Contents

Kilosbayan, Inc. v. Guingona, Jr. 232 S 110 (1994)...................................................1

Ever Electrical Manufacturing, Inc. (EEMI) v. Samahang Manggagawa ng Ever
Electrical/NAMAWU Local 224, 672 S 562 (2012)....................................................32
Gotesco Properties, Inc. v. Fajardo, 692 S 319 (2013)............................................44
Corpuz v. Grospe, 333 S 425 (2000).......................................................................51
Feliciano v. Commission on Audit, 419 S 363 (2004)...............................................58
Veterans Federation of the Philippines v. Reyes, 483 S 526 (2006).........................75
Liban v. Gordon, 593 S 68 (2009)............................................................................98
Smith Bell & Co. v. Natividad, 40 Phil. 136 (1920)................................................112
Bataan Shipyard & engineering v. PCGG 150 S 181 (1987)...................................125
ULEP v. The Legal Clinic, 223 S 378 (1993)...........................................................162
Samahan ng Optometrists v. Acebedo International Corp., 270 S 298 (1997)......191
Alfafara v. Acebedo Optical Company, 381 S 293 (2002)......................................199

Kilosbayan, Inc. v. Guingona, Jr. 232 S 110 (1994)

G.R. No. 113375 May 5, 1994
KILOSBAYAN, INCORPORATED, JOVITO R. SALONGA, CIRILO A.
RIGOS, ERME CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO,
EPHRAIM
TENDERO,
FERNANDO
SANTIAGO,
JOSE
ABCEDE,
CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V.
VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, SEN. FREDDIE
WEBB,
SEN.
WIGBERTO
TAADA,
and
REP.
JOKER
P.
ARROYO, petitioners,
vs.
TEOFISTO GUINGONA, JR., in his capacity as Executive Secretary,
Office of the President; RENATO CORONA, in his capacity as
Assistant Executive Secretary and Chairman of the Presidential
review Committee on the Lotto, Office of the President; PHILIPPINE
1

CHARITY SWEEPSTAKES OFFICE; and

MANAGEMENT CORPORATION, respondents.

PHILIPPINE

GAMING

Jovito R. Salonga, Fernando Santiago, Emilio C. Capulong, Jr. and Felipe L.

Gozon for petitioners.
Renato L. Cayetano and Eleazar B. Reyes for PGMC.
Gamaliel G. Bongco, Oscar Karaan and Jedideoh Sincero for intervenors.

DAVIDE, JR., J.:

This is a special civil action for prohibition and injunction, with a prayer for a
temporary restraining order and preliminary injunction, which seeks to
prohibit and restrain the implementation of the "Contract of Lease" executed
by the Philippine Charity Sweepstakes Office (PCSO) and the Philippine
Gaming Management Corporation (PGMC) in connection with the on- line
lottery system, also known as "lotto."
Petitioner Kilosbayan, Incorporated (KILOSBAYAN) avers that it is a nonstock domestic corporation composed of civic-spirited citizens, pastors,
priests, nuns, and lay leaders who are committed to the cause of truth,
justice, and national renewal. The rest of the petitioners, except Senators
Freddie Webb and Wigberto Taada and Representative Joker P. Arroyo, are
suing in their capacities as members of the Board of Trustees of KILOSBAYAN
and as taxpayers and concerned citizens. Senators Webb and Taada and
Representative Arroyo are suing in their capacities as members of Congress
and as taxpayers and concerned citizens of the Philippines.
The pleadings of the parties disclose the factual antecedents which triggered
off the filing of this petition.
Pursuant to Section 1 of the charter of the PCSO (R.A. No. 1169, as
amended by B.P. Blg. 42) which grants it the authority to hold and conduct
"charity sweepstakes races, lotteries and other similar activities," the PCSO
decided to establish an on- line lottery system for the purpose of increasing
its revenue base and diversifying its sources of funds. Sometime before
March 1993, after learning that the PCSO was interested in operating an on2

line lottery system, the Berjaya Group Berhad, "a multinational company and
one of the ten largest public companies in Malaysia," long "engaged in,
among others, successful lottery operations in Asia, running both Lotto and
Digit games, thru its subsidiary, Sports Toto Malaysia," with its "affiliate, the
International Totalizator Systems, Inc., . . . an American public company
engaged in the international sale or provision of computer systems,
softwares, terminals, training and other technical services to the gaming
industry," "became interested to offer its services and resources to PCSO."
As an initial step, Berjaya Group Berhad (through its individual nominees)
organized with some Filipino investors in March 1993 a Philippine corporation
known as the Philippine Gaming Management Corporation (PGMC), which
"was intended to be the medium through which the technical and
management services required for the project would be offered and
delivered to PCSO." 1
Before August 1993, the PCSO formally issued a Request for Proposal (RFP)
for the Lease Contract of an on-line lottery system for the PCSO. 2 Relevant
provisions of the RFP are the following:
1. EXECUTIVE SUMMARY
xxx xxx xxx
1.2. PCSO is seeking a suitable contractor which shall build, at
its own expense, all the facilities ('Facilities') needed to operate
and maintain a nationwide on-line lottery system. PCSO shall
lease the Facilities for a fixed percentage ofquarterly gross
receipts. All receipts from ticket sales shall be turned over
directly to PCSO. All capital, operating expenses and expansion
expenses and risks shall be for the exclusive account of the
Lessor.
xxx xxx xxx
1.4. The lease shall be for a period not exceeding fifteen (15)
years.
1.5. The Lessor is expected to submit a comprehensive
nationwide lottery development plan ("Development Plan") which
3

will include the game, the marketing of the games, and the
logistics to introduce the games to all the cities and
municipalities of the country within five (5) years.
xxx xxx xxx
1.7. The Lessor shall be selected based on its technical
expertise, hardware and software capability, maintenance
support, and financial resources. The Development Plan shall
have a substantial bearing on the choice of the Lessor. The
Lessor shall be a domestic corporation, with at least sixty
percent (60%) of its shares owned by Filipino shareholders.
xxx xxx xxx
The Office of the President, the National Disaster Control
Coordinating Council, the Philippine National Police, and the
National Bureau of Investigation shall be authorized to use the
nationwide telecommunications system of the Facilities Free of
Charge.
1.8. Upon expiration of the lease, the Facilities shall be owned by
PCSO without any additional consideration. 3
xxx xxx xxx
2.2. OBJECTIVES
The objectives of PCSO in leasing the Facilities from a private
entity are as follows:
xxx xxx xxx
2.2.2. Enable PCSO to operate a nationwide on-line Lottery
system at no expense or risk to the government.
xxx xxx xxx
2.4. DUTIES AND RESPONSIBILITIES OF THE LESSOR

xxx xxx xxx

2.4.2. THE LESSOR
The Proponent is expected to furnish and maintain the Facilities,
including the personnel needed to operate the computers, the
communications network and sales offices under a build-lease
basis. The printing of tickets shall be undertaken under the
supervision and control of PCSO. The Facilities shall enable PCSO
to computerize the entire gaming system.
The Proponent is expected to formulate and design consumeroriented Master Games Plan suited to the marketplace, especially
geared to Filipino gaming habits and preferences. In addition,
the Master Games Plan is expected to include a Product Plan for
each game and explain how each will be introduced into the
market. This will be an integral part of the Development Plan
which PCSO will require from the Proponent.
xxx xxx xxx
The Proponent is expected to provide upgrades to modernize the
entire gaming system over the life ofthe lease contract.
The Proponent is expected to provide technology transfer to
PCSO technical personnel. 4
7. GENERAL GUIDELINES FOR PROPONENTS
xxx xxx xxx
Finally, the Proponent must be able to stand the acid test of
proving that it is an entity able to take on the role of responsible
maintainer of the on-line lottery system, and able to achieve
PSCO's goal of formalizing an on-line lottery system to achieve
its mandated objective. 5
xxx xxx xxx
16. DEFINITION OF TERMS
5

Facilities: All capital equipment, computers, terminals, software,

nationwide telecommunication network, ticket sales offices,
furnishings, and fixtures; printing costs; cost of salaries and
wages; advertising and promotion expenses; maintenance costs;
expansion and replacement costs; security and insurance, and all
other related expenses needed to operate nationwide on-line
lottery system. 6
Considering the above citizenship requirement, the PGMC claims that the
Berjaya Group "undertook to reduce its equity stakes in PGMC to 40%," by
selling 35% out of the original 75% foreign stockholdings to local investors.
On 15 August 1993, PGMC submitted its bid to the PCSO. 7
The bids were evaluated by the Special Pre-Qualification Bids and Awards
Committee (SPBAC) for the on-line lottery and its Bid Report was thereafter
submitted to the Office of the President. 8 The submission was preceded by
complaints by the Committee's Chairperson, Dr. Mita Pardo de Tavera. 9
On 21 October 1993, the Office of the President announced that it had given
the respondent PGMC the go-signal to operate the country's on-line lottery
system and that the corresponding implementing contract would be
submitted not later than 8 November 1993 "for final clearance and approval
by the Chief Executive." 10 This announcement was published in the Manila
Standard, Philippine Daily Inquirer, and the Manila Times on 29 October
1993. 11
On 4 November 1993, KILOSBAYAN sent an open letter to Presidential Fidel
V. Ramos strongly opposing the setting up to the on-line lottery system on
the basis of serious moral and ethical considerations. 12
At the meeting of the Committee on Games and Amusements of the Senate
on 12 November 1993, KILOSBAYAN reiterated its vigorous opposition to the
on-line lottery on account of its immorality and illegality. 13
On 19 November 1993, the media reported that despite the opposition,
"Malacaang will push through with the operation of an on-line lottery
system nationwide" and that it is actually the respondent PCSO which will

operate the lottery while the winning corporate bidders are merely
"lessors." 14
On 1 December 1993, KILOSBAYAN requested copies of all documents
pertaining to the lottery award from Executive Secretary Teofisto Guingona,
Jr. In his answer of 17 December 1993, the Executive Secretary informed
KILOSBAYAN that the requested documents would be duly transmitted
before the end of the month. 15. However, on that same date, an agreement
denominated as "Contract of Lease" was finally executed by respondent
PCSO and respondent PGMC. 16 The President, per the press statement
issued by the Office of the President, approved it on 20 December 1993. 17
In view of their materiality and relevance, we quote the following salient
provisions of the Contract of Lease:
1. DEFINITIONS
The following words
respective meanings:

and

terms

shall

have

the

following

1.1 Rental Fee Amount to be paid by PCSO to the LESSOR as

compensation for the fulfillment of the obligations of the LESSOR
under this Contract, including, but not limited to the lease of the
Facilities.
xxx xxx xxx
1.3 Facilities All capital equipment, computers, terminals,
software (including source codes for the On-Line Lottery
application software for the terminals, telecommunications and
central systems), technology, intellectual property rights,
telecommunications network, and furnishings and fixtures.
1.4 Maintenance and Other Costs All costs and expenses
relating to printing, manpower, salaries and wages, advertising
and promotion, maintenance, expansion and replacement,
security and insurance, and all other related expenses needed to
operate an On-Line Lottery System, which shall be for the
account of the LESSOR. All expenses relating to the setting-up,
7

operation and maintenance of ticket sales offices of dealers and

retailers shall be borne by PCSO's dealers and retailers.
1.5 Development Plan The detailed plan of all games, the
marketing thereof, number of players, value of winnings and the
logistics required to introduce the games, including the Master
Games Plan as approved by PCSO, attached hereto as Annex
"A", modified as necessary by the provisions of this Contract.
xxx xxx xxx
1.8 Escrow Deposit The proposal deposit in the sum of Three
Hundred Million Pesos (P300,000,000.00) submitted by the
LESSOR to PCSO pursuant to the requirements of the Request
for Proposals.
2. SUBJECT MATTER OF THE LEASE
The LESSOR shall build, furnish and maintain at its own expense
and risk the Facilities for the On-Line Lottery System of PCSO in
the Territory on an exclusive basis. The LESSOR shall bear all
Maintenance and Other Costs as defined herein.
xxx xxx xxx
3. RENTAL FEE
For and in consideration of the performance by the LESSOR of its
obligations herein, PCSO shall pay LESSOR a fixed Rental Fee
equal to four point nine percent (4.9%) of gross receipts from
ticket sales, payable net of taxes required by law to be withheld,
on a semi-monthly basis. Goodwill, franchise and similar fees
shall belong to PCSO.
4. LEASE PERIOD
The period of the lease shall commence ninety (90) days from
the date of effectivity of this Contract and shall run for a period
of eight (8) years thereafter, unless sooner terminated in
accordance with this Contract.
8

5. RIGHTS AND OBLIGATIONS OF PCSO AS OPERATOR OF THE

ON-LINE LOTTERY SYSTEM
PCSO shall be the sole and individual operator of the On-Line
Lottery System. Consequently:
5.1 PCSO shall have sole responsibility to decide whether to
implement, fully or partially, the Master Games Plan of the
LESSOR. PCSO shall have the sole responsibility to determine
the time for introducing new games to the market. The Master
Games Plan included in Annex "A" hereof is hereby approved by
PCSO.
5.2 PCSO shall have control over revenues and receipts of
whatever nature from the On-Line Lottery System. After paying
the Rental Fee to the LESSOR, PCSO shall have exclusive
responsibility to determine the Revenue Allocation Plan;
Provided, that the same shall be consistent with the requirement
of R.A. No. 1169, as amended, which fixes a prize fund of fifty
five percent (55%) on the average.
5.3 PCSO shall have exclusive control over the printing of tickets,
including but not limited to the design, text, and contents
thereof.
5.4 PCSO shall have sole responsibility over the appointment of
dealers or retailers throughout the country. PCSO shall appoint
the dealers and retailers in a timely manner with due regard to
the implementation timetable of the On-Line Lottery System.
Nothing herein shall preclude the LESSOR from recommending
dealers or retailers for appointment by PCSO, which shall act on
said recommendation within forty-eight (48) hours.
5.5 PCSO shall designate the necessary personnel to monitor
and audit the daily performance of the On-Line Lottery System.
For this purpose, PCSO designees shall be given, free of charge,
suitable and adequate space, furniture and fixtures, in all offices
of the LESSOR, including but not limited to its headquarters,
alternate site, regional and area offices.
9

5.6 PCSO shall have the responsibility to resolve, and exclusive

jurisdiction over, all matters involving the operation of the OnLine Lottery System not otherwise provided in this Contract.
5.7 PCSO shall promulgate procedural and coordinating rules
governing all activities relating to the On-Line Lottery System.
5.8 PCSO will be responsible for the payment of prize monies,
commissions to agents and dealers, and taxes and levies (if any)
chargeable to the operator of the On-Line Lottery System. The
LESSOR will bear all other Maintenance and Other Costs, except
as provided in Section 1.4.
5.9 PCSO shall assist the LESSOR in the following:
5.9.1 Work permits for the LESSOR's staff;
5.9.2 Approvals for importation of the Facilities;
5.9.3 Approvals and consents for the On-Line Lottery
System; and
5.9.4 Business and premises licenses for all offices of
the LESSOR and licenses for the telecommunications
network.
5.10 In the event that PCSO shall pre-terminate this Contract or
suspend the operation of the On-Line Lottery System, in breach
of this Contract and through no fault of the LESSOR, PCSO shall
promptly, and in any event not later than sixty (60) days,
reimburse the LESSOR the amount of its total investment cost
associated with the On-Line Lottery System, including but not
limited to the cost of the Facilities, and further compensate the
LESSOR for loss of expected net profit after tax, computed over
the unexpired term of the lease.
6. DUTIES AND RESPONSIBILITIES OF THE LESSOR
The LESSOR is one of not more than three (3) lessors of similar
facilities for the nationwide On-Line Lottery System of PCSO. It is
10

understood that the rights of the LESSOR are primarily those of

a lessor of the Facilities, and consequently, all rights involving
the business aspects of the use of the Facilities are within the
jurisdiction of PCSO. During the term of the lease, the LESSOR
shall.
6.1 Maintain and preserve its corporate existence, rights and
privileges, and conduct its business in an orderly, efficient, and
customary manner.
6.2 Maintain insurance coverage with insurers acceptable to
PCSO on all Facilities.
6.3 Comply with all laws, statues, rules and regulations, orders
and directives, obligations and duties by which it is legally
bound.
6.4 Duly pay and discharge all taxes, assessments and
government charges now and hereafter imposed of whatever
nature that may be legally levied upon it.
6.5 Keep all the Facilities in fail safe condition and, if necessary,
upgrade, replace and improve the Facilities from time to time as
new technology develops, in order to make the On-Line Lottery
System more cost-effective and/or competitive, and as may be
required by PCSO shall not impose such requirements
unreasonably nor arbitrarily.
6.6 Provide PCSO with management terminals which will allow
real-time monitoring of the On-Line Lottery System.
6.7 Upon effectivity of this Contract, commence the training of
PCSO and other local personnel and the transfer of technology
and expertise, such that at the end of the term of this Contract,
PCSO will be able to effectively take-over the Facilities and
efficiently operate the On-Line Lottery System.
6.8 Undertake a positive advertising and promotions campaign
for both institutional and product lines without engaging in
negative advertising against other lessors.
11

6.9 Bear all expenses and risks relating to the Facilities

including, but not limited to, Maintenance and Other Costs and:
xxx xxx xxx
6.10 Bear all risks if the revenues from ticket sales, on an
annualized basis, are insufficient to pay the entire prize money.
6.11 Be, and is hereby, authorized to collect and retain for
own account, a security deposit from dealers and retailers, in
amount determined with the approval of PCSO, in respect
equipment supplied by the LESSOR. PCSO's approval shall not
unreasonably withheld.

its
an
of
be

xxx xxx xxx

6.12 Comply with procedural and coordinating rules issued by
PCSO.
7. REPRESENTATIONS AND WARRANTIES
The LESSOR represents and warrants that:
7.1 The LESSOR is corporation duly organized and existing under
the laws of the Republic of the Philippines, at least sixty percent
(60%) of the outstanding capital stock of which is owned by
Filipino shareholders. The minimum required Filipino equity
participation shall not be impaired through voluntary or
involuntary transfer, disposition, or sale of shares of stock by the
present stockholders.
7.2 The LESSOR and its Affiliates have the full corporate and
legal power and authority to own and operate their properties
and to carry on their business in the place where such properties
are now or may be conducted. . . .
7.3 The LESSOR has or has access to all the financing and
funding requirements to promptly and effectively carry out the
terms of this Contract. . . .

12

7.4 The LESSOR has or has access to all the managerial and
technical expertise to promptly and effectively carry out the
terms of this Contract. . . .
xxx xxx xxx
10. TELECOMMUNICATIONS NETWORK
The LESSOR shall establish a telecommunications network that
will connect all municipalities and cities in the Territory in
accordance with, at the LESSOR's option, either of the LESSOR's
proposals (or a combinations of both such proposals) attached
hereto as Annex "B," and under the following PCSO schedule:
xxx xxx xxx
PCSO may, at its option, require the LESSOR to establish the
telecommunications network in accordance with the above
Timetable in provinces where the LESSOR has not yet installed
terminals. Provided, that such provinces have existing nodes.
Once a municipality or city is serviced by land lines of a licensed
public telephone company, and such lines are connected to Metro
Manila, then the obligation of the LESSOR to connect such
municipality or city through a telecommunications network shall
cease with respect to such municipality or city. The voice facility
will cover the four offices of the Office of the President, National
Disaster Control Coordinating Council, Philippine National Police
and the National Bureau of Investigation, and each city and
municipality in the Territory except Metro Manila, and those cities
and municipalities which have easy telephone access from these
four offices. Voice calls from the four offices shall be transmitted
via radio or VSAT to the remote municipalities which will be
connected to this voice facility through wired network or by
radio. The facility shall be designed to handle four private
conversations at any one time.
xxx xxx xxx
13. STOCK DISPERSAL PLAN
13

Within two (2) years from the effectivity of this Contract, the
LESSOR shall cause itself to be listed in the local stock exchange
and offer at least twenty five percent (25%) of its equity to the
public.
14. NON-COMPETITION
The LESSOR shall not, directly or indirectly, undertake any
activity or business in competition with or adverse to the On-Line
Lottery System of PCSO unless it obtains the latter's prior
written consent thereto.
15. HOLD HARMLESS CLAUSE
15.1 The LESSOR shall at all times protect and defend, at its cost
and expense, PCSO from and against any and all liabilities and
claims for damages and/or suits for or by reason of any deaths
of, or any injury or injuries to any person or persons, or
damages to property of any kind whatsoever, caused by the
LESSOR, its subcontractors, its authorized agents or employees,
from any cause or causes whatsoever.
15.2 The LESSOR hereby covenants and agrees to indemnify and
hold PCSO harmless from all liabilities, charges, expenses
(including reasonable counsel fees) and costs on account of or
by reason of any such death or deaths, injury or injuries,
liabilities, claims, suits or losses caused by the LESSOR's fault or
negligence.
15.3 The LESSOR shall at all times protect and defend, at its
own cost and expense, its title to the facilities and PCSO's
interest therein from and against any and all claims for the
duration of the Contract until transfer to PCSO of ownership of
the serviceable Facilities.
16. SECURITY
16.1 To ensure faithful compliance by the LESSOR with the terms
of the Contract, the LESSOR shall secure a Performance Bond
14

from a reputable insurance company or companies acceptable to

PCSO.
16.2 The Performance Bond shall be in the initial amount of
Three Hundred Million Pesos (P300,000,000.00), to its U.S.
dollar equivalent, and shall be renewed to cover the duration of
the Contract. However, the Performance Bond shall be reduced
proportionately to the percentage of unencumbered terminals
installed; Provided, that the Performance Bond shall in no case
be less than One Hundred Fifty Million Pesos (P150,000,000.00).
16.3 The LESSOR may at its option maintain its Escrow Deposit
as the Performance Bond. . . .
17. PENALTIES
17.1 Except as may be provided in Section 17.2, should the
LESSOR fail to take remedial measures within seven (7) days,
and rectify the breach within thirty (30) days, from written
notice by PCSO of any wilfull or grossly negligent violation of the
material terms and conditions of this Contract, all unencumbered
Facilities shall automatically become the property of PCSO
without consideration and without need for further notice or
demand by PCSO. The Performance Bond shall likewise be
forfeited in favor of PCSO.
17.2 Should the LESSOR fail to comply with the terms of the
Timetables provided in Section 9 and 10, it shall be subject to an
initial Penalty of Twenty Thousand Pesos (P20,000.00), per city
or municipality per every month of delay; Provided, that the
Penalty shall increase, every ninety (90) days, by the amount of
Twenty Thousand Pesos (P20,000.00) per city or municipality per
month, whilst shall failure to comply persists. The penalty shall
be deducted by PCSO from the rental fee.
xxx xxx xxx
20. OWNERSHIP OF THE FACILITIES

15

After expiration of the term of the lease as provided in Section 4,

the Facilities directly required for the On-Line Lottery System
mentioned in Section 1.3 shall automatically belong in full
ownership to PCSO without any further consideration other than
the Rental Fees already paid during the effectivity of the lease.
21. TERMINATION OF THE LEASE
PCSO may terminate this Contract for any breach of the material
provisions of this Contract, including the following:
21.1 The LESSOR is insolvent or bankrupt or unable to pay its
debts, stops or suspends or threatens to stop or suspend
payment of all or a material part of its debts, or proposes or
makes a general assignment or an arrangement or compositions
with or for the benefit of its creditors; or
21.2 An order is made or an effective resolution passed for the
winding up or dissolution of the LESSOR or when it ceases or
threatens to cease to carry on all or a material part of its
operations or business; or
21.3 Any material statement, representation or warranty made
or furnished by the LESSOR proved to be materially false or
misleading;
said termination to take effect upon receipt of
written notice of termination by the LESSOR and
failure to take remedial action within seven (7) days
and cure or remedy the same within thirty (30) days
from notice.
Any suspension, cancellation or termination of this
Contract shall not relieve the LESSOR of any liability
that may have already accrued hereunder.
xxx xxx xxx
Considering the denial by the Office of the President of its protest and the
statement of Assistant Executive Secretary Renato Corona that "only a court
16

injunction can stop Malacaang," and the imminent implementation of the

Contract of Lease in February 1994, KILOSBAYAN, with its co-petitioners,
filed on 28 January 1994 this petition.
In support of the petition, the petitioners claim that:
. . . X X THE OFFICE OF THE PRESIDENT, ACTING
THROUGH RESPONDENTS EXECUTIVE SECRETARY
AND/OR ASSISTANT EXECUTIVE SECRETARY FOR
LEGAL AFFAIRS, AND THE PCSO GRAVELY ABUSE[D]
THEIR
DISCRETION
AND/OR
FUNCTIONS
TANTAMOUNT TO LACK OF JURISDICTION AND/OR
AUTHORITY IN RESPECTIVELY: (A) APPROVING THE
AWARD OF THE CONTRACT TO, AND (B) ENTERING
INTO THE SO-CALLED "CONTRACT OF LEASE" WITH,
RESPONDENT PGMC FOR THE INSTALLATION,
ESTABLISHMENT AND OPERATION OF THE ON-LINE
LOTTERY AND TELECOMMUNICATION SYSTEMS
REQUIRED AND/OR AUTHORIZED UNDER THE SAID
CONTRACT, CONSIDERING THAT:
a) Under Section 1 of the Charter of the PCSO, the PCSO is
prohibited
from
holding
and
conducting
lotteries
"in
collaboration, association or joint venture with any person,
association, company or entity";
b) Under Act No. 3846 and established jurisprudence, a
Congressional franchise is required before any person may be
allowed to establish and operate said telecommunications
system;
c) Under Section 11, Article XII of the Constitution, a less than
60% Filipino-owned and/or controlled corporation, like the
PGMC, is disqualified from operating a public service, like the
said telecommunications system; and
d) Respondent PGMC is not authorized by its charter and under
the Foreign Investment Act (R.A. No. 7042) to install, establish
and operate the on-line lotto and telecommunications systems. 18
17

Petitioners submit that the PCSO cannot validly enter into the assailed
Contract of Lease with the PGMC because it is an arrangement wherein the
PCSO would hold and conduct the on-line lottery system in "collaboration" or
"association" with the PGMC, in violation of Section 1(B) of R.A. No. 1169, as
amended by B.P. Blg. 42, which prohibits the PCSO from holding and
conducting charity sweepstakes races, lotteries, and other similar activities
"in collaboration, association or joint venture with any person, association,
company or entity, foreign or domestic." Even granting arguendo that a
lease of facilities is not within the contemplation of "collaboration" or
"association," an analysis, however, of the Contract of Lease clearly shows
that there is a "collaboration, association, or joint venture between
respondents PCSO and PGMC in the holding of the On-Line Lottery System,"
and that there are terms and conditions of the Contract "showing that
respondent PGMC is the actual lotto operator and not respondent PCSO." 19
The petitioners also point out that paragraph 10 of the Contract of Lease
requires or authorizes PGMC to establish a telecommunications network that
will connect all the municipalities and cities in the territory. However, PGMC
cannot do that because it has no franchise from Congress to construct,
install, establish, or operate the network pursuant to Section 1 of Act No.
3846, as amended. Moreover, PGMC is a 75% foreign-owned or controlled
corporation and cannot, therefore, be granted a franchise for that purpose
because of Section 11, Article XII of the 1987 Constitution. Furthermore,
since "the subscribed foreign capital" of the PGMC "comes to about 75%, as
shown by paragraph EIGHT of its Articles of Incorporation," it cannot lawfully
enter into the contract in question because all forms of gambling and
lottery is one of them are included in the so-called foreign investments
negative list under the Foreign Investments Act (R.A. No. 7042) where only
up to 40% foreign capital is allowed. 20
Finally, the petitioners insist that the Articles of Incorporation of PGMC do
not authorize it to establish and operate an on-line lottery and
telecommunications systems. 21
Accordingly, the petitioners pray that we issue a temporary restraining order
and a writ of preliminary injunction commanding the respondents or any
person acting in their places or upon their instructions to cease and desist
from implementing the challenged Contract of Lease and, after hearing the

18

merits of the petition, that we render judgment declaring the Contract of

Lease void and without effect and making the injunction permanent. 22
We required the respondents to comment on the petition.
In its Comment filed on 1 March 1994, private respondent PGMC asserts that
"(1) [it] is merely an independent contractor for a piece of work, (i.e., the
building and maintenance of a lottery system to be used by PCSO in the
operation of its lottery franchise); and (2) as such independent contractor,
PGMC is not a co-operator of the lottery franchise with PCSO, nor is PCSO
sharing its franchise, 'in collaboration, association or joint venture' with
PGMC as such statutory limitation is viewed from the context, intent, and
spirit of Republic Act 1169, as amended by Batas Pambansa 42." It further
claims that as an independent contractor for a piece of work, it is neither
engaged in "gambling" nor in "public service" relative to the
telecommunications network, which the petitioners even consider as an
"indispensable requirement" of an on-line lottery system. Finally, it states
that the execution and implementation of the contract does not violate the
Constitution and the laws; that the issue on the "morality" of the lottery
franchise granted to the PCSO is political and not judicial or legal, which
should be ventilated in another forum; and that the "petitioners do not
appear to have the legal standing or real interest in the subject contract and
in obtaining the reliefs sought." 23
In their Comment filed by the Office of the Solicitor General, public
respondents Executive Secretary Teofisto Guingona, Jr., Assistant Executive
Secretary Renato Corona, and the PCSO maintain that the contract of lease
in question does not violate Section 1 of R.A. No. 1169, as amended by B.P.
Blg. 42, and that the petitioner's interpretation of the phrase "in
collaboration, association or joint venture" in Section 1 is "much too narrow,
strained and utterly devoid of logic" for it "ignores the reality that PCSO, as a
corporate entity, is vested with the basic and essential prerogative to enter
into all kinds of transactions or contracts as may be necessary for the
attainment of its purposes and objectives." What the PCSO charter "seeks to
prohibit is that arrangement akin to a "joint venture" or partnership where
there is "community of interest in the business, sharing of profits and losses,
and a mutual right of control," a characteristic which does not obtain in a
contract of lease." With respect to the challenged Contract of Lease, the
"role of PGMC is limited to that of a lessor of the facilities" for the on-line
19

lottery system; in "strict technical and legal sense," said contract "can be
categorized as a contract for a piece of work as defined in Articles 1467,
1713 and 1644 of the Civil Code."
They further claim that the establishment of the telecommunications system
stipulated in the Contract of Lease does not require a congressional franchise
because PGMC will not operate a public utility; moreover, PGMC's
"establishment of a telecommunications system is not intended to establish
a telecommunications business," and it has been held that where the
facilities are operated "not for business purposes but for its own use," a
legislative franchise is not required before a certificate of public convenience
can be granted. 24 Even granting arguendo that PGMC is a public utility,
pursuant
to Albano
S.
25
Reyes,
"it can establish a telecommunications system even without a
legislative franchise because not every public utility is required to secure a
legislative franchise before it could establish, maintain, and operate the
service"; and, in any case, "PGMC's establishment of the telecommunications
system stipulated in its contract of lease with PCSO falls within the
exceptions under Section 1 of Act No. 3846 where a legislative franchise is
not necessary for the establishment of radio stations."
They also argue that the contract does not violate the Foreign Investment
Act of 1991; that the Articles of Incorporation of PGMC authorize it to enter
into the Contract of Lease; and that the issues of "wisdom, morality and
propriety of acts of the executive department are beyond the ambit of
judicial review."
Finally, the public respondents allege that the petitioners have no standing to
maintain the instant suit, citing our resolution in Valmonte vs. Philippine
Charity Sweepstakes Office. 26
Several parties filed motions to intervene as petitioners in this case, 27 but
only the motion of Senators Alberto Romulo, Arturo Tolentino, Francisco
Tatad, Gloria Macapagal-Arroyo, Vicente Sotto III, John Osmea, Ramon
Revilla, and Jose Lina 28 was granted, and the respondents were required to
comment on their petition in intervention, which the public respondents and
PGMC did.

20

In the meantime, the petitioners filed with the Securities and Exchange
Commission on 29 March 1994 a petition against PGMC for the nullification
of the latter's General Information Sheets. That case, however, has no
bearing in this petition.
On 11 April 1994, we heard the parties in oral arguments. Thereafter, we
resolved to consider the matter submitted for resolution and pending
resolution of the major issues in this case, to issue a temporary restraining
order commanding the respondents or any person acting in their place or
upon their instructions to cease and desist from implementing the challenged
Contract of Lease.
In the deliberation on this case on 26 April 1994, we resolved to consider
only these issues: (a) the locus standi of the petitioners, and (b) the legality
and validity of the Contract of Lease in the light of Section 1 of R.A. No.
1169, as amended by B.P. Blg. 42, which prohibits the PCSO from holding
and conducting lotteries "in collaboration, association or joint venture with
any person, association, company or entity, whether domestic or foreign."
On the first issue, seven Justices voted to sustain the locus standi of the
petitioners, while six voted not to. On the second issue, the seven Justices
were of the opinion that the Contract of Lease violates the exception to
Section 1(B) of R.A. No. 1169, as amended by B.P. Blg. 42, and is, therefore,
invalid and contrary to law. The six Justices stated that they wished to
express no opinion thereon in view of their stand on the first issue. The Chief
Justice took no part because one of the Directors of the PCSO is his brotherin-law.
This case was then assigned to this ponente for the writing of the opinion of
the Court.
The preliminary issue on the locus standi of the petitioners should, indeed,
be resolved in their favor. A party's standing before this Court is a procedural
technicality which it may, in the exercise of its discretion, set aside in view of
the importance of the issues raised. In the landmark Emergency Powers
Cases, 29 this Court brushed aside this technicality because "the
transcendental importance to the public of these cases demands that they be
settled promptly and definitely, brushing aside, if we must, technicalities of
procedure. (Avelino vs. Cuenco, G.R. No. L-2821)." Insofar as taxpayers'
suits are concerned, this Court had declared that it "is not devoid of
21

discretion as to whether or not it should be entertained," 30 or that it "enjoys

an open discretion to entertain the same or not." 31 In De La Llana vs.
Alba, 32 this Court declared:
1. The argument as to the lack of standing of petitioners is easily
resolved. As far as Judge de la Llana is concerned, he certainly
falls within the principle set forth in Justice Laurel's opinion
in People vs. Vera [65 Phil. 56 (1937)]. Thus: "The unchallenged
rule is that the person who impugns the validity of a statute
must have a personal and substantial interest in the case such
that he has sustained, or will sustain, direct injury as a result of
its enforcement [Ibid, 89]. The other petitioners as members of
the bar and officers of the court cannot be considered as devoid
of "any personal and substantial interest" on the matter. There is
relevance to this excerpt from a separate opinion in Aquino, Jr.
v. Commission on Elections [L-40004, January 31, 1975, 62
SCRA 275]: "Then there is the attack on the standing of
petitioners, as vindicating at most what they consider a public
right and not protecting their rights as individuals. This is to
conjure the specter of the public right dogma as an inhibition to
parties intent on keeping public officials staying on the path of
constitutionalism. As was so well put by Jaffe; "The protection of
private rights is an essential constituent of public interest and,
conversely, without a well-ordered state there could be no
enforcement of private rights. Private and public interests are,
both in a substantive and procedural sense, aspects of the
totality of the legal order." Moreover, petitioners have
convincingly shown that in their capacity as taxpayers, their
standing to sue has been amply demonstrated. There would be a
retreat from the liberal approach followed in Pascual v. Secretary
of Public Works, foreshadowed by the very decision of People v.
Vera where the doctrine was first fully discussed, if we act
differently now. I do not think we are prepared to take that step.
Respondents, however, would hard back to the American
Supreme Court doctrine in Mellon v. Frothingham, with their
claim that what petitioners possess "is an interest which is
shared in common by other people and is comparatively so
minute and indeterminate as to afford any basis and assurance
22

that the judicial process can act on it." That is to speak in the
language of a bygone era, even in the United States. For as Chief
Justice Warren clearly pointed out in the later case of Flast v.
Cohen, the barrier thus set up if not breached has definitely
been lowered.
In Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs.
Tan, 33 reiterated in Basco vs. Philippine Amusements and Gaming
Corporation, 34 this Court stated:
Objections to taxpayers' suits for lack of sufficient personality
standing or interest are, however, in the main procedural
matters. Considering the importance to the public of the cases at
bar, and in keeping with the Court's duty, under the 1987
Constitution, to determine whether or not the other branches of
government have kept themselves within the limits of the
Constitution and the laws and that they have not abused the
discretion given to them, this Court has brushed aside
technicalities of procedure and has taken cognizance of these
petitions.
and in Association of Small Landowners in the Philippines, Inc. vs. Secretary
of Agrarian Reform, 35 it declared:
With particular regard to the requirement of proper party as
applied in the cases before us, we hold that the same is satisfied
by the petitioners and intervenors because each of them has
sustained or is in danger of sustaining an immediate injury as a
result of the acts or measures complained of. [Ex Parte Levitt,
303 US 633]. And even if, strictly speaking, they are not covered
by the definition, it is still within the wide discretion of the Court
to waive the requirement and so remove the impediment to its
addressing and resolving the serious constitutional questions
raised.
In the first Emergency Powers Cases, ordinary citizens and
taxpayers were allowed to question the constitutionality of
several executive orders issued by President Quirino although
they were invoking only an indirect and general interest shared
23

in common with the public. The Court dismissed the objective

that they were not proper parties and ruled that the
transcendental importance to the public of these cases demands
that they be settled promptly and definitely, brushing aside, if we
must, technicalities of procedure. We have since then applied
this exception in many other cases. (Emphasis supplied)
In Daza vs. Singson,

36

this Court once more said:

. . . For another, we have early as in the Emergency Powers

Cases that where serious constitutional questions are involved,
"the transcendental importance to the public of these cases
demands that they be settled promptly and definitely, brushing
aside, if we must, technicalities of procedure." The same policy
has since then been consistently followed by the Court, as
in Gonzales vs. Commission on Elections [21 SCRA 774] . . .
The Federal Supreme Court of the United States of America has also
expressed its discretionary power to liberalize the rule on locus standi.
In United States vs. Federal Power Commission and Virginia Rea Association
vs. Federal Power Commission, 37 it held:
We hold that petitioners have standing. Differences of view,
however, preclude a single opinion of the Court as to both
petitioners. It would not further clarification of this complicated
specialty of federal jurisdiction, the solution of whose problems is
in any event more or less determined by the specific
circumstances of individual situations, to set out the divergent
grounds in support of standing in these cases.
In line with the liberal policy of this Court on locus standi, ordinary
taxpayers, members of Congress, and even association of planters, and nonprofit civic organizations were allowed to initiate and prosecute actions
before this Court to question the constitutionality or validity of laws, acts,
decisions, rulings, or orders of various government agencies or
instrumentalities.
Among
such cases
were those assailing the
constitutionality of (a) R.A. No. 3836 insofar as it allows retirement gratuity
and commutation of vacation and sick leave to Senators and Representatives
and to elective officials of both Houses of Congress; 38 (b) Executive Order
24

No. 284, issued by President Corazon C. Aquino on 25 July 1987, which

allowed members of the cabinet, their undersecretaries, and assistant
secretaries to hold other government offices or positions; 39 (c) the
automatic appropriation for debt service in the General Appropriations
Act; 40 (d) R.A. No. 7056 on the holding of desynchronized elections; 41 (d)
R.A. No. 1869 (the charter of the Philippine Amusement and Gaming
Corporation) on the ground that it is contrary to morals, public policy, and
order; 42 and (f) R.A. No. 6975, establishing the Philippine National
Police. 43
Other cases where we have followed a liberal policy regarding locus
standi include those attacking the validity or legality of (a) an order allowing
the importation of rice in the light of the prohibition imposed by R.A. No.
3452; 44(b) P.D. Nos. 991 and 1033 insofar as they proposed amendments to
the Constitution and P.D. No. 1031 insofar as it directed the COMELEC to
supervise, control, hold, and conduct the referendum-plebiscite on 16
October 1976; 45 (c) the bidding for the sale of the 3,179 square meters of
land at Roppongi, Minato-ku, Tokyo, Japan; 46 (d) the approval without
hearing by the Board of Investments of the amended application of the
Bataan Petrochemical Corporation to transfer the site of its plant from
Bataan to Batangas and the validity of such transfer and the shift of
feedstock from naphtha only to naphtha and/or liquefied petroleum
gas; 47 (e) the decisions, orders, rulings, and resolutions of the Executive
Secretary, Secretary of Finance, Commissioner of Internal Revenue,
Commissioner of Customs, and the Fiscal Incentives Review Board
exempting the National Power Corporation from indirect tax and duties; 48 (f)
the orders of the Energy Regulatory Board of 5 and 6 December 1990 on the
ground that the hearings conducted on the second provisional increase in oil
prices did not allow the petitioner substantial cross-examination; 49 (g)
Executive Order No. 478 which levied a special duty of P0.95 per liter or
P151.05 per barrel of imported crude oil and P1.00 per liter of imported oil
products; 50 (h) resolutions of the Commission on Elections concerning the
apportionment, by district, of the number of elective members
of Sanggunians;51 and (i) memorandum orders issued by a Mayor affecting
the Chief of Police of Pasay City. 52
In the 1975 case of Aquino vs. Commission on Elections, 53 this Court,
despite its unequivocal ruling that the petitioners therein had no personality
to file the petition, resolved nevertheless to pass upon the issues raised
25

because of the far-reaching implications of the petition. We did no less in De

Guia vs. COMELEC 54 where, although we declared that De Guia "does not
appear to have locus standi, a standing in law, a personal or substantial
interest," we brushed aside the procedural infirmity "considering the
importance of the issue involved, concerning as it does the political exercise
of qualified voters affected by the apportionment, and petitioner alleging
abuse of discretion and violation of the Constitution by respondent."
We find the instant petition to be of transcendental importance to the public.
The issues it raised are of paramount public interest and of a category even
higher than those involved in many of the aforecited cases. The ramifications
of such issues immeasurably affect the social, economic, and moral wellbeing of the people even in the remotest barangays of the country and the
counter-productive and retrogressive effects of the envisioned on-line lottery
system are as staggering as the billions in pesos it is expected to raise. The
legal standing then of the petitioners deserves recognition and, in the
exercise of its sound discretion, this Court hereby brushes aside the
procedural barrier which the respondents tried to take advantage of.
And now on the substantive issue.
Section 1 of R.A. No. 1169, as amending by B.P. Blg. 42, prohibits the PCSO
from holding and conducting lotteries "in collaboration, association or joint
venture with any person, association, company or entity, whether domestic
or foreign." Section 1 provides:
Sec. 1. The Philippine Charity Sweepstakes Office. The
Philippine Charity Sweepstakes Office, hereinafter designated the
Office, shall be the principal government agency for raising and
providing for funds for health programs, medical assistance and
services and charities of national character, and as such shall
have the general powers conferred in section thirteen of Act
Numbered One thousand four hundred fifty-nine, as amended,
and shall have the authority:
A. To hold and conduct charity sweepstakes races,
lotteries and other similar activities, in such
frequency and manner, as shall be determined, and

26

subject to such rules and regulations as shall be

promulgated by the Board of Directors.
B. Subject to the approval of the Minister of Human
Settlements, to engage in health and welfare-related
investments, programs, projects and activities which
may be profit-oriented, by itself or in collaboration,
association or joint venture with any person,
association, company or entity, whether domestic or
foreign, except for the activities mentioned in the
preceding paragraph (A), for the purpose of
providing for permanent and continuing sources of
funds for health programs, including the expansion
of existing ones, medical assistance and services,
and/or charitable grants: Provided, That such
investment will not compete with the private sector
in areas where investments are adequate as may be
determined
by
the
National
Economic
and
Development Authority. (emphasis supplied)
The language of the section is indisputably clear that with respect to its
franchise or privilege "to hold and conduct charity sweepstakes races,
lotteries and other similar activities," the PCSO cannot exercise it "in
collaboration, association or joint venture" with any other party. This is the
unequivocal meaning and import of the phrase "except for the activities
mentioned in the preceding paragraph (A)," namely, "charity sweepstakes
races, lotteries and other similar activities."
B.P. Blg. 42 originated from Parliamentary Bill No. 622, which was covered
by Committee Report No. 103 as reported out by the Committee on SocioEconomic Planning and Development of the Interim Batasang Pambansa. The
original text of paragraph B, Section 1 of Parliamentary Bill No. 622 reads as
follows:
To engage in any and all investments and related profit-oriented
projects or programs and activities by itself or in collaboration,
association or joint venture with any person, association,
company or entity, whether domestic or foreign, for the main

27

purpose of raising funds for health and medical assistance and

services and charitable grants. 55
During the period of committee amendments, the Committee on SocioEconomic Planning and Development, through Assemblyman Ronaldo B.
Zamora, introduced an amendment by substitution to the said paragraph B
such that, as amended, it should read as follows:
Subject to the approval of the Minister of Human Settlements, to
engage in health-oriented investments, programs, projects and
activities which may be profit- oriented, by itself or in
collaboration, association, or joint venture with any person,
association, company or entity, whether domestic or foreign, for
the purpose of providing for permanent and continuing sources
of funds for health programs, including the expansion of existing
ones, medical assistance and services and/or charitable
grants. 56
Before the motion of Assemblyman Zamora for the approval of the
amendment could be acted upon, Assemblyman Davide introduced an
amendment to the amendment:
MR. DAVIDE.
Mr. Speaker.
THE SPEAKER.
The gentleman from Cebu is recognized.
MR. DAVIDE.
May I introduce an amendment to the
committee amendment? The amendment
would be to insert after "foreign" in the
amendment just read the following:
EXCEPT FOR THE ACTIVITY IN LETTER
(A) ABOVE.

