G.R. No.

108734 May 29, 1996

CONCEPT BUILDERS, INC., petitioner, vs.
THE NATIONAL LABOR RELATIONS
COMMISSION, (First Division); and Norberto
Marabe; Rodolfo Raquel, Cristobal Riego,
Manuel Gillego, Palcronio Giducos, Pedro
Aboigar, Norberto Comendador, Rogelio Salut,
Emilio Garcia, Jr., Mariano Rio, Paulina Basea,
Alfredo Albera, Paquito Salut, Domingo
Guarino, Romeo Galve, Dominador Sabina,
Felipe Radiana, Gavino Sualibio, Moreno
Escares, Ferdinand Torres, Felipe Basilan, and
Ruben Robalos, respondents.

Petitioner Concept Builders, Inc., a domestic

corporation, with principal office at 355 Maysan
Road, Valenzuela, Metro Manila, is engaged in the
construction business. Private respondents were
employed by said company as laborers,
carpenters and riggers.

On November, 1981, private respondents were

served individual written notices of termination of
employment by petitioner, effective on November
30, 1981. It was stated in the individual notices
that their contracts of employment had expired
and the project in which they were hired had been
completed.

HERMOSISIMA, JR., J.:

The corporate mask may be lifted and the

corporate veil may be pierced when a corporation
is just but the alter ego of a person or of another
corporation. Where badges of fraud exist; where
public convenience is defeated; where a wrong is
sought to be justified thereby, the corporate fiction
or the notion of legal entity should come to
naught. The law in these instances will regard the
corporation as a mere association of persons and,
in case of two corporations, merge them into one.
Thus, where a sister corporation is used as a
shield to evade a corporation's subsidiary liability
for damages, the corporation may not be heard to
say that it has a personality separate and distinct
from the other corporation. The piercing of the
corporate veil comes into play.

This special civil action ostensibly raises the

question of whether the National Labor Relations
Commission committed grave abuse of discretion
when it issued a "break-open order" to the sheriff
to be enforced against personal property found in
the premises of petitioner's sister company.

Corporation Law

Public respondent found it to be, the fact,

however, that at the time of the termination of
private respondent's employment, the project in
which they were hired had not yet been finished
and completed. Petitioner had to engage the
services of sub-contractors whose workers
performed the functions of private respondents.

Aggrieved, private respondents filed a complaint

for illegal dismissal, unfair labor practice and nonpayment of their legal holiday pay, overtime pay
and thirteenth-month pay against petitioner.

On December 19, 1984, the Labor Arbiter

rendered
judgment 1 ordering
petitioner
to
reinstate private respondents and to pay them
back wages equivalent to one year or three
hundred working days.

On November 27, 1985, the National Labor

Relations Commission (NLRC) dismissed the
motion for reconsideration filed by petitioner on
the ground that the said decision had already
become final and executory. 2

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On October 16, 1986, the NLRC Research and

Information Department made the finding that
private respondents' back wages amounted to
P199,800.00. 3

1. All the employees inside petitioner's premises

at 355 Maysan Road, Valenzuela, Metro
Manila, claimed that they were employees of
Hydro Pipes Philippines, Inc. (HPPI) and not
by respondent;
2. Levy was made upon personal properties he
found in the premises;

On October 29, 1986, the Labor Arbiter issued a

writ of execution directing the sheriff to execute
the Decision, dated December 19, 1984. The writ
was partially satisfied through garnishment of
sums from petitioner's debtor, the Metropolitan
Waterworks and Sewerage Authority, in the
amount of P81,385.34. Said amount was turned
over to the cashier of the NLRC.

On February 1, 1989, an Alias Writ of Execution

was issued by the Labor Arbiter directing the
sheriff to collect from herein petitioner the sum of
P117,414.76, representing the balance of the
judgment award, and to reinstate private
respondents to their former positions.

On July 13, 1989, the sheriff issued a report

stating that he tried to serve the alias writ of
execution on petitioner through the security guard
on duty but the service was refused on the ground
that petitioner no longer occupied the premises.

On September 26, 1986, upon motion of private

respondents, the Labor Arbiter issued a second
alias writ of execution.

The said writ had not been enforced by the

special sheriff because, as stated in his progress
report, dated November 2, 1989:

3. Security guards with high-powered guns

prevented him from removing the properties
he had levied upon. 4

The said special sheriff recommended that a

"break-open order" be issued to enable him to
enter petitioner's premises so that he could
proceed with the public auction sale of the
aforesaid personal properties on November 7,
1989.

On November 6, 1989, a certain Dennis

Cuyegkeng filed a third-party claim with the Labor
Arbiter alleging that the properties sought to be
levied upon by the sheriff were owned by Hydro
(Phils.), Inc. (HPPI) of which he is the VicePresident.

On November 23, 1989, private respondents filed

a "Motion for Issuance of a Break-Open Order,"
alleging that HPPI and petitioner corporation were
owned by the same incorporator/stockholders.
They also alleged that petitioner temporarily
suspended its business operations in order to
evade its legal obligations to them and that private
respondents were willing to post an indemnity
bond to answer for any damages which petitioner
and HPPI may suffer because of the issuance of
the break-open order.

In support of their claim against HPPI, private

respondents presented duly certified copies of the
General Informations Sheet, dated May 15, 1987,

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submitted by petitioner to the Securities Exchange

Commission (SEC) and the General Information
Sheet, dated May 25, 1987, submitted by HPPI to
the Securities and Exchange Commission.

Virgilio O. Casino Corporate Secretary

4. Principal Office
The General Information Sheet submitted by the
petitioner revealed the following:

355 Maysan Road

Valenzuela, Metro Manila. 5

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

On the other hand, the General Information Sheet

of HPPI revealed the following:

HPPI P 6,999,500.00
Antonio W. Lim 2,900,000.00
1.

Breakdown of Subscribed Capital

Dennis S. Cuyegkeng 300.00

Name of Stockholder Amount Subscribed
Elisa C. Lim 100,000.00
Antonio W. Lim P 400,000.00
Teodulo R. Dino 100.00
Elisa C. Lim 57,700.00
Virgilio O. Casino 100.00
AWL Trading 455,000.00
Dennis S. Cuyegkeng 40,100.00
2. Board of Directors
Teodulo R. Dino 100.00
Antonio W. Lim Chairman
Virgilio O. Casino 100.00
Dennis S. Cuyegkeng Member
Elisa C. Lim Member
2.

Board of Directors

Teodulo R. Dino Member

Antonio W. Lim Chairman
Virgilio O. Casino Member
Elisa C. Lim Member
Dennis S. Cuyegkeng Member
3. Corporate Officers
Virgilio O. Casino Member
Antonio W. Lim President
Teodulo R. Dino Member
Dennis S. Cuyegkeng Assistant to the
President
Elisa O. Lim Treasurer

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3.

Corporate Officers

Hence, the resort to the present petition.

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the
President
Elisa C. Lim Treasurer
Virgilio O. Casino Corporate Secretary

4.

Principal Office
355 Maysan Road, Valenzuela,
Metro Manila. 6

On February 1, 1990, HPPI filed an Opposition to

private respondents' motion for issuance of a
break-open order, contending that HPPI is a
corporation which is separate and distinct from
petitioner. HPPI also alleged that the two
corporations are engaged in two different kinds of
businesses, i.e., HPPI is a manufacturing firm
while petitioner was then engaged in construction.
On March 2, 1990, the Labor Arbiter issued an
Order which denied private respondents' motion
for break-open order.
Private respondents then appealed to the NLRC.
On April 23, 1992, the NLRC set aside the order
of the Labor Arbiter, issued a break-open order
and directed private respondents to file a bond.
Thereafter, it directed the sheriff to proceed with
the auction sale of the properties already levied
upon. It dismissed the third-party claim for lack of
merit.

Petitioner moved for reconsideration but the

motion was denied by the NLRC in a Resolution,
dated December 3, 1992.

Corporation Law

Petitioner alleges that the NLRC committed grave

abuse of discretion when it ordered the execution
of its decision despite a third-party claim on the
levied property. Petitioner further contends, that
the doctrine of piercing the corporate veil should
not have been applied, in this case, in the
absence of any showing that it created HPPI in
order to evade its liability to private respondents. It
also contends that HPPI is engaged in the
manufacture and sale of steel, concrete and iron
pipes, a business which is distinct and separate
from petitioner's construction business. Hence, it
is of no consequence that petitioner and HPPI
shared the same premises, the same President
and the same set of officers and subscribers. 7

We
find
petitioner's
unmeritorious.

contention

to

be

It is a fundamental principle of corporation law that

a corporation is an entity separate and distinct
from its stockholders and from other corporations
to which it may be connected. 8 But, this separate
and distinct personality of a corporation is merely
a fiction created by law for convenience and to
promote justice. 9 So, when the notion of separate
juridical personality is used to defeat public
convenience, justify wrong, protect fraud or
defend crime, or is used as a device to defeat the
labor laws, 10 this separate personality of the
corporation may be disregarded or the veil of
corporate fiction pierced. 11 This is true likewise
when the corporation is merely an adjunct, a
business conduit or an alter ego of another
corporation. 12

The conditions under which the juridical entity

may be disregarded vary according to the peculiar
facts and circumstances of each case. No hard
and fast rule can be accurately laid down, but

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certainly, there are some probative factors of

identity that will justify the application of the
doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or
ownership of both corporations.

common

1. Control, not mere majority or complete stock

control, but complete domination, not only of
finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at
the time no separate mind, will or existence of
its own;

2. Identity of directors and officers.

3. The manner of keeping corporate books and
records.
4.

Methods of conducting the business. 13

The SEC en banc explained the "instrumentality

rule" which the courts have applied in disregarding
the separate juridical personality of corporations
as follows:

Where one corporation is so organized and

controlled and its affairs are conducted so that
it is, in fact, a mere instrumentality or adjunct
of the other, the fiction of the corporate entity
of the "instrumentality" may be disregarded.
The control necessary to invoke the rule is not
majority or even complete stock control but
such domination of instances, policies and
practices that the controlled corporation has,
so to speak, no separate mind, will or
existence of its own, and is but a conduit for
its principal. It must be kept in mind that the
control must be shown to have been
exercised at the time the acts complained of
took place. Moreover, the control and breach
of duty must proximately cause the injury or
unjust loss for which the complaint is made.

The test in determining the applicability of the

doctrine of piercing the veil of corporate fiction is
as follows:

2. Such control must have been used by the

defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other
positive legal duty or dishonest and unjust act
in contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss
complained of.

The absence of any one of these elements

prevents "piercing the corporate veil." In applying
the "instrumentality" or "alter ego" doctrine, the
courts are concerned with reality and not form,
with how the corporation operated and the
individual defendant's relationship to that
operation. 14
Thus the question of whether a corporation is a
mere alter ego, a mere sheet or paper
corporation, a sham or a subterfuge is purely one
of fact. 15

In this case, the NLRC noted that, while petitioner

claimed that it ceased its business operations on
April 29, 1986, it filed an Information Sheet with
the Securities and Exchange Commission on May
15, 1987, stating that its office address is at 355
Maysan Road, Valenzuela, Metro Manila. On the
other hand, HPPI, the third-party claimant,
submitted on the same day, a similar information
sheet stating that its office address is at 355
Maysan Road, Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:

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Both information sheets were filed by

the same Virgilio O. Casio as the corporate
secretary of both corporations. It would also
not be amiss to note that both corporations
had the same president, the same board of
directors, the same corporate officers, and
substantially the same subscribers.

From the foregoing, it appears that, among

other things, the respondent (herein
petitioner) and the third-party claimant shared
the same address and/or premises. Under this
circumstances, (sic) it cannot be said that the
property levied upon by the sheriff were not of
respondents. 16

Clearly, petitioner ceased its business operations

in order to evade the payment to private
respondents of back wages and to bar their
reinstatement to their former positions. HPPI is
obviously a business conduit of petitioner
corporation and its emergence was skillfully
orchestrated to avoid the financial liability that
already attached to petitioner corporation.

The facts in this case are analogous to Claparols

v. Court of Industrial Relations, where we had the
occasion to rule:

Respondent court's findings that indeed the

Claparols Steel and Nail Plant, which ceased
operation
of
June
30,
1957,
was
SUCCEEDED by the Claparols Steel
Corporation effective the next day, July 1,
1957, up to December 7, 1962, when the
latter finally ceased to operate, were not
disputed by petitioner. It is very clear that the
latter corporation was a continuation and
successor of the first entity . . . . Both
predecessors and successor were owned and

Corporation Law

controlled by petitioner Eduardo Claparols

and there was no break in the succession and
continuity of the same business. This
"avoiding-the-liability" scheme is very patent,
considering that 90% of the subscribed shares
of stock of the Claparols Steel Corporation
(the second corporation) was owned by
respondent . . . Claparols himself, and all the
assets of the dissolved Claparols Steel and
Nail plant were turned over to the emerging
Claparols Steel Corporation.

It is very obvious that the second corporation

seeks the protective shield of a corporate
fiction whose veil in the present case could,
and should, be pierced as it was deliberately
and maliciously designed to evade its financial
obligation to its employees.

In view of the failure of the sheriff, in the case at

bar, to effect a levy upon the property subject of
the execution, private respondents had no other
recourse but to apply for a break-open order after
the third-party claim of HPPI was dismissed for
lack of merit by the NLRC. This is in consonance
with Section 3, Rule VII of the NLRC Manual of
Execution of Judgment which provides that:

Should the losing party, his agent or

representative, refuse or prohibit the Sheriff or
his representative entry to the place where the
property subject of execution is located or
kept, the judgment creditor may apply to the
Commission or Labor Arbiter concerned for a
break-open order.

Furthermore, our perusal of the records shows

that the twin requirements of due notice and
hearing were complied with. Petitioner and the
third-party claimant were given the opportunity to
submit evidence in support of their claim.

Full Text Assign.#1

Hence, the NLRC did not commit any grave abuse

of discretion when it affirmed the break-open order
issued by the Labor Arbiter.

Finally, we do not find any reason to disturb the

rule that factual findings of quasi-judicial agencies
supported by substantial evidence are binding on
this Court and are entitled to great respect, in the
absence of showing of grave abuse of a
discretion. 18

WHEREFORE, the petition is DISMISSED and

the assailed resolutions of the NLRC, dated April
23, 1992 and December 3, 1992, are AFFIRMED.

SO ORDERED.
G.R. No. 166282
February 13, 2013
HEIRS OF FE TAN UY (Represented by her
heir, Mauling Uy Lim), Petitioners, vs.
INTERNATIONAL EXCHANGE BANK,
Respondent.
x----------------------------------x
G.R. No. 166283
GOLDKEY DEVELOPMENT CORP., Petitioner,
vs. INTERNATIONAL EXCHANGE
BANK, Respondent.

Exchange Bank (iBank), granted loans to Hammer

Garments Corporation (Hammer), covered by
promissory notes and deeds of assignment, in the
following amounts:3
Date of Promissory
June 23, 1997
July 24, 1997
July 25, 1997
August 1, 1997
August 1, 1997
August 14, 1997
August 21, 1997
August 21, 1997
September 3, 1997
Total

Note Amount
P 5,599,471.33
2,700,000.00
2,300,000.00
2,938,505.04
3,361,494.96
980,000.00
2,527,200.00
3,146,715.00
1,385,511.75
P24,938,898.08

These were made pursuant to the LetterAgreement,4 dated March 23, 1996, between
iBank and Hammer, represented by its President
and General Manager, Manuel Chua (Chua) a.k.a.
Manuel Chua Uy Po Tiong, granting Hammer a
P25 Million-Peso Omnibus Line.5 The loans were
secured by a P 9 Million-Peso Real Estate
Mortgage6 executed on July 1, 1997 by Goldkey
Development Corporation (Goldkey) over several
of its properties and a P 25 Million-Peso Surety
Agreement7 signed by Chua and his wife, Fe Tan
Uy (Uy), on April 15, 1996.

DECISION

As of October 28, 1997, Hammer had an

outstanding obligation of P25,420,177.62 to
iBank.8 Hammer defaulted in the payment of its
loans, prompting iBank to foreclose on Goldkeys
third-party Real Estate Mortgage. The mortgaged
properties were sold for P 12 million during the
foreclosure sale, leaving an unpaid balance of P
13,420,177.62.9 For failure of Hammer to pay the
deficiency, iBank filed a Complaint10 for sum of
money on December 16, 1997 against Hammer,
Chua, Uy, and Goldkey before the Regional Trial
Court, Makati City (RTC).11

MENDOZA, J.:
Before the Court are two consolidated petitions for
review on certiorari under Rule 45 of the 1997
Revised Rules of Civil Procedure, assailing the
August 16, 2004 Decision1 and the December 2,
2004 Resolution2 of the Court of Appeals (CA) in
CA-G.R. CV No. 69817 entitled "International
Exchange Bank v. Hammer Garments Corp., et
al."

Despite service of summons, Chua and Hammer

did not file their respective answers and were
declared in default. In her separate answer, Uy
claimed that she was not liable to iBank because
she never executed a surety agreement in favor of
iBank. Goldkey, on the other hand, also denies
liability, averring that it acted only as a third-party
mortgagor and that it was a corporation separate
and distinct from Hammer.12

The Facts

Meanwhile, iBank applied for the issuance of a

writ of preliminary attachment which was granted
by the RTC in its December 17, 1997 Order. 13 The
Notice of Levy on Attachment of Real Properties,

On several occasions, from June 23, 1997 to

September 3, 1997, respondent International

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dated July 15, 1998, covering the properties under

the name of Goldkey, was sent by the sheriff to
the Registry of Deeds of Quezon City.14

Whether or not there is guilt by association in

those cases where the veil of corporate fiction
may be pierced;20 and

The RTC, in its Decision,15 dated December 27,

2000, ruled in favor of iBank. While it made the
pronouncement that the signature of Uy on the
Surety Agreement was a forgery, it nevertheless
held her liable for the outstanding obligation of
Hammer because she was an officer and
stockholder of the said corporation. The RTC
agreed with Goldkey that as a third-party
mortgagor, its liability was limited to the properties
mortgaged. It came to the conclusion, however,
that Goldkey and Hammer were one and the
same entity for the following reasons: (1) both
were family corporations of Chua and Uy, with
Chua as the President and Chief Operating
Officer; (2) both corporations shared the same
office and transacted business from the same
place, (3) the assets of Hammer and Goldkey
were co-mingled; and (4) when Chua absconded,
both Hammer and Goldkey ceased to operate. As
such, the piercing of the veil of corporate fiction
was warranted. Uy, as an officer and stockholder
of Hammer and Goldkey, was found liable to
iBank together with Chua, Hammer and Goldkey
for the deficiency ofP13,420,177.62.
Aggrieved, the heirs of Uy and Goldkey
(petitioners) elevated the case to the CA. On
August 16, 2004, it promulgated its decision
affirming the findings of the RTC. The CA found
that iBank was not negligent in evaluating the
financial stability of Hammer. According to the
appellate court, iBank was induced to grant the
loan because petitioners, with intent to defraud
the bank, submitted a falsified Financial Report for
1996 which incorrectly declared the assets and
cashflow of Hammer.16 Because petitioners acted
maliciously and in bad faith and used the
corporate fiction to defraud iBank, they should be
treated as one and the same as Hammer.17

Whether or not the "alter ego" theory in

disregarding the corporate personality of a
corporation is applicable to Goldkey.21

Hence, these petitions filed separately by the

heirs of Uy and Goldkey. On February 9, 2005,
this Court ordered the consolidation of the two
cases.18
The Issues
Petitioners raise the following issues:
Whether or not a trial court, under the facts of
this case, can go out of the issues raised by
the pleadings;19

Corporation Law

Simplifying the issues in this case, the Court must

resolve the following: (1) whether Uy can be held
liable to iBank for the loan obligation of Hammer
as an officer and stockholder of the said
corporation; and (2) whether Goldkey can be held
liable for the obligation of Hammer for being a
mere alter ego of the latter.
The Courts Ruling
The petitions are partly meritorious.
Uy is not liable; The piercing of the veil of
corporate fiction is not justified
The heirs of Uy argue that the latter could not be
held liable for being merely an officer of Hammer
and Goldkey because it was not shown that she
had committed any actionable wrong22 or that she
had participated in the transaction between
Hammer and iBank. They further claim that she
had cut all ties with Hammer and her husband
long before the execution of the loan.23
The Court finds in favor of Uy.
Basic is the rule in corporation law that a
corporation is a juridical entity which is vested with
a legal personality separate and distinct from
those acting for and in its behalf and, in general,
from the people comprising it. Following this
principle, obligations incurred by the corporation,
acting through its directors, officers and
employees, are its sole liabilities. A director, officer
or employee of a corporation is generally not held
personally liable for obligations incurred by the
corporation.24 Nevertheless, this legal fiction may
be disregarded if it is used as a means to
perpetrate fraud or an illegal act, or as a vehicle
for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate
issues.25 This is consistent with the provisions of
the Corporation Code of the Philippines, which
states:
Sec. 31. Liability of directors, trustees or
officers. Directors or trustees who wilfully
and knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in

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directing the affairs of the corporation or

acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally for
all damages resulting therefrom suffered by
the corporation, its stockholders or members
and other persons.
Solidary liability will then attach to the directors,
officers or employees of the corporation in certain
circumstances, such as:
1. When directors and trustees or, in appropriate
cases, the officers of a corporation: (a) vote
for or assent to patently unlawful acts of the
corporation; (b) act in bad faith or with gross
negligence in directing the corporate affairs;
and (c) are guilty of conflict of interest to the
prejudice of the corporation, its stockholders
or members, and other persons;
2. When a director or officer has consented to
the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with
the corporate secretary his written objection
thereto;
3. When a director, trustee or officer has
contractually agreed or stipulated to hold
himself personally and solidarily liable with the
corporation; or
4. When a director, trustee or officer is made, by
specific provision of law, personally liable for
his corporate action.26
Before a director or officer of a corporation can be
held personally liable for corporate obligations,
however, the following requisites must concur: (1)
the complainant must allege in the complaint that
the director or officer assented to patently unlawful
acts of the corporation, or that the officer was
guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith.27
While it is true that the determination of the
existence of any of the circumstances that would
warrant the piercing of the veil of corporate fiction
is a question of fact which cannot be the subject
of a petition for review on certiorari under Rule 45,
this Court can take cognizance of factual issues if
the findings of the lower court are not supported
by the evidence on record or are based on a
misapprehension of facts.28
In this case, petitioners are correct to argue that it
was not alleged, much less proven, that Uy
committed an act as an officer of Hammer that
would permit the piercing of the corporate veil. A
reading of the complaint reveals that with regard

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to Uy, iBank did not demand that she be held

liable for the obligations of Hammer because she
was a corporate officer who committed bad faith
or gross negligence in the performance of her
duties such that the lifting of the corporate mask
would be merited. What the complaint simply
stated is that she, together with her errant
husband Chua, acted as surety of Hammer, as
evidenced by her signature on the Surety
Agreement which was later found by the RTC to
have been forged.29
Considering that the only basis for holding Uy
liable for the payment of the loan was proven to
be a falsified document, there was no sufficient
justification for the RTC to have ruled that Uy
should be held jointly and severally liable to iBank
for the unpaid loan of Hammer. Neither did the CA
explain its affirmation of the RTCs ruling against
Uy. The Court cannot give credence to the
simplistic declaration of the RTC that liability
would attach directly to Uy for the sole reason that
she was an officer and stockholder of Hammer.
At most, Uy could have been charged with
negligence in the performance of her duties as
treasurer of Hammer by allowing the company to
contract a loan despite its precarious financial
position. Furthermore, if it was true, as petitioners
claim, that she no longer performed the functions
of a treasurer, then she should have formally
resigned as treasurer to isolate herself from any
liability that could result from her being an officer
of
the
corporation.
Nonetheless,
these
shortcomings of Uy are not sufficient to justify the
piercing of the corporate veil which requires that
the negligence of the officer must be so gross that
it could amount to bad faith and must be
established by clear and convincing evidence.
Gross negligence is one that is characterized by
the lack of the slightest care, acting or failing to
act in a situation where there is a duty to act,
wilfully and intentionally with a conscious
indifference to the consequences insofar as other
persons may be affected.30
It behooves this Court to emphasize that the
piercing of the veil of corporate fiction is frowned
upon and can only be done if it has been clearly
established that the separate and distinct
personality of the corporation is used to justify a
wrong,
protect
fraud,
or
perpetrate
a
deception.31 As aptly explained in Philippine
National Bank v. Andrada Electric & Engineering
Company:32
Hence, any application of the doctrine of piercing
the corporate veil should be done with caution. A

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court should be mindful of the milieu where it is to

be applied. It must be certain that the corporate
fiction was misused to such an extent that
injustice, fraud, or crime was committed against
another, in disregard of its rights. The wrongdoing
must be clearly and convincingly established; it
cannot be presumed. Otherwise, an injustice that
was never unintended may result from an
erroneous application.33

In fact, it is Goldkey who is now precluded from

denying the validity of the Real Estate Mortgage.
In its Answer with Affirmative Defenses and
Compulsory Counterclaim, dated January 5, 1998,
it already admitted that it acted as a third-party
mortgagor to secure the obligation of Hammer to
iBank.38 Thus, it cannot, at this late stage,
question the due execution of the third-party
mortgage.

