VOL.

25, OCTOBER 29, 1968 845

Villa Key Transit, Inc. vs. Ferrer

No. L-23893. October 29, 1968.

VILLA REY TRANSIT, INC., plaintiff-appellant, vs. EUSEBIO E.

FERRER, PANGASINAN TRANSPORTATION Co., INC., and
PUBLIC SERVICE COMMISSION, defendants, EUSEBIO E.
FERRER and PANGASINAN TRANSPORTATION Co., INC.,
defendants-appellants.

PANGASINAN TRANSPORTATION Co., INC., third-party

plaintiff-appellant, vs. JOSE M. VILLARAMA third-party
defendant-appellee.

Evidence; Admissibility of secondary evidence when original is in

adverse party's custody; Requisites of.—Section 5 of Rule 130 of the Rules
of Court provides for the requisites for the admissibility of secondary
evidence when the original is in the custody of the adverse party, thus: (1)
opponent's possession of the original; (2) reasonable notice to opponent to
produce the original; (3) satisfactory proof of its existence; and (4) failure or
refusal of opponent to produce the original in court. Regarding the f irst
element, it is not necessary for a party seeking to introduce secondary
evidence to show that the original is in the actual possession of his
adversary. It is enough that the circumstances are such as to indicate that the
writing is in his possession or under his control. Neither is it required that
the party entitled to the custody of the instrument should, on being notified
to produce it, admit having it in his possession.

846

846 SUPREME COURT REPORTS ANNOTATED

Villa Rey Transit, Inc. vs. Ferrer

The party calling for such evidence may introduce a copy thereof as in the
case of loss.
Corporation law; Corporation separate and distinct from members
thereof; Piercing the corporate veil, when necessary.—The doctrine that a
corporation is a legal entity distinct and separate from the members and
stockholders who compose it is recognized and respected in all cases which
are within reason and the law. When the fiction is urged as a means of
perpetrating a fraud or an illegal act or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, the achievement or
perfection of a monopoly or generally the perpetration of knavery or crime,
the veil with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals.
Contracts; Validity of stipulations in restraint of trade.—The 10-year
restrictive clause in the contract between Villarama and Pantranco while in
the nature of an agreement suppressing competition, is nevertheless
reasonable and not harmful or obnoxious to public interest. The disputed
stipulation is only incidental to the main agreement which is that of sale, the
restraint is only partial: first, in scope, it refers only to application for TPU
by the seller in competition with the lines sold to the buyer; second, in
duration, it is only for ten (10) years; and, third, with respect to situs or
territory, the restraint is only along the lines covered by the certif icates
sold. It does not appear that the ultimate result of the clause or stipulation
would leave solely to Pantranco the right to operate along the lines in
question, thereby establishing a monopoly. The main purpose of the restraint
is to protect for a limited time the business of the buyer. The rule is that a
contract in restraint of trade is valid provided there is a limitation upon
either time or place.
Contracts; Purchaser in good faith; Rule of caveat emptor.—The 10-
year prohibition upon Villarama is not against his application f or, or
purchase of, certif icates of public convenience, but merely the operation of
TPU along the lines covered by the certificates sold by him to Pantranco.
Consequently, the sale between Fernando and the Corporation is valid, such
that the rightful ownership of the disputed certificates still belongs to the
plaintiff being the purchaser in good faith and for value thereof. In view of
the rule of caveat emptor, what was acquired by Ferrer in the sheriff's sale
was only the right which Fernando had in the certificates of public
convenience on the day of the sale. Of the same principle is the provision of
Article 1544. of the Civil Code, that "If the same thing should have been
sold to different vendees, the ownership shall be transferred to the person
who may have first taken possession thereof in good faith. if it should be
movable property."

847

VOL. 25, OCTOBER 29, 1968 847

Villa Rey Transit, Inc. vs. Ferrer

APPEAL from a decision of the Court of First Instance of Manila.

The facts are stated in the opinion of the Court.

     Chuidian Law Office for plaintiff-appellant Villa Rey Transit,
Inc.
          Bengzon, Zarraga & Villegas for defendant-appellant
Pangasinan Transportation Co., Inc.
           Laurea & Pison for third-party defendant-appellee Jose
Villarama.

ANGELES, J.:

This is a tri-party appeal from the decision of the Court of First

Instance of Manila, Civil Case No. 41845, declaring null and void
the sheriff's sale of two certificates of public convenience in favor of
defendant Eusebio E. Ferrer and the subsequent sale thereof by the
latter to defendant Pangasinan Transportation Co., Inc.; declaring the
plaintiff Villa Rey Transit, Inc., to be the lawful owner of the said
certificates of public convenience; and ordering the private
defendants, jointly and severally, to pay to the plaintiff, the sum of
P5,000.00 as and for attorney's fees. The case against the PSC was
dismissed.
The rather ramified circumstances of the instant case can best be
understood by a chronological narration of the essential facts, to wit:
Prior to 1959, Jose M. Villarama was an operator of a bus
transportation, under the business name of Villa Rey Transit,
pursuant to certificates of public convenience granted him by the
Public Service Commission (PSC, for short) in Cases Nos. 44213
and 104651, which authorized him to operate a total of thirty-two
(32) units on various routes or lines from Pangasinan to Manila, and
vice-versa. On January 8, 1959, he sold the aforementioned two
certificates of public convenience to the Pangasinan Transportation
Company, Inc. (otherwise known as Pantranco), for P350,000.00
with the condition, among others, that the seller (Villarama) "shall not
for a period of 10 years from the date of this sale, apply for any TPU
service identical or competing with the buyer."
Barely three months thereafter, or on March 6, 1959,