28

When it is joint venture or in

collaboration with any entity such
collaboration or joint venture must not
include activity activity letter (a) which is
the
holding
and
conducting
of
sweepstakes races, lotteries and other
similar acts.
MR. ZAMORA.
We accept the amendment, Mr. Speaker.
MR. DAVIDE.
Thank you, Mr. Speaker.
THE SPEAKER.
Is
there
any
objection
to
the
amendment? (Silence) The amendment,
as amended, is approved. 57
Further amendments to paragraph B were introduced and approved. When
Assemblyman Zamora read the final text of paragraph B as further
amended, the earlier approved amendment of Assemblyman Davide became
"EXCEPT FOR THE ACTIVITIES MENTIONED IN PARAGRAPH (A)"; and by
virtue of the amendment introduced by Assemblyman Emmanuel Pelaez, the
word PRECEDING was inserted before PARAGRAPH. Assemblyman Pelaez
introduced other amendments. Thereafter, the new paragraph B was
approved. 58
This is now paragraph B, Section 1 of R.A. No. 1169, as amended by B.P.
Blg. 42.
No interpretation of the said provision to relax or circumvent the prohibition
can be allowed since the privilege to hold or conduct charity sweepstakes
races, lotteries, or other similar activities is a franchise granted by the
legislature to the PCSO. It is a settled rule that "in all grants by the
government to individuals or corporations of rights, privileges and
franchises, the words are to be taken most strongly against the grantee ....
29

[o]ne who claims a franchise or privilege in derogation of the common rights

of the public must prove his title thereto by a grant which is clearly and
definitely expressed, and he cannot enlarge it by equivocal or doubtful
provisions or by probable inferences. Whatever is not unequivocally granted
is withheld. Nothing passes by mere implication." 59
In short then, by the exception explicitly made in paragraph B, Section 1 of
its charter, the PCSO cannot share its franchise with another by way of
collaboration, association or joint venture. Neither can it assign, transfer, or
lease such franchise. It has been said that "the rights and privileges
conferred under a franchise may, without doubt, be assigned or transferred
when the grant is to the grantee and assigns, or is authorized by statute. On
the other hand, the right of transfer or assignment may be restricted by
statute or the constitution, or be made subject to the approval of the grantor
or a governmental agency, such as a public utilities commission, exception
that an existing right of assignment cannot be impaired by subsequent
legislation." 60
It may also be pointed out that the franchise granted to the PCSO to hold
and conduct lotteries allows it to hold and conduct a species of gambling. It
is settled that "a statute which authorizes the carrying on of a gambling
activity or business should be strictly construed and every reasonable doubt
so resolved as to limit the powers and rights claimed under its authority." 61
Does the challenged Contract of Lease violate or contravene the exception in
Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, which prohibits the
PCSO from holding and conducting lotteries "in collaboration, association or
joint venture with" another?
We agree with the petitioners that it does, notwithstanding its denomination
or designation as a (Contract of Lease). We are neither convinced nor moved
or fazed by the insistence and forceful arguments of the PGMC that it does
not because in reality it is only an independent contractor for a piece of
work, i.e., the building and maintenance of a lottery system to be used by
the PCSO in the operation of its lottery franchise. Whether the contract in
question is one of lease or whether the PGMC is merely an independent
contractor should not be decided on the basis of the title or designation of
the contract but by the intent of the parties, which may be gathered from
the provisions of the contract itself. Animus hominis est anima scripti. The
30

intention of the party is the soul of the instrument. In order to give life or
effect to an instrument, it is essential to look to the intention of the
individual who executed it. 62 And, pursuant to Article 1371 of the Civil Code,
"to
determine
the
intention of
the
contracting
parties,
their
contemporaneous and subsequent acts shall be principally considered." To
put it more bluntly, no one should be deceived by the title or designation of
a contract.
A careful analysis and evaluation of the provisions of the contract and a
consideration of the contemporaneous acts of the PCSO and PGMC
indubitably disclose that the contract is not in reality a contract of lease
under which the PGMC is merely an independent contractor for a piece of
work, but one where the statutorily proscribed collaboration or association,
in the least, or joint venture, at the most, exists between the contracting
parties. Collaboration is defined as the acts of working together in a joint
project. 63 Association means the act of a number of persons in uniting
together for some special purpose or business. 64 Joint venture is defined as
an association of persons or companies jointly undertaking some commercial
enterprise; generally all contribute assets and share risks. It requires a
community of interest in the performance of the subject matter, a right to
direct and govern the policy in connection therewith, and duty, which may be
altered
by
agreement
to
share
both
in
profit
and
65
losses.
The contemporaneous acts of the PCSO and the PGMC reveal that the PCSO
had neither funds of its own nor the expertise to operate and manage an online lottery system, and that although it wished to have the system, it would
have it "at no expense or risks to the government." Because of these serious
constraints and unwillingness to bear expenses and assume risks, the PCSO
was candid enough to state in its RFP that it is seeking for "a suitable
contractor which shall build, at its own expense, all the facilities needed to
operate and maintain" the system; exclusively bear "all capital, operating
expenses and expansion expenses and risks"; and submit "a comprehensive
nationwide lottery development plan . . . which will include the game, the
marketing of the games, and the logistics to introduce the game to all the
cities and municipalities of the country within five (5) years"; and that the
operation of the on-line lottery system should be "at no expense or risk to
the government" meaning itself, since it is a government-owned and
controlled agency. The facilities referred to means "all capital equipment,
31

computers, terminals, software, nationwide telecommunications network,

ticket sales offices, furnishings and fixtures, printing costs, costs of salaries
and wages, advertising and promotions expenses, maintenance costs,
expansion and replacement costs, security and insurance, and all other
related expenses needed to operate a nationwide on-line lottery system."
In short, the only contribution the PCSO would have is its franchise or
authority to operate the on-line lottery system; with the rest, including
the risks of the business, being borne by the proponent or bidder. It could be
for this reason that it warned that "the proponent must be able to stand to
the acid test of proving that it is an entity able to take on the role of
responsible maintainer of the on-line lottery system." The PCSO, however,
makes it clear in its RFP that the proponent can propose a period of the
contract which shall not exceed fifteen years, during which time it is assured
of a "rental" which shall not exceed 12% of gross receipts. As admitted by
the PGMC, upon learning of the PCSO's decision, the Berjaya Group Berhad,
with its affiliates, wanted to offer its services and resources to the PCSO.
Forthwith, it organized the PGMC as "a medium through which the technical
and management services required for the project would be offered and
delivered to PCSO." 66
Undoubtedly, then, the Berjaya Group Berhad knew all along that in
connection with an on-line lottery system, the PCSO had nothing but its
franchise, which it solemnly guaranteed it had in the General Information of
the RFP. 67Howsoever viewed then, from the very inception, the PCSO and
the PGMC mutually understood that any arrangement between them would
necessarily
leave
to
the
PGMC
the technical,
operations,
and
management aspects of the on-line lottery system while the PCSO would,
primarily, provide the franchise. The words Gaming and Management in the
corporate name of respondent Philippine Gaming Management Corporation
could not have been conceived just for euphemistic purposes. Of course, the
RFP cannot substitute for the Contract of Lease which was subsequently
executed by the PCSO and the PGMC. Nevertheless, the Contract of Lease
incorporates their intention and understanding.
The so-called Contract of Lease is not, therefore, what it purports to be. Its
denomination as such is a crafty device, carefully conceived, to provide a
built-in defense in the event that the agreement is questioned as violative of
the exception in Section 1 (B) of the PCSO's charter. The acuity or skill of its
32

draftsmen to accomplish that purpose easily manifests itself in the Contract

of Lease. It is outstanding for its careful and meticulous drafting designed to
give an immediate impression that it is a contract of lease. Yet, woven
therein are provisions which negate its title and betray the true intention of
the parties to be in or to have a joint venture for a period of eight years in
the operation and maintenance of the on-line lottery system.
Consistent with the above observations on the RFP, the PCSO has only its
franchise to offer, while the PGMC represents and warrants that it has
access to all managerial and technical expertise to promptly and effectively
carry out the terms of the contract. And, for a period of eight years, the
PGMC is under obligation to keep all the Facilities in safe condition and if
necessary, upgrade, replace, and improve them from time to time as new
technology develops to make the on-line lottery system more cost-effective
and competitive; exclusively bear all costs and expenses relating to the
printing, manpower, salaries and wages, advertising and promotion,
maintenance, expansion and replacement, security and insurance, and all
other related expenses needed to operate the on-line lottery system;
undertake a positive advertising and promotions campaign for both
institutional and product lines without engaging in negative advertising
against other lessors; bear the salaries and related costs of skilled and
qualified personnel for administrative and technical operations; comply
with procedural and coordinating rules issued by the PCSO; and to train
PCSO and other local personnel and to effect the transfer of technology and
other expertise, such that at the end of the term of the contract, the PCSO
will be able to effectively take over the Facilities and efficiently operate the
on-line lottery system. The latter simply means that, indeed, the managers,
technicians or employees who shall operate the on-line lottery system are
not managers, technicians or employees of the PCSO, but of the PGMC and
that it is only after the expiration of the contract that the PCSO will operate
the system. After eight years, the PCSO would automatically become the
owner of the Facilities without any other further consideration.
For these reasons, too, the PGMC has the initial prerogative to prepare the
detailed plan of all games and the marketing thereof, and determine the
number of players, value of winnings, and the logistics required to introduce
the games, including the Master Games Plan. Of course, the PCSO has the
reserved authority to disapprove them. 68 And, while the PCSO has the sole
responsibility over the appointment of dealers and retailers throughout the
33

country, the PGMC may, nevertheless, recommend for appointment dealers

and retailers which shall be acted upon by the PCSO within forty-eight hours
and collect and retain, for its own account, a security deposit from dealers
and retailers in respect of equipment supplied by it.
This joint venture is further established by the following:
(a) Rent is defined in the lease contract as the amount to be paid to the
PGMC as compensation for the fulfillment of its obligations under the
contract, including, but not limited to the lease of the Facilities. However,
this rent is not actually a fixed amount. Although it is stated to be 4.9% of
gross receipts from ticket sales, payable net of taxes required by law to be
withheld, it may be drastically reduced or, in extreme cases, nothing may be
due or demandable at all because the PGMC binds itself to "bear all risks if
the revenue from the ticket sales, on an annualized basis, are insufficient to
pay the entire prize money." This risk-bearing provision is unusual in a
lessor-lessee relationship, but inherent in a joint venture.
(b) In the event of pre-termination of the contract by the PCSO, or its
suspension of operation of the on-line lottery system in breach of the
contract and through no fault of the PGMC, the PCSO binds itself "to
promptly, and in any event not later than sixty (60) days, reimburse the
Lessor the amount of its total investment cost associated with the On-Line
Lottery System, including but not limited to the cost of the Facilities, and
further compensate the LESSOR for loss of expected net profit after tax,
computed over the unexpired term of the lease." If the contract were indeed
one of lease, the payment of the expected profits or rentals for the
unexpired portion of the term of the contract would be enough.
(c) The PGMC cannot "directly or indirectly undertake any activity or
business in competition with or adverse to the On-Line Lottery System of
PCSO unless it obtains the latter's prior written consent." If the PGMC is
engaged in the business of leasing equipment and technology for an on-line
lottery system, we fail to see any acceptable reason why it should allow a
restriction on the pursuit of such business.
(d) The PGMC shall provide the PCSO the audited Annual Report sent to its
stockholders, and within two years from the effectivity of the contract, cause
itself to be listed in the local stock exchange and offer at least 25% of its
34

equity to the public. If the PGMC is merely a lessor, this imposition is

unreasonable and whimsical, and could only be tied up to the fact that the
PGMC will actually operate and manage the system; hence, increasing public
participation in the corporation would enhance public interest.
(e) The PGMC shall put up an Escrow Deposit of P300,000,000.00 pursuant
to the requirements of the RFP, which it may, at its option, maintain as its
initial performance bond required to ensure its faithful compliance with the
terms of the contract.
(f) The PCSO shall designate the necessary personnel to monitor and audit
the
daily
performance
of
the
on-line
lottery
system;
and
promulgate procedural and coordinating rules governing all activities relating
to the on-line lottery system. The first further confirms that it is the PGMC
which will operate the system and the PCSO may, for the protection of its
interest, monitor and audit the daily performance of the system. The second
admits the coordinating and cooperative powers and functions of the parties.
(g) The PCSO may validly terminate the contract if the PGMC becomes
insolvent or bankrupt or is unable to pay its debts, or if it stops or suspends
or threatens to stop or suspend payment of all or a material part of its
debts.
All of the foregoing unmistakably confirm the indispensable role of the PGMC
in the pursuit, operation, conduct, and management of the On-Line Lottery
System. They exhibit and demonstrate the parties' indivisible community of
interest in the conception, birth and growth of the on-line lottery, and, above
all, in its profits, with each having a right in the formulation and
implementation of policies related to the business and sharing, as well, in
the losses with the PGMC bearing the greatest burden because of its
assumption of expenses and risks, and the PCSO the least, because of its
confessed unwillingness to bear expenses and risks. In a manner of
speaking, each is wed to the other for better or for worse. In the final
analysis, however, in the light of the PCSO's RFP and the above highlighted
provisions, as well as the "Hold Harmless Clause" of the Contract of Lease, it
is even safe to conclude that the actual lessor in this case is the PCSO and
the subject matter thereof is its franchise to hold and conduct lotteries since
it is, in reality, the PGMC which operates and manages the on-line lottery
system for a period of eight years.
35

We thus declare that the challenged Contract of Lease violates the exception
provided for in paragraph B, Section 1 of R.A. No. 1169, as amended by B.P.
Blg. 42, and is, therefore, invalid for being contrary to law. This conclusion
renders unnecessary further discussion on the other issues raised by the
petitioners.
WHEREFORE, the instant petition is hereby GRANTED and the challenged
Contract of Lease executed on 17 December 1993 by respondent Philippine
Charity Sweepstakes Office (PCSO) and respondent Philippine Gaming
Management Corporation (PGMC) is hereby DECLARED contrary to law and
invalid.
The Temporary Restraining Order issued on 11 April 1994 is hereby MADE
PERMANENT.
No pronouncement as to costs.
SO ORDERED.

Ever
Electrical
Manufacturing,
Inc.
(EEMI)
v.
Samahang
Manggagawa ng Ever Electrical/NAMAWU Local 224, 672 S 562
(2012)
EVER
ELECTRICAL
G.R. No. 194795
MANUFACTURING,
INC.,
(EEMI) and VICENTE GO,
Petitioners,

Present:

PERALTA, J., Acting Chairperson,*

ABAD,
- versus -

VILLARAMA, JR.,* *
MENDOZA, and

36

SAMAHANG
MANGGAGAWA
NG
EVER
ELECTRICAL/
NAMAWU
LOCAL
224 represented by FELIMON
PANGANIBAN,

PERLAS-BERNABE, JJ.

Respondents.

Promulgated:

June 13, 2012

x
----------------------------------------------------------------------------------------------------x

DECISION

MENDOZA, J.:

This petition for review on certiorari [1] under Rule 45 of the 1997 Rules
of Civil Procedure assails the August 31, 2010 Decision [2] and the December
16, 2010 Resolution[3] of the Court of Appeals (CA) in CA-G.R. SP No.
108978.

Petitioner Ever Electrical Manufacturing, Inc. (EEMI) is a corporation

engaged in the business of manufacturing electrical parts and supplies. On
37

the other hand, the respondents are members of Samahang Manggagawa ng

Ever Electrical/NAMAWU Local 224 (respondents) headed by Felimon
Panganiban.

The controversy started when EEMI closed its business operations

on October 11, 2006 resulting in the termination of the services of its
employees. Aggrieved, respondents filed a complaint for illegal dismissal
with prayer for payment of 13 thmonth pay, separation pay, damages, and
attorneys fees. Respondents alleged that the closure was made without any
warning, notice or memorandum and in full disregard of the requirements of
the Labor Code.

In its defense, EEMI explained that it had closed the business due to
various factors. In 1995, it invested in Orient Commercial Banking
Corporation (Orient Bank) the sum of P500,000,000.00 and during the Asian
Currency crises, various economies in the South East Asian Region were hurt
badly. EEMI was one of those who suffered huge losses. In November 1996,
it obtained a loan in the amount of P121,400,000.00 from United Coconut
Planters Bank (UCPB). As security for the loan, EEMIs land and its
improvements, including the factory, were mortgaged to UCPB.

EEMIs business suffered further losses due to the continued entry of

cheaper goods from China and other Asian countries. Adding to EEMIs
financial woes was the closure of Orient Bank where most of its resources
were invested. As a result, EEMI was not able to meet its loan obligations
with UCPB.

38

In an attempt to save the company, EEMI entered into a dacion en

pago arrangement with UCPB which, in effect, transferred ownership of the
companys property to UCPB as reflected in TCT No. 429159. Originally, EEMI
wanted to lease the premises to continue its business operation but under
UCPBs policy, a previous debtor who failed to settle its loan obligation was
not eligible to lease its acquired assets. Thus, UCPB agreed to lease it to an
affiliate corporation, EGO Electrical Supply Co, Inc. (EGO), for and in behalf
of EEMI. On February 2, 2002, a lease agreement was entered into between
UCPB and EGO.[4] The said lease came to a halt when UCPB instituted an
unlawful detainer suit against EGO before the Metropolitan Trial Court,
Branch 5, Makati City (MeTC) docketed as Civil Case No. 88602. On August
11, 2006, the MeTC ruled in favor of UCPB and ordered EGO to vacate the
leased premises and pay rentals to UCPB in the amount of P21,473,843.65.
[5]
On September 19, 2006, a writ of execution was issued. [6] Consequently,
on October 11, 2006, the Sheriff implemented the writ by closing the
premises and, as a result, EEMIs employees were prevented from entering
the factory.

On April 25, 2007, the Labor Arbiter (LA) ruled that respondents were
not illegally dismissed. It, however, ordered EEMI and its President, Vicente
Go (Go), to pay their employees separation pay and 13 th month pay
respectively.[7] The decretal portion of the LA decision, reads:

CONFORMABLY WITH THE FOREGOING, Judgment is

hereby rendered ordering the respondent[s] in solidum to pay
the complainants their separation pay, 13 th month pay of the
three (3) workers and the balance of their 13 th month pay as
computed which computation is made a part of this disposition.

On September 15, 2008, the NLRC reversed and set aside the decision
of the LA. The NLRC dismissed the complaint for lack of merit and ruled that
39

since EEMIs cessation of business operation was due to serious business

losses, the employees were not entitled to separation pay.[8]

Respondents moved for reconsideration of the NLRC decision, but the

NLRC denied the motion in its March 23, 2009 Resolution.[9]

Unperturbed, respondents elevated the case before the CA via a

petition for certiorari under Rule 65.[10]

On August 31, 2010, the CA granted the petition. [11] It nullified the
decision of the NLRC and reinstated the LA decision. The dispositive portion
of the CA decision reads:

ACCORDINGLY, the petition is GRANTED. The Decision

dated September 15, 2008 and Resolution dated March 23,
2009 of the National Labor Relations Commission are NULLIFIED
and the Decision dated April 25, 2007 of Labor Arbiter
Melquiades Sol Del Rosario, REINSTATED.

The CA held that respondents were entitled to separation pay and

13th month pay because the closure of EEMIs business operation was
effected by the enforcement of a writ of execution and not by reason of
business losses. The CA, citing Restaurante Las Conchas v. Lydia Llego,
[12]
upheld the solidary liability of EEMI and Go, declaring that when the
employer corporation is no longer existing and unable to satisfy the
judgment in favor of the employees, the officers should be held liable for
acting on behalf of the corporation.[13]
EEMI and Go filed a motion for reconsideration but it was denied in the
CA Resolution dated December 16, 2010.[14]

40

Hence, this petition.[15]

Issues:

1. Whether the CA erred in finding that the closure of EEMIs operation

was not due to business losses; and

2. Whether the CA erred in finding Vicente Go solidarily liable with

EEMI.

The petition is partly meritorious.

Article 283 of the Labor Code provides:

Art. 283. Closure of establishment and reduction of

personnel. The employer may also terminate the employment of
any employee due to the installation of labor saving devices,
redundancy, retrenchment to prevent losses or the closing or
cessation of operation of the establishment or undertaking
unless the closing is for the purpose of circumventing the
provisions of this Title, by serving a written notice on the
workers and the Ministry of Labor and Employment at least one
(1) month before the intended date thereof. In case of
termination due to the installation of labor saving devices or
redundancy, the worker affected thereby shall be entitled to a
separation pay equivalent to at least his one (1) month pay or to
at least one (1) month pay for every year of service, whichever
is higher. In case of retrenchment to prevent losses and in cases
of closures or cessation of operations of establishment or under
41

taking not due to serious business losses or financial reverses,

the separation pay shall be equivalent to one (1) month pay or
at least one-half (1/2) month pay for every year of service,
whichever is higher. A fraction of at least six (6) months shall be
considered one (1) whole year.

Article 283 of the Labor Code identifies closure or cessation of

operation of the establishment as an authorized cause for terminating an
employee. Similarly, the said provision mandates that employees who are
laid off from work due to closures that are not due to business insolvency
should be paid separation pay equivalent to one-month pay or to at least
one-half month pay for every year of service, whichever is higher. A fraction
of at least six months shall be considered one whole year.

Although business reverses or losses are recognized by law as an

authorized cause, it is still essential that the alleged losses in the business
operations be proven convincingly; otherwise, this ground for termination of
employment would be susceptible to abuse by conniving employers, who
might be merely feigning business losses or reverses in their business
ventures in order to ease out employees.[16]

In this case, EEMI failed to establish that the main reason for its
closure was business reverses. As aptly observed by the CA, the cessation of
EEMIs business was not directly brought about by serious business losses or
financial reverses, but by reason of the enforcement of a judgment against
it. Thus, EEMI should be required to pay separation pay to its affected
employees.

As to whether or not Go should be held solidarily liable with EEMI, the

Court agrees with the petitioner.
42

As a general rule, corporate officers should not be held solidarily liable

with the corporation for separation pay for it is settled that a corporation is
invested by law with a personality separate and distinct from those of the
persons composing it as well as from that of any other legal entity to which
it may be related. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not of
itself sufficient ground for disregarding the separate corporate personality.[17]

The LA was of the view that Go, as President of the corporation,

actively participated in the management of EEMIs corporate obligations, and,
accordingly, rendered judgment ordering EEMI and Go in solidum to pay the
complainants[18] their due. He explained that [r]espondent Gos negligence in
not paying the lease rental of the plant in behalf of the lessee EGO Electrical
Supply, Inc., where EEMI was operating and reimburse expenses of UCPB for
real estate taxes and the like, prompted the bank to file an unlawful detainer
case against the lessee, EGO Electrical Supply Co. This evasion of an existing
obligation, made respondent Go as liable as respondent EEMI, for
complainants money awards.[19] Added the LA, being the President and the
one actively representing respondent EEMI, in major contracts i.e. Real
Estate Mortgage, loans, dacion en pago, respondent Go has to be liable in
the case.[20] As earlier stated, the CA affirmed the LA decision citing the case
of Restaurante Las Conchas v. Llego,[21] where it was held that when the
employer corporation is no longer existing and unable to satisfy the
judgment in favor of the employees, the officers should be held liable for
acting on behalf of the corporation.[22]

A study of Restaurante Las Conchas case, however, bares that it was

an application of the exception rather than the general rule. As stated in the
said case, as a rule, the officers and members of a corporation are not
personally liable for acts done in the performance of their duties. [23] The
Court therein explained that it applied the exception because of the peculiar
circumstances of the case. If the rule would be applied, the employees would
43

end up in an empty victory because as the restaurant had been closed for
lack of venue, there would be no one to pay its liability as the respondents
therein claimed that the restaurant was owned by a different entity, not a
party in the case.[24]

In two subsequent cases, the Courts ruling in Restaurante Las

Conchas was invoked but the Court refused to consider it reasoning out that
it was the exception rather than the rule. The two cases were Mandaue
Dinghow Dimsum House, Co., Inc. and/or Henry Uytengsu v. National Labor
Relations Commission[25] and Pantranco Employees Association (PEAPTGWO) v. National Labor Relations Commission.[26]

In Mandaue Dinghow Dimsum House, Co., Inc., the Court declined to

apply the ruling in Restaurante Las Conchas because there was no evidence
that the respondent therein, Henry Uytrengsu, acted in bad faith or in excess
of his authority. It stressed that a corporation is invested by law with a
personality separate and distinct from those of the persons composing it as
well as from that of any other legal entity to which it may be related. For
said reason, the doctrine of piercing the veil of corporate fiction must be
exercised with caution.[27] Citing Malayang Samahan ng mga Manggagawa sa
M. Greenfield v. Ramos,[28] the Court explained that corporate directors and
officers are solidarily liable with the corporation for the termination of
employees done with malice or bad faith. It stressed that bad faith does not
connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of wrong; it means breach of a
known duty through some motive or interest or ill will; it partakes of the
nature of fraud.

In Pantranco Employees Association, the Court also rejected the

invocation of Restaurante Las Conchas and refused to pierce the veil of
corporate fiction. It explained:

44

As between PNB and PNEI, petitioners want us to disregard

their separate personalities, and insist that because the
company, PNEI, has already ceased operations and there is no
other way by which the judgment in favor of the employees can
be satisfied, corporate officers can be held jointly and severally
liable with the company. Petitioners rely on the pronouncement
of this Court in A.C. Ransom Labor Union-CCLU v. NLRC and
subsequent cases.
This reliance fails to persuade. We find the aforesaid
decisions inapplicable to the instant case.
For one, in the said cases, the persons made liable after
the companys cessation of operations were the officers and
agents of the corporation. The rationale is that, since the
corporation is an artificial person, it must have an officer who
can be presumed to be the employer, being the person acting in
the interest of the employer. The corporation, only in the
technical sense, is the employer. In the instant case, what is
being made liable is another corporation (PNB) which acquired
the debtor corporation (PNEI).
Moreover, in the recent cases Carag v. National Labor
Relations Commission and McLeod v. National Labor Relations
Commission, the Court explained the doctrine laid down in AC
Ransom relative to the personal liability of the officers and
agents of the employer for the debts of the latter. In AC Ransom,
the Court imputed liability to the officers of the corporation on
the strength of the definition of an employer in Article 212(c)
(now Article 212[e]) of the Labor Code. Under the said provision,
employer includes any person acting in the interest of an
employer, directly or indirectly, but does not include any labor
organization or any of its officers or agents except when acting
as employer. It was clarified in Carag and McLeod that Article
212(e) of the Labor Code, by itself, does not make a corporate
officer personally liable for the debts of the corporation. It added
that the governing law on personal liability of directors or officers
for debts of the corporation is still Section 31 of the Corporation
Code.
45

More importantly, as aptly observed by this Court in AC

Ransom, it appears that Ransom, foreseeing the possibility or
probability of payment of backwages to its employees,
organized Rosario to replace Ransom, with the latter to be
eventually phased out if the strikers win their case. The
execution could not be implemented against Ransom because of
the disposition posthaste of its leviable assets evidently in order
to evade its just and due obligations. Hence, the Court sustained
the piercing of the corporate veil and made the officers of
Ransom personally liable for the debts of the latter.
Clearly, what can be inferred from the earlier cases is that
the doctrine of piercing the corporate veil applies only in three
(3) basic areas, namely: 1) defeat of public convenience as when
the corporate fiction is used as a vehicle for the evasion of an
existing obligation; 2) fraud cases or when the corporate entity
is used to justify a wrong, protect fraud, or defend a crime; or 3)
alter ego cases, where a corporation is merely a farce since it 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. In the absence of
malice, bad faith, or a specific provision of law making a
corporate officer liable, such corporate officer cannot be
made
personally
liable
for
corporate
liabilities.
[29]
[Emphasis supplied]

Similarly, in the case at bench, the records do not warrant an

application of the exception. The rule, which requires the presence of malice
or bad faith, must still prevail. In the recent case of Wensha Spa Center
and/or Xu Zhi Jie v. Yung,[30] the Court absolved the corporations president
from liability in the absence of bad faith or malice. In the said case, the
Court stated:

46

In labor cases, corporate directors and officers may be

held solidarily liable with the corporation for the termination of
employment only if done with malice or in bad faith. [31] Bad faith
does not connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing
of wrong; it means breach of a known duty through some motive
or interest or ill will; it partakes of the nature of fraud. [32]

In the present case, Go may have acted in behalf of EEMI but the
companys failure to operate cannot be equated to bad faith. Cessation of
business operation is brought about by various causes like mismanagement,
lack of demand, negligence, or lack of business foresight. Unless it can be
shown that the closure was deliberate, malicious and in bad faith, the Court
must apply the general rule that a corporation has, by law, a personality
separate and distinct from that of its owners. As there is no evidence that
Go, as EEMIs President, acted maliciously or in bad faith in handling their
business affairs and in eventually implementing the closure of its business,
he cannot be held jointly and solidarily liable with EEMI.

WHEREFORE, the petition is PARTIALLY GRANTED. The August 31, 2010

Decision of the Court of Appeals is AFFIRMED with MODIFICATION that Vicente
Go is not solidarily liable with Ever Electrical Manufacturing, Inc.

SO ORDERED.

Gotesco Properties, Inc. v. Fajardo, 692 S 319 (2013)

G.R. No. 201167
February 27, 2013

47

GOTESCO PROPERTIES, INC., JOSE C. GO, EVELYN GO, LOURDES G.

ORTIGA,
GEORGE
GO,
and
VICENTE
GO, Petitioners,
vs.
SPOUSES EUGENIO and ANGELINA FAJARDO, Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of
Court is the July 22, 2011 Decision 1and February 29, 2012 Resolution2 of the
Court of Appeals (CA) in CA-G.R. SP No. 112981, which affirmed with
modification the August 27, 2009 Decision3 of the Office of the President
(OP).
The Facts
On January 24, 1995, respondent-spouses Eugenio and Angelina Fajardo
(Sps. Fajardo) entered into a Contract to Sell4 (contract) with petitionercorporation Gotesco Properties, Inc. (GPI) for the purchase of a 100-square
meter lot identified as Lot No. 13, Block No.6, Phase No. IV of Evergreen
Executive Village, a subdivision project owned and developed by GPI located
at Deparo Road, Novaliches, Caloocan City. The subject lot is a portion of a
bigger lot covered by Transfer Certificate of Title (TCT) No. 244220 5 (mother
title).
Under the contract, Sps. Fajardo undertook to pay the purchase price
of P126,000.00 within a 10-year period, including interest at the rate of nine
percent (9%) per annum. GPI, on the other hand, agreed to execute a final
deed of sale (deed) in favor of Sps. Fajardo upon full payment of the
stipulated consideration. However, despite its full payment of the purchase
price on January 17, 20006 and subsequent demands,7 GPI failed to execute
the deed and to deliver the title and physical possession of the subject lot.
Thus, on May 3, 2006, Sps. Fajardo filed before the Housing and Land Use
Regulatory
Board-Expanded
National
Capital
Region
Field
Office
8
(HLURBENCRFO) a complaint for specific performance or rescission of
contract with damages against GPI and the members of its Board of
Directors namely, Jose C. Go, Evelyn Go, Lourdes G. Ortiga, George Go, and

48

Vicente Go (individual petitioners), docketed as HLURB Case No. REM050306-13319.

Sps. Fajardo averred that GPI violated Section 20 9 of Presidential Decree No.
95710 (PD 957) due to its failure to construct and provide water facilities,
improvements, infrastructures and other forms of development including
water supply and lighting facilities for the subdivision project. They also
alleged that GPI failed to provide boundary marks for each lot and that the
mother title including the subject lot had no technical description and was
even levied upon by the Bangko Sentral ng Pilipinas (BSP) without their
knowledge. They thus prayed that GPI be ordered to execute the deed, to
deliver the corresponding certificate of title and the physical possession of
the subject lot within a reasonable period, and to develop Evergreen
Executive Village; or in the alternative, to cancel and/or rescind the contract
and refund the total payments made plus legal interest starting January
2000.
For their part, petitioners maintained that at the time of the execution of the
contract, Sps. Fajardo were actually aware that GPI's certificate of title had
no technical description inscribed on it. Nonetheless, the title to the subject
lot was free from any liens or encumbrances. 11 Petitioners claimed that the
failure to deliver the title to Sps. Fajardo was beyond their control 12 because
while GPI's petition for inscription of technical description (LRC Case No.
4211) was favorably granted13 by the Regional Trial Court of Caloocan City,
Branch 131 (RTC-Caloocan), the same was reversed 14 by the CA; this caused
the delay in the subdivision of the property into individual lots with individual
titles. Given the foregoing incidents, petitioners thus argued that Article
1191 of the Civil Code (Code) the provision on which Sps. Fajardo anchor
their right of rescission remained inapplicable since they were actually
willing to comply with their obligation but were only prevented from doing so
due to circumstances beyond their control. Separately, petitioners pointed
out that BSP's adverse claim/levy which was annotated long after the
execution of the contract had already been settled.
The Ruling of the HLURB-ENCRFO
On February 9, 2007, the HLURB-ENCRFO issued a Decision 15 in favor of Sps.
Fajardo, holding that GPIs obligation to execute the corresponding deed and
to deliver the transfer certificate of title and possession of the subject lot
49

arose and thus became due and demandable at the time Sps. Fajardo had
fully paid the purchase price for the subject lot. Consequently, GPIs failure
to meet the said obligation constituted a substantial breach of the contract
which perforce warranted its rescission. In this regard, Sps. Fajardo were
given the option to recover the money they paid to GPI in the amount
of P168,728.83, plus legal interest reckoned from date of extra-judicial
demand in September 2002 until fully paid. Petitioners were likewise held
jointly and solidarily liable for the payment of moral and exemplary
damages, attorney's fees and the costs of suit.
The Ruling of the HLURB Board of Commissioners
On appeal, the HLURB Board of Commissioners affirmed the above ruling in
its August 3, 2007 Decision, 16finding that the failure to execute the deed and
to deliver the title to Sps. Fajardo amounted to a violation of Section 25 of
PD 957 which therefore, warranted the refund of payments in favor of Sps.
Fajardo.
The Ruling of the OP
On further appeal, the OP affirmed the HLURB rulings in its August 27, 2009
Decision.17 In so doing, it emphasized the mandatory tenor of Section 25 of
PD 957 which requires the delivery of title to the buyer upon full payment
and found that GPI unjustifiably failed to comply with the same.
The Ruling of the CA
On petition for review, the CA affirmed the above rulings with modification,
fixing the amount to be refunded to Sps. Fajardo at the prevailing market
value of the property18 pursuant to the ruling in Solid Homes v. Tan (Solid
Homes).19
The Petition
Petitioners insist that Sps. Fajardo have no right to rescind the contract
considering that GPI's inability to comply therewith was due to reasons
beyond its control and thus, should not be held liable to refund the payments
they had received. Further, since the individual petitioners never participated
in the acts complained of nor found to have acted in bad faith, they should
not be held liable to pay damages and attorney's fees.
50

The Court's Ruling

The petition is partly meritorious.
A. Sps. Fajardos right to rescind
It is settled that in a contract to sell, the seller's obligation to deliver the
corresponding certificates of title is simultaneous and reciprocal to the
buyer's full payment of the purchase price. 20 In this relation, Section 25 of
PD 957, which regulates the subject transaction, imposes on the subdivision
owner or developer the obligation to cause the transfer of the corresponding
certificate of title to the buyer upon full payment, to wit:
Sec. 25. Issuance of Title. The owner or developer shall deliver the title
of the lot or unit to the buyer upon full payment of the lot or unit. No
fee, except those required for the registration of the deed of sale in the
Registry of Deeds, shall be collected for the issuance of such title. In the
event a mortgage over the lot or unit is outstanding at the time of the
issuance of the title to the buyer, the owner or developer shall redeem the
mortgage or the corresponding portion thereof within six months from such
issuance in order that the title over any fully paid lot or unit may be secured
and delivered to the buyer in accordance herewith. (Emphasis supplied.)
In the present case, Sps. Fajardo claim that GPI breached the contract due
to its failure to execute the deed of sale and to deliver the title and
possession over the subject lot, notwithstanding the full payment of the
purchase price made by Sps. Fajardo on January 17, 2000 21 as well as the
latters demand for GPI to comply with the aforementioned obligations per
the letter22 dated September 16, 2002. For its part, petitioners proffer that
GPI could not have committed any breach of contract considering that its
purported non-compliance was largely impelled by circumstances beyond its
control i.e., the legal proceedings concerning the subdivision of the property
into individual lots. Hence, absent any substantial breach, Sps. Fajardo had
no right to rescind the contract.
The Court does not find merit in petitioners contention.
A perusal of the records shows that GPI acquired the subject property on
March 10, 1992 through a Deed of Partition and Exchange 23 executed
51

between it and Andres Pacheco (Andres), the former registered owner of the
property. GPI was issued TCT No. 244220 on March 16, 1992 but the same
did not bear any technical description. 24 However, no plausible explanation
was advanced by the petitioners as to why the petition for inscription
(docketed as LRC Case No. 4211) dated January 6, 2000, 25 was filed only
after almost eight (8) years from the acquisition of the subject property.
Neither did petitioners sufficiently explain why GPI took no positive action to
cause the immediate filing of a new petition for inscription within a
reasonable time from notice of the July 15, 2003 CA Decision which
dismissed GPIs earlier petition based on technical defects, this
notwithstanding Sps. Fajardo's full payment of the purchase price and prior
demand for delivery of title. GPI filed the petition before the RTC-Caloocan,
Branch 122 (docketed as LRC Case No. C-5026) only on November 23,
2006,26 following receipt of the letter27 dated February 10, 2006 and the
filing of the complaint on May 3, 2006, alternatively seeking refund of
payments. While the court a quo decided the latter petition for inscription in
its favor,28 there is no showing that the same had attained finality or that the
approved technical description had in fact been annotated on TCT No.
244220, or even that the subdivision plan had already been approved.
Moreover, despite petitioners allegation29 that the claim of BSP had been
settled, there appears to be no cancellation of the annotations 30 in GPIs
favor. Clearly, the long delay in the performance of GPI's obligation from
date of demand on September 16, 2002 was unreasonable and unjustified. It
cannot therefore be denied that GPI substantially breached its contract to
sell with Sps. Fajardo which thereby accords the latter the right to rescind
the same pursuant to Article 1191 of the Code, viz:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.

52

The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who
have acquired the thing, in accordance with articles 1385 and 1388 and the
Mortgage Law.
B. Effects of rescission
At this juncture, it is noteworthy to point out that rescission does not merely
terminate the contract and release the parties from further obligations to
each other, but abrogates the contract from its inception and restores the
parties to their original positions as if no contract has been
made.31 Consequently, mutual restitution, which entails the return of the
benefits that each party may have received as a result of the contract, is
thus required.32To be sure, it has been settled that the effects of rescission
as provided for in Article 1385 of the Code are equally applicable to cases
under Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission under
Article 1191.1wphi1 This means bringing the parties back to their original
status prior to the inception of the contract. Article 1385 of the Civil Code
provides, thus:
ART. 1385. Rescission creates the obligation to return the things
which were the object of the contract, together with their fruits, and
the price with its interest; consequently, it can be carried out only
when he who demands rescission can return whatever he may be
obligated to restore.
Neither shall rescission take place when the things which are the object of
the contract are legally in the possession of third persons who did not act in
bad faith.
In this case, indemnity for damages may be demanded from the person
causing the loss.

53

This Court has consistently ruled that this provision applies to

rescission under Article 1191:
Since Article 1385 of the Civil Code expressly and clearly states that
"rescission creates the obligation to return the things which were the object
of the contract, together with their fruits, and the price with its interest," the
Court finds no justification to sustain petitioners position that said Article
1385 does not apply to rescission under Article 1191. x x x 33 (Emphasis
supplied; citations omitted.)
In this light, it cannot be denied that only GPI benefited from the contract,
having received full payment of the contract price plus interests as early as
January 17, 2000, while Sps. Fajardo remained prejudiced by the persisting
non-delivery of the subject lot despite full payment. As a necessary
consequence, considering the propriety of the rescission as earlier discussed,
Sps. Fajardo must be able to recover the price of the property pegged at its
prevailing market value consistent with the Courts pronouncement in Solid
Homes,34 viz:
Indeed, there would be unjust enrichment if respondents Solid Homes, Inc.
& Purita Soliven are made to pay only the purchase price plus interest. It is
definite that the value of the subject property already escalated after almost
two decades from the time the petitioner paid for it. Equity and justice
dictate that the injured party should be paid the market value of the
lot, otherwise, respondents Solid Homes, Inc. & Purita Soliven would
enrich themselves at the expense of herein lot owners when they
sell the same lot at the present market value. Surely, such a situation
should not be countenanced for to do so would be contrary to reason and
therefore, unconscionable. Over time, courts have recognized with almost
pedantic adherence that what is inconvenient or contrary to reason is not
allowed in law. (Emphasis supplied.)
On this score, it is apt to mention that it is the intent of PD 957 to protect
the buyer against unscrupulous developers, operators and/or sellers who
reneged on their obligations. 35 Thus, in order to achieve this purpose, equity
and justice dictate that the injured party should be afforded full recompense
and as such, be allowed to recover the prevailing market value of the
undelivered lot which had been fully paid for.1wphi1

54

C. Moral and exemplary damages, attorneys fees and costs of suit

Furthermore, the Court finds that there is proper legal basis to accord moral
and exemplary damages and attorney's fees, including costs of suit. Verily,
GPIs unjustified failure to comply with its obligations as above-discussed
caused Sps. Fajardo serious anxiety, mental anguish and sleepless nights,
thereby justifying the award of moral damages. In the same vein, the
payment of exemplary damages remains in order so as to prevent similarly
minded subdivision developers to commit the same transgression. And
finally, considering that Sps. Fajardo were constrained to engage the
services of counsel to file this suit, the award of attorneys fees must be
likewise sustained.
D. Liability of individual Petitioners
However, the Court finds no basis to hold individual petitioners solidarily
liable with petitioner GPI for the payment of damages in favor of Sps.
Fajardo since it was not shown that they acted maliciously or dealt with the
latter in bad faith. Settled 1s the rule that in the absence of malice and bad
faith, as in this case, officers of the corporation cannot be made personally
liable for liabilities of the corporation which, by legal fiction, has a
personality separate and distinct from its officers, stockholders, and
members.36
WHEREFORE, the assailed July 22, 2011 Decision and February 29, 2012
Resolution of the Court of Appeals in CA-G.R. SP No. 112981 are
hereby AFFIRMED WITH MODIFICATION, absolving individual petitioners
Jose C. Go, Evelyn Go, Lourdes G. Ortiga, George Go, and Vicente Go from
personal liability towards respondent-spouses Eugenio and Angelina Fajardo.
SO ORDERED.

