Jurisprudence: G.R. No. L-14441 December 17, 1966

EN BANC

G.R. No. L-14441      December 17, 1966

PEDRO R. PALTING, petitioner,
vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.

BARRERA, J.:

This is a petition for review of the order of August 29, 1958, later supplemented and amplified by another dated September 9, 1958, of the Securities and Exchange Commission denying the opposition to, and instead, granting the registration, and licensing the sale in the Philippines, of 5,000,000 shares of the capital stock of the respondent-appellee San Jose Petroleum, Inc. (hereafter referred to as SAN JOSE PETROLEUM), a corporation organized and existing in the Republic of Panama.

On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine Securities and Exchange Commission a sworn registration statement, for the registration and licensing for sale in the Philippines Voting Trust Certificates representing 2,000,000 shares of its capital stock of a par value of $0.35 a share, at P1.00 per share. It was alleged that the entire proceeds of the sale of said securities will be devoted or used exclusively to finance the operations of San Jose Oil Company, Inc. (a domestic mining corporation hereafter to be referred to as SAN JOSE OIL) which has 14 petroleum exploration concessions covering an area of a little less than 1,000,000 hectares, located in the provinces of Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo, Cotabato, Davao and Agusan. It was the express condition of the sale that every purchaser of the securities shall not receive a stock certificate, but a registered or bearer-voting-trust certificate from the voting trustees named therein James L. Buckley and Austin G.E. Taylor, the first residing in Connecticut, U.S.A., and the second in New York City. While this application for registration was pending consideration by the Securities and Exchange Commission, SAN JOSE PETROLEUM filed an amended Statement on June 20, 1958, for registration of the sale in the Philippines of its shares of capital stock, which was increased from 2,000,000 to 5,000,000, at a reduced offering price of from P1.00 to P0.70 per share. At this time the par value of the shares has also been reduced from $.35 to $.01 per share.1

Pedro R. Palting and others, allegedly prospective investors in the shares of SAN JOSE PETROLEUM, filed with the Securities and Exchange Commission an opposition to registration and licensing of the securities on the grounds that (1) the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian corporation and SAN JOSE OIL, a domestic corporation, violates the Constitution of the Philippines, the Corporation Law and the Petroleum Act of 1949; (2) the issuer has not been licensed to transact business in the Philippines; (3) the sale of the shares of the issuer is fraudulent, and works or tends to work a fraud upon Philippine purchasers; and (4) the issuer as an enterprise, as well as its business, is based upon unsound business principles. Answering the foregoing opposition of Palting, et al., the registrant SAN JOSE PETROLEUM claimed that it was a "business enterprise" enjoying parity rights under the Ordinance appended to the Constitution, which parity right, with respect to mineral resources in the Philippines, may be exercised, pursuant to the Laurel-Langley Agreement, only through the medium of a corporation organized under the laws of the Philippines. Thus, registrant which is allegedly qualified to exercise rights under the Parity Amendment, had to do so through the medium of a domestic corporation, which is the SAN JOSE OIL. It refused the contention that the Corporation Law was being violated, by alleging that Section 13 thereof applies only to foreign corporations doing business in the Philippines, and registrant was not doing business here. The mere fact that it was a holding company of SAN JOSE OIL and that registrant undertook the financing of and giving technical assistance to said corporation did not constitute transaction of business in the Philippines. Registrant also denied that the offering for sale in the Philippines of its shares of capital stock was fraudulent or would work or tend to work fraud on the investors. On August 29, 1958, and on September 9, 1958 the Securities and Exchange Commissioner issued the orders object of the present appeal.

The issues raised by the parties in this appeal are as follows:

1. Whether or not petitioner Pedro R. Palting, as a "prospective investor" in respondent's securities, has personality to file the present petition for review of the order of the Securities and Exchange Commission;

2. Whether or not the issue raised herein is already moot and academic;

3. Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, a foreign corporation, and SAN JOSE OIL COMPANY, INC., a domestic mining corporation, is violative of the Constitution, the Laurel-Langley Agreement, the Petroleum Act of 1949, and the Corporation Law; and

4. Whether or not the sale of respondent's securities is fraudulent, or would work or tend to work fraud to purchasers of such securities in the Philippines.

1. In answer to the notice and order of the Securities and Exchange Commissioner, published in 2 newspapers of general circulation in the Philippines, for "any person who is opposed" to the petition for registration and licensing of respondent's securities, to file his opposition in 7 days, herein petitioner so filed an opposition. And, the Commissioner, having denied his opposition and instead, directed the registration of the securities to be offered for sale, oppositor Palting instituted the present proceeding for review of said order.

Respondent raises the question of the personality of petitioner to bring this appeal, contending that as a mere "prospective investor", he is not an "Aggrieved" or "interested" person who may properly maintain the suit. Citing a 1931 ruling of Utah State Supreme Court2 it is claimed that the phrase "party aggrieved" used in the Securities Act3 and the Rules of Court4 as having the right to appeal should refer only to issuers, dealers and salesmen of securities.

It is true that in the cited case, it was ruled that the phrase "person aggrieved" is that party "aggrieved by the judgment or decree where it operates on his rights of property or bears directly upon his interest", that the word "aggrieved" refers to "a substantial grievance, a denial of some personal property right or the imposition upon a party of a burden or obligation." But a careful reading of the case would show that the appeal therein was dismissed because the court held that an order of registration was not final and therefore not appealable. The foregoing pronouncement relied upon by herein respondent was made in construing the provision regarding an order of revocation which the court held was the one appealable. And since the law provides that in revoking the registration of any security, only the issuer and every registered dealer of the security are notified, excluding any person or group of persons having no such interest in the securities, said court concluded that the phrase "interested person" refers only to issuers, dealers or salesmen of securities.

We cannot consider the foregoing ruling by the Utah State Court as controlling on the issue in this case. Our Securities Act in Section 7(c) thereof, requires the publication and notice of the registration statement. Pursuant thereto, the Securities and Exchange Commissioner caused the publication of an order in part reading as follows:

. . . Any person who is opposed with this petition must file his written opposition with this Commission within said period (2 weeks). . . .

In other words, as construed by the administrative office entrusted with the enforcement of the Securities Act, any person (who may not be "aggrieved" or "interested" within the legal acceptation of the word) is allowed or permitted to file an opposition to the registration of securities for sale in the Philippines. And this is in consonance with the generally accepted principle that Blue Sky Laws are enacted to protect investors and prospective purchasers and to prevent fraud and preclude the sale of securities which are in fact worthless or worth substantially less than the asking price. It is for this purpose that herein petitioner duly filed his opposition giving grounds therefor. Respondent SAN JOSE PETROLEUM was required to reply to the opposition. Subsequently both the petition and the opposition were set for hearing during which the petitioner was allowed to actively participate and did so by cross-examining the respondent's witnesses and filing his memorandum in support of his opposition. He therefore to all intents and purposes became a party to the proceedings. And under the New Rules of Court,5 such a party can appeal from a final order, ruling or decision of the Securities and Exchange Commission. This new Rule eliminating the word "aggrieved" appearing in the old Rule, being procedural in nature,6 and in view of the express provision of Rule 144 that the new rules made effective on January 1, 1964 shall govern not only cases brought after they took effect but all further proceedings in cases then pending, except to the extent that in the opinion of the Court their application would not be feasible or would work injustice, in which event the former procedure shall apply, we hold that the present appeal is properly within the appellate jurisdiction of this Court.

The order allowing the registration and sale of respondent's securities is clearly a final order that is appealable. The mere fact that such authority may be later suspended or revoked, depending on future developments, does not give it the character of an interlocutory or provisional ruling. And the fact that seven days after the publication of the order, the securities are deemed registered (Sec. 7, Com. Act 83, as amended), points to the finality of the order. Rights and obligations necessarily arise therefrom if not reviewed on appeal.

