Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-15092

May 18, 1962

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,

vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
Taada, Teehankee and Carreon for plaintiffs-appellants.
Hilado and Hilado for defendant-appellee.
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 defendantappellee'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 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.
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
Las enmiendas arriba transcritas forman parte del contrato de
molienda enmendado, otorgado por y la Bacolod-Murcia
Milling Co., Inc.
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:
Republic of the Philippines

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 plaintiffsappellants to sue for such additional increases as they may be entitled
to for the crop years subsequent to those herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.

SUPREME COURT
Manila
EN BANC
G.R. No. L-5377

December 29, 1954

MARIA CLARA PIROVANA ET AL., plaintiffs-appellees,

vs.
THE DE LA RAMA STEAMSHIP CO., defendant-appellant.
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.
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 vires, and, if valid, the
obligation to pay the amount given is not yet due and demandable.
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.
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.
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.
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.
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.
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.

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.
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).
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.
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.
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.
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
PIROVANO
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:
Whereas, the late Enrico Pirovano, President and General
Manager of the De la Rama Steamship Company, died in Manila
sometime in November, 1944:
Whereas, the said Enrico Pirovano was largely responsible for
the rapid and very successful development of the activities of
thus company;
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;
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;lawphil.net
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;
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.
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;
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.
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.

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;

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).

That all amounts received from the above-mentioned policies

shall be divided equally among the minors heirs of said Enrico
Pirovano;

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

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 abovementioned until the time the time the same amounts are paid
to the minor heirs of Enrico Pirovano previously mentioned;

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.
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.
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.
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.lawphil.net
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;
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.
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?
We will discuss these issues separately.
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.
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 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:

10

Whereas, the late Enrico Pirovano President and General

Manager of the De la Rama Steamship Company, died in Manila
sometime in November, 1944;
Whereas, the said Enrico Pirovano was largely responsible for
the rapid and very successful development of the activities of
this company;
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;
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;
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;
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;
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;

Whereas, early in 1941, the life of the said Enrico Pirovano was
insured in various life companies, to wit:
Whereas, the said Enrico Pirovano is survived by 4 minor
children, to wit: Esteban, Maria Carla, Enrico and John Albert,
all surnamed Pirovano; and
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;
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.)
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

11

donations. These donations are called remunerative donations .

(Sinco and Capistrano, The Civil Code, Vol. 1, p. 676; Manresa,
5th ed., pp. 72-73.)
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:
(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."
(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.
(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.
(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.
(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.
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

12

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.

(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.

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:

(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.

Second. The purposes for which said corporation is formed

are:
(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.
(b) To sell, let, charter, or otherwise dispose of the said vessels
or other property of the company.
(c) To carry on the business of carriers by water.
(d) To carry on the business of shipowners in all of its
branches.

(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.

(h) To borrow, or raise, or secure the payment of money in such

manner as the company shall think fit.
(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.
(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

13

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.
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.
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 and intra 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

14

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.
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 is ultra 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).
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).
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.).
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.).
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

15

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.
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).
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.)
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 retained
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

16

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., 563564). 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 ultravires 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).
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.
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,

17

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.
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.
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.
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

18

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.)
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.
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.
Having reached the foregoing conclusion, we deem it unnecessary to
discuss the other issues raised by the parties in their briefs.
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.

19

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.

20

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
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.

21

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

22

hold the certificate and thereunder operate as a common carrier by

land.

because such acquisition would be without purpose and would have

no necessary connection with petitioner's legitimate business.

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.

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.

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,

23

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.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
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 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

24

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

25

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.

26

27

G.R. No. 80599 September 15, 1989

ERNESTINA CRISOLOGO-JOSE, petitioner,
vs.
COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own
behalf and as Vice-President for Sales of Mover Enterprises,
Inc., respondents.
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:

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

In 1980, plaintiff Ricardo S. Santos, Jr. was the vicepresident 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

28

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. Q14867 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.

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.

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.

29

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 vicepresident 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.

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.

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,

30

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.

31

Indeed, respondent court went beyond the ratiocination called for in

the appeal to it in CA-G.R. CV. No. 05464. In its own decision therein,
it declared that "(t)he lone issue dwells in the question of whether an
accommodation party can validly consign the amount of the debt due
with the court after his tender of payment was refused by the creditor."
Yet, from the commercial and civil law aspects determinative of said
issue, it digressed into the merits of the aforesaid Criminal Case No.
Q-14867, thus:
Section 2 of B.P. 22 establishes the prima facie evidence
of knowledge of such insufficiency of funds or credit.
Thus, the making, drawing and issuance of a check,
payment of which is refused by the drawee because of
insufficient funds in or credit with such bank is prima
facie evidence of knowledge of insufficiency of funds or
credit, when the check is presented within 90 days from
the date of the check.
It will be noted that the last part of Section 2 of B.P. 22
provides that the element of knowledge of insufficiency
of funds or credit is not present and, therefore, the
crime does not exist, when the drawer pays the holder
the amount due or makes arrangements for payment in
full by the drawee of such check within five (5) banking
days after receiving notice that such check has not been
paid by the drawee.
Based on the foregoing consideration, this Court finds
that the plaintiff-appellant acted within Ms legal rights
when he consigned the amount of P45,000.00 on
August 14, 1981, between August 7, 1981, the date
when plaintiff-appellant receive (sic) the notice of nonpayment, 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.

