Boy Scouts of the Philippines vs.

Commission on Audit (2011) [Vital Role of the Youth]

Petition: petition for prohibition with preliminary injunction and temporary restraining order
Petitioner: Boy Scouts of the Philippines
Respondent: Commission on Audit
Ponencia: Leonardo-De Castro
DOCTRINE:
An institution that molds and prepares the youth to become model citizens and outstanding leaders of
the country through lessons in patriotism, civic consciousness and moral values, ultimately redounds
to the benefit of public welfare and the state. The aforementioned functions are undeniably sovereign
functions enshrined under the Art. II- Sec. 13 of the Constitution
FACTS:
-The BSP is a public corporation created under Commonwealth Act No. 111 dated October 31, 1936,
and whose functions relate to the fostering of public virtues of citizenship and patriotism and the
general improvement of the moral spirit and fiber of the youth.
-On Aug 19, 1999, COA issued Resolution No. 99-011 "Defining the Commission's policy with respect
to the audit of the Boy Scouts of the Philippines" which provides for the conduction of an annual
financial audit of the Boy Scouts of the Phil. and the expression of an opinion on the fairness of their
financial statements. The BSP shall also be classified among the government corporations belonging
to the Educational, Social, Scientific, Civic and Research Sector.
- The COA resolution stated that the BSP was created as a public corporation under Commonwealth
Act No. 111 and is a government-controlled corporation. The COA Resolution also cited its
constitutional mandate under Section 2 (1), Article IX (D).
-On Nov. 26, 1999, the BSP National President Jejomar Binay sought reconsideration of the
resolution stating that the BSP is not subject to the Commission's jurisdiction because it is not a unit
of the government. Moreover, RA 7278 virtually eliminated the "substantial government participation"
in the National Executive Board and that the BSP is not as a government instrumentality under the
1987 Administrative Code which provides that instrumentality refers to "any agency of the National
Government, not integrated within the department framework, vested with special functions or
jurisdiction by law.
-On July 3, 2000, Director Sunico, Corporate Audit Officer of the COA, furnished the BSP with a copy
of the Memorandum that opined that the substantial government participation is only one (1) of the
three (3) grounds relied upon by the Court in the resolution of the case. Other considerations include
the character of the BSP's purposes and functions which has a public aspect and the statutory
designation of the BSP as a "public corporation". On the argument that BSP is not "a government
instrumentality" and "agency" of the government, the Supreme Court has elucidated this matter in the
BSP vs NLRC case when it declared that BSP is both a "government-controlled corporation with an
original charter" and as an "instrumentality" of the Government.

-Upon the BSP's request, the audit was deferred for thirty (30) days. The BSP then filed a Petition for
Prohibition with Prayer for Preliminary Injunction and/or Temporary Restraining Order before the
COA.
ISSUES: W/N the BSP is a public corporation and is subject to COAs audit jurisdiction.
PROVISIONS:
-Commonwealth Act No. 111 (Boy Scout Charter), or An Act to Create a Public Corporation to be
Known as the Boy Scouts of the Philippines, and to Define its Powers and Purposes: Section 3.The
purpose of this corporation shall be to promote, through organization, and cooperation with other
agencies, the ability of boys to do things for themselves and others, to train them in scoutcraft, and to
teach them patriotism, courage, self-reliance, and kindred virtues, using the methods which are now
in common use by boy scouts.
-Section 2(1), Article IX-D of the Constitution provides that COA shall have the power, authority,
and duty to examine, audit and settle all accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the
Government, or any of its subdivisions, agencies or instrumentalities, including government-owned or
controlled corporations with original charters
-ART II- Section 13 of the Constitution. The State recognizes the vital role of the youth in nationbuilding and shall promote and protect their physical, moral, spiritual, intellectual, and social wellbeing. It shall inculcate in the youth patriotism and nationalism, and encourage their involvement in
public and civic affairs.
Article 44 of the Civil Code:
The following are juridical persons:
(1)The State and its political subdivisions;
(2)Other corporations, institutions and entities for public interest or purpose created by law;
their personality begins as soon as they have been constituted according to law;
(3)Corporations, partnerships and associations for private interest or purpose to which the law
grants a juridical personality, separate and distinct from that of each shareholder, partner or member
RULING + RATIO: Yes. BSP is a public corporation and its funds are subject to the COA's audit
jurisdiction.
The BSP is a public corporation whose functions relate to the fostering of public virtues of citizenship
and patriotism and the general improvement of the moral spirit and fiber of the youth. The functions of
the BSP include, among others, the teaching to the youth of patriotism, courage, self-reliance, and
kindred virtues, are undeniably sovereign functions enshrined under the Constitution. Any attempt to
classify the BSP as a private corporation would be incomprehensible since no less than the law which
created it had designated it as a public corporation and its statutory mandate embraces performance
of sovereign functions. The manner of creation and the purpose for which the BSP was created
indubitably prove that it is a government agency.