Our position on this procedural matter — that the order is appealable and the appeal taken here is proper — is strengthened by the intervention of the Solicitor General, under Section 23 of Rule 3 of the Rules of Court, as the constitutional issues herein presented affect the validity of Section 13 of the Corporation Law, which, according to the respondent, conflicts with the Parity Ordinance and the Laurel-Langley Agreement recognizing, it is claimed, its right to exploit our petroleum resources notwithstanding said provisions of the Corporation Law.

2. Respondent likewise contends that since the order of Registration/Licensing dated September 9, 1958 took effect 30 days from September 3, 1958, and since no stay order has been issued by the Supreme Court, respondent's shares became registered and licensed under the law as of October 3, 1958. Consequently, it is asserted, the present appeal has become academic. Frankly we are unable to follow respondent's argumentation. First it claims that the order of August 29 and that of September 9, 1958 are not final orders and therefor are not appealable. Then when these orders, according to its theory became final and were implemented, it argues that the orders can no longer be appealed as the question of registration and licensing became moot and academic.

But the fact is that because of the authority to sell, the securities are, in all probabilities, still being traded in the open market. Consequently the issue is much alive as to whether respondent's securities should continue to be the subject of sale. The purpose of the inquiry on this matter is not fully served just because the securities had passed out of the hands of the issuer and its dealers. Obviously, so long as the securities are outstanding and are placed in the channels of trade and commerce, members of the investing public are entitled to have the question of the worth or legality of the securities resolved one way or another.

But more fundamental than this consideration, we agree with the late Senator Claro M. Recto, who appeared as amicus curiae in this case, that while apparently the immediate issue in this appeal is the right of respondent SAN JOSE PETROLEUM to dispose of and sell its securities to the Filipino public, the real and ultimate controversy here would actually call for the construction of the constitutional provisions governing the disposition, utilization, exploitation and development of our natural resources. And certainly this is neither moot nor academic.

3. We now come to the meat of the controversy — the "tie-up" between SAN JOSE OIL on the one hand, and the respondent SAN JOSE PETROLEUM and its associates, on the other. The relationship of these corporations involved or affected in this case is admitted and established through the papers and documents which are parts of the records: SAN JOSE OIL, is a domestic mining corporation, 90% of the outstanding capital stock of which is owned by respondent SAN JOSE PETROLEUM, a foreign (Panamanian) corporation, the majority interest of which is owned by OIL INVESTMENTS, Inc., another foreign (Panamanian) company. This latter corporation in turn is wholly (100%) owned by PANTEPEC OIL COMPANY, C.A., and PANCOASTAL PETROLEUM COMPANY, C.A., both organized and existing under the laws of Venezuela. As of September 30, 1956, there were 9,976 stockholders of PANCOASTAL PETROLEUM found in 49 American states and U.S. territories, holding 3,476,988 shares of stock; whereas, as of November 30, 1956, PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by 12,373 stockholders scattered in 49 American state. In the two lists of stockholders, there is no indication of the citizenship of these stockholders,7 or of the total number of authorized stocks of each corporation, for the purpose of determining the corresponding percentage of these listed stockholders in relation to the respective capital stock of said corporation.

Petitioner, as well as the amicus curiae and the Solicitor General8 contend that the relationship between herein respondent SAN JOSE PETROLEUM and its subsidiary, SAN JOSE OIL, violates the Petroleum Law of 1949, the Philippine Constitution, and Section 13 of the Corporation Law, which inhibits a mining corporation from acquiring an interest in another mining corporation. It is respondent's theory, on the other hand, that far from violating the Constitution; such relationship between the two corporations is in accordance with the Laurel-Langley Agreement which implemented the Ordinance Appended to the Constitution, and that Section 13 of the Corporation Law is not applicable because respondent is not licensed to do business, as it is not doing business, in the Philippines.

Article XIII, Section 1 of the Philippine Constitution provides:

SEC. 1. All agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, and other natural resources of the Philippines belong to the State, and their disposition, exploitation, development, or utilization shall be limited to citizens of the Philippines, or to corporations or associations at least sixty per centum of the capital of which is owned by such citizens, subject to any existing right, grant, lease or concession at the time of the inauguration of this Government established under this Constitution. . . . (Emphasis supplied)

In the 1946 Ordinance Appended to the Constitution, this right (to utilize and exploit our natural resources) was extended to citizens of the United States, thus:

Notwithstanding the provisions of section one, Article Thirteen, and section eight, Article Fourteen, of the foregoing Constitution, during the effectivity of the Executive Agreement entered into by the President of the Philippines with the President of the United States on the fourth of July, nineteen hundred and forty-six, pursuant to the provisions of Commonwealth Act Numbered Seven hundred and thirty-three, but in no case to extend beyond the third of July, nineteen hundred and seventy-four, the disposition, exploitation, development, and utilization of all agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, and other natural resources of the Philippines, and the operation of public utilities shall, if open to any person, be open to citizens of the United States, and to all forms of business enterprises owned or controlled, directly or indirectly, by citizens of the United States in the same manner as to, and under the same conditions imposed upon, citizens of the Philippines or corporations or associations owned or controlled by citizens of the Philippines (Emphasis supplied.)

In the 1954 Revised Trade Agreement concluded between the United States and the Philippines, also known as the Laurel-Langley Agreement, embodied in Republic Act 1355, the following provisions appear:

ARTICLE VI

1. The disposition, exploitation, development and utilization of all agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces and sources of potential energy, and other natural resources of either Party, and the operation of public utilities, shall, if open to any person, be open to citizens of the other Party and to all forms of business enterprise owned or controlled, directly or indirectly, by citizens of such other Party in the same manner as to and under the same conditions imposed upon citizens or corporations or associations owned or controlled by citizens of the Party granting the right.

2. The rights provided for in Paragraph 1 may be exercised, . . . in the case of citizens of the United States, with respect to natural resources in the public domain in the Philippines, only through the medium of a corporation organized under the laws of the Philippines and at least 60% of the capital stock of which is owned or controlled by citizens of the United States. . . .

3. The United States of America reserves the rights of the several States of the United States to limit the extent to which citizens or corporations or associations owned or controlled by citizens of the Philippines may engage in the activities specified in this Article. The Republic of the Philippines reserves the power to deny any of the rights specified in this Article to citizens of the United States who are citizens of States, or to corporations or associations at least 60% of whose capital stock or capital is owned or controlled by citizens of States, which deny like rights to citizens of the Philippines, or to corporations or associations which are owned or controlled by citizens of the Philippines. . . . (Emphasis supplied.)

Re-stated, the privilege to utilize, exploit, and develop the natural resources of this country was granted, by Article XIII of the Constitution, to Filipino citizens or to corporations or associations 60% of the capital of which is owned by such citizens. With the Parity Amendment to the Constitution, the same right was extended to citizens of the United States and business enterprises owned or controlled directly or indirectly, by citizens of the United States.

There could be no serious doubt as to the meaning of the word "citizens" used in the aforementioned provisions of the Constitution. The right was granted to 2 types of persons: natural persons (Filipino or American citizens) and juridical persons (corporations 60% of which capital is owned by Filipinos and business enterprises owned or controlled directly or indirectly, by citizens of the United States). In American law, "citizen" has been defined as "one who, under the constitution and laws of the United States, has a right to vote for representatives in congress and other public officers, and who is qualified to fill offices in the gift of the people. (1 Bouvier's Law Dictionary, p. 490.) A citizen is —

One of the sovereign people. A constituent member of the sovereignty, synonymous with the people." (Scott v. Sandford, 19 Ho. [U.S.] 404, 15 L. Ed. 691.)

A member of the civil state entitled to all its privileges. (Cooley, Const. Lim. 77. See U.S. v. Cruikshank 92 U.S. 542, 23 L. Ed. 588; Minor v. Happersett 21 Wall. [U.S.] 162, 22 L. Ed. 627.)

These concepts clarified, is herein respondent SAN JOSE PETROLEUM an American business enterprise entitled to parity rights in the Philippines? The answer must be in the negative, for the following reasons:

Firstly — It is not owned or controlled directly by citizens of the United States, because it is owned and controlled by a corporation, the OIL INVESTMENTS, another foreign (Panamanian) corporation.