848

848 SUPREME COURT REPORTS ANNOTATED

Villa Rey Transit, Inc. vs. Ferrer

a corporation called Villa Rey Transit, Inc. (which shall be referred

to hereafter as the Corporation) was organized with a capital stock of
P500,000.00 divided into 5,000 shares of the par value of P100.00
each; P200,000.00 was the subscribed stock; Natividad R. Villarama
(wife of Jose M. Villarama) was one of the incorporators, and she
subscribed for P1,000.00; the balance of ?199,000.00 was
subscribed by the brother and sister-in-law of Jose M. Villarama; of
the subscribed capital stock, P105,000.00 was paid to the treasurer
of the corporation, who was Natividad R. Villarama.
In less than a month after its registration with the Securities and
Exchange Commission (March 10, 1959), the Corporation, on April
7, 1959, bought five certificates of public convenience, forty-nine
buses, tools and equipment from one Valentin Fernando, for the sum
of P249,000.00, of which P100,000.00 was paid upon the signing of
the contract; P50,000.00 was payable upon the final approval of the
sale by the PSC; P49,500.00 one year after the f inal approval of the
sale; and the balance of P50,000.00 "shall be paid by the BUYER to
the different suppliers of the SELLER."
The very same day that the aforementioned contract of sale was
executed, the parties thereto immediately applied with the PSC for
its approval, with a prayer for the issuance of a provisional authority
in favor 1of the vendee Corporation to operate the service therein
involved. On May 19, 1959, the PSC granted the provisional permit
prayed for, upon the condition that "it may be modified or revoked
by the Commission at any time, shall be subject to whatever action
that may be taken on the basic application and shall be valid only
during the pendency of said application." Before the PSC could take
final action on said application for approval of sale, however, the
Sheriff of Manila, on July 7, 1959, levied on two of the five
certificates of public convenience involved therein, namely, those
issued under PSC cases Nos. 59494 and 63780, pursuant to a writ of
execution issued by the Court of First

_______________

1 Application for approval of sale docketed as PSC Case No. 124057.

849

VOL. 25, OCTOBER 29, 1968 849

Villa Rey Transit, Inc. vs. Ferrer

Instance of Pangasinan in Civil Case No. 13798, in favor of Eusebio

Ferrer, plaintiff, judgment creditor, against Valentin Fernando,
defendant, judgment debtor. The Sheriff made and entered the levy
in the records of the PSC. On July 16, 1959, a public sale was
conducted by the Sheriff of the said two certificates of public
convenience. Ferrer was the highest bidder, and a certificate of sale
was issued in his name.
Thereafter, Ferrer sold the two certificates of public convenience
to Pantranco, and jointly submitted for approval their corresponding
2
contract of sale to the PSC. Pantranco therein prayed that it be
authorized provisionally to operate the service involved in the said
two certificates.
The applications for approval of sale, filed before the PSC, by
Fernando and the Corporation, Case No. 124057, and that of Ferrer
and Pantranco, Case No. 126278, were scheduled for a joint hearing.
In the meantime, to wit, on July 22, 1959, the PSC issued an order
disposing that during the pendency of the cases and before a final
resolution on the aforesaid applications, the Pantranco shall be the
one to operate provisionally the service under the two certificates
embraced in the contract between Ferrer and Pantranco. The
Corporation took issue with this particular 3ruling of the PSC and
elevated the matter to the Supreme Court, which decreed, after
deliberation, that until the issue on the ownership of the disputed
certificates shall have been finally settled by the proper court, the
Corporation should be the one to operate the lines provisionally.
On November 4, 1959, the Corporation filed in the Court of First
Instance of Manila, a complaint for the annulment of the sheriff's
sale of the aforesaid two certificates of public convenience (PSC
Cases Nos. 59494 and 63780) in favor of the defendant Ferrer, and
the subsequent sale thereof by the latter to Pantranco, against Ferrer,
Pantranco and the PSC. The plaintiff Corporation prayed therein that
all the orders of the PSC relative to the parties' dispute over the said
certificates be annulled.

________________

2 PSC Case No. 126278.

3 G.R. Nos. L-17684-85, promulgated May 30, 1962.

850

850 SUPREME COURT REPORTS ANNOTATED

Villa Rey Transit, Inc. vs. Ferrer

In separate answers, the defendants Ferrer and Pantranco averred

that the plaintiff Corporation had no valid title to the certificates in
question because the contract pursuant to which it acquired them f
rom Fernando was subject to a suspensive condition—the approval
of the PSC—which has not yet been fulfilled, and, therefore, the
Sheriff's levy and the consequent sale at public auction of the
certificates referred to, as well as the sale of the same by Ferrer to
Pantranco, were valid and regular, and vested unto Pantranco, a
superior right thereto.
Pantranco, on its part, filed a third-party complaint against Jose
M. Villarama, alleging that Villarama and the Corporation, are one
and the same; that Villarama and/or the Corporation was disqualified
from operating the two certificates in question by virtue of the
aforementioned agreement between said Villarama and Pantranco,
which stipulated that Villarama "shall not for a period of 10 years
from the date of this sale, apply for any TPU service identical or
competing with the buyer."
Upon the joinder of the issues in both the complaint and third-
party complaint, the case was tried, and thereafter decision was
rendered in the terms, as above stated.
As stated at the beginning, all the parties involved have appealed
from the decision. They submitted a joint record on appeal.
Pantranco disputes the correctness of the decision insofar as it
holds that Villa Rey Transit, Inc. (Corporation) is a distinct and
separate entity from Jose M. Villarama; that the restriction clause in
the contract of January 8, 1959 between Pantranco and Villarama is
null and void; that the Sheriff's sale of July 16, 1959, is likewise null
and void; and the failure to award damages in its favor and against
Villarama.
 Ferrer, for his part. challenges the decision insofar as it holds that
the sheriff's sale is null and void; and the sale of the two certificates
in question by Valentin Fernando to the Corporation, is valid. He
also assails the award of P5,000.00 as attorney's fees in favor of the
Corporation, and the failure to award moral damages to him as
prayed for in his counterclaim.

