V.

PRESUMPTIONS IN AID OF CONSTRUCTION AND INTERPRETATION

A. Presumption of Validity and Constitutionality of Laws

 REMMAN ENTERPRISES v. PROFESSIONAL REGULATORY BOARD OF REAL ESTATE

SERVICE, GR No. 197676, Feb. 04, 2014
Facts:
R.A. No. 9646, otherwise known as the "Real Estate Service Act of the Philippines" was signed into law
on June 29, 2009 by President Gloria Macapagal-Arroyo. It aims to professionalize the real estate service
sector under a regulatory scheme of licensing, registration and... supervision of real estate service
practitioners (real estate brokers, appraisers, assessors, consultants and salespersons) in the country.
Prior to its enactment, real estate service practitioners were under the supervision of the Department of
Trade and Industry (DTI) through... the Bureau of Trade Regulation and Consumer Protection (BTRCP), in
the exercise of its consumer regulation functions. Such authority is now transferred to the Professional
Regulation Commission (PRC) through the Professional Regulatory Board of Real Estate Service
(PRBRES)... created under the new law.
The implementing rules and regulations (IRR) of R.A. No. 9646 were promulgated on July 21, 2010 by the
PRC and PRBRES under Resolution No. 02, Series of 2010.
On December 7, 2010, herein petitioners Remman Enterprises, Inc. (REI) and the Chamber of Real
Estate and Builders' Association (CREBA) instituted Civil Case No. 10-124776 in the Regional Trial Court
of Manila, Branch 42. Petitioners sought to declare as void and... unconstitutional the following provisions
of R.A. No. 9646
According to petitioners, the new law is constitutionally infirm because (1) it violates Article VI, Section 26
(1) of the 1987 Philippine Constitution which mandates that "[e]very bill passed by Congress shall
embrace only one subject which shall be expressed in the... title thereof"; (2) it is in direct conflict with
Executive Order (E.O.) No. 648 which transferred the exclusive jurisdiction of the National Housing
Authority (NHA) to regulate the real estate trade and business to the Human Settlements Commission,
now the Housing and Land Use
Regulatory Board (HLURB), which authority includes the issuance of license to sell of subdivision owners
and developers pursuant to Presidential Decree (P.D.) No. 957; (3) it violates the due process clause as it
impinges on the real estate developers' most basic ownership... rights, the right to use and dispose
property, which is enshrined in Article 428 of the Civil Code; and (4) Section 28(a) of R.A. No. 9646
violates the equal protection clause as no substantial distinctions exist between real estate developers
and the exempted group mentioned... since both are property owners dealing with their own property.
Issues:
Whether there is a justiciable controversy for this Honorable Court to adjudicate;
Whether [R.A. No. 9646] is unconstitutional for violating the "one title-one subject" rule under Article VI,
Section 26 (1) of the Philippine Constitution;
Whether [R.A. No. 9646] is in conflict with PD 957, as amended by EO 648, with respect to the exclusive
jurisdiction of the HLURB to regulate real estate developers;
Whether Sections 28(a), 29, and 32 of [R.A. No. 9646], insofar as they affect the rights of real estate
developers, are unconstitutional for violating substantive due process; and
Whether Section 28(a), which treats real estate developers differently from other natural or juridical
persons who directly perform acts of real estate service with reference to their own property, is
unconstitutional for violating the equal protection clause.[3]
Ruling:
The petition has no merit.
The Constitution[4] requires as a condition precedent for the exercise of judicial power the existence of an
actual controversy between litigants. An actual case or controversy involves a conflict of legal rights, an
assertion of opposite legal claims... susceptible to judicial resolution.[5] The controversy must be
justiciable definite and concrete touching on the legal relations of parties having adverse legal interests,
which may be resolved by a court of law through the application of a law.[6] In other words, the pleadings
must show an active antagonistic assertion of a legal right, on the one hand, and a denial thereof on the
other; that is, it must concern a real and not a merely theoretical question or issue. There ought to be an
actual and... substantial controversy admitting of specific relief through a decree conclusive in nature, as
distinguished from an opinion advising what the law would be upon a hypothetical state of facts.[7] An
actual case is ripe for adjudication when the act being... challenged has a direct adverse effect on the
individual challenging it.
No Violation of One-Title One-Subject Rule
To determine whether there has been compliance with the constitutional requirement that the subject of
an act shall be expressed in its title, the Court laid down the rule that
Constitutional provisions relating to the subject matter and titles of statutes should not be so narrowly
construed as to cripple or impede the power of legislation. The requirement that the subject of an act shall
be expressed in its title should receive a... reasonable and not a technical construction. It is sufficient if the
title be comprehensive enough reasonably to include the general object which a statute seeks to effect,
without expressing each and every end and means necessary or convenient for the accomplishing of
that... object. Mere details need not be set forth. The title need not be an abstract or index of the Act.[10]
(Emphasis supplied.)
The primary objective of R.A. No. 9646 is expressed as follows:
SEC. 2. Declaration of Policy. The State recognizes the vital role of real estate service practitioners in the
social, political, economic development and progress of the country by promoting the real estate market,
stimulating economic activity and enhancing... government income from real property-based transactions.
Hence, it shall develop and nurture through proper and effective regulation and supervision a corps of
technically competent, responsible and respected professional real estate service practitioners whose
standards of... practice and service shall be globally competitive and will promote the growth of the real
estate industry.
We find that the inclusion of real estate developers is germane to the law's primary goal of developing "a
corps of technically competent, responsible and respected professional real estate service practitioners
whose standards of practice and service shall be globally... competitive and will promote the growth of the
real estate industry." Since the marketing aspect of real estate development projects entails the
performance of those acts and transactions defined as real estate service practices under Section 3(g) of
R.A. No. 9646, it is... logically covered by the regulatory scheme to professionalize the entire real estate
service sector.
Principles:

B. Presumption against Injustice

C. Presumptions against Implied Repeal

D. Presumptions against Ineffectiveness

E. Presumptions against Absurdity

F. Presumptions against Undesirable Consequences Never Intended by the

Legislative Measure

G. Presumption against Irrepealable Laws

VI. CONSTRUCTION OF PARTICULAR STATUTES

A. Strict Construction

B. Liberal Construction

C. Penal Statutes

G.R. No. 173473 Case Digest

G.R. No. 173473, December 17, 2008
People of the Philippines
vs Beth Temporada
Ponente: Ynares-Santiago

Facts:
Accused Rosemarie Robles, Bernadette Miranda, Nenita Catacotan, Jojo Resco and
Beth Temporada are all employees of ATTC, a Travel and Tour Company, recruited
and promised overseas employment for a fee to Rogelio Legaspis Jr, as a
technician in Singapore, and other overseas workers. The accused were holding
office in Makati but eventually transferred to Manila. After paying placements
fees, none of the overseas recruits was able to leave or recover what they
have paid, thus they filed separate criminal complaints against accused in
Manila.

The accused were then sentenced to life imprisonment for illegal recruitment
and estafa. Then the case was referred to the CA for intermediate review, CA
affirmed with modification on the penalty. The penalty was lowered for the
lower court due to insufficiency of evidence.

Issue: Whether the accused were guilty of 5 counts of estafa and illegal
recruitment, and be charged of the penalty of life imprisonment.

Ruling:
The Court affirms the modification of the CA, except for the penalty on the 5
counts of estafa.

Although Temporada is saying that she is not a principal to the illegal

recruitment and estafa because she is a mere employee of ATTC and that she was
just echoing the requirement of her employer, the Court believes that
Temporada actively and consciously participated in illegal recruitment.
The Court agrees with the lower court that the accused were guilty of illegal
recruitment by a syndicate with the penalty of life imprisonment. The accused
were convicted separately also for 5 counts of estafa. 

G.R. No. 180700               March 4, 2008

GERARDO R. VILLASEÑOR and RODEL A. MESA, Petitioners,

vs.
SANDIGANBAYAN (5th Division) and LOUELLA MAE OCO-PESQUERRA (Office of the Special Prosecutor,
Ombudsman), Respondents.

RESOLUTION

REYES, R.T., J.:

DOES preventive suspension in an administrative proceeding bar preventive suspension in a criminal case founded
on the same facts and circumstances?

The question is posed in this petition for certiorari under Rule 65 of the 1997 Rules of Civil Procedure. Petitioners
seek to annul and set aside the Sandiganbayan1 Resolution2 of July 3, 2007 in Criminal Case No. 27756 for violation
of Section 3, Republic Act (R.A.) No. 3019, 3 as amended, suspending them pendente lite. Also assailed is the
October 10, 2007 Resolution4 denying their motion for reconsideration.

Factual Antecedents

On August 18, 2001, disaster struck. In the wee hours of the morning, the Quezon City Manor Hotel went ablaze
resulting in the death of seventy-four (74) people and injuries to scores of others. Investigation into the tragedy
revealed that the hotel was a veritable fire trap.

Petitioners, together with other officials of the City Engineering Office of Quezon City, are presently
facing criminal charges before the 5th Division of the Sandiganbayan for the crime of multiple homicide through
reckless imprudence and for violation of Section 3(e) of R.A. No. 3019. They were also charged administratively with
gross negligence, gross misconduct and conduct prejudicial to the interest of the service in connection with the
Manor Hotel inferno.

In two separate Orders dated August 29, 2001 5 and September 7, 20016 in the administrative case, petitioners
Villaseñor and Mesa were preventively suspended for a period of six (6) months, effective upon receipt of the
suspension order.

On September 20, 2006, during the pendency of the criminal case, respondent special prosecutor Louella Mae Oco-
Pesquera filed a motion for suspension pendente lite7 of petitioners.

Petitioners opposed8 the motion, contending that they had already been suspended for six (6) months relative to the
administrative case, based on the same facts and circumstances. They posited that any preventive suspension that
may be warranted in the criminal case was already absorbed by the preventive suspension in the administrative
case because both the criminal and administrative cases were anchored on the same set of facts.

In the assailed Resolution9 of July 3, 2007, respondent court granted the prosecution’s motion for suspension. It
ordered the suspension of petitioners for a period of ninety (90) days. The dispositive portion reads, thus:
WHEREFORE, in light of the foregoing, accused Romeo M. Montallana, Romualdo C. Santos, Gerardo R.
Villaseñor, and Rodel A. Mesa are hereby suspended from their respective public positions as earlier enumerated,
and from any other public office which they may now or hereafter be holding for a period of ninety (90) days from
receipt of this resolution, unless a motion for reconsideration is seasonably filed. While the prosecution sought to
suspend accused Alfredo N. Macapugay, it appears, however, that he was already dismissed from the service,
hence, he can no longer be subjected to this suspension order.

Let a copy of this resolution be furnished Honorable Feliciano Belmonte, Quezon City Mayor for implementation of
this suspension. He is hereby requested to inform this Court of his action thereon within five (5) days from receipt of
this resolution.

The suspension of the accused shall be automatically lifted upon the expiration of the ninety-day period from the
time of the implementation of this resolution.

SO ORDERED.10

In the equally assailed Resolution11 of October 10, 2007, petitioners’ motion for reconsideration was denied for lack
of merit.

Issue

Petitioners have resorted to the present recourse, hoisting the lone issue of "WHETHER OR NOT THE PUBLIC
RESPONDENT ACTED IN EXCESS OF JURISDICTION AND/OR WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF JURISDICTION IN ORDERING THE SUSPENSION PENDENTE LITE OF HEREIN
PETITIONERS DESPITE THE FACT THAT THEY HAD ALREADY BEEN PREVIOUSLY SUSPENDED
ADMINISTRATIVELY BASED ON THE SAME FACTS AND CIRCUMSTANCES.12

Our Ruling

Mandatory nature of preventive suspension

It is well-settled that preventive suspension under Section 13 of R.A. No. 3019 is mandatory. It is evident from the
very wording of the law:

Suspension and loss of benefits. – Any incumbent public officer against whom any criminal prosecution under a
valid information under this Act or under Title 7, Book II of the Revised Penal Code or for any offense involving fraud
upon the government or public funds or property, whether as a simple or as a complex offense and in whatever
stage of the execution and mode of participation, is pending in court, shall be suspended from office. x x x
(Underscoring supplied)

A whole slew of cases reinforce this provision of law. In Luciano v. Provincial Governor,13 the Court pronounced that
suspension of a public officer under Section 13 of R.A. No. 3019 is mandatory. This was reiterated in Luciano v.
Mariano,14 People v. Albano,15 Gonzaga v. Sandiganbayan16 and Bunye v. Escareal.17 In the last mentioned case, the
Court said:

Adverting to this Court’s observation in Ganzon v. CA, 200 SCRA 271, 272, that the sole objective of an
administrative suspension is "to prevent the accused from hampering the normal course of the investigation with his
influence and authority over possible witnesses or to keep him off the records and other evidence" and "to assist
prosecutors in firming up a case, if any, against an erring official," the petitioners insist that as no such reason for
their suspension exists, then the order suspending them should be set aside as a grave abuse of the court’s
discretion.

xxxx

The Court finds no merit in those arguments. Section 13 of R.A. No. 3019, as amended, unequivocally provides that
the accused public officials "shall  be suspended from office" while the criminal prosecution is pending in court.
In Gonzaga v. Sandiganbayan, 201 SCRA 417, 422, 426, this Court ruled that such preventive suspension
is mandatory; there are no ifs and buts about it.18 (Underscoring supplied)

Again, in Bolastig v. Sandiganbayan,19 the Court stressed the mandatory nature of preventive suspension as follows:

x x x It is now settled that Sec. 13 of Republic Act No. 3019 makes it mandatory for the Sandiganbayan to suspend
any public official against whom a valid information charging violation of that law, Book II, Title 7 of the Revised
Penal Code, or any offense involving fraud upon government or public funds or property is filed. The court trying a
case has neither discretion nor duty to determine whether preventive suspension is required to prevent the accused
from using his office to intimidate witnesses or frustrate his prosecution or continuing committing malfeasance in
office. The presumption is that unless the accused is suspended he may frustrate his prosecution or commit further
acts of malfeasance or do both, in the same way that upon a finding that there is probable cause to believe that a
crime has been committed and that the accused is probably guilty thereof, the law requires the judge to issue a
warrant for the arrest of the accused. The law does not require the court to determine whether the accused is likely
to escape or evade the jurisdiction of the court.20 (Underscoring supplied)

Clearly, there can be no doubt as to the validity of the Sandiganbayan’s suspension of petitioners in connection with
the pending criminal case before it. It was merely doing what was required of it by law.

Criminal and administrative cases separate and distinct

Significantly, there are three kinds of remedies that are available against a public officer for impropriety in the
performance of his powers and the discharge of his duties: (1) civil, (2) criminal, and (3) administrative. These
remedies may be invoked separately, alternately, simultaneously or successively. Sometimes, the same offense
may be the subject of all three kinds of remedies.21

Defeat of any of the three remedies will not necessarily preclude resort to other remedies or affect decisions
reached thereunder, as different degrees of evidence are required in these several actions. In criminal cases, proof
beyond reasonable doubt is needed whereas a mere preponderance of evidence will suffice in civil cases. 22 In
administrative proceedings, only substantial evidence is required.

It is clear, then, that criminal and administrative cases are distinct from each other. 23 The settled rule is that criminal
and civil cases are altogether different from administrative matters, such that the first two will not inevitably govern
or affect the third and vice versa.24 Verily, administrative cases may proceed independently of criminal proceedings. 25

Socrates v. Sandiganbayan,26 citing the Court’s pronouncements in Luciano v. Provincial Governor,27 recounted:

The Court then hastened to clarify that such a view may not be taken as an encroachment upon the power of
suspension given other officials, reiterating in the process that a line should be drawn between administrative
proceedings and criminal actions in court, that one is apart from the other. x x x28 (Underscoring supplied)

Based on the foregoing, criminal actions will not preclude administrative proceedings, and vice-versa, insofar as the
application of the law on preventive suspension is concerned.

Preventive suspension not a penalty

Imposed during the pendency of proceedings, preventive suspension is not a penalty in itself. It is merely a measure
of precaution so that the employee who is charged may be separated, for obvious reasons, from office. Thus,
preventive suspension is distinct from the penalty. While the former may be imposed on a respondent during the
investigation of the charges against him, the latter may be meted out to him at the final disposition of the case. 29

The Court’s discussion in Quimbo v. Gervacio30 is enlightening:

Jurisprudential law establishes a clear-cut distinction between suspension as preventive measure and

suspension as penalty. The distinction, by considering the purpose aspect of the suspensions, is readily cognizable
as they have different ends sought to be achieved.
Preventive suspension is merely a preventive measure, a preliminary step in an administrative investigation. The
purpose of the suspension order is to prevent the accused from using his position and the powers and prerogatives
of his office to influence potential witnesses or tamper with records which may be vital in the prosecution of the case
against him. If after such investigation, the charge is established and the person investigated is found guilty of acts
warranting his suspension or removal, then he is suspended, removed or dismissed. This is the penalty. 1avvphi1

That preventive suspension is not a penalty is in fact explicitly provided by Section 24 of Rule XIV of the Omnibus
Rules Implementing Book V of the Administrative Code of 1987 (Executive Order No. 292) and other Pertinent Civil
Service Laws.

Sec. 24. Preventive suspension is not a punishment or penalty for misconduct in office but is considered to be a
preventive measure.31

The accused public officers whose culpability remains to be proven are entitled to the constitutional presumption of
innocence.32 The law itself provides for the reinstatement of the public officer concerned and payment to him of the
salaries and benefits for the duration of the suspension in the event of an acquittal:

Suspension and loss of benefits. – Any incumbent public officer against whom any criminal prosecution under a
valid information under this Act or under Title 7, Book II of the Revised Penal Code or for any offense involving fraud
upon the government or public funds or property, whether as a simple or as a complex offense and in whatever
stage of the execution and mode of participation, is pending in court, shall be suspended from office. Should he be
convicted by final judgment, he shall lose all retirement and gratuity benefits under the law, but if he is acquitted, he
shall be entitled to reinstatement and to the salaries and benefits which he failed to receive during
suspension, unless in the meantime administrative proceedings have been filed against him. 33 (Underscoring
supplied)

Sec. 13 of R.A. No. 3019 not a penal provision but a procedural one

It is petitioners’ contention that as a penal statute, the provision on preventive suspension should be strictly
construed against the State and liberally in their favor.

We cannot agree. Section 13 of R.A. No. 3019 on preventive suspension is not a penal provision. It is procedural in
nature. Hence, the strict construction rule finds no application. The Court expounded on this point in Buenaseda v.
Flavier:34

Penal statutes are strictly construed while procedural statutes are liberally construed (Crawford, Statutory
Construction, Interpretation of Laws, pp. 460-461; Lacson v. Romero, 92 Phil. 456 [1953]). The test in determining if
a statute is penal is whether a penalty is imposed for the punishment of a wrong to the public or for the redress of an
injury to an individual (59 Corpuz Juris, Sec. 658; Crawford, Statutory Construction, pp. 496-497). A Code
prescribing the procedure in criminal cases is not a penal statute and is to be interpreted liberally (People v. Adler,
140 N.Y. 331; 35 N.E. 644).35 (Underlining supplied)

As We have already established, preventive suspension is not, in actual fact, a penalty at all. It is a procedural rule.

Automatic lift of suspension after ninety (90) days

It must be borne in mind that the preventive suspension of petitioners will only last ninety (90) days, not the entire
duration of the criminal case like petitioners seem to think. Indeed, it would be constitutionally proscribed if the
suspension were to be of an indefinite duration or for an unreasonable length of time. The Court has thus laid down
the rule that preventive suspension may not exceed the maximum period of ninety (90) days, in consonance with
Presidential Decree No. 807,36 now Section 52 of the Administrative Code of 1987. 37

Even the dispositive portion itself of the assailed July 3, 2007 Resolution 38 could not be any clearer:

WHEREFORE, x x x.

xxxx
The suspension of the accused shall be automatically lifted upon the expiration of the ninety-day period from the
time of the implementation of this resolution.

SO ORDERED.39

In fine, the preventive suspension against petitioners must be upheld, as the Sandiganbayan committed no grave
abuse of discretion.

WHEREFORE, the petition is DISMISSED for lack of merit.

SO ORDERED.

G.R. No. 108718 July 14, 1994

GENARO R. REYES CONSTRUCTION, INC. and UNIVERSAL DOCKYARD., petitioners,

vs.
THE HONORABLE COURT OF APPEALS, THE DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS, JOSE
P. DE JESUS, ROMULO M. DEL ROSARIO, ET AL.

J.P. Villanueva & Associates and Ricardo J.M. Rivera Law Office for petitioners.

MELO, J.:

Herein petitioners Genaro G. Reyes Construction, Inc. (or GGRCI) and Universal Dockyard Ltd. (or UDL) seek the
nullification of the decision dated October 20, 1992 and the resolution dated January 20, 1993 of the Eighth Division
of the Court of Appeals in CA-G.R. SP No. 28632. The said decision and resolution affirmed the two orders issued
by the Regional Trial Court of the National Capital Judicial Region (Branch 15) dated June 22, 1992 and August 5,
1992 in its Civil Case No. 92-61345 which denied herein petitioners' application for a temporary restraining order
and a writ of preliminary injunction to enjoin the Department of Public Works and Highways (DPWH) and then
DPWH Secretary Jose P. de Jesus, and others therein impleaded from enforcing and implementing the notice of
pre-termination of petitioners' contract for the implementation of Lower Agusan Development Project, Stage I, Phase
1, Butuan City, or any part thereof, to any person; and prohibiting said defendants from bidding said project or any
part thereof, or awarding it to any person.

On March 1, 1992, the Government through respondent DPWH on one hand, and the joint venture of Genaro G.
Reyes Construction, Inc. (GGRCI), Universal Dockyard, Ltd. (UDL), a British construction firm, Home Construction
(HC), and JPL Construction (JPLC), (represented by petitioner Genaro G. Reyes, as President of lead contractor
GGRCI) on the other hand, entered into a "Contract for the construction of the flood control facilities and land
improvement works of the Lower Agusan Development Project, Stage 1, Phase 1, Butuan City" (Annex B, Petition;
pp. 75-88, Rollo).

In the bidding which preceded the awards by the DPWH of the contract to the GGRCI, et al. Joint Venture,
petitioners submitted the lowest bid below the Approved Government Estimate (AGE) of P492,563,998.00.

The following bids were submitted:

1. Petitioner — P445,858,196.02 — 9.45% below approved government estimate of P492,563,998.00.

2. D.M. Wenceslao & Associates — P659,980,029.00 33.99% above government estimate.

3. Hanil Development Corporation — P696,524,897.91 — 41% above government estimate.

4. F.F. Cruz and China Stage Engineering — backed out.

5. C.M. Pancho and A.M. Oreta — disqualified.

On May 8, 1992 the Notice to Proceed (Annex C, Petition; p. 89, Rollo) was issued by DPWH Undersecretary
Romulo Del Rosario. It was received by petitioners on May 9, 1992 and they forthwith mobilized and deployed their
men and equipment. The notice to proceed specifically stated that the contract would take effect not later than thirty
days from its receipt by petitioners.

On April 23, 1992, the other respondents, DPWH Project Engineers Japanese Eiichiro Araide and Engineer Aquiles
C. Sollano recommended termination of the contract alleging that as of that date "the project work progress is
already 9.50 percent behind schedule (negative slippage)" (Annex F, Petition; pp. 92-93, Rollo). Four days later, or
on April 27, 1992, Consultant Eiichiro Araide gave another figure of 9.8% negative slippage (Annex G, Petition; pp.
93-96, Rollo).

Under the law, specifically Presidential Decree No. 1870, the Government (herein represented by the DPWH) is
authorized to take over delayed infrastructure projects only whenever a contractor is behind schedule in its contract
and incurs 15% or more negative slippage based on its approved PERT/CM, and the implementing agency, at the
discretion of the Minister concerned, may undertake the administration of the whole or a portion of the unfinished
work or have the whole or portion of such unfinished work done by another contractor through a negotiated contract
at the current valuation price.

Also, Department Order No. 102, Series of 1988 of the DPWH, provides:

To insure timely and effective remedial steps in response to delays in project implementation, all
Project Managers (PMs), Regional Directors (RDs) and District Engineers (DEs) concerned shall
undertake the following calibrated actions where contracts for infrastructure projects reach the levels
of negative slippage (attributable to the contractor) indicated below:

1. Negative Slippage of 5% (Early Warning Stage). The contractor shall be given a warning and
required to submit a "catch-up" program to eliminate the slippage. The PM/RD/DE shall provide
temporary supervision and monitoring of the work.

2. Negative Slippage of 10% ("ICU" Stage). The contractor shall be given a second warning and
required to submit a detailed action program on a fortnightly (two weeks) basis which commits him to
accelerate the work and accomplish specific physical targets which will reduce the slippage over a
definite time period. Furthermore, the contractor shall be instructed to specify the additional input
resources — money, manpower, materials, machines, and management in which he should mobilize
for this action program. The PM/RD/DE shall exercise closer supervision and meet the contractor
every other week to evaluate the progress of work and resolve any problems and bottlenecks.

3. Negative Slippage of 15% ("make or break" stage). The contractor shall be issued a final warning
and required to come up with a more detailed program of activities with weekly physical targets
together with the required additional input resources. On-site supervision shall be intensified, and
evaluation of project performance will be done at least once a week. At the same time the
PM/RD/DE shall prepare contingency plans for the termination and rescission of the contract and/or
take over of the work by administration or contract.

