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Transcript of Harden to Aurbach
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8/10/2019 Harden to Aurbach
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FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf
and in that all other stockholders of the Balatoc Mining Company, etc.,
plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING
COMPANY, H. E. RENZ, JOHN W. JAUSSERMANN, and A. W. BEAM,
defendants-appellees.
This action was originally instituted in the Court of First Instance of the City
of Manila by F. M. Harden, acting in his own behalf and that of all other
stockholders of the Balatoc Mining Co. who might join in the action and
contribute to the expense of the suit. With the plaintiff Harden two others,
J. D. Highsmith and John C. Hart, subsequently associated themselves. The
defendants are the Benguet Consolidated Mining Co., the Balatoc Mining
Co., H. E. Renz, John W. Haussermann, and A. W. Beam. The principal
purpose of the original action was to annul a certificate covering 600,000
shares of the stock of the Balatoc Mining Co., which have been issued to theBenguet Consolidated Mining Co., and to secure to the Balatoc Mining Co.,
the restoration of a large sum of money alleged to have been unlawfully
collected by the Benguet Consolidated Mining Co., with legal interest, after
deduction therefrom of the amount expended by the latter company under
a contract between the two companies, bearing date of March 9, 1927. The
complaint was afterwards amended so as to include a prayer for the
annulment of this contract. Shortly prior to the institution of this lawsuit,
the Benguet Consolidated Mining Co., transferred to H. E. Renz, as trustee,
the certificate for 600,000 shares of the Balatoc Mining Co. which constitute
the principal subject matter of the action. This was done apparently to
facilitate the splitting up to the shares in the course of the sale or
distribution. To prevent this the plaintiffs, upon filing their original
complaint, procured a preliminary injunction restraining the defendants,
their agents and servants, from selling, assigning or transferring the 600,000
shares of the Balatoc Mining Co., or any part thereof, and from removing
said shares from the Philippine Islands. This explains the connection of Renz
with the case. The other individual defendants are made merely as officials
of the Benguet Consolidated Mining Co. Upon hearing the cause the trial
court dismissed the complaint and dissolved the preliminary injunction, with
costs against the plaintiffs. From this judgment the plaintiffs appealed.
The facts which have given rise this lawsuit are simple, as the financial
interests involve are immense. Briefly told these facts are as follows: The
Benguet Consolidated Mining Co. was organized in June, 1903, as a sociedad
anonima in conformity with the provisions of Spanish law; while the Balatoc
Mining Co. was organized in December 1925, as a corporation, in conformity
with the provisions of the Corporation Law (Act No. 1459). Both entities
were organized for the purpose of engaging in the mining of gold in the
Philippine Islands, and their respective properties are located only a few
miles apart in the subprovince of Benguet. The capital stock of the Balatoc
Mining Co. consists of one million shares of the par value of one peso (P1)
each.
When the Balatoc Mining Co. was first organized the properties acquired by
it were largely undeveloped; and the original stockholders were unable to
supply the means needed for profitable operation. For this reason, the
board of directors of the corporation ordered a suspension of all work,
effective July 31, 1926. In November of the same year a general meeting ofthe company's stockholders appointed a committee for the purpose of
interesting outside capital in the mine. Under the authority of this
resolution the committee approached A. W. Beam, then president and
general manager of the Benguet Company, to secure the capital necessary
to the development of the Balatoc property. As a result of the negotiations
thus begun, a contract, formally authorized by the management of both
companies, was executed on March 9, 1927, the principal features of which
were that the Benguet Company was to proceed with the development and
construct a milling plant for the Balatoc mine, of a capacity of 100 tons of
ore per day, and with an extraction of at least 85 per cent of the gold
content. The Benguet Company also agreed to erect an appropriate power
plant, with the aerial tramlines and such other surface buildings as might be
needed to operate the mine. In return for this it was agreed that the
Benguet Company should receive from the treasurer of the Balatoc
Company shares of a par value of P600,000, in payment for the first
P600,000 be thus advanced to it by the Benguet Company.
The performance of this contract was speedily begun, and by May 31, 1929,
the Benguet Company had spent upon the development the sum of
P1,417,952.15. In compensation for this work a certificate for six hundred
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thousand shares of the stock of the Balatoc Company has been delivered to
the Benguet Company, and the excess value of the work in the amount of
P817,952.15 has been returned to the Benguet Company in cash.
Meanwhile dividends of the Balatoc Company have been enriching its
stockholders, and at the time of the filing of the complaint the value of its
shares had increased in the market from a nominal valuation to more than
eleven pesos per share. While the Benguet Company was pouring its million
and a half into the Balatoc property, the arrangements made between the
two companies appear to have been viewed by the plaintiff Harden with
complacency, he being the owner of many thousands of the shares of the
Balatoc Company. But as soon as the success of the development had
become apparent, he began this litigation in which he has been joined by
two others of the eighty shareholders of the Balatoc Company.
Briefly, the legal point upon which the action is planted is that it is unlawful
for the Benguet Company to hold any interest in a mining corporation and
that the contract by which the interest here in question was acquired mustbe annulled, with the consequent obliteration of the certificate issued to
the Benguet Company and the corresponding enrichment of the
shareholders of the Balatoc Company.
When the Philippine Islands passed to the sovereignty of the United States,
in the attention of the Philippine Commission was early drawn to the fact
that there is no entity in Spanish law exactly corresponding to the notion of
the corporation in English and American law; and in the Philippine Bill,
approved July 1, 1902, the Congress of the United States inserted certain
provisions, under the head of Franchises, which were intended to controlthe lawmaking power in the Philippine Islands in the matter of granting of
franchises, privileges and concessions. These provisions are found in section
74 and 75 of the Act. The provisions of section 74 have been superseded by
section 28 of the Act of Congress of August 29, 1916, but in section 75 there
is a provision referring to mining corporations, which still remains the law,
as amended. This provisions, in its original form, reads as follows: "... it shall
be unlawful for any member of a corporation engaged in agriculture or
mining and for any corporation organized for any purpose except irrigation
to be in any wise interested in any other corporation engaged in agriculture
or in mining."
Under the guidance of this and certain other provisions thus enacted by
Congress, the Philippine Commission entered upon the enactment of a
general law authorizing the creation of corporations in the Philippine
Islands. This rather elaborate piece of legislation is embodied in what is
called our Corporation Law (Act No. 1459 of the Philippine Commission).
The evident purpose of the commission was to introduce the American
corporation into the Philippine Islands as the standard commercial entity
and to hasten the day when the sociedad anonima of the Spanish law would
be obsolete. That statute is a sort of codification of American corporate law.
For the purposes general description only, it may be stated that the
sociedad anonima is something very much like the English joint stock
company, with features resembling those of both the partnership is shown
in the fact that sociedad, the generic component of its name in Spanish, is
the same word that is used in that language to designate other forms of
partnership, and in its organization it is constructed along the same generallines as the ordinary partnership. It is therefore not surprising that for
purposes of loose translation the expression sociedad anonima has not
infrequently the other hand, the affinity of this entity to the American
corporation has not escaped notice, and the expression sociedad anonima is
now generally translated by the word corporation. But when the word
corporation is used in the sense of sociedad anonima and close
discrimination is necessary, it should be associated with the Spanish
expression sociedad anonima either in a parenthesis or connected by the
word "or". This latter device was adopted in sections 75 and 191 of the
Corporation Law.
In drafting the Corporation Law the Philippine Commission inserted bodily,
in subsection (5) of section 13 of that Act (No. 1459) the words which we
have already quoted from section 75 of the Act of Congress of July 1, 1902
(Philippine Bill); and it is of course obvious that whatever meaning originally
attached to this provision in the Act of Congress, the same significance
should be attached to it in section 13 of our Corporation Law.
As it was the intention of our lawmakers to stimulate the introduction of the
American Corporation into Philippine law in the place of the sociedad
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anonima, it was necessary to make certain adjustments resulting from the
continued co-existence, for a time, of the two forms of commercial entities.
