9/7/22, 3:10 PM G.R. No. L-21601 December 28, 1968 - NIELSON & COMPANY, INC. v.

INC. v. LEPANTO CONSOLIDATED MINING COMPANY : Decembe…

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December 1968 - Philippine Supreme Court Decisions/Resolutions

Philippine Supreme Court

Jurisprudence

Philippine Supreme Court Jurisprudence > Year 1968 >

December 1968 Decisions >
G.R. No. L-21601 December 28,
1968 - NIELSON & COMPANY, INC. v. LEPANTO
CONSOLIDATED MINING COMPANY:

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EN BANC

[G.R. No. L-21601. December 28, 1968.]

NIELSON & COMPANY, INC., Plaintiff-Appellant, v.

LEPANTO CONSOLIDATED MINING COMPANY,
Defendant-Appellee.

SYLLABUS

1. REMEDIAL LAW; APPEAL; QUESTION OF FACT OR LAW

NOT RAISED IN THE LOWER COURT MAY NOT BE RAISED ON
APPEAL; INSTANT CASE. — In the pleadings filed by
defendant Lepanto in the lower court and its memorandum
and brief on appeal it never asserted the theory that it has
the right to terminate the management contract because
that contract is one of agency which it could terminate at
will. While it is true that in its ninth and tenth special
affirmative defenses, it has the right to terminate the
management contract in question, that plea of its right to
terminate was not based upon the ground that the relation
between defendant and plaintiff was that of principal and
agent but upon the ground that plaintiff had allegedly not
complied with certain terms of the management contract. If
defendant had thought of considering the management
contract as one of agency it could have amended its answer
by stating exactly its position. It could have asserted its
theory of agency in its memorandum for the lower and in its
brief on appeal. This, defendant did not do. It is the rule, and
the settled doctrine that a party cannot change his theory on
appeal, that is, that a party cannot raise in the appellate
court any question of law or of fact that was not raised in the
court below or which was not within the issue made by the
parties in their pleadings.

2. CIVIL LAW; SPECIAL CONTRACTS; AGENCY

DISTINGUISHED FROM LEASE OF SERVICES. — In both
agency and lease of services one of the parties binds himself
to render some service to the other party. Agency, however,

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is distinguished from lease of work or services in that the

basis of agency is representation, while in the lease of work
or services the basis is employment. The lessor of services
does not represent his employer while the agent represents
his principal. Agency is a preparatory contract as agency
"does not stop with the agency because the purpose is to
enter into other contracts." The most characteristic feature of
an agency relationship is the agent’s power to bring about
business relations between his principal and third persons.
"The agent is destined to execute juridical acts (creation,
modification or extinction of relations with third parties).
Lease services contemplate only material (non-juridical)
acts."

cralaw virtua1aw library

3. ID.; ID.; CONTRACT IN INSTANT CASE IS FOR LEASE OF

SERVICES. — It appears that the principal and paramount
undertaking of plaintiff under the management contract was
the operation and development of the mine and the
operation of the mill. All the other undertakings mentioned in
the contract are necessary or incidental to the principal
undertaking — these other undertakings being dependent
upon the work on the development of the mine and the
operation of the mill. In the performance of this principal
undertaking plaintiff was not in any way executing juridical
acts for defendant, destined to create, modify or extinguish
business relations between Lepanto and third persons. In
other words, in performing its principal undertaking plaintiff
was not acting as an agent of defendant Lepanto, in the
sense that the term agent is interpreted under the law of
agency, but as one who was performing material acts for an
employer, for a compensation.

4. ID.; ID.; ID.; DEFENDANT MAY NOT TERMINATE

CONTRACT AT WILL. — In the instant case, paragraph XI of
the contract provides: ". . . Nielson agrees that Lepanto may
cancel this agreement at any time upon ninety days written
notice, in the event that Nielson for any reason whatsoever,
except acts of God, strike and other causes beyond its
control, shall cease to prosecute the operation and
development of the properties herein described, in good faith
and in accordance with the approved mining practice"
defendant could not terminate the agreement at will. Under
the provision, it could terminate or cancel the agreement by
giving notice of termination 90 days in advance only in the
event that plaintiff should prosecute in bad faith and not in

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accordance with approved mining practice the operation and

development of the mining properties of defendant.
Defendant could not terminate the agreement if plaintiff
should cease to prosecute the operation and development of
the mining properties by reason of acts of God, strike and
other causes beyond the control of plaintiff. It is, therefore,
by express stipulation of the parties, the management
contract in question is not revocable at will of defendant.
This management contract is not a contract of agency as
defined in Article 1700 of the Old Civil Code, but a contract
of lease of service as defined in Article 1544 of the same
code. This contract can not be unilaterally revoked by
defendant.

5. ID.; ID.; ID.; EXTENSION OF CONTRACT EQUAL TO

PERIOD OF SUSPENSION. — The nature of the contract for
management and operation of mines justifies the
interpretation of the force majeure clause, that a period
equal to the period of suspension due to force majeure
should be added to the original term of the contract by way
of an extension. We, therefore, reiterate the ruling in our
decision that since the management contract in the instant
case was suspended from February 1942 to June 26, 1948,
from the latter the contract had yet five years to go.

6. ID.; ID.; ID.; ID.; PLAINTIFF LIMITED TO MANAGEMENT

FEES FOR PERIOD OF EXTENSION. — Since the management
contract had been extended for 5 years, or 60 months, from
June 27, 1948 to June 26, 1953, and the cause of action of
plaintiff to claim for its compensation during that period of
extension had not prescribed, it follows that plaintiff should
be awarded the management fees during the whole period of
extension plus the 10% of the value of the dividends
declared during the said period of extension the 10% of the
depletion reserve that was set up, and the 10% of any
amount expended out of surplus earnings for capital account.

7. ID.; PRESCRIPTION; INAPPLICABILITY THEREOF IN

INSTANT CASE. — The claim accrued on December 31, 1941,
and the right to commence an action thereon started on
January 1, 1942. The action on this claim did not prescribe
although the complaint was filed on February 6, 1958 - or
after a lapse of 16 years, 1 month and 5 days — because of
the operation of moratorium law. The moratorium period of 8
years, 2 months and 8 days should be deducted from the
period that had elapsed since the accrual of the cause of
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action to the date of the filing of the complaint, so that there

is a period of less than 8 years to be reckoned for the
purpose of prescription.

8. ID.; EXECUTIVE ORDER NUMBER 32, MORATORIUM LAW.

— Executive Order No. 32 covered all debts and monetary
obligation on contract before the war (or before December
1941) and those contracted subsequent to Dec. 8, 1941 and
during the Japanese occupation. RA No. 342, approved on
July 26, 1948, lifted the moratorium provided for in
Executive Order No. 32 on pre-war (or pre-Dec. 8, 1941)
debts of debtors who had not filed war damage claims with
the United States War Damage Commission. In other words,
after the effectivity of RA No. 342, the debt moratorium was
limited (1) to debts and other monetary obligations which
were contracted after Dec. 8, 1941 and during the Japanese
occupation, and (2) to those pre-war (or pre-Dec. 8, 1941)
debts and other monetary claims. That was the situation up
to May 18, 1953 when this Court declared RA No. 342
unconstitutional. It has been held by this Court, however,
that from March 10, 1945 when Executive Order No. 32 was
issued, to May 18, 1953 when RA No. 342 was declared
unconstitutional — or a period of 8 years, 2 months and 8
days — the debt moratorium was in force, and had the effect
of suspending the period of prescription.

9. MERCANTILE LAW; CORPORATIONS; SHARES OF STOCK;

ISSUANCE THEREOF. — From Section 16 of the Corporation
Law, the consideration for which shares of stock may be
issued are: (1) cash; (2) property and (3) undistributed
profits. Shares of stock are given the special name "stock
dividends" only if they are issued in lieu of undistributed
profits. If the shares of stocks are issued in exchange of cash
or Property then those shares do not fall under the category
of "stock dividends." A corporation may legally issue shares
of stock in consideration of services rendered to it by a
person not a stockholder, or in payment of its indebtedness.
A share of stock issued to pay for services rendered is
equivalent to a stock issued in exchange of property because
services is equivalent to property. Likewise a share of stock
issued in payment of indebtedness is equivalent to issuing a
stock in exchange for cash. But a share of stock thus issued
should be part of the original capital stock of the corporation
upon its organization, or part of the stocks issued when the
increase of the capitalization of a corporation is properly
authorized.