851

VOL. 25, OCTOBER 29, 1968 851

Villa Rey Transit, Inc. vs. Ferrer

The Corporation, on the other hand. prays for a review of that

portion of the decision awarding only P5,000.00 as attorney's fees,
and insisting that it is entitled to an award of P100,000.00 by way of
exemplary damages,
After a careful study of the facts obtaining in the case, the vital
issues to be resolved are: (1) Does the stipulation between Villarama
and Pantranco, as contained in the deed of sale, that the former
"SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE
OF THIS SALE, APPLY FOR ANY TPU SERVICE IDENTICAL
OR COMPETING WITH THE BUYER", apply to new lines only or
does it include existing lines?; (2) Assuming that said stipulation
covers all kinds of lines, is such stipulation valid and enforceable?;
(3) In the affirmative, that said stipulation is valid, did it bind the
Corporation?
For convenience, We propose to discuss the foregoing issues by
starting with the last proposition.
The evidence has disclosed that Villarama, albeit was not an
incorporator or stockholder of the Corporation, alleging that he did
not become such, because he did not have sufficient funds to invest,
his wife, however, was an incorporator with the least subscribed
number of shares, and was elected treasurer of the Corporation. The
finances of the Corporation which, under all concepts in the law, are
supposed to be under the control and administration of the treasurer
keeping them as trust fund for the Corporation, were, nonetheless,
manipulated and disbursed as if they were the private funds of
Villarama, in such a way and extent that Villarama appeared to be
the actual owner-treasurer of the business without regard to the4
rights of the stockholders. The following testimony of Villarama,
together with the other evidence on record, attests to that effect:

"Q. — Doctor, I want to go back again to the incorporation of the

Villa Rey Transit, Inc. You heard the testimony presented
here by the bank regarding the initial opening deposit of
ONE HUNDRED FIVE THOUSAND PESOS, of which
amount Eighty-Five Thousand Pesos was a check drawn by
yourself personally. In the direct examination you told the
Court that the reason you drew a check for

________________
 4 TSN. pp. 1649-1651, Session of April 8, 1963.

852

852 SUPREME COURT REPORTS ANNOTATED

Villa Rey Transit, Inc. vs. Ferrer

  Eighty-Five Thousand Pesos was because you and your

wife, or your wife, had spent the money of the stockholders
given to her for incorporation. Will you please tell the
Honorable Court if you knew at the time your wife was
spending the money to pay debts, you personally know she
was spending the money of the incorporators ?
"A. — You know my money and my wife's money are one. We
never talk about those things.
"Q. — Doctor, your answer then is that since your money and your
wife's money are one money and you did not know when
your wife was paying debts with the incorporator's money ?
"A. — Because sometimes she uses my money, and sometimes the
money given to her she gives to me and I deposit the
money.
"Q. — Actually, aside from your wife, you were also the custodian
of some of the incorporators here, in the beginning?
"A. — Not necessarily, they give to my wife and when my wife
hands to me I did not know it belonged to the incorporators.
"Q. — It supposes then your wife gives you some of the money
received by her in her capacity as treasurer of the
corporation ?
"A. — Maybe.
"Q. — What did you do with the money, deposit in a regular
account?
"A. — Deposit in my account
"Q. — Of all the money given to your wife, she did not receive any
check?
"A. — I do not remember.
"Q. — Is it usual for you, Doctor, to be given Fifty Thousand Pesos
without even asking what is this?
x      x      x      x      x      x      x      x      x
JUDGE:      Reform the question.
"Q. — The subscription of your brother-in-law, Mr. Reyes, is Fifty-
Two Thousand Pesos, did your wife give you Fifty-Two
Thousand Pesos?
"A. — I have testified before that sometimes my wife gives me
money and I do not know exactly for what."
The evidence further shows that the initial cash capitalization of the
corporation of P105,000.00 was mostly financed by Villarama. Of
the P105,000.00 deposited in the First National City Bank of New
York, representing the initial paid-up capital of the Corporation,
P85,000.00 was covered by Villarama's personal check. The deposit

