Chapter 5: Promoters’ Contracts Prior to Incorporation o petitioner was rendering efficient service before its electric plant was
service before its electric plant was burned, and
25 SCRA 285 - RIZAL LIGHT & ICE CO., INC. vs. PSC and Morong Elec. Co. (1968)
ZALDIVAR, J.:
PSC granted Morong Electric’s application for a CPCN. Rizal Light, a prior operator
contested this decision stating that such grant was invalid considering SEC issued Morong
Electrics certificate of incorporation months after the decision. SC held that while a franchise
cannot take effect until the grantee corporation is organized, the franchise may,
nevertheless, be applied for before the company is fully organized; a grant of a franchise is
valid although the corporation is not created until afterwards.
DOCTRINE
McQuillin: “The fact that a company is not completely incorporated at the time the grant is
made to it by a municipality to use the streets does not, in most jurisdictions, affect the
validity of the grant. But such grant cannot take effect until the corporation is organized…”
Fletcher: “While a franchise cannot take effect until the grantee corporation is
organized, the franchise may, nevertheless, be applied for before the company is fully
organized. A grant of a street franchise is valid although the corporation is not created
until afterwards.”
Thompson (explains reason for these rules^): “…an ordinance granting a privilege to a
corporation is not void because the beneficiary of the ordinance is not fully organized at the
time of the introduction of the ordinance. It is enough that organization is complete prior to
the passage and acceptance of the ordinance. The reason is that a privilege of this
character is a mere license to the corporation until it accepts the grant and complies
with its terms and conditions.”
xxx
[IMPT] The ruling that a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract or transact any business
is NOT ABSOLUTE. Under American jurisprudence, a contract made by the promoters
of a corporation on its behalf may be adopted, accepted or ratified by the corporation
when organized.
FACTS
1. Morong Electric applied for a CPCN with the PSC to provide for electric service in
Morong, Rizal.
2. In May 1962, Morong Electric was granted a franchise. PSC found that “Morong Electric
is a corporation duly organized and existing under the laws of the Philippines, the
stockholders of which are Filipino citizens, that it is financially capable of operating an
electric light, heat and power service, and that at the time the decision was rendered
there was absence of electric service in Morong, Rizal”
3. It was only on October 17 of the same year that the SEC issued Morong Electric’s
certificate of incorporation.
4. Rizal Light, a prior operator, contends that Morong should not have been granted the
CPCN because:
o it did not have a corporate personality at the time it was granted a franchise and
when it applied for said certificate
o it is not financially capable of undertaking an electric service
therefore, being a prior operator its investment should be protected and no new
party should be granted a franchise and certificate of public convenience and
necessity to operate an electric service in the same locality.
ISSUE with HOLDING
WON the franchise granted to Morong Electric is valid despite the fact that such was granted
before Morong Electric’s certificate of incorporation was issued by the SEC – VALID
 Petitioner: until a corporation has come into being, in this jurisdiction, by the issuance
of a certificate of incorporation by the SEC, it cannot enter into any contract as a
corporation. The franchise was granted to Morong Electric when it was not yet in esse
is null and void
 SC: Petitioner's contention that Morong Electric did not yet have a legal personality
when a municipal franchise was granted to it is correct. The juridical personality and
legal existence of Morong Electric began only when its certificate of incorporation was
issued by the SEC.
o Before that date, or pending the issuance of said certificate of incorporation, the
incorporators cannot be considered as de facto corporation, but the fact that
Morong Electric had no corporate existence on the day the franchise was
granted in its name does not render the franchise invalid, because later
Morong Electric obtained its certificate of incorporation and then accepted the
franchise in accordance with tshe terms and conditions thereof. This view is
sustained by eminent American authorities (see doctrine)
 Thus, the incorporation of Morong Electric on October 17, 1962 and its acceptance of
the franchise as shown by its action in prosecuting the application filed with the
Commission for the approval of said franchise 1) perfected a contract between the
respondent municipality and Morong Electric and 2) cured the deficiency pointed out by
the petitioner in the application of Morong EIectric.
 The conclusion regarding the validity of the franchise granted to Morong Electric is not
incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc.
vs. Teodoro Sandiko wherein Court held that a corporation should have a full and
complete organization and existence as an entity before it can enter into any kind of a
contract or transact any business.
o this Court did not say in that case that the rule is absolute or that under no
circumstances may the acts of promoters of a corporation be ratified or
accepted by the corporation if and when subsequently organized
o there are exceptions such as the fact that American courts generally hold that a
contract made by the promoters of a corporation on its behalf may be adopted,
accepted or ratified by the corporation when organized
DISPOSITIVE PORTION
PSC decision affirmed.
DIGESTER: MTR
1