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10. ID.; ID.; STOCK DIVIDEND, DEFINED. — A "stock

dividend" is any dividend payable in shares of stock of the
corporation declaring or authorizing such dividend. It is,
what the term itself implies, a distribution of the shares of
stock of the corporation among the stockholders as
dividends. A stock dividend of a corporation is a dividend
paid in shares of stock instead of cash and is properly
payable only out of surplus profits. So, a stock dividend is
actually two things: (1) a dividend, and (2) the enforced use
of the dividend money to purchase additional shares of stock
at par. When a corporation issues stock dividends, it shows
that the corporations’ accumulated profits have been
capitalized instead of distributed to the stockholders or
retained as surplus available for distribution, in money or in
kind, should opportunity offer. Far from being a realization of
profits for the stockholder, it tends rather to postpone said
realization, in that the fund represented by the new stock
has been transferred from the surplus to assets and no
longer available for actual distribution.

11. ID.; ID.; DIVIDEND. — The term "dividend" both in the

technical sense and its ordinary acceptation, is that part or
portion of the profits of the enterprise which the corporation,
by its governing agents, sets apart for ratable division
among the holders of the capital stock. It means the fund
actually set aside, and declared by the directors of the
corporation as a dividend, and duly ordered by the directory,
or by the stockholders at a corporate meeting to be divided
or distributed among the stockholders according to their
respective interests.

12. ATTORNEYS; ATTORNEYS FEES; AWARD OF ATTORNEYS

FEES IS WITHIN THE SOUND DISCRETION OF THE COURT. —
The matter of the award of attorneys fees is within the sound
discretion of this court. In our decision We have stated the
reason why the award of P50,000.00 for attorney’s fees is
considered by this Court as reasonable.

DECISION

ZALDIVAR, J.:

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Lepanto seeks the reconsideration of the decision rendered on

December 17, 1966. The motion for reconsideration is based on
two sets of grounds — the first set consisting of four principal
grounds, and the second set consisting of five alternative
grounds, as follows: chanrob1es virtual 1aw library

Principal Grounds:

chanrob1es virtual 1aw library

1. The court erred in overlooking and failing to apply the proper

law applicable to the agency or management contract in
question, namely, Article 1733 of the Old Civil Code (Article 1920
of the new), by virtue of which said agency was effectively
revoked and terminated in 1945 when, as stated in paragraph 20
of the complaint, "defendant voluntarily . . . prevented plaintiff
from resuming management and operation of said mining
properties."

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2. The court erred in holding that paragraph II of the

management contract (Exhibit C) suspended the period of said
contract.

3. The court erred in reversing the ruling of the trial judge,

based on well-settled jurisprudence of this Supreme Court, that
the management agreement was only suspended but not
extended on account of the war.

4 The court erred in reversing the finding of the trial judge that
Nielson’s action had prescribed, but considering only the first
claim and ignoring the prescriptibility of the other claims.

Alternative Grounds:

chanrob1es virtual 1aw library

5. The court erred in holding that the period of suspension of the

contract on account of the war lasted from February 1942 to
June 26, 1948.

6. Assuming arguendo that Nielson is entitled to any relief, the

court erred in awarding as damages (a) 10% of the cash
dividends declared and paid in December, 1941; (b) the
management fee of P2,500.00 for the month of January, 1942;
and (c) the full contract price for the extended period of sixty
months, since these damages were neither demanded nor
proved and, in any case, not allowable under the general law of

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damages.

7. Assuming arguendo that appellant is entitled to any relief, the

court erred in ordering appellee to issue and deliver to appellant
shares of stock together with fruits thereof.

8. The court erred in awarding to appellant an undetermined

amount of shares of stock and/or cash, which award cannot be
ascertained and executed without further litigation.

9. The court erred in rendering judgment for attorney’s fees.

We are going to dwell on these grounds in the order they are

presented.

1. In its first principal ground Lepanto claims that its own

counsel and this Court had overlooked the real nature of the
management contract entered into by and between Lepanto and
Nielson, and the law that is applicable on said contract. Lepanto
now asserts for the first time - and this is done in a motion for
reconsideration — that the management contract in question is a
contract of agency such that it has the right to revoke and
terminate the said contract, as it did terminate the same, under
the law of agency, and particularly pursuant to Article 1733 of
the Old Civil Code (Article 1920 of the New Civil Code)

We have taken note that Lepanto is advancing a new theory. We

have carefully examined the pleadings filed by Lepanto in the
lower court, its memorandum and its brief on appeal, and never
did it assert the theory that it has the right to terminate the
management contract because that contract is one of agency
which it could terminate at will. While it is true that in its ninth
and tenth special affirmative defenses, in its answer in the court
below, Lepanto pleaded that it had the right to terminate the
management contract in question, that plea of its right to
terminate was not based upon the ground that the relation
between Lepanto and Nielson was that of principal and agent but
upon the ground that Nielson had allegedly not complied with
certain terms of the management contract. If Lepanto had
thought of considering the management contract as one of
agency it could have amended its answer by stating exactly its
position. It could have asserted its theory of agency in its
memorandum for the lower court and in its brief on appeal. This,
Lepanto did not do. It is the rule, and the settled doctrine of this
Court, that a party cannot change his theory on appeal — that is,
that a party cannot raise in the appellate court any question of
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law or of fact that was not raised in the court below or which was
not within the issue made by the parties in their pleadings
(Section 19, Rule 49 of the old Rules of Court, and also Section
18 of the new Rules of Court; Hautea v. Magallon, L-20345,
November 28, 1964; Northern Motors, Inc. v. Prince Line, L-
13884, February 29, 1960; American Express Co. v. Natividad,
46 Phil. 207; Agoncillo v. Javier, 38 Phil. 424 and Molina v.
Somes, 24 Phil. 49)

At any rate, even if we allow Lepanto to assert its new theory at

this very late stage of the proceedings, this Court cannot sustain
the same.

Lepanto contends that the management contract in question

(Exhibit C) is one of agency because: (1) Nielson was to manage
and operate the mining properties and mill on behalf, and for the
account, of Lepanto; and (2) Nielson was authorized to represent
Lepanto in entering, on Lepanto’s behalf, into contracts for the
hiring of laborers, purchase of supplies, and the sale and
marketing of the ores mined. All these, Lepanto claims, show
that Nielson was, by the terms of the contract, destined to
execute juridical acts not on its own behalf but on behalf of
Lepanto under the control of the Board of Directors of Lepanto
"at all times." Hence Lepanto claims that the contract is one of
agency. Lepanto then maintains that an agency is revocable at
the will of the principal (Article 1733 of the Old Civil Code)
regardless of any term or period stipulated in the contract, and it
was in pursuance of that right that Lepanto terminated the
contract in 1945 when it took over and assumed exclusive
management of the work previously entrusted to Nielson under
the contract. Lepanto finally maintains that Nielson as an agent
is not entitled to damages since the law gives to the principal the
right to terminate the agency at will.

Because of Lepanto’s new theory We consider it necessary to

determine the nature of the management contract — whether it
is a contract of agency or a contract of lease of services.
Incidentally, we have noted that the lower court, in the decision
appealed from, considered the management contract as a
contract of lease of services.

Article 1709 of the Old Civil Code, defining contract of agency,

provides:

jgc:chanrobles.com.ph

"By the contract of agency, one person binds himself to render

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some service or do something for the account or at the request

of another."

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Article 1544, defining contract of lease of service, provides: jgc:chanrobles.com.ph

"In a lease of work or services, one of the parties binds himself

to make or construct something or to render a service to the
other for a price certain."

cralaw virtua1aw library

In both agency and lease of services one of the parties binds

himself to render some service to the other party. Agency,
however, is distinguished from lease of work or services in that
the basis of agency is representation, while in the lease of work
or services the basis is employment. The lessor of services does
not represent his employer, while the agent represents his
principal. Manresa, in his "Commentarios al Codigo Civil Español"
(1931, Tomo IX, pp. 372-373), points out that the element of
representation distinguishes agency from lease of services, as
follows:

jgc:chanrobles.com.ph

"Nuestro art. 1.709 como el art 1.984 del Codigo de Napoleon y

cuantos textos legales citamos en las concordancias, expresan
claramente esta idea de la representación, ‘hacer alguna cosa
por cuenta o encargo de otra’ dice nuestro Codigo; ‘poder de
hacer alguna cosa para el mandante o en su nombre’ dice el
Codigo de Napoleon, y en tales palabras aparece vivo y luminoso
el concepto y la teoria de la representacion, tan fecunda en
enseñanzas, que a su sola luz es como se explican las diferencias
que separan el mandato del arrendamiento de servicios, de los
contratos inominados, del consejo y de la gestion de negocios.