853

VOL. 25, OCTOBER 29, 1968 853

Villa Rey Transit, Inc. vs. Ferrer

slip for the said amount of P105,000.00 was admitted in evidence as

Exh. 23, which shows on its face that P20,000.00 was paid in cash
and P85,000.00 thereof was covered by Check No. F-50271 of the
First National
5
City Bank of New York. The testimonies of Alfonso
Sancho and Joaquin Amansec,6 both employees of said bank, have
proved that the drawer of the check was Jose Villarama himself.
Another witness, Celso Rivera, accountant of the Corporation,
testified that while in the books of the corporation there appears an
entry that the treasurer received P95,000.00 as second installment of
the paid-in subscriptions, and, subsequently, also P100,000.00 as the
first installment of the offer for second subscriptions worth
P200,000.00 from the original subscribers, yet Villarama
7
directed
him (Rivera) to make vouchers liquidating the sums. Thus, it was
made to appear that the P95,000.00 was delivered to Villarama in
payment for equipment purchased from him, and the ?100,000.00
was loaned as advances to the stockholders. The said accountant,
however, testified that he was not aware of any amount of money
that had actually passed hands among the parties involved,8 and
actually the only money of the corporation was the P105,000.00
covered by the deposit slip Exh. 23, of which as mentioned above,
P85,000.00 was paid by Villarama's personal check.
Further, the evidence shows that when the Corporation was in its
initial months of operation, Villarama purchased and paid with his
personal checks Ford trucks for the Corporation. Exhibits 20 and 21
disclose that the said purchases were paid by Philippine Bank of
Commerce Checks Nos. 992618-B and 993621-B, respectively.
These checks have been sufficiently established by Fausto Abad,
Assistant Accountant of Manila
9
Trading & Supply Co., from which
the trucks were purchased and Aristedes So-

_______________

5 TSN, pp. 1210, 1217-1218, Session of Oct 8, 1962.

6 TSN, p. 1262, Session of Nov. 8. 1962.
7 TSN, pp. 947-948, Session of Sept. 3, 1962; TSN, pp. 1022, 1025, 1027-1029,
Session of Sept 7, 1962.
8 TSN, pp. 948-949.
9 TSN, pp. 899, 901, Session of Aug. 27, 1962,

854
854 SUPREME COURT REPORTS ANNOTATED
Villa Rey Transit, Inc. vs. Ferrer

lano, an employee of the Philippine Bank of Commerce,10 as having

been drawn by Villarama.
Exhibits 6 to 19 and Exh. 22, which are photostatic copies of
ledger entries and vouchers showing that Villarama had co-mingled
his personal funds and transactions with those made in the name of
the Corporation, are very illuminating evidence. Villarama has
assailed the admissibility of these exhibits, contending that no
evidentiary value whatsoever should be given to them since "they
were merely photostatic copies of the originals, the best evidence
being the originals themselves." According to him, at the time
Pantranco offered the said exhibits, it was the most likely possessor
of the originals thereof because they were stolen from the f iles of
the Corporation and only Pantranco was able to produce the alleged
photostat copies thereof.
Section 5 of Rule 130 of the Rules of Court provides for the
requisites for the admissibility of secondary evidence when the
original is in the custody of the adverse party, thus: (1) opponent's
possession of the original; (2) reasonable notice to opponent to
produce the original; (3) satisfactory proof of its existence; and (4)
failure or refusal of opponent to produce the original in court.11 12
Villarama has practically admitted the second and fourth requisites.
As to the third, he admitted their previous existence in13the files of
the Corporation and also that he had seen some of them. Regarding
the first element, Villarama's theory is that since even at the time of
the issuance of the subpoena duces tecum, the originals were already
missing, therefore, the Corporation was no longer in possession of
the same. However, it is not necessary for a party seeking to
introduce secondary evidence to show that the original is in the
actual possession of his adversary. It is enough that the
circumstances are such as to indicate that the writing is in his
possession or under his control. Neither is it required that the party
entitled to the custody of the instrument should, on being notified

_______________

10 TSN, pp. 1227-1228, Session of Oct. 8, 1962.

11 Francisco, Evidence, 1964, ed. p. 113.
12 Plaintiff-appellee's Brief, pp. 45-46.
13 TSN, pp. 1568-1569, Session of April 8, 1963.

855

VOL. 25, OCTOBER 29, 1968 855

Villa Rey Transit, Inc. vs. Ferrer

14
to produce it, admit having it in his possession. Hence, secondary
evidence is admissible where he denies having it in his possession.
The party calling for such evidence may introduce a copy thereof as
in the case of loss. For, among the exceptions to the best evidence
rule is "when the 15original has been lost, destroyed, or cannot be
produced in court." The originals of the vouchers in question must
be deemed to have been lost, as even the Corporation admits such
loss. Viewed upon this light, there can be no doubt as to the
admissibility in evidence of Exhibits 6 to 19 and 22.
Taking account 16of the foregoing evidence, together with Celso
Rivera's testimony, it would appear that: Villarama supplied the
organization expenses 17and the assets of the Corporation, such as
trucks and equipments; there was no actual payment by the original
subscribers of the amounts
18
of P95,000.00 and P1 00,000.00 as
appearing in the books; Villarama made use of the money 19
of the
Corporation and deposited them to his20 private accounts; and the
Corporation paid his personal accounts.
Villarama himself admitted that he mingled the corporate funds
21
with his own money. He also admitted that gasoline purchases of
22
the Corporation were made in his name because "he had existing
account with Stanvac which was properly secured and he23wanted the
Corporation to benefit from the rebates that he received."
The foregoing circumstances are strong persuasive evidence
showing that Villarama has been too much involved

_______________

14 See the Revised Rules of Court—Evidence by Francisco, 1964 ed., pp. 113-114.
15 Sec. 2(a), Rule 130, Rules of Court.
16 It was Celso Rivera who prepared these documents as admitted by Villarama.
TSN, pp. 1580 1581. Session of April 8, 1963.
17 Exh. 6.
18 Exhs. 8 to 8-C.
19 Exhs. 7 to 7-C.
20 Exhs. 10 to 19, 22; TSN, pp. 1709-1710. Session of April 16, 1963.
21 TSN, p. 1625. Session of April 8, 1963.
22 TSN. p. 1646. Session of April 8, 1963.
23 Brief for Plaintiff-appellee, p. 49.