32

WHEREFORE, subject to the aforesaid modifications, the judgment of

respondent Court of Appeals is AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-37331

March 18, 1933

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own

behalf and in that all other stockholders of the Balatoc Mining Company,
etc., plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING
COMPANY, H. E. RENZ, JOHN W. JAUSSERMANN, and A. W.
BEAM, defendants-appellees.
Gibbs and McDonough and Roman Ozaeta for appellants.
DeWitt, Perkins and Brady for appellees.
Ross, Lawrence and Selph for appellee Balatoc Mining Company.
STREET, J.:
This action was originally instituted in the Court of First Instance of the City of
Manila by F. M. Harden, acting in his own behalf and that of all other
stockholders of the Balatoc Mining Co. who might join in the action and
contribute to the expense of the suit. With the plaintiff Harden two others, J. D.
Highsmith and John C. Hart, subsequently associated themselves. The
defendants are the Benguet Consolidated Mining Co., the Balatoc Mining Co.,
H. E. Renz, John W. Haussermann, and A. W. Beam. The principal purpose of
the original action was to annul a certificate covering 600,000 shares of the
stock of the Balatoc Mining Co., which have been issued to the Benguet
Consolidated Mining Co., and to secure to the Balatoc Mining Co., the
restoration of a large sum of money alleged to have been unlawfully collected
by the Benguet Consolidated Mining Co., with legal interest, after deduction
therefrom of the amount expended by the latter company under a contract
between the two companies, bearing date of March 9, 1927. The complaint

33

was afterwards amended so as to include a prayer for the annulment of this

contract. Shortly prior to the institution of this lawsuit, the Benguet
Consolidated Mining Co., transferred to H. E. Renz, as trustee, the certificate
for 600,000 shares of the Balatoc Mining Co. which constitute the principal
subject matter of the action. This was done apparently to facilitate the splitting
up to the shares in the course of the sale or distribution. To prevent this the
plaintiffs, upon filing their original complaint, procured a preliminary injunction
restraining the defendants, their agents and servants, from selling, assigning
or transferring the 600,000 shares of the Balatoc Mining Co., or any part
thereof, and from removing said shares from the Philippine Islands. This
explains the connection of Renz with the case. The other individual defendants
are made merely as officials of the Benguet Consolidated Mining Co. Upon
hearing the cause the trial court dismissed the complaint and dissolved the
preliminary injunction, with costs against the plaintiffs. From this judgment the
plaintiffs appealed.
The facts which have given rise this lawsuit are simple, as the financial
interests involve are immense. Briefly told these facts are as follows: The
Benguet Consolidated Mining Co. was organized in June, 1903, as a sociedad
anonima in conformity with the provisions of Spanish law; while the Balatoc
Mining Co. was organized in December 1925, as a corporation, in conformity
with the provisions of the Corporation Law (Act No. 1459). Both entities were
organized for the purpose of engaging in the mining of gold in the Philippine
Islands, and their respective properties are located only a few miles apart in
the subprovince of Benguet. The capital stock of the Balatoc Mining Co.
consists of one million shares of the par value of one peso (P1) each.
When the Balatoc Mining Co. was first organized the properties acquired by it
were largely undeveloped; and the original stockholders were unable to supply
the means needed for profitable operation. For this reason, the board of
directors of the corporation ordered a suspension of all work, effective July 31,
1926. In November of the same year a general meeting of the company's
stockholders appointed a committee for the purpose of interesting outside
capital in the mine. Under the authority of this resolution the committee
approached A. W. Beam, then president and general manager of the Benguet
Company, to secure the capital necessary to the development of the Balatoc
property. As a result of the negotiations thus begun, a contract, formally
authorized by the management of both companies, was executed on March 9,
1927, the principal features of which were that the Benguet Company was to
proceed with the development and construct a milling plant for the Balatoc
mine, of a capacity of 100 tons of ore per day, and with an extraction of at least
85 per cent of the gold content. The Benguet Company also agreed to erect an
appropriate power plant, with the aerial tramlines and such other surface
buildings as might be needed to operate the mine. In return for this it was
agreed that the Benguet Company should receive from the treasurer of the
Balatoc Company shares of a par value of P600,000, in payment for the first
P600,000 be thus advanced to it by the Benguet Company.