"En efecto, en el arrendamiento de servicios al obligarse para su

ejecucion, se trabaja, en verdad, para el dueño que remunera la
labor, pero ni se le representa ni se obra en su nombre . . ."

cralaw virtua1aw library

On the basis of the interpretation of Article 1709 of the old Civil

Code, Article 1868 of the new Civil Code has defined the contract
of agency in more explicit terms, as follows:

jgc:chanrobles.com.ph

"By the contract of agency a person binds himself to render

some service or to do something in representation or on behalf
of another, with the consent or authority of the latter."

cralaw virtua1aw library

There is another obvious distinction between agency and lease of

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services. Agency is a preparatory contract, as agency "does not

stop with the agency because the purpose is to enter into other
contracts." The most characteristic feature of an agency
relationship is the agent’s power to bring about business
relations between his principal and third persons. "The agent is
destined to execute juridical acts (creation, modification or
extinction of relations with third parties). Lease of services
contemplate only material (non-juridical) acts." (Reyes and
Puno, "An Outline of Philippine Civil Law," Vol. V, p. 277)

In the light of the interpretations we have mentioned in the

foregoing paragraphs, let us now determine the nature of the
management contract in question. Under the contract, Nielson
had agreed, for a period of five years, with the right to renew for
a like period, to explore, develop and operate the mining claims
of Lepanto, and to mine, or mine and mill, such pay ore as may
be found therein and to market the metallic products recovered
therefrom which may prove to be marketable, as well as to
render for Lepanto other services specified in the contract. We
gather from the contract that the work undertaken by Nielson
was to take complete charge, subject at all times to the general
control of the Board of Directors of Lepanto, of the exploration
and development of the mining claims, of the hiring of a
sufficient and competent staff and of sufficient and capable
laborers, of the prospecting and development of the mine, of the
erection and operation of the mill, and of the beneficiation and
marketing of the minerals found on the mining properties; and in
carrying out said obligation Nielson should proceed diligently and
in accordance with the best mining practice. In connection with
its work Nielson was to submit reports, maps, plans and
recommendations with respect to the operation and development
of the mining properties, make recommendations and plans on
the erection or enlargement of any existing mill, dispatch mining
engineers and technicians to the mining properties as from time
to time may reasonably be required to investigate and make
recommendations without cost or expense to Lepanto. Nielson
was also to "act as purchasing agent of supplies, equipment and
other necessary purchases by Lepanto, provided, however, that
no purchase shall be made without the prior approval of
Lepanto; and provided further, that no commission shall be
claimed or retained by Nielson on such purchase" ; and "to
submit all requisition for supplies, all contracts and arrangement
with engineers, and staff and all matters requiring the
expenditures of money, present or future, for prior approval by
Lepanto; and also to make contracts subject to the prior
approval of Lepanto for the sale and marketing of the minerals
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mined from said properties, when said products are in a suitable

condition for marketing." 1

It thus appears that the principal and paramount undertaking of

Nielson under the management contract was the operation and
development of the mine and the operation of the mill. All the
other undertakings mentioned in the contract are necessary or
incidental to the principal undertaking — these other
undertakings being dependent upon the work on the
development of the mine and the operation of the mill. In the
performance of this principal undertaking Nielson was not in any
way executing juridical acts for Lepanto, destined to create,
modify or extinguish business relations between Lepanto and
third persons. In other words, in performing its principal
undertaking Nielson was not acting as an agent of Lepanto, in
the sense that the term agent is interpreted under the law of
agency, but as one who was performing material acts for an
employer, for a compensation.

It is true that the management contract provides that Nielson

would also act as purchasing agent of supplies and enter into
contracts regarding the sale of mineral, but the contract also
provides that Nielson could not make any purchase, or sell the
minerals, without the prior approval of Lepanto. It is clear,
therefore, that even in these cases Nielson could not execute
juridical acts which would bind Lepanto without first securing the
approval of Lepanto. Nielson, then, was to act only as an
intermediary, not as an agent.

Lepanto contends that the management contract in question

being one of agency it had the right to terminate the contract at
will pursuant to the provision of Article 1733 of the old Civil
Code. We find, however, a provision in the management contract
which militates against this stand of Lepanto. Paragraph XI of
the contract provides:

jgc:chanrobles.com.ph

"Both parties to this agreement fully recognize that the terms of

this Agreement are made possible only because of the faith or
confidence that the Officials of each company have in the other;
therefore, in order to assure that such confidence and faith shall
abide and continue, NIELSON agrees that LEPANTO may cancel
this Agreement at any time upon ninety (90) days written notice,
in the event that NIELSON for any reason whatsoever, except
acts of God, strike and other causes beyond its control, shall
cease to prosecute the operation and development of the

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properties herein described, in good faith and in accordance with

approved mining practice."

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It is thus seen, from the above-quoted provision of paragraph XI

of the management contract, that Lepanto could not terminate
the agreement at will. Lepanto could terminate or cancel the
agreement by giving notice of termination ninety days in
advance only in the event that Nielson should prosecute in bad
faith and not in accordance with approved mining practice the
operation and development of the mining properties of Lepanto.
Lepanto could not terminate the agreement if Nielson should
cease to prosecute the operation and development of the mining
properties by reason of acts of God, strike and other causes
beyond the control of Nielson.

The phrase "Both parties to this agreement fully recognize that

the terms of this agreement are made possible only because of
the faith and confidence of the officials of each company have in
the other" in paragraph XI of the management contract does not
qualify the relation between Lepanto and Nielson as that of
principal and agent based on trust and confidence, such that the
contractual relation may be terminated by the principal at any
time that the principal loses trust and confidence in the agent.
Rather, that phrase simply implies the circumstance that brought
about the execution of the management contract. Thus, in the
annual report for 1936 2 , submitted by Mr. C. A. Dewit,
President of Lepanto, to its’ stockholders, under date of March
15, 1937, we read the following:

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"To the Stockholders:

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x       x       x

"The incorporation of our Company was effected as a result of

negotiations with Messrs. Nielson & Co., Inc., and an offer by
these gentlemen to Messrs. C. I. Cookes and V. L. Lednicky,
dated August 11, 1936, reading as follows:

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‘Messrs. Cookes and Lednicky,’

‘Present.

‘Re: Mankayan Copper Mines.

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‘GENTLEMEN:

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‘After an examination of your property by our engineers, we

have decided to offer as we hereby offer to underwrite the entire
issue of stock of a corporation to be formed for the purpose of
taking over said properties, said corporation to have an
authorized capital of P1,750,000.00, of which P700,000.00 will
be issued in escrow to the claimowners in exchange for their
claims, and the balance of P1,050,000.00 we will sell to the
public at par or take ourselves.

‘The arrangement will be under the following conditions:

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‘1. The subscriptions for cash shall be payable 50% at time of

subscription and the balance subject to the call of the Board of
Directors of the proposed corporation.

‘2. We shall have an underwriting and brokerage commission of

10% of the P1,050,000.00 to be sold for cash to the public, said
commission to be payable from the first payment of 50% on
each subscription.

‘3. We will bear the cost of preparing and mailing any prospectus
that may be required, but no such prospectus will be sent out
until the text thereof has been first approved by the Board of
Directors of the proposed corporation.

‘4. That after the organization of the corporation, all operating

contract be entered into between ourselves and said corporation,
under the terms which the property will be developed and mined
and a mill erected, under our supervision, our compensation to
be P2,000.00 per month until the property is put on a profitable
basis and P2,500.00 per month plus 10% of the net profits for a
period of five years thereafter.`

‘5. That we shall have the option to renew said operating

contract for an additional period of five years, on the same basis
as the original contract, upon the expiration thereof.

‘It is understood that the development and mining operations on

said property, and the erection of the mill thereon, and the
expenditures therefore, shall be subject to the general control of
the Board of Directors of the proposed corporation, and, in case
you accept this proposition, that a detailed operating contract
will be entered into, covering the relationships between the

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parties.

Yours very truly,

(Sgd.) L. R. Nielson’"

"Pursuant to the provisions of paragraph 2 of this offer, Messrs.

