The trial court found Rimas statement within the
"bounds of freedom of speech, expression, and of the press." The dispositive portion of
the decision reads:

xxx

WHEREFORE, premises considered, this court finds for the plaintiff. Considering the
degree of damages caused by the controversial utterances, which are not found
by this court to be really very serious and damaging, and there being no
showing that indeed the enrollment of plaintiff school dropped,defendants
Hermogenes "Jun" Alegre, Jr. and Filipinas Broadcasting Network (owner of the radio
station DZRC), are hereby jointly and severally ordered to pay plaintiff Ago Medical and
Educational Center-Bicol Christian College of Medicine (AMEC-BCCM) the amount
of P300,000.00 moral damages, plus P30,000.00 reimbursement of attorneys fees, and to
pay the costs of suit.

xxx My friends based on the expose, AMEC is a dumping ground for moral and physically
misfit people. What does this mean? Immoral and physically misfits as teachers.

xxx On our end our task is to attend to the interests of students. It is likely that the
students would be influenced by evil. When they become members of society
outside of campus will be liabilities rather than assets.What do you expect from a
doctor who while studying at AMEC is so much burdened with unreasonable imposition?
What do you expect from a student who aside from peculiar problems because not all
students are rich in their struggle to improve their social status are even more burdened
with false regulations. xxx9(Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning institution. With the
supposed exposs, FBNI, Rima and Alegre "transmitted malicious imputations, and as
such, destroyed plaintiffs (AMEC and Ago) reputation." AMEC and Ago included FBNI as
defendant for allegedly failing to exercise due diligence in the selection and supervision of
its employees, particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an
Answer10 alleging that the broadcasts against AMEC were fair and true. FBNI, Rima and
Alegre claimed that they were plainly impelled by a sense of public duty to report the
"goings-on in AMEC, [which is] an institution imbued with public interest."
Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty.
Edmundo Cea, collaborating counsel of Atty. Lozares, filed a Motion to Dismiss 11 on FBNIs
behalf. The trial court denied the motion to dismiss. Consequently, FBNI filed a separate
Answer claiming that it exercised due diligence in the selection and supervision of Rima

SO ORDERED.

13

(Emphasis supplied)

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the
other, appealed the decision to the Court of Appeals. The Court of Appeals affirmed the
trial courts judgment with modification. The appellate court made Rima solidarily liable
with FBNI and Alegre. The appellate court denied Agos claim for damages and attorneys
fees because the broadcasts were directed against AMEC, and not against her. The
dispositive portion of the Court of Appeals decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the
modification that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I] and
Hermo[g]enes Alegre.
SO ORDERED.14

FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals
denied in its 26 January 2000 Resolution.
Hence, FBNI filed this petition.15

IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR PAYMENT
OF MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.
The Courts Ruling

The Ruling of the Court of Appeals


The Court of Appeals upheld the trial courts ruling that the questioned broadcasts are
libelous per se and that FBNI, Rima and Alegre failed to overcome the legal presumption
of malice. The Court of Appeals found Rima and Alegres claim that they were actuated by
their moral and social duty to inform the public of the students gripes as insufficient to
justify the utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the Court of
Appeals ruled that the broadcasts were made "with reckless disregard as to whether they
were true or false." The appellate court pointed out that FBNI, Rima and Alegre failed to
present in court any of the students who allegedly complained against AMEC. Rima and
Alegre merely gave a single name when asked to identify the students. According to the
Court of Appeals, these circumstances cast doubt on the veracity of the broadcasters
claim that they were "impelled by their moral and social duty to inform the public about
the students gripes."
The Court of Appeals found Rima also liable for libel since he remarked that "(1) AMECBCCM is a dumping ground for morally and physically misfit teachers; (2) AMEC obtained
the services of Dean Justita Lola to minimize expenses on its employees salaries; and (3)
AMEC burdened the students with unreasonable imposition and false regulations." 16
The Court of Appeals held that FBNI failed to exercise due diligence in the selection and
supervision of its employees for allowing Rima and Alegre to make the radio broadcasts
without the proper KBP accreditation. The Court of Appeals denied Agos claim for
damages and attorneys fees because the libelous remarks were directed against AMEC,
and not against her. The Court of Appeals adjudged FBNI, Rima and Alegre solidarily liable
to pay AMEC moral damages, attorneys fees and costs of suit.1awphi1.nt
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and

We deny the petition.