856

856 SUPREME COURT REPORTS ANNOTATED

Villa Rey Transit, Inc. vs. Ferrer

in the affairs of the Corporation to altogether negative the claim that

he was only a part-time general manager. They show beyond doubt
that the Corporation is his alter ego.
It is significant that not a single one of the acts enumerated above
as proof of Villarama's oneness with the Corporation has been
denied by him. On the contrary, he has admitted them with offered
excuses.
Villarama has admitted, for instance, having paid P85,000.00 of
the initial capital of the Corporation with the lame excuse that "his
wife had requested him to reimburse the amount entrusted to her by
the incorporators and which she had used to pay the obligations of
Dr. Villarama (her husband) incurred while he was still the owner of
Villa Rey Transit, a single proprietorship." But with his admission
that he had received P350,000.0024 from Pantranco for the sale of the
two certificates and one unit, it becomes difficult to accept 25
Villarama's explanation that he and his wife, after consultation,
spent the money of their relatives (the stockholders) when they were
supposed to have their own money. Even if Pantranco paid the
P350,000.00 in check to him, as claimed, it could have been easy for
Villarama to have deposited said check in his account and issued his
own check to pay his obligations. And there is no evidence adduced
that the said amount of P350,000.00 was all spent or was insufficient
to settle his prior obligations in his business, and in the light of the
stipulation in the deed of sale between Villarama and Pantranco that
P50,000.00 of the selling price was earmarked for the payments of
accounts due to his creditors, the excuse appears unbelievable.
On his having paid for purchases by the Corporation of trucks
from the Manila Trading & Supply Co. with his personal checks, his
reason was that be was only sharing with the Corporation his credit
with some companies. And his main reason for mingling his funds
with that of the Corporation and for the latter's paying his private
bills is that it would be more convenient that he kept the

________________

24 TSN, pp. 1593, 1658, Session of April 8, 1963.

25 TSN, pp. 1660-1661, ditto.

857

VOL. 25, OCTOBER 29, 1968 857

Villa Rey Transit, Inc. vs. Ferrer

and since he had loaned money to the Corporation, this would be

set-off by the latter's paying his bills. Villarama admitted, however,
that the corporate funds in his possession were not only for
registration26
fees but for other important obligations which were not
specified.
Indeed, while Villarama was not the Treasurer
27
of the Corporation
but was, allegedly, only a part-time manager, he admitted not only
having held the corporate money but that he advanced and lent funds
for28 the Corporation, and yet there was no Board Resolution allowing
it.
Villarama's explanation on the matter of his involvement with the
corporate affairs of the Corporation only renders more credible
Pantranco's claim that his control over the corporation, especially in
the management and disposition of its funds, was so extensive and
intimate that it is impossible to segregate and identify which money
belonged to whom. The interference of Villarama in the complex
affairs of the corporation, and particularly its finances, are much too
inconsistent with the ends and purposes of the Corporation law,
which, precisely, seeks to separate personal responsibilities from
corporate undertakings. It is the very essence of incorporation that
the acts and conduct of the corporation be carried out in its own
corporate name because it has its own personality.
The doctrine that a corporation is a legal entity distinct and
separate from the members and stockholders who compose it is
recognized and respected in all cases which are within reason and
29
the law. When the fiction is urged as a means of perpetrating a
fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievement or
perfection of a monopoly or generally the perpetration of knavery or
30
crime. the veil with which the law covers and isolates

_______________

26 TSN, pp. 1699-1718, Session of April 16, 1963.

27 TSN, p. 1714, Session of April 16, 1963.
28 TSN, pp. 1627-1628, Session of April 8, 1968.
29 Borja v. Vasquez, 74 Phil. 56.
30 Koppel Phil. v. Yatco, 77 Phil. 496; Lidell & Co. v. Collector, G.R. No. L-9687,
June 30, 1961; Commissioner v. Norton & Harrison Company, G.R. No. L-17618,
Aug. 31, 1964; Guevarra, Phil. Corp. Law, 1961 ed., p. 7.

858

858 SUPREME COURT REPORTS ANNOTATED

Villa Rey Transit, Inc. vs. Ferrer

the corporation f rom the members or stockholders who compose it

will be lifted to allow for its consideration merely as an aggregation
of individuals.
Upon the foregoing considerations, We are of the opinion, and so
hold, that the preponderance of evidence have shown that the Villa
Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that the
restrictive clause in the contract entered into by the latter and
Pantranco is also enforceable and binding against the said
Corporation. For the rule is that a seller or promisor may not make
use of a corporate
31
entity as a means of evading the obligation of his
covenant. Where the Corporation is substantially the alter ego of
the covenantor to the restrictive32agreement, it can be enjoined from
competing with the covenantee.
The Corporation contends that even on the supposition that Villa
Rey Transit, Inc. and Villarama are one and the same, the restrictive
clause in the contract between Villarama and Pantranco does not
include the purchase of existing lines but it only applies to
application for the new lines. The clause in dispute reads thus:

"(4) The SELLER shall not, for a period of ten (10) years f rom the date of
this sale apply for any TPU service identical or competing with the BUYER"
(Italics supplied)
As We read the disputed clause, it is evident from the context thereof
that the intention of the parties was to eliminate the seller as a
competitor of the buyer f or ten years along the lines of operation
covered by the certificates of public convenience subject of their
transaction. The word "apply" as broadly used has for frame of
reference, a service by the seller on lines or routes that would
compete with the buyer along the routes acquired by the latter. In
this jurisdiction, prior33authorization is needed before anyone can
operate a TPU service, whether the service consists in a new line or
an old one acquired f rom a previous operator. The clear intention of
the parties was to prevent the seller from conducting any
competitive line for 10 years since, anyway, he has bound himself
not to

_______________

31 36 Am. Jur. 548; 18 Am. Jur. 2nd 563-564.