Nielson & Co., took subscriptions for One Million Fifty Thousand
Pesos (P1,050,000.00) in shares of our Company and their
underwriting and brokerage commission has been paid. More
than fifty per cent of these subscriptions have been paid to the
Company in cash. The claimowners have transferred their claims
to the Corporation, but the P700,000.00 in stock which they are
to receive therefor, is as yet held in escrow.

"Immediately upon the formation of the Corporation Messrs.

Nielson & Co., assumed the Management of the property under
the control of the Board of Directors. A modification in the
Management Contract was made with the consent of all the then
stockholders, in virtue of which the compensation of Messrs.
Nielson & Co., was increased to P2,500.00 per month when mill
construction began. The formal Management Contract was not
entered into until January 30, 1937."

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x       x       x

"Manila, March 15, 1937

(Sgd.) "C.A. DeWitt

"President"

We can gather from the foregoing statements in the annual

report for 1936, and from the provision of paragraph XI of the
Management contract, that the employment by Lepanto of
Nielson to operate and manage its mines was principally in
consideration of the know-how and technical services that
Nielson offered Lepanto. The contract thus entered into pursuant
to the offer made by Nielson and accepted by Lepanto was a
"detailed operating contract." It was not a contract of agency.
Nowhere in the record is it shown that Lepanto considered
Nielson as its agent and that Lepanto terminated the
management contract because it had lost its trust and
confidence in Nielson.

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The contention of Lepanto that it had terminated the

management contract in 1945, following the liberation of the
mines from Japanese control, because the relation between it
and Nielson was one of agency and as such it could terminate
the agency at will, is, therefore, untenable. On the other hand, it
can be said that, in asserting that it had terminated or cancelled
the management contract in 1945, Lepanto had thereby violated
the express terms of the management contract. The
management contract was renewed to last until January 31,
1947, so that the contract had yet almost two years to go —
upon the liberation of the mines in 1945. There is no showing
that Nielson had ceased to prosecute the operation and
development of the mines in good faith and in accordance with
approved mining practice which would warrant the termination of
the contract upon ninety days written notice. In fact there was
no such written notice of termination. It is an admitted fact that
Nielson ceased to operate and develop the mines because of the
war — a cause beyond the control of Nielson.

Indeed, if the management contract in question was intended to

create a relationship of principal and agent between Lepanto and
Nielson, paragraph XI of the contract should not have been
inserted because, as provided in Article 1733 of the old Civil
Code, agency is essentially revocable at the will of the principal -
that means, with or without cause. But precisely said paragraph
XI was inserted in the management contract to provide for the
cause for its revocation. The provision of paragraph XI must be
given effect.

In the construction of an instrument where there are several

provisions or particulars, such a construction is, if possible, to be
adopted as will give effect to all, 3 and if some stipulation of any
contract should admit of several meanings, it shall be understood
as bearing that import which is most adequate to render it
effectual. 4

It is Our considered view that by express stipulation of the

parties, the management contract in question is not revocable at
the will of Lepanto. We rule that this management contract is not
a contract of agency as defined in Article 1709 of the old Civil
Code, but a contract of lease of services as defined in Article
1544 of the same Code. This contract can not be unilaterally
revoked by Lepanto.

The first ground of the motion for reconsideration should,

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therefore, be brushed aside.

2. In the second, third and fifth grounds of its motion for

reconsideration, Lepanto maintains that this Court erred, in
holding that paragraph II of the management contract
suspended the period of said contract, in holding that the
agreement was not only suspended but was extended on
account of the war, and in holding that the period of suspension
on account of the war lasted from February, 1942 to June 26,
1948. We are going to discuss these three grounds together
because they are inter-related.

In Our decision we have dwelt lengthily on the points that the

management contract was suspended because of the war, and
that the period of the contract was extended for the period
equivalent to the time when Nielson was unable to perform the
work of mining and milling because of the adverse effects of the
war on the work of mining and milling. It is the contention of
Lepanto that the happening of those events, and the effects of
those events, simply suspended the performance of the
obligations by either party in the contract, but did not suspend
the period of the contract, much less extended the period of the
contract.

We have conscientiously considered the arguments of Lepanto in

support of these three grounds, but We are not persuaded to
reconsider the rulings that We made in Our decision.

We want to say a little more on these points, however. Paragraph

II of the management contract provides as follows:

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"In the event of inundation, flooding of the mine, typhoon,

earthquake or any other force majeure, war, insurrection, civil
commotion, organized strike, riot, fire, injury to the machinery
or other event or cause reasonably beyond the control of
NIELSON and which adversely affects the work of mining and
milling; NIELSON shall report such fact to LEPANTO and without
liability or breach of the terms of this Agreement, the same shall
remain in suspense, wholly or partially during the terms of such
inability." (Italics supplied)

A reading of the above-quoted paragraph II cannot but convey

the idea that upon the happening of any of the events
enumerated therein, which adversely affects the work of mining
and milling, the agreement is deemed suspended for as long as

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Nielson is unable to perform its work of mining and milling

because of the adverse effects of the happening of the event on
the work of mining and milling. During the period when the
adverse effects on the work of mining and milling exist, neither
party in the contract would be held liable for non- compliance of
its obligation under the contract. In other words, the operation of
the contract is suspended for as long as the adverse effects of
the happening of any of those events had impeded or obstructed
the work of mining and milling. An analysis of the phraseology of
the above-quoted paragraph II of the management contract
readily supports the conclusion that it is the agreement, or the
contract, that is suspended. The phrase "the same" can refer to
no other than the term "Agreement" which immediately precedes
it. The "Agreement" may be wholly or partially suspended, and
this situation will depend on whether the event wholly or
partially affected adversely the work of mining and milling. In
the instant case, the war had adversely affected — and wholly at
that — the work of mining and milling. We have clearly stated in
Our decision the circumstances brought about by the war which
caused the whole or total suspension of the agreement or of the
management contract.

LEPANTO itself admits that the management contract was

suspended. We quote from the brief of LEPANTO:

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"Probably, what Nielson meant was, it was prevented by Lepanto

to assume again the management of the mine in 1945, at the
precise time when defendant was at the feverish phase of
rehabilitation and although the contract had already been
suspended." (Lepanto’s Brief, p. 9)

". . . it was impossible, as a result of the destruction of the mine,

for the plaintiff to manage and operate the same and because,
as provided in the agreement, the contract was suspended by
reason of the war." (Lepanto’s Brief, pp. 9-10)

"Clause II, by its terms, is clear that the contract is suspended in

case fortuitous event or force majeure, such as war, adversely
affects the work of mining and milling." (Lepanto’s Brief, p. 49)

Lepanto is correct when it said that the obligations under the

contract were suspended upon the happening of any of the
events enumerated in paragraph II of the management contract.
Indeed, those obligations were suspended because the contract
itself was suspended. When we talk of a contract that has been

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suspended we certainly mean that the contract temporarily

ceased to be operative, and the contract becomes operative
again upon the happening of a condition — or when a situation
obtains — which warrants the termination of the suspension of
the contract.

In Our decision We pointed out that the agreement in the

management contract would be suspended when two conditions
concur, namely: (1) the happening of the event constituting a
force majeure that was reasonably beyond the control of Nielson,
and (2) that the event constituting the force majeure adversely
affected the work of mining and milling. The suspension,
therefore, would last not only while the event constituting the
force majeure continued to occur but also for as long as the
adverse effects of the force majeure on the work of mining and
milling had not been eliminated. Under the management contract
the happening alone of the event constituting the force majeure
which did not affect adversely the work of mining and milling
would not suspend the period of the contract. It is only when the
two conditions concur that the period of the agreement is
suspended.

It is not denied that because of the war, in February 1942, the

mine, the original mill, the original power plant, the supplies and
equipment, and all installations at the Mankayan mines of
Lepanto, were destroyed upon order of the United States Army,
to prevent their utilization by the enemy. It is not denied that for
the duration of the war Nielson could not undertake the work of
mining and milling. When the mines were liberated from the
enemy in August, 1945, the condition of the mines, the mill, the
power plant and other installations, was not the same as in
February 1942 when they were ordered destroyed by the US
army. Certainly, upon the liberation of the mines from the
enemy, the work of mining and milling could not be undertaken
by Nielson under the same favorable circumstances that
obtained before February 1942. The work of mining and milling,
as undertaken by Nielson in January, 1942, could not be
resumed by Nielson soon after liberation because of the adverse
effects of the war, and this situation continued until June of
1948. Hence, the suspension of the management contract did
not end upon the liberation of the mines in August, 1945. The
mines and the mill and the installations, laid waste by the
ravages of war, had to be reconstructed and rehabilitated, and it
can be said that it was only on June 26, 1948 that the adverse
effects of the war on the work of mining and milling had ended,
because it was on that date that the operation of the mines and
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the mill was resumed. The period of suspension should,

therefore, be reckoned from February 1942 until June 26, 1948,
because it was during this period that the war and the adverse
effects of the war on the work of mining and milling had lasted.
The mines and the installations had to be rehabilitated because
of the adverse effects of the war. The work of rehabilitation
started soon after the liberation of the mines in August, 1945
and lasted until June 26, 1948 when, as stated in Lepanto’s
annual report to its stockholders for the year 1948, "June 28,
1948 marked the official return to operation of this company at
its properties at Mankayan, Mountain province, Philippines" (Exh.
F-1).