Corpuz v. Grospe, 333 S 425 (2000)

[G.R. No. 135297. June 8, 2000]
GAVINO CORPUZ, petitioner, vs. Spouses GERONIMO GROSPE and
HILARIA GROSPE, respondents.
55

DECISION
PANGANIBAN, J.:
The sale, transfer or conveyance of land reform rights are, as a rule, void in
order to prevent a circumvention of agrarian reform laws. However, in the
present case, the voluntary surrender or waiver of these rights in favor of
the Samahang Nayon is valid because such action is deemed a legally
permissible conveyance in favor of the government. After the surrender or
waiver of said land reform rights, the Department of Agrarian Reform, which
took control of the property, validly awarded it to private respondents.
The Case
Before the Court is a Petition for Review on Certiorari of the May 14, 1998
Decision[1] and the August 19, 1998 Resolution [2] in CA-GR SP No. 47176, in
which the Court of Appeals (CA)[3] dismissed the petitioners appeal and
denied reconsideration respectively.
The decretal portion of the assailed Decision reads:[4]
"IN THE LIGHT OF ALL THE FOREGOING, the Petition is denied
due course and is hereby dismissed. The Decision appealed from
is AFFIRMED. With costs against the Petitioner."
The Facts
Petitioner Gavino Corpuz was a farmer-beneficiary under the Operation Land
Transfer (OLT) Program of the Department of Agrarian Reform (DAR).
Pursuant to Presidential Decree (PD) No. 27, he was issued a Certificate of
Land Transfer (CLT) over two parcels of agricultural land (Lot Nos. 3017 and
012) with a total area of 3.3 hectares situated in Salungat, Sto. Domingo,
Nueva Ecija. The lots were formerly owned by a certain Florentino Chioco
and registered under Title No. 126638.
To pay for his wifes hospitalization, petitioner mortgaged the subject land on
January 20, 1982, in favor of Virginia de Leon. When the contract period
expired, he again mortgaged it to Respondent Hilaria Grospe, wife of
Geronimo Grospe, for a period of four years (December 5, 1986 to
December 5, 1990) to guarantee a loan of P32,500. The parties executed a
56

contract denominated as "Kasunduan Sa Pagpapahiram Ng Lupang

Sakahan,"[5] which allowed the respondents to use or cultivate the land
during the duration of the mortgage.
Before the Department of Agrarian Reform Adjudication Board (DARAB) in
Cabanatuan City (Region III), petitioner instituted against the respondents
an action for recovery of possession.[6] In his Complaint, he alleged that they
had entered the disputed land by force and intimidation on January 10 and
11, 1991, and destroyed the palay that he had planted on the land.
Respondents, in their Answer, claimed that the "Kasunduan" between them
and petitioner allowed the former to take over the possession and cultivation
of the property until the latter paid his loan. Instead of paying his loan,
petitioner allegedly executed on June 29, 1989, a "Waiver of Rights" [7]
over the landholding in favor of respondents in consideration of P54,394.
Petitioner denied waiving his rights and interest over the landholding and
alleged that his and his childrens signatures appearing on the Waiver were
forgeries.
Provincial Agrarian Reform Adjudicator (PARAD) Ernesto P. Tabara ruled that
petitioner
abandoned
and
surrendered
the
landholding
to
the
Samahang Nayon of Malaya, Sto. Domingo, Nueva Ecija, which had passed
Resolution Nos. 16 and 27 recommending the reallocation of the said lots to
the respondent spouses, who were the "most qualified farmer[s]beneficiaries."[8]
The Department of Agrarian Reform Adjudication Board (DARAB), [9] in a
Decision promulgated on October 8, 1997 in DARAB Case No. 1251, affirmed
the provincial adjudicators Decision.[10] Petitioners Motion for Reconsideration
was denied in the Resolution dated February 26, 1998. [11] As earlier stated,
petitioners appeal was denied by the Court of Appeals.
Ruling of the Court of Appeals
The appellate court ruled that petitioner had abandoned the landholding and
forfeited his right as a beneficiary. It rejected his contention that all deeds
relinquishing possession of the landholding by a beneficiary were
unenforceable. Section 9 of Republic Act (RA) 1199 and Section 28 of RA
57

6389 allow a tenant to voluntarily sever his tenancy status by voluntary

surrender. The waiver by petitioner of his rights and his conformity to the
Samahang Nayon Resolutions reallocating the landholding to the
respondents are immutable evidence of his abandonment and voluntary
surrender of his rights as beneficiary under the land reform laws.
Furthermore, petitioner failed to prove with clear and convincing evidence
the alleged forgery of his and his sons signatures.
Hence, this recourse.[12]
Issues
Feeling aggrieved, the petitioner alleges in his Memorandum that the
appellate court committed these reversible errors:[13]
"I
xxx [I]n relying on the findings of fact of the DARAB and PARAD
as conclusive when the judgment is based on a misapprehension
of facts and the inference taken is manifestly mistaken.
"II
xxx [I]n disregarding and/or ignoring the claim of petitioner that
the alleged waiver documents are all forgeries.
"III
xxx [I]n ruling that petitioner had forfeited his right to become a
beneficiary under PD No. 27.
"IV
xxx [I]n failing to rule on the legality and/or validity of the
waiver/transfer action."
In short, the focal issues are: (1) Was the appellate court correct in finding
that the signatures of petitioner and his sons on the Waiver were not forged?
(2) Assuming arguendo that the signatures in the Waiver were genuine, was
58

it null and void for being contrary to agrarian laws? (3) Did the petitioner
abandon his rights as a beneficiary under PD 27? (4) Did he, by voluntary
surrender, forfeit his right as a beneficiary?
The Courts Ruling
The Petition is devoid of merit.
First Issue: Factual Findings
Alleging that an information for estafa through falsification was filed against
the respondents, petitioner insists that his signature on the Waiver was
forged.
We are not persuaded. The filing of an information for estafa does not by
itself prove that the respondents forged his signature. It only means that the
public prosecutor found probable cause against the respondents, but such
finding does not constitute binding evidence of forgery or fraud. [14] We agree
with the well-reasoned CA ruling on this point:[15]
"xxx We are not swayed by Petitioners incantations that his
signature on the Waiver of Rights is a forgery. In the first place,
forgery is never presumed. The Petitioner is mandated to prove
forgery with clear and convincing evidence. The Petitioner failed
to do so. Indeed, the Waiver of Rights executed by the Petitioner
was even with the written conformity of his four (4) sons (at
page 11, Rollo). The Petitioner himself signed the Resolution of
the Board of Samahang Nayon of Malaya, Sto. Domingo, Nueva
Ecija, surrendering his possession of the landholding to the
Samahang Nayon, (idem, supra). Under Memorandum Circular
No. 7, dated April 23, 1979 of the Secretary of Agrarian Reform,
transactions involving transfer of rights of possession and or
cultivation of agricultural lands are first investigated by a team
leader of the DAR District who then submits the results of his
investigation to the District Officer who, in turn, submits his
report to the Regional Director who, then, acts on said report. In
the present recourse, the requisite investigation was conducted
and the report thereon was submitted to and approved by the
Regional Director. Under Section 3(m), Rule 131 of the Rules of
59

Evidence, public officers are presumed to have performed their

duties regularly and in accordance with law."
As a rule, if the factual findings of the Court of Appeals coincide with those
of the DARAB -- an administrative body which has acquired expertise on the
matter such findings are accorded respect and will not be disturbed on
appeal.[16] The presence or the absence of forgery was an issue of fact that
was convincingly settled by the agrarian and the appellate tribunals.
Petitioner utterly failed to convince us that the appellate court had
misapprehended the facts. Quite the contrary, its findings were wellsupported by the evidence.
Second Issue: Validity of the "Waiver of Rights"
Petitioner insists that agreements purportedly relinquishing possession of
landholdings are invalid for being violative of the agrarian reform laws.
Private respondents contend that petitioner was no longer entitled to
recognition as a farmer-beneficiary because of the series of mortgages he
had taken out over the land. They also cite his "Waiver of Rights" and
abandonment of the farm.
We have already ruled that the sale or transfer of rights over a property
covered by a Certificate of Land Transfer is void except when the alienation
is made in favor of the government or through hereditary succession. This
ruling is intended to prevent a reversion to the old feudal system in which
the landowners reacquired vast tracts of land, thus negating the
governments program of freeing the tenant from the bondage of the soil.
[17]
In Torres v. Ventura,[18] the Court clearly held:
"xxx As such [the farmer-beneficiary] gained the rights to
possess, cultivate and enjoy the landholding for himself. Those
rights over that particular property were granted by the
government to him and to no other. To insure his continued
possession and enjoyment of the property, he could not, under
the law, make any valid form of transfer except to the
government or by hereditary succession, to his successors.

60

"xxx [T]he then Ministry of Agrarian Reform issued the following

Memorandum Circular [No. 7, Series of 1979, April 23, 1979]:
"Despite the above prohibition, however, there are reports that
many farmer-beneficiaries of PD 27 have transferred the
ownership, rights, and/or possession of their farms/homelots to
other persons or have surrendered the same to their former
landowners. All these transactions/surrenders are violative of PD
27 and therefore, null and void."
Third Issue: Abandonment
Based on the invalidity of the Waiver, petitioner concludes that the PARAD,
the DARAB and the CA erroneously ruled on the basis of the said document
that he had abandoned or voluntarily surrendered his landholding. Denying
that he abandoned the land, he contends that the transaction was a simple
loan to enable him to pay the expenses incurred for his wifes hospitalization.
We agree. Abandonment[19] requires (a) a clear and absolute intention to
renounce a right or claim or to desert a right or property; and (b) an
external act by which that intention is expressed or carried into effect. [20] The
intention to abandon implies a departure, with the avowed intent of never
returning, resuming or claiming the right and the interest that have been
abandoned.[21]
The CA ruled that abandonment required (a) the tenants clear intention to
sever the agricultural tenancy relationship; and (b) his failure to work on the
landholding for no valid reason. [22] The CA also deemed the following as
formidable evidence of his intent to sever the tenancy relationship: (a) the
mortgage and (b) his express approval and conformity to the Samahang
Nayon Resolution installing the private respondents as tenants/farmersbeneficiaries of the landholding. We disagree.
As earlier shown, the Waiver was void. Furthermore, the mortgage expired
after four years. Thus, the private respondents were obligated to return
possession of the landholding to the petitioner. At bottom, we see on the
part of the petitioner no clear, absolute or irrevocable intent to abandon. His
surrender of possession did not amount to an abandonment because there

61

was an obligation on the part of private respondents to return possession

upon full payment of the loan.
Fourth Issue: Voluntary Surrender
Contrary to the finding of the appellate court, the petitioner also denies that
he voluntarily surrendered his landholding.
His contention is untenable. The nullity of the Waiver does not save the case
for him because there is a clear showing that he voluntarily surrendered his
landholding to the Samahang Nayon which, under the present
circumstances, may qualify as a surrender or transfer, to the government, of
his rights under the agrarian laws.
PD 27 provides that title to land acquired pursuant to the land reform
program shall not be transferable except through hereditary succession or to
the government, in accordance with the provisions of existing laws and
regulations. Section 8 of RA 3844 also provides that "[t]he agricultural
leasehold relation xxx shall be extinguished by: xxx (2) [v]oluntary
surrender of the landholding by the agricultural lessee, xxx."
In this case, petitioners intention to surrender the landholding was clear and
unequivocal. He signed his concurrence to the Samahang Nayon Resolutions
surrendering his possession of the landholding. The Samahan then
recommended to the team leader of the DAR District that the private
respondent be designated farmer-beneficiary of said landholding.
To repeat, the land was surrendered to the government, not transferred to
another private person. It was the government, through the DAR, which
awarded the landholding to the private respondents who were declared as
qualified beneficiaries under the agrarian laws. Voluntary surrender, as a
mode of extinguishment of tenancy relations, does not require court
approval as long as it is convincingly and sufficiently proved by competent
evidence.[23]
Petitioners voluntary surrender to the Samahang Nayon qualifies as a
surrender or transfer to the government because such action forms part of
the mechanism for the disposition and the reallocation of farmholdings of
tenant-farmers who refuse to become beneficiaries of PD 27. Under
62

Memorandum Circular No. 8-80 of the then Ministry of Agrarian Reform, the
Samahan shall, upon notice from the agrarian reform team leader,
recommend other tenant-farmers who shall be substituted to all rights and
obligations of the abandoning or surrendering tenant-farmer. Besides, these
cooperatives are established to provide a strong social and economic
organization to ensure that the tenant-farmers will enjoy on a lasting basis
the benefits of agrarian reform.
The cooperatives work in close coordination with DAR officers (regional
directors, district officers, team leaders and field personnel) to attain the
goals of agrarian reform (DAR Memorandum Circular No. 10, Series of
1977). The Department of Local Government (now the Department of
Interior and Local Government) regulates them through the Bureau of
Cooperative Development (Section 8, PD 175). They also have access to
financial assistance through the Cooperative Development Fund, which is
administered by a management committee composed of the representatives
from the DILG, the Central Bank, the Philippine National Bank, the DAR and
the DENR (Section 6, PD 175).
Petitioner insists that his act of allowing another to possess and cultivate his
land did not amount to abandonment or voluntary surrender, as the rights of
an OLT beneficiary are preserved even in case of transfer of legal possession
over the subject property, as held in Coconut Cooperative Marketing
Association (Cocoma) v. Court of Appeals.[24]
We disagree. Petitioner misconstrued the Cocoma ruling because what was
prohibited was the perpetration of the tenancy or leasehold relationship
between the landlord and the farmer-beneficiary. The case did not rule out
abandonment or voluntary surrender by the agricultural tenant or lessee in
favor of the government.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision and
Resolution AFFIRMED insofar as it dismissed petitioners appeal. Costs
against petitioner.
SO ORDERED.

63

Feliciano v. Commission on Audit, 419 S 363 (2004)

[G.R. No. 147402. January 14, 2004]
ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of
the Leyte Metropolitan Water District (LMWD), Tacloban
City, petitioner, vs. COMMISSION ON AUDIT, Chairman CELSO
D. GANGAN, Commissioners RAUL C. FLORES and EMMANUEL M.
DALMAN,
and
Regional
Director
of
COA
Region
VIII, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for certiorari[1] to annul the Commission on Audits (COA)
Resolution dated 3 January 2000 and the Decision dated 30 January 2001
denying the Motion for Reconsideration. The COA denied petitioner Ranulfo
C. Felicianos request for COA to cease all audit services, and to stop
charging auditing fees, to Leyte Metropolitan Water District (LMWD). The
COA also denied petitioners request for COA to refund all auditing fees
previously paid by LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the
accounts of LMWD. Subsequently, LMWD received a letter from COA dated
19 July 1999 requesting payment of auditing fees. As General Manager of
LMWD, petitioner sent a reply dated 12 October 1999 informing COAs
Regional Director that the water district could not pay the auditing
fees. Petitioner cited as basis for his action Sections 6 and 20 of Presidential
Decree 198 (PD 198)[2], as well as Section 18 of Republic Act No. 6758 (RA
6758). The Regional Director referred petitioners reply to the COA Chairman
on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional Director
asking for refund of all auditing fees LMWD previously paid to COA.

64

On 16 March 2000, petitioner received COA Chairman Celso D. Gangans

Resolution dated 3 January 2000 denying his requests. Petitioner filed a
motion for reconsideration on 31 March 2000, which COA denied on 30
January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the
petition were resolutions of the Visayas Association of Water Districts
(VAWD) and the Philippine Association of Water Districts (PAWD) supporting
the petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COAs audit jurisdiction
over local water districts in Davao City Water District v. Civil Service
Commission and Commission on Audit,[3] as follows:
The above-quoted provision [referring to Section 3(b) PD 198] definitely sets
to naught petitioners contention that they are private corporations. It is clear
therefrom that the power to appoint the members who will comprise the
members of the Board of Directors belong to the local executives of the local
subdivision unit where such districts are located. In contrast, the members
of the Board of Directors or the trustees of a private corporation are elected
from among members or stockholders thereof. It would not be amiss at this
point to emphasize that a private corporation is created for the private
purpose, benefit, aim and end of its members or stockholders. Necessarily,
said members or stockholders should be given a free hand to choose who
will compose the governing body of their corporation. But this is not the case
here and this clearly indicates that petitioners are not private corporations.
The COA also denied petitioners request for COA to stop charging auditing
fees as well as petitioners request for COA to refund all auditing fees already
paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion
amounting to lack or excess of jurisdiction by auditing LMWD and requiring it
to pay auditing fees. Petitioner raises the following issues for resolution:

65

1. Whether a Local Water District (LWD) created under PD 198, as

amended, is a government-owned or controlled corporation
subject to the audit jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended, prohibits COAs
certified public accountants from auditing local water districts;
and
3. Whether Section 18 of RA 6758 prohibits the COA from charging
government-owned and controlled corporations auditing fees.
The Ruling of the Court
The petition lacks merit.
The Constitution and existing laws [4] mandate COA to audit all
government agencies, including government-owned and controlled
corporations (GOCCs) with original charters. An LWD is a GOCC with an
original charter. Section 2(1), Article IX-D of the Constitution provides for
COAs audit jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit 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 and
controlled corporations with original charters, and on a post-audit
basis: (a) constitutional bodies, commissions and offices that have been
granted fiscal autonomy under this Constitution; (b) autonomous state
colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities
receiving subsidy or equity, directly or indirectly, from or through the
government, which are required by law or the granting institution to submit
to such audit as a condition of subsidy or equity. However, where the internal
control system of the audited agencies is inadequate, the Commission may
adopt such measures, including temporary or special pre-audit, as are
necessary and appropriate to correct the deficiencies. It shall keep the
general accounts of the Government and, for such period as may be

66

provided by law, preserve the vouchers and other supporting papers

pertaining thereto. (Emphasis supplied)
The COAs audit jurisdiction extends not only to government agencies or
instrumentalities, but also to government-owned and controlled corporations
with original charters as well as other government-owned or controlled
corporations without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a reexamination of a doctrine backed by a long line of cases culminating
in Davao City Water District v. Civil Service Commission [5] and just
recently reiterated in De Jesus v. Commission on Audit.[6] Petitioner
maintains that LWDs are not government-owned and controlled corporations
with original charters. Petitioner even argues that LWDs are private
corporations. Petitioner asks the Court to consider certain interpretations of
the applicable laws, which would give a new perspective to the issue of the
true character of water districts.[7]
Petitioner theorizes that what PD 198 created was the Local Waters
Utilities Administration (LWUA) and not the LWDs. Petitioner claims that
LWDs are created pursuant to and not created directly by PD 198. Thus,
petitioner concludes that PD 198 is not an original charter that would place
LWDs within the audit jurisdiction of COA as defined in Section 2(1), Article
IX-D of the Constitution. Petitioner elaborates that PD 198 does not create
LWDs since it does not expressly direct the creation of such entities, but only
provides for their formation on an optional or voluntary basis. [8] Petitioner
adds that the operative act that creates an LWD is the approval of the
Sanggunian Resolution as specified in PD 198.
Petitioners contention deserves scant consideration.
We begin by explaining the general framework under the fundamental
law. The Constitution recognizes two classes of corporations. The first refers
to private corporations created under a general law. The second refers to

67

government-owned or controlled corporations created

charters. Section 16, Article XII of the Constitution provides:

by

special

Sec. 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Governmentowned or controlled corporations may be created or established by special
charters in the interest of the common good and subject to the test of
economic viability.
The Constitution emphatically prohibits the creation of private corporations
except by a general law applicable to all citizens. [9] The purpose of this
constitutional provision is to ban private corporations created by special
charters, which historically gave certain individuals, families or groups
special privileges denied to other citizens.[10]
In short, Congress cannot enact a law creating a private corporation with
a special charter. Such legislation would be unconstitutional. Private
corporations may exist only under a general law. If the corporation is
private, it must necessarily exist under a general law. Stated differently, only
corporations created under a general law can qualify as private
corporations. Under existing laws, that general law is the Corporation Code,
[11]
except that the Cooperative Code governs the incorporation of
cooperatives.[12]
The Constitution authorizes Congress to create government-owned or
controlled corporations through special charters. Since private corporations
cannot have special charters, it follows that Congress can create
corporations with special charters only if such corporations are governmentowned or controlled.
Obviously, LWDs are not private corporations because they are not
created under the Corporation Code. LWDs are not registered with the
Securities and Exchange Commission. Section 14 of the Corporation Code
states that [A]ll corporations organized under this code shall file with the
Securities and Exchange Commission articles of incorporation x x x. LWDs
have no articles of incorporation, no incorporators and no stockholders or
members. There are no stockholders or members to elect the board directors
of LWDs as in the case of all corporations registered with the Securities and
Exchange Commission. The local mayor or the provincial governor appoints
68

the directors of LWDs for a fixed term of office. This Court has ruled that
LWDs are not created under the Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded
from the coverage of the CSC are those corporations created pursuant to the
Corporation Code. Significantly, petitioners are not created under the
said code, but on the contrary, they were created pursuant to a
special law and are governed primarily by its provision. [13] (Emphasis
supplied)
LWDs exist by virtue of PD 198, which constitutes their special
charter. Since under the Constitution only government-owned or controlled
corporations may have special charters, LWDs can validly exist only if they
are government-owned or controlled. To claim that LWDs are private
corporations with a special charter is to admit that their existence is
constitutionally infirm.
Unlike private corporations, which derive their legal existence and power
from the Corporation Code, LWDs derive their legal existence and power
from PD 198. Sections 6 and 25 of PD 198[14] provide:
Section 6. Formation of District. This Act is the source of authorization
and power to form and maintain a district. For purposes of this Act, a
district shall be considered as a quasi-public corporation performing
public service and supplying public wants. As such, a district shall
exercise the powers, rights and privileges given to private
corporations under existing laws, in addition to the powers granted
in, and subject to such restrictions imposed, under this Act.
(a) The name of the local water district, which shall include the name of the
city, municipality, or province, or region thereof, served by said system,
followed by the words Water District.
(b) A description of the boundary of the district. In the case of a city or
municipality, such boundary may include all lands within the city or
municipality. A district may include one or more municipalities, cities or
provinces, or portions thereof.

69

(c) A statement completely transferring any and all waterworks and/or

sewerage facilities managed, operated by or under the control of such city,
municipality or province to such district upon the filing of resolution forming
the district.
(d) A statement identifying the purpose for which the district is formed,
which shall include those purposes outlined in Section 5 above.
(e) The names of the initial directors of the district with the date of
expiration of term of office for each.
(f) A statement that the district may only be dissolved on the grounds and
under the conditions set forth in Section 44 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set
forth in Section 36 of this Title.
Nothing in the resolution of formation shall state or infer that the local
legislative body has the power to dissolve, alter or affect the district beyond
that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof,
desire to form a single district, a similar resolution shall be adopted in each
city, municipality and province.
xxx
Sec. 25. Authorization. The district may exercise all the powers which
are expressly granted by this Title or which are necessarily implied
from or incidental to the powers and purposes herein stated. For the
purpose of carrying out the objectives of this Act, a district is hereby granted
the power of eminent domain, the exercise thereof shall, however, be
subject to review by the Administration. (Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198,
which expressly confers on LWDs corporate powers. Section 6 of PD
198 provides that LWDs shall exercise the powers, rights and privileges
given to private corporations under existing laws.Without PD 198, LWDs
would have no corporate powers. Thus, PD 198 constitutes the special

70

enabling charter of LWDs. The ineluctable conclusion is that LWDs are

government-owned and controlled corporations with a special charter.
The phrase government-owned and controlled corporations with original
charters means GOCCs created under special laws and not under the general
incorporation law. There is no difference between the term original charters
and special charters. The Court clarified this in National Service
Corporation v. NLRC[15] by citing the deliberations in the Constitutional
Commission, as follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed
amendment to now read as follows: including government-owned or
controlled corporations WITH ORIGINAL CHARTERS. The purpose of this
amendment is to indicate that government corporations such as the GSIS
and SSS, which have original charters, fall within the ambit of the civil
service. However, corporations which are subsidiaries of these chartered
agencies such as the Philippine Airlines, Manila Hotel and Hyatt are excluded
from the coverage of the civil service.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?
MR. FOZ. Just one question, Mr. Presiding Officer. By the term
original charters, what exactly do we mean?
MR. ROMULO. We mean that they were created by law, by an act of
Congress, or by special law.
MR. FOZ. And not under the general corporation law.
MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the Committee accepts
the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general
corporation law are out.
71

MR. ROMULO. That is correct. (Emphasis supplied)

Again, in Davao City Water District v. Civil Service Commission,
the Court reiterated the meaning of the phrase government-owned and
controlled corporations with original charters in this wise:
[16]

By government-owned or controlled corporation with original

charter, We mean government owned or controlled corporation
created by a special law and not under the Corporation Code of the
Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No. 82819,
February 8, 1989, 170 SCRA 79, 82), We held:
The Court, in National Service Corporation (NASECO) v. National
Labor Relations Commission, G.R. No. 69870, promulgated on 29
November 1988, quoting extensively from the deliberations of the
1986 Constitutional Commission in respect of the intent and
meaning of the new phrase with original charter, in effect held that
government-owned and controlled corporations with original charter
refer to corporations chartered by special law as distinguished from
corporations organized under our general incorporation statute the
Corporation Code. In NASECO, the company involved had been organized
under the general incorporation statute and was a subsidiary of the National
Investment Development Corporation (NIDC) which in turn was a subsidiary
of the Philippine National Bank, a bank chartered by a special statute. Thus,
government-owned or controlled corporations like NASECO are effectively,
excluded from the scope of the Civil Service. (Emphasis supplied)
Petitioners contention that the Sangguniang Bayan resolution creates the
LWDs assumes that the Sangguniang Bayan has the power to create
corporations. This is a patently baseless assumption. The Local Government
Code[17] does not vest in the Sangguniang Bayan the power to create
corporations.[18] What the Local Government Code empowers the
Sangguniang Bayan to do is to provide for the establishment of a
waterworks system subject to existing laws. Thus, Section 447(5)(vii) of the
Local Government Code provides:
SECTION 447. Powers, Duties, Functions and Compensation. (a) The
sangguniang bayan, as the legislative body of the municipality, shall enact
ordinances, approve resolutions and appropriate funds for the general
72

welfare of the municipality and its inhabitants pursuant to Section 16 of this

Code and in the proper exercise of the corporate powers of the municipality
as provided for under Section 22 of this Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment, operation,
maintenance, and repair of an efficient waterworks system to supply water
for the inhabitants; regulate the construction, maintenance, repair and use
of hydrants, pumps, cisterns and reservoirs; protect the purity and quantity
of the water supply of the municipality and, for this purpose, extend the
coverage of appropriate ordinances over all territory within the drainage area
of said water supply and within one hundred (100) meters of the reservoir,
conduit, canal, aqueduct, pumping station, or watershed used in connection
with the water service; and regulate the consumption, use or wastage of
water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a waterworks system only in
accordance with the provisions of PD 198. The Sangguniang Bayan has no
power to create a corporate entity that will operate its waterworks
system. However, the Sangguniang Bayan may avail of existing enabling
laws, like PD 198, to form and incorporate a water district. Besides, even
assuming for the sake of argument that the Sangguniang Bayan has the
power to create corporations, the LWDs would remain government-owned or
controlled corporations subject to COAs audit jurisdiction. The resolution of
the Sangguniang Bayan would constitute an LWDs special charter, making
the LWD a government-owned and controlled corporation with an original
charter. In any event, the Court has already ruled inBaguio Water District
v. Trajano[19] that the Sangguniang Bayan resolution is not the special
charter of LWDs, thus:
While it is true that a resolution of a local sanggunian is still necessary for
the final creation of a district, this Court is of the opinion that said resolution
cannot be considered as its charter, the same being intended only to
implement the provisions of said decree.

73

Petitioner further contends that a law must create directly and explicitly a
GOCC in order that it may have an original charter. In short, petitioner
argues that one special law cannot serve as enabling law for several GOCCs
but only for one GOCC. Section 16, Article XII of the Constitution mandates
that Congress shall not, except by general law,[20] provide for the creation
of private corporations. Thus, the Constitution prohibits one special law to
create one private corporation, requiring instead a general law to create
private corporations. In contrast, the same Section 16 states that
Government-owned or controlled corporations may be created or established
by special charters. Thus, the Constitution permits Congress to create a
GOCC with a special charter. There is, however, no prohibition on Congress
to create several GOCCs of the same class under one special enabling
charter.
The rationale behind the prohibition on private corporations having
special charters does not apply to GOCCs. There is no danger of creating
special privileges to certain individuals, families or groups if there is one
special law creating each GOCC. Certainly, such danger will not exist
whether one special law creates one GOCC, or one special enabling law
creates several GOCCs. Thus, Congress may create GOCCs either by special
charters specific to each GOCC, or by one special enabling charter applicable
to a class of GOCCs, like PD 198 which applies only to LWDs.
Petitioner also contends that LWDs are private corporations because
Section 6 of PD 198[21] declares that LWDs shall be considered quasi-public in
nature. Petitioners rationale is that only private corporations may be deemed
quasi-public and not public corporations. Put differently, petitioner
rationalizes that a public corporation cannot be deemed quasi-public because
such corporation is already public. Petitioner concludes that the term quasipublic can only apply to private corporations. Petitioners argument is
inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COAs
audit jurisdiction depends on the governments ownership or control of a
corporation. The nature of the corporation, whether it is private, quasipublic, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over governmentowned and controlled corporations with original charters, as well as
74

government-owned
or
controlled
corporations
without
original
charters. GOCCs with original charters are subject to COA pre-audit, while
GOCCs without original charters are subject to COA post-audit. GOCCs
without original charters refer to corporations created under the Corporation
Code but are owned or controlled by the government. The nature or purpose
of the corporation is not material in determining COAs audit
jurisdiction. Neither is the manner of creation of a corporation, whether
under a general or special law.
The determining factor of COAs audit jurisdiction is government
ownership or control of the corporation. In Philippine Veterans Bank
Employees Union-NUBE v. Philippine Veterans Bank,[22] the Court even
ruled that the criterion of ownership and control is more important than the
issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B,
Section 2(1) that the Civil Service embraces all branches, subdivisions,
instrumentalities, and agencies of the Government, including governmentowned or controlled corporations with original charters. As the Bank is not
owned or controlled by the Government although it does have an
original charter in the form of R.A. No. 3518, [23] it clearly does not fall
under the Civil Service and should be regarded as an ordinary
commercial corporation. Section 28 of the said law so provides. The
consequence is that the relations of the Bank with its employees should be
governed by the labor laws, under which in fact they have already been paid
some of their claims. (Emphasis supplied)
Certainly, the government owns and controls LWDs. The government
organizes LWDs in accordance with a specific law, PD 198. There is no
private party involved as co-owner in the creation of an LWD. Just prior to
the creation of LWDs, the national or local government owns and controls all
their assets. The government controls LWDs because under PD 198 the
municipal or city mayor, or the provincial governor, appoints all the board
directors of an LWD for a fixed term of six years. [24] The board directors of
LWDs are not co-owners of the LWDs. LWDs have no private stockholders or
members. The board directors and other personnel of LWDs are government
employees subject to civil service laws[25] and anti-graft laws.[26]

75

While Section 8 of PD 198 states that [N]o public official shall serve as
director of an LWD, it only means that the appointees to the board of
directors of LWDs shall come from the private sector. Once such private
sector representatives assume office as directors, they become public
officials governed by the civil service law and anti-graft laws. Otherwise,
Section 8 of PD 198 would contravene Section 2(1), Article IX-B of the
Constitution declaring that the civil service includes government-owned or
controlled corporations with original charters.
If LWDs are neither GOCCs with original charters nor GOCCs without
original charters, then they would fall under the term agencies or
instrumentalities of the government and thus still subject to COAs audit
jurisdiction. However, the stark and undeniable fact is that the government
owns LWDs. Section 45[27] of PD 198 recognizes government ownership of
LWDs when Section 45 states that the board of directors may dissolve an
LWD only on the condition that another public entity has acquired the
assets of the district and has assumed all obligations and liabilities attached
thereto. The implication is clear that an LWD is a public and not a private
entity.
Petitioner does not allege that some entity other than the government
owns or controls LWDs. Instead, petitioner advances the theory that the
Water Districts owner is the District itself.[28] Assuming for the sake of
argument that an LWD is self-owned, [29] as petitioner describes an LWD, the
government in any event controls all LWDs. First, government officials
appoint all LWD directors to a fixed term of office. Second, any per diem of
LWD directors in excess of P50 is subject to the approval of the Local Water
Utilities Administration, and directors can receive no other compensation for
their services to the LWD.[30] Third, the Local Water Utilities Administration
can require LWDs to merge or consolidate their facilities or operations.
[31]
This element of government control subjects LWDs to COAs audit
jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became
private entities through the transfer of ownership of water facilities from
local government units to their respective water districts as mandated by PD
198. Petitioner is grasping at straws.Privatization involves the transfer of
government assets to a private entity. Petitioner concedes that the owner of
the assets transferred under Section 6 (c) of PD 198 is no other than the
76

LWD itself.[32] The transfer of assets mandated by PD 198 is a transfer of the

water systems facilities managed, operated by or under the control of such
city, municipality or province to such (water) district. [33] In short, the transfer
is from one government entity to another government entity. PD 198 is
bereft of any indication that the transfer is to privatize the operation and
control of water systems.
Finally, petitioner claims that even on the assumption that the
government owns and controls LWDs, Section 20 of PD 198 prevents COA
from auditing LWDs. [34] Section 20 of PD 198 provides:
Sec. 20. System of Business Administration. The Board shall, as soon as
practicable, prescribe and define by resolution a system of business
administration and accounting for the district, which shall be patterned upon
and conform to the standards established by the Administration. Auditing
shall be performed by a certified public accountant not in the
government service. The Administration may, however, conduct annual
audits of the fiscal operations of the district to be performed by an auditor
retained by the Administration. Expenses incurred in connection therewith
shall be borne equally by the water district concerned and the
Administration.[35] (Emphasis supplied)
Petitioner argues that PD 198 expressly prohibits COA auditors, or any
government auditor for that matter, from auditing LWDs. Petitioner asserts
that this is the import of the second sentence of Section 20 of PD 198 when
it states that [A]uditing shall be performed by a certified public accountant
not in the government service.[36]
PD 198
legislation
jurisdiction.
or devise to

cannot prevail over the Constitution. No amount of clever

can
exclude
GOCCs
like
LWDs
from
COAs
audit
Section 3, Article IX-C of the Constitution outlaws any scheme
escape COAs audit jurisdiction, thus:

Sec. 3. No law shall be passed exempting any entity of the Government or

its subsidiary in any guise whatever, or any investment of public funds,
from the jurisdiction of the Commission on Audit. (Emphasis supplied)
The framers of the Constitution added Section 3, Article IX-D of the
Constitution precisely to annul provisions of Presidential Decrees, like that of
77

Section 20 of PD 198, that exempt GOCCs from COA audit. The following
exchange in the deliberations of the Constitutional Commission elucidates
this intent of the framers:
MR. OPLE: I propose to add a new section on line 9, page 2 of the amended
committee report which reads: NO LAW SHALL BE PASSED EXEMPTING ANY
ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE
WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE
JURISDICTION OF THE COMMISSION ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took
advantage of the absence of a legislature in the past to obtain
presidential decrees exempting themselves from the jurisdiction of
the Commission on Audit, one notable example of which is the Philippine
National Oil Company which is really an empty shell. It is a holding
corporation by itself, and strictly on its own account. Its funds were not very
impressive in quantity but underneath that shell there were billions of pesos
in a multiplicity of companies. The PNOC the empty shell under a presidential
decree was covered by the jurisdiction of the Commission on Audit, but the
billions of pesos invested in different corporations underneath it were
exempted from the coverage of the Commission on Audit.
Another example is the United Coconut Planters Bank. The Commission on
Audit has determined that the coconut levy is a form of taxation; and that,
therefore, these funds attributed to the shares of 1,400,000 coconut farmers
are, in effect, public funds. And that was, I think, the basis of the PCGG in
undertaking that last major sequestration of up to 94 percent of all the
shares in the United Coconut Planters Bank. The charter of the UCPB,
through a presidential decree, exempted it from the jurisdiction of the
Commission on Audit, it being a private organization.
So these are the fetuses of future abuse that we are slaying right here with
this additional section.
May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED
EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY

78

GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE

JURISDICTION OF THE COMMISSION ON AUDIT.
THE PRESIDENT: May we know the position of the Committee on the
proposed amendment of Commissioner Ople?
MR. JAMIR: If the honorable Commissioner will change the number of the
section to 4, we will accept the amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam
amendment.

President,

point

of

inquiry

on

the

new

THE PRESIDENT: Commissioner de Castro is recognized.

MR. DE CASTRO: Thank
Commissioner Ople.

you. May

just

ask

few

questions

of

Is that not included in Section 2 (1) where it states: (c) government-owned

or controlled corporations and their subsidiaries? So that if these
government-owned and controlled corporations and their subsidiaries are
subjected to the audit of the COA, any law exempting certain government
corporations or subsidiaries will be already unconstitutional.
So I believe,
unnecessary.

Madam

President,

that

the

proposed

amendment

is

MR. MONSOD: Madam President, since this has been accepted, we would
like to reply to the point raised by Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD: I think the Commissioner is trying to avoid the situation that
happened in the past, because the same provision was in the 1973
Constitution and yet somehow a law or a decree was passed where certain
institutions were exempted from audit. We are just reaffirming, emphasizing,
the role of the Commission on Audit so that this problem will never arise in
the future.[37]

79

There is an irreconcilable conflict between the second sentence of Section

20 of PD 198 prohibiting COA auditors from auditing LWDs and Sections 2(1)
and 3, Article IX-D of the Constitution vesting in COA the power to audit all
GOCCs. We rule that the second sentence of Section 20 of PD 198 is
unconstitutional since it violates Sections 2(1) and 3, Article IX-D of the
Constitution.
On the Legality of COAs
Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit
services violate the prohibition in Section 18 of RA 6758, [38] which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel and of
other Agencies. In order to preserve the independence and integrity of the
Commission on Audit (COA), its officials and employees are prohibited from
receiving salaries, honoraria, bonuses, allowances or other emoluments from
any government entity, local government unit, government-owned or
controlled corporations, and government financial institutions, except those
compensation paid directly by COA out of its appropriations
and contributions.
Government entities, including government-owned or controlled corporations
including financial institutions and local government units are hereby
prohibited from assessing or billing other government entities, including
government-owned or controlled corporations including financial institutions
or local government units for services rendered by its officials and
employees as part of their regular functions for purposes of paying additional
compensation to said officials and employees. (Emphasis supplied)
Claiming that Section 18 is absolute and leaves no doubt, [39] petitioner asks
COA to discontinue its practice of charging auditing fees to LWDs since such
practice allegedly violates the law.
Petitioners claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving any kind
of compensation from any government entity except compensation paid
directly by COA out of its appropriations and contributions. Thus, RA
80

6758 itself recognizes an exception to the statutory ban on COA personnel

receiving compensation from GOCCs. In Tejada v. Domingo,[40] the Court
declared:
There can be no question that Section 18 of Republic Act No. 6758 is
designed to strengthen further the policy x x x to preserve the independence
and integrity of the COA, by explicitly PROHIBITING: (1) COA officials and
employees from receiving salaries, honoraria, bonuses, allowances or other
emoluments from any government entity, local government unit, GOCCs and
government financial institutions, except such compensation paid
directly by the COA out of its appropriations and contributions, and
(2) government entities, including GOCCs, government financial institutions
and local government units from assessing or billing other government
entities, GOCCs, government financial institutions or local government units
for services rendered by the latters officials and employees as part of their
regular functions for purposes of paying additional compensation to said
officials and employees.
xxx
The first aspect of the strategy is directed to the COA itself, while the second
aspect is addressed directly against the GOCCs and government financial
institutions. Under the first, COA personnel assigned to auditing units
of GOCCs or government financial institutions can receive only such
salaries, allowances or fringe benefits paid directly by the COA out of
its appropriations and contributions. The contributions referred to
are the cost of audit services earlier mentioned which cannot include
the extra emoluments or benefits now claimed by petitioners.The
COA is further barred from assessing or billing GOCCs and government
financial institutions for services rendered by its personnel as part of their
regular audit functions for purposes of paying additional compensation to
such personnel. x x x. (Emphasis supplied)
In Tejada,
the
Court
explained
the
meaning
of
the
word contributions in Section 18 of RA 6758, which allows COA to charge
GOCCs the cost of its audit services:
x x x the contributions from the GOCCs are limited to the cost of audit
services which are based on the actual cost of the audit function in the
81

corporation concerned plus a reasonable rate to cover overhead

expenses. The actual audit cost shall include personnel services,
maintenance and other operating expenses, depreciation on capital and
equipment and out-of-pocket expenses. In respect to the allowances and
fringe benefits granted by the GOCCs to the COA personnel assigned to the
formers auditing units, the same shall be directly defrayed by COA from its
own appropriations x x x. [41]
COA may charge GOCCs actual audit cost but GOCCs must pay the same
directly to COA and not to COA auditors. Petitioner has not alleged that COA
charges LWDs auditing fees in excess of COAs actual audit cost. Neither has
petitioner alleged that the auditing fees are paid by LWDs directly to
individual COA auditors. Thus, petitioners contention must fail.
WHEREFORE, the Resolution of the Commission on Audit dated 3
January 2000 and the Decision dated 30 January 2001 denying petitioners
Motion for Reconsideration are AFFIRMED. The second sentence of Section
20 of Presidential Decree No. 198 is declared VOID for being inconsistent
with Sections 2 (1) and 3, Article IX-D of the Constitution. No costs.
SO ORDERED.

Veterans Federation of the Philippines v. Reyes, 483 S 526 (2006)

G. R. No. 155027
February 28, 2006
THE VETERANS FEDERATION OF THE PHILIPPINES represented by
Esmeraldo
R.
Acorda, Petitioner,
vs.
Hon. ANGELO T. REYES in his capacity as Secretary of National
Defense; and Hon. EDGARDO E. BATENGA in his capacity as
Undersecretary for Civil Relations and Administration of the
Department of National Defense, Respondents.
DECISION
CHICO-NAZARIO, J.:

82

This is a Petition for Certiorari with Prohibition under Rule 65 of the 1997
Rules of Civil Procedure, with a prayer to declare as void Department
Circular No. 04 of the Department of National Defense (DND), dated 10 June
2002.
Petitioner in this case is the Veterans Federation of the Philippines (VFP), a
corporate body organized under Republic Act No. 2640, dated 18 June 1960,
as amended, and duly registered with the Securities and Exchange
Commission. Respondent Angelo T. Reyes was the Secretary of National
Defense (DND Secretary) who issued the assailed Department Circular No.
04, dated 10 June 2002. Respondent Edgardo E. Batenga was the DND
Undersecretary for Civil Relations and Administration who was tasked by the
respondent DND Secretary to conduct an extensive management audit of the
records of petitioner.
The factual and procedural antecedents of this case are as follows:
Petitioner VFP was created under Rep. Act No. 2640, 1 a statute approved on
18 June 1960.
On 15 April 2002, petitioners incumbent president received a letter dated 13
April 2002 which reads:
Col. Emmanuel V. De Ocampo (Ret.)
President
Veterans Federation of the Philippines
Makati, Metro Manila
Dear Col. De Ocampo:
Please be informed that during the preparation of my briefing before the
Cabinet and the President last March 9, 2002, we came across some legal
bases which tended to show that there is an organizational and management
relationship between Veterans Federation of the Philippines and the
Philippine Veterans Bank which for many years have been inadvertently
overlooked.

83

I refer to Republic Act 2640 creating the body corporate known as the VFP
and Republic Act 3518 creating the Phil. Vets [sic] Bank.
1. RA 2640 dated 18 June 60 Section 1 ... "hereby created a body
corporate, under the control and supervision of the Secretary of
National Defense."
2. RA 2640 Section 12 ... "On or before the last day of the month
following the end of each fiscal year, the Federation shall make and
transmit to the President of the Philippines or to the Secretary of
National Defense, a report of its proceedings for the past year,
including a full, complete and itemized report of receipts and
expenditures of whatever kind."
3. Republic Act 3518 dated 18 June 1963 (An Act Creating the
Philippine Veterans Bank, and for Other Purposes) provides in Section
6 that ... "the affairs and business of the Philippine Veterans Bank shall
be directed and its property managed, controlled and preserved,
unless otherwise provided in this Act, by a Board of Directors
consisting of eleven (11) members to be composed of three ex officio
members to wit: the Philippine Veterans Administrator, the President of
the Veterans Federation of the Philippines and the Secretary of
National Defense x x x.
It is therefore in the context of clarification and rectification of what should
have been done by the DND (Department of National Defense) for and about
the VFP and PVB that I am requesting appropriate information and report
about these two corporate bodies.
Therefore it may become necessary that a conference with your staffs in
these two bodies be set.
Thank you and anticipating your action on this request.
Very truly yours,
(SGD) ANGELO T. REYES
[DND] Secretary

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On 10 June 2002, respondent DND Secretary issued the assailed DND

Department Circular No. 04 entitled, "Further Implementing the Provisions of
Sections 12 and 23 of Republic Act No. 2640," the full text of which appears
as follows:
Department of National Defense
Department Circular No. 04
Subject: Further Implementing the Provisions of Sections 1 & 2 of
Republic Act No. 2640
Authority: Republic Act No. 2640
Executive Order No. 292 dated July 25, 1987
Section 1
These rules shall govern and apply to the management and operations of the
Veterans Federation of the Philippines (VFP) within the context provided by
EO 292 s-1987.
Section 2 DEFINITION OF TERMS for the purpose of these rules, the
terms, phrases or words used herein shall, unless the context indicates
otherwise, mean or be understood as follows:
Supervision and Control it shall include authority to act directly whenever a
specific function is entrusted by law or regulation to a subordinate; direct the
performance of a duty; restrain the commission of acts; approve, reverse or
modify acts and decisions of subordinate officials or units; determine
priorities in the execution of plans and programs; and prescribe standards,
guidelines, plans and programs.
Power of Control power to alter, modify, nullify or set aside what a
subordinate officer had done in the performance of his duties and to
substitute the judgment of the former to that of the latter.

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Supervision means overseeing or the power of an officer to see to it that

their subordinate officers perform their duties; it does not allow the superior
to annul the acts of the subordinate.
Administrative Process embraces matter concerning the procedure in the
disposition of both routine and contested matters, and the matter in which
determinations are made, enforced or reviewed.
Government Agency as defined under PD 1445, a government agency or
agency of government or "agency" refers to any department, bureau or
office of the national government, or any of its branches or instrumentalities,
of any political subdivision, as well as any government owned or controlled
corporation, including its subsidiaries, or other self-governing board or
commission of the government.
Government Owned and Controlled Corporation (GOCC) refer to any
agency organized as a stock or non-stock corporation, vested with functions
relating to public needs whether governmental or proprietary in nature, and
owned by the government directly or through its instrumentalities wholly or,
where applicable as in the case of stock corporations, to the extent of at
least 50% of its capital stock.
Fund sum of money or other resources set aside for the purpose of
carrying out specific activities or attaining certain objectives in accordance
with special regulations, restrictions or limitations and constitutes an
independent, fiscal and accounting entity.
Government Fund includes public monies of every sort and other resources
pertaining to any agency of the government.
Veteran any person who rendered military service in the land, sea or air
forces of the Philippines during the revolution against Spain, the Philippine
American War, World War II, including Filipino citizens who served in Allied
Forces in the Philippine territory and foreign nationals who served in
Philippine forces; the Korean campaign, the Vietnam campaign, the Antidissidence campaign, or other wars or military campaigns; or who rendered
military service in the Armed Forces of the Philippines and has been
honorably discharged or separated after at least six (6) years total
cumulative active service or sooner separated due to the death or disability
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arising from a wound or injury received or sickness or disease incurred in

line of duty while in the active service.
Section 3 Relationship Between the DND and the VFP
3.1 Sec 1 of RA 3140 provides "... the following persons (heads
veterans associations and organizations in the Philippines)
associates and successors are hereby created a body corporate,
control and supervision of the Secretary of National Defense,
name, style and title of "Veterans Federation of the Philippines ..."

of various
and their
under the
under the

The Secretary of National Defense shall be charged with the duty of

supervising the veterans and allied program under the jurisdiction of the
Department. It shall also have the responsibility of overseeing and ensuring
the judicious and effective implementation of veterans assistance, benefits,
and utilization of VFP assets.
3.2 To effectively supervise and control the corporate affairs of the
Federation and to safeguard the interests and welfare of the veterans who
are also wards of the State entrusted under the protection of the DND, the
Secretary may personally or through a designated representative, require
the submission of reports, documents and other papers regarding any or all
of the Federations business transactions particularly those relating to the
VFP functions under Section 2 of RA 2640.
The Secretary or his representative may attend conferences of the supreme
council of the VFP and such other activities he may deem relevant.
3.3 The Secretary shall from time to time issue guidelines, directives and
other orders governing vital government activities including, but not limited
to, the conduct of elections; the acquisition, management and dispositions of
properties, the accounting of funds, financial interests, stocks and bonds,
corporate investments, etc. and such other transactions which may affect
the interests of the veterans.
3.4 Financial transactions of the Federation shall follow the provisions of the
government auditing code (PD 1445) i.e. government funds shall be spent or
used for public purposes; trust funds shall be available and may be spent
only for the specific purpose for which the trust was created or the funds
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received; fiscal responsibility shall, to the greatest extent, be shared by all

those exercising authority over the financial affairs, transactions, and
operations of the federation; disbursements or dispositions of government
funds or property shall invariably bear the approval of the proper officials.
Section 4 Records of the FEDERATION
As a corporate body and in accordance with appropriate laws, it shall keep
and carefully preserve records of all business transactions, minutes of
meetings of stockholders/members of the board of directors reflecting all
details about such activity.
All such records and minutes shall be open to directors, trustees,
stockholders, and other members for inspection and copies of which may be
requested.
As a body corporate, it shall submit the following: annual report;
proceedings of council meetings; report of operations together with financial
statement of its assets and liabilities and fund balance per year; statement
of revenues and expenses per year; statement of cash flows per year as
certified by the accountant; and other documents/reports as may be
necessary or required by the SND.
Section 5 Submission of Annual and Periodic Report
As mandated under appropriate laws, the following reports shall be
submitted to the SND, to wit:
a. Annual Report to be submitted not later than every January 31 of
the following year. Said report shall consist of the following:
1. Financial Report of the Federation, signed by the Treasurer
General and Auditor General;
2. Roster of Members of the Supreme Council;
3. Roster of Members of the Executive Board and National
Officers; and
4. Current listing of officers and management of VFP.
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b. Report on the proceedings of each Supreme Council Meeting to be

submitted not later than one month after the meeting;
c. Report of the VFP President as may be required by SND or as may
be found necessary by the President of the Federation;
d. Resolutions passed by the Executive Board and the Supreme Council
for confirmation to be submitted not later than one month after the
approval of the resolution;
e. After Operation/Activity Reports to be submitted not later than one
month after such operation or activity;
Section 6 Penal Sanctions
As an attached agency to a regular department of the government, the VFP
and all its instrumentalities, officials and personnel shall be subject to the
penal provisions of such laws, rules and regulations applicable to the
attached agencies of the government.
In a letter dated 6 August 2002 addressed to the President of petitioner,
respondent DND Secretary reiterated his instructions in his earlier letter of
13 April 2002.
Thereafter, petitioners President received a letter dated 23 August 2002
from respondent Undersecretary, informing him that Department Order No.
129 dated 23 August 2002 directed "the conduct of a Management Audit of
the Veterans Federation of the Philippines." 4 The letter went on to state that
respondent DND Secretary "believes that the mandate given by said law can
be meaningfully exercised if this department can better appreciate the
functions, responsibilities and situation on the ground and this can be done
by undertaking a thorough study of the organization." 5
Respondent Undersecretary also requested both for a briefing and for
documents on personnel, ongoing projects and petitioners financial
condition. The letter ended by stating that, after the briefing, the support
staff of the Audit Committee would begin their work to meet the one-month
target within which to submit a report.