Indeed, there is no showing that Uy committed

gross negligence. And in the absence of any of
the aforementioned requisites for making a
corporate officer, director or stockholder
personally liable for the obligations of a
corporation, Uy, as a treasurer and stockholder of
Hammer, cannot be made to answer for the
unpaid debts of the corporation.

Similarly, Goldkey is undoubtedly mistaken in

claiming that iBank is seeking to enforce an
obligation of Chua. The records clearly show that
it was Hammer, of which Chua was the president
and a stockholder, which contracted a loan from
iBank. What iBank sought was redress from
Goldkey by demanding that the veil of corporate
fiction be lifted so that it could not raise the
defense of having a separate juridical personality
to evade liability for the obligations of Hammer.

Goldkey is a mere alter ego of Hammer

Goldkey contends that it cannot be held
responsible for the obligations of its stockholder,
Chua.34 Moreover, it theorizes that iBank is
estopped from expanding Goldkeys liability
beyond the real estate mortgage. 35 It adds that it
did not authorize the execution of the said
mortgage.36 Finally, it passes the blame on to
iBank for failing to exercise the requisite due
diligence in properly evaluating Hammers
creditworthiness before it was extended an
omnibus line.37
The Court disagrees with Goldkey.
There is no reason to discount the findings of the
CA that iBank duly inspected the viability of
Hammer and satisfied itself that the latter was a
good credit risk based on the Financial Statement
submitted. In addition, iBank required that the loan
be secured by Goldkeys Real Estate Mortgage
and the Surety Agreement with Chua and Uy. The
records support the factual conclusions made by
the RTC and the CA.
To the Courts mind, Goldkeys argument, that
iBank is barred from pursuing Goldkey for the
satisfaction of the unpaid obligation of Hammer
because it had already limited its liability to the
real estate mortgage, is completely absurd.
Goldkey needs to be reminded that it is being
sued not as a consequence of the real estate
mortgage, but rather, because it acted as an alter
ego of Hammer. Accordingly, they must be treated
as one and the same entity, making Goldkey
accountable for the debts of Hammer.

Corporation Law

Under a variation of the doctrine of piercing the

veil of corporate fiction, when two business
enterprises are owned, conducted and controlled
by the same parties, both law and equity will,
when necessary to protect the rights of third
parties, disregard the legal fiction that two
corporations are distinct entities and treat them as
identical or one and the same.39
While the conditions for the disregard of the
juridical entity may vary, the following are some
probative factors of identity that will justify the
application of the doctrine of piercing the
corporate veil, as laid down in Concept Builders,
Inc. v NLRC:40
(1) Stock ownership by one or common
ownership of both corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate books
and records, and
(4) Methods of conducting the business.41
These factors are unquestionably present in the
case of Goldkey and Hammer, as observed by the
RTC, as follows:
1. Both corporations are family corporations of
defendants Manuel Chua and his wife Fe Tan
Uy. The other incorporators and shareholders
of the two corporations are the brother and
sister of Manuel Chua (Benito Ng Po Hing and
Nenita Chua Tan) and the sister of Fe Tan Uy,
Milagros Revilla. The other incorporator/share
holder is Manling Uy, the daughter of Manuel
Chua Uy Po Tiong and Fe Tan Uy.

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10

The stockholders of Hammer Garments as of

March 23, 1987, aside from spouses Manuel
and Fe Tan Uy are: Benito Chua, brother
Manuel Chua, Nenita Chua Tan, sister of
Manuel Chua and Tessie See Chua Tan. On
March 8, 1988, the shares of Tessie See
Chua Uy were assigned to Milagros T. Revilla,
thereby consolidating the shares in the family
of Manuel Chua and Fe Tan Uy.
2. Hammer Garments and Goldkey share the
same office and practically transact their
business from the same place.
3. Defendant Manuel Chua is the President and
Chief Operating Officer of both corporations.
All business transactions of Goldkey and
Hammer are done at the instance of
defendant Manuel Chua who is authorized to
do so by the corporations.
The promissory notes subject of this
complaint are signed by him as Hammers
President and General Manager. The thirdparty real estate mortgage of defendant
Goldkey is signed by him for Goldkey to
secure the loan obligation of Hammer
Garments with plaintiff "iBank". The other
third-party real estate mortgages which
Goldkey executed in favor of the other creditor
banks of Hammer are also assigned by
Manuel Chua.
4. The assets of Goldkey and Hammer are comingled. The real properties of Goldkey are
mortgaged to secure Hammers obligation
with creditor banks.
The proceed of at least two loans which
Hammer obtained from plaintiff "iBank",
purportedly to finance its export to Wal-Mart
are instead used to finance the purchase of a
managers check payable to Goldkey. The
defendants claim that Goldkey is a creditor of
Hammer to justify its receipt of the Managers
check is not substantiated by evidence.
Despite subpoenas issued by this Court,
Goldkey thru its treasurer, defendant Fe Tan
Uy and or its corporate secretary Manling Uy
failed to produce the Financial Statement of
Goldkey.

continue the business of Goldkey, if it were

different or distinct from Hammer which
suffered financial set back.42
Based on the foregoing findings of the RTC, it was
apparent that Goldkey was merely an adjunct of
Hammer and, as such, the legal fiction that it has
a separate personality from that of Hammer
should be brushed aside as they are, undeniably,
one and the same.
WHEREFORE, the petitions are PARTLY
GRANTED. The August 16, 2004 Decision and
the December 2, 2004 Resolution of the Court of
Appeals in CA-G.R. CV No. 69817, are hereby
MODIFIED. Fe Tan Uy is released from any
liability arising from the debts incurred by Hammer
from iBank. Hammer Garments Corporation,
Manuel Chua Uy Po Tiong and Goldkey
Development Corporation are jointly and severally
liable to pay International Exchange Bank the sum
of P13,420,177.62 representing the unpaid loan
obligation of Hammer as of December 12, 1997
plus interest. No costs.
SO ORDERED.

G.R. No. 167530

PHILIPPINE NATIONAL BANK, Petitioner, vs.

HYDRO RESOURCES CONTRACTORS
CORPORATION, Respondent.
x-----------------------x
G.R. No. 167561
ASSET PRIVATIZATION TRUST, Petitioner,
vs. HYDRO RESOURCES CONTRACTORS
CORPORATION, Respondent.

5. When defendant Manuel Chua "disappeared",

the defendant Goldkey ceased to operate
despite the claim that the other "officers" and
stockholders like Benito Chua, Nenita Chua
Tan, Fe Tan Uy, Manling Uy and Milagros T.
Revilla are still around and may be able to

Corporation Law

March 13, 2013

Full Text Assign.#1

x-----------------------x
G.R. No. 167603
DEVELOPMENT BANK OF THE
PHILIPPINES, Petitioner, vs.HYDRO
RESOURCES CONTRACTORS
CORPORATION, Respondent.

11

payments already made by NMIC under the

program and crediting the NMICs receivables
from

DECISION

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the
Decision2 dated November 30, 2004 and the
Resolution3 dated March 22, 2005 of the Court of
Appeals in CA-G.R. CV No. 57553. The said
Decision affirmed the Decision4dated November 6,
1995 of the Regional Trial Court (RTC) of Makati
City, Branch 62, granting a judgment award
of P8,370,934.74, plus legal interest, in favor of
respondent
Hydro
Resources
Contractors
Corporation (HRCC) with the modification that the
Privatization and Management Office (PMO),
successor of petitioner Asset Privatization Trust
(APT),5 has been held solidarily liable with Nonoc
Mining and Industrial Corporation (NMIC)6and
petitioners Philippine National Bank (PNB) and
Development Bank of the Philippines (DBP), while
the Resolution denied reconsideration separately
prayed for by PNB, DBP, and APT.

Sometime in 1984, petitioners DBP and PNB

foreclosed on certain mortgages made on the
properties of Marinduque Mining and Industrial
Corporation (MMIC). As a result of the
foreclosure, DBP and PNB acquired substantially
all the assets of MMIC and resumed the business
operations of the defunct MMIC by organizing
NMIC.7 DBP and PNB owned 57% and 43% of the
shares of NMIC, respectively, except for five
qualifying shares.8 As of September 1984, the
members of the Board of Directors of NMIC,
namely, Jose Tengco, Jr., Rolando Zosa, Ruben
Ancheta, Geraldo Agulto, and Faustino Agbada,
were either from DBP or PNB.9

Subsequently, NMIC engaged the services of

Hercon, Inc., for NMICs Mine Stripping and Road
Construction Program in 1985 for a total contract
price of P35,770,120. After computing the

Corporation Law

Hercon, Inc., the latter found that NMIC still has

an unpaid balance of P8,370,934.74.10 Hercon,
Inc. made several demands on NMIC, including a
letter of final demand dated August 12, 1986, and
when these were not heeded, a complaint for sum
of money was filed in the RTC of Makati, Branch
136 seeking to hold petitioners NMIC, DBP, and
PNB solidarily liable for the amount owing Hercon,
Inc.11 The case was docketed as Civil Case No.
15375.

Subsequent to the filing of the complaint, Hercon,

Inc. was acquired by HRCC in a merger. This
prompted the amendment of the complaint to
substitute HRCC for Hercon, Inc.12

Thereafter, on December 8, 1986, then President

Corazon C. Aquino issued Proclamation No. 50
creating the APT for the expeditious disposition
and
privatization
of
certain
government
corporations and/or the assets thereof. Pursuant
to the said Proclamation, on February 27, 1987,
DBP and PNB executed their respective deeds of
transfer in favor of the National Government
assigning, transferring and conveying certain
assets and liabilities, including their respective
stakes in NMIC.13 In turn and on even date, the
National Government transferred the said assets
and liabilities to the APT as trustee under a Trust
Agreement.14 Thus, the complaint was amended
for the second time to implead and include the
APT as a defendant.

In its answer,15 NMIC claimed that HRCC had no

cause of action. It also asserted that its contract
with HRCC was entered into by its then President
without any authority. Moreover, the said contract
allegedly failed to comply with laws, rules and

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12

regulations concerning government contracts.

NMIC further claimed that the contract amount
was
manifestly
excessive
and
grossly
disadvantageous to the government. NMIC made
counterclaims for the amounts already paid to
Hercon, Inc. and attorneys fees, as well as
payment for equipment rental for four trucks,
replacement of parts and other services, and
damage to some of NMICs properties.16

For its part, DBPs answer 17 raised the defense

that HRCC had no cause of action against it
because DBP was not privy to HRCCs contract
with NMIC. Moreover, NMICs juridical personality
is separate from that of DBP. DBP further
interposed a counterclaim for attorneys fees.18
PNBs answer19 also invoked lack of cause of
action against it. It also raised estoppel on
HRCCs part and laches as defenses, claiming
that the inclusion of PNB in the complaint was the
first time a demand for payment was made on it
by HRCC. PNB also invoked the separate juridical
personality of NMIC and made counterclaims for
moral damages and attorneys fees.20

APT set up the following defenses in its answer 21:

lack of cause of action against it, lack of privity
between Hercon, Inc. and APT, and the National
Governments preferred lien over the assets of
NMIC.22

From the documentary evidence adduced by the

plaintiff, some of which were even adopted by
defendants and DBP and PNB as their own
evidence (Exhibits "I", "I-1", "I-2", "I-3", "I-4", "I-5",
"I5-A", "I-5-B", "I-5-C", "I-5-D" and submarkings,
inclusive), it had been established that except for
five (5) qualifying shares, NMIC is owned by
defendants DBP and PNB, with the former owning
57% thereof, and the latter 43%. As of September
24, 1984, all the members of NMICs Board of
Directors, namely, Messrs. Jose Tengco, Jr.,
Rolando M. Zosa, Ruben Ancheta, Geraldo
Agulto, and Faustino Agbada are either from DBP
or PNB (Exhibits "I-5", "I-5-C", "I-5-D").

The business of NMIC was then also being

conducted and controlled by both DBP and PNB.
In fact, it was Rolando M. Zosa, then Governor of
DBP, who was signing and entering into contracts
with third persons, on behalf of NMIC.

In this jurisdiction, it is well-settled that "where it

appears that the business enterprises are owned,
conducted and controlled by the same parties,
both law and equity will, when necessary to
protect the rights of third persons, disregard legal
fiction that two (2) corporations are distinct
entities, and treat them as identical." (Phil.
Veterans Investment Development Corp. vs. CA,
181 SCRA 669).

After trial, the RTC of Makati rendered a Decision

dated November 6, 1995 in favor of HRCC. It
pierced the corporate veil of NMIC and held DBP
and PNB solidarily liable with NMIC:

From all indications, it appears that NMIC is a

mere adjunct, business conduit or alter ego of
both DBP and PNB. Thus, the DBP and PNB are
jointly and severally liable with NMIC for the
latters unpaid obligations to plaintiff.23

On the issue of whether or not there is sufficient

ground to pierce the veil of corporate fiction, this
Court likewise finds for the plaintiff.

Having found DBP and PNB solidarily liable with

NMIC, the dispositive portion of the Decision of
the trial court reads:

Corporation Law

Full Text Assign.#1

13

WHEREFORE, in view of the foregoing,

judgment is hereby rendered in favor of the
plaintiff
HYDRO
RESOURCES
CONTRACTORS
CORPORATION
and
against the defendants NONOC

MINING AND INDUSTRIAL CORPORATION,

DEVELOPMENT
BANK
OF
THE
PHILIPPINES and PHILIPPINE NATIONAL
BANK, ordering the aforenamed defendants,
to pay the plaintiff jointly and severally, the
sum ofP8,370,934.74 plus legal interest
thereon from date of demand, and attorneys
fees equivalent to 25% of the judgment
award.

stockholders of five (5) consisting of its own

officers and included in its charter merely to
comply with the requirement of the law as to
number of incorporators; and that the
directorates of DBP, PNB and [NMIC] are
interlocked.

xxxx

We find it therefore correct for the lower court

to have ruled that:
"From all indications, it appears that NMIC
is a mere adjunct, business conduit or
alter ego of both DBP and PNB. Thus, the
DBP and PNB are jointly and severally
liable with NMIC for the latters unpaid
obligation to plaintiff."26(Citation omitted.)

The complaint against APT is hereby

dismissed. However, APT, as trustee of
NONOC
MINING
AND
INDUSTRIAL
CORPORATION is directed to ensure
compliance with this Decision.24

DBP and PNB filed their respective appeals in the

Court of Appeals. Both insisted that it was wrong
for the RTC to pierce the veil of NMICs corporate
personality and hold DBP and PNB solidarily
liable with NMIC.25

The Court of Appeals rendered the Decision dated

November 30, 2004, affirmed the piercing of the
veil of the corporate personality of NMIC and held
DBP, PNB, and APT solidarily liable with NMIC. In
particular, the Court of Appeals made the following
findings:

The Court of Appeals then concluded that, "in

keeping with the concept of justice and fair play,"
the corporate veil of NMIC should be pierced,
ratiocinating:

For to treat NMIC as a separate legal entity

from DBP and PNB for the purpose of
securing beneficial contracts, and then using
such separate entity to evade the payment of
a just debt, would be the height of injustice
and iniquity. Surely that could not have been
the intendment of the law with respect to
corporations. x x x.27

The dispositive portion of the Decision of the

Court of Appeals reads:
In the case before Us, it is indubitable that
[NMIC] was owned by appellants DBP and
PNB to the extent of 57% and 43%
respectively; that said two (2) appellants are
the only stockholders, with the qualifying

Corporation Law

WHEREFORE, premises considered, the

Decision appealed from is hereby MODIFIED.

Full Text Assign.#1

14

The judgment in favor of appellee Hydro

Resources Contractors Corporation in the
amount of P8,370,934.74 with legal interest
from date of demand is hereby AFFIRMED,
but the dismissal of the case as against
Assets Privatization Trust is REVERSED, and
its
successor
the
Privatization
and
Management Office is INCLUDED as one of
those jointly and severally liable for such
indebtedness. The award of attorneys fees is
DELETED.

All other claims and counter-claims are

hereby DISMISSED.

Costs against appellants.28

The respective motions for reconsideration of

DBP, PNB, and APT were denied.29

Hence, these consolidated petitions.30

All three petitioners assert that NMIC is a

corporate entity with a juridical personality
separate and distinct from both PNB and DBP.
They insist that the majority ownership by DBP
and PNB of NMIC is not a sufficient ground for
disregarding the separate corporate personality of
NMIC because NMIC was not a mere adjunct,
business conduit or alter ego of DBP and PNB.
According to them, the application of the doctrine
of piercing the corporate veil is unwarranted as
nothing in the records would show that the
ownership and control of the shareholdings of
NMIC by DBP and PNB were used to commit
fraud, illegality or injustice. In the absence of
evidence that the stock control by DBP and PNB
over NMIC was used to commit some fraud or a
wrong and that said control was the proximate
cause of the injury sustained by HRCC, resort to

Corporation Law

the doctrine of "piercing the veil of corporate

entity" is misplaced.31

DBP and PNB further argue that, assuming they

may be held solidarily liable with NMIC to pay
NMICs exclusive and separate corporate
indebtedness to HRCC, such liability of the two
banks was transferred to and assumed by the
National Government through the APT, now the
PMO, under the respective deeds of transfer both
dated February 27, 1997 executed by DBP and
PNB pursuant to Proclamation No. 50 dated
December 8, 1986 and Administrative Order No.
14 dated February 3, 1987.

For its part, the APT contends that, in the absence

of an unqualified assumption by the National
Government of all liabilities incurred by NMIC, the
National Government through the APT could not
be held liable for NMICs contractual liability. The
APT asserts that HRCC had not sufficiently shown
that the APT is the successor-in-interest of all the
liabilities of NMIC, or of DBP and PNB as
transferors, and that the adjudged liability is
included among the liabilities assigned and
transferred by DBP and PNB in favor of the
National Government.

HRCC counters that both the RTC and the CA

correctly applied the doctrine of "piercing the veil
of corporate fiction." It claims that NMIC was the
alter ego of DBP and PNB which owned,
conducted and controlled the business of NMIC
as shown by the following circumstances: NMIC
was owned by DBP and PNB, the officers of DBP
and PNB were also the officers of NMIC, and DBP
and PNB financed the operations of NMIC. HRCC
further argues that a parent corporation may be
held liable for the contracts or obligations of its
subsidiary corporation where the latter is a mere
agency, instrumentality or adjunct of the parent
corporation.

Full Text Assign.#1

15

Moreover, HRCC asserts that the APT was

properly held solidarily liable with DBP, PNB, and
NMIC because the APT assumed the obligations
of DBP and PNB as the successor-in-interest of
the said banks with respect to the assets and
liabilities of NMIC.35 As trustee of the Republic of
the Philippines, the APT also assumed the
responsibility of the Republic pursuant to the
following provision of Section 2.02 of the
respective deeds of transfer executed by DBP and
PNB in favor of the Republic:

SECTION 2. TRANSFER OF BANKS

LIABILITIES

xxxx

2.02 With respect to the Banks liabilities

which are contingent and those liabilities
where the Banks creditors consent to the
transfer thereof is not obtained, said liabilities
shall remain in the books of the BANK with
the GOVERNMENT funding the payment
thereof.36

After a careful review of the case, this Court finds

the petitions impressed with merit.

A corporation is an artificial entity created by

operation of law. It possesses the right of
succession and such powers, attributes, and
properties expressly authorized by law or incident
to its existence.37 It has a personality separate and
distinct from that of its stockholders and from that
of other corporations to which it may be
connected.38 As a consequence of its status as a
distinct legal entity and as a result of a conscious
policy decision to promote capital formation, 39 a
corporation incurs its own liabilities and is legally
responsible for payment of its obligations. 40 In

Corporation Law

other words, by virtue of the separate juridical

personality of a corporation, the corporate debt or
credit is not the debt or credit of the
stockholder.41 This protection from liability for
shareholders is the principle of limited liability.42

Equally well-settled is the principle that the

corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter
ego of a person or of another corporation. For
reasons of public policy and in the interest of
justice, the corporate veil will justifiably be impaled
only when it becomes a shield for fraud, illegality
or inequity committed against third persons.43

However, the rule is that a court should be careful

in assessing the milieu where the doctrine of the
corporate veil may be applied. Otherwise an
injustice, although unintended, may result from its
erroneous application.44 Thus, cutting through the
corporate
cover
requires
an
approach
characterized by due care and caution:

Hence, any application of the doctrine of

piercing the corporate veil should be done
with caution. A court should be mindful of the
milieu where it is to be applied. It must be
certain that the corporate fiction was misused
to such an extent that injustice, fraud, or crime
was committed against another, in disregard
of its rights. The wrongdoing must be clearly
and convincingly established; it cannot be
presumed. x x x.45 (Emphases supplied;
citations omitted.)

Sarona
v.
National
Labor
Relations
Commission46 has
defined
the
scope
of
application of the doctrine of piercing the
corporate veil:

Full Text Assign.#1

16

The doctrine of piercing the corporate veil

applies only in three (3) basic areas, namely:
1) defeat of public convenience as when the
corporate fiction is used as a vehicle for the
evasion of an existing obligation; 2) fraud
cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a
crime; or 3) alter ego cases, where a
corporation is merely a farce since it is a mere
alter ego or business conduit of a person, or
where the corporation is so organized and
controlled and its affairs are so conducted as
to make it merely an instrumentality, agency,
conduit or adjunct of another corporation.
(Citation omitted.)

Here, HRCC has alleged from the inception of this

case that DBP and PNB (and the APT as
assignee of DBP and PNB) should be held
solidarily liable for using NMIC as alter ego. 47 The
RTC sustained the allegation of HRCC and
pierced the corporate veil of NMIC pursuant to the
alter ego theory when it concluded that NMIC "is a
mere adjunct, business conduit or alter ego of
both DBP and PNB."48 The Court of Appeals
upheld such conclusion of the trial court.49 In other
words, both the trial and appellate courts relied on
the alter ego theory when they disregarded the
separate corporate personality of NMIC.

In this connection, case law lays down a threepronged test to determine the application of the
alter ego theory, which is also known as the
instrumentality theory, namely:

(1) Control, not mere majority or complete

stock control, but complete domination,
not only of finances but of policy and
business practice in respect to the
transaction attacked so that the corporate
entity as to this transaction had at the
time no separate mind, will or existence of
its own;

Corporation Law

(2) Such control must have been used by the

defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs
legal right; and
(3) The aforesaid control and breach of duty
must have proximately caused the injury
or unjust loss complained of.50 (Emphases
omitted.)

The first prong is the "instrumentality" or "control"

test. This test requires that the subsidiary be
completely under the control and domination of
the parent.51 It examines the parent corporations
relationship with the subsidiary.52It inquires
whether a subsidiary corporation is so organized
and controlled and its affairs are so conducted as
to make it a mere instrumentality or agent of the
parent corporation such that its separate
existence as a distinct corporate entity will be
ignored.53 It seeks to establish whether the
subsidiary corporation has no autonomy and the
parent corporation, though acting through the
subsidiary in form and appearance, "is operating
the business directly for itself."54

The second prong is the "fraud" test. This test

requires that the parent corporations conduct in
using the subsidiary corporation be unjust,
fraudulent or wrongful.55 It examines the
relationship of the plaintiff to the corporation. 56 It
recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way
that harms the plaintiff creditor.57 As such, it
requires a showing of "an element of injustice or
fundamental unfairness."58

The third prong is the "harm" test. This test

requires the plaintiff to show that the defendants
control, exerted in a fraudulent, illegal or
otherwise unfair manner toward it, caused the
harm suffered.59 A causal connection between the

Full Text Assign.#1

17

fraudulent conduct committed through the

instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove
that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendants
exercise of control and improper use of the
corporate form and, thereby, suffer damages.60

directorates
of
DBP,
PNB
and
65
NMIC. Unfortunately, the conclusion of the trial
and appellate courts that the DBP and PNB fit the
alter ego theory with respect to NMICs
transaction with HRCC on the premise of
complete stock ownership and interlocking
directorates involved a quantum leap in logic and
law exposing a gap in reason and fact.

To summarize, piercing the corporate veil based

on the alter ego theory requires the concurrence
of three elements: control of the corporation by
the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff,
and harm or damage caused to the plaintiff by the
fraudulent or unfair act of the corporation. The
absence of any of these elements prevents
piercing the corporate veil.61

While ownership by one corporation of all or a

great majority of stocks of another corporation and
their interlocking directorates may serve as indicia
of control, by themselves and without more,
however, these circumstances are insufficient to
establish an alter ego relationship or connection
between DBP and PNB on the one hand and
NMIC on the other hand, that will justify the
puncturing of the latters corporate cover. This
Court has declared that "mere ownership by a
single stockholder or by another corporation of all
or nearly all of the capital stock of a corporation is
not of itself sufficient ground for disregarding the
separate corporate personality."66 This Court has
likewise ruled that the "existence of interlocking
directors, corporate officers and shareholders is
not enough justification to pierce the veil of
corporate fiction in the absence of fraud or other
public policy considerations."67

This Court finds that none of the tests has been

satisfactorily met in this case.