Secondly — Neither can it be said that it is indirectly owned and controlled by American citizens through the OIL INVESTMENTS, for this latter corporation is in turn owned and controlled, not by citizens of the United States, but still by two foreign (Venezuelan) corporations, the PANTEPEC OIL COMPANY and PANCOASTAL PETROLEUM.

Thirdly — Although it is claimed that these two last corporations are owned and controlled respectively by 12,373 and 9,979 stockholders residing in the different American states, there is no showing in the certification furnished by respondent that the stockholders of PANCOASTAL or those of them holding the controlling stock, are citizens of the United States.

Fourthly — Granting that these individual stockholders are American citizens, it is yet necessary to establish that the different states of which they are citizens, allow Filipino citizens or corporations or associations owned or controlled by Filipino citizens, to engage in the exploitation, etc. of the natural resources of these states (see paragraph 3, Article VI of the Laurel-Langley Agreement, supra). Respondent has presented no proof to this effect.

Fifthly — But even if the requirements mentioned in the two immediately preceding paragraphs are satisfied, nevertheless to hold that the set-up disclosed in this case, with a long chain of intervening foreign corporations, comes within the purview of the Parity Amendment regarding business enterprises indirectly owned or controlled by citizens of the United States, is to unduly stretch and strain the language and intent of the law. For, to what extent must the word "indirectly" be carried? Must we trace the ownership or control of these various corporations ad infinitum for the purpose of determining whether the American ownership-control-requirement is satisfied? Add to this the admitted fact that the shares of stock of the PANTEPEC and PANCOASTAL which are allegedly owned or controlled directly by citizens of the United States, are traded in the stock exchange in New York, and you have a situation where it becomes a practical impossibility to determine at any given time, the citizenship of the controlling stock required by the law. In the circumstances, we have to hold that the respondent SAN JOSE PETROLEUM, as presently constituted, is not a business enterprise that is authorized to exercise the parity privileges under the Parity Ordinance, the Laurel-Langley Agreement and the Petroleum Law. Its tie-up with SAN JOSE OIL is, consequently, illegal.

What, then, would be the Status of SAN JOSE OIL, about 90% of whose stock is owned by SAN JOSE PETROLEUM? This is a query which we need not resolve in this case as SAN JOSE OIL is not a party and it is not necessary to do so to dispose of the present controversy. But it is a matter that probably the Solicitor General would want to look into.

There is another issue which has been discussed extensively by the parties. This is whether or not an American mining corporation may lawfully "be in anywise interested in any other corporation (domestic or foreign) organized for the purpose of engaging in agriculture or in mining," in the Philippines or whether an American citizen owning stock in more than one corporation organized for the purpose of engaging in agriculture or in mining, may own more than 15% of the capital stock then outstanding and entitled to vote, of each of such corporations, in view of the express prohibition contained in Section 13 of the Philippine Corporation Law. The petitioner in this case contends that the provisions of the Corporation Law must be applied to American citizens and business enterprise otherwise entitled to exercise the parity privileges, because both the Laurel-Langley Agreement (Art. VI, par. 1) and the Petroleum Act of 1948 (Art. 31), specifically provide that the enjoyment by them of the same rights and obligations granted under the provisions of both laws shall be "in the same manner as to, and under the same conditions imposed upon, citizens of the Philippines or corporations or associations owned or controlled by citizens of the Philippines." The petitioner further contends that, as the enjoyment of the privilege of exploiting mineral resources in the Philippines by Filipino citizens or corporations owned or controlled by citizens of the Philippines (which corporation must necessarily be organized under the Corporation Law), is made subject to the limitations provided in Section 13 of the Corporation Law, so necessarily the exercise of the parity rights by citizens of the United States or business enterprise owned or controlled, directly or indirectly, by citizens of the United States, must equally be subject to the same limitations contained in the aforesaid Section 13 of the Corporation Law.

In view of the conclusions we have already arrived at, we deem it not indispensable for us to pass upon this legal question, especially taking into account the statement of the respondent (SAN JOSE PETROLEUM) that it is essentially a holding company, and as found by the Securities and Exchange Commissioner, its principal activity is limited to the financing and giving technical assistance to SAN JOSE OIL.

4. Respondent SAN JOSE PETROLEUM, whose shares of stock were allowed registration for sale in the Philippines, was incorporated under the laws of Panama in April, 1956 with an authorized capital stock of $500,000.00, American currency, divided into 50,000,000 shares at par value of $0.01 per share. By virtue of a 3-party Agreement of June 14, 1956, respondent was supposed to have received from OIL INVESTMENTS 8,000,000 shares of the capital stock of SAN JOSE OIL (at par value of $0.01 per share), plus a note for $250,000.00 due in 6 months, for which respondent issued in favor of OIL INVESTMENTS 16,000,000 shares of its capital stock, at $0.01 per share or with a value of $160,000.00, plus a note for $230,297.97 maturing in 2 years at 6% per annum interest,9 and the assumption of payment of the unpaid price of 7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).

On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased from $500,000.00 to $17,500,000.00 by increasing the par value of the same 50,000,000 shares, from $0.01 to $0.35. Without any additional consideration, the 16,000,000 shares of $0.01 previously issued to OIL INVESTMENTS with a total value of $160,000.00 were changed with 16,000,000 shares of the recapitalized stock at $0.35 per share, or valued at $5,600,000.00. And, to make it appear that cash was received for these re-issued 16,000,000 shares, the board of directors of respondent corporation placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN JOSE OIL (still having par value of $0.10 per share) which were received from OIL INVESTMENTS as part-consideration for the 16,000,000 shares at $0.01 per share.

In the Balance Sheet of respondent, dated July 12, 1956, from the $5,900,000.00, supposedly the value of the 8,000,000 shares of SAN JOSE OIL, the sum of $5,100,000.00 was deducted, corresponding to the alleged difference between the "value" of the said shares and the subscription price thereof which is $800,000.00 (at $0.10 per share). From this $800,000.00, the subscription price of the SAN JOSE OIL shares, the amount of $319,702.03 was deducted, as allegedly unpaid subscription price, thereby giving a difference of $480,297.97, which was placed as the amount allegedly paid in on the subscription price of the 8,000,000 SAN JOSE OIL shares. Then, by adding thereto the note receivable from OIL INVESTMENTS, for $250,000.00 (part-consideration for the 16,000,000 SAN JOSE PETROLEUM shares), and the sum of $6,516.21, as deferred expenses, SAN JOSE PETROLEUM appeared to have assets in the sum of $736,814.18.

These figures are highly questionable. Take the item $5,900,000.00 the valuation placed on the 8,000,000 shares of SAN JOSE OIL. There appears no basis for such valuation other than belief by the board of directors of respondent that "should San Jose Oil Company be granted the bulk of the concessions applied for upon reasonable terms, that it would have a reasonable value of approximately $10,000,000." 10 Then, of this amount, the subscription price of $800,000.00 was deducted and called it "difference between the (above) valuation and the subscription price for the 8,000,000 shares." Of this $800,000.00 subscription price, they deducted the sum of $480,297.97 and the difference was placed as the unpaid portion of the subscription price. In other words, it was made to appear that they paid in $480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This amount ($480,297.97) was supposedly that $250,000.00 paid by OIL INVESMENTS for 7,500,000 shares of SAN JOSE OIL, embodied in the June 14 Agreement, and a sum of $230,297.97 the amount expended or advanced by OIL INVESTMENTS to SAN JOSE OIL. And yet, there is still an item among respondent's liabilities, for $230,297.97 appearing as note payable to Oil Investments, maturing in two (2) years at six percent (6%) per annum. 11 As far as it appears from the records, for the 16,000,000 shares at $0.35 per share issued to OIL INVESTMENTS, respondent SAN JOSE PETROLEUM received from OIL INVESTMENTS only the note for $250,000.00 plus the 8,000,000 shares of SAN JOSE OIL, with par value of $0.10 per share or a total of $1,050,000.00 — the only assets of the corporation. In other words, respondent actually lost $4,550,000.00, which was received by OIL INVESTMENTS.