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A letter dated 28 August 2003 informed petitioners President that the

Management Audit Group headed by the Undersecretary would be paying
petitioner a visit on 30 August 2002 for an update on VFPs different affiliates
and the financial statement of the Federation.
Subsequently, the Secretary General of the VFP sent an undated letter to
respondent DND Secretary, with notice to respondent Undersecretary for
Civil Relations and Administration, complaining about the alleged broadness
of the scope of the management audit and requesting the suspension thereof
until such time that specific areas of the audit shall have been agreed upon.
The request was, however, denied by the Undersecretary in a letter dated 4
September 2002 on the ground that a specific timeframe had been set for
the activity.
Petitioner thus filed this Petition for Certiorari with Prohibition under Rule 65
of the 1997 Rules of Civil Procedure, praying for the following reliefs:
1. For this Court to issue a temporary restraining order and a writ of
preliminary prohibitory and mandatory injunction to enjoin respondent
Secretary and all those acting under his discretion and authority from:
(a) implementing DND Department Circular No. 04; and (b) continuing
with the ongoing management audit of petitioners books of account;
2. After hearing the issues on notice
a. Declare DND Department Circular No. 04 as null and void for
being ultra vires;
b. Convert the writ of prohibition, preliminary prohibitory and
mandatory injunction into a permanent one.6
GIVING DUE COURSE TO THE PETITION
Petitioner asserts that, although cases which question the constitutionality or
validity of administrative issuances are ordinarily filed with the lower courts,
the urgency and substantive importance of the question on hand and the
public interest attendant to the subject matter of the petition justify its being
filed with this Court directly as an original action. 7

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It is settled that the Regional Trial Court and the Court of Appeals also
exercise original jurisdiction over petitions for certiorari and prohibition. As
we have held in numerous occasions, however, such concurrence of original
jurisdiction does not mean that the party seeking extraordinary writs has the
absolute freedom to file his petition in the court of his choice. 8 Thus, in
Commissioner of Internal Revenue v. Leal,9 we held that:
Such concurrence of original jurisdiction among the Regional Trial Court, the
Court of Appeals and this Court, however, does not mean that the party
seeking any of the extraordinary writs has the absolute freedom to file his
petition in the court of his choice. The hierarchy of courts in our judicial
system determines the appropriate forum for these petitions. Thus, petitions
for the issuance of the said writs against the first level (inferior) courts must
be filed with the Regional Trial Court and those against the latter, with the
Court of Appeals. A direct invocation of this Courts original jurisdiction to
issue these writs should be allowed only where there are special and
important reasons therefor, specifically and sufficiently set forth in the
petition. This is the established policy to prevent inordinate demands upon
the Courts time and attention, which are better devoted to matters within
its exclusive jurisdiction, and to prevent further over-crowding of the Courts
docket. Thus, it was proper for petitioner to institute the special civil action
for certiorari with the Court of Appeals assailing the RTC order denying his
motion to dismiss based on lack of jurisdiction.
The petition itself, in this case, does not specifically and sufficiently set forth
the special and important reasons why the Court should give due course to
this petition in the first instance, hereby failing to fulfill the conditions set
forth in Commissioner of Internal Revenue v. Leal. 10 While we reiterate the
policies set forth in Leal and allied cases and continue to abhor the
propensity of a number of litigants to disregard the principle of hierarchy of
courts in our judicial system, we, however, resolve to take judicial notice of
the fact that the persons who stand to lose in a possible protracted litigation
in this case are war veterans, many of whom have precious little time left to
enjoy the benefits that can be conferred by petitioner corporation. This
bickering for the power over petitioner corporation, an entity created to
represent and defend the interests of Filipino veterans, should be resolved as
soon as possible in order for it to once and for all direct its resources to its
rightful beneficiaries all over the country. All these said, we hereby resolve to
give due course to this petition.
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ISSUES
Petitioner mainly alleges that the rules and guidelines laid down in the
assailed Department Circular No. 04 expanded the scope of "control and
supervision" beyond what has been laid down in Rep. Act No.
2640.11Petitioner further submits the following issues to this Court:
1. Was the challenged department circular passed in the valid exercise
of the respondent Secretarys "control and supervision"?
2. Could the challenged department circular validly lay standards
classifying the VFP, an essentially civilian organization, within the
ambit of statutes only applying to government entities?
3. Does the department circular, which grants respondent direct
management control on the VFP, unduly encroach on the prerogatives
of VFPs governing body?
At the heart of all these issues and all of petitioners prayers and assertions
in this case is petitioners claim that it is a private non-government
corporation.
CENTRAL ISSUE:
IS THE VFP A PRIVATE CORPORATION?
Petitioner claims that it is not a public nor a governmental entity but a
private organization, and advances this claim to prove that the issuance of
DND Department Circular No. 04 is an invalid exercise of respondent
Secretarys control and supervision.12
This Court has defined the power of control as "the power of an officer to
alter or modify or nullify or set aside what a subordinate has done in the
performance of his duties and to substitute the judgment of the former to
that of the latter."13 The power of supervision, on the other hand, means
"overseeing, or the power or authority of an officer to see that subordinate
officers perform their duties. If the latter fail or neglect to fulfill them, the
former may take such action or step as prescribed by law to make them
perform their duties."14 These definitions are synonymous with the
definitions in the assailed Department Circular No. 04, while the other
92

provisions of the assailed department circular are mere consequences of

control and supervision as defined.
Thus, in order for petitioners premise to be able to support its conclusion,
petitioners should be deemed to imply either of the following: (1) that it is
unconstitutional/impermissible for the law (Rep. Act No. 2640) to grant
control and/or supervision to the Secretary of National Defense over a
private organization, or (2) that the control and/or supervision that can be
granted to the Secretary of National Defense over a private organization is
limited, and is not as strong as they are defined above.
The following provision of the 1935 Constitution, the organic act controlling
at the time of the creation of the VFP in 1960, is relevant:
Section 7. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations, unless such
corporations are owned and controlled by the Government or any subdivision
or instrumentality thereof.15
On the other hand, its counterparts in the 1973 and 1987 constitutions are
the following:
Section 4. The National Assembly shall not, except by general law, provide
for the formation, organization, or regulation of private corporations, unless
such corporations are owned or controlled by the government or any
subdivision or instrumentality thereof.16
Sec. 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Governmentowned and controlled corporations may be created or established by special
charters in the interest of the common good and subject to the test of
economic viability.17
From the foregoing, it is crystal clear that our constitutions explicitly prohibit
the regulation by special laws of private corporations, with the exception of
government-owned or controlled corporations (GOCCs). Hence, it would be
impermissible for the law to grant control of the VFP to a public official if it
were neither a public corporation, an unincorporated governmental entity,
nor a GOCC.18 Said constitutional provisions can even be read to prohibit the
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creation itself of the VFP if it were neither of the three mentioned above, but
we cannot go into that in this case since there is no challenge to the creation
of the VFP in the petition as to permit this Court from considering its nullity.
Petitioner vigorously argues that the VFP is a private non-government
organization, pressing on the following contentions:
1. The VFP does not possess the elements which would qualify it as a
public office, particularly the possession/delegation of a portion of
sovereign power of government to be exercised for the benefit of the
public;
2. VFP funds are not public funds because
a) No budgetary appropriations or government funds have been
released to the VFP directly or indirectly from the Department of
Budget and Management (DBM);
b) VFP funds come from membership dues;
c) The lease rentals raised from the use of government lands
reserved for the VFP are private in character and do not belong
to the government. Said rentals are fruits of VFPs labor and
efforts in managing and administering the lands for VFP
purposes and objectives. A close analogy would be any Filipino
citizen settling on government land and who tills the land for his
livelihood and sustenance. The fruits of his labor belong to him
and not to the owner of the land. Such fruits are not public
funds.
3. Although the juridical personality of the VFP emanates from a
statutory charter, the VFP retains its essential character as a private,
civilian federation of veterans voluntarily formed by the veterans
themselves to attain a unity of effort, purpose and objectives, e.g.
a. The members of the VFP are individual members and retirees
from the public and military service;
b. Membership in the VFP is voluntary, not compulsory;

94

c. The VFP is governed, not by the Civil Service Law, the Articles
of War nor the GSIS Law, but by the Labor Code and the SSS
Law;
d. The VFP has its own Constitution and By-Laws and is
governed by a Supreme Council who are elected from and by the
members themselves;
4. The Administrative Code of 1987 does not provide that the VFP is an
attached agency, nor does it provide that it is an entity under the
control and supervision of the DND in the context of the provisions of
said code.
5. The DBM declared that the VFP is a non-government organization
and issued a certificate that the VFP has not been a direct recipient of
any funds released by the DBM.
These arguments of petitioner notwithstanding, we are constrained to rule
that petitioner is in fact a public corporation. Before responding to
petitioners allegations one by one, here are the more evident reasons why
the VFP is a public corporation:
(1) Rep. Act No. 2640 is entitled "An Act to Create a Public Corporation
to be Known as the Veterans Federation of the Philippines, Defining its
Powers, and for Other Purposes."
(2) Any action or decision of the Federation or of the Supreme Council
shall be subject to the approval of the Secretary of Defense.19
(3) The VFP is required to submit annual reports of its proceedings for
the past year, including a full, complete and itemized report of receipts
and expenditures of whatever kind, to the President of the Philippines
or to the Secretary of National Defense.20
(4) Under Executive Order No. 37 dated 2 December 1992, the VFP
was listed as among the government-owned and controlled
corporations that will not be privatized.
(5) In Ang Bagong Bayani OFW Labor Party v. COMELEC, 21 this Court
held in a minute resolution that the "VFP [Veterans Federation Party] is
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an adjunct of the government, as it is merely an incarnation of the

Veterans Federation of the Philippines.
And now to answer petitioners reasons for insisting that it is a private
corporation:
1. Petitioner claims that the VFP does not possess the elements which would
qualify it as a public office, particularly the possession/delegation of a
portion of sovereign power of government to be exercised for the benefit of
the public;
In Laurel v. Desierto,22 we adopted the definition of Mechem of a public
office, that it is "the right, authority and duty, created and conferred by law,
by which, for a given period, either fixed by law or enduring at the pleasure
of the creating power, an individual is invested with some portion of the
sovereign functions of the government, to be exercised by him for the
benefit of the public."
In the same case, we went on to adopt Mechems view that the delegation to
the individual of some of the sovereign functions of government is "[t]he
most important characteristic" in determining whether a position is a public
office or not.23 Such portion of the sovereignty of the country, either
legislative, executive or judicial, must attach to the office for the time being,
to be exercised for the public benefit. Unless the powers conferred are of this
nature, the individual is not a public officer. The most important
characteristic which distinguishes an office from an employment or contract
is that the creation and conferring of an office involves a delegation to the
individual of some of the sovereign functions of government, to be exercised
by him for the benefit of the public; that some portion of the sovereignty
of the country, either legislative, executive or judicial, attaches, for the time
being, to be exercised for the public benefit. Unless the powers conferred are
of this nature, the individual is not a public officer.24 The issue, therefore, is
whether the VFAs officers have been delegated some portion of the
sovereignty of the country, to be exercised for the public benefit.
In several cases, we have dealt with the issue of whether certain specific
activities can be classified as sovereign functions. These cases, which deal
with activities not immediately apparent to be sovereign functions, upheld

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the public sovereign nature of operations needed either to promote social

justice25 or to stimulate patriotic sentiments and love of country.26
As regards the promotion of social justice as a sovereign function, we held in
Agricultural Credit and Cooperative Financing Administration (ACCFA) v.
Confederation of Unions in Government Corporations and Offices
(CUGCO),27 that the compelling urgency with which the Constitution speaks
of social justice does not leave any doubt that land reform is not an optional
but a compulsory function of sovereignty. The same reason was used in our
declaration that socialized housing is likewise a sovereign function. 28 Highly
significant here is the observation of former Chief Justice Querube
Makalintal:
The growing complexities of modern society, however, have rendered this
traditional classification of the functions of government [into constituent and
ministrant functions] quite unrealistic, not to say obsolete. The areas which
used to be left to private enterprise and initiative and which the government
was called upon to enter optionally, and only "because it was better
equipped to administer for the public welfare than is any private individual or
group of individuals," continue to lose their well-defined boundaries and to
be absorbed within activities that the government must undertake in its
sovereign capacity if it is to meet the increasing social challenges of the
times. Here[,] as almost everywhere else[,] the tendency is undoubtedly
towards a greater socialization of economic forces. Here, of course, this
development was envisioned, indeed adopted as a national policy, by the
Constitution itself in its declaration of principle concerning the promotion of
social justice.29 (Emphasis supplied.)
It was, on the other hand, the fact that the National Centennial Celebrations
was calculated to arouse and stimulate patriotic sentiments and love of
country that it was considered as a sovereign function in Laurel v.
Desierto.30 In Laurel, the Court then took its cue from a similar case in the
United States involving a Fourth of July fireworks display. The holding of the
Centennial Celebrations was held to be an executive function, as it was
intended to enforce Article XIV of the Constitution which provides for the
conservation, promotion and popularization of the nations historical and
cultural heritage and resources, and artistic relations.

97

In the case at bar, the functions of petitioner corporation enshrined in

Section 4 of Rep. Act No. 264031 should most certainly fall within the
category of sovereign functions. The protection of the interests of war
veterans is not only meant to promote social justice, but is also intended to
reward patriotism. All of the functions in Section 4 concern the well-being of
war veterans, our countrymen who risked their lives and lost their limbs in
fighting for and defending our nation. It would be injustice of catastrophic
proportions to say that it is beyond sovereigntys power to reward the people
who defended her.
Like the holding of the National Centennial Celebrations, the functions of the
VFP are executive functions, designed to implement not just the provisions
of Rep. Act No. 2640, but also, and more importantly, the Constitutional
mandate for the State to provide immediate and adequate care, benefits and
other forms of assistance to war veterans and veterans of military
campaigns, their surviving spouses and orphans.32
2. Petitioner claims that VFP funds are not public funds.
Petitioner claims that its funds are not public funds because no budgetary
appropriations or government funds have been released to the VFP directly
or indirectly from the DBM, and because VFP funds come from membership
dues and lease rentals earned from administering government lands
reserved for the VFP.
The fact that no budgetary appropriations have been released to the VFP
does not prove that it is a private corporation. The DBM indeed did not see it
fit to propose budgetary appropriations to the VFP, having itself believed that
the VFP is a private corporation.33 If the DBM, however, is mistaken as to its
conclusion regarding the nature of VFPs incorporation, its previous
assertions will not prevent future budgetary appropriations to the VFP. The
erroneous application of the law by public officers does not bar a subsequent
correct application of the law.34
Nevertheless, funds in the hands of the VFP from whatever source are public
funds, and can be used only for public purposes. This is mandated by the
following provisions of Rep. Act No. 2640:

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(1) Section 2 provides that the VFP can only "invest its funds for the
exclusive benefit of the Veterans of the Philippines;"
(2) Section 2 likewise provides that "(a)ny action or decision of the
Federation or of the Supreme Council shall be subject to the approval
of the Secretary of National Defense." Hence, all activities of the VFP
to which the Supreme Council can apply its funds are subject to the
approval of the Secretary of National Defense;
(3) Section 4 provides that "the Federation shall exist solely for the
purposes of a benevolent character, and not for the pecuniary benefit
of its members;"1avvphil.net
(4) Section 6 provides that all funds of the VFP in excess of operating
expenses are "reserved for disbursement, as the Supreme Council may
authorize, for the purposes stated in Section two of this Act;"
(5) Section 10 provides that "(a)ny donation or contribution which
from time to time may be made to the Federation by the Government
of the Philippines or any of its subdivisions, branches, offices, agencies
or instrumentalities shall be expended by the Supreme Council only for
the purposes mentioned in this Act."; and finally,
(6) Section 12 requires the submission of annual reports of VFP
proceedings for the past year, including a full, complete and itemized
report of receipts and expenditures of whatever kind, to the President
of the Philippines or to the Secretary of National Defense.
It is important to note here that the membership dues collected from the
individual members of VFPs affiliate organizations do not become public
funds while they are still funds of the affiliate organizations. A close reading
of Section 135 of Rep. Act No. 2640 reveals that what has been created as a
body corporate is not the individual membership of the affiliate
organizations, but merely the aggregation of the heads of the affiliate
organizations. Thus, only the money remitted by the affiliate organizations
to the VFP partake in the public nature of the VFP funds.
In Republic v. COCOFED,36 we held that the Coconut Levy Funds are public
funds because, inter alia, (1) they were meant to be for the benefit of the
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coconut industry, one of the major industries supporting the national

economy, and its farmers; and (2) the very laws governing coconut levies
recognize their public character. The same is true with regard to the VFP
funds. No less public is the use for the VFP funds, as such use is limited to
the purposes of the VFP which we have ruled to be sovereign functions.
Likewise, the law governing VFP funds (Rep. Act No. 2640) recognizes the
public character of the funds as shown in the enumerated provisions above.
We also observed in the same COCOFED case that "(e)ven if the money is
allocated for a special purpose and raised by special means, it is still public
in character."37 In the case at bar, some of the funds were raised by even
more special means, as the contributions from affiliate organizations of the
VFP can hardly be regarded as enforced contributions as to be considered
taxes. They are more in the nature of donations which have always been
recognized as a source of public funding. Affiliate organizations of the VFP
cannot complain of their contributions becoming public funds upon the
receipt by the VFP, since they are presumed aware of the provisions of Rep.
Act No. 2640 which not only specifies the exclusive purposes for which VFP
funds can be used, but also provides for the regulation of such funds by the
national government through the Secretary of National Defense. There is
nothing wrong, whether legally or morally, from raising revenues through
non-traditional methods. As remarked by Justice Florentino Feliciano in his
concurring opinion in Kilosbayan, Incorporated v. Guingona, Jr.38 where he
explained that the funds raised by the On-line Lottery System were also
public in nature, thus:
x x x [T]he more successful the government is in raising revenues by nontraditional methods such as PAGCOR operations and privatization measures,
the lesser will be the pressure upon the traditional sources of public
revenues, i.e., the pocket books of individual taxpayers and importers.
Petitioner additionally harps on the inapplicability of the case of Laurel v.
Desierto39 which was cited by Respondents. Petitioner claims that among the
reasons National Centennial Commission Chair Salvador Laurel was
considered a public officer was the fact that his compensation was derived
from public funds. Having ruled that VFP funds from whatever source are
public funds, we can safely conclude that the Supreme Councils
compensation, taken as they are from VFP funds under the term "operating
expenses" in Section 6 of Rep. Act No. 2640, are derived from public funds.
100

The particular nomenclature of the compensation taken from VFP funds is

not even of relevance here. As we said in Laurel concerning compensation as
an element of public office:
Under particular circumstances, "compensation" has been held to include
allowance for personal expenses, commissions, expenses, fees, an
honorarium, mileage or traveling expenses, payments for services,
restitution or a balancing of accounts, salary, and wages.40
3. Petitioner argues that it is a civilian federation where membership is
voluntary.
Petitioner claims that the Secretary of National Defense "historically did not
indulge in the direct or micromanagement of the VFP precisely because it is
essentially a civilian organization where membership is voluntary." 41 This
reliance of petitioner on what has "historically" been done is erroneous, since
laws are not repealed by disuse, custom, or practice to the
contrary.42 Furthermore, as earlier stated, the erroneous application of the
law by public officers does not bar a subsequent correct application of the
law.43
Neither is the civilian nature of VFP relevant in this case. The Constitution
does not contain any prohibition, express or implied, against the grant of
control and/or supervision to the Secretary of National Defense over a
civilian organization. The Office of the Secretary of National Defense is itself
a civilian office, its occupant being an alter ego of the civilian Commanderin-Chief. This set-up is the manifestation of the constitutional principle that
civilian authority is, at all times, supreme over the military.44 There being no
such constitutional prohibition, the creation of a civilian public organization
by Rep. Act No. 2640 is not rendered invalid by its being placed under the
control and supervision of the Secretary of National Defense.
Petitioners stand that the VFP is a private corporation because membership
thereto is voluntary is likewise erroneous. As stated above, the membership
of the VFP is not the individual membership of the affiliate organizations, but
merely the aggregation of the heads of such affiliate organizations. These
heads forming the VFP then elect the Supreme Council and the other
officers,45 of this public corporation.

101

4. Petitioner claims that the Administrative Code of 1987 does not provide
that the VFP is an attached agency, and nor does it provide that it is an
entity under the control and supervision of the DND in the context of the
provisions of said code.
The Administrative Code, by giving definitions of the various entities covered
by it, acknowledges that its enumeration is not exclusive. The Administrative
Code could not be said to have repealed nor enormously modified Rep. Act
No. 2640 by implication, as such repeal or enormous modification by
implication is not favored in statutory construction. 46
5. Petitioner offers as evidence the DBM opinion that the VFP is a nongovernment organization in its certification that the VFP "has not been a
direct recipient of any funds released by the DBM."
Respondents claim that the supposed declaration of the DBM that petitioner
is a non-government organization is not persuasive, since DBM is not a
quasi-judicial agency. They aver that what we have said of the Bureau of
Local Government Finance (BLGF) in Philippine Long Distance Telephone
Company (PLDT) v. City of Davao47 can be applied to DBM:
In any case, it is contended, the ruling of the Bureau of Local Government
Finance (BLGF) that petitioners exemption from local taxes has been
restored is a contemporaneous construction of Section 23 [of R.A. No. 7925
and, as such, is entitled to great weight.
The ruling of the BLGF has been considered in this case. But unlike the Court
of Tax Appeals, which is a special court created for the purpose of reviewing
tax cases, the BLGF was created merely to provide consultative services and
technical assistance to local governments and the general public on local
taxation and other related matters. Thus, the rule that the "Court will not set
aside conclusions rendered by the CTA, which is, by the very nature of its
function, dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the subject, unless
there has been an abuse or improvident exercise of authority" cannot apply
in the case of the BLGF.
On this score, though, we disagree with respondents and hold that the
DBMs appraisal is considered persuasive. Respondents misread the PLDT
102

case in asserting that only quasi-judicial agencies determination can be

considered persuasive. What the PLDT case points out is that, for an
administrative agencys opinion to be persuasive, the administrative agency
involved (whether it has quasi-judicial powers or not) must be an expert in
the field they are giving their opinion on.
The DBM is indeed an expert on determining what the various government
agencies and corporations are. This determination is necessary for the DBM
to fulfill its mandate:
Sec. 2. Mandate. - The Department shall be responsible for the formulation
and implementation of the National Budget with the goal of attaining our
national socio-economic plans and objectives.
The Department shall be responsible for the efficient and sound utilization of
government funds and revenues to effectively achieve our country's
development objectives.48
The persuasiveness of the DBM opinion has, however, been overcome by all
the previous explanations we have laid so far. It has also been eclipsed by
another similarly persuasive opinion, that of the Department of National
Defense embodied in Department Circular No. 04. The DND is clearly more
of an expert with respect to the determination of the entities under it, and
its Administrative Rules and Regulations are entitled to great respect and
have in their favor the presumption of legality.49
The DBM opinion furthermore suffers from its lack of explanation and
justification in the "certification of non-receipt" where said opinion was
given. The DBM has not furnished, in said certification or elsewhere, an
explanation for its opinion that VFP is a non-government organization.
THE FATE OF DEPARTMENT CIRCULAR NO. 04
Our ruling that petitioner is a public corporation is determinative of whether
or not we should grant petitioners prayer to declare Department Circular No.
04 void.
Petitioner assails Department Circular No. 04 on the ground that it expanded
the scope of control and supervision beyond what has been laid down in Rep.
Act No. 2640. Petitioner alleges that "(t)he equation of the meaning of
103

`control and `supervision of the Administrative Code of 1987 as the same

`control and supervision under Rep. Act No. 2640, takes out the context of
the original legislative intent from the peculiar surrounding circumstances
and conditions that brought about the creation of the VFP." 50 Petitioner
claims that the VFP "was intended as a self-governing autonomous body with
a Supreme Council as governing authority," and that the assailed circular
"pre-empts VFPs original self-governance and autonomy (in) representing
veterans organizations, and substitutes government discretion and decisions
to that of the veterans own determination." 51 Petitioner says that the
circulars provisions practically render the Supreme Council inutile, despite
its being the statutory governing body of the VFP.52
As previously mentioned, this Court has defined the power of control as "the
power of an officer to alter or modify or nullify or set aside what a
subordinate has done in the performance of his duties and to substitute the
judgment of the former to that of the latter." 53 The power of supervision, on
the other hand, means "overseeing, or the power or authority of an officer to
see that subordinate officers perform their duties."54 Under the
Administrative Code of 1987:55
Supervision and control shall include the authority to act directly whenever a
specific function is entrusted by law or regulation to a subordinate; direct the
performance of duty; restrain the commission of acts; review, approve,
reverse or modify acts and decisions of subordinate officials or units;
determine priorities in the execution of plans and programs; and prescribe
standards, guidelines, plans and programs. x x x
The definition of the power of control and supervision under Section 2 of the
assailed Department Circular are synonymous with the foregoing definitions.
Consequently, and considering that petitioner is a public corporation, the
provisions of the assailed Department Circular No. 04 did not supplant nor
modify the provisions of Republic Act No. 2640, thus not violating the settled
rule that "all such (administrative) issuances must not override, but must
remain consistent and in harmony with the law they seek to apply or
implement. Administrative rules and regulations are intended to carry out,
neither to supplant nor to modify, the law."56
Section 3.2 of the assailed department circular, which authorizes the
Secretary of National Defense to "x x x personally or through a designated
104

representative, require the submission of reports, documents and other

papers regarding any or all of the Federations business functions, x x x."
as well as Section 3.3 which allows the Secretary of DND to
x x x [F]rom time to time issue guidelines, directives and other orders
governing vital government activities including, but not limited to, the
conduct of elections, the acquisition, management and dispositions of
properties, the accounting of funds, financial interests, stocks and bonds,
corporate investments, etc. and such other transactions which may affect
the interests of the veterans.
are merely consequences of both the power of control and supervision
granted by Rep. Act No. 2640. The power to alter or modify or nullify or set
aside what a subordinate has done in the performance of his duties, or to
see to it that subordinate officers perform their duties in accordance with
law, necessarily requires the ability of the superior officer to monitor, as
closely as it desires, the acts of the subordinate.
The same is true with respect to Sections 4 and 5 of the assailed
Department Circular No. 04, which requires the preservation of the records
of the Federation and the submission to the Secretary of National Defense of
annual and periodic reports.
Petitioner likewise claims that the assailed DND Department Circular No. 04
was never published, and hence void. 57 Respondents deny such nonpublication.58
We have put forth both the rule and the exception on the publication of
administrative rules and regulations in the case of Taada v. Tuvera: 59
x x x Administrative rules and regulations must also be published if their
purpose is to enforce or implement existing law pursuant also to a valid
delegation.
Interpretative regulations and those merely internal in nature, that is,
regulating only the personnel of the administrative agency and not the
public, need not be published. Neither is publication required of the so-called
letters of instructions issued by administrative superiors concerning the rules
105

on guidelines to be followed by their subordinates in the performance of

their duties.
Even assuming that the assailed circular was not published, its validity is not
affected by such non-publication for the reason that its provisions fall under
two of the exceptions enumerated in Taada.
Department Circular No. 04 is an internal regulation. As we have ruled, they
are meant to regulate a public corporation under the control of DND, and not
the public in general. As likewise discussed above, what has been created as
a body corporate by Rep. Act No. 2640 is not the individual membership of
the affiliate organizations of the VFP, but merely the aggregation of the
heads of the affiliate organizations. Consequently, the individual members of
the affiliate organizations, who are not public officers, are beyond the
regulation of the circular.
Sections 2, 3 and 6 of the assailed circular are additionally merely
interpretative in nature. They add nothing to the law. They do not affect the
substantial rights of any person, whether party to the case at bar or not. In
Sections 2 and 3, control and supervision are defined, mentioning actions
that can be performed as consequences of such control and supervision, but
without specifying the particular actions that shall be rendered to control and
supervise the VFP. Section 6, in the same vein, merely state what the
drafters of the circular perceived to be consequences of being an attached
agency to a regular department of the government, enumerating sanctions
and remedies provided by law that may be availed of whenever desired.
Petitioner then objects to the implementation of Sec. 3.4 of the assailed
Department Circular, which provides that
3.4 Financial transactions of the Federation shall follow the provisions of the
government auditing code (PD 1445) i.e. government funds shall be spent or
used for public purposes; trust funds shall be available and may be spent
only for the specific purpose for which the trust was created or the funds
received; fiscal responsibility shall, to the greatest extent, be shared by all
those exercising authority over the financial affairs, transactions, and
operations of the federation; disbursements or dispositions of government
funds or property shall invariably bear the approval of the proper officials.

106

Since we have also previously determined that VFP funds are public funds,
there is likewise no reason to declare this provision invalid. Section 3.4 is
correct in requiring the VFP funds to be used for public purposes, but only
insofar the term "public purposes" is construed to mean "public purposes
enumerated in Rep. Act No. 2640."
Having in their possession public funds, the officers of the VFP, especially its
fiscal officers, must indeed share in the fiscal responsibility to the greatest
extent.
As to petitioners allegation that VFP was intended as a self-governing
autonomous body with a Supreme Council as governing authority, we find
that the provisions of Rep. Act No. 2640 concerning the control and
supervision of the Secretary of National Defense clearly withholds from the
VFP complete autonomy. To say, however, that such provisions render the
VFP inutile is an exaggeration. An office is not rendered inutile by the fact
that it is placed under the control of a higher office. These subordinate
offices, such as the executive offices under the control of the President,
exercise discretion at the first instance. While their acts can be altered or
even set aside by the superior, these acts are effective and are deemed the
acts of the superior until they are modified. Surely, we cannot say that the
offices of all the Department Secretaries are worthless positions.
In sum, the assailed DND Department Circular No. 04 does not supplant nor
modify and is, on the contrary, perfectly in consonance with Rep. Act No.
2640. Petitioner VFP is a public corporation. As such, it can be placed under
the control and supervision of the Secretary of National Defense, who
consequently has the power to conduct an extensive management audit of
petitioner corporation.
WHEREFORE, the Petition is hereby DISMISSED for lack of merit. The validity
of the Department of National Defense Department Circular No. 04 is
AFFIRMED.
SO ORDERED.

107

Liban v. Gordon, 593 S 68 (2009)

DANTE V. LIBAN, REYNALDO M.
BERNARDO and SALVADOR M.
VIARI,

G. R. No. 175352

Petitioners,

Present:

CORONA, C.J.,
CARPIO,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,
LEONARDO-DE CASTRO,

- versus -

BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
RICHARD J. GORDON,

PEREZ,

Respondent.

MENDOZA, and
SERENO, JJ.

PHILIPPINE
CROSS,

NATIONAL

RED

108

Promulgated:

Intervenor.

January 18, 2011

x-------------------------------------------------x

RESOLUTION

LEONARDO-DE CASTRO, J.:

109

This
resolves
the Motion
for
Clarification
and/or
for
Reconsideration[1] filed on August 10, 2009 by respondent Richard J.
Gordon (respondent) of the Decision promulgated by this Court on July 15,
2009 (the Decision), the Motion for Partial Reconsideration[2] filed
on August 27, 2009 by movant-intervenor Philippine National Red Cross
(PNRC), and the latters Manifestation and Motion to Admit Attached
Position Paper[3] filed on December 23, 2009.

In the Decision,[4] the Court held that respondent did not forfeit
his seat in the Senate when he accepted the chairmanship of the PNRC
Board of Governors, as the office of the PNRC Chairman is not a government
office or an office in a government-owned or controlled corporation for
purposes of the prohibition in Section 13, Article VI of the 1987 Constitution.
[5]
The Decision, however, further declared void the PNRC Charter insofar as
it creates the PNRC as a private corporation and consequently ruled that the
PNRC should incorporate under the Corporation Code and register with the
Securities and Exchange Commission if it wants to be a private corporation.
[6]
The dispositive portion of the Decision reads as follows:

WHEREFORE, we declare that the office of the Chairman

of the Philippine National Red Cross is not a government office or
an office in a government-owned or controlled corporation for
purposes of the prohibition in Section 13, Article VI of the 1987
Constitution. We also declare that Sections 1, 2, 3, 4(a), 5, 6, 7,
8, 9, 10, 11, 12, and 13 of the Charter of the Philippine National
Red Cross, or Republic Act No. 95, as amended by Presidential
Decree Nos. 1264 and 1643, are VOID because they create the
PNRC as a private corporation or grant it corporate powers.[7]
In his Motion for Clarification and/or for Reconsideration, respondent
raises the following grounds: (1) as the issue of constitutionality of Republic
Act (R.A.) No. 95 was not raised by the parties, the Court went beyond the
case in deciding such issue; and (2) as the Court decided that Petitioners did

110

not have standing to file the instant Petition, the pronouncement of the
Court on the validity of R.A. No. 95 should be considered obiter.[8]

Respondent argues that the validity of R.A. No. 95 was a non-issue;

therefore, it was unnecessary for the Court to decide on that question.
Respondent cites Laurel v. Garcia,[9] wherein the Court said that it will not
pass upon a constitutional question although properly presented by the
record if the case can be disposed of on some other ground and goes on to
claim that since this Court, in the Decision, disposed of the petition on some
other ground, i.e., lack of standing of petitioners, there was no need for it to
delve into the validity of R.A. No. 95, and the rest of the judgment should be
deemed obiter.

In its Motion for Partial Reconsideration, PNRC prays that the

Court sustain the constitutionality of its Charter on the following grounds:

A.

B.

THE
ASSAILED
DECISION
DECLARING
UNCONSTITUTIONAL REPUBLIC ACT NO. 95 AS AMENDED
DEPRIVED INTERVENOR PNRC OF ITS CONSTITUTIONAL
RIGHT TO DUE PROCESS.

1.

INTERVENOR PNRC WAS NEVER A PARTY TO THE

INSTANT CONTROVERSY.

2.

THE CONSTITUTIONALITY OF REPUBLIC ACT NO. 95,

AS AMENDED WAS NEVER AN ISSUE IN THIS CASE.

THE CURRENT CHARTER OF PNRC IS PRESIDENTIAL

DECREE NO. 1264 AND NOT REPUBLIC ACT NO. 95.

111

PRESIDENTIAL DECREE NO. 1264 WAS NOT A CREATION OF

CONGRESS.

C.

PNRCS STRUCTURE IS SUI GENERIS; IT IS A CLASS OF

ITS OWN. WHILE IT IS PERFORMING HUMANITARIAN
FUNCTIONS AS AN AUXILIARY TO GOVERNMENT, IT IS A
NEUTRAL ENTITY SEPARATE AND INDEPENDENT OF
GOVERNMENT CONTROL, YET IT DOES NOT QUALIFY AS
STRICTLY PRIVATE IN CHARACTER.

In his Comment and Manifestation[10] filed on November 9, 2009,

respondent manifests: (1) that he agrees with the position taken by the
PNRC in its Motion for Partial Reconsideration dated August 27, 2009; and
(2) as of the writing of said Comment and Manifestation, there was pending
before the Congress of the Philippines a proposed bill entitled An Act
Recognizing the PNRC as an Independent, Autonomous, Non-Governmental
Organization Auxiliary to the Authorities of the Republic of the Philippines in
the Humanitarian Field, to be Known as The Philippine Red Cross. [11]

After a thorough study of the arguments and points raised by the respondent
as well as those of movant-intervenor in their respective motions, we have
reconsidered our pronouncements in our Decision dated July 15, 2009 with
regard to the nature of the PNRC and the constitutionality of some provisions
of the PNRC Charter, R.A. No. 95, as amended.

As correctly pointed out in respondents Motion, the issue of constitutionality

of R.A. No. 95 was not raised by the parties, and was not among the issues
defined in the body of the Decision; thus, it was not the very lis mota of the
case. We have reiterated the rule as to when the Court will consider the
issue of constitutionality in Alvarez v. PICOP Resources, Inc.,[12] thus:
112

This Court will not touch the issue of unconstitutionality

unless it is the very lis mota. It is a well-established rule
that a court should not pass upon a constitutional
question and decide a law to be unconstitutional or
invalid, unless such question is raised by the parties and
that when it is raised, if the record also presents some other
ground upon which the court may [rest] its judgment, that
course will be adopted and the constitutional question will be left
for consideration until such question will be unavoidable. [13]

Under the rule quoted above, therefore, this Court should not have
declared void certain sections of R.A. No. 95, as amended by Presidential
Decree (P.D.) Nos. 1264 and 1643, the PNRC Charter. Instead, the Court
should have exercised judicial restraint on this matter, especially since there
was some other ground upon which the Court could have based its
judgment. Furthermore, the PNRC, the entity most adversely affected by this
declaration of unconstitutionality, which was not even originally a party to
this case, was being compelled, as a consequence of the Decision, to
suddenly reorganize and incorporate under the Corporation Code, after
more than sixty (60) years of existence in this country.

Its existence as a chartered corporation remained unchallenged on ground of

unconstitutionality notwithstanding that R.A. No. 95 was enacted on March
22, 1947 during the effectivity of the 1935 Constitution, which provided for a
proscription against the creation of private corporations by special law, to
wit:

SEC. 7. The Congress shall not, except by general law,

provide for the formation, organization, or regulation of private
113

corporations, unless such corporations are owned and controlled

by the Government or any subdivision or instrumentality thereof.
(Art. XIV, 1935 Constitution.)

Similar provisions are found in Article XIV, Section 4 of the 1973 Constitution
and Article XII, Section 16 of the 1987 Constitution. The latter reads:

SECTION 16. The Congress shall not, except by general

law, provide for the formation, organization, or regulation of
private
corporations.
Government-owned
or
controlled
corporations may be created or established by special charters in
the interest of the common good and subject to the test of
economic viability.

Since its enactment, the PNRC Charter was amended several times,
particularly on June 11, 1953, August 16, 1971, December 15, 1977, and
October 1, 1979, by virtue of R.A. No. 855, R.A. No. 6373, P.D. No. 1264,
and P.D. No. 1643, respectively.The passage of several laws relating to the
PNRCs corporate existence notwithstanding the effectivity of the
constitutional proscription on the creation of private corporations by law, is a
recognition that the PNRC is not strictly in the nature of a private corporation
contemplated by the aforesaid constitutional ban.

A closer look at the nature of the PNRC would show that there is none
like it not just in terms of structure, but also in terms of history, public
service and official status accorded to it by the State and the international
community. There is merit in PNRCs contention that its structure is sui
generis.
114

The PNRC succeeded the chapter of the American Red Cross which was
in existence in the Philippines since 1917. It was created by an Act of
Congress after the Republic of the Philippines became an independent nation
on July 6, 1946 and proclaimed on February 14, 1947 its adherence to the
Convention of Geneva of July 29, 1929 for the Amelioration of the Condition
of the Wounded and Sick of Armies in the Field (the Geneva Red Cross
Convention). By that action the Philippines indicated its desire to participate
with the nations of the world in mitigating the suffering caused by war and
to establish in the Philippines a voluntary organization for that purpose and
like other volunteer organizations established in other countries which have
ratified the Geneva Conventions, to promote the health and welfare of the
people in peace and in war.[14]

The provisions of R.A. No. 95, as amended by R.A. Nos. 855 and 6373,
and further amended by P.D. Nos. 1264 and 1643, show the historical
background and legal basis of the creation of the PNRC by legislative fiat, as
a voluntary organization impressed with public interest. Pertinently R.A. No.
95, as amended by P.D. 1264, provides:

WHEREAS, during the meeting in Geneva, Switzerland, on

22 August 1894, the nations of the world unanimously agreed to
diminish within their power the evils inherent in war;

WHEREAS, more than one hundred forty nations of the

world have ratified or adhered to the Geneva Conventions of
August 12, 1949 for the Amelioration of the Condition of the
Wounded and Sick of Armed Forces in the Field and at Sea, The
Prisoners of War, and The Civilian Population in Time of War
referred to in this Charter as the Geneva Conventions;

115

WHEREAS, the Republic of the Philippines became an

independent nation on July 4, 1946, and proclaimed on
February 14, 1947 its adherence to the Geneva
Conventions of 1929, and by the action, indicated its
desire to participate with the nations of the world in
mitigating the suffering caused by war and to establish in
the Philippines a voluntary organization for that purpose
as contemplated by the Geneva Conventions;

WHEREAS, there existed in the Philippines since 1917 a

chapter of the American National Red Cross which was
terminated in view of the independence of the Philippines; and

WHEREAS, the volunteer organizations established in other

countries which have ratified or adhered to the Geneva
Conventions assist in promoting the health and welfare of
their people in peace and in war, and through their mutual
assistance and cooperation directly and through their
international organizations promote better understanding and
sympathy among the people of the world;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of

the Philippines, by virtue of the powers vested in me by the
Constitution as Commander-in-Chief of all the Armed Forces of
the Philippines and pursuant to Proclamation No. 1081 dated
September 21, 1972, and General Order No. 1 dated September
22, 1972, do hereby decree and order that Republic Act No. 95,
Charter of the Philippine National Red Cross (PNRC) as amended
by Republic Acts No. 855 and 6373, be further amended as
follows:

116

Section 1. There is hereby created in the Republic of

the Philippines a body corporate and politic to be the
voluntary organization officially designated to assist the
Republic of the Philippines in discharging the obligations
set forth in the Geneva Conventions and to perform such
other duties as are inherent upon a national Red Cross
Society. The national headquarters of this Corporation
shall be located in Metropolitan Manila. (Emphasis supplied.)

The significant public service rendered by the PNRC can be gleaned

from Section 3 of its Charter, which provides:

Section 3. That the purposes of this Corporation shall be

as follows:

(a) To provide volunteer aid to the sick and wounded of

armed forces in time of war, in accordance with the spirit of and
under the conditions prescribed by the Geneva Conventions to
which the Republic of the Philippines proclaimed its adherence;

(b) For the purposes mentioned in the preceding subsection, to perform all duties devolving upon the Corporation as
a result of the adherence of the Republic of the Philippines to the
said Convention;

(c) To act in matters of voluntary relief and in accordance

with the authorities of the armed forces as a medium of
communication between people of the Republic of the Philippines
117

and their Armed Forces, in time of peace and in time of war, and
to act in such matters between similar national societies of other
governments and the Governments and people and the Armed
Forces of the Republic of the Philippines;

(d) To establish and maintain a system of national and

international relief in time of peace and in time of war and apply
the same in meeting and emergency needs caused by typhoons,
flood, fires, earthquakes, and other natural disasters and to
devise and carry on measures for minimizing the suffering
caused by such disasters;

(e) To devise and promote such other services in time of

peace and in time of war as may be found desirable in improving
the health, safety and welfare of the Filipino people;

(f) To devise such means as to make every citizen and/or

resident of the Philippines a member of the Red Cross.

The PNRC is one of the National Red Cross and Red Crescent Societies,
which, together with the International Committee of the Red Cross (ICRC)
and the IFRC and RCS, make up the International Red Cross and Red
Crescent Movement (the Movement). They constitute a worldwide
humanitarian movement, whose mission is:

[T]o prevent and alleviate human suffering wherever it may be

found, to protect life and health and ensure respect for the
human being, in particular in times of armed conflict and other
emergencies, to work for the prevention of disease and for the
118

promotion of health and social welfare, to encourage voluntary

service and a constant readiness to give help by the members of
the Movement, and a universal sense of solidarity towards all
those in need of its protection and assistance.[15]

The PNRC works closely with the ICRC and has been involved in
humanitarian activities in the Philippines since 1982. Among others, these
activities in the country include:

1.

Giving protection and assistance to civilians displaced or

otherwise affected by armed clashes between the government and
armed opposition groups, primarily in Mindanao;

2.

Working to minimize the effects of armed hostilities and violence

on the population;

3.
4.

Visiting detainees; and

Promoting awareness of international humanitarian law in the
public and private sectors.[16]

National Societies such as the PNRC act as auxiliaries to the public

authorities of their own countries in the humanitarian field and provide a
range of services including disaster relief and health and social programmes.