Accordingly, in section 75 of the Corporation Law, a provision is found
making the sociedad anonima subject to the provisions of the Corporation
Law "so far as such provisions may be applicable", and giving to the
sociedades anonimas previously created in the Islands the option to
continue business as such or to reform and organize under the provisions of
the Corporation Law. Again, in section 191 of the Corporation Law, the Code
of Commerce is repealed in so far as it relates to sociedades anonimas. The
purpose of the commission in repealing this part of the Code of Commerce
was to compel commercial entities thereafter organized to incorporate
under the Corporation Law, unless they should prefer to adopt some form
or other of the partnership. To this provision was added another to the
effect that existing sociedades anonimas, which elected to continue their
business as such, instead of reforming and reorganizing under the
Corporation Law, should continue to be governed by the laws that were in
force prior to the passage of this Act "in relation to their organization andmethod of transacting business and to the rights of members thereof as
between themselves, but their relations to the public and public officials
shall be governed by the provisions of this Act."
As already observed, the provision above quoted from section 75 of the Act
Congress of July 1, 1902 (Philippine Bill), generally prohibiting corporations
engaged in mining and members of such from being interested in any other
corporation engaged in mining, was amended by section 7 of Act No. 3518
of the Philippine Legislature, approved by Congress March 1, 1929. The
change in the law effected by this amendment was in the direction ofliberalization. Thus, the inhibition contained in the original provision against
members of a corporation engaged in agriculture or mining from being
interested in other corporations engaged in agriculture or in mining was so
modified as merely to prohibit any such member from holding more than
fifteen per centum of the outstanding capital stock of another such
corporation. Moreover, the explicit prohibition against the holding by any
corporation (except for irrigation) of an interest in any other corporation
engaged in agriculture or in mining was so modified as to limit the
restriction to corporations organized for the purpose of engaging in
agriculture or in mining.
As originally drawn, our Corporation Law (Act No. 1459) did not contain any
appropriate clause directly penalizing the act of a corporation, a member of
a corporation , in acquiring an interest contrary to paragraph (5) of section
13 of the Act. The Philippine Legislature undertook to remedy this situation
in section 3 of Act No. 2792 of the Philippine Legislature, approved on
February 18, 1919, but this provision was declared invalid by this court in
Government of the Philippine Islands vs. El Hogar Filipino (50 Phil., 399), for
lack of an adequate title to the Act. Subsequently the Legislature reenacted
substantially the same penal provision in section 21 of Act No. 3518, under a
title sufficiently broad to comprehend the subject matter. This part of Act
No. 3518 became effective upon approval by the Governor-General, on
December 3, 1928, and it was therefore in full force when the contract now
in question was made.
This provision was inserted as a new section in the Corporation Law,
forming section 1990 (A) of said Act as it now stands. Omitting the proviso,which seems not to be pertinent to the present controversy, said provision
reads as follows:
SEC. 190 (A). Penalties. The violation of any of the provisions of this Act
and its amendments not otherwise penalized therein, shall be punished by a
fine of not more than five thousand pesos and by imprisonment for not
more than five years, in the discretion of the court. If the violation is
committed by a corporation, the same shall, upon such violation being
proved, be dissolved by quo warranto proceedings instituted by the
Attorney-General or by any provincial fiscal by order of said Attorney-General: . . . .
Upon a survey of the facts sketched above it is obvious that there are two
fundamental questions involved in this controversy. The first is whether the
plaintiffs can maintain an action based upon the violation of law supposedly
committed by the Benguet Company in this case. The second is whether,
assuming the first question to be answered in the affirmative, the Benguet
Company, which was organized as a sociedad anonima, is a corporation
within the meaning of the language used by the Congress of the United
States, and later by the Philippine Legislature, prohibiting a mining
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corporation from becoming interested in another mining corporation. It is
obvious that, if the first question be answered in the negative, it will be
unnecessary to consider the second question in this lawsuit.
Upon the first point it is at once obvious that the provision referred to was
adopted by the lawmakers with a sole view to the public policy that should
control in the granting of mining rights. Furthermore, the penalties imposed
in what is now section 190 (A) of the Corporation Law for the violation of
the prohibition in question are of such nature that they can be enforced
only by a criminal prosecution or by an action of quo warranto. But these
proceedings can be maintained only by the Attorney-General in
representation of the Government.
What room then is left for the private action which the plaintiffs seek to
assert in this case? The defendant Benguet Company has committed no civil
wrong against the plaintiffs, and if a public wrong has been committed, the
directors of the Balatoc Company, and the plaintiff Harden himself, werethe active inducers of the commission of that wrong. The contract,
supposing it to have been unlawful in fact, has been performed on both
sides, by the building of the Balatoc plant by the Benguet Company and the
delivery to the latter of the certificate of 600,000 shares of the Balatoc
Company. There is no possibility of really undoing what has been done.
Nobody would suggest the demolition of the mill. The Balatoc Company is
secure in the possession of that improvement, and talk about putting the
parties in status quo ante by restoring the consideration with interest, while
the Balatoc Company remains in possession of what it obtained by the use
of that money, does not quite meet the case. Also, to mulct the BenguetCompany in many millions of dollars in favor of individuals who have not the
slightest equitable right to that money in a proposition to which no court
can give a ready assent.
The most plausible presentation of the case of the plaintiffs proceeds on the
assumption that only one of the contracting parties has been guilty of a
misdemeanor, namely, the Benguet Company, and that the other party, the
Balatoc Company, is wholly innocent to participation in that wrong. The
plaintiffs would then have us apply the second paragraph of article 1305 of
the Civil Code which declares that an innocent party to an illegal contract
may recover anything he may have given, while he is not bound to fulfill any
promise he may have made. But, supposing that the first hurdle can be
safely vaulted, the general remedy supplied in article 1305 of the Civil Code
cannot be invoked where an adequate special remedy is supplied in a
special law. It has been so held by this court in Go Chioco vs. Martinez (45
Phil., 256, 280), where we refused to apply that article to a case of nullity
arising upon a usurious loan. The reason given for the decision on this point
was that the Usury Act, as amended, contains all the provisions necessary
for the effectuation of its purposes, with the result that the remedy given in
article 1305 of the Civil Code is unnecessary. Much more is that idea
applicable to the situation now before us, where the special provisions give
ample remedies for the enforcement of the law by action in the name of the
Government, and where no civil wrong has been done to the party here
seeking redress.
The view of the case presented above rest upon considerations arising upon
our own statutes; and it would seem to be unnecessary to ransack theAmerican decisions for analogies pertinent to the case. We may observe,
however, that the situation involved is not unlike that which has frequently
arisen in the United States under provisions of the National Bank Act
prohibiting banks organized under that law from holding real property. It
has been uniformly held that a trust deed or mortgaged conveying property
of this kind to a bank, by way of security, is valid until the transaction is
assailed in a direct proceeding instituted by the Government against the
bank, and the illegality of such tenure supplies no basis for an action by the
former private owner, or his creditor, to annul the conveyance. (National
Bank vs. Matthews, 98 U. S., 621; Kerfoot vs. Farmers & M. Bank, 218 U. S.,281.) Other analogies point in the same direction. (South & Ala. R. Ginniss
vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co.
vs. Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R.
Co., 77 Hun., 332.)
Most suggestive perhaps of all the cases in Compaia Azucarera de Carolina
vs. Registrar (19 Porto Rico, 143), for the reason that this case arose under a
provision of the Foraker Act, a law analogous to our Philippine Bill. It
appears that the registrar had refused to register two deeds in favor of the
Compaia Azucarera on the ground that the land thereby conveyed was in
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excess of the area permitted by law to the company. The Porto Rican court
reversed the ruling of the registrar and ordered the registration of the
deeds, saying:
Thus it may be seen that a corporation limited by the law or by its charter
has until the State acts every power and capacity that any other individual
capable of acquiring lands, possesses. The corporation may exercise every
act of ownership over such lands; it may sue in ejectment or unlawful
detainer and it may demand specific performance. It has an absolute title
against all the world except the State after a proper proceeding is begun in a
court of law. ... The Attorney General is the exclusive officer in whom is
confided the right to initiate proceedings for escheat or attack the right of a
corporation to hold land.