This is a civil action for damages as a result of the allegedly defamatory remarks of Rima
and Alegre against AMEC.17 While AMEC did not point out clearly the legal basis for its
complaint, a reading of the complaint reveals that AMECs cause of action is based on
Articles 30 and 33 of the Civil Code. Article 3018 authorizes a separate civil action to
recover civil liability arising from a criminal offense. On the other hand, Article
3319 particularly provides that the injured party may bring a separate civil action for
damages in cases of defamation, fraud, and physical injuries. AMEC also invokes Article
1920 of the Civil Code to justify its claim for damages. AMEC cites Articles 2176 21 and
218022 of the Civil Code to hold FBNI solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel23 is a public and malicious imputation of a crime, or of a vice or defect, real or
imaginary, or any act or omission, condition, status, or circumstance tending to cause the
dishonor, discredit, or contempt of a natural or juridical person, or to blacken the memory
of one who is dead.24
There is no question that the broadcasts were made public and imputed to AMEC defects
or circumstances tending to cause it dishonor, discredit and contempt. Rima and Alegres
remarks such as "greed for money on the part of AMECs administrators"; "AMEC is a
dumping ground, garbage of xxx moral and physical misfits"; and AMEC students who
graduate "will be liabilities rather than assets" of the society are libelous per se. Taken as
a whole, the broadcasts suggest that AMEC is a money-making institution where
physically and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and
Alegre were plainly impelled by their civic duty to air the students gripes. FBNI alleges
that there is no evidence that ill will or spite motivated Rima and Alegre in making the
broadcasts. FBNI further points out that Rima and Alegre exerted efforts to obtain AMECs
side and gave Ago the opportunity to defend AMEC and its administrators. FBNI concludes
that since there is no malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious.25 Rima and Alegre failed to show
adequately their good intention and justifiable motive in airing the supposed gripes of the

students. As hosts of a documentary or public affairs program, Rima and Alegre should
have presented the public issues "free from inaccurate and misleading
information."26 Hearing the students alleged complaints a month before the
expos,27 they had sufficient time to verify their sources and information. However, Rima
and Alegre hardly made a thorough investigation of the students alleged gripes. Neither
did they inquire about nor confirm the purported irregularities in AMEC from the
Department of Education, Culture and Sports. Alegre testified that he merely went to
AMEC to verify his report from an alleged AMEC official who refused to disclose any
information. Alegre simply relied on the words of the students "because they were many
and not because there is proof that what they are saying is true." 28 This plainly shows
Rima and Alegres reckless disregard of whether their report was true or not.
Contrary to FBNIs claim, the broadcasts were not "the result of straight reporting."
Significantly, some courts in the United States apply the privilege of "neutral reportage" in
libel cases involving matters of public interest or public figures. Under this privilege, a
republisher who accurately and disinterestedly reports certain defamatory statements
made against public figures is shielded from liability, regardless of the republishers
subjective awareness of the truth or falsity of the accusation.29 Rima and Alegre cannot
invoke the privilege of neutral reportage because unfounded comments abound in the
broadcasts. Moreover, there is no existing controversy involving AMEC when the
broadcasts were made. The privilege of neutral reportage applies where the defamed
person is a public figure who is involved in an existing controversy, and a party to that
controversy makes the defamatory statement. 30
However, FBNI argues vigorously that malice in law does not apply to this case.
Citing Borjal v. Court of Appeals,31 FBNI contends that the broadcasts "fall within the
coverage of qualifiedly privileged communications" for being commentaries on matters of
public interest. Such being the case, AMEC should prove malice in fact or actual malice.
Since AMEC allegedly failed to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the "doctrine of
fair comment," thus:
[F]air commentaries on matters of public interest are privileged and constitute a valid
defense in an action for libel or slander. The doctrine of fair comment means that while in
general every discreditable imputation publicly made is deemed false, because every man
is presumed innocent until his guilt is judicially proved, and every false imputation is
deemed malicious, nevertheless, when the discreditable imputation is directed against a
public person in his public capacity, it is not necessarily actionable. In order that such
discreditable imputation to a public official may be actionable, it must either be
a false allegation of fact or a comment based on a false supposition. If the
comment is an expression of opinion, based on established facts, then it is
immaterial that the opinion happens to be mistaken, as long as it might reasonably be
inferred from the facts.32(Emphasis supplied)
True, AMEC is a private learning institution whose business of educating students is
"genuinely imbued with public interest." The welfare of the youth in general and AMECs

