Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 129459 September 29, 1998

SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner,
vs.
COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE
GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND
DEVELOPMENT CORP., respondents.

PANGANIBAN, J.:
May corporate treasurer, by herself and without any authorization from he board of
directors, validly sell a parcel of land owned by the corporation?. May the veil of
corporate fiction be pierced on the mere ground that almost all of the shares of stock
of the corporation are owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this Court in resolving the Petition
for Review on Certioraribefore us, assailing the March 18, 1997 Decision 1 of the
Court of Appeals 2 in CA GR CV No. 46801 which, in turn, modified the July 18, 1994
Decision of the Regional Trial Court of Makati, Metro Manila, Branch 63 3 in Civil Case
No. 89-3511. The RTC dismissed both the Complaint and the Counterclaim filed by
the parties. On the other hand, the Court of Appeals ruled:
WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH
MODIFICATION ordering defendant-appellee Nenita Lee Gruenberg to REFUND or
return to plaintiff-appellant the downpayment of P100,000.00 which she received from
plaintiff-appellant. There is no pronouncement as to costs. 4
The petition also challenges the June 10, 1997 CA Resolution denying
reconsideration. 5
The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.'s amended
complaint alleged that on 14 February 1989, plaintiff-appellant entered into an
agreement with defendant-appellee Motorich Sales Corporation for the transfer to it of
a parcel of land identified as Lot 30, Block 1 of the Acropolis Greens Subdivision
located in the District of Murphy, Quezon City. Metro Manila, containing an area of
Four Hundred Fourteen (414) square meters, covered by TCT No. (362909) 2876:

that as stipulated in the Agreement of 14 February 1989, plaintiff-appellant paid the

downpayment in the sum of One Hundred Thousand (P100,000.00) Pesos, the
balance to be paid on or before March 2, 1989; that on March 1, 1989. Mr. Andres T.
Co, president of plaintiff-appellant corporation, wrote a letter to defendant-appellee
Motorich Sales Corporation requesting for a computation of the balance to be paid:
that said letter was coursed through defendant-appellee's broker. Linda Aduca, who
wrote the computation of the balance: that on March 2, 1989, plaintiff-appellant was
ready with the amount corresponding to the balance, covered by Metrobank Cashier's
Check No. 004223, payable to defendant-appellee Motorich Sales Corporation; that
plaintiff-appellant and defendant-appellee Motorich Sales Corporation were supposed
to meet in the office of plaintiff-appellant but defendant-appellee's treasurer, Nenita
Lee Gruenberg, did not appear; that defendant-appellee Motorich Sales Corporation
despite repeated demands and in utter disregard of its commitments had refused to
execute the Transfer of Rights/Deed of Assignment which is necessary to transfer the
certificate of title; that defendant ACL Development Corp. is impleaded as a
necessary party since Transfer Certificate of Title No. (362909) 2876 is still in the
name of said defendant; while defendant JNM Realty & Development Corp. is
likewise impleaded as a necessary party in view of the fact that it is the transferor of
right in favor of defendant-appellee Motorich Sales Corporation: that on April 6, 1989,
defendant ACL Development Corporation and Motorich Sales Corporation entered
into a Deed of Absolute Sale whereby the former transferred to the latter the subject
property; that by reason of said transfer, the Registry of Deeds of Quezon City issued
a new title in the name of Motorich Sales Corporation, represented by defendantappellee Nenita Lee Gruenberg and Reynaldo L. Gruenberg, under Transfer
Certificate of Title No. 3571; that as a result of defendants-appellees Nenita Lee
Gruenberg and Motorich Sales Corporation's bad faith in refusing to execute a formal
Transfer of Rights/Deed of Assignment, plaintiff-appellant suffered moral and nominal
damages which may be assessed against defendants-appellees in the sum of Five
Hundred Thousand (500,000.00) Pesos; that as a result of defendants-appellees
Nenita Lee Gruenberg and Motorich Sales Corporation's unjustified and unwarranted
failure to execute the required Transfer of Rights/Deed of Assignment or formal deed
of sale in favor of plaintiff-appellant, defendants-appellees should be assessed
exemplary damages in the sum of One Hundred Thousand (P100,000.00) Pesos; that
by reason of defendants-appellees' bad faith in refusing to execute a Transfer of
Rights/Deed of Assignment in favor of plaintiff-appellant, the latter lost the opportunity
to construct a residential building in the sum of One Hundred Thousand
(P100,000.00) Pesos; and that as a consequence of defendants-appellees Nenita
Lee Gruenberg and Motorich Sales Corporation's bad faith in refusing to execute a
deed of sale in favor of plaintiff-appellant, it has been constrained to obtain the
services of counsel at an agreed fee of One Hundred Thousand (P100,000.00) Pesos
plus appearance fee for every appearance in court hearings.
In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee
Gruenberg interposed as affirmative defense that the President and Chairman of
Motorich did not sign the agreement adverted to in par. 3 of the amended complaint;
that Mrs. Gruenberg's signature on the agreement (ref: par. 3 of Amended Complaint)
is inadequate to bind Motorich. The other signature, that of Mr. Reynaldo Gruenberg,
President and Chairman of Motorich, is required: that plaintiff knew this from the very
beginning as it was presented a copy of the Transfer of Rights (Annex B of amended
complaint) at the time the Agreement (Annex B of amended complaint) was signed;
that plaintiff-appellant itself drafted the Agreement and insisted that Mrs. Gruenberg
accept the P100,000.00 as earnest money; that granting, without admitting, the

enforceability of the agreement, plaintiff-appellant nonetheless failed to pay in legal

tender within the stipulated period (up to March 2, 1989); that it was the
understanding between Mrs. Gruenberg and plaintiff-appellant that the Transfer of
Rights/Deed of Assignment will be signed only upon receipt of cash payment; thus
they agreed that if the payment be in check, they will meet at a bank designated by
plaintiff-appellant where they will encash the check and sign the Transfer of
Rights/Deed. However, plaintiff-appellant informed Mrs. Gruenberg of the alleged
availability of the check, by phone, only after banking hours.
On the basis of the evidence, the court a quo rendered the judgment appealed from[,]
dismissing plaintiff-appellant's complaint, ruling that:
The issue to be resolved is: whether plaintiff had the right to compel defendants to
execute a deed of absolute sale in accordance with the agreement of February 14,
1989: and if so, whether plaintiff is entitled to damage.
As to the first question, there is no evidence to show that defendant Nenita Lee
Gruenberg was indeed authorized by defendant corporation. Motorich Sales, to
dispose of that property covered by T.C.T. No. (362909) 2876. Since the property is
clearly owned by the corporation. Motorich Sales, then its disposition should be
governed by the requirement laid down in Sec. 40. of the Corporation Code of the
Philippines, to wit:
Sec. 40, Sale or other disposition of assets. Subject to the provisions of existing laws
on illegal combination and monopolies, a corporation may by a majority vote of its
board of directors . . . sell, lease, exchange, mortgage, pledge or otherwise dispose of
all or substantially all of its property and assets including its goodwill . . . when
authorized by the vote of the stockholders representing at least two third (2/3) of the
outstanding capital stock . . .
No such vote was obtained by defendant Nenita Lee Gruenberg for that proposed
sale[;] neither was there evidence to show that the supposed transaction was ratified
by the corporation. Plaintiff should have been on the look out under these
circumstances. More so, plaintiff himself [owns] several corporations (tsn dated
August 16, 1993, p. 3) which makes him knowledgeable on corporation matters.
Regarding the question of damages, the Court likewise, does not find substantial
evidence to hold defendant Nenita Lee Gruenberg liable considering that she did not
in anyway misrepresent herself to be authorized by the corporation to sell the
property to plaintiff (tsn dated September 27, 1991, p. 8).
In the light of the foregoing, the Court hereby renders judgment DISMISSING the
complaint at instance for lack of merit.
"Defendants" counterclaim is also DISMISSED for lack of basis. (Decision, pp. 78; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:

This Agreement, made and entered into by and between:

MOTORICH SALES CORPORATION, a corporation duly organized and existing
under and by virtue of Philippine Laws, with principal office address at 5510 South
Super Hi-way cor. Balderama St., Pio del Pilar. Makati, Metro Manila, represented
herein by its Treasurer, NENITA LEE GRUENBERG, hereinafter referred to as the
TRANSFEROR;
and
SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized
and existing under and by virtue of the laws of the Philippines, with principal office
address at Sumulong Highway, Barrio Mambungan, Antipolo, Rizal, represented
herein by its President, ANDRES T. CO, hereinafter referred to as the TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30
Block 1 of the ACROPOLIS GREENS SUBDIVISION located at the District of Murphy,
Quezon City, Metro Manila, containing an area of FOUR HUNDRED FOURTEEN
(414) SQUARE METERS, covered by a TRANSFER OF RIGHTS between JNM
Realty & Dev. Corp. as the Transferor and Motorich Sales Corp. as the Transferee;
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties
have agreed as follows:
1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS
(P5,200.00) per square meter; subject to the following terms:
a. Earnest money amounting to ONE HUNDRED THOUSAND PESOS
(P100,000.00), will be paid upon the execution of this agreement and shall form part
of the total purchase price;
b. Balance shall be payable on or before March 2, 1989;
2. That the monthly amortization for the month of February 1989 shall be for the
account of the Transferor; and that the monthly amortization starting March 21, 1989
shall be for the account of the Transferee;
The transferor warrants that he [sic] is the lawful owner of the above-described
property and that there [are] no existing liens and/or encumbrances of whatsoever
nature;
In case of failure by the Transferee to pay the balance on the date specified on 1, (b),
the earnest money shall be forfeited in favor of the Transferor.
That upon full payment of the balance, the TRANSFEROR agrees to execute a
TRANSFER OF RIGHTS/DEED OF ASSIGNMENT in favor of the TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of
February, 1989 at Greenhills, San Juan, Metro Manila, Philippines.

MOTORICH SALES CORPORATION SAN JUAN STRUCTURAL & STEEL

FABRICATORS

3. Is the alleged alteration of Gruenberg's testimony as recorded in the transcript of

stenographic notes material to the disposition of this case?

TRANSFEROR TRANSFEREE

4. Are respondents liable for damages and attorney's fees?

[SGD.] [SGD.]

The Court's Ruling

By. NENITA LEE GRUENBERG By: ANDRES T. CO

The petition is devoid of merit.

Treasurer President

First Issue: Validity of Agreement

Signed In the presence of:

Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14,
1989, it entered through its president, Andres Co, into the disputed Agreement with
Respondent Motorich Sales Corporation, which was in turn allegedly represented by
its treasurer, Nenita Lee Gruenberg. Petitioner insists that "[w]hen Gruenberg and Co
affixed their signatures on the contract they both consented to be bound by the terms
thereof." Ergo, petitioner contends that the contract is binding on the two
corporations. We do not agree.

[SGD.] [SGD.]
6
In its recourse before the Court of Appeals, petitioner insisted:
1. Appellant is entitled to compel the appellees to execute a Deed of Absolute Sale in
accordance with the Agreement of February 14, 1989,
2. Plaintiff is entitled to damages. 7
As stated earlier, the Court of Appeals debunked petitioner's arguments and affirmed
the Decision of the RTC with the modification that Respondent Nenita Lee Gruenberg
was ordered to refund P100,000 to petitioner, the amount remitted as "downpayment"
or "earnest money." Hence, this petition before us. 8
The Issues
Before this Court, petitioner raises the following issues:
I. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in
the instant case
II. Whether or not the appellate court may consider matters which the parties failed to
raise in the lower court
III. Whether or not there is a valid and enforceable contract between the petitioner
and the respondent corporation
IV. Whether or not the Court of Appeals erred in holding that there is a valid
correction/substitution of answer in the transcript of stenographic note[s].
V. Whether or not respondents are liable for damages and attorney's fees 9
The Court synthesized the foregoing and will thus discuss them seriatim as follows:
1. Was there a valid contract of sale between petitioner and Motorich?
2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich?

True, Gruenberg and Co signed on February 14, 1989, the Agreement, according to
which a lot owned by Motorich Sales Corporation was purportedly sold. Such
contract, however, cannot bind Motorich, because it never authorized or ratified such
sale.
A corporation is a juridical person separate and distinct from its stockholders or
members. Accordingly, the property of the corporation is not the property of its
stockholders or members and may not be sold by the stockholders or members
without express authorization from the corporation's board of directors. 10 Section 23
of BP 68, otherwise known as the Corporation Code of the Philippines, provides;
Sec. 23. The Board of Directors or Trustees. Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled and
held by the board of directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members of the corporation, who
shall hold office for one (1) year and until their successors are elected and qualified.
Indubitably, a corporation may act only through its board of directors or, when
authorized either by its bylaws or by its board resolution, through its officers or agents
in the normal course of business. The general principles of agency govern the relation
between the corporation and its officers or agents, subject to the articles of
incorporation, bylaws, or relevant provisions of law. 11 Thus, this Court has held that "a
corporate officer or agent may represent and bind the corporation in transactions with
third persons to the extent that the authority to do so has been conferred upon him,
and this includes powers which have been intentionally conferred, and also such
powers as, in the usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by custom and usage,
as usually pertaining to the particular officer or agent, and such apparent powers as
the corporation has caused persons dealing with the officer or agent to believe that it
has conferred." 12

Furthermore, the Court has also recognized the rule that "persons dealing with an
assumed agent, whether the assumed agency be a general or special one bound at
their peril, if they would hold the principal liable, to ascertain not only the fact of
agency but also the nature and extent of authority, and in case either is controverted,
the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil.
19)." 13 Unless duly authorized, a treasurer, whose powers are limited, cannot bind the
corporation in a sale of its assets. 14
In the case at bar, Respondent Motorich categorically denies that it ever authorized
Nenita Gruenberg, its treasurer, to sell the subject parcel of land. 15 Consequently,
petitioner had the burden of proving that Nenita Gruenberg was in fact authorized to
represent and bind Motorich in the transaction. Petitioner failed to discharge this
burden. Its offer of evidence before the trial court contained no proof of such
authority. 16 It has not shown any provision of said respondent's articles of
incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed
such power.
That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the
responsibility of ascertaining the extent of her authority to represent the corporation.
Petitioner cannot assume that she, by virtue of her position, was authorized to sell the
property of the corporation. Selling is obviously foreign to a corporate treasurer's
function, which generally has been described as "to receive and keep the funds of the
corporation, and to disburse them in accordance with the authority given him by the
board or the properly authorized officers."17
Neither was such real estate sale shown to be a normal business activity of Motorich.
The primary purpose of Motorich is marketing, distribution, export and import in
relation to a general merchandising business. 18 Unmistakably, its treasurer is not
cloaked with actual or apparent authority to buy or sell real property, an activity which
falls way beyond the scope of her general authority.
Art. 1874 and 1878 of the Civil Code of the Philippines provides:
Art. 1874. When a sale of a piece of land or any interest therein is through an agent,
the authority of the latter shall be in writing: otherwise, the sale shall be void.
Art. 1878. Special powers of attorney are necessary in the following case:
xxx xxx xxx
(5) To enter any contract by which the ownership of an immovable is transmitted or
acquired either gratuitously or for a valuable consideration;
xxx xxx xxx.
Petitioner further contends that Respondent Motorich has ratified said contract of sale
because of its "acceptance of benefits," as evidenced by the receipt issued by
Respondent Gruenberg. 19 Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope of their authority are
binding on the corporation. But when these officers exceed their authority, their

actions "cannot bind the corporation, unless it has ratified such acts or is estopped
from disclaiming them." 20
In this case, there is a clear absence of proof that Motorich ever authorized Nenita
Gruenberg, or made it appear to any third person that she had the authority, to sell its
land or to receive the earnest money. Neither was there any proof that Motorich
ratified, expressly or impliedly, the contract. Petitioner rests its argument on the
receipt which, however, does not prove the fact of ratification. The document is a
hand-written one, not a corporate receipt, and it bears only Nenita Gruenberg's
signature. Certainly, this document alone does not prove that her acts were
authorized or ratified by Motorich.
Art. 1318 of the Civil Code lists the requisites of a valid and perfected contract: "(1)
consent of the contracting parties; (2) object certain which is the subject matter of the
contract; (3) cause of the obligation which is established." As found by the trial
court 21 and affirmed by the Court of Appeals, 22 there is no evidence that Gruenberg
was authorized to enter into the contract of sale, or that the said contract was ratified
by Motorich. This factual finding of the two courts is binding on this Court. 23 As the
consent of the seller was not obtained, no contract to bind the obligor was perfected.
Therefore, there can be no valid contract of sale between petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg
to sell its parcel of land, we hold that the February 14, 1989 Agreement entered into
by the latter with petitioner is void under Article 1874 of the Civil Code. Being
inexistent and void from the beginning, said contract cannot be ratified. 24
Second
Piercing the Corporate Veil Not Justified

Issue:

Petitioner also argues that the veil of corporate fiction of Motorich should be pierced,
because the latter is a close corporation. Since "Spouses Reynaldo L. Gruenberg and
Nenita R. Gruenberg owned all or almost all or 99.866% to be accurate, of the
subscribed capital stock" 25 of Motorich, petitioner argues that Gruenberg needed no
authorization from the board to enter into the subject contract. 26 It adds that, being
solely owned by the Spouses Gruenberg, the company can treated as a close
corporation which can be bound by the acts of its principal stockholder who needs no
specific authority. The Court is not persuaded.
First, petitioner itself concedes having raised the issue belatedly, 27 not having done
so during the trial, but only when it filed its sur-rejoinder before the Court of
Appeals. 28 Thus, this Court cannot entertain said issue at this late stage of the
proceedings. It is well-settled the points of law, theories and arguments not brought to
the attention of the trial court need not be, and ordinarily will not be, considered by a
reviewing court, as they cannot be raised for the first time on appeal. 29Allowing
petitioner to change horses in midstream, as it were, is to run roughshod over the
basic principles of fair play, justice and due process.
Second, even if the above mentioned argument were to be addressed at this time, the
Court still finds no reason to uphold it. True, one of the advantages of a corporate
form of business organization is the limitation of an investor's liability to the amount of
the investment. 30 This feature flows from the legal theory that a corporate entity is
separate and distinct from its stockholders. However, the statutorily granted privilege

of a corporate veil may be used only for legitimate purposes. 31 On equitable

considerations, the veil can be disregarded when it is utilized as a shield to commit
fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or
serve as a mere alter ego or business conduit of a person or an instrumentality,
agency or adjunct of another corporation. 32
Thus, the Court has consistently ruled that "[w]hen the fiction is used as a means of
perpetrating a fraud or an illegal act or as vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievement or perfection of a monopoly
or generally the perpetration of knavery or crime, the veil with which the law covers
and isolates the corporation from the members or stockholders who compose it will
be lifted to allow for its consideration merely as an aggregation of individuals." 33
We stress that the corporate fiction should be set aside when it becomes a shield
against liability for fraud, illegality or inequity committed on third persons. The
question of piercing the veil of corporate fiction is essentially, then, a matter of proof.
In the present case, however, the Court finds no reason to pierce the corporate veil of
Respondent Motorich. Petitioner utterly failed to establish that said corporation was
formed, or that it is operated, for the purpose of shielding any alleged fraudulent or
illegal activities of its officers or stockholders; or that the said veil was used to conceal
fraud, illegality or inequity at the expense of third persons like petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96
of the Corporation Code defines a close corporation as follows:
Sec. 96. Definition and Applicability of Title. A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that: (1) All of the
corporation's issued stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons, not exceeding twenty (20);
(2) All of the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and (3) The corporation shall not list in
any stock exchange or make any public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall be deemed not a close corporation
when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled
by another corporation which is not a close corporation within the meaning of this
Code. . . . .
The articles of incorporation 34 of Motorich Sales Corporation does not contain any
provision stating that (1) the number of stockholders shall not exceed 20, or (2) a
preemption of shares is restricted in favor of any stockholder or of the corporation, or
(3) listing its stocks in any stock exchange or making a public offering of such stocks
is prohibited. From its articles, it is clear that Respondent Motorich is not a close
corporation. 35 Motorich does not become one either, just because Spouses Reynaldo
and Nenita Gruenberg owned 99.866% of its subscribed capital stock. The "[m]ere
ownership by a single stockholder or by another corporation of all or capital stock of a
corporation is not of itself sufficient ground for disregarding the separate corporate
personalities." 36 So, too, a narrow distribution of ownership does not, by itself, make
a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals 37 wherein the
Court ruled that ". . . petitioner corporation is classified as a close corporation and,
consequently, a board resolution authorizing the sale or mortgage of the subject

property is not necessary to bind the corporation for the action of its president." 38 But
the factual milieu in Dulay is not on all fours with the present case. In Dulay, the sale
of real property was contracted by the president of a close corporation with the
knowledge and acquiescence of its board of directors. 39 In the present case, Motorich
is not a close corporation, as previously discussed, and the agreement was entered
into by the corporate treasurer without the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where "an action by a
director, who singly is the controlling stockholder, may be considered as a binding
corporate act and a board action as nothing more than a mere formality." 40 The
present case, however, is not one of them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own "almost
99.866%" of Respondent Motorich.41 Since Nenita is not the sole controlling
stockholder of Motorich, the aforementioned exception does not apply.
Grantingarguendo that the corporate veil of Motorich is to be disregarded, the subject
parcel of land would then be treated as conjugal property of Spouses Gruenberg,
because the same was acquired during their marriage. There being no indication that
said spouses, who appear to have been married before the effectivity of the Family
Code, have agreed to a different property regime, their property relations would be
governed by conjugal partnership of gains. 42 As a consequence, Nenita Gruenberg
could not have effected a sale of the subject lot because "[t]here is no co-ownership
between the spouses in the properties of the conjugal partnership of gains. Hence,
neither spouse can alienate in favor of another his or interest in the partnership or in
any property belonging to it; neither spouse can ask for a partition of the properties
before the partnership has been legally dissolved." 43
Assuming further, for the sake of argument, that the spouses' property regime is the
absolute community of property, the sale would still be invalid. Under this regime,
"alienation of community property must have the written consent of the other spouse
or he authority of the court without which the disposition or encumbrance
is void." 44 Both requirements are manifestly absent in the instant case.
Third Issue: Challenged Portion of TSN Immaterial
Petitioner calls our attention to the following excerpt of the transcript of stenographic
notes (TSN):
Q Did you ever represent to Mr. Co that you were authorized by the corporation to sell
the property?
A Yes, sir. 45
Petitioner claims that the answer "Yes" was crossed out, and, in its place was written
a "No" with an initial scribbled above it. 46 This, however, is insufficient to prove that
Nenita Gruenberg was authorized to represent Respondent Motorich in the sale of its
immovable property. Said excerpt be understood in the context of her whole
testimony. During her cross-examination. Respondent Gruenberg testified:
Q So, you signed in your capacity as the treasurer?
[A] Yes, sir.

Q Even then you kn[e]w all along that you [were] not authorized?
A Yes, sir.

was deposited with the account of Aren Commercial c/o Motorich Sales
Corporation." 50 Respondent Gruenberg, however, disputes the allegations of
petitioner. She testified as follows:

Q You stated on direct examination that you did not represent that you were
authorized to sell the property?

Q You voluntarily accepted the P100,000.00, as a matter of fact, that was encashed,
the check was encashed.

A Yes, sir.

A Yes. sir, the check was paid in my name and I deposit[ed] it.