But this is not all. Some of the provisions of the Articles of Incorporation of respondent SAN JOSE PETROLEUM are noteworthy; viz:

(1) the directors of the Company need not be shareholders;

(2) that in the meetings of the board of directors, any director may be represented and may vote through a proxy who also need not be a director or stockholder; and

(3) that no contract or transaction between the corporation and any other association or partnership will be affected, except in case of fraud, by the fact that any of the directors or officers of the corporation is interested in, or is a director or officer of, such other association or partnership, and that no such contract or transaction of the corporation with any other person or persons, firm, association or partnership shall be affected by the fact that any director or officer of the corporation is a party to or has an interest in, such contract or transaction, or has in anyway connected with such other person or persons, firm, association or partnership; and finally, that all and any of the persons who may become director or officer of the corporation shall be relieved from all responsibility for which they may otherwise be liable by reason of any contract entered into with the corporation, whether it be for his benefit or for the benefit of any other person, firm, association or partnership in which he may be interested.

These provisions are in direct opposition to our corporation law and corporate practices in this country. These provisions alone would outlaw any corporation locally organized or doing business in this jurisdiction. Consider the unique and unusual provision that no contract or transaction between the company and any other association or corporation shall be affected except in case of fraud, by the fact that any of the directors or officers of the company may be interested in or are directors or officers of such other association or corporation; and that none of such contracts or transactions of this company with any person or persons, firms, associations or corporations shall be affected by the fact that any director or officer of this company is a party to or has an interest in such contract or transaction or has any connection with such person or persons, firms associations or corporations; and that any and all persons who may become directors or officers of this company are hereby relieved of all responsibility which they would otherwise incur by reason of any contract entered into which this company either for their own benefit, or for the benefit of any person, firm, association or corporation in which they may be interested.

The impact of these provisions upon the traditional judiciary relationship between the directors and the stockholders of a corporation is too obvious to escape notice by those who are called upon to protect the interest of investors. The directors and officers of the company can do anything, short of actual fraud, with the affairs of the corporation even to benefit themselves directly or other persons or entities in which they are interested, and with immunity because of the advance condonation or relief from responsibility by reason of such acts. This and the other provision which authorizes the election of non-stockholders as directors, completely disassociate the stockholders from the government and management of the business in which they have invested.

To cap it all on April 17, 1957, admittedly to assure continuity of the management and stability of SAN JOSE PETROLEUM, OIL INVESTMENTS, as holder of the only subscribed stock of the former corporation and acting "on behalf of all future holders of voting trust certificates," entered into a voting trust agreement12 with James L. Buckley and Austin E. Taylor, whereby said Trustees were given authority to vote the shares represented by the outstanding trust certificates (including those that may henceforth be issued) in the following manner:

(a) At all elections of directors, the Trustees will designate a suitable proxy or proxies to vote for the election of directors designated by the Trustees in their own discretion, having in mind the best interests of the holders of the voting trust certificates, it being understood that any and all of the Trustees shall be eligible for election as directors;

(b) On any proposition for removal of a director, the Trustees shall designate a suitable proxy or proxies to vote for or against such proposition as the Trustees in their own discretion may determine, having in mind the best interest of the holders of the voting trust certificates;

(c) With respect to all other matters arising at any meeting of stockholders, the Trustees will instruct such proxy or proxies attending such meetings to vote the shares of stock held by the Trustees in accordance with the written instructions of each holder of voting trust certificates. (Emphasis supplied.)

It was also therein provided that the said Agreement shall be binding upon the parties thereto, their successors, and upon all holders of voting trust certificates.

And these are the voting trust certificates that are offered to investors as authorized by Security and Exchange Commissioner. It can not be doubted that the sale of respondent's securities would, to say the least, work or tend to work fraud to Philippine investors.

FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to dismiss this appeal, is denied and the orders of the Securities and Exchange Commissioner, allowing the registration of Respondent's securities and licensing their sale in the Philippines are hereby set aside. The case is remanded to the Securities and Exchange Commission for appropriate action in consonance with this decision. With costs. Let a copy of this decision be furnished the Solicitor General for whatever action he may deem advisable to take in the premises. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.

Castro, J., took no part.

Torts and Damages Case Digest: Lopez v. Pan American (1966)

G.R. No. L-20434            July 30, 1966

Lessons Applicable: Factors in determining amount (Torts and Damages)

Laws Applicable: 

FACTS:

• August 1, 1960: Pan American Employees Association staged a strike so Pan Am forced them to take a leave of absence without pay on February 22, 1961 to February 23, 1961
• court a quo: affected them financially and economically, it ordered Pan America to pay them their two days salaries
• CA: affirmed.

ISSUE: W/N the employees should be awarded back wages.

HELD: NO. AFFIRMED in so far as it declares petitioner Pan American World Airways, Inc. not guilty of unfair labor practice, but IS REVERSED in so far as it orders said petitioner to pay the members of the respondent labor union, Pan American Employees Association, their wages or salaries for February 22 and 23, 1961 when they were made by the petitioner to go on furlough. The petitioner is absolved from paying the said back wages. No pronouncement as to costs. It is so ordered.

• The dismiss employee is not entirely without remedy if his charge of unfair labor practice fails and his complaint dismissed, because the breach by the employer of the obligation to him may be redressed like an ordinary contract or obligation
• in placing its employees on furlough for two days, petitioner acted in good faith. The record shows that before laying them off it asked permission from the industrial court and only effected the furlough after said court authorized it to do so.
• the step taken by respondent was necessary to protect its interest whose business is mainly dependent on the flight of its planes," giving as additional reason that "lack of work as a cause of lay-off is justified.
• Inasmuch as petitioner acted in good faith, it should not be ordered to pay back wages to its laid off employees. 
• not paid their wages for only two days, We do not believe that the same would place them in such a financial and economic distress as to warrant the award of their back wages

Jurisprudence: G.R. No. L-20434

EN BANC

G.R. No. L-20434             July 30, 1966

PAN AMERICAN WORLD AIRWAYS, INC., petitioner,

vs.

COURT OF INDUSTRIAL RELATIONS, ET AL., respondents.

Ross, Selph and Carrascoso for petitioner.

J. C. Espina and Associates for respondents.

ZALDIVAR, J.:

This is a petition for certiorari to review the order of the Presiding Judge of the Court of Industrial Relations, dated July 10, 1962, in its Case No. 2744-ULP, the dispositive portion of which reads as follows:

In view of the foregoing, this Court finds no basis to declare respondent guilty of unfair labor practice and, therefore, the charge of illegal lock-out is without merit. Respondent is, however, directed to pay members of complainant union who were forced to take leave of absence without pay on February 22, 1961 to February 23, 1961 their two days wages or salaries for the reasons discussed in the preceding paragraphs.

Upon a motion for a partial reconsideration of the above-mentioned order, filed by the herein petitioner Pan American World Airways, Inc. (respondent in the court below) seeking the elimination of that part of the order providing for the payment of two days' wages of the members of the herein respondent labor union (petitioner below) who were made to go on leave without pay, the Court of Industrial Relations en banc, in a resolution of August 27, 1962, affirmed said order in toto.

Petitioner Pan American World Airways, Inc. urges now, before this Court, that the respondent Court of Industrial Relations erred in ordering the payment of the two days wages in spite of the finding that the herein petitioner was not guilty of unfair labor practice.

It appears that on account of a strike staged by respondent Pan American Employees Association on August 1, 1960, against the management of petitioner's branch in the Philippines, the labor dispute was certified by the Office of the President to the Court of Industrial Relations on August 3, 1960 pursuant to Section 10 of Republic Act 875, as it affected an industry indispensable to national interest (Case No. 30-IPA).