The performance of this contract was speedily begun, and by May 31, 1929,
the Benguet Company had spent upon the development the sum of
P1,417,952.15. In compensation for this work a certificate for six hundred
thousand shares of the stock of the Balatoc Company has been delivered to
the Benguet Company, and the excess value of the work in the amount of
P817,952.15 has been returned to the Benguet Company in cash. Meanwhile
dividends of the Balatoc Company have been enriching its stockholders, and
at the time of the filing of the complaint the value of its shares had increased in
the market from a nominal valuation to more than eleven pesos per share.
While the Benguet Company was pouring its million and a half into the Balatoc
property, the arrangements made between the two companies appear to have
been viewed by the plaintiff Harden with complacency, he being the owner of
many thousands of the shares of the Balatoc Company. But as soon as the
success of the development had become apparent, he began this litigation in
which he has been joined by two others of the eighty shareholders of the
Balatoc Company.
Briefly, the legal point upon which the action is planted is that it is unlawful for
the Benguet Company to hold any interest in a mining corporation and that the
contract by which the interest here in question was acquired must be annulled,
with the consequent obliteration of the certificate issued to the Benguet
Company and the corresponding enrichment of the shareholders of the
Balatoc Company.
When the Philippine Islands passed to the sovereignty of the United States, in
the attention of the Philippine Commission was early drawn to the fact that
there is no entity in Spanish law exactly corresponding to the notion of the
corporation in English and American law; and in the Philippine Bill, approved
July 1, 1902, the Congress of the United States inserted certain provisions,
under the head of Franchises, which were intended to control the lawmaking
power in the Philippine Islands in the matter of granting of franchises,
privileges and concessions. These provisions are found in section 74 and 75
of the Act. The provisions of section 74 have been superseded by section 28 of
the Act of Congress of August 29, 1916, but in section 75 there is a provision
referring to mining corporations, which still remains the law, as amended. This
provisions, in its original form, reads as follows: "... it shall be unlawful for any
member of a corporation engaged in agriculture or mining and for any
corporation organized for any purpose except irrigation to be in any wise
interested in any other corporation engaged in agriculture or in mining."
Under the guidance of this and certain other provisions thus enacted by
Congress, the Philippine Commission entered upon the enactment of a
general law authorizing the creation of corporations in the Philippine Islands.
This rather elaborate piece of legislation is embodied in what is called our
Corporation Law (Act No. 1459 of the Philippine Commission). The evident
purpose of the commission was to introduce the American corporation into the

34

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 coexistence, 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: . . . .

35

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.

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.

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.

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.)

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

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

36

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.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-36207

October 26, 1932

IRINEO G. CARLOS, plaintiff-appellant,

vs.
MINDORO SUGAR CO., ET AL., defendants-appellees.

37

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.

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:

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.

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

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

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

38

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

39

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
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:

40

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 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.
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.
. . . 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

41

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. 314-315.)
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.)
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.)

guarantee the bonds to the value of P3,000,000 because this amount

far exceeds its capital of P1,000,000 of which only one-half 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;
(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 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.

It has been intimated according to section 121 of the Corporation Law,

the Philippine Trust Company, as a banking institution, could not

42

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
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.

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 third-party 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.

43

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.

44

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 Vice-president 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. 9Bank).
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. 8Bank, 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

45

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.

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.

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

46

Bank, Mr. J. V. Buenaventura. This notwithstanding, the Board of

Directors of petitioner required that the consideration be raised to
P3.00 per picul.

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

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.

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.

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 P2,800-00, 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 VicePresident 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 1956-1957 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.

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

47

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.

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."

WHEREFORE, in view of the foregoing, the decision of the Court of

Appeals is hereby AFFIRMED.

48

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
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

49

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 internalrevenue 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 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.

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.

50

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-30896 April 28, 1983
JOSE O. SIA, petitioner,
vs.
THE PEOPLE OF THE PHILIPPINES, respondent.

DE CASTRO, J.:

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 the
value of the said goods, in the said sum of P71,023.60.
(Original Records, p. 1).

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:

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:

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

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

51

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. 103104).
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, supra-may 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

52

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

53

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

54

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.
SO ORDERED.

55

BROADCASTING CORP., VIVA PRODUCTIONS, INC., and

VICENTE DEL ROSARIO, respondents.
SYNOPSIS
In 1990, ABS-CBN and VIVA executed a Film Exhibition
Agreement whereby the latter gave the former an exclusive right to
exhibit 24 VIVA Films for TV telecast. Later, VIVA, through respondent
Vincent del Rosario, offered ABS-CBN a list of 3 film packages (36
titles) from which the latter may exercise its right of first refusal under
their agreement. ABS-CBN ticked off 10 titles therefrom. Thereafter,
in February 1992, Del Rosario offered ABS-CBN airing rights over a
package of 104 movies for P60 million. In April, 1992, Del Rosario,
and Eugenio Lopez of ABS-CBN, met at a restaurant to discuss the
package proposal. According to Lopez, however, what they agreed
upon was ABS-CBNs exclusive film rights to 14 films for P36 million.
Del Rosario denied the same. He insisted that the discussion was on
VIVAs offer of 104 films for P60 million, to which ABSCBN later made a
counterproposal but rejected by VIVAs Board of Directors. Hence,
VIVA later granted RBS the exclusive right to air the 104 VIVA films,
including the 14 films supposedly granted to ABS-CBN. ABS-CBN
then filed a complaint for specific performance with prayer for
injunction. The RTC granted the prayer and required ABS-CBN post a
P35 million bond. But while ABS-CBN was moving for reduction of the
bond, RBS offered to put up a counterbond and was allowed to post
P30 million. Later, the RTC rendered a decision in favor of RBS and
VIVA, ordering ABS-CBN to pay RBS the amount it paid for the print
advertisement and premium on the counterbond, moral damages,
exemplary damages and attorneys fee. ABS-CBN appealed to the Court
of Appeals. Viva and Del Rosario also appealed seeking moral and
exemplary damages and additional attorneys fees. The Court of
Appeals affirmed the RTC decision and sustained the monetary
awards, VIVAs and Del Rosarios appeals were denied.

FIRST DIVISION
[G.R. No. 128690. January 21, 1999]
ABS-CBN

BROADCASTING

vs. HONORABLE

COURT

CORPORATION, petitioners,
OF

APPEALS,

REPUBLIC

The key issues are: 1. Whether there was a perfected contract

between VIVA and ABS-CBN; and 2. Whether RBS is entitled to
damages and attorneys fees.