Q But you also did not say that you were not authorized to sell the property, you did
not tell that to Mr. Co, is that correct?

Q In your account?
A Yes, sir. 51

A That was not asked of me.

In any event, Gruenberg offered to return the amount to petitioner ". . . since the sale
did not push through." 52

Q Yes, just answer it.

A I just told them that I was the treasurer of the corporation and it [was] also the
president who [was] also authorized to sign on behalf of the corporation.
Q You did not say that you were not authorized nor did you say that you were
authorized?
A Mr. Co was very interested to purchase the property and he offered to put up a
P100,000.00 earnest money at that time. That was our first meeting. 47
Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell
its property. On the other hand, her testimony demonstrates that the president of
Petitioner Corporation, in his great desire to buy the property, threw caution to the
wind by offering and paying the earnest money without first verifying Gruenberg's
authority to sell the lot.
Fourth
Damages and Attorney's Fees

Issue:

Finally, petitioner prays for damages and attorney's fees, alleging that "[i]n an utter
display of malice and bad faith, respondents attempted and succeeded in impressing
on the trial court and [the] Court of Appeals that Gruenberg did not represent herself
as authorized by Respondent Motorich despite the receipt issued by the former
specifically indicating that she was signing on behalf of Motorich Sales Corporation.
Respondent Motorich likewise acted in bad faith when it claimed it did not authorize
Respondent Gruenberg and that the contract [was] not binding, [insofar] as it [was]
concerned, despite receipt and enjoyment of the proceeds of Gruenberg's
act." 48Assuming that Respondent Motorich was not a party to the alleged fraud,
petitioner maintains that Respondent Gruenberg should be held liable because she
"acted fraudulently and in bad faith [in] representing herself as duly authorized by
[R]espondent [C]orporation." 49
As already stated, we sustain the findings of both the trial and the appellate courts
that the foregoing allegations lack factual bases. Hence, an award of damages or
attorney's fees cannot be justified. The amount paid as "earnest money" was not
proven to have redounded to the benefit of Respondent Motorich. Petitioner claims
that said amount was deposited to the account of Respondent Motorich, because "it

Moreover, we note that Andres Co is not a neophyte in the world of corporate

business. He has been the president of Petitioner Corporation for more than ten years
and has also served as chief executive of two other corporate entities. 53 Co cannot
feign ignorance of the scope of the authority of a corporate treasurer such as
Gruenberg. Neither can he be oblivious to his duty to ascertain the scope of
Gruenberg's authorization to enter into a contract to sell a parcel of land belonging to
Motorich.
Indeed, petitioner's claim of fraud and bad faith is unsubstantiated and fails to
persuade the Court. Indubitably, petitioner appears to be the victim of its own officer's
negligence in entering into a contract with and paying an unauthorized officer of
another corporation.
As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be
ordered to return to petitioner the amount she received as earnest money, as "no one
shall enrich himself at the expense of another." 54 a principle embodied in Article 2154
of Civil Code. 55 Although there was no binding relation between them, petitioner paid
Gruenberg on the mistaken belief that she had the authority to sell the property of
Motorich. 56 Article 2155 of Civil Code provides that "[p]ayment by reason of a mistake
in the contruction or application of a difficult question of law may come within the
scope of the preceding article."
WHEREFORE, the petition is hereby DENIED and the assailed Decision is
AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 173463
October 13, 2010

GLOBAL BUSINESS HOLDINGS, INC. (formerly Global Business Bank, Inc.),

Petitioner,
vs.
SURECOMP SOFTWARE, B.V., Respondent.
DECISION
NACHURA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court, assailing the Decision1 dated May 5, 2006 and the Resolution2 dated July 10,
2006 of the Court of Appeals (CA) in CA-G.R. SP No. 75524.

stressed that it could not be held accountable for any breach as the agreement was
entered into between Surecomp and ABC. It had not, in any manner, taken part in the
negotiation and execution of the agreement but merely took over the operations of
ABC as a result of the merger. On the second ground, Global averred that the
agreement, being a technology transfer arrangement, failed to comply with Sections
87 and 88 of the Intellectual Property Code of the Philippines.8
In the interim, Global filed a motion for leave to serve written interrogatories to
Surecomp in preparation for the hearing on the motion to dismiss, attaching thereto
its written interrogatories.
After an exchange of pleadings on the motions filed by Global, on June 18, 2002, the
RTC issued an Order,9 the pertinent portions of which read:

The facts of the case are as follows:

On March 29, 1999, respondent Surecomp Software, B.V. (Surecomp), a foreign
corporation duly organized and existing under the laws of the Netherlands, entered
into a software license agreement with Asian Bank Corporation (ABC), a domestic
corporation, for the use of its IMEX Software System (System) in the banks computer
system for a period of twenty (20) years.3
In July 2000, ABC merged with petitioner Global Business Holdings, Inc. (Global),4
with Global as the surviving corporation. When Global took over the operations of
ABC, it found the System unworkable for its operations, and informed Surecomp of its
decision to discontinue with the agreement and to stop further payments thereon.
Consequently, for failure of Global to pay its obligations under the agreement despite
demands, Surecomp filed a complaint for breach of contract with damages before the
Regional Trial Court (RTC) of Makati. The case was docketed as Civil Case No. 011278.5
In its complaint, Surecomp alleged that it is a foreign corporation not doing business
in the Philippines and is suing on an isolated transaction. Pursuant to the agreement,
it installed the System in ABCs computers for a consideration of US$298,000.00 as
license fee. ABC also undertook to pay Surecomp professional services, which
included on-site support and development of interfaces, and annual maintenance fees
for five (5) subsequent anniversaries, and committed to purchase one (1) or two (2)
Remote Access solutions at discounted prices. In a separate transaction, ABC
requested Surecomp to purchase on its behalf a software called MF Cobol Runtime
with a promise to reimburse its cost. Notwithstanding the delivery of the product and
the services provided, Global failed to pay and comply with its obligations under the
agreement. Thus, Surecomp demanded payment of actual damages amounting to
US$319,955.00 and an additional amount of US$227,610.00 for Globals unilateral
pretermination of the agreement, exemplary damages, attorneys fees and costs of
suit.6
Instead of filing an answer, Global filed a motion to dismiss based on two grounds: (1)
that Surecomp had no capacity to sue because it was doing business in the
Philippines without a license; and (2) that the claim on which the action was founded
was unenforceable under the Intellectual Property Code of the Philippines.7
On the first ground, Global argued that the contract entered into was not an isolated
transaction since the contract was for a period of 20 years. Furthermore, Global

After a thorough and careful deliberation of the respective arguments advanced by

the parties in support of their positions in these two (2) incidents, and since it cannot
be denied that there is indeed a contract entered into between the plaintiff [Surecomp]
and the defendant [Global], the latter as a successor in interest of the merging
corporation Asian Bank, defendant [Global] is estopped from denying plaintiffs
[Surecomps] capacity to sue it for alleged breach of that contract with damages. Its
argument that it was not the one who actually contracted with the plaintiff [Surecomp]
as it was the merging Asian Bank which did, is of no moment as it does not relieve
defendant Global Bank of its contractual obligation under the Agreement on account
of its undertaking under it:
"x x x shall be responsible for all the liabilities and obligations of ASIANBANK in the
same manner as if the Merged Bank had itself incurred such liabilities or obligations,
and any pending claim, action or proceeding brought by or against ASIANBANK may
be prosecuted by or against the Merged Bank. The right of creditors or liens upon the
property of ASIANBANK shall not be impaired by the merger; provided that the
Merged Bank shall have the right to exercise all defenses, rights, privileges, set-offs
and counter-claims of every kind and nature which ASIANBANK may have, or with
the Merged Bank may invoke under existing laws."
It appearing however that the second ground relied upon by the defendant [Global],
i.e., that the cause of action of the plaintiff is anchored on an unenforceable contract
under the provision of the Intellectual Property Code, will require a hearing before the
motion to dismiss can be resolved and considering the established jurisprudence in
this jurisdiction, that availment of mode of discovery by any of the parties to a
litigation, shall be liberally construed to the end that the truth of the controversy on
hand, shall be ascertained at a less expense with the concomitant facility and
expeditiousness, the motion to serve written interrogatories upon the plaintiff
[Surecomp] filed by the defendant [Global] is GRANTED insofar as the alleged
unenforceability of the subject contract is concerned. Accordingly, the latter is directed
to serve the written interrogatories upon the plaintiff [Surecomp], which is required to
act on it in accordance with the pertinent rule on the matter.
Necessarily, the resolution of the motion to dismiss is held in abeyance until after a
hearing on it is property conducted, relative to the second ground aforementioned.
SO ORDERED.10

Surecomp moved for partial reconsideration, praying for an outright denial of the
motion to dismiss, while Global filed a motion for reconsideration.11

A motion for reconsideration was filed by Global. On July 10, 2006, the CA issued a
Resolution18 denying the motion for reconsideration for lack of merit.

On November 27, 2002, the RTC issued an Order,12 the fallo of which reads:

Hence, this petition.

WHEREFORE, the Order of this Court dated 18 June 2002 is modified. Defendants
[Globals] Motion to Dismiss dated 17 October 2001 is denied on the two grounds
therein alleged. Defendant [Global] is given five (5) days from receipt of this Order
within which to file its Answer.

Global presents the following issues for resolution: (1) whether a special civil action
for certiorari is the proper remedy for a denial of a motion to dismiss; and (2) whether
Global is estopped from questioning Surecomps capacity to sue.19
The petition is bereft of merit.

The resolution of defendants [Globals] Motion to Serve Written Interrogatories is held

in abeyance pending the filing of the Answer.
SO ORDERED.13
In partially modifying the first assailed Order, the RTC ratiocinated, viz.:
This court sees no reason to further belabor the issue on plaintiffs capacity to sue
since there is a prima facie showing that defendant entered into a contract with
defendant and having done so, willingly, it cannot now be made to raise the issue of
capacity to sue [Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824]. That defendant
was not aware of plaintiffs lack of capacity to sue or that defendant did not benefit
from the transaction are arguments that are hardly supported by the evidence already
presented for the resolution of the Motion to Dismiss.
As to the issue of unenforceability of the subject contract under the Intellectual
Property Code, this court finds justification in modifying the earlier Order allowing the
further presentation of evidence. It appearing that the subject contract between the
parties is an executed, rather than an executory, contract the statute of frauds
therefore finds no application here.
xxxx
As to defendants Motion to Serve Written Interrogatories, this court finds that resort
to such a discovery mechanism while laudable is premature as defendant has yet to
file its Answer. As the case now stands, the issues are not yet joined and the disputed
facts are not clear.14

I
An order denying a motion to dismiss is an interlocutory order which neither
terminates nor finally disposes of a case as it leaves something to be done by the
court before the case is finally decided on the merits. As such, the general rule is that
the denial of a motion to dismiss cannot be questioned in a special civil action for
certiorari which is a remedy designed to correct errors of jurisdiction and not errors of
judgment.20
To justify the grant of the extraordinary remedy of certiorari, the denial of the motion to
dismiss must have been tainted with grave abuse of discretion. By "grave abuse of
discretion" is meant such capricious and whimsical exercise of judgment that is
equivalent to lack of jurisdiction. The abuse of discretion must be grave as where the
power is exercised in an arbitrary or despotic manner by reason of passion or
personal hostility, and must be so patent and gross as to amount to an evasion of
positive duty or to a virtual refusal to perform the duty enjoined by or to act all in
contemplation of law.21
In the instant case, Global did not properly substantiate its claim of arbitrariness on
the part of the trial court judge that issued the assailed orders denying the motion to
dismiss. In a petition for certiorari, absent such showing of arbitrariness,
capriciousness, or ill motive in the disposition of the trial judge in the case, we are
constrained to uphold the courts ruling, especially because its decision was upheld
by the CA.
II

Undaunted, Global filed a petition for certiorari with prayer for the issuance of a
temporary restraining order and/or writ of preliminary injunction under Rule 65 of the
Rules of Court before the CA, contending that the RTC abused its discretion and
acted in excess of its jurisdiction.15

The determination of a corporations capacity is a factual question that requires the

elicitation of a preponderant set of facts.22 As a rule, unlicensed foreign non-resident
corporations doing business in the Philippines cannot file suits in the Philippines.23
This is mandated under Section 133 of the Corporation Code, which reads:

On May 5, 2006, the CA rendered a Decision,16 the dispositive portion of which

reads:

Sec. 133. Doing business without a license. - No foreign corporation transacting

business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines, but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.

WHEREFORE, premises considered, the instant petition is DENIED. The assailed

Orders dated June 18, 2002 and November 27, 2002 of the Regional Trial Court of
Makati City, Branch 146, in Civil Case No. 01-1278 are hereby AFFIRMED.
SO ORDERED.17

A corporation has a legal status only within the state or territory in which it was
organized. For this reason, a corporation organized in another country has no

personality to file suits in the Philippines. In order to subject a foreign corporation

doing business in the country to the jurisdiction of our courts, it must acquire a license
from the Securities and Exchange Commission and appoint an agent for service of
process. Without such license, it cannot institute a suit in the Philippines.241avvphi1

vs.
HON. COURT OF APPEALS and GENERAL CREDIT CORPORATION,
respondents.
DECISION

The exception to this rule is the doctrine of estoppel. Global is estopped from
challenging Surecomps capacity to sue.
A foreign corporation doing business in the Philippines without license may sue in
Philippine courts a Filipino citizen or a Philippine entity that had contracted with and
benefited from it.25 A party is estopped from challenging the personality of a
corporation after having acknowledged the same by entering into a contract with it.26
The principle is applied to prevent a person contracting with a foreign corporation
from later taking advantage of its noncompliance with the statutes, chiefly in cases
where such person has received the benefits of the contract. 27
Due to Globals merger with ABC and because it is the surviving corporation, it is as if
it was the one which entered into contract with Surecomp. In the merger of two
existing corporations, one of the corporations survives and continues the business,
while the other is dissolved, and all its rights, properties, and liabilities are acquired by
the surviving corporation.28 This is particularly true in this case. Based on the
findings of fact of the RTC, as affirmed by the CA, under the terms of the merger or
consolidation, Global assumed all the liabilities and obligations of ABC as if it had
incurred such liabilities or obligations itself. In the same way, Global also has the right
to exercise all defenses, rights, privileges, and counter-claims of every kind and
nature which ABC may have or invoke under the law. These findings of fact were
never contested by Global in any of its pleadings filed before this Court.
WHEREFORE, in view of the foregoing, the Decision dated May 5, 2006 and the
Resolution dated July 10, 2006 of the Court of Appeals in CA-G.R. SP No. 75524 are
hereby AFFIRMED. Costs against petitioner.
SO ORDERED.

YNARES-SANTIAGO, J.:
Assailed in this petition for review is the consolidated decision of the Court of Appeals
dated July 7, 1994, which reversed the separate decisions of the Regional Trial Court
of Pasig City and the Regional Trial Court of Quezon City in two cases between
petitioner Reynoso and respondent General Credit Corporation (GCC).
Sometime in the early 1960s, the Commercial Credit Corporation (hereinafter,
CCC), a financing and investment firm, decided to organize franchise companies in
different parts of the country, wherein it shall hold thirty percent (30%) equity.
Employees of the CCC were designated as resident managers of the franchise
companies. Petitioner Bibiano O. Reynoso, IV was designated as the resident
manager of the franchise company in Quezon City, known as the Commercial Credit
Corporation of Quezon City (hereinafter, CCC-QC).
CCC-QC entered into an exclusive management contract with CCC whereby the
latter was granted the management and full control of the business activities of the
former. Under the contract, CCC-QC shall sell, discount and/or assign its receivables
to CCC. Subsequently, however, this discounting arrangement was discontinued
pursuant to the so-called DOSRI Rule, prohibiting the lending of funds by
corporations to its directors, officers, stockholders and other persons with related
interests therein.
On account of the new restrictions imposed by the Central Bank policy by virtue of the
DOSRI Rule, CCC decided to form CCC Equity Corporation, (hereinafter, CCCEquity), a wholly-owned subsidiary, to which CCC transferred its thirty (30%) percent
equity in CCC-QC, together with two seats in the latters Board of Directors.
Under the new set-up, several officials of Commercial Credit Corporation, including
petitioner Reynoso, became employees of CCC-Equity. While petitioner continued to
be the Resident Manager of CCC-QC, he drew his salaries and allowances from
CCC-Equity. Furthermore, although an employee of CCC-Equity, petitioner, as well
as all employees of CCC-QC, became qualified members of the Commercial Credit
Corporation Employees Pension Plan.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. Nos. 116124-25 November 22, 2000
BIBIANO O. REYNOSO, IV, petitioner,

As Resident Manager of CCC-QC, petitioner oversaw the operations of CCC-QC and

supervised its employees. The business activities of CCC-QC pertain to the
acceptance of funds from depositors who are issued interest-bearing promissory
notes. The amounts deposited are then loaned out to various borrowers. Petitioner,
in order to boost the business activities of CCC-QC, deposited his personal funds in
the company. In return, CCC-QC issued to him its interest-bearing promissory notes.
On August 15, 1980, a complaint for sum of money with preliminary attachment,[1]
docketed as Civil Case No. Q-30583, was instituted in the then Court of First Instance
of Rizal by CCC-QC against petitioner, who had in the meantime been dismissed
from his employment by CCC-Equity. The complaint was subsequently amended in

order to include Hidelita Nuval, petitioners wife, as a party defendant.[2] The

complaint alleged that petitioner embezzled the funds of CCC-QC amounting to
P1,300,593.11. Out of this amount, at least P630,000.00 was used for the purchase
of a house and lot located at No. 12 Macopa Street, Valle Verde I, Pasig City. The
property was mortgaged to CCC, and was later foreclosed.
In his amended Answer, petitioner denied having unlawfully used funds of CCC-QC
and asserted that the sum of P1,300,593.11 represented his money placements in
CCC-QC, as shown by twenty-three (23) checks which he issued to the said
company.[3]
The case was subsequently transferred to the Regional Trial Court of Quezon City,
Branch 86, pursuant to the Judiciary Reorganization Act of 1980.
On January 14, 1985, the trial court rendered its decision, the decretal portion of
which states:
Premises considered, the Court finds the complaint without merit. Accordingly, said
complaint is hereby DISMISSED.
By reason of said complaint, defendant Bibiano Reynoso IV suffered degradation,
humiliation and mental anguish.
On the counterclaim, which the Court finds to be meritorious, plaintiff corporation is
hereby ordered:
a)
to pay defendant the sum of P185,000.00 plus 14% interest per annum from
October 2, 1980 until fully paid;
b)
to pay defendant P3,639,470.82 plus interest thereon at the rate of 14% per
annum from June 24, 1981, the date of filing of Amended Answer, until fully paid; from
this amount may be deducted the remaining obligation of defendant under the
promissory note of October 24, 1977, in the sum of P9,738.00 plus penalty at the
rate of 1% per month from December 24, 1977 until fully paid;
c)

to pay defendants P200,000.00 as moral damages;

d)

to pay defendants P100,000.00 as exemplary damages;

e)

to pay defendants P25,000.00 as and for attorneys fees; plus costs of the suit.

SO ORDERED.
Both parties appealed to the then Intermediate Appellate Court. The appeal of
Commercial Credit Corporation of Quezon City was dismissed for failure to pay
docket fees. Petitioner, on the other hand, withdrew his appeal.
Hence, the decision became final and, accordingly, a Writ of Execution was issued on
July 24, 1989.[4] However, the judgment remained unsatisfied,[5]prompting petitioner
to file a Motion for Alias Writ of Execution, Examination of Judgment Debtor, and to
Bring Financial Records for Examination to Court. CCC-QC filed an Opposition to

petitioners motion,[6] alleging that the possession of its premises and records had
been taken over by CCC.
Meanwhile, in 1983, CCC became known as the General Credit Corporation.
On November 22, 1991, the Regional Trial Court of Quezon City issued an Order
directing General Credit Corporation to file its comment on petitioners motion for alias
writ of execution.[7] General Credit Corporation filed a Special Appearance and
Opposition on December 2, 1991,[8] alleging that it was not a party to the case, and
therefore petitioner should direct his claim against CCC-QC and not General Credit
Corporation. Petitioner filed his reply,[9] stating that the CCC-QC is an adjunct
instrumentality, conduit and agency of CCC. Furthermore, petitioner invoked the
decision of the Securities and Exchange Commission in SEC Case No. 2581, entitled,
Avelina G. Ramoso, et al., Petitioner versus General Credit Corp., et al.,
Respondents, where it was declared that General Credit Corporation, CCC-Equity
and other franchised companies including CCC-QC were declared as one
corporation.
On December 9, 1991, the Regional Trial Court of Quezon City ordered the issuance
of an alias writ of execution.[10] On December 20, 1991, General Credit Corporation
filed an Omnibus Motion,[11] alleging that SEC Case No. 2581 was still pending
appeal, and maintaining that the levy on properties of the General Credit Corporation
by the deputy sheriff of the court was erroneous.
In his Opposition to the Omnibus Motion, petitioner insisted that General Credit
Corporation is just the new name of Commercial Credit Corporation; hence, General
Credit Corporation and Commercial Credit Corporation should be treated as one and
the same entity.
On February 13, 1992, the Regional Trial Court of Quezon City denied the Omnibus
Motion.[12] On March 5, 1992, it issued an Order directing the issuance of an alias
writ of execution.[13]
Previously, on February 21, 1992, General Credit Corporation instituted a complaint
before the Regional Trial Court of Pasig against Bibiano Reynoso IV and Edgardo C.
Tanangco, in his capacity as Deputy Sheriff of Quezon City,[14] docketed as Civil
Case No. 61777, praying that the levy on its parcel of land located in Pasig, Metro
Manila and covered by Transfer Certificate of Title No. 29940 be declared null and
void, and that defendant sheriff be enjoined from consolidating ownership over the
land and from further levying on other properties of General Credit Corporation to
answer for any liability under the decision in Civil Case No. Q-30583.
The Regional Trial Court of Pasig, Branch 167, did not issue a temporary restraining
order. Thus, General Credit Corporation instituted two (2) petitions for certiorari with
the Court of Appeals, docketed as CA-G.R. SP No. 27518[15] and CA-G.R. SP No.
27683. These cases were later consolidated.
On July 7, 1994, the Court of Appeals rendered a decision in the two consolidated
cases, the dispositive portion of which reads:
WHEREFORE, in SP No. 27518 we declare the issue of the respondent courts
refusal to issue a restraining order as having been rendered moot by our Resolution

of 7 April 1992 which, by way of injunctive relief, provided that the respondents and
their representatives are hereby enjoined from conducting an auction sale (on
execution) of petitioners properties as well as initiating similar acts of levying (upon)
and selling on execution other properties of said petitioner. The injunction thus
granted, as modified by the words in parenthesis, shall remain in force until Civil Case
No. 61777 shall have been finally terminated.
In SP No. 27683, we grant the petition for certiorari and accordingly NULLIFY and
SET ASIDE, for having been issued in excess of jurisdiction, the Order of 13 February
1992 in Civil Case No. Q-30583 as well as any other order or process through which
the petitioner is made liable under the judgment in said Civil Case No. Q-30583.
No damages and no costs.
SO ORDERED.[16]
Hence, this petition for review anchored on the following arguments:
1. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27683
WHEN IT NULLIFIED AND SET ASIDE THE 13 FEBRUARY 1992 ORDER AND
OTHER ORDERS OR PROCESS OF BRANCH 86 OF THE REGIONAL TRIAL
COURT OF QUEZON CITY THROUGH WHICH GENERAL CREDIT CORPORATION
IS MADE LIABLE UNDER THE JUDGMENT THAT WAS RENDERED IN CIVIL CASE
NO. Q-30583.
2. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27518
WHEN IT ENJOINED THE AUCTION SALE ON EXECUTION OF THE PROPERTIES
OF GENERAL CREDIT CORPORATION AS WELL AS INITIATING SIMILAR ACTS
OF LEVYING UPON AND SELLING ON EXECUTION OF OTHER PROPERTIES OF
GENERAL CREDIT CORPORATION.
3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT GENERAL
CREDIT CORPORATION IS A STRANGER TO CIVIL CASE NO. Q-30583, INSTEAD
OF, DECLARING THAT COMMERCIAL CREDIT CORPORATION OF QUEZON CITY
IS THE ALTER EGO, INSTRUMENTALITY, CONDUIT OR ADJUNCT OF
COMMERCIAL CREDIT CORPORATION AND ITS SUCCESSOR GENERAL
CREDIT CORPORATION.
At the outset, it must be stressed that there is no longer any controversy over
petitioners claims against his former employer, CCC-QC, inasmuch as the decision in
Civil Case No. Q-30583 of the Regional Trial Court of Quezon City has long become
final and executory. The only issue, therefore, to be resolved in the instant petition is
whether or not the judgment in favor of petitioner may be executed against
respondent General Credit Corporation. The latter contends that it is a corporation
separate and distinct from CCC-QC and, therefore, its properties may not be levied
upon to satisfy the monetary judgment in favor of petitioner. In short, respondent
raises corporate fiction as its defense. Hence, we are necessarily called upon to
apply the doctrine of piercing the veil of corporate entity in order to determine if
General Credit Corporation, formerly CCC, may be held liable for the obligations of
CCC-QC.
The petition is impressed with merit.