Moreover, there are three classes of juridical persons under Article 44 of the Civil Code and the BSP,
as presently constituted under Republic Act No. 7278, falls under the second classification.
The purpose of the BSP as stated in its amended charter shows that it was created in order to
implement a State policy declared in Article II, Section 13 of the Constitution.
Evidently, the BSP, which was created by a special law to serve a public purpose in pursuit of a
constitutional mandate, comes within the class of "public corporations" defined by paragraph 2, Article
44 of the Civil Code and governed by the law which creates it.

DISPOSITION: WHEREFORE, premises considered, the instant petition for prohibition is

DISMISSED.

Dissenting Opinion relevant to the issue: (Carpio)

According to Carpio, the public purpose of the BSP is not determinative of status. The BSP
performs functions which may be classified as public in character, in the sense that it promotes
"virtues of citizenship and patriotism and the general improvement of the moral spirit and fiber of our
youth." However, this fact alone does not automatically make the BSP a GOCC. The fact that a
certain juridical entity is impressed with public interest does not, by that circumstance alone,
make the entity a public corporation, incorporated solely for the public good. Authorities are of
the view that the purpose alone of the corporation cannot be taken as a safe guide, for the fact is that
almost all corporations are nowadays created to promote the interest, good, or convenience of the
public.
-The true criterion to determine whether a corporation is public or private is found in the totality of the
relation of the corporation to the State. If the corporation is created by the State as the latter's own
agency or instrumentality to help it in carrying out its governmental functions, then that corporation is
considered public; otherwise, it is private.
=============================================================================

LIRAG TEXTILE MILLS, INC. VS. SSS

153 SCRA 338
Facts:

SSS (respondent) and Lirag Textile Mills (Petitioner) entered into a Purchased
Agreement which Respondent agreed to purchase preferred stocks of Petitioner worth
P1 million subject to conditions:

For Petitioner to repurchase the shares of stocks at a regular interval of

one year and to pay dividends.
o Failure to redeem and pay the dividend, the entire obligation shall become
due and demandable and it shall be liable for an amount equivalent to
12% of the amount then outstanding as liquidated damages.
Basilio Lirag (Basilio) as President of Lirag Textile Mills signed the Agreement as a
surety to guarantee the redemption of the stocks, the payment of dividends and
other obligations.
Pursuant to the Agreement, Respondent paid Petitioner P500,000 on two
occasions and the latter issued 5,000 preferred stocks with a par value of P100 as
evidenced by Stock Certificate Nos. 128 and 139.
After sending Respondent sent demand letters, Petitioner and Basilio still made no
redemption nor made dividend payments.
Respondent filed an action for specific performance and damages against
Petitioner:
Petitioner contends that there is no obligation on their part to redeem the stock
certificates since Respondent is still a preferred stock holder of the company and
such redemption is dependent upon the financial ability of the company.
On the part of Basilio, he contends that his liability only arises only if the company is
liable and does not perform its obligations under the Agreement.
o

Issue:
1
2
3

Whether or not the Purchase Agreement entered into by the Parties is a debt
instrument?
If so, Is Basilio liable as surety?
Whether or not Lirag is liable for the interest as liquidated damages?

Held:
1

YES, the Purchase Agreement is a debt instrument. The terms and conditions of the
Agreement show that parties intended the repurchase of preferred shares on the
respective scheduled dates to be an absolute obligation, which does not depend on
the financial ability of the corporation.
o This absolute obligation on the part of the Petitioner corporation is made manifest
by the fact that a surety was required to see to it that the obligation is fulfilled in
the event the principal debtors inability to do so.
o It cannot be said that SSS is a preferred stockholder. The rights given by the
Purchase Agreement to SSS are not rights enjoyed by ordinary stockholders. Since
there was a condition that failure to repurchase the stocks on the scheduled dates
renders the entire obligation due and demandable with interest. These features
clearly show that intent of the parties to be bound therein as debtor and creditor
and not as a corporation and stockholder.

YES, Basilio is liable as surety. Thus it follows that he cannot deny liability for Lirags
default. As surety, he is bound immediately to pay SSS the amount then outstanding.

The award of liquidated damages represented by 12% of the amount then

outstanding is correct, considering that the petitioners in the stipulation of facts
admitted having failed to fulfill their obligations under the Agreement. The grant of
liquidated damages is expressly provided for the Purchase Agreement in case of
contractual breach.
Since Lirag did not deny its failure to redeem the preferred shares and the nonpayment of dividends which are overdue, they are bound to earn legal interest from
the time of demand, in this case, judicial i.e. the time of filing the action.