In applying the alter ego doctrine, the courts are

concerned with reality and not form, with how the
corporation
operated
and
the
individual
defendants relationship to that operation. 62 With
respect to the control element, it refers not to
paper or formal control by majority or even
complete stock control but actual control which
amounts to "such domination of finances, policies
and practices that the controlled corporation has,
so to speak, no separate mind, will or existence of
its own, and is but a conduit for its principal." 63 In
addition, the control must be shown to have been
exercised at the time the acts complained of took
place.64

Both the RTC and the Court of Appeals applied

the alter ego theory and penetrated the corporate
cover of NMIC based on two factors: (1) the
ownership by DBP and PNB of effectively all the
stocks of NMIC, and (2) the alleged interlocking

Corporation Law

True, the findings of fact of the Court of Appeals

are conclusive and cannot be reviewed on appeal
to this Court, provided they are borne out of the
record or are based on substantial evidence. 68 It is
equally true that the question of whether one
corporation is merely an alter ego of another is
purely one of fact. So is the question of whether a
corporation is a paper company, a sham or
subterfuge or whether the requisite quantum of
evidence has been adduced warranting the
piercing
of
the
veil
of
corporate
personality.69 Nevertheless, it has been held in
Sarona
v.
National
Labor
Relations
Commission70 that this Court has the power to
resolve a question of fact, such as whether a
corporation is a mere alter ego of another entity or
whether the corporate fiction was invoked for
fraudulent or malevolent ends, if the findings in

Full Text Assign.#1

18

the assailed decision are either not supported by

the evidence on record or based on a
misapprehension of facts.

In this case, nothing in the records shows that the

corporate finances, policies and practices of NMIC
were dominated by DBP and PNB in such a way
that NMIC could be considered to have no
separate mind, will or existence of its own but a
mere conduit for DBP and PNB. On the contrary,
the evidence establishes that HRCC knew and
acted on the knowledge that it was dealing with
NMIC, not with NMICs stockholders. The letter
proposal of Hercon, Inc., HRCCs predecessor-ininterest, regarding the contract for NMICs mine
stripping and road construction program was
addressed to and accepted by NMIC. 71 The
various billing reports, progress reports,
statements of accounts and communications of
Hercon, Inc./HRCC regarding NMICs mine
stripping and road construction program in 1985
concerned NMIC and NMICs officers, without any
indication of or reference to the control exercised
by DBP and/or PNB over NMICs affairs, policies
and practices.72

HRCC has presented nothing to show that DBP

and PNB had a hand in the act complained of, the
alleged undue disregard by NMIC of the demands
of HRCC to satisfy the unpaid claims for services
rendered by HRCC in connection with NMICs
mine stripping and road construction program in
1985. On the contrary, the overall picture painted
by the evidence offered by HRCC is one where
HRCC was dealing with NMIC as a distinct
juridical person acting through its own corporate
officers.73

Moreover, the finding that the respective boards of

directors of NMIC, DBP, and PNB were
interlocking has no basis. HRCCs Exhibit "I5,"74 the initial General Information Sheet
submitted by NMIC to the Securities and
Exchange Commission, relied upon by the trial
court and the Court of Appeals may have proven

Corporation Law

that DBP and PNB owned the stocks of NMIC to

the extent of 57% and 43%, respectively.
However, nothing in it supports a finding that
NMIC, DBP, and PNB had interlocking directors as
it only indicates that, of the five members of
NMICs board of directors, four were nominees of
either DBP or PNB and only one was a nominee
of both DBP and PNB.75 Only two members of the
board of directors of NMIC, Jose Tengco, Jr. and
Rolando Zosa, were established to be members
of the board of governors of DBP and none was
proved to be a member of the board of directors of
PNB.76 No director of NMIC was shown to be also
sitting
simultaneously in
the
board
of
governors/directors of both DBP and PNB.

In reaching its conclusion of an alter ego

relationship between DBP and PNB on the one
hand and NMIC on the other hand, the Court of
Appeals invoked Sibagat Timber Corporation v.
Garcia,77 which it described as "a case under a
similar factual milieu."78 However, in Sibagat
Timber Corporation, this Court took care to
enumerate the circumstances which led to the
piercing of the corporate veil of Sibagat Timber
Corporation for being the alter ego of Del Rosario
& Sons Logging Enterprises, Inc. Those
circumstances were as follows: holding office in
the same building, practical identity of the officers
and directors of the two corporations and
assumption of management and control of
Sibagat
Timber
Corporation
by
the
directors/officers of Del Rosario & Sons Logging
Enterprises, Inc.

Here, DBP and PNB maintain an address different

from that of NMIC.79 As already discussed, there
was insufficient proof of interlocking directorates.
There was not even an allegation of similarity of
corporate officers. Instead of evidence that DBP
and PNB assumed and controlled the
management of NMIC, HRCCs evidence shows
that NMIC operated as a distinct entity endowed
with its own legal personality. Thus, what obtains
in this case is a factual backdrop different from,
not similar to, Sibagat Timber Corporation.

Full Text Assign.#1

19

In relation to the second element, to disregard the

separate juridical personality of a corporation, the
wrongdoing or unjust act in contravention of a
plaintiffs legal rights must be clearly and
convincingly established; it cannot be presumed.
Without a demonstration that any of the evils
sought to be prevented by the doctrine is present,
it does not apply.80
In this case, the Court of Appeals declared:

We are not saying that PNB and DBP are

guilty of fraud in forming NMIC, nor are we
implying that NMIC was used to conceal
fraud. x x x.81

Such a declaration clearly negates the possibility

that DBP and PNB exercised control over NMIC
which DBP and PNB used "to commit fraud or
wrong, to perpetuate the violation of a statutory or
other positive legal duty, or dishonest and unjust
act in contravention of plaintiffs legal rights." It is
a recognition that, even assuming that DBP and
PNB exercised control over NMIC, there is no
evidence that the juridical personality of NMIC
was used by DBP and PNB to commit a fraud or
to do a wrong against HRCC.

There being a total absence of evidence pointing

to a fraudulent, illegal or unfair act committed
against HRCC by DBP and PNB under the guise
of NMIC, there is no basis to hold that NMIC was
a mere alter ego of DBP and PNB. As this Court
ruled in Ramoso v. Court of Appeals82:

As a general rule, a corporation will be looked

upon as a legal entity, unless and until
sufficient reason to the contrary appears.
When the notion of legal entity is used to
defeat public convenience, justify wrong,

Corporation Law

protect fraud, or defend crime, the law will

regard the corporation as an association of
persons. Also, the corporate entity may be
disregarded in the interest of justice in such
cases as fraud that may work inequities
among members of the corporation internally,
involving no rights of the public or third
persons. In both instances, there must have
been fraud, and proof of it. For the separate
juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly
and convincingly established. It cannot be
presumed.

As regards the third element, in the absence of

both control by DBP and PNB of NMIC and fraud
or fundamental unfairness perpetuated by DBP
and PNB through the corporate cover of NMIC, no
harm could be said to have been proximately
caused by DBP and PNB on HRCC for which
HRCC could hold DBP and PNB solidarily liable
with NMIC.

Considering that, under the deeds of transfer

executed by DBP and PNB, the liability of the APT
as transferee of the rights, titles and interests of
DBP and PNB in NMIC will attach only if DBP and
PNB are held liable, the APT incurs no liability for
the judgment indebtedness of NMIC. Even HRCC
recognizes that "as assignee of DBP and PNB 's
loan receivables," the APT simply "stepped into
the shoes of DBP and PNB with respect to the
latter's rights and obligations" in NMIC. 83 As such
assignee, therefore, the APT incurs no liability with
respect to NMIC other than whatever liabilities
may be imputable to its assignors, DBP and PNB.

Even under Section 2.02 of the respective deeds

of transfer executed by DBP and PNB which
HRCC invokes, the APT cannot be held liable.
The contingent liability for which the National
Government, through the APT, may be held liable
under the said provision refers to contingent
liabilities of DBP and PNB. Since DBP and PNB
may not be held solidarily liable with NMIC, no

Full Text Assign.#1

20

contingent liability may be imputed to the APT as

well. Only NMIC as a distinct and separate legal
entity is liable to pay its corporate obligation to
HRCC in the amount of P8,370,934.74, with legal
interest thereon from date of demand.

As trustee of the. assets of NMIC, however, the

APT should ensure compliance by NMIC of the
judgment against it. The APT itself acknowledges
this.84

WHEREFORE,
GRANTED.

the

petitions

are

G.R. No. 142616

July 31, 2001

PHILIPPINE NATIONAL BANK, petitioner, vs.

RITRATTO
GROUP
INC.,
RIATTO
INTERNATIONAL,
INC.,
and
DADASAN
GENERAL MERCHANDISE, respondents.

hereby
KAPUNAN, J.:

The complaint as against Development Bank of

the Philippines, the Philippine National Bank, and
the Asset Privatization Trust, now the Privatization
and Management Office, is DISMISSED for lack of
merit. The Asset Privatization Trust, now the
Privatization and Management Office, as trustee
of Nonoc Mining and Industrial Corporation, now
the
Philnico
Processing
Corporation,
is
DIRECTED to ensure compliance by the Nonoc
Mining and Industrial Corporation, now the
Philnico Processing Corporation, with this
Decision.

In a petition for review on certiorari under Rule 45

of the Revised Rules of Court, petitioner seeks to
annul and set aside the Court of Appeals' decision
in C.A. CV G.R. S.P. No. 55374 dated March 27,
2000, affirming the Order issuing a writ of
preliminary injunction of the Regional Trial Court
of Makati, Branch 147 dated June 30, 1999, and
its Order dated October 4, 1999, which denied
petitioner's motion to dismiss.

The antecedents of this case are as follows:

SO ORDERED.
Petitioner Philippine National Bank is a domestic
corporation organized and existing under
Philippine law. Meanwhile, respondents Ritratto
Group, Inc., Riatto International, Inc. and Dadasan
General Merchandise are domestic corporations,
likewise, organized and existing under Philippine
law.

On May 29, 1996, PNB International Finance Ltd.

(PNB-IFL) a subsidiary company of PNB,
organized and doing business in Hong Kong,

Corporation Law

Full Text Assign.#1

21

extended a letter of credit in favor of the

respondents in the amount of US$300,000.00
secured by real estate mortgages constituted over
four (4) parcels of land in Makati City. This credit
facility was later increased successively to
US$1,140,000.00 in September 1996; to
US$1,290,000.00 in November 1996; to
US$1,425,000.00 in February 1997; and
decreased to US$1,421,316.18 in April 1998.
Respondents made repayments of the loan
incurred by remitting those amounts to their loan
account with PNB-IFL in Hong Kong.

Petitioner, thereafter, in a petition for certiorari and

prohibition assailed the issuance of the writ of
preliminary injunction before the Court of Appeals.
In the impugned decision,1 the appellate court
dismissed the petition. Petitioner thus seeks
recourse to this Court and raises the following
errors:

1.

However, as of April 30, 1998, their outstanding

obligations stood at US$1,497,274.70. Pursuant
to the terms of the real estate mortgages, PNBIFL, through its attorney-in-fact PNB, notified the
respondents of the foreclosure of all the real
estate mortgages and that the properties subject
thereof were to be sold at a public auction on May
27, 1999 at the Makati City Hall.

.
2.

On May 25, 1999, respondents filed a complaint

for injunction with prayer for the issuance of a writ
of preliminary injunction and/or temporary
restraining order before the Regional Trial Court of
Makati. The Executive Judge of the Regional Trial
Court of Makati issued a 72-hour temporary
restraining order. On May 28, 1999, the case was
raffled to Branch 147 of the Regional Trial Court of
Makati. The trial judge then set a hearing on June
8, 1999. At the hearing of the application for
preliminary injunction, petitioner was given a
period of seven days to file its written opposition
to the application. On June 15, 1999, petitioner
filed an opposition to the application for a writ of
preliminary injunction to which the respondents
filed a reply. On June 25, 1999, petitioner filed a
motion to dismiss on the grounds of failure to
state a cause of action and the absence of any
privity between the petitioner and respondents.
On June 30, 1999, the trial court judge issued an
Order for the issuance of a writ of preliminary
injunction, which writ was correspondingly issued
on July 14, 1999. On October 4, 1999, the motion
to dismiss was denied by the trial court judge for
lack of merit.

Corporation Law

THE COURT OF APPEALS PALPABLY

ERRED
IN
NOT DISMISSING
THE
COMPLAINT A QUO, CONSIDERING THAT
BY
THE
ALLEGATIONS
OF
THE
COMPLAINT, NO CAUSE OF ACTION
EXISTS AGAINST PETITIONER, WHICH IS
NOT A REAL PARTY IN INTEREST BEING A
MERE ATTORNEY-IN-FACT AUTHORIZED
TO ENFORCE AN ANCILLARY CONTRACT

THE COURT OF APPEALS PALPABLY

ERRED IN ALLOWING THE TRIAL COURT
TO ISSUE IN EXCESS OR LACK OF
JURISDICTION A WRIT OF PRELIMINARY
INJUNCTION OVER AND BEYOND WHAT
WAS PRAYED FOR IN THE COMPLAINT A
QUO CONTRARY TO CHIEF OF STAFF, AFP
VS. GUADIZ JR., 101 SCRA 827.2

Petitioner prays, inter alia, that the Court of

Appeals' Decision dated March 27, 2000 and the
trial court's Orders dated June 30, 1999 and
October 4, 1999 be set aside and the dismissal of
the complaint in the instant case.3

In their Comment, respondents argue that even

assuming arguendo that petitioner and PNB-IFL
are two separate entities, petitioner is still the
party-in-interest in the application for preliminary
injunction because it is tasked to commit acts of
foreclosing respondents' properties. Respondents
maintain that the entire credit facility is void as it

Full Text Assign.#1

22

contains stipulations in violation of the principle of

mutuality of contracts.5 In addition, respondents
justified the act of the court a quo in applying the
doctrine of "Piercing the Veil of Corporate Identity"
by stating that petitioner is merely an alter ego or
a business conduit of PNB-IFL.6

The petition is impressed with merit.

Respondents, in their complaint, anchor their

prayer for injunction on alleged invalid provisions
of the contract:

bases for the real estate mortgage over the said

property.8

The contract questioned is one entered into

between respondent and PNB-IFL, not PNB. In
their complaint, respondents admit that petitioner
is a mere attorney-in-fact for the PNB-IFL with full
power and authority to, inter alia, foreclose on the
properties mortgaged to secure their loan
obligations with PNB-IFL. In other words, herein
petitioner is an agent with limited authority and
specific duties under a special power of attorney
incorporated in the real estate mortgage. It is not
privy to the loan contracts entered into by
respondents and PNB-IFL.

GROUNDS

THE DETERMINATION OF THE INTEREST

RATES BEING LEFT TO THE SOLE
DISCRETION OF THE DEFENDANT PNB
CONTRAVENES THE PRINCIPAL OF
MUTUALITY OF CONTRACTS.

The issue of the validity of the loan contracts is a

matter between PNB-IFL, the petitioner's principal
and the party to the loan contracts, and the
respondents. Yet, despite the recognition that
petitioner is a mere agent, the respondents in their
complaint prayed that the petitioner PNB be
ordered to re-compute the rescheduling of the
interest to be paid by them in accordance with the
terms and conditions in the documents evidencing
the credit facilities, and crediting the amount
previously paid to PNB by herein respondents.9

II. THERE BEING A STIPULATION IN THE LOAN

AGREEMENT THAT THE RATE OF
INTEREST AGREED UPON MAY BE
UNILATERALLY
MODIFIED
BY
DEFENDANT,
THERE
WAS
NO
STIPULATION THAT THE RATE OF
INTEREST SHALL BE REDUCED IN THE
EVENT THAT THE APPLICABLE MAXIMUM
RATE OF INTEREST IS REDUCED BY LAW
OR BY THE MONETARY BOARD.7

Clearly, petitioner not being a part to the contract

has no power to re-compute the interest rates set
forth in the contract. Respondents, therefore, do
not have any cause of action against petitioner.

I.

Based
on
the
aforementioned
grounds,
respondents sought to enjoin and restrain PNB
from the foreclosure and eventual sale of the
property in order to protect their rights to said
property by reason of void credit facilities as

Corporation Law

The trial court, however, in its Order dated

October 4, 1994, ruled that since PNB-IFL, is a
wholly owned subsidiary of defendant Philippine
National Bank, the suit against the defendant PNB
is a suit against PNB-IFL.10In justifying its ruling,
the trial court, citing the case of Koppel Phil. Inc.
vs. Yatco,11 reasoned that the corporate entity may
be disregarded where a corporation is the mere
alter ego, or business conduit of a person or

Full Text Assign.#1

23

where the corporation is so organized and

controlled and its affairs are so conducted, as to
make it merely an instrumentality, agency, conduit
or adjunct of another corporation.12

We disagree.

The general rule is that as a legal entity, a

corporation has a personality distinct and
separate from its individual stockholders or
members, and is not affected by the personal
rights, obligations and transactions of the
latter.13The mere fact that a corporation owns all of
the stocks of another corporation, taken alone is
not sufficient to justify their being treated as one
entity. If used to perform legitimate functions, a
subsidiary's
separate
existence
may be
respected, and the liability of the parent
corporation as well as the subsidiary will be
confined to those arising in their respective
business. The courts may in the exercise of
judicial discretion step in to prevent the abuses of
separate entity privilege and pierce the veil of
corporate entity.

We find, however, that the ruling in Koppel finds

no application in the case at bar. In said case, this
Court disregarded the separate existence of the
parent and the subsidiary on the ground that the
latter was formed merely for the purpose of
evading the payment of higher taxes. In the case
at bar, respondents fail to show any cogent
reason why the separate entities of the PNB and
PNB-IFL should be disregarded.
While there exists no definite test of general
application in determining when a subsidiary may
be treated as a mere instrumentality of the parent
corporation, some factors have been identified
that will justify the application of the treatment of
the doctrine of the piercing of the corporate veil.
The case of Garrett vs. Southern Railway Co.14is
enlightening. The case involved a suit against the
Southern Railway Company. Plaintiff was

Corporation Law

employed by Lenoir Car Works and alleged that

he sustained injuries while working for Lenoir. He,
however, filed a suit against Southern Railway
Company on the ground that Southern had
acquired the entire capital stock of Lenoir Car
Works, hence, the latter corporation was but a
mere instrumentality of the former. The Tennessee
Supreme Court stated that as a general rule the
stock ownership alone by one corporation of the
stock of another does not thereby render the
dominant corporation liable for the torts of the
subsidiary unless the separate corporate
existence of the subsidiary is a mere sham, or
unless the control of the subsidiary is such that it
is but an instrumentality or adjunct of the
dominant corporation. Said Court then outlined
the circumstances which may be useful in the
determination of whether the subsidiary is but a
mere instrumentality of the parent-corporation:

The Circumstance rendering the subsidiary

an instrumentality. It is manifestly impossible
to catalogue the infinite variations of fact that
can arise but there are certain common
circumstances which are important and which,
if present in the proper combination, are
controlling.

These are as follows:

(a) The parent corporation owns all or most

of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations
have common directors or officers.
(c) The parent
subsidiary.

corporation

finances

the

(d) The parent corporation subscribes to all

the capital stock of the subsidiary or
otherwise causes its incorporation.

Full Text Assign.#1

24

(e) The subsidiary has grossly inadequate

capital.
(f) The parent corporation pays the salaries
and other expenses or losses of the
subsidiary.
(g) The subsidiary has substantially no
business except with the parent
corporation or no assets except those
conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or
in the statements of its officers, the
subsidiary is described as a department
or division of the parent corporation, or its
business or financial responsibility is
referred to as the parent corporation's
own.
(i) The parent corporation uses the property
of the subsidiary as its own.
(j) The directors or executives of the
subsidiary do not act independently in the
interest of the subsidiary but take their
orders from the parent corporation.
(k) The formal legal requirements of the
subsidiary are not observed.

In Concept Builders, Inc. v. NLRC,16 we have laid

the test in determining the applicability of the
doctrine of piercing the veil of corporate fiction, to
wit:

1. Control, not mere majority or complete

control, but complete domination, not only
of finances but of policy and business
practice in respect to the transaction
attacked so that the corporate entity as to
this transaction had at the time no
separate mind, will or existence of its
own.
2. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
other positive legal duty, or dishonest and,
unjust act in contravention of plaintiffs
legal rights; and,

The Tennessee Supreme Court thus ruled:

In the case at bar only two of the eleven listed

indicia occur, namely, the ownership of most
of the capital stock of Lenoir by Southern, and
possibly subscription to the capital stock of
Lenoir. . . The complaint must be dismissed.

Similarly, in this jurisdiction, we have held that the

doctrine of piercing the corporate veil is an
equitable doctrine developed to address situations
where the separate corporate personality of a
corporation is abused or used for wrongful

Corporation Law

purposes. The doctrine applies when the

corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or
defend crime, or when it is made as a shield to
confuse the legitimate issues, or where a
corporation is the mere alter ego or business
conduit of a person, or where the corporation is so
organized and controlled and its affairs are so
conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another
corporation.15

3. The aforesaid control and breach of duty

must proximately cause the injury or
unjust loss complained of.

The absence of any one of these elements

prevents "piercing the corporate veil." In
applying the "instrumentality" or "alter ego"
doctrine, the courts are concerned with reality
and not form, with how the corporation
operated and the individual defendant's
relationship to the operation.17

Full Text Assign.#1

25

Aside from the fact that PNB-IFL is a wholly

owned subsidiary of petitioner PNB, there is no
showing of the indicative factors that the former
corporation is a mere instrumentality of the latter
are present. Neither is there a demonstration that
any of the evils sought to be prevented by the
doctrine of piercing the corporate veil exists.
Inescapably, therefore, the doctrine of piercing the
corporate veil based on the alter ego or
instrumentality doctrine finds no application in the
case at bar.

In any case, the parent-subsidiary relationship

between PNB and PNB-IFL is not the significant
legal relationship involved in this case since the
petitioner was not sued because it is the parent
company of PNB-IFL. Rather, the petitioner was
sued because it acted as an attorney-in-fact of
PNB-IFL in initiating the foreclosure proceedings.
A suit against an agent cannot without compelling
reasons be considered a suit against the principal.
Under the Rules of Court, every action must be
prosecuted or defended in the name of the real
party-in-interest, unless otherwise authorized by
law or these Rules.18 In mandatory terms, the
Rules require that "parties-in-interest without
whom no final determination can be had, an
action shall be joined either as plaintiffs or
defendants."19 In the case at bar, the injunction
suit is directed only against the agent, not the
principal.

Anent the issuance of the preliminary injunction,

the same must be lifted as it is a mere provisional
remedy but adjunct to the main suit.20 A writ of
preliminary injunction is an ancillary or preventive
remedy that may only be resorted to by a litigant
to protect or preserve his rights or interests and
for no other purpose during the pendency of the
principal action. The dismissal of the principal
action thus results in the denial of the prayer for
the issuance of the writ. Further, there is no
showing that respondents are entitled to the
issuance of the writ. Section 3, Rule 58, of the
1997 Rules of Civil Procedure provides:

Corporation Law

SECTION 3. Grounds for issuance of

preliminary injunction. A preliminary
injunction may be granted when it is
established:

(a) That the applicant is entitled to the relief

demanded, and the whole or part of such
relief
consists
in
restraining
the
commission or continuance of the act or
acts complained of, or in requiring the
performance of an act or acts, either for a
limited period or perpetually,
(b) That the commission, continuance or nonperformance of the acts or acts
complained of during the litigation would
probably work injustice to the applicant; or
(c) That a party, court, agency or a person is
doing, threatening, or is attempting to do,
or is procuring or suffering to be done,
some act or acts probably in violation of
the rights of the applicant respecting the
subject of the action or proceeding, and
tending to render the judgment ineffectual.

Thus, an injunctive remedy may only be resorted

to when there is a pressing necessity to avoid
injurious consequences which cannot be
remedied
under
any
standard
compensation. Respondents do not deny their
indebtedness. Their properties are by their own
choice encumbered by real estate mortgages.
Upon the non-payment of the loans, which were
secured by the mortgages sought to be
foreclosed, the mortgaged properties are properly
subject to a foreclosure sale. Moreover,
respondents questioned the alleged void
stipulations in the contract only when petitioner
initiated the foreclosure proceedings. Clearly,
respondents have failed to prove that they have a
right protected and that the acts against which the
writ is to be directed are violative of said
right.22The Court is not unmindful of the findings of

Full Text Assign.#1

26

both the trial court and the appellate court that

there may be serious grounds to nullify the
provisions of the loan agreement. However, as
earlier discussed, respondents committed the
mistake of filing the case against the wrong party,
thus, they must suffer the consequences of their
error.

resolution3 of the Court of Appeals (CA) in CAG.R. CV. No. 87879. The CA decision affirmed the
December 15, 2004 decision4 of the Regional Trial
Court RTC) of Makati City, Branch 136, in Civil
Case No. 00-594. The CA subsequently denied
the petitioners motion for reconsideration.