Having shown that the plaintiffs in this case have no right of action against
the Benguet Company for the infraction of law supposed to have been
committed, we forego cny discussion of the further question whether asociedad anonima created under Spanish law, such as the Benguet
Company, is a corporation within the meaning of the prohibitory provision
already so many times mentioned. That important question should, in our
opinion, be left until it is raised in an action brought by the Government.
The judgment which is the subject of his appeal will therefore be affirmed,
and it is so ordered, with costs against the appellants.
EXCELLENT QUALITY APPAREL INC., versus
WIN MULTI RICH BUILDERS, INC.,
February 10, 2009
Before us is a Rule 45 petition[1] seeking the reversal of the Decision[2] and
Resolution[3] of the Court of Appeals in CA-G.R. SP No. 84640. The Court of
Appeals had annulled two orders[4] of the Regional Trial Court (RTC),
Branch 32, of Manila in Civil Case No. 04-108940. This case involves a claim
for a sum of money which arose from a construction dispute.
On 26 March 1996, petitioner Excellent Quality Apparel, Inc. (petitioner)
then represented by Max L.F. Ying, Vice-President for Productions, andAlfiero R. Orden, Treasurer, entered into a contract[5] with Multi-Rich
Builders (Multi-Rich) represented by Wilson G. Chua (Chua), its President
and General Manager, for the construction of a garment factory within the
Cavite Philippine Economic Zone Authority (CPEZ).[6] The duration of the
project was for a maximum period of five (5) months or 150 consecutive
calendar days. Included in the contract is an arbitration clause which is as
follows:
Article XIX : ARBITRATION CLAUSE
Should there be any dispute, controversy or difference between the parties
arising out of this Contract that may not be resolved by them to their
mutual satisfaction, the matter shall be submitted to an Arbitration
Committee of three (3) members; one (1) chosen by the OWNER; one (1)
chosen by the CONTRACTOR; and the Chairman thereof to be chosen by two
(2) members. The decision of the Arbitration Committee shall be final and
binding on both the parties hereto. The Arbitration shall be governed by theArbitration Law (R.A. [No.] 876). The cost of arbitration shall be borned [sic]
jointly by both CONTRACTOR and OWNER on 50-50 basis.[7]
The construction of the factory building was completed on 27 November
1996.
Respondent Win Multi-Rich Builders, Inc. (Win) was incorporated withthe Securities and Exchange Commission (SEC) on 20 February 1997[8] with
Chua as its President and General Manager. On 26 January 2004, Win filed a
complaint for a sum of money[9] against petitioner and Mr. Ying amounting
to P8,634,448.20. It also prayed for the issuance of a writ of attachment
claiming that Mr. Ying was about to abscond and that petitioner was about
to close. Win obtained a surety bond[10] issued by Visayan Surety &
Insurance Corporation. On 10 February 2004, the RTC issued the Writ of
Attachment[11] against the properties of petitioner.
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On 16 February 2004, Sheriff Salvador D. Dacumos of the RTC of
Manila, Branch 32, went to the office of petitioner in CPEZ to serve the Writ
of Attachment, Summons[12] and the Complaint. Petitioner issued
Equitable PCIBank (PEZA Branch) Check No. 160149, dated 16 February
2004, in the amount of P8,634,448.20, to prevent the Sheriff from taking
possession of its properties.[13] The check was made payable to the Office
of the Clerk of Court of the RTC of Manila as a guarantee for whatever
liability there may be against petitioner.
Petitioner filed an Omnibus Motion[14] claiming that it was neither
about to close. It also denied owing anything to Win, as it had already paid
all its obligations to it. Lastly, it questioned the jurisdiction of the trial court
from taking cognizance of the case. Petitioner pointed to the presence of
the Arbitration Clause and it asserted that the case should be referred to
the Construction Industry Arbitration Commission (CIAC) pursuant to
Executive Order (E.O.) No. 1008.
In the hearing held on 10 February 2004, the counsel of Win moved
that its name in the case be changed from Win Multi-Rich Builders, Inc. to
Multi-Rich Builders, Inc. It was only then that petitioner apparently
became aware of the variance in the name of the plaintiff. In the Reply[15]
filed by petitioner, it moved to dismiss the case since Win was not the
contractor and neither a party to the contract, thus it cannot institute the
case. Petitioner obtained a Certificate of Non-Registration of
Corporation/Partnership[16] from the SEC which certified that the latter did
not have any records of a Multi-Rich Builders, Inc. Moreover, Win in its
Rejoinder[17] did not oppose the allegations in the Reply. Win admittedthat it was only incorporated on 20 February 1997 while the construction
contract was executed on 26 March 1996. Likewise, it admitted that at the
time of execution of the contract, Multi-Rich was a registered sole
proprietorship and was issued a business permit[18] by the Office of the
Mayor of Manila.
In an Order[19] dated 12 April 2004, the RTC denied the motion and
stated that the issues can be answered in a full-blown trial. Upon its denial,
petitioner filed its Answer and prayed for the dismissal of the case.[20] Win
filed a Motion[21] to deposit the garnished amount to the court to protect
its legal rights. In a Manifestation,[22] petitioner vehemently opposed the
deposit of the garnished amount. The RTC issued an Order[23] dated 20
April 2004, which granted the motion to deposit the garnished amount. On
the same date, Win filed a motion[24] to release the garnished amount to it.
Petitioner filed its opposition[25] to the motion claiming that the release of
the money does not have legal and factual basis.
On 18 June 2004, petitioner filed a petition for review on certiorari[26]
under Rule 65 before the Court of Appeals, which questioned the
jurisdiction of the RTC and challenged the orders issued by the lower court
with a prayer for the issuance of a temporary retraining order and a writ of
preliminary injunction. Subsequently, petitioner filed a Supplemental
Manifestation and Motion[27] and alleged that the money deposited with
the RTC was turned over to Win. Win admitted that the garnished amount
had already been released to it. On 14 March 2006, the Court of Appeals
rendered its Decision[28] annulling the 12 April and 20 April 2004 orders ofthe RTC. It also ruled that the RTC had jurisdiction over the case since it is a
suit for collection of sum of money. Petitioner filed a Motion for
Reconsideration[29] which was subsequently denied in a resolution.[30]
Hence this petition.
Petitioner raised the following issues to wit: (1) does Win have a legal
personality to institute the present case; (2) does the RTC have jurisdiction
over the case notwithstanding the presence of the arbitration clause; and
(3) was the issuance of the writ of attachment and the subsequentgarnishment proper.
A suit may only be instituted by the real party in interest. Section 2,
Rule 3 of the Rules of Court defines parties in interest in this manner:
A real party in interest is the party who stands to be benefited or injured by
the judgment in the suit, or the party entitled to the avails of the suit.
Unless otherwise authorized by law or these Rules, every action must be
prosecuted or defended in the name of the real party in interest.
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Is Win a real party in interest? We answer in the negative.
Win admitted that the contract was executed between Multi-Rich and
petitioner. It further admitted that Multi-Rich was a sole proprietorship with
a business permit issued by the Office of the Mayor of Manila. A sole
proprietorship is the oldest, simplest, and most prevalent form of business
enterprise.[31] It is an unorganized business owned by one person. The sole
proprietor is personally liable for all the debts and obligations of the
business.[32] In the case of Mangila v. Court of Appeals,[33] we held that:
x x x In fact, there is no law authorizing sole proprietorships to file a suit in
court.
A sole proprietorship does not possess a juridical personality separate and
distinct from the personality of the owner of the enterprise. The law merely
recognizes the existence of a sole proprietorship as a form of business
organization conducted for profit by a single individual and requires itsproprietor or owner to secure licenses and permits, register its business
name, and pay taxes to the national government. The law does not vest a
separate legal personality on the sole proprietorship or empower it to file or
defend an action in court.