32 94 A. L. R. 346, 348.
33 Secs. 15. and 18, Com. Act 146.

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VOL. 25, OCTOBER 29, 1968 859

Villa Rey Transit, Inc. vs. Ferrer

apply for authorization to operate along such lines f or the duration

34
of such period.
If the prohibition is to be applied only to the acquisition of new
certif icates of public convenience thru an application with the
Public Service Commission, this would, in effect, allow the seller
just the same to compete with the buyer as long as his authority to
operate is only acquired thru transfer or sale from a previous
operator, thus defeating the intention of the parties. For what would
prevent the seller, under the circumstances, from having a
representative or dummy apply in the latter's name and then later on
transferring the same by sale to the seller? Since stipulations in a
contract is the law between the contracting parties,

"Every person must, in the exercise of his rights and in the performance of
his duties, act with justice, give 'everyone his due, and observe honesty and
good faith." (Art. 19, New Civil Code.)

We are not impressed of Villarama's contention that the re-wording

of the two previous drafts of the contract of sale between Villarama
and Pantranco is significant in that as it now appears, the parties
intended to effect the least restriction. We are persuaded, after an
examination of the supposed drafts, that the scope of the final
stipulation, while not as long and prolix as those in the drafts, is just
as broad and comprehensive. At most, it can be said that the re-
wording was done merely f or brevity and simplicity.
The evident intention behind the restriction was to eliminate the
sellers as a competitor, and this must be, considering such factors as
35
 35
the good will that the seller

_______________

34 The 10-year period will expire on January, 1969. Hence, it is practically over.
35 Recent cases have enlarged the concept of good will over the behavioristic
resort of old customers to the old place of business. It is now recognized that "It may
include in addition to those factors all that goes with a business in excess of its mere
capital and physical value, such as reputation f or promptness, fidelity, integrity,
politeness, business sagacity and commercial skill in the conduct of its affairs,
solicitude for the welfare of customers and other tangible elements which contri

860

860 SUPREME COURT REPORTS ANNOTATED

Villa Rey Transit, Inc. vs. Ferrer

had already gained from the riding public and his adeptness and
proficiency in the trade. 36On this matter, Corbin, an authority on
Contracts, has this to say:

"When one buys the business of another as a going concern, he usually

wishes to keep it going; he wishes to get the location, the building, the stock
in trade, and the customers. He wishes to step into the seller's shoes and to
enjoy the same business relations with other men. He is willing to pay much
more if he can get the 'good will' of the business, meaning by this the good
will of the customers, that they may continue to tread the old footpath to his
door and maintain with him the business relations enjoyed by the seller.
"x x x In order to be well assured of this, he obtains and pays for the
seller's promise not to reopen business in competition with the business
sold."

As to whether or not such a stipulation

37
in restraint of trade is valid,
our jurisprudence on the matter says:

'The law concerning contracts which tend to restrain business or trade has
gone through a long series of changes from time to time with the changing
condition of trade and commerce. With trifling exceptions, said changes
have been a continuous development of a general rule. The early cases show
plainly a disposition to avoid and annul all contract which prohibited or
restrained any one from using a lawful trade 'at any time or at any place', as
being against the benefit of the state. Later, however, the rule became well
established that if the restraint was limited to 'a certain time' and within 'a,
certain place', such contracts were valid and not 'against the benefit of the
state.' Later cases, and we think the rule is now well established, have held
that a contract in restraint of trade is valid providing there is a limitation
upon either time or place. A contract, however, which restrains a man from
entering into business or trade without either a limitation as to time or place,
will be held invalid.
"The public welfare of course must always be considered

_______________
 bute to successful commercial venture." (Footnotes to p. 4592, Williston on Contracts, Vol.
5, citing cases.)
36 Corbin on Contracts, Vol. 6, Sec. 1385, p. 483.
37 Del Castillo v. Richmon, 45 Phil. 683, citing Anchor Electric Co. v. Hawkes, 171 Mass.
101; Alger v. Tacher, 19 Pickering (Mass.) 51; Taylor v. Blanchard, 13 Allen (Mass.) 370;
Lurkin Rule Co. v. Fringeli, 57 Ohio State 596; Fowle v. Park, 131 U.S. 88, 97; Diamond
Match Co. v. Reeber, 106 N.Y. 473; National Benefit Co. v. Union Hospital Co., 45 Minn. 272;
Swigert & Howard v. Tilden, 121 lowa, 650. See also Ollendorf v. Abrahamson, 38 Phil. 585.

861

VOL. 25, OCTOBER 29, 1968 861

Villa Rey Transit, Inc. vs. Ferrer

and if it be not involved and the restraint upon one party is not greater than
protection to the other requires, contracts like the one we are discussing will
be sustained. The general tendency, we believe, of modern authority, is to
make the test whether the restraint is reasonably necessary for the protection
of the contracting parties. If the contract is reasonably necessary to protect
the interest of the parties, it will be upheld." (Italics supplied.)