A corporation is an artificial being created by operation of law, having the right of

succession and the powers, attributes, and properties expressly authorized by law or
incident to its existence.[17] It is an artificial being invested by law with a personality
separate and distinct from those of the persons composing it as well as from that of
any other legal entity to which it may be related.[18] It was evolved to make possible
the aggregation and assembling of huge amounts of capital upon which big business
depends. It also has the advantage of non-dependence on the lives of those who
compose it even as it enjoys certain rights and conducts activities of natural persons.
Precisely because the corporation is such a prevalent and dominating factor in the
business life of the country, the law has to look carefully into the exercise of powers
by these artificial persons it has created.
Any piercing of the corporate veil has to be done with caution. However, the Court
will not hesitate to use its supervisory and adjudicative powers where the corporate
fiction is used as an unfair device to achieve an inequitable result, defraud creditors,
evade contracts and obligations, or to shield it from the effects of a court decision.
The corporate fiction has to be disregarded when necessary in the interest of justice.
In First Philippine International Bank v. Court of Appeals, et al.,[19] we held:
When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or generally the perpetration of knavery or
crime, the veil with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for its consideration
merely as an aggregation of individuals.
Also in the above-cited case, we stated that this Court has pierced the veil of
corporate fiction in numerous cases where it was used, among others, to avoid a
judgment credit;[20] to avoid inclusion of corporate assets as part of the estate of a
decedent;[21] to avoid liability arising from debt;[22] when made use of as a shield to
perpetrate fraud and/or confuse legitimate issues;[23] or to promote unfair objectives
or otherwise to shield them.[24]
In the appealed judgment, the Court of Appeals sustained respondents arguments of
separateness and its character as a different corporation which is a non-party or
stranger to this case.
The defense of separateness will be disregarded where the business affairs of a
subsidiary corporation are so controlled by the mother corporation to the extent that it
becomes an instrument or agent of its parent. But even when there is dominance
over the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction
applies only when such fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime.[25]
We stated in Tomas Lao Construction v. National Labor Relations Commission,[26]
that the legal fiction of a corporation being a judicial entity with a distinct and separate
personality was envisaged for convenience and to serve justice. Therefore, it should
not be used as a subterfuge to commit injustice and circumvent the law.
Precisely for the above reasons, we grant the instant petition.

It is obvious that the use by CCC-QC of the same name of Commercial Credit
Corporation was intended to publicly identify it as a component of the CCC group of
companies engaged in one and the same business, i.e., investment and financing.
Aside from CCC-Quezon City, other franchise companies were organized such as
CCC-North Manila and CCC-Cagayan Valley. The organization of subsidiary
corporations as what was done here is usually resorted to for the aggrupation of
capital, the ability to cover more territory and population, the decentralization of
activities best decentralized, and the securing of other legitimate advantages. But
when the mother corporation and its subsidiary cease to act in good faith and honest
business judgment, when the corporate device is used by the parent to avoid its
liability for legitimate obligations of the subsidiary, and when the corporate fiction is
used to perpetrate fraud or promote injustice, the law steps in to remedy the problem.
When that happens, the corporate character is not necessarily abrogated. It
continues for legitimate objectives. However, it is pierced in order to remedy injustice,
such as that inflicted in this case.
Factually and legally, the CCC had dominant control of the business operations of
CCC-QC. The exclusive management contract insured that CCC-QC would be
managed and controlled by CCC and would not deviate from the commands of the
mother corporation. In addition to the exclusive management contract, CCC
appointed its own employee, petitioner, as the resident manager of CCC-QC.
Petitioners designation as resident manager implies that he was placed in CCC-QC
by a superior authority. In fact, even after his assignment to the subsidiary
corporation, petitioner continued to receive his salaries, allowances, and benefits from
CCC, which later became respondent General Credit Corporation. Not only that.
Petitioner and the other permanent employees of CCC-QC were qualified members
and participants of the Employees Pension Plan of CCC.
There are other indications in the record which attest to the applicability of the identity
rule in this case, namely: the unity of interests, management, and control; the
transfer of funds to suit their individual corporate conveniences; and the dominance of
policy and practice by the mother corporation insure that CCC-QC was an
instrumentality or agency of CCC.
As petitioner stresses, both CCC and CCC-QC were engaged in the same principal
line of business involving a single transaction process. Under their discounting
arrangements, CCC financed the operations of CCC-QC. The subsidiary sold,
discounted, or assigned its accounts receivables to CCC.
The testimony of Joselito D. Liwanag, accountant and auditor of CCC since 1971,
shows the pervasive and intensive auditing function of CCC over CCC-QC.[27] The
two corporations also shared the same office space. CCC-QC had no office of its
own.

CCC-QC. The judgment award in this case arose from the counterclaim which
petitioner set up against CCC-QC.
The circumstances which led to the filing of the aforesaid complaint are quite
revealing. As narrated above, the discounting agreements through which CCC
controlled the finances of its subordinates became unlawful when Central Bank
adopted the DOSRI prohibitions. Under this rule the directors, officers, and
stockholders are prohibited from borrowing from their company. Instead of adhering
to the letter and spirit of the regulations by avoiding DOSRI loans altogether, CCC
used the corporate device to continue the prohibited practice. CCC organized still
another corporation, the CCC-Equity Corporation. However, as a wholly owned
subsidiary, CCC-Equity was in fact only another name for CCC. Key officials of CCC,
including the resident managers of subsidiary corporations, were appointed to
positions in CCC-Equity.
In order to circumvent the Central Banks disapproval of CCC-QCs mode of reducing
its DOSRI lender accounts and its directive to follow Central Bank requirements,
resident managers, including petitioner, were told to observe a pseudo-compliance
with the phasing out orders. For his unwillingness to satisfactorily conform to these
directives and his reluctance to resort to illegal practices, petitioner earned the ire of
his employers. Eventually, his services were terminated, and criminal and civil cases
were filed against him.
Petitioner issued twenty-three checks as money placements with CCC-QC because
of difficulties faced by the firm in implementing the required phase-out program.
Funds from his current account in the Far East Bank and Trust Company were
transferred to CCC-QC. These monies were alleged in the criminal complaints
against him as having been stolen. Complaints for qualified theft and estafa were
brought by CCC-QC against petitioner. These criminal cases were later dismissed.
Similarly, the civil complaint which was filed with the Court of First Instance of Pasig
and later transferred to the Regional Trial Court of Quezon City was dismissed, but
his counterclaims were granted.
Faced with the financial obligations which CCC-QC had to satisfy, the mother firm
closed CCC-QC, in obvious fraud of its creditors. CCC-QC, instead of opposing its
closure, cooperated in its own demise. Conveniently, CCC-QC stated in its
opposition to the motion for alias writ of execution that all its properties and assets
had been transferred and taken over by CCC.
Under the foregoing circumstances, the contention of respondent General Credit
Corporation, the new name of CCC, that the corporate fiction should be appreciated
in its favor is without merit.

The complaint in Civil Case No. Q-30583, instituted by CCC-QC, was even verified by
the director-representative of CCC. The lawyers who filed the complaint and
amended complaint were all in-house lawyers of CCC.

Paraphrasing the ruling in Claparols v. Court of Industrial Relations,[28] reiterated in

Concept Builders Inc. v. National Labor Relations,[29] it is very obvious that
respondent seeks the protective shield of a corporate fiction whose veil the present
case could, and should, be pierced as it was deliberately and maliciously designed to
evade its financial obligation of its employees.

The challenged decision of the Court of Appeals states that CCC, now General Credit
Corporation, is not a formal party in the case. The reason for this is that the
complaint was filed by CCC-QC against petitioner. The choice of parties was with

If the corporate fiction is sustained, it becomes a handy deception to avoid a

judgment debt and work an injustice. The decision raised to us for review is an
invitation to multiplicity of litigation. As we stated in Islamic Directorate vs. Court of

Appeals,[30] the ends of justice are not served if further litigation is encouraged when
the issue is determinable based on the records.
A court judgment becomes useless and ineffective if the employer, in this case CCC
as a mother corporation, is placed beyond the legal reach of the judgment creditor
who, after protracted litigation, has been found entitled to positive relief. Courts have
been organized to put an end to controversy. This purpose should not be negated by
an inapplicable and wrong use of the fiction of the corporate veil.
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and
ASIDE. The injunction against the holding of an auction sale for the execution of the
decision in Civil Case No. Q-30583 of properties of General Credit Corporation, and
the levying upon and selling on execution of other properties of General Credit
Corporation, is LIFTED.
SO ORDERED.

KAPUNAN, J.:
In a petition for review on certiorari under Rule 45 of the Revised Rules of Court,
petitioner seeks to annul and set aside the Court of Appeals' decision in C.A. CV G.R.
S.P. No. 55374 dated March 27, 2000, affirming the Order issuing a writ of preliminary
injunction of the Regional Trial Court of Makati, Branch 147 dated June 30, 1999, and
its Order dated October 4, 1999, which denied petitioner's motion to dismiss.
The antecedents of this case are as follows:
Petitioner Philippine National Bank is a domestic corporation organized and existing
under Philippine law. Meanwhile, respondents Ritratto Group, Inc., Riatto
International, Inc. and Dadasan General Merchandise are domestic corporations,
likewise, organized and existing under Philippine law.
On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of
PNB, organized and doing business in Hong Kong, extended a letter of credit in favor
of the respondents in the amount of US$300,000.00 secured by real estate
mortgages constituted over four (4) parcels of land in Makati City. This credit facility
was later increased successively to US$1,140,000.00 in September 1996; to
US$1,290,000.00 in November 1996; to US$1,425,000.00 in February 1997; and
decreased to US$1,421,316.18 in April 1998. Respondents made repayments of the
loan incurred by remitting those amounts to their loan account with PNB-IFL in Hong
Kong.
However, as of April 30, 1998, their outstanding obligations stood at
US$1,497,274.70. Pursuant to the terms of the real estate mortgages, PNB-IFL,
through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the
real estate mortgages and that the properties subject thereof were to be sold at a
public auction on May 27, 1999 at the Makati City Hall.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 142616
July 31, 2001
PHILIPPINE NATIONAL BANK, petitioner,
vs.
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN
GENERAL MERCHANDISE,respondents.

On May 25, 1999, respondents filed a complaint for injunction with prayer for the
issuance of a writ of preliminary injunction and/or temporary restraining order before
the Regional Trial Court of Makati. The Executive Judge of the Regional Trial Court of
Makati issued a 72-hour temporary restraining order. On May 28, 1999, the case was
raffled to Branch 147 of the Regional Trial Court of Makati. The trial judge then set a
hearing on June 8, 1999. At the hearing of the application for preliminary injunction,
petitioner was given a period of seven days to file its written opposition to the
application. On June 15, 1999, petitioner filed an opposition to the application for a
writ of preliminary injunction to which the respondents filed a reply. On June 25, 1999,
petitioner filed a motion to dismiss on the grounds of failure to state a cause of action
and the absence of any privity between the petitioner and respondents. On June 30,
1999, the trial court judge issued an Order for the issuance of a writ of preliminary
injunction, which writ was correspondingly issued on July 14, 1999. On October 4,
1999, the motion to dismiss was denied by the trial court judge for lack of merit.
Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance
of the writ of preliminary injunction before the Court of Appeals. In the impugned
decision,1 the appellate court dismissed the petition. Petitioner thus seeks recourse to
this Court and raises the following errors:
1.

THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE

COMPLAINT A QUO, CONSIDERING THAT BY THE ALLEGATIONS OF THE
COMPLAINT, NO CAUSE OF ACTION EXISTS AGAINST PETITIONER, WHICH IS
NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-FACT
AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.
2.
THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT
TO ISSUE IN EXCESS OR LACK OF JURISDICTION A WRIT OF PRELIMINARY
INJUNCTION OVER AND BEYOND WHAT WAS PRAYED FOR IN THE COMPLAINT
A QUO CONTRARY TO CHIEF OF STAFF, AFP VS. GUADIZ JR., 101 SCRA 827.2
Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000
and the trial court's Orders dated June 30, 1999 and October 4, 1999 be set aside
and the dismissal of the complaint in the instant case.3
In their Comment, respondents argue that even assuming arguendo that petitioner
and PNB-IFL are two separate entities, petitioner is still the party-in-interest in the
application for preliminary injunction because it is tasked to commit acts of foreclosing
respondents' properties.4 Respondents maintain that the entire credit facility is void as
it contains stipulations in violation of the principle of mutuality of contracts. 5 In
addition, respondents justified the act of the court a quo in applying the doctrine of
"Piercing the Veil of Corporate Identity" by stating that petitioner is merely an alter
ego or a business conduit of PNB-IFL.6
The petition is impressed with merit.
Respondents, in their complaint, anchor their prayer for injunction on alleged invalid
provisions of the contract:
GROUNDS
I
THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE
DISCRETION OF THE DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF
MUTUALITY OF CONTRACTS.
II
THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF
INTEREST AGREED UPON MAY BE UNILATERALLY MODIFIED BY DEFENDANT,
THERE WAS NO STIPULATION THAT THE RATE OF INTEREST SHALL BE
REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM RATE OF
INTEREST IS REDUCED BY LAW OR BY THE MONETARY BOARD.7
Based on the aforementioned grounds, respondents sought to enjoin and restrain
PNB from the foreclosure and eventual sale of the property in order to protect their
rights to said property by reason of void credit facilities as bases for the real estate
mortgage over the said property.8

The contract questioned is one entered into between respondent and PNB-IFL, not
PNB. In their complaint, respondents admit that petitioner is a mere attorney-in-fact
for the PNB-IFL with full power and authority to, inter alia, foreclose on the properties
mortgaged to secure their loan obligations with PNB-IFL. In other words, herein
petitioner is an agent with limited authority and specific duties under a special power
of attorney incorporated in the real estate mortgage. It is not privy to the loan
contracts entered into by respondents and PNB-IFL.
The issue of the validity of the loan contracts is a matter between PNB-IFL, the
petitioner's principal and the party to the loan contracts, and the respondents. Yet,
despite the recognition that petitioner is a mere agent, the respondents in their
complaint prayed that the petitioner PNB be ordered to re-compute the rescheduling
of the interest to be paid by them in accordance with the terms and conditions in the
documents evidencing the credit facilities, and crediting the amount previously paid to
PNB by herein respondents.9Clearly, petitioner not being a part to the contract has no
power to re-compute the interest rates set forth in the contract. Respondents,
therefore, do not have any cause of action against petitioner.The trial court, however,
in its Order dated October 4, 1994, ruled that since PNB-IFL, is a wholly owned
subsidiary of defendant Philippine National Bank, the suit against the defendant PNB
is a suit against PNB-IFL.10In justifying its ruling, the trial court, citing the case
of Koppel Phil. Inc. vs. Yatco,11 reasoned that the corporate entity may be disregarded
where a corporation is the mere alter ego, or business conduit of a person or where
the corporation is so organized and controlled and its affairs are so conducted, as to
make it merely an instrumentality, agency, conduit or adjunct of another corporation.12
We disagree.
The general rule is that as a legal entity, a corporation has a personality distinct and
separate from its individual stockholders or members, and is not affected by the
personal rights, obligations and transactions of the latter.13The mere fact that a
corporation owns all of the stocks of another corporation, taken alone is not sufficient
to justify their being treated as one entity. If used to perform legitimate functions, a
subsidiary's separate existence may be respected, and the liability of the parent
corporation as well as the subsidiary will be confined to those arising in their
respective business. The courts may in the exercise of judicial discretion step in to
prevent the abuses of separate entity privilege and pierce the veil of corporate entity.
We find, however, that the ruling in Koppel finds no application in the case at bar. In
said case, this Court disregarded the separate existence of the parent and the
subsidiary on the ground that the latter was formed merely for the purpose of evading
the payment of higher taxes. In the case at bar, respondents fail to show any cogent
reason why the separate entities of the PNB and PNB-IFL should be disregarded.
While there exists no definite test of general application in determining when a
subsidiary may be treated as a mere instrumentality of the parent corporation, some
factors have been identified that will justify the application of the treatment of the
doctrine of the piercing of the corporate veil. The case of Garrett vs. Southern
Railway Co.14is enlightening. The case involved a suit against the Southern Railway
Company. Plaintiff was employed by Lenoir Car Works and alleged that he sustained
injuries while working for Lenoir. He, however, filed a suit against Southern Railway
Company on the ground that Southern had acquired the entire capital stock of Lenoir
Car Works, hence, the latter corporation was but a mere instrumentality of the former.

The Tennessee Supreme Court stated that as a general rule the stock ownership
alone by one corporation of the stock of another does not thereby render the
dominant corporation liable for the torts of the subsidiary unless the separate
corporate existence of the subsidiary is a mere sham, or unless the control of the
subsidiary is such that it is but an instrumentality or adjunct of the dominant
corporation. Said Court then outlined the circumstances which may be useful in the
determination of whether the subsidiary is but a mere instrumentality of the parentcorporation:The Circumstance rendering the subsidiary an instrumentality. It is
manifestly impossible to catalogue the infinite variations of fact that can arise but
there are certain common circumstances which are important and which, if present in
the proper combination, are controlling.
These are as follows:
(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the
subsidiary.
(g) The subsidiary has substantially no business except with the parent corporation or
no assets except those conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the
subsidiary is described as a department or division of the parent corporation, or its
business or financial responsibility is referred to as the parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in the
interest of the subsidiary but take their orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.
The Tennessee Supreme Court thus ruled:
In the case at bar only two of the eleven listed indicia occur, namely, the ownership of
most of the capital stock of Lenoir by Southern, and possibly subscription to the
capital stock of Lenoir. . . The complaint must be dismissed.
Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate
veil is an equitable doctrine developed to address situations where the separate
corporate personality of a corporation is abused or used for wrongful purposes. The
doctrine applies when the corporate fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime, or when it is made as a shield to confuse
the legitimate issues, or where a corporation is the mere alter ego or business conduit
of a person, or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.15
In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining the
applicability of the doctrine of piercing the veil of corporate fiction, to wit:
1. Control, not mere majority or complete control, but complete domination, not only
of finances but of policy and business practice in respect to the transaction attacked

so that the corporate entity as to this transaction had at the time no separate mind,
will or existence of its own.
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and,
unjust act in contravention of plaintiffs legal rights; and,
3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate veil." In
applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual defendant's
relationship to the operation.17
Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there
is no showing of the indicative factors that the former corporation is a mere
instrumentality of the latter are present. Neither is there a demonstration that any of
the evils sought to be prevented by the doctrine of piercing the corporate veil exists.
Inescapably, therefore, the doctrine of piercing the corporate veil based on the alter
ego or instrumentality doctrine finds no application in the case at bar.
In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the
significant legal relationship involved in this case since the petitioner was not sued
because it is the parent company of PNB-IFL. Rather, the petitioner was sued
because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure
proceedings. A suit against an agent cannot without compelling reasons be
considered a suit against the principal. Under the Rules of Court, every action must
be prosecuted or defended in the name of the real party-in-interest, unless otherwise
authorized by law or these Rules.18 In mandatory terms, the Rules require that
"parties-in-interest without whom no final determination can be had, an action shall be
joined either as plaintiffs or defendants." 19 In the case at bar, the injunction suit is
directed only against the agent, not the principal.
Anent the issuance of the preliminary injunction, the same must be lifted as it is a
mere provisional remedy but adjunct to the main suit. 20 A writ of preliminary injunction
is an ancillary or preventive remedy that may only be resorted to by a litigant to
protect or preserve his rights or interests and for no other purpose during the
pendency of the principal action. The dismissal of the principal action thus results in
the denial of the prayer for the issuance of the writ. Further, there is no showing that
respondents are entitled to the issuance of the writ. Section 3, Rule 58, of the 1997
Rules of Civil Procedure provides:
SECTION 3. Grounds for issuance of preliminary injunction. A preliminary
injunction may be granted when it is established:
(a) That the applicant is entitled to the relief demanded, and the whole or part of such
relief consists in restraining the commission or continuance of the act or acts
complained of, or in requiring the performance of an act or acts, either for a limited
period or perpetually,

(b) That the commission, continuance or non-performance of the acts or acts

complained of during the litigation would probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is attempting to
do, or is procuring or suffering to be done, some act or acts probably in violation of
the rights of the applicant respecting the subject of the action or proceeding, and
tending to render the judgment ineffectual.
Thus, an injunctive remedy may only be resorted to when there is a pressing
necessity to avoid injurious consequences which cannot be remedied under any
standard compensation.21 Respondents do not deny their indebtedness. Their
properties are by their own choice encumbered by real estate mortgages. Upon the
non-payment of the loans, which were secured by the mortgages sought to be
foreclosed, the mortgaged properties are properly subject to a foreclosure sale.
Moreover, respondents questioned the alleged void stipulations in the contract only
when petitioner initiated the foreclosure proceedings. Clearly, respondents have failed
to prove that they have a right protected and that the acts against which the writ is to
be directed are violative of said right.22The Court is not unmindful of the findings of
both the trial court and the appellate court that there may be serious grounds to nullify
the provisions of the loan agreement. However, as earlier discussed, respondents
committed the mistake of filing the case against the wrong party, thus, they must
suffer the consequences of their error.
All told, respondents do not have a cause of action against the petitioner as the latter
is not privy to the contract the provisions of which respondents seek to declare void.
Accordingly, the case before the Regional Trial Court must be dismissed and the
preliminary injunction issued in connection therewith, must be lifted.
IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed
decision of the Court of Appeals is hereby REVERSED. The Orders dated June 30,
1999 and October 4, 1999 of the Regional Trial Court of Makati, Branch 147 in Civil
Case No. 99-1037 are hereby ANNULLED and SET ASIDE and the complaint in said
case DISMISSED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 150283
April 16, 2008
RYUICHI YAMAMOTO, petitioner,
vs.
NISHINO LEATHER INDUSTRIES, INC. and IKUO NISHINO, respondents.
DECISION
CARPIO MORALES, J.:

In 1983, petitioner, Ryuichi Yamamoto (Yamamoto), a Japanese national, organized

under Philippine laws Wako Enterprises Manila, Incorporated (WAKO), a corporation
engaged principally in leather tanning, now known as Nishino Leather Industries, Inc.
(NLII), one of herein respondents.
In 1987, Yamamoto and the other respondent, Ikuo Nishino (Nishino), also a
Japanese national, forged a Memorandum of Agreement under which they agreed to
enter into a joint venture wherein Nishino would acquire such number of shares of
stock equivalent to 70% of the authorized capital stock of WAKO.
Eventually, Nishino and his brother1 Yoshinobu Nishino (Yoshinobu) acquired more
than 70% of the authorized capital stock of WAKO, reducing Yamamotos investment
therein to, by his claim, 10%,2 less than 10% according to Nishino.3
The corporate name of WAKO was later changed to, as reflected earlier, its current
name NLII.
Negotiations subsequently ensued in light of a planned takeover of NLII by Nishino
who would buy-out the shares of stock of Yamamoto. In the course of the
negotiations, Yoshinobu and Nishinos counsel Atty. Emmanuel G. Doce (Atty. Doce)
advised Yamamoto by letter dated October 30, 1991, the pertinent portions of which
follow:
Hereunder is a simple memorandum of the subject matters discussed with me by Mr.
Yoshinobu Nishino yesterday, October 29th, based on the letter of Mr. Ikuo Nishino
from Japan, and which I am now transmitting to you.4
xxxx
12. Machinery and Equipment:
The following machinery/equipment have been contributed by you to the company:
Splitting machine

1 unit

Samming machine

1 unit

Forklift

1 unit

Drums

4 units

Toggling machine

2 units

Regarding the above machines, you may take them out with you (for your own use
and sale) if you want,provided, the value of such machines is deducted from your and
Wakos capital contributions, which will be paid to you.