Willex vs Ca
CIVIL LAW; SPECIAL CONTRACTS; GUARANTY; THE CONSIDERATION NECESSARY TO
SUPPORT A SURETY OBLIGATION NEED NOT PASS DIRECTLY TO THE SURETY, A
CONSIDERATION MOVING TO THE PRINCIPAL ALONE IS SUFFICIENT. - Willex Plastic argues
that the Continuing Guaranty, being an accessory contract, cannot legally exist because of the
absence of a valid principal obligation. Its contention is based on the fact that it is not a party
either to the Continuing Surety Agreement or to the loan agreement between Manilabank and
Inter-Resin Industrial. Put in another way the consideration necessary to support a surety
obligation need not pass directly to the surety, a consideration moving to the principal alone being
sufficient. For a guarantor or surety is bound by the same consideration that makes the contract
effective between the principal parties thereto. . . . It is never necessary that a guarantor or surety
should receive any part or benefit, if such there be, accruing to his principal.
ID.; ID.; ID.; ALTHOUGH A CONTRACT OF SURETY IS ORDINARILY NOT TO BE CONSTRUED AS
RETROSPECTIVE, IN THE END THE INTENTION OF THE PARTIES AS REVEALED BY THE
EVIDENCE IS CONTROLLING. - Willex Plastic contends that the Continuing Guaranty cannot be
retroactively applied so as to secure the payments made by Interbank under the two Continuing
Surety Agreements. Willex Plastic invokes the ruling in El Vencedor v. Canlas (44 Phil. 699 [1923])
and Dio v. Court of Appeals (216 SCRA 9 [1992]) in support of its contention that a contract of
suretyship or guaranty should be applied prospectively. The cases cited are, however, distinguishable
from the present case. In El Vencedor v. Canlas we held that a contract of suretyship is not
retrospective and no liability attaches for defaults occurring before it is entered into unless an intent to
be so liable is indicated. There we found nothing in the contract to show that the parties intended the
surety bonds to answer for the debts contracted previous to the execution of the bonds. In contrast, in
this case, the parties to the Continuing Guaranty clearly provided that the guaranty would cover
sums obtained and/or to be obtained by Inter-Resin Industrial from Interbank. On the other hand, in

Dio v. Court of Appeals the issue was whether the sureties could be held liable for an obligation
contracted after the execution of the continuing surety agreement. It was held that by its very nature
a continuing suretyship contemplates a future course of dealing. It is prospective in its operation and
is generally intended to provide security with respect to future transactions. By no means, however,
was it meant in that case that in all instances a contract of guaranty or suretyship should be
prospective in application. Indeed, as we also held in Bank of the Philippine Islands v. Foerster, (49
Phil. 843 [1926]) although a contract of suretyship is ordinarily not to be construed as retrospective, in
the end the intention of the parties as revealed by the evidence is controlling. What was said there
applies mutatis mutandis to the case at bar: In our opinion, the appealed judgment is erroneous. It is
very true that bonds or other contracts of suretyship are ordinarily not to be construed as
retrospective, but that rule must yield to the intention of the contracting parties as revealed by the
evidence, and does not interfere with the use of the ordinary tests and canons of interpretation which
apply in regard to other contracts. In the present case the circumstances so clearly indicate that the
bond given by Echevarria was intended to cover all of the indebtedness of the Arrocera upon its
current account with the plaintiff Bank that we cannot possibly adopt the view of the court below in
regard to the effect of the bond.
Facts: Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the Manila
Banking Corporation. To secure payment of the credit accommodation, Inter-Resin Industrial and the
Investment and Underwriting Corporation of the Philippines (IUCP) executed two documents, both
entitled Continuing Surety Agreement and dated December 1, 1978, whereby they bound
themselves solidarily to pay Manilabank obligations of every kind, on which the [Inter-Resin
Industrial] may now be indebted or hereafter become indebted to the [Manilabank]. On April 2, 1979,
Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed a Continuing Guaranty
in favor of IUCP whereby For and in consideration of the sum or sums obtained and/or to be
obtained by Inter-Resin Industrial Corporation from IUCP, Inter-Resin Industrial and Willex Plastic
jointly and severally guaranteed the prompt and punctual payment at maturity of the NOTE/S issued
by the DEBTOR/S . . . to the extent of the aggregate principal sum of FIVE MILLION PESOS
(P5,000,000.00) Philippine Currency and such interests, charges and penalties as hereafter may be
specified. On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of
P4,334,280.61 representing Inter-Resin Industrials outstanding obligation. (Exh. M-1) On February
23 and 24, 1981, Atrium Capital Corp., which in the meantime had succeeded IUCP, demanded from
Inter-Resin Industrial and Willex Plastic the payment of what it (IUCP) had paid to Manilabank. As
neither one of the sureties paid, Atrium filed this case in the court below against Inter-Resin Industrial
and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn succeeded Atrium, the
sum of P687,500.00 representing the proceeds of its fire insurance policy for the destruction of its
properties.
In its answer, Inter-Resin Industrial admitted that the Continuing Guaranty was intended to secure
payment to Atrium of the amount of P4,334,280.61 which the latter had paid to Manilabank. It
claimed, however, that it had already fully paid its obligation to Atrium Capital.