Analyzing the characteristics of the questioned stipulation, We find

that although it is in the nature of an agreement suppressing
competition, it is, however, merely ancillary or incidental to the
main agreement which is that of sale. The suppression or restraint is
only partial or limited: first, in scope, it refers only to application for
TPU by the seller in competition with the lines sold to the buyer;
second, in duration, it is only for ten (10) years and third with
respect to situs or territory, the restraint is only along the lines
covered by the certificates sold. In view of these limitations, coupled
with the consideration of P350,000.00 for just two certificates of
public convenience, and considering, furthermore, that the disputed
stipulation is only incidental to a main agreement, the same38 is
reasonable and it is not harmful nor obnoxious to public service. It
does not appear that the ultimate result of the clause or stipulation
would be to leave solely to Pantranco the right to operate along the
lines in question, thereby establishing a monopoly or predominance
approximating thereto. We believe the main purpose of the restraint
was to protect for a limited time the business of the buyer.
Indeed, the evils of monopoly are f arf etched here. There can be
no danger of price controls or deterioration of the service because of
39
the close supervision of 40the Public Service Commission. This
Court had stated long ago, that

_______________

38 Clearly, the greater part of said consideration was to compensate Villarama for
not competing with Pantranco for at least 10 years, within which period the latter
would put up 31 other units (certificates contained authorization for 32 units), train
drivers thereof and incur such other expenses, so as to put the service along the lines
acquired in good, operating and competing condition.
39 See Secs. 16-C, 19 and 20-A, Com. Act 146.
 40 National Coal Co. v. Public Utility Commission, 47 Phil. 356, 360.

862

862 SUPREME COURT REPORTS ANNOTATED

Villa Rey Transit, Inc. vs. Ferrer

"when one devotes his property to a use in which the public has an
interest, he virtually grants to the public an interest in that use and
submits it to such public use under reasonable rules and regulations
to be fixed by the Public Utility Commission."
Regarding that aspect of the clause that it is merely ancillary or
incidental to a lawful agreement, the underlying reason sustaining its
validity is well explained in 36 Am. Jur. 537-539, to wit:

"x x x Numerous authorities hold that a covenant which is incidental to the

sale and transfer of a trade or business, and which purports to bind the seller
not to engage in the same business in competition with the purchaser, is
lawful and enforceable. While such covenants are designed to prevent
competition on the part of the seller, it is ordinarily neither their purpose nor
effect to stifle competition generally in the locality, nor to prevent it at all in
a way or to an extent injurious to the public. The business in the hands of
the purchaser is carried on just as it was in the hands of the seller; the
former merely takes the place of the latter; the commodities of the trade are
as open to the public as they were before; the same competition exists as
existed before; there is the same employment furnished to others after as
before; the profits of the business go as they did before to swell the sum of
public wealth; the public has the same opportunities of purchasing, if it is a
mercantile business; and production is not lessened if it is a manufacturing
plant."

The reliance by the lower court on the case of Red Line

41
Transportation Co. v. Bachrach, and finding that the stipulation is
illegal and void seems misplaced. In the said Red Line case, the
agreement therein sought to be enforced was virtually a division of
territory between two operators, each company imposing upon itself
an obligation not to operate in any territory covered by the routes of
the other. Restraints of this type, among common carriers, have
always been covered by the general rule invalidating agreements in
42
restraint of trade.
Neither are the other cases relied upon by the plaintiff-appellee
applicable to the instant case. In Pampanga

________________

41 67 Phil. 577.
42 See Negros Ice & Cold Storage Co., Inc. v. PSC, 90 Phil. 138. See also 58 C. J.
S. 1051.

863

VOL. 25, OCTOBER 29, 1968 863

 Villa Rey Transit, Inc. vs. Ferrer

43
Bus Co., Inc. v. Enriquez, the undertaking of the applicant therein
not to apply for the lif ting of restrictions imposed on his certificates
of public convenience was not an ancillary or incidental agreement.
The restraint was the principal objective. On the other hand, in Red
44
Line Transportation Co., Inc. v. Gonzaga, the restraint there in
question not to ask for extension of the line, or trips, or increase of
equipment—was not an agreement between the parties but a
condition imposed in the certif icate of public convenience itself.
Upon the foregoing considerations, Our conclusion is that the
stipulation prohibiting Villarama for a period of 10 years to "apply"
for TPU service along the lines covered by the certificates of public
convenience sold by him to Pantranco is valid and reasonable.
Having arrived at this conclusion, and considering that the
preponderance of the evidence have shown that Villa Rey Transit,
Inc. is itself the alter ego of Villarama, We hold, as prayed for in
Pantranco's third party complaint, that the said Corporation should,
until the expiration of the 1-year period abovementioned, be
enjoined from operating the lines subject of the prohibition.
To avoid any misunderstanding, it is here to be emphasized that
the 10-year prohibition upon Villarama is not against his application
for, or purchase of, certificates of public convenience, but merely the
operation of TPU along the lines covered by the certificates sold by
him to Pantranco. Consequently, the sale between Fernando and the
Corporation is valid, such that the rightful ownership of the disputed
certificates still belongs to the plaintiff being the prior purchaser in
good faith and for value thereof. In view of the ancient rule of
caveat emptor prevailing in this jurisdiction, what was acquired by
Ferrer in the sheriff's sale was only the right which Fernando,
judgment debtor, had in the certificates of public convenience on the
45
day of the sale.

_______________

43 66 Phil. 645.
44 G.R. No. L-10834, April 28, 1960.
45 See secs. 25 & 26, Rule 39, Rules of Court.