During the pendency of this case (No. 30-IPA) in the industrial court, or on February 21, 1961, petitioner filed in the said case an urgent petition praying, upon the ground that due to the illegal stoppage by its flight engineers in the United States which curtailed petitioner's plane flights the world over and because of the uncertain duration of said strike, for authority to place on furlough without pay 80 of its employees, promising to recall them to their work as soon as its operation would be resumed. The industrial court, on the same day, issued an order granting the petition "without prejudice to deciding the petition on the merits later on."1 Pursuant to said order, petitioner served notice to its employees and placed them on furlough without pay effective February 22, 1961. Because of the termination of the strike in the United States petitioner called its employees back to work on February 24, 1961. Actually, the employees were on furlough for two days, February 22 and 23, 1961.

Because of the aforementioned furlough, an Acting Prosecutor of the Court of Industrial Relations filed in behalf of respondent union, on April 8, 1961, a complaint charging petitioner of unfair labor practice under Section 4(a), subsection 6, in relation to Sections 13, 14 and 15 of Republic Act 875 (Case No. 2744-ULP), alleging that on February 21, 1961, the officials of the company, without filing with the Conciliation Service thirty days prior notice and without having first bargained collectively with respondent union pursuant to Section 14 of the Industrial Peace Act and, further, in violation of article 14 of their collective bargaining agreement, locked out some of its members from their work.

Petitioner, in its answer, denied the charge, averring that if some were temporarily laid off it was with the approval of the court and as a result of the curtailment of petitioner's plane flights brought about by the strike in the United States, and that immediately upon its termination petitioner recalled its furloughed employees back to work on February 24, 1961.

On July 10, 1962, the court a quo issued an order declaring that petitioner did not lock out its employees and absolving it from the charge of unfair labor practice. Considering, however, the sudden and abrupt layoff imposed upon the employees concerned which, according to the court, affected them financially and economically, it ordered petitioner to pay them their two days salaries. Hence this petition for review interposed by petitioner, posing the following query: Petitioner having been declared from the charge of unfair labor practice and declared not guilty of locking out its employees, may the Court of Industrial Relations order the payment of two days back wages to its laid off employees?

The issue raised is not new. In the case of National Labor Union vs. Insular-Yebana Tobacco Corporation, G.R. No. L-15363, July 31, 1961, this Court declared:

A consideration of the entire law on the matter clearly discloses the intention of the lawmaker to consider acts which are alleged to constitute unfair labor practices as violations of the law or offenses, to be prosecuted in the same manner as a criminal offense. The reason for this provision is that the commission of an unfair labor practice is an offense against a public right or interest and should be prosecuted in the same manner as a public offense. It should also be noted that there is no provision in Section 5 for the return or reinstatement of a dismissed employee, if the charge for unfair labor has not been proved. On the contrary, the provision of the law is clear and express that if the acts alleged to have been committed as constituting unfair labor practice have not been proved, or if the complainant asks for the dismissal of the case, the charges for unfair labor practice shall be dismissed.

x x x           x x x           x x x

This prohibition confirms the principles above indicated governing the proceeding in unfair labor practice. ... This prohibition against the court's exercising its power of conciliation and mediation, is in complete consonance with the directive contained in the same section ... . The reason for the distinction between an unfair labor practice case and a mere violation of an employer of its contractual obligation towards an employee is, ... That unfair labor practice cases involve violation of a public right or policy, to be prosecuted like criminal offenses; whereas a breach of an obligation of the employer to his employees is only a contractual breach to be redressed like an ordinary contract or obligation.

x x x           x x x           x x x

In conformity with the principle above expressed, we hold that the cases at bar having been instituted expressly as unfair labor practice cases, pursuant to Section 5 of the Industrial Peace Act, and no unfair labor practice having been proved to have been committed, the Court of Industrial Relations has no power to grant remedy under its general powers of mediation and conciliation, such as reinstatement or back wages, but must limit itself to dismissing the charges of unfair labor practice. (Emphasis supplied)

And reiterating the same doctrine in the case of Baguio Gold Mining Company vs. Tabisola, et al., G.R. L-15265, decided on April 27, 1962, this Court declared:

The sole issue petitioner presents is: Does the Court of Industrial Relations have authority to order reinstatement and award back wages where the employer was declared not guilty of the unfair labor practice charges?

A similar question rose in National Labor Union vs. Insular-Yebana Tobacco Corporation. This Court's answer was in the negative.

The law is clear. In an unfair labor practice cases where the Court of Industrial Relations finds that the person charged in the complaint has engaged or is engaging in unfair labor practice, the court is expressly granted the power to order reinstatement with or without backpay. But this authority had been implicitly withheld where the charge is not substantiated. Then the Court of Industrial Relations is directed to simply dismiss the complaint.

In support of the view that the Industrial Court possesses the questioned authority, respondents contend that said court, under Commonwealth Act 103, has broad powers including reinstatement and award of back wages; and that in approving Republic Act 875, Congress had not intended to place the employee in a situation where after his unfair labor practice charge is dismissed, he may not be accorded the necessary protection guaranteed by the Constitution and the civil code.

The authority of the Court of Industrial Relations to order reinstatement under Commonwealth Act 103 is confined to instances covered thereby, i.e., when the court is exercising its power of arbitration and conciliation. In unfair labor practice cases, which are distinctive proceedings prosecuted like criminal offenses, the Industrial Court is inhibited from exercising its powers of arbitration and conciliation.

The dismiss employee is not entirely without remedy if his charge of unfair labor practice fails and his complaint dismissed, because the breach by the employer of the obligation to him may be redressed like an ordinary contract or obligation.2

Respondents contend, however, that because the unfair labor practice case (Case No. 2744-ULP) is an incident of Case No. 30-IPA which was certified by the President to the Court of Industrial Relations, the court a quo can exercise its power of mediation and conciliation and was justified in making the questioned award.

This contention has no merit. It should be noted that Case No. 30-IPA refers to the strike carried out by the members of respondent union on August 1, 1960 protesting the dismissal of their 20 affiliates by petitioner because their services were no longer needed as the ground handling and servicing of its planes was taken over by the Philippine Air Lines. The instant unfair labor practice case, on the other hand, (Case No. 2744-ULP) involves the temporary layoff of 80 of the union members on February 22 and 23, 1961 because they had no work to do due to the curtailment of petitioner's plane flights all over the world, including Manila, brought about by the strike of its flight engineers in the United States. Since these cases involves different employees, issues, and causes of action, and that the basis of the second is distinct, separate, and did not arise out of the first case subject of certification by the President to the industrial court, it certainly is not an incident of the first case as it has no relation thereof whatsoever. And it appearing that the case at bar was instituted expressly and independently as an unfair labor practice pursuant to Section 4(a), subsection 6 in relation to Sections 13, 14, and 15 of Republic Act 875, the industrial court must decide the same in accordance with its limited power embodied in said Act and not on its authority under Commonwealth Act 103. Hence, the court a quo could neither exercise its power of mediation and conciliation nor order the award of back wages but had to limit itself to dismissing the unfair labor practice case, there being no evidence to substantiate it.3 This opinion finds further support in the recent decision of this Court wherein We held:

... On June 17, 1953, the GSIS Employees Association declares a strike for failure of the GSIS to grant its demands. ... adoption of scale of salaries ... continuance of family allowance ... free hospitalization and medicine, ... .

Upon failure of the System to grant the demands, a general strike took place, and the case was certified to the Court of Industrial Relations.

On June 11, 1957, the GSIS Employees Association filed a petition, to which they gave the name of "incidental motion", in Court of Industrial Relations Case No. 896-V, on behalf of its member Pedro Olase, alleging that said employee was forced to resign from the GSIS and praying for his immediate reinstatement with pay ... . The GSIS questioned the jurisdiction of the Court of Industrial Relations to review the dismissal as an incident of the original Case No. 896-V, contending that the case of the dismissal of Olase is not an incident and can not be an incident of the pending action in the Court of Industrial Relations.

In reply to the above contention, it was claimed on behalf of Pedro Olase that there was an order in said Case No. 896-V prohibiting dismissal of employees during the pendency of the action. The GSIS. argued, in reply, that the dismissal or separation of Olase could not be an incident of the pending action between the parties. After overruling the motion to dismiss filed by the GSIS, the court below issued the order already quoted above.