The International Federation of Red Cross (IFRC) and Red Crescent

Societies (RCS) Position Paper,[17] submitted by the PNRC, is instructive with
regard to the elements of the specific nature of the National Societies such
as the PNRC, to wit:
119

National Societies, such as the Philippine National Red

Cross and its sister Red Cross and Red Crescent Societies, have
certain specificities deriving from the 1949 Geneva Convention
and the Statutes of the International Red Cross and Red
Crescent Movement (the Movement). They are also guided by
the seven Fundamental Principles of the Red Cross and Red
Crescent Movement: Humanity, Impartiality, Neutrality,
Independence, Voluntary Service, Unity and Universality.

A
National
Society
partakes
of
a sui
generis character. It is a protected component of the Red
Cross movement under Articles 24 and 26 of the First Geneva
Convention, especially in times of armed conflict. These
provisions require that the staff of a National Society shall be
respected and protected in all circumstances. Such protection is
not ordinarily afforded by an international treaty to ordinary
private entities or even non-governmental organisations
(NGOs). This sui generis character is also emphasized by the
Fourth Geneva Convention which holds that an Occupying Power
cannot require any change in the personnel or structure of
a National
Society. National
societies
are
therefore
organizations that are directly regulated by international
humanitarian law, in contrast to other ordinary private
entities, including NGOs.

xxxx

In addition, National Societies are not only officially

recognized by their public authorities as voluntary aid societies,
auxiliary to the public authorities in the humanitarian field, but
also benefit from recognition at the International level. This is
120

considered to be an element distinguishing National Societies

from other organisations (mainly NGOs) and other forms of
humanitarian response.

x x x. No other organisation belongs to a world-wide

Movement in which all Societies have equal status and share
equal responsibilities and duties in helping each other. This is
considered to be the essence of the Fundamental Principle of
Universality.

Furthermore, the National Societies are considered to

be auxiliaries to the public authorities in the humanitarian field.
x x x.

The auxiliary status of [a] Red Cross Society means that

it is at one and the same time a private institution and a
public service organization because the very nature of its
work implies cooperation with the authorities, a link with
the State. In carrying out their major functions, Red Cross
Societies give their humanitarian support to official bodies, in
general having larger resources than the Societies, working
towards comparable ends in a given sector.

x x x No other organization has a duty to be its

governments humanitarian partner while remaining
independent.[18] (Emphases ours.)

121

It is in recognition of this sui generis character of the PNRC that R.A. No. 95
has remained valid and effective from the time of its enactment in March 22,
1947 under the 1935 Constitution and during the effectivity of the 1973
Constitution and the 1987 Constitution.

The PNRC Charter and its amendatory laws have not been questioned
or challenged on constitutional grounds, not even in this case before the
Court now.

In the Decision, the Court, citing Feliciano v. Commission on Audit,

[19]
explained that the purpose of the constitutional provision prohibiting
Congress from creating private corporations was to prevent the granting of
special privileges to certain individuals, families, or groups, which were
denied to other groups. Based on the above discussion, it can be seen that
the PNRC Charter does not come within the spirit of this constitutional
provision, as it does not grant special privileges to a particular individual,
family, or group, but creates an entity that strives to serve the common
good.

Furthermore, a strict and mechanical interpretation of Article XII, Section 16

of the 1987 Constitution will hinder the State in adopting measures that will
serve the public good or national interest. It should be noted that a special
law, R.A. No. 9520, the Philippine Cooperative Code of 2008, and not the
general corporation code, vests corporate power and capacities upon
cooperatives which are private corporations, in order to implement the
States avowed policy.

122

In the Decision of July 15, 2009, the Court recognized the public
service rendered by the PNRC as the governments partner in the observance
of its international commitments, to wit:

The PNRC is a non-profit, donor-funded, voluntary, humanitarian

organization, whose mission is to bring timely, effective, and
compassionate humanitarian assistance for the most vulnerable
without consideration of nationality, race, religion, gender, social
status, or political affiliation. The PNRC provides six major
services: Blood Services, Disaster Management, Safety Services,
Community Health and Nursing, Social Services and Voluntary
Service.

The Republic of the Philippines, adhering to the Geneva

Conventions, established the PNRC as a voluntary organization
for the purpose contemplated in the Geneva Convention of 27
July 1929. x x x.[20] (Citations omitted.)

So must this Court recognize too the countrys adherence to the

Geneva Convention and respect the unique status of the PNRC in
consonance with its treaty obligations. The Geneva Convention has the
force and effect of law.[21] Under the Constitution, the Philippines adopts the
generally accepted principles of international law as part of the law of the
land.[22] This constitutional provision must be reconciled and harmonized
with Article XII, Section 16 of the Constitution, instead of using the latter to
negate the former.

By requiring the PNRC to organize under the Corporation Code just like
any other private corporation, the Decision of July 15, 2009 lost sight of the
123

PNRCs special status under international humanitarian law and as an

auxiliary of the State, designated to assist it in discharging its obligations
under the Geneva Conventions. Although the PNRC is called to be
independent under its Fundamental Principles, it interprets such
independence as inclusive of its duty to be the governments humanitarian
partner. To be recognized in the International Committee, the PNRC must
have an autonomous status, and carry out its humanitarian mission in a
neutral and impartial manner.

However, in accordance with the Fundamental Principle of Voluntary

Service of National Societies of the Movement, the PNRC must be
distinguished from private and profit-making entities. It is the main
characteristic of National Societies that they are not inspired by the desire
for financial gain but by individual commitment and devotion to a
humanitarian purpose freely chosen or accepted as part of the service that
National Societies through its volunteers and/or members render to the
Community.[23]

The PNRC, as a National Society of the International Red Cross and

Red Crescent Movement, can neither be classified as an instrumentality of
the State, so as not to lose its character of neutrality as well as its
independence, nor strictly as a private corporation since it is regulated by
international humanitarian law and is treated as an auxiliary of the State.[24]

Based on the above, the sui generis status of the PNRC is now
sufficiently established. Although it is neither a subdivision, agency, or
instrumentality of the government, nor a government-owned or -controlled
corporation or a subsidiary thereof, as succinctly explained in the Decision of
July 15, 2009, so much so that respondent, under the Decision, was
correctly allowed to hold his position as Chairman thereof concurrently while
he served as a Senator, such a conclusion does not ipso facto imply that the
124

PNRC is a private corporation within the contemplation of the provision of

the Constitution, that must be organized under the Corporation Code. As
correctly mentioned by Justice Roberto A. Abad, the sui generis character of
PNRC requires us to approach controversies involving the PNRC on a caseto-case basis.

In sum, the PNRC enjoys a special status as an important ally and

auxiliary of the government in the humanitarian field in accordance with its
commitments under international law. This Court cannot all of a sudden
refuse to recognize its existence, especially since the issue of the
constitutionality of the PNRC Charter was never raised by the parties. It
bears emphasizing that the PNRC has responded to almost all national
disasters since 1947, and is widely known to provide a substantial portion of
the countrys blood requirements. Its humanitarian work is unparalleled. The
Court should not shake its existence to the core in an untimely and drastic
manner that would not only have negative consequences to those who
depend on it in times of disaster and armed hostilities but also have adverse
effects on the image of the Philippines in the international community. The
sections of the PNRC Charter that were declared void must therefore
stay.

WHEREFORE, premises considered, respondent Richard J.

Gordons Motion for Clarification and/or for Reconsideration and
movant-intervenor
PNRCs Motion
for
Partial
Reconsideration of the Decision in G.R. No. 175352 dated July 15, 2009
are GRANTED. The constitutionality of R.A. No. 95, as amended, the charter
of the Philippine National Red Cross, was not raised by the parties as an
issue and should not have been passed upon by this Court. The structure of
the PNRC is sui generis being neither strictly private nor public in
nature. R.A. No. 95 remains valid and constitutional in its entirety. The
dispositive portion of the Decision should therefore be MODIFIED by
deleting the second sentence, to now read as follows:
125

WHEREFORE, we declare that the office of the Chairman

of the Philippine National Red Cross is not a government office or
an office in a government-owned or controlled corporation for
purposes of the prohibition in Section 13, Article VI of the 1987
Constitution.

SO ORDERED.

Smith Bell & Co. v. Natividad, 40 Phil. 136 (1920)

G.R. No. 15574
September 17, 1919
SMITH,
BELL
vs.
JOAQUIN NATIVIDAD,
Cebu, respondent.

&

COMPANY

Collector

of

Ross
and
Lawrence
Attorney-General Paredes for respondent.

(LTD.), petitioner,

Customs

for

of

the

port

of

petitioner.

MALCOLM, J.:
A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.), against
Joaquin Natividad, Collector of Customs of the port of Cebu, Philippine
Islands, to compel him to issue a certificate of Philippine registry to the
petitioner for its motor vessel Bato. The Attorney-General, acting as counsel
for respondent, demurs to the petition on the general ground that it does not
state facts sufficient to constitute a cause of action. While the facts are thus
admitted, and while, moreover, the pertinent provisions of law are clear and
understandable, and interpretative American jurisprudence is found in
abundance, yet the issue submitted is not lightly to be resolved. The
question, flatly presented, is, whether Act. No. 2761 of the Philippine
Legislature is valid or, more directly stated, whether the Government of
126

the Philippine Islands, through its Legislature, can deny the registry of
vessels in its coastwise trade to corporations having alien stockholders.
FACTS.
Smith, Bell & Co., (Ltd.), is a corporation organized and existing under the
laws of the Philippine Islands. A majority of its stockholders are British
subjects. It is the owner of a motor vessel known as the Bato built for it in
the Philippine Islands in 1916, of more than fifteen tons gross The Bato was
brought to Cebu in the present year for the purpose of transporting plaintiff's
merchandise between ports in the Islands. Application was made at Cebu,
the home port of the vessel, to the Collector of Customs for a certificate of
Philippine registry. The Collector refused to issue the certificate, giving as his
reason that all the stockholders of Smith, Bell & Co., Ltd., were not citizens
either of the United States or of the Philippine Islands. The instant action is
the result.
LAW.
The Act of Congress of April 29, 1908, repealing the Shipping Act of April 30,
1906 but reenacting a portion of section 3 of this Law, and still in force,
provides in its section 1:
That until Congress shall have authorized the registry as vessels of the
United States of vessels owned in the Philippine Islands, the
Government of the Philippine Islands is hereby authorized to adopt,
from time to time, and enforce regulations governing the
transportation of merchandise and passengers between ports or places
in the Philippine Archipelago. (35 Stat. at L., 70; Section 3912, U. S.
Comp Stat. [1916]; 7 Pub. Laws, 364.)
The Act of Congress of August 29, 1916, commonly known as the Jones Law,
still in force, provides in section 3, (first paragraph, first sentence), 6, 7, 8,
10, and 31, as follows.
SEC. 3. That no law shall be enacted in said Islands which shall
deprive any person of life, liberty, or property without due process of
law, or deny to any person therein the equal protection of the
laws. . . .
127

SEC. 6. That the laws now in force in the Philippines shall continue in
force and effect, except as altered, amended, or modified herein, until
altered, amended, or repealed by the legislative authority herein
provided or by Act of Congress of the United States.
SEC. 7. That the legislative authority herein provided shall have power,
when not inconsistent with this Act, by due enactment to amend, alter
modify, or repeal any law, civil or criminal, continued in force by this
Act as it may from time to time see fit
This power shall specifically extend with the limitation herein provided
as to the tariff to all laws relating to revenue provided as to the tariff
to all laws relating to revenue and taxation in effect in the Philippines.
SEC. 8. That general legislative power, except as otherwise herein
provided, is hereby granted to the Philippine Legislature, authorized by
this Act.
SEC. 10. That while this Act provides that the Philippine government
shall have the authority to enact a tariff law the trade relations
between the islands and the United States shall continue to be
governed exclusively by laws of the Congress of the United
States: Provided, That tariff acts or acts amendatory to the tariff of the
Philippine Islands shall not become law until they shall receive the
approval of the President of the United States, nor shall any act of the
Philippine Legislature affecting immigration or the currency or coinage
laws of the Philippines become a law until it has been approved by the
President of the United States: Provided further, That the President
shall approve or disapprove any act mentioned in the foregoing proviso
within six months from and after its enactment and submission for his
approval, and if not disapproved within such time it shall become a law
the same as if it had been specifically approved.
SEC. 31. That all laws or parts of laws applicable to the Philippines not
in conflict with any of the provisions of this Act are hereby continued in
force and effect." (39 Stat at L., 546.)

128

On February 23, 1918, the Philippine Legislature enacted Act No. 2761. The
first section of this law amended section 1172 of the Administrative Code to
read as follows:
SEC. 1172. Certificate of Philippine register. Upon registration of a
vessel of domestic ownership, and of more than fifteen tons gross, a
certificate of Philippine register shall be issued for it. If the vessel is of
domestic ownership and of fifteen tons gross or less, the taking of the
certificate of Philippine register shall be optional with the owner.
"Domestic ownership," as used in this section, means ownership
vested in some one or more of the following classes of persons: (a)
Citizens or native inhabitants of the Philippine Islands; (b) citizens of
the United States residing in the Philippine Islands; (c) any corporation
or company composed wholly of citizens of the Philippine Islands or of
the United States or of both, created under the laws of the United
States, or of any State thereof, or of thereof, or the managing agent or
master of the vessel resides in the Philippine Islands
Any vessel of more than fifteen gross tons which on February eighth,
nineteen hundred and eighteen, had a certificate of Philippine register
under existing law, shall likewise be deemed a vessel of domestic
ownership so long as there shall not be any change in the ownership
thereof nor any transfer of stock of the companies or corporations
owning such vessel to person not included under the last preceding
paragraph.
Sections 2 and 3 of Act No. 2761 amended sections 1176 and 1202 of the
Administrative Code to read as follows:
SEC. 1176. Investigation into character of vessel. No application for
a certificate of Philippine register shall be approved until the collector
of customs is satisfied from an inspection of the vessel that it is
engaged or destined to be engaged in legitimate trade and that it is of
domestic ownership as such ownership is defined in section eleven
hundred and seventy-two of this Code.
The collector of customs may at any time inspect a vessel or examine
its owner, master, crew, or passengers in order to ascertain whether
129

the vessel is engaged in legitimate trade and is entitled to have or

retain the certificate of Philippine register.
SEC. 1202. Limiting number of foreign officers and engineers on board
vessels. No Philippine vessel operating in the coastwise trade or on
the high seas shall be permitted to have on board more than one
master or one mate and one engineer who are not citizens of the
United States or of the Philippine Islands, even if they hold licenses
under section one thousand one hundred and ninety-nine hereof. No
other person who is not a citizen of the United States or of the
Philippine Islands shall be an officer or a member of the crew of such
vessel. Any such vessel which fails to comply with the terms of this
section shall be required to pay an additional tonnage tax of fifty
centavos per net ton per month during the continuance of said failure.
ISSUES.
Predicated on these facts and provisions of law, the issues as above stated
recur, namely, whether Act No 2761 of the Philippine Legislature is valid in
whole or in part whether the Government of the Philippine Islands,
through its Legislature, can deny the registry of vessel in its coastwise trade
to corporations having alien stockholders .
OPINION.
1. Considered from a positive standpoint, there can exist no measure of
doubt as to the power of the Philippine Legislature to enact Act No. 2761.
The Act of Congress of April 29, 1908, with its specific delegation of
authority to the Government of the Philippine Islands to regulate the
transportation of merchandise and passengers between ports or places
therein, the liberal construction given to the provisions of the Philippine Bill,
the Act of Congress of July 1, 1902, by the courts, and the grant by the Act
of Congress of August 29, 1916, of general legislative power to the Philippine
Legislature, are certainly superabundant authority for such a law. While the
Act of the local legislature may in a way be inconsistent with the Act of
Congress regulating the coasting trade of the Continental United States, yet
the general rule that only such laws of the United States have force in the
Philippines as are expressly extended thereto, and the abnegation of power
by Congress in favor of the Philippine Islands would leave no starting point
130

for convincing argument. As a matter of fact, counsel for petitioner does not
assail legislative action from this direction (See U. S. vs. Bull [1910], 15
Phil., 7; Sinnot vs. Davenport [1859] 22 How., 227.)
2. It is from the negative, prohibitory standpoint that counsel argues against
the constitutionality of Act No. 2761. The first paragraph of the Philippine Bill
of Rights of the Philippine Bill, repeated again in the first paragraph of the
Philippine Bill of Rights as set forth in the Jones Law, provides "That no law
shall be enacted in said Islands which shall deprive any person of life, liberty,
or property without due process of law, or deny to any person therein the
equal protection of the laws." Counsel says that Act No. 2761 denies to
Smith, Bell & Co., Ltd., the equal protection of the laws because it, in effect,
prohibits the corporation from owning vessels, and because classification of
corporations based on the citizenship of one or more of their stockholders is
capricious, and that Act No. 2761 deprives the corporation of its properly
without due process of law because by the passage of the law company was
automatically deprived of every beneficial attribute of ownership in
the Bato and left with the naked title to a boat it could not use .
The guaranties extended by the Congress of the United States to the
Philippine Islands have been used in the same sense as like provisions found
in the United States Constitution. While the "due process of law and equal
protection of the laws" clause of the Philippine Bill of Rights is couched in
slightly different words than the corresponding clause of the Fourteenth
Amendment to the United States Constitution, the first should be interpreted
and given the same force and effect as the latter. (Kepner vs. U.S. [1904],
195 U. S., 100; Sierra vs. Mortiga [1907], 204 U. S.,.470; U. S. vs. Bull
[1910], 15 Phil., 7.) The meaning of the Fourteenth Amendment has been
announced in classic decisions of the United States Supreme Court. Even at
the expense of restating what is so well known, these basic principles must
again be set down in order to serve as the basis of this decision.
The guaranties of the Fourteenth Amendment and so of the first paragraph
of the Philippine Bill of Rights, are universal in their application to all person
within the territorial jurisdiction, without regard to any differences of race,
color, or nationality. The word "person" includes aliens. (Yick Wo vs. Hopkins
[1886], 118 U. S., 356; Truax vs. Raich [1915], 239 U. S., 33.) Private
corporations, likewise, are "persons" within the scope of the guaranties in so
far as their property is concerned. (Santa Clara County vs. Southern Pac. R.
131

R. Co. [1886], 118.U. S., 394; Pembina Mining Co. vs. Pennsylvania
[1888],.125 U. S., 181 Covington & L. Turnpike Road Co. vs. Sandford
[1896], 164 U. S., 578.) Classification with the end in view of providing
diversity of treatment may be made among corporations, but must be based
upon some reasonable ground and not be a mere arbitrary selection (Gulf,
Colorado & Santa Fe Railway Co. vs. Ellis [1897],.165 U. S., 150.) Examples
of laws held unconstitutional because of unlawful discrimination against
aliens could be cited. Generally, these decisions relate to statutes which had
attempted arbitrarily to forbid aliens to engage in ordinary kinds of business
to earn their living. (State vs. Montgomery [1900], 94 Maine, 192, peddling
but see. Commonwealth vs. Hana [1907],
195 Mass., 262;
Templar vs. Board of Examiners of Barbers [1902], 131 Mich., 254, barbers;
Yick Wo vs. Hopkins [1886], 118 U. S.,.356, discrimination against Chinese;
Truax vs. Raich [1915], 239 U. S., 33; In re Parrott [1880], 1 Fed , 481;
Fraser vs. McConway & Torley Co. [1897], 82 Fed , 257; Juniata Limestone
Co. vs. Fagley [1898], 187 Penn., 193, all relating to the employment of
aliens by private corporations.)
A literal application of general principles to the facts before us would, of
course, cause the inevitable deduction that Act No. 2761 is unconstitutional
by reason of its denial to a corporation, some of whole members are
foreigners, of the equal protection of the laws. Like all beneficient
propositions, deeper research discloses provisos. Examples of a denial of
rights to aliens notwithstanding the provisions of the Fourteenth Amendment
could be cited. (Tragesser vs. Gray [1890], 73 Md., 250, licenses to sell
spirituous liquors denied to persons not citizens of the United States;
Commonwealth vs. Hana [1907], 195 Mass , 262, excluding aliens from the
right to peddle; Patsone vs. Commonwealth of Pennsylvania [1914], 232 U.
S. , 138, prohibiting the killing of any wild bird or animal by any
unnaturalized foreign-born resident; Ex parte Gilleti [1915], 70 Fla., 442,
discriminating in favor of citizens with reference to the taking for private use
of the common property in fish and oysters found in the public waters of the
State; Heim vs. McCall [1915], 239 U. S.,.175, and Crane vs. New York
[1915], 239 U. S., 195, limiting employment on public works by, or for, the
State or a municipality to citizens of the United States.)
One of the exceptions to the general rule, most persistent and far reaching
in influence is, that neither the Fourteenth Amendment to the United States
Constitution, broad and comprehensive as it is, nor any other amendment,
132

"was designed to interfere with the power of the State, sometimes termed
its `police power,' to prescribe regulations to promote the health, peace,
morals, education, and good order of the people, and legislate so as to
increase the industries of the State, develop its resources and add to its
wealth and prosperity. From the very necessities of society, legislation of a
special character, having these objects in view, must often be had in certain
districts." (Barbier vs. Connolly [1884], 113 U.S., 27; New Orleans Gas
Co. vs. Lousiana Light Co. [1885], 115 U.S., 650.) This is the same police
power which the United States Supreme Court say "extends to so dealing
with the conditions which exist in the state as to bring out of them the
greatest welfare in of its people." (Bacon vs. Walker [1907], 204 U.S., 311.)
For quite similar reasons, none of the provision of the Philippine Organic Law
could could have had the effect of denying to the Government of the
Philippine Islands, acting through its Legislature, the right to exercise that
most essential, insistent, and illimitable of powers, the sovereign police
power, in the promotion of the general welfare and the public interest. (U.
S. vs. Toribio [1910], 15 Phil., 85; Churchill and Tait vs. Rafferty [1915], 32
Phil., 580; Rubi vs. Provincial Board of Mindoro [1919], 39 Phil., 660.)
Another notable exception permits of the regulation or distribution of the
public domain or the common property or resources of the people of the
State, so that use may be limited to its citizens. (Ex parte Gilleti [1915], 70
Fla.,
442;
McCready vs. Virginia
[1876],
94
U.
S.,
391;
Patsone vs. Commonwealth of Pennsylvania [1914], 232U. S., 138.) Still
another exception permits of the limitation of employment in the
construction of public works by, or for, the State or a municipality to citizens
of the United States or of the State. (Atkin vs. Kansas [1903],191 U. S.,
207; Heim vs. McCall [1915], 239 U.S., 175; Crane vs. New York [1915],
239 U. S., 195.) Even as to classification, it is admitted that a State may
classify with reference to the evil to be prevented; the question is a practical
one,
dependent
upon
experience.
(Patsone vs. Commonwealth
of
Pennsylvania [1914], 232 U. S., 138.)
To justify that portion of Act no. 2761 which permits corporations or
companies to obtain a certificate of Philippine registry only on condition that
they be composed wholly of citizens of the Philippine Islands or of the United
States or both, as not infringing Philippine Organic Law, it must be done
under some one of the exceptions here mentioned This must be done,

133

moreover, having particularly in mind what is so often of controlling effect in

this jurisdiction our local experience and our peculiar local conditions.
To recall a few facts in geography, within the confines of Philippine
jurisdictional limits are found more than three thousand islands. Literally,
and absolutely, steamship lines are, for an Insular territory thus situated, the
arteries of commerce. If one be severed, the life-blood of the nation is lost.
If on the other hand these arteries are protected, then the security of the
country and the promotion of the general welfare is sustained. Time and
again, with such conditions confronting it, has the executive branch of the
Government of the Philippine Islands, always later with the sanction of the
judicial branch, taken a firm stand with reference to the presence of
undesirable foreigners. The Government has thus assumed to act for the allsufficient and primitive reason of the benefit and protection of its own
citizens and of the self-preservation and integrity of its dominion. (In
re Patterson [1902], 1 Phil., 93; Forbes vs. Chuoco, Tiaco and Crossfield
[1910], 16 Phil., 534;.228 U.S., 549; In re McCulloch Dick [1918], 38 Phil.,
41.) Boats owned by foreigners, particularly by such solid and reputable
firms as the instant claimant, might indeed traverse the waters of the
Philippines for ages without doing any particular harm. Again, some
evilminded foreigner might very easily take advantage of such lavish
hospitality to chart Philippine waters, to obtain valuable information for
unfriendly foreign powers, to stir up insurrection, or to prejudice Filipino or
American commerce. Moreover, under the Spanish portion of Philippine law,
the waters within the domestic jurisdiction are deemed part of the national
domain, open to public use. (Book II, Tit. IV, Ch. I, Civil Code; Spanish Law
of Waters of August 3, 1866, arts 1, 2, 3.) Common carriers which in the
Philippines as in the United States and other countries are, as Lord Hale
said, "affected with a public interest," can only be permitted to use these
public waters as a privilege and under such conditions as to the
representatives of the people may seem wise. (See De Villata vs. Stanley
[1915], 32 Phil., 541.)
In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.S., 138), a
case herein before mentioned, Justice Holmes delivering the opinion of the
United States Supreme Court said:
This statute makes it unlawful for any unnaturalized foreign-born
resident to kill any wild bird or animal except in defense of person or
134

property, and `to that end' makes it unlawful for such foreign-born
person to own or be possessed of a shotgun or rifle; with a penalty of
$25 and a forfeiture of the gun or guns. The plaintiff in error was found
guilty and was sentenced to pay the abovementioned fine. The
judgment was affirmed on successive appeals. (231 Pa., 46; 79 Atl.,
928.) He brings the case to this court on the ground that the statute is
contrary to the 14th Amendment and also is in contravention of the
treaty between the United States and Italy, to which latter country the
plaintiff in error belongs .
Under the 14th Amendment the objection is twofold; unjustifiably
depriving the alien of property, and discrimination against such aliens
as a class. But the former really depends upon the latter, since it
hardly can be disputed that if the lawful object, the protection of wild
life (Geer vs. Connecticut, 161 U.S., 519; 40 L. ed., 793; 16 Sup. Ct.
Rep., 600), warrants the discrimination, the, means adopted for
making it effective also might be adopted. . . .
The discrimination undoubtedly presents a more difficult question. But
we start with reference to the evil to be prevented, and that if the
class discriminated against is or reasonably might be considered to
define those from whom the evil mainly is to be feared, it properly
may be picked out. A lack of abstract symmetry does not matter. The
question is a practical one, dependent upon experience. . . .
The question therefore narrows itself to whether this court can say
that the legislature of Pennsylvania was not warranted in assuming as
its premise for the law that resident unnaturalized aliens were the
peculiar source of the evil that it desired to prevent.
(Barrett vs. Indiana,. 229 U.S., 26, 29; 57 L. ed., 1050, 1052; 33 Sup.
Ct. Rep., 692.)
Obviously the question, so stated, is one of local experience, on which
this court ought to be very slow to declare that the state legislature
was wrong in its facts (Adams vs. Milwaukee, 228 U.S., 572, 583; 57
L. ed., 971,.977; 33 Sup. Ct. Rep., 610.) If we might trust popular
speech in some states it was right; but it is enough that this court has
no such knowledge of local conditions as to be able to say that it was
manifestly wrong. . . .
135

Judgment affirmed.
We are inclined to the view that while Smith, Bell & Co. Ltd., a corporation
having alien stockholders, is entitled to the protection afforded by the dueprocess of law and equal protection of the laws clause of the Philippine Bill of
Rights, nevertheless, Act No. 2761 of the Philippine Legislature, in denying
to corporations such as Smith, Bell &. Co. Ltd., the right to register vessels
in the Philippines coastwise trade, does not belong to that vicious species of
class legislation which must always be condemned, but does fall within
authorized exceptions, notably, within the purview of the police power, and
so does not offend against the constitutional provision.
This opinion might well be brought to a close at this point. It occurs to us,
however, that the legislative history of the United States and the Philippine
Islands, and, probably, the legislative history of other countries, if we were
to take the time to search it out, might disclose similar attempts at
restriction on the right to enter the coastwise trade, and might thus furnish
valuable aid by which to ascertain and, if possible, effectuate legislative
intention.
3. The power to regulate commerce, expressly delegated to the
Congress by the Constitution, includes the power to nationalize ships
built and owned in the United States by registries and enrollments,
and the recording of the muniments of title of American vessels. The
Congress "may encourage or it may entirely prohibit such commerce,
and it may regulate in any way it may see fit between these two
extremes." (U.S. vs. Craig [1886], 28 Fed., 795; Gibbons vs. Ogden
[1824], 9 Wheat., 1; The Passenger Cases [1849], 7 How., 283.)
Acting within the purview of such power, the first Congress of the United
States had not been long convened before it enacted on September 1, 1789,
"An Act for Registering and Clearing Vessels, Regulating the Coasting Trade,
and for other purposes." Section 1 of this law provided that for any ship or
vessel to obtain the benefits of American registry, it must belong wholly to a
citizen or citizens of the United States "and no other." (1 Stat. at L., 55.)
That Act was shortly after repealed, but the same idea was carried into the
Acts of Congress of December 31, 1792 and February 18, 1793. (1 Stat. at
L., 287, 305.).Section 4 of the Act of 1792 provided that in order to obtain
the registry of any vessel, an oath shall be taken and subscribed by the
136

owner, or by one of the owners thereof, before the officer authorized to

make such registry, declaring, "that there is no subject or citizen of any
foreign prince or state, directly or indirectly, by way of trust, confidence, or
otherwise, interested in such vessel, or in the profits or issues thereof."
Section 32 of the Act of 1793 even went so far as to say "that if any licensed
ship or vessel shall be transferred to any person who is not at the time of
such transfer a citizen of and resident within the United States, ... every
such vessel with her tackle, apparel, and furniture, and the cargo found on
board her, shall be forefeited." In case of alienation to a foreigner, Chief
Justice Marshall said that all the privileges of an American bottom were ipso
facto forfeited. (U.S. vs. Willings and Francis [1807], 4 Cranch, 48.) Even as
late as 1873, the Attorney-General of the United States was of the opinion
that under the provisions of the Act of December 31, 1792, no vessel in
which a foreigner is directly or indirectly interested can lawfully be registered
as a vessel of the United. States. (14 Op. Atty.-Gen. [U.S.], 340.)
These laws continued in force without contest, although possibly the Act of
March 3, 1825, may have affected them, until amended by the Act of May
28, 1896 (29 Stat. at L., 188) which extended the privileges of registry from
vessels wholly owned by a citizen or citizens of the United States to
corporations created under the laws of any of the states thereof. The law, as
amended, made possible the deduction that a vessel belonging to a domestic
corporation was entitled to registry or enrollment even though some stock of
the company be owned by aliens. The right of ownership of stock in a
corporation was thereafter distinct from the right to hold the property by the
corporation
(Humphreys vs. McKissock
[1890],
140
U.S.,
304;
Queen vs. Arnaud [1846], 9 Q. B., 806; 29 Op. Atty.-Gen. [U.S.],188.)
On American occupation of the Philippines, the new government found a
substantive law in operation in the Islands with a civil law history which it
wisely continued in force Article fifteen of the Spanish Code of Commerce
permitted any foreigner to engage in Philippine trade if he had legal capacity
to do so under the laws of his nation. When the Philippine Commission came
to enact the Customs Administrative Act (No. 355) in 1902, it returned to
the old American policy of limiting the protection and flag of the United
States to vessels owned by citizens of the United States or by native
inhabitants of the Philippine Islands (Sec. 117.) Two years later, the same
body reverted to the existing Congressional law by permitting certification to
be issued to a citizen of the United States or to a corporation or company
137

created under the laws of the United States or of any state thereof or of the
Philippine Islands (Act No. 1235, sec. 3.) The two administration codes
repeated the same provisions with the necessary amplification of inclusion of
citizens or native inhabitants of the Philippine Islands (Adm. Code of 1916,
sec. 1345; Adm. Code of 1917, sec. 1172). And now Act No. 2761 has
returned to the restrictive idea of the original Customs Administrative Act
which in turn was merely a reflection of the statutory language of the first
American Congress.
Provisions such as those in Act No. 2761, which deny to foreigners the right
to a certificate of Philippine registry, are thus found not to be as radical as a
first reading would make them appear.
Without any subterfuge, the apparent purpose of the Philippine Legislature is
seen to be to enact an anti-alien shipping act. The ultimate purpose of the
Legislature is to encourage Philippine ship-building. This, without doubt, has,
likewise, been the intention of the United States Congress in passing
navigation or tariff laws on different occasions. The object of such a law, the
United States Supreme Court once said, was to encourage American trade,
navigation, and ship-building by giving American ship-owners exclusive
privileges. (Old Dominion Steamship Co. vs. Virginia [1905], 198 U.S., 299;
Kent's Commentaries, Vol. 3, p. 139.)
In the concurring opinion of Justice Johnson in Gibbons vs. Ogden ([1824], 9
Wheat., 1) is found the following:
Licensing acts, in fact, in legislation, are universally restraining acts;
as, for example, acts licensing gaming houses, retailers of spirituous
liquors, etc. The act, in this instance, is distinctly of that character, and
forms part of an extensive system, the object of which is to encourage
American shipping, and place them on an equal footing with the
shipping of other nations. Almost every commercial nation reserves to
its own subjects a monopoly of its coasting trade; and a countervailing
privilege in favor of American shipping is contemplated, in the whole
legislation of the United States on this subject. It is not to give the
vessel an American character, that the license is granted; that effect
has been correctly attributed to the act of her enrollment. But it is to
confer on her American privileges, as contradistinguished from foreign;
and to preserve the. Government from fraud by foreigners, in
138

surreptitiously intruding themselves into the American commercial

marine, as well as frauds upon the revenue in the trade coastwise, that
this whole system is projected.
The United States Congress in assuming its grave responsibility of legislating
wisely for a new country did so imbued with a spirit of Americanism.
Domestic navigation and trade, it decreed, could only be carried on by
citizens of the United States. If the representatives of the American people
acted in this patriotic manner to advance the national policy, and if their
action was accepted without protest in the courts, who can say that they did
not enact such beneficial laws under the all-pervading police power, with the
prime motive of safeguarding the country and of promoting its prosperity?
Quite similarly, the Philippine Legislature made up entirely of Filipinos,
representing the mandate of the Filipino people and the guardian of their
rights, acting under practically autonomous powers, and imbued with a
strong sense of Philippinism, has desired for these Islands safety from
foreign interlopers, the use of the common property exclusively by its
citizens and the citizens of the United States, and protection for the common
good of the people. Who can say, therefore, especially can a court, that with
all the facts and circumstances affecting the Filipino people before it, the
Philippine Legislature has erred in the enactment of Act No. 2761?
Surely, the members of the judiciary are not expected to live apart from
active life, in monastic seclusion amidst dusty tomes and ancient records,
but, as keen spectators of passing events and alive to the dictates of the
general the national welfare, can incline the scales of their decisions in
favor of that solution which will most effectively promote the public policy.
All the presumption is in favor of the constitutionally of the law and without
good and strong reasons, courts should not attempt to nullify the action of
the Legislature. "In construing a statute enacted by the Philippine
Commission (Legislature), we deem it our duty not to give it a construction
which would be repugnant to an Act of Congress, if the language of the
statute is fairly susceptible of another construction not in conflict with the
higher law." (In re Guaria [1913], 24. Phil., 36; U.S. vs. Ten Yu [1912], 24
Phil., 1.) That is the true construction which will best carry legislative
intention into effect.
With full consciousness of the importance of the question, we nevertheless
are clearly of the opinion that the limitation of domestic ownership for
139

purposes of obtaining a certificate of Philippine registry in the coastwise

trade to citizens of the Philippine Islands, and to citizens of the United
States, does not violate the provisions of paragraph 1 of section 3 of the Act
of Congress of August 29, 1916 No treaty right relied upon Act No. 2761 of
the Philippine Legislature is held valid and constitutional .
The petition for a writ of mandamus is denied, with costs against the
petitioner. So ordered.

Bataan Shipyard & engineering v. PCGG 150 S 181 (1987)

G.R. No. 75885 May 27, 1987
BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner,
vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN
JOVITO SALONGA, COMMISSIONER MARY CONCEPCION BAUTISTA,
COMMISSIONER RAMON DIAZ, COMMISSIONER RAUL R. DAZA,
COMMISSIONER QUINTIN S. DOROMAL, CAPT. JORGE B. SIACUNCO,
et al., respondents.
Apostol, Bernas, Gumaru, Ona and Associates for petitioner.
Vicente G. Sison for intervenor A.T. Abesamis.

NARVASA, J.:
Challenged in this special civil action of certiorari and prohibition by a private
corporation known as the Bataan Shipyard and Engineering Co., Inc. are: (1)
Executive Orders Numbered 1 and 2, promulgated by President Corazon C.
Aquino on February 28, 1986 and March 12, 1986, respectively, and (2) the
sequestration, takeover, and other orders issued, and acts done, in
accordance with said executive orders by the Presidential Commission on
Good Government and/or its Commissioners and agents, affecting said
corporation.
1. The Sequestration, Takeover, and Other Orders Complained of

140

a. The Basic Sequestration Order

The sequestration order which, in the view of the petitioner corporation,
initiated all its misery was issued on April 14, 1986 by Commissioner Mary
Concepcion Bautista. It was addressed to three of the agents of the
Commission, hereafter simply referred to as PCGG. It reads as follows:
RE: SEQUESTRATION ORDER
By virtue of the powers vested in the Presidential Commission on
Good Government, by authority of the President of the
Philippines, you are hereby directed to sequester the following
companies.
1. Bataan Shipyard
(Engineering
Island
Shipyard)

and Engineering
Shipyard
and

Co., Inc.
Mariveles

2. Baseco Quarry
3. Philippine Jai-Alai Corporation
4. Fidelity Management Co., Inc.
5. Romson Realty, Inc.
6. Trident Management Co.
7. New Trident Management
8. Bay Transport
9. And all affiliate companies of Alfredo "Bejo"
Romualdez
You are hereby ordered:
1. To implement this sequestration order with a minimum
disruption of these companies' business activities.
2. To ensure the continuity of these companies as going
concerns, the care and maintenance of these assets until such
time that the Office of the President through the Commission on
Good Government should decide otherwise.
141

3. To report
periodically.

to

the

Commission

on

Good

Government

Further, you are authorized to request for Military/Security

Support from the Military/Police authorities, and such other acts
essential to the achievement of this sequestration order. 1
b. Order for Production of Documents
On the strength of the above sequestration order, Mr. Jose M. Balde, acting
for the PCGG, addressed a letter dated April 18, 1986 to the President and
other officers of petitioner firm, reiterating an earlier request for the
production of certain documents, to wit:
1. Stock Transfer Book
2. Legal documents, such as:
2.1. Articles of Incorporation
2.2. By-Laws
2.3. Minutes of the Annual Stockholders Meeting
from 1973 to 1986
2.4. Minutes of the Regular and Special Meetings of
the Board of Directors from 1973 to 1986
2.5. Minutes of the Executive Committee Meetings
from 1973 to 1986
2.6.
Existing
contracts
suppliers/contractors/others.

with

3. Yearly list of stockholders with their corresponding

share/stockholdings from 1973 to 1986 duly certified by the
Corporate Secretary.
4. Audited Financial Statements such as Balance Sheet, Profit &
Loss and others from 1973 to December 31, 1985.
5. Monthly Financial Statements for the current year up to March
31, 1986.

142

6. Consolidated Cash Position Reports from January to April 15,

1986.
7. Inventory listings of assets up dated up to March 31, 1986.
8. Updated schedule of Accounts Receivable and Accounts
Payable.
9. Complete list of depository banks for all funds with the
authorized signatories for withdrawals thereof.
10. Schedule of company investments and placements.