Kindly let me know of your comments on all the above, soonest.

B.

x x x x5 (Emphasis and underscoring supplied)

x x x IN HOLDING THAT THE DOCTRINE OF PROMISSORY ESTOPPEL DOES

NOT APPLY TO THE CASE AT BAR.

On the basis of such letter, Yamamoto attempted to recover the machineries and
equipment which were, by Yamamotos admission, part of his investment in the
corporation,6 but he was frustrated by respondents, drawing Yamamoto to file on
January 15, 1992 before the Regional Trial Court (RTC) of Makati a
complaint7 against them for replevin.
Branch 45 of the Makati RTC issued a writ of replevin after Yamamoto filed a bond. 8
In their Answer with Counterclaim,9 respondents claimed that the machineries and
equipment subject of replevin form part of Yamamotos capital contributions in
consideration of his equity in NLII and should thus be treated as corporate property;
and that the above-said letter of Atty. Doce to Yamamoto was merely a proposal,
"conditioned on [Yamamotos] sell-out to . . . Nishino of his entire equity,"10 which
proposal was yet to be authorized by the stockholders and Board of Directors of NLII.
By way of Counterclaim, respondents, alleging that they suffered damage due to the
seizure via the implementation of the writ of replevin over the machineries and
equipment, prayed for the award to them of moral and exemplary damages,
attorneys fees and litigation expenses, and costs of suit.
The trial court, by Decision of June 9, 1995, decided the case in favor of
Yamamoto,11 disposing thus:
WHEREFORE, judgment is hereby rendered: (1) declaring plaintiff as the rightful
owner and possessor of the machineries in question, and making the writ of seizure
permanent; (2) ordering defendants to pay plaintiff attorneys fees and expenses of
litigation in the amount of Fifty Thousand Pesos (P50,000.00), Philippine Currency;
(3) dismissing defendants counterclaims for lack of merit; and (4) ordering
defendants to pay the costs of suit.
SO ORDERED.12 (Underscoring supplied)
On appeal,13 the Court of Appeals held in favor of herein respondents and
accordingly reversed the RTC decision and dismissed the complaint.14 In so holding,
the appellate court found that the machineries and equipment claimed by Yamamoto
are corporate property of NLII and may not thus be retrieved without the authority of
the NLII Board of Directors;15 and that petitioners argument that Nishino and
Yamamoto cannot hide behind the shield of corporate fiction does not lie, 16 nor does
petitioners invocation of the doctrine of promissory estoppel. 17 At the same time, the
Court of Appeals found no ground to support respondents Counterclaim.18
The Court of Appeals having denied19 his Motion for Reconsideration,20 Yamamoto
filed the present petition,21faulting the Court of Appeals
A.
x x x IN HOLDING THAT THE VEIL OF CORPORATE FICTION SHOULD NOT BE
PIERCED IN THE CASE AT BAR.

C.
x x x IN HOLDING THAT RESPONDENTS ARE NOT LIABLE FOR ATTORNEYS
FEES.22
The resolution of the petition hinges, in the main, on whether the advice in the letter of
Atty. Doce that Yamamoto may retrieve the machineries and equipment, which
admittedly were part of his investment, bound the corporation. The Court holds in the
negative.
Indeed, without a Board Resolution authorizing respondent Nishino to act for and in
behalf of the corporation, he cannot bind the latter. Under the Corporation Law, unless
otherwise provided, corporate powers are exercised by the Board of Directors.23
Urging this Court to pierce the veil of corporate fiction, Yamamoto argues, viz:
During the negotiations, the issue as to the ownership of the Machiner[ies] never
came up. Neither did the issue on the proper procedure to be taken to execute the
complete take-over of the Company come up since Ikuo, Yoshinobu, and Yamamoto
were the owners thereof, the presence of other stockholders being only for the
purpose of complying with the minimum requirements of the law.
What course of action the Company decides to do or not to do depends not on the
"other members of the Board of Directors". It depends on what Ikuo and Yoshinobu
decide. The Company is but a mere instrumentality of Ikuo [and] Yoshinobu.24
xxxx
x x x The Company hardly holds board meetings. It has an inactive board, the
directors are directors in name only and are there to do the bidding of the Nish[i]nos,
nothing more. Its minutes are paper minutes. x x x 25
xxxx
The fact that the parties started at a 70-30 ratio and Yamamotos percentage declined
to 10% does not mean the 20% went to others. x x x The 20% went to no one else
but Ikuo himself. x x x Yoshinobu is the younger brother of Ikuo and has no say
at all in the business. Only Ikuo makes the decisions. There were, therefore, no
other members of the Board who have not given their approval.26(Emphasis and
underscoring supplied)
While the veil of separate corporate personality may be pierced when the corporation
is merely an adjunct, a business conduit, or alter ego of a person, 27 the mere
ownership by a single stockholder of even all or nearly all of the capital stocks of a
corporation is not by itself a sufficient ground to disregard the separate corporate
personality.28

The elements determinative of the applicability of the doctrine of piercing the veil of
corporate fiction follow:
"1. Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;

Respondents cannot now argue that they did not intend for Yamamoto to rely upon
the Letter. That was the purpose of the Letter to begin with. Petitioner[s] in fact, relied
upon said Letter and such reliance was further strengthened during their meeting at
the Manila Peninsula.
To sanction respondents attempt to evade their obligation would be to sanction the
perpetration of fraud and injustice against petitioner.32 (Underscoring supplied)

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of the plaintiffs legal rights; and

It bears noting, however, that the aforementioned paragraph 12 of the letter is

followed by a request for Yamamoto to give his "comments on all the above,
soonest."33

3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.

What was thus proffered to Yamamoto was not a promise, but a mere offer, subject to
his acceptance. Without acceptance, a mere offer produces no obligation.34

The absence of any one of these elements prevents "piercing the corporate
veil." In applying the instrumentality or alter ego doctrine, the courts are concerned
with reality and not form, with how the corporation operated and the individual
defendants relationship to that operation." 29 (Italics in the original; emphasis and
underscoring supplied)

Thus, under Article 1181 of the Civil Code, "[i]n conditional obligations, the acquisition
of rights, as well as the extinguishment or loss of those already acquired, shall
depend upon the happening of the event which constitutes the condition." In the case
at bar, there is no showing of compliance with the condition for allowing Yamamoto to
take the machineries and equipment, namely, his agreement to the deduction of their
value from his capital contribution due him in the buy-out of his interests in NLII.
Yamamotos allegation that he agreed to the condition 35 remained just that, no proof
thereof having been presented.

In relation to the second element, to disregard the separate juridical personality of a

corporation, the wrongdoing or unjust act in contravention of a plaintiffs legal rights
must be clearly and convincingly established; it cannot be presumed. 30 Without a
demonstration that any of the evils sought to be prevented by the doctrine is present,
it does not apply.31
In the case at bar, there is no showing that Nishino used the separate personality of
NLII to unjustly act or do wrong to Yamamoto in contravention of his legal rights.
Yamamoto argues,
respondents, thus:

in

another

vein,

that promissory

estoppel lies

against

Under the doctrine of promissory estoppel, x x x estoppel may arise from the making
of a promise, even though without consideration, if it was intended that the promise
should be relied upon and in fact it was relied upon, and if a refusal to enforce it
would be virtually to sanction the perpetration of fraud or would result in other
injustice.
x x x Ikuo and Yoshinobu wanted Yamamoto out of the Company. For this purpose
negotiations were had between the parties. Having expressly given Yamamoto,
through the Letter and through a subsequent meeting at the Manila Peninsula where
Ikuo himself confirmed that Yamamoto may take out the Machinery from the
Company anytime, respondents should not be allowed to turn around and do the
exact opposite of what they have represented they will do.
In paragraph twelve (12) of the Letter, Yamamoto was expressly advised that he could
take out the Machinery if he wanted to so, provided that the value of said machines
would be deducted from his capital contribution x x x.
xxxx

The machineries and equipment, which comprised Yamamotos investment in

NLII,36 thus remained part of the capital property of the corporation. 37It is settled that
the property of a corporation is not the property of its stockholders or
members.38 Under the trust fund doctrine, the capital stock, property, and other assets
of a corporation are regarded as equity in trust for the payment of corporate creditors
which are preferred over the stockholders in the distribution of corporate assets. 39The
distribution of corporate assets and property cannot be made to depend on the whims
and caprices of the stockholders, officers, or directors of the corporation unless the
indispensable conditions and procedures for the protection of corporate creditors are
followed.40
WHEREFORE, the petition is DENIED.
G.R. No. 182729
September 29, 2010
KUKAN INTERNATIONAL CORPORATION, Petitioner,
vs.
HON. AMOR REYES, in her capacity as Presiding Judge of the Regional Trial
Court of Manila, Branch 21, and ROMEO M. MORALES, doing business under
the name and style "RM Morales Trophies and Plaques," Respondents.
DECISION
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the
January 23, 2008 Decision1and the April 16, 2008 Resolution2 rendered by the Court
of Appeals (CA) in CA-G.R. SP No. 100152.

The assailed CA decision affirmed the March 12, 2007 3 and June 7, 20074 Orders of
the Regional Trial Court (RTC) of Manila, Branch 21, in Civil Case No. 99-93173,
entitled Romeo M. Morales, doing business under the name and style RM Morales
Trophies and Plaques v. Kukan, Inc. In the said orders, the RTC disregarded the
separate corporate identities of Kukan, Inc. and Kukan International Corporation and
declared them to be one and the same entity. Accordingly, the RTC held Kukan
International Corporation, albeit not impleaded in the underlying complaint of Romeo
M. Morales, liable for the judgment award decreed in a Decision dated November 28,
20025 in favor of Morales and against Kukan, Inc.
The Facts
Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and
installation of signages in a building being constructed in Makati City. Morales
tendered the winning bid and was awarded the PhP 5 million contract. Some of the
items in the project award were later excluded resulting in the corresponding
reduction of the contract price to PhP 3,388,502. Despite his compliance with his
contractual undertakings, Morales was only paid the amount of PhP 1,976,371.07,
leaving a balance of PhP 1,412,130.93, which Kukan, Inc. refused to pay despite
demands. Shortchanged, Morales filed a Complaint6 with the RTC against Kukan, Inc.
for a sum of money, the case docketed as Civil Case No. 99-93173 and eventually
raffled to Branch 17 of the court.
Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim,
trial ensued. However, starting November 2000, Kukan, Inc. no longer appeared and
participated in the proceedings before the trial court, prompting the RTC to declare
Kukan, Inc. in default and paving the way for Morales to present his evidence ex
parte.
On November 28, 2002, the RTC rendered a Decision finding for Morales and against
Kukan, Inc., disposing as follows:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil
Procedure, and by preponderance of evidence, judgment is hereby rendered in favor
of the plaintiff, ordering Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per
annum from February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable
attorneys fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.
For lack of factual foundation, the counterclaim is DISMISSED.
IT IS SO ORDERED.7

After the above decision became final and executory, Morales moved for and secured
a writ of execution8 against Kukan, Inc. The sheriff then levied upon various personal
properties found at what was supposed to be Kukan, Inc.s office at Unit 2205, 88
Corporate Center, Salcedo Village, Makati City. Alleging that it owned the properties
thus levied and that it was a different corporation from Kukan, Inc., Kukan
International Corporation (KIC) filed an Affidavit of Third-Party Claim. Notably, KIC
was incorporated in August 2000, or shortly after Kukan, Inc. had stopped
participating in Civil Case No. 99-93173.
In reaction to the third party claim, Morales interposed an Omnibus Motion dated April
30, 2003. In it, Morales prayed, applying the principle of piercing the veil of corporate
fiction, that an order be issued for the satisfaction of the judgment debt of Kukan, Inc.
with the properties under the name or in the possession of KIC, it being alleged that
both corporations are but one and the same entity. KIC opposed Morales motion. By
Order of May 29, 20039as reiterated in a subsequent order, the court denied the
omnibus motion.
In a bid to establish the link between KIC and Kukan, Inc., and thus determine the
true relationship between the two, Morales filed a Motion for Examination of
Judgment Debtors dated May 4, 2005. In this motion Morales sought that subponae
be issued against the primary stockholders of Kukan, Inc., among them Michael
Chan, a.k.a. Chan Kai Kit. This too was denied by the trial court in an Order dated
May 24, 2005.10
Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who
eventually granted the motion. The case was re-raffled to Branch 21, presided by
public respondent Judge Amor Reyes.
Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of
Corporate Fiction to declare KIC as having no existence separate from Kukan, Inc.
This time around, the RTC, by Order dated March 12, 2007, granted the motion, the
dispositive portion of which reads:
WHEREFORE, premises considered, the motion is hereby GRANTED. The Court
hereby declares as follows:
1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and the
same corporation;
2. the levy made on the properties of Kukan International Corp. is hereby valid;
3. Kukan International Corp. and Michael Chan are jointly and severally liable to pay
the amount awarded to plaintiff pursuant to the decision of November [28], 2002
which has long been final and executory.
SO ORDERED.
From the above order, KIC moved but was denied reconsideration in another Order
dated June 7, 2007.
KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and
June 7, 2007 RTC Orders.

On January 23, 2008, the CA rendered the assailed decision, the dispositive portion
of which states:
WHEREFORE, premises considered, the petition is hereby DENIED and the assailed
Orders dated March 12, 2007 and June 7, 2007 of the court a quo are both
AFFIRMED. No costs.
SO ORDERED.11
The CA later denied KICs motion for reconsideration in the assailed resolution.
Hence, the instant petition for review, with the following issues KIC raises for the
Courts consideration:
1. There is no legal basis for the [CA] to resolve and declare that petitioners
Constitutional Right to Due Process was not violated by the public respondent in
rendering the Orders dated March 12, 2007 and June 7, 2007 and in declaring
petitioner to be liable for the judgment obligations of the corporation "Kukan, Inc." to
private respondent as petitioner is a stranger to the case and was never made a
party in the case before the trial court nor was it ever served a summons and a copy
of the complaint.
2. There is no legal basis for the [CA] to resolve and declare that the Orders dated
March 12, 2007 and June 7, 2007 rendered by public respondent declaring the
petitioner liable to the judgment obligations of the corporation "Kukan, Inc." to private
respondent are valid as said orders of the public respondent modify and/or amend the
trial courts final and executory decision rendered on November 28, 2002.
3. There is no legal basis for the [CA] to resolve and declare that the Orders dated
March 12, 2007 and June 7, 2007 rendered by public respondent declaring the
petitioner [KIC] and the corporation "Kukan, Inc." as one and the same, and,
therefore, the Veil of Corporate Fiction between them be pierced as the procedure
undertaken by public respondent which the [CA] upheld is not sanctioned by the
Rules of Court and/or established jurisprudence enunciated by this Honorable
Supreme Court.12
In gist, the issues to be resolved boil down to the question of, first, whether the trial
court can, after the judgment against Kukan, Inc. has attained finality, execute it
against the property of KIC; second, whether the trial court acquired jurisdiction over
KIC; and third, whether the trial and appellate courts correctly applied, under the
premises, the principle of piercing the veil of corporate fiction.
The Ruling of the Court
The petition is meritorious.
First
Issue:
Against
Whom
Executory Judgment Be Executed

Can

Final

and

The preliminary question that must be answered is whether or not the trial court can,
after adjudging Kukan, Inc. liable for a sum of money in a final and executory
judgment, execute such judgment debt against the property of KIC.

The poser must be answered in the negative.

In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control
over the execution of its judgment:
A case in which an execution has been issued is regarded as still pending so that all
proceedings on the execution are proceedings in the suit. There is no question that
the court which rendered the judgment has a general supervisory control over its
process of execution, and this power carries with it the right to determine every
question of fact and law which may be involved in the execution.
We reiterated the above holding in Javier v. Court of Appeals14 in this wise: "The said
branch has a general supervisory control over its processes in the execution of its
judgment with a right to determine every question of fact and law which may be
involved in the execution."
The courts supervisory control does not, however, extend as to authorize the
alteration or amendment of a final and executory decision, save for certain recognized
exceptions, among which is the correction of clerical errors. Else, the court violates
the principle of finality of judgment and its immutability, concepts which the Court, in
Tan v. Timbal,15 defined:
As we held in Industrial Management International Development Corporation vs.
NLRC:
It is an elementary principle of procedure that the resolution of the court in a given
issue as embodied in the dispositive part of a decision or order is the controlling factor
as to settlement of rights of the parties. Once a decision or order becomes final and
executory, it is removed from the power or jurisdiction of the court which rendered it to
further alter or amend it. It thereby becomes immutable and unalterable and any
amendment or alteration which substantially affects a final and executory judgment is
null and void for lack of jurisdiction, including the entire proceedings held for that
purpose. An order of execution which varies the tenor of the judgment or exceeds the
terms thereof is a nullity. (Emphasis supplied.)
Republic v. Tango16 expounded on the same principle and its exceptions:
Deeply ingrained in our jurisprudence is the principle that a decision that has
acquired finality becomes immutable and unalterable. As such, it may no longer
be modified in any respect even if the modification is meant to correct erroneous
conclusions of fact or law and whether it will be made by the court that rendered it or
by the highest court of the land. x x x
The doctrine of finality of judgment is grounded on the fundamental principle of public
policy and sound practice that, at the risk of occasional error, the judgment of courts
and the award of quasi-judicial agencies must become final on some definite date
fixed by law. The only exceptions to the general rule are the correction of clerical
errors, the so-called nunc pro tunc entries which cause no prejudice to any party, void
judgments, and whenever circumstances transpire after the finality of the decision
which render its execution unjust and inequitable. None of the exceptions obtains
here to merit the review sought. (Emphasis added.)

So, did the RTC, in breach of the doctrine of immutability and inalterability of
judgment, order the execution of its final decision in a manner as would amount to its
prohibited alteration or modification?
We repair to the dispositive portion of the final and executory RTC decision.
Pertinently, it provides:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil
Procedure, and by preponderance of evidence, judgment is hereby rendered in favor
of the plaintiff, ordering Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per
annum from February 17, 1999 until full payment;

procedural rule on service of summons can be waived by voluntary submission to the

courts jurisdiction through any form of appearance by the party or its counsel."22
We cannot give imprimatur to the appellate courts appreciation of the thrust of Sec.
20, Rule 14 of the Rules in concluding that the trial court acquired jurisdiction over
KIC.
Orion Security Corporation v. Kalfam Enterprises, Inc.23 explains how courts acquire
jurisdiction over the parties in a civil case:
Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the
other hand, jurisdiction over the defendants in a civil case is acquired either through
the service of summons upon them or through their voluntary appearance in court
and their submission to its authority. (Emphasis supplied.)

3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable

attorneys fees; and

In the fairly recent Palma v. Galvez, 24 the Court reiterated its holding in Orion Security
Corporation, stating: "[I]n civil cases, the trial court acquires jurisdiction over the
person of the defendant either by the service of summons or by the latters voluntary
appearance and submission to the authority of the former."

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.

The courts jurisdiction over a party-defendant resulting from his voluntary submission
to its authority is provided under Sec. 20, Rule 14 of the Rules, which states:

x x x x (Emphasis supplied.)

Section 20. Voluntary appearance. The defendants voluntary appearance in the

actions shall be equivalent to service of summons. The inclusion in a motion to
dismiss of other grounds aside from lack of jurisdiction over the person of the
defendant shall not be deemed a voluntary appearance.