We find merit in the contention of the GSIS that the dismissal of Olase did not arise out of any of the demands made in the strike. The order of the Court of Industrial Relations not to dismiss any employee during the pendency of the case then under consideration must necessarily refer to dismissals occasioned, directly or indirectly by the demands under consideration in the case. The malfeasance of which Olase was charged has absolutely no connection with the demands of the GSIS Employees Association, hence, the GSIS was not prohibited from dismissing Olase, for the said malfeasance which has no relation to any of the demands then pending consideration before the Court. (Government Service Insurance System, et al. vs. Court of Industrial Relations, et al., L-17186 and L-17363, October 31, 1961.)

Finally, it cannot be disputed that in placing its employees on furlough for two days, petitioner acted in good faith. The record shows that before laying them off it asked permission from the industrial court and only effected the furlough after said court authorized it to do so. As correctly found by the court a quo the layoff was resorted to because "respondent's planes were grounded and there was temporary cessation of work due to the flight engineers' strike in America", and so it believed "that the step taken by respondent was necessary to protect its interest whose business is mainly dependent on the flight of its planes," giving as additional reason that "lack of work as a cause of lay-off is justified."4 The trial court also found that petitioner in refusing its employees to work was not motivated by any illicit purpose, and true to its assurance upon the resumption of its operation, petitioner immediately called them back. Inasmuch as petitioner acted in good faith, it should not be ordered to pay back wages to its laid off employees.

... It is, therefore, fair to conclude that the employer had acted in good faith. In reaching this view, this Court holds the opinion that while complainants are entitled to reinstatement on the theory that their separation was based upon a mistaken interpretation of the closed shop provision, they are not however entitled to back wages because their separation was effected in good faith. (Findlay Millar Timber Company vs. PLASLU, et al., L-18217 & L-18222, September 29, 1962)5

The fact that the layoff was sudden and abrupt should not militate against petitioner, not only because the permission it asked for such layoff was granted outright by the court itself, but also because there is no evidence to show that petitioner was aware that its flight engineers in the United States would strike too soon, and that said strike would adversely affect its business in the Philippines. And considering further that the laid off employees were not paid their wages for only two days, We do not believe that the same would place them in such a financial and economic distress as to warrant the award of their back wages.6 While it is true that the employees failed to earn the wages they ought to have received if they were allowed to work, it cannot likewise be denied that the company did not earn, and even lost, during the strike as it paid the wages of the other employees it required to work whose services were needed. Considering, therefore, that the parties had no hand or participation in the situation they were in, and that the stoppage of the work was not the direct consequence of the company's lockout or unfair labor practice, "the economic loss should not be shifted to the employer."7 Justice and equity demand that each must have to bear its own loss, thus placing the parties in equal footing where none should profit from the other there being no fault of either.

Wherefore, the order of the Presiding Judge of the Court of Industrial Relations dated July 10, 1962, as affirmed by the Court of Industrial Relations en banc, IS AFFIRMED in so far as it declares petitioner Pan American World Airways, Inc. not guilty of unfair labor practice, but IS REVERSED in so far as it orders said petitioner to pay the members of the respondent labor union, Pan American Employees Association, their wages or salaries for February 22 and 23, 1961 when they were made by the petitioner to go on furlough. The petitioner is absolved from paying the said back wages. No pronouncement as to costs. It is so ordered.

Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Sanchez and Castro, JJ., concur.

Bengzon, J.P., J., took no part.

Footnotes

1As quoted from the order.

2See also Cagalawan vs. Customs Canteen, et al., L-16031, October 31, 1961; Naric Workers' Union vs. The CIR, et al., L-14999, December 30, 1961; Pomposa Vda. de Nator, et al. vs. The Hon. CIR, et al., March 30, 1962; Malaya Workers Union, et al. vs. The CIR, et al., April 23, 1963.

3National Labor Union vs. Insular-Yebana Tobacco Corporation, supra.

4"Where the management finds it unnecessary to continue employing some of its laborers ... said management is authorized to dismiss said laborers, specially when the dismissal is only temporary." (Arte Español Iron Works Labor Union vs. Pedret, 100 Phil. 1040)

5See also National Labor Union vs. Zip Venetian Blind, et al., L-15827-28, May 31, 1961; GSIS, et al. vs. CIR, et al., L-17186 & L-17363, supra.

6The case of Dee Chuan & Co. vs. Nahag, et al., (L-7201 & L-7211) cited by respondent court was decided on September 22, 1954 and is not applicable because what was awarded to the laborers therein was their separation pay, not back wages, due to the failure of petitioner therein to give the requisite notice, and even to notify the industrial court about their dismissal notwithstanding the injunction it issued. In the instant case the employees were not dismissed but were temporarily laid off for only two days, hence the award in the Dee Chuan case was more compelling and justifiable than in the case at bar. Besides, since the Dee Chuan case was decided in 1954 while the Findlay Millar case and others cited elsewhere in this decision were decided in 1962 or later, the doctrine laid down in the latter cases must control.

7Cromwell Commercial Employees and Laborers Union vs. Court of Industrial Relations, et al., G.R. No. L-19778, September 30, 1964, citing Dinglasan vs. National Labor Union, G.R. No. L-14183, November 28, 1959.

Insurance Case Digest: De la Cruz v. Capital Ins. & Surety Co, Inc. (1966)

G.R. No. L-21574           June 30, 1966
Lessons Applicable: Liability of Insurer for Suicide and Accidental Death (Insurance)

Laws Applicable: 

FACTS:

• Eduardo de la Cruz, employed as a mucker in the Itogon-Suyoc Mines, Inc. in Baguio, was the holder of an accident insurance policy "against death or disability caused by accidental means"
• January 1, 1957: For the celebration of the New Year, the Itogon-Suyoc Mines, Inc. sponsored a boxing contest for general entertainment wherein Eduardo, a non-professional boxer participated
• In the course of his bout with another non-professional boxer of the same height, weight, and size, Eduardo slipped and was hit by his opponent on the left part of the back of the head, causing Eduardo to fall, with his head hitting the rope of the ring
• He was brought to the Baguio General Hospital the following day.  He died due to hemorrhage, intracranial.
• Simon de la Cruz, the father of the insured and who was named beneficiary under the policy, thereupon filed a claim with the insurance company
• The Capital Insurance and Surety co., inc denied stating that the death caused by his participation in a boxing contest was not accidental
• RTC: favored Simon

ISSUE: W/N the cause of death was accident

HELD:YES.

• Eduardo slipped, which was unintentional
• The terms "accident" and "accidental"
• as used in insurance contracts, have not acquired any technical meaning and are construed by the courts in their ordinary and common acceptation
• happen by chance or fortuitously, without intention and design, and which is unexpected, unusual, and unforeseen
• event that takes place without one's foresight or expectation
• event that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not expected
• where the death or injury is not the natural or probable result of the insured's voluntary act, or if something unforeseen occurs in the doing of the act which produces the injury, the resulting death is within the protection of policies insuring against death or injury from accident
• while the participation of the insured in the boxing contest is voluntary, the injury was sustained when he slid, giving occasion to the infliction by his opponent of the blow that threw him to the ropes of the ring is not
• The fact that boxing is attended with some risks of external injuries does not make any injuries received in the course of the game not accidental
• In boxing as in other equally physically rigorous sports, such as basketball or baseball, death is not ordinarily anticipated to result. If, therefore, it ever does, the injury or death can only be accidental or produced by some unforeseen happening or event as what occurred in this case
• Furthermore, the policy involved herein specifically excluded from its coverage —
  (e) Death or disablement consequent upon the Insured engaging in football, hunting, pigsticking, steeplechasing, polo-playing, racing of any kind, mountaineering, or motorcycling.
• Death or disablement resulting from engagement in boxing contests was not declared outside of the protection of the insurance contract 

Jurisprudence: G.R. No. L-21574

EN BANC

G.R. No. L-21574             June 30, 1966

SIMON DE LA CRUZ, plaintiff and appellee,
vs.
THE CAPITAL INSURANCE and SURETY CO., INC., defendant and appellant.