56

The first issue is resolved against ABS-CBN, in the absence of the

requisites to make a valid contract. The alleged agreement on the 14
films, if there is one, is not binding to VIVA as it is not manifested that
Del Rosario has an authority to bind VIVA. Thus, when ABS-CBN
made a counter-proposal to VIVA, the same was submitted to its Board
of Directors, who rejected the same. Further, the Court agreed that
the alleged agreement is not a continuation of the 1990 Contract as
the right of first refusal under the said contract had already been
exercised by ABS-CBN. However, on the issue of damages, the Court
found ABS-CBN. RBS is not entitled to actual damages as the claim
thereof did not arise from that which allows the same to be recovered.
Neither is RBS entitled to attorneys fees as there is no showing of bad
faith in the other partys persistence in his case. Also, being a
corporation, RBS is not entitled to moral damages as the same is
awarded to compensate actual injuries suffered. Lastly, exemplary
damages cannot be awarded in the absence of proof that ABS-CBN was
inspired by malice or bad faith.

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.
2. CORPORATION LAW; BOARD OF DIRECTORS; POWER TO
ENTER

CONTRACTS;

DELEGATION;

VALIDITY

THEREOF. Under the Corporation Code, 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. Delegation to officers makes the latter agents of the
corporation; accordingly, the general rules of agency as to the
binding effects of their acts would apply. For such officers to be
deemed fully clothed by the corporation to exercise a power of the
Board, did not have the authority to accept ABS-CBNs counteroffer was best evidenced by his submission of the draft contract to
VIVAS Board of Directors for the latters approval. In any event,
there was between Del Rosario and Lopez III no meeting of minds.

SYLLABUS
1. CIVIL LAW; CONTRACT; ELUCIDATED. A contract is a meeting of
minds between two persons whereby one binds himself to give
something or to render some service to another 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. 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. 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

INTO

3.

CIVIL

LAW;

OBLIGATIONS

AND

CONTRACTS;

DAMAGES;

ACTUAL DAMAGES; ELABORATED. 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. The
indemnification shall comprehend not only the value of the loss
suffered, but also that of the profits that the obligee failed to
obtain. In contracts and quasi-contracts the damages which may

57

be awarded are dependent on whether the obligor acted with good

faith or otherwise. In 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. 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 have been foreseen or could have reasonably been
foreseen by the defendant. 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
plaintiffs business standing or commercial credit.
4. ID.; ID.; ID.; ID.; CASE AT BAR. 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-CBNs alleged knowledge of lack of cause of action.
Needless to state, the award of actual damages cannot be
comprehended under the law on actual damages. RBS could only
probably take refuge under Articles 19, 20, and 21 of the Civil
Code. 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. 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 grounds 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.
5. ID.; ID.; ID.; ID.; ATTORNEYS FEES; ELABORATED. As regards
attorneys fees, the law is clear that in the absence of stipulation,
attorneys fees may be recovered as actual or compensatory
damages under any of the circumstances provided for in Article
2208 of the Civil Code. The general rule is that attorneys fees
cannot be recovered as part of damages because of the policy that
no premium should be placed on the right of litigate. They are not
to be awarded every time a party wins a suit. The power of the
court to award attorneys fees under Article 2208 demands factual,
legal, and equitable justification. Even when a claimant is
compelled to litigate with third persons or to incur expenses to
protect his rights, still attorneys fees may not be awarded where
no sufficient showing of bad faith could be reflected in a partys
persistence in a case other than an erroneous conviction of the
righteousness of his cause.
6. ID.; ID.; ID.; MORAL DAMAGES; ELABORATED. 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. 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. 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
the 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.
Trial courts must then guard against the award of exorbitant

58

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.
7. ID.; ID.; ID.; ID.; CASE AT BAR. RBSs 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. However, 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 can be experienced only by one having a nervous
system. The statement in People v. Manero and Mambulao
Lumber Co. v. PNB 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.
8. ID.; ID.; ID.; EXEMPLARY DAMAGES; ELUCIDATED. 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. They are recoverable in
criminal cases as part of the civil liability when the crime was
committed with one or more aggravating circumstances; in quasidelicts, if the defendant acted with gross negligence; and in
contracts and quasi-contracts, if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner.
9. ID.; ID.; ID.; ID.; CASE AT BAR. The claim of RBS against ABSCBN is not based on contract, quasi-contract, delict, or quasidelict. 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. 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. Such must be
substantiated by evidence. There is no adequate proof that ABSCBN 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 persons exercise of a
right, it isdamnum absque injuria.
DECISION
DAVIDE, JR., C.J.:
In this petition for review on certiorari, petitioners ABS-CBN
Broadcasting Corp. (hereinafter 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-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-

59

1.4 ABS-CBN shall have the right of first refusal to the next twentyfour (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.

3. Underground guerillas

Viva, through defendant Del Rosario, offered ABS-CBN, through its

vice-president Charo Santos-Concio, a list of three (3) film packages
(36 title) from which ABS-CBN may exercise its right of first refusal
under the afore-said agreement (Exhs. 1 par. 2, 2, 2-A and 2-B
Viva). ABS-CBN, however through Mrs. Concio, can tick off only ten
(10) titles (from the list) we can purchase (Exh. 3 Viva) and therefore
did not accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked
off by Mrs. Concio are not the subject of the case at bar except the film
Maging Sino Ka Man.