4. Negative Slippage beyond 15% ("terminal" stage). The PM/RD/DE shall contract and/or take over
of the remaining work by administration or assignment to another contractor/appropriate agency.
Proper transitory measures shall be taken to minimize work disruptions, e.g., take over by
administration while rebidding is going on.

Because of negative slippage of 9.50% as of April 23, 1992, or 9.86% as revised on April 27, 1992, respondent
Project Director Antonio A. Alpasan wrote a memorandum (Annex H, Petition; p. 98, Rollo) dated May 8, 1992 to
respondent DPWH Undersecretary Romulo Del Rosario recommending either of two alternatives:

1. Negotiate the entire balance of the work with the second lowest bidder, but if the second lowest bidder is
blacklisted, then to the third lowest bidder; or
2. Rebid the whole balance of the work or divide it into contract packages.

On May 14, 1992, DPWH Acting Secretary Gregorio Alvarez notified petitioner GGRCI that its contract is being
terminated (Annex D, Petition; p. 90, Rollo). Also on May 14, 1992, respondent DPWH Undersecretary Romulo Del
Rosario wrote respondent Secretary De Jesus a memorandum (Annex I, Petition; p. 99, Rollo), "recommending that
the balance of the work be offered to the third lowest bidder, the Korean firm of Hanil Development Corporation and
that in the event that the negotiation with Hanil fails, the balance of the work be repackaged into several
components for rebidding as soon as possible.

At this juncture, note must be taken of the circumstance that the bid price of Hanil of P696,524,897.96 was 41.4%
over and above the approved government estimate (AGE) of P492,563,998.00 for the project. Hanil's bid was higher
by P254,666,701.94 vis-a-vis petitioners' bid and contract price.

On May 14, 1992, respondent DPWH Secretary De Jesus wrote petitioners that its contract for the project was
terminated (Annex E, Petition; p. 91, Rollo). On May 22, 1992, petitioners wrote a letter requesting reconsideration
of the termination order, pointing out, inter alia, that:

. . . the bid of Hanil Corp. when the project was bidded 15 October 1990 was already
P696,524,897.00, 41.4% above the Approved Agency Estimate (AAE), which amounts to
P492,563,998.00. Categorically, we are taking a price difference of P203,960,849.00, which is
obviously much to the disadvantage of the Department and the Filipino people.

In comparison to the contract price of P445,858,196.00, 9.48% below the AAE, the government and
Filipino people stand to earn a savings of P46,705,802.00 and P250,666,651 compared to Hanil's
bid price.

. . . Reviewing the incurred negative slippage in detail, it can clearly be seen that the bulk can be
attributed to the unaccomplished spoilbank and dredging section of the project.

The spoilbank section, supposedly 100 hectares in area had right of way problems; that is, only 40
hectares or 40% of the total area have been acquired. (Annex J, Petition; pp. 100-101, Rollo.)

The request for reconsideration was reiterated on May 26, 1992 and June 14, 1992 (Annexes K and L, Petition; pp.
102-106, Rollo) inviting the DPWH's attention that: (a) based on Hanil's bid price the government stands to lose
P250,666,651.00, apart from the additional P100 Million worth in escalation price as indicated in the
recommendation of respondents Alpasa (Annex H, Petition) and Del Rosario (Annex I, supra); (b) the delay and
failure of the DPWH Project Office (PMO) to procure the 100 hectares right of way for the project's spoilbank area
(only 40 hectares was acquired by the DPWH) as provided for in the tender documents, thereby contributing to a
negative slippage equivalent to 3% due to the suspension of work in that area because of right of way problems.

On June 2, 1992, DPWH Secretary De Jesus terminated the contract of the GGRCI, et al. Joint Venture (Annex M,
Petition; p. 107, Rollo).

On October 8, 1992, respondent DPWH Undersecretary Romulo del Rosario sent a letter (Annex N, Petition; pp.
108-110, Rollo) to Mr. Hideo Tanaka, Chief Representative of Japan's Overseas Economic Cooperation Fund (or
OECF) recommending that the termination of petitioners' contract be lifted upon the following observations:

. . . some reasons contributed to the delay covering the negative slippage was also due to the
government's fault, such as:

a. Overlapping of duties and responsibilities among the expatriates, the local

consultants and the field PMO.

b. Unauthorized variation order with the project manager and the expatriate
consultant issuing it without prior authority from the central office reducing the length
of the flood wall from 5.825 km. to 1.868 km. and change it to levee, with a total cost
reduction of P75,458,091.03.
 c. The right of way problem where the project has a so-called spoiled bank section
which is supposed to be 100 hectares and the government has to secure the right-of-
way. But as of the present, only about 40 hectares or 40% has been acquired, out of
which, about 20 hectares are contiguous while the remaining are scattered. Because
of this the contractor found it difficult to pursue the project as it is quite unrealistic to
dispose of the dredged materials. Aside from this, there is also the right-of-way
problems encountered in the floodwall and levee construction.

3. With the termination effected, the contractor filed a case in the trial court twice denied by the trial
court. Right now the case has been appealed to the Court of Appeals.

4. The DPWH sent an investigating team to verify the allegations of the contractor on the faults of
the Government and found to have been true.

5. To resolve the issue, we have studied and came up with three options to continue the project as
presented in our report to Secretary De Jesus (copy attached). Considering the advantages and
disadvantages presented, we recommend that the termination order be lifted and the contract with
the joint venture be pursued on the premise that the vigorous action of the contractor in pursuing the
case, it is evident that they have all the intention to finish the project. Otherwise all their actions
would prove nothing and futile.

The above recommendation was based on the report of Andres Canlas, DPWH Project Manager IV, dated
September 8, 1992 (Annex C-2, Urgent Motion for Issuance of Temporary Restraining Order; p. 196, Rollo) that the
negative slippage of the project was caused not only by the contractor but also by the government side.

On May 28, 1992 GGRCI, et al. Joint Venture filed a case for prohibition, specific performance, and injunction
against respondent DPWH as the sole defendant before the Regional Trial Court of Manila (Civil Case No. 92-
61345). The joint venture subsequently filed an Amended Petition impleading additional defendants (respondents
herein) and including claims for damages.

On June 25, 1992 and August 5, 1992, the regional trial court issued orders denying the joint venture's prayer for
preliminary injunction citing Section 1 of Presidential Decree No. 1818 providing that:

No court in the Philippines shall have jurisdiction to issue any restraining order, preliminary
injunction, or preliminary mandatory injunction in any case, dispute or controversy involving any
infrastructure project or a mining, fishery, forest or other natural resource development of the
government or any public utility operated by the government including any other public utilities for
the transport of the goods or commodities, stevedoring and arrastre contracts, to prohibit any person
or persons, entity or government official from proceeding with, or continuing the execution or
implementation of any such project, or the operation of such public utility, or pursuing any lawful
activity necessary for such execution, implementation or operation.

On August 11, 1992 the joint venture filed with the Court of Appeals a petition for certiorari and prohibition with a
prayer for a writ of preliminary injunction to set aside the trial court's orders.

The petition in CA-G.R. 28632 was dismissed by respondent Court of Appeals in a decision dated October 20, 1992
(Annex A, Petition; pp. 68-75, Rollo) and a subsequent motion for reconsideration was denied in a resolution dated
January 20, 1993 (Annex A-1, Petition; p. 77, Rollo).

Much reliance is placed on the prohibition embodied in Section 1 of Presidential Decree No. 1818 which forbids any
Court in the Philippines, including this Court, from issuing any restraining order, preliminary injunction, or preliminary
mandatory injunction in any case, dispute or controversy involving, as in the case at bar, an infrastructure project, to
prohibit any person or entity from continuing with the execution or implementation of such project. It is on the basis
of such provision that the door is being closed on petitioners' prayer for redress.

Such proposition is not well-taken.

Against the backdrop of the undisputed facts that (a) respondents terminated petitioners' contract based on slippage
of 9.86% and (b) the contributory fault of the government which substantially added to the slippage — the primary
question that presents itself is whether the termination was proper even if the slippage had not reached the 15%
level mentioned by the law as to justify termination. This is a legal, not a factual question. In consequence, if the
termination be adjudged unjustified, are the courts powerless to intervene due to the caveat under the aforequoted
Section 1 of Presidential Decree No. 1818?

Although we entertain serious doubts in regard to the constitutionality of Presidential Decree No. 1818, we
nonetheless feel that said decree finds no application to the case at bench. It will be observed that what Presidential
Decree No. 1818 proscribes is the issuance of a writ of injunction to impede or, in the language of the statute:

. . . to prohibit any person or persons, entity or government official from proceeding with, or

continuing the execution or implementation of any such project, or the operation of such public utility,
or pursuing any lawful activity necessary for such execution, implementation or operation.

In the case at bench, the net effect of granting the petition is not to stave off implementation of a government project
but precisely to say to public respondents that they ought to implement the award and should not thus cancel the
contract of petitioners inasmuch as the negative slippage is less than the minimum level specified by Presidential
Decree No. 1870. Hence, the proscription under Presidential Decree No. 1818 is inapplicable since we are not
restraining implementation of a government project. Verily, we are instructing public respondents to allow petitioners
to proceed with the project.

In the determination of whether respondents have acted within the bounds of the law when they terminated the
contract based on the admitted 9.86% slippage, resort must be had to the very law, Presidential Decree No. 1870
and DPWH Circular No. 102, upon which respondents anchor their authority to terminate the contract.

The pertinent provisions of Presidential Decree No. 1870 give the implementing agency (in this instance, the
DPWH) authority to terminate the contract whenever the contractor is behind schedule in its contract work and
incurs 15% or more negative slippage based on its approved PERT/CPM. Section 1 of Presidential Decree No.
1870 reads thus:

1. Whenever a contractor is behind schedule in the contract work and incurs 15% or more negative
slippage based on its approved PERT/CPM, the implementing agency, at the discretion of the
Ministry concerned, may undertake by administration the whole or a portion of the unfinished
work done by another qualified contractor through negotiated contract at the current valuation
prices.

Now Circular No. 102, Series of 1988, promulgated to implement Presidential Decree No. 1870, provides four
stages of negative slippage with which calibrated action, at each stage, has to be undertaken as remedial steps to
correct delays in project implementation, as follows:

1) Negative slippage of 5% ("early warning" stage). Contractor is given a warning;

2) Negative slippage of 10% ("ICU" stage). The contractor is given a second warning;

3) Negative slippage of 15% ("make or break" stage). The contractor shall be issued a final warning;

4) Negative slippage beyond 15% ("terminal" stage). The PM/RD/DE shall initiate termination/rescission of the
contract and/or take-over of the remaining work by administration or assignment to another contractor/appropriate
agency.

The discretion, therefore, of the DPWH to terminate or rescind the contract comes into play only in the event the
contractor shall have incurred a negative slippage of 15% or more. In the instant case, the negative slippage of
petitioners at the time they were served the notice of termination was only 9.86%. Hence, respondents violated the
law and committed an illegal act and abused their discretion when they terminated petitioners’ contract based on
negative slippage of only 9.86%. Such wrongful and illegal act is in derogation of petitioners' right not to be deprived
of property without due process of law. Petitioners' contract with the DPWH covering the project in question is a
proprietary right within the meaning of the Constitution and can only be rescinded strictly in accordance with the
governing law, Presidential Decree No. 1870, as implemented by DPWH Circular No. 102. And relative to this
axiom, it has been previously emphasized that courts may declare an action or resolution of an administrative
authority to be illegal because it violates or fails to comply with some mandatory provision of the law or because it is
corrupt, arbitrary, or capricious (Borromeo vs. City of Manila and Rodriguez Lanuza, 62 Phil. 512; 516 [1935];
Annotation on the Power of Judicial Review of Public Bidding and Awards of Government Contracts, 50 SCRA 491;
498 [1973])

The Office of the Solicitor General maintains that under Paragraph 2 of Presidential Decree No. 1870, the DPWH
may take over or award a project to another contractor whenever work is not done on schedule, meaning anywhere
from zero slippage to 15% slippage. This would lead to hopeless contradiction between Paragraph 1 and Paragraph
2. A law cannot possibly negate in one paragraph what it grants in another. Paragraph 2 can only be interpreted as
allowing discretion after the 15% limit in Paragraph 1 is exceeded. It cannot be doubted that in cases of force
majeure, revolution, anomalous transactions in the DPWH itself, and other similar reasons, the Department Head
may still extend the contract beyond 15% slippage. Only then may sound discretion come in.

Paragraph 3 of Presidential Decree No. 1870 refers to specific causes — (a) refusal of the contractor to provide
tools, equipment, and workers; (b) subletting or assigning the contract to subcontractors without DPWH permission;
and (c) willful violation of covenants and agreements. Not one of the above exists in the case at bench.
Respondents cannot, as they allege, rely on the ordinary rules of contract under the Civil Code that if the obligor
does not comply with the terms and conditions of the contract, the obligee has the right to ask for rescission with
damages. A special law fixes the condition of slippage at 15%. This has to be followed. The law on contracts cannot
also penalize the obligor for faults of the obligee.

The 15% slippage required by Presidential Decree No. 1870 can be likened to the 15-day reglementary period for
appealing that cannot co-exist with a contradictory provision allowing a court, in its discretion, to reduce the period to
one or two days. Fifteen days means fifteen days. Fifteen percent slippage does not mean 9.5%.

The six (6) instances cited as capable of offsetting or negating the first requirement of 15% slippage would give the
DPWH blanket prerogative to terminate a contract at anytime and on the slightest pretext, including those created by
DPWH itself as in this case. It is a grant of arbitrary power. It is delegation running riot.

The requirement of public bidding might as well be abolished. DPWH officials are compelled by law to accept only
the best bid in the award of contract. However, what is the point in conducting a public bidding if, only a short while
later, a winning bidder can be disqualified on a one or two percent slippage caused by DPWH itself or a claim that
certain tools and equipment have not been provided or a pretext that any term or condition has been violated. The
15% limiting point must be followed. The other provisions come in only if they caused the slippage to go beyond
15%.

It is argued that this Court is not a trier of facts. However, neither can this Court ignore facts coming from DPWH
itself. Except for general statements and conclusions, there is nothing presented by respondents to show that the
logical and convincing assertions of petitioner are not true.

According to respondents, petitioners failed to mobilize the minimum equipment for the project and to send a
sufficient number of engineers. Respondents state that from Day One, there should have been thirty-four (34)
pieces of light and heavy equipment but that petitioners dispatched only fourteen (14) to the job site. Precisely, all
these alleged shortcomings of petitioners were clearly taken into consideration in arriving at a conclusion that the
negative slippage is only 9.50%.

Petitioners, of course, deny the allegation of delay. They state that they mobilized surveyors, engineers, and
laborers; brought all the necessary equipment to the job site, constructed bunk houses, relocated buildings such as
those of the Pagatpatan Elementary School. Petitioners' engineers were old hands of DPWH and familiar with every
aspect of the construction. The best evidence that the statements of petitioners are more accurate than those of
respondents is that the DPWH Investigating Team went to the jobsite and thereafter filed a lengthy report. It was on
the basis of the report that then Undersecretary del Rosario later recommended that the termination order be
reconsidered and revoked and that petitioners should be allowed to continue with the construction under the original
contract. The Undersecretary did not mention what respondents now allege in their memorandum.
Common sense also dictates that 34 pieces of light and heavy equipment cannot all be used simultaneously on Day
One. More so, because the right of way was admittedly not secured by DPWH. The machinery would only be idle or
get in each other's way.

Assuming respondents to be correct that there was a three-month delay in commencing the job, the slippage is still
9.86% inspite of all petitioners' alleged shortcomings. Petitioners claim to have mobilized the men and the materials
on time and attribute the delay to DPWH but emphasize that "whatever dates are chosen and whatever causes are
adduced by the respondents and given the worst scenario, the slippage does not go beyond 9.85%, still not a basis
to cancel the contract" (p. 4, Petitioners' Memorandum dated February 2, 1994).

Respondents keep on blaming petitioners for delay but their own DPWH Investigating Team and the second highest
official of the DPWH laid the blame on the government engineers and purchasing officials.

The right of way problem calls for special mention. The letter of DPWH Undersecretary Romulo del Rosario dated
October 8, 1992 recommended the lifting of the cancellation of the contract, because of, among other things, the
right-of-way problem.

It was ascertained during the hearing conducted by the Court on January 12, 1994 that of the 100-hectare spoiled
bank section, only 40 hectares have been acquired. Half of this 40 hectares is broken down into small parcels
separate from each other. In the other half, DPWH paid the landowners but took no steps to attend to the tenants
who refused and continue to refuse to vacate their farms unless compensated. The dredging on the river shall result
in 1,300,000 cubic meters of mud, silt, and debris flowing into the area. Unless a ring embankment is constructed
around the entire 100 hectares, the mud and silt would inundate neighboring areas. Petitioners cannot possibly start
dredging until after the 100 hectares are acquired because this would drown or bury the people, work animals, and
farms in the still-to-be acquired 60 hectares, not to mention the tenants who refuse to leave their farms in the 40
hectares already purchased until compensation benefits are given to them.

The Solicitor General has also failed to explain the purchase of non-essential areas. There was no explanation for
the sudden change from a reinforced concrete floodwall to an earthen levee along a six kilometer stretch of the
project. The concrete floodwall calls for the purchase of a 10-meter wide strip of land along it. The earthen levee
requires a 35-meter wide adjacent strip of land. Anywhere up to 25 meters wide and six kilometers long of
expensive urban land had to be purchased to cover up the use of right-of-way funds where it is not essential.

There should likewise be an explanation why an extra P71,000,000 in addition to the earlier amount of P51,000,000
had to be appropriated for right of way.

What is appalling and seemingly anomalous is the recommendation of respondent officials to offer the project to
Hanil Corporation, the third lowest bidder, and whose bid had been previously disqualified for being 41.40% over
and above the government estimate for the project of P492,563,998.00. Indeed, the Hanil bid was P696,524,897.96,
or higher by P254,666,701.94 as compared to petitioners' bid and contract price of P445,858,196.02.

Respondents' wrongful termination of the contract which petitioners agreed to execute, and have in fact executed
partially, at the price of P445,858,196.02 and in offering it to Hanil, a disqualified bidder which previously entered
with a bid of P696,524,817.96, would result in a financial loss to the government in the amount of no less than
P254,666,201.94, Hence, respondents would seem to appear to be entering into a negotiated contract grossly
disadvantageous to the government.

The intent of the law (P.D. 1870) in allowing the government to take over delayed construction projects with negative
slippage of 15% or more is primarily "to save money and to avoid dislocation of the financial projections and/or cash
flow of the government", as clearly stated in the 3rd preambulatory clause of said decree, as follows:

Whereas, any delay in the completion of the contract in accordance with the approved PERT/CPM
and/or contract time as stipulated, will not only dislocate the financial projections and/or the cash
flow of the Government on these projects, but also unduly prejudice the public interest sought to be
subserved by the timely completion of the infrastructure project.
The termination of petitioners' contract does not, therefore, subserve public interest. On the other hand, it would
result in a huge dislocation of the financial projections and/or cash flow of the Government. On this score, it has
been said as a general doctrine that though the law be fair on its face, and impartial in appearance, yet if it is
applied and administered by the public authorities charged with their administration and thus representing the
government itself, with an evil eye and unequal hand so as practically to make unjust and illegal discrimination, the
denial of equal justice is still within the prohibition of the Constitution. (Yick Wo vs. Hopkins, 128 U.S. 356; Ex parte
Virginia, 100 U.S. 339; Henderson vs. Mayor, 92 U.S. 259; Chy Lung vs. Freeman, 92 U.S. 175; Ned vs. Delaware,
103 U.S. 320; Soon Hing vs. Crowley, 113 U.S. 703).

If the unjust and unlawful acts of respondents are not struck down and respondents are not restrained, the
Government stands to lose from Three Hundred Fifty Million (P350 Million) Pesos additional expenditures. Under
Presidential Decree No. 1870 when the project is rebidded or awarded through negotiated contract, compensation is
at "current valuation price" (Sec. 1, P.D. 1870). Considering the increase in prices of labor and materials, it is a
certainty that any new bidder would ask for prices much higher than the already high prices which the losing bidders
offered in the March 1, 1991 bidding. Tremendous loss of taxpayers' money thus is inevitable. This Court cannot,
therefore, close its eyes to the resultant evil which will be inflicted not only upon petitioners, but also on the Filipino
people and the dissipation of taxpayers' money arising from the unjust termination of petitioners' contract and the
rebidding to or renegotiation with other parties of the project. Public interest and the stakes of the Government
dictate the issuance of the writs of injunction and prohibition restraining respondents from enforcing the order
terminating petitioners' contract for the construction of the flood control facilities and land improvement works of the
Lower Agusan Development Project, Stage I,
Phase 1.

It may be emphasized that the law fixing the stages of negative slippage before termination of a contract may be
effected and the undisputed loss of P350 million if the termination is pushed through are not the only reasons why
this petition should be granted.

By the very admissions of respondent DPWH, such as the October 8, 1992 letter of Undersecretary Roberto del
Rosario to the Japanese consultant, earlier cited, the main cause of the delay was due to respondent DPWH
officials and not to petitioner. A total of P51 million was appropriated and released to acquire rights of way or to buy
the lands upon which the flood control project would be constructed. The farmers and landowners refused to move
out when the funds to compensate them were not forthcoming. This was the main cause of the 9.6% slippage and it
is not attributable to petitioners.

The DPWH Team which investigated the causes of slippage further found that there was an overlapping of duties
and responsibilities among the Japanese consultant, the local consultants, and the Field Project Manager, thus
sustaining petitioners' claim of unwarranted delays in the approval of work and equipment, not to mention changes
of orders which left petitioners wondering what to do and whom to follow.

There is ample evidence in the record before us to show that the DPWH was responsible for the main causes of the
delay. As stated by petitioners, DPWH, in failing to comply with its obligations seemingly wants the contractors to
work in a most unorthodox if not unthinkable manner to justify irregular purchases which should not have been
made.

In fine, not only was the slippage within legally tolerable limits but the cause of the slippage are attributable to
respondent DPWH officials. The inflexible stance of respondents towards the compromise offers of petitioners, even
before this Court ordered them to explore such a possibility, but especially after we asked them to do so, convinces
the Court all the more that there are irregularities which respondents are sweeping under the rug. The record also
shows that even after the stop-work order was given and while petitioners were trying to have it reconsidered, they
continued working full force on the project thus minimizing or eliminating the slippage which caused the disputed
problems.

WHEREFORE, the petition is hereby GRANTED and the decision dated October 20, 1992, as well as the resolution
dated January 20, 1993 of the Court of Appeals in CA-G.R. SP No. 28632 are hereby SET ASIDE.

SO ORDERED.
D. Statutes in Derogation of Fundamental Rights

G.R. No. L-53460 May 27, 1983

THE PROVINCIAL CHAPTER of LAGUNA, NACIONALISTA PARTY (NP), petitioner,

vs.
COMMISSION ON ELECTIONS and FELICISIMO T. SAN LUIS, respondents.

Marciano P. Brion Jr. for petitioner.

The Solicitor General for respondent COMELEC.

Felicisimo T San Luis and Rustico F. de los Reyes for private respondent.

MAKASIAR, J.:

This is a petition for certiorari filed by the petitioner against respondents which seeks to impugn the validity of the
proceedings held before the respondent Commission on Elections (COMELEC) in PDC No. 165, wherein the
disqualification of herein private respondent Felicisimo T. San Luis was sought, the same being allegedly violative of
the due process clause of the Constitution; and to reverse the dismissal resolution issued by respondent COMELEC
in said PDC No. 165, as being allegedly in contravention of the Constitution (Article XII-C, Section 10) and of
Section 4, Batas Pambansa Blg. 52.

In the elections of November 8, 1971, private respondent Felicisimo T. San Luis was the official candidate of' the
Liberal Party (LP) for Governor of Laguna. Private respondent won and accordingly assumed said position, the term
of which would have ordinarily expired on December 31, 1975.

On January 18, 1980, petitioner filed with the COMELEC a petition (docketed as PDC No. 165) to disqualify the
private respondent from running as official candidate of the Kilusang Bagong Lipunan (KBL) for the organization,'as
of Governor in the province of Laguna based on "turncoatism" as provided for under Section 10, Article XII-C, of the
1973 Constitution in relation to Section 4 of Batas Pambansa Blg. 52 [pp. 22-24, rec.].

Section 10, Article XII-C, of the 1973 Constitution reads:

Sec. 10. — No elective public officer may change his political party affiliation during his term of
office, and no candidate for any elective public office may change his political party affiliation within
six months immediately preceding or following an election.

The pertinent portion of Section 4, Batas Pambansa Blg. 52 reads:

Sec. 4. Special Disqualification. — In addition to violation of Section 10 of Article XII-C, of the

Constitution and disqualifications mentioned in existing laws, which are hereby declared as
disqualifications for any of the elective officials enumerated in Section 1 hereof, any retired elective
provincial, city or municipal official, who has received payment of the retirement benefits to which he
is entitled under the law and who shall have been 65 years of age at the commencement of the term
of office to which he seeks to be elected, shall not be qualified to run for the same elective local
organization,'as from which he has retired (emphasis supplied).