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to
pay the aforementioned awards to Morales. Thus, making KIC, thru the medium of a
writ of execution, answerable for the above judgment liability is a clear case of
altering a decision, an instance of granting relief not contemplated in the decision
sought to be executed. And the change does not fall under any of the recognized
exceptions to the doctrine of finality and immutability of judgment. It is a settled rule
that a writ of execution must conform to the fallo of the judgment; as an inevitable
corollary, a writ beyond the terms of the judgment is a nullity.17
Thus, on this ground alone, the instant petition can already be granted. Nonetheless,
an examination of the other issues raised by KIC would be proper.
Second
Issue:
Propriety
Assuming Jurisdiction over KIC

of

the

RTC

The next issue turns on the validity of the execution the trial court authorized against
KIC and its property, given that it was neither made a party nor impleaded in Civil
Case No. 99-93173, let alone served with summons. In other words, did the trial court
acquire jurisdiction over KIC?
In the assailed decision, the appellate court deemed KIC to have voluntarily submitted
itself to the jurisdiction of the trial court owing to its filing of four (4) pleadings adverted
to earlier, namely: (a) the Affidavit of Third-Party Claim;18 (b) the Comment and
Opposition to Plaintiffs Omnibus Motion;19 (c) the Motion for Reconsideration of the
RTC Order dated March 12, 2007;20 and (d) the Motion for Leave to Admit
Reply.21 The CA, citing Section 20, Rule 14 of the Rules of Court, stated that "the

To be sure, the CAs ruling that any form of appearance by the party or its counsel is
deemed as voluntary appearance finds support in the kindred Republic v. Ker & Co.,
Ltd.25 and De Midgely v. Ferandos.26
Republic and De Midgely, however, have already been modified if not altogether
superseded27 by La Naval Drug Corporation v. Court of Appeals, 28 wherein the Court
essentially ruled and elucidated on the current view in our jurisdiction, to wit: "[A]
special appearance before the courtchallenging its jurisdiction over the person
through a motion to dismiss even if the movant invokes other groundsis not
tantamount to estoppel or a waiver by the movant of his objection to jurisdiction over
his person; and such is not constitutive of a voluntary submission to the jurisdiction of
the court."29
In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173.
Even if it is conceded that it raised affirmative defenses through its aforementioned
pleadings, KIC never abandoned its challenge, however implicit, to the RTCs
jurisdiction over its person. The challenge was subsumed in KICs primary assertion
that it was not the same entity as Kukan, Inc. Pertinently, in its Comment and
Opposition to Plaintiffs Omnibus Motion dated May 20, 2003, KIC entered its
"special but not voluntary appearance" alleging therein that it was a different entity
and has a separate legal personality from Kukan, Inc. And KIC would consistently
reiterate this assertion in all its pleadings, thus effectively resisting all along the RTCs
jurisdiction of its person. It cannot be overemphasized that KIC could not file before
the RTC a motion to dismiss and its attachments in Civil Case No. 99-93173,

precisely because KIC was neither impleaded nor served with summons.
Consequently, KIC could only assert and claim through its affidavits, comments, and
motions filed by special appearance before the RTC that it is separate and distinct
from Kukan, Inc.
Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its
objection to the courts lack of jurisdiction over its person. It would defy logic to say
that KIC unequivocally submitted itself to the jurisdiction of the RTC when it strongly
asserted that it and Kukan, Inc. are different entities. In the scheme of things
obtaining, KIC had no other option but to insist on its separate identity and plead for
relief consistent with that position.
Third
Issue:
Veil of Corporate Fiction

Piercing

the

The third and main issue in this case is whether or not the trial and appellate courts
correctly applied the principle of piercing the veil of corporate entitycalled also as
disregarding the fiction of a separate juridical personality of a corporationto support
a conclusion that Kukan, Inc. and KIC are but one and the same corporation with
respect to the contract award referred to at the outset. This principle finds its context
on the postulate that a corporation is an artificial being invested with a personality
separate and distinct from those of the stockholders and from other corporations to
which it may be connected or related.31
In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations
Commission,32 the Court revisited the subject principle of piercing the veil of corporate
fiction and wrote:
Under the doctrine of "piercing the veil of corporate fiction," the court looks at the
corporation as a mere collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate juridical personality of the
corporation unifying the group. Another formulation of this doctrine is that when two
business enterprises are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third parties, disregard the
legal fiction that two corporations are distinct entities and treat them as identical or as
one and the same.
Whether the separate personality of the corporation should be pierced hinges
on obtaining facts appropriately pleaded or proved. However, any piercing of the
corporate veil has to be done with caution, albeit the Court will not hesitate to
disregard the corporate veil when it is misused or when necessary in the interest of
justice. x x x (Emphasis supplied.)
The same principle was the subject and discussed in Rivera v. United Laboratories,
Inc.:
While a corporation may exist for any lawful purpose, the law will regard it as an
association of persons or, in case of two corporations, merge them into one, when its
corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of
piercing the veil of corporate fiction. The doctrine applies only when such corporate
fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, or when it is made as a shield to confuse the legitimate issues, or where a

corporation is the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of another corporation.
To disregard the separate juridical personality of a corporation, the wrongdoing must
be established clearly and convincingly. It cannot be presumed. 33 (Emphasis
supplied.)
Now, as before the appellate court, petitioner KIC maintains that the RTC violated its
right to due process when, in the execution of its November 28, 2002 Decision, the
court authorized the issuance of the writ against KIC for Kukan, Inc.s judgment debt,
albeit KIC has never been a party to the underlying suit. As a counterpoint, Morales
argues that KICs specific concern on due process and on the validity of the writ to
execute the RTCs November 28, 2002 Decision would be mooted if it were
established that KIC and Kukan, Inc. are indeed one and the same corporation.
Morales contention is untenable.
The principle of piercing the veil of corporate fiction, and the resulting treatment of two
related corporations as one and the same juridical person with respect to a given
transaction, is basically applied only to determine established liability; 34 it is not
available to confer on the court a jurisdiction it has not acquired, in the first place,
over a party not impleaded in a case. Elsewise put, a corporation not impleaded in a
suit cannot be subject to the courts process of piercing the veil of its corporate fiction.
In that situation, the court has not acquired jurisdiction over the corporation and,
hence, any proceedings taken against that corporation and its property would infringe
on its right to due process. Aguedo Agbayani, a recognized authority on Commercial
Law, stated as much:
23. Piercing the veil of corporate entity applies to determination of liability not of
jurisdiction. x x x
This is so because the doctrine of piercing the veil of corporate fiction comes to play
only during the trial of the case after the court has already acquired jurisdiction over
the corporation. Hence, before this doctrine can be applied, based on the evidence
presented, it is imperative that the court must first have jurisdiction over the
corporation.35 x x x (Emphasis supplied.)
The implication of the above comment is twofold: (1) the court must first acquire
jurisdiction over the corporation or corporations involved before its or their separate
personalities are disregarded; and (2) the doctrine of piercing the veil of corporate
entity can only be raised during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the authority of the court by way of
service of summons or what passes as such service.
The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent
the matter of the time and manner of raising the principle in question, it is undisputed
that no full-blown trial involving KIC was had when the RTC disregarded the corporate
veil of KIC. The reason for this actuality is simple and undisputed: KIC was not
impleaded in Civil Case No. 99-93173 and that the RTC did not acquire jurisdiction
over it. It was dragged to the case after it reacted to the improper execution of its
properties and veritably hauled to court, not thru the usual process of service of

summons, but by mere motion of a party with whom it has no privity of contract and
after the decision in the main case had already become final and executory. As to the
propriety of a plea for the application of the principle by mere motion, the following
excerpts are instructive:
Generally, a motion is appropriate only in the absence of remedies by regular
pleadings, and is not available to settle important questions of law, or to dispose of
the merits of the case. A motion is usually a proceeding incidental to an action, but it
may be a wholly distinct or independent proceeding. A motion in this sense is not
within this discussion even though the relief demanded is denominated an "order."
A motion generally relates to procedure and is often resorted to in order to correct
errors which have crept in along the line of the principal actions progress. Generally,
where there is a procedural defect in a proceeding and no method under statute or
rule of court by which it may be called to the attention of the court, a motion is an
appropriate remedy. In many jurisdictions, the motion has replaced the common-law
pleas testing the sufficiency of the pleadings, and various common-law writs, such as
writ of error coram nobis and audita querela. In some cases, a motion may be one of
several remedies available. For example, in some jurisdictions, a motion to vacate an
order is a remedy alternative to an appeal therefrom.
Statutes governing motions are given a liberal construction.36 (Emphasis supplied.)
The bottom line issue of whether Morales can proceed against KIC for the judgment
debt of Kukan, Inc.assuming hypothetically that he can, applying the piercing the
corporate veil principleresolves itself into the question of whether a mere motion is
the appropriate vehicle for such purpose.
Verily, Morales espouses the application of the principle of piercing the corporate veil
to hold KIC liable on theory that Kukan, Inc. was out to defraud him through the use of
the separate and distinct personality of another corporation, KIC. In net effect,
Morales adverted motion to pierce the veil of corporate fiction dated January 3, 2007
stated a new cause of action, i.e., for the liability of judgment debtor Kukan, Inc. to be
borne by KIC on the alleged identity of the two corporations. This new cause of action
should be properly ventilated in another complaint and subsequent trial where the
doctrine of piercing the corporate veil can, if appropriate, be applied, based on the
evidence adduced. Establishing the claim of Morales and the corresponding liability of
KIC for Kukan Inc.s indebtedness could hardly be the subject, under the premises, of
a mere motion interposed after the principal action against Kukan, Inc. alone had
peremptorily been terminated. After all, a complaint is one where the plaintiff alleges
causes of action.
In any event, the principle of piercing the veil of corporate fiction finds no application
to the instant case.
As a general rule, courts should be wary of lifting the corporate veil between
corporations, however related. Philippine National Bank v. Andrada Electric
Engineering Company37 explains why:
A corporation is an artificial being created by operation of law. x x x It has a
personality separate and distinct from the persons composing it, as well as from any
other legal entity to which it may be related. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of
another corporation. For reasons of public policy and in the interest of justice, the
corporate veil will justifiably be impaled only when it becomes a shield for fraud,
illegality or inequity committed against third persons.
Hence, any application of the doctrine of piercing the corporate veil should be done
with caution. A court should be mindful of the milieu where it is to be applied. It must
be certain that the corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly established; it cannot be presumed.
Otherwise, an injustice that was never unintended may result from an erroneous
application.
This Court has pierced the corporate veil to ward off a judgment credit, to avoid
inclusion of corporate assets as part of the estate of the decedent, to escape liability
arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either to
promote or to shield unfair objectives or to cover up an otherwise blatant violation of
the prohibition against forum-shopping. Only in these and similar instances may
the veil be pierced and disregarded. (Emphasis supplied.)
In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear
and convincing proof that the separate and distinct personality of the corporation was
purposefully employed to evade a legitimate and binding commitment and perpetuate
a fraud or like wrongdoings. To be sure, the Court has, on numerous
occasions,38 applied the principle where a corporation is dissolved and its assets are
transferred to another to avoid a financial liability of the first corporation with the result
that the second corporation should be considered a continuation and successor of the
first entity.
In those instances when the Court pierced the veil of corporate fiction of two
corporations, there was a confluence of the following factors:
1. A first corporation is dissolved;
2. The assets of the first corporation is transferred to a second corporation to avoid a
financial liability of the first corporation; and
3. Both corporations are owned and controlled by the same persons such that the
second corporation should be considered as a continuation and successor of the first
corporation.
In the instant case, however, the second and third factors are conspicuously absent.
There is, therefore, no compelling justification for disregarding the fiction of corporate
entity separating Kukan, Inc. from KIC. In applying the principle, both the RTC and
the CA miserably failed to identify the presence of the abovementioned factors.
Consider:
The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC
based on the following premises and arguments:

While it is true that a corporation has a separate and distinct personality from its
stockholder, director and officers, the law expressly provides for an exception. When
Michael Chan, the Managing Director of defendant Kukan, Inc. (majority stockholder
of the newly formed corporation [KIC]) confirmed the award to plaintiff to supply and
install interior signages in the Enterprise Center he (Michael Chan, Managing Director
of defendant Kukan, Inc.) knew that there was no sufficient corporate funds to pay its
obligation/account, thus implying bad faith on his part and fraud in contracting the
obligation. Michael Chan neither returned the interior signages nor tendered payment
to the plaintiff. This circumstance may warrant the piercing of the veil of corporation
fiction. Having been guilty of bad faith in the management of corporate matters the
corporate trustee, director or officer may be held personally liable. x x x
Since fraud is a state of mind, it need not be proved by direct evidence but may be
inferred from the circumstances of the case. x x x [A]nd the circumstances are: the
signature of Michael Chan, Managing Director of Kukan, Inc. appearing in the
confirmation of the award sent to the plaintiff; signature of Chan Kai Kit, a British
National appearing in the Articles of Incorporation and signature of Michael Chan also
a British National appearing in the Articles of Incorporation [of] Kukan International
Corp. give the impression that they are one and the same person, that Michael Chan
and Chan Kai Kit are both majority stockholders of Kukan International Corp. and
Kukan, Inc. holding 40% of the stocks; that Kukan International Corp. is practically
doing the same kind of business as that of Kukan, Inc.39 (Emphasis supplied.)
As is apparent from its disquisition, the RTC brushed aside the separate corporate
existence of Kukan, Inc. and KIC on the main argument that Michael Chan owns 40%
of the common shares of both corporations, obviously oblivious that overlapping stock
ownership is a common business phenomenon. It must be remembered, however,
that KICs properties were the ones seized upon levy on execution and not that of
Kukan, Inc. or of Michael Chan for that matter. Mere ownership by a single
stockholder or by another corporation of a substantial block of shares of a corporation
does not, standing alone, provide sufficient justification for disregarding the separate
corporate personality.40 For this ground to hold sway in this case, there must be proof
that Chan had control or complete dominion of Kukan and KICs finances, policies,
and business practices; he used such control to commit fraud; and the control was
the proximate cause of the financial loss complained of by Morales. The absence of
any of the elements prevents the piercing of the corporate veil. 41 And indeed, the
records do not show the presence of these elements.
On the other hand, the CA held:
In the present case, the facts disclose that Kukan, Inc. entered into a contractual
obligation x x x worth more than three million pesos although it had only Php5,000.00
paid-up capital; [KIC] was incorporated shortly before Kukan, Inc. suddenly ceased to
appear and participate in the trial; [KICs] purpose is related and somewhat akin to
that of Kukan, Inc.; and in [KIC] Michael Chan, a.k.a., Chan Kai Kit, holds forty
percent of the outstanding stocks, while he formerly held the same amount of stocks
in Kukan Inc. These would lead to the inescapable conclusion that Kukan, Inc.
committed fraudulent representation by awarding to the private respondent the
contract with full knowledge that it was not in a position to comply with the obligation it
had assumed because of inadequate paid-up capital. It bears stressing that
shareholders should in good faith put at the risk of the business, unencumbered

capital reasonably adequate for its prospective liabilities. The capital should not be
illusory or trifling compared with the business to be done and the risk of loss.
Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael
Chan, a.k.a. Chan Kai Kit has the largest block of shares in both business
enterprises. The emergence of the former was cleverly timed with the hasty
withdrawal of the latter during the trial to avoid the financial liability that was
eventually suffered by the latter. The two companies have a related business
purpose. Considering these circumstances, the obvious conclusion is that the
creation of Kukan International Corporation served as a device to evade the
obligation incurred by Kukan, Inc. and yet profit from the goodwill attained by the
name "Kukan" by continuing to engage in the same line of business with the same list
of clients.42 (Emphasis supplied.)
Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the
similarity of the business activities in which both corporations are engaged as a
jumping board to its conclusion that the creation of KIC "served as a device to evade
the obligation incurred by Kukan, Inc." The appellate court, however, left a gaping
hole by failing to demonstrate that Kukan, Inc. and its stockholders defrauded
Morales. In fine, there is no showing that the incorporation, and the separate and
distinct personality, of KIC was used to defeat Morales right to recover from Kukan,
Inc. Judging from the records, no serious attempt was made to levy on the properties
of Kukan, Inc. Morales could not, thus, validly argue that Kukan, Inc. tried to avoid
liability or had no property against which to proceed.
Morales further contends that Kukan, Inc.s closure is evidenced by its failure to file its
2001 General Information Sheet (GIS) with the Securities and Exchange
Commission. However, such fact does not necessarily mean that Kukan, Inc. had
altogether ceased operations, as Morales would have this Court believe, for it is
stated on the face of the GIS that it is only upon a failure to file the corporate GIS for
five (5) consecutive years that non-operation shall be presumed.
The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a
paid-up capital of PhP 5,000 is not an indication of the intent on the part of its
management to defraud creditors. Paid-up capital is merely seed money to start a
corporation or a business entity. As in this case, it merely represented the
capitalization upon incorporation in 1997 of Kukan, Inc. Paid-up capitalization of PhP
5,000 is not and should not be taken as a reflection of the firms capacity to meet its
recurrent and long-term obligations. It must be borne in mind that the equity portion
cannot be equated to the viability of a business concern, for the best test is the
working capital which consists of the liquid assets of a given business relating to the
nature of the business concern.lawphil
Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be
viewed as a badge of fraud, for it is in compliance with Sec. 13 of the Corporation
Code,43 which only requires a minimum paid-up capital of PhP 5,000.1avvphi1The
suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and
controlled as they are by the same stockholders, stands without factual basis. It is
true that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital
stock of both corporations. But such circumstance, standing alone, is insufficient to
establish identity. There must be at least a substantial identity of stockholders for both
corporations in order to consider this factor to be constitutive of corporate identity.It

would not avail Morales any to rely44 on General Credit Corporation v. Alsons
Development and Investment Corporation.45 General Credit Corporation is factually
not on all fours with the instant case. There, the common stockholders of the
corporations represented 90% of the outstanding capital stock of the companies,
unlike here where Michael Chan merely represents 40% of the outstanding capital
stock of both KIC and Kukan, Inc., not even a majority of it. In that case, moreover,
evidence was adduced to support the finding that the funds of the second corporation
came from the first. Finally, there was proof in General Credit Corporation of complete
control, such that one corporation was a mere dummy or alter ego of the other, which
is absent in the instant case.Evidently, the aforementioned case relied upon by
Morales cannot justify the application of the principle of piercing the veil of corporate
fiction to the instant case. As shown by the records, the name Michael Chan, the
similarity of business activities engaged in, and incidentally the word "Kukan"
appearing in the corporate names provide the nexus between Kukan, Inc. and KIC.
As illustrated, these circumstances are insufficient to establish the identity of KIC as
the alter ego or successor of Kukan, Inc.It bears reiterating that piercing the veil of
corporate fiction is frowned upon. Accordingly, those who seek to pierce the veil must
clearly establish that the separate and distinct personalities of the corporations are
set up to justify a wrong, protect fraud, or perpetrate a deception. In the concrete and
on the assumption that the RTC has validly acquired jurisdiction over the party
concerned, Morales ought to have proved by convincing evidence that Kukan, Inc.
was collapsed and thereafter KIC purposely formed and operated to defraud him.
Morales has not to us discharged his burden.
WHEREFORE, the petition is hereby GRANTED. The CAs January 23, 2008
Decision and April 16, 2008 Resolution in CA-G.R. SP No. 100152 are hereby
REVERSED and SET ASIDE. The levy placed upon the personal properties of Kukan
International Corporation is hereby ordered lifted and the personal properties ordered
returned to Kukan International Corporation. The RTC of Manila, Branch 21 is hereby
directed to execute the RTC Decision dated November 28, 2002 against Kukan, Inc.
with reasonable dispatch.
No costs.
SO ORDERED.

decision rendered by Branch 135, Regional Trial Court of Makati, Metro Manila. The
procedural antecedents of this petition are as follows:
On January 23, 1985, petitioner filed a complaint 2 against private respondents to
recover three thousand four hundred twelve and six centavos (P3,412.06),
representing the balance of the jeep body purchased by the Manuels from petitioner;
an additional sum of twenty thousand four hundred fifty-four and eighty centavos
(P20,454.80) representing the unpaid balance on the cost of repair of the vehicle; and
six thousand pesos (P6,000.00) for cost of suit and attorney's fees. 3 To the original
balance on the price of jeep body were added the costs of repair. 4 In their answer,
private respondents interposed a counterclaim for unpaid legal services by Gregorio
Manuel in the amount of fifty thousand pesos (P50,000) which was not paid by the
incorporators, directors and officers of the petitioner. The trial court decided the case
on June 26, 1985, in favor of petitioner in regard to the petitioner's claim for money,
but also allowed the counter-claim of private respondents. Both parties appealed. On
April 15, 1991, the Court of Appeals sustained the trial court's decision. 5 Hence, the
present petition.
For our review in particular is the propriety of the permissive counterclaim which
private respondents filed together with their answer to petitioner's complaint for a sum
of money. Private respondent Gregorio Manuel alleged as an affirmative defense that,
while he was petitioner's Assistant Legal Officer, he represented members of the
Francisco family in the intestate estate proceedings of the late Benita Trinidad.
However, even after the termination of the proceedings, his services were not paid.
Said family members, he said, were also incorporators, directors and officers of
petitioner. Hence to petitioner's collection suit, he filed a counter permissive
counterclaim for the unpaid attorney's fees. 6
For failure of petitioner to answer the counterclaim, the trial court declared petitioner
in default on this score, and evidence ex-parte was presented on the counterclaim.
The trial court ruled in favor of private respondents and found that Gregorio Manuel
indeed rendered legal services to the Francisco family in Special Proceedings
Number 7803 "In the Matter of Intestate Estate of Benita Trinidad". Said court also
found that his legal services were not compensated despite repeated demands, and
thus ordered petitioner to pay him the amount of fifty thousand (P50,000.00) pesos. 7

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

Dissatisfied with the trial court's order, petitioner elevated the matter to the Court of
Appeals, posing the following issues:

G.R. No. 100812 June 25, 1999

FRANCISCO MOTORS CORPORATION, petitioner,
vs.
COURT OF APPEALS and SPOUSES GREGORIO and LIBRADA
MANUEL, respondents.

WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS

NULL AND VOID AS IT NEVER ACQUIRED JURISDICTION OVER THE PERSON
OF THE DEFENDANT.

I.

II.

QUISUMBING, J.:

WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN THE

ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE TO THE
CLAIM OF DEFENDANT-APPELLEES.

This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to
annul the decision 1 of the Court of Appeals in C.A. G.R. CV No. 10014 affirming the

III.

WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFFAPPELLANT TO ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM. 8
Petitioner contended that the trial court did not acquire jurisdiction over it because no
summons was validly served on it together with the copy of the answer containing the
permissive counterclaim. Further, petitioner questions the propriety of its being made
party to the case because it was not the real party in interest but the individual
members of the Francisco family concerned with the intestate case.
In its assailed decision now before us for review, respondent Court of Appeals held
that a counterclaim must be answered in ten (10) days, pursuant to Section 4, Rule
11, of the Rules of Court; and nowhere does it state in the Rules that a party still
needed to be summoned anew if a counterclaim was set up against him. Failure to
serve summons, said respondent court, did not effectively negate trial court's
jurisdiction over petitioner in the matter of the counterclaim. It likewise pointed out that
there was no reason for petitioner to be excused from answering the counterclaim.
Court records showed that its former counsel, Nicanor G. Alvarez, received the copy
of the answer with counterclaim two (2) days prior to his withdrawal as counsel for
petitioner. Moreover when petitioner's new counsel, Jose N. Aquino, entered his
appearance, three (3) days still remained within the period to file an answer to the
counterclaim. Having failed to answer, petitioner was correctly considered in default
by
the
trial
court. 9 Even assuming that the trial court acquired no jurisdiction over petitioner,
respondent court also said, but having filed a motion for reconsideration seeking relief
from the said order of default, petitioner was estopped from further questioning the
trial court's jurisdiction. 10
On the question of its liability for attorney's fees owing to private respondent Gregorio
Manuel, petitioner argued that being a corporation, it should not be held liable therefor
because these fees were owed by the incorporators, directors and officers of the
corporation in their personal capacity as heirs of Benita Trinidad. Petitioner stressed
that the personality of the corporation, vis-a-vis the individual persons who hired the
services of private respondent, is separate and distinct, 11 hence, the liability of said
individuals did not become an obligation chargeable against petitioner.
Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:
However, this distinct and separate personality is merely a fiction created by law for
convenience and to promote justice. Accordingly, this separate personality of the
corporation may be disregarded, or the veil of corporate fiction pierced, in cases
where it is used as a cloak or cover for found (sic) illegality, or to work an injustice, or
where necessary to achieve equity or when necessary for the protection of creditors.
(Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347) Corporations are composed of
natural persons and the legal fiction of a separate corporate personality is not a shield
for the commission of injustice and inequity. (Chemplex Philippines, Inc. vs.
Pamatian, 57 SCRA 408).
In the instant case, evidence shows that the plaintiff-appellant Francisco Motors
Corporation is composed of the heirs of the late Benita Trinidad as directors and
incorporators for whom defendant Gregorio Manuel rendered legal services in the
intestate estate case of their deceased mother. Considering the aforestated principles
and circumstances established in this case, equity and justice demands plaintiff-

appellant's veil of corporate identity should be pierced and the defendant be

compensated for legal services rendered to the heirs, who are directors of the
plaintiff-appellant corporation. 12
Now before us, petitioner assigns the following errors:
I.
THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING
THE VEIL OF CORPORATE ENTITY.
II.
THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS
JURISDICTION OVER PETITIONER WITH RESPECT TO THE COUNTERCLAIM. 13
Petitioner submits that respondent court should not have resorted to piercing the veil
of corporate fiction because the transaction concerned only respondent Gregorio
Manuel and the heirs of the late Benita Trinidad. According to petitioner, there was no
cause of action by said respondent against petitioner; personal concerns of the heirs
should be distinguished from those involving corporate affairs. Petitioner further
contends that the present case does not fall among the instances wherein the courts
may look beyond the distinct personality of a corporation. According to petitioner, the
services for which respondent Gregorio Manuel seeks to collect fees from petitioner
are personal in nature. Hence, it avers the heirs should have been sued in their
personal capacity, and not involve the corporation. 14
With regard to the permissive counterclaim, petitioner also insists that there was no
proper service of the answer containing the permissive counterclaim. It claims that the
counterclaim is a separate case which can only be properly served upon the opposing
party through summons. Further petitioner states that by nature, a permissive
counterclaim is one which does not arise out of nor is necessarily connected with the
subject of the opposing party's claim. Petitioner avers that since there was no service
of summons upon it with regard to the counterclaim, then the court did not acquire
jurisdiction over petitioner. Since a counterclaim is considered an action independent
from the answer, according to petitioner, then in effect there should be two
simultaneous actions between the same parties: each party is at the same time both
plaintiff and defendant with respect to the other,15 requiring in each case separate
summonses.
In their Comment, private respondents focus on the two questions raised by
petitioner. They defend the propriety of piercing the veil of corporate fiction, but deny
the necessity of serving separate summonses on petitioner in regard to their
permissive counterclaim contained in the answer.
Private respondents maintain both trial and appellate courts found that respondent
Gregorio Manuel was employed as assistant legal officer of petitioner corporation,
and that his services were solicited by the incorporators, directors and members to
handle and represent them in Special Proceedings No. 7803, concerning the Intestate
Estate of the late Benita Trinidad. They assert that the members of petitioner
corporation took advantage of their positions by not compensating respondent
Gregorio Manuel after the termination of the estate proceedings despite his repeated

demands for payment of his services. They cite findings of the appellate court that
support piercing the veil of corporate identity in this particular case. They assert that
the corporate veil may be disregarded when it is used to defeat public convenience,
justify wrong, protect fraud, and defend crime. It may also be pierced, according to
them, where the corporate entity is being used as an alter ego, adjunct, or business
conduit for the sole benefit of the stockholders or of another corporate entity. In these
instances, they aver, the corporation should be treated merely as an association of
individual persons. 16
Private respondents dispute petitioner's claim that its right to due process was
violated when respondents' counterclaim was granted due course, although no
summons was served upon it. They claim that no provision in the Rules of Court
requires service of summons upon a defendant in a counterclaim. Private
respondents argue that when the petitioner filed its complaint before the trial court it
voluntarily submitted itself to the jurisdiction of the court. As a consequence, the
issuance of summons on it was no longer necessary. Private respondents say they
served a copy of their answer with affirmative defenses and counterclaim on
petitioner's former counsel, Nicanor G. Alvarez. While petitioner would have the Court
believe that respondents served said copy upon Alvarez after he had withdrawn his
appearance as counsel for the petitioner, private respondents assert that this
contention is utterly baseless. Records disclose that the answer was received two (2)
days before the former counsel for petitioner withdrew his appearance, according to
private respondents. They maintain that the present petition is but a form of dilatory
appeal, to set off petitioner's obligations to the respondents by running up more
interest it could recover from them. Private respondents therefore claim damages
against petitioner. 17
To resolve the issues in this case, we must first determine the propriety of piercing the
veil of corporate fiction.
Basic in corporation law is the principle that a corporation has a separate personality
distinct from its stockholders and from other corporations to which it may be
connected. 18 However, under the doctrine of piercing the veil of corporate entity, the
corporation's separate juridical personality may be disregarded, for example, when
the corporate identity is used to defeat public convenience, justify wrong, protect
fraud, or defend crime. Also, where the corporation is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation, then its distinct personality may be ignored. 19 In these
circumstances, the courts will treat the corporation as a mere aggrupation of persons
and the liability will directly attach to them. The legal fiction of a separate corporate
personality in those cited instances, for reasons of public policy and in the interest of
justice, will be justifiably set aside.
In our view, however, given the facts and circumstances of this case, the doctrine of
piercing the corporate veil has no relevant application here. Respondent court erred
in permitting the trial court's resort to this doctrine. The rationale behind piercing a
corporation's identity in a given case is to remove the barrier between the corporation
from the persons comprising it to thwart the fraudulent and illegal schemes of those
who use the corporate personality as a shield for undertaking certain proscribed
activities. However, in the case at bar, instead of holding certain individuals or
persons responsible for an alleged corporate act, the situation has been reversed. It

is the petitioner as a corporation which is being ordered to answer for the personal
liability of certain individual directors, officers and incorporators concerned. Hence, it
appears to us that the doctrine has been turned upside down because of its
erroneous invocation. Note that according to private respondent Gregorio Manuel his
services were solicited as counsel for members of the Francisco family to represent
them in the intestate proceedings over Benita Trinidad's estate. These estate
proceedings did not involve any business of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco family
members but also from petitioner corporation on the claims that its management had
requested his services and he acceded thereto as an employee of petitioner from
whom it could be deduced he was also receiving a salary. His move to recover unpaid
legal fees through a counterclaim against Francisco Motors Corporation, to offset the
unpaid balance of the purchase and repair of a jeep body could only result from an
obvious misapprehension that petitioner's corporate assets could be used to answer
for the liabilities of its individual directors, officers, and incorporators. Such result if
permitted could easily prejudice the corporation, its own creditors, and even other
stockholders; hence, clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services involved, whatever
obligation said incorporators, directors and officers of the corporation had incurred, it
was incurred in their personal capacity. When directors and officers of a corporation
are unable to compensate a party for a personal obligation, it is far-fetched to allege
that the corporation is perpetuating fraud or promoting injustice, and be thereby held
liable therefor by piercing its corporate veil. While there are no hard and fast rules on
disregarding separate corporate identity, we must always be mindful of its function
and purpose. A court should be careful in assessing the milieu where the doctrine of
piercing the corporate veil may be applied. Otherwise an injustice, although
unintended, may result from its erroneous application.
The personality of the corporation and those of its incorporators, directors and officers
in their personal capacities ought to be kept separate in this case. The claim for legal
fees against the concerned individual incorporators, officers and directors could not
be properly directed against the corporation without violating basic principles
governing corporations. Moreover, every action including a counterclaim must
be prosecuted or defended in the name of the real party in interest. 20 It is plainly an
error to lay the claim for legal fees of private respondent Gregorio Manuel at the door
of petitioner (FMC) rather than individual members of the Francisco family.
However, with regard to the procedural issue raised by petitioner's allegation, that it
needed to be summoned anew in order for the court to acquire jurisdiction over it, we
agree with respondent court's view to the contrary. Section 4, Rule 11 of the Rules of
Court provides that a counterclaim or cross-claim must be answered within ten (10)
days from service. Nothing in the Rules of Court says that summons should first be
served on the defendant before an answer to counterclaim must be made. The
purpose of a summons is to enable the court to acquire jurisdiction over the person of
the defendant. Although a counterclaim is treated as an entirely distinct and
independent action, the defendant in the counterclaim, being the plaintiff in the
original complaint, has already submitted to the jurisdiction of the court. Following
Rule 9, Section 3 of the 1997 Rules of Civil Procedure, 21 if a defendant (herein
petitioner) fails to answer the counterclaim, then upon motion of plaintiff, the
defendant may be declared in default. This is what happened to petitioner in this

case, and this Court finds no procedural error in the disposition of the appellate court
on this particular issue. Moreover, as noted by the respondent court, when petitioner
filed its motion seeking to set aside the order of default, in effect it submitted itself to
the jurisdiction of the court. As well said by respondent court:
Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show
that upon its request, plaintiff-appellant was granted time to file a motion for
reconsideration of the disputed decision. Plaintiff-appellant did file its motion for
reconsideration to set aside the order of default and the judgment rendered on the
counterclaim.
Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the
counterclaim, as it vigorously insists, plaintiff-appellant is considered to have
submitted to the court's jurisdiction when it filed the motion for reconsideration
seeking relief from the court. (Soriano vs. Palacio, 12 SCRA 447). A party is estopped
from assailing the jurisdiction of a court after voluntarily submitting himself to its
jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel is a bar against any
claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA 37). 22
WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby
REVERSED insofar only as it held Francisco Motors Corporation liable for the legal
obligation owing to private respondent Gregorio Manuel; but this decision is without
prejudice to his filing the proper suit against the concerned members of the Francisco
family in their personal capacity. No pronouncement as to costs.1wphi1.nt
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 126204
November 20, 2001
NATIONAL POWER CORPORATION, petitioner,
vs.
PHILIPP BROTHERS OCEANIC, INC., respondent.
SANDOVAL-GUTIERREZ, J.:
Where a person merely uses a right pertaining to him, without bad faith or intent to
injure, the fact that damages are thereby suffered by another will not make him
liable.1
This principle finds useful application to the present case.
Before us is a petition for review of the Decision 2 dated August 27, 1996 of the Court
of Appeals affirming in toto the Decision3 dated January 16, 1992 of the Regional Trial
Court, Branch 57, Makati City.

The facts are:

On May 14, 1987, the National Power Corporation (NAPOCOR) issued invitations to
bid for the supply and delivery of 120,000 metric tons of imported coal for its
Batangas Coal-Fired Thermal Power Plant in Calaca, Batangas. The Philipp Brothers
Oceanic, Inc. (PHIBRO) prequalified and was allowed to participate as one of the
bidders. After the public bidding was conducted, PHIBRO's bid was accepted.
NAPOCOR's acceptance was conveyed in a letter dated July 8, 1987, which was
received by PHIBRO on July 15, 1987.The "Bidding Terms and
Specifications"4 provide for the manner of shipment of coals, thus:
"SECTION V
SHIPMENT
The winning TENDERER who then becomes the SELLER shall arrange and provide
gearless bulk carrier for the shipment of coal to arrive at discharging port on or before
thirty (30) calendar days after receipt of the Letter of Credit by the SELLER or its
nominee as per Section XIV hereof to meet the vessel arrival schedules at Calaca,
Batangas, Philippines as follows:
60,000 +/ - 10 % July 20, 1987
60,000 +/ - 10% September 4, 1987"5
On July 10, 1987, PHIBRO sent word to NAPOCOR that industrial disputes might
soon plague Australia, the shipment's point of origin, which could seriously hamper
PHIBRO's ability to supply the needed coal.6 From July 23 to July 31, 1987, PHIBRO
again apprised NAPOCOR of the situation in Australia, particularly informing the latter
that the ship owners therein are not willing to load cargo unless a "strike-free" clause
is incorporated in the charter party or the contract of carriage. 7 In order to hasten the
transfer of coal, PHIBRO proposed to NAPOCOR that they equally share the burden
of a "strike-free" clause. NAPOCOR refused.
On August 6, 1987, PHIBRO received from NAPOCOR a confirmed and workable
letter of credit. Instead of delivering the coal on or before the thirtieth day after receipt
of the Letter of Credit, as agreed upon by the parties in the July contract, PHIBRO
effected its first shipment only on November 17, 1987.
Consequently, in October 1987, NAPOCOR once more advertised for the delivery of
coal to its Calaca thermal plant. PHIBRO participated anew in this subsequent
bidding. On November 24, 1987, NAPOCOR disapproved PHIBRO's application for
pre-qualification to bid for not meeting the minimum requirements.8 Upon further
inquiry, PHIBRO found that the real reason for the disapproval was its purported
failure to satisfy NAPOCOR's demand for damages due to the delay in the delivery of
the first coal shipment.
This prompted PHIBRO to file an action for damages with application for injunction
against NAPOCOR with the Regional Trial Court, Branch 57, Makati City.9 In its
complaint, PHIBRO alleged that NAPOCOR's act of disqualifying it in the October
1987 bidding and in all subsequent biddings was tainted with malice and bad faith.
PHIBRO prayed for actual, moral and exemplary damages and attorney's fees.

In its answer, NAPOCOR averred that the strikes in Australia could not be invoked as
reason for the delay in the delivery of coal because PHIBRO itself admitted that as of
July 28, 1987 those strikes had already ceased. And, even assuming that the strikes
were still ongoing, PHIBRO should have shouldered the burden of a "strike-free"
clause because their contract was "C and F Calaca, Batangas, Philippines," meaning,
the cost and freight from the point of origin until the point of destination would be for
the account of PHIBRO. Furthermore, NAPOCOR claimed that due to PHIBRO's
failure to deliver the coal on time, it was compelled to purchase coal from ASEA at a
higher price. NAPOCOR claimed for actual damages in the amount of
P12,436,185.73, representing the increase in the price of coal, and a claim of
P500,000.00 as litigation expenses.10
Thereafter, trial on the merits ensued.
On January 16, 1992, the trial court rendered a decision in favor of PHIBRO, the
dispositive portion of which reads:
"WHEREFORE, judgment is hereby rendered in favor of plaintiff Philipp Brothers
Oceanic Inc. (PHIBRO) and against the defendant National Power Corporation
(NAPOCOR) ordering the said defendant NAPOCOR:
1. To reinstate Philipp Brothers Oceanic, Inc. (PHIBRO) in the defendant National
Power Corporation's list of accredited bidders and allow PHIBRO to participate in any
and all future tenders of National Power Corporation for the supply and delivery of
imported steam coal;
2. To pay Philipp Brothers Oceanic, Inc. (PHIBRO);
a. The peso equivalent at the time of payment of $864,000 as actual damages,
b. The peso equivalent at the time of payment of $100,000 as moral damages;
c. The peso equivalent at the time of payment of $50,000 as exemplary damages;
d. The peso equivalent at the time of payment of $73,231.91 as reimbursement for
expenses, cost of litigation and attorney's fees;
3. To pay the costs of suit;
4. The counterclaims of defendant NAPOCOR are dismissed for lack of merit.
SO ORDERED."11
Unsatisfied, NAPOCOR, through the Solicitor General, elevated the case to the Court
of Appeals. On August 27, 1996, the Court of Appeals rendered a Decision affirming
in toto the Decision of the Regional Trial Court. It ratiocinated that:
"There is ample evidence to show that although PHIBRO's delivery of the shipment of
coal was delayed, the delay was in fact caused by a) Napocor's own delay in opening
a workable letter of credit; and b) the strikes which plaqued the Australian coal
industry from the first week of July to the third week of September 1987. Strikes are

included in the definition of force majeure in Section XVII of the Bidding Terms and
Specifications, (supra), so Phibro is not liable for any delay caused thereby.
Phibro was informed of the acceptance of its bid on July 8, 1987. Delivery of coal was
to be effected thirty (30) days from Napocor's opening of a confirmed and workable
letter of credit. Napocor was only able to do so on August 6, 1987.
By that time, Australia's coal industry was in the middle of a seething controversy and
unrest, occasioned by strikes, overtime bans, mine stoppages. The origin, the scope
and the effects of this industrial unrest are lucidly described in the uncontroverted
testimony of James Archibald, an employee of Phibro and member of the Export
Committee of the Australian Coal Association during the time these events transpired.
xxx

xxx

xxx

The records also attest that Phibro periodically informed Napocor of these
developments as early as July 1, 1987, even before the bid was approved. Yet,
Napocor did not forthwith open the letter of credit in order to avoid delay which might
be caused by the strikes and their after-effects.
"Strikes" are undoubtedly included in the force majeure clause of the Bidding Terms
and Specifications (supra). The renowned civilist, Prof. Arturo Tolentino, defines
force majeure as "an event which takes place by accident and could not have been
foreseen." (Civil Code of the Philippines, Volume IV, Obligations and Contracts, 126,
[1991]) He further states:
"Fortuitous events may be produced by two general causes: (1) by Nature, such as
earthquakes, storms, floods, epidemics, fires, etc., and (2) by the act of man, such as
an armed invasion, attack by bandits, governmental prohibitions, robbery, etc."
Tolentino adds that the term generally applies, broadly speaking, to natural accidents.
In order that acts of man such as a strike, may constitute fortuitous event, it is
necessary that they have the force of an imposition which the debtor could not have
resisted. He cites a parallel example in the case of Philippine National Bank v. Court
of Appeals, 94 SCRA 357 (1979), wherein the Supreme Court said that the outbreak
of war which prevents performance exempts a party from liability.
Hence, by law and by stipulation of the parties, the strikes which took place in
Australia from the first week of July to the third week of September, 1987, exempted
Phibro from the effects of delay of the delivery of the shipment of coal."12
Twice thwarted, NAPOCOR comes to us via a petition for review ascribing to the
Court of Appeals the following errors:
I
"Respondent Court of Appeals gravely and seriously erred in concluding and so
holding that PHIBRO's delay in the delivery of imported coal was due to NAPOCOR's
alleged delay in opening a letter of credit and to forcemajeure, and not to PHIBRO's
own deliberate acts and faults."13
II

"Respondent Court of Appeals gravely and seriously erred in concluding and so

holding that NAPOCOR acted maliciously and unjustifiably in disqualifying PHIBRO
from participating in the December 8, 1987 and future biddings for the supply of
imported coal despite the existence of valid grounds therefor such as serious
impairment of its track record."14
III
"Respondent Court of Appeals gravely and seriously erred in concluding and so
holding that PHIBRO was entitled to injunctive relief, to actual or compensatory, moral
and exemplary damages, attorney's fees and litigation expenses despite the clear
absence of legal and factual bases for such award."15
IV
"Respondent Court of Appeals gravely and seriously erred in absolving PHIBRO from
any liability for damages to NAPOCOR for its unjustified and deliberate refusal and/or
failure to deliver the contracted imported coal within the stipulated period."16
V
"Respondent Court of Appeals gravely and seriously erred in dismissing NAPOCOR's
counterclaims for damages and litigation expenses."17
It is axiomatic that only questions of law, not questions of fact, may be raised before
this Court in a petition for review under Rule 45 of the Rules of Court. 18 The findings
of facts of the Court of Appeals are conclusive and binding on this Court 19 and they
carry even more weight when the said court affirms the factual findings of the trial
court.20 Stated differently, the findings of the Court of .Appeals, by itself, which are
supported by substantial evidence, are almost beyond the power of review by this
Court.21
With the foregoing settled jurisprudence, we find it pointless to delve lengthily on the
factual issues raised by petitioner. The existence of strikes in Australia having been
duly established in the lower courts, we are left only with the burden of determining
whether or not NAPOCOR acted wrongfully or with bad faith in disqualifying PHIBRO
from participating in the subsequent public bidding.
Let us consider the case in its proper perspective.
The Court of Appeals is justified in sustaining the Regional Trial Court's decision
exonerating PHIBRO from any liability for damages to NAPOCOR as it was clearly
established from the evidence, testimonial and documentary, that what prevented
PHIBRO from complying with its obligation under the July 1987 contract was the
industrial disputes which besieged Australia during that time. Extant in our Civil Code
is the rule that no person shall be responsible for those events which could not be
foreseen, or which, though foreseen, were inevitable. 22 This means that when an
obligor is unable to fulfill his obligation because of a fortuitous event or force majeure,
he cannot be held liable for damages for non-performance.23
In addition to the above legal precept, it is worthy to note that PHIBRO and
NAPOCOR explicitly agreed in Section XVII of the "Bidding Terms and

Specifications"24 that "neither seller (PHIBRO) nor buyer (NAPOCOR) shall be liable
for any delay in or failure of the performance of its obligations, other than the payment
of money due, if any such delay or failure is due to Force Majeure." Specifically, they
defined force majeure as "any disabling cause beyond the control of and without fault
or negligence of the party, which causes may include but are not restricted to Acts of
God or of the public enemy; acts of the Government in either its sovereign or
contractual capacity; governmental restrictions; strikes, fires, floods, wars, typhoons,
storms, epidemics and quarantine restrictions."
The law is clear and so is the contract between NAPOCOR and PHIBRO. Therefore,
we have no reason to rule otherwise.
However, proceeding from the premise that PHIBRO was prevented by
force majeure from complying with its obligation, does it necessarily follow that
NAPOCOR acted unjustly, capriciously, and unfairly in disapproving PHIBRO's
application for pre-qualification to bid?
First, it must be stressed that NAPOCOR was not bound under any contract to
approve PHIBRO's pre-qualification requirements. In fact, NAPOCOR had expressly
reserved its right to reject bids. The Instruction to Bidders found in the "PostQualification Documents/Specifications for the Supply and Delivery of Coal for the
Batangas Coal-Fired Thermal Power Plant I at Calaca, Batangas Philippines," 25 is
explicit, thus:
"IB-17 RESERVATION OF NAPOCOR TO REJECT BIDS
NAPOCOR reserves the right to reject any or all bids, to waive any minor informality
in the bids received.The right is also reserved to reject the bids of any bidder who has
previously failed to properly perform or complete on time any and all contracts for
delivery of coal or any supply undertaken by a bidder."26(Emphasis supplied)
This Court has held that where the right to reject is so reserved, the lowest bid or any
bid for that matter may be rejected on a mere technicality.27 And where the
government as advertiser, availing itself of that right, makes its choice in rejecting any
or all bids, the losing bidder has no cause to complain nor right to dispute that choice
unless an unfairness or injustice is shown. Accordingly, a bidder has no ground of
action to compel the Government to award the contract in his favor, nor to compel it to
accept his bid. Even the lowest bid or any bid may be rejected. 28 In Celeste v. Court
of Appeals,29 we had the occasion to rule:
"Moreover, paragraph 15 of the Instructions to Bidders states that 'the Government
hereby reserves the right to reject any or all bids submitted.' In the case of A.C.
Esguerra and Sons v. Aytona, 4 SCRA 1245, 1249 (1962), we held:
'x x x [I]n the invitation to bid, there is a condition imposed upon the bidders to the
effect that the bidders shall be subject to the right of the government to reject any and
all bids subject to its discretion. Here the government has made its choice, and
unless an unfairness or injustice is shown, the losing bidders have no cause to
complain, nor right to dispute that choice.'