The Factual Antecedents

All told, respondents do not have a cause of
action against the petitioner as the latter is not
privy to the contract the provisions of which
respondents seek to declare void. Accordingly, the
case before the Regional Trial Court must be
dismissed and the preliminary injunction issued in
connection therewith, must be lifted.

IN VIEW OF THE FOREGOING, the petition is

hereby GRANTED. The assailed decision of the
Court of Appeals is hereby REVERSED. The
Orders dated June 30, 1999 and October 4, 1999
of the Regional Trial Court of Makati, Branch 147
in Civil Case No. 99-1037 are hereby ANNULLED
and SET ASIDE and the complaint in said case
DISMISSED. SO ORDERED.

G.R. No. 186433

November 27, 2013

NUCCIO SAVERIO and NS INTERNATIONAL

INC., Petitioners, vs. ALFONSO G.
PUYAT, Respondent.

DECISION

BRION, J.:
We resolve the petition for review on
certiorari,1 filed by petitioners Nuccio Saverio and
NS International, Inc. (NS) against respondent
Alfonso G. Puyat, challenging the October 27,
2008 decision2 and the February 10, 2009

Corporation Law

On July 22, 1996, the respondent granted a loan

to NSI. The loan was made pursuant to the
Memorandum of Agreement and Promissory Note
(MOA)5 between the respondent and NSI,
represented by Nuccio. It was agreed that the
respondent would extend a credit line with a limit
of P500,000.00 to NSI, to be paid within thirty (30)
days from the time of the signing of the document.
The loan carried an interest rate of 17% per
annum, or at an adjusted rate of 25% per annum if
payment is beyond the stipulated period. The
petitioners
received
a
total
amount
of P300,000.00 and certain machineries intended
for their fertilizer processing plant business
(business). The proposed business, however,
failed to materialize.

On several occasions, Nuccio made personal

payments amounting to P600,000.00. However,
as of December 16, 1999, the petitioners allegedly
had an outstanding balance of P460,505.86.
When the petitioners defaulted in the payment of
the loan, the respondent filed a collection suit with
the RTC, alleging mainly that the petitioners still
owe him the value of the machineries as shown
by the Breakdown of Account6 he presented.

The petitioners refuted the respondents allegation

and insisted that they have already paid the loan,
evidenced by the respondents receipt for the
amount of P600,000.00. They submitted that their
remaining obligation to pay the machineries
value, if any, had long been extinguished by their

Full Text Assign.#1

27

business failure to materialize. They posited that,

even assuming without conceding that they are
liable, the amount being claimed is inaccurate, the
penalty and
the
interest
imposed
are
unconscionable, and an independent accounting
is needed to determine the exact amount of their
liability.

The RTC Ruling

In its decision dated December 15, 2004, the RTC

found that aside from the cash loan, the
petitioners obligation to the respondent also
covered the payment of the machineries value.
The RTC also brushed aside the petitioners claim
of partnership. The RTC thus ruled that the
payment of P600,000.00 did not completely
extinguish the petitioners obligation.

The RTC also found merit in the respondents

contention that the petitioners are one and the
same. Based on Nuccios act of entering a loan
with the respondent for purposes of financing
NSIs proposed business and his own admission
during cross-examination that the word "NS" in
NSIs name stands for "Nuccio Saverio," the RTC
found that the application of the doctrine of
piercing the veil of corporate fiction was proper.

The RTC, moreover, concluded that the interest

rates stipulated in the MOA were not usurious and
that the respondent is entitled to attorneys fees
on account of the petitioners willful breach of the
loan obligation. Thus, principally relying on the
submitted Breakdown of Account, the RTC
ordered the petitioners, jointly and severally, to
pay the balance of P460,505.86, at 12% interest,
and attorneys fees equivalent to 25% of the total
amount due.

The CA Ruling

The petitioners appealed the RTC ruling to the

CA. There, they argued that in view of the lack of
proper accounting and the respondents failure to
substantiate his claims, the exact amount of their
indebtedness had not been proven. Nuccio also
argued that by virtue of NSIs separate and
distinct personality, he cannot be made solidarily
liable with NSI.

On October 27, 2008, the CA rendered a

decision7 declaring the petitioners jointly and
severally liable for the amount that the respondent
sought. The appellate court likewise held that
since the petitioners neither questioned the
delivery of the machineries nor their valuation,
their obligation to pay the amount of P460,505.86
under the Breakdown of Account remained
unrefuted.

The CA also affirmed the RTC ruling that

petitioners are one and the same for the following
reasons: (1) Nuccio owned forty percent (40%) of
NSI; (2) Nuccio personally entered into the loan
contract with the respondent because there was
no board resolution from NSI; (3) the petitioners
were represented by the same counsel; (4) the
failure of NSI to object to Nuccios acts shows the
latters control over the corporation; and (5)
Nuccios control over NSI was used to commit a
wrong or fraud. It further adopted the RTCs
findings of bad faith and willful breach of
obligation on the petitioners part, and affirmed its
award of attorneys fees.

The Petition

The petitioners submit that the CA gravely erred in

ruling that a proper accounting was not necessary.

Corporation Law

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28

They argue that the Breakdown of Account which the RTC used as a basis in awarding the
claim, as affirmed by the CA - is hearsay since the
person who prepared it, Ramoncito P. Puyat, was
not presented in court to authenticate it. They also
point to the absence of the awards computation in
the RTC ruling, arguing that assuming they are
still indebted to the respondent, the specific
amount
of
their
indebtedness
remains
undetermined, thus the need for an accounting to
determine their exact liability.

The Issue

The case presents to us the issue of whether the

CA committed a reversible error in affirming the
RTCs decision holding the petitioners jointly and
severally liable for the amount claimed.

Our Ruling

They further question the CAs findings of solidary

liability. They submit that in the absence of any
showing that corporate fiction was used to defeat
public convenience, justify a wrong, protect fraud
or defend a crime, or where the corporation is a
mere alter ego or business conduit of a person,
Nuccios mere ownership of forty percent (40%)
does not justify the piercing of the separate and
distinct personality of NSI.

After a review of the parties contentions, we hold

that a remand of the case to the court of origin for
a complete accounting and determination of the
actual amount of the petitioners indebtedness is
called for.

The determination of questions of fact is improper

in a Rule 45 proceeding; Exceptions.

The Case for the Respondent

The respondent counters that the issues raised by

the petitioners in the present petition pertaining
to the correctness of the calibration of the
documentary and testimonial evidence by the
RTC, as affirmed by the CA, in awarding the
money claims are essentially factual, not legal.
These issues, therefore, cannot, as a general rule,
be reviewed by the Supreme Court in an appeal
by certiorari. In other words, the resolution of the
assigned errors is beyond the ambit of a Rule 45
petition.

Corporation Law

The respondent questions the present petitions

propriety, and contends that in a petition for review
on certiorari under Rule 45 of the Rules of Court,
only questions of law may be raised. He argues
that the petitioners are raising factual issues that
are not permissible under the present petition and
these issues have already been extensively
passed upon by the RTC and the CA. The
petitioners, on the other hand, assert that the
exact amount of their indebtedness has not been
determined with certainty. They insist that the
amount of P460,505.86 awarded in favor of the
respondent has no basis because the latter failed
to substantiate his claim. They also maintain that
the Breakdown of Account used by the lower
courts in arriving at the collectible amount is
unreliable for the respondents failure to adduce
supporting documents for the alleged additional
expenses charged against them. With no
independent determination of the actual amount of
their indebtedness, the petitioners submit that an
order for a proper accounting is imperative.

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29

We agree with the petitioners. While we find the

fact of indebtedness to be undisputed, the
determination of the extent of the adjudged money
award is not, because of the lack of any
supporting documentary and testimonial evidence.
These evidentiary issues, of course, are
necessarily factual, but as we held in The Insular
Life Assurance Company, Ltd. v. Court of
Appeals,8 this Court may take cognizance even of
factual issues under exceptional circumstances. In
this cited case, we held:

It is a settled rule that in the exercise of the

Supreme Court's power of review, the Court is
not a trier of facts and does not normally
undertake the re-examination of the evidence
presented by the contending parties during
the trial of the case considering that the
findings of facts of the CA are conclusive and
binding on the Court. However, the Court had
recognized several exceptions to this rule, to
wit: (1) when the findings are grounded
entirely on speculation, surmises or
conjectures; (2) when the inference made is
manifestly mistaken, absurd or impossible; (3)
when there is grave abuse of discretion; (4)
when the judgment is based on a
misapprehension of facts; (5) when the
findings of facts are conflicting; (6) when in
making its findings the Court of Appeals went
beyond the issues of the case, or its findings
are contrary to the admissions of both the
appellant and the appellee; (7) when the
findings are contrary to the trial court; (8)
when the findings are conclusions without
citation of specific evidence on which they are
based; (9) when the facts set forth in the
petition as well as in the petitioner's main and
reply briefs are not disputed by the
respondent; (10) when the findings of fact are
premised on the supposed absence of
evidence and contradicted by the evidence on
record; and (11) when the Court of Appeals
manifestly overlooked certain relevant facts
not disputed by the parties, which, if properly
considered,
would
justify a
different
conclusion.

Corporation Law

We note in this regard that the RTC, in awarding

the amount of P460,505.86 in favor of the
respondent, principally relied on the Breakdown of
Account. Under this document, numerous entries,
including the cash loan, were enumerated and
identified with their corresponding amounts. It
included the items of expenses allegedly
chargeable to the petitioners, the value of the
machineries, the amount credited as paid, and the
interest and penalty allegedly incurred.

A careful perusal of the records, however, reveals

that the entries in the Breakdown of Account and
their corresponding amounts are not supported by
the respondents presented evidence. The
itemized expenses, as repeatedly pointed out by
the petitioners, were not proven, and the
remaining indebtedness, after the partial payment
of P600,000.00, was merely derived by the RTC
from the Breakdown of Account.

Significantly, the RTC ruling neither showed how

the award was computed nor how the interest and
penalty were calculated. In fact, it merely declared
the petitioners liable for the amount claimed by
the respondent and adopted the breakdown of
liability in the Breakdown of Account. This
irregularity is even aggravated by the RTCs
explicit refusal to explain why the payment
of P600,000.00 did not extinguish the debt. While
it may be true that the petitioners indebtedness,
aside from the cash loan of P300,000.00,
undoubtedly covered the value of the
machineries, the RTC decision was far from clear
and instructive on the actual remaining
indebtedness (inclusive of the machineries value,
penalties and interests) after the partial payment
was made and how these were all computed.

We, thus, find it unacceptable for the RTC to

simply come up with a conclusion that the
payment of P600,000.00 did not extinguish the

Full Text Assign.#1

30

debt, or, assuming it really did not, that the

remaining amount of indebtedness amounts
exactly to P460,505.86, without any showing of
how this balance was arrived at. To our mind, the
RTCs ruling, in so far as the determination of the
actual indebtedness is concerned, is incomplete.

What happened at the RTC likewise transpired at

the CA when the latter affirmed the appealed
decision; the CA merely glossed over the
contention of the petitioners, and adopted the
RTCs findings without giving any enlightenment.
To reiterate, nowhere in the decisions of the RTC
and the CA did they specify how the award,
including the penalty and interest, was
determined. The petitioners were left in the dark
as to how their indebtedness of P300,000.00,
after making a payment of P600,000.00,
ballooned
to P460,505.86.
Worse,
unsubstantiated expenses, appearing in the
Breakdown of Account, were charged to them.

We, therefore, hold it inescapable that the prayer

for proper accounting to determine the petitioners
actual remaining indebtedness should be granted.
As this requires presentation of additional
evidence, a remand of the case is only proper and
in order.
Piercing the veil of corporate fiction is not justified.
The petitioners are not one and the same.

At the outset, we note that the question of whether

NSI is an alter ego of Nuccio is a factual one. This
is also true with respect to the question of whether
the totality of the evidence adduced by the
respondent warrants the application of the
piercing the veil of corporate fiction doctrine. As
we did in the issue of accounting, we hold that the
Court may properly wade into the piercing the veil
issue although purely factual questions are
involved.

Corporation Law

After a careful study of the records and the

findings of both the RTC and the CA, we hold that
their conclusions, based on the given findings, are
not supported by the evidence on record.

The rule is settled that a corporation is vested by

law with a personality separate and distinct from
the persons composing it. Following this principle,
a stockholder, generally, is not answerable for the
acts or liabilities of the corporation, and vice
versa. The obligations incurred by the corporate
officers, or other persons acting as corporate
agents, are the direct accountabilities of the
corporation they represent, and not theirs. A
director, officer or employee of a corporation is
generally not held personally liable for obligations
incurred by the corporation9 and while there may
be instances where solidary liabilities may arise,
these circumstances are exceptional.10

Incidentally, we have ruled that mere ownership

by a single stockholder or by another corporation
of all or nearly all of the capital stocks of the
corporation is not, by itself, a sufficient ground for
disregarding the separate corporate personality.
Other than mere ownership of capital stocks,
circumstances showing that the corporation is
being used to commit fraud or proof of existence
of absolute control over the corporation have to be
proven. In short, before the corporate fiction can
be disregarded, alter-ego elements must first be
sufficiently established.

In Hi-Cement Corporation v. Insular Bank of Asia

and America (later PCI-Bank, now Equitable PCIBank),11 we refused to apply the piercing the veil
doctrine on the ground that the corporation was a
mere alter ego because mere ownership by a
stockholder of all or nearly all of the capital stocks
of a corporation does not, by itself, justify the
disregard of the separate corporate personality. In
this cited case, we ruled that in order for the
ground of corporate ownership to stand, the
following
circumstances
should
also
be
established: (1) that the stockholders had control

Full Text Assign.#1

31

or complete domination of the corporations

finances and that the latter had no separate
existence with respect to the act complained of;
(2) that they used such control to commit a wrong
or fraud; and (3) the control was the proximate
cause of the loss or injury.

Applying these principles to the present case, we

opine and so hold that the attendant
circumstances do not warrant the piercing of the
veil of NSIs corporate fiction.

Aside from the undisputed fact of Nuccios 40%

shareholdings with NSI, the RTC applied the
piercing the veil doctrine based on the following
reasons. First, there was no board resolution
authorizing Nuccio to enter into a contract of loan.
Second, the petitioners were represented by one
and the same counsel. Third, NSI did not object to
Nuccios act of contracting the loan.

Fourth, the control over NSI was used to commit a

wrong or fraud. Fifth, Nuccios admission that
"NS" in the corporate name "NSI" means "Nuccio
Saverio."

We are not convinced of the sufficiency of these

cited reasons. In our view, the RTC failed to
provide a clear and convincing explanation why
the doctrine was applied. It merely declared that
its application of the doctrine of piercing the veil of
corporate fiction has a basis, specifying for this
purpose the act of Nuccios entering into a
contract of loan with the respondent and the
reasons stated above.

The records of the case, however, do not show

that Nuccio had control or domination over NSIs
finances.1wphi1 The mere fact that it was Nuccio
who, in behalf of the corporation, signed the MOA

Corporation Law

is not sufficient to prove that he exercised control

over the corporations finances. Neither the
absence of a board resolution authorizing him to
contract the loan nor NSIs failure to object thereto
supports this conclusion. These may be indicators
that, among others, may point the proof required
to justify the piercing the veil of corporate fiction,
but by themselves, they do not rise to the level of
proof required to support the desired conclusion. It
should be noted in this regard that while Nuccio
was the signatory of the loan and the money was
delivered to him, the proceeds of the loan were
unquestionably intended for NSIs proposed
business plan. That the business did not
materialize is not also sufficient proof to justify a
piercing, in the absence of proof that the business
plan was a fraudulent scheme geared to secure
funds from the respondent for the petitioners
undisclosed goals.

Considering that the basis for holding Nuccio

liable for the payment of the loan has been proven
to be insufficient, we find no justification for the
RTC to hold him jointly and solidarily liable for
NSIs unpaid loan. Similarly, we find that the CA
ruling is wanting in sufficient explanation to justify
the doctrines application and affirmation of the
RTCs ruling. With these points firmly in mind, we
hold that NSIs liability should not attach to
Nuccio.

On the final issue of the award of attorneys fees,

Article 1229 of the New Civil Code provides:

Article 1229. The judge shall equitably

reduce the penalty when the principal
obligation has been partly or irregularly
complied with by the debtor. Even if there has
been no performance, the penalty may also
be reduced by the courts if it is iniquitous or
unconscionable.

Full Text Assign.#1

32

Under the circumstances of the case, we find the

respondents entitlement to attorneys fees to be
justified. There is no doubt that he was forced to
litigate to protect his interest, i.e., to recover his
money. We find, however, that in view of the
partial payment of P600,000.00, the award of
attorneys fees equivalent to 25% should be
reduced to 10% of the total amount due. The
award of appearance fee of P3,000.00 and
litigation cost of P10,000.00 should, however,
stand as these are costs necessarily attendant to
litigation.

This appeal is brought by the Commissioner of

Customs to seek the review and reversal of the
decision promulgated on September 29,
2003,1 whereby the Court of Appeals (CA)
affirmed the adverse ruling of the Court of Tax
Appeals (CTA) declaring the assessment for
deficiency taxes and duties against Oilink
International Corporation (Oilink) null and void.

WHEREFORE, the petition is GRANTED. The

October 27, 2008 decision and the February 10,
2009 resolution of the Court of Appeals in CAG.R. CV. No. 87879 are REVERSED AND SET
ASIDE. The case is REMANDED to the Regional
Trial Court of Makati City, Branch 136, for proper
accounting and reception of such evidence as
may be needed to determine the actual amount of
petitioner NS International, Inc.s indebtedness,
and to adjudicate respondent Alfonso G. Puyats
claims as such evidence may warrant.

The antecedents are summarized in the assailed

decision.2

SO ORDERED.

On January 11, 1996, Oilink was incorporated for

the primary purpose of manufacturing, importing,
exporting, buying, selling or dealing in oil and gas,
and their refinements and by-products at
wholesale and retail of petroleum. URC and Oilink
had interlocking directors when Oilink started its
business.

G.R. No. 161759

Antecedents

On September 15, 1966, Union Refinery

Corporation (URC) was established under the
Corporation Code of the Philippines. In the course
of its business undertakings, particularly in the
period from 1991 to 1994, URC imported oil
products into the country.

July 2, 2014

COMMISSIONER OF CUSTOMS, Petitioner, vs.

OILINK INTERNATIONAL CORP. Respondent.

DECISION

In applying for and in expediting the transfer of the

operators name for the Customs Bonded
Warehouse then operated by URC, Esther
Magleo, the Vice-President and General Manager
of URC, sent a letter dated January 15, 1996 to
manifest that URC and Oilink had the same Board
of Directors and that Oilink was 100% owned by
URC.

BERSAMIN, J.:

Corporation Law

Full Text Assign.#1

33

On March 4, 1998, Oscar Brillo, the District

Collector of the Port of Manila, formally demanded
that URC pay the taxes and duties on its oil
imports that had arrived between January 6, 1991
and November 7, 1995 at the Port of Lucanin in
Mariveles, Bataan.

On April 16, 1998, Brillo made another demand

letter to URC for the payment of the reduced sum
ofP289,287,486.60 for the Value-Added Taxes
(VAT), special duties and excise taxes for the
years 1991-1995.
On April 23, 1998, URC, through its counsel,
responded to the demands by seeking the landed
computations of the assessments, and challenged
the inconsistencies of the demands.

On November 25, 1998, then Customs

Commissioner Pedro C. Mendoza formally
directed
that
URC
pay
the
amount
of P119,223,541.71 representing URCs special
duties, VAT, and Excise Taxes that it had failed to
pay at the time of the release of its 17 oil
shipments that had arrived in the Sub-port of
Mariveles from January 1, 1991 to September 7,
1995.

On December 21, 1998, Commissioner Mendoza

wrote again to require URC to pay deficiency
taxes but in the reduced sum of P99,216,580.10.
On December 23, 1998, upon his assumption of
office, Customs Commissioner Nelson Tan
transmitted another demand letter to URC
affirming the assessment of P99,216,580.10 by
Commissioner Mendoza.

On January 18, 1999, Magleo, in behalf of URC,

replied by letter to Commissioner Tans affirmance
by denying liability, insisting instead that

Corporation Law

only P28,933,079.20 should be paid by way of

compromise.

On March 26, 1999, Commissioner Tan

responded by rejecting Magleos proposal, and
directed URC to payP99,216,580.10.

On May 24, 1999, Manuel Co, URCs President,

conveyed to Commissioner Tan URCs willingness
to pay onlyP94,216,580.10, of which the initial
amount of P28,264,974.00 would be taken from
the collectibles of Oilink from the National Power
Corporation, and the balance to be paid in
monthly installments over a period ofthree years
to be secured with corresponding post-dated
checks and its future available tax credits.

On July 2, 1999, Commissioner Tan made a final

demand for the total liability of P138,060,200.49
upon URC and Oilink.

On July 8, 1999, Co requested from

Commissioner Tan a complete finding of the facts
and law in support ofthe assessment made in the
latters July 2, 1999 final demand.

Also on July 8, 1999, Oilink formally protested the

assessment on the ground that it was not the
party liable for the assessed deficiency taxes.
On July 12, 1999, after receiving the July 8, 1999
letter from Co, Commissioner Tan communicated
in writing the detailed computation of the tax
liability, stressing that the Bureau of Customs
(BoC) would not issue any clearance to Oilink
unless the amount of P138,060,200.49 demanded
as Oilinks tax liability befirst paid, and a
performance bond be posted by URC/Oilink to
secure the payment of any adjustments that would

Full Text Assign.#1

34

result from the BIRs review of the liabilities for

VAT, excise tax, special duties, penalties, etc.

Thus, on July 30, 1999, Oilink appealed to the

CTA, seeking the nullification of the assessment
for having been issued without authority and with
grave abuse of discretion tantamount to lack of
jurisdiction because the Government was thereby
shifting the imposition from URC to Oilink.

Decision of the CTA

On July 9, 2001, the CTA rendered its decision

declaring as null and void the assessment of the
Commissioner of Customs, to wit:

IN THE LIGHT OF ALL THE FOREGOING,

the petition is hereby GRANTED. The
assailed assessment issued by Respondent
against
herein
Petitioner
OILINK
INTERNATIONAL CORPORATION is hereby
declared NULL and VOID.

SO ORDERED.3

The Commissioner of Customs seasonably filed a

motion for reconsideration,4 but the CTA denied
the motion for lack of merit.5

Judgment of the CA

holding that it had jurisdiction over the subject

matter; (b) the CTA gravely erred in holding that
Oilink had a cause of action; and (c) the CTA
gravely erred in holding that the Commissioner of
Customs could not pierce the veil of corporate
fiction.

On the issue of the jurisdiction of the CTA, the CA

held:

x x x the case at bar is very much within the

purview of the jurisdiction of the Court of Tax
Appeals since it is undisputed that what is
involved herein is the respondents liability for
payment of money to the Government as
evidenced by the demand letters sent by the
petitioner. Hence, the Court of Tax Appeals
did noterr in taking cognizance of the petition
for review filed by the respondent.

xxxx

We find the petitioners submission untenable.

The principle of non-exhaustion of administrative
remedy is not an iron-clad rule for there are
instances that immediate resort to judicial action
may be proper. Verily, a cursory examination of
the factual milieu of the instant case indeed
reveals that exhaustion of administrative remedy
would be unavailing because it was the
Commissioner of Customs himself who was
demanding from the respondent payment of tax
liability. In addition, it may be recalled that a
crucial issue in the petition for review filed by the
respondent before the CTA is whether or not the
doctrine of piercing the veil of corporate fiction
validly applies. Indubitably, this is purely a
question of law where judicial recourse may
certainly be resorted to.6

Aggrieved, the Commissioner of Customs brought

a petition for review in the CA upon the following
issues, namely: (a) the CTA gravely erred in

Corporation Law

Full Text Assign.#1

35

As to whether or not the Commissioner of

Customs could lawfully pierce the veil of corporate
fiction in order to treat Oilink as the mere alter ego
of URC, the CA concurred with the CTA, quoting
the latters following findings:

In the case at bar, the said wrongdoing was

not clearly and convincingly established by
Respondent. He did not submit any evidence
to support his allegations but merely
submitted the case for decision based on the
pleadings and evidence presented by
petitioner. Stated otherwise, should the
Respondent sufficiently prove that OILINK
was merely set up in order to avoid the
payment of taxes or for some other purpose
which will defeat public convenience, justify
wrong, protect fraud or defend crime, this
Court will not hesitate to pierce the veil of
corporate fiction by URC and OILINK.7

Section 7. Jurisdiction. - The Court of Tax

Appeals shall exercise exclusive appellate
jurisdiction to review by appeal, as herein
provided:

xxxx

2. Decisions of the Commissioner o fCustoms

in cases involving liability for Customs duties,
fees or other money charges; seizure,
detention or release of property affected;
fines, forfeitures or other penalties imposed in
relation thereto; or other matters arising under
the Customs Law or other law or part of law
administered by the Bureau of Customs;

xxxx

Issues

Hence, this appeal, whereby the Commissioner of

Customs reiterates the issues raised in the CA.