The records likewise reveal that prior to January 23, 1980, a similar petition to disqualify on the ground of
turncoatism (docketed as PDC No. 172) was filed by the Provincial Chapter of Laguna, Kilusang Bagong Lipunan
(KBL) against Wenceslao R. Lagumbay, the Nacionalista Party (NP) official candidate for Governor of Laguna, in
the January 30, 1980 elections [pp.. 79-80, rec.].

On January 21, 1980, private respondent Felicisimo T. San Luis filed with the Commission on Elections
(COMELEC) his answer in PDC No. 165 [pp. 25-28, rec.]. On the same date, the Commission on Elections
(COMELEC) set for joint hearing PDC No. 165 and PDC No. 172 on January 24, 1980 at 10:00 A.M. [pp. 75-76,
rec.].

On January 23, 1980, the private respondent filed with the public respondent COMELEC his "Formal Submission of
Annexes" [pp. 31-32, rec.].

On January 24, 1980, private respondent Felicisimo T. San Luis (respondent in PDC No. 165) filed with the
Commission on Elections (COMELEC) a memorandum [pp. 77-78, rec.l. Likewise, on the same date, Wenceslao R.
Lagumbay, respondent in PDC No. 172, filed with the COMELEC a "Formal Offer of Documentary Evidences with
Comments on Petitioner's Own Evidences" [pp. 85-A to 87, rec.].

On January 25, 1980, herein petitioner filed with the Commission on Elections a memorandum [p. 2, COMELEC's
Comment; p. 95, rec.].

On February 4, 1980, the private respondent filed with the COMELEC a motion for an early favorable resolution of
the case, it allegedly appearing that he had won over Wenceslao R. Lagumbay, the Nacionalista Party (NP) official
candidate, by a majority of around 55,000 votes [p. 2, COMELEC's Comment; p. 95, rec.].

On February 6, 1980, the petitioner filed with the COMELEC its reiteration to disqualify private respondent
Felicisimo T. San Luis [p. 2, COMELEC's Comment; p. 95, rec.].

On February 21, 1980, the COMELEC, in a resolution, denied the petition to disqualify private respondent Felicisimo
T. San Luis as "the petitioner failed to present sufficient evidence against herein respondent. " Thus, Resolution No.
9188 reads:

9188. (PDC No. 165). In the matter of the petition for disqualification, dated January 18, 1980, tied
by the Provincial Chapter of Laguna, Nacionalista Party (NP), represented by Wenceslao R.
Lagumbay, Acting Chairman, against Felicisimo T. San Luis, respondent, on the ground that said
respondent allegedly violated the provision of Section 10, Article XII- C, Constitution in relation to
Batas Pambansa Big. 52.

A review of the said petition shows that the petitioner failed to present sufficient evidence against
herein respondent.

Premises considered, the Commission RESOLVED to deny the Petition of the Provincial Chapter of
Laguna, Nacionalista Party (NP).

SO ORDERED [p. 33, rec.; emphasis supplied].

Hence, the instant petition.

It is initially contended by the petitioner that public respondent Commission on Elections issued the questioned
resolution (No. 9188) dismissing the petition in PDC No. 165, without observance of the cardinal precepts of due
process.

While petitioner admitted that the disqualification case was set for hearing on January 24, 1980 at 10:00 A.M.,
nevertheless, it vehemently argued that the mere setting alone of such hearing cannot be taken as satisfying the
requirements of due process.
Thus, petitioner insisted "that at COMELEC no formal hearing was conducted wherein the parties could have
confronted witnesses against each other. "NOT A SINGLE COMMISSIONER WAS IN ATTENDANCE. Only a staff
member of its Legal Department was present when the case was called for hearing, and he directed the parties to
submit their respective 'Annexes' (exhibits) after which, their memoranda" [p. 1, Petitioner's Reply; p. 118, rec.].

The aforesaid allegations of the petitioner have no foundation. It is to be noted that private respondent in its
comment filed before this Court alleged the following.

Private respondent thru counsel manifested that he was formally resting his case on the basis of the
exhibits 1 evidence which he had formally offered in writing, and a copy of which was further
presentation Atty. Marciano Brion Jr., counsel for the petitioner. Atty. Brion reserved his right to
register his objections to the exhibits in writing, and manifested that he was; not presenting any
more evidence, in view of the admission of private respondent that he was elected Governor of
Laguna on November 8,1971 as official candidate of the Liberal Party and then ran for the same
position as the standard bearer of the KBL Party during the January 30, 1980 elections. In fact, this
was the same trend of argument adopted by petitioner when it argued as follows:

If private respondent is bound, as all parties who filed pleadings in Court should be
bound, by his affirmative allegations and admission in his pleadings signed by him
under oath, then the case should end here with his disqualification and without any
need for any presentation discussion.'

Not that private respondent agrees with the aforegoing Argument of Petitioner. The same was
merely cited to show that in the proceedings before respondent COMELEC, petitioner really
preferred not to present evidence, contrary to its claim now, that it was denied procedural due
process, in that its counsel was not able to present evidence confront witnesses or object to exhibits.
Parties were even required to submit their respective memoranda. Private respondent submitted his
memoranda in both cases, PDC No. 165 and 172, xerox copies of which are hereto attached as
Annexes 3 and 4 of this comment.

If Petitioner did not submit its memoranda, that is its fault, but certainly, it cannot shift the blame on
the respondent COMELEC or to private respondent for not doing what it should have done.

Attached to this Comment as Annex 5 is the xerox copy of the Formal Submission of Annexes of
Respondent in PDC No. 166 showing on the bottom of page 2 thereof, that petitioner thru counsel
was duly furnished a copy thereof. The fact of the matter is that counsel for petitioner concentrated
his efforts more on PDC No. 172 entitled the Provincial Chapter of Laguna (KBL) vs. Wenceslao R.
Lagumbay, as shown by the fact that on the date of the hearing on January 24, 1980, he submitted
therein his own 'Formal Offer of Documentary Evidence with Comments on Petitioner's Own
Evidences' a xerox copy of which is hereto attached as Annex 6 of this Comment [pp. 46, Comment
of Private Respondent Felicisimo T. San Luis; pp. 48-50, rec.; emphasis supplied].

In its reply, petitioner miserably failed to deny the said allegations of the private respondent. This is fatal to the
cause of the petitioner. WE are constrained to sustain the stand of private respondent; for, apart from the
presumption of regularity accorded to respondent Commission in the performance of its duties, petitioner failed to
timely assert his right prior to the issuance of the above-questioned resolution. From January 24, 1980 up to
February 21, 1980, when respondent COMELEC issued the aforementioned resolution, petitioner failed to press
before respondent COMELEC its bid for an opportunity to be heard and belatedly cry for an alleged denial of due
process only after receipt of an adverse resolution.

As correctly pointed out by the private respondent, "(I)ndeed, if petitioner had evidence to present or wanted to
confront witnesses or object to evidence in open session (instead of submitting a written objection as he manifested
before respondent COMELEC) why did it not file a motion to set the case again for hearing, knouting that elections
were over and either its candidate or the private respondent would be proclaimed sooner or later. Surely, if
petitioner sincerely believed that it has not presented evidence, it should have acted immediately by asking the
COMELEC to set the case for hearing for reception of its evidence, unless of course, petitioner thought that its
candidate would win the elections, which was, of course, presumptuous on its part [pp. 8-9, Comment of Private
Respondent Felicisimo T. San Luis, pp. 52-53, rec.; emphasis supplied].
The requirements of due process are obeyed as long as the parties are given the opportunity to be heard. In the
case at bar, petitioner was afforded all the chances to be heard until it submitted the case for resolution by his
manifestation that, because of the admission of private respondent that he ran as Liberal Party candidate in the
1971 elections, he was not presenting any more evidence, only reserving his right to object to respondent's
evidence.

In the case of Maglasang vs. Ople (L-38813, 63 SCRA 508 [19751, then Associate Justice, now Chief Justice
Enrique M. Fernando, ruled that the right of due process is not denied where the aggrieved party was given the
opportunity to be heard.

The essence of due process is the requirement of notice and hearing, the presence of a party at a trial is not always
of the essence of due process, and an that due process requires is an opportunity to be heard (Auyong Hian vs.
Court of Tax Appeals, et al., L-28782, Sept. 12, 1974, 59 SCRA 110; Asprec vs. Itchon, L-21685, April 30, 1966, 16
SCRA 921; Cornejo vs. Secretary of Justice, et al., L-32818, June 28, 1974, 57 SCRA 663).

It is significant to note that respondent COMELEC's resolution was issued after private respondent submitted his
"Formal Submission of Annexes" and after both parties submitted their respective memoranda. Thus, respondent
COMELEC stated that it "decided PDC No. 165 based on the petition and memorandum of the petitioner and the
answer, memorandum and the motion for the early favorable resolution of the case of the private respondent. To
say, at this late hour, that the petitioner was denied the process in the COMELEC is unwarranted, ... . The petitioner
had been allowed ample opportunity to ventilate its charge before the respondent COMELEC, as seen above, and
failed in its attempt to support the same with proof " (p. 4, COMELEC's Comment; p. 97, rec.).

In other words, the petition filed against private respondent in PDC No. 165 was deemed submitted for decision on
the basis of the pleadings, annexes and memoranda of the parties. And there is no denial of due process if the
decision was "rendered on the evidence presented at the hearing, or at least contained in the record and disclosed
to the parties affected (Interstate Commerce Commission vs. L. & N.R. Co., 227 U.S. 88, 33 S. Ct. 185, 57 Law. ed.
431; cited in Ang Tibay, et al. vs. The Court of Industrial Relations, et al., 69 Phil. 635, 643; emphasis supplied).

A case in point is the case of Armedilla vs. COMELEC, et al. (No. 53393, recently decided by this Court on March
31, 1981). In said case, the COMELEC dismissed Armedilla's petition to disqualify private respondent Dizon. The
dismissal was anchored on the ground of insufficiency of evidence. Thus:

30. With respect to the disqualification case against Dizon, Armedilla interposed in this Court on
March 18, 1980 an 'appeal by certiorari' wherein he contended that the Comelec did not observe due
process in dismissing the case (G.R. No. 53393).

31. Dizon in his comment on that appeal traversed the allegation as to nonobservance of due
process. He said that at the hearing of the petition for disqualification on January 26, 1980 in the
Comelec the case was submitted on the basis of the pleadings (p. 30, rollo of G.R. No. 53393)
[emphasis supplied].

In Ruling to the effect that the COMELEC complied with the basic requirements of procedural due process in
deciding the case on the basis of the pleadings submitted by the parties, this Court declared:

With respect to the disqualification case against Mayor Dizon (G.R. No. 53393), the contention that
due process was not observed in dismissing that case is not well-taken because petitioner Armedilla
was given a chance to controvert Dizon's defense that he was already a KBL partisan in April 1978,
or more than six months prior to January 30, 1980 but Armedilla was not able to overthrow that
defense. He submitted the case for decision by the Comelec on the pleadings (emphasis supplied).

Similarly, in the more recent case of Garcia vs. COMELEC, et al., (No. 53793, June 29,1981), this Court ruled:

Likewise, We are not in accord with the argument of the petitioner that she was denied due process
because she was not afforded the opportunity 'to refute the alleged findings of the handwriting
experts of the Comelec.' Such contention is without merit. At the outset, it should be recalled that at
the hearing on March 11, 1980 before the COMELEC, the parties dispensed with the presentation of
 testimonial evidence, and merely prepared oral arguments and submitted the case for decision after
filing their 'Annexes' memoranda. Petitioner therefore waived further presentation of
evidence (emphasis supplied).

Aside from the fact that petitioner expressly waived its right to present presentation evidence, the mere act of
petitioner's counsel in merely filing a memorandum after being satisfied with the alleged admission of private
respondent until the issuance of the aforequoted adverse resolution, is already an implied manifestation that he was
waiving his right to the other elements of a judicial hearing, like the presentation of additional evidence or the cross-
examination of witnesses.

And petitioner's right to a hearing embracing particular elements, appropriate to judicial proceedings may be waived
by taking part in informal proceedings without objection (Martin vs. Wolfson, 218 Minn. 557, 16 NW 2d 884; cited in
2 Am. Jur. 2d 114). Thus:

... The right to present evidence, to have witnesses sworn and to have them subjected to direct and
cross-examination in accordance with recognized judicial procedure was the right of any interested
person present at the hearing. But unless that right was asserted, it must be considered waived
While courts have a tender regard for the rights and privileges of citizens, there is no reason of
public policy why they should invoke for him constitutional or statutory rights which he himself has
voluntarily relinquished .

... And, if the failure to swear a witness in an ordinary civil trial, or even in a criminal trial, may be
waived by failure to object or by express consent (70 C.J., Witnesses, S 654; 39 Am. Jur., New Trial,
S 532), clearly the right to have witnesses sworn and subjected to examination in an administrative
hearing conducted without traditional court ritual must be considered as waived where interested
participate therein without questioning the procedure. People ex rel. Niebuhr v. McAdoo 184 N.Y.
304, 77 N.E. 260, 6 Ann. Cas. 56; Proctor v. Smith, Tex. Civ. App., 299 S.W. 663 ... [Martin vs.
Wolfson, supra, p. 890; emphasis supplied].

It is finally contended by petitioner that private respondent Felicisimo T. San Luis is guilty of "turncoatism," in
violation of Section 10, Article XII (C) of the 1973 Constitution in relation to Section 4 of Batas Pambansa Blg. 52
and P.D. No. 1661, as amended by P.D. No. 1661-A.

It is undisputed that private respondent won the gubernatorial organization,'as in the 1971 local elections under the
banner of the Liberal Party and that when he filed his certificate of candidacy for governor on January 3, 1980 for
the January 30, 1980 elections, he indicated his party affiliation as that of Kilusang Bagong Lipunan (KBL). Since
1971 however, "much water has passed under the bridge." A review of the political events prior and subsequent to
the November 8, 1971 local elections becomes imperative to resolve the aforesaid issue.

On March 16, 1967, Congress of the Philippines passed Resolution No. 2, which was amended by
Resolution No. 4 of said body, adopted on June 17, 1969, calling a Convention to propose
amendments to the Constitution of the Philippines. Said Resolution No. 2, as amended, was
implemented by Republic Act No. 6132, approved on August 24, 1970, pursuant to the provisions of
which the election of delegates to said Convention was held on November 10, 1970, and the 1971
Constitutional Convention began to perform its functions on June 1, 1971. While the Convention was
in session on September 21, 1972, the President issued Proclamation No. 1081 placing the entire
Philippines under Martial Law. On November 29, 1972, the Convention approved its Proposed
Constitution of the Philippines. The next day, November 30, 1972, the President of the Philippines
issued Presidential Decree No. 73, 'submitting to the Filipino people for ratification or rejection the
Constitution of the Republic of the Philippines proposed by the 1971 Constitutional Convention, and
appropriating funds thereof,' as well as setting the plebiscite for said ratification or rejection of the
Proposed Constitution on January 15, 1973. ... (Javellana vs. The Executive Secretary, 50 SCRA
30, 55).

In a Presidential Decree dated December 31, 1972, the President issued P.D. No. 86 organizing Citizens
Assemblies in each barrio in municipalities and in each district or ward in chartered cities "to broaden the base of
citizens participation in the democratic process and to afford ample opportunities for the citizenry to express their
views on important national issues." This was subsequently amended by P.D. No. 86-A on January 5, 1973 and
P.D. No. 86-B on January 7, 1973 requiring the submission of important national questions or issues, among them
the approval of the New Constitution, and the holding of a plebiscite on the New Constitution. On January 17, 1973,
the President issued Proclamation No. 1102 "(A)nnouncing the ratification by the Filipino people of the Constitution
proposed by the 1971 Constitutional Convention."

On March 31, 1973, this Court ruled in the above-quoted Javellana case that "there is no presentation judicial
obstacle to the new Constitution being considered in force and effect."

The aforesaid new Constitution in its Transitory Provisions extended indefinitely the term of organization,'as of all
incumbent public officers and employees at the time of the ratification of the said Constitution. Thus:

All officials and employees in the existing Government of the Republic of the Philippines shall
continue in organization,'as until otherwise provided by law or decreed by the incumbent President of
the Philippines, but all officials whose appointments are by this Constitution vested in the Prime
Minister shall vacate their 'Annexes' offices upon the appointment and qualification of their
successors (Sec. 9, Art. XVII).

It is significant to point out at this juncture that a novel provision of the 1973 Constitution pertinent to the case at bar
reads:

No elective public officer may change his political party affiliation during his term of office, and no
candidate for any elective public organization,'as may change his political party affiliation within six
months immediately preceding or following an election (Sec. 10, Art. XII [C]).

A casual perusal of Section 10, Article XII (C) of the 1973 Constitution would readily show that it imposes
prohibition, on two classes of individuals, namely:

(1) an elective public officer who changes political party affiliation during his term of office, and

(2) a candidate for any elective public office who changes political party affiliation within 6 months immediately
preceding or following an election.

It is very much apparent from the pleadings filed by the petitioner that in seeking the disqualification of herein private
respondent before respondent COMELEC it heavily relied on the first clause of Section 10, Article XII (C)-prohibiting
elective public officers from changing party affiliation during their term of office.

In arguing that private respondent is guilty of "turncoatism" under the second clause of Section 10, Article XII (C) of
the 1973 Constitution, petitioner asserted:

More than anything, it may not be safe to admit that private respondent, legally speaking, moved
over to the KBL on March 15, 1978, as contended. Not even if the genuineness of his purported
Certificate of Affiliation with that organization is admitted. To be reckoned with, unfortunately for him,
are the pronouncements of the Honorable Supreme Court in Peralta vs. Comelec, 82 SCRA 30 and
Lakas ng Bayan vs. Comelec, 82 SCRA 196, to the effect that the KBL was not a political party in
1978, but only 'an umbrella organization,'as it specifically said:

The KBL is NOT A POLITICAL PARTY. It is a group or aggrupation ..., which is "a
tempo-alliance, union, or coalition ... of persons or parties for the purpose of joint
action and combining their resources to support a common list of candidates
(emphasis supplied).

And so, insofar as the now involved, constitutional ban is concerned, when did private respondent
transfer affiliation to the KBL? Certainly, not before KBL became a political party 'only in late
December, 1979, after the sudden calling of the elections for January 30, 1980,' by the words of
Justice Teehankee in concurring in the Reyes vs. Comelec decision.
 Thus, did private respondent also violate the second phase of the same constitutional prohibition
that of changing party affiliation within six months before election (pp. 6-7, Petitioner's Reply; pp.
123-124, rec.).

The above contention is not wen taken. In the case of Sevilleja vs. COMELEC (Nos. 52793 and 53504, August 31,
1981), reiterated in Geronimo vs. COMELEC (No. 52413, September 26, 1981), this Court ruled:

... (T)he question of whether or not the KBL is a political party has been foreclosed by subsequent
political developments. As significantly observed by this Court in Santos vs. Commission on
Elections, et al., supra-

Under its Resolution Ne 1406, promulgated December 22, 1979 laying down rules on
the accreditation of political parties, Section 1 thereof provides that any duly
registered political party in the April 7, 1978 election shag be entitled to accreditation.
Pursuant to this Resolution, KBL was duly accredited separately from the NP That
KBL had always been a political party or aggrupation can, therefore, no longer be
open to question. Were KBL not such a political party, block voting as was declared
valid in the case of Peralta vs. COMELEC, 82 SCRA 30, G.R. No. L-47771, March
11, 1978, could not have been availed of, by it, as it unquestionably did, in the 1978
elections. For block voting is voting for a political party.

Moreover, after the decision in the case of LABAN vs. COMELEC (82 SCRA 196 [19781), the KBL
was transformed into a distinct political party and ceased as a mere umbrella organization, as shown
by subsequent political developments. It is significant to note that, after the April 1978 election, in the
Interim Batasang Pambansa, majority of the assemblymen are Identified and Identify themselves
with pride as KBL members sporting T-shirts, hats and pins labelled KBL; while the handful of
opposition diehards Identify themselves as members of the Nacionalista Party or Pusyon Bisaya or
Mindanao Alliance Much later, until December, 1979, the majority members of the IBP kept referring
to themselves as KBL members and held caucuses or meetings to discuss vital issues and proposed
legislations as such KBL members. On the floor of the IBP, the members of the KBL Identify
themselves as such and the KBL has been referred to as the party of the administration. The
actuations of the organizers, leaders and members of the KBL established the said party as a de
facto political party since April 1, 1978. The acts performed by the KBL leaders and their members,
not the formality of its registration as a party, should determine the commencement of its existence
as such political party. It has been held with reference to illegal associations that the nature and true
character of an organization are oftentimes determined by the speeches and activities of its leaders
and members rather than by its constitution and by-laws (Mr. Justice Mariano Albert in People vs.
Ramos, CA-G.R. No. 5318, Dec. 28,1940,40 O.G. 2305, Sept. 30,1941).

The hesitant stance taken by petitioner in assailing the candidacy of private respondent based on the second
clause of Section 10, Article XII (C), prohibiting candidates for any elective public office from changing party
affiliation within 6 months immediately preceding or following an election is not surprising. It must be noted that as
early as March, 1978, private respondent was undisputedly expelled from the Liberal Party together with other
Liberal Party stalwarts as Governor Eduardo Joson of Nueva Ecija, Governor Faustino Dy of Isabela and
Assemblyman Eddie Ilarde-about fifteen (15) months before the six-month prohibitive period commenced in July,
1979 (pp. 83-84, rec.). The expulsion was obviously due to private respondent's open support for and affiliation with
the then newly organized Kilusang Bagong Lipunan (KBL). This is shown by the fact that he became Chairman of
the KBL, Provincial Chapter in Laguna, and Chairman and Campaign Manager for Region IV-A consisting among
others of the Southern Tagalog provinces and hence actively campaigned for KBL candidates in the April, 1978
elections for the members of the Interim Batasang Pambansa. It is likewise undisputed that private respondent has
been a holder of a certificate of affiliation as a bona fide KBL member as early as of March, 1978.

Of course, there can be no doubt that had private respondent sought within six months before January 30, 1980, his
expulsion from the Liberal Party to anticipate a forthcoming elections as alluded to by petitioner, the same is clearly
an act of political opportunism. But such expulsion could not have been sought by private respondent as there was
no certainty as to the calling of elections on January 30, 1980. As a matter of fact, the January 30, 1980 local
elections was not even contemplated in April, 1978. In the language of petitioner, "(N)o one for a fact, then knew
when the next elections would be called" (p. 6, Petitioner's Reply; p. 123, rec.).
The contention of petitioner that private respondent switched party affiliation during his term of organization,'as and
hence guilty of "turncoatism" is not tenable. It is appropriate to note that private respondent was elected governor on
November 8, 1971 for a frameup. term or up to 1975. As correctly pointed out by private respondent, that the term
of office of those elected in the November 1971 elections expired on December 31, 1975, the period intended by the
framers to be covered by the constitutional prohibition, can be gleaned from among the questions asked during the
February 27, 1975 referendum and from one of the whereases of P.D. No. 1296, also known as "The 1978 Election
Code."

Thus, in the referendum of February 27, 1975, the following specific question was among the questions asked:

ON LOCAL OFFICIALS

At the expiration of the terms of office of your local elective officials on December 31, 1975, how do
you want their successors chosen: to be appointed by the President or elected in accordance with
the Election Code? (Emphasis supplied).

And among the whereases of P.D. No. 1296, more popularly known as "The 1978 Election Code"
reads:

WHEREAS, the elective local officials whose terms of office expired on December 31, 1975 were
allowed to continue in organization,'as subject to the pleasure of the President; (emphasis supplied).

Furthermore, in the case of Seares vs. COMELEC (L-34381, May 31, 1977, 77 SCRA 273, 278), this Court ruled
that four-year term of office of those elected in the November 8, 1971 elections already expired. In the aforesaid
Seares case, a petition was filed on November 23, 1971 against private respondents Carmelo Barbero and Gavino
Balbin, who were duly elected as governor and vice-governor respectively, assailing the minute resolution issued by
respondent COMELEC denying for lack of merit, petitioner's petition for the cancellation of the certificate of
candidacy of private respondents and the minute resolution likewise issued by respondent COMELEC denying
petitioner's motion for reconsideration subsequently filed.

In dismissing the said petition, this Court, speaking through then Associate Justice Felix Q. Antonio, stated inter
alia: "and considering further, that the four-year term of office of those elected and proclaimed in the election of
November 8, 1971, particularly the offices of Governor and Vice-Governor has already expired, We find the present
petition moot and academic" (emphasis supplied).

Noteworthy in the above-cited case is the fact that it was decided by this Court after December 1975 and over four
(4) years prior to the January 30, 1980 local elections.

While there might be plausibility in the contention of petitioner that Section 9, Article XVII in the Transitory Provisions
extended indefinitely the term of organization,'as of all incumbent public officers and employees, nonetheless, the
same will not suffice to bring the case of the private respondent within the constitutional prohibition.

WE take the view that the evident intention of the new Constitution was to apply the prohibition, as to party switching
(turncoatism) to the term of office for which one was previously elected in relation to the political party under which
he ran and won. In the present case, the prombition, should only apply to the term for which private respondent was
elected governor as a Liberal Party candidate from January 1, 1972 to December 3l,1975.

It must be noted that the new Constitution was ratified on January 17, 1973 when the term of office of local elective
public officials, who were elected as such under the two major political parties, the Nacionalista Party and Liberal
Party, had not expired. Having been elected in the November, 1971 local elections, their term of organization,'as
expired on December 31, 1975.