Lepanto would argue that if the management contract was

suspended at all the suspension should cease in August of 1945,
contending that the effects of the war should cease upon the
liberation of the mines from the enemy. This contention cannot
be sustained, because the period of rehabilitation was still a
period when the physical effects of the war — the destruction of
the mines and of all the mining installations — adversely
affected, and made impossible, the work of mining and milling.
Hence, the period of the reconstruction and rehabilitation of the
mines and the installations must be counted as part of the period
of suspension of the contract.

Lepanto claims that it would not be unfair to end the period of

suspension upon the liberation of the mines because soon after
the liberation of the mines Nielson insisted to resume the
management work, and that Nielson was under obligation to
reconstruct the mill in the same way that it was under obligation
to construct the mill in 1937. This contention is untenable. It is
true that Nielson insisted to resume its management work after
liberation, but this was only for the purpose of restoring the
mines, the mill, and other installations to their operating and
producing condition as of February 1942 when they were ordered
destroyed. It is not shown by any evidence in the record, that
Nielson had agreed, or would have agreed, that the period of
suspension of the contract would end upon the liberation of the
mines. This is so because, as found by this Court, the intention
of the parties in the management contract, and as understood by
them, the management contract was suspended for as long as
the adverse effects of the force majeure on the work of mining
and milling had not been removed, and the contract would be
extended for as long as it was suspended. Under the
management contract Nielson had the obligation to erect and
operate the mill, but not to re-erect or reconstruct the mill in
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case of its destruction by force majeure.

It is the considered view of this Court that it would not be fair to

Nielson to consider the suspension of the contract as terminated
upon the liberation of the mines because then Nielson would be
placed in a situation whereby it would have to suffer the adverse
effects of the war on the work of mining and milling. The
evidence shows that as of January 1942 the operation of the
mines under the management of Nielson was already under
beneficial conditions, so much so that dividends were already
declared by Lepanto for the years 1939, 1940 and 1941. To
make the management contract immediately operative after the
liberation of the mines from the Japanese, at the time when the
mines and all its installations were laid waste as a result of the
war, would be to place Nielson in a situation whereby it would
lose all the benefits of what it had accomplished in placing the
Lepanto mines in profitable operation before the outbreak of the
war in December, 1941. The record shows that Nielson started
its management operation way back in 1936, even before the
management contract was entered into. As early as August 1936
Nielson negotiated with Messrs. C.I. Cookes and V.L. Lednicky for
the operation of the Mankayan mines and it was the result of
those negotiations that Lepanto was incorporated; that it was
Nielson that helped to capitalize Lepanto, and that after the
formation of the corporation (Lepanto) Nielson immediately
assumed the management of the mining properties of Lepanto.
It was not until January 30, 1937 when the management
contract in question was entered into between Lepanto and
Nielson (Exhibit A).

A contract for the management and operation of mines calls for a

speculative and risky venture on the part of the manager-
operator. The manager-operator invests its technical know-how,
undertakes back-breaking efforts and tremendous spade-work,
so to say, in the first years of its management and operation of
the mines, in the expectation that the investment and the efforts
employed might be rewarded later with success. This expected
success may never come. This had happened in the very case of
the Mankayan mines where, as recounted by Mr. Lednicky of
Lepanto, various persons and entities of different nationalities,
including Lednicky himself, invested all their money and failed.
The manager-operator may not strike sufficient ore in the first,
second, third, or fourth year of the management contract, or he
may not strike ore even until the end of the fifth year. Unless the
manager-operator strikes sufficient quantity of ore he cannot
expect profits or reward for his investment and efforts. In the
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case of Nielson, its corps of competent engineers, geologists,

and technicians begun working on the Mankayan mines of
Lepanto since the latter part of 1936, and continued their work
without success and profit through 1937, 1938, and the earlier
part of 1939. It was only in December of 1939 when the efforts
of Nielson started to be rewarded when Lepanto realized profits
and the first dividends were declared. From that time on Nielson
could expect profit to come to it — as in fact Lepanto declared
dividends for 1940 and 1941 — if the development and operation
of the mines and the mill would continue unhampered. The
operation, and the expected profits, however, would still be
subject to hazards due to the occurrence of fortuitous events,
fires, earthquakes, strikes, war, etc., constituting force majeure,
which would result in the destruction of the mines and the mill.
One of these diverse causes, or one after the other, may
consume the whole period of the contract, and if it should
happen that way the manager- operator would reap no profit to
compensate for the first years of spade-work and investment of
efforts and know-how. Hence, in fairness to the manager-
operator, so that he may not be deprived of the benefits of the
work he had accomplished, the force majeure clause is
incorporated as a standard clause in contracts for the
management and operation of mines.

The nature of the contract for the management and operation of

mines justifies the interpretation of the force majeure clause,
that a period equal to the period of suspension due to force
majeure should be added to the original term of the contract by
way of an extension. We, therefore, reiterate the ruling in Our
decision that the management contract in the instant case was
suspended from February, 1942 to June 26, 1948, and that from
the latter date the contract had yet five years to go.

3. In the fourth ground of its motion for reconsideration, Lepanto

maintains that this Court erred in reversing the finding of the
trial court that Nielson’s action has prescribed, by considering
only the first claim and ignoring the prescriptibility of the other
claims.

This ground of the motion for reconsideration has no merit.

In Our decision We stated that the claims of Nielson are based

on a written document, and, as such, the cause of action
prescribes in ten years. 5 Inasmuch as there are different claims
which accrued on different dates the prescriptive periods for all
the claims are not the same. The claims of Nielson that have
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been awarded by this Court are itemized in the dispositive part

of the decision.

The first item of the awards in Our decision refers to Nielson’s

compensation in the sum of P17,500.00, which is equivalent to
10% of the cash dividends declared by Lepanto in December,
1941. As We have stated in Our decision, this claim accrued on
December 31, 1941, and the right to commence an action
thereon started on January 1, 1942. We declared that the action
on this claim did not prescribe although the complaint was filed
on February 6, 1958 — or after a lapse of 16 years, 1 month and
5 days — because of the operation of the moratorium law. We
declared that under the applicable decisions of this Court 6 the
moratorium period of 8 years, 2 months and 8 days should be
deducted from the period that had elapsed since the accrual of
the cause of action to the date of the filing of the complaint, so
that there is a period of less than 8 years to be reckoned for the
purpose of prescription.

This claim of Nielson is covered by Executive Order No. 32,

issued on March 10, 1945, which provides as follows:

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"Enforcement of payments of all debts and other monetary

obligations payable in the Philippines, except debts and other
monetary obligations entered into in any area after declaration
by Presidential Proclamation that such area has been freed from
enemy occupation and control, is temporarily suspended pending
action by the Commonwealth Government." (41 O.G. 56-57;
Emphasis supplied)

Executive Order No. 32 covered all debts and monetary

obligation contracted before the war (or before December 8,
1941) and those contracted subsequent to December 8, 1941
and during the Japanese occupation. Republic Act No. 342,
approved on July 26, 1948, lifted the moratorium provided for in
Executive Order No. 32 on pre-war (or pre-December 8, 1941)
debts of debtors who had not filed war damage claims with the
United States War Damage Commission. In other words, after
the effectivity of Republic Act No. 342, the debt moratorium was
limited: (1) to debts and other monetary obligations which were
contracted after December 8, 1941 and during the Japanese
occupation, and (2) to those pre-war (or pre-December 8, 1941)
debts and other monetary obligations where the debtors filed
war damage claims. That was the situation up to May 18, 1953
when this Court declared Republic Act No. 342 unconstitutional.