Ruling of the Court

Nonetheless, the Commissioner of Customs

contends that the CTA should not take cognizance
of the case because of the lapse of the 30-day
period within which to appeal, arguing that on
November 25, 1998 URC had already received
the BoCs final assessment demanding payment
of the amount due within 10 days, but filed the
petition only on July 30, 1999.8

We affirm the judgment of the CA.

1.
The CTA had jurisdiction over the controversy
There is no question that the CTA had the
jurisdiction over the case. Republic Act No. 1125,
the law creating the CTA, defined the appellate
jurisdiction of the CTA as follows:

Corporation Law

We rule against the Commissioner of Customs.

The CTA correctly ruled that the reckoning date for
Oilinks appeal was July 12, 1999, not July 2,
1999, because it was on the former date that the
Commissioner of Customs denied the protest of
Oilink. Clearly, the filing of the petition on July 30,
1999 by Oilink was well within its reglementary
period to appeal. The insistence by the
Commissioner of Customs on reckoning the
reglementary period to appeal from November 25,
1998, the date when URC received the final

Full Text Assign.#1

36

demand letter, is unwarranted. We note that the

November 25, 1998 final demand letter of the BoC
was addressed to URC, not to Oilink. As such, the
final demand sent to URC did not bind Oilink
unless the separate identities of the corporations
were disregarded in order to consider them as
one.

decided to deny the protest by Oilink on July 12,

1999, and stressed then that the demand to pay
was final. In that instance, the exhaustion of
administrative remedies would have been an
exercise in futility because it was already the
Commissioner of Customs demanding the
payment of the deficiency taxes and duties.

2.

3.

Oilink had a valid cause of action

There was no ground to pierce the veil of

corporate existence

The Commissioner of Customs posits that the

final demand letter dated July 2, 1999 from which
Oilink appealed was not the final "action" or
"ruling" from which an appeal could be taken as
contemplated by Section 2402 of the Tariff and
Customs Code; that what Section 7 of RA No.
1125 referred to as a decision that was appealable
to the CTA was a judgment or order of the
Commissioner of Customs that was final in nature,
not merely an interlocutory one; that Oilink did not
exhaust its administrative remedies under Section
2308 of the Tariff and Customs Code by paying
the assessment under protest; that only when the
ensuing decision of the Collector and then the
adverse decision of the Commissioner of Customs
would it be proper for Oilink to seek judicial relief
from the CTA; and that, accordingly, the CTA
should have dismissed the petition for lack of
cause of action.

The position of the Commissioner of Customs

lacks merit.

The CA correctly held that the principle of nonexhaustion of administrative remedies was not an
iron-clad rule because there were instances in
which the immediate resort to judicial action was
proper. This was one such exceptional instance
when the principle did not apply. As the records
indicate, the Commissioner of Customs already

Corporation Law

A corporation, upon coming into existence, is

invested by law with a personality separate and
distinct from those of the persons composing it as
well as from any other legal entity to which it may
be related. For this reason, a stockholder is
generally not made to answer for the acts or
liabilities of the corporation, and vice versa. The
separate and distinct personality of the
corporation is, however, a mere fiction established
by law for convenience and to promote the ends
of justice. It may not be used or invoked for ends
that subvert the policy and purpose behind its
establishment, or intended by law to which the
corporation owes its being. This is true particularly
when the fiction is used to defeat public
convenience, to justify wrong, to protect fraud, to
defend crime, to confuse legitimate legal or
judicial issues, to perpetrate deception or
otherwise to circumvent the law. This is likewise
true where the corporate entity is being used as
an alter ego, adjunct, or business conduit for the
sole benefit of the stockholders or of another
corporate entity. In such instances, the veil of
corporate entity will be pierced or disregarded with
reference to the particular transaction involved.9

In Philippine National Bank v. Ritratto Group,

Inc.,10 the Court has outlined the following
circumstances that are useful in the determination
of whether a subsidiary is a mere instrumentality
of the parent-corporation, viz:

Full Text Assign.#1

37

from the outset manifested that its belated pursuit

of Oilink was only an afterthought.
1. Control, not mere majority or complete
control, but complete domination, not only of
finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at
the time no separate mind, will or existence of
its own;
2. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetrate the violation of a statutory or other
positive legal duty, or dishonest and, unjust
act in contravention of plaintiff's legal rights;
and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss
complained of.

In applying the "instrumentality" or "alter ego"

doctrine, the courts are concerned with reality, not
form, and with how the corporation operated and
the individual defendant's relationship to the
operation.11 Consequently, the absence of any one
of the foregoing elements disauthorizes the
piercing of the corporate veil.

Indeed, the doctrine of piercing the corporate veil

has
no
application
here
because
the
Commissioner of Customs did not establish that
Oilink had been set up to avoid the payment of
taxes or duties, or for purposes that would defeat
public convenience, justify wrong, protect fraud,
defend crime, confuse legitimate legal or judicial
issues, perpetrate deception or otherwise
circumvent the law. It is also noteworthy that from
the outset the Commissioner of Customs sought
to collect the deficiency taxes and duties from
URC, and that it was only on July 2, 1999 when
the Commissioner of Customs sent the demand
letter to both URC and Oilink. That was revealing,
because the failure of the Commissioner of
Customs to pursue the remedies against Oilink

Corporation Law

WHEREFORE, the Court AFFIRMS the decision

promulgated by the Court of Appeals on
September 29, 2003.

No pronouncement
ORDERED.

on

G.R. No. 182770

costs

of

suit.

SO

September 17, 2014

WPM INTERNATIONAL TRADING, INC. and

WARLITO P. MANLAPAZ, Petitioners, vs.
FE CORAZON LABAYEN, Respondent.

DECISION

BRION, J.:
We review in this petition for review on
certiorari1 the decision2 dated September 28, 2007
and the resolution3dated April 28, 2008 of the
Court of Appeals (CA) in CA-G.R. CV No. 68289
that affirmed with modification the decision4 of the
Regional Trial Court (RTC), Branch 77, Quezon
City.

The Factual Background

The respondent, Fe Corazon Labayen, is the

owner of H.B.O. Systems Consultants, a
management and consultant firm. The petitioner,
WPM International Trading, Inc. (WPM), is a
domestic corporation engaged in the restaurant

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38

business, while Warlito P. Manlapaz (Manlapaz) is

its president.

Complaint for Damages

(Civil Case No. Q-92-13446)

Sometime in 1990, WPM entered into a

management agreement with the respondent, by
virtue of which the respondent was authorized to
operate, manage and rehabilitate Quickbite, a
restaurant owned and operated by WPM. As part
of her tasks, the respondent looked for a
contractor who would renovate the two existing
Quickbite outlets in Divisoria, Manila and Lepanto
St., University Belt, Manila. Pursuant to the
agreement, the respondent engaged the services
of CLN Engineering Services (CLN) to renovate
Quickbite-Divisoria at the cost ofP432,876.02.

On June 13, 1990, Quickbite-Divisorias

renovation was finally completed, and its
possession was delivered to the respondent.
However, out of the P432,876.02 renovation cost,
only the amount of P320,000.00 was paid to CLN,
leaving a balance of P112,876.02.

Complaint for Sum of Money (Civil Case No. Q90-7013)

On October 19, 1990, CLN filed a complaint for

sum of money and damages before the RTC
against the respondent and Manlapaz, which was
docketed as Civil Case No. Q-90-7013. CLN later
amended the complaint to exclude Manlapaz as
defendant. The respondent was declared in
default for her failure to file a responsive pleading.
The RTC, in its January 28, 1991 decision, found
the respondent liable to pay CLN actual damages
in the amount of P112,876.02 with 12% interest
per annum from June 18,1990 (the date of first
demand) and 20% of the amount recoverable as
attorneys fees.

Corporation Law

Thereafter, the respondent instituted a complaint

for damages against the petitioners, WPM and
Manlapaz. The respondent alleged that in Civil
Case No. Q-90-7013, she was adjudged liable for
a contract that she entered into for and in behalf
of the petitioners, to which she should be entitled
to reimbursement; that her participation in the
management agreement was limited only to
introducing Manlapaz to Engineer Carmelo Neri
(Neri), CLNs general manager; that it was actually
Manlapaz and Neri who agreed on the terms and
conditions of the agreement; that when the
complaint for damages was filed against her, she
was abroad; and that she did not know of the case
until she returned to the Philippines and received
a copy of the decision of the RTC.

In
her
prayer, the
respondent
sought
indemnification in the amount of P112,876.60 plus
interest at 12%per annum from June 18, 1990
until fully paid; and 20% of the award as attorneys
fees. She likewise prayed that an award
of P100,000.00
as
moral
damages
and P20,000.00 as attorneys fees be paid to her.
In his defense, Manlapaz claims that it was his
fellow incorporator/director Edgar Alcansaje who
was in-charge with the daily operations of the
Quickbite outlets; that when Alcansaje left WPM,
the remaining directors were compelled to hire the
respondent as manager; that the respondent had
entered into the renovation agreement with CLN
in her own personal capacity; that when he found
the amount quoted by CLN too high, he instructed
the respondent to either renegotiate for a lower
price or to look for another contractor; that since
the respondent had exceeded her authority as
agent of WPM, the renovation agreement should
only bind her; and that since WPM has a separate
and distinct personality, Manlapaz cannot be
made liable for the respondents claim.

Full Text Assign.#1

39

Manlapaz prayed for the dismissal of the

complaint for lack of cause of action, and by way
of counterclaim, for the award of P350,000.00 as
moral and exemplary damages and P50,000.00
attorneys fees.

The RTC, through an order dated March 2, 1993

declared WPM in default for its failure to file a
responsive pleading.

The Decision of the RTC

In its decision, the RTC held that the respondent

is entitled to indemnity from Manlapaz. The RTC
found that based on the records, there is a clear
indication that WPM is a mere instrumentality or
business conduit of Manlapaz and as such, WPM
and Manlapaz are considered one and the same.
The RTC also found that Manlapaz had complete
control over WPM considering that he is its
chairman, president and treasurer at the same
time. The RTC thus concluded that Manlapaz is
liable in his personal capacity to reimburse the
respondent the amount she paid to CLN in
connection with the renovation agreement.

The petitioners appealed the RTC decision with

the CA. There, they argued that in view of the
respondents act of entering into a renovation
agreement with CLN in excess of her authority as
WPMs agent, she is not entitled to indemnity for
the amount she paid. Manlapaz also contended
that by virtue of WPMs separate and distinct
personality, he cannot be made solidarily liable
with WPM.

The Ruling of the Court of Appeals

Corporation Law

On September 28, 2007, the CA affirmed, with

modification on the award of attorneys fees, the
decision of the RTC.The CA held that the
petitioners are barred from raising as a defense
the respondents alleged lack of authority to enter
into the renovation agreement in view of their tacit
ratification of the contract.

The CA likewise affirmed the RTC ruling that

WPM and Manlapaz are one and the same based
on the following: (1) Manlapaz is the principal
stockholder of WPM; (2) Manlapaz had complete
control over WPM because he concurrently held
the positions of president, chairman of the board
and treasurer, in violation of the Corporation
Code; (3) two of the four other stockholders of
WPM are employed by Manlapaz either directly or
indirectly; (4) Manlapazs residence is the
registered principal office of WPM; and (5) the
acronym "WPM" was derived from Manlapazs
initials. The CA applied the principle of piercing
the veil of corporate fiction and agreed with the
RTC that Manlapaz cannot evade his liability by
simply invoking WPMs separate and distinct
personality.

After the CA's denial of their motion for

reconsideration, the petitioners filed the present
petition for review on certiorari under Rule 45 of
the Rules of Court.

The Petition

The petitioners submit that the CA gravely erred in

sustaining the RTCs application of the principle of
piercing the veil of corporate fiction. They argue
that the legal fiction of corporate personality could
only be discarded upon clear and convincing proof
that the corporation is being used as a shield to
avoid liability or to commit a fraud. Since the

Full Text Assign.#1

40

respondent failed to establish that any of the

circumstances that would warrant the piercing is
present, Manlapaz claims that he cannot be made
solidarily liable with WPM to answer for damages
allegedly incurred by the respondent.

Generally, factual findings of the lower courts are

accorded the highest degree of respect, if not
finality. When adopted and confirmed by the CA,
these findings are final and conclusive and may
not be reviewed on appeal,7save in some
recognized exceptions8 among others, when the
judgment is based on misapprehension of facts.

The petitioners further argue that, assuming they

may be held liable to reimburse to the respondent
the amount she paid in Civil Case No. Q-90-7013,
such liability is only limited to the amount
of P112,876.02, representing the balance of the
obligation to CLN, and should not include the
twelve 12% percent interest, damages and
attorneys fees.

We have reviewed the records and found that the

application of the principle of piercing the veil of
corporate fiction is unwarranted in the present
case.

On the Application of the Principle of Piercing

the Veil of Corporate Fiction

The Issues

The core issues are: (1) whether WPM is a mere

instrumentality, alter-ego, and business conduit of
Manlapaz; and (2) whether Manlapaz is jointly and
severally liable with WPM to the respondent for
reimbursement, damages and interest.

Our Ruling

We find merit in the petition.

We note, at the outset, that the question of

whether a corporation is a mere instrumentality or
alter-ego of another is purely one of fact. 5 This is
also true with respect to the question of whether
the totality of the evidence adduced by the
respondent warrants the application of the
piercing the veil of corporate fiction doctrine.6

Corporation Law

The rule is settled that a corporation has a

personality separate and distinct from the persons
acting for and in its behalf and, in general, from
the people comprising it.9 Following this principle,
the obligations incurred by the corporate officers,
or other persons acting as corporate agents, are
the direct accountabilities of the corporation they
represent, and not theirs. Thus, a director, officer
or employee of a corporation is generally not held
personally liable for obligations incurred by the
corporation;10 it
is
only
in
exceptional
circumstances that solidary liability will attach to
them.

Incidentally, the doctrine of piercing the corporate

veil applies only in three (3) basic instances,
namely: a) when the separate and distinct
corporate personality defeats public convenience,
as when the corporate fiction is used as a vehicle
for the evasion of an existing obligation; b) in
fraud cases, or when the corporate entity is used
to justify a wrong, protect a fraud, or defend a
crime; or c) is used in alter ego cases, i.e., where
a corporation is essentially a farce, since it is a
mere alter ego or business conduit of a person, or
where the corporation is so organized and
controlled and its affairs so conducted as to make

Full Text Assign.#1

41

it merely an instrumentality, agency, conduit or

adjunct of another corporation.11

stocks of a corporation is not by itself a sufficient

ground to disregard the separate corporate
personality. To disregard the separate juridical
personality of a corporation, the wrongdoing must
be clearly and convincingly established.14

Piercing the corporate veil based on the alter ego

theory requires the concurrence of three
elements, namely:

(1) Control, not mere majority or complete

stock control, but complete domination,
not only of finances but of policy and
business practice in respect to the
transaction attacked so that the corporate
entity as to this transaction had at the
time no separate mind, will or existence of
its own;
(2) Such control must have be enused by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs
legal right; and
(3) The aforesaid control and breach of duty
must have proximately caused the injury
or unjust loss complained of.

Likewise, the records of the case do not support

the lower courts finding that Manlapaz had control
or domination over WPM or its finances. That
Manlapaz concurrently held the positions of
president, chairman and treasurer, or that the
Manlapazs residence is the registered principal
office of WPM, are insufficient considerations to
prove that he had exercised absolute control over
WPM.

In this connection, we stress that the control

necessary to invoke the instrumentality or alter
ego rule is not majority or even complete stock
control but such domination of finances, policies
and practices that the controlled corporation has,
so to speak, no separate mind, will or existence of
its own, and is but a conduit for its principal. The
control must be shown to have been exercised at
the time the acts complained of took place.
Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for
which the complaint is made.

The absence of any of these elements prevents

piercing the corporate veil.12
In the present case, the attendant circumstances
do not establish that WPM is a mere alter ego of
Manlapaz.

Aside from the fact that Manlapaz was the

principal stockholder of WPM, records do not
show that WPM was organized and controlled,
and its affairs conducted in a manner that made it
merely an instrumentality, agency, conduit or
adjunct of Manlapaz. As held in Martinez v. Court
of Appeals,13 the mere ownership by a single
stockholder of even all or nearly all of the capital

Corporation Law

Here, the respondent failed to prove that

Manlapaz, acting as president, had absolute
control over WPM. Even granting that he
exercised a certain degree of control over the
finances, policies and practices of WPM, in view
of his position as president, chairman and
treasurer of the corporation, such control does not
necessarily warrant piercing the veil of corporate
fiction since there was not a single proof that
WPM was formed to defraud CLN or the
respondent, or that Manlapaz was guilty of bad
faith or fraud.

Full Text Assign.#1

42

On the contrary, the evidence establishes that

CLN and the respondent knew and acted on the
knowledge that they were dealing with WPM for
the renovation of the latters restaurant, and not
with Manlapaz. That WPM later reneged on its
monetary obligation to CLN, resulting to the filing
of a civil case for sum of money against the
respondent, does not automatically indicate fraud,
in the absence of any proof to support it.

This Court also observed that the CA failed to

demonstrate how the separate and distinct
personality of WPM was used by Manlapaz to
defeat the respondents right for reimbursement.
Neither was there any showing that WPM
attempted to avoid liability or had no property
against which to proceed.

Since no harm could be said to have been

proximately caused by Manlapaz for which the
latter could be held solidarily liable with WPM, and
considering that there was no proof that WPM had
insufficient funds, there was no sufficient
justification for the RTC and the CA to have ruled
that Manlapaz should be held jointly and severally
liable to the respondent for the amount she paid to
CLN. Hence, only WPM is liable to indemnify the
respondent.

On the award of moral damages, we find the

same in order in view of WPM's unjustified refusal
to pay a just debt. Under Article 2220 of the New
Civil Code,16 moral damages may be awarded in
cases of a breach of contract where the defendant
acted fraudulently or in bad faith or was guilty of
gross negligence amounting to bad faith.

In the present case, when payment for the

balance of the renovation cost was demanded,
WPM, instead of complying with its obligation,
denied having authorized the respondent to
contract in its behalf and accordingly refused to
pay. Such cold refusal to pay a just debt amounts
to a breach of contract in bad faith, as
contemplated by Article 2220. Hence, the CA's
order to pay moral damages was in order.

WHEREFORE, in light of the foregoing, the

decision dated September 28, 2007 of the Court
of Appeals in CA-G.R. CV No. 68289 is
MODIFIED and. that petitioner Warlito P.
Manlapaz is ABSOLVED from any liability under
the renovation agreement. SO ORDERED.

G.R. No. 174938

Finally, we emphasize that the piercing of the veil
of corporate fiction is frowned upon and thus,
must be done with caution.15 It can only be done if
it has been clearly established that the separate
and distinct personality of the corporation is used
to justify a wrong, protect fraud, or perpetrate a
deception. The court must be certain that the
corporate fiction was misused to such an extent
that injustice, fraud, or crime was committed
against another, in disregard of its rights; it cannot
be presumed.

On the Award of Moral Damages

Corporation Law

October 1, 2014

GERARDO LANUZA, JR. AND ANTONIO O.

OLBES, Petitioners, vs. BF CORPORATION,
SHANGRI-LA PROPERTIES, INC., ALFREDO C.
RAMOS, RUFO B. COLAYCO, MAXIMO G.
LICAUCO III, AND BENJAMIN C.
RAMOS, Respondents.

DECISION

LEONEN, J.:

Full Text Assign.#1

43

Corporate representatives may be compelled to

submit to arbitration proceedings pursuant to a
contract entered into by the corporation they
represent if there are allegations of bad faith or
malice in their acts representing the corporation.

This is a Rule 45 petition, assailing the Court of

Appeals' May 11, 2006 decision and October 5,
2006 resolution. The Court of Appeals affirmed the
trial court's decision holding that petitioners, as
director, should submit themselves as parties to
the
arbitration proceedings
between
BF
Corporation and Shangri-La Properties, Inc.
(Shangri-La).

In 1993, BF Corporation filed a collection

complaint with the Regional Trial Court against
Shangri-Laand the members of its board of
directors: Alfredo C. Ramos, Rufo B. Colayco,
Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo
G. Licauco III, and Benjamin C. Ramos.1

BF Corporation alleged in its complaint that on

December 11, 1989 and May 30, 1991, it entered
into agreements with Shangri-La wherein it
undertook to construct for Shangri-La a mall and a
multilevel parking structure along EDSA.2

a matter of delayed processing of

Corporations progress billing statements.6

BF

BF Corporation eventually completed the

construction
of
the
buildings.7 Shangri-La
allegedly took possession of the buildings while
still owing BF Corporation an outstanding
balance.8

BF Corporation alleged that despite repeated

demands, Shangri-La refused to pay the balance
owed to it.9 It also alleged that the Shangri-Las
directors were in bad faith in directing ShangriLas affairs. Therefore, they should be held jointly
and severally liable with Shangri-La for its
obligations as well as for the damages that BF
Corporation incurred as a result of Shangri-Las
default.10

On August 3, 1993, Shangri-La, Alfredo C.

Ramos, Rufo B. Colayco, Maximo G. Licauco III,
and Benjamin C. Ramos filed a motion to suspend
the proceedings in view of BF Corporations failure
to submit its dispute to arbitration, in accordance
with the arbitration clause provided in its contract,
quoted in the motion as follows:11

35. Arbitration
Shangri-La had been consistent in paying BF
Corporation in accordance with its progress billing
statements.3However, by October 1991, ShangriLa started defaulting in payment.4

BF Corporation alleged that Shangri-La induced

BF Corporation to continue with the construction
of the buildings using its own funds and credit
despite Shangri-Las default.5 According to BF
Corporation, ShangriLa misrepresented that it had
funds to pay for its obligations with BF
Corporation, and the delay in payment was simply

Corporation Law

(1) Provided always that in case any dispute

or difference shall arise between the Owner or
the Project Manager on his behalf and the
Contractor, either during the progress or after
the completion or abandonment of the Works
as to the construction of this Contract or as to
any matter or thing of whatsoever nature
arising there under or inc onnection therewith
(including any matter or thing left by this
Contract to the discretion of the Project
Manager or the withholding by the Project
Manager of any certificate to which the
Contractor may claim to be entitled or the

Full Text Assign.#1

44

measurement and valuation mentioned in

clause 30(5)(a) of these Conditions or the
rights and liabilities of the parties under
clauses 25, 26, 32 or 33 of these Conditions),
the owner and the Contractor hereby agree to
exert all efforts to settle their differences or
dispute amicably. Failing these efforts then
such dispute or difference shall be referred to
arbitration in accordance with the rules and
procedures of the Philippine Arbitration Law.
xxx

xxx

On April 28, 1995, the Court of Appeals granted

the petition for certiorari and ordered the
submission of the dispute to arbitration.18

Aggrieved by the Court of Appeals decision, BF

Corporation filed a petition for review on certiorari
with this court.19 On March 27, 1998, this court
affirmed the Court of Appeals decision, directing
that the dispute be submitted for arbitration.20

xxx

(6) The award of such Arbitrators shall be final

and binding on the parties. The decision of the
Arbitrators shall be a condition precedent to
any right of legal action that either party may
have against the other. . . . 12 (Underscoring in
the original)

Another issue arose after BF Corporation had

initiated arbitration proceedings. BF Corporation
and Shangri-La failed to agree as to the law that
should govern the arbitration proceedings. 21 On
October 27, 1998, the trial court issued the order
directing the parties to conduct the proceedings in
accordance with Republic Act No. 876.22

On August 19, 1993, BF Corporation opposed the

motion to suspend proceedings.13

In the November 18, 1993 order, the Regional

Trial Court denied the motion to suspend
proceedings.14

On December 8, 1993, petitioners filed an answer

to BF Corporations complaint, with compulsory
counter claim against BF Corporation and
crossclaim against Shangri-La.15 They alleged that
they had resigned as members of Shangri-Las
board of directors as of July 15, 1991.16

After the Regional Trial Court denied on February

11, 1994 the motion for reconsideration of its
November 18, 1993 order, Shangri-La, Alfredo C.
Ramos, Rufo B. Colayco, Maximo G. Licauco III,
and Benjamin Ramos filed a petition for certiorari
with the Court of Appeals.17

Corporation Law

Shangri-La filed an omnibus motion and BF

Corporation an urgent motion for clarification, both
seeking to clarify the term, "parties," and whether
Shangri-Las directors should be included in the
arbitration proceedings and served with separate
demands for arbitration.23

Petitioners filed their comment on Shangri-Las

and BF Corporations motions, praying that they
be excluded from the arbitration proceedings for
being non-parties to Shangri-Las and BF
Corporations agreement.24

On July 28, 2003, the trial court issued the order

directing service of demands for arbitration upon
all
defendants
in
BF
Corporations
complaint.25 According to the trial court, ShangriLas directors were interested parties who "must
also be served with a demand for arbitration to
give them the opportunity to ventilate their side of
the controversy, safeguard their interest and fend
off their respective positions."26 Petitioners motion

Full Text Assign.#1

45

for reconsideration of this order was denied by the

trial court on January 19, 2005.27
The dispositive portion of the Court of Appeals
decision reads:
Petitioners filed a petition for certiorari with the
Court of Appeals, alleging grave abuse of
discretion in the issuance of orders compelling
them to submit to arbitration proceedings despite
being third parties to the contract between
Shangri-La and BF Corporation.28

In its May 11, 2006 decision,29 the Court of

Appeals dismissed petitioners petition for
certiorari. The Court of Appeals ruled that
ShangriLas directors were necessary parties in
the arbitration proceedings.30 According to the
Court of Appeals:

[They were] deemed not third-parties to the

contract as they [were] sued for their acts in
representation of the party to the contract
pursuant to Art. 31 of the Corporation Code, and
that as directors of the defendant corporation,
[they], in accordance with Art. 1217 of the Civil
Code, stand to be benefited or injured by the
result of the arbitration proceedings, hence, being
necessary parties, they must be joined in order to
have complete adjudication of the controversy.
Consequently, if [they were] excluded as parties in
the arbitration proceedings and an arbitral award
is rendered, holding [Shangri-La] and its board of
directors jointly and solidarily liable to private
respondent BF Corporation, a problem will arise,
i.e., whether petitioners will be bound by such
arbitral award, and this will prevent complete
determination of the issues and resolution of the
controversy.31

The Court of Appeals further ruled that "excluding

petitioners in the arbitration proceedings . . .
would be contrary to the policy against multiplicity
of suits."32

Corporation Law

WHEREFORE, the petition is DISMISSED.