The original petition was instituted by Win, which is a SEC-registered
corporation. It filed a collection of sum of money suit which involved a
construction contract entered into by petitioner and Multi-Rich, a sole
proprietorship. The counsel of Win wanted to change the name of the
plaintiff in the suit to Multi-Rich. The change cannot be countenanced. Theplaintiff in the collection suit is a corporation. The name cannot be changed
to that of a sole proprietorship. Again, a sole proprietorship is not vested
with juridical personality to file or defend an action.[34]
Petitioner had continuously contested the legal personality of Win to
institute the case. Win was given ample opportunity to adduce evidence to
show that it had legal personality. It failed to do so. Corpus Juris Secundum,
notes:
x x x where an individual or sole trader organizes a corporation to take over
his business and all his assets, and it becomes in effect merely an alter ego
of the incorporator, the corporation, either on the grounds of implied
assumption of the debts or on the grounds that the business is the same
and is merely being conducted under a new guise, is liable for the
incorporator's preexisting debts and liabilities. Clearly, where the
corporation assumes or accepts the debt of its predecessor in business it is
liable and if the transfer of assets is in fraud of creditors it will be liable to
the extent of the assets transferred. The corporation is not liable on an
implied assumption of debts from the receipt of assets where the
incorporator retains sufficient assets to pay the indebtedness, or where
none of his assets are transferred to the corporation, or
where, although all the assets of the incorporator have been transferred,
there is a change in the persons carrying on the business and the
corporation is not merely an alter ego of the person to whose business it
succeeded.[35]
In order for a corporation to be able to file suit and claim the receivables of
its predecessor in business, in this case a sole proprietorship, it must show
proof that the corporation had acquired the assets and liabilities of the sole
proprietorship. Win could have easily presented or attached any document
e.g., deed of assignment which will show whether the assets, liabilities and
receivables of Multi-Rich were acquired by Win. Having been given the
opportunity to rebut the allegations made by petitioner, Win failed to use
that opportunity. Thus, we cannot presume that Multi-Rich is the
predecessor-in-business of Win and hold that the latter has standing toinstitute the collection suit.
Assuming arguendo that Win has legal personality, the petition will still
be granted.
Section 4 of E.O. No. 1008[36] provides for the jurisdiction of the
Construction Industry Arbitration Commission, to wit:
Section 4. Jurisdiction.The CIAC shall have original and exclusive
jurisdiction over disputes arising from, or connected with, contracts entered
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into by parties involved in construction in the Philippines, whether the
disputes arises before or after the completion of the contract, or after the
abandonment or breach thereof. These disputes may involve government or
private contracts. For the Board to acquire jurisdiction, the parties to a
dispute must agree to submit the same to voluntary arbitration.
The jurisdiction of the CIAC may include but is not limited to violation
of specifications for materials and workmanship; violation of the terms of
agreement; interpretation and/or application of contractual time and
delays; amount of damages and penalties; commencement time and delays;
maintenance and defects; payment, default of employer or contractor and
changes in contract cost.
Excluded from the coverage of this law are disputes from employer-
employee relationships which shall continue to be covered by the Labor
Code of the Philippines.
There is nothing in the law which limits the exercise of jurisdiction to
complex or difficult cases. E.O. No. 1008 does not distinguish between
claims involving payment of money or not.[37] The CIAC acquires
jurisdiction over a construction contract by the mere fact that the parties
agreed to submit to voluntary arbitration.[38] The law does not preclude
parties from stipulating a preferred forum or arbitral body but they may not
divest the CIAC of jurisdiction as provided by law.[39] Arbitration is an
alternative method of dispute resolution which is highly encouraged.[40]
The arbitration clause is a commitment on the part of the parties to submit
to arbitration the disputes covered since that clause is binding, and they areexpected to
abide by it in good faith.[41] Clearly, the RTC should not have taken
cognizance of the collection suit. The presence of the arbitration clause
vested jurisdiction to the CIAC over all construction disputes between
Petitioner and Multi-Rich. The RTC does not have jurisdiction.[42]
Based on the foregoing, there is no need to discuss the propriety of the
issuance of the writ of attachment. However, we cannot allow Win to retain
the garnished amount which was turned over by the RTC. The RTC did not
have jurisdiction to issue the questioned writ of attachment and to order
the release of the garnished funds.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals
is hereby MODIFIED. Civil Case No. 04-108940 is DISMISSED. Win Multi-Rich
Builders, Inc. is ORDERED to return the garnished amount of EIGHT
MILLION SIX HUNDRED THIRTY-FOUR THOUSAND FOUR HUNDRED
FORTY-EIGHT PESOS AND FORTY CENTAVOS (P8,634,448.40),
which was turned over by the Regional Trial Court, to petitioner with legal
interest of 12 percent (12%) per annum upon finality of this Decision until
payment.
SO ORDERED.
BIENVENIDO EJERCITO and JOSE MARTINEZ,
- versusCONSTRUCTION,
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, assailing the Court of Appeals Decision*1+ and Resolution*2+
in CA-G.R. SP No. 89001. The appellate courts decision dismissed the
petition for certiorari, which sought to set aside the Order[3] dated 08
November 2004 issued by Hon. Marie Christine Jacob, Presiding Judge of the
Regional Trial Court (RTC) of Quezon City, Branch 100. The appellate courts
resolution denied petitioners motion for reconsideration of the decision.
As culled from the records, the following factual antecedents appear:
On 5 March 2004, the City Government of Quezon City, represented by
Mayor Feliciano Belmonte, Jr., entered into a construction contract[4] with
M.R. Vargas Construction, represented by Marcial Vargas in his capacity as
general manager of the said business enterprise, for the improvement and
concreting of Panay Avenue.[5] Pursuant to the contract, the business
enterprise commenced its clearing operations by removing the structures
and uprooting the trees along the thoroughfare. Its foreman, RenatoAgarao, supervised the clearing operations.[6]
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Claiming that the clearing operations lacked the necessary permit and prior
consultation, petitioners Bienvenido Ejercito and Jose Martinez, as well as a
certain Oscar Baria, brought the matter to the attention of the barangay
authorities, Mayor Belmonte, Senator Ma. Ana Consuelo A.S. Madrigal, the
Department of Environment and Natural Resources and the Philippine
Coconut Authority.[7]
The efforts of petitioners proved unsuccessful. Hence, on 10 September
2004, they filed a petition for injunction before the Quezon City RTC. The
petition named M.R. Vargas Construction Co., represented by herein
Marcial R. Vargas and Renato Agarao, as respondent.*8+
The Petition,[9] docketed as Civil Case No. Q-04-53687, indicated that
Respondent M.R. Vargas Construction, is an entity, with office address at
the 4th Floor, President Tower, Timog Avenue corner Scout Ybardaloza [sic]
St., Quezon City, represented herein by its President Marcial Vargas and itsconstruction foreman Renato Agarao, where they may be served with
summons and other court processes.*10+
The petition was accompanied with an application for a temporary
restraining order (TRO) and a writ of preliminary injunction.[11] Thus, the
Office of the Clerk of Court forthwith issued summons and notice of raffle
on 10 September 2004.[12] Upon service of the processes on the
aforementioned address, they were returned unserved on the ground that
respondent enterprise was unknown thereat.[13]
The petition was subsequently raffled to the sala of Judge Jacob, before
which petitioners application for a temporary restraining order was heard
on 15 September 2004.[14] On the same day, when Agarao was also
present in court, Judge Jacob issued a TRO directing respondent enterprise
to desist from cutting, damaging or transferring the trees found along Panay
Avenue.[15]
On 23 September 2004, the Mangoba Tan Agus Law Offices filed a special
appearance on behalf of respondent enterprise and moved for the dismissal
of the petition as well as the quashal of the temporary restraining order on
the ground of lack of jurisdiction over respondent enterprise. The motion
also assailed the raffle of the case for having been conducted in violation of
Section 4, Rule 58 of the Rules of Court; the issuance of the TRO without
requiring the posting of a bond; the failure to implead the Government of
Quezon City despite its being the real party-in- interest; and petitioners
application for the injunctive writ which was allegedly grossly defective in
form and substance.[16]
The motion to dismiss the petition and to quash the TRO was heard on 24
September 2004.[17] Before the hearing, a court interpreter showed to
respondent enterprises counsel a copy of the summons and of the notice of
raffle in which appear a signature at the bottom of each copy, apparently
indicating the receipt of the summons.[18] On the mistaken belief that the
summons was received by respondent enterprise, at the hearing of the
motion, its counsel withdrew two of the grounds stated in the motion, to
wit, lack of jurisdiction and irregularity in the raffle of the case.[19]
At the hearing of petitioners application for a writ of preliminary injunction
on 1 October 2004, the counsel for respondent enterprise manifested that
he was adopting the arguments in the motion to quash the TRO.[20] On 6
October 2004, the RTC issued an Order granting petitioners application for
a writ of preliminary injunction.[21]
On 7 October 2004, counsel for respondent enterprise filed a manifestation
with urgent omnibus motion to nullify the proceedings and to cite
petitioners and the process server in contempt of court.[22] He argued that
respondent enterprise failed to receive the summons, alleging that it washerein petitioner Jose Martinez who signed as recipient thereof as well as of
the notice of raffle that was served on 10 September 2004.[23]
On 18 October 2004, the writ of preliminary injunction was issued.