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7 It has been held by this Court, however, that from March 10,
1945 when Executive Order No. 32 was issued, to May 18, 1953
when Republic Act No. 342 was declared unconstitutional — or a
period of 8 years, 2 months and 8 days — the debt moratorium
was in force, and had the effect of suspending the period of
prescription. 8

Lepanto is wrong when in its motion for reconsideration it claims

that the moratorium provided for in Executive Order No. 32 was
continued by Republic Act No. 342 "only with respect to debtors
of pre-war obligations or those incurred prior to December 8,
1941," and that "the moratorium was lifted and terminated with
respect to obligations incurred after December 8, 1941." 9

This Court has held that Republic Act No. 342 does not apply to
debts contracted during the war and did not lift the moratorium
in relation thereto. 10 In the case of Abraham, Et. Al. v.
Intestate Estate of Juan C. Ysmael, Et Al., L-16741, Jan. 31,
1962, this Court said:

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"Respondents, however, contend that Republic Act No. 342,

which took effect on July 26, 1948, lifted the moratorium on
debts contracted during the Japanese occupation. The court has
already held that Republic Act No. 342 did not lift the
moratorium on debts contracted during the war (Uy v. Kalaw
Katigbak, G.R. No. L-1830, Dec. 31, 1949) but modified
Executive Order No. 32 as to pre-war debts, making the
protection available only to debtors who had war damage claims
(Sison v. Mirasol, G.R. No. L-4711, Oct. 3, 1952)"

We therefore reiterate the ruling in Our decision that the claim

involved in the first item awarded to Nielson had not prescribed.

What we have stated herein regarding the non-prescription of

the cause of action of the claim involved in the first item in the
award also holds true with respect to the second item in the
award, which refers to Nielson’s claim for management fee of
P2,500.00 for January, 1942. Lepanto admits that this second
item, like the first, is a monetary obligation. The right of action
of Nielson regarding this claim accrued on January 31, 1942.

As regards items 3, 4, 5, 6 and 7 in the awards in the decision,

the moratorium law is not applicable. That is the reason why in
Our decision We did not discuss the question of prescription
regarding these items. The claims of Nielson involved in these

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items are based on the management contract, and Nielson’s

cause of action regarding these claims prescribes in ten years.
Corollary to Our ruling that the management contract was
suspended from February, 1942 until June 26, 1948, and that
the contract was extended for five years from June 26, 1948, the
right of action of Nielson to claim for what is due to it during that
period of extension accrued during the period from June 26,
1948 till the end of the five-year extension period — or until
June 26, 1953. And so, even if We reckon June 26, 1948 as the
starting date of the ten-year period in connection with the
prescriptibility of the claims involved in items 3, 4, 5, 6 and 7 of
the awards in the decision, it is obvious that when the complaint
was filed on February 6, 1958 the ten-year prescriptive period
had not yet lapsed.

In Our decision We have also ruled that the right of action of

Nielson against Lepanto had not prescribed because of the
arbitration clause in the Management contract. We are satisfied
that there is evidence that Nielson had asked for arbitration, and
an arbitration committee had been constituted. The arbitration
committee, however, failed to bring about any settlement of the
differences between Nielson and Lepanto. On June 25, 1957
counsel for Lepanto definitely advised Nielson that they were not
entertaining any claim of Nielson. The complaint in this case was
filed on February 6, 1958.

4. In the sixth ground of its motion for reconsideration, Lepanto

maintains that this Court "erred in awarding as damages (a)
10% of the cash dividends declared and paid in December, 1941;
(b) the management fee of P2,500.00 for the month of January
1942; and (c) the full contract price for the extended period of
60 months, since the damages were never demanded nor proved
and, in any case, not allowable under the general law on
damages."

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We have stated in Our decision that the original agreement in

the management contract regarding the compensation of Nielson
was modified, such that instead of receiving a monthly
compensation of P2,500.00 plus 10% of the net profits from the
operation of the properties for the preceding month, 11 Nielson
would receive a compensation of P2,500.00 a month, plus
(1)10% of the dividends declared and paid, when and as paid,
during the period of the contract, and at the end of each year,
(2)10% of any depletion reserve that may be set up, and (3)
10% of any amount expended during the year out of surplus

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earnings for capital account.

It is shown that in December, 1941, cash dividends amounting to

P175,000.00 was declared by Lepanto. 12 Nielson, therefore,
should receive the equivalent of 10% of this amount, or the sum
of P17,500.00. We have found that this amount was not paid to
Nielson.

In its motion for reconsideration, Lepanto inserted a

photographic copy of page 127 of its cash disbursement book,
allegedly for 1941, in an effort to show that this amount of
P17,500.00 had been paid to Nielson. It appears, however, in
this photographic copy of page 127 of the cash disbursement
book that the sum of P17,500.00 was entered on October 29 as
"surplus a/c Nielson & Co. Inc." The entry does not make any
reference to dividends or participation of Nielson in the profits.
On the other hand, in the photographic copy of page 89 of the
1941 cash disbursement book, also attached to the motion for
reconsideration, there is an entry for P17,500.00 on April 23,
1941 which states "Accts. Pay. Particip. Nielson & Co. Inc." This
entry for April 23, 1941 may really be the participation of Nielson
in the profits based on dividends declared in April 1941 as shown
in Exhibit L. But in the same Exhibit L it is not stated that any
dividend was declared in October 1941. On the contrary it is
stated in Exhibit L that dividends were declared in December
1941. We cannot entertain this piece of evidence for several
reasons: (1) because this evidence was not presented during the
trial in the court below; (2) there is no showing that this piece of
evidence is newly discovered and that Lepanto was not in
possession of said evidence when this case was being tried in the
court below; and (3) according to Exhibit L cash dividends of
P175,000.00 were declared in December, 1941, and so the sum
of P17,500.00 which appears to have been paid to Nielson in
October 1941 could not be payment of the equivalent of 10% of
the cash dividends that were later declared in December, 1941.

As regards the management fee of Nielson corresponding to

January, 1942, in the sum of P2,500.00, We have also found that
Nielson is entitled to be paid this amount, and that this amount
was not paid by Lepanto to Nielson. Whereas, Lepanto was able
to prove that it had paid the management fees of Nielson for
November and December, 1941, 13 it was not able to present
any evidence to show that the management fee of P2,500.00 for
January, 1942 had been paid.

It having been declared in Our decision, as well as in this

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resolution, that the management contract had been extended for

5 years, or sixty months, from June 27, 1948 to June 26, 1953,
and that the cause of action of Nielson to claim for its
compensation during that period of extension had not
prescribed, it follows that Nielson should be awarded the
management fees during the whole period of extension, plus the
10% of the value of the dividends declared during the said
period of extension, the 10% of the depletion reserve that was
set up, and the 10% of any amount expended out of surplus
earnings for capital account.

5. In the seventh ground of its motion for reconsideration,

Lepanto maintains that this Court erred in ordering Lepanto to
issue and deliver to Nielson shares of stock together with fruits
thereof.

In Our decision, We declared that pursuant to the modified

agreement regarding the compensation of Nielson which
provides, among others, that Nielson would receive 10% of any
dividends declared and paid, when and as paid, Nielson should
be paid 10% of the stock dividends declared by Lepanto during
the period of extension of the contract.

It is not denied that on November 28, 1949, Lepanto declared

stock dividends worth P1,000,000.00; and on August 22, 1950,
it declared stock dividends worth P2,000,000.00. In other words,
during the period of extension Lepanto had declared stock
dividends worth 3,000,000.00. We held in Our decision that
Nielson is entitled to receive 10% of the stock dividends
declared, or shares of stocks, worth P300,000.00 at the par
value of P0.10 per share. We ordered Lepanto to issue and
deliver to Nielson those shares of stocks as well as all the fruits
or dividends that accrued to said shares.

In its motion for reconsideration, Lepanto contends that the

payment to Nielson of stock dividends as compensation for its
services under the management contract is a violation of the
Corporation Law, and that it was not, and it could not be, the
intention of Lepanto and Nielson — as contracting parties — that
the services of Nielson should be paid in shares of stock taken
out of stock dividends declared by Lepanto. We have assiduously
considered the arguments adduced by Lepanto in support of its
contention, as well as the answer of Nielson in this connection,
and We have arrived at the conclusion that there is merit in the
contention of Lepanto.