It is worth noting that private respondent was allowed to continue in office at the pleasure of the President by virtue
of the provisions of the Transitory Provisions and supplemented by the results of the referendum on February 27,
1975, thru which the people opted for appointment by the President as the manner of choosing the successors of
local offtce whose terms were to expire on December 31, 1975.
The period beyond December 31, 1975 is no longer within the coverage of the phrase "term of office" for which
respondent was elected as a Liberal candidate for purposes of applying the constitutional prohibition.

Thus, private respondent argued that "(E)ven granting arguendo therefore, that private respondent changed political
party affiliation when the constitutional prohibition, was already in effect, and not before, as discussed earlier in this
Comment, still it could not be said that he changed affiliation during the term for which he was elected Governor as
a Liberal which is what is obviously contemplated in the prohibition. A public officer is prohibited from changing
political party affiliation during his term of organization,'as to prevent opportunism of one who after having been
catapulted to organization,'as with the help of a political party simply abandons his party and switches to another,
while serving his term, thereby ignoring the meaning of the electoral results and making a mockery of the popular
will. But if the change took place after the expiration of the term to which he had been elected under a particular
party, as in this case, where private respondent ran as a KBL four (4) years after the expiration of his frameup. term
on December 31, 1975, then the prombition, does not apply, for the reason that, that part of his term from
December 31, 1975 up to March 2, 1980, was not by virtue of his having been elected as a Liberal but because he
was allowed to continue in office 'at the pleasure of the President,' who apropos is the titular head of the KBL party"
(pp. 24-25, Private Respondent's Comment; pp. 68-69, rec.; emphasis supplied).

In fine, what is essential is the political party of the elective public official as of the date of his election and during the
four-year term to which he had been elected and not his political inclinations after the said frameup. term expires.

Finally, to make the constitutional prohibition, applicable to the period beyond the frameup. term to which public
officials were elected in the 1971 local elections under their respective political parties would work manifest injustice
and unduly impinge on the freedom of association guaranteed to all individuals. Incumbent public officials who ran
during the last election (1971 elections) prior to the 1973 Constitution which embodies the said novel provision,
would be undoubtedly unjustifiably prejudiced if the party under the banner of which they ran and won, would no
longer participate in the succeeding elections after the effectivity of the new Constitution, such as the Liberal Party in
the case at bar which boycotted all elections during and after the lifting of martial law. In the present case, it appears
that most of the prominent LP leaders who participated in the elections held after the effectivity of the new
Constitution, campaigned and ran under new opposition groups such as the Lakas ng Bayan (LABAN), National
Union for Liberation (NUL) Mindanao Alliance (MA) Pusyon Bisaya, Bicol Saro and other new political aggrupations.
This We believe was not the manifest intention of the framers.

Indeed, "of two reasonably possible constructions, one of which wouId diminish or restrict fundamental right of
people and the other of which would not do so, latter construction must be adopted" (16 C.J..S 69 footnote). Hence,
the more logical interpretation is that which gives effect to Section 10 of Article XII (C) of the 1973 Constitution and
does not violate the individual's basic right to association.

WHEREFORE, THE PETITION IS HEREBY DISMISSED. NO COSTS.

SO ORDERED.

Fernando, C.J., Aquino, Concepcion Jr., Guerrero, De Castro, Melencio- Herrera, Plana, Escolin and Gutierrez, Jr.,
concur.

Teehankee, Abad Santos and Vasquez, JJ took no part.

Relova, J., is on leave.

G.R. No. 108718 July 14, 1994

GENARO R. REYES CONSTRUCTION, INC. and UNIVERSAL DOCKYARD., petitioners,
vs.
THE HONORABLE COURT OF APPEALS, THE DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS, JOSE
P. DE JESUS, ROMULO M. DEL ROSARIO, ET AL.

J.P. Villanueva & Associates and Ricardo J.M. Rivera Law Office for petitioners.

MELO, J.:

Herein petitioners Genaro G. Reyes Construction, Inc. (or GGRCI) and Universal Dockyard Ltd. (or UDL) seek the
nullification of the decision dated October 20, 1992 and the resolution dated January 20, 1993 of the Eighth Division
of the Court of Appeals in CA-G.R. SP No. 28632. The said decision and resolution affirmed the two orders issued
by the Regional Trial Court of the National Capital Judicial Region (Branch 15) dated June 22, 1992 and August 5,
1992 in its Civil Case No. 92-61345 which denied herein petitioners' application for a temporary restraining order
and a writ of preliminary injunction to enjoin the Department of Public Works and Highways (DPWH) and then
DPWH Secretary Jose P. de Jesus, and others therein impleaded from enforcing and implementing the notice of
pre-termination of petitioners' contract for the implementation of Lower Agusan Development Project, Stage I, Phase
1, Butuan City, or any part thereof, to any person; and prohibiting said defendants from bidding said project or any
part thereof, or awarding it to any person.

On March 1, 1992, the Government through respondent DPWH on one hand, and the joint venture of Genaro G.
Reyes Construction, Inc. (GGRCI), Universal Dockyard, Ltd. (UDL), a British construction firm, Home Construction
(HC), and JPL Construction (JPLC), (represented by petitioner Genaro G. Reyes, as President of lead contractor
GGRCI) on the other hand, entered into a "Contract for the construction of the flood control facilities and land
improvement works of the Lower Agusan Development Project, Stage 1, Phase 1, Butuan City" (Annex B, Petition;
pp. 75-88, Rollo).

In the bidding which preceded the awards by the DPWH of the contract to the GGRCI, et al. Joint Venture,
petitioners submitted the lowest bid below the Approved Government Estimate (AGE) of P492,563,998.00.

The following bids were submitted:

1. Petitioner — P445,858,196.02 — 9.45% below approved government estimate of P492,563,998.00.

2. D.M. Wenceslao & Associates — P659,980,029.00 33.99% above government estimate.

3. Hanil Development Corporation — P696,524,897.91 — 41% above government estimate.

4. F.F. Cruz and China Stage Engineering — backed out.

5. C.M. Pancho and A.M. Oreta — disqualified.

On May 8, 1992 the Notice to Proceed (Annex C, Petition; p. 89, Rollo) was issued by DPWH Undersecretary
Romulo Del Rosario. It was received by petitioners on May 9, 1992 and they forthwith mobilized and deployed their
men and equipment. The notice to proceed specifically stated that the contract would take effect not later than thirty
days from its receipt by petitioners.

On April 23, 1992, the other respondents, DPWH Project Engineers Japanese Eiichiro Araide and Engineer Aquiles
C. Sollano recommended termination of the contract alleging that as of that date "the project work progress is
already 9.50 percent behind schedule (negative slippage)" (Annex F, Petition; pp. 92-93, Rollo). Four days later, or
on April 27, 1992, Consultant Eiichiro Araide gave another figure of 9.8% negative slippage (Annex G, Petition; pp.
93-96, Rollo).

Under the law, specifically Presidential Decree No. 1870, the Government (herein represented by the DPWH) is
authorized to take over delayed infrastructure projects only whenever a contractor is behind schedule in its contract
and incurs 15% or more negative slippage based on its approved PERT/CM, and the implementing agency, at the
discretion of the Minister concerned, may undertake the administration of the whole or a portion of the unfinished
work or have the whole or portion of such unfinished work done by another contractor through a negotiated contract
at the current valuation price.

Also, Department Order No. 102, Series of 1988 of the DPWH, provides:

To insure timely and effective remedial steps in response to delays in project implementation, all
Project Managers (PMs), Regional Directors (RDs) and District Engineers (DEs) concerned shall
undertake the following calibrated actions where contracts for infrastructure projects reach the levels
of negative slippage (attributable to the contractor) indicated below:

1. Negative Slippage of 5% (Early Warning Stage). The contractor shall be given a warning and
required to submit a "catch-up" program to eliminate the slippage. The PM/RD/DE shall provide
temporary supervision and monitoring of the work.

2. Negative Slippage of 10% ("ICU" Stage). The contractor shall be given a second warning and
required to submit a detailed action program on a fortnightly (two weeks) basis which commits him to
accelerate the work and accomplish specific physical targets which will reduce the slippage over a
definite time period. Furthermore, the contractor shall be instructed to specify the additional input
resources — money, manpower, materials, machines, and management in which he should mobilize
for this action program. The PM/RD/DE shall exercise closer supervision and meet the contractor
every other week to evaluate the progress of work and resolve any problems and bottlenecks.

3. Negative Slippage of 15% ("make or break" stage). The contractor shall be issued a final warning
and required to come up with a more detailed program of activities with weekly physical targets
together with the required additional input resources. On-site supervision shall be intensified, and
evaluation of project performance will be done at least once a week. At the same time the
PM/RD/DE shall prepare contingency plans for the termination and rescission of the contract and/or
take over of the work by administration or contract.

4. Negative Slippage beyond 15% ("terminal" stage). The PM/RD/DE shall contract and/or take over
of the remaining work by administration or assignment to another contractor/appropriate agency.
Proper transitory measures shall be taken to minimize work disruptions, e.g., take over by
administration while rebidding is going on.

Because of negative slippage of 9.50% as of April 23, 1992, or 9.86% as revised on April 27, 1992, respondent
Project Director Antonio A. Alpasan wrote a memorandum (Annex H, Petition; p. 98, Rollo) dated May 8, 1992 to
respondent DPWH Undersecretary Romulo Del Rosario recommending either of two alternatives:

1. Negotiate the entire balance of the work with the second lowest bidder, but if the second lowest bidder is
blacklisted, then to the third lowest bidder; or

2. Rebid the whole balance of the work or divide it into contract packages.

On May 14, 1992, DPWH Acting Secretary Gregorio Alvarez notified petitioner GGRCI that its contract is being
terminated (Annex D, Petition; p. 90, Rollo). Also on May 14, 1992, respondent DPWH Undersecretary Romulo Del
Rosario wrote respondent Secretary De Jesus a memorandum (Annex I, Petition; p. 99, Rollo), "recommending that
the balance of the work be offered to the third lowest bidder, the Korean firm of Hanil Development Corporation and
that in the event that the negotiation with Hanil fails, the balance of the work be repackaged into several
components for rebidding as soon as possible.

At this juncture, note must be taken of the circumstance that the bid price of Hanil of P696,524,897.96 was 41.4%
over and above the approved government estimate (AGE) of P492,563,998.00 for the project. Hanil's bid was higher
by P254,666,701.94 vis-a-vis petitioners' bid and contract price.
On May 14, 1992, respondent DPWH Secretary De Jesus wrote petitioners that its contract for the project was
terminated (Annex E, Petition; p. 91, Rollo). On May 22, 1992, petitioners wrote a letter requesting reconsideration
of the termination order, pointing out, inter alia, that:

. . . the bid of Hanil Corp. when the project was bidded 15 October 1990 was already
P696,524,897.00, 41.4% above the Approved Agency Estimate (AAE), which amounts to
P492,563,998.00. Categorically, we are taking a price difference of P203,960,849.00, which is
obviously much to the disadvantage of the Department and the Filipino people.

In comparison to the contract price of P445,858,196.00, 9.48% below the AAE, the government and
Filipino people stand to earn a savings of P46,705,802.00 and P250,666,651 compared to Hanil's
bid price.

. . . Reviewing the incurred negative slippage in detail, it can clearly be seen that the bulk can be
attributed to the unaccomplished spoilbank and dredging section of the project.

The spoilbank section, supposedly 100 hectares in area had right of way problems; that is, only 40
hectares or 40% of the total area have been acquired. (Annex J, Petition; pp. 100-101, Rollo.)

The request for reconsideration was reiterated on May 26, 1992 and June 14, 1992 (Annexes K and L, Petition; pp.
102-106, Rollo) inviting the DPWH's attention that: (a) based on Hanil's bid price the government stands to lose
P250,666,651.00, apart from the additional P100 Million worth in escalation price as indicated in the
recommendation of respondents Alpasa (Annex H, Petition) and Del Rosario (Annex I, supra); (b) the delay and
failure of the DPWH Project Office (PMO) to procure the 100 hectares right of way for the project's spoilbank area
(only 40 hectares was acquired by the DPWH) as provided for in the tender documents, thereby contributing to a
negative slippage equivalent to 3% due to the suspension of work in that area because of right of way problems.

On June 2, 1992, DPWH Secretary De Jesus terminated the contract of the GGRCI, et al. Joint Venture (Annex M,
Petition; p. 107, Rollo).

On October 8, 1992, respondent DPWH Undersecretary Romulo del Rosario sent a letter (Annex N, Petition; pp.
108-110, Rollo) to Mr. Hideo Tanaka, Chief Representative of Japan's Overseas Economic Cooperation Fund (or
OECF) recommending that the termination of petitioners' contract be lifted upon the following observations:

. . . some reasons contributed to the delay covering the negative slippage was also due to the
government's fault, such as:

a. Overlapping of duties and responsibilities among the expatriates, the local

consultants and the field PMO.

b. Unauthorized variation order with the project manager and the expatriate
consultant issuing it without prior authority from the central office reducing the length
of the flood wall from 5.825 km. to 1.868 km. and change it to levee, with a total cost
reduction of P75,458,091.03.

c. The right of way problem where the project has a so-called spoiled bank section
which is supposed to be 100 hectares and the government has to secure the right-of-
way. But as of the present, only about 40 hectares or 40% has been acquired, out of
which, about 20 hectares are contiguous while the remaining are scattered. Because
of this the contractor found it difficult to pursue the project as it is quite unrealistic to
dispose of the dredged materials. Aside from this, there is also the right-of-way
problems encountered in the floodwall and levee construction.

3. With the termination effected, the contractor filed a case in the trial court twice denied by the trial
court. Right now the case has been appealed to the Court of Appeals.
 4. The DPWH sent an investigating team to verify the allegations of the contractor on the faults of
the Government and found to have been true.

5. To resolve the issue, we have studied and came up with three options to continue the project as
presented in our report to Secretary De Jesus (copy attached). Considering the advantages and
disadvantages presented, we recommend that the termination order be lifted and the contract with
the joint venture be pursued on the premise that the vigorous action of the contractor in pursuing the
case, it is evident that they have all the intention to finish the project. Otherwise all their actions
would prove nothing and futile.

The above recommendation was based on the report of Andres Canlas, DPWH Project Manager IV, dated
September 8, 1992 (Annex C-2, Urgent Motion for Issuance of Temporary Restraining Order; p. 196, Rollo) that the
negative slippage of the project was caused not only by the contractor but also by the government side.

On May 28, 1992 GGRCI, et al. Joint Venture filed a case for prohibition, specific performance, and injunction
against respondent DPWH as the sole defendant before the Regional Trial Court of Manila (Civil Case No. 92-
61345). The joint venture subsequently filed an Amended Petition impleading additional defendants (respondents
herein) and including claims for damages.

On June 25, 1992 and August 5, 1992, the regional trial court issued orders denying the joint venture's prayer for
preliminary injunction citing Section 1 of Presidential Decree No. 1818 providing that:

No court in the Philippines shall have jurisdiction to issue any restraining order, preliminary
injunction, or preliminary mandatory injunction in any case, dispute or controversy involving any
infrastructure project or a mining, fishery, forest or other natural resource development of the
government or any public utility operated by the government including any other public utilities for
the transport of the goods or commodities, stevedoring and arrastre contracts, to prohibit any person
or persons, entity or government official from proceeding with, or continuing the execution or
implementation of any such project, or the operation of such public utility, or pursuing any lawful
activity necessary for such execution, implementation or operation.

On August 11, 1992 the joint venture filed with the Court of Appeals a petition for certiorari and prohibition with a
prayer for a writ of preliminary injunction to set aside the trial court's orders.

The petition in CA-G.R. 28632 was dismissed by respondent Court of Appeals in a decision dated October 20, 1992
(Annex A, Petition; pp. 68-75, Rollo) and a subsequent motion for reconsideration was denied in a resolution dated
January 20, 1993 (Annex A-1, Petition; p. 77, Rollo).

Much reliance is placed on the prohibition embodied in Section 1 of Presidential Decree No. 1818 which forbids any
Court in the Philippines, including this Court, from issuing any restraining order, preliminary injunction, or preliminary
mandatory injunction in any case, dispute or controversy involving, as in the case at bar, an infrastructure project, to
prohibit any person or entity from continuing with the execution or implementation of such project. It is on the basis
of such provision that the door is being closed on petitioners' prayer for redress.

Such proposition is not well-taken.

Against the backdrop of the undisputed facts that (a) respondents terminated petitioners' contract based on slippage
of 9.86% and (b) the contributory fault of the government which substantially added to the slippage — the primary
question that presents itself is whether the termination was proper even if the slippage had not reached the 15%
level mentioned by the law as to justify termination. This is a legal, not a factual question. In consequence, if the
termination be adjudged unjustified, are the courts powerless to intervene due to the caveat under the aforequoted
Section 1 of Presidential Decree No. 1818?

Although we entertain serious doubts in regard to the constitutionality of Presidential Decree No. 1818, we
nonetheless feel that said decree finds no application to the case at bench. It will be observed that what Presidential
Decree No. 1818 proscribes is the issuance of a writ of injunction to impede or, in the language of the statute:
 . . . to prohibit any person or persons, entity or government official from proceeding with, or
continuing the execution or implementation of any such project, or the operation of such public utility,
or pursuing any lawful activity necessary for such execution, implementation or operation.

In the case at bench, the net effect of granting the petition is not to stave off implementation of a government project
but precisely to say to public respondents that they ought to implement the award and should not thus cancel the
contract of petitioners inasmuch as the negative slippage is less than the minimum level specified by Presidential
Decree No. 1870. Hence, the proscription under Presidential Decree No. 1818 is inapplicable since we are not
restraining implementation of a government project. Verily, we are instructing public respondents to allow petitioners
to proceed with the project.

In the determination of whether respondents have acted within the bounds of the law when they terminated the
contract based on the admitted 9.86% slippage, resort must be had to the very law, Presidential Decree No. 1870
and DPWH Circular No. 102, upon which respondents anchor their authority to terminate the contract.

The pertinent provisions of Presidential Decree No. 1870 give the implementing agency (in this instance, the
DPWH) authority to terminate the contract whenever the contractor is behind schedule in its contract work and
incurs 15% or more negative slippage based on its approved PERT/CPM. Section 1 of Presidential Decree No.
1870 reads thus:

1. Whenever a contractor is behind schedule in the contract work and incurs 15% or more negative
slippage based on its approved PERT/CPM, the implementing agency, at the discretion of the
Ministry concerned, may undertake by administration the whole or a portion of the unfinished
work done by another qualified contractor through negotiated contract at the current valuation
prices.

Now Circular No. 102, Series of 1988, promulgated to implement Presidential Decree No. 1870, provides four
stages of negative slippage with which calibrated action, at each stage, has to be undertaken as remedial steps to
correct delays in project implementation, as follows:

1) Negative slippage of 5% ("early warning" stage). Contractor is given a warning;

2) Negative slippage of 10% ("ICU" stage). The contractor is given a second warning;

3) Negative slippage of 15% ("make or break" stage). The contractor shall be issued a final warning;

4) Negative slippage beyond 15% ("terminal" stage). The PM/RD/DE shall initiate termination/rescission of the
contract and/or take-over of the remaining work by administration or assignment to another contractor/appropriate
agency.

The discretion, therefore, of the DPWH to terminate or rescind the contract comes into play only in the event the
contractor shall have incurred a negative slippage of 15% or more. In the instant case, the negative slippage of
petitioners at the time they were served the notice of termination was only 9.86%. Hence, respondents violated the
law and committed an illegal act and abused their discretion when they terminated petitioners’ contract based on
negative slippage of only 9.86%. Such wrongful and illegal act is in derogation of petitioners' right not to be deprived
of property without due process of law. Petitioners' contract with the DPWH covering the project in question is a
proprietary right within the meaning of the Constitution and can only be rescinded strictly in accordance with the
governing law, Presidential Decree No. 1870, as implemented by DPWH Circular No. 102. And relative to this
axiom, it has been previously emphasized that courts may declare an action or resolution of an administrative
authority to be illegal because it violates or fails to comply with some mandatory provision of the law or because it is
corrupt, arbitrary, or capricious (Borromeo vs. City of Manila and Rodriguez Lanuza, 62 Phil. 512; 516 [1935];
Annotation on the Power of Judicial Review of Public Bidding and Awards of Government Contracts, 50 SCRA 491;
498 [1973])

The Office of the Solicitor General maintains that under Paragraph 2 of Presidential Decree No. 1870, the DPWH
may take over or award a project to another contractor whenever work is not done on schedule, meaning anywhere
from zero slippage to 15% slippage. This would lead to hopeless contradiction between Paragraph 1 and Paragraph
2. A law cannot possibly negate in one paragraph what it grants in another. Paragraph 2 can only be interpreted as
allowing discretion after the 15% limit in Paragraph 1 is exceeded. It cannot be doubted that in cases of force
majeure, revolution, anomalous transactions in the DPWH itself, and other similar reasons, the Department Head
may still extend the contract beyond 15% slippage. Only then may sound discretion come in.

Paragraph 3 of Presidential Decree No. 1870 refers to specific causes — (a) refusal of the contractor to provide
tools, equipment, and workers; (b) subletting or assigning the contract to subcontractors without DPWH permission;
and (c) willful violation of covenants and agreements. Not one of the above exists in the case at bench.
Respondents cannot, as they allege, rely on the ordinary rules of contract under the Civil Code that if the obligor
does not comply with the terms and conditions of the contract, the obligee has the right to ask for rescission with
damages. A special law fixes the condition of slippage at 15%. This has to be followed. The law on contracts cannot
also penalize the obligor for faults of the obligee.

The 15% slippage required by Presidential Decree No. 1870 can be likened to the 15-day reglementary period for
appealing that cannot co-exist with a contradictory provision allowing a court, in its discretion, to reduce the period to
one or two days. Fifteen days means fifteen days. Fifteen percent slippage does not mean 9.5%.

The six (6) instances cited as capable of offsetting or negating the first requirement of 15% slippage would give the
DPWH blanket prerogative to terminate a contract at anytime and on the slightest pretext, including those created by
DPWH itself as in this case. It is a grant of arbitrary power. It is delegation running riot.

The requirement of public bidding might as well be abolished. DPWH officials are compelled by law to accept only
the best bid in the award of contract. However, what is the point in conducting a public bidding if, only a short while
later, a winning bidder can be disqualified on a one or two percent slippage caused by DPWH itself or a claim that
certain tools and equipment have not been provided or a pretext that any term or condition has been violated. The
15% limiting point must be followed. The other provisions come in only if they caused the slippage to go beyond
15%.

It is argued that this Court is not a trier of facts. However, neither can this Court ignore facts coming from DPWH
itself. Except for general statements and conclusions, there is nothing presented by respondents to show that the
logical and convincing assertions of petitioner are not true.

According to respondents, petitioners failed to mobilize the minimum equipment for the project and to send a
sufficient number of engineers. Respondents state that from Day One, there should have been thirty-four (34)
pieces of light and heavy equipment but that petitioners dispatched only fourteen (14) to the job site. Precisely, all
these alleged shortcomings of petitioners were clearly taken into consideration in arriving at a conclusion that the
negative slippage is only 9.50%.

Petitioners, of course, deny the allegation of delay. They state that they mobilized surveyors, engineers, and
laborers; brought all the necessary equipment to the job site, constructed bunk houses, relocated buildings such as
those of the Pagatpatan Elementary School. Petitioners' engineers were old hands of DPWH and familiar with every
aspect of the construction. The best evidence that the statements of petitioners are more accurate than those of
respondents is that the DPWH Investigating Team went to the jobsite and thereafter filed a lengthy report. It was on
the basis of the report that then Undersecretary del Rosario later recommended that the termination order be
reconsidered and revoked and that petitioners should be allowed to continue with the construction under the original
contract. The Undersecretary did not mention what respondents now allege in their memorandum.

Common sense also dictates that 34 pieces of light and heavy equipment cannot all be used simultaneously on Day
One. More so, because the right of way was admittedly not secured by DPWH. The machinery would only be idle or
get in each other's way.

Assuming respondents to be correct that there was a three-month delay in commencing the job, the slippage is still
9.86% inspite of all petitioners' alleged shortcomings. Petitioners claim to have mobilized the men and the materials
on time and attribute the delay to DPWH but emphasize that "whatever dates are chosen and whatever causes are
adduced by the respondents and given the worst scenario, the slippage does not go beyond 9.85%, still not a basis
to cancel the contract" (p. 4, Petitioners' Memorandum dated February 2, 1994).
Respondents keep on blaming petitioners for delay but their own DPWH Investigating Team and the second highest
official of the DPWH laid the blame on the government engineers and purchasing officials.

The right of way problem calls for special mention. The letter of DPWH Undersecretary Romulo del Rosario dated
October 8, 1992 recommended the lifting of the cancellation of the contract, because of, among other things, the
right-of-way problem.

It was ascertained during the hearing conducted by the Court on January 12, 1994 that of the 100-hectare spoiled
bank section, only 40 hectares have been acquired. Half of this 40 hectares is broken down into small parcels
separate from each other. In the other half, DPWH paid the landowners but took no steps to attend to the tenants
who refused and continue to refuse to vacate their farms unless compensated. The dredging on the river shall result
in 1,300,000 cubic meters of mud, silt, and debris flowing into the area. Unless a ring embankment is constructed
around the entire 100 hectares, the mud and silt would inundate neighboring areas. Petitioners cannot possibly start
dredging until after the 100 hectares are acquired because this would drown or bury the people, work animals, and
farms in the still-to-be acquired 60 hectares, not to mention the tenants who refuse to leave their farms in the 40
hectares already purchased until compensation benefits are given to them.