students in particular is a matter which the public has the right to know. Thus, similar to
the newspaper articles in Borjal, the subject broadcasts dealt with matters of public
interest. However, unlike in Borjal, the questioned broadcasts are not based
on established facts. The record supports the following findings of the trial court:
xxx Although defendants claim that they were motivated by consistent reports of students
and parents against plaintiff, yet, defendants have not presented in court, nor even gave
name of a single student who made the complaint to them, much less present written
complaint or petition to that effect. To accept this defense of defendants is too dangerous
because it could easily give license to the media to malign people and establishments
based on flimsy excuses that there were reports to them although they could not
satisfactorily establish it. Such laxity would encourage careless and irresponsible
broadcasting which is inimical to public interests.
Secondly, there is reason to believe that defendant radio broadcasters, contrary to the
mandates of their duties, did not verify and analyze the truth of the reports before they
aired it, in order to prove that they are in good faith.
Alegre contended that plaintiff school had no permit and is not accredited to offer Physical
Therapy courses. Yet, plaintiff produced a certificate coming from DECS that as of Sept.
22, 1987 or more than 2 years before the controversial broadcast, accreditation to offer
Physical Therapy course had already been given the plaintiff, which certificate is signed
by no less than the Secretary of Education and Culture herself, Lourdes R. Quisumbing
(Exh. C-rebuttal). Defendants could have easily known this were they careful enough to
verify. And yet, defendants were very categorical and sounded too positive when they
made the erroneous report that plaintiff had no permit to offer Physical Therapy courses
which they were offering.
The allegation that plaintiff was getting tremendous aids from foreign foundations like
Mcdonald Foundation prove not to be true also. The truth is there is no Mcdonald
Foundation existing. Although a big building of plaintiff school was given the name
Mcdonald building, that was only in order to honor the first missionary in Bicol of plaintiffs
religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants over the air, not
a single centavo appears to be received by plaintiff school from the aforementioned
McDonald Foundation which does not exist.
Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that
when medical students fail in one subject, they are made to repeat all the other
subject[s], even those they have already passed, nor their claim that the school charges
laboratory fees even if there are no laboratories in the school. No evidence was presented
to prove the bases for these claims, at least in order to give semblance of good faith.
As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers,
defendant[s] singled out Dean Justita Lola who is said to be so old, with zero visibility
already. Dean Lola testified in court last Jan. 21, 1991, and was found to be 75 years old.
xxx Even older people prove to be effective teachers like Supreme Court Justices who are

still very much in demand as law professors in their late years. Counsel for defendants is
past 75 but is found by this court to be still very sharp and effective.l^vvphi1.net So is
plaintiffs counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally
infirmed, but is still alert and docile.
The contention that plaintiffs graduates become liabilities rather than assets of our
society is a mere conclusion. Being from the place himself, this court is aware that
majority of the medical graduates of plaintiffs pass the board examination easily and
become prosperous and responsible professionals.33