The letter closed with the warning that if the documents were not submitted
within five days, the officers would be cited for "contempt in pursuance with
Presidential Executive Order Nos. 1 and 2."
c. Orders Re Engineer Island
(1) Termination of Contract for Security Services
A third order assailed by petitioner corporation, hereafter referred to simply
as BASECO, is that issued on April 21, 1986 by a Capt. Flordelino B. Zabala,
a member of the task force assigned to carry out the basic sequestration
order. He sent a letter to BASECO's Vice-President for Finance, 3 terminating
the contract for security services within the Engineer Island compound
between BASECO and "Anchor and FAIRWAYS" and "other civilian security
agencies," CAPCOM military personnel having already been assigned to the
area,
(2) Change of Mode of Payment of Entry Charges
On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed
to "Truck Owners and Contractors," particularly a "Mr. Buddy Ondivilla
National Marine Corporation," advising of the amendment in part of their
contracts with BASECO in the sense that the stipulated charges for use of
the BASECO road network were made payable "upon entry and not anymore
subject to monthly billing as was originally agreed upon." 4
d. Aborted Contract for Improvement of Wharf at Engineer
Island
On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract
in behalf of BASECO with Deltamarine Integrated Port Services, Inc., in
143

virtue of which the latter undertook to introduce improvements costing

approximately P210,000.00 on the BASECO wharf at Engineer Island,
allegedly then in poor condition, avowedly to "optimize its utilization and in
return maximize the revenue which would flow into the government coffers,"
in consideration of Deltamarine's being granted "priority in using the
improved portion of the wharf ahead of anybody" and exemption "from the
payment of any charges for the use of wharf including the area where it may
install its bagging equipments" "until the improvement remains in a
condition suitable for port operations." 5 It seems however that this contract
was never consummated. Capt. Jorge B. Siacunco, "Head- (PCGG) BASECO
Management Team," advised Deltamarine by letter dated July 30, 1986 that
"the new management is not in a position to honor the said contract" and
thus "whatever improvements * * (may be introduced) shall be deemed
unauthorized * * and shall be at * * (Deltamarine's) own risk." 6
e. Order for Operation of Sesiman Rock Quarry, Mariveles,
Bataan
By Order dated June 20, 1986, Commissioner Mary Bautista first directed a
PCGG agent, Mayor Melba O. Buenaventura, "to plan and implement
progress towards maximizing the continuous operation of the BASECO
Sesiman Rock Quarry * * by conventional methods;" but afterwards,
Commissioner Bautista, in representation of the PCGG, authorized another
party, A.T. Abesamis, to operate the quarry, located at Mariveles, Bataan, an
agreement to this effect having been executed by them on September 17,
1986. 7
f. Order to Dispose of Scrap, etc.
By another Order of Commissioner Bautista, this time dated June 26, 1986,
Mayor Buenaventura was also "authorized to clean and beautify the
Company's compound," and in this connection, to dispose of or sell "metal
scraps" and other materials, equipment and machineries no longer usable,
subject to specified guidelines and safeguards including audit and
verification. 8
g. The TAKEOVER Order
By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the
provisional takeover by the PCGG of BASECO, "the Philippine Dockyard
Corporation and all their affiliated companies." 9 Diaz invoked the provisions
of Section 3 (c) of Executive Order No. 1, empowering the Commission

144

* * To provisionally takeover in the public interest or to prevent

its disposal or dissipation, business enterprises and properties
taken over by the government of the Marcos Administration or
by entities or persons close to former President Marcos, until the
transactions leading to such acquisition by the latter can be
disposed of by the appropriate authorities.
A management team was designated to implement the order, headed by
Capt. Siacunco, and was given the following powers:
1. Conducts all aspects of operation of the subject companies;
2. Installs key officers, hires and terminates personnel as
necessary;
3. Enters into contracts related to management and operation of
the companies;
4. Ensures that the assets of the companies are not dissipated
and used effectively and efficiently; revenues are duly accounted
for; and disburses funds only as may be necessary;
5. Does actions including among others, seeking of military
support as may be necessary, that will ensure compliance to this
order;
6. Holds itself fully accountable to the Presidential Commission
on Good Government on all aspects related to this take-over
order.
h. Termination of Services of BASECO Officers
Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S.
Mendoza, Moises M. Valdez, Gilberto Pasimanero, and Benito R. Cuesta I,
advising of the termination of their services by the PCGG. 10
2. Petitioner's Plea and Postulates
It is the foregoing specific orders and acts of the PCGG and its members and
agents which, to repeat, petitioner BASECO would have this Court nullify.
More particularly, BASECO prays that this Court1) declare unconstitutional and void Executive Orders Numbered 1 and 2;

145

2) annul the sequestration order dated April- 14, 1986, and all other orders
subsequently issued and acts done on the basis thereof, inclusive of the
takeover order of July 14, 1986 and the termination of the services of the
BASECO executives. 11
a. Re Executive Orders No. 1 and 2, and the Sequestration and
Takeover Orders
While BASECO concedes that "sequestration without resorting to judicial
action, might be made within the context of Executive Orders Nos. 1 and 2
before March 25, 1986 when the Freedom Constitution was promulgated,
under the principle that the law promulgated by the ruler under a
revolutionary regime is the law of the land, it ceased to be acceptable when
the same ruler opted to promulgate the Freedom Constitution on March 25,
1986 wherein under Section I of the same, Article IV (Bill of Rights) of the
1973 Constitution was adopted providing, among others, that "No person
shall be deprived of life, liberty and property without due process of law."
(Const., Art. I V, Sec. 1)." 12
It declares that its objection to the constitutionality of the Executive Orders
"as well as the Sequestration Order * * and Takeover Order * * issued
purportedly under the authority of said Executive Orders, rests on four
fundamental considerations: First, no notice and hearing was accorded * *
(it) before its properties and business were taken over; Second, the PCGG is
not a court, but a purely investigative agency and therefore not competent
to act as prosecutor and judge in the same cause; Third, there is nothing in
the issuances which envisions any proceeding, process or remedy by which
petitioner may expeditiously challenge the validity of the takeover after the
same has been effected; and Fourthly, being directed against specified
persons, and in disregard of the constitutional presumption of innocence and
general rules and procedures, they constitute a Bill of Attainder." 13
b. Re Order to Produce Documents
It argues that the order to produce corporate records from 1973 to 1986,
which it has apparently already complied with, was issued without court
authority and infringed its constitutional right against self-incrimination, and
unreasonable search and seizure. 14
c. Re PCGG's Exercise of Right of Ownership and Management
BASECO further contends that the PCGG had unduly interfered with its right
of dominion and management of its business affairs by

146

1) terminating its contract for security services with Fairways & Anchor,
without the consent and against the will of the contracting parties; and
amending the mode of payment of entry fees stipulated in its Lease Contract
with National Stevedoring & Lighterage Corporation, these acts being in
violation of the non-impairment clause of the constitution; 15
2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous
contract" with Deltamarine Integrated Port Services, Inc., giving the latter
free use of BASECO premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and
operate its rock quarry at Sesiman, Mariveles; 17
4) authorizing the same mayor to sell or dispose of its metal scrap,
equipment, machinery and other materials; 18
5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and
all their affiliated companies;
6) terminating the services of BASECO executives: President Hilario M. Ruiz;
EVP Manuel S. Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto
Pasimanero; Legal Dept. Mgr. Benito R. Cuesta I; 19
7) planning to elect its own Board of Directors;

20

8) allowing willingly or unwillingly its personnel to take, steal, carry away

from petitioner's premises at Mariveles * * rolls of cable wires, worth
P600,000.00 on May 11, 1986; 21
9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars
supposed to have been buried therein. 22
3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover
Orders
Many misconceptions and much doubt about the matter of sequestration,
takeover and freeze orders have been engendered by misapprehension, or
incomplete comprehension if not indeed downright ignorance of the law
governing these remedies. It is needful that these misconceptions and
doubts be dispelled so that uninformed and useless debates about them may
be avoided, and arguments tainted b sophistry or intellectual dishonesty be
quickly exposed and discarded. Towards this end, this opinion will essay an
exposition of the law on the matter. In the process many of the objections
raised by BASECO will be dealt with.
147

4. The Governing Law

a. Proclamation No. 3
The impugned executive orders are avowedly meant to carry out the explicit
command of the Provisional Constitution, ordained by Proclamation No.
3, 23 that the President-in the exercise of legislative power which she was
authorized to continue to wield "(until a legislature is elected and convened
under a new Constitution" "shall give priority to measures to achieve the
mandate of the people," among others to (r)ecover ill-gotten properties
amassed by the leaders and supporters of the previous regime and protect
the interest of the people through orders of sequestration or freezing of
assets or accounts." 24
b. Executive Order No. 1
Executive Order No. 1 stresses the "urgent need to recover all ill-gotten
wealth," and postulates that "vast resources of the government have been
amassed by former President Ferdinand E. Marcos, his immediate family,
relatives, and close associates both here and abroad." 25 Upon these
premises, the Presidential Commission on Good Government was
created, 26 "charged with the task of assisting the President in regard to
(certain specified) matters," among which was precisely* * The recovery of all in-gotten wealth accumulated by former
President Ferdinand E. Marcos, his immediate family, relatives,
subordinates and close associates, whether located in the
Philippines or abroad, including the takeover or sequestration of
all business enterprises and entities owned or controlled by
them, during his administration, directly or through nominees,
by taking undue advantage of their public office and/or using
their powers, authority, influence, connections or relationship. 27
In relation to the takeover or sequestration that it was authorized to
undertake in the fulfillment of its mission, the PCGG was granted "power and
authority" to do the following particular acts, to wit:
1. To sequester or place or cause to be placed under its control
or possession any building or office wherein any ill-gotten wealth
or properties may be found, and any records pertaining thereto,
in order to prevent their destruction, concealment or
disappearance which would frustrate or hamper the investigation
or otherwise prevent the Commission from accomplishing its
task.
148

2. To provisionally take over in the public interest or to prevent

the disposal or dissipation, business enterprises and properties
taken over by the government of the Marcos Administration or
by entities or persons close to former President Marcos, until the
transactions leading to such acquisition by the latter can be
disposed of by the appropriate authorities.
3. To enjoin or restrain any actual or threatened commission of
acts by any person or entity that may render moot and
academic, or frustrate or otherwise make ineffectual the efforts
of the Commission to carry out its task under this order. 28
So that it might ascertain the facts germane to its objectives, it was granted
power to conduct investigations; require submission of evidence by
subpoenae ad testificandum and duces tecum; administer oaths; punish for
contempt. 29 It was given power also to promulgate such rules and
regulations as may be necessary to carry out the purposes of * * (its
creation). 30
c. Executive Order No. 2
Executive Order No. 2 gives additional and more specific data and directions
respecting "the recovery of ill-gotten properties amassed by the leaders and
supporters of the previous regime." It declares that:
1) * * the Government of the Philippines is in possession of
evidence showing that there are assets and properties
purportedly pertaining to former Ferdinand E. Marcos, and/or his
wife Mrs. Imelda Romualdez Marcos, their close relatives,
subordinates, business associates, dummies, agents or nominees
which had been or were acquired by them directly or indirectly,
through or as a result of the improper or illegal use of funds or
properties owned by the government of the Philippines or any of
its branches, instrumentalities, enterprises, banks or financial
institutions, or by taking undue advantage of their office,
authority, influence, connections or relationship, resulting in their
unjust enrichment and causing grave damage and prejudice to
the Filipino people and the Republic of the Philippines:" and
2) * * said assets and properties are in the form of bank
accounts, deposits, trust accounts, shares of stocks, buildings,
shopping centers, condominiums, mansions, residences, estates,
and other kinds of real and personal properties in the Philippines
and in various countries of the world." 31
149

Upon these premises, the President1) froze "all assets and properties in the Philippines in which
former President Marcos and/or his wife, Mrs. Imelda Romualdez
Marcos, their close relatives, subordinates, business associates,
dummies, agents, or nominees have any interest or
participation;
2) prohibited former President Ferdinand Marcos and/or his wife
* *, their close relatives, subordinates, business associates,
duties, agents, or nominees from transferring, conveying,
encumbering, concealing or dissipating said assets or properties
in the Philippines and abroad, pending the outcome of
appropriate proceedings in the Philippines to determine whether
any such assets or properties were acquired by them through or
as a result of improper or illegal use of or the conversion of
funds belonging to the Government of the Philippines or any of
its branches, instrumentalities, enterprises, banks or financial
institutions, or by taking undue advantage of their official
position, authority, relationship, connection or influence to
unjustly enrich themselves at the expense and to the grave
damage and prejudice of the Filipino people and the Republic of
the Philippines;
3)
prohibited "any
person
from transferring,
conveying,
encumbering or otherwise depleting or concealing such assets
and properties or from assisting or taking part in their transfer,
encumbrance, concealment or dissipation under pain of such
penalties as are prescribed by law;" and
4) required "all persons in the Philippines holding such assets or
properties, whether located in the Philippines or abroad, in their
names as nominees, agents or trustees, to make full
disclosure of the same to the Commission on Good Government
within thirty (30) days from publication of * (the) Executive
Order, * *. 32
d. Executive Order No. 14
A third executive order is relevant: Executive Order No. 14, 33 by which the
PCGG is empowered, "with the assistance of the Office of the Solicitor
General and other government agencies, * * to file and prosecute all cases
investigated by it * * as may be warranted by its findings." 34 All such cases,
whether civil or criminal, are to be filed "with the Sandiganbayan which shall
150

have exclusive and original jurisdiction thereof." 35 Executive Order No. 14

also pertinently provides that civil suits for restitution, reparation of
damages, or indemnification for consequential damages, forfeiture
proceedings provided for under Republic Act No. 1379, or any other civil
actions under the Civil Code or other existing laws, in connection with * *
(said Executive Orders Numbered 1 and 2) may be filed separately from and
proceed independently of any criminal proceedings and may be proved by a
preponderance of evidence;" and that, moreover, the "technical rules of
procedure and evidence shall not be strictly applied to* * (said)civil
cases." 36
5. Contemplated Situations
The situations envisaged and sought to be governed are self-evident, these
being:
1) that "(i)ll-gotten properties (were) amassed by the leaders
and supporters of the previous regime"; 37
a) more particularly, that ill-gotten wealth (was) accumulated by
former President Ferdinand E. Marcos, his immediate family,
relatives, subordinates and close associates, * * located in the
Philippines or abroad, * * (and) business enterprises and entities
(came to be) owned or controlled by them, during * * (the
Marcos) administration, directly or through nominees, by taking
undue advantage of their public office and/or using their powers,
authority, influence, Connections or relationship; 38
b) otherwise stated, that "there are assets and properties
purportedly pertaining to former President Ferdinand E. Marcos,
and/or his wife Mrs. Imelda Romualdez Marcos, their close
relatives, subordinates, business associates, dummies, agents or
nominees which had been or were acquired by them directly or
indirectly, through or as a result of the improper or illegal use of
funds or properties owned by the Government of the Philippines
or any of its branches, instrumentalities, enterprises, banks or
financial institutions, or by taking undue advantage of their
office, authority, influence, connections or relationship, resulting
in their unjust enrichment and causing grave damage and
prejudice to the Filipino people and the Republic of the
Philippines"; 39
c) that "said assets and properties are in the form of bank
accounts. deposits, trust. accounts, shares of stocks, buildings,
151

shopping centers, condominiums, mansions, residences, estates,

and other kinds of real and personal properties in the Philippines
and in various countries of the world;" 40 and
2) that certain "business enterprises and properties (were) taken
over by the government of the Marcos Administration or by
entities or persons close to former President Marcos. 41
6. Government's Right and Duty to Recover All Ill-gotten Wealth
There can be no debate about the validity and eminent propriety of the
Government's plan "to recover all ill-gotten wealth."
Neither can there be any debate about the proposition that assuming the
above described factual premises of the Executive Orders and Proclamation
No. 3 to be true, to be demonstrable by competent evidence, the recovery
from Marcos, his family and his dominions of the assets and properties
involved, is not only a right but a duty on the part of Government.
But however plain and valid that right and duty may be, still a balance must
be sought with the equally compelling necessity that a proper respect be
accorded and adequate protection assured, the fundamental rights of private
property and free enterprise which are deemed pillars of a free society such
as ours, and to which all members of that society may without exception lay
claim.
* * Democracy, as a way of life enshrined in the Constitution,
embraces as its necessary components freedom of conscience,
freedom of expression, and freedom in the pursuit of
happiness. Along with these freedoms are included economic
freedom and freedom of enterprise within reasonable bounds
and under proper control. * * Evincing much concern for the
protection of property, the Constitution distinctly recognizes the
preferred position which real estate has occupied in law for
ages. Property is bound up with every aspect of social life in a
democracy as democracy is conceived in the Constitution. The
Constitution realizes the indispensable role which property,
owned in reasonable quantities and used legitimately, plays in
the stimulation to economic effort and the formation and growth
of a solid social middle class that is said to be the bulwark of
democracy and the backbone of every progressive and happy
country. 42
a. Need of Evidentiary Substantiation in Proper Suit
152

Consequently, the factual premises of the Executive Orders cannot simply be

assumed. They will have to be duly established by adequate proof in each
case, in a proper judicial proceeding, so that the recovery of the ill-gotten
wealth may be validly and properly adjudged and consummated; although
there are some who maintain that the fact-that an immense fortune, and
"vast resources of the government have been amassed by former President
Ferdinand E. Marcos, his immediate family, relatives, and close associates
both here and abroad," and they have resorted to all sorts of clever schemes
and manipulations to disguise and hide their illicit acquisitions-is within the
realm of judicial notice, being of so extensive notoriety as to dispense with
proof thereof, Be this as it may, the requirement of evidentiary
substantiation has been expressly acknowledged, and the procedure to be
followed explicitly laid down, in Executive Order No. 14.
b. Need of Provisional Measures to Collect and Conserve Assets
Pending Suits
Nor may it be gainsaid that pending the institution of the suits for the
recovery of such "ill-gotten wealth" as the evidence at hand may reveal,
there is an obvious and imperative need for preliminary, provisional
measures to prevent the concealment, disappearance, destruction,
dissipation, or loss of the assets and properties subject of the suits, or to
restrain or foil acts that may render moot and academic, or effectively
hamper, delay, or negate efforts to recover the same.
7. Provisional Remedies Prescribed by Law
To answer this need, the law has prescribed three (3) provisional remedies.
These are: (1) sequestration; (2) freeze orders; and (3) provisional
takeover.
Sequestration and freezing are remedies applicable generally to unearthed
instances of "ill-gotten wealth." The remedy of "provisional takeover" is
peculiar to cases where "business enterprises and properties (were) taken
over by the government of the Marcos Administration or by entities or
persons close to former President Marcos." 43
a. Sequestration
By the clear terms of the law, the power of the PCGG to sequester
property claimed to be "ill-gotten" means to place or cause to be placed
under its possession or control said property, or any building or office
wherein any such property and any records pertaining thereto may be found,
including "business enterprises and entities,"-for the purpose of preventing
153

the destruction, concealment or dissipation of, and otherwise conserving and

preserving, the same-until it can be determined, through appropriate judicial
proceedings, whether the property was in truth will- gotten," i.e., acquired
through or as a result of improper or illegal use of or the conversion of funds
belonging to the Government or any of its branches, instrumentalities,
enterprises, banks or financial institutions, or by taking undue advantage of
official position, authority relationship, connection or influence, resulting in
unjust enrichment of the ostensible owner and grave damage and prejudice
to the State. 44 And this, too, is the sense in which the term is commonly
understood in other jurisdictions. 45
b. "Freeze Order"
A "freeze order" prohibits the person having possession or control of
property alleged to constitute "ill-gotten wealth" "from transferring,
conveying, encumbering or otherwise depleting or concealing such property,
or from assisting or taking part in its transfer, encumbrance, concealment, or
dissipation." 46 In other words, it commands the possessor to hold the
property and conserve it subject to the orders and disposition of the
authority decreeing such freezing. In this sense, it is akin to a garnishment
by which the possessor or ostensible owner of property is enjoined not to
deliver, transfer, or otherwise dispose of any effects or credits in his
possession or control, and thus becomes in a sense an involuntary
depositary thereof. 47
c. Provisional Takeover
In providing for the remedy of "provisional takeover," the law acknowledges
the apparent distinction between "ill gotten" "business enterprises and
entities" (going concerns, businesses in actual operation), generally, as to
which the remedy of sequestration applies, it being necessarily inferred that
the remedy entails no interference, or the least possible interference with
the actual management and operations thereof; and "business enterprises
which were taken over by the government government of the Marcos
Administration or by entities or persons close to him," in particular, as to
which a "provisional takeover" is authorized, "in the public interest or to
prevent disposal or dissipation of the enterprises." 48 Such a "provisional
takeover" imports something more than sequestration or freezing, more
than the placing of the business under physical possession and control, albeit
without or with the least possible interference with the management and
carrying on of the business itself. In a "provisional takeover," what is taken
into custody is not only the physical assets of the business enterprise or
entity, but the business operation as well. It is in fine the assumption of
control not only over things, but over operations or on- going activities. But,
154

to repeat, such a "provisional takeover" is allowed only as regards "business

enterprises * * taken over by the government of the Marcos Administration
or by entities or persons close to former President Marcos."
d. No Divestment of Title Over Property Seized
It may perhaps be well at this point to stress once again the provisional,
contingent character of the remedies just described. Indeed the law plainly
qualifies the remedy of take-over by the adjective, "provisional." These
remedies may be resorted to only for a particular exigency: to prevent in the
public interest the disappearance or dissipation of property or business, and
conserve it pending adjudgment in appropriate proceedings of the primary
issue of whether or not the acquisition of title or other right thereto by the
apparent owner was attended by some vitiating anomaly. None of the
remedies is meant to deprive the owner or possessor of his title or any right
to the property sequestered, frozen or taken over and vest it in the
sequestering agency, the Government or other person. This can be done
only for the causes and by the processes laid down by law.
That this is the sense in which the power to sequester, freeze or provisionally
take over is to be understood and exercised, the language of the executive
orders in question leaves no doubt. Executive Order No. 1 declares that the
sequestration of property the acquisition of which is suspect shall last "until
the transactions leading to such acquisition * * can be disposed of by the
appropriate authorities." 49 Executive Order No. 2 declares that the assets or
properties therein mentioned shall remain frozen "pending the outcome of
appropriate proceedings in the Philippines to determine whether any such
assets or properties were acquired" by illegal means. Executive Order No. 14
makes clear that judicial proceedings are essential for the resolution of the
basic issue of whether or not particular assets are "ill-gotten," and resultant
recovery thereof by the Government is warranted.
e. State of Seizure Not To Be Indefinitely Maintained; The
Constitutional Command
There is thus no cause for the apprehension voiced by BASECO 50 that
sequestration, freezing or provisional takeover is designed to be an end in
itself, that it is the device through which persons may be deprived of their
property branded as "ill-gotten," that it is intended to bring about a
permanent, rather than a passing, transitional state of affairs. That this is
not so is quite explicitly declared by the governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears
about the duration of these provisional remedies. Section 26 of its Transitory
155

Provisions, 51 lays down the relevant rule in plain terms, apart from
extending ratification or confirmation (although not really necessary) to the
institution by presidential fiat of the remedy of sequestration and freeze
orders:
SEC. 26. The authority to issue sequestration or freeze orders
under Proclamation No. 3 dated March 25, 1986 in relation to
the recovery of ill-gotten wealth shag remain operative for not
more than eighteen months after the ratification of this
Constitution. However, in the national interest, as certified by the
President, the Congress may extend said period.
A sequestration or freeze order shall be issued only upon
showing of a prima facie case. The order and the list of the
sequestered or frozen properties shall forthwith be registered
with the proper court. For orders issued before the ratification of
this Constitution, the corresponding judicial action or proceeding
shall be filed within six months from its ratification. For those
issued after such ratification, the judicial action or proceeding
shall be commenced within six months from the issuance
thereof.
The sequestration or freeze order is deemed automatically lifted
if no judicial action or proceeding is commenced as herein
provided. 52
f. Kinship to Attachment Receivership
As thus described, sequestration, freezing and provisional takeover are akin
to the provisional remedy of preliminary attachment, or receivership. 53 By
attachment, a sheriff seizes property of a defendant in a civil suit so that it
may stand as security for the satisfaction of any judgment that may be
obtained, and not disposed of, or dissipated, or lost intentionally or
otherwise, pending the action. 54 By receivership, property, real or personal,
which is subject of litigation, is placed in the possession and control of a
receiver appointed by the Court, who shall conserve it pending final
determination of the title or right of possession over it. 55 All these remedies
sequestration, freezing, provisional, takeover, attachment and
receivership are provisional, temporary, designed for-particular
exigencies, attended by no character of permanency or finality, and always
subject to the control of the issuing court or agency.
g. Remedies, Non-Judicial

156

Parenthetically, that writs of sequestration or freeze or takeover orders are

not issued by a court is of no moment. The Solicitor General draws attention
to the writ of distraint and levy which since 1936 the Commissioner of
Internal Revenue has been by law authorized to issue against property of a
delinquent taxpayer. 56 BASECO itself declares that it has not manifested "a
rigid insistence on sequestration as a purely judicial remedy * * (as it feels)
that the law should not be ossified to a point that makes it insensitive to
change." What it insists on, what it pronounces to be its "unyielding position,
is that any change in procedure, or the institution of a new one, should
conform to due process and the other prescriptions of the Bill of Rights of
the Constitution." 57 It is, to be sure, a proposition on which there can be no
disagreement.
h. Orders May Issue Ex Parte
Like the remedy of preliminary attachment and receivership, as well as
delivery of personal property in replevin suits, sequestration and provisional
takeover writs may issue ex parte. 58 And as in preliminary attachment,
receivership, and delivery of personality, no objection of any significance
may be raised to the ex parte issuance of an order of sequestration, freezing
or takeover, given its fundamental character of temporariness or
conditionality; and taking account specially of the constitutionally expressed
"mandate of the people to recover ill-gotten properties amassed by the
leaders and supporters of the previous regime and protect the interest of the
people;" 59 as well as the obvious need to avoid alerting suspected
possessors of "ill-gotten wealth" and thereby cause that disappearance or
loss of property precisely sought to be prevented, and the fact, just as selfevident, that "any transfer, disposition, concealment or disappearance of said
assets and properties would frustrate, obstruct or hamper the efforts of the
Government" at the just recovery thereof. 60
8. Requisites for Validity
What is indispensable is that, again as in the case of attachment and
receivership, there exist a prima facie factual foundation, at least, for the
sequestration, freeze or takeover order, and adequate and fair opportunity to
contest it and endeavor to cause its negation or nullification. 61
Both are assured under the executive orders in question and the rules and
regulations promulgated by the PCGG.
a. Prima Facie Evidence as Basis for Orders

157

Executive Order No. 14 enjoins that there be "due regard to the

requirements of fairness and due process." 62Executive Order No. 2 declares
that with respect to claims on allegedly "ill-gotten" assets and properties, "it
is the position of the new democratic government that President Marcos * *
(and other parties affected) be afforded fair opportunity to contest these
claims before appropriate Philippine authorities." 63 Section 7 of the
Commission's Rules and Regulations provides that sequestration or freeze
(and takeover) orders issue upon the authority of at least two
commissioners, based on the affirmation or complaint of an interested
party, or motu proprio when the Commission has reasonable grounds to
believe that the issuance thereof is warranted. 64 A similar requirement is
now found in Section 26, Art. XVIII of the 1987 Constitution, which requires
that a "sequestration or freeze order shall be issued only upon showing of
a prima facie case." 65
b. Opportunity to Contest
And Sections 5 and 6 of the same Rules and Regulations lay down the
procedure by which a party may seek to set aside a writ of sequestration or
freeze order, viz:
SECTION 5. Who may contend.-The person against whom a writ
of sequestration or freeze or hold order is directed may request
the lifting thereof in writing, either personally or through counsel
within five (5) days from receipt of the writ or order, or in the
case of a hold order, from date of knowledge thereof.
SECTION 6. Procedure for review of writ or order.-After due
hearing or motu proprio for good cause shown, the Commission
may lift the writ or order unconditionally or subject to such
conditions as it may deem necessary, taking into consideration
the evidence and the circumstance of the case. The resolution of
the commission may be appealed by the party concerned to the
Office of the President of the Philippines within fifteen (15) days
from receipt thereof.
Parenthetically, even if the requirement for a prima facie showing of "illgotten wealth" were not expressly imposed by some rule or regulation as a
condition to warrant the sequestration or freezing of property contemplated
in the executive orders in question, it would nevertheless be exigible in this
jurisdiction in which the Rule of Law prevails and official acts which are
devoid of rational basis in fact or law, or are whimsical and capricious, are
condemned and struck down. 66

158

9. Constitutional Sanction of Remedies

If any doubt should still persist in the face of the foregoing considerations as
to the validity and propriety of sequestration, freeze and takeover orders, it
should be dispelled by the fact that these particular remedies and the
authority of the PCGG to issue them have received constitutional
approbation and sanction. As already mentioned, the Provisional or
"Freedom" Constitution recognizes the power and duty of the President to
enact "measures to achieve the mandate of the people to * * * (recover illgotten properties amassed by the leaders and supporters of the previous
regime and protect the interest of the people through orders of
sequestration or freezing of assets or accounts." And as also already
adverted to, Section 26, Article XVIII of the 1987 Constitution 67 treats of,
and ratifies the "authority to issue sequestration or freeze orders under
Proclamation No. 3 dated March 25, 1986."
The institution of these provisional remedies is also premised upon the
State's inherent police power, regarded, as t lie power of promoting the
public welfare by restraining and regulating the use of liberty and
property," 68 and as "the most essential, insistent and illimitable of powers *
* in the promotion of general welfare and the public interest," 69and said to
be co-extensive with self-protection and * * not inaptly termed (also)
the'law of overruling necessity." " 70
10. PCGG not a "Judge"; General Functions
It should also by now be reasonably evident from what has thus far been
said that the PCGG is not, and was never intended to act as, a judge. Its
general function is to conduct investigations in order to collect
evidence establishing instances of "ill-gotten wealth;" issue sequestration,
and such orders as may be warranted by the evidence thus collected and as
may be necessary to preserve and conserve the assets of which it takes
custody and control and prevent their disappearance, loss or dissipation; and
eventually file and prosecute in the proper court of competent jurisdiction all
cases investigated by it as may be warranted by its findings. It does not try
and decide, or hear and determine, or adjudicate with any character of
finality or compulsion, cases involving the essential issue of whether or not
property should be forfeited and transferred to the State because "ill-gotten"
within the meaning of the Constitution and the executive orders. This
function is reserved to the designated court, in this case, the
Sandiganbayan. 71 There can therefore be no serious regard accorded to the
accusation, leveled by BASECO, 72 that the PCGG plays the perfidious role of
prosecutor and judge at the same time.

159

11. Facts Preclude Grant of Relief to Petitioner

Upon these premises and reasoned conclusions, and upon the facts disclosed
by the record, hereafter to be discussed, the petition cannot succeed. The
writs of certiorari and prohibition prayed for will not be issued.
The facts show that the corporation known as BASECO was owned or
controlled by President Marcos "during his administration, through nominees,
by taking undue advantage of his public office and/or using his powers,
authority, or influence, " and that it was by and through the same means,
that BASECO had taken over the business and/or assets of the National
Shipyard and Engineering Co., Inc., and other government-owned or
controlled entities.
12. Organization and Stock Distribution of BASECO
BASECO describes itself in its petition as "a shiprepair and shipbuilding
company * * incorporated as a domestic private corporation * * (on Aug.
30, 1972) by a consortium of Filipino shipowners and shipping executives.
Its main office is at Engineer Island, Port Area, Manila, where its Engineer
Island Shipyard is housed, and its main shipyard is located at Mariveles
Bataan." 73 Its Articles of Incorporation disclose that its authorized capital
stock is P60,000,000.00 divided into 60,000 shares, of which 12,000 shares
with a value of P12,000,000.00 have been subscribed, and on said
subscription, the aggregate sum of P3,035,000.00 has been paid by the
incorporators. 74 The same articles Identify the incorporators, numbering
fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3) Eduardo T.
Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7)
Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose
Francisco, (11) Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S.
Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.
By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to
be stockholders, namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3)
Zacarias Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6) Rodolfo
Torres. As of this year, 1986, there were twenty (20) stockholders listed in
BASECO's Stock and Transfer Book. 75 Their names and the number of
shares respectively held by them are as follows:

1. Jose
Rojas

A.

160

1,248
shares

2.
Severino
G. de la Cruz

1,248
shares

3. Emilio
Yap

T.

2,508
shares

4.
Jose
Fernandez

1,248
shares

5.
Jose
Francisco

128
shares

6. Manuel S.
Mendoza

96 shares

7. Anthony P.
Lee

1,248
shares

8. Hilario M.
Ruiz

32 shares

9. Constante
L. Farias

8 shares

10.
Fidelity
Management,
Inc.

65,882
shares

161

11.
Trident
Management

7,412
shares

12.
United
Phil. Lines

1,240
shares

13. Renato M.
Tanseco

8 shares

14.
Fidel
Ventura

8 shares

15. Metro Bay

Drydock

136,370
shares

16.
Manuel
Jacela

1 share

17. Jonathan
G. Lu

1 share

18. Jose
Tanchanco

1 share

J.

19. Dioscoro
Papa

162

128
shares

20. Edward T.
Marcelo

4 shares

TOTAL

218,819
shares.

13 Acquisition of NASSCO by BASECO

Barely six months after its incorporation, BASECO acquired from National
Shipyard & Steel Corporation, or NASSCO, a government-owned or
controlled corporation, the latter's shipyard at Mariveles, Bataan, known as
the Bataan National Shipyard (BNS), and except for NASSCO's Engineer
Island Shops and certain equipment of the BNS, consigned for future
negotiation all its structures, buildings, shops, quarters, houses, plants,
equipment and facilities, in stock or in transit. This it did in virtue of a
"Contract of Purchase and Sale with Chattel Mortgage" executed on February
13, 1973. The price was P52,000,000.00. As partial payment thereof,
BASECO delivered to NASSCO a cash bond of P11,400,000.00, convertible
into cash within twenty-four (24) hours from completion of the inventory
undertaken pursuant to the contract. The balance of P41,600,000.00, with
interest at seven percent (7%) per annum, compounded semi-annually, was
stipulated to be paid in equal semi-annual installments over a term of nine
(9) years, payment to commence after a grace period of two (2) years from
date of turnover of the shipyard to BASECO. 76
14. Subsequent Reduction of Price; Intervention of Marcos
Unaccountably, the price of P52,000,000.00 was reduced by more than onehalf, to P24,311,550.00, about eight (8) months later. A document to this
effect was executed on October 9, 1973, entitled "Memorandum
Agreement," and was signed for NASSCO by Arturo Pacificador, as Presiding
Officer of the Board of Directors, and David R. Ines, as General
Manager. 77 This agreement bore, at the top right corner of the first page,
the word "APPROVED" in the handwriting of President Marcos, followed by
his usual full signature. The document recited that a down payment of
P5,862,310.00 had been made by BASECO, and the balance of
P19,449,240.00 was payable in equal semi-annual installments over nine (9)
years after a grace period of two (2) years, with interest at 7% per annum.
15. Acquisition of 300 Hectares from Export Processing Zone Authority
163

On October 1, 1974, BASECO acquired three hundred (300) hectares of land

in Mariveles from the Export Processing Zone Authority for the price of
P10,047,940.00 of which, as set out in the document of sale, P2,000.000.00
was paid upon its execution, and the balance stipulated to be payable in
installments. 78
16. Acquisition of Other Assets of NASSCO; Intervention of Marcos
Some nine months afterwards, or on July 15, 1975, to be precise, BASECO,
again with the intervention of President Marcos, acquired ownership of the
rest of the assets of NASSCO which had not been included in the first two
(2) purchase documents. This was accomplished by a deed entitled "Contract
of Purchase and Sale," 79which, like the Memorandum of Agreement dated
October 9, 1973 supra also bore at the upper right-hand corner of its first
page, the handwritten notation of President Marcos reading, "APPROVED,
July 29, 1973," and underneath it, his usual full signature. Transferred to
BASECO were NASSCO's "ownership and all its titles, rights and interests
over all equipment and facilities including structures, buildings, shops,
quarters, houses, plants and expendable or semi-expendable assets, located
at the Engineer Island, known as the Engineer Island Shops, including all the
equipment of the Bataan National Shipyards (BNS) which were excluded
from the sale of NBS to BASECO but retained by BASECO and all other
selected equipment and machineries of NASSCO at J. Panganiban Smelting
Plant." In the same deed, NASSCO committed itself to cooperate with
BASECO for the acquisition from the National Government or other
appropriate Government entity of Engineer Island. Consideration for the sale
was set at P5,000,000.00; a down payment of P1,000,000.00 appears to
have been made, and the balance was stipulated to be paid at 7% interest
per annum in equal semi annual installments over a term of nine (9) years,
to commence after a grace period of two (2) years. Mr. Arturo Pacificador
again signed for NASSCO, together with the general manager, Mr. David R.
Ines.
17. Loans Obtained
It further appears that on May 27, 1975 BASECO obtained a loan from the
NDC, taken from "the last available Japanese war damage fund of
$19,000,000.00," to pay for "Japanese made heavy equipment (brand
new)." 80On September 3, 1975, it got another loan also from the NDC in the
amount of P30,000,000.00 (id.). And on January 28, 1976, it got still
another loan, this time from the GSIS, in the sum of P12,400,000.00. 81 The
claim has been made that not a single centavo has been paid on these
loans. 82

164

18. Reports to President Marcos

In September, 1977, two (2) reports were submitted to President Marcos
regarding BASECO. The first was contained in a letter dated September 5,
1977 of Hilario M. Ruiz, BASECO president. 83 The second was embodied in a
confidential memorandum dated September 16, 1977 of Capt. A.T.
Romualdez. 84 They further disclose the fine hand of Marcos in the affairs of
BASECO, and that of a Romualdez, a relative by affinity.
a. BASECO President's Report
In his letter of September 5, 1977, BASECO President Ruiz reported to
Marcos that there had been "no orders or demands for ship construction" for
some time and expressed the fear that if that state of affairs persisted,
BASECO would not be able to pay its debts to the Government, which at the
time stood at the not inconsiderable amount of P165,854,000.00. 85 He
suggested that, to "save the situation," there be a "spin-off (of their)
shipbuilding activities which shall be handled exclusively by an entirely new
corporation to be created;" and towards this end, he informed Marcos that
BASECO was
* * inviting NDC and LUSTEVECO to participate by converting
the NDC shipbuilding loan to BASECO amounting to P341.165M
and assuming and converting a portion of BASECO's shipbuilding
loans from REPACOM amounting to P52.2M or a total of
P83.365M as NDC's equity contribution in the new corporation.
LUSTEVECO will participate by absorbing and converting a
portion of the REPACOM loan of Bay Shipyard and Drydock, Inc.,
amounting to P32.538M. 86
b. Romualdez' Report
Capt. A.T. Romualdez' report to the President was submitted eleven (11)
days later. It opened with the following caption:
MEMORANDUM:
FOR : The President
SUBJECT: An Evaluation and Re-assessment of a Performance of
a Mission
FROM: Capt. A.T. Romualdez.

165

Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting
its loan obligations due chiefly to the fact that "orders to build ships as
expected * * did not materialize."
He advised that five stockholders had "waived and/or assigned their holdings
inblank," these being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo
Torres, (4) Magiliw Torres, and (5) Anthony P. Lee. Pointing out that "Mr.
Magiliw Torres * * is already dead and Mr. Jose A. Rojas had a major heart
attack," he made the following quite revealing, and it may be added, quite
cynical and indurate recommendation, to wit:
* * (that) their replacements (be effected) so we can register
their names in the stock book prior to the implementation
of your instructions to pass a board resolution to legalize the
transfers under SEC regulations;
2. By getting their replacements, the families cannot question us
later on; and
3. We will owe no further favors from them.

87

He also transmitted to Marcos, together with the report, the following

documents: 88
1. Stock certificates indorsed and assigned in blank with
assignments and waivers; 89
2. The articles of incorporation, the amended articles, and the
by-laws of BASECO;
3. Deed of Sales, wherein NASSCO sold to BASECO four (4)
parcels of land in "Engineer Island", Port Area, Manila;
4. Transfer Certificate of Title No. 124822 in the name of
BASECO, covering "Engineer Island";
5. Contract dated October 9, 1973, between NASSCO and
BASECO re-structure and equipment at Mariveles, Bataan;
6. Contract dated July 16, 1975, between NASSCO and BASECO
re-structure and equipment at Engineer Island, Port Area Manila;
7. Contract dated October 1, 1974, between EPZA and BASECO
re 300 hectares of land at Mariveles, Bataan;
166

8. List of BASECO's fixed assets;

9. Loan Agreement dated September 3, 1975, BASECO's loan
from NDC of P30,000,000.00;
10. BASECO-REPACOM Agreement dated May 27, 1975;
11. GSIS loan to BASECO dated January 28, 1976 of
P12,400,000.00 for the housing facilities for BASECO's rank-andfile employees. 90
Capt. Romualdez also recommended that BASECO's loans be restructured
"until such period when BASECO will have enough orders for ships in order
for the company to meet loan obligations," and that
An LOI may be issued to government agencies using floating
equipment, that a linkage scheme be applied to a certain percent
of BASECO's net profit as part of BASECO's amortization
payments to make it justifiable for you, Sir. 91
It is noteworthy that Capt. A.T. Romualdez does not appear to be a
stockholder or officer of BASECO, yet he has presented a report on BASECO
to President Marcos, and his report demonstrates intimate familiarity with
the firm's affairs and problems.
19. Marcos' Response to Reports
President Marcos lost no time in acting on his subordinates'
recommendations, particularly as regards the "spin-off" and the "linkage
scheme" relative to "BASECO's amortization payments."
a. Instructions re "Spin-Off"
Under date of September 28, 1977, he addressed a Memorandum to
Secretary Geronimo Velasco of the Philippine National Oil Company and
Chairman Constante Farias of the National Development Company,
directing them "to participate in the formation of a new corporation resulting
from the spin-off of the shipbuilding component of BASECO along the
following guidelines:
a. Equity participation of government shall be through
LUSTEVECO and NDC in the amount of P115,903,000 consisting
of the following obligations of BASECO which are hereby

167

authorized to be converted to equity of the said new corporation,

to wit:
1. NDC P83,865,000 (P31.165M loan & P52.2M
Reparation)
2. LUSTEVECO P32,538,000 (Reparation)
b. Equity participation of government shall be in the form of nonvoting shares.
For immediate compliance.

92

Mr. Marcos' guidelines were promptly complied with by his subordinates.

Twenty-two (22) days after receiving their president's memorandum, Messrs.
Hilario M. Ruiz, Constante L. Farias and Geronimo Z. Velasco, in
representation of their respective corporations, executed a PREINCORPORATION AGREEMENT dated October 20, 1977. 93 In it, they
undertook to form a shipbuilding corporation to be known as "PHIL-ASIA
SHIPBUILDING CORPORATION," to bring to realization their president's
instructions. It would seem that the new corporation ultimately formed was
actually named "Philippine Dockyard Corporation (PDC)." 94
b. Letter of Instructions No. 670
Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of
instructions. On February 14, 1978, he issued Letter of Instructions No. 670
addressed to the Reparations Commission REPACOM the Philippine National
Oil Company (PNOC), the Luzon Stevedoring Company (LUSTEVECO), and
the National Development Company (NDC). What is commanded therein is
summarized by the Solicitor General, with pithy and not inaccurate
observations as to the effects thereof (in italics), as follows:
* * 1) the shipbuilding equipment procured by BASECO through
reparations be transferred to NDC subject to reimbursement by
NDC to BASECO (of) the amount of s allegedly representing the
handling and incidental expenses incurred by BASECO in the
installation of said equipment (so instead of NDC getting paid on
its loan to BASECO, it was made to pay BASECO instead the
amount of P18.285M); 2) the shipbuilding equipment procured
from reparations through EPZA, now in the possession of
BASECO and BSDI (Bay Shipyard & Drydocking, Inc.) be
transferred to LUSTEVECO through PNOC; and 3) the
shipbuilding equipment (thus) transferred be invested by
168

LUSTEVECO, acting through PNOC and NDC, as the

government's equity participation in a shipbuilding corporation to
be established in partnership with the private sector.
xxx xxx xxx
And so, through a simple letter of instruction and memorandum,
BASECO's loan obligation to NDC and REPACOM * * in the total
amount of P83.365M and BSD's REPACOM loan of P32.438M
were wiped out and converted into non-voting preferred
shares. 95
20. Evidence of Marcos'
Ownership of BASECO
It cannot therefore be gainsaid that, in the context of the proceedings at bar,
the actuality of the control by President Marcos of BASECO has been
sufficiently shown.
Other evidence submitted to the Court by the Solicitor General proves that
President Marcos not only exercised control over BASECO, but also that
he actually owns well nigh one hundred percent of its outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986,
there were 218,819 shares of stock outstanding, ostensibly owned by twenty
(20) stockholders. 96 Four of these twenty are juridical persons: (1) Metro
Bay Drydock, recorded as holding 136,370 shares; (2) Fidelity Management,
Inc., 65,882 shares; (3) Trident Management, 7,412 shares; and (4) United
Phil. Lines, 1,240 shares. The first three corporations, among themselves,
own an aggregate of 209,664 shares of BASECO stock, or 95.82% of the
outstanding stock.
Now, the Solicitor General has drawn the Court's attention to the intriguing
circumstance that found in Malacanang shortly after the sudden flight of
President Marcos, were certificates corresponding to more than ninety-five
percent (95%) of all the outstanding shares of stock of BASECO, endorsed in
blank, together with deeds of assignment of practically all the outstanding
shares of stock of the three (3) corporations above mentioned (which
hold 95.82% of all BASECO stock), signed by the owners thereof although
not notarized. 97
More specifically, found in Malacanang (and now in the custody of the PCGG)
were:
169

1) the deeds of assignment of all 600 outstanding shares of

Fidelity Management Inc. which supposedly owns as aforesaid
65,882 shares of BASECO stock;
2) the deeds of assignment of 2,499,995 of the 2,500,000
outstanding shares of Metro Bay Drydock Corporation which
allegedly owns 136,370 shares of BASECO stock;
3) the deeds of assignment of 800 outstanding shares of Trident
Management Co., Inc. which allegedly owns 7,412 shares of
BASECO stock, assigned in blank; 98 and
4) stock certificates corresponding to 207,725 out of the
218,819 outstanding shares of BASECO stock; that is, all but 5
% all endorsed in blank. 99
While the petitioner's counsel was quick to dispute this asserted fact,
assuring this Court that the BASECO stockholders were still in possession of
their respective stock certificates and had "never endorsed * * them in blank
or to anyone else," 100 that denial is exposed by his own prior and
subsequent recorded statements as a mere gesture of defiance rather than a
verifiable factual declaration.
By resolution dated September 25, 1986, this Court granted BASECO's
counsel a period of 10 days "to SUBMIT, as undertaken by him, * * the
certificates of stock issued to the stockholders of * * BASECO as of April 23,
1986, as listed in Annex 'P' of the petition.' 101 Counsel thereafter moved
for extension; and in his motion dated October 2, 1986, he declared inter
alia that "said certificates of stock are in the possession of third parties,
among whom being the respondents themselves * * and petitioner is still
endeavoring to secure copies thereof from them." 102 On the same day he
filed another motion praying that he be allowed "to secure copies of the
Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other
Certificates, of Stock of petitioner's stockholders in possession of
respondents." 103
In a Manifestation dated October 10, 1986,, 104 the Solicitor General not
unreasonably argued that counsel's aforestated motion to secure copies of
the stock certificates "confirms the fact that stockholders of petitioner
corporation are not in possession of * * (their) certificates of stock," and the
reason, according to him, was "that 95% of said shares * * have been
endorsed in blank and found in Malacaang after the former President and
his family fled the country." To this manifestation BASECO's counsel replied

170

on November 5, 1986, as already mentioned, Stubbornly insisting that the

firm's stockholders had not really assigned their stock. 105
In view of the parties' conflicting declarations, this Court resolved on
November 27, 1986 among other things "to require * * the petitioner * *
to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals
of the stock certificates alleged to be in its possession or accessible to it,
mentioned and described in Annex 'P' of its petition, (and other pleadings) *
* within ten (10) days from notice." 106 In a motion filed on December 5,
1986, 107 BASECO's counsel made the statement, quite surprising in the
premises, that "it will negotiate with the owners (of the BASECO stock in
question) to allow petitioner to borrow from them, if available, the
certificates referred to" but that "it needs a more sufficient time therefor"
(sic). BASECO's counsel however eventually had to confess inability to
produce the originals of the stock certificates, putting up the feeble excuse
that while he had "requested the stockholders to allow * * (him) to borrow
said certificates, * * some of * * (them) claimed that they had delivered the
certificates to third parties by way of pledge and/or to secure performance of
obligations, while others allegedly have entrusted them to third parties in
view of last national emergency." 108 He has conveniently omitted, nor has
he offered to give the details of the transactions adverted to by him, or to
explain why he had not impressed on the supposed stockholders the
primordial importance of convincing this Court of their present custody of the
originals of the stock, or if he had done so, why the stockholders are
unwilling to agree to some sort of arrangement so that the originals of their
certificates might at the very least be exhibited to the Court. Under the
circumstances, the Court can only conclude that he could not get the
originals from the stockholders for the simple reason that, as the Solicitor
General maintains, said stockholders in truth no longer have them in their
possession, these having already been assigned in blank to then President
Marcos.
21. Facts Justify Issuance of Sequestration and Takeover Orders
In the light of the affirmative showing by the Government that, prima
facie at least, the stockholders and directors of BASECO as of April,
1986 109 were mere "dummies," nominees or alter egos of President
Marcos; at any rate, that they are no longer owners of any shares of stock in
the corporation, the conclusion cannot be avoided that said stockholders and
directors have no basis and no standing whatever to cause the filing and
prosecution of the instant proceeding; and to grant relief to BASECO, as
prayed for in the petition, would in effect be to restore the assets, properties
and business sequestered and taken over by the PCGG to persons who are
"dummies," nominees or alter egos of the former president.
171

From the standpoint of the PCGG, the facts herein stated at some length do
indeed show that the private corporation known as BASECO was "owned or
controlled by former President Ferdinand E. Marcos * * during his
administration, * * through nominees, by taking advantage of * * (his)
public office and/or using * * (his) powers, authority, influence * *," and
that NASSCO and other property of the government had been taken over by
BASECO; and the situation justified the sequestration as well as the
provisional takeover of the corporation in the public interest, in accordance
with the terms of Executive Orders No. 1 and 2, pending the filing of the
requisite actions with the Sandiganbayan to cause divestment of title thereto
from Marcos, and its adjudication in favor of the Republic pursuant to
Executive Order No. 14.
As already earlier stated, this Court agrees that this assessment of the facts
is correct; accordingly, it sustains the acts of sequestration and takeover by
the PCGG as being in accord with the law, and, in view of what has thus far
been set out in this opinion, pronounces to be without merit the theory that
said acts, and the executive orders pursuant to which they were done, are
fatally defective in not according to the parties affected prior notice and
hearing, or an adequate remedy to impugn, set aside or otherwise obtain
relief therefrom, or that the PCGG had acted as prosecutor and judge at the
same time.
22. Executive Orders Not a Bill of Attainder
Neither will this Court sustain the theory that the executive orders in
question are a bill of attainder. 110 "A bill of attainder is a legislative act
which inflicts punishment without judicial trial." 111 "Its essence is the
substitution of a legislative for a judicial determination of guilt." 112
In the first place, nothing in the executive orders can be reasonably
construed as a determination or declaration of guilt. On the contrary, the
executive orders, inclusive of Executive Order No. 14, make it perfectly clear
that any judgment of guilt in the amassing or acquisition of "ill-gotten
wealth" is to be handed down by a judicial tribunal, in this case,
the Sandiganbayan, upon complaint filed and prosecuted by the PCGG. In
the second place, no punishment is inflicted by the executive orders, as the
merest glance at their provisions will immediately make apparent. In no
sense, therefore, may the executive orders be regarded as a bill of attainder.
23. No Violation of Right against Self-Incrimination and Unreasonable
Searches and Seizures

172

BASECO also contends that its right against self incrimination and
unreasonable searches and seizures had been transgressed by the Order of
April 18, 1986 which required it "to produce corporate records from 1973 to
1986 under pain of contempt of the Commission if it fails to do so." The
order was issued upon the authority of Section 3 (e) of Executive Order No.
1, treating of the PCGG's power to "issue subpoenas requiring * * the
production of such books, papers, contracts, records, statements of accounts
and other documents as may be material to the investigation conducted by
the Commission, " and paragraph (3), Executive Order No. 2 dealing with its
power to "require all persons in the Philippines holding * * (alleged "illgotten") assets or properties, whether located in the Philippines or abroad,
in their names as nominees, agents or trustees, to make full disclosure of
the same * *." The contention lacks merit.
It is elementary that the right against self-incrimination has no application to
juridical persons.
While an individual may lawfully refuse to answer incriminating
questions unless protected by an immunity statute, it does not
follow that a corporation, vested with special privileges and
franchises, may refuse to show its hand when charged with an
abuse ofsuchprivileges * * 113
Relevant jurisprudence is also cited by the Solicitor General. 114
* * corporations are not entitled to all of the constitutional
protections which private individuals have. * * They are not at
all within the privilege against self-incrimination, although this
court more than once has said that the privilege runs very
closely with the 4th Amendment's Search and Seizure
provisions. It is also settled that an officer of the company
cannot refuse to produce its records in its possession upon the
plea that they will either incriminate him or may incriminate
it." (Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186;
emphasis, the Solicitor General's).
* * The corporation is a creature of the state. It is presumed to
be incorporated for the benefit of the public. It received certain
special privileges and franchises, and holds them subject to the
laws of the state and the limitations of its charter. Its powers are
limited by law. It can make no contract not authorized by its
charter. Its rights to act as a corporation are only preserved to it
so long as it obeys the laws of its creation. There is a reserve
right in the legislature to investigate its contracts and find out
173

whether it has exceeded its powers. It would be a strange

anomaly to hold that a state, having chartered a corporation to
make use of certain franchises, could not, in the exercise of
sovereignty, inquire how these franchises had been employed,
and whether they had been abused, and demand the production
of the corporate books and papers for that purpose. The defense
amounts to this, that an officer of the corporation which is
charged with a criminal violation of the statute may plead the
criminality of such corporation as a refusal to produce its books.
To state this proposition is to answer it. While an individual may
lawfully refuse to answer incriminating questions unless
protected by an immunity statute, it does not follow that a
corporation, vested with special privileges and franchises may
refuse to show its hand when charged with an abuse of such
privileges. (Wilson v. United States, 55 Law Ed., 771, 780
[emphasis, the Solicitor General's])
At any rate, Executive Order No. 14-A, amending Section 4 of Executive
Order No. 14 assures protection to individuals required to produce evidence
before the PCGG against any possible violation of his right against selfincrimination. It gives them immunity from prosecution on the basis of
testimony or information he is compelled to present. As amended, said
Section 4 now provides that
xxx xxx xxx
The witness may not refuse to comply with the order on the
basis of his privilege against self-incrimination; but no testimony
or other information compelled under the order (or any
information directly or indirectly derived from such testimony, or
other information) may be used against the witness in any
criminal case, except a prosecution for perjury, giving a false
statement, or otherwise failing to comply with the order.
The constitutional safeguard against unreasonable searches and seizures
finds no application to the case at bar either. There has been no search
undertaken by any agent or representative of the PCGG, and of course no
seizure on the occasion thereof.
24. Scope and Extent of Powers of the PCGG
One other question remains to be disposed of, that respecting the scope and
extent of the powers that may be wielded by the PCGG with regard to the
properties or businesses placed under sequestration or provisionally taken
174

over. Obviously, it is not a question to which an answer can be easily given,

much less one which will suffice for every conceivable situation.
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG cannot
exercise acts of dominion over property sequestered, frozen or provisionally
taken over. AS already earlier stressed with no little insistence, the act of
sequestration; freezing or provisional takeover of property does not import
or bring about a divestment of title over said property; does not make the
PCGG the owner thereof. In relation to the property sequestered, frozen or
provisionally taken
over, the PCGG is
a conservator,
not
an
owner. Therefore, it can not perform acts of strict ownership; and this is
specially true in the situations contemplated by the sequestration rules
where, unlike cases of receivership, for example, no court exercises effective
supervision or can upon due application and hearing, grant authority for the
performance of acts of dominion.
Equally evident is that the resort to the provisional remedies in question
should entail the least possible interference with business operations or
activities so that, in the event that the accusation of the business enterprise
being "ill gotten" be not proven, it may be returned to its rightful owner as
far as possible in the same condition as it was at the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the property
or business sequestered or provisionally taken over, much like a courtappointed receiver, 115 such as to bring and defend actions in its own
name; receive rents; collect debts due; pay outstanding debts; and
generally do such other acts and things as may be necessary to fulfill its
mission as conservator and administrator. In this context, it may in addition
enjoin or restrain any actual or threatened commission of acts by any person
or entity that may render moot and academic, or frustrate or otherwise
make ineffectual its efforts to carry out its task; punish for direct or indirect
contempt in accordance with the Rules of Court; and seek and secure the
assistance
of
any
office,
agency
or
instrumentality
of
the
government. 116 In the case of sequestered businesses generally (i.e.,
going concerns, businesses in current operation), as in the case of
sequestered objects, its essential role, as already discussed, is that of
conservator, caretaker, "watchdog" or overseer. It is not that of manager, or
innovator, much less an owner.