Subsequently, petitioners filed a motion for ocular inspection and another
motion praying that respondent enterprise be ordered to
restore the structures damaged by its clearing operations.[24]
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On 8 November 2004, the RTC issued the assailed Order,[25] nullifying the
proceedings thus far conducted in the case.[26] Petitioners sought
reconsideration, but the motion was denied in an Order dated 20 December
2004.[27]
Thus, petitioners filed a petition for certiorari before the Court of Appeals
assailing the 8 November 2004 Order issued by Judge Jacob.[28] This time,
aside from Judge Jacob and the enterprise M.R. Vargas Construction itself,
the petition also named Marcial R. Vargas and Renato Agarao, the
enterprises owner and foreman, respectively, as individual respondents.
The separate addresses of said respondents were also indicated in the initial
part of the petition.
It was argued in the petition that Judge Jacob committed grave abuse of
direction in nullifying the proceedings on the ground of lack of jurisdiction in
view of Agaraos presence at the hearing on petitioners application for TRO,
in failing to act on petitioners pending motions and in directing instead theissuance of new summons on respondent enterprise.[29]
On 10 October 2005, the Court of Appeals rendered the assailed Decision
dismissing the petition for certiorari for lack of merit.[30] In its Order dated
28 April 2006, the Court of Appeals denied petitioners motion for
reconsideration.
Hence, the instant petition attributes the following errors to the Court ofAppeals:
I.
THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL TRIAL
COURT DID NOT OBTAIN JURISDICTION OVER THE RESPONDENTS, DEPSITE
THE RECEIPT OF COURT PROCESSES AND VOLUNTARY APPEARANCE BEFORE
THE COURTS.
II.
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE WITHDRAWAL
BY PRIVATE RESPONDENTS OF THE GROUND OF ABSENCE OF JURISDICTION
OVER ITS PERSON CONSTITUTED A WAIVER OF SUCH OBJECTION[31]
The instant petitionwhich similarly impleads the enterprise, M.R. Vargas
Construction, Marcial R. Vargas and Renato Agarao as respondentsraises
two issues, namely: (1) whether the trial court acquired jurisdiction over
respondent enterprise and (2) whether the defense of lack of jurisdiction
had been waived.
Jurisdiction over the defendant is acquired either upon a valid service of
summons or the defendants voluntary appearance in court. When the
defendant does not voluntarily submit to the courts jurisdiction or when
there is no valid service of summons, any judgment of the court, which has
no jurisdiction over the person of the defendant is null and void. In an
action strictly in personam, personal service on the defendant is thepreferred mode of service, that is, by handing a copy of the summons to the
defendant in person.[32]
Citing the jurisdictional implications of the failure of service of summons,
the Court of Appeals concluded that no grave abuse of discretion was
committed by Judge Jacob in nullifying the proceedings thus far conducted
in the case based on the finding that the summons had not been served on
respondent enterprise and that Agarao, despite being present at the 15
September 2004 hearing, was not authorized to represent respondent
enterprise in said hearing.
Petitioners take exception. They argue that the trial court acquired
jurisdiction over respondent enterprise, an entity without juridical
personality, through the appearance of its foreman, Agarao, at the 15
September 2004 hearing on the TRO application. Petitioners theorize that
the voluntary appearance of Agarao in said hearing was equivalent to
service of summons binding upon respondent enterprise, following by
analogy, Section 8, Rule 14[33] which allows the service of summons on any
of the defendants associated to an entity without juridical personality.
Furthermore, they contend that the receipt by a certain Rona Adol of the
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court processes was binding upon respondent enterprise because the latter
did not deny the authority of Adol to receive communications on its behalf.
Petitioners argument is untenable.
At the outset, it is worthy to note that both the Court of Appeals and the
trial court found that summons was not served on respondent enterprise.
The Officers Return stated essentially that the server failed to serve the
summons on respondent enterprise because it could not be found at the
address alleged in the petition. This factual finding, especially when
affirmed by the appellate court, is conclusive upon this Court and should not
be disturbed because this Court is not a trier of facts.
A sole proprietorship does not possess a juridical personality separate and
distinct from the personality of the owner of the enterprise. The law does
not vest a separate legal personality on the sole proprietorship or empower
it to file or defend an action in court.[34] Only natural or juridical persons orentities authorized by law may be parties to a civil action and every action
must be prosecuted and defended in the name of the real parties-in-
interest.[35]
The records show that respondent enterprise, M.R. Vargas Construction Co.,
is a sole proprietorship and, therefore, an entity without juridical
personality. Clearly, the real party-in-interest is Marcial R. Vargas who is the
owner of the enterprise. Thus, the petition for injunction should have
impleaded him as the party respondent either simply by mention of his
name or by denominating him as doing business under the name and styleof M.R. VargasConstruction Co. It was erroneous to refer to him, as the
petition did in both its caption and body, as representing the enterprise.
Petitioners apparently realized this procedural lapse when in the petition for
certiorari filed before the Court of Appeals and in the instant petition, M.R.
Vargas Construction, Marcial R. Vargas and Renato Agaro were separately
named as individual respondents.
Since respondent enterprise is only a sole proprietorship, an entity without
juridical personality, the suit for injunction may be instituted only against its
owner, Marcial Vargas. Accordingly summons should have been served on
Vargas himself, following Rule 14, Sections 6[36] and 7[37] of the Rules of
Court on personal service and substituted service. In the instant case, no
service of summons, whether personal or substituted, was effected on
Vargas. It is well-established that summons upon a respondent or a
defendant must be served by handing a copy thereof to him in person or, if
he refuses to receive it, by tendering it to him. Personal service of summons
most effectively ensures that the notice desired under the constitutional
requirement of due process is accomplished. If however efforts to find him
personally would make prompt service impossible, service may be
completed by substituted service, i.e., by leaving copies of the summons at
his dwelling house or residence with some person of suitable age and
discretion then residing therein or by leaving the copies at his office or
regular place of business with some competent person in charge
thereof.[38]
The modes of service of summons should be strictly followed in order that
the court may acquire jurisdiction over the respondents, and failure tostrictly comply with the requirements of the rules regarding the order of its
publication is a fatal defect in the service of summons. It cannot be
overemphasized that the statutory requirements on service of summons,
whether personally, by substituted service or by publication, must be
followed strictly, faithfully and fully, and any mode of service other than
that prescribed by the statute is considered ineffective.[39]
Agarao was not a party respondent in the injunction case before the trial
court. Certainly, he is not a real party-in-interest against whom the
injunction suit may be brought, absent any showing that he is also an owneror he acts as an agent of respondent enterprise. Agarao is only a foreman,
bereft of any authority to defend the suit on behalf of respondent
enterprise. As earlier mentioned, the suit against an entity without juridical
personality like respondent enterprise may be instituted only by or against
its owner. Impleading Agarao as a party-respondent in the suit for injunction
would have no legal consequence. In any event, the petition for injunction
described Agarao only as a representative of M.R. Vargas Construction Co.,
which is a mere inconsequentiality considering that only Vargas, as its sole
owner, is authorized by the Rules of Court to defend the suit on behalf of
the enterprise.