The public has a right to expect and demand that radio broadcast practitioners live up to
the code of conduct of their profession, just like other professionals. A professional code of
conduct provides the standards for determining whether a person has acted justly,
honestly and with good faith in the exercise of his rights and performance of his duties as
required by Article 1937 of the Civil Code. A professional code of conduct also provides the
standards for determining whether a person who willfully causes loss or injury to another
has acted in a manner contrary to morals or good customs under Article 21 38 of the Civil
Code.
II.
Whether AMEC is entitled to moral damages

Had the comments been an expression of opinion based on established facts, it is


immaterial that the opinion happens to be mistaken, as long as it might reasonably be
inferred from the facts.34 However, the comments of Rima and Alegre were not backed up
by facts. Therefore, the broadcasts are not privileged and remain libelousper se.
The broadcasts also violate the Radio Code 35 of the Kapisanan ng mga Brodkaster sa
Pilipinas, Ink. ("Radio Code"). Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues free from personal
bias, prejudice and inaccurate and misleading information. x x x
Furthermore, the station shall strive to present balanced discussion of issues. x x
x.
xxx
7. The station shall be responsible at all times in the supervision of public affairs,
public issues and commentary programs so that they conform to the provisions
and standards of this code.
8. It shall be the responsibility of the newscaster, commentator, host and
announcer to protect public interest, general welfare and good order in the
presentation of public affairs and public issues.36 (Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down
the code of ethical conduct governing practitioners in the radio broadcast industry. The
Radio Code is a voluntary code of conduct imposed by the radio broadcast industry on its
own members. The Radio Code is a public warranty by the radio broadcast industry that
radio broadcast practitioners are subject to a code by which their conduct are measured
for lapses, liability and sanctions.

FBNI contends that AMEC is not entitled to moral damages because it is a corporation. 39
A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock. 40 The Court of Appeals cites Mambulao
Lumber Co. v. PNB, et al.41 to justify the award of moral damages. However, the Courts
statement in Mambulao that "a corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral damages" is an obiter dictum.42
Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 43 of the
Civil Code. This provision expressly authorizes the recovery of moral damages in cases of
libel, slander or any other form of defamation. Article 2219(7) does not qualify whether
the plaintiff is a natural or juridical person. Therefore, a juridical person such as a
corporation can validly complain for libel or any other form of defamation and claim for
moral damages.44
Moreover, where the broadcast is libelous per se, the law implies damages.45 In such a
case, evidence of an honest mistake or the want of character or reputation of the party
libeled goes only in mitigation of damages.46Neither in such a case is the plaintiff required
to introduce evidence of actual damages as a condition precedent to the recovery of some
damages.47 In this case, the broadcasts are libelous per se. Thus, AMEC is entitled to
moral damages.
However, we find the award of P300,000 moral damages unreasonable. The record shows
that even though the broadcasts were libelous per se, AMEC has not suffered any
substantial or material damage to its reputation. Therefore, we reduce the award of moral
damages from P300,000 to P150,000.
III.
Whether the award of attorneys fees is proper

FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the
award of attorneys fees. FBNI adds that the instant case does not fall under the
enumeration in Article 220848 of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify satisfactorily its
claim for attorneys fees. AMEC did not adduce evidence to warrant the award of
attorneys fees. Moreover, both the trial and appellate courts failed to explicitly state in
their respective decisions the rationale for the award of attorneys fees. 49 InInter-Asia
Investment Industries, Inc. v. Court of Appeals ,50 we held that:
[I]t is an accepted doctrine that the award thereof as an item of damages is the exception
rather than the rule, and counsels fees are not to be awarded every time a party wins a
suit. The power of the court to award attorneys fees under Article 2208 of the
Civil Code demands factual, legal and equitable justification, without which the
award is a conclusion without a premise, its basis being improperly left to
speculation and conjecture. In all events, the court must explicitly state in the text of
the decision, and not only in the decretal portion thereof, the legal reason for the award of
attorneys fees.51 (Emphasis supplied)
While it mentioned about the award of attorneys fees by stating that it "lies within the
discretion of the court and depends upon the circumstances of each case," the Court of
Appeals failed to point out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre for moral damages, attorneys fees
and costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of
damages and attorneys fees because it exercised due diligence in the selection and
supervision of its employees, particularly Rima and Alegre. FBNI maintains that its
broadcasters, including Rima and Alegre, undergo a "very regimented process" before
they are allowed to go on air. "Those who apply for broadcaster are subjected to
interviews, examinations and an apprenticeship program."
FBNI further argues that Alegres age and lack of training are irrelevant to his competence
as a broadcaster. FBNI points out that the "minor deficiencies in the KBP accreditation of
Rima and Alegre do not in any way prove that FBNI did not exercise the diligence of a
good father of a family in selecting and supervising them." Rimas accreditation lapsed
due to his non-payment of the KBP annual fees while Alegres accreditation card was
delayed allegedly for reasons attributable to the KBP Manila Office. FBNI claims that
membership in the KBP is merely voluntary and not required by any law or government
regulation.
FBNIs arguments do not persuade us.

The basis of the present action is a tort. Joint tort feasors are jointly and severally liable
for the tort which they commit.52 Joint tort feasors are all the persons who command,
instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the
commission of a tort, or who approve of it after it is done, if done for their benefit. 53 Thus,
AMEC correctly anchored its cause of action against FBNI on Articles 2176 and 2180 of the
Civil Code.1a\^/phi1.net
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay
for damages arising from the libelous broadcasts. As stated by the Court of Appeals,
"recovery for defamatory statements published by radio or television may be had from
the owner of the station, a licensee, the operator of the station, or a person who
procures, or participates in, the making of the defamatory statements." 54 An employer and
employee are solidarily liable for a defamatory statement by the employee within the
course and scope of his or her employment, at least when the employer authorizes or
ratifies the defamation.55 In this case, Rima and Alegre were clearly performing their
official duties as hosts of FBNIs radio program Expos when they aired the broadcasts.
FBNI neither alleged nor proved that Rima and Alegre went beyond the scope of their
work at that time. There was likewise no showing that FBNI did not authorize and ratify
the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence in
the selection andsupervision of its employees, particularly Rima and Alegre. FBNI
merely showed that it exercised diligence in theselection of its broadcasters without
introducing any evidence to prove that it observed the same diligence in
thesupervision of Rima and Alegre. FBNI did not show how it exercised diligence in
supervising its broadcasters. FBNIs alleged constant reminder to its broadcasters to
"observe truth, fairness and objectivity and to refrain from using libelous and indecent
language" is not enough to prove due diligence in the supervision of its broadcasters.
Adequate training of the broadcasters on the industrys code of conduct, sufficient
information on libel laws, and continuous evaluation of the broadcasters performance are
but a few of the many ways of showing diligence in the supervision of broadcasters.
FBNI claims that it "has taken all the precaution in the selection of Rima and Alegre as
broadcasters, bearing in mind their qualifications." However, no clear and convincing
evidence shows that Rima and Alegre underwent FBNIs "regimented process" of
application. Furthermore, FBNI admits that Rima and Alegre had deficiencies in their KBP
accreditation,56 which is one of FBNIs requirements before it hires a broadcaster.
Significantly, membership in the KBP, while voluntary, indicates the broadcasters strong
commitment to observe the broadcast industrys rules and regulations. Clearly, these
circumstances show FBNIs lack of diligence in selecting andsupervising Rima and Alegre.
Hence, FBNI is solidarily liable to pay damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999
and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with
the MODIFICATION that the award of moral damages is reduced from P300,000
to P150,000 and the award of attorneys fees is deleted. Costs against petitioner.

SO ORDERED.

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