175

c. Powers over Business Enterprises Taken Over by Marcos or

Entities or Persons Close to him; Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to
have been "taken over by the government of the Marcos Administration or
by entities or persons close to former President Marcos," 117 the PCGG is
given power and authority, as already adverted to, to "provisionally take (it)
over in the public interest or to prevent * * (its) disposal or dissipation;" and
since the term is obviously employed in reference to going concerns, or
business enterprises in operation, something more than mere physical
custody is connoted; the PCGG may in this case exercise some measure of
control in the operation, running, or management of the business itself. But
even in this special situation, the intrusion into management should be
restricted to the minimum degree necessary to accomplish the legislative
will, which is "to prevent the disposal or dissipation" of the business
enterprise. There should be no hasty, indiscriminate, unreasoned
replacement or substitution of management officials or change of policies,
particularly in respect of viable establishments. In fact, such a replacement
or substitution should be avoided if at all possible, and undertaken only
when justified by demonstrably tenable grounds and in line with the stated
objectives of the PCGG. And it goes without saying that where replacement
of management officers may be called for, the greatest prudence,
circumspection, care and attention - should accompany that undertaking to
the end that truly competent, experienced and honest managers may be
recruited. There should be no role to be played in this area by rank
amateurs, no matter how wen meaning. The road to hell, it has been said, is
paved with good intentions. The business is not to be experimented or
played around with, not run into the ground, not driven to bankruptcy, not
fleeced, not ruined. Sight should never be lost sight of the ultimate objective
of the whole exercise, which is to turn over the business to the Republic,
once judicially established to be "ill-gotten." Reason dictates that it is only
under these conditions and circumstances that the supervision,
administration and control of business enterprises provisionally taken over
may legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and circumstances
that the PCGG may properly exercise the prerogative to vote sequestered
stock of corporations, granted to it by the President of the Philippines
through a Memorandum dated June 26, 1986. That Memorandum authorizes
the PCGG, "pending the outcome of proceedings to determine the ownership
of * * (sequestered) shares of stock," "to vote such shares of stock as it
may have sequestered in corporations at all stockholders' meetings called for
176

the election of directors, declaration of dividends, amendment of the Articles

of Incorporation, etc." The Memorandum should be construed in such a
manner as to be consistent with, and not contradictory of the Executive
Orders earlier promulgated on the same matter. There should be no exercise
of the right to vote simply because the right exists, or because the stocks
sequestered constitute the controlling or a substantial part of the corporate
voting power. The stock is not to be voted to replace directors, or revise the
articles or by-laws, or otherwise bring about substantial changes in policy,
program or practice of the corporation except for demonstrably weighty and
defensible grounds, and always in the context of the stated purposes of
sequestration or provisional takeover, i.e., to prevent the dispersion or undue
disposal of the corporate assets. Directors are not to be voted out simply
because the power to do so exists. Substitution of directors is not to be done
without reason or rhyme, should indeed be shunned if at an possible, and
undertaken only when essential to prevent disappearance or wastage of
corporate property, and always under such circumstances as assure that the
replacements are truly possessed of competence, experience and probity.
In the case at bar, there was adequate justification to vote the incumbent
directors out of office and elect others in their stead because the evidence
showed prima facie that the former were just tools of President Marcos and
were no longer owners of any stock in the firm, if they ever were at all. This
is why, in its Resolution of October 28, 1986; 118 this Court declared that
Petitioner has failed to make out a case of grave abuse or excess
of jurisdiction in respondents' calling and holding of a
stockholders' meeting for the election of directors as authorized
by the Memorandum of the President * * (to the PCGG) dated
June 26, 1986, particularly, where as in this case, the
government can, through its designated directors, properly
exercise control and management over what appear to be
properties and assets owned and belonging to the government
itself and over which the persons who appear in this case on
behalf of BASECO have failed to show any right or even any
shareholding in said corporation.
It must however be emphasized that the conduct of the PCGG nominees in
the BASECO Board in the management of the company's affairs should
henceforth be guided and governed by the norms herein laid down. They
should never for a moment allow themselves to forget that they are
conservators, not owners of the business; they are fiduciaries, trustees, of
whom the highest degree of diligence and rectitude is, in the premises,
required.

177

25. No Sufficient Showing of Other Irregularities

As to the other irregularities complained of by BASECO, i.e., the cancellation
or revision, and the execution of certain contracts, inclusive of the
termination of the employment of some of its executives, 119 this Court
cannot, in the present state of the evidence on record, pass upon them. It is
not necessary to do so. The issues arising therefrom may and will be left for
initial determination in the appropriate action. But the Court will state that
absent any showing of any important cause therefor, it will not normally
substitute its judgment for that of the PCGG in these individual transactions.
It is clear however, that as things now stand, the petitioner cannot be said to
have established the correctness of its submission that the acts of the PCGG
in question were done without or in excess of its powers, or with grave
abuse of discretion.
WHEREFORE, the petition is dismissed. The temporary restraining order
issued on October 14, 1986 is lifted.
Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.

ULEP v. The Legal Clinic, 223 S 378 (1993)

Bar Matter No. 553 June 17, 1993
MAURICIO
C.
vs.
THE LEGAL CLINIC, INC., respondent.

ULEP, petitioner,

R E SO L U T I O N

REGALADO, J.:
Petitioner prays this Court "to order the respondent to cease and desist from
issuing advertisements similar to or of the same tenor as that of annexes "A"
and "B" (of said petition) and to perpetually prohibit persons or entities from
making advertisements pertaining to the exercise of the law profession other
than those allowed by law."
The advertisements complained of by herein petitioner are as follows:
178

Annex A
SECRET
P560.00
for
Info
on
ANNULMENT. VISA.

valid
DIVORCE.

MARRIAGE?
marriage.
ABSENCE.

THE Please call: 521-0767 LEGAL 5217232, 5222041 CLINIC,

INC. 8:30 am 6:00 pm 7-Flr. Victoria Bldg., UN Ave., Mla.
Annex B
GUAM DIVORCE.
DON PARKINSON
an Attorney in Guam, is giving FREE BOOKS on Guam Divorce
through The Legal Clinic beginning Monday to Friday during
office hours.
Guam divorce. Annulment of Marriage. Immigration Problems,
Visa Ext. Quota/Non-quota Res. & Special Retiree's Visa.
Declaration of Absence. Remarriage to Filipina Fiancees.
Adoption. Investment in the Phil. US/Foreign Visa for Filipina
Spouse/Children. Call Marivic.
THE 7F Victoria Bldg. 429 UN Ave., LEGAL Ermita, Manila nr. US
Embassy CLINIC, INC. 1 Tel. 521-7232; 521-7251; 522-2041;
521-0767
It is the submission of petitioner that the advertisements above reproduced
are champterous, unethical, demeaning of the law profession, and
destructive of the confidence of the community in the integrity of the
members of the bar and that, as a member of the legal profession, he is
ashamed and offended by the said advertisements, hence the reliefs sought
in his petition as hereinbefore quoted.
In its answer to the petition, respondent admits the fact of publication of
said advertisement at its instance, but claims that it is not engaged in the
practice of law but in the rendering of "legal support services" through
179

paralegals with the use of modern computers and electronic machines.

Respondent further argues that assuming that the services advertised are
legal services, the act of advertising these services should be allowed
supposedly
in the light of the case of John R. Bates and Van O'Steen vs. State Bar of
Arizona, 2 reportedly decided by the United States Supreme Court on June 7,
1977.
Considering the critical implications on the legal profession of the issues
raised herein, we required the (1) Integrated Bar of the Philippines (IBP), (2)
Philippine Bar Association (PBA), (3) Philippine Lawyers' Association (PLA),
(4) U.P. Womens Lawyers' Circle (WILOCI), (5) Women Lawyers Association
of the Philippines (WLAP), and (6) Federacion International de Abogadas
(FIDA) to submit their respective position papers on the controversy and,
thereafter, their memoranda. 3 The said bar associations readily responded
and extended their valuable services and cooperation of which this Court
takes note with appreciation and gratitude.
The main issues posed for resolution before the Court are whether or not the
services offered by respondent, The Legal Clinic, Inc., as advertised by it
constitutes practice of law and, in either case, whether the same can
properly be the subject of the advertisements herein complained of.
Before proceeding with an in-depth analysis of the merits of this case, we
deem it proper and enlightening to present hereunder excerpts from the
respective position papers adopted by the aforementioned bar associations
and the memoranda submitted by them on the issues involved in this bar
matter.
1. Integrated Bar of the Philippines:
xxx xxx xxx
Notwithstanding the subtle manner by which respondent
endeavored to distinguish the two terms, i.e., "legal support
services" vis-a-vis "legal services", common sense would readily
dictate that the same are essentially without substantial
distinction. For who could deny that document search, evidence
gathering, assistance to layman in need of basic institutional
180

services from government or non-government agencies like

birth, marriage, property, or business registration, obtaining
documents like clearance, passports, local or foreign visas,
constitutes practice of law?
xxx xxx xxx
The Integrated Bar of the Philippines (IBP) does not wish to
make issue with respondent's foreign citations. Suffice it to state
that the IBP has made its position manifest, to wit, that it
strongly opposes the view espoused by respondent (to the effect
that today it is alright to advertise one's legal services).
The IBP accordingly declares in no uncertain terms its opposition
to respondent's act of establishing a "legal clinic" and of
concomitantly advertising the same through newspaper
publications.
The IBP would therefore invoke the administrative supervision of
this Honorable Court to perpetually restrain respondent from
undertaking highly unethical activities in the field of law practice
as aforedescribed. 4
xxx xxx xxx
A. The use of the name "The Legal Clinic, Inc." gives the
impression that respondent corporation is being operated by
lawyers and that it renders legal services.
While the respondent repeatedly denies that it offers legal
services to the public, the advertisements in question give the
impression that respondent is offering legal services. The Petition
in fact simply assumes this to be so, as earlier mentioned,
apparently because this (is) the effect that the advertisements
have on the reading public.
The impression created by the advertisements in question can be
traced, first of all, to the very name being used by respondent
"The Legal Clinic, Inc." Such a name, it is respectfully submitted
connotes the rendering of legal services for legal problems, just
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like a medical clinic connotes medical services for medical

problems. More importantly, the term "Legal Clinic" connotes
lawyers, as the term medical clinic connotes doctors.
Furthermore, the respondent's name, as published in the
advertisements subject of the present case, appears with (the)
scale(s) of justice, which all the more reinforces the impression
that it is being operated by members of the bar and that it offers
legal services. In addition, the advertisements in question
appear with a picture and name of a person being represented
as a lawyer from Guam, and this practically removes whatever
doubt may still remain as to the nature of the service or services
being offered.
It thus becomes irrelevant whether respondent is merely offering
"legal support services" as claimed by it, or whether it offers
legal services as any lawyer actively engaged in law practice
does. And it becomes unnecessary to make a distinction between
"legal services" and "legal support services," as the respondent
would have it. The advertisements in question leave no room for
doubt in the minds of the reading public that legal services are
being offered by lawyers, whether true or not.
B. The advertisements in question are meant to induce the
performance of acts contrary to law, morals, public order and
public policy.
It may be conceded that, as the respondent claims, the
advertisements in question are only meant to inform the general
public of the services being offered by it. Said advertisements,
however, emphasize to Guam divorce, and any law student ought
to know that under the Family Code, there is only one instance
when a foreign divorce is recognized, and that is:
Article 26. . . .
Where a marriage between a Filipino citizen and a
foreigner is validly celebrated and a divorce is
thereafter validly obtained abroad by the alien
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spouse capacitating him or her to remarry, the

Filipino spouse shall have capacity to remarry under
Philippine Law.
It must not be forgotten, too, that the Family Code (defines) a
marriage as follows:
Article 1. Marriage is special contract of permanent
union between a man and woman entered into
accordance with law for the establishment of
conjugal and family life. It is the foundation of the
family and an inviolable social institution whose
nature, consequences, and incidents are governed by
law and not subject to stipulation, except that
marriage settlements may fix the property relation
during the marriage within the limits provided by this
Code.
By simply reading the questioned advertisements, it is obvious
that the message being conveyed is that Filipinos can avoid the
legal consequences of a marriage celebrated in accordance with
our law, by simply going to Guam for a divorce. This is not only
misleading, but encourages, or serves to induce, violation of
Philippine law. At the very least, this can be considered "the dark
side" of legal practice, where certain defects in Philippine laws
are exploited for the sake of profit. At worst, this is outright
malpractice.
Rule 1.02. A lawyer shall not counsel or abet
activities aimed at defiance of the law or at lessening
confidence in the legal system.
In addition, it may also be relevant to point out that
advertisements such as that shown in Annex "A" of the Petition,
which contains a cartoon of a motor vehicle with the words "Just
Married" on its bumper and seems to address those planning a
"secret marriage," if not suggesting a "secret marriage," makes
light of the "special contract of permanent union," the inviolable
social institution," which is how the Family Code describes
183

marriage, obviously to emphasize its sanctity and inviolability.

Worse, this particular advertisement appears to encourage
marriages celebrated in secrecy, which is suggestive of immoral
publication of applications for a marriage license.
If the article "Rx for Legal Problems" is to be reviewed, it can
readily be concluded that the above impressions one may gather
from the advertisements in question are accurate. The Sharon
Cuneta-Gabby Concepcion example alone confirms what the
advertisements suggest. Here it can be seen that criminal acts
are
being
encouraged
or
committed
(a bigamous marriage in Hong Kong or Las Vegas) with impunity
simply because the jurisdiction of Philippine courts does not
extend to the place where the crime is committed.
Even if it be assumed, arguendo, (that) the "legal support
services" respondent offers do not constitute legal services as
commonly understood, the advertisements in question give the
impression that respondent corporation is being operated by
lawyers and that it offers legal services, as earlier discussed.
Thus, the only logical consequence is that, in the eyes of an
ordinary newspaper reader, members of the bar themselves are
encouraging or inducing the performance of acts which are
contrary to law, morals, good customs and the public good,
thereby destroying and demeaning the integrity of the Bar.
xxx xxx xxx
It is respectfully submitted that respondent should be enjoined
from causing the publication of the advertisements in question,
or any other advertisements similar thereto. It is also submitted
that respondent should be prohibited from further performing or
offering some of the services it presently offers, or, at the very
least, from offering such services to the public in general.
The IBP is aware of the fact that providing computerized legal
research, electronic data gathering, storage and retrieval,
standardized legal forms, investigators for gathering of evidence,
and like services will greatly benefit the legal profession and
184

should not be stifled but instead encouraged. However, when the

conduct of such business by non-members of the Bar encroaches
upon the practice of law, there can be no choice but to prohibit
such business.
Admittedly, many of the services involved in the case at bar can
be better performed by specialists in other fields, such as
computer experts, who by reason of their having devoted time
and effort exclusively to such field cannot fulfill the exacting
requirements for admission to the Bar. To prohibit them from
"encroaching" upon the legal profession will deny the profession
of the great benefits and advantages of modern technology.
Indeed, a lawyer using a computer will be doing better than a
lawyer using a typewriter, even if both are (equal) in skill.
Both the Bench and the Bar, however, should be careful not to
allow or tolerate the illegal practice of law in any form, not only
for the protection of members of the Bar but also, and more
importantly, for the protection of the public. Technological
development in the profession may be encouraged without
tolerating, but instead ensuring prevention of illegal practice.
There might be nothing objectionable if respondent is allowed to
perform all of its services, but only if such services are made
available exclusively to members of the Bench and Bar.
Respondent would then be offering technical assistance, not legal
services. Alternatively, the more difficult task of carefully
distinguishing between which service may be offered to the
public in general and which should be made available exclusively
to members of the Bar may be undertaken. This, however, may
require further proceedings because of the factual considerations
involved.
It must be emphasized, however, that some of respondent's
services ought to be prohibited outright, such as acts which tend
to suggest or induce celebration abroad of marriages which are
bigamous or otherwise illegal and void under Philippine law.
While respondent may not be prohibited from simply
disseminating information regarding such matters, it must be
185

required to include, in the information given, a disclaimer that it

is not authorized to practice law, that certain course of action
may be illegal under Philippine law, that it is not authorized or
capable of rendering a legal opinion, that a lawyer should be
consulted before deciding on which course of action to take, and
that it cannot recommend any particular lawyer without
subjecting itself to possible sanctions for illegal practice of law.
If respondent is allowed to advertise, advertising should be
directed exclusively at members of the Bar, with a clear and
unmistakable disclaimer that it is not authorized to practice law
or perform legal services.
The benefits of being assisted by paralegals cannot be ignored.
But nobody should be allowed to represent himself as a
"paralegal" for profit, without such term being clearly defined by
rule or regulation, and without any adequate and effective
means of regulating his activities. Also, law practice in a
corporate form may prove to be advantageous to the legal
profession, but before allowance of such practice may be
considered, the corporation's Article of Incorporation and Bylaws must conform to each and every provision of the Code of
Professional Responsibility and the Rules of Court. 5
2. Philippine Bar Association:
xxx xxx xxx.
Respondent asserts that it "is not engaged in the practice of law
but engaged in giving legal support services to lawyers and
laymen, through experienced paralegals, with the use of modern
computers and electronic machines" (pars. 2 and 3, Comment).
This is absurd. Unquestionably, respondent's acts of holding out
itself to the public under the trade name "The Legal Clinic, Inc.,"
and soliciting employment for its enumerated services fall within
the realm of a practice which thus yields itself to the regulatory
powers of the Supreme Court. For respondent to say that it is
merely engaged in paralegal work is to stretch credulity.
Respondent's own commercial advertisement which announces a
186

certain Atty. Don Parkinson to be handling the fields of law belies

its pretense. From all indications, respondent "The Legal Clinic,
Inc." is offering and rendering legal services through its reserve
of lawyers. It has been held that the practice of law is not limited
to the conduct of cases in court, but includes drawing of deeds,
incorporation, rendering opinions, and advising clients as to their
legal right and then take them to an attorney and ask the latter
to look after their case in court See Martin, Legal and Judicial
Ethics, 1984 ed., p. 39).
It is apt to recall that only natural persons can engage in the
practice of law, and such limitation cannot be evaded by
a corporation employing competent lawyers to practice for it.
Obviously, this is the scheme or device by which respondent
"The Legal Clinic, Inc." holds out itself to the public and solicits
employment of its legal services. It is an odious vehicle for
deception, especially so when the public cannot ventilate any
grievance for malpractice against the business conduit. Precisely,
the limitation of practice of law to persons who have been duly
admitted as members of the Bar (Sec. 1, Rule 138, Revised
Rules of Court) is to subject the members to the discipline of the
Supreme Court. Although respondent uses its business name,
the persons and the lawyers who act for it are subject to court
discipline. The practice of law is not a profession open to all who
wish to engage in it nor can it be assigned to another (See 5 Am.
Jur. 270). It is a personal right limited to persons who have
qualified themselves under the law. It follows that not only
respondent but also all the persons who are acting for
respondent are the persons engaged in unethical law practice. 6
3. Philippine Lawyers' Association:
The Philippine Lawyers' Association's position, in answer to the
issues stated herein, are wit:
1. The Legal Clinic is engaged in the practice of law;
2. Such practice is unauthorized;

187

3. The advertisements complained of are not only unethical, but

also misleading and patently immoral; and
4. The Honorable Supreme Court has the power to supress and
punish the Legal Clinic and its corporate officers for its
unauthorized practice of law and for its unethical, misleading and
immoral advertising.
xxx xxx xxx
Respondent posits that is it not engaged in the practice of law. It
claims that it merely renders "legal support services" to answers,
litigants and the general public as enunciated in the Primary
Purpose Clause of its Article(s) of Incorporation. (See pages 2 to
5 of Respondent's Comment). But its advertised services, as
enumerated above, clearly and convincingly show that it is
indeed engaged in law practice, albeit outside of court.
As advertised, it offers the general public its advisory services on
Persons and Family Relations Law, particularly regarding foreign
divorces, annulment of marriages, secret marriages, absence
and adoption; Immigration Laws, particularly on visa related
problems, immigration problems; the Investments Law of the
Philippines and such other related laws.
Its advertised services unmistakably require the application of
the aforesaid law, the legal principles and procedures related
thereto, the legal advices based thereon and which activities call
for legal training, knowledge and experience.
Applying the test laid down by the Court in the aforecited Agrava
Case, the activities of respondent fall squarely and are embraced
in what lawyers and laymen equally term as "the practice of
law." 7
4. U.P. Women Lawyers' Circle:
In resolving, the issues before this Honorable Court, paramount
consideration should be given to the protection of the general
188

public from the danger of being exploited by unqualified persons

or entities who may be engaged in the practice of law.
At present, becoming a lawyer requires one to take a rigorous
four-year course of study on top of a four-year bachelor of arts
or sciences course and then to take and pass the bar
examinations. Only then, is a lawyer qualified to practice law.
While the use of a paralegal is sanctioned in many jurisdiction as
an aid to the administration of justice, there are in those
jurisdictions, courses of study and/or standards which would
qualify these paralegals to deal with the general public as such.
While it may now be the opportune time to establish these
courses of study and/or standards, the fact remains that at
present, these do not exist in the Philippines. In the meantime,
this Honorable Court may decide to make measures to protect
the general public from being exploited by those who may be
dealing with the general public in the guise of being "paralegals"
without being qualified to do so.
In the same manner, the general public should also be protected
from the dangers which may be brought about by advertising of
legal services. While it appears that lawyers are prohibited under
the present Code of Professional Responsibility from advertising,
it appears in the instant case that legal services are being
advertised not by lawyers but by an entity staffed by
"paralegals." Clearly, measures should be taken to protect the
general public from falling prey to those who advertise legal
services without being qualified to offer such services. 8
A perusal of the questioned advertisements of Respondent,
however, seems to give the impression that information
regarding validity of marriages, divorce, annulment of marriage,
immigration, visa extensions, declaration of absence, adoption
and foreign investment, which are in essence, legal matters , will
be given to them if they avail of its services. The Respondent's
name The Legal Clinic, Inc. does not help matters. It gives
the impression again that Respondent will or can cure the legal
problems brought to them. Assuming that Respondent is, as
189

claimed, staffed purely by paralegals, it also gives the misleading

impression that there are lawyers involved in The Legal Clinic,
Inc., as there are doctors in any medical clinic, when only
"paralegals" are involved in The Legal Clinic, Inc.
Respondent's allegations are further belied by the very
admissions of its President and majority stockholder, Atty.
Nogales, who gave an insight on the structure and main purpose
of Respondent corporation in the aforementioned "Starweek"
article." 9
5. Women Lawyer's Association of the Philippines:
Annexes "A" and "B" of the petition are clearly advertisements to
solicit cases for the purpose of gain which, as provided for under
the above cited law, (are) illegal and against the Code of
Professional Responsibility of lawyers in this country.
Annex "A" of the petition is not only illegal in that it is an
advertisement to solicit cases, but it is illegal in that in bold
letters it announces that the Legal Clinic, Inc., could work
out/cause the celebration of a secret marriage which is not only
illegal but immoral in this country. While it is advertised that one
has to go to said agency and pay P560 for a valid marriage it is
certainly fooling the public for valid marriages in the Philippines
are solemnized only by officers authorized to do so under the
law. And to employ an agency for said purpose of contracting
marriage is not necessary.
No amount of reasoning that in the USA, Canada and other
countries the trend is towards allowing lawyers to advertise their
special skills to enable people to obtain from qualified
practitioners legal services for their particular needs can justify
the use of advertisements such as are the subject matter of the
petition, for one (cannot) justify an illegal act even by whatever
merit the illegal act may serve. The law has yet to be amended
so that such act could become justifiable.

190

We submit further that these advertisements that seem to

project that secret marriages and divorce are possible in this
country for a fee, when in fact it is not so, are highly
reprehensible.
It would encourage people to consult this clinic about how they
could go about having a secret marriage here, when it cannot
nor should ever be attempted, and seek advice on divorce,
where in this country there is none, except under the Code of
Muslim Personal Laws in the Philippines. It is also against good
morals and is deceitful because it falsely represents to the public
to be able to do that which by our laws cannot be done (and) by
our Code of Morals should not be done.
In the case (of) In re Taguda, 53 Phil. 37, the Supreme Court
held that solicitation for clients by an attorney by circulars of
advertisements, is unprofessional, and offenses of this character
justify permanent elimination from the Bar. 10
6. Federacion Internacional de Abogados:
xxx xxx xxx
1.7 That entities admittedly not engaged in the practice of law,
such as management consultancy firms or travel agencies,
whether run by lawyers or not, perform the services rendered by
Respondent does not necessarily lead to the conclusion that
Respondent is not unlawfully practicing law. In the same vein,
however, the fact that the business of respondent (assuming it
can be engaged in independently of the practice of law) involves
knowledge of the law does not necessarily make respondent
guilty of unlawful practice of law.
. . . . Of necessity, no one . . . . acting as a
consultant can render effective service unless he is
familiar with such statutes and regulations. He must
be careful not to suggest a course of conduct which
the law forbids. It seems . . . .clear that (the
consultant's) knowledge of the law, and his use of
191

that knowledge as a factor in determining what

measures he shall recommend, do not constitute the
practice of law . . . . It is not only presumed that all
men know the law, but it is a fact that most men
have considerable acquaintance with broad features
of the law . . . . Our knowledge of the law
accurate or inaccurate moulds our conduct not
only when we are acting for ourselves, but when we
are serving others. Bankers, liquor dealers and
laymen generally possess rather precise knowledge
of the laws touching their particular business or
profession. A good example is the architect, who
must be familiar with zoning, building and fire
prevention codes, factory and tenement house
statutes, and who draws plans and specification in
harmony with the law. This is not practicing law.
But suppose the architect, asked by his client to omit
a fire tower, replies that it is required by the statute.
Or the industrial relations expert cites, in support of
some measure that he recommends, a decision of
the National Labor Relations Board. Are they
practicing law? In my opinion, they are not, provided
no separate fee is charged for the legal advice or
information, and the legal question is subordinate
and incidental to a major non-legal problem.
It is largely a matter of degree and of custom.
If it were usual for one intending to erect a building
on his land to engage a lawyer to advise him and the
architect in respect to the building code and the like,
then an architect who performed this function would
probably be considered to be trespassing on territory
reserved for licensed attorneys. Likewise, if the
industrial relations field had been pre-empted by
lawyers, or custom placed a lawyer always at the
elbow of the lay personnel man. But this is not the
case. The most important body of the industrial
192

relations experts are the officers and business agents

of the labor unions and few of them are lawyers.
Among the larger corporate employers, it has been
the practice for some years to delegate special
responsibility in employee matters to a management
group chosen for their practical knowledge and skill
in such matter, and without regard to legal thinking
or lack of it. More recently, consultants like the
defendants have the same service that the larger
employers get from their own specialized staff.
The handling of industrial relations is growing into a
recognized profession for which appropriate courses
are offered by our leading universities. The court
should be very cautious about declaring [that] a
widespread, well-established method of conducting
business is unlawful, or that the considerable class of
men who customarily perform a certain function
have no right to do so, or that the technical
education given by our schools cannot be used by
the graduates in their business.
In determining whether a man is practicing law, we
should consider his work for any particular client or
customer, as a whole. I can imagine defendant being
engaged primarily to advise as to the law defining his
client's obligations to his employees, to guide his
client's obligations to his employees, to guide his
client along the path charted by law. This, of course,
would be the practice of the law. But such is not the
fact in the case before me. Defendant's primarily
efforts are along economic and psychological lines.
The law only provides the frame within which he
must work, just as the zoning code limits the kind of
building the limits the kind of building the architect
may plan. The incidental legal advice or information
defendant may give, does not transform his activities
into the practice of law. Let me add that if, even as a
minor feature of his work, he performed services
193

which are customarily reserved to members of the

bar, he would be practicing law. For instance, if as
part of a welfare program, he drew employees' wills.
Another branch of defendant's work is the
representations of the employer in the adjustment of
grievances and in collective bargaining, with or
without a mediator. This is not per se the practice of
law. Anyone may use an agent for negotiations and
may select an agent particularly skilled in the subject
under discussion, and the person appointed is free to
accept the employment whether or not he is a
member of the bar. Here, however, there may be an
exception where the business turns on a question of
law. Most real estate sales are negotiated by brokers
who are not lawyers. But if the value of the land
depends on a disputed right-of-way and the principal
role of the negotiator is to assess the probable
outcome of the dispute and persuade the opposite
party to the same opinion, then it may be that only a
lawyer can accept the assignment. Or if a
controversy between an employer and his men grows
from differing interpretations of a contract, or of a
statute, it is quite likely that defendant should not
handle it. But I need not reach a definite conclusion
here, since the situation is not presented by the
proofs.
Defendant also appears to represent the employer
before administrative agencies of the federal
government, especially before trial examiners of the
National Labor Relations Board. An agency of the
federal government, acting by virtue of an authority
granted by the Congress, may regulate the
representation of parties before such agency. The
State of New Jersey is without power to interfere
with such determination or to forbid representation
before the agency by one whom the agency admits.
The rules of the National Labor Relations Board give
194

to a party the right to appear in person, or by

counsel, or by other representative. Rules and
Regulations, September 11th, 1946, S. 203.31.
'Counsel' here means a licensed attorney, and ther
representative' one not a lawyer. In this phase of his
work, defendant may lawfully do whatever the Labor
Board allows, even arguing questions purely legal.
(Auerbacher v. Wood, 53 A. 2d 800, cited in Statsky,
Introduction to Paralegalism [1974], at pp. 154156.).
1.8 From the foregoing, it can be said that a person engaged in a
lawful calling (which may involve knowledge of the law) is not
engaged in the practice of law provided that:
(a) The legal question is subordinate and incidental to a major
non-legal problem;.
(b) The services performed are not customarily reserved to
members of the bar; .
(c) No separate fee is charged for the legal advice or
information.
All these must be considered in relation to the work for any
particular client as a whole.
1.9. If the person involved is both lawyer and non-lawyer, the
Code of Professional Responsibility succintly states the rule of
conduct:
Rule 15.08 A lawyer who is engaged in another profession or
occupation concurrently with the practice of law shall make clear
to his client whether he is acting as a lawyer or in another
capacity.
1.10. In the present case. the Legal Clinic appears to render
wedding services (See Annex "A" Petition). Services on routine,
straightforward marriages, like securing a marriage license, and
making arrangements with a priest or a judge, may not
195

constitute practice of law. However, if the problem is as

complicated as that described in "Rx for Legal Problems" on the
Sharon Cuneta-Gabby Concepcion-Richard Gomez case, then
what may be involved is actually the practice of law. If a nonlawyer, such as the Legal Clinic, renders such services then it is
engaged in the unauthorized practice of law.
1.11. The Legal Clinic also appears to give information on
divorce, absence, annulment of marriage and visas (See
Annexes "A" and "B" Petition). Purely giving informational
materials may not constitute of law. The business is similar to
that of a bookstore where the customer buys materials on the
subject and determines on the subject and determines by
himself what courses of action to take.
It is not entirely improbable, however, that aside from purely
giving information, the Legal Clinic's paralegals may apply the
law to the particular problem of the client, and give legal advice.
Such would constitute unauthorized practice of law.
It cannot be claimed that the publication of a legal
text which publication of a legal text which purports
to say what the law is amount to legal practice. And
the mere fact that the principles or rules stated in
the text may be accepted by a particular reader as a
solution to his problem does not affect this. . . . .
Apparently it is urged that the conjoining of these
two, that is, the text and the forms, with advice as to
how the forms should be filled out, constitutes the
unlawful practice of law. But that is the situation with
many approved and accepted texts. Dacey's book is
sold to the public at large. There is no personal
contact or relationship with a particular individual.
Nor does there exist that relation of confidence and
trust so necessary to the status of attorney and
client. THIS IS THE ESSENTIAL OF LEGAL PRACTICE
THE REPRESENTATION AND ADVISING OF A
PARTICULAR
PERSON
IN
A
PARTICULAR
SITUATION. At most the book assumes to offer
196

general advice on common problems, and does not

purport to give personal advice on a specific problem
peculiar to a designated or readily identified person.
Similarly the defendant's publication does not
purport to give personal advice on a specific problem
peculiar to a designated or readily identified person
in a particular situation in their publication and
sale of the kits, such publication and sale did not
constitutes the unlawful practice of law . . . . There
being no legal impediment under the statute to the
sale of the kit, there was no proper basis for the
injunction against defendant maintaining an office for
the purpose of selling to persons seeking a divorce,
separation, annulment or separation agreement any
printed material or writings relating to matrimonial
law or the prohibition in the memorandum of
modification of the judgment against defendant
having an interest in any publishing house publishing
his manuscript on divorce and against his having any
personal contact with any prospective purchaser. The
record does fully support, however, the finding that
for the change of $75 or $100 for the kit, the
defendant gave legal advice in the course of personal
contacts concerning particular problems which might
arise in the preparation and presentation of the
purchaser's asserted matrimonial cause of action or
pursuit of other legal remedies and assistance in the
preparation of necessary documents (The injunction
therefore sought to) enjoin conduct constituting the
practice of law, particularly with reference to the
giving of advice and counsel by the defendant
relating to specific problems of particular individuals
in connection with a divorce, separation, annulment
of separation agreement sought and should be
affirmed. (State v. Winder, 348, NYS 2D 270 [1973],
cited in Statsky, supra at p. 101.).

197

1.12. Respondent, of course, states that its services are "strictly

non-diagnostic, non-advisory. "It is not controverted, however,
that if the services "involve giving legal advice or counselling,"
such would constitute practice of law (Comment, par. 6.2). It is
in this light that FIDA submits that a factual inquiry may be
necessary for the judicious disposition of this case.
xxx xxx xxx
2.10. Annex "A" may be ethically objectionable in that it can give
the impression (or perpetuate the wrong notion) that there is a
secret marriage. With all the solemnities, formalities and other
requisites of marriages (See Articles 2, et seq., Family Code), no
Philippine marriage can be secret.
2.11. Annex "B" may likewise be ethically objectionable. The
second paragraph thereof (which is not necessarily related to the
first paragraph) fails to state the limitation that only "paralegal
services?" or "legal support services", and not legal services, are
available." 11
A prefatory discussion on the meaning of the phrase "practice of law"
becomes exigent for the proper determination of the issues raised by the
petition at bar. On this score, we note that the clause "practice of law" has
long been the subject of judicial construction and interpretation. The courts
have laid down general principles and doctrines explaining the meaning and
scope of the term, some of which we now take into account.
Practice of law means any activity, in or out of court, which requires the
application of law, legal procedures, knowledge, training and experience. To
engage in the practice of law is to perform those acts which are
characteristic of the profession. Generally, to practice law is to give advice or
render any kind of service that involves legal knowledge or skill. 12
The practice of law is not limited to the conduct of cases in court. It includes
legal advice and counsel, and the preparation of legal instruments and
contract by which legal rights are secured, although such matter may or may
not be pending in a court. 13

198

In the practice of his profession, a licensed attorney at law generally

engages in three principal types of professional activity: legal advice and
instructions to clients to inform them of their rights and obligations,
preparation for clients of documents requiring knowledge of legal principles
not possessed by ordinary layman, and appearance for clients before public
tribunals which possess power and authority to determine rights of life,
liberty, and property according to law, in order to assist in proper
interpretation and enforcement of law. 14
When a person participates in the a trial and advertises himself as a lawyer,
he is in the practice of law. 15 One who confers with clients, advises them as
to their legal rights and then takes the business to an attorney and asks the
latter to look after the case in court, is also practicing law. 16 Giving advice
for compensation regarding the legal status and rights of another and the
conduct with respect thereto constitutes a practice of law. 17 One who
renders an opinion as to the proper interpretation of a statute, and receives
pay for it, is, to that extent, practicing law. 18
In the recent case of Cayetano vs. Monsod, 19 after citing the doctrines in
several cases, we laid down the test to determine whether certain acts
constitute "practice of law," thus:
Black defines "practice of law" as:
The rendition of services requiring the knowledge and the
application of legal principles and technique to serve the interest
of another with his consent. It is not limited to appearing in
court, or advising and assisting in the conduct of litigation, but
embraces the preparation of pleadings, and other papers incident
to actions and special proceedings, conveyancing, the
preparation of legal instruments of all kinds, and the giving of all
legal advice to clients. It embraces all advice to clients and all
actions taken for them in matters connected with the law.
The practice of law is not limited to the conduct of cases on court.(Land Title
Abstract and Trust Co. v. Dworken , 129 Ohio St. 23, 193N. E. 650). A
person is also considered to be in the practice of law when he:

199

. . . . for valuable consideration engages in the business of

advising person, firms, associations or corporations as to their
right under the law, or appears in a representative capacity as
an advocate in proceedings, pending or prospective, before any
court, commissioner, referee, board, body, committee, or
commission constituted by law or authorized to settle
controversies and there, in such representative capacity,
performs any act or acts for the purpose of obtaining or
defending the rights of their clients under the law. Otherwise
stated, one who, in a representative capacity, engages in the
business of advising clients as to their rights under the law, or
while so engaged performs any act or acts either in court or
outside of court for that purpose, is engaged in the practice of
law. (State ex. rel. Mckittrick v. C.S. Dudley and Co., 102 S. W.
2d 895, 340 Mo. 852).
This Court, in the case of Philippines Lawyers Association v. Agrava (105
Phil. 173, 176-177),stated:
The practice of law is not limited to the conduct of cases or
litigation in court; it embraces the preparation of pleadings and
other papers incident to actions and special proceedings, the
management of such actions and proceedings on behalf of clients
before judges and courts, and in addition, conveying. In general,
all advice to clients, and all action taken for them in matters
connected with the law incorporation services, assessment and
condemnation services contemplating an appearance before a
judicial body, the foreclosure of a mortgage, enforcement of a
creditor's claim in bankruptcy and insolvency proceedings, and
conducting proceedings in attachment, and in matters or estate
and guardianship have been held to constitute law practice, as
do the preparation and drafting of legal instruments, where the
work done involves the determination by the trained legal mind
of the legal effect of facts and conditions. (5 Am. Jr. p. 262,
263).
Practice of law under modern conditions consists in no small part
of work performed outside of any court and having no immediate
relation to proceedings in court. It embraces conveyancing, the
200

giving of legal advice on a large variety of subjects and the

preparation and execution of legal instruments covering an
extensive field of business and trust relations and other affairs.
Although these transactions may have no direct connection with
court proceedings, they are always subject to become involved in
litigation. They require in many aspects a high degree of legal
skill, a wide experience with men and affairs, and great capacity
for adaptation to difficult and complex situations. These
customary functions of an attorney or counselor at law bear an
intimate relation to the administration of justice by the courts.
No valid distinction, so far as concerns the question set forth in
the order, can be drawn between that part of the work of the
lawyer which involves appearance in court and that part which
involves advice and drafting of instruments in his office. It is of
importance to the welfare of the public that these manifold
customary functions be performed by persons possessed of
adequate learning and skill, of sound moral character, and acting
at all times under the heavy trust obligations to clients which
rests upon all attorneys. (Moran, Comments on the Rules o
Court, Vol. 3 [1973 ed.], pp. 665-666, citing In Re Opinion of the
Justices [Mass], 194 N. E. 313, quoted in Rhode Is. Bar Assoc. v.
Automobile Service Assoc. [R.I.] 197 A. 139, 144).
The practice of law, therefore, covers a wide range of activities in and out of
court. Applying the aforementioned criteria to the case at bar, we agree with
the perceptive findings and observations of the aforestated bar associations
that the activities of respondent, as advertised, constitute "practice of law."
The contention of respondent that it merely offers legal support services can
neither be seriously considered nor sustained. Said proposition is belied by
respondent's own description of the services it has been offering, to wit:
Legal support services basically consists of giving ready
information by trained paralegals to laymen and lawyers, which
are strictly non-diagnostic, non-advisory, through the extensive
use of computers and modern information technology in the
gathering, processing, storage, transmission and reproduction of
information and communication, such as computerized legal
research; encoding and reproduction of documents and
201

pleadings prepared by laymen or lawyers; document search;

evidence gathering; locating parties or witnesses to a case; fact
finding investigations; and assistance to laymen in need of basic
institutional services from government or non-government
agencies,
like
birth,
marriage,
property, or
business
registrations;
educational
or
employment
records
or
certifications,
obtaining
documentation
like
clearances,
passports, local or foreign visas; giving information about laws of
other countries that they may find useful, like foreign divorce,
marriage or adoption laws that they can avail of preparatory to
emigration to the foreign country, and other matters that do not
involve representation of clients in court; designing and installing
computer systems, programs, or software for the efficient
management of law offices, corporate legal departments, courts
and other entities engaged in dispensing or administering legal
services. 20
While some of the services being offered by respondent corporation merely
involve mechanical and technical knowhow, such as the installation of
computer systems and programs for the efficient management of law offices,
or the computerization of research aids and materials, these will not suffice
to justify an exception to the general rule.
What is palpably clear is that respondent corporation gives out legal
information to laymen and lawyers. Its contention that such function is nonadvisory and non-diagnostic is more apparent than real. In providing
information, for example, about foreign laws on marriage, divorce and
adoption, it strains the credulity of this Court that all the respondent
corporation will simply do is look for the law, furnish a copy thereof to the
client, and stop there as if it were merely a bookstore. With its attorneys and
so called paralegals, it will necessarily have to explain to the client the
intricacies of the law and advise him or her on the proper course of action to
be taken as may be provided for by said law. That is what its advertisements
represent and for the which services it will consequently charge and be paid.
That activity falls squarely within the jurisprudential definition of "practice of
law." Such a conclusion will not be altered by the fact that respondent
corporation does not represent clients in court since law practice, as the
weight of authority holds, is not limited merely giving legal advice, contract
drafting and so forth.
202