The Solicitor General has also failed to explain the purchase of non-essential areas. There was no explanation for
the sudden change from a reinforced concrete floodwall to an earthen levee along a six kilometer stretch of the
project. The concrete floodwall calls for the purchase of a 10-meter wide strip of land along it. The earthen levee
requires a 35-meter wide adjacent strip of land. Anywhere up to 25 meters wide and six kilometers long of
expensive urban land had to be purchased to cover up the use of right-of-way funds where it is not essential.

There should likewise be an explanation why an extra P71,000,000 in addition to the earlier amount of P51,000,000
had to be appropriated for right of way.

What is appalling and seemingly anomalous is the recommendation of respondent officials to offer the project to
Hanil Corporation, the third lowest bidder, and whose bid had been previously disqualified for being 41.40% over
and above the government estimate for the project of P492,563,998.00. Indeed, the Hanil bid was P696,524,897.96,
or higher by P254,666,701.94 as compared to petitioners' bid and contract price of P445,858,196.02.

Respondents' wrongful termination of the contract which petitioners agreed to execute, and have in fact executed
partially, at the price of P445,858,196.02 and in offering it to Hanil, a disqualified bidder which previously entered
with a bid of P696,524,817.96, would result in a financial loss to the government in the amount of no less than
P254,666,201.94, Hence, respondents would seem to appear to be entering into a negotiated contract grossly
disadvantageous to the government.

The intent of the law (P.D. 1870) in allowing the government to take over delayed construction projects with negative
slippage of 15% or more is primarily "to save money and to avoid dislocation of the financial projections and/or cash
flow of the government", as clearly stated in the 3rd preambulatory clause of said decree, as follows:

Whereas, any delay in the completion of the contract in accordance with the approved PERT/CPM
and/or contract time as stipulated, will not only dislocate the financial projections and/or the cash
flow of the Government on these projects, but also unduly prejudice the public interest sought to be
subserved by the timely completion of the infrastructure project.

The termination of petitioners' contract does not, therefore, subserve public interest. On the other hand, it would
result in a huge dislocation of the financial projections and/or cash flow of the Government. On this score, it has
been said as a general doctrine that though the law be fair on its face, and impartial in appearance, yet if it is
applied and administered by the public authorities charged with their administration and thus representing the
government itself, with an evil eye and unequal hand so as practically to make unjust and illegal discrimination, the
denial of equal justice is still within the prohibition of the Constitution. (Yick Wo vs. Hopkins, 128 U.S. 356; Ex parte
Virginia, 100 U.S. 339; Henderson vs. Mayor, 92 U.S. 259; Chy Lung vs. Freeman, 92 U.S. 175; Ned vs. Delaware,
103 U.S. 320; Soon Hing vs. Crowley, 113 U.S. 703).

If the unjust and unlawful acts of respondents are not struck down and respondents are not restrained, the
Government stands to lose from Three Hundred Fifty Million (P350 Million) Pesos additional expenditures. Under
Presidential Decree No. 1870 when the project is rebidded or awarded through negotiated contract, compensation is
at "current valuation price" (Sec. 1, P.D. 1870). Considering the increase in prices of labor and materials, it is a
certainty that any new bidder would ask for prices much higher than the already high prices which the losing bidders
offered in the March 1, 1991 bidding. Tremendous loss of taxpayers' money thus is inevitable. This Court cannot,
therefore, close its eyes to the resultant evil which will be inflicted not only upon petitioners, but also on the Filipino
people and the dissipation of taxpayers' money arising from the unjust termination of petitioners' contract and the
rebidding to or renegotiation with other parties of the project. Public interest and the stakes of the Government
dictate the issuance of the writs of injunction and prohibition restraining respondents from enforcing the order
terminating petitioners' contract for the construction of the flood control facilities and land improvement works of the
Lower Agusan Development Project, Stage I,
Phase 1.

It may be emphasized that the law fixing the stages of negative slippage before termination of a contract may be
effected and the undisputed loss of P350 million if the termination is pushed through are not the only reasons why
this petition should be granted.

By the very admissions of respondent DPWH, such as the October 8, 1992 letter of Undersecretary Roberto del
Rosario to the Japanese consultant, earlier cited, the main cause of the delay was due to respondent DPWH
officials and not to petitioner. A total of P51 million was appropriated and released to acquire rights of way or to buy
the lands upon which the flood control project would be constructed. The farmers and landowners refused to move
out when the funds to compensate them were not forthcoming. This was the main cause of the 9.6% slippage and it
is not attributable to petitioners.

The DPWH Team which investigated the causes of slippage further found that there was an overlapping of duties
and responsibilities among the Japanese consultant, the local consultants, and the Field Project Manager, thus
sustaining petitioners' claim of unwarranted delays in the approval of work and equipment, not to mention changes
of orders which left petitioners wondering what to do and whom to follow.

There is ample evidence in the record before us to show that the DPWH was responsible for the main causes of the
delay. As stated by petitioners, DPWH, in failing to comply with its obligations seemingly wants the contractors to
work in a most unorthodox if not unthinkable manner to justify irregular purchases which should not have been
made.

In fine, not only was the slippage within legally tolerable limits but the cause of the slippage are attributable to
respondent DPWH officials. The inflexible stance of respondents towards the compromise offers of petitioners, even
before this Court ordered them to explore such a possibility, but especially after we asked them to do so, convinces
the Court all the more that there are irregularities which respondents are sweeping under the rug. The record also
shows that even after the stop-work order was given and while petitioners were trying to have it reconsidered, they
continued working full force on the project thus minimizing or eliminating the slippage which caused the disputed
problems.

WHEREFORE, the petition is hereby GRANTED and the decision dated October 20, 1992, as well as the resolution
dated January 20, 1993 of the Court of Appeals in CA-G.R. SP No. 28632 are hereby SET ASIDE.

SO ORDERED.

E. Rules of Court

Section 6. Construction. — These Rules shall be liberally construed in order to promote their objective of securing a
just, speedy and inexpensive disposition of every action and proceeding. (2a)

VETTE INDUSTRIAL SALES CO., INC. vs CHENG

G.R. No. 170232        Dec 5, 2006

FACTS:

Cheng filed an action for specific performance and damages against Vette Industrial Sales Co. for
breaching their obligation contained in the Memorandum of Agreement. Under the MOA, the company
acknowledged owing Cheng a sum of money as compensation for the shares he transferred, insurance
proceeds and signing bonus. In their answer with counterclaim, Vettel Industrial claimed that the shares
have already been paid; that the MOA is unenforceable and void. After failing to settle during mediation,
the case was referred back to the court. 

On the day of the Pre-trial, Cheng and his counsel Atty. Ferrer failed to appear resulting to the dismissal of
the case. Cheng filed a motion for reconsideration. Vette Industrial claims that the motion was
procedurally defective because it was not served three days before the date of the hearing and no proof of
service was given to the court, in violation of Sections 4 and 6 of Rule 15. The trial court granted the
motion. Vette Industrial elevated the case to the CA. The ruling of the trial court was vacated and Cheng’s
complaint was dismissed without prejudice. Both parties assailed the ruling before the SC.

ISSUE:

Is the rule of notice required under Sections 4 and 5, Rule 15 of the Rules of Court violated? 

RULING:

No. Although the Court has consistently held that a motion which does not meet the requirements of
Sections 4 and 5 of Rule 15 of the Rules of Court is considered a worthless piece of paper, there are
exceptions to the strict application of this rule: 

1. Where a rigid application will result in a manifest failure or miscarriage of justice; especially if a party
successfully shows that the alleged defect in the questioned final and executory judgment is not apparent
on its face or from the recitals contained therein; 

2. Where the interest of substantial justice will be served; 

3. Where the resolution of the motion is addressed solely to the sound and judicious discretion of the
court; 

4. Where the injustice to the adverse party is not commensurate [to] the degree of his thoughtlessness in
not complying with the procedure prescribed." 

A notice of hearing is conceptualized as an integral component of procedural due process intended to

afford the adverse parties a chance to be heard before a motion is resolved by the court. Through such
notice, the adverse party is permitted time to study and answer the arguments in the motion. When the
trial court received Cheng’s Manifestation and Motion for Reconsideration, it did not immediately resolve
the motion. Instead, it allowed Vette Industrial to file their comment and also leave to file a rejoinder if
Cheng files a reply. 

The notice requirement is not a ritual to be followed blindly. Instead, procedural rules are liberally
construed to promote their objective and to assist in obtaining a just, speedy and inexpensive
determination of any action and proceeding. Rules of procedure are but tools designed to facilitate the
attainment of justice, such that when rigid application of the rules tend to frustrate rather than promote
substantial justice, SC is empowered to suspend their operation.

G.R. No. 170232             December 5, 2006

VETTE INDUSTRIAL SALES CO., INC., KENNETH TAN, ESTRELLA CHENG, LUISITO RAMOS, YVETTE TAN,
KESSENTH CHENG, VEVETTE CHENG and FELESAVETTE CHENG, petitioners,
vs.
SUI SOAN S. CHENG a.k.a. CHENG SUI SOAN, respondent.

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

G.R. No. 170301             December 5, 2006

SUI SOAN S. CHENG a.k.a. CHENG SUI SOAN, petitioner,

vs.
VETTE INDUSTRIAL SALES CO., INC., KENNETH TAN, ESTRELLA CHENG, LUISITO RAMOS, YVETTE TAN,
KESSENTH CHENG, VEVETTE CHENG and FELESAVETTE CHENG, respondents.

DECISION

YNARES-SANTIAGO, J.:

These consolidated Petitions for Review on Certiorari1 assail the Decision2 dated September 22, 2005 of the Court
of Appeals in CA-G.R. SP No. 88863 entitled, "Vette Industrial Sales, Company, Inc., Kenneth Tan, Estrella Cheng,
Luisito Ramos, Yvette Tan, Kessenth Cheng, Vevette Cheng, and Felesavette Cheng, Petitioners versus Hon.
Regional Trial Court of Manila, Branch 173, and Sui Soan S. Cheng a.k.a. Cheng Sui Soan, Respondents." Also
assailed is the Resolution3 dated October 27, 2005 denying petitioners’ motion for partial reconsideration and
respondent Sui’s motion for reconsideration.

In his Complaint4 for specific performance and damages filed against Vette Industrial Sales Company, Inc., Kenneth
Tan, Estrella Cheng, Luisito Ramos, Yvette Tan, Kessenth Cheng, Vevette Cheng, and Felesavette Cheng
(petitioners) and docketed as Civil Case No. 03-105691, Sui Soan S. Cheng a.k.a. Cheng Sui Soan (Sui) alleged
that on October 24, 2001, he executed a Deed of Assignment, 5 where he transferred his 40,000 shares in the
company in favor of Kenneth Tan, Vevette Cheng, Felesavette Cheng, and Yvette Tan (Petitioners-Assignees). To
implement the Deed of Assignment, the company acknowledged in a Memorandum of Agreement (MOA), 6 that it
owed him P6.8 million pesos, plus insurance proceeds amounting to P760,000.00 and a signing bonus of
P300,000.00. Thereafter, he was issued 48 postdated checks but after the 11th check, the remaining checks were
dishonored by the bank. Sui also claimed that petitioners did not remit to him the insurance proceeds, thus
breaching their obligation under the MOA which entitled him to moral and exemplary damages, and attorney’s fees.

In their Answer With Compulsory Counterclaim,7 petitioners alleged that Sui sold his shares for only P1.00 per share
which they already paid; that the MOA was unenforceable because it was executed without authorization from the
board of directors; that the MOA was void for want of consideration; and that petitioner Kenneth Tan executed the
MOA after Sui issued threats and refused to sign the waiver and quitclaim.

After the issues were joined, pre-trial was set on July 3, 2003. 8 However, the case was first submitted for mediation
but it was referred back to the court for continuation of the proceedings when no settlement was arrived at during
mediation.

Sui thereafter filed a Motion to Set Pre-trial9 on December 16, 2003. Petitioners received the motion but they did not
attend because there was no notice from the Court setting the pre-trial date. On December 29, 2003, petitioners
received two orders from the trial court. The first Order 10 allowed Sui to present evidence ex-parte, while the second
Order11 revoked the first order after the trial court noted that "what was set for consideration on December 16, 2003
was merely a motion to set pre-trial." Thus, the trial court reset the pre-trial on January 15, 2004 but it was
postponed and moved to May 21, 2004. On said date, Sui and his counsel, Atty. Pedro M. Ferrer (Atty. Ferrer),
failed to appear. Consequently, the trial court ordered the dismissal of the case without prejudice on the part of
petitioners to present and prove their counterclaim and set the hearing for reception of evidence on June 22, 2004. 12

Atty. Ferrer filed a Manifestation and Motion for Reconsideration 13 of the order of dismissal, explaining that he
arrived late for the hearing because he had to drop by his office to get the case folder because he had just arrived
from South Cotabato where he served as Chief Counsel in the Provincial Board of Canvassers for Governor Datu
Pax Mangudadatu and Congressman Suharto Mangudadatu.

The trial court required petitioners to file their Comment on the Manifestation and Motion for Reconsideration. In
their Opposition,14 petitioners asserted that the motion for reconsideration be denied outright because (1) Sui did not
comply with the three-day notice rule which is mandatory under Section 4, Rule 15 of the Rules of Court considering
that petitioners received the manifestation and motion for reconsideration only one day prior to the date of hearing of
the motion for resolution, thus the same must be treated as a mere scrap of paper; (2) the trial court did not comply
with Section 6 of Rule 15 of the Rules 15 when it acted on the manifestation and motion of Sui despite the latter’s
failure to submit proof of receipt by petitioners of the manifestation and motion; (3) the negligence of counsel binds
the client, thus, when Atty. Ferrer arrived late for the hearing, the trial court correctly dismissed the complaint; and
(4) the explanation of Atty. Ferrer is unacceptable because traffic gridlocks are daily events in the metropolis, thus,
Atty. Ferrer should have left his place early.

In his Reply,16 Sui averred that the motion complied with Section 5 of Rule 15 of the Rules 17 and that the setting of
the hearing of the motion on May 28, 2004 was within the three day period for it was filed on May 25, 2004. He
added that the same was not heard because the trial court allowed petitioners to file a comment on the
manifestation and motion for reconsideration, which was received by the latter prior to the said setting.

In an Order dated December 16, 2004,18 the trial court granted Sui’s motion for reconsideration and set aside the
dismissal of the complaint, the dispositive portion of which provides:

WHEREFORE, prescinding with such ruling and in the interest of substantial justice, plaintiff’s motion is
GRANTED and the order dated May 21, 2004 is hereby lifted and set aside with the warning that any delay
in this proceedings will not be countenanced by the Court.

Set pre-trial anew on February 15, 2005.

Notify the parties.

SO ORDERED.19

The trial court cited Ace Navigation Co., Inc. v. Court of Appeals,20 which held that since rules of procedure are mere
tools designed to facilitate the attainment of justice, their strict and rigid application which would result in
technicalities that tend to frustrate rather than promote substantial justice must always be avoided – the dismissal of
an appeal on purely technical ground is frowned upon especially if it will result to unfairness.

The Motion for Reconsideration21 filed by petitioners was denied by the trial court22 hence they filed a Petition for
Certiorari23 with the Court of Appeals which granted the petition, thus:
 UPON THE VIEW WE TAKE OF THIS CASE, THUS, the writ applied for is partly GRANTED. The assailed
orders must be, as they hereby are, VACATED and SET ASIDE, and another hereby issued dismissing the
instant complaint, but "without prejudice." This means that the complaint can be REINSTATED. On the other
hand, petitioners are hereby given leave to present before the Trial Court evidence of their counterclaim.
Without costs in this instance.

SO ORDERED.24

The Court of Appeals noted that both Atty. Ferrer and Sui were not in attendance at the pre-trial conference; that
Section 5 of Rule 18 mentions only the effect of the failure to appear on the part of "the plaintiff" but is silent on the
effect of failure of the party’s counsel to appear at the pre-trial; that the Manifestation and Motion for
Reconsideration25 mentioned only the reasons why Atty. Ferrer was absent without stating that he was fully
authorized in writing to enter into an amicable settlement, or to submit to alternative modes of dispute resolution, or
to enter into stipulations or admissions of facts and of documents; and that there was no explanation for Sui’s
nonappearance. Thus, based on these circumstances, the Court of Appeals held that dismissal of the case is proper
but without prejudice to the filing of a new action. 26

Both parties moved for reconsideration but the same were jointly denied in a Resolution dated October 27, 2005.

Hence, these consolidated Petitions.

In G.R. No. 170232, petitioners raise the following errors:

I.

THE COURT OF APPEALS ERRED IN NOT DISMISSING THE COMPLAINT OF RESPONDENT CHENG
IN CIVIL CASE NO. 03-105691 WITH PREJUDICE.

II.

THE COURT OF APPEALS ERRED IN CONCLUDING THAT RESPONDENT’S COUNSEL FAILED TO

APPRECIATE THE BASIC RULES ON PRE-TRIAL.

III.

THE COURT OF APPEALS ERRED IN NOT CONSIDERING THE MISTAKE OR NEGLIGENCE OF

RESPONDENT’S COUNSEL AS BINDING ON THE RESPONDENT HIMSELF.

IV.

THE COURT OF APPEALS ERRED IN APPLYING THE RULINGS OF THE HONORABLE COURT IN THE
DE LOS REYES VS. CAPULE (102 PHIL. 464) AND SUAREZ VS. COURT OF APPEALS (220 SCRA
274) CASES.

V.

THE COURT OF APPEALS ERRED IN NOT CONSIDERING RESPONDENT’S MANIFESTATION AND

MOTION FOR RECONSIDERATION DATED MAY 21, 2004 FILED BEFORE THE TRIAL COURT AS A
MERE SCRAP, AND A USELESS PIECE, OF PAPER AND IN NOT CONSIDERING THE ORDER DATED
MAY 21, 2004 OF THE TRIAL COURT AS ALREADY FINAL IN VIEW OF THE PROCEDURAL
INVALIDITY/DEFECTIVENESS (I.E. IT FAILED TO COMPLY WITH SECTIONS 4 AND 6 OF THE RULES)
OF RESPONDENT’S MANIFESTATION AND MOTION FOR RECONSIDERATION DATED MAY 21, 2004.

In G.R. No. 170301, Sui raises the following issues, thus:

 I. THE COURT OF APPEALS ERRED IN NOT RULING THAT THE NON-APPEARANCE OF PETITIONER
IN THE PRE-TRIAL MAY BE EXCUSED FOR A VALID CAUSE.

II. THE COURT OF APPEALS ERRED IN NOT RULING THAT THE CASE OF ACE NAVIGATION CO. INC.
VS. COURT OF APPEALS IS SQUARELY APPLICABLE TO THE INSTANT CASE.

The core issue for resolution is whether the Court of Appeals erred in dismissing without prejudice Civil Case No.
03-105691 and in ruling that the trial court committed grave abuse of discretion when it granted Sui’s motion for
reconsideration to set aside the order of dismissal of the complaint.

The judge has the discretion whether or not to declare a party non-suited. 27 It is, likewise, settled that the
determination of whether or not an order of dismissal issued under such conditions should be maintained or
reconsidered rests upon the sound discretion of the trial judge. 28 The next question to be resolved is whether there
was grave abuse of discretion of the trial judge. We hold that there was none.

The case of Estate of Salud Jimenez v. Philippine Export Processing Zone 29 discussed the propriety of filing a
Petition for Certiorari under Section 1 of Rule 65 of the Rules of Court, thus:

A petition for certiorari is the proper remedy when any tribunal, board, or officer exercising judicial or quasi-
judicial functions has acted without or in excess of its jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction and there is no appeal, nor any plain, speedy, and adequate
remedy at law. Grave abuse of discretion is defined as the capricious and whimsical exercise of judgment as
is equivalent to lack of jurisdiction. An error of judgment committed in the exercise of its legitimate
jurisdiction is not the same as "grave abuse of discretion." An abuse of discretion is not sufficient by itself to
justify the issuance of a writ of certiorari. The abuse must be grave and patent, and it must be shown that
the discretion was exercised arbitrarily and despotically.

As a general rule, a petition for certiorari will not lie if an appeal is the proper remedy thereto such as when
an error of judgment as well as of procedure are involved. As long as a court acts within its jurisdiction and
does not gravely abuse its discretion in the exercise thereof, any supposed error committed by it will amount
to nothing more than an error of judgment reviewable by a timely appeal and not assailable by a special civil
action of certiorari. However, in certain exceptional cases, where the rigid application of such rule will result
in a manifest failure or miscarriage of justice, the provisions of the Rules of Court which are technical rules
may be relaxed. Certiorari has been deemed to be justified, for instance, in order to prevent irreparable
damage and injury to a party where the trial judge has capriciously and whimsically exercised his judgment,
or where there may be danger of clear failure of justice, or where an ordinary appeal would simply be
inadequate to relieve a party from the injurious effects of the judgment complained of. 30 (Emphasis supplied)

Lack of jurisdiction and excess of jurisdiction are distinguished thus: the respondent acts without jurisdiction if he
does not have the legal power to determine the case; where the respondent, being clothed with the power to
determine the case, oversteps his authority as determined by law, he is performing a function in excess of his
jurisdiction.31 Thus, we now discuss whether the trial court granted the motion for reconsideration of Sui and
reinstated the complaint without basis in law. Citing the case of Ace Navigation Co., Inc. v. Court of Appeals, 32 the
trial court held that rules of procedures are mere tools designed to facilitate the attainment of justice and must be
relaxed if its strict and rigid application would frustrate rather than promote substantial justice. Thus, it lifted and set
aside its order of dismissal in the interest of substantial justice, which is the legal basis for the trial court to grant the
motion for reconsideration of Sui.

We have repeatedly warned against the injudicious and often impetuous issuance of default orders. 33 While it is
desirable that the Rules of Court be faithfully observed, courts should not be so strict about procedural lapses that
do not really impair the proper administration of justice. If the rules are intended to ensure the proper and orderly
conduct of litigation, it is because of the higher objective they seek which is the attainment of justice and the
protection of substantive rights of the parties. Thus, the relaxation of procedural rules, or saving a particular case
from the operation of technicalities when substantial justice requires it, as in the instant case, should no longer be
subject to cavil.34
When the Court of Appeals held that the case is dismissible because Sui did not attend the pre-trial conference, it
failed to consider the explanation of Atty. Ferrer that Sui executed a "Special Power of Attorney" in his behalf and
that he was not absent on the scheduled pre-trial but was only late.

Under Section 4 of Rule 18 of the Rules,35 the non-appearance of a party at the pre-trial may be excused when there
is a valid cause shown or when a representative shall appear in his behalf, and is fully authorized in writing to enter
into an amicable settlement, to submit to alternative modes of dispute resolution, and to enter into stipulations or
admissions of facts and of documents. Although Sui was absent during the pre-trial, Atty. Ferrer alleged that he was
fully authorized to represent Sui. Moreover, it is not entirely accurate to state that Atty. Ferrer was absent during the
pre-trial because he was only late, the reasons for which he explained in his Manifestation and Motion for
Reconsideration. The circumstances attendant in the instant case compel this Court to relax the rules of procedure
in the interest of substantial justice.

Petitioners claim that the motion for reconsideration of Sui was procedurally defective because it was not served
three days before the date of the hearing and no proof of service was given to the court, in violation of Sections 4
and 6 of Rule 15. Petitioners also aver that they received the Manifestation and Motion for Reconsideration of Sui
on May 27, 2004 but the hearing was scheduled on May 28, 2004. Thus, it is nothing but a scrap of paper because
it violated the three-day notice rule.

We are not persuaded.

In the instant case, we find that the purpose of a notice of hearing had been served. In Vlason Enterprises
Corporation v. Court of Appeals, 36 we enumerated the exceptions to the rule on notice of hearing, to wit:

The Court has consistently held that a motion which does not meet the requirements of Sections 4 and 5 of
Rule 15 of the Rules of Court is considered a worthless piece of paper, which the clerk of court has no right
to receive and the trial court has no authority to act upon. Service of a copy of a motion containing a notice
of the time and the place of hearing of that motion is a mandatory requirement, and the failure of movants to
comply with these requirements renders their motions fatally defective. However, there are exceptions to the
strict application of this rule. These exceptions are as follows:

"x x x Liberal construction of this rule has been allowed by this Court in cases (1) where a rigid
application will result in a manifest failure or miscarriage of justice; especially if a party successfully
shows that the alleged defect in the questioned final and executory judgment is not apparent on its
face or from the recitals contained therein; (2) where the interest of substantial justice will be served;
(3) where the resolution of the motion is addressed solely to the sound and judicious discretion of
the court; and (4) where the injustice to the adverse party is not commensurate [to] the degree of his
thoughtlessness in not complying with the procedure prescribed."

The present case falls under the first exception. Petitioner was not informed of any cause of action or claim
against it. All of a sudden, the vessels which petitioner used in its salvaging business were levied upon and
sold in execution to satisfy a supposed judgment against it. To allow this to happen simply because of a
lapse in fulfilling the notice requirement – which, as already said, was satisfactorily explained – would be a
manifest failure or miscarriage of justice.