The assailed orders dated July 28, 2003 and
January 19, 2005 of public respondent RTC,
Branch 157, Pasig City, in Civil Case No.
63400, are AFFIRMED.33

The Court of Appeals denied petitioners motion

for reconsideration in the October 5, 2006
resolution.34

On November 24, 2006, petitioners filed a petition

for review of the May 11, 2006 Court of Appeals
decision and the October 5, 2006 Court of
Appeals resolution.35

The issue in this case is whether petitioners

should be made parties to the arbitration
proceedings, pursuant to the arbitration clause
provided in the contract between BF Corporation
and Shangri-La.

Petitioners argue that they cannot be held

personally liable for corporate acts or
obligations.36 The corporation is a separate being,
and nothing justifies BF Corporations allegation
that they are solidarily liable with ShangriLa.37Neither did they bind themselves personally
nor did they undertake to shoulder Shangri-Las
obligations should it fail in its obligations. 38 BF
Corporation also failed to establish fraud or bad
faith on their part.39

Full Text Assign.#1

46

Petitioners also argue that they are third parties to

the contract between BF Corporation and
Shangri-La.40Provisions
including
arbitration
stipulations should bind only the parties. 41 Based
on our arbitration laws, parties who are strangers
to an agreement cannot be compelled to
arbitrate.42

Petitioners point out that our arbitration laws were

enacted to promote the autonomy of parties in
resolving their disputes.43 Compelling them to
submit to arbitration is against this purpose and
may be tantamount to stipulating for the parties. 44
Separate comments on the petition were filed by
BF Corporation, and Maximo G. Licauco III,
Alfredo C. Ramos and Benjamin C. Ramos.45

Maximo G. Licauco III Alfredo C. Ramos, and

Benjamin C. Ramos agreed with petitioners that
Shangri-Las directors, being non-parties to the
contract, should not be made personally liable for
Shangri-Las acts.46Since the contract was
executed only by BF Corporation and Shangri-La,
only they should be affected by the contracts
stipulation.47 BF Corporation also failed to
specifically allege the unlawful acts of the
directors that should make them solidarily liable
with Shangri-La for its obligations.48

Meanwhile, in its comment, BF Corporation

argued that the courts ruling that the parties
should undergo arbitration "clearly contemplated
the inclusion of the directors of the
corporation[.]"49 BF Corporation also argued that
while petitioners were not parties to the
agreement, they were still impleaded under
Section 31 of the Corporation Code.50 Section 31
makes directors solidarily liable for fraud, gross
negligence, and bad faith.51Petitioners are not
really third parties to the agreement because they
are being sued as Shangri-Las representatives,
under Section 31 of the Corporation Code.52

Corporation Law

BF Corporation further argued that because

petitioners were impleaded for their solidary
liability, they are necessary parties to the
arbitration proceedings.53 The full resolution of all
disputes in the arbitration proceedings should also
be done in the interest of justice.54

In the manifestation dated September 6, 2007,

petitioners informed the court that the Arbitral
Tribunal had already promulgated its decision on
July 31, 2007.55 The Arbitral Tribunal denied BF
Corporations claims against them.56 Petitioners
stated that "[they] were included by the Arbitral
Tribunal in the proceedings conducted . . .
notwithstanding [their] continuing objection
thereto. . . ."57 They also stated that "[their]
unwilling participation in the arbitration case was
done ex abundante ad cautela, as manifested
therein on several occasions."58 Petitioners
informed the court that they already manifested
with the trial court that "any action taken on [the
Arbitral Tribunals decision] should be without
prejudice to the resolution of [this] case." 59

Upon the courts order, petitioners and Shangri-La

filed their respective memoranda. Petitioners and
Maximo G. Licauco III, Alfredo C. Ramos, and
Benjamin C. Ramos reiterated their arguments
that they should not be held liable for Shangri-Las
default and made parties to the arbitration
proceedings because only BF Corporation and
Shangri-La were parties to the contract.

In its memorandum, Shangri-La argued that

petitioners were impleaded for their solidary
liability under Section 31 of the Corporation Code.
Shangri-La added that their exclusion from the
arbitration proceedings will result in multiplicity of
suits, which "is not favored in this jurisdiction." 60 It
pointed out that the case had already been
mooted by the termination of the arbitration
proceedings,
which
petitioners
actively

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47

participated in.61 Moreover, BF Corporation

assailed only the correctness of the Arbitral
Tribunals award and not the part absolving
Shangri-Las directors from liability.62

BF Corporation filed a counter-manifestation with

motion to dismiss63 in lieu of the required
memorandum.

While under the circumstances a ruling on the

merits of the petition for certiorari is not
warranted, still, as set forth at the opening of
this opinion, the fact that this case is moot and
academic should not preclude this Tribunal
from setting forth in language clear and
unmistakable, the obligation of fidelity on the
part of lower court judges to the unequivocal
command of the Constitution that excessive
bail shall not be required.67

In its counter-manifestation, BF Corporation

pointed out that since "petitioners counterclaims
were already dismissed with finality, and the
claims against them were likewise dismissed with
finality, they no longer have any interest or
personality in the arbitration case. Thus, there is
no longer any need to resolve the present
Petition, which mainly questions the inclusion of
petitioners in the arbitration proceedings." 64 The
courts decision in this case will no longer have
any effect on the issue of petitioners inclusion in
the arbitration proceedings.65

This principle was repeated in subsequent cases

when this court deemed it proper to clarify
important matters for guidance.68

The petition must fail.

This jurisdiction adopts a policy in favor of

arbitration. Arbitration allows the parties to avoid
litigation and settle disputes amicably and more
expeditiously by themselves and through their
choice of arbitrators.

The Arbitral Tribunals decision, absolving

petitioners from liability, and its binding effect on
BF Corporation, have rendered this case moot
and academic.

The mootness of the case, however, had not

precluded us from resolving issues so that
principles may be established for the guidance of
the bench, bar, and the public. In De la Camara v.
Hon. Enage,66 this court disregarded the fact that
petitioner in that case already escaped from
prison and ruled on the issue of excessive bails:

Corporation Law

Thus, we rule that petitioners may be compelled

to submit to the arbitration proceedings in
accordance with Shangri-La and BF Corporations
agreement, in order to determine if the distinction
between Shangri-Las personality and their
personalities should be disregarded.

The policy in favor of arbitration has been affirmed

in our Civil Code,69 which was approved as early
as 1949. It was later institutionalized by the
approval of Republic Act No. 876, 70 which
expressly authorized, made valid, enforceable,
and irrevocable parties decision to submit their
controversies, including incidental issues, to
arbitration. This court recognized this policy in
Eastboard Navigation, Ltd. v. Ysmael and
Company, Inc.:71

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48

As a corollary to the question regarding the

existence of an arbitration agreement,
defendant raises the issue that, even if it be
granted that it agreed to submit its dispute
with plaintiff to arbitration, said agreement is
void and without effect for it amounts to
removing said dispute from the jurisdiction of
the courts in which the parties are domiciled
or where the dispute occurred. It is true that
there are authorities which hold that "a clause
in a contract providing that all matters in
dispute between the parties shall be referred
to arbitrators and to them alone, is contrary to
public policy and cannot oust the courts of
jurisdiction" (Manila Electric Co. vs. Pasay
Transportation Co., 57 Phil., 600, 603),
however, there are authorities which favor
"the more intelligent view that arbitration, as
an inexpensive, speedy and amicable method
of settling disputes, and as a means of
avoiding litigation, should receive every
encouragement from the courts which may be
extended without contravening sound public
policy or settled law" (3 Am. Jur., p. 835).
Congress has officially adopted the modern
view when it reproduced in the new Civil Code
the provisions of the old Code on Arbitration.
And only recently it approved Republic Act
No. 876 expressly authorizing arbitration of
future disputes.72 (Emphasis supplied)

In view of our policy to adopt arbitration as a

manner of settling disputes, arbitration clauses
are liberally construed to favor arbitration. Thus, in
LM Power Engineering Corporation v. Capitol
Industrial Construction Groups, Inc.,73 this court
said:
Being an inexpensive, speedy and amicable
method of settling disputes, arbitration
along with mediation, conciliation and
negotiation is encouraged by the Supreme
Court. Aside from unclogging judicial dockets,
arbitration also hastens the resolution of
disputes, especially of the commercial kind. It
is thus regarded as the "wave of the future" in
international civil and commercial disputes.
Brushing aside a contractual agreement

Corporation Law

calling for arbitration between the parties

would be a step backward.

Consistent with the above-mentioned policy of

encouraging alternative dispute resolution
methods, courts should liberally construe
arbitration clauses. Provided such clause is
susceptible of an interpretation that covers the
asserted dispute, an order to arbitrate should
be granted. Any doubt should be resolved in
favor of arbitration.74(Emphasis supplied)

A more clear-cut statement of the state policy to

encourage arbitration and to favor interpretations
that would render effective an arbitration clause
was later expressed in Republic Act No. 9285:75

SEC. 2. Declaration of Policy.- It is hereby

declared the policy of the State to actively
promote party autonomy in the resolution of
disputes or the freedom of the party to make
their own arrangements to resolve their
disputes. Towards this end, the State shall
encourage and actively promote the use of
Alternative Dispute Resolution (ADR) as an
important means to achieve speedy and
impartial justice and declog court dockets. As
such, the State shall provide means for the
use of ADR as an efficient tool and an
alternative procedure for the resolution of
appropriate cases. Likewise, the State shall
enlist active private sector participation in the
settlement of disputes through ADR. This Act
shall be without prejudice to the adoption by
the Supreme Court of any ADR system, such
as mediation, conciliation, arbitration, or any
combination thereof as a means of achieving
speedy and efficient means of resolving cases
pending before all courts in the Philippines
which shall be governed by such rules as the
Supreme Court may approve from time to
time.
....

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49

SEC. 25. Interpretation of the Act.- In

interpreting the Act, the court shall have due
regard to the policy of the law in favor of
arbitration. Where action is commenced by or
against multiple parties, one or more of whom
are parties who are bound by the arbitration
agreement although the civil action may
continue as to those who are not bound by
such arbitration agreement. (Emphasis
supplied)

Thus, if there is an interpretation that would

render effective an arbitration clause for purposes
of avoiding litigation and expediting resolution of
the dispute, that interpretation shall be adopted.
Petitioners main argument arises from the
separate personality given to juridical persons vis-vis their directors, officers, stockholders, and
agents. Since they did not sign the arbitration
agreement in any capacity, they cannot be forced
to submit to the jurisdiction of the Arbitration
Tribunal in accordance with the arbitration
agreement. Moreover, they had already resigned
as directors of Shangri-La at the time of the
alleged default.

Indeed, as petitioners point out, their personalities

as directors of Shangri-La are separate and
distinct from Shangri-La.

A corporation is an artificial entity created by

fiction of law.76 This means that while it is not a
person, naturally, the law gives it a distinct
personality and treats it as such. A corporation, in
the legal sense, is an individual with a personality
that is distinct and separate from other persons
including its stockholders, officers, directors,
representatives,77 and other juridical entities. The
law vests in corporations rights, powers, and
attributes as if they were natural persons with
physical existence and capabilities to act on their
own.78 For instance, they have the power to sue
and enter into transactions or contracts. Section
36 of the Corporation Code enumerates some of a
corporations powers, thus:

Corporation Law

Section 36. Corporate powers and capacity.

Every corporation incorporated under this
Code has the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for
the period of time stated in the articles of
incorporation and the certificate of
incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in
accordance with the provisions of this
Code;
5. To adopt by-laws, not contrary to law,
morals, or public policy, and to amend or
repeal the same in accordance with this
Code;
6. In case of stock corporations, to issue or
sell stocks to subscribers and to sell
treasury stocks in accordance with the
provisions of this Code; and to admit
members to the corporation if it be a nonstock corporation;
7. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and
personal property, including securities and
bonds of other corporations, as the
transaction of the lawful business of the
corporation
may
reasonably
and
necessarily require, subject to the
limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with
other corporations as provided in this
Code;
9. To make reasonable donations, including
those for the public welfare or for hospital,

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50

charitable, cultural, scientific, civic, or

similar purposes: Provided, That no
corporation, domestic or foreign, shall
give donations in aid of any political party
or candidate or for purposes of partisan
political activity;

Augusto
Salas,
Jr.
v.
Laperal
Realty
79
Corporation that an arbitration clause shall not
apply to persons who were neither parties to the
contract nor assignees of previous parties, thus:

10. To establish pension, retirement, and

other plans for the benefit of its directors,
trustees, officers and employees; and

A submission to arbitration is a contract. As such,

the Agreement, containing the stipulation on
arbitration, binds the parties thereto, as well as
their assigns and heirs. But only they.80 (Citations
omitted)

11. To exercise such other powers as may be

essential or necessary to carry out its
purpose or purposes as stated in its
articles of incorporation. (13a)

Similarly, in Del Monte Corporation-USA v. Court

of Appeals,81 this court ruled:

Because a corporations existence is only by

fiction of law, it can only exercise its rights and
powers through its directors, officers, or agents,
who are all natural persons. A corporation cannot
sue or enter into contracts without them.

A consequence of a corporations separate

personality is that consent by a corporation
through its representatives is not consent of the
representative, personally. Its obligations, incurred
through official acts of its representatives, are its
own. A stockholder, director, or representative
does not become a party to a contract just
because a corporation executed a contract
through
that
stockholder,
director
or
representative.

Hence, a corporations representatives are

generally not bound by the terms of the contract
executed by the corporation. They are not
personally liable for obligations and liabilities
incurred on or in behalf of the corporation.

The provision to submit to arbitration any

dispute arising therefrom and the relationship
of the parties is part of that contract and is
itself a contract. As a rule, contracts are
respected as the law between the contracting
parties and produce effect as between them,
their assigns and heirs. Clearly, only parties to
the Agreement . . . are bound by the
Agreement and its arbitration clause as they
are the only signatories thereto. 82 (Citation
omitted)

This court incorporated these rulings in Agan, Jr.

v. Philippine International Air Terminals Co.,
Inc.83 and Stanfilco Employees v. DOLE
Philippines, Inc., et al.84

As a general rule, therefore, a corporations

representative who did not personally bind himself
or herself to an arbitration agreement cannot be
forced to participate in arbitration proceedings
made pursuant to an agreement entered into by
the corporation. He or she is generally not
considered a party to that agreement.

Petitioners are also correct that arbitration

promotes the parties autonomy in resolving their
disputes. This court recognized in Heirs of

Corporation Law

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51

However, there are instances when the distinction

between personalities of directors, officers, and
representatives, and of the corporation, are
disregarded. We call this piercing the veil of
corporate fiction.

Piercing the corporate veil is warranted when "[the

separate personality of a corporation] is used as a
means to perpetrate fraud or an illegal act, or as a
vehicle for the evasion of an existing obligation,
the circumvention of statutes, or to confuse
legitimate issues."85 It is also warranted in alter
ego cases "where a corporation is merely a farce
since it is a mere alter ego or business conduit of
a person, or where the corporation is so organized
and controlled and its affairs are so conducted as
to make it merely an instrumentality, agency,
conduit or adjunct of another corporation."86

When corporate veil is pierced, the corporation

and persons who are normally treated as distinct
from the corporation are treated as one person,
such that when the corporation is adjudged liable,
these persons, too, become liable as if they were
the corporation.

Among the persons who may be treated as the

corporation itself under certain circumstances are
its directors and officers. Section 31 of the
Corporation Code provides the instances when
directors, trustees, or officers may become liable
for corporate acts:

all damages resulting therefrom suffered by

the corporation, its stockholders or members
and other persons.

When a director, trustee or officer attempts to

acquire or acquires, in violation of his duty,
any interest adverse to the corporation in
respect of any matter which has been reposed
inhim in confidence, as to which equity
imposes a disability upon him to deal in his
own behalf, he shall be liable as a trustee for
the corporation and must account for the
profits which otherwise would have accrued to
the corporation. (n)

Based on the above provision, a director, trustee,

or officer of a corporation may be made solidarily
liable with it for all damages suffered by the
corporation, its stockholders or members, and
other persons in any of the following cases:

a) The director or trustee willfully and

knowingly voted for or assented to a
patently unlawful corporate act;
b) The director or trustee was guilty of gross
negligence or bad faith in directing
corporate affairs; and
c) The director or trustee acquired personal
or pecuniary interest in conflict with his or
her duties as director or trustee.
Solidary liability with the corporation will also
attach in the following instances:

Sec. 31. Liability of directors, trustees or

officers. - Directors or trustees who willfully
and knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation or
acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally for

Corporation Law

a) "When a director or officer has consented

to the issuance of watered stocks or who,
having knowledge thereof, did not
forthwith file with the corporate secretary
his written objection thereto";87

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52

b) "When a director, trustee or officer has

contractually agreed or stipulated to hold
himself personally and solidarily liable
with the corporation";88 and
c) "When a director, trustee or officer is
made, by specific provision of law,
personally liable for his corporate
action."89

When there are allegations of bad faith or malice

against corporate directors or representatives, it
becomes the duty of courts or tribunals to
determine if these persons and the corporation
should be treated as one. Without a trial, courts
and tribunals have no basis for determining
whether the veil of corporate fiction should be
pierced. Courts or tribunals do not have such prior
knowledge. Thus, the courts or tribunals must first
determine whether circumstances exist to warrant
the courts or tribunals to disregard the distinction
between the corporation and the persons
representing it. The determination of these
circumstances must be made by one tribunal or
court in a proceeding participated in by all parties
involved, including current representatives of the
corporation,
and
those
persons
whose
personalities are impliedly the same as the
corporation. This is because when the court or
tribunal finds that circumstances exist warranting
the piercing of the corporate veil, the corporate
representatives are treated as the corporation
itself and should be held liable for corporate acts.
The
corporations
distinct
personality
is
disregarded, and the corporation is seen as a
mere aggregation of persons undertaking a
business under the collective name of the
corporation.

Hence, when the directors, as in this case, are

impleaded in a case against a corporation,
alleging malice or bad faith on their part in
directing the affairs of the corporation,
complainants are effectively alleging that the
directors and the corporation are not acting as
separate entities. They are alleging that the acts
or omissions by the corporation that violated their

Corporation Law

rights are also the directors acts or

omissions.90 They are alleging that contracts
executed by the corporation are contracts
executed by the directors. Complainants
effectively pray that the corporate veil be pierced
because the cause of action between the
corporation and the directors is the same.

In that case, complainants have no choice but to

institute only one proceeding against the parties.
Under the Rules of Court, filing of multiple suits for
a single cause of action is prohibited. Institution of
more than one suit for the same cause of action
constitutes splitting the cause of action, which is a
ground for the dismissal of the others. Thus, in
Rule 2:

Section 3. One suit for a single cause of

action. A party may not institute more than
one suit for a single cause of action. (3a)

Section 4. Splitting a single cause of action;

effect of. If two or more suits are instituted
on the basis of the same cause of action, the
filing of one or a judgment upon the merits in
any one is available as a ground for the
dismissal of the others. (4a)

It is because the personalities of petitioners and

the corporation may later be found to be indistinct
that we rule that petitioners may be compelled to
submit to arbitration.

However, in ruling that petitioners may be

compelled to submit to the arbitration
proceedings, we are not overturning Heirs of
Augusto Salas wherein this court affirmed the
basic arbitration principle that only parties to an
arbitration agreement may be compelled to submit
to arbitration. In that case, this court recognized

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53

that persons other than the main party may be

compelled to submit to arbitration, e.g., assignees
and heirs. Assignees and heirs may be
considered parties to an arbitration agreement
entered into by their assignor because the
assignors rights and obligations are transferred to
them upon assignment. In other words, the
assignors rights and obligations become their
own rights and obligations. In the same way, the
corporations obligations are treated as the
representatives obligations when the corporate
veil is pierced. Moreover, in Heirs of Augusto
Salas, this court affirmed its policy against
multiplicity of suits and unnecessary delay. This
court said that "to split the proceeding into
arbitration for some parties and trial for other
parties would "result in multiplicity of suits,
duplicitous
procedure
and
unnecessary
91
delay." This court also intimated that the interest
of justice would be best observed if it adjudicated
rights in a single proceeding. 92 While the facts of
that case prompted this court to direct the trial
court to proceed to determine the issues of that
case, it did not prohibit courts from allowing the
case
to
proceed
to
arbitration,
when
circumstances warrant.

Hence, the issue of whether the corporations acts

in violation of complainants rights, and the
incidental issue of whether piercing of the
corporate veil is warranted, should be determined
in a single proceeding. Such finding would
determine if the corporation is merely an
aggregation of persons whose liabilities must be
treated as one with the corporation.

However, when the courts disregard the

corporations distinct and separate personality
from its directors or officers, the courts do not say
that the corporation, in all instances and for all
purposes, is the same as its directors,
stockholders, officers, and agents. It does not
result in an absolute confusion of personalities of
the corporation and the persons composing or
representing it. Courts merely discount the
distinction and treat them as one, in relation to a
specific act, in order to extend the terms of the

Corporation Law

contract and the liabilities for all damages to erring

corporate officials who participated in the
corporations illegal acts. This is done so that the
legal fiction cannot be used to perpetrate
illegalities and injustices.

Thus, in cases alleging solidary liability with the

corporation or praying for the piercing of the
corporate veil, parties who are normally treated as
distinct individuals should be made to participate
in the arbitration proceedings in order to
determine if such distinction should indeed be
disregarded and, if so, to determine the extent of
their liabilities.

In this case, the Arbitral Tribunal rendered a

decision, finding that BF Corporation failed to
prove the existence of circumstances that render
petitioners and the other directors solidarily liable.
It ruled that petitioners and Shangri-Las other
directors were not liable for the contractual
obligations of Shangri-La to BF Corporation. The
Arbitral Tribunals decision was made with the
participation of petitioners, albeit with their
continuing objection. In view of our discussion
above, we rule that petitioners are bound by such
decision.

WHEREFORE, the petition is DENIED. The Court

of Appeals' decision of May 11, 2006 and
resolution of October 5, 2006 are AFFIRMED.

SO ORDERED.
G.R. No. 192571
July 23, 2013
ABBOTT LABORATORIES, PHILIPPINES,
CECILLE A. TERRIBLE, EDWIN D. FEIST,
MARIA OLIVIA T. YABUTMISA, TERESITA C.
BERNARDO, AND ALLAN G.
ALMAZAR, Petitioners, vs. PEARLIE ANN F.
ALCARAZ, Respondent.

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DECISION

54

PERLAS-BERNABE, J.:
Assailed in this petition for review on
certiorari1 are the Decision2 dated December
10,2009 and Resolution3dated June 9, 2010 of the
Court of Appeals (CA) in CA-G.R. SP No. 101045
which pronounced that the National Labor
Relations Commission (NLRC) did not gravely
abuse its discretion when it ruled that respondent
Pearlie Ann F. Alcaraz (Alcaraz) was illegally
dismissed from her employment.