Achacoso, Nera and Ocampo for defendant and appellant.
Agustin M. Gramata for plaintiff and appellee.

BARRERA, J.:

This is an appeal by the Capital Insurance & Surety Company, Inc., from the decision of the Court of First Instance of Pangasinan (in Civ Case No. U-265), ordering it to indemnify therein plaintiff Simon de la Cruz for the death of the latter's son, to pay the burial expenses, and attorney's fees.

Eduardo de la Cruz, employed as a mucker in the Itogon-Suyoc Mines, Inc. in Baguio, was the holder of an accident insurance policy (No. ITO-BFE-170) underwritten by the Capital Insurance & Surety Co., Inc., for the period beginning November 13, 1956 to November 12, 1957. On January 1, 1957, in connection with the celebration of the New Year, the Itogon-Suyoc Mines, Inc. sponsored a boxing contest for general entertainment wherein the insured Eduardo de la Cruz, a non-professional boxer participated. In the course of his bout with another person, likewise a non-professional, of the same height, weight, and size, Eduardo slipped and was hit by his opponent on the left part of the back of the head, causing Eduardo to fall, with his head hitting the rope of the ring. He was brought to the Baguio General Hospital the following day. The cause of death was reported as hemorrhage, intracranial, left.

Simon de la Cruz, the father of the insured and who was named beneficiary under the policy, thereupon filed a claim with the insurance company for payment of the indemnity under the insurance policy. As the claim was denied, De la Cruz instituted the action in the Court of First Instance of Pangasinan for specific performance. Defendant insurer set up the defense that the death of the insured, caused by his participation in a boxing contest, was not accidental and, therefore, not covered by insurance. After due hearing the court rendered the decision in favor of the plaintiff which is the subject of the present appeal.

It is not disputed that during the ring fight with another non-professional boxer, Eduardo slipped, which was unintentional. At this opportunity, his opponent landed on Eduardo's head a blow, which sent the latter to the ropes. That must have caused the cranial injury that led to his death. Eduardo was insured "against death or disability caused by accidental means". Appellant insurer now contends that while the death of the insured was due to head injury, said injury was sustained because of his voluntary participation in the contest. It is claimed that the participation in the boxing contest was the "means" that produced the injury which, in turn, caused the death of the insured. And, since his inclusion in the boxing card was voluntary on the part of the insured, he cannot be considered to have met his death by "accidental means".

The terms "accident" and "accidental", as used in insurance contracts, have not acquired any technical meaning, and are construed by the courts in their ordinary and common acceptation. Thus, the terms have been taken to mean that which happen by chance or fortuitously, without intention and design, and which is unexpected, unusual, and unforeseen. An accident is an event that takes place without one's foresight or expectation — an event that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not expected.¹

Appellant however, would like to make a distinction between "accident or accidental" and "accidental means", which is the term used in the insurance policy involved here. It is argued that to be considered within the protection of the policy, what is required to be accidental is the means that caused or brought the death and not the death itself. It may be mentioned in this connection, that the tendency of court decisions in the United States in recent years is to eliminate the fine distinction between the terms "accidental" and "accidental means" and to consider them as legally synonymous.² But, even if we take appellant's theory, the death of the insured in the case at bar would still be entitled to indemnification under the policy. The generally accepted rule is that, death or injury does not result from accident or accidental means within the terms of an
accident-policy if it is the natural result of the insured's voluntary act, unaccompanied by anything unforeseen except the death or injury.³ There is no accident when a deliberate act is performed unless some additional, unexpected, independent, and unforeseen happening occurs which produces or brings about the result of injury or death.⁴ In other words, where the death or injury is not the natural or probable result of the insured's voluntary act, or if something unforeseen occurs in the doing of the act which produces the injury, the resulting death is within the protection of policies insuring against death or injury from accident.

In the present case, while the participation of the insured in the boxing contest is voluntary, the injury was sustained when he slid, giving occasion to the infliction by his opponent of the blow that threw him to the ropes of the ring. Without this unfortunate incident, that is, the unintentional slipping of the deceased, perhaps he could not have received that blow in the head and would not have died. The fact that boxing is attended with some risks of external injuries does not make any injuries received in the course of the game not accidental. In boxing as in other equally physically rigorous sports, such as basketball or baseball, death is not ordinarily anticipated to result. If, therefore, it ever does, the injury or death can only be accidental or produced by some unforeseen happening or event as what occurred in this case.

Furthermore, the policy involved herein specifically excluded from its coverage —

(e) Death or disablement consequent upon the Insured engaging in football, hunting, pigsticking, steeplechasing, polo-playing, racing of any kind, mountaineering, or motorcycling.

Death or disablement resulting from engagement in boxing contests was not declared outside of the protection of the insurance contract. Failure of the defendant insurance company to include death resulting from a boxing match or other sports among the prohibitive risks leads inevitably to the conclusion that it did not intend to limit or exempt itself from liability for such death.⁵

Wherefore, in view of the foregoing considerations, the decision appealed from is hereby affirmed, with costs against appellant. so ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.

Footnotes

¹29A Am. Jur. pp. 308-309, and cases cited therein.

²Traveler's Protective Association v. Stephens, 185 Ark. 660, 49 S.W. (2d) 364; Equitable Life Assur. v. Hemenover, 100 Colo. 231, 67 P. (2d) 80, 110 ALR 1270; see cases cited in 29A Am. Jur. sec. 1166.

³Landress v. Phoenix Mut. Life Ins. Co., 291 U.S. 291, 78 L. ed. 934, 54 S. Ct. 461, 90 ALR 1382; Davis v. Jefferson Standard Life Ins. Co., 73 F (2d) 330, 96 ALR 599, and others.

⁴Evans v. Metropolitan Life Ins. Co., 26 Wash. (2d) 594, 174 P. (2d) 961.

⁵Brams v. New York Life Ins. 299 Pa. 11 148 Atl. 855; Jolley v. Jefferson Standard Life Ins. Co., 95 Wash, 683, 294 Pac. 585.

Insurance Case Digest: Social Security System v. Davac (1966)

G.R. No. L-21642             July 30, 1966

Lessons Applicable: Invalid Designation (Insurance)

FACTS:

• Petronilo Davac, a former employee of Lianga Bay Logging Co., Inc. became a member of the Social Security System (SSS) he designated Candelaria Davac as his beneficiary and indicated his relationship to her as that of "wife"
• Lourdes Tuplano his legal wife and their son Romeo Davac and Candelaria Davac and their minor daughter Elizabeth Davac filed their claims
• Social Security Commission: Candelaria Davac 

ISSUE: W/N Candelaria Davac can claim and New Civil Code 739 is not applicable

HELD: YES. 

• she was not guilty of concubinage, there being no proof that she had knowledge of the previous marriage of her husband Petronilo
• The amounts that may thus be received cannot be considered as property earned by the member during his lifetime
• if there is a named beneficiary and the designation is not invalid (as it is not so in this case), it is not the heirs of the employee who are entitled to receive the benefits (unless they are the designated beneficiaries themselves). It is only when there is no designated beneficiaries or when the designation is void, that the laws of succession are applicable. And we have already held that the Social Security Act is not a law of succession. 

Jurisprudence: G.R. No. L-21642

EN BANC

G.R. No. L-21642             July 30, 1966

SOCIAL SECURITY SYSTEM, petitioner-appellee,

vs.

CANDELARIA D. DAVAC, ET AL., respondents;

LOURDES Tuplano, respondent-appellant.

J. Ma. Francisco and N. G. Bravo for respondent-appellant.

Office of the Solicitor General Arturo A. Alafriz, Solicitor Camilo D. Quiason and E. T. Duran for petitioner-appellee.

BARRERA, J.:

This is an appeal from the resolution of the Social Security Commission declaring respondent Candelaria Davac as the person entitled to receive the death benefits payable for the death of Petronilo Davac.