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Section 16 of the Corporation Law, in part, provides as follows:

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"No corporation organized under this Act shall create or issue

bills, notes or other evidence of debt, for circulation as money,
and no corporation shall issue stock or bonds except in exchange
for actual cash paid to the corporation or for: (1) property
actually received by it at a fair valuation equal to the par or
issued value of the stock or bonds so issued; and in case of
disagreement as to their value, the same shall be presumed to
be the assessed value or the value appearing in invoices or other
commercial documents, as the case may be; and the burden or
proof that the real present value of the property is greater than
the assessed value or value appearing in invoices or other
commercial documents, as the case may be, shall be upon the
corporation, or for (2) profits earned by it but not distributed
among its stockholders or members; Provided, however, That no
stock or bond dividend shall be issued without the approval of
stockholders representing not less than two-thirds of all stock
then outstanding and entitled to vote at a general meeting of the
corporation or at a special meeting duly called for the purpose.

x       x       x

"No corporation shall make or declare any dividend except from

the surplus profits arising from its business, or divide or
distribute its capital stock or property other than actual profits
among its members or stockholders until after the payment of its
debts and the termination of its existence by limitation or lawful
dissolution: Provided, That banking, savings and loan, and trust
corporations may receive deposits and issue certificates of
deposit, checks, drafts, and bills of exchange, and the like in the
transaction of the ordinary business of banking, savings and
loan, and trust corporations." (As amended by Act No. 2792, and
Act No. 3518; Emphasis supplied.)

From the above-quoted provision of Section 16 of the

Corporation Law, the consideration for which shares of stock may
be issued are: (1) cash; (2) property; and (3) undistributed
profits. Shares of stock are given the special name "stock
dividends" only if they are issued in lieu of undistributed profits.
If shares of stocks are issued in exchange of cash or property
then those shares do not fall under the category of "stock
dividends." A corporation may legally issue shares of stock in
consideration of services rendered to it by a person not a

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stockholder, or in payment of its indebtedness. A share of stock

issued to pay for services rendered is equivalent to a stock
issued in exchange of property, because services is equivalent to
property. 14 Likewise a share of stock issued in payment of
indebtedness is equivalent to issuing a stock in exchange for
cash. But a share of stock thus issued should be part of the
original capital stock of the corporation upon its organization, or
part of the stocks issued when the increase of the capitalization
of a corporation is properly authorized. In other words, it is the
shares of stock that are originally issued by the corporation and
forming part of the capital that can be exchanged for cash or
services rendered, or property; that is, if the corporation has
original shares of stock unsold or unsubscribed, either coming
from the original capitalization or from the increased
capitalization. Those shares of stock may be issued to a person
who is not a stockholder, or to a person already a stockholder in
exchange for services rendered or for cash or property. But a
share of stock coming from stock dividends declared cannot be
issued to one who is not a stockholder of a corporation.

A "stock dividend" is any dividend payable in shares of stock of

the corporation declaring or authorizing such dividend. It is,
what the term itself implies, a distribution of the shares of stock
of the corporation among the stockholders as dividends. A stock
dividend of a corporation is a dividend paid in shares of stock
instead of cash, and is properly payable only out of surplus
profits. 15 So, a stock dividend is actually two things: (1) a
dividend, and (2) the enforced use of the dividend money to
purchase additional shares of stock at par. 16 When a
corporation issues stock dividends, it shows that the
corporation’s accumulated profits have been capitalized instead
of distributed to the stockholders or retained as surplus available
for distribution, in money or kind, should opportunity offer. Far
from being a realization of profits for the stockholder, it tends
rather to postpone said realization, in that the fund represented
by the new stock has been transferred from surplus to assets
and no longer available for actual distribution. 17 Thus, it is
apparent that stock dividends are issued only to stockholders.
This is so because only stockholders are entitled to dividends.
They are the only ones who have a right to a proportional share
in that part of the surplus which is declared as dividends. A stock
dividend really adds nothing to the interest of the stockholder;
the proportional interest of each stockholder remains the same.
18 If a stockholder is deprived of his stock dividends — and this
happens if the shares of stock forming part of the stock
dividends are issued to a non-stockholder — then the proportion
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of the stockholder’s interest changes radically. Stock dividends

are civil fruits of the original investment, and to the owners of
the shares belong the civil fruits. 19

The term "dividend" both in the technical sense and its ordinary
acceptation, is that part or portion of the profits of the enterprise
which the corporation, by its governing agents, sets apart for
ratable division among the holders of the capital stock. It means
the fund actually set aside, and declared by the directors of the
corporation as a dividends, and duly ordered by the director, or
by the stockholders at a corporate meeting, to be divided or
distributed among the stockholders according to their respective
interests. 20

It is Our considered view, therefore, that under Section 16 of the

Corporation Law stock dividends can not be issued to a person
who is not a stockholder in payment of services rendered. And
so, in the case at bar Nielson can not be paid in shares of stock
which form part of the stock dividends of Lepanto for services it
rendered under the management contract. We sustain the
contention of Lepanto that the understanding between Lepanto
and Nielson was simply to make the cash value of the stock
dividends declared as the basis for determining the amount of
compensation that should be paid to Nielson, in the proportion of
10% of the cash value of the stock dividends declared. And this
conclusion of Ours finds support in the record.

We had adverted to in Our decision that in 1940 there was some

dispute between Lepanto and Nielson regarding the application
and interpretation of certain provisions of the original contract
particularly with regard to the 10% participation of Nielson in the
net profits, so that some adjustments had to be made. In the
minutes of the meeting of the Board of Directors of Lepanto on
August 21, 1940, We read the following:

jgc:chanrobles.com.ph

"The Chairman stated that he believed that it would be better to

tie the computation of the 10% participation of Nielson &
Company, Inc. to the dividend, because Nielson will then be able
to definitely compute its net participation by the amount of the
dividends declared. In addition to the dividend, we have been
setting up a depletion reserve and it does not seem fair to
burden the 10% participation of Nielson with the depletion
reserve, as the depletion reserve should not be considered as an
operating expense. After a prolonged discussion, upon motion
duly made and seconded, it was —

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"RESOLVED, That the President, be, and he hereby is, authorized

to enter into an agreement with Nielson & Company, Inc.,
modifying Paragraph V of management contract of January 30,
1937, effective January 1, 1940, in such a way that Nielson &
Company, Inc. shall receive 10% of any dividends declared and
paid, when and as paid during the period of the contract and at
the end of each year, 10% of any depletion reserve that may be
set up and 10% of any amount expended during the year out of
surplus earnings for capital account." (Emphasis supplied.)

From the sentence, "The Chairman stated that he believed that it

would be better to tie the computation of the 10% participation
of Nielson & Company, Inc. to the dividend, because Nielson will
then be able to definitely compute its net participation by the
amount of the dividends declared" the idea is conveyed that the
intention of Lepanto, as expressed by its Chairman C. A. DeWitt,
was to make the value of the dividends declared — whether the
dividends were in cash or in stock — as the basis for determining
the amount of compensation that should be paid to Nielson, in
the proportion of 10% of the cash value of the dividends so
declared. It does not mean, however, that the compensation of
Nielson would be taken from the amount actually declared as
cash dividend to be distributed to the stockholder, nor from the
shares of stocks to be issued to the stockholders as stock
dividends, but from the other assets or funds of the corporation
which are not burdened by the dividends thus declared. In other
words, if, for example, cash dividends of P300,000.00 are
declared. Nielson would be entitled to a compensation of
P30,000.00, but this P30,000.00 should not be taken from the
P300,000.00 to be distributed as cash dividends to the
stockholders but from some other funds or assets of the
corporation which are not included in the amount to answer for
the cash dividends thus declared. This is so because if the
P30,000.00 would be taken out from the P300,000.00 declared
as cash dividends, then the stockholders would not be getting
P300,000.00 as dividends but only P270,000.00. There would be
a dilution of the dividend that corresponds to each share of stock
held by the stockholders. Similarly, if there were stock dividends
worth one million pesos that were declared, which means an
issuance of ten million shares at the par value of ten centavos
per share, it does not mean that Nielson would be given 100,000
shares. It only means that Nielson should be given the
equivalent of 10% of the aggregate cash value of those shares
issued as stock dividends. That this was the understanding of
Nielson itself is borne out by the fact that in its appeal brief
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Nielson urged that it should be paid P300,000.00 being 10% of

the P3,000,000.00 stock dividends declared on November 28,
1949 and August 20, 1950 . . ." 21

We, therefore, reconsider that part of Our decision which

declares that Nielson is entitled to shares of stock worth
P300,000.00 based on the stock dividends declared on
November 28, 1949 and on August 20, 1950, together with all
the fruits accruing thereto. Instead, We declare that Nielson is
entitled to payment by Lepanto of P300,000.00 in cash, which is
equivalent to 10% of the money value of the stock dividends
worth P3,000,000.00 which were declared on November 28,
1949 and on August 20, 1950, with interest thereon at the rate
of 6% from February 6, 1958.