After having successfully passed the preemployment requirements, you are hereby
appointed as follows:
Position Title : Regulatory Affairs Manager
Department : Hospira
The terms of your employment are:
Nature of Employment : Probationary
Effectivity : February 15, 2005 to August
14, 2005
Basic Salary : P110,000.00/ month

The Facts
On June 27, 2004, petitioner Abbott Laboratories,
Philippines (Abbott) caused the publication in a
major broadsheet newspaper of its need for a
Medical and Regulatory Affairs Manager
(Regulatory Affairs Manager) who would: (a) be
responsible
for
drug
safety
surveillance
operations, staffing, and budget; (b) lead the
development and implementation of standard
operating procedures/policies for drug safety
surveillance and vigilance; and (c) act as the
primary interface with internal and external
customers regarding safety operations and
queries.4 Alcaraz - who was then a Regulatory
Affairs and Information Manager at Aventis
Pasteur Philippines, Incorporated (another
pharmaceutical company like Abbott) showed
interest and submitted her application on October
4, 2004.5
On December 7, 2004, Abbott formally offered
Alcaraz the abovementioned position which was
an item under the companys Hospira Affiliate
Local Surveillance Unit (ALSU) department. 6 In
Abbotts offer sheet.7 it was stated that Alcaraz
was to be employed on a probationary
basis.8 Later that day, she accepted the said offer
and received an electronic mail (e-mail) from
Abbotts Recruitment Officer, petitioner Teresita C.
Bernardo (Bernardo), confirming the same.
Attached to Bernardos e-mail were Abbotts
organizational chart and a job description of
Alcarazs work.9
On February 12, 2005, Alcaraz signed an
employment contract which stated, inter alia, that
she was to be placed on probation for a period of
six (6) months beginning February 15, 2005 to
August 14, 2005. The said contract was also
signed by Abbotts General Manager, petitioner
Edwin Feist (Feist):10
PROBATIONARY EMPLOYMENT
Dear Pearl,

Corporation Law

It is understood that you agree to abide by all

existing policies, rules and regulations of the
company, as well as those, which may be
hereinafter promulgated.
Unless renewed, probationary appointment
expires on the date indicated subject to earlier
termination by the Company for any justifiable
reason.
If you agree to the terms and conditions of
your employment, please signify your
conformity below and return a copy to HRD.
Welcome to Abbott!
Very truly yours,
Sgd.
EDWIN D. FEIST
General Manager
CONFORME:
Sgd.
PEARLIE ANN FERRER-ALCARAZ
During Alcarazs pre-employment orientation,
petitioner Allan G. Almazar (Almazar), Hospiras
Country Transition Manager, briefed her on her
duties and responsibilities as Regulatory Affairs
Manager, stating that: (a) she will handle the staff
of Hospira ALSU and will directly report to
Almazar on matters regarding Hopiras local
operations, operational budget, and performance
evaluation of the Hospira ALSU Staff who are on
probationary status; (b) she must implement
Abbotts Code of Good Corporate Conduct (Code
of Conduct), office policies on human resources
and finance, and ensure that Abbott will hire
people who are fit in the organizational discipline;
(c) petitioner Kelly Walsh (Walsh), Manager of the
Literature Drug Surveillance Drug Safety of
Hospira, will be her immediate supervisor; (d) she
should always coordinate with Abbotts human
resource officers in the management and
discipline of the staff; (e) Hospira ALSU will spin
off from Abbott in early 2006 and will be officially

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55

incorporated and known as Hospira, Philippines.

In the interim, Hospira ALSU operations will still
be under Abbotts management, excluding the
technical aspects of the operations which is under
the control and supervision of Walsh; and (f) the
processing of information and/or raw material data
subject of Hospira ALSU operations will be strictly
confined and controlled under the computer
system and network being maintained and
operated from the United States. For this purpose,
all those involved in Hospira ALSU are required to
use two identification cards: one, to identify them
as Abbotts employees and another, to identify
them as Hospira employees.11
On March 3, 2005, petitioner Maria Olivia T.
Yabut-Misa (Misa), Abbotts Human Resources
(HR) Director, sent Alcaraz an e-mail which
contained an explanation of the procedure for
evaluating the performance of probationary
employees and further indicated that Abbott had
only one evaluation system for all of its
employees. Alcaraz was also given copies of
Abbotts Code of Conduct and Probationary
Performance Standards and Evaluation (PPSE)
and Performance Excellence Orientation Modules
(Performance Modules) which she had to apply in
line with her task of evaluating the Hospira ALSU
staff.12
Abbotts PPSE procedure mandates that the job
performance of a probationary employee should
be formally reviewed and discussed with the
employee at least twice: first on the third month
and second on the fifth month from the date of
employment.
The
necessary
Performance
Improvement Plan should also be made during
the third-month review in case of a gap between
the employees performance and the standards
set. These performance standards should be
discussed in detail with the employee within the
first two (2) weeks on the job. It was equally
required that a signed copy of the PPSE form
must be submitted to Abbotts Human Resources
Department (HRD) and shall serve as
documentation of the employees performance
during his/her probationary period. This shall form
the basis for recommending the confirmation or
termination of the probationary employment.13
During the course of her employment, Alcaraz
noticed that some of the staff had disciplinary
problems. Thus, she would reprimand them for
their unprofessional behavior such as nonobservance of the dress code, moonlighting, and
disrespect of Abbott officers. However, Alcarazs
method of management was considered by Walsh
to be "too strict."14 Alcaraz approached Misa to

Corporation Law

discuss these concerns and was told to "lie low"

and let Walsh handle the matter. Misa even
assured her that Abbotts HRD would support her
in all her management decisions.15
On April 12, 2005, Alcaraz received an e-mail from
Misa requesting immediate action on the staffs
performance evaluation as their probationary
periods were about to end. This Alcaraz eventually
submitted.16
On April 20, 2005, Alcaraz had a meeting with
petitioner Cecille Terrible (Terrible), Abbotts
former HR Director, to discuss certain issues
regarding staff performance standards. In the
course thereof, Alcaraz accidentally saw a printed
copy of an e-mail sent by Walsh to some staff
members which essentially contained queries
regarding the formers job performance. Alcaraz
asked if Walshs action was the normal process of
evaluation. Terrible said that it was not.17
On May 16, 2005, Alcaraz was called to a meeting
with Walsh and Terrible where she was informed
that she failed to meet the regularization
standards for the position of Regulatory Affairs
Manager.18 Thereafter,
Walsh
and
Terrible
requested Alcaraz to tender her resignation, else
they be forced to terminate her services. She was
also told that, regardless of her choice, she should
no longer report for work and was asked to
surrender her office identification cards. She
requested to be given one week to decide on the
same, but to no avail.19
On May 17, 2005, Alcaraz told her administrative
assistant, Claude Gonzales (Gonzales), that she
would be on leave for that day. However,
Gonzales told her that Walsh and Terrible already
announced to the whole Hospira ALSU staff that
Alcaraz already resigned due to health reasons.20
On May 23, 2005, Walsh, Almazar, and Bernardo
personally handed to Alcaraz a letter stating that
her services had been terminated effective May
19, 2005.21 The letter detailed the reasons for
Alcarazs termination particularly, that Alcaraz:
(a) did not manage her time effectively; (b) failed
to gain the trust of her staff and to build an
effective rapport with them; (c) failed to train her
staff effectively; and (d) was not able to obtain the
knowledge and ability to make sound judgments
on case processing and article review which were
necessary for the proper performance of her
duties.22 On May 27, 2005, Alcaraz received
another copy of the said termination letter via
registered mail.23

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56

Alcaraz felt that she was unjustly terminated from

her employment and thus, filed a complaint for
illegal dismissal and damages against Abbott and
its officers, namely, Misa, Bernardo, Almazar,
Walsh, Terrible, and Feist.24 She claimed that she
should have already been considered as a regular
and not a probationary employee given Abbotts
failure to inform her of the reasonable standards
for her regularization upon her engagement as
required under Article 29525 of the Labor Code. In
this relation, she contended that while her
employment contract stated that she was to be
engaged on a probationary status, the same did
not indicate the standards on which her
regularization would be based. 26 She further
averred that the individual petitioners maliciously
connived to illegally dismiss her when: (a) they
threatened her with termination; (b) she was
ordered not to enter company premises even if
she was still an employee thereof; and (c) they
publicly announced that she already resigned in
order to humiliate her.27
On the contrary, petitioners maintained that
Alcaraz was validly terminated from her
probationary employment given her failure to
satisfy the prescribed standards for her
regularization which were made known to her at
the time of her engagement.28
The LA Ruling
In a Decision dated March 30, 2006,29 the LA
dismissed Alcarazs complaint for lack of merit.
The LA rejected Alcarazs argument that she was
not informed of the reasonable standards to
qualify as a regular employee considering her
admissions that she was briefed by Almazar on
her work during her pre-employment orientation
meeting30 and that she received copies of Abbotts
Code of Conduct and Performance Modules
which were used for evaluating all types of Abbott
employees.31 As Alcaraz was unable to meet the
standards set by Abbott as per her performance
evaluation, the LA ruled that the termination of her
probationary employment was justified.32 Lastly,
the LA found that there was no evidence to
conclude that Abbotts officers and employees
acted in bad faith in terminating Alcarazs
employment.33
Displeased with the LAs ruling, Alcaraz filed an
appeal with the National Labor Relations
Commission (NLRC).
The NLRC Ruling

Corporation Law

On September 15, 2006, the NLRC rendered a

Decision,34 annulling and setting aside the LAs
ruling, the dispositive portion of which reads:
WHEREFORE, the Decision of the Labor
Arbiter dated 31 March 2006 [sic] is hereby
reversed, annulled and set aside and
judgment is hereby rendered:
1. Finding respondents Abbot [sic] and
individual respondents to have committed
illegal dismissal;
2. Respondents are ordered to immediately
reinstate complainant to her former
position without loss of seniority rights
immediately upon receipt hereof;
3. To jointly and severally pay complainant
backwages computed from 16 May 2005
until finality of this decision. As of the date
hereof the backwages is computed at
a. Backwages
months -

for

15

PhP 1,650,000.00

b. 13th month pay -

110,000.00

TOTAL

PhP 1,760,000.00

4. Respondents are ordered to pay

complainant
moral
damages
of P50,000.00 and exemplary damages
ofP50,000.00.
5. Respondents are also ordered to pay
attorneys fees of 10% of the total award.
6. All other claims are dismissed for lack of
merit.
SO ORDERED.35
The NLRC reversed the findings of the LA and
ruled that there was no evidence showing that
Alcaraz had been apprised of her probationary
status and the requirements which she should
have complied with in order to be a regular
employee.36 It held that Alcarazs receipt of her job
description and Abbotts Code of Conduct and
Performance Modules was not equivalent to her
being actually informed of the performance
standards upon which she should have been
evaluated on.37 It further observed that Abbott did
not comply with its own standard operating
procedure
in
evaluating
probationary
employees.38 The NLRC was also not convinced
that Alcaraz was terminated for a valid cause
given that petitioners allegation of Alcarazs "poor
performance" remained unsubstantiated.39
Petitioners filed a motion for reconsideration
which was denied by the NLRC in a Resolution
dated July 31, 2007.40

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57

Aggrieved, petitioners filed with the CA a Petition

for Certiorari with Prayer for Issuance of a
Temporary Restraining Order and/or Writ of
Preliminary Injunction, docketed as CA G.R. SP
No. 101045 (First CA Petition), alleging grave
abuse of discretion on the part of NLRC when it
ruled that Alcaraz was illegally dismissed.41
Pending resolution of the First CA Petition,
Alcaraz moved for the execution of the NLRCs
Decision before the LA, which petitioners strongly
opposed. The LA denied the said motion in an
Order dated July 8, 2008 which was, however,
eventually reversed on appeal by the
NLRC.42 Due to the foregoing, petitioners filed
another Petition for Certiorari with the CA,
docketed as CA G.R. SP No. 111318 (Second CA
Petition), assailing the propriety of the execution
of the NLRC decision.43
The CA Ruling
With regard to the First CA Petition, the CA, in a
Decision44 dated December 10, 2009, affirmed the
ruling of the NLRC and held that the latter did not
commit any grave abuse of discretion in finding
that Alcaraz was illegally dismissed.
It observed that Alcaraz was not apprised at the
start of her employment of the reasonable
standards under which she could qualify as a
regular employee.45 This was based on its
examination of the employment contract which
showed that the same did not contain any
standard of performance or any stipulation that
Alcaraz shall undergo a performance evaluation
before she could qualify as a regular
employee.46 It also found that Abbott was unable
to prove that there was any reasonable ground to
terminate Alcarazs employment.47 Abbott moved
for the reconsideration of the aforementioned
ruling which was, however, denied by the CA in a
Resolution48 dated June 9, 2010.

appealed to the NLRC through a Memorandum

of Appeal dated June 16, 2010 (June 16, 2010
Memorandum of Appeal ) on the ground that the
implementation of the LAs order would render its
motion for reconsideration moot and academic.50
Meanwhile, petitioners motion for reconsideration
of the CAs May 18, 2010 Resolution in the
Second CA Petition was denied via a Resolution
dated October 4, 2010.51 This attained finality on
January 10, 2011 for petitioners failure to timely
appeal the same.52 Hence, as it stands, only the
issues in the First CA petition are left to be
resolved.
Incidentally, in her Comment dated November 15,
2010, Alcaraz also alleges that petitioners were
guilty of forum shopping when they filed the
Second CA Petition pending the resolution of their
motion for reconsideration of the CAs December
10, 2009 Decision i.e., the decision in the First CA
Petition.53 She also contends that petitioners have
not complied with the certification requirement
under Section 5, Rule 7 of the Rules of Court
when they failed to disclose in the instant petition
the filing of the June 16, 2010 Memorandum of
Appeal filed before the NLRC.54
The Issues Before the Court
The following issues have been raised for the
Courts resolution: (a) whether or not petitioners
are guilty of forum shopping and have violated the
certification requirement under Section 5, Rule 7
of the Rules of Court; (b) whether or not Alcaraz
was sufficiently informed of the reasonable
standards to qualify her as a regular employee; (c)
whether or not Alcaraz was validly terminated
from her employment; and (d) whether or not the
individual petitioners herein are liable.
The Courts Ruling
A. Forum Shopping and
Violation of Section 5, Rule 7
of the Rules of Court.

The CA likewise denied the Second CA Petition in

a Resolution dated May 18, 2010 (May 18, 2010
Resolution) and ruled that the NLRC was correct
in upholding the execution of the NLRC
Decision.49 Thus, petitioners filed a motion for
reconsideration.

At the outset, it is noteworthy to mention that the

prohibition against forum shopping is different
from a violation of the certification requirement
under Section 5, Rule 7 of the Rules of Court. In
Sps. Ong v. CA,55 the Court explained that:

While the petitioners motion for reconsideration of

the CAs May 18, 2010 Resolution was pending,
Alcaraz again moved for the issuance of a writ of
execution before the LA. On June 7, 2010,
petitioners received the LAs order granting
Alcarazs motion for execution which they in turn

x x x The distinction between the prohibition

against forum shopping and the certification
requirement should by now be too elementary
to be misunderstood. To reiterate, compliance
with the certification against forum shopping is
separate from and independent of the

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avoidance of the act of forum shopping itself.

There is a difference in the treatment between
failure to comply with the certification
requirement and violation of the prohibition
against forum shopping not only in terms of
imposable sanctions but also in the manner of
enforcing them. The former constitutes
sufficient cause for the dismissal without
prejudice to the filing of the complaint or
initiatory pleading upon motion and after
hearing, while the latter is a ground for
summary dismissal thereof and for direct
contempt. x x x. 56
As to the first, forum shopping takes place when a
litigant files multiple suits involving the same
parties, either simultaneously or successively, to
secure a favorable judgment. It exists where the
elements of litis pendentia are present, namely:
(a) identity of parties, or at least such parties who
represent the same interests in both actions; (b)
identity of rights asserted and relief prayed for, the
relief being founded on the same facts; and (c) the
identity with respect to the two preceding
particulars in the two (2) cases is such that any
judgment that may be rendered in the pending
case, regardless of which party is successful,
would amount to res judicata in the other case.57
In this case, records show that, except for the
element of identity of parties, the elements of
forum shopping do not exist. Evidently, the First
CA Petition was instituted to question the ruling of
the NLRC that Alcaraz was illegally dismissed. On
the other hand, the Second CA Petition pertains to
the propriety of the enforcement of the judgment
award pending the resolution of the First CA
Petition and the finality of the decision in the labor
dispute between Alcaraz and the petitioners.
Based on the foregoing, a judgment in the Second
CA Petition will not constitute res judicata insofar
as the First CA Petition is concerned. Thus,
considering that the two petitions clearly cover
different subject matters and causes of action,
there exists no forum shopping.
As to the second, Alcaraz further imputes that the
petitioners violated the certification requirement
under Section 5, Rule 7 of the Rules of Court 58 by
not disclosing the fact that it filed the June 16,
2010 Memorandum of Appeal before the NLRC in
the instant petition.
In this regard, Section 5(b), Rule 7 of the Rules of
Court requires that a plaintiff who files a case
should provide a complete statement of the
present status of any pending case if the latter
involves the same issues as the one that was
filed. If there is no such similar pending case,

Corporation Law

Section 5(a) of the same rule provides that the

plaintiff is obliged to declare under oath that to the
best of his knowledge, no such other action or
claim is pending.
Records show that the issues raised in the instant
petition and those in the June 16, 2010
Memorandum of Appeal filed with the NLRC
likewise cover different subject matters and
causes of action. In this case, the validity of
Alcarazs dismissal is at issue whereas in the said
Memorandum of Appeal, the propriety of the
issuance of a writ of execution was in question.
Thus, given the dissimilar issues, petitioners did
not have to disclose in the present petition the
filing of their June 16, 2010 Memorandum of
Appeal with the NLRC. In any event, considering
that the issue on the propriety of the issuance of a
writ of execution had been resolved in the Second
CA Petition which in fact had already attained
finality the matter of disclosing the June 16,
2010 Memorandum of Appeal is now moot and
academic.
Having settled the foregoing procedural matter,
the Court now proceeds to resolve the substantive
issues.
B. Probationary employment;
grounds for termination.
A probationary employee, like a regular employee,
enjoys security of tenure. However, in cases of
probationary employment, aside from just or
authorized causes of termination, an additional
ground is provided under Article 295 of the Labor
Code, i.e., the probationary employee may also
be terminated for failure to qualify as a regular
employee in accordance with the reasonable
standards made known by the employer to the
employee at the time of the engagement. 59 Thus,
the services of an employee who has been
engaged on probationary basis may be terminated
for any of the following: (a) a just or (b) an
authorized cause; and (c) when he fails to qualify
as a regular employee in accordance with
reasonable standards prescribed by the
employer.60
Corollary thereto, Section 6(d), Rule I, Book VI of
the Implementing Rules of the Labor Code
provides that if the employer fails to inform the
probationary employee of the reasonable
standards upon which the regularization would be
based on at the time of the engagement, then the
said employee shall be deemed a regular
employee, viz.:

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59

(d) In all cases of probationary employment, the

employer shall make known to the employee the
standards under which he will qualify as a regular
employee at the time of his engagement. Where
no standards are made known to the employee at
that time, he shall be deemed a regular employee.
In other words, the employer is made to
comply with two (2) requirements when
dealing with a probationary employee: first,
the employer must communicate the
regularization standards to the probationary
employee; and second, the employer must
make such communication at the time of the
probationary employees engagement. If the
employer fails to comply with either, the
employee is deemed as a regular and not a
probationary employee.
Keeping with these rules, an employer is deemed
to have made known the standards that would
qualify a probationary employee to be a regular
employee when it has exerted reasonable efforts
to apprise the employee of what he is expected to
do or accomplish during the trial period of
probation. This goes without saying that the
employee is sufficiently made aware of his
probationary status as well as the length of time of
the probation.
The exception to the foregoing is when the job is
self-descriptive in nature, for instance, in the case
of maids, cooks, drivers, or messengers. 61 Also, in
Aberdeen Court, Inc. v. Agustin,62 it has been held
that the rule on notifying a probationary employee
of the standards of regularization should not be
used to exculpate an employee who acts in a
manner contrary to basic knowledge and common
sense in regard to which there is no need to spell
out a policy or standard to be met. In the same
light, an employees failure to perform the duties
and responsibilities which have been clearly made
known to him constitutes a justifiable basis for a
probationary employees non-regularization.
In this case, petitioners contend that Alcaraz was
terminated because she failed to qualify as a
regular employee according to Abbotts standards
which were made known to her at the time of her
engagement. Contrarily, Alcaraz claims that Abbott
never apprised her of these standards and thus,
maintains that she is a regular and not a mere
probationary employee.
The Court finds petitioners assertions to be welltaken.

stated requirements. This conclusion is largely

impelled by the fact that Abbott clearly conveyed
to Alcaraz her duties and responsibilities as
Regulatory Affairs Manager prior to, during the
time of her engagement, and the incipient stages
of her employment. On this score, the Court finds
it apt to detail not only the incidents which point
out to the efforts made by Abbott but also those
circumstances which would show that Alcaraz was
well-apprised of her employers expectations that
would, in turn, determine her regularization:
(a) On June 27, 2004, Abbott caused the
publication in a major broadsheet
newspaper of its need for a Regulatory
Affairs Manager, indicating therein the job
description for as well as the duties and
responsibilities attendant to the aforesaid
position; this prompted Alcaraz to submit
her application to Abbott on October 4,
2004;
(b) In Abbotts December 7, 2004 offer sheet,
it was stated that Alcaraz was to be
employed on a probationary status;
(c) On February 12, 2005, Alcaraz signed an
employment contract which specifically
stated, inter alia, that she was to be
placed on probation for a period of six (6)
months beginning February 15, 2005 to
August 14, 2005;
(d) On the day Alcaraz accepted Abbotts
employment offer, Bernardo sent her
copies of Abbotts organizational structure
and her job description through e-mail;
(e) Alcaraz was made to undergo a preemployment orientation where Almazar
informed her that she had to implement
Abbotts Code of Conduct and office
policies on human resources and finance
and that she would be reporting directly to
Walsh;
(f) Alcaraz was also required to undergo a
training program as part of her orientation;
(g) Alcaraz received copies of Abbotts Code
of Conduct and Performance Modules
from Misa who explained to her the
procedure for evaluating the performance
of probationary employees; she was
further notified that Abbott had only one
evaluation system for all of its employees;
and
(h) Moreover, Alcaraz had previously worked
for another pharmaceutical company and
had admitted to have an "extensive
training and background" to acquire the
necessary skills for her job.63

A punctilious examination of the records reveals

that Abbott had indeed complied with the above-

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60

Considering the totality of the above-stated

circumstances, it cannot, therefore, be doubted
that Alcaraz was well-aware that her regularization
would depend on her ability and capacity to fulfill
the requirements of her position as Regulatory
Affairs Manager and that her failure to perform
such would give Abbott a valid cause to terminate
her probationary employment.
Verily, basic knowledge and common sense
dictate that the adequate performance of ones
duties is, by and of itself, an inherent and implied
standard for a probationary employee to be
regularized; such is a regularization standard
which need not be literally spelled out or mapped
into technical indicators in every case. In this
regard, it must be observed that the assessment
of adequate duty performance is in the nature of a
management prerogative which when reasonably
exercised as Abbott did in this case should be
respected. This is especially true of a managerial
employee like Alcaraz who was tasked with the
vital responsibility of handling the personnel and
important matters of her department.
In fine, the Court rules that Alcarazs status as a
probationary employee and her consequent
dismissal must stand. Consequently, in holding
that Alcaraz was illegally dismissed due to her
status as a regular and not a probationary
employee, the Court finds that the NLRC
committed a grave abuse of discretion.
To elucidate, records show that the NLRC based
its decision on the premise that Alcarazs receipt
of her job description and Abbotts Code of
Conduct and Performance Modules was not
equivalent to being actually informed of the
performance standards upon which she should
have been evaluated on.64 It, however, overlooked
the legal implication of the other attendant
circumstances as detailed herein which should
have warranted a contrary finding that Alcaraz
was indeed a probationary and not a regular
employee more particularly the fact that she was
well-aware of her duties and responsibilities and
that her failure to adequately perform the same
would lead to her non-regularization and
eventually, her termination.
Accordingly,
by
affirming
the
NLRCs
pronouncement which is tainted with grave abuse
of discretion, the CA committed a reversible error
which, perforce, necessitates the reversal of its
decision.
C. Probationary employment;
termination procedure.

Corporation Law

A different procedure is applied when terminating

a probationary employee; the usual two-notice
rule does not govern.65 Section 2, Rule I, Book VI
of the Implementing Rules of the Labor Code
states that "if the termination is brought about by
the x x x failure of an employee to meet the
standards of the employer in case of probationary
employment, it shall be sufficient that a written
notice is served the employee, within a
reasonable time from the effective date of
termination."
As the records show, Alcaraz's dismissal was
effected through a letter dated May 19, 2005
which she received on May 23, 2005 and again on
May 27, 2005. Stated therein were the reasons for
her termination, i.e., that after proper evaluation,
Abbott determined that she failed to meet the
reasonable standards for her regularization
considering her lack of time and people
management and decision-making skills, which
are necessary in the performance of her functions
as Regulatory Affairs Manager.66 Undeniably, this
written notice sufficiently meets the criteria set
forth above, thereby legitimizing the cause and
manner of Alcarazs dismissal as a probationary
employee under the parameters set by the Labor
Code.67
D. Employers violation of
company policy and
procedure.
Nonetheless, despite the existence of a sufficient
ground to terminate Alcarazs employment and
Abbotts compliance with the Labor Code
termination procedure, it is readily apparent that
Abbott breached its contractual obligation to
Alcaraz when it failed to abide by its own
procedure in evaluating the performance of a
probationary employee.
Veritably, a company policy partakes of the nature
of an implied contract between the employer and
employee. In Parts Depot, Inc. v. Beiswenger,68 it
has been held that:
Employer statements of policy . . . can give
rise to contractual rights in employees without
evidence that the parties mutually agreed that
the policy statements would create contractual
rights in the employee, and, hence, although
the statement of policy is signed by neither
party, can be unilaterally amended by the
employer without notice to the employee, and
contains no reference to a specific employee,
his job description or compensation, and

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61

although no reference was made to the policy

statement in pre-employment interviews and
the employee does not learn of its existence
until after his hiring. Toussaint, 292 N.W .2d at
892. The principle is akin to estoppel. Once
an employer establishes an express
personnel policy and the employee continues
to work while the policy remains in effect, the
policy is deemed an implied contract for so
long as it remains in effect. If the employer
unilaterally changes the policy, the terms of
the implied contract are also thereby changed.
(Emphasis and underscoring supplied.)

latters labor rights and duties would, to some

extent, depend.