6. lady Commando

I hope you will consider this request of mine.

For further enlightenment, this rejection letter dated January 06, 1992
(Exh 3 Viva) is hereby quoted:

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.

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 our very first contract because of the cheap production value of
these movies as well as the lack of big action stars. As a film producer,
I am sure you understand what I am trying to say as Viva produces
only big action pictures.
In fact, I would like to request two (2) additional runs for these movies
as I can only schedule them in out non-primetime slots. We have to
cover the amount that was paid for these movies because as you very
well know that non-primetime advertising rates are very low. These are
the unaired titles in the first contract.
1. Kontra Persa [sic]
2. Raider Platoon

4. Tiger Command
5. Boy de Sabog

7. Batang Matadero
8. Rebelyon

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.

Thanking you and with my warmest regards.

(Signed)
Charo Santos-Concio
On February 27, 1992, defendant Del Rosario approached ABS-CBNs
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 ABSCBN may choose another 52 titles, as a total of 156 titles, proposing to
sell to ABS-CBN airing rights over this package of 52 originals and 52
re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash
and P30,000,000.00 worth of television spots (Exh. 4 to 4-C Viva; 9
Viva).
On April 2, 1992, defendant Del Rosario and ABS-CBNs 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-CBN
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

60

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 Vivas 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 ABSCBN).
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior
vice-president for Finance discussed the terms and conditions of Vivas
offer to sell the 104 films, after the rejection of the same package by
ABS-CBN.
On April 07, 1992, defendant Del Rosario received through his
secretary , a handwritten note from Ms. Concio, (Exh. 5 Viva), which
reads: Heres 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 film rights to 53 films and contains
a right of first refusal to 1992 Viva Films. The said counter proposal
was however rejected by Vivas Board of Directors [in the] evening of the
same day, April 7, 1992, as Viva would not sell anything less than the
package of 104 films for P60 million pesos (Exh. 9 Viva), and such
rejection was relayed to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN and following several
negotiations and meetings defendant Del Rosario and Vivas 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 28 May 1992, the 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 respondent RBS channel 7 at seven
oclock 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-CBNs posting of a 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 counterbond.[9]
In the meantime, private respondents filed separate answer with
counterclaim.[10] RBS also set up a cross-claim against VIVA.
On 3 August 1992, the RTC issued an order[11] dissolving the writ
of preliminary injunction upon the posting by RBS of a P30 million
counterbond to answer for whatever damages ABS-CBN might suffer
by virtue of such dissolution. However, it reduced petitioners
injunction bond to P15 million as a condition precedent for the
reinstatement of the writ of preliminary injunction should private
respondents be unable to post a counterbond.
At the pre-trial[12] on 6 August 1992, the parties upon suggestion
of the court, agreed to explore the possibility of an amicable
settlement. In the meantime, RBS prayed for and was granted
reasonable time within which to put up a P30 million counterbond in
the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement, RBS
posted on 1 October 1992 a counterbond, which the RTC approved in
its Order of 15 October 1992.[13]
On 19 October 1992, ABS-CBN filed a motion for
reconsideration[14] of the 3 August and 15 October 1992 Orders, which
RBS opposed.[15]
On 29 October, the RTC conducted a pre-trial.[16]
Pending resolution of its motion for reconsideration, ABS-CBN
filed with the Court of Appeals a petition[17] challenging the RTCs Order
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.

61

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

restraining order[18] to enjoin the airing, broadcasting, and televising of
any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a
decision[19] dismissing the petition in CA-G.R. SP 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 s G.R.
No. 108363.
In the meantime the RTC received the evidence for the parties in
Civil Case No. Q-92-12309. 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, judgment 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 defendants RBSs bond
to lift the injunction;
b) P191,843.00 for the amount of print advertisement
for Maging Sino Ka Man in various newspapers;
c) Attorneys fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For the defendant VIVA, plaintiff ABS-CBN is ordered to
pay P212,000.00 by way of reasonable attorneys fees.
(4) The cross-claim of defendant RBS against defendant VIVA
is dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price
and terms of the offer. The alleged agreement between Lopez III and
Del Rosario was subject to the approval of the VIVA Board of Directors,

and said agreement was disapproved during the meeting of the Board
on 7 April 1992. Hence, there was no basis for ABS-CBNs 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. Concios 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-CBNs 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 RTCs decision, ABS-CBN appealed to the Court
of Appeals claiming that there was a perfected contract between ABSCBN 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 attorneys 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, its agent, might have agreed with Lopez III. The
appellate court did not even believe ABS-CBNs 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-CBNs 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 twentyfour (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 subjected to such terms as may be agreed upon by
the parties thereto, and that the said right shall be exercised by ABSCBN within fifteen (15) days from the actual offer in writing.

62

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-CBNs 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 VIVA was sometime in December 1991, (Exhibits 2, 2-A, 2B; 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, Mrs. 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 ABSCBN shall exercise its right of first refusal has already expired.[22]
Accordingly, respondent court sustained the award factual
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 has 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 RBSs
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 petitioners knowledge that
the contract with VIVA had not been perfected. It also upheld the
award of attorneys fees, reasoning that with ABS-CBNs act of
instituting Civil Case No. Q-92-12309, RBS was unnecessarily forced
to litigate. The appellate court, however, reduced the awards of moral
damages to P 2 million, exemplary damages to P2 million, and
attorneys fees to P500,000.00.