A notice of hearing is conceptualized as an integral component of procedural due process intended to afford
the adverse parties a chance to be heard before a motion is resolved by the court. Through such notice, the
adverse party is permitted time to study and answer the arguments in the motion.

Circumstances in the case at bar show that private respondent was not denied procedural due process, and
that the very purpose of a notice of hearing had been served. On the day of the hearing, Atty. Desierto did
not object to the said Motion for lack of notice to him; in fact, he was furnished in open court with a copy of
the motion and was granted by the trial court thirty days to file his opposition to it. These circumstances
clearly justify a departure from the literal application of the notice of hearing rule. In other cases, after the
trial court learns that a motion lacks such notice, the prompt resetting of the hearing with due notice to all the
parties is held to have cured the defect.
 Verily, the notice requirement is not a ritual to be followed blindly. Procedural due process is not based
solely on a mechanistic and literal application that renders any deviation inexorably fatal. Instead, procedural
rules are liberally construed to promote their objective and to assist in obtaining a just, speedy and
inexpensive determination of any action and proceeding. For the foregoing reasons, we believe that
Respondent Court committed reversible error in holding that the Motion for Reconsideration was a mere
scrap of paper.37 (Emphasis supplied)

When the trial court received Sui’s Manifestation and Motion for Reconsideration, it did not immediately resolve the
motion. Instead, it allowed petitioners to file their comment and also leave to file a rejoinder if Sui files a
reply.38 These circumstances justify a departure from the literal application of the rule because petitioners were given
the opportunity to study and answer the arguments in the motion.

Petitioners’ claim that Sui failed to attach proof of service in violation of Section 6, Rule 15 of the Rule, must fail. In
Republic of the Philippines v. Court of Appeals,39 we held, thus:

Nonetheless, considering the question raised in the appeal of the government and the amount involved in
this case, we think the Court of Appeals should have considered the subsequent service of the motion for
reconsideration to be a substantial compliance with the requirement in Rule 15, §6. In De Rapisura v.
Nicolas, the movant also failed to attach to his motion for reconsideration proof of service of a copy thereof
to the other party. Nonetheless, this Court held the failure not fatal as the adverse party had actually
received a copy of the motion and was in fact present in court when the motion was heard. It was held that
the demands of substantial justice were satisfied by the actual receipt of said motion under those
conditions.40

Petitioners admitted that they received a copy of Sui’s Manifestation and Motion for Reconsideration. In fact, they
had the opportunity to oppose the same. Under these circumstances, we find that the demands of substantial justice
and due process were satisfied.

It is the policy of the Court to afford party-litigants the amplest opportunity to enable them to have their cases justly
determined, free from the constraints of technicalities. 41 It should be remembered that rules of procedure are but
tools designed to facilitate the attainment of justice, such that when rigid application of the rules tend to frustrate
rather than promote substantial justice, this Court is empowered to suspend their operation. 42

WHEREFORE, in view of the foregoing, the Decision dated September 22, 2005 and the Resolution dated October
27, 2005 of the Court of Appeals in CA-G.R. SP No. 88863 is REVERSED and SET ASIDE. The Order of the
Regional Trial Court in Civil Case No. 03-105691, lifting its previous order of dismissal is REINSTATED and
AFFIRMED.

SO ORDERED.

ARKETING CORPORATION  et al.

CASE DIGEST: PHILIPPINE NATIONAL BANK V. DEANG

MARKETING CORPORATION ET AL.
Published by symba on September 5, 2013 | Leave a response

PHILIPPINE NATIONAL BANK

v. 

DEANG MARKETING CORPORATION et al.

573 SCRA 375 (2008), SECOND DIVISION

Deang Marketing Corporation (DMC), et al. filed before the Regional Trial Court (RTC) a complaint
against Philippine National Bank (PNB) for reformation of contract and specific performance
claiming that the dacion en pago arrangement forged by them already transformed DMC‘s loan
obligation.

Summons was served on PNB requiring it to Answer until May 5, 2006. DMC subsequently filed a
Motion to Declare PNB in Default. The RTC thereafter received a Motion for Extension of Time to File
Answer. On May 16, 2006, RTC granted PNB’s Motion. DMC filed a Motion for Reconsideration of
RTC‘s order denying their Motion to Declare PNB in default. The RTC denied such motion. DMC
subsequently assailed RTC‘s Orders of May 16, 2006 and August 9, 2006 via certiorari to the Court of
Appeals (CA). The CA annulled the RTC‘s orders.

ISSUE:

Whether or not the CA erred in declaring PNB in default

HELD:

PNB‘s Motion for Extension of Time to File Answer was laden with glaring lapses. It had, following
the reglementary 15-day period after service of summons (unless a different period is fixed by the
court), until May 5, 2006 within which to file an Answer or appropriate pleading. It filed the Motion
for Extension, however, via a private courier on May 14, 2006, which was received by the trial court
on May 15, 2006 or ten days late.

It is a basic rule of remedial law that a motion for extension of time to file a pleading must be filed
before the expiration of the period sought to be extended. The court’s discretion to grant a motion for
extension is conditioned upon such motion’s timeliness, the passing of which renders the court
powerless to entertain or grant it. Since the motion for extension was filed after the lapse of the
prescribed period, there was no more period to extend.

PNB was not candid enough to aver in the Motion for Extension that the period had lapsed, as it still
toyed with the idea that it could get away with it. The allegations therein were crafted as if the said
motion was timely filed. Notably, the May 16, 2006 Order expressed no inkling that the motion was
filed out of time. The trial court either was deceived by or it casually disregarded the apparent falsity
foisted by petitioner.

In denying DMC’s Motion for Reconsideration of its grant of PNB’s Motion for Extension, the RTC
ruled that it was inclined to reconsider or lift an order of default. By such ruling, the trial court
preempted the dictates of orderly procedure by unduly anticipating and signifying a slant toward
the remedies and arguments yet to be availed of and raised by PNB.

In the present case, no satisfactory reason was adduced to justify the tardiness of the Answer and no
compelling reason was given to justify its admission. The intention to delay was rather obvious. The
Court thus finds PNB’s negligence inexcusable, as the circumstances behind and the reasons for the
delay are detestable.

PHILIPPINE NATIONAL BANK v. DEANG MARKETING CORPORATION, GR No. 177931, 2008-12-08

Facts:
Respondents Deang Marketing Corporation and Berlita Deang filed before the RTC of Angeles City a
Complaint... against petitioner,... for reformation of contract and specific performance, claiming that a
dacion en pago... arrangement in the February 21, 2005 Consolidation and Restructuring Agreement...
forged by them transformed respondents' outstanding loan obligations into a 7-year term loan
Summons was served on petitioner... respondents filed a Motion to Declare Defendant[-herein petitioner]
in Default
On even date, the trial court received petitioner's Motion for Extension of Time... to
File Answer... eight days prior to the slated hearing of respondents' Motion to Declare [Petitioner] in
Default, the trial court issued an Order denying said motion and granting petitioner's Motion for Extension
of Time to File Answer. To the trial court's
Order respondents filed a Motion for Reconsideration.
In the meantime, petitioner filed its Answer to the Complaint
The trial court,... denied respondents' Motion for Reconsideration... of its... rder denying their Motion to
Declare petitioner in default and granting the latter's Motion for Extension.
Respondents subsequently assailed the trial court's Orders... via certiorari to the Court of Appeals which,
by the challenged Decision... annulled the trial court's orders,... Petitioner's Motion for Reconsideration
having been denied... it filed the present Petition for Review
Prayer for the Issuance of Temporary Restraining Order/Preliminary Injunction) which ascribes error to the
Court of Appeals
Issues:
DECLARING PNB IN DEFAULT AND ORDERING THAT THE ANSWER FILED IN THE RTC BE
EXPUNGED FROM THE RECORDS OF THE CASE
Ruling:
Petitioner's Motion for Extension of Time to File Answer was laden with glaring lapses.
Petitioner had, following the reglementary 15-day period after service of summons (unless a different
period is fixed by the court),... until May 5, 2006 within which to file an Answer or appropriate pleading. It
filed the Motion for Extension,... however, via a private courier on May 14, 2006, which was received by
the trial court on May 15, 2006 or ten days late.
It is a basic rule of remedial law that a motion for extension of time to file a pleading must be filed before
the expiration of the period sought to be extended.
The court's discretion to grant a motion for extension is conditioned upon... such motion's timeliness, the
passing of which renders the court powerless to entertain or grant it
Since the motion for extension was filed after the lapse of the prescribed period, there was no more period
to extend.
In requesting for a 30-day extension or until June 11, 2006 to file answer, petitioner apparently reckoned
the date from which the extension would start on May 12, 2006, which was not the last day of the 15-day
period sought to be extended, it being May
5, 2006. By computation, petitioner actually sought more than 30 days, contrary to the period of extension
it purportedly requested. The counting of the period was erroneous, even if one uses the material dates
alleged by petitioner.
Petitioner... clearly disregarded elementary rules[15] and jurisprudence... on the matter.
The flaws in petitioner's moves/representations reinforce respondents' claim that the Motion for Extension
was "cunningly" dated May 5, 2006 (the last day to file a responsive pleading) to make it appear that it
was timely filed, although it was transmitted only on May 14, 2006.
Petitioner's allegation that the Motion it filed was the one actually prepared and signed on May 5, 2006
In the present case, no satisfactory reason was adduced to justify the tardiness of the Answer and no
compelling reason was given to justify its admission. The intention to delay was rather obvious.
The Court thus finds petitioner's negligence inexcusable, as the circumstances behind and the reasons for
the delay are detestable.
ontradicts its earlier claim in its Opposition to the Motion to Declare [It] in Default that "[s]hort of time in
coming up with
[herein petitioner's] Answer on April 28, 2006," its counsel caused to be prepared a Motion for Extension
of Time to File Answer which was, however, misplaced, and upon discovery thereof "another motion for
extension was immediately caused to be prepared and... filed."
Principles:
WHEREFORE, the petition is DENIED.
SO ORDERED

G.R. No. 177931             December 8, 2008

PHILIPPINE NATIONAL BANK, petitioner,

vs.
DEANG MARKETING CORPORATION and BERLITA DEANG, respondents.

DECISION

CARPIO MORALES, J.:

The Philippine National Bank (petitioner) assails the February 26, 2007 Decision 1 and the May 16, 2007
Resolution2 of the Court of Appeals, which set aside the Orders of May 16, 2006 and August 9, 2006 of the Regional
Trial Court (RTC) of Angeles City, Branch 57, and consequently declared petitioner in default.

Respondents Deang Marketing Corporation and Berlita Deang filed before the RTC of Angeles City a
Complaint3 against petitioner, docketed as Civil Case No. 12686, for reformation of contract and specific
performance, claiming that a dacion en pago arrangement in the February 21, 2005 Consolidation and Restructuring
Agreement4 forged by them transformed respondents' outstanding loan obligations into a 7-year term loan
of P36,483,699.45.

Summons was served on petitioner on April 20, 2006. 5

On May 15, 2006, respondents filed a Motion to Declare Defendant[-herein petitioner] in Default, 6 which they set for
hearing on May 24, 2006. On even date, the trial court received petitioner's Motion for Extension of Time [30 days
up to June 11, 2006] to File Answer7 dated May 5, 2006.

The following day, May 16, 2006 or eight days prior to the slated hearing of respondents' Motion to Declare
[Petitioner] in Default, the trial court issued an Order denying said motion and granting petitioner's Motion for
Extension of Time to File Answer. To the trial court's Order respondents filed a Motion for Reconsideration.

In the meantime, petitioner filed its Answer to the Complaint on May 25, 2006.

The trial court, by Order of August 9, 2006, 8 denied respondents' Motion for Reconsideration of its May 16, 2006
Order denying their Motion to Declare petitioner in default and granting the latter's Motion for Extension.
Respondents subsequently assailed the trial court's Orders of May 16, 2006 and August 9, 2006 via certiorari to the
Court of Appeals which, by the challenged Decision of February 26, 2007, annulled the trial court's orders, disposing
as follows:

WHEREFORE, premises considered, the petition is GRANTED. The Orders dated May 16, 2006 and
August 9, 2006 issued by the Hon. Omar T. Viola are hereby ANNULLED and SET ASIDE.
Accordingly, private respondent is declared IN DEFAULT and the Answer filed by private respondent is
ordered EXPUNGED from the records of the case. The case is REMANDED to the Regional Trial Court,
Branch 57, Angeles City, for further proceedings.

SO ORDERED.9 (Emphasis in the original, underscoring supplied)

Petitioner's Motion for Reconsideration having been denied by Resolution of May 16, 2007, it filed the present
Petition for Review (with Prayer for the Issuance of Temporary Restraining Order/Preliminary Injunction) which
ascribes error to the Court of Appeals in:

. . . DECLARING PNB IN DEFAULT AND ORDERING THAT THE ANSWER FILED IN THE RTC BE
EXPUNGED FROM THE RECORDS OF THE CASE [AND]

. . . ANNULLING AND SETTING ASIDE THE ORDERS DATED MAY 16, 2006 AND AUGUST 9, 2006 OF
THE RTC.10

The petition fails.

Petitioner's Motion for Extension of Time to File Answer was laden with glaring lapses.

Petitioner had, following the reglementary 15-day period after service of summons (unless a different period is fixed
by the court),11 until May 5, 2006 within which to file an Answer or appropriate pleading. It filed the Motion for
Extension, however, via a private courier on May 14, 2006, which was received by the trial court on May 15, 2006 or
ten days late.

It is a basic rule of remedial law that a motion for extension of time to file a pleading must be filed before the
expiration of the period sought to be extended. 12 The court's discretion to grant a motion for extension is conditioned
upon such motion's timeliness, the passing of which renders the court powerless to entertain or grant it.13 Since the
motion for extension was filed after the lapse of the prescribed period, there was no more period to extend.

Petitioner was not candid enough to aver in the Motion for Extension that the period had lapsed, as it still toyed with
the idea that it could get away with it. The allegations therein were crafted as if the said motion was timely filed.
Notably, the May 16, 2006 Order expressed no inkling that the motion was filed out of time. The trial court either was
deceived by or it casually disregarded the apparent falsity foisted by petitioner. Lest this Court be similarly deceived,
it is imperative to carefully examine the facts.

By petitioner's allegation in its Motion for Extension, it received the summons on April 24, 2006. This is belied by the
Process Server's Return, which indicates that petitioner received the summons on April 20, 2006. Petitioner's
counsel was to later clarify that it was only on April 24, 2006 that she received copies of the summons and complaint
which were faxed from petitioner's main office.

In requesting for a 30-day extension or until June 11, 2006 to file answer, petitioner apparently reckoned the date
from which the extension would start on May 12, 2006, which was not the last day of the 15-day period sought to be
extended, it being May 5, 2006. By computation, petitioner actually sought more than 30 days, contrary to the period
of extension it purportedly requested. The counting of the period was erroneous, even if one uses the material dates
alleged by petitioner.14 Petitioner clearly disregarded elementary rules 15 and jurisprudence16 on the matter.

The flaws in petitioner's moves/representations reinforce respondents' claim that the Motion for Extension was
"cunningly" dated May 5, 2006 (the last day to file a responsive pleading) to make it appear that it was timely filed,
although it was transmitted only on May 14, 2006. Petitioner's allegation that the Motion it filed was the one actually
prepared and signed on May 5, 200617 contradicts its earlier claim in its Opposition to the Motion to Declare [It] in
Default that "[s]hort of time in coming up with [herein petitioner's] Answer on April 28, 2006," its counsel caused to
be prepared a Motion for Extension of Time to File Answer which was, however, misplaced, and upon discovery
thereof "another motion for extension was immediately caused to be prepared and filed." 18

More. Petitioner served and filed the Motion for Extension through a private courier, LBC, a mode not recognized by
the rules.19 Explanation for availing such mode was not stated in the Motion. 20 The mode was, nonetheless, clearly
unjustifiable, considering that (a) petitioner's handling counsel was based in nearby San Fernando; (b) postal
registry service is, for lack of explanation to the contrary, available in Pampanga; 21 (c) urgency is out of the equation
because the official date of filing done via private messengerial service is the date of actual receipt of the
court,22 and had the motion been personally filed the following day (May 15, 2006), it would have reached the court
earlier. It thus shows that the mode was utilized to obscure any indication that the motion was filed out of time.

In denying respondents' Motion for Reconsideration of its grant of petitioner's Motion for Extension, the trial court
ruled that it was inclined to reconsider or lift an order of default. 23 By such ruling, the trial court preempted the
dictates of orderly procedure by unduly anticipating and signifying a slant toward the remedies and arguments yet to
be availed of and raised by petitioner.

Petitioner can not harp on Indiana Aerospace University v. Comm. on Higher Educ.24 which it cites. In that case, the
Answer had already been filed- albeit after the 15-day period, but before the defendants were declared in default. In
the present case, had the hearing on the Motion to Declare Petitioner in Default pushed through on May 24, 2006,
the trial court would have readily noticed that no Answer had yet been filed on said date, the Answer having been
filed, as earlier stated, only on May 25, 2006.

Neither can petitioner harp on Sps. Ampeloquio, Sr. v. Court of Appeals,25 for the Court therein held that it is within
the discretion of the trial court to permit the filing of an answer even beyond the reglementary period, provided
that there is justification for the belated action and there is no showing that the defendant intended to delay the
case. Thus, in that case, the therein defendant-respondent deferred the submission of a prepared Answer as it
awaited the trial court's resolution on its motion to dismiss, which resolution had, it turned out, been priorly issued, a
copy of which was, however, mistakenly addressed to another counsel.

In the present case, no satisfactory reason was adduced to justify the tardiness of the Answer and no compelling
reason was given to justify its admission. The intention to delay was rather obvious.

It is not amiss to mention at this juncture that the Court's attention has been drawn to the fact
that petitioner's counsel even notarized the Verification of respondents' Complaint as well as the Corporate
Secretary's Certificate as early as April 10, 2006. By such act, which is irregular, to say the least, petitioner's
counsel was even made aware in advance of the impending filing of the case against her client-herein petitioner.

Moreover, petitioner's handling counsel belongs to its Legal Department which monitors its pending cases and
oversees a network of lawyers.

On petitioner's counsel's belated and trite allegation of heavy volume of work which called for the filing of the Motion
for Extension, nowhere is it therein claimed that there was heavy volume of work in other equally important
cases.26 With the implication that petitioner had been all the while preparing an Answer, it defies comprehension how
petitioner still attributes the delay to "inadvertence," "honest oversight" and "simple remission" in its having allegedly
misplaced the Motion for Extension. 27

The Court thus finds petitioner's negligence inexcusable, as the circumstances behind and the reasons for the delay
are detestable.

Rules of procedure, especially those prescribing the time within which certain acts must be done, have often been
held as absolutely indispensable to the prevention of needless delays and to the orderly and speedy discharge of
business. The bare invocation of "the interest of substantial justice" is not a magic wand that will automatically
compel this Court to suspend procedural rules.28

Under Rule 1, Section 6 of the 1997 Rules of Civil Procedure, liberal construction of the rules is the
controlling principle to effect substantial justice. Thus, litigations should, as much as possible, be decided on
 their merits and not on technicalities. This does not mean, however, that procedural rules are to be ignored
or disdained at will to suit the convenience of a party. Procedural law has its own rationale in the orderly
administration of justice, namely, to ensure the effective enforcement of substantive rights by providing for a
system that obviates arbitrariness, caprice, despotism, or whimsicality in the settlement of disputes. Hence,
it is a mistake to suppose that substantive law and procedural law are contradictory to each other, or as
often suggested, that enforcement of procedural rules should never be permitted if it would result in
prejudice to the substantive rights of the litigants.

Litigation is not a game of technicalities, but every case must be prosecuted in accordance with the
prescribed procedure so that issues may be properly presented and justly resolved. Hence, rules of
procedure must be faithfully followed except only when for persuasive reasons, they may be relaxed to
relieve a litigant of an injustice not commensurate with his failure to comply with the prescribed
procedure. Concomitant to a liberal application of the rules of procedure should be an effort on the part of
the party invoking liberality to explain his failure to abide by the rules.29 (Underscoring supplied)

Given the foregoing circumstances, Justice Presbitero Velasco, Jr., in his Dissenting Opinion, still finds "exceptional
circumstances" that warrant this Court to suspend its rules and accord liberality to petitioner, citing Section 11, Rule
11 of the Rules of Court, which reads:

Upon motion and on such terms as may be just, the court may extend the time to plead provided in these
Rules.

The court may also, upon like terms, allow an answer or other pleading to be filed after the time fixed by
these Rules. (Emphasis and underscoring supplied)

From the foregoing discussion, it is unimaginable how "such terms as may be just" may be applied in petitioner's
favor. Under the stated premises, to grant the petition along the lines of liberality is to countenance the context of
fibs and flaws.

Obviously grasping straws in its final pitch to win the court's leniency, petitioner employed a ploy to conceal not just
the lapse of time but also the serious lapses of non-compliance with basic rules. The scheme insults the intelligence
of the Court. While the Court frowns upon default judgments, it does not condone gross transgressions of the rules
and perceptible vestiges of bad faith.

Good faith is central to the concept of "excusable neglect" justifying failure to answer. 30 An attempt to cover up the
procedural lapses and obscure the technical imperfections negates good faith on the part of the party imploring the
accommodating arm of the court.

In his Dissenting Opinion, Justice Velasco proffers that the complaint centers on the interpretation of a contract
which can only be determined if the parties are heard in the course of trial.

There is no arguing that all complaints of whatever nature can only be determined if the parties are heard. There is,
however, a standing rule set in place for a declaration of default, in cases where there is no justification for the
belated action, and there is showing that the defendant intended to delay the case. In this case, the party
lackadaisically squandered its opportunity to file a responsive pleading and, worse, made deceptive moves in an
obvious attempt to redeem itself.

The Court is duty-bound to observe its rules and procedures and uphold the noble purpose behind their issuance.
Rules are laid down for the benefit of all and should not be made dependent upon a suitor's sweet time and own
bidding.31

In preliminarily assessing the merits of the case, the Court is merely tasked to consider whether the reception of
defendant's evidence would serve a practical purpose, considering that respondents had, during the pendency of
the case, concluded the ex-parte presentation of evidence.32

Accordingly, after carefully reviewing petitioner's Answer and Pre-Trial Brief, the Court finds that to re-open the
presentation of evidence just to ventilate the defense of mere denial - that there exists no dacion en pago -and to
present the written agreement, the existence of which is already admitted by respondents, would serve no practical
purpose.

If petitioner is confident that the complaint lacks merit, then it need not worry because once the defendant is
declared in default, the plaintiff is not automatically entitled to the relief prayed for. Favorable relief can be granted
only after it has been ascertained that it is warranted by the evidence offered and the facts proven by the presenting
party.33 In any event, petitioner, even if declared in default, is not deprived of his right to appeal the decision of the
trial court.34

To emphasize, the case does not involve any outright deprivation of life, liberty or property. Contrary to what is being
depicted, intimated or romanticized, petitioner does not stand to lose P36,483,699.45 regardless of the
characterization of the commercial transaction entered into by the parties. The amount is secured by mortgages
over prime real properties, which is precisely the subject of the alleged dacion en pago.

WHEREFORE, the petition is DENIED.

SO ORDERED.

F. Revenue/Tax Laws

Republic Flour Mills vs Commissioner of Customs and

CTA
G.R. No. L-28463 May 31, 1971

FERNANDO, J.

Petition for the review of a decision of respondent Court of Tax Appeals

FACTS: Republic Flour Mills (RFM) were importing wheat to produce flour. During the
process of transforming wheat into flour, bran (ipa) and pollard (darak) were also
produced. RFM were exporting bran and pollard but they were not paying wharfage dues
because RFM were referring to them as wastes and not products. RFM interpreted
Section 2802 of the Tariff and Custom Code referring only to “products of the
Philippines” that are to be levied, etc. Hence, RFM did not agree with the CTA’s decision
that a collection of wharfage dues must be given for exporting them.

ISSUE: Whether or not such collection of wharfage dues was in accordance with law.

HELD: Yes. Under Section 2802 of the Tariff and Customs Code, it stated that: “There
shall be levied, collected and paid on all articles imported or brought into the Philippines,
and on products of the Philippines… exported from the Phils., a charge of two pesos per
gross metric ton as a fee for wharfage…” – which simply means that as long as the goods
are produced in the country, they fall within the terms of the above section. Hence, the
Supreme Court affirmed the decision of the Court of Tax Appeals.

[CASE DIGEST] REPUBLIC FLOUR MILLS v. CIR (G.R. No. L-28463, 31

SCRA 148)
May 31, 1971

Ponente: Fernando, J.

FACTS

Republic Flour Mills was a company engaged in manufacture of wheat flour, producing pollard and bran in the process
of milling. It paid its wharfage dues for 1963 and 1964 under protest, claiming that it should not, under its construction
of the Tariff and Customs Code, be liable for wharfage dues on its exportation of bran and pollard as these were not
"products of the Philippines," coming as they did from wheat grain which were imported from abroad, and being
"merely parts of the wheat grain milled to produce flour which had become waste."

The CTA denied the claim and ruled that the company was liable for the wharfage dues.

RULING

The Court ruled in favor of the CTA.