The aforesaid conclusion is further strengthened by an article published in

the January 13, 1991 issue of the Starweek/The Sunday Magazine of the
Philippines Star, entitled "Rx for Legal Problems," where an insight into the
structure, main purpose and operations of respondent corporation was given
by its own "proprietor," Atty. Rogelio P. Nogales:
This is the kind of business that is transacted everyday at The
Legal Clinic, with offices on the seventh floor of the Victoria
Building along U. N. Avenue in Manila. No matter what the
client's problem, and even if it is as complicated as the CunetaConcepcion domestic situation, Atty. Nogales and his staff of
lawyers, who, like doctors are "specialists" in various fields can
take care of it. The Legal Clinic, Inc. has specialists in taxation
and criminal law, medico-legal problems, labor, litigation, and
family law. These specialist are backed up by a battery of
paralegals, counsellors and attorneys.
Atty. Nogales set up The Legal Clinic in 1984. Inspired by the
trend in the medical field toward specialization, it caters to
clients who cannot afford the services of the big law firms.
The Legal Clinic has regular and walk-in clients. "when they
come, we start by analyzing the problem. That's what doctors do
also. They ask you how you contracted what's bothering you,
they take your temperature, they observe you for the symptoms
and so on. That's how we operate, too. And once the problem
has been categorized, then it's referred to one of our specialists.
There are cases which do not, in medical terms, require surgery
or follow-up treatment. These The Legal Clinic disposes of in a
matter of minutes. "Things like preparing a simple deed of sale
or an affidavit of loss can be taken care of by our staff or, if this
were a hospital the residents or the interns. We can take care of
these matters on a while you wait basis. Again, kung baga sa
hospital, out-patient, hindi kailangang ma-confine. It's just like a
common cold or diarrhea," explains Atty. Nogales.
Those cases which requires more extensive "treatment" are dealt
with accordingly. "If you had a rich relative who died and named
203

you her sole heir, and you stand to inherit millions of pesos of
property, we would refer you to a specialist in taxation. There
would be real estate taxes and arrears which would need to be
put in order, and your relative is even taxed by the state for the
right to transfer her property, and only a specialist in taxation
would be properly trained to deal with the problem. Now, if there
were other heirs contesting your rich relatives will, then you
would need a litigator, who knows how to arrange the problem
for presentation in court, and gather evidence to support the
case. 21
That fact that the corporation employs paralegals to carry out its services is
not controlling. What is important is that it is engaged in the practice of law
by virtue of the nature of the services it renders which thereby brings it
within the ambit of the statutory prohibitions against the advertisements
which it has caused to be published and are now assailed in this proceeding.
Further, as correctly and appropriately pointed out by the U.P. WILOCI, said
reported facts sufficiently establish that the main purpose of respondent is to
serve as a one-stop-shop of sorts for various legal problems wherein a client
may avail of legal services from simple documentation to complex litigation
and corporate undertakings. Most of these services are undoubtedly beyond
the domain of paralegals, but rather, are exclusive functions of lawyers
engaged in the practice of law. 22
It should be noted that in our jurisdiction the services being offered by
private respondent which constitute practice of law cannot be performed by
paralegals. Only a person duly admitted as a member of the bar, or hereafter
admitted as such in accordance with the provisions of the Rules of Court,
and who is in good and regular standing, is entitled to practice law. 23
Public policy requires that the practice of law be limited to those individuals
found duly qualified in education and character. The permissive right
conferred on the lawyers is an individual and limited privilege subject to
withdrawal if he fails to maintain proper standards of moral and professional
conduct. The purpose is to protect the public, the court, the client and the
bar from the incompetence or dishonesty of those unlicensed to practice law
and not subject to the disciplinary control of the court. 24

204

The same rule is observed in the american jurisdiction wherefrom

respondent would wish to draw support for his thesis. The doctrines there
also stress that the practice of law is limited to those who meet the
requirements for, and have been admitted to, the bar, and various statutes
or rules specifically so provide. 25 The practice of law is not a lawful business
except for members of the bar who have complied with all the conditions
required by statute and the rules of court. Only those persons are allowed to
practice law who, by reason of attainments previously acquired through
education and study, have been recognized by the courts as possessing
profound knowledge of legal science entitling them to advise, counsel with,
protect, or defend the rights claims, or liabilities of their clients, with respect
to the construction, interpretation, operation and effect of law. 26 The
justification for excluding from the practice of law those not admitted to the
bar is found, not in the protection of the bar from competition, but in the
protection of the public from being advised and represented in legal matters
by incompetent and unreliable persons over whom the judicial department
can exercise little control. 27
We have to necessarily and definitely reject respondent's position that the
concept in the United States of paralegals as an occupation separate from
the law profession be adopted in this jurisdiction. Whatever may be its
merits, respondent cannot but be aware that this should first be a matter for
judicial rules or legislative action, and not of unilateral adoption as it has
done.
Paralegals in the United States are trained professionals. As admitted by
respondent, there are schools and universities there which offer studies and
degrees in paralegal education, while there are none in the Philippines. 28 As
the concept of the "paralegals" or "legal assistant" evolved in the United
States, standards and guidelines also evolved to protect the general public.
One of the major standards or guidelines was developed by the American
Bar Association which set up Guidelines for the Approval of Legal Assistant
Education Programs (1973). Legislation has even been proposed to certify
legal assistants. There are also associations of paralegals in the United
States with their own code of professional ethics, such as the National
Association of Legal Assistants, Inc. and the American Paralegal
Association. 29

205

In the Philippines, we still have a restricted concept and limited acceptance

of what may be considered as paralegal service. As pointed out by FIDA,
some persons not duly licensed to practice law are or have been allowed
limited representation in behalf of another or to render legal services, but
such allowable services are limited in scope and extent by the law, rules or
regulations granting permission therefor. 30
Accordingly, we have adopted the American judicial policy that, in the
absence of constitutional or statutory authority, a person who has not been
admitted as an attorney cannot practice law for the proper administration of
justice cannot be hindered by the unwarranted intrusion of an unauthorized
and unskilled person into the practice of law. 31 That policy should continue
to be one of encouraging persons who are unsure of their legal rights and
remedies to seek legal assistance only from persons licensed to practice law
in the state. 32
Anent the issue on the validity of the questioned advertisements, the Code
of Professional Responsibility provides that a lawyer in making known his
legal services shall use only true, honest, fair, dignified and objective
information or statement of facts. 33 He is not supposed to use or permit the
use of any false, fraudulent, misleading, deceptive, undignified, selflaudatory or unfair statement or claim regarding his qualifications or legal
services. 34 Nor shall he pay or give something of value to representatives of
the mass media in anticipation of, or in return for, publicity to attract legal
business. 35 Prior to the adoption of the code of Professional Responsibility,
the Canons of Professional Ethics had also warned that lawyers should not
resort to indirect advertisements for professional employment, such as
furnishing or inspiring newspaper comments, or procuring his photograph to
be published in connection with causes in which the lawyer has been or is
engaged or concerning the manner of their conduct, the magnitude of the
interest involved, the importance of the lawyer's position, and all other like
self-laudation. 36
The standards of the legal profession condemn the lawyer's advertisement of
his talents. A lawyer cannot, without violating the ethics of his profession.
advertise his talents or skill as in a manner similar to a merchant advertising
his goods. 37 The prescription against advertising of legal services or
solicitation of legal business rests on the fundamental postulate that the that
the practice of law is a profession. Thus, in the case of The Director of
206

Religious Affairs. vs. Estanislao R. Bayot 38 an advertisement, similar to

those of respondent which are involved in the present proceeding, 39 was
held to constitute improper advertising or solicitation.
The pertinent part of the decision therein reads:
It is undeniable that the advertisement in question was a
flagrant violation by the respondent of the ethics of his
profession, it being a brazen solicitation of business from the
public. Section 25 of Rule 127 expressly provides among other
things that "the practice of soliciting cases at law for the purpose
of gain, either personally or thru paid agents or brokers,
constitutes malpractice." It is highly unethical for an attorney to
advertise his talents or skill as a merchant advertises his wares.
Law is a profession and not a trade. The lawyer degrades himself
and his profession who stoops to and adopts the practices of
mercantilism by advertising his services or offering them to the
public. As a member of the bar, he defiles the temple of justice
with mercenary activities as the money-changers of old defiled
the temple of Jehovah. "The most worthy and effective
advertisement possible, even for a young lawyer, . . . . is the
establishment of a well-merited reputation for professional
capacity and fidelity to trust. This cannot be forced but must be
the outcome of character and conduct." (Canon 27, Code of
Ethics.).
We repeat, the canon of the profession tell us that the best advertising
possible for a lawyer is a well-merited reputation for professional capacity
and fidelity to trust, which must be earned as the outcome of character and
conduct. Good and efficient service to a client as well as to the community
has a way of publicizing itself and catching public attention. That publicity is
a normal by-product of effective service which is right and proper. A good
and reputable lawyer needs no artificial stimulus to generate it and to
magnify his success. He easily sees the difference between a normal byproduct of able service and the unwholesome result of propaganda. 40
Of course, not all types of advertising or solicitation are prohibited. The
canons of the profession enumerate exceptions to the rule against
advertising or solicitation and define the extent to which they may be
207

undertaken. The exceptions are of two broad categories, namely, those

which are expressly allowed and those which are necessarily implied from
the restrictions. 41
The first of such exceptions is the publication in reputable law lists, in a
manner consistent with the standards of conduct imposed by the canons, of
brief biographical and informative data. "Such data must not be misleading
and may include only a statement of the lawyer's name and the names of his
professional associates; addresses, telephone numbers, cable addresses;
branches of law practiced; date and place of birth and admission to the bar;
schools attended with dates of graduation, degrees and other educational
distinction; public or quasi-public offices; posts of honor; legal authorships;
legal teaching positions; membership and offices in bar associations and
committees thereof, in legal and scientific societies and legal fraternities; the
fact of listings in other reputable law lists; the names and addresses of
references; and, with their written consent, the names of clients regularly
represented." 42
The law list must be a reputable law list published primarily for that purpose;
it cannot be a mere supplemental feature of a paper, magazine, trade journal
or periodical which is published principally for other purposes. For that
reason, a lawyer may not properly publish his brief biographical and
informative data in a daily paper, magazine, trade journal or society
program. Nor may a lawyer permit his name to be published in a law list the
conduct, management or contents of which are calculated or likely to
deceive or injure the public or the bar, or to lower the dignity or standing of
the profession. 43
The use of an ordinary simple professional card is also permitted. The card
may contain only a statement of his name, the name of the law firm which
he is connected with, address, telephone number and special branch of law
practiced. The publication of a simple announcement of the opening of a law
firm or of changes in the partnership, associates, firm name or office
address, being for the convenience of the profession, is not objectionable.
He may likewise have his name listed in a telephone directory but not under
a designation of special branch of law. 44
Verily, taking into consideration the nature and contents of the
advertisements for which respondent is being taken to task, which even
208

includes a quotation of the fees charged by said respondent corporation for

services rendered, we find and so hold that the same definitely do not and
conclusively cannot fall under any of the above-mentioned exceptions.
The ruling in the case of Bates, et al. vs. State Bar of Arizona, 45 which is
repeatedly invoked and constitutes the justification relied upon by
respondent, is obviously not applicable to the case at bar. Foremost is the
fact that the disciplinary rule involved in said case explicitly allows a lawyer,
as an exception to the prohibition against advertisements by lawyers, to
publish a statement of legal fees for an initial consultation or the availability
upon request of a written schedule of fees or an estimate of the fee to be
charged for the specific services. No such exception is provided for, expressly
or impliedly, whether in our former Canons of Professional Ethics or the
present Code of Professional Responsibility. Besides, even the disciplinary
rule in the Bates case contains a proviso that the exceptions stated therein
are "not applicable in any state unless and until it is implemented by such
authority in that state." 46 This goes to show that an exception to the general
rule, such as that being invoked by herein respondent, can be made only if
and when the canons expressly provide for such an exception. Otherwise,
the prohibition stands, as in the case at bar.
It bears mention that in a survey conducted by the American Bar Association
after the decision in Bates, on the attitude of the public about lawyers after
viewing television commercials, it was found that public opinion dropped
significantly 47 with respect to these characteristics of lawyers:
Trustworthy
from
71%
Professional
from
71%
Honest
from
65%
Dignified from 45% to 14%

to
to
to

14%
14%
14%

Secondly, it is our firm belief that with the present situation of our legal and
judicial systems, to allow the publication of advertisements of the kind used
by respondent would only serve to aggravate what is already a deteriorating
public opinion of the legal profession whose integrity has consistently been
under attack lately by media and the community in general. At this point in
time, it is of utmost importance in the face of such negative, even if unfair,
criticisms at times, to adopt and maintain that level of professional conduct

209

which is beyond reproach, and to exert all efforts to regain the high esteem
formerly accorded to the legal profession.
In sum, it is undoubtedly a misbehavior on the part of the lawyer, subject to
disciplinary action, to advertise his services except in allowable
instances 48 or to aid a layman in the unauthorized practice of
law. 49 Considering that Atty. Rogelio P. Nogales, who is the prime
incorporator, major stockholder and proprietor of The Legal Clinic, Inc. is a
member of the Philippine Bar, he is hereby reprimanded, with a warning that
a repetition of the same or similar acts which are involved in this proceeding
will be dealt with more severely.
While we deem it necessary that the question as to the legality or illegality
of the purpose/s for which the Legal Clinic, Inc. was created should be
passed upon and determined, we are constrained to refrain from lapsing into
an obiter on that aspect since it is clearly not within the adjudicative
parameters of the present proceeding which is merely administrative in
nature. It is, of course, imperative that this matter be promptly determined,
albeit in a different proceeding and forum, since, under the present state of
our law and jurisprudence, a corporation cannot be organized for or engage
in the practice of law in this country. This interdiction, just like the rule
against unethical advertising, cannot be subverted by employing some socalled paralegals supposedly rendering the alleged support services.
The remedy for the apparent breach of this prohibition by respondent is the
concern and province of the Solicitor General who can institute the
corresponding quo warranto action, 50 after due ascertainment of the factual
background and basis for the grant of respondent's corporate charter, in light
of the putative misuse thereof. That spin-off from the instant bar matter is
referred to the Solicitor General for such action as may be necessary under
the circumstances.
ACCORDINGLY, the Court Resolved to RESTRAIN and ENJOIN herein
respondent, The Legal Clinic, Inc., from issuing or causing the publication or
dissemination of any advertisement in any form which is of the same or
similar tenor and purpose as Annexes "A" and "B" of this petition, and from
conducting, directly or indirectly, any activity, operation or transaction
proscribed by law or the Code of Professional Ethics as indicated herein. Let
copies of this resolution be furnished the Integrated Bar of the Philippines,
210

the Office of the Bar Confidant and the Office of the Solicitor General for
appropriate action in accordance herewith.
Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Grio-Aquino, Davide, Jr.,
Romero, Nocon, Bellosillo, Melo and Quiason, JJ., concur

Samahan ng Optometrists v. Acebedo International Corp., 270 S 298

(1997)
[G.R. No. 117097. March 21, 1997]
SAMAHAN NG OPTOMETRISTS SA PILIPINAS, ILOCOS SUR-ABRA
CHAPTER, EDUARDO MA. GUIRNALDA, DANTE G. PACQUING and
OCTAVIO
A.
DE
PERALTA, petitioners,
vs.
ACEBEDO
INTERNATIONAL CORPORATION and the HON. COURT OF
APPEALS, respondents.
DECISION
HERMOSISIMA, JR., J.:
Before us is a petition seeking the review and ultimately the reversal of
the decision[1] of the Court of Appeals[2] which rejected what petitioners
vehemently claim to be a prohibition, under Republic Act (RA.) No. 1998,
popularly known as the old Optometry Law, against the employment by
corporations, usually optical shops and eyeware stores, of optometrists, such
practice, according to petitioners, being an indirect violation of the rule
against corporations exercising professions reserved only to natural persons.
Petitioners understandably did not welcome the herein assailed decision
because they have, earlier, obtained a decision [3] favorable to them from the
Regional Trial Court of Candon, Ilocos Sur, Branch 23, presided over by
Judge Gabino Balbin, Jr. The said judge had, in the main, ruled that the
operations of private respondent Acebedo International Corporation involves
the practice of optometry which is precluded by RA. No. 1998.
The undisputed facts of the case, as found by the respondent Court of
Appeals and quoted by petitioners, are as follows:
211

"On February 22, 1991, x x x [private respondent] filed an application with

the Office of the Mayor of Candon, Ilocos Sur, for the issuance of a permit for
the opening and operation of a branch of the Acebedo Optical in that
municipality.
The application was opposed by the x x x [petitioner] Samahan ng
Optometrists sa Pilipinas (SOP) which contended that x x x [private
respondent] is a juridical entity not qualified to practice optometry.
On March 6, 1991, x x x [private respondent] filed its answer, arguing it is
not the corporation, but the optometrists employed by it, who would be
practicing optometry.
On April 17, 1991, the Mayor of Candon created a committee, composed of
"public respondents Eduardo Ma. Guirnalda, Dante G. Pacquing and Octavio
de Peralta, to pass on [private respondent's] application.
On September 26, 1991 the committee rendered a decision denying [private
respondent's] application for a mayor's permit to operate a branch in Candon
and ordering x x x [private respondent] to close its establishment within
fifteen (15) days from receipt of the decision. Acebedo moved for a
reconsideration but its motion was denied on November 14, 1991. x x x
[Private respondent] was ordered to close its establishment within ten (10)
days from receipt of the order.
On December 9, 1991, x x x [private respondent] filed with the Court of
Appeals a petition for certiorari (CA G.R SP No. 26782), questioning the
decision of respondent committee. Its petition, however, was referred to the
court a quo, which on December 16, 1992, dismissed Acebedo's petition.
Hence, x x x [the] appeal [to the respondent Court of Appeals]." [4]
The singular issue, admittedly extensively debated and intensely
contested not only by the members of the optometry profession and the
players in the business of selling optical ware, supplies, substances and
instruments but also by the members of the Senate during the deliberations
respecting R A. 8050, otherwise known as Revised New Optometry Law, is
this: May corporations, engaged in the business of selling optical wares,
supplies, substances and instruments which, as an incident to and in the
ordinary course of the business hire optometrists, be said to be practicing
212

the profession of optometry which, by legal mandate, may only be engaged

in by natural persons possessed of specific legal qualifications?
The trial court resolved this issue in the affirmative. In so finding, it
explained, thus:
"The denial of the application of Acebedo rested on the grounds that it is
operating an optical shop and it is practicing optometry where its charter
does not grant to it authority to practice the former. Acebedo submits that
the findings of the Commission have no basis both in law and in fact. It
argues that the hiring of optometrists by the petitioner is merely incidental
to its main business which is the sale of optical products. Acebedo contends
further that its employees have a personality separate and distinct from that
of Acebedo which is a juridical entity, and it cannot therefore be considered
as engaged in optometry.
The Court disagrees.
Quoted for the enlightenment of both parties is a portion of the contested
Decision, to wit:
'The visit revealed the following:
1. The establishment was manned by three personnel: Dr. Salvador
Pagarigan, optometrist; Miss Lilibeth Begonia, receptionist; and a laboratory
technician, who refused to give his name;
2. There were several shelves containing eyeglasses;
3. There were benches where, according to Miss Begonia, would-be clients
can sit while waiting for their turn to be examined;
4. An examination room complete with an optical chair and optical charts;
and,
5. An optical laboratory.'
The Court is very much aware of the existence of several shops owned by
Acebedo. They are operating up to the present. But the Court has to rely in
this case on the findings of the Commission created by the Mayor of Candon
213

in the absence of proof that the same was arrived at hastily and without
regard for the rights of the parties. In fact, the contested Decision was
issued only after an ocular inspection was conducted and the parties have
submitted their respective memorandum.
The findings of the Commission reveal that the operation of Acebedo's local
shop involves the practice of optometry. If indeed Acebedo is engaged in the
sale of optical products, the absence of sales clerks more than demonstrate
its real business. In the contested Decision, the floor plan of the shop was
even commented on as that of an optical shop. As noted by the members of
the Commission, there was also a banner in front of the shop prominently
display advertising free consultations (libreng consulta sa mata). These
facts, taken together, denote that Acebedo was operating in Candon an
optical shop contrary to law.
While it is also true that a corporation has a personality separate and distinct
from that of its personnel, the veil of corporate fiction cannot be used for the
purpose of some illegal activity. The veil of corporate fiction can be pierced,
as in this case, and the acts of the personnel of the corporation will be
considered as those of the corporation. Acebedo then is engaged in the
practice of optometry."[5]
Disagreeing with the foregoing decision of the trial court, private
respondent appealed therefrom and asked the respondent Court of Appeals
to reverse the same on the ground that the court a quo erred in concluding
that private respondent was engaged in the practice of optometry by
operating an optical shop.
Respondent appellate court found that private respondent's contentions
merited the reversal of the court a quo's decision. The respondent court,
speaking through Court of Appeals Presiding Justice, now Supreme Court
Associate Justice Vicente V. Mendoza, ratiocinated in this wise:
"First. x x x [Private respondent] maintains that it is not practicing
optometry nor is it operating an optical clinic. The contention has merit. The
amended Articles of Incorporation of x x x [private respondent] in part
states:
PRIMARY PURPOSES
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1. To own, maintain, conduct, operate and carry on the business of

dispensing opticians and optical establishments, and in the course of the
business, to buy, sell, ship, store and otherwise use, deal in, acquire and
dispose of every kind of optical, ophthalmic and scientific instrument, glass,
lens, optical solutions or equipment necessary or convenient to the operation
and conduct of the general business of dispensing opticians.
SECONDARY PURPOSES
....
3. To do all and everything necessary, suitable or proper for the
accomplishment of any of the purposes, the attainment of any of the
objects, or in the exercise of any of the powers herein set forth, either alone
or in conjunction with other corporations, firms or individuals and either as
principal or agents and to do every other act or acts, thing or things,
incidental or appurtenant to or growing out of or connected with the
abovementioned objects, purposes or powers.
Clearly, the corporation is not an optical clinic. Nor is it but rather the
optometrists employed by it who are engaged in the practice of optometry.
Petitioner-appellant simply dispenses optical and ophthalmic instruments and
supplies.
Indeed, the Optometry Law (Rep. Act No. 1998), which x x x [petitioners]
cite, does not prohibit corporations, like x x x [private respondent; from
employing licensed optometrists.
What it prohibits is the practice of the profession without license by those
engaged in it. This is clear from Sec. 2 of the law which provides:
No person shall practice or attempt to practice optometry as defined in this
Act, without holding a valid certificate of registration as optometrist issued to
him by the Board of Examiners in Optometry herein created and in
accordance with the provisions hereof: Provided, that valid certificates of
registration as optometrists shall be issued to optometrists of good moral
character now registered in accordance with the provisions of chapter thirtythree of the Revised Administrative Code, who shall, by application within a

215

period of one year from the effectivity of this Act, be exempt from the
provisions of sections eleven, twelve and twenty-three of this Act. . . .
The prohibition is thus addressed to natural persons who are required to
have a valid certificate of registration as optometrist' and who must be of
'good moral character'. The prohibition can have no application to x x x
[private respondent] which is not itself engaged in the practice of optometry.
As the Professional Regulation Commission said, "Acebedo Optical, Acebedo
Optical Clinic, Acebedo Optical Co., Inc. and Acebedo International, Inc. are
not natural persons who can take the Optometrist licensure examinations.
They are not, and cannot be registered as Optometrist under RA 1998 [The
Optometry Law].'"[6]
Petitioners filed a Motion for Reconsideration of the aforegoing decision.
It was, however, denied by respondent appellate court. Hence, this petition
anchored on the following sole ground:
"ISSUE
WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN
DECLARING THAT PRIVATE RESPONDENT ACEBEDO INTERNATIONAL
CORPORATION DOES NOT VIOLATE THE OPTOMETRY LAW (R. A. NO. 1998)
WHEN IT EMPLOYS OPTOMETRISTS TO ENGAGE IN THE PRACTICE OF
OPTOMETRY UNDER ITS NAME AND FOR ITS BEHALF
The herein petitioner most respectfully submits that the private respondent
Acebedo International Corporation flagrantly violates R. A. No. 1998 and the
Corporation Code of the Philippines when it employs optometrists to engage
in the practice of optometry under its name and for its behalf." [7]
We hold that the petition lacks merit.
Private respondent does not deny that it employs optometrists whose
role in the operations of its optical shops is to administer the proper eye
examination in order to determine the correct type and grade of lenses to
prescribe to persons purchasing the same from private respondent's optical
shops. Petitioners vehemently insist that in so employing said optometrists,
private respondent is in effect itself practicing optometry. Such practice,

216

petitioners conclude, is in violation of RA. No. 1998, which, it must be noted

at this juncture, has been repealed and superseded by RA. 8050.
Petitioners' contentions are, however, untenable. The fact that private
respondent hires optometrists who practice their profession in the course of
their employment in private respondent's optical shops, does not translate
into a practice of optometry by private respondent itself. Private respondent
is a corporation created and organized for the purpose of conducting the
business of selling optical lenses or eyeglasses, among others. The clientele
of private respondent understably, would largely be composed of persons
with defective vision and thus need the proper lenses to correct the same
and enable them to gain normal vision. The determination of the proper
lenses to sell to private respondent's clientele entails the employment of
optometrists who have been precisely trained for that purpose. Private
respondent's business is not the determination itself of the proper lenses
needed by persons with defective vision. Private respondent's business,
rather, is the buying and importing of eyeglasses and lenses and other
similar or allied instruments from suppliers thereof and selling the same to
consumers.
For petitioners' argument to hold water, there need be clear showing that
RA. No. 1998 prohibits a corporation from hiring optometrists, for only then
would it be undeniably evident that the intention of the legislature is to
preclude the formation of the so-called optometry corporations because such
is tantamount to the practice of the profession of optometry which is legally
exercisable only by natural persons and professional partnerships. We have
carefully reviewed RA. No. 1998 however, and we find nothing therein that
supports petitioner's insistent claims.[8]
It is significant to note that even under RA. No. 8050, known as the
Revised Optometry Law,[9] we find no prohibition against the hiring by
corporations of optometrists. The pertinent provisions of RA. No. 8050,
regarding the practice of optometry, are reproduced below for ready
reference:
"THE PRACTICE OF OPTOMETRY
SEC. 4. Acts Constituting the practice of Optometry. Any of the following acts
constitute the practice of optometry:
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a) The examination of the human eye through the employment of subjective

and objective procedures, including the use of specific topical diagnostic
pharmaceutical agents or drugs and instruments, tools, equipment,
implements, visual aids, apparatuses, machines, ocular exercises and related
devices, for the purpose of determining the condition and acuity of human
vision to correct and improve the same in accordance with subsections (b),
(c) and (d) hereof; vision to correct and improve the same in accordance
with subsections (b), (c) and (d) hereof;
b) The prescription and dispensing of ophthalmic lenses, prisms, contact
lenses and their accessories and solutions, frames and their accessories, and
supplies for the purpose of correcting and treating defects, deficiencies and
abnormalities of vision.
c) The conduct of ocular exercises and vision training, the provision of
orthoptics and other devices and procedures to aid and correct abnormalities
of human vision, and the installation of prosthetic devices;
d) The counseling of patients with regard to vision and eye care and
hygiene;
e) The establishment of offices, clinics, and similar places where optometric
services are offered; and
f) The collection of professional fees for the performance of any of the acts
mentioned in paragraphs (a), (b), (c) and (d) of this section.
SEC. 5. Prohibition Against the Unauthorized Practice of Optometry. - No
person shall practice optometry as defined in Section 3 of this Act nor
perform any of the acts, constituting the practice of optometry as setforth in
Section 4 hereof, without having been first admitted to the practice of this
profession under the provisions of this Act and its implementing rules and
regulations: Provided, That this prohibition shall not apply to regularly
licensed and duly registered physicians who have received post-graduate
training in the diagnosis and treatment of eye diseases: Provided, however,
That the examination of the human eye by duly registered physicians in
connection with the physical examination of patients shall not be considered
as practice of optometry: Provided, further, That public health workers

218

trained and involved in the government's blindness prevention program may

conduct only visual acuity test and visual screening.
SEC. 6 Disclosure of Authority to Practice. An optometrist shall be required
to indicate his professional license number and the date of its expiration in
the documents he issues or signs in connection with the practice of his
profession. He shall also display his certificate of registration in a
conspicuous area of his clinic or office."
All told, there is no law that prohibits the hiring by corporations of
optometrists or considers the hiring by corporations of optometrists as a
practice by the corporation itself of the profession of optometry.
WHEREFORE, the instant petition is hereby DISMISSED.
Costs against the petitioners.
SO ORDERED.

Alfafara v. Acebedo Optical Company, 381 S 293 (2002)

[G.R. No. 148384. April 17, 2002]
DOCTORS ROSA P. ALFAFARA, VIVIAN DYHONGPO, MARIA TORRES,
EMMA YBAEZ, ELSA CABARDO, REBECCA SANTIAGO, PRISCILLA
NARVASA, SUSIE CHAN, CLARO CINCO, FELIPE CINCO, CARMEN
MODESTO, FELISA LIMKIMSO, ARLENE DORIO, ROSALINDA
BONO, and SUSAN YU, in their own behalf and in behalf of all
the other 80 optometrists-members of the SAMAHAN NG
OPTOMETRISTS SA PILIPINAS-CEBU CHAPTER, petitioners, vs.
ACEBEDO OPTICAL, CO., INC., respondent.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision,[1] dated January
20, 2000, of the Court of Appeals, setting aside the decision, [2] dated
219

September 3, 1993, of the Regional Trial Court, Branch 9, Cebu City, which
enjoined respondent Acebedo Optical Co., Inc., its agents, representatives,
and/or employees from practicing optometry, as defined in 1(a) of Republic
Act No. 1998, in the province and cities of Cebu, and the resolution, dated
May 10, 2001, of the appeals court denying petitioners motion for
reconsideration.
Petitioners are optometrists. They brought, in their own behalf and in
behalf of 80 other optometrists, who are members of the Samahan ng
Optometrists sa Pilipinas-Cebu Chapter, an injunctive suit in the Regional
Trial Court, Branch 9, Cebu City to enjoin respondent Acebedo Optical Co.,
Inc. and its agents, representatives, and/or employees from practicing
optometry in the province of Cebu. In their complaint, they alleged that
respondent opened several optical shops in Cebu and announced to the
public, through leaflets, newspapers, and other forms of advertisement, the
availability of ready-to-wear eyeglasses for sale at P60.00 each and free
services by optometrists in such outlets. They claimed that, through the
licensed optometrists under its employ, respondent had been engaging in the
practice of optometry by examining the human eye, analyzing the ocular
functions, prescribing ophthalmic lenses, prisms, and contact lenses; and
conducting ocular exercises, visual trainings, orthoptics, prosthetics, and
other preventive or corrective measures for the aid, correction, or relief of
the human eye. They contended that such acts of respondent were done in
violation of the Optometry Law (R.A. No. 1998) [3] and the Code of Ethics for
Optometrists, promulgated by the Board of Examiners in Optometry on July
11, 1983. They sought payment to them of attorneys fees, litigation
expenses, and the costs of the suit.[4]
The trial court at first dismissed the suit but, on motion of petitioners,
reinstated the action and granted their prayer for a writ of preliminary
injunction and/or restraining order. Petitioners argued that the case involved
a pure question of law, i.e., whether or not respondents hiring of
optometrists was violative of the applicable laws, and that, as such, the case
was an exception to the rule requiring exhaustion of administrative remedies
as a condition for the filing of an injunctive suit. They further alleged that
the Board of Optometry held itself to be without jurisdiction over the
president of respondent Acebedo Company as he was not duly registered
with the Professional Regulation Commission.

220

In its answer, respondent averred that the advertisements referred to by

petitioner were part of its promotion to make known to the public the
opening of its new branches in Cebu; that incidental to its business of selling
optical products, it hired duly licensed optometrists who conducted eye
examination, prescribed ophthalmic lenses, and rendered other services;
that it exercised neither control nor supervision over the optometrists under
its employ; and that the hired optometrists exercised neither control nor
supervision in the sale of optical products and accessories by respondent.By
way of special and affirmative defense, respondent stated that the
optometrists should be impleaded as party-defendants because they were
indispensable parties; that the trial court had no jurisdiction over the case;
that the filing of the complaint was barred by res judicata as similar suits
had been previously dismissed by the Court of First instance of Lucena City
and the Securities and Exchange Commission; and that the petitioners were
guilty of forum-shopping. Respondent sought the recovery of P100,000.00
as moral damages, P500,000.00 as exemplary damages, and P100,000.00
as attorneys fees.[5]
During the pre-trial conference, the parties entered into the following
stipulation of facts: that the petitioners were duly licensed optometrists; that
the petitioners were all members of the Samahan ng Optometrists ng
Pilipinas (SOP)-Cebu Chapter; that SOP-Cebu Chapter was a chapter of SOP
Incorporated, a national organization; that the SOP-Cebu Chapter had a
program called Sight Saving Month; that the Sight Saving Month program
was also a program of the SOP nationwide; that petitioners SOP Sight Saving
Month program provided free consultations; that respondent was a
corporation with several outlets in Cebu; that respondent was selling optical
products and ready-to-wear eyeglasses of limited grades; that during the
opening of its new branches in Cebu, the respondent advertised its products
through leaflets, newspapers, and other similar means, such as streamers
and loudspeakers on board a vehicle; that respondent hired optometrists
who conducted eye examinations, prescribed ophthalmic lenses, and
rendered other optometry services; and that while the hired optometrists
received their salary from respondent, they are not precluded from seeking
other sources of income.[6]
The evidence for the petitioners showed that respondent advertised its
ready-to-wear eyeglasses in newspapers, posters pasted on the walls, and
announcements made in roving jeeps. A witness testified that he purchased
221

a pair of eyeglasses for P66.00 (P60.00 plus P6.00 for VAT) without any prior
eye examination by an optometrist. A week later, he had vision difficulty and
consulted an optometrist who advised him to buy a pair of eyeglasses with
the correct grade. Petitioners thus sought to prove that the selling of readyto-wear eyeglasses by respondent was detrimental to the public.
On the other hand, respondent maintained that before the customers
purchased the ready-to-wear eyeglasses on display, they either have a prior
prescription from an optometrist or had to be examined first by the branch
optometrist. Customers thus had the option either to buy the ready-to-wear
eyeglasses on display or to order a new pair of eyeglasses.
After hearing, judgment was rendered in favor of petitioners. The trial
court found that the hiring of licensed optometrists by the respondent was
unlawful because it resulted in the practice of the optometry profession by
respondent, a juridical person. It ruled that respondent could not raise the
issue of res judicata as there was no decision on the merits of the case
rendered by any court of competent jurisdiction and, consequently,
petitioners could not be guilty of forum-shopping. As to petitioners failure to
implead the optometrists in the employ of respondent, the trial court
explained that since the issue involved the propriety of respondents hiring of
optometrists to perform optometry services, the optometrists did not have to
be impleaded as defendants. As to whether respondents selling of ready-towear eyeglasses to customers without prior eye examination violated the
applicable laws and was detrimental to the public, the trial court ruled that
petitioners failed to substantiate such claim.
Respondent appealed to the Court of Appeals contending that the trial
court erred in holding that respondent was illegally engaged in the practice
of Optometry; that being indispensable parties, the licensed optometrists
employed by respondent should have been impleaded as defendants; and
that the trial court erred in not holding that petitioners, by filing several
harassment suits before various fora, were guilty of forum-shopping.
The Court of Appeals reversed the decision of the trial court and
dismissed the complaint of petitioners. Citing the case of Samahan ng
Optometrists sa Pilipinas, Ilocos Sur-Abra Chapter v. Acebedo International
Corporation,[7] the appeals court ruled that respondents hiring of licensed
optometrists did not constitute practice of optometry nor violate any law. As
222

to the second issue raised, the Court of Appeals stated that since the
complaint was lodged solely against respondent for its hiring of optometrists,
whatever decision the trial court would render would solely affect respondent
since what was sought to be restrained was the employment of licensed
optometrists; hence, the optometrists were not indispensable parties. Anent
the issue of forum-shopping, the appeals court found no cogent reason to
reverse the findings of the trial court that the administrative case before the
Professional Regulation Commission was not decided on the merits while the
letters of petitioners sent to government officials did not constitute judicial
proceedings.
Petitioners filed a motion for reconsideration but their motion was
denied. Hence, this petition alleging that the Court of Appeals erred in
holding that respondent Acebedo was not engaged in the practice of
optometry.
The petition has no merit.
First. Petitioners contend that the ruling in Samahan ng Optometrists sa
Pilipinas, Ilocos Sur-Abra Chapter v. Acebedo International Corporation [8] is
no longer controlling because of the later case of Apacionado v. Professional
Regulation
Commission.[9] In Apacionado, petitioners
Ma.
Cristina
Apacionado and Zenaida Robil, who were employed by Acebedo as
optometrists, were suspended from the practice of optometry for two (2)
years by the Board of Optometry for violation of R.A. No. 1998 and Art. III,
6 of the Code of Ethics for Optometrists for having participated in the
promotional advertisement of Acebedo, entitled Libreng Konsulta sa Mata:
Reading Glasses P60.00, held from July 5-14, 1989 in Tuguegarao,
Cagayan. In affirming the suspension of the optometrists, the Professional
Regulation Commission found that by rendering professional services to
Acebedos clientele (free eye consultations and refractions), petitioners were
guilty of unprofessional conduct. Consequently, their professional licenses as
optometrists were suspended for two (2) years. This was because the
services of the two optometrists were the ones being offered to the public
for free. The decision of the Professional Regulation Commission was
affirmed by the Court of Appeals and later by this Court. As our resolution,
dated July 12, 1999,[10] stated in pertinent parts:
Thus, the instant petition which must likewise fail.
223

The Court finds the decision of the Court of Appeals to be in accordance with
the law. The Rules and Regulation[s] of the Board of Examiners for
[O]ptometry are quite explicit, and Rule 56 provides:
Rule 56. Acts Constituting Unprofessional Conduct.- It shall be considered
unprofessional for any registered optometrist:
(1) To make optometric examinations outside of his regular clinic,
unless he shall have received an unsolicited written request by
the person or persons to be examined;
(2) To advertise a price or prices [of] spectacle frames,
mountings, or ophthalmic lenses and other ophthalmic devices
used in the practice of Optometry and to be associated with,
or remain in the employ of, any person who does such
advertising;
.
(4)

To advertise free examination, examination included,

discounts, installments, wholesale and retail, or similar words
and phrases which would tend to remove the spirit of
professionalism;

.
(11) To use Mobile Units for conducting refraction in any area
within ten (10) kilometers of a Municipality.
Likewise, Section 6 of the Code of Ethics for optometrists states:
SEC. 6. The following are deemed, among others, to be unethical and are
deemed to constitute unprofessional conduct:
.
c. Performing optometric examination outside of the regular
office, unless he shall have received unsolicited request to make
such an examination.

224

.
u. To use Mobile Units for conducting refraction in any area within
ten (10) kilometers of a Municipality.
These provisions petitioners, through Acebedo, were found to have violated.
Petitioners cannot deny that it was their skills as optometrists
their licenses which Acebedo used in order to enable itself
optometric services to its clientele. Under such arrangement,
acted as tools of Acebedo so that the latter can offer the whole
services to its clientele.

as well as
to render
petitioners
package of

Corollarily, Republic Act No. 1998 pertinently provides:

SEC. 20. Revocation or suspension of certificate. - The Board may, after
giving proper notice and hearing to the party concerned, revoke or suspend
a certificate of registration for the causes mentioned in the next preceding
section, or for unprofessional conduct.
Having knowingly allowed themselves to be used as tools in furtherance of
[the] unauthorized practice of optometry, petitioners are clearly liable for
unethical and unprofessional practice of their profession. The Court, thus
finds no error committed by the Court of Appeals.
WHEREFORE, petition is denied due course.
Petitioners cite the Tennessee Supreme Court statement in Lens Crafter,
Inc. v. Sunquist,[11] stating that:
The logical result would be that corporations and business partnerships
might practice law, medicine, dentistry or any other profession by the simple
expedient of employing licensed agents. And, if this were permitted,
professional standards would be practically destroyed and professions
requiring special training would be commercialized, to the public
detriment.The ethics of any profession is based upon personal or individual
responsibility.
The contention has no merit. An optometrist is a person who has been
certified by the Board of Optometry and registered with the Professional
225

Regulation Commission as qualified to practice optometry in the Philippines.

[12]
Thus, only natural persons can engage in the practice of optometry and
not corporations. Respondent, which is not a natural person, cannot take the
licensure examinations for optometrist and, therefore, it cannot be
registered as an optometrist under R.A. No. 1998. It is noteworthy that,
in Apacionado, the Court did not find Acebedo to be engaged in the practice
of optometry. The optometrists in that case were found guilty of
unprofessional conduct and their licenses were suspended for two (2) years
for having participated, in their capacities as optometrists, in the
implementation of the promotional advertisement of Acebedo. In contrast, in
the case at bar, respondent is merely engaged in the business of selling
optical products, not in the practice of optometry, whether directly or
indirectly, through its hired optometrists.
In Samahan ng Optometrists sa Pilipinas, Ilocos Sur-Abra Chapter v.
Acebedo International Corporation,[13] petitioners opposed respondent
Acebedos application for a municipal permit to operate a branch in Candon,
Ilocos Sur. They brought suit to enjoin respondent Acebedo from employing
optometrists as this allegedly constituted an indirect violation of R.A. No.
1998, which prohibits corporations from exercising professions reserved only
to natural persons. The committee created by the Mayor of Candon to pass
on Acebedos application denied the same and ordered the closure of
Acebedo optical shops. Acebedo appealed but its appeal was dismissed by
the trial court on the ground that it was practicing optometry. On appeal, the
Court of Appeals held that Acebedo was not operating as an optical clinic nor
engaged in the practice of optometry, although it employed licensed
optometrists. Acebedo simply dispensed optical and ophthalmic instruments
and supplies. It was pointed out that R.A. No. 1998 does not prohibit
corporations from employing licensed optometrists. What it prohibits is the
practice of optometry by individuals who do not have a license to
practice. The prohibition is addressed to natural persons who are required to
have a valid certificate of registration as optometrist and who must be of
good moral character. This Court affirmed the ruling of the appeals court and
explained that even under R.A. No. 8050 (Revised Optometry Law) there is
no prohibition against the hiring by corporations of optometrists. The fact
that Acebedo hired optometrists who practiced their profession in the course
of their employment in Acebedos optical shops did not mean that it was itself
engaged in the practice of optometry.
226

We see no reason to deviate from the ruling that a duly licensed

optometrist is not prohibited from being employed by respondent and that
respondent cannot be said to be exercising the optometry profession by
reason of such employment.
Second. Petitioners argue that an optometrist, who is employed by a
corporation, such as Acebedo, is not acting on his own capacity but as an
employee or agent of the corporation. They contend that, as a mere
employee or agent, such optometrist cannot be held personally liable for his
acts done in the course of his employment as an optometrist under the
following provisions of the Civil Code. Thus,
Art. 1897. The agent who acts as such is not personally liable to the party
with whom he contracts, unless he expressly binds himself or exceeds the
limits of his authority without giving such party sufficient notice of his
powers.
Art. 1910. The principal must comply with all the obligations which the agent
may have contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the
principal is not bound except when he ratifies it expressly or tacitly.
This contention likewise has no merit. While the optometrists are
employees of respondent, their practice of optometry is separate and distinct
from the business of respondent of selling optical products. They are
personally liable for acts done in the course of their practice in the same way
that if respondent is sued in court in connection with its business of selling
optical products, the optometrists need not be impleaded as party
defendants. In that regard, the Board of Optometry and the Professional
Regulation Commission regulate their practice and have exclusive original
jurisdiction over them.
In the later case of Acebedo Optical Company, Inc. v. Court of Appeals,
petitioner Acebedo was granted by the City Mayor of Iligan a business
permit subject to certain conditions, to wit:
[14]

1. Since it is a corporation, Acebedo cannot put up an optical clinic but only

a commercial store;
227

2. Acebedo cannot examine and/or prescribe reading and similar optical

glasses for patients, because these are functions of optical clinics;
3. Acebedo cannot sell reading and similar eyeglasses without a prescription
having first been made by an independent optometrist (not its employee) or
independent optical clinic. Acebedo can only sell directly to the public,
without need of a prescription, Ray-Ban and similar eyeglasses;
4. Acebedo cannot advertise optical lenses and eyeglasses, but can advertise
Ray-Ban and similar glasses and frames;
5. Acebedo is allowed to grind lenses but only upon the prescription of an
independent optometrist.
The Samahang Optometrist sa Pilipinas-Iligan Chapter sought the
cancellation and/or revocation of Acebedos permit on the ground that it had
violated the conditions for its business permit. After due investigation,
Acebedo was found guilty of violating the conditions of its permit and, as a
consequence, its permit was cancelled. Acebedo was advised that its permit
would not be renewed. Acebedo filed a petition for certiorari, prohibition, and
mandamus in the Regional Trial Court, but its petition was dismissed for nonexhaustion of administrative remedies. Acebedo then filed a petition for
certiorari, prohibition, and mandamus with the Court of Appeals. At first, its
petition was dismissed. On appeal, however, the decision of the Court of
Appeals was reversed. This Court held that a business permit is issued
primarily to regulate the conduct of a business and, therefore, the City
Mayor cannot, through the issuance of such permit, regulate the practice of
a profession, like optometry. This Court held Acebedo to be entitled to a
permit to do business as an optical shop because, although it had duly
licensed optometrists in its employ, it did not apply for a license to engage in
the practice of optometry as a corporate body or entity.
WHEREFORE, the petition is DENIED for lack of showing that the Court
of Appeals committed a reversible error.
SO ORDERED.

228