Since there is no evidence to prove bad faith and arbitrariness on the part of the
petitioners in evaluating the bids, we rule that the private respondents are not entitled
to damages representing lost profits." (Emphasis supplied)
Verily, a reservation of the government of its right to reject any bid, generally vests in
the authorities a wide discretion as to who is the best and most advantageous bidder.
The exercise of such discretion involves inquiry, investigation, comparison,
deliberation and decision, which are quasi-judicial functions, and when honestly
exercised, may not be reviewed by the court. 30 In Bureau Veritas v. Office of the
President,31 we decreed:
"The discretion to accept or reject a bid and award contracts is vested in the
Government agencies entrusted with that function. The discretion given to the
authorities on this matter is of such wide latitude that the Courts will not interfere
therewith, unless it is apparent that it is used as a shield to a fraudulent award.
(Jalandoni v. NARRA, 108 Phil. 486 [1960]) x x x. The exercise of this discretion is a
policy decision that necessitates prior inquiry, investigation, comparison, evaluation,
and deliberation. This task can best be discharged by the Government agencies
concerned, not by the Courts. The role of the Courts is to ascertain whether a branch
or instrumentality of the Government has transgresses its constitutional boundaries.
But the Courts will not interfere with executive or legislative discretion exercised
within those boundaries. Otherwise, it strays into the realm of policy decision-making.
x x x." (Emphasis supplied)
Owing to the discretionary character of the right involved in this case, the propriety of
NAPOCOR's act should therefore be judged on the basis of the general principles
regulating human relations, the forefront provision of which is Article 19 of the Civil
Code which provides that "every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith."32Accordingly, a person will be protected only when he acts in
the legitimate exercise of his right, that is, when he acts with prudence and in good
faith; but not when he acts with negligence or abuse.33
Did NAPOCOR abuse its right or act unjustly in disqualifying PHIBRO from the public
bidding?
We rule in the negative.
In practice, courts, in the sound exercise of their discretion, will have to determine
under all the facts and circumstances when the exercise of a right is unjust, or when
there has been an abuse of right.34
We went over the record of the case with painstaking solicitude and we are convinced
that NAPOCOR's act of disapproving PHIBRO's application for pre-qualification to bid
was without any intent to injure or a purposive motive to perpetrate damage.
Apparently, NAPOCOR acted on the strong conviction that PHIBRO had a "seriouslyimpaired" track record. NAPOCOR cannot be faulted from believing so. At this
juncture, it is worth mentioning that at the time NAPOCOR issued its subsequent
Invitation to Bid, i.e., October 1987, PHIBRO had not yet delivered the first shipment
of coal under the July 1987 contract, which was due on or before September 5, 1987.
Naturally, NAPOCOR is justified in entertaining doubts on PHIBRO's qualification or
capability to assume an obligation under a new contract.

Moreover, PHIBRO's actuation in 1987 raised doubts as to the real situation of the
coal industry in Australia. It appears from the records that when NAPOCOR was
constrained to consider an offer from another coal supplier (ASEA) at a price of
US$33.44 per metric ton, PHIBRO unexpectedly offered the immediate delivery of
60,000 metric tons of Ulan steam coal at US$31.00 per metric ton for arrival at
Calaca, Batangas on September 20-21, 1987."35 Of course, NAPOCOR had reason to
ponder how come PHIBRO could assure the immediate delivery of 60,000 metric
tons of coal from the same source to arrive at Calaca not later than September 20/21,
1987 but it could not deliver the coal it had undertaken under its contract?
Significantly, one characteristic of a fortuitous event, in a legal sense, and
consequently in relations to contracts, is that "the concurrence must be such as to
render it impossible for the debtor to fulfill his obligation in a normal manner." 36 Faced
with the above circumstance, NAPOCOR is justified in assuming that, may be, there
was really no fortuitous event or force majeure which could render it impossible for
PHIBRO to effect the delivery of coal. Correspondingly, it is also justified in treating
PHIBRO's failure to deliver a serious impairment of its track record. That the trial
court, thereafter, found PHIBRO's unexpected offer actually a result of its desire to
minimize losses on the part of NAPOCOR is inconsequential. In determining the
existence of good faith, the yardstick is the frame of mind of the
actor
at the time he committed the act, disregarding actualities or facts outside his
knowledge. We cannot fault NAPOCOR if it mistook PHIBRO's unexpected offer a
mere attempt on the latter's part to undercut ASEA or an indication of PHIBRO's
inconsistency. The circumstances warrant such contemplation.
That NAPOCOR believed all along that PHIBRO's failure to deliver on time was
unfounded is manifest from its letters37 reminding PHIBRO that it was bound to deliver
the coal within 30 days from its (PHIBRO's) receipt of the Letter of Credit, otherwise it
would be constrained to take legal action. The same honest belief can be deduced
from NAPOCOR's Board Resolution, thus:
"On the legal aspect, Management stressed that failure of PBO to deliver under the
contract makes them liable for damages, considering that the reasons invoked were
not valid. The measure of the damages will be limited to actual and compensatory
damages. However, it was reported that Philipp Brothers advised they would like to
have continuous business relation with NPC so they are willing to sit down or even
proposed that the case be submitted to the Department of Justice as to avoid a court
action or arbitration.
xxx

xxx

xxx

On the technical-economic aspect, Management claims that if PBO delivers in

November 1987 and January 1988, there are some advantages. If PBO reacts to any
legal action and fails to deliver, the options are: one, to use 100% Semirara and
second, to go into urgent coal order. The first option will result in a 75 MW derating
and oil will be needed as supplement. We will stand to lose around P30 M. On the
other hand, if NPC goes into an urgent coal order, there will be an additional expense
of $786,000 or P16.11 M, considering the price of the latest purchase with ASEA. On
both points, reliability is decreased."38

The very purpose of requiring a bidder to furnish the awarding authority its prequalification documents is to ensure that only those "responsible" and "qualified"
bidders could bid and be awarded with government contracts. It bears stressing that
the award of a contract is measured not solely by the smallest amount of bid for its
performance, but also by the "responsibility" of the bidder. Consequently, the integrity,
honesty, and trustworthiness of the bidder is to be considered. An awarding official is
justified in considering a bidder not qualified or not responsible if he has previously
defrauded the public in such contracts or if, on the evidence before him, the official
bona fide believes the bidder has committed such fraud, despite the fact that there is
yet no judicial determination to that effect.39 Otherwise stated, if the awarding body
bona fide believes that a bidder has seriously impaired its track record because of a
particular conduct, it is justified in disqualifying the bidder. This policy is necessary to
protect the interest of the awarding body against irresponsible bidders.
Thus, one who acted pursuant to the sincere belief that another willfully committed an
act prejudicial to the interest of the government cannot be considered to have acted in
bad faith. Bad faith has always been a question of intention. It is that corrupt motive
that operates in the mind. As understood in law, it contemplates a state of mind
affirmatively operating with furtive design or with some motive of self-interest or ill-will
or for ulterior purpose.40 While confined in the realm of thought, its presence may be
ascertained through the party's actuation or through circumstantial evidence. 41 The
circumstances under which NAPOCOR disapproved PHIBRO's pre-qualification to bid
do not show an intention to cause damage to the latter. The measure it adopted was
one of self-protection. Consequently, we cannot penalize NAPOCOR for the course of
action it took. NAPOCOR cannot be made liable for actual, moral and exemplary
damages.
Corollarily, in awarding to PHIBRO actual damages in the amount of $864,000, the
Regional Trial Court computed what could have been the profits of PHIBRO had
NAPOCOR allowed it to participate in the subsequent public bidding. It ruled that
"PHIBRO would have won the tenders for the supply of about 960,000 metric tons out
of at least 1,200,000 metric tons" from the public bidding of December 1987 to 1990.
We quote the trial court's ruling, thus:
". . . PHIBRO was unjustly excluded from participating in at least five (5) tenders
beginning December 1987 to 1990, for the supply and delivery of imported coal with a
total volume of about 1,200,000 metric tons valued at no less than US$32 Million.
(Exhs. "AA," "AA-1-1," to "AA-2"). The price of imported coal for delivery in 1988 was
quoted in June 1988 by bidders at US$41.35 to US$43.95 per metric ton (Exh. "JJ");
in September 1988 at US$41.50 to US$49.50 per metric ton (Exh. "J-1"); in
November 1988 at US$39.00 to US$48.50 per metric ton (Exh. "J-2") and for the
1989 deliveries, at US$44.35 to US$47.35 per metric ton (Exh. "J-3") and US$38.00
to US$48.25 per metric ton in September 1990 (Exh. "JJ-6" and "JJ-7"). PHIBRO
would have won the tenders for the supply and delivery of about 960,000 metric tons
of coal out of at least 1,200,000 metric tons awarded during said period based on its
proven track record of 80%. The Court, therefore finds that as a result of its
disqualification, PHIBRO suffered damages equivalent to its standard 3% margin in
960,000 metric tons of coal at the most conservative price of US$30,000 per metric
ton, or the total of US$864,000 which PHIBRO would have earned had it been
allowed to participate in biddings in which it was disqualified and in subsequent
tenders for supply and delivery of imported coal."

We find this to be erroneous.

Basic is the rule that to recover actual damages, the amount of loss must not only be
capable of proof but must actually be proven with reasonable degree of certainty,
premised upon competent proof or best evidence obtainable of the actual amount
thereof.42 A court cannot merely rely on speculations, conjectures, or guesswork as to
the fact and amount of damages. Thus, while indemnification for damages shall
comprehend not only the value of the loss suffered, but also that of the profits which
the obligee failed to obtain, 43 it is imperative that the basis of the alleged unearned
profits is not too speculative and conjectural as to show the actual damages which
may be suffered on a future period.
In Pantranco North Express, Inc. v. Court of Appeals,44 this Court denied the plaintiff's
claim for actual damages which was premised on a contract he was about to
negotiate on the ground that there was still the requisite public bidding to be complied
with, thus:
"As to the alleged contract he was about to negotiate with Minister Hipolito, there is
no showing that the same has been awarded to him. If Tandoc was about to negotiate
a contract with Minister Hipolito, there was no assurance that the former would get it
or that the latter would award the contract to him since there was the requisite public
bidding. The claimed loss of profit arising out of that alleged contract which was still
to be negotiated is a mere expectancy. Tandoc's claim that he could have earned P2
million in profits is highly speculative and no concrete evidence was presented to
prove the same. The only unearned income to which Tandoc is entitled to from the
evidence presented is that for the one-month period, during which his business was
interrupted, which is P6,125.00, considering that his annual net income was
P73,500.00."
In Lufthansa German Airlines v. Court of Appeals,45 this Court likewise disallowed the
trial court's award of actual damages for unrealized profits in the amount of
US$75,000.00 for being highly speculative. It was held that "the realization of profits
by respondent . . . was not a certainty, but depended on a number of factors, foremost
of which was his ability to invite investors and to win the bid." This Court went further
saying that actual or compensatory damages cannot be presumed, but must be duly
proved, and proved with reasonable degree of certainty.
And in National Power Corporation v. Court of Appeals,46 the Court, in denying the
bidder's claim for unrealized commissions, ruled that even if NAPOCOR does not
deny its (bidder's) claims for unrealized commissions, and that these claims have
been transmuted into judicial admissions, these admissions cannot prevail over the
rules and regulations governing the bidding for NAPOCOR contracts, which
necessarily and inherently include the reservation by the NAPOCOR of its right to
reject any or all bids.
The award of moral damages is likewise improper. To reiterate, NAPOCOR did not
act in bad faith. Moreover, moral damages are not, as a general rule, granted to a
corporation.47 While it is true that besmirched reputation is included in moral
damages, it cannot cause mental anguish to a corporation, unlike in the case of a
natural person, for a corporation has no reputation in the sense that an individual has,
and besides, it is inherently impossible for a corporation to suffer mental
anguish.48 In LBC Express, Inc. v. Court of Appeals,49 we ruled:

"Moral damages are granted in recompense for physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. A corporation, being an artificial person and having
existence only in legal contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only by one having a nervous system and it flows from
real ills, sorrows, and griefs of life all of which cannot be suffered by respondent
bank as an artificial person."

moral and exemplary damages, reimbursement for expenses, cost of litigation and
attorney's fees, and costs of suit, is DELETED.
SO ORDERED.

Neither can we award exemplary damages under Article 2234 of the Civil Code.
Before the court may consider the question of whether or not exemplary damages
should be awarded, the plaintiff must show that he is entitled to moral, temperate, or
compensatory damages.
NAPOCOR, in this petition, likewise contests the judgment of the lower courts
awarding PHIBRO the amount of $73,231.91 as reimbursement for expenses, cost of
litigation and attorney's fees.
We agree with NAPOCOR.
This Court has laid down the rule that in the absence of stipulation, a winning party
may be awarded attorney's fees only in case plaintiff's action or defendant's stand is
so untenable as to amount to gross and evident bad faith. 50 This cannot be said of the
case at bar. NAPOCOR is justified in resisting PHIBRO's claim for damages. As a
matter of fact, we partially grant the prayer of NAPOCOR as we find that it did not act
in bad faith in disapproving PHIBRO's pre-qualification to bid.
Trial courts must be reminded that attorney's fees may not be awarded to a party
simply because the judgment is favorable to him, for it may amount to imposing a
premium on the right to redress grievances in court. We adopt the same policy with
respect to the expenses of litigation. A winning party may be entitled to expenses of
litigation only where he, by reason of plaintiff's clearly unjustifiable claims or
defendant's unreasonable refusal to his demands, was compelled to incur said
expenditures. Evidently, the facts of this case do not warrant the granting of such
litigation expenses to PHIBRO.

Republic of the Philippines

SUPREME COURT
Manila
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

At this point, we believe that, in the interest of fairness, NAPOCOR should give
PHIBRO another opportunity to participate in future public bidding. As earlier
mentioned, the delay on its part was due to a fortuitous event.

CARPIO, J.:

But before we dispose of this case, we take this occasion to remind PHIBRO of the
indispensability of coal to a coal-fired thermal plant. With households and businesses
being entirely dependent on the electricity supplied by NAPOCOR, the delivery of
coal cannot be venturesome. Indeed, public interest demands that one who offers to
deliver coal at an appointed time must give a reasonable assurance that it can carry
through. With the deleterious possible consequences that may result from failure to
deliver the needed coal, we believe there is greater strain of commitment in this kind
of obligation.

This petition for review1 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 Decision3 of the Regional Trial
Court of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of Appeals held
Filipinas Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and
Carmelo Rima liable for libel and ordered them to solidarily pay Ago Medical and
Educational Center-Bicol Christian College of Medicine moral damages, attorneys
fees and costs of suit.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 126204 dated
August 27, 1996 is hereby MODIFIED. The award, in favor of PHIBRO, of actual,

The Antecedents

The Case

"Expos" is a radio documentary4 program hosted by Carmelo Mel Rima ("Rima")

and Hermogenes Jun Alegre ("Alegre").5 Expos is aired every morning over DZRCAM which is owned by Filipinas Broadcasting Network, Inc. ("FBNI"). "Expos" is
heard over Legazpi City, the Albay municipalities and other Bicol areas.6
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various
alleged complaints from students, teachers and parents against Ago Medical and
Educational Center-Bicol Christian College of Medicine ("AMEC") and its
administrators. Claiming that the broadcasts were defamatory, AMEC and Angelita
Ago ("Ago"), as Dean of AMECs College of Medicine, filed a complaint for
damages7 against FBNI, Rima and Alegre on 27 February 1990. Quoted are portions
of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking medical course
at AMEC-BCCM, advise them to pass all subjects because if they fail in any
subject they will repeat their year level, taking up all subjects including those
they have passed already. Several students had approached me stating that they
had consulted with the DECS which told them that there is no such regulation. If
[there] is no such regulation why is AMEC doing the same?
xxx
Second: Earlier AMEC students in Physical Therapy had complained that the
course is not recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if the subject
does not have an instructor - such greed for money on the part of AMECs
administration. Take the subject Anatomy: students would pay for the subject upon
enrolment because it is offered by the school. However there would be no instructor
for such subject. Students would be informed that course would be moved to a later
date because the school is still searching for the appropriate instructor.
xxx
It is a public knowledge that the Ago Medical and Educational Center has survived
and has been surviving for the past few years since its inception because of funds
support from foreign foundations. If you will take a look at the AMEC premises youll
find out that the names of the buildings there are foreign soundings. There is a
McDonald Hall. Why not Jose Rizal or Bonifacio Hall? That is a very concrete and
undeniable evidence that the support of foreign foundations for AMEC is substantial,
isnt it? With the report which is the basis of the expose in DZRC today, it would be
very easy for detractors and enemies of the Ago family to stop the flow of support of
foreign foundations who assist the medical school on the basis of the latters purpose.
But if the purpose of the institution (AMEC) is to deceive students at cross purpose
with its reason for being it is possible for these foreign foundations to lift or suspend
their donations temporarily.8
xxx

On the other hand, the administrators of AMEC-BCCM, AMEC Science High

School and the AMEC-Institute of Mass Communication in their effort to
minimize expenses in terms of salary are absorbing or continues to accept
"rejects". For example how many teachers in AMEC are former teachers of Aquinas
University but were removed because of immorality? Does it mean that the present
administration of AMEC have the total definite moral foundation from catholic
administrator of Aquinas University. I will prove to you my friends, that AMEC is a
dumping ground, garbage, not merely of moral and physical misfits. Probably
they only qualify in terms of intellect. The Dean of Student Affairs of AMEC is Justita
Lola, as the family name implies. She is too old to work, being an old woman. Is the
AMEC administration exploiting the very [e]nterprising or compromising and
undemanding Lola? Could it be that AMEC is just patiently making use of Dean
Justita Lola were if she is very old. As in atmospheric situation zero visibility the
plane cannot land, meaning she is very old, low pay follows. By the way, Dean Justita
Lola is also the chairman of the committee on scholarship in AMEC. She had retired
from Bicol University a long time ago but AMEC has patiently made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and
physically misfit people. What does this mean? Immoral and physically misfits as
teachers.
May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that
your are no longer fit to teach. You are too old. As an aviation, your case is zero
visibility. Dont insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the
scholarship committee at that. The reason is practical cost saving in salaries,
because an old person is not fastidious, so long as she has money to buy the
ingredient of beetle juice. The elderly can get by thats why she (Lola) was taken in
as Dean.
xxx
xxx On our end our task is to attend to the interests of students. It is likely that the
students would be influenced by evil. When they become members of society
outside of campus will be liabilities rather than assets.What do you expect from a
doctor who while studying at AMEC is so much burdened with unreasonable
imposition? What do you expect from a student who aside from peculiar problems
because not all students are rich in their struggle to improve their social status are
even more burdened with false regulations. xxx9(Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning institution. With the
supposed exposs, FBNI, Rima and Alegre "transmitted malicious imputations, and
as such, destroyed plaintiffs (AMEC and Ago) reputation." AMEC and Ago included
FBNI as defendant for allegedly failing to exercise due diligence in the selection and
supervision of its employees, particularly Rima and Alegre.

On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an
Answer10 alleging that the broadcasts against AMEC were fair and true. FBNI, Rima
and Alegre claimed that they were plainly impelled by a sense of public duty to report
the "goings-on in AMEC, [which is] an institution imbued with public interest."

SO ORDERED.14

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.

Hence, FBNI filed this petition.15

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:

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

The Ruling of the Court of Appeals

The Court of Appeals upheld the trial courts ruling that the questioned broadcasts are
libelous per se and that FBNI, Rima and Alegre failed to overcome the legal
presumption of malice. The Court of Appeals found Rima and Alegres claim that they
were actuated by their moral and social duty to inform the public of the students
gripes as insufficient to justify the utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the Court
of Appeals ruled that the broadcasts were made "with reckless disregard as to
whether they were true or false." The appellate court pointed out that FBNI, Rima and
Alegre failed to present in court any of the students who allegedly complained against
AMEC. Rima and Alegre merely gave a single name when asked to identify the
students. According to the Court of Appeals, these circumstances cast doubt on the
veracity of the broadcasters claim that they were "impelled by their moral and social
duty to inform the public about the students gripes."
The Court of Appeals found Rima also liable for libel since he remarked that "(1)
AMEC-BCCM is a dumping ground for morally and physically misfit teachers; (2)
AMEC obtained the services of Dean Justita Lola to minimize expenses on its
employees salaries; and (3) AMEC burdened the students with unreasonable
imposition and false regulations."16

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.

The Court of Appeals held that FBNI failed to exercise due diligence in the selection
and supervision of its employees for allowing Rima and Alegre to make the radio
broadcasts without the proper KBP accreditation. The Court of Appeals denied Agos
claim for damages and attorneys fees because the libelous remarks were directed
against AMEC, and not against her. The Court of Appeals adjudged FBNI, Rima and
Alegre solidarily liable to pay AMEC moral damages, attorneys fees and costs of
suit.1awphi1.nt

SO ORDERED. 13 (Emphasis supplied)

FBNI raises the following issues for resolution:

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:

I. WHETHER THE BROADCASTS ARE LIBELOUS;

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.

Issues

II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;

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

We deny the petition.

This is a civil action for damages as a result of the allegedly defamatory remarks of
Rima and Alegre against AMEC.17 While AMEC did not point out clearly the legal
basis for its complaint, a reading of the complaint reveals that AMECs cause of action
is based on Articles 30 and 33 of the Civil Code. Article 30 18 authorizes a separate
civil action to recover civil liability arising from a criminal offense. On the other hand,
Article 3319 particularly provides that the injured party may bring a separate civil action
for damages in cases of defamation, fraud, and physical injuries. AMEC also invokes
Article 1920 of the Civil Code to justify its claim for damages. AMEC cites Articles
217621 and 218022 of the Civil Code to hold FBNI solidarily liable with Rima and
Alegre.
I.
Whether the broadcasts are libelous
A libel23 is a public and malicious imputation of a crime, or of a vice or defect, real or
imaginary, or any act or omission, condition, status, or circumstance tending to cause
the dishonor, discredit, or contempt of a natural or juridical person, or to blacken the
memory of one who is dead.24
There is no question that the broadcasts were made public and imputed to AMEC
defects or circumstances tending to cause it dishonor, discredit and contempt. Rima
and Alegres remarks such as "greed for money on the part of AMECs
administrators"; "AMEC is a dumping ground, garbage of xxx moral and physical
misfits"; and AMEC students who graduate "will be liabilities rather than assets" of the
society are libelous per se. Taken as a whole, the broadcasts suggest that AMEC is a
money-making institution where physically and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that
Rima and Alegre were plainly impelled by their civic duty to air the students gripes.
FBNI alleges that there is no evidence that ill will or spite motivated Rima and Alegre
in making the broadcasts. FBNI further points out that Rima and Alegre exerted
efforts to obtain AMECs side and gave Ago the opportunity to defend AMEC and its
administrators. FBNI concludes that since there is no malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious. 25 Rima and Alegre failed to show
adequately their good intention and justifiable motive in airing the supposed gripes of
the students. As hosts of a documentary or public affairs program, Rima and Alegre
should have presented the public issues "free from inaccurate and misleading
information."26 Hearing the students alleged complaints a month before the
expos,27 they had sufficient time to verify their sources and information. However,
Rima and Alegre hardly made a thorough investigation of the students alleged gripes.
Neither did they inquire about nor confirm the purported irregularities in AMEC from
the Department of Education, Culture and Sports. Alegre testified that he merely went
to AMEC to verify his report from an alleged AMEC official who refused to disclose
any information. Alegre simply relied on the words of the students "because they were
many and not because there is proof that what they are saying is true." 28 This plainly
shows Rima and Alegres reckless disregard of whether their report was true or not.