The language of Section 2802 appears to be quite explicit: "There shall be levied, collected and paid on all articles
imported or brought into the Philippines, and on products of the Philippines ... exported from the Philippines, a charge
of two pesos per gross metric ton as a fee for wharfage ...."

One category refers to what is imported; the other mentions products of the Philippines that are exported. Even
without undue scrutiny, it does appear quite obvious that as long as the goods are produced in the country, they fall
within the terms of this section.

G.R. No. L-28463 May 31, 1971

REPUBLIC FLOUR MILLS INC., petitioner,

vs.
THE COMMISSIONER OF CUSTOMS and THE COURT OF TAX APPEALS, respondents.

Agrava & Agrava for petitioner.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Pacifico P. de Castro and Solicitor
Santiago M. Kapunan for respondents.

FERNANDO, J.:
It is a novel question that this petition for the review of a decision of respondent Court of Tax Appeals presents.
Petitioner Republic Flour Mills, Inc. would have this Court construe the words "products of the Philippines" found in
Section 2802 of the Tariff and Custom Code  as excluding bran (ipa) and pollard (darak) on the ground that, coming
1

as they do from wheat grain which is imported in the Philippines, they are merely waste and not the products, which
is the flour produced.  That way, it would not be liable at all for the wharfage dues assessed under such section by
2

respondent Commission of Customs. It elevated the matter to respondent Court, as the construction it would place
on the aforesaid section appears too strained and far remote from the ordinary meaning of the text, not to mention
the policy of the Act. We affirm.

In the decision of respondent Court now sought to be reviewed, after stating that what was before it was an appeal
from a decision of the Commissioner of Customs holding petitioner liable for the sum of P7,948.00 as wharfage due
the facts were set forth as follows: "Petitioner, Republic Flour Mills, Inc., is a domestic corporation, primarily
engaged in the manufacture of wheat flour, and produces pollard (darak) and bran (ipa) in the process of milling.
During the period from December, 1963 to July, 1964, inclusive, petitioner exported Pollard and/or bran which was
loaded from lighters alongside vessels engaged in foreign trade while anchored near the breakwater The
respondent assessed the petitioner by way of wharfage dues on the said exportations in the sum of P7,948.00,
which assessment was paid by petitioner under protest."  The only issue, in the opinion of respondent Court, is
3

whether or not such collection of wharfage dues was in accordance with law. The main contention before
respondent Court of petitioner was "that inasmuch as no government or private wharves or government facilities
[were] utilized in exporting the pollard and/or bran, the collection of wharfage dues is contrary to law."  On the other
4

hand, the stand of respondent Commissioner of Customs was that petitioner was liable for wharfage dues "upon
receipt or discharge of the exported goods by a vessel engaged in foreign trade regardless of the non-use of
government-owned or private wharves."  Respondent Court of Tax Appeals sustained the action taken by the
5

Commissioner of Customs under the appropriate provision of the Tariff and Customs Code, relying on our decision
in Procter & Gamble Phil. Manufacturing Corp. v. Commissioner of Customs.  It did not feel called upon to answer
6

the question now before us as, in its opinion, petitioner only called its attention to it for the first time in its
memorandum.

Hence, this petition for review. The sole error assigned by petitioner is that it should not, under its construction of the
Act, be liable for wharfage dues on its exportation of bran and pollard as they are not "products of the Philippines",
coming as they did from wheat grain which were imported from abroad, and being "merely parts of the wheat grain
milled by Petitioner to produce flour which had become waste."  We find, to repeat, such contention unpersuasive
7

and affirm the decision of respondent Court of Tax Appeals.

1. The language of Section 2802 appears to be quite explicit: "There shall be levied, collected and paid on all
articles imported or brought into the Philippines, and on products of the Philippines ... exported from the Philippines,
a charge of two pesos per gross metric ton as a fee for wharfage ...." One category refers to what is imported. The
other mentions products of the Philippines that are exported. Even without undue scrutiny, it does appear quite
obvious that as long as the goods are produced in the country, they fall within the terms of the above section.
Petitioner appeared to have entertained such a nation. In its petition for review before respondent Court, it
categorically asserted: "Petitioner is primarily engaged in the manufacture of flour from wheat grain. In the process
of milling the wheat grain into flour, petitioner also produces 'bran' and 'pollard' which it exports abroad."  It does
8

take a certain amount of hair-splitting to exclude from its operation what petitioner calls "waste" resulting from the
production of flour processed from the wheat grain in petitioner's flour mills in the Philippines. It is always timely to
remember that, as stressed by Justice Moreland: "The first and fundamental duty of courts, in our judgment, is to
apply the law. Construction and interpretation come only after it has been demonstrated that application is
impossible or inadequate without them."  Petitioner ought to have been aware that deference to such a doctrine
9

precludes an affirmative response to its contention. The law is clear; it must be obeyed. It is as simple, as that.  10

2. There is need of confining familiar language of a statute to its usual signification. While statutory construction
involves the exercise of choice, the temptation to roam at will and rely on one's predilections as to what policy
should prevail is to be resisted. The search must be for a reasonable interpretation. It is best to keep in mind the
reminder from Holmes that "there is no canon against using common sense in construing laws as saying what
obviously means."   To paraphrase Frankfurter, interpolation must be eschewed but evisceration avoided. Certainly,
11

the utmost effort should be exerted lest the interpretation arrived at does violence to the statutory language in its
total context. It would be then to ignore what has been stressed time and time again as to limits of judicial freedom
in the construction of statutes to accept their view advanced by petitioner.
3. Then, again, there is the fundamental postulate in statutory construction requiring fidelity to the legislative
purpose. What Congress intended is not to be frustrates. Its objective must be carried out. Even if there be doubt as
to the meaning of the language employed, the interpretation should not be at war with the end sought to be attained.
No undue reflection is needed to show that if through an ingenious argument, the scope of a statute may be
contracted, the probability that other exceptions may be thought of is not remote. If petitioner were to prevail,
subsequent pleas motivated by the same desire to be excluded from the operation of the Tariff and Customs Code
would likewise be entitled to sympathetic consideration. It is desirable then that the gates to such efforts at undue
restriction of the coverage of the Act be kept closed. Otherwise, the end result would be not respect for, but defiance
of, a clear legislative mandate. That kind of approach in statutory construction has never recommended itself. It
does not now.  12

WHEREFORE, the decision of respondent Court of Tax Appeals of November 27, 1967 is affirmed. With costs
against petitioner.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Villamor and Makasiar, JJ., concur.

Castro, Teehankee and Barredo, JJ., took no part.

Footnotes

1 Section 2802 of the Tariff and Customs Code (1957) reads in full "Schedule of Dues. — There
shall be levied, collected and paid on all articles imported or brought into the Philippines, and on
products of the Philippines except coal, lumber, creosoted and other pressure treated materials as
well as other minor forest products, cement, guano natural rock asphalt, the minerals and ores of
base metals (e.g., copper, lead, zinc, iron, chromite manganese, magnesite and steel), and sugar
molasses exported from the Philippines, a charge of two pesos per gross metric ton as a fee for
wharfage: Provided, That in the case of logs, or flitches twelve inches square or equivalent cross-
sectional area, or over, a charge of sixty centavos per cubic meter shall be collected."

2 According to the petition: "(a) Petitioner is engaged in the manufacture of flour from wheat grain. It
imports the wheat grain from abroad and mills the same to produce the flour. The wheat grain is not
a product of the Philippines. Properly and technically speaking, the product of the milling process is
the flour produced. (b) In the course of producing flour, part of the wheat grain be waste in the form
of bran and pollard." Par. 4, p. 2.

3 Decision, Appendix to Petitioner's Brief, pp. 9-10.

4 Ibid., p. 10.

5 Ibid.

6 L-22819, April 27, 1967, 19 SCRA 883. This portion of Justice Bengzon's opinion was cited in the
opinion of respondent Court of Tax Appeals: "But when a vessel anchors at the Bay and discharges
or unloads its cargo, wharfage dues are forthwith collected. For, as stated, said dues are assessed
against the cargo discharged. This is clear from the provision of the law under which the assessment
is based on the quantity, weight or measure of the cargo received by the importer and/or discharged
by such vessel. And wharfage dues on the cargo are distinct from harbor fees or berthing charges
on the vessel, so much so that different sections of the law cover them." At p. 889.

7 Decision, Appendix to Petitioner's Brief, p. 7.

8 Petition for Review before respondent Court of Tax Appeals dated April 7, 1967, par. 3.

9 Lizarraga Hermanos v. Yap Tico, 24 Phil. 504, 513 (1913).

 10 Cf. People v. Mapa, L-22301, Aug. 30, 1967, 20 SCRA 1164; Pacific Oxygen & Acetylene Co. v.
Central Bank, L-21881, March 1, 1968, 22 SCRA 917; Dequito v. Lopez, L-27757, March 28, 1968,
22 SCRA 1352; Padilla v. City of Pasay, L-24039, June 29, 1968, 23 SCRA 1349; Garcia v.
Vasquez, L-26808, March 28, 1969, 27 SCRA 505; La Perla Cigar & Cigarette Factory v. Capapas,
L-27948 & 28001-11, July 31, 1969, 28 SCRA 1085; Mobil Oil Phil., Inc. v. Diocares, L-26371, Sept.
30, 1969, 29 SCRA 656; Luzon Surety Co., Inc. v. De Garcia, L-25659, Oct. 31, 1969, 30 SCRA
111; Vda. de Macabenta v. Davao Stevedore Terminal Company, L-27489, April 30, 1970, 32 SCRA
553.

11 Rosehen v. Ward, 279 US 337, 339 (1929).

12 Cf. Ty Sue v. Hord, 12 Phil. 485 (1909; United States v. Toribio, 15 Phil. 85 (1910) ; Riera v.
Palmaroli, 40 Phil. 105 (1919); Commissioner of Customs v. Caltex Phil., Inc., 106 Phil. 829 (1959);
Sarcos v. Castillo, L-29755, Jan. 31, 1969, 26 SCRA 853; Automotive Parts & Equipment Co., Inc. v.
Lingad, L-26406, Oct. 31, 1969, 30 SCRA 248.

G.R. No. L-40858 September 15, 1987

SPOUSES FEDERICO SERFINO and LORNA BACHAR, petitioners,

vs.
THE COURT OF APPEALS and LOPEZ SUGAR CENTRAL MILL CO., INC., respondents.

No. L-40751 September 15, 1987

PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, LOPEZ SUGAR CENTRAL MILL COMPANY, INC., SPOUSES
FEDERICO SERFINO and LORNA BACHAR, respondents.

PARAS, J.:

Before Us are two (2) Petitions for certiorari to review the decision 1 of the Court of Appeals als in CA-G.R. No. 37748-R, consolidated
for Our disposition since they arose from the same factual background.

The records of the case show that on August 25, 1937, a parcel of land consisting of 21.1676 hectares situated in
the Municipality of Sagay, Province of Negros Occidental, was patented in the name of Pacifico Casamayor, under
Homestead Patent No. 44139. Upon registration of said patent in the office of the Register of Deeds of Negros
Occidental, OCT No. 1839 was issued by said office in the name of Pacifico Casamayor. On December 14, 1945,
the latter sold said land in favor of Nemesia D. Baltazar.

Apparently, OCT No. 1839 was lost during the war and upon petition of Nemesia Baltazar, the Court of First
Instance of Negros Occidental ordered   the reconstitution thereof. Pursuant thereto, OCT No. 14-R (1839) was
2

issued on January 18, 1946 in the name of Pacifico Casamayor. On that same day, TCT No. 57-N was issued in the
name of Nemesia Baltazar but after the cancellation of OCT No. 14-R (1839).

On August 25, 1951, Nemesia Baltazar, sold said property to Lopez Sugar Central Mill Co., Inc. (Lopez Sugar
Central, for brevity). The latter, however did not present the documents for registration until December 17, 1964 to
the Office of the Registry of Deeds. Said office refused registration upon its discovery that the same property was
covered by another certificate of title, TCT No. 38985, in the name of Federico Serfino.

An inquiry into this discrepancy reveals that the Provincial Treasurer of Negros Occidental on October 30, 1956 had
conducted a public auction sale of this property for tax delinquency for the period starting the year 1950. Notice of
this public auction sale was sent to Pacifico Casamayor but none to Nemesia Baltazar and Lopez Sugar Million
There being no public bidders on the scheduled date of sale, the Provincial Treasurer of Negros Occidental issued a
Certification of Sale of Delinquent Real Property over the disputed land to the Province of Negros Occidental. On
May 14, 1964, upon payment of the amount of P1,838.49 by Federico Serfino, a Certificate of Repurchase of Real
Property was issued and executed by the Provincial Treasurer in favor of Federico Serfino, for and in behalf of
Pacifico Casamayor.

On May 28, 1964, Serfino filed a petition with the Court of First Instance of Negros Occidental for the Reconstitution
of OCT No. 1839 in the name of Pacifico Casamayor, upon the allegation that said title was lost. After due
publication and hearing, said OCT was ordered reconstituted and thus OCT No. RP-1304 (1839) was issued by the
Registry of Deeds in the name of Casamayor.

On October 30, 1964, Serfino petitioned the court for confirmation of his title to the land as purchaser in the auction
sale. On October 31, 1964, court granted the petition and on November 2, 1964, OCT No. RP-1304 (1839) was
cancelled and TCT No. 38985 was issued in the name of Federico Serfino, married to Lorna Bachar.

On November 19, 1964, the spouses Serfinos mortgaged the land to the Philippine National Bank (PNB) to secure a
loan in the amount of P5,000.00. Said mortgage in favor of PNB was inscribed in TCT No. 38985. Hence, this was
the situation of the land when the Office of the Register of Deeds refused registration of the property in question
requested by the Lopez Sugar Central.

The lower court in its Order, dated January 16, 1965 in the Petition of the Office of the Register of Deeds seeking
the cancellation of either TCT No. 57-N (in the name of Nemesia Baltazar) or TCT No. 38985 (in the name of Lopez
Sugar Central), ordered Lopez Sugar Central and spouses Serfino to take the necessary steps towards the clearing
of their respective titles before a court of general jurisdiction. Pursuant thereto, Lopez Sugar Central, on May 5,
1965, instituted an action for 1) annulment of OCT No. RP-1304 (1839), of TCT No. 38985 and of the mortgage
executed by the Serfinos in favor of PNB, 2) for the registration of the Deed of Sale, 3) for the issuance of a TCT in
its name and 4) for recovery of possession of the disputed land from the Serfinos.

On February 4, 1966, the lower court rendered its decision,   the dispositive portion reading as follows:
3

WHEREFORE, and considering the conclusions and opinion set forth above, judgment is hereby
rendered as follows:

1. The Register of Deeds of Negros Occidental is hereby ordered to cancel Transfer Certificate of
Title No. 38985;

2. The same Register of Deeds is ordered to register the deed of sale executed by Nemesia D.
Baltazar on August 25, 1951, and after cancelling Transfer Certificate of Title No. 57-N and other
titles issued prior thereto, to issue a new transfer certificate of title in the name of Lopez Sugar
Central Mill Co., Inc., upon previous payments of the legal fees;

3. The Lopez Sugar Central Mill Co., Inc., shall pay the Philippine National Bank, Bacolod Branch,
the sum of P5,261.11 secured by a real estate mortgaged registered and annotated on Transfer
Certificate of Title 38985 which shall be carried over in the new transfer certificate of title to be
issued to the Lopez Sugar Central Mill Co., Inc. with the right of recourse to the Assurance Fund;
and

4. The defendant, Federico Serfino, is hereby ordered to vacate the land in question and to deliver
the possession thereof to the plaintiff;

5. The plaintiff is exempt from reimbursing the defendant, Federico Serfino, for the sum of P602.94
which the latter paid for the repurchase of the land in question for the reason that the former is
already burdened with the payment of the mortgage indebtedness with the Philippine National Bank
in the amount of P5,261.11; and

6. The Court makes no award for damages and costs.

 SO ORDERED. (Rollo L-40751, pp. 117 & 118, Joint Record on Appeal, Annex "D", p. 50)

Both parties appealed from this decision of the trial court. Ruling on the assignment of errors, the appellate court
affirmed the judgment of the trial court with modification in its decision, the pertinent portion reading as follows:

Plaintiff contends that the mortgage executed by the Serfinos in favor of PNB is null and void,
because the property conveyed in mortgage did not belong to them. The contention is meritorious.
That the mortgagor should be the absolute owner of the property mortgaged is an essential requisite
for the validity of a contract of mortgage (Art. 2085, Civil Code); and a mortgage constituted by one
not the owner of the property mortgaged is null and void, the registration of the mortgage
notwithstanding (Parqui vs. PNB, 96 Phil. 157). Thus, the mortgage lien of PNB in the contract
executed in its favor by the Serfinos did not attach to the property in question.

The argument advanced by appellee PNB that it is a mortgagee in good faith deserves scant
consideration. Note that when the mortgage was constituted, the disputed land was covered by a
valid and existing title, TCT No. 57-N, in the name of Nemesis D. Baltazar. Indeed, the whole world,
including appellee PNB, is charged with notice thereof. Consequently, that portion of the trial court's
decision declaring plaintiff liable to the PNB for payment of the sum of P5,261.11 should beset aside.

As to the plaintiff's claim for damages against the Serfinos, We find the same devoid of merit.
Whatever injury plaintiff may have suffered was occasioned by the faulty and defective indexing and
filing system in the office of the Register of Deeds of Negros Occidental, and not by any intentional
Act on the part of the Serfino Spouses. Anyway, the evidence fails to show that they deliberately
intended to cause damage to plaintiff.

However, equity dictates that plaintiff should reimburse the Serfino spouses of the sum of P1,839.49,
representing the unpaid taxes and penalties paid by the latter when they repurchased the property
from the province of Negros Occidental.

WHEREFORE, with the modifications above indicated, the judgment appealed from is hereby
affirmed. No costs.

SO ORDERED. (Decision, Annex "A", pp. 40-42, Rollo-L40751)

From the aforesaid ruling, the spouses Serfino and the Philippine National Bank appealed to Us by way of certiorari.
Petitioners, spouses Serfinos   assign the following errors:
4

I. The Purchase by plaintiff-appellant corporation (Lopez Sugar Central) of the lot in question was
null and void from the beginning.

II. Petitioners are proper parties to challenge the legality of the sale of the land in question to private
respondent.

III. Notice to Nemesia Baltazar of the Tax Sale of the land in question was not essential to the
validity of the sale.

IV. The legality of the auction sale of the property in question was not in issue before the court a
quo.

Petitioner Philippine National Bank   submits the following.

5

ASSIGNMENT OF ERRORS

I. The Court of Appeals erred in holding that the auction sale of the disputed property was null and
void.
 II. The Court of Appeals erred in not holding that petitioner is a mortgagee in good faith.

Petitioners spouses Serfinos maintain that sale of a land covered by homestead to be valid must have the following
requisites: 1) consent of the grantee 2) approval of the Secretary of Agriculture and Natural Resources 3) sale is
solely for educational, religious, or charitable purposes or for a right of way (Sec. 121, CA No. 141 ).

Petitioner spouses Serfinos in support of their first assignment of error cited Sec. 121, CA No. 141 reading as
follows:

SEC. 121. Except with the consent of the grantee and the approval of the Secretary of Agriculture
and Commerce, and solely for commercial, industrial, educational, religious or charitable purposes
or for a right of way, no corporation, association, or partnership may acquire or have any right, title,
interest, or property right whatsoever to any land granted under the free patent, homestead or
individual sale provisions of this Act or to any permanent improvement on such land.

They argue that since private respondent is a corporation, it is barred from owning land granted under the free
patent if the aforementioned requisites are not present. Such Pacifico Casamayor who obtained a Homestead
Patent and later an original certificate of title in his name. Later it was this original grantee who sold the land in
question to Nemesia Baltazar on December 14, 1945 or more than eight (8) years after he obtained his homestead
patent on August 25, 1937. On these facts, We now apply Sec. 118 of Commonwealth Act No. 141 which prohibits
the alienation of homestead lots to private individual within five (5) years from the date of the issuance of the patent
and not Sec. 121 which governs sale to corporation. Since the grant was more than five (5) years before, the
transfer to Nemesia Baltazar was valid and legal. Nemesia Baltazar who became the titled or registered owner as
evidenced by TCT No. 57-N, could exercise acts of ownership over the land such as disposing of it to private
respondent by a deed of sale.

The assailed decision of the appellate court declares that the prescribed procedure in auction sales of property for
tax delinquency being in derogation of property rights should be followed punctiliously. Strict adherence to the
statutes governing tax sales is imperative not only for the protection of the tax payers, but also to allay any possible
suspicion of collusion between the buyer and the public officials called upon to enforce such laws. Notice of sale to
the delinquent land owners and to the public in general is an essential and indispensable requirement of law, the
non-fulfillment of which initiates the sale.

We give our stamp of approval on the aforementioned ruling of the respondent court. In the case at bar, there is no
evidence that Nemesia Baltazar, who had obtained a transfer certificate of title in her name on January 18, 1946,
was notified of the auction sale which was scheduled on October 30, 1956. Neither was she furnished as the owner
of the delinquent real property with the certificate of sale as prescribed by Sec. 37 of Commonwealth Act No. 470.
These infirmities are fatal. Worth mentioning also is the fact that Lopez Sugar Central was not entirely negligent in
its payment of land taxes. The record shows that taxes were paid for the years 1950 to 1953 and a receipt therefor
was obtained in its name. The sale therefore by the Province of Negros Occidental of the land in dispute to the
spouses Serfinos was void since the Province of Negros Occidental was not the real owner of the property thus
sold. In turn, the spouses Serfinos title which has been derived from that of the Province of Negros Occidental is
likewise void. A purchaser of real estate at the tax sale obtains only such title as that held by the taxpayer, the
principle of caveat emptor applies. Where land is sold for delinquency taxes under the provisions of the Provincial
Assessment Law, rights of registered but undeclared owners of the land are not affected by the proceedings and the
sale conveys only such interest as the person who has declared the property for taxation has therein.

We now come to the arguments of petitioner Philippine National Bank. The appellate court in modifying the trial
court's decision nullified the mortgage in favor of Philippine National Bank and exempted Lopez Sugar Central from
the payment to PNB of the amount of the mortgage loan. Petitioner Philippine National Bank now questions this
maintaining that it is a mortgagee in good faith and as such is entitled to the protection of the law.

We find merit in petitioner's contention. The findings of fact by the trial court which were undisputed by the
contending parties show that after TCT No. 38985 had been issued in the name of Federico Serfino, he declared
the property in his name for the year 1965 under T.D. No. 9382, continuously paid the taxes and introduced
improvements thereon in the nature of feeder roads and sugar cane plants. It was under these circumstances that
PNB extended a loan to Serfino, secured by the land in question on the strength of TCT No. 38985 in the name of
the Serfinos and after a spot investigation by one of the bank inspectors who made a report of his investigation.
After the execution of a real estate mortgage in favor of the Philippine National Bank duly annotated on the title of
the Serfinos TCT No. 38985, the bank actually loaned Serfino the amount of P5,000.00 which amounted to
P5,261.11 as of August 17, 1965. Petitioner Philippine National Bank relied on TCT No. 38985, the genuineness of
which is not in issue as it was really issued by the Register of Deeds of Negros Occidental. Philippine National Bank
had every right to rely on TCT No. 38985 as it was a sufficient evidence of ownership of the mortgagor. The
Philippine National Bank at that time had no way of knowing of the existence of another genuine title covering the
same land in question.

The fact that the public auction sale of the disputed property was not valid (for lack of notice of the auction sale to
the actual owner) can not in any way be attributed to the mortgagee's (PNB's) fault. The fact remains that in spite of
the lack of notice to the actual registered owner at that time (who was Nemesia Baltazar) the Register of Deeds
issued a TCT in the name of Federico Serfino married to Lorna Bachar which title was relied upon by petitioner
Philippine National Bank. The Register of Deeds disowned liability and negligence or connivance claiming that
existence of TCT No. 57-N in the name of Nemesia Baltazar was not found in the records of the Register of Deeds
for the reason that it did not exist in the index card as the land was not designated by cadastral lot number. Thus the
discrepancy was due to the faulty system of indexing the parcels of land. Be it noted that the inability of the Register
of Deeds to notify the actual owner or Lopez Sugar Central of the scheduled public auction sale was partly due to
the failure of Lopez Sugar Central to declare the land in its name for a number of years and to pay the complete
taxes thereon. Petitioner Philippine National Bank is therefore entitled to the payment of the mortgage loan as ruled
by the trial court and exempted from the payment of costs.

WHEREFORE, premises considered, with the slight modification that the PNB mortgage credit must be paid by
Lopez Sugar Central, the assailed decision is hereby AFFIRMED.

SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION
  

G.R. No. 108576 January 20, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP., respondents.