On the other hand, respondent Court of Appeals denied VIVA and

Del Rosarios 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 PREPONFERANCE 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 ATORNEYS FEES 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 Lopezs testimony that he and Del Rosario met
at the Tamarind Grill Restaurant, discussed the terms and conditions
of the second list (the 1992 Film Exhibition Agreement) and upon
agreement thereon, wrote the same on a paper napkin. It also asserts
that the contract has already been effective, as the elements thereof,
namely, consent, object, and consideration were established. It then
concludes that the Court of Appeals pronouncements were not
supported by law and jurisprudence, as per our decision of 1
December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals,
[23]
which cited Toyota Shaw, Inc. v. Court of Appeals;[24] Ang
Yu Asuncion v. Court of Appeals,[25] and Villonco Realty Company v.
Bormaheco, Inc.[26]

63

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 of 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 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 nonshowing of Maging Sino Ka Man; on the contrary, it was brought out
during trial that with or without the case or injunction, RBS would
have spent such an amount to generate interest in the film.
ABS-CBN further contends that there was no other 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 ABSCBN 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 from
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 attorneys fees, ABS-CBN maintains that
the same had no factual, legal, or equitable justification. In sustaining

the trial courts award, the Court of Appeals acted in clear disregard of
the doctrine laid down in Buan v. Camaganacan[32] that the text of the
decision should state the reason why attorneys 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 partys persistence in a case other than an
erroneous conviction of the righteousness of his cause, attorneys 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 meeting of minds between
them regarding the object and consideration of the alleged contract. It
affirms that ABS-CBNs claim of a right of first refusal was correctly
rejected by the trial court. RBS insists the premium it had paid for the
counterbond constituted a pecuniary loss upon which it may recover. It
was obliged to put up the counterbond 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 out to announce the
showing on a particular day and hour on Channel 7, i.e., in its entirety
at one time, not as series to be shown on a periodic basis. Hence, the
print advertisements were good and relevant for the particular date of
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 ABSCBN filed the case and secured injunctions purely for the purpose of
harassing and prejudicing RBS. Pursuant then to Articles 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 done is not illicit, and there is abuse of

64

rights where a plaintiff institutes an 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 respondent RBS cited 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 ABSCBNs 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 cancelled, irate viewers called up
RBS offices and subjected RBS to verbal abuse (Announce kayo ng
announce, hindi ninyo naman ilalabas, nanloloko yata kayo) (Exh. 3RBS, par.3). This alone was not something RBS brought upon itself. It
was exactly what ABS-CBN had planted 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 in 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 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-CBNs 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 attorneys fees. It may be noted that that
award of attorneys 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 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

65

any modification or variation from the terms of the offer annuls the
offer.[40]

the counter-offer, the acceptance did not bind VIVA, as there was no
proof whatsoever that Del Rosario had the specific authority to do so.

When Mr. Del Rosario of Viva met 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 VIVAs offer to ABS-CBN to enter into a
new Film Exhibition Agreement. But ABS-CBN, sent through Ms.
Concio, counter-proposal in the form a draft contract proposing
exhibition of 53 films for a consideration of P35 million. This counterproposal 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 VIVAs offer, for it was
met by a counter-offer which substantially varied the terms of the
offer.

Under the 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
binding 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-CBNs counter-offer
was best evidenced by his submission of the draft contract to VIVAs
Board of Directors for the latters 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:

ABS-CBNs 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
an 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 meetings
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 vendors
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. [45] However,
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
VIVAs offer hence, they underwent 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 counteroffer. Even if it be conceded arguendo that Del Rosario had accepted

A number of considerations militate against ABS-CBNs 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
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 Exhibit C reflected the true intent of the
parties, then ABS-CBNs 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
contract, so as to preclude perfection thereof. For settled is the rule

66

that there can be no contract where there is no object certain which is

its subject matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony
(Exh. D) States:
We were able to reach an agreement. VIVA gave us the exclusive license
to show these fourteen (14) films, and we agreed to pay Viva the
amount of P16,050,000.00 as well as grant Viva commercial slots
worth P19,950,000.00. We had already earmarked
this P16,050,000.00.
which gives a total consideration of P36 million (P19,951,000.00
plus P16,050,000.00 equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q What was written in this napkin?
A The total price, the breakdown the known Viva movies, the 7
blockbuster movies and the other 7 Viva movies because the
price was broken down accordingly. The none [sic] Viva and the
seven other Viva movies and the sharing between the cash
portion and the concerned spot portion in the total amount
of P35 million pesos.
Now, which is which? P36 million or P35 million? This weakens ABSCBNs 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-CBNs 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 Tamarinf meeting the second
meeting wherein you claimed that you have the meeting of the
minds between you and Mr. Vic del Rosario, what happened?
A Vic Del Rosario was supposed to call us up and tell us specifically
the result of the discussion with the Board of Directors.
Q And you are referring to the so-called agreement which you wrote
in [sic] a piece of paper?
A Yes, sir.
Q So, he was going to forward that to the board of Directors for
approval?
A Yes, sir (Tsn, pp. 42-43, June 8, 1992)
Q Did Mr. Del Rosario tell you that he will submit it to his Board for
approval?
A Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt that he knew
Mr. Del Rosario had no authority to bind Viva to a contract with ABSCBN 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 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 Barnes [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