6. In the eighth ground of its motion for reconsideration Lepanto

maintains that this Court erred in awarding to Nielson an
undetermined amount of shares of stock and/or cash, which
award can not be ascertained and executed without further
litigation.

In view of Our ruling in this resolution that Nielson is not entitled

to receive shares of stock as stock dividends in payment of its
compensation under the management contract, We do not
consider it necessary to discuss this ground of the motion for
reconsideration. The awards in the present case are all reduced
to specific sums of money.

7. In the ninth ground of its motion for reconsideration Lepanto

maintains that this Court erred in rendering judgment or
attorney’s fees.

The matter of the award of attorney’s fees is within the sound

discretion of this Court. In Our decision We have stated the
reason why the award of P50,000.00 for attorney’s fees is
considered by this Court as reasonable.

Accordingly, We resolve to modify the decision that We rendered

on December 17, 1966, in the sense that instead of awarding
Nielson shares of stock worth P300,000.00 at the par value of
ten centavos (P0.10) per share based on the stock dividends
declared by Lepanto on November 28, 1949 and August 20,
1950, together with their fruits, Nielson should be awarded the
sum of P300,000.00 which is an amount equivalent to 10% of
the cash value of the stock dividends thus declared, as part of
the compensation due Nielson under the management contract.
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The dispositive portion of the decision should, therefore, be

amended, to read as follows:

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IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby

reverse the decision of the court a quo and enter in lieu thereof
another, ordering the appellee Lepanto to pay the appellant
Nielson the different amounts as specified hereinbelow:

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(1) Seventeen thousand five hundred pesos (P17,500.00),

equivalent to 10% of the cash dividends of December, 1941, with
legal interest thereon from the date of the filing of the
complaint;

(2) Two thousand five hundred pesos (P2,500.00), as

management fee for January, 1942, with legal interest thereon
from the date of the filing of the complaint;

(3) One hundred fifty thousand pesos (P150,000.00),

representing management fees for the sixty-month period of
extension of the management contract, with legal interest
thereon from the date of the filing of the complaint;

(4) One million four hundred thousand pesos (P1,400,000.00),

equivalent to 10% of the cash dividends declared during the
period of extension of the management contract, with legal
interest thereon from the date of the filing of the complaint;

(5) Three hundred thousand pesos (P300,000.00), equivalent to

10% of the cash value of the stock dividends declared on
November 28, 1949 and August 20, 1950, with legal interest
thereon from the date of the filing of the complaint;

(6) Fifty three thousand nine hundred twenty eight pesos and
eighty eight centavos (P53,928.88), equivalent to 10% of the
depletion reserve set up during the period of extension, with
legal interest thereon from the date of the filing of the
complaint;

(7) Six hundred ninety four thousand three hundred sixty four
pesos and seventy six centavos (P694,364.76), equivalent to
10% of the expenses for capital account during the period of
extension, with legal interest thereon from the date of the filing
of the complaint;

(8) Fifty thousand pesos (P50,000.00) as attorney’s fees; and

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(9) The costs.

It is so ordered..

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez and

Ruiz Castro, JJ., concur.

Fernando, Capistrano, Teehankee and Barredo, JJ., did not take

part.

Endnotes:

1. Annex to complaint, pp. 43-46, R. A.; Also Exhibit

C.

2. Exhibit A.

3. Sec. 9, Rule 130 of the Rules of Court.

4. Article 1373 of the (new) Civil Code.

5. Section 43, par. 1, Act 190.

6. Tiosejo v. Day, Et Al., L-9944, April 30, 1937; Levi

Hermanos, Inc. v. Perez, L-14487, April 29, 1960.

7. Rutter v. Esteban, 93 Phil. 68.

8. Tiosejo v. Day, supra; Levi Hermanos Inc. v. Perez,

supra.

9. Motion for reconsideration, p. 60.

10. Uy v. Kalaw Katigbak, G.R. No. L-1830, Dec. 31,

1949; Sison v. Mirasol, L-4711, Oct. 31, 1952;
Compania Maritima v. Court of Appeals, L-14949, May
30, 1960.

11. Par. V of Management Contract, Exhibit C.

12. Page 3, Exhibit L, Report for 1954.

13. Exhibit 1.

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14. Sec. 5187, 11 Fletcher, Cyclopedia of the Law on

Private Corporations, p. 422.

15. Sec. 16, Corporation Law.

16. Words and Phrases, p. 270.

17. Fisher v. Trinidad, 43 Phil. 973.

18. Towne v. Eisner, 62 L. Ed. 372.

19. Art. 441, Civil Code of the Philippines.

20. 7 Thompson on Corporations 134-135.

21. p. 115, Nielson’s Appeal Brief.

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December-1968
Jurisprudence              
  

G.R. No. L-23457

December 16, 1968 -
ERNESTO ESCALER, ET.,
AL. v. TOMAS P.
PANGANIBAN

G.R. No. L-24170

December 16, 1968 -
ILLUH ASAALI, ET., AL.
v. COMMISSIONER OF
CUSTOMS

G.R. No. L-28593

December 16, 1968 -
JUAN YSASI v. JOSE F.
FERNANDEZ

G.R. No. L-20392

December 18, 1968 -
MARCIAL T. CAEDO, ET.,

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AL v. YU KHE THAI, ET.,

AL.

G.R. No. L-20920

December 18, 1968 -
RESTITUTO SIBAL v.
GREGORIO T. LANTIN

G.R. Nos. L-24198 &

24207-10 December
18, 1968 - PHILIPPINE
LONG DISTANCE
TELEPHONE CO. v.
PUBLIC SERVICE
COMMISSION

G.R. No. L-21118

December 18, 1968 -
LEON CLIMACO v.
CARLOS SIY UY, ET AL.,

G.R. No. L-24993

December 18, 1968 -
UNITED RETAUROR’S
EMPLOYEES & LABOR
UNION v. HON.
GUILLERMO E. TORRES

G.R. No. L-22615

December 24, 1968 -
BENEDICTO C. LAGMAN
v. HON. ENRIQUE
MEDINA

G.R. No. L-24349

December 24, 1968 -
SEVEN-UP BOTTLING
CO. OF THE PHIL. v.
VIRGILIO RIMERATA

G.R. No. L-26252

December 24, 1968 -
CONRADO DIZON, ET.,
AL. v. HONORIO
ROMERO

G.R. No. L-25406

December 24, 1968 -
SOCIAL SECURITY
SYSTEM v. COURT OF
APPEALS

G.R. No. L-27933

December 24, 1968 -
DIVERSIFIED CREDIT
CORPORATION v.

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FELIPE ROSADO, ET.,

AL.

G.R. No. L-21906

December 24, 1968 -
INOCENCIA DELUAO,
ET., AL v. NICANOR
CASTEEL, ET., AL

G.R. No. L-25078

December 24, 1968 -
ALATCO
TRANSPORTATION, INC.
v. ROSALIO S. BONETE,
JR.

G.R. No. L-29471

December 24, 1968 -
PHIL. ASSOCIATION OF
FREE LABOR UNIONS
(PAFLU) v. HON.
JOAQUIN M.
SALVADOR, ET AL.

G.R. No. L-29488

December 24, 1968 -
ANGEL M. TINIO v.
DALMACIO MINA, ET
AL.,

G.R. No. L-29676

December 24, 1968 -
PEOPLE OF THE PHIL. v.
LOURDES P. SAN DIEGO

G.R. No. L-29905

December 24, 1968 - N.
M. BALUYOT & CO. v.
ANTONIO TY, ET., AL.

G.R. No. L-29588

December 27, 1968 -
ANTONIO J. VILLEGAS,
ET., AL. v. ABELARDO
SUBIDO

G.R. No. L-21601

December 28, 1968 -
NIELSON & COMPANY,
INC. v. LEPANTO
CONSOLIDATED
MINING COMPANY

G.R. No. L-23697

December 28, 1968 -
OCTAVIO INFANTADO v.
FELIPE LIWANAG

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G.R. No. L-26521

December 28, 1968 -
EUSEBIO VILLANUEVA,
ET AL., v. CITY OF
ILOILO

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