The facts of the case as found by the Social Security Commission, briefly are: The late Petronilo Davac, a former employee of Lianga Bay Logging Co., Inc. became a member of the Social Security System (SSS for short) on September 1, 1957. As such member, he was assigned SS I.D. No. 08-007137. In SSS form E-1 (Member's Record) which he accomplished and filed with the SSS on November 21, 1957, he designated respondent Candelaria Davac as his beneficiary and indicated his relationship to her as that of "wife". He died on April 5, 1959 and, thereupon, each of the respondents (Candelaria Davac and Lourdes Tuplano) filed their claims for death benefit with the SSS. It appears from their respective claims and the documents submitted in support thereof, that the deceased contracted two marriages, the first, with claimant Lourdes Tuplano on August 29, 1946, who bore him a child, Romeo Davac, and the second, with Candelaria Davac on January 18, 1949, with whom he had a minor daughter Elizabeth Davac. Due to their conflicting claims, the processing thereof was held in abeyance, whereupon the SSS filed this petition praying that respondents be required to interpose and litigate between themselves their conflicting claims over the death benefits in question.1äwphï1.ñët

On February 25, 1963, the Social Security Commission issued the resolution referred to above, Not satisfied with the said resolution, respondent Lourdes Tuplano brought to us the present appeal.

The only question to be determined herein is whether or not the Social Security Commission acted correctly in declaring respondent Candelaria Davac as the person entitled to receive the death benefits in question.

Section 13, Republic Act No. 1161, as amended by Republic Act No. 1792, in force at the time Petronilo Davac's death on April 5, 1959, provides:

1. SEC. 13. Upon the covered employee's death or total and permanent disability under such conditions as the Commission may define, before becoming eligible for retirement and if either such death or disability is not compensable under the Workmen's Compensation Act, he or, in case of his death, his beneficiaries, as recorded by his employer shall be entitled to the following benefit: ... . (emphasis supplied.)

Under this provision, the beneficiary "as recorded" by the employee's employer is the one entitled to the death benefits. In the case of Tecson vs. Social Security System, (L-15798, December 28, 1961), this Court, construing said Section 13, said:

It may be true that the purpose of the coverage under the Social Security System is protection of the employee as well as of his family, but this purpose or intention of the law cannot be enforced to the extent of contradicting the very provisions of said law as contained in Section 13, thereof, ... . When the provision of a law are clear and explicit, the courts can do nothing but apply its clear and explicit provisions (Velasco vs. Lopez, 1 Phil, 270; Caminetti vs. U.S., 242 U.S. 470, 61 L. ed. 442).

But appellant contends that the designation herein made in the person of the second and, therefore, bigamous wife is null and void, because (1) it contravenes the provisions of the Civil Code, and (2) it deprives the lawful wife of her share in the conjugal property as well as of her own and her child's legitime in the inheritance.

As to the first point, appellant argues that a beneficiary under the Social Security System partakes of the nature of a beneficiary in life insurance policy and, therefore, the same qualifications and disqualifications should be applied.

Article 2012 of the New Civil Code provides:

ART. 2012. Any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him according to said article.

And Article 739 of the same Code prescribes:

ART. 739. The following donations shall be void:

(1) Those made between persons who were guilty of adultery or concubinage at the time of the donation;

x x x           x x x           x x x

Without deciding whether the naming of a beneficiary of the benefits accruing from membership in the Social Security System is a donation, or that it creates a situation analogous to the relation of an insured and the beneficiary under a life insurance policy, it is enough, for the purpose of the instant case, to state that the disqualification mentioned in Article 739 is not applicable to herein appellee Candelaria Davac because she was not guilty of concubinage, there being no proof that she had knowledge of the previous marriage of her husband Petronilo.1

Regarding the second point raised by appellant, the benefits accruing from membership in the Social Security System do not form part of the properties of the conjugal partnership of the covered member. They are disbursed from a public special fund created by Congress in pursuance to the declared policy of the Republic "to develop, establish gradually and perfect a social security system which ... shall provide protection against the hazards of disability, sickness, old age and death."2

The sources of this special fund are the covered employee's contribution (equal to 2-½ per cent of the employee's monthly compensation);3 the employer's contribution (equivalent to 3-½ per cent of the monthly compensation of the covered employee);4 and the Government contribution which consists in yearly appropriation of public funds to assure the maintenance of an adequate working balance of the funds of the System.5 Additionally, Section 21 of the Social Security Act, as amended by Republic Act 1792, provides:

SEC. 21. Government Guarantee. — The benefits prescribed in this Act shall not be diminished and to guarantee said benefits the Government of the Republic of the Philippines accepts general responsibility for the solvency of the System.

From the foregoing provisions, it appears that the benefit receivable under the Act is in the nature of a special privilege or an arrangement secured by the law, pursuant to the policy of the State to provide social security to the workingmen. The amounts that may thus be received cannot be considered as property earned by the member during his lifetime. His contribution to the fund, it may be noted, constitutes only an insignificant portion thereof. Then, the benefits are specifically declared not transferable,6 and exempted from tax legal processes, and lien.7 Furthermore, in the settlement of claims thereunder the procedure to be observed is governed not by the general provisions of law, but by rules and regulations promulgated by the Commission. Thus, if the money is payable to the estate of a deceased member, it is the Commission, not the probate or regular court that determines the person or persons to whom it is payable.8 that the benefits under the Social Security Act are not intended by the lawmaking body to form part of the estate of the covered members may be gathered from the subsequent amendment made to Section 15 thereof, as follows:

SEC. 15. Non-transferability of benefit. — The system shall pay the benefits provided for in this Act to such persons as may be entitled thereto in accordance with the provisions of this Act. Such benefits are not transferable, and no power of attorney or other document executed by those entitled thereto in favor of any agent, attorney, or any other individual for the collection thereof in their behalf shall be recognized except when they are physically and legally unable to collect personally such benefits: Provided, however, That in the case of death benefits, if no beneficiary has been designated or the designation there of is void, said benefits shall be paid to the legal heirs in accordance with the laws of succession. (Rep. Act 2658, amending Rep. Act 1161.)

In short, if there is a named beneficiary and the designation is not invalid (as it is not so in this case), it is not the heirs of the employee who are entitled to receive the benefits (unless they are the designated beneficiaries themselves). It is only when there is no designated beneficiaries or when the designation is void, that the laws of succession are applicable. And we have already held that the Social Security Act is not a law of succession.9

Wherefore, in view of the foregoing considerations, the resolution of the Social Security Commission appealed from is hereby affirmed, with costs against the appellant.

So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, concur.

Footnotes

1For a woman to be guilty of concubinage, she must know the man to be married (Viada y Vilaseca, Vol. 5, p. 217).

2Sec. 1, Rep. Act 1792, in force at the time of death of herein covered member.

3See. 18, id.

4Sec. 19, id.

5Sec. 20, id.

6Sec. 15, id.

7See. 16, id.

8Sec. 5, id.

9See Tecson vs. Social Security System, supra.

Insurance Case Digest: Misamis Lumber Corp. v. Capital Ins. and Surety Co., Inc. (1966)

G.R. No. L-21380             May 20, 1966

Lessons Applicable: Judicial Construction Cannot Alter Terms (Insurance)

FACTS:

• Misamis Lumber Corporation (Misamis), formerly Lanao Timber Mills, Inc., insured its Ford Falcon motor car with Capital Insurance & Surety Company (Capital)
• November 25, 1961 11 pm: The car broke when it hit a hollow block lying alongside the water hole which the driver did not see because the on-coming car did not dim its light
• The car was towed and repaired by Morosi Motors costing P302.27 
• November 29, 1961: After the repairs were made, Misamis made a report to Capital who only admits liability of P150
• CFI: paragraph 4 of the policy is clear and specific and leaves no room for interpretation that the repair liability is limited to P150

ISSUE: W/N Misamis is entitled to an amount exceeding P150

HELD: NO.

• insurance contract may be rather onerous (one-sided) but that in itself does not justify the abrogation of its express terms, terms which the insured accepted or adhered to and which is the law between the contracting parties