Harden to Aurbach

8/10/2019 Harden to Aurbach

1/22

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


2/22

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


3/22

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


4/22

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


5/22

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.


6/22

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.


7/22

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


8/22

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]


9/22

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]


10/22

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


11/22

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.


12/22

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.


13/22

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:


14/22

... 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.


15/22

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.


16/22

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:


17/22

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.


18/22

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:


19/22

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


20/22

voting, each Filipino stockholder can cumulate his votes. ASI, however,

should not be allow

Date post:	02-Jun-2018
Category:	Documents
Upload:	leogen-tomulto
View:	240 times
Download:	0 times

Harden to Aurbach

Documents