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Despite Agaraos not being a party-respondent, petitioners nevertheless
confuse his presence or attendance at the hearing on the application for
TRO with the notion of voluntary appearance, which interpretation has a
legal nuance as far as jurisdiction is concerned. While it is true that an
appearance in whatever form, without explicitly objecting to the jurisdiction
of the court over the person, is a submission to the jurisdiction of the court
over the person, the appearance must constitute a positive act on the part
of the litigant manifesting an intention to submit to the courts
jurisdiction.[40] Thus, in the instances where the Court upheld the
jurisdiction of the trial court over the person of the defendant, the parties
showed the intention to participate or be bound by the proceedings
through the filing of a motion, a plea or an answer.[41]
Neither is the service of the notice of hearing on the application for a TRO
on a certain Rona Adol binding on respondent enterprise. The records show
that Rona Adol received the notice of hearing on behalf of an entity namedJCB. More importantly, for purposes of acquiring jurisdiction over the
person of the defendant, the Rules require the service of summons and not
of any other court processes.
Petitioners also contend that respondent enterprise waived the defense of
lack of jurisdiction when its counsel actively demanded positive action on
the omnibus motion. The argument is implausible.
It should be noted that when the defendants appearance is made precisely
to object to the jurisdiction of the court over his person, it cannot beconsidered as appearance in court.[42] Such was the purpose of the
omnibus motion, as counsel for respondent enterprise precisely manifested
therein that he erroneously believed that Vargas himself had received the
summons when in fact it was petitioner Martinez who signed as recipient of
the summons. Noteworthy is the fact that when the counsel first appeared
in court his appearance was special in character and was only for the
purpose of questioning the courts jurisdiction over Vargas, considering that
the latter never received the summons. However, the counsel was shown a
copy of the summons where a signature appears at the bottom which led
him to believe that the summons was actually received by Vargas when in
fact it was petitioner Martinez himself who affixed his signature as recipient
thereof. When the counsel discovered his mistake, he lost no time pleading
that the proceedings be nullified and that petitioners and the process server
be cited for contempt of court. Both the trial and appellate courts
concluded that the improvident withdrawal of the defense of lack of
jurisdiction was an innocuous error, proceeding on the undeniable fact that
the summons was not properly served on Vargas. Thus, the Court of Appeals
did not commit a reversible error when it affirmed the trial courts
nullification of the proceedings for lack of jurisdiction.
WHEREFORE, the instant petition for certiorari is DENIED. The Decision and
Resolution of the Court of Appeals in CA-G.R. SP No. 89001 are AFFIRMED in
toto. Costs against petitioners.
The temporary restraining order issued in this case is DISSOLVED.
SO ORDERED.
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and
CHARLES CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V.
LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO,
GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUZ, respondents.
These consolidated petitions seek the review of the amended decision of
the Court of Appeals in CA-G.R. SP Nos. 05604 and 05617 which set aside
the earlier decision dated June 5, 1986, of the then Intermediate Appellate
Court and directed that in all subsequent elections for directors of Sanitary
Wares Manufacturing Corporation (Saniwares), American Standard Inc. (ASI)
cannot nominate more than three (3) directors; that the Filipino
stockholders shall not interfere in ASI's choice of its three (3) nominees;
that, on the other hand, the Filipino stockholders can nominate only six (6)
candidates and in the event they cannot agree on the six (6) nominees, they
shall vote only among themselves to determine who the six (6) nominees
will be, with cumulative voting to be allowed but without interference fromASI.
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The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was incorporated for the
primary purpose of manufacturing and marketing sanitary wares. One of the
incorporators, Mr. Baldwin Young went abroad to look for foreign partners,
European or American who could help in its expansion plans. On August 15,
1962, ASI, a foreign corporation domiciled in Delaware, United States
entered into an Agreement with Saniwares and some Filipino investors
whereby ASI and the Filipino investors agreed to participate in the
ownership of an enterprise which would engage primarily in the business of
manufacturing in the Philippines and selling here and abroad vitreous china
and sanitary wares. The parties agreed that the business operations in the
Philippines shall be carried on by an incorporated enterprise and that the
name of the corporation shall initially be "Sanitary Wares Manufacturing
Corporation."
The Agreement has the following provisions relevant to the issues in these
cases on the nomination and election of the directors of the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be
substantially in the form annexed hereto as Exhibit A and, insofar as
permitted under Philippine law, shall specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of
Directors, which shall consist of nine individuals. As long as American-
Standard shall own at least 30% of the outstanding stock of the Corporation,
three of the nine directors shall be designated by American-Standard, and
the other six shall be designated by the other stockholders of the
Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to
protect it as a minority group, including the grant of veto powers over a
number of corporate acts and the right to designate certain officers, such as
a member of the Executive Committee whose vote was required for
important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation
was also registered with the Board of Investments for availment of
incentives with the condition that at least 60% of the capital stock of the
corporation shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the
American corporation prospered. Unfortunately, with the business
successes, there came a deterioration of the initially harmonious relationsbetween the two groups. According to the Filipino group, a basic
disagreement was due to their desire to expand the export operations of
the company to which ASI objected as it apparently had other subsidiaries
of joint joint venture groups in the countries where Philippine exports were
contemplated. On March 8, 1983, the annual stockholders' meeting was
held. The meeting was presided by Baldwin Young. The minutes were taken
by the Secretary, Avelino Cruz. After disposing of the preliminary items in
the agenda, the stockholders then proceeded to the election of the
members of the board of directors. The ASI group nominated three persons
namely; Wolfgang Aurbach, John Griffin and David P. Whittingham. ThePhilippine investors nominated six, namely; Ernesto Lagdameo, Sr., Raul A.
Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr.
Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in turn
nominated Mr. Charles Chamsay. The chairman, Baldwin Young ruled the
last two nominations out of order on the basis of section 5 (a) of the
Agreement, the consistent practice of the parties during the past annual
stockholders' meetings to nominate only nine persons as nominees for the
nine-member board of directors, and the legal advice of Saniwares' legal
counsel. The following events then, transpired:
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... There were protests against the action of the Chairman and heated
arguments ensued. An appeal was made by the ASI representative to the
body of stockholders present that a vote be taken on the ruling of the
Chairman. The Chairman, Baldwin Young, declared the appeal out of order
and no vote on the ruling was taken. The Chairman then instructed the
Corporate Secretary to cast all the votes present and represented by proxy
equally for the 6 nominees of the Philippine Investors and the 3 nominees of
ASI, thus effectively excluding the 2 additional persons nominated, namely,
Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua
protested the decision of the Chairman and announced that all votes
accruing to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No.
05617) were being cumulatively voted for the three ASI nominees and
Charles Chamsay, and instructed the Secretary to so vote. Luciano E. Salazar
and other proxy holders announced that all the votes owned by and or
represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617)
were being voted cumulatively in favor of Luciano E. Salazar. The Chairman,
Baldwin Young, nevertheless instructed the Secretary to cast all votesequally in favor of the three ASI nominees, namely, Wolfgang Aurbach, John
Griffin and David Whittingham and the six originally nominated by Rogelio
Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo,
Jr., Enrique Lagdameo, George F. Lee, and Baldwin Young. The Secretary
then certified for the election of the following Wolfgang Aurbach, John
Griffin, David Whittingham Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr.,
Enrique Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young. The
representative of ASI then moved to recess the meeting which was duly
seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No.