MARTINEZ, J.:

1
Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the Court of Appeals (CA)   which
2
affirmed the ruling of the Court of Tax Appeals (CTA)   that private respondent A. Soriano
Corporation's (hereinafter ANSCOR) redemption and exchange of the stocks of its foreign
stockholders cannot be considered as "essentially equivalent to a distribution of taxable dividends
under, Section 83(b) of the 1939 Internal Revenue Act. 3

The undisputed facts are as follows:

Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the corporation "A. Soriano
Cia", predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par value of
4
P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens.    In 193
Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. 5

On September 12, 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00
divided into 25,000 common shares with the same par value of the additional 15,000 shares, only
10,000 was issued which were all subscribed by Don Andres, after the other stockholders waived
favor of the former their pre-emptive rights to subscribe to the new issues. 6 This increased his
subscription to 14,963 common shares. 7 A month later, 8 Don Andres transferred 1,250 shares e
to his two sons, Jose and Andres, Jr., as their initial investments in ANSCOR.  9 Both sons are
foreigners. 10

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made betw
1949 and December 20, 1963. 11 On December 30, 1964 Don Andres died. As of that date, the
records revealed that he has a total shareholdings of 185,154 shares 12 — 50,495 of which are
original issues and the balance of 134.659 shares as stock dividend declarations. 13 Correspondingly, one-h
14
that shareholdings or 92,577   shares were transferred to his wife, Doña Carmen Soriano, as her conjugal sha

The other half formed part of his estate. 15

A day after Don Andres died, ANSCOR increased its capital stock to P20M 16 and in 1966 further
increased it to P30M. 17 In the same year (December 1966), stock dividends worth 46,290 and
46,287 shares were respectively received by the Don Andres estate 18 and Doña Carmen from
ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864 19 commo
shares each. 20

On December 28, 1967, Doña Carmen requested a ruling from the United States Internal Revenu
Service (IRS), inquiring if an exchange of common with preferred shares may be considered as a
tax avoidance scheme 21 under Section 367 of the 1954 U.S. Revenue Act. 22 By January 2, 1968
ANSCOR reclassified its existing 300,000 common shares into 150,000 common and 150,000
preferred shares. 23

In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization
scheme and not tax avoidance. 24 Consequently,   on March 31, 1968 Doña Carmen exchanged h
25

whole 138,864 common shares for 138,860 of the newly reclassified preferred shares. The estate
Don Andres in turn, exchanged 11,140 of its common shares, for the remaining 11,140 preferred
shares, thus reducing its (the estate) common shares to 127,727. 26

On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares
from the Don Andres' estate. By November 1968, the Board further increased ANSCOR's capital
stock to P75M divided into 150,000 preferred shares and 600,000 common shares. 27 About a ye
later, ANSCOR again redeemed 80,000 common shares from the Don Andres' estate, 28 further
reducing the latter's common shareholdings to 19,727. As stated in the Board Resolutions,
ANSCOR's business purpose for both redemptions of stocks is to partially retire said stocks as
treasury shares in order to reduce the company's foreign exchange remittances in case cash
dividends are declared. 29

In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a
report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to
Sections 53 and 54 of the 1939 Revenue Code, 30 for the year 1968 and the second quarter of 1969 based on the transactions of excha
31
31 and redemption of stocks.   The Bureau of Internal Revenue (BIR) made the corresponding assessments

despite the claim of ANSCOR that it availed of the tax amnesty under Presidential Decree
(P.D.) 23   which were amended by P.D.'s 67 and 157.   However, petitioner ruled that the invoke
32 33

decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act und
which ANSCOR was assessed. 34 ANSCOR's subsequent protest on the assessments was denie
in 1983 by petitioner. 35

Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on
the redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioner's ruling
after finding sufficient evidence to overcome the prima facie correctness of the questioned
assessments. 36 In a petition for review the CA as mentioned, affirmed the ruling of the
CTA. 37 Hence, this petition.
38
The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act    which provides:
Sec. 83. Distribution of dividends or assets by corporations. —

(b) Stock dividends — A stock dividend representing the transfer of surplus to capital account shall not be sub
to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent
the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock sha
considered as taxable income to the extent it represents a distribution of earnings or profits accumulated afte
March first, nineteen hundred and thirteen. (Emphasis supplied)

Specifically, the issue is whether ANSCOR's redemption of stocks from its stockholder as well as the exchange of
common with preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend"
 making the proceeds thereof taxable under the provisions of the above-quoted law.

Petitioner contends that the exchange transaction a tantamount to "cancellation" under Section 83(b) making the proceeds
thereof taxable. It also argues that the Section applies to stock dividends which is the bulk of stocks that ANSCOR redeemed
Further, petitioner claims that under the "net effect test," the estate of Don Andres gained from the redemption. Accordingly, i
was the duty of ANSCOR to withhold the tax-at-source arising from the two transactions, pursuant to Section 53 and 54 of th
39
1939 Revenue Act. 

ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres esta
or from Doña Carmen based on the two transactions, because the same were done for legitimate
business purposes which are (a) to reduce its foreign exchange remittances in the event the
company would declare cash dividends, 40 and to (b) subsequently "filipinized" ownership of
ANSCOR, as allegedly, envisioned by Don Andres. 41 It likewise invoked the amnesty provisions of P.D. 67.
42
We must emphasize that the application of Sec. 83(b) depends on the special factual circumstances of each case.    The
findings of facts of a special court (CTA) exercising particular expertise on the subject of tax,
generally binds this Court, 43 considering that it is substantially similar to the findings of the CA which is the final arbiter of questions of facts. 44 The
issue in this case does not only deal with facts but whether the law applies to a particular set of
facts. Moreover, this Court is not necessarily bound by the lower courts' conclusions of law drawn
from such facts. 45
AMNESTY:

46
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67    provides:
1. In all cases of voluntary disclosures of previously untaxed income and/or wealth such as earnings, receipts
gifts, bequests or any other acquisitions from any source whatsoever which are taxable under the National
Internal Revenue Code, as amended, realized here or abroad by any taxpayer, natural or judicial; the collectio
all internal revenue taxes including the increments or penalties or account of non-payment as well as all civil,
criminal or administrative liabilities arising from or incident to such disclosures under the National Internal
Revenue Code, the Revised Penal Code, the Anti-Graft and Corrupt Practices Act, the Revised Administrative
Code, the Civil Service laws and regulations, laws and regulations on Immigration and Deportation, or any oth
applicable law or proclamation, are hereby condoned and, in lieu thereof, a tax of ten (10%) per centum on su
previously untaxed income or wealth, is hereby imposed, subject to the following conditions: (conditions omitt
[Emphasis supplied].

The decree condones "the collection of all internal revenue taxes including the increments or penalties or account of
payment as well as all civil, criminal or administrative liable arising from or incident to" (voluntary) disclosures under t
NIRC of previously untaxed income and/or wealth "realized here or abroad by any taxpayer, natural or juridical."

May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? An income taxpayer covers
47
persons who derive taxable income.    ANSCOR was assessed by petitioner for deficiency withholding tax
under Section 53 and 54 of the 1939 Code. As such, it is being held liable in its capacity as a
withholding agent and not its personality as a taxpayer.
In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an ag
48 49
of the government for the collection of the tax   in order to ensure its payments;   the payer is the taxpayer
he is the person subject to tax impose by law; 50 and the payee is the taxing authority. 51 In other
words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding syste
however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and
independent from the taxpayer,   because the income tax is still impose on and due from the latte
52

The agent is not liable for the tax as no wealth flowed into him — he earned no income. The Tax
Code only makes the agent personally liable for the tax 53 arising from the breach of its legal duty
withhold as distinguish from its duty to pay tax since:
the government's cause of action against the withholding is not for the collection of income tax, but for the
enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed on
54
withholding agent and not upon the taxpayer. 

Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not protected
the amnesty under the decree.
55
 The taxpayer
Codal provisions on withholding tax are mandatory and must be complied with by the withholding agent. 
should not answer for the non-performance by the withholding agent of its legal duty to withhold
unless there is collusion or bad faith. The former could not be deemed to have evaded the tax ha
the withholding agent performed its duty. This could be the situation for which the amnesty decre
was intended. Thus, to curtail tax evasion and give tax evaders a chance to reform, 56 it was deem
administratively feasible to grant tax amnesty in certain instances. In addition, a "tax amnesty, mu
like a tax exemption, is never favored nor presumed in law and if granted by a statute, the term of
the amnesty like that of a tax exemption must be construed strictly against the taxpayer and libera
in favor of the taxing authority.  The rule on strictissimi juris equally applies. 58 So that, any doubt
57

the application of an amnesty law/decree should be resolved in favor of the taxing authority.
Furthermore, ANSCOR's claim of amnesty cannot prosper. The implementing rules of P.D. 370 which expand
amnesty on previously untaxed income under P.D. 23 is very explicit, to wit:

Sec. 4. Cases not covered by amnesty. — The following cases are not covered by the amnesty subject of the
regulations:

x x x           x x x          x x x

(2) Tax liabilities with or without assessments, on withholding tax at source provided under Section 53 and 54
the National Internal Revenue Code, as amended;  59

ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision of law, it is not
covered by the amnesty.

TAX ON STOCK DIVIDENDS

General Rule

60
Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code of 1928.    It laid down the
general rule known as the proportionate test 61 wherein
stock dividends once issued
form part of the capital and, thus, subject to income tax.  Specifically, the 62

general rule states that:

A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.

Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US Revenue Code
provision originally referred to "stock dividends" only, without any exception. Stock dividends, strictly speaking, represent cap
and do not constitute income to its
63 64
recipient.   So that the mere issuance thereof is not yet subject to income tax   as they are nothing
but an "enrichment through increase in value of capital
investment." 65 As capital, the stock dividends postpone the realization of profits because the "fun
represented by the new stock has been transferred from surplus to capital and no longer availabl
for actual distribution." 66 Income in tax law is "an amount of money coming to a person within a
specified time, whether as payment for services, interest, or profit from investment." 67 It means c
or its equivalent.   It is gain derived and severed from capital, 69 from labor or from both
68

combined 70 — so that to tax a stock dividend would be to tax a capital increase rather than th
income. 71 In a loose sense, stock dividends issued by the corporation, are considered unrealized
gain, and cannot be subjected to income tax until that gain has been realized. Before the realizati
stock dividends are nothing but a representation of an interest in the corporate properties. 72 As
capital, it is not yet subject to income tax. It should be noted that capital and income are different.
Capital is wealth or fund; whereas income is profit or gain or the flow of wealth. 73 The determining
factor for the imposition of income tax is whether any gain or profit was derived from a transaction
The Exception

However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as
make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribut
of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered
as taxable income to the extent it represents a distribution of earnings or profits accumulated after March first
nineteen hundred and thirteen. (Emphasis supplied).

In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber   (that pro rata stock dividends
75

not taxable income), the exempting clause above quoted was added because provision corporation found a loophole in the
original provision. They resorted to devious means to circumvent the law and evade the tax. Corporate earnings would be
distributed under the guise of its initial capitalization by declaring the stock dividends previously issued and later redeem said
dividends by paying cash to the stockholder. This process of issuance-redemption amounts to a distribution of taxable cash
dividends which was lust delayed so as to escape the tax. It becomes a convenient technical strategy to avoid the effects of
taxation.

Thus, to plug the loophole — the exempting clause was added. It provides that the redemption or cancellation of stock divide
depending on the "time" and "manner" it was made, is essentially equivalent to a distribution of taxable dividends," making th
proceeds thereof "taxable income" "to the extent it represents profits". The exception was designed to prevent the issuance a
cancellation or redemption of stock dividends, which is fundamentally not taxable, from being made use of as a device for the
76
actual distribution of cash dividends, which is taxable.   Thus,

the provision had the obvious purpose of preventing a corporation from avoiding dividend tax treatment by
distributing earnings to its shareholders in two transactions — a pro rata stock dividend followed by a pro
77
rata redemption — that would have the same economic consequences as a simple dividend. 

Although redemption and cancellation are generally considered capital transactions, as suc
they are not subject to tax. However, it does not necessarily mean that a shareholder may n
realize a taxable gain from such transactions. 78 Simply put, depending on the circumstance
the proceeds of redemption of stock dividends are essentially distribution of cash dividends
which when paid becomes the absolute property of the stockholder. Thereafter, the latter
becomes the exclusive owner thereof and can exercise the freedom of choice. 79 Having
 realized gain from that redemption, the income earner cannot escape income tax. 80

As qualified by the phrase "such time and in such manner," the exception was not intended to
characterize as taxable dividend every distribution of earnings arising from the redemption of stoc
dividend. 81 So that, whether the amount distributed in the redemption should be treated as the
equivalent of a "taxable dividend" is a question of fact, 82 which is determinable on "the basis of th
particular facts of the transaction in question. 83 No decisive test can be used to determine the
application of the exemption under Section 83(b). The use of the words "such manner" and
"essentially equivalent" negative any idea that a weighted formula can resolve a crucial issue —
Should the distribution be treated as taxable dividend. 84 On this aspect, American courts develop
certain recognized criteria, which includes the following: 85
1) the presence or absence of real business purpose,

2) the amount of earnings and profits available for the declaration of a regular dividends and t
corporation's past record with respect to the declaration of dividends,

3) the effect of the distribution, as compared with the declaration of regular dividend,

86
4) the lapse of time between issuance and redemption, 

5) the presence of a substantial surplus 87 and a generous supply of cash which invites suspicion a
88
does a meager policy in relation both to current earnings and accumulated surplus, 

REDEMPTION AND CANCELLATION

For the exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there is redemption or cancellation; (b
the transaction involves stock dividends and (c) the "time and manner" of the transaction makes it "essentially equiva
to a distribution of taxable dividends." Of these, the most important is the third.

89
 in exchange for property
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock 
whether or not the acquired stock is cancelled, retired or held in the treasury. 90 Essentially, the
corporation gets back some of its stock, distributes cash or property to the shareholder in paymen
for the stock, and continues in business as before. The redemption of stock dividends previously
issued is used as a veil for the constructive distribution of cash dividends. In the instant case, the
is no dispute that ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice
(28,000 and 80,000 common shares). But where did the shares redeemed come from? If its sour
is the original capital subscriptions upon establishment of the corporation or from initial capital
investment in an existing enterprise, its redemption to the concurrent value of acquisition may not
invite the application of Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere return
capital. On the contrary, if the redeemed shares are from stock dividend declarations other than a
initial capital investment, the proceeds of the redemption is additional wealth, for it is not merely a
return of capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here, it is undisput
91
that at the time of the last redemption, the original common shares owned by the estate were only 25,247.5   This means
that from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000
less 25,247.5) must have come from stock dividends. Besides, in the absence of evidence to the
contrary, the Tax Code presumes that every distribution of corporate property, in whole or in part,
made out of corporate profits 92 such as stock dividends. The capital cannot be distributed in the
form of redemption of stock dividends without violating the trust fund doctrine — wherein the capi
stock, property and other assets of the corporation are regarded as equity in trust for the paymen
the corporate creditors. 93 Once capital, it is always capital. 94 That doctrine was intended for the
protection of corporate creditors. 95

With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years
earlier. The time alone that lapsed from the issuance to the redemption is not a sufficient indicato
determine taxability. It is a must to consider the factual circumstances as to the manner of both th
issuance and the redemption. The "time" element is a factor to show a device to evade tax and th
scheme of cancelling or redeeming the same shares is a method usually adopted to accomplish t
end sought. 96 Was this transaction used as a "continuing plan," "device" or "artifice" to evade
payment of tax? It is necessary to determine the "net effect" of the transaction between the
shareholder-income taxpayer and the acquiring (redeeming) corporation. 97 The "net effect" test is
not evidence or testimony to be considered; it is rather an inference to be drawn or a conclusion t
be reached. 98 It is also important to know whether the issuance of stock dividends was dictated b
legitimate business reasons, the presence of which might negate a tax evasion plan. 99

The issuance of stock dividends and its subsequent redemption must be separate, distinct, and n
related, for the redemption to be considered a legitimate tax scheme. 100 Redemption cannot be
used as a cloak to distribute corporate earnings. 101 Otherwise, the apparent intention to avoid tax
becomes doubtful as the intention to evade becomes manifest. It has been ruled that:
[A]n operation with no business or corporate purpose — is a mere devise which put on the form of a corporate
reorganization as a disguise for concealing its real character, and the sole object and accomplishment of whic
was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to
102
transfer a parcel of corporate shares to a stockholder. 

Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be
applicable if the redeemed shares were issued with bona fide business purpose, 103 which is judg
after each and every step of the transaction have been considered and the whole transaction doe
not amount to a tax evasion scheme.
ANSCOR invoked two reasons to justify the redemptions — (1) the alleged "filipinization" program and (2) the reduction of fo
exchange remittances in case cash dividends are declared. The Court is not concerned with the wisdom of these purposes b
on their relevance to the whole transaction which can be inferred from the outcome thereof. Again, it is the "net effect rather t
104
the motives and plans of the taxpayer or his corporation"   that is the fundamental guide in administering Sec
83(b). This tax provision is aimed at the result. 105 It also applies even if at the time of the issuanc
the stock dividend, there was no intention to redeem it as a means of distributing profit or avoidin
tax on dividends. 106 The existence of legitimate business purposes in support of the redemption o
stock dividends is immaterial in income taxation. It has no relevance in determining "dividend
equivalence". 107 Such purposes may be material only upon the issuance of the stock dividends. T
test of taxability under the exempting clause, when it provides "such time and manner" as would
make the redemption "essentially equivalent to the distribution of a taxable dividend", is whether t
redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there may
be a dividend equivalence treatment. In the metaphor of Eisner v. Macomber, income is not deem
"realize" until the fruit has fallen or been plucked from the tree.
The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or profit is realiz
108
or received, actually or constructively,   and (3) it is not exempted by law or treaty from income tax. Any
business purpose as to why or how the income was earned by the taxpayer is not a requirement.
Income tax is assessed on income received from any property, activity or service that produces th
income because the Tax Code stands as an indifferent neutral party on the matter of where incom
comes
from. 109

As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether
income was realized through the redemption of stock dividends. The redemption converts into
money the stock dividends which become a realized profit or gain and consequently, the
stockholder's separate property. 110 Profits derived from the capital invested cannot escape incom
tax. As realized income, the proceeds of the redeemed stock dividends can be reached by incom
taxation regardless of the existence of any business purpose for the redemption. Otherwise, to ru
that the said proceeds are exempt from income tax when the redemption is supported by legitima
business reasons would defeat the very purpose of imposing tax on income. Such argument wou
open the door for income earners not to pay tax so long as the person from whom the income wa
derived has legitimate business reasons. In other words, the payment of tax under the exempting
clause of Section 83(b) would be made to depend not on the income of the taxpayer, but on the
business purposes of a third party (the corporation herein) from whom the income was earned. T
is absurd, illogical and impractical considering that the Bureau of Internal Revenue (BIR) would b
pestered with instances in determining the legitimacy of business reasons that every income earn
may interposed. It is not administratively feasible and cannot therefore be allowed.
The ruling in the American cases cited and relied upon by ANSCOR that "the redeemed shares are the equivalent of dividend
111
only if the shares were not issued for genuine business purposes",   or the "redeemed shares have
been issued by a corporation bona fide" 112 bears no relevance in determining the non-taxability o
the proceeds of redemption ANSCOR, relying heavily and applying said cases, argued that so lon
as the redemption is supported by valid corporate purposes the proceeds are not subject to
tax. 113 The adoption by the courts below 114 of such argument is misleading if not misplaced. A
review of the cited American cases shows that the presence or absence of "genuine business
purposes" may be material with respect to the issuance or declaration of stock dividends but not o
its subsequent redemption. The issuance and the redemption of stocks are two different
transactions. Although the existence of legitimate corporate purposes may justify a corporation's
acquisition of its own shares under Section 41 of the Corporation Code, 115 such purposes cannot
excuse the stockholder from the effects of taxation arising from the redemption. If the issuance of
stock dividends is part of a tax evasion plan and thus, without legitimate business reasons, the
redemption becomes suspicious which exempting clause. The substance of the whole transaction
not its form, usually controls the tax consequences. 116

The two purposes invoked by ANSCOR, under the facts of this case are no excuse for its tax
liability. First, the alleged "filipinization" plan cannot be considered legitimate as it was not
implemented until the BIR started making assessments on the proceeds of the redemption. Such
corporate plan was not stated in nor supported by any Board Resolution but a mere afterthought
interposed by the counsel of ANSCOR. Being a separate entity, the corporation can act only thro
its Board of Directors. 117 The Board Resolutions authorizing the redemptions state only one purp
— reduction of foreign exchange remittances in case cash dividends are declared. Not even this
purpose can be given credence. Records show that despite the existence of enormous corporate
profits no cash dividend was ever declared by ANSCOR from 1945 until the BIR started making
assessments in the early 1970's. Although a corporation under certain exceptions, has the
prerogative when to issue dividends, yet when no cash dividends was issued for about three
decades, this circumstance negates the legitimacy of ANSCOR's alleged purposes. Moreover, to
issue stock dividends is to increase the shareholdings of ANSCOR's foreign stockholders contrar
its "filipinization" plan. This would also increase rather than reduce their need for foreign exchang
remittances in case of cash dividend declaration, considering that ANSCOR is a family corporatio
where the majority shares at the time of redemptions were held by Don Andres' foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a valid excuse for the
imposition of tax. Otherwise, the taxpayer's liability to pay income tax would be made to depend upon a third person who did
earn the income being taxed. Furthermore, even if the said purposes support the redemption and justify the issuance of stock
dividends, the same has no bearing whatsoever on the imposition of the tax herein assessed because the proceeds of the
redemption are deemed taxable dividends since it was shown that income was generated therefrom.

Thirdly, ANSCOR argued that to treat as "taxable dividend" the proceeds of the redeemed stock dividends would be to impos
such stock an undisclosed lien and would be extremely unfair to intervening purchase, i.e. those who buys the stock dividend
118
after their issuance.   Such argument, however, bears no relevance in this case as no intervening buyer is involved. And even if there is an intervening buyer, it is
necessary to look into the factual milieu of the case if income was realized from the transaction. Again, we reiterate that the dividend equivalence test depends on such "time a
119
 may be unfair to a subsequent stock buyer who has no
manner" of the transaction and its net effect. The undisclosed lien 

capital interest in the company. But the unfairness may not be true to an original subscriber like D
Andres, who holds stock dividends as gains from his investments. The subsequent buyer who bu
stock dividends is investing capital. It just so happen that what he bought is stock dividends. The
effect of its (stock dividends) redemption from that subsequent buyer is merely to return his capita
subscription, which is income if redeemed from the original subscriber.
After considering the manner and the circumstances by which the issuance and redemption of stock dividends were made, th
is no other conclusion but that the proceeds thereof are essentially considered equivalent to a distribution of taxable dividend
As "taxable dividend" under Section 83(b), it is part of the "entire income" subject to tax under Section 22 in relation to Sectio
120
21   of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are included in
"gross income". As income, it is subject to income tax which is required to be withheld at source.
The 1997 Tax Code may have altered the situation but it does not change this disposition.
121
EXCHANGE OF COMMON WITH PREFERRED SHARES 

Exchange is an act of taking or giving one thing for another involving 122 reciprocal transfer 123 and
generally considered as a taxable transaction. The exchange of common stocks with preferred
stocks, or preferred for common or a combination of either for both, may not produce a recognize
gain or loss, so long as the provisions of Section 83(b) is not applicable. This is true in a trade
between two (2) persons as well as a trade between a stockholder and a corporation. In general,
this trade must be parts of merger, transfer to controlled corporation, corporate acquisitions or
corporate reorganizations. No taxable gain or loss may be recognized on exchange of property,
stock or securities related to reorganizations. 124
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into
common and preferred, and that parts of the common shares of the Don Andres estate and all of
Doña Carmen's shares were exchanged for the whole 150.000 preferred shares. Thereafter, both
the Don Andres estate and Doña Carmen remained as corporate subscribers except that their
subscriptions now include preferred shares. There was no change in their proportional interest af
the exchange. There was no cash flow. Both stocks had the same par value. Under the facts here
any difference in their market value would be immaterial at the time of exchange because no inco
is yet realized — it was a mere corporate paper transaction. It would have been different, if the
exchange transaction resulted into a flow of wealth, in which case income tax may be imposed. 12

Reclassification of shares does not always bring any substantial alteration in the subscriber's
proportional interest. But the exchange is different — there would be a shifting of the balance of
stock features, like priority in dividend declarations or absence of voting rights. Yet neither the
reclassification nor exchange per se, yields realize income for tax purposes. A common stock
represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily
and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro
rata division of profits. 126 Preferred stocks are those which entitle the shareholder to some priorit
on dividends and asset distribution. 127

Both shares are part of the corporation's capital stock. Both stockholders are no different from
ordinary investors who take on the same investment risks. Preferred and common shareholders
participate in the same venture, willing to share in the profits and losses of the
enterprise. 128 Moreover, under the doctrine of equality of shares — all stocks issued by the
corporation are presumed equal with the same privileges and liabilities, provided that the Articles
Incorporation is silent on such differences. 129

In this case, the exchange of shares, without more, produces no realized income to the subscribe
There is only a modification of the subscriber's rights and privileges — which is not a flow of weal
for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his
entire interest and not when there is still maintenance of proprietary interest. 130

WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that
ANSCOR's redemption of 82,752.5 stock dividends is herein considered as essentially equivalen
a distribution of taxable dividends for which it is LIABLE for the withholding tax-at-source. The
decision is AFFIRMED in all other respects.
SO ORDERED.

Davide, Jr., C.J., Melo, Kapunan and Pardo, JJ., concur.

G. Labor Laws
H. Social Security Laws

I. Election Laws

J. Corporation Laws

K. Insurance Laws

L. Retirement and Pension Laws

M. Agrarian Laws

N. Naturalization Laws

O. Wills

VII. CONFLICTING STATUTES

VIII. CONSTRUCTION OF THE CONSTITUTION

REQUISITES BEFORE THE COURT