864

864 SUPREME COURT REPORTS ANNOTATED

Villa Rey Transit, Inc. vs. Ferrer

46
Accordingly, by the "Notice of Levy Upon Personalty" the
Commissioner of Public Service was notified that "by virtue of an
Order of Execution issued by the Court of First Instance of
Pangasinan, the rights, interests, or participation which the
defendant, VALENTIN A. FERNANDO—in the above entitled case
may have in the following realty/personalty is attached or levied
upon, to wit: The rights, interests and participation on the
Certificates of Public Convenience issued to Valentin A. Fernando,
in Cases Nos. 59494, etc. x x x Lines—Manila to Lingayen,
Dagupan, etc. vice versa." Such notice of levy only shows that
Ferrer, the vendee at auction of said certificates, merely stepped into
the shoes of the judgment debtor. Of the same principle is the
provision of Article 1544 of the Civil Code, that "If the same thing
should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession
thereof in good faith, if it should be movable property."
There is no merit in Pantranco and Ferrer's theory that the sale of
the certif icates of public convenience in question, between the
Corporation and Fernando, was not consummated, it being only a
condition sale subject to the suspensive condition of its approval by
the Public Service Commission. While section 20 (g) of the Public
Service Act provides that "subject to established limitation and
exceptions and saving provisions to the contrary, it shall be unlawful
for any public service or for the owner, lessee or operator thereof,
without the approval and authorization of the Commission
previously had x x x to sell, alienate; mortgage. encumber or lease
its property, franchise, certificates, privileges, or rights or any part
thereof, x x x," the same section also provides:

"x x x Provided, however, That nothing herein contained shall be construed

to prevent the transaction from being negotiated or completed before its
approval or to prevent the sale, alienation, or lease by any public service of
any of its property in the ordinary course of its business."

It is clear, therefore, that the requisite approval of the

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46 (?)

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VOL. 25, OCTOBER 29, 1968 865

Villa Rey Transit, Inc. vs. Ferrer

PSC is not a condition precedent for the validity and consummation

of the sale.
Anent the question of damages allegedly suffered by the parties,
each of the appellants has its or his own version to allege.
Villa Rey Transit, Inc. claims that by virtue of the "tortious acts"
of defendants (Pantranco and Ferrer) in acquiring the certif icates of
public convenience in question, despite constructive and actual
knowledge on their part of a prior sale executed by Fernando in f
avor of the said corporation, which necessitated the latter to f ile the
action to annul the sheriff's sale to Ferrer and the subsequent transfer
to Pantranco, it is entitled to collect actual and compensatory
damages, and attorney's fees in the amount of P25,000.00. The
evidence on record, however, does not clearly show that said
defendants acted in bad faith in their acquisition of the certificates in
question. They believed that because the bill of sale has yet to be
approved by the Public Service Commission, the transaction was not
a consummated sale, and, therefore, the title to or ownership of the
certificates was still with the seller. The award by the lower court of
attorney's fees of P5,000.00 in favor of Villa Rey Transit, Inc. is,
therefore, without basis and be set aside.
Eusebio Ferrer's charge that by reason of the filing of the action
to annul the sheriff s sale, he had suffered and should be awarded
moral, exemplary damages and attorney's fees, cannot be
entertained, in view of the conclusion herein reached that the sale by
Fernando to the Corporation was valid.
Pantranco, on the other hand, justifies its claim for damages with
the allegation that when it purchased Villarama's business for
P350,000.00, it intended to build up the traffic along the lines
covered by the certificates but it was not afforded an opportunity to
do so since barely three months had elapsed when the contract was
violated by Villarama operating along the same lines in the name of
Villa Rey Transit, Inc. It is f urther claimed by Pantranco that the
underhanded manner in which Villarama violated the contract is
pertinent in establishing

866

866 SUPREME COURT REPORTS ANNOTATED

Villa Rey Transit, Inc. vs. Ferrer

punitive or moral damages. Its contention as to the proper measure

of damages is that it should be the purchase price of P350,000.00
that it paid to Villarama. While We are f ully in accord with
Pantranco's claim of entitlement to damages it suffered as a result of
Villarama's breach of his contract with it, the record does not
sufficiently supply the necessary evidentiary materials upon which
to base the award and there is need for further proceedings in the
lower court to ascertain the proper amount.
PREMISES CONSIDERED, the judgment appealed from is
hereby modified as follows:

1. The sale of the two certificates of public convenience in

question by Valentin Fernando to Villa Rey Transit, Inc. is
declared preferred over that made by the Sheriff at public
auction of the aforesaid certificate of public convenience in
favor of Eusebio Ferrer;
2. Reversed, insof ar as it dismisses the third-party complaint f
iled by Pangasinan Transportation Co. against Jose M.
Villarama, holding that Villa Rey Transit, Inc. is an entity
distinct and separate f rom the personality of Jose M.
Villarama, and insofar as it awards the sum of P5,000.00 as
attorney's fees in favor of Villa Rey Transit, Inc.;
3. The case is remanded to the trial court for the reception of
evidence in consonance with the above findings as regards
the amount of damages suffered by Pantranco; and
 4. On equitable considerations, without costs. So ordered.

     Concepcion, C. J., Reyes, J.B.L., Dizon, Makalintal, Castro

and Fernando, JJ., concur.
     Zaldivar, J., is on leave.
     Sanchez and Capistrano, JJ., did not take part,

Judgment reversed with modification and case remanded to trial

court for reception of evidence.

Note.—See the annotation in "Piercing the Veil of Corporate

Fiction," 22 SCRA 1159-1163.

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867

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