05617). This motion to adjourn was accepted by the Chairman, BaldwinYoung, who announced that the motion was carried and declared the
meeting adjourned. Protests against the adjournment were registered and
having been ignored, Mr. Jaqua the ASI representative, stated that the
meeting was not adjourned but only recessed and that the meeting would
be reconvened in the next room. The Chairman then threatened to have the
stockholders who did not agree to the decision of the Chairman on the
casting of votes bodily thrown out. The ASI Group, Luciano E. Salazar and
other stockholders, allegedly representing 53 or 54% of the shares of
Saniwares, decided to continue the meeting at the elevator lobby of the
American Standard Building. The continued meeting was presided by
Luciano E. Salazar, while Andres Gatmaitan acted as Secretary. On the basis
of the cumulative votes cast earlier in the meeting, the ASI Group
nominated its four nominees; Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay. Luciano E. Salazar voted for himself,
thus the said five directors were certified as elected directors by the Acting
Secretary, Andres Gatmaitan, with the explanation that there was a tie
among the other six (6) nominees for the four (4) remaining positions of
directors and that the body decided not to break the tie. (pp. 37-39, Rollo of
75975-76)
These incidents triggered off the filing of separate petitions by the parties
with the Securities and Exchange Commission (SEC). The first petition filed
was for preliminary injunction by Saniwares, Emesto V. Lagdameo, Baldwin
Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and
George F. Lee against Luciano Salazar and Charles Chamsay. The case was
denominated as SEC Case No. 2417. The second petition was for quo
warranto and application for receivership by Wolfgang Aurbach, JohnGriffin, David Whittingham, Luciano E. Salazar and Charles Chamsay against
the group of Young and Lagdameo (petitioners in SEC Case No. 2417) and
Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both sets of
parties except for Avelino Cruz claimed to be the legitimate directors of the
corporation.
The two petitions were consolidated and tried jointly by a hearing officer
who rendered a decision upholding the election of the Lagdameo Group and
dismissing the quo warranto petition of Salazar and Chamsay. The ASI Group
and Salazar appealed the decision to the SEC en banc which affirmed thehearing officer's decision.
The SEC decision led to the filing of two separate appeals with the
Intermediate Appellate Court by Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604) and
by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions
were consolidated and the appellate court in its decision ordered the
remand of the case to the Securities and Exchange Commission with the
directive that a new stockholders' meeting of Saniwares be ordered
convoked as soon as possible, under the supervision of the Commission.
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Upon a motion for reconsideration filed by the appellees Lagdameo Group)
the appellate court (Court of Appeals) rendered the questioned amended
decision. Petitioners Wolfgang Aurbach, John Griffin, David P. Whittingham
and Charles Chamsay in G.R. No. 75875 assign the following errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED
ELECTION OF PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD OF
DIRECTORS OF SANIWARES WHEN IN FACT THERE WAS NO ELECTION AT
ALL.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM
EXERCISING THEIR FULL VOTING RIGHTS REPRESENTED BY THE NUMBER OF
SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS AND THE
CORPORATION THEY REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT
DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS
PROVISIONS INTO THE AGREEMENT OF THE PARTIES WHICH WERE NOT
THERE, WHICH ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended
decision on the following grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding
contractual agreements entered into by stockholders and the replacement
of the conditions of such agreements with terms never contemplated by thestockholders but merely dictated by the CA .
11.2. The Amended decision would likewise sanction the deprivation of
the property rights of stockholders without due process of law in order that
a favored group of stockholders may be illegally benefitted and guaranteed
a continuing monopoly of the control of a corporation. (pp. 14-15, Rollo-
75975-76)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I
THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE
RECOGNIZING THAT THE STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO
TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC INTENT OF THE
AGREEMENT AND THE LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE
PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8
MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24,
Rollo-75951)
The issues raised in the petitions are interrelated, hence, they are discussed
jointly.
The main issue hinges on who were the duly elected directors of Saniwares
for the year 1983 during its annual stockholders' meeting held on March 8,
1983. To answer this question the following factors should be determined:
(1) the nature of the business established by the parties whether it was a
joint venture or a corporation and (2) whether or not the ASI Group may
vote their additional 10% equity during elections of Saniwares' board of
directors.
The rule is that whether the parties to a particular contract have thereby
established among themselves a joint venture or some other relationdepends upon their actual intention which is determined in accordance with
the rules governing the interpretation and construction of contracts.
(Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678;
Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd
668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the
actual intention of the parties should be viewed strictly on the "Agreement"
dated August 15,1962 wherein it is clearly stated that the parties' intention
was to form a corporation and not a joint venture.
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They specifically mention number 16 under Miscellaneous Provisions which
states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of the
parties hereto partners or joint venturers in respect of any transaction
hereunder. (At P. 66, Rollo-GR No. 75875)
They object to the admission of other evidence which tends to show that
the parties' agreement was to establish a joint venture presented by the
Lagdameo and Young Group on the ground that it contravenes the parol
evidence rule under section 7, Rule 130 of the Revised Rules of Court.
According to them, the Lagdameo and Young Group never pleaded in their
pleading that the "Agreement" failed to express the true intent of the
parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have
been reduced to writing, it is to be considered as containing all such terms,
and therefore, there can be, between the parties and their successors in
interest, no evidence of the terms of the agreement other than the contents
of the writing, except in the following cases:
(a) Where a mistake or imperfection of the writing, or its failure toexpress the true intent and agreement of the parties or the validity of the
agreement is put in issue by the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in
their Reply and Answer to Counterclaim in SEC Case No. 2417 that the
Agreement failed to express the true intent of the parties, to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it appear
that the parties thereto disclaim being partners or joint venturers such
disclaimer is directed at third parties and is not inconsistent with, and does
not preclude, the existence of two distinct groups of stockholders in
Saniwares one of which (the Philippine Investors) shall constitute the
majority, and the other ASI shall constitute the minority stockholder. In any
event, the evident intention of the Philippine Investors and ASI in entering
into the Agreement is to enter into ajoint venture enterprise, and if some
words in the Agreement appear to be contrary to the evident intention of
the parties, the latter shall prevail over the former (Art. 1370, New Civil
Code). The various stipulations of a contract shall be interpreted together
attributing to the doubtful ones that sense which may result from all of
them taken jointly (Art. 1374, New Civil Code). Moreover, in order to judge
the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered. (Art. 1371, New Civil Code).
(Part I, Original Records, SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that the
parties joined their efforts in furtherance of an enterprise for their joint
profit, the question whether they intended by their agreement to create a
joint adventure, or to assume some other relation is a question of fact for
the jury. (Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v.
Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96
33 C.J. p. 871)
In the instant cases, our examination of important provisions of the
Agreement as well as the testimonial evidence presented by the Lagdameo
and Young Group shows that the parties agreed to establish a joint venture
and not a corporation. The history of the organization of Saniwares and the
unusual arrangements which govern its policy making body are all
consistent with a joint venture and not with an ordinary corporation. As
stated by the SEC:
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According to the unrebutted testimony of Mr. Baldwin Young, he negotiated
the Agreement with ASI in behalf of the Philippine nationals. He testified
that ASI agreed to accept the role of minority vis-a-vis the Philippine
National group of investors, on the condition that the Agreement should
contain provisions to protect ASI as the minority.
An examination of the Agreement shows that certain provisions were
included to protect the interests of ASI as the minority. For example, the
vote of 7 out of 9 directors is required in certain enumerated corporate acts
[Sec. 3 (b) (ii) (a) of the Agreement]. ASI is contractually entitled to
designate a member of the Executive Committee and the vote of this
member is required for certain transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75% super-majority vote for the amendment
of the articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is
also given the right to designate the president and plant manager [Sec. 5
(6)]. The Agreement further provides that the sales policy of Saniwares shall
be that which is normally followed by ASI [Sec. 13 (a)] and that Saniwares
should not export "Standard" products otherwise than through ASI's Export
Marketing Services [Sec. 13 (6)]. Under the Agreement, ASI agreed to
provide technology and know-how to Saniwares and the latter paid royalties
for the same. (At p. 2).
xxx xxx xxx
It is pertinent to note that the provisions of the Agreement requiring a 7 out
of 9 votes of the board of directors for certain actions, in effect gave ASI(which designates 3 directors under the Agreement) an effective veto
power. Furthermore, the grant to ASI of the right to designate certain
officers of the corporation; the super-majority voting requirements for
amendments of the articles and by-laws; and most significantly to the issues
of tms case, the provision that ASI shall designate 3 out of the 9 directors
and the other stockholders shall designate the other 6, clearly indicate that
there are two distinct groups in Saniwares, namely ASI, which owns 40% of
the capital stock and the Philippine National stockholders who own the
balance of 60%, and that 2) ASI is given certain protections as the minority
stockholder.