Contrary to FBNIs claim, the broadcasts were not "the result of straight reporting."
Significantly, some courts in the United States apply the privilege of "neutral
reportage" in libel cases involving matters of public interest or public figures. Under
this privilege, a republisher who accurately and disinterestedly reports certain
defamatory statements made against public figures is shielded from liability,
regardless of the republishers subjective awareness of the truth or falsity of the
accusation.29 Rima and Alegre cannot invoke the privilege of neutral reportage
because unfounded comments abound in the broadcasts. Moreover, there is no
existing controversy involving AMEC when the broadcasts were made. The privilege
of neutral reportage applies where the defamed person is a public figure who is
involved in an existing controversy, and a party to that controversy makes the
defamatory statement.30
However, FBNI argues vigorously that malice in law does not apply to this case.
Citing Borjal v. Court of Appeals,31 FBNI contends that the broadcasts "fall within
the coverage of qualifiedly privileged communications" for being commentaries on
matters of public interest. Such being the case, AMEC should prove malice in fact or
actual malice. Since AMEC allegedly failed to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the
"doctrine of fair comment," thus:
[F]air commentaries on matters of public interest are privileged and constitute a valid
defense in an action for libel or slander. The doctrine of fair comment means that
while in general every discreditable imputation publicly made is deemed false,
because every man is presumed innocent until his guilt is judicially proved, and every
false imputation is deemed malicious, nevertheless, when the discreditable imputation
is directed against a public person in his public capacity, it is not necessarily
actionable. In order that such discreditable imputation to a public official may be
actionable, it must either be a false allegation of fact or a comment based on a
false supposition. If the comment is an expression of opinion, based on
established facts, then it is immaterial that the opinion happens to be mistaken, as
long as it might reasonably be inferred from the facts.32(Emphasis supplied)
True, AMEC is a private learning institution whose business of educating students is
"genuinely imbued with public interest." The welfare of the youth in general and
AMECs students in particular is a matter which the public has the right to know. Thus,
similar to the newspaper articles in Borjal, the subject broadcasts dealt with matters
of public interest. However, unlike in Borjal, the questioned broadcasts are not based
on established facts. The record supports the following findings of the trial court:
xxx Although defendants claim that they were motivated by consistent reports of
students and parents against plaintiff, yet, defendants have not presented in court,
nor even gave name of a single student who made the complaint to them, much less
present written complaint or petition to that effect. To accept this defense of
defendants is too dangerous because it could easily give license to the media to
malign people and establishments based on flimsy excuses that there were reports to
them although they could not satisfactorily establish it. Such laxity would encourage
careless and irresponsible broadcasting which is inimical to public interests.

Secondly, there is reason to believe that defendant radio broadcasters, contrary to the
mandates of their duties, did not verify and analyze the truth of the reports before they
aired it, in order to prove that they are in good faith.
Alegre contended that plaintiff school had no permit and is not accredited to offer
Physical Therapy courses. Yet, plaintiff produced a certificate coming from DECS that
as of Sept. 22, 1987 or more than 2 years before the controversial broadcast,
accreditation to offer Physical Therapy course had already been given the plaintiff,
which certificate is signed by no less than the Secretary of Education and Culture
herself, Lourdes R. Quisumbing (Exh. C-rebuttal). Defendants could have easily
known this were they careful enough to verify. And yet, defendants were very
categorical and sounded too positive when they made the erroneous report that
plaintiff had no permit to offer Physical Therapy courses which they were offering.
The allegation that plaintiff was getting tremendous aids from foreign foundations like
Mcdonald Foundation prove not to be true also. The truth is there is no Mcdonald
Foundation existing. Although a big building of plaintiff school was given the name
Mcdonald building, that was only in order to honor the first missionary in Bicol of
plaintiffs religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants
over the air, not a single centavo appears to be received by plaintiff school from the
aforementioned McDonald Foundation which does not exist.
Defendants did not even also bother to prove their claim, though denied by Dra. Ago,
that when medical students fail in one subject, they are made to repeat all the other
subject[s], even those they have already passed, nor their claim that the school
charges laboratory fees even if there are no laboratories in the school. No evidence
was presented to prove the bases for these claims, at least in order to give
semblance of good faith.
As for the allegation that plaintiff is the dumping ground for misfits, and immoral
teachers, defendant[s] singled out Dean Justita Lola who is said to be so old, with
zero visibility already. Dean Lola testified in court last Jan. 21, 1991, and was found to
be 75 years old. xxx Even older people prove to be effective teachers like Supreme
Court Justices who are still very much in demand as law professors in their late years.
Counsel for defendants is past 75 but is found by this court to be still very sharp and
effective.l^vvphi1.net So is plaintiffs counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally
infirmed, but is still alert and docile.
The contention that plaintiffs graduates become liabilities rather than assets of our
society is a mere conclusion. Being from the place himself, this court is aware that
majority of the medical graduates of plaintiffs pass the board examination easily and
become prosperous and responsible professionals.33
Had the comments been an expression of opinion based on established facts, it is
immaterial that the opinion happens to be mistaken, as long as it might reasonably be
inferred from the facts.34 However, the comments of Rima and Alegre were not
backed up by facts. Therefore, the broadcasts are not privileged and remain
libelousper se.

The broadcasts also violate the Radio Code35 of the Kapisanan ng mga Brodkaster sa
Pilipinas, Ink. ("Radio Code"). Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues free from personal bias,
prejudice and inaccurate and misleading information. x x x Furthermore, the
station shall strive to present balanced discussion of issues. x x x.
xxx
7. The station shall be responsible at all times in the supervision of public affairs,
public issues and commentary programs so that they conform to the provisions and
standards of this code.
8. It shall be the responsibility of the newscaster, commentator, host and announcer
to protect public interest, general welfare and good order in the presentation of public
affairs and public issues.36 (Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the Radio Code, which lays
down the code of ethical conduct governing practitioners in the radio broadcast
industry. The Radio Code is a voluntary code of conduct imposed by the radio
broadcast industry on its own members. The Radio Code is a public warranty by the
radio broadcast industry that radio broadcast practitioners are subject to a code by
which their conduct are measured for lapses, liability and sanctions.
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 2138 of the Civil Code.
II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages because it is a
corporation.39
A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral shock.40 The Court of Appeals
cites Mambulao Lumber Co. v. PNB, et al.41 to justify the award of moral damages.
However, the Courts statement in Mambulao that "a corporation may have a good
reputation which, if besmirched, may also be a ground for the award of moral
damages" is an obiter dictum.42

Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 43 of
the Civil Code. This provision expressly authorizes the recovery of moral damages in
cases of libel, slander or any other form of defamation. Article 2219(7) does not
qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical
person such as a corporation can validly complain for libel or any other form of
defamation and claim for moral damages.44

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."

Moreover, where the broadcast is libelous per se, the law implies damages. 45 In such
a case, evidence of an honest mistake or the want of character or reputation of the
party libeled goes only in mitigation of damages.46Neither in such a case is the plaintiff
required to introduce evidence of actual damages as a condition precedent to the
recovery of some damages.47 In this case, the broadcasts are libelous per se. Thus,
AMEC is entitled to moral damages.

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.

However, we find the award of P300,000 moral damages unreasonable. The record
shows that even though the broadcasts were libelous per se, AMEC has not suffered
any substantial or material damage to its reputation. Therefore, we reduce the award
of moral damages from P300,000 to P150,000.
III.
Whether the award of attorneys fees is proper
FBNI contends that since AMEC is not entitled to moral damages, there is no basis
for the award of attorneys fees. FBNI adds that the instant case does not fall under
the enumeration in Article 220848 of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify
satisfactorily its claim for attorneys fees. AMEC did not adduce evidence to warrant
the award of attorneys fees. Moreover, both the trial and appellate courts failed to
explicitly state in their respective decisions the rationale for the award of attorneys
fees.49 InInter-Asia Investment Industries, Inc. v. Court of Appeals ,50 we held that:
[I]t is an accepted doctrine that the award thereof as an item of damages is the
exception rather than the rule, and counsels fees are not to be awarded every time a
party wins a suit. The power of the court to award attorneys fees under Article
2208 of the Civil Code demands factual, legal and equitable justification,
without which the award is a conclusion without a premise, its basis being
improperly left to speculation and conjecture. In all events, the court must
explicitly state in the text of the decision, and not only in the decretal portion thereof,
the legal reason for the award of attorneys fees.51 (Emphasis supplied)
While it mentioned about the award of attorneys fees by stating that it "lies within the
discretion of the court and depends upon the circumstances of each case," the Court
of Appeals failed to point out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre for moral damages, attorneys
fees and costs of suit

FBNIs arguments do not persuade us.

The basis of the present action is a tort. Joint tort feasors are jointly and severally
liable for the tort which they commit.52 Joint tort feasors are all the persons who
command, instigate, promote, encourage, advise, countenance, cooperate in, aid or
abet the commission of a tort, or who approve of it after it is done, if done for their
benefit.53 Thus, AMEC correctly anchored its cause of action against FBNI on Articles
2176 and 2180 of the Civil Code.1a\^/phi1.net
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable
to pay for damages arising from the libelous broadcasts. As stated by the Court of
Appeals, "recovery for defamatory statements published by radio or television may be
had from the owner of the station, a licensee, the operator of the station, or a
person who procures, or participates in, the making of the defamatory
statements."54 An employer and employee are solidarily liable for a defamatory
statement by the employee within the course and scope of his or her employment, at
least when the employer authorizes or ratifies the defamation. 55 In this case, Rima
and Alegre were clearly performing their official duties as hosts of FBNIs radio
program Expos when they aired the broadcasts. FBNI neither alleged nor proved
that Rima and Alegre went beyond the scope of their work at that time. There was
likewise no showing that FBNI did not authorize and ratify the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence
in the selection andsupervision of its employees, particularly Rima and Alegre.
FBNI merely showed that it exercised diligence in theselection of its broadcasters
without introducing any evidence to prove that it observed the same diligence in
thesupervision of Rima and Alegre. FBNI did not show how it exercised diligence in
supervising its broadcasters. FBNIs alleged constant reminder to its broadcasters to
"observe truth, fairness and objectivity and to refrain from using libelous and indecent
language" is not enough to prove due diligence in the supervision of its broadcasters.
Adequate training of the broadcasters on the industrys code of conduct, sufficient
information on libel laws, and continuous evaluation of the broadcasters performance
are but a few of the many ways of showing diligence in the supervision of
broadcasters.

FBNI claims that it "has taken all the precaution in the selection of Rima and Alegre
as broadcasters, bearing in mind their qualifications." However, no clear and
convincing evidence shows that Rima and Alegre underwent FBNIs "regimented
process" of application. Furthermore, FBNI admits that Rima and Alegre had
deficiencies in their KBP accreditation,56 which is one of FBNIs requirements before it
hires a broadcaster. Significantly, membership in the KBP, while voluntary, indicates
the broadcasters strong commitment to observe the broadcast industrys rules and
regulations. Clearly, these circumstances show FBNIs lack of diligence in
selecting andsupervising Rima and Alegre. Hence, FBNI is solidarily liable to pay
damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January
1999 and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No.
40151 with the MODIFICATION that the award of moral damages is reduced
from P300,000 to P150,000 and the award of attorneys fees is deleted. Costs against
petitioner.
SO ORDERED.

72886, which affirmed the 8 June 2001 decision of the Regional Trial Court, Branch 5,
of Cebu City.4
The facts, as culled from the records, follow.
On 28 March 1978, spouses Raymundo and Desamparados Crystal obtained
a P300,000.00 loan in behalf of the Cebu Contractors Consortium Co. (CCCC) from
the Bank of the Philippine Islands-Butuan branch (BPI-Butuan). The loan was
secured by a chattel mortgage on heavy equipment and machinery of CCCC. On the
same date, the spouses executed in favor of BPI-Butuan a Continuing
Suretyship5 where they bound themselves as surety of CCCC in the aggregate
principal sum of not exceeding P300,000.00. Thereafter, or on 29 March 1979,
Raymundo Crystal executed a promissory note6 for the amount of P300,000.00, also
in favor of BPI-Butuan.
Sometime in August 1979, CCCC renewed a previous loan, this time from BPI, Cebu
City branch (BPI-Cebu City). The renewal was evidenced by a promissory note7 dated
13 August 1979, signed by the spouses in their personal capacities and as managing
partners of CCCC. The promissory note states that the spouses are jointly and
severally liable with CCCC. It appears that before the original loan could be granted,
BPI-Cebu City required CCCC to put up a security.
However, CCCC had no real property to offer as security for the loan; hence, the
spouses executed a real estate mortgage8 over their own real property on 22
September 1977.9 On 3 October 1977, they executed another real estate mortgage
over the same lot in favor of BPI-Cebu City, to secure an additional loan
of P20,000.00 of CCCC.10

Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
G.R. No. 172428

November 28, 2008

HERMAN C. CRYSTAL, LAMBERTO C. CRYSTAL, ANN GEORGIA C. SOLANTE,

and DORIS C. MAGLASANG, as Heirs of Deceased SPOUSES RAYMUNDO I.
CRYSTAL
and
DESAMPARADOS
C.
CRYSTAL, petitioners,
vs.
BANK OF THE PHILIPPINE ISLANDS, respondent.
DECISION
TINGA, J.:
Before us is a Petition for Review1 of the Decision2 and Resolution3 of the Court of
Appeals dated 24 October 2005 and 31 March 2006, respectively, in CA G.R. CV No.

CCCC failed to pay its loans to both BPI-Butuan and BPI-Cebu City when they
became due. CCCC, as well as the spouses, failed to pay their obligations despite
demands. Thus, BPI resorted to the foreclosure of the chattel mortgage and the real
estate mortgage. The foreclosure sale on the chattel mortgage was initially stalled
with the issuance of a restraining order against BPI.11 However, following BPIs
compliance with the necessary requisites of extrajudicial foreclosure, the foreclosure
sale on the chattel mortgage was consummated on 28 February 1988, with the
proceeds amounting to P240,000.00 applied to the loan from BPI-Butuan which had
then reached P707,393.90.12Meanwhile, on 7 July 1981, Insular Bank of Asia and
America (IBAA), through its Vice-President for Legal and Corporate Affairs, offered to
buy the lot subject of the two (2) real
estate mortgages and to pay directly the spouses indebtedness in exchange for the
release of the mortgages. BPI rejected IBAAs offer to pay.13
BPI filed a complaint for sum of money against CCCC and the spouses before the
Regional Trial Court of Butuan City (RTC Butuan), seeking to recover the deficiency
of the loan of CCCC and the spouses with BPI-Butuan. The trial court ruled in favor of
BPI. Pursuant to the decision, BPI instituted extrajudicial foreclosure of the spouses
mortgaged property.14
On 10 April 1985, the spouses filed an action for Injunction With Damages, With A
Prayer For A Restraining Order and/ or Writ of Preliminary Injunction.15 The spouses
claimed that the foreclosure of the real estate mortgages is illegal because BPI

should have exhausted CCCCs properties first, stressing that they are mere
guarantors of the renewed loans. They also prayed that they be awarded moral and
exemplary damages, attorneys fees, litigation expenses and cost of suit.
Subsequently, the spouses filed an amended complaint, 16 additionally alleging that
CCCC had opened and maintained a foreign currency savings account (FCSA-197)
with bpi, Makati branch (BPI-Makati), and that said FCSA was used as security for
a P450,000.00 loan also extended by BPI-Makati. TheP450,000.00 loan was
allegedly paid, and thereafter the spouses demanded the return of the FCSA
passbook. BPI rejected the demand; thus, the spouses were unable to withdraw from
the said account to pay for their other obligations to BPI.
The trial court dismissed the spouses complaint and ordered them to pay moral and
exemplary damages and attorneys fees to BPI. 17 It ruled that since the spouses
agreed to bind themselves jointly and severally, they are solidarily liable for the loans;
hence, BPI can validly foreclose the two real estate mortgages. Moreover, being
guarantors-mortgagors, the spouses are not entitled to the benefit of exhaustion.
Anent the FCSA, the trial court found that CCCC originally had FCDU SA No. 197
with BPI, Dewey Boulevard branch, which was transferred to BPI-Makati as FCDU SA
76/0035, at the request of Desamparados Crystal. FCDU SA 76/0035 was thus
closed, but Desamparados Crystal failed to surrender the passbook because it was
lost. The transferred FCSA in BPI-Makati was the one used as security for
CCCCs P450,000.00 loan from BPI-Makati. CCCC was no longer allowed to
withdraw from FCDU SA No. 197 because it was already closed.
The spouses appealed the decision of the trial court to the Court of Appeals, but their
appeal was dismissed.18 The spouses moved for the reconsideration of the decision,
but the Court of Appeals also denied their motion for reconsideration. 19 Hence, the
present petition.
Before the Court, petitioners who are the heirs of the spouses argue that the failure of
the spouses to pay the BPI-Cebu City loan of P120,000.00 was due to BPIs illegal
refusal to accept payment for the loan unless the P300,000.00 loan from BPI-Butuan
would also be paid. Consequently, in view of BPIs unjust refusal to accept payment of
the BPI-Cebu City loan, the loan obligation of the spouses was extinguished,
petitioners contend.
The contention has no merit. Petitioners rely on IBAAs offer to purchase the
mortgaged lot from them and to directly pay BPI out of the proceeds thereof to settle
the loan.20 BPIs refusal to agree to such payment scheme cannot extinguish the
spouses loan obligation. In the first place, IBAA is not privy to the loan agreement or
the promissory note between the spouses and BPI. Contracts, after all, take effect
only between the parties, their successors in interest, heirs
and assigns.21 Besides, under Art. 1236 of the Civil Code, the creditor is not bound to
accept payment or performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to the contrary. We see no
stipulation in the promissory note which states that a third person may fulfill the
spouses obligation. Thus, it is clear that the spouses alone bear responsibility for the
same.

In any event, the promissory note is the controlling repository of the obligation of the
spouses. Under the promissory note, the spouses defined the parameters of their
obligation as follows:
On or before June 29, 1980 on demand, for value received, I/we promise to pay,
jointly and severally, to the BANK OF THE PHILIPPINE ISLANDS, at its office in the
city of Cebu Philippines, the sum of ONE HUNDRED TWENTY THOUSAND PESOS
(P120,0000.00), Philippine Currency, subject to periodic installments on the principal
as follows: P30,000.00 quarterly amortization starting September 28, 1979. x x x 22
A solidary obligation is one in which each of the debtors is liable for the entire
obligation, and each of the creditors is entitled to demand the satisfaction of the whole
obligation from any or all of the debtors. 23 A liability is solidary "only when the
obligation expressly so states, when the law so provides or when the nature of the
obligation so requires."24 Thus, when the obligor undertakes to be "jointly and
severally" liable, it means that the obligation is solidary,25 such as in this case. By
stating "I/we promise to pay, jointly and severally, to the BANK OF THE PHILIPPINE
ISLANDS," the spouses agreed to be sought out and be demanded payment from, by
BPI. BPI did demand payment from them, but they failed to comply with their
obligation, prompting BPIs valid resort to the foreclosure of the chattel mortgage and
the real estate mortgages.
More importantly, the promissory note, wherein the spouses undertook to be solidarily
liable for the principal loan, partakes the nature of a suretyship and therefore is an
additional security for the loan. Thus we held in one case that if solidary liability was
instituted to "guarantee" a principal obligation, the law deems the contract to be one
of suretyship.26 And while a contract of a surety is in essence secondary only to a
valid principal obligation, the suretys liability to the creditor or promisee of the
principal is said to be direct, primary, and absolute; in other words, the surety is
directly and equally bound with the principal. The surety therefore becomes liable for
the debt or duty of another even if he possesses no direct or personal interest over
the obligations nor does he receive any benefit therefrom.27
Petitioners contend that the Court of Appeals erred in not granting their
counterclaims, considering that they suffered moral damages in view of the unjust
refusal of BPI to accept the payment scheme proposed by IBAA and the allegedly
unjust and illegal foreclosure of the real estate mortgages on their
property.28 Conversely, they argue that the Court of Appeals erred in awarding moral
damages to BPI, which is a corporation, as well as exemplary damages, attorneys
fees and expenses of litigation.29
We do not agree. Moral damages are meant to compensate the claimant for any
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation and similar injuries unjustly
caused.30 Such damages, to be recoverable, must be the proximate result of a
wrongful act or omission the factual basis for which is satisfactorily established by the
aggrieved party.31 There being no wrongful or unjust act on the part of BPI in
demanding payment from them and in seeking the foreclosure of the chattel and real
estate mortgages, there is no lawful basis for award of damages in favor of the
spouses.

Neither is BPI entitled to moral damages. 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.32 The Court of Appeals found BPI as "being famous and having gained
its familiarity and respect not only in the Philippines but also in the whole world
because of its good will and good reputation must protect and defend the same
against any unwarranted suit such as the case at bench." 33 In holding that BPI is
entitled to moral damages, the Court of Appeals relied on the case of People v.
Manero,34 wherein the Court ruled that "[i]t is only when a juridical person has a good
reputation that is debased, resulting in social humiliation, that moral damages may be
awarded."35
We do not agree with the Court of Appeals. A statement similar to that made by the
Court in Manerocan be found in the case of Mambulao Lumber Co. v. PNB, et
al.,36 thus:
x x x Obviously, an artificial person like herein appellant corporation cannot
experience physical sufferings, mental anguish, fright, serious anxiety, wounded
feelings, moral shock or social humiliation which are basis of moral damages. A
corporation may have good reputation which, if besmirched may also be a
ground for the award of moral damages. x x x (Emphasis supplied)
Nevertheless, in the more recent cases of ABS-CBN Corp. v. Court of Appeals, et
al.,37 and Filipinas Broadcasting Network, Inc. v. Ago Medical and Educational CenterBicol Christian College of Medicine (AMEC-BCCM),38 the Court held that the
statements in Manero and Mambulao were mere obiter dicta, implying that the award
of moral damages to corporations is not a hard and fast rule. Indeed, while the Court
may allow the grant of moral damages to corporations, it is not automatically granted;
there must still be proof of the existence of the factual basis of the damage and its
causal relation to the defendants acts. This is so because moral damages, though
incapable of pecuniary estimation, are in the category of an award designed to
compensate the claimant for actual injurysuffered and not to impose a penalty on the
wrongdoer.39
The spouses complaint against BPI proved to be unfounded, but it does not
automatically entitle BPI to moral damages. Although the institution of a clearly
unfounded civil suit can at times be a legal
justification for an award of attorney's fees, such filing, however, has almost invariably
been held not to be a ground for an award of moral damages. The rationale for the
rule is that the law could not have meant to impose a penalty on the right to litigate.
Otherwise, moral damages must every time be awarded in favor of the prevailing

defendant against an unsuccessful plaintiff.40 BPI may have been inconvenienced by

the suit, but we do not see how it could have possibly suffered besmirched reputation
on account of the single suit alone. Hence, the award of moral damages should be
deleted.
The awards of exemplary damages and attorneys fees, however, are proper.
Exemplary damages, on the other hand, are imposed by way of example or correction
for the public good, when the party to a contract acts in a wanton, fraudulent,
oppressive or malevolent manner, while attorneys fees are allowed when exemplary
damages are awarded and when the party to a suit is compelled to incur expenses to
protect his interest.41 The spouses instituted their complaint against BPI
notwithstanding the fact that they were the ones who failed to pay their obligations.
Consequently, BPI was forced to litigate and defend its interest. For these reasons,
BPI is entitled to the awards of exemplary damages and attorneys fees.
WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court of
Appeals dated 24 October 2005 and 31 March 2006, respectively, are hereby
AFFIRMED, with the MODIFICATION that the award of moral damages to Bank of the
Philippine Islands is DELETED.
Costs against the petitioners.
SO ORDERED.