67

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 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 104 films be maintained (Exh. 7-1 Cica).[49]
The contention that ABS-CBN had yet to fully exercise its right of
first refusal over twenty-four films under the 1990 Film Exhibition
Agreement and that the meeting between Lopez and Del Rosario was a
continuation of said previous contract is untenable. As observed by the
trial court, ABS-CBNs 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 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 right of 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. In 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 defendants 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 have
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 plaintiffs 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-CBNs alleged knowledge of lack of cause of
action. Thus paragraph 12 of RBSs 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 against 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 hid 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 the 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

68

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 attorneys fees, the law is clear that in the absence of
stipulation, attorneys 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 attorneys 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 t award attorneys fees under Article
2208 demands factual, legal, and equitable justification.[60] Even when
a claimant is compelled to litigate with third persons or to incur
expenses to protect his rights, still attorneys fees may not be awarded
where no sufficient showing of bad faith could be reflected in a partys
persistence in a case other than an 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. RBSs 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 the 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 or 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 can 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 quasidelicts, 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 provisions of

69

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 impose
a penalty on the right to litigate. If damages result from a persons
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 attorneys fees in favor of
VIVA Productions, Inc.
No pronouncement as to costs.
SO ORDERED.

FIRST DIVISION
[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.:
The Case
This petition for review[1] assails the 4 January 1999
Decision[2] 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 Decision[3] of the Regional Trial
Court of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of
Appeals held Filipinas Broadcasting Network, Inc. and its broadcasters
Hermogenes Alegre and Carmelo Rima liable for libel and ordered them
to solidarily pay Ago Medical and Educational Center-Bicol Christian
College of Medicine moral damages, attorneys fees and costs of suit.
The Antecedents
Expos is a radio documentary[4] 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]

70

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 damages [7] against
FBNI, Rima and Alegre on 27 February 1990. Quoted are portions of
the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking
medical course at AMEC-BCCM, advise them to pass all subjects
because if they fail in any subject they will repeat their year level,
taking up all subjects including those they have passed already.
Several students had approached me stating that they had consulted
with the DECS which told them that there is no such regulation. If
[there] is no such regulation why is AMEC doing the same?
xxx
Second: Earlier AMEC students in Physical Therapy had
complained that the course is not recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if
the subject does not have an instructor - such greed for money on
the part of AMECs administration. Take the subject Anatomy:
students would pay for the subject upon enrolment because it is
offered by the school. However there would be no instructor for such
subject. Students would be informed that course would be moved to a
later date because the school is still searching for the appropriate
instructor.

in DZRC today, it would be very easy for detractors and enemies of the
Ago family to stop the flow of support of foreign foundations who assist
the medical school on the basis of the latters purpose. But if the
purpose of the institution (AMEC) is to deceive students at cross
purpose with its reason for being it is possible for these foreign
foundations to lift or suspend their donations temporarily.[8]
xxx
On the other hand, the administrators of AMEC-BCCM, AMEC
Science High School and the AMEC-Institute of Mass
Communication in their effort to minimize expenses in terms of
salary are absorbing or continues to accept rejects. For example
how many teachers in AMEC are former teachers of Aquinas University
but were removed because of immorality? Does it mean that the
present administration of AMEC have the total definite moral
foundation from catholic administrator of Aquinas University. I will
prove to you my friends, that AMEC is a dumping ground, garbage,
not merely of moral and physical misfits. Probably they only qualify
in terms of intellect. The Dean of Student Affairs of AMEC is Justita
Lola, as the family name implies. She is too old to work, being an old
woman. Is the AMEC administration exploiting the very [e]nterprising
or compromising and undemanding Lola? Could it be that AMEC is
just patiently making use of Dean Justita Lola were if she is very old.
As in atmospheric situation zero visibility the plane cannot land,
meaning she is very old, low pay follows. By the way, Dean Justita Lola
is also the chairman of the committee on scholarship in AMEC. She
had retired from Bicol University a long time ago but AMEC has
patiently made use of her.
xxx

xxx

MEL RIMA:

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

xxx My friends based on the expose, AMEC is a dumping ground for

moral and physically misfit people. What does this mean? Immoral and
physically misfits as teachers.
May I say Im sorry to Dean Justita Lola. But this is the truth. The
truth is this, that your are no longer fit to teach. You are too old. As an
aviation, your case is zero visibility. Dont insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman
of the scholarship committee at that. The reason is practical cost

71

saving in salaries, because an old person is not fastidious, so long as

she has money to buy the ingredient of beetle juice. The elderly can get
by thats why she (Lola) was taken in as Dean.
xxx
xxx On our end our task is to attend to the interests of students. It is
likely that the students would be influenced by evil. When they
become members of society outside of campus will be liabilities
rather than assets. What do you expect from a doctor who while
studying at AMEC is so much burdened with unreasonable
imposition? What do you expect from a student who aside from
peculiar problems because not all students are rich in their struggle to
improve their social status are even more burdened with false
regulations. xxx[9] (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 Answer[10] 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 and Alegre. FBNI claimed that before hiring a
broadcaster, the broadcaster should (1) file an application; (2) be
interviewed; and (3) undergo an apprenticeship and training program
after passing the interview. FBNI likewise claimed that it always
reminds its broadcasters to observe truth, fairness and objectivity in
their broadcasts and to refrain from using libelous and indecent
language. Moreover, FBNI requires all broadcasters to pass
the Kapisanan ng mga Brodkaster sa Pilipinas (KBP) accreditation test
and to secure a KBP permit.