Premises considered, we believe that under the Agreement there are two
groups of stockholders who established a corporation with provisions for a
special contractual relationship between the parties, i.e., ASI and the other
stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not
"nominated" or "elected" in the selection of the nine directors on a six to
three ratio. Each group is assured of a fixed number of directors in the
board.
Moreover, ASI in its communications referred to the enterprise as joint
venture. Baldwin Young also testified that Section 16(c) of the Agreement
that "Nothing herein contained shall be construed to constitute any of the
parties hereto partners or joint venturers in respect of any transaction
hereunder" was merely to obviate the possibility of the enterprise being
treated as partnership for tax purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial
and manufacturing capacities of a local firm are constrained to seek the
technology and marketing assistance of huge multinational corporations of
the developed world. Arrangements are formalized where a foreign group
becomes a minority owner of a firm in exchange for its manufacturing
expertise, use of its brand names, and other such assistance. However,
there is always a danger from such arrangements. The foreign group may,
from the start, intend to establish its own sole or monopolistic operations
and merely uses the joint venture arrangement to gain a foothold or testthe Philippine waters, so to speak. Or the covetousness may come later. As
the Philippine firm enlarges its operations and becomes profitable, the
foreign group undermines the local majority ownership and actively tries to
completely or predominantly take over the entire company. This
undermining of joint ventures is not consistent with fair dealing to say the
least. To the extent that such subversive actions can be lawfully prevented,
the courts should extend protection especially in industries where
constitutional and legal requirements reserve controlling ownership to
Filipino citizens.
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The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of
stockholders to enter into agreements regarding the exercise of their voting
rights.
Sec. 100. Agreements by stockholders.-
xxx xxx xxx
2. An agreement between two or more stockholders, if in writing and
signed by the parties thereto, may provide that in exercising any voting
rights, the shares held by them shall be voted as therein provided, or as
they may agree, or as determined in accordance with a procedure agreed
upon by them.
Appellants contend that the above provision is included in the Corporation
Code's chapter on close corporations and Saniwares cannot be a close
corporation because it has 95 stockholders. Firstly, although Saniwares had
95 stockholders at the time of the disputed stockholders meeting, these 95
stockholders are not separate from each other but are divisible into groups
representing a single Identifiable interest. For example, ASI, its nominees
and lawyers count for 13 of the 95 stockholders. The YoungYutivo family
count for another 13 stockholders, the Chamsay family for 8 stockholders,
the Santos family for 9 stockholders, the Dy family for 7 stockholders, etc. If
the members of one family and/or business or interest group are
considered as one (which, it is respectfully submitted, they should be forpurposes of determining how closely held Saniwares is there were as of 8
March 1983, practically only 17 stockholders of Saniwares. (Please refer to
discussion in pp. 5 to 6 of appellees' Rejoinder Memorandum dated 11
December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a close
corporation because it has more than 20 stockholders, the undeniable fact
is that it is a close-held corporation. Surely, appellants cannot honestly claim
that Saniwares is a public issue or a widely held corporation.
In the United States, many courts have taken a realistic approach to joint
venture corporations and have not rigidly applied principles of corporation
law designed primarily for public issue corporations. These courts have
indicated that express arrangements between corporate joint ventures
should be construed with less emphasis on the ordinary rules of law usually
applied to corporate entities and with more consideration given to the
nature of the agreement between the joint venturers (Please see Wabash
Ry v. American Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v.Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v.
Atlantic Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207
Md., 212,113 A 2d 903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90,
90, 295 N.W. 571; Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of
Joint Venture Corporations", 11 Vand Law Rev. p. 680,1958). These
American cases dealt with legal questions as to the extent to which the
requirements arising from the corporate form of joint venture corporations
should control, and the courts ruled that substantial justice lay with those
litigants who relied on the joint venture agreement rather than the litigants
who relied on the orthodox principles of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the joint venture
deviate from the traditional pattern of corporation management. A noted
authority has pointed out that just as in close corporations, shareholders'
agreements in joint venture corporations often contain provisions which do
one or more of the following: (1) require greater than majority vote for
shareholder and director action; (2) give certain shareholders or groups ofshareholders power to select a specified number of directors; (3) give to the
shareholders control over the selection and retention of employees; and (4)
set up a procedure for the settlement of disputes by arbitration (See I O'
Neal, Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of
SEC Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not
necessarily imply that agreements regarding the exercise of voting rights are
allowed only in close corporations. As Campos and Lopez-Campos explain:
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Paragraph 2 refers to pooling and voting agreements in particular. Does this
provision necessarily imply that these agreements can be valid only in close
corporations as defined by the Code? Suppose that a corporation has
twenty five stockholders, and therefore cannot qualify as a close
corporation under section 96, can some of them enter into an agreement to
vote as a unit in the election of directors? It is submitted that there is no
reason for denying stockholders of corporations other than close ones the
right to enter into not voting or pooling agreements to protect theirinterests, as long as they do not intend to commit any wrong, or fraud on
the other stockholders not parties to the agreement. Of course, voting or
pooling agreements are perhaps more useful and more often resorted to in
close corporations. But they may also be found necessary even in widely
held corporations. Moreover, since the Code limits the legal meaning of
close corporations to those which comply with the requisites laid down by
section 96, it is entirely possible that a corporation which is in fact a close
corporation will not come within the definition. In such case, its
stockholders should not be precluded from entering into contracts like
voting agreements if these are otherwise valid. (Campos & Lopez-Campos,
op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating to the
designation or nomination of directors restricts the right of the Agreement's
signatories to vote for directors, such contractual provision, as correctly
held by the SEC, is valid and binding upon the signatories thereto, which
include appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote theiradditional equity during elections of Saniwares' board of directors, the
Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the
management of the corporation is spelled out in the Agreement. Section
5(a) hereof says that three of the nine directors shall be designated by ASI
and the remaining six by the other stockholders, i.e., the Filipino
stockholders. This allocation of board seats is obviously in consonance with
the minority position of ASI.
Having entered into a well-defined contractual relationship, it is imperative
that the parties should honor and adhere to their respective rights and
obligations thereunder. Appellants seem to contend that any allocation of
board seats, even in joint venture corporations, are null and void to the
extent that such may interfere with the stockholder's rights to cumulative
voting as provided in Section 24 of the Corporation Code. This Court should
not be prepared to hold that any agreement which curtails in any way
cumulative voting should be struck down, even if such agreement has beenfreely entered into by experienced businessmen and do not prejudice those
who are not parties thereto. It may well be that it would be more cogent to
hold, as the Securities and Exchange Commission has held in the decision
appealed from, that cumulative voting rights may be voluntarily waived by
stockholders who enter into special relationships with each other to pursue
and implement specific purposes, as in joint venture relationships between
foreign and local stockholders, so long as such agreements do not adversely
affect third parties.
In any event, it is believed that we are not here called upon to make a
general rule on this question. Rather, all that needs to be done is to give life
and effect to the particular contractual rights and obligations which the
parties have assumed for themselves.
On the one hand, the clearly established minority position of ASI and the
contractual allocation of board seats Cannot be disregarded. On the other
hand, the rights of the stockholders to cumulative voting should also be
protected.
In our decision sought to be reconsidered, we opted to uphold the second
over the first. Upon further reflection, we feel that the proper and just
solution to give due consideration to both factors suggests itself quite
clearly. This Court should recognize and uphold the division of the
stockholders into two groups, and at the same time uphold the right of the
stockholders within each group to cumulative voting in the process of
determining who the group's nominees would be. In practical terms, as
suggested by appellant Luciano E. Salazar himself, this means that if the
Filipino stockholders cannot agree who their six nominees will be, a vote
would have to be taken among the Filipino stockholders only. During this
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voting, each Filipino stockholder can cumulate his votes. ASI, however,
should not be allow