On 14 December 1992, the trial court rendered a

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.
In absolving Rima from the charge, the trial court ruled that
Rimas only participation was when he agreed with Alegres expos. The
trial court found Rimas statement within the bounds of freedom of
speech, expression, and of the press. The dispositive portion of the
decision reads:
WHEREFORE, premises considered, this court finds for the
plaintiff. Considering the degree of damages caused by the
controversial utterances, which are not found by this court to be
really very serious and damaging, and there being no showing that
indeed the enrollment of plaintiff school dropped, defendants
Hermogenes Jun Alegre, Jr. and Filipinas Broadcasting Network (owner
of the radio station DZRC), are hereby jointly and severally ordered to
pay plaintiff Ago Medical and Educational Center-Bicol Christian
College of Medicine (AMEC-BCCM) the amount of P300,000.00 moral
damages, plus P30,000.00 reimbursement of attorneys fees, and to pay
the costs of suit.
SO ORDERED. [13] (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one hand, and
AMEC and Ago, on the other, appealed the decision to the Court of
Appeals. The Court of Appeals affirmed the trial courts judgment with
modification. The appellate court made Rima solidarily liable with
FBNI and Alegre. The appellate court denied Agos claim for damages
and attorneys fees because the broadcasts were directed against
AMEC, and not against her. The dispositive portion of the Court of
Appeals decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED,
subject to the modification that broadcaster Mel Rima is SOLIDARILY
ADJUDGED liable with FBN[I] and Hermo[g]enes Alegre.
SO ORDERED.[14]

72

FBNI, Rima and Alegre filed a motion for reconsideration which

the Court of Appeals denied in its 26 January 2000 Resolution.
Hence, FBNI filed this petition.[15]
The Ruling of the Court of Appeals

I. WHETHER THE BROADCASTS ARE LIBELOUS;

II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER;
and

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.

IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND

ALEGRE FOR PAYMENT OF MORAL DAMAGES,
ATTORNEYS FEES AND COSTS OF SUIT.

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.

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 30[18] authorizes a separate civil
action to recover civil liability arising from a criminal offense. On the
other hand, Article 33[19] 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 19 [20] of the
Civil Code to justify its claim for damages. AMEC cites Articles
2176[21] and 2180[22] of the Civil Code to hold FBNI solidarily liable with
Rima and Alegre.

The Court of Appeals found Rima also liable for libel since he
remarked that (1) AMEC-BCCM is a dumping ground for morally and
physically misfit teachers; (2) AMEC obtained the services of Dean
Justita Lola to minimize expenses on its employees salaries; and (3)
AMEC burdened the students with unreasonable imposition and false
regulations.[16]
The Court of Appeals held that FBNI failed to exercise due
diligence in the selection and supervision of its employees for allowing
Rima and Alegre to make the radio broadcasts without the proper KBP
accreditation. The Court of Appeals denied Agos claim for damages
and attorneys fees because the libelous remarks were directed against
AMEC, and not against her. The Court of Appeals adjudged FBNI, Rima
and Alegre solidarily liable to pay AMEC moral damages, attorneys fees
and costs of suit.
Issues
FBNI raises the following issues for resolution:

The Courts Ruling

We deny the petition.

I.
Whether the broadcasts are libelous
[23]

A libel 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

73

suggest that AMEC is a money-making institution where physically

and morally unfit teachers abound.

an existing controversy, and a party to that controversy makes the

defamatory statement.[30]

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.

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 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

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 inBorjal, 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

74

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. So is plaintiffs counsel.
Dr. Lola was observed by this court not to be physically decrepit yet,
nor mentally infirmed, but is still alert and docile.
The contention that plaintiffs graduates become liabilities rather than
assets of our society is a mere conclusion. Being from the place
himself, this court is aware that majority of the medical graduates of
plaintiffs pass the board examination easily and become prosperous
and responsible professionals.[33]
Had the comments been an expression of opinion based on
established facts, it is immaterial that the opinion happens to be
mistaken, as long as it might reasonably be inferred from the facts.
[34]
However, the comments of Rima and Alegre were not backed up by
facts. Therefore, the broadcasts are not privileged and remain
libelous per 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.

75

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)

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]

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.

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.[46] Neither 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.

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 19[37] 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
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 inMambulao 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

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 2208 [48] of
the Civil Code.
The award of attorneys fees is not proper because AMEC failed to
justify satisfactorily its claim for attorneys fees. AMEC did not adduce
evidence to warrant the award of attorneys fees. Moreover, both the
trial and appellate courts failed to explicitly state in their respective
decisions the rationale for the award of attorneys fees. [49] In Inter-Asia
Investment Industries, Inc. v. Court of Appeals,[50] we held that:
[I]t is an accepted doctrine that the award thereof as an item of
damages is the exception rather than the rule, and counsels fees are
not to be awarded every time a party wins a suit. The power of the
court to award attorneys fees under Article 2208 of the Civil Code
demands factual, legal and equitable justification, without which
the award is a conclusion without a premise, its basis being
improperly left to speculation and conjecture. In all events, the
court must explicitly state in the text of the decision, and not only in

76

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.

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 and supervision of its
employees, particularly Rima and Alegre. FBNI merely showed that it
exercised diligence in the selection of its broadcasters without
introducing any evidence to prove that it observed the same diligence
in the supervision 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

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selecting and supervising 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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