Hence, given such nature, company personnel

policies create an obligation on the part of both
the employee and the employer to abide by the
same.

Case law has settled that an employer who

terminates an employee for a valid cause but
does so through invalid procedure is liable to pay
the latter nominal damages.

Records show that Abbotts PPSE procedure

mandates, inter alia, that the job performance of a
probationary employee should be formally
reviewed and discussed with the employee at
least twice: first on the third month and second on
the fifth month from the date of employment.
Abbott is also required to come up with a
Performance Improvement Plan during the third
month review to bridge the gap between the
employees performance and the standards set, if
any.69 In addition, a signed copy of the PPSE form
should be submitted to Abbotts HRD as the same
would serve as basis for recommending the
confirmation or termination of the probationary
employment.70

In Agabon v. NLRC (Agabon),71 the Court

pronounced that where the dismissal is for a just
cause, the lack of statutory due process should
not nullify the dismissal, or render it illegal, or
ineffectual. However, the employer should
indemnify the employee for the violation of his
statutory rights.72 Thus, in Agabon, the employer
was ordered to pay the employee nominal
damages in the amount of P30,000.00.73

In this case, it is apparent that Abbott failed to

follow the above-stated procedure in evaluating
Alcaraz. For one, there lies a hiatus of evidence
that a signed copy of Alcarazs PPSE form was
submitted to the HRD. It was not even shown that
a PPSE form was completed to formally assess
her performance. Neither was the performance
evaluation discussed with her during the third and
fifth months of her employment. Nor did Abbott
come up with the necessary Performance
Improvement Plan to properly gauge Alcarazs
performance with the set company standards.
While it is Abbotts management prerogative to
promulgate its own company rules and even
subsequently amend them, this right equally
demands that when it does create its own policies
and thereafter notify its employee of the same, it
accords upon itself the obligation to faithfully
implement them. Indeed, a contrary interpretation
would entail a disharmonious relationship in the
work place for the laborer should never be mired
by the uncertainty of flimsy rules in which the

Corporation Law

In this light, while there lies due cause to

terminate Alcarazs probationary employment for
her failure to meet the standards required for her
regularization, and while it must be further pointed
out that Abbott had satisfied its statutory duty to
serve a written notice of termination, the fact that
it violated its own company procedure renders the
termination of Alcarazs employment procedurally
infirm, warranting the payment of nominal
damages. A further exposition is apropos.

Proceeding from the same ratio, the Court

modified Agabon in the case of Jaka Food
Processing Corporation v. Pacot (Jaka)74 where it
created a distinction between procedurally
defective dismissals due to a just cause, on one
hand, and those due to an authorized cause, on
the other.
It was explained that if the dismissal is based on a
just cause under Article 282 of the Labor Code
(now Article 296) but the employer failed to
comply with the notice requirement, the sanction
to be imposed upon him should be tempered
because the dismissal process was, in effect,
initiated by an act imputable to the employee; if
the dismissal is based on an authorized cause
under Article 283 (now Article 297) but the
employer failed to comply with the notice
requirement, the sanction should be stiffer
because the dismissal process was initiated by
the employers exercise of his management
prerogative.75 Hence, in Jaka, where the
employee was dismissed for an authorized cause
of retrenchment76 as contradistinguished from
the employee in Agabon who was dismissed for a
just cause of neglect of duty77 the Court ordered
the employer to pay the employee nominal
damages at the higher amount of P50,000.00.

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62

Evidently, the sanctions imposed in both Agabon

and Jaka proceed from the necessity to deter
employers from future violations of the statutory
due process rights of employees.78 In similar
regard, the Court deems it proper to apply the
same principle to the case at bar for the reason
that an employers contractual breach of its own
company procedure albeit not statutory in
source has the parallel effect of violating the
laborers rights. Suffice it to state, the contract is
the law between the parties and thus, breaches of
the same impel recompense to vindicate a right
that has been violated. Consequently, while the
Court is wont to uphold the dismissal of Alcaraz
because a valid cause exists, the payment of
nominal damages on account of Abbotts
contractual breach is warranted in accordance
with Article 2221 of the Civil Code.79
Anent the proper amount of damages to be
awarded, the Court observes that Alcarazs
dismissal proceeded from her failure to comply
with the standards required for her regularization.
As such, it is undeniable that the dismissal
process was, in effect, initiated by an act
imputable to the employee, akin to dismissals due
to just causes under Article 296 of the Labor
Code. Therefore, the Court deems it appropriate
to fix the amount of nominal damages at the
amount of P30,000.00, consistent with its rulings
in both Agabon and Jaka.
E. Liability of individual
petitioners as corporate
officers.
It is hornbook principle that personal liability of
corporate directors, trustees or officers attaches
only when: (a) they assent to a patently unlawful
act of the corporation, or when they are guilty of
bad faith or gross negligence in directing its
affairs, or when there is a conflict of interest
resulting in damages to the corporation, its
stockholders or other persons; (b) they consent to
the issuance of watered down stocks or when,
having knowledge of such issuance, do not
forthwith file with the corporate secretary their
written objection; (c) they agree to hold
themselves personally and solidarily liable with
the corporation; or (d) they are made by specific
provision of law personally answerable for their
corporate action.80

the same vein, she further attributes the loss of

some of her remaining belongings to them.81
Alcarazs contention fails to persuade.
A judicious perusal of the records show that other
than her unfounded assertions on the matter,
there is no evidence to support the fact that the
individual petitioners herein, in their capacity as
Abbotts officers and employees, acted in bad faith
or were motivated by ill will in terminating
Alcarazs services. The fact that Alcaraz was
made to resign and not allowed to enter the
workplace does not necessarily indicate bad faith
on Abbotts part since a sufficient ground existed
for the latter to actually proceed with her
termination. On the alleged loss of her personal
belongings, records are bereft of any showing that
the same could be attributed to Abbott or any of its
officers. It is a well-settled rule that bad faith
cannot be presumed and he who alleges bad faith
has the onus of proving it. All told, since Alcaraz
failed to prove any malicious act on the part of
Abbott or any of its officers, the Court finds the
award of moral or exemplary damages
unwarranted.
WHEREFORE, the petition is GRANTED. The
Decision dated December 10, 2009 and
Resolution dated June 9, 2010 of the Court of
Appeals in CA-G.R. SP No. 101045 are hereby
REVERSED and SET ASIDE. Accordingly, the
Decision dated March 30, 2006 of the Labor
Arbiter is REINSTATED with the MODIFICATION
that petitioner Abbott Laboratories, Philippines be
ORDERED to pay respondent Pearlie Ann F.
Alcaraz nominal damages in the amount
of P30,000.00 on account of its breach of its own
company procedure.
SO ORDERED.

G.R. No. 185160

POLYMER RUBBER CORPORATION and

JOSEPH ANG, Petitioners, vs.
BAYOLO SALAMUDING, Respondent.

In this case, Alcaraz alleges that the individual

petitioners acted in bad faith with regard to the
supposed crude manner by which her
probationary employment was terminated and
thus, should be held liable together with Abbott. In

Corporation Law

July 24, 2013

Full Text Assign.#1

DECISION

63

REYES, J.:

time they were illegally dismissed up to

the time of reinstatement.

The instant petition1 assails the Decision2 dated

June 30, 2008 of the Court of Appeals (CA) in CAG.R. SP No. 98387 directing the recall of the alias
writ of execution and the lifting of the notice of
levy on the shares of stocks of petitioner Joseph
Ang (Ang). The Resolution3 dated November 5,
2008 denied the motion for reconsideration
thereof.

2. To pay individual complainants their 13th

month pay and for the year 1990 in the
following amount:

a. Mariano Gulanan .. P3,194

b. Rodolfo Raif . P3,439

The antecedent facts are as follows:

c. Bayolo Salamuding P3,284

Herein
respondent
Bayolo
Salamuding
(Salamuding), Mariano Gulanan and Rodolfo Raif
(referred to as the complainants) were employees
of petitioner Polymer Rubber Corporation
(Polymer), who were dismissed after allegedly
committing certain irregularities against Polymer.

3. To pay individual complainants overtime

in the amount of P1,335 each.
4. To pay individual complainants overtime
in the amount of P6,608.80 each.
5. To pay individual complainants moral and
exemplary damages in the amount
of P10,000 each.

On July 24, 1990, the three employees filed a

complaint against Polymer and Ang (petitioners)
for unfair labor practice, illegal dismissal, nonpayment of overtime services, violation of
Presidential Decree No. 851, with prayer for
reinstatement and payment of back wages,
attorneys fees, moral and exemplary damages.4
On November 21, 1990, the Labor Arbiter (LA)
rendered a decision, the dispositive portion of
which reads:

WHEREFORE, judgment is hereby rendered

dismissing the complainant unfair labor
practice (sic) but directing the respondent the
following:

1. Reinstate complainants to their former

position with full back wages from the

Corporation Law

6. To pay attorneys fee equivalent to ten

(10) percent of the total monetary award
of the complainants.

SO ORDERED.5

A writ of execution was subsequently issued on

April 18, 1991 to implement the aforesaid
judgment.6

The petitioners appealed to the National Labor

Relations Commission (NLRC).

On April 7, 1992, the NLRC affirmed the decision

of the LA with modifications. The NLRC deleted

Full Text Assign.#1

64

the award of moral and exemplary damages,

service incentive pay, and modified the
computation
of
13th
month
pay.7 The
corresponding Entry of Judgment was made on
September 25, 1992,8 and an alias writ of
execution was issued on October 29, 1992, based
on the NLRC decision.9

The case was subsequently elevated to the

Supreme Court (SC) on a petition for certiorari. In
a Resolution dated September 29, 1993, the
Court affirmed the disposition of the NLRC with
the further modification that the award of overtime
pay to the complainants was deleted.10

On September 30, 1993, Polymer ceased its

operations.11

Upon a motion dated November 11, 1994, the LA

a quo issued a writ of execution on November 16,
1994 based on the SC resolution. Since the writ of
execution was returned unsatisfied, another alias
writ of execution was issued on June 4, 1997.12

In the latter part of 2004, Polymer with all its

improvements in the premises was gutted by
fire.13

On December 2, 2004, the complainants filed a

Motion for Recomputation and Issuance of Fifth
(5th) Alias Writ of Execution. The Research and
Computation Unit of the NLRC came up with the
total amount of P2,962,737.65. Due to the failure
of the petitioners to comment/oppose the amount
despite notice, the LA approved said amount.14

Corporation Law

Thus, on April 26, 2005, the LA issued a 5th Alias

Writ of Execution15 prayed for commanding the
sheriff to collect the amount.
In the implementation of this alias writ of
execution dated April 26, 2005, the shares of
stocks of Ang at USA Resources Corporation
were levied.

On November 10, 2005, the petitioners moved to

quash the 5th alias writ of execution, and to lift the
notice of garnishment.16 They alleged that: a) Ang
should not be held jointly and severally liable with
Polymer since it was only the latter which was
held liable in the decision of the LA, NLRC and
the Supreme Court; b) the computation of the
monetary award in favor of the complainants in
the amount of P2,962,737.65 was misleading,
anomalous and highly erroneous; and c) the
decision sought to be enforced by mere motion is
already barred by the statute of limitations.17

In an Order18 dated December 16, 2005, the LA

granted the motion. The LA ordered the quashal
and recall of the writ of execution, as well as the
lifting of the notice of levy on Angs shares of
stocks.

The LA ruled that the Decision dated November

21, 1990 did not contain any pronouncement that
Ang was also liable. To hold Ang liable at this
stage when the decision had long become final
and executory will vary the tenor of the judgment,
or in excess of its terms. As to the extent of the
computation of the backwages, the same must
only cover the period during which the company
was in actual operation. Further, the LA found that
the complainants motion to execute the LAs
decision was already barred by the statute of
limitations. The fallo of the decision reads:

Full Text Assign.#1

65

WHEREFORE, premises all considered, an

order is hereby rendered quashing and
recalling the Writ of Execution and lifting the
Notice of Levy on the Shares of Stocks of
respondent Joseph Ang.19

On appeal, the NLRC affirmed the findings of the

LA in a Decision20 dated September 27, 2006. It,
however, made a pronouncement that the
complainants did not sleep on their rights as they
continued to file series of motions for the
execution of the monetary award and are, thus,
not barred by the statute of limitations. The appeal
on the aspect of the lifting of the notice of levy on
the shares of stocks of Ang was dismissed. The
dispositive portion of the decision reads as
follows:

WHEREFORE, the assailed Order dated

December 16, 2005 is hereby AFFIRMED with
MODIFICATION declaring the rights of the
complainants to execute the Decision dated
November 21, 1990 not having barred by the
statute of limitations. The appeal is hereby,
DISMISSED for lack of merit.21

On January 12, 2007, the NLRC denied the

motion for reconsideration of the foregoing
decision.22

Undeterred, Salamuding filed a Petition for

Certiorari23 before the CA.

director of Polymer was considered the highest

ranking officer of Polymer, he was therefore
properly impleaded and may be held jointly and
severally liable for the obligations of Polymer to its
dismissed employees. Thus, the dispositive
portion of the assailed decision reads as follows:

WHEREFORE, the petition is granted in part.

The Decision dated September 27, 2006 and
the Resolution dated January 12, 2007 of
respondent NLRC are hereby annulled and
set aside insofar as they direct the recall and
quashal of the Writ of Execution and lifting of
the Notice of Levy on the shares of stock of
respondent Joseph Ang. The Order dated
December 16, 2005 of the Honorable Labor
Arbiter Ramon Valentin C. Reyes is nullified.

Let the records of the case be remanded to

the Labor Arbiter for execution of the Decision
dated November 21, 1990 as modified by the
NLRC against the respondents Polymer
Rubber Corporation and Joseph Ang.27

Aggrieved by the CA decision, the petitioners filed

the instant petition raising the following questions
of law:

a. That upon the finality of the Decision, the

same can no longer be altered or
modified;
b. That the Officer of the Corporation cannot
be personally held liable and be made to
pay the liability of the corporation;

On June 30, 2008, the CA found merit with the

petition.24 The CA stated that there has to be a
responsible person or persons working in the
interest of Polymer who may also be considered
as the employer, invoking the cases of NYK Intl.
Knitwear Corp. Phils. v. NLRC25 and A.C. Ransom
Labor Union-CCLU v. NLRC.26 Since Ang as the

Corporation Law

c.

Full Text Assign.#1

That the losing party cannot be held liable

to pay the salaries and benefits of the
employees beyond the companies [sic]
existence;

66

d. That the separation pay of employees of

the company which has closed its
business permanently is only half month
salary for every year of service.28

There is merit in the petition.

"A corporation, as a juridical entity, may act only

through its directors, officers and employees.
Obligations incurred as a result of the directors
and officers acts as corporate agents, are not
their personal liability but the direct responsibility
of the corporation they represent. As a rule, they
are only solidarily liable with the corporation for
the illegal termination of services of employees if
they acted with malice or bad faith."29

To hold a director or officer personally liable for

corporate obligations, two requisites must concur:
(1) it must be alleged in the complaint that the
director or officer assented to patently unlawful
acts of the corporation or that the officer was guilty
of gross negligence or bad faith; and (2) there
must be proof that the officer acted in bad faith. 30

In the instant case, the CA imputed bad faith on

the part of the petitioners when Polymer ceased
its operations the day after the promulgation of the
SC resolution in 1993 which was allegedly meant
to evade liability. The CA found it necessary to
pierce the corporate fiction and pointed at Ang as
the responsible person to pay for Salamudings
money claims. Except for this assertion, there is
nothing in the records that show that Ang was
responsible for the acts complained of. At any
rate, we find that it will require a great stretch of
imagination to conclude that a corporation would
cease its operations if only to evade the payment
of the adjudged monetary awards in favor of three
(3) of its employees.

Corporation Law

The dispositive portion of the LA Decision dated

November 21, 1990 which Salamuding attempts
to enforce does not mention that Ang is jointly and
severally liable with Polymer. Ang is merely one of
the incorporators of Polymer and to single him out
and require him to personally answer for the
liabilities of Polymer is without basis. In the
absence of a finding that he acted with malice or
bad faith, it was error for the CA to hold him
responsible.

In Aliling v. Feliciano,31 the Court explained to wit:

The CA held the president of WWWEC, Jose B.
Feliciano, San Mateo and Lariosa jointly and
severally liable for the monetary awards of Aliling
on the ground that the officers are considered
"employers" acting in the interest of the
corporation. The CA cited NYK International
Knitwear Corporation Philippines (NYK) v.
National Labor Relations Commission in support
of its argument. Notably, NYK in turn cited A.C.
Ransom Labor Union-CCLU v. NLRC.

Such ruling has been reversed by the Court in

Alba v. Yupangco, where the Court ruled:

"By Order of September 5, 2007, the Labor

Arbiter denied respondents motion to quash
the 3rd alias writ. Brushing aside respondents
contention that his liability is merely joint, the
Labor Arbiter ruled:

Full Text Assign.#1

Such issue regarding the personal liability

of the officers of a corporation for the
payment of wages and money claims to
its employees, as in the instant case, has
long been resolved by the Supreme Court
in a long list of cases [A.C. Ransom Labor
Union-CLU vs. NLRC (142 SCRA 269)
and reiterated in the cases of Chua vs.
NLRC (182 SCRA 353), Gudez vs. NLRC

67

(183 SCRA 644)]. In the aforementioned

cases, the Supreme Court has expressly
held that the irresponsible officer of the
corporation (e.g., President) is liable for
the corporations obligations to its
workers. Thus, respondent Yupangco,
being the president of the respondent YL
Land and Ultra Motors Corp., is properly
jointly and severally liable with the
defendantcorporations for the labor claims
of Complainants Alba and De Guzman. x
xx
xxxx

(b) act in bad faith or with gross

negligence in directing the corporate
affairs;

xxxx

In labor cases, for instance, the Court has held

corporate directors and officers solidarily liable
with the corporation for the termination of
employment of employees done with malice or in
bad faith."32 (Citations omitted and underscoring
ours)

As reflected above, the Labor Arbiter held that

respondents liability is solidary.

There is solidary liability when the obligation

expressly so states, when the law so provides, or
when the nature of the obligation so requires.
MAM Realty Development Corporation v. NLRC,
on solidary liability of corporate officers in labor
disputes, enlightens:

x x x A corporation being a juridical entity, may

act only through its directors, officers and
employees. Obligations incurred by them,
acting as such corporate agents are not theirs
but the direct accountabilities of the
corporation they represent. True solidary
liabilities may at times be incurred but only
when exceptional circumstances warrant such
as, generally, in the following cases:
1. When directors and trustees or, in
appropriate cases, the officers of a
corporation:

(a) vote for or assent to patently unlawful

acts of the corporation;

Corporation Law

To hold Ang personally liable at this stage is quite

unfair. The judgment of the LA, as affirmed by the
NLRC and later by the SC had already long
become final and executory. It has been held that
a final and executory judgment can no longer be
altered. The judgment may no longer be modified
in any respect, even if the modification is meant to
correct what is perceived to be an erroneous
conclusion of fact or law, and regardless of
whether the modification is attempted to be made
by the court rendering it or by the highest Court of
the land.33 "Since the alias writ of execution did
not conform, is different from and thus went
beyond or varied the tenor of the judgment which
gave it life, it is a nullity. To maintain otherwise
would be to ignore the constitutional provision
against depriving a person of his property without
due process of law."34

Anent the computation of their liability for the

payment of separation pay in lieu of reinstatement
in favor of Salamuding, the Court agrees with the
ruling of the LA that it must be computed only up
to the time Polymer ceased operations in
September 1993. The computation must be based
on the number of days when Polymer was in
actual operation.35 It cannot be held liable to pay
separation pay beyond such closure of business
because even if the illegally dismissed employees

Full Text Assign.#1

68

would be reinstated, they could not possibly work

beyond the time of the cessation of its
operation.36 In the case of Chronicle Securities
Corp. v. NLRC,37 we ruled that even an employer
who is "found guilty of unfair labor practice in
dismissing his employee may not be ordered so to
pay backwages beyond the date of closure of
business where such closure was due to
legitimate business reasons and not merely an
attempt to defeat the order of reinstatement." 38
WHEREFORE, the petition is GRANTED. The
Decision dated June 30, 2008 and the Resolution
dated November 5, 2008 of the Court of Appeals
in CA-G.R. SP No. 98387 are SET ASIDE. The
Decision of the National Labor Relations
Commission dated September 27, 2006 is
REINSTATED. Let the records of the case be
remanded to the Labor Arbiter for proper
computation of the award in accordance with this
decision. SO ORDERED.

G.R. No. 186732

June 13, 2013

Respondent Elpidio Rodriguez (Rodriguez) was

previously employed as a bus conductor.4 He
entered into an employment contract with
Contract Tours Manpower5 (Contact Tours) and
was assigned to work with petitioner bus
company, ALPS Transportation.6

During the course of his employment, Rodriguez

was found to have committed irregularities on 26
April 2003,7 12 October 2003,8 and 26 January
2005.9 The latest irregularity report dated 26
January 2005 stated that he had collected bus
fares without issuing corresponding tickets to
passengers. The report was annotated with the
word "Terminate."10

Rodriguez alleged that he was dismissed from his

employment on 27 January 2005, or the day after
the issuance of the last irregularity report.
However, he did not receive any written notice of
termination.11 He went back to the bus company a
number of times, but it refused to readmit him.12

ALPS TRANSPORTATION and/or ALFREDO E.

PEREZ, Petitioners, vs. ELPIDIO M.
RODRIGUEZ, Respondent
On 11 August 2005, Rodriguez filed before the
labor arbiter a complaint for illegal dismissal,
nonpayment of 13th month pay, and damages
against ALPS Transportation and Alfredo Perez,
the proprietor of petitioner bus company.13

DECISION

SERENO, CJ.:

Before this Court is a Rule 45 Petition for

Review1 assailing the Decision2 and Resolution3 of
the Court of Appeals (CA) in CA-G.R. SP No.
100163.

In response to the complaint, petitioners stated

that they did not have any prerogative to dismiss
Rodriguez, as he was not their employee, but that
of Contact Tours.14 In fact, based on their
agreement with Contact Tours, it was supposedly
the latter that had the obligation to inform
respondent of the contents of the reports and to
decide on the appropriate sanctions.15 Petitioners
further explained that due to the issuance of the
three irregularity reports against Rodriguez, they

THE FACTS

Corporation Law

Full Text Assign.#1

69

wrote to Contact Tours and recommended the

termination of respondents assignment to them.16
During the pendency of the illegal dismissal case
before the labor arbiter, ALPS Transportation
charged Rodriguez with theft before the Office of
the
Provincial
Prosecutor
of
Tanauan,
17
Batangas. However, petitioners eventually filed
an Affidavit of Desistance and withdrew the
criminal charges against respondent.18

On 12 January 2006, the labor arbiter dismissed

the illegal dismissal complaint for lack of
merit.19 He explained that no evidence had been
adduced to support the contention of Rodriguez
that the latter had been terminated on 27 January
2005.20 Moreover,
during
the
mandatory
conference, the representative of Contact Tours
manifested that the company had not dismissed
Rodriguez, and that it was in fact willing to
reinstate him to his former position. 21 Thus, the
labor arbiter concluded that Rodriguez had not
been illegally dismissed, and was actually an
employee of Contact Tours, and not of ALPS
Transportation.22

Rodriguez appealed the dismissal to the National

Labor Relations Commission (NLRC). On 28
February 2007, the NLRC set aside the decision
of the labor arbiter and entered a new one, the
dispositive portion of which reads:

WHEREFORE, the assailed Decision dated

January 12, 2006 is hereby SET ASIDE and a
new one is being entered, directing the
respondents to reinstate the complainant to
his former position without loss of seniority
rights and privileges but without backwages.

SO ORDERED.23

Corporation Law

In so concluding, the NLRC ruled that Contact

Tours was a labor-only contractor.24 Thus,
Rodriguez should be considered as a regular
employee of ALPS Transportation.25

As regards the claim of illegal dismissal, the

NLRC found that Rodriguez failed to prove that
his services were illegally terminated by
petitioners, and that he was prevented from
returning to work.26 However, the bus company
likewise failed to prove that he had abandoned his
work.27 Thus, citing previous rulings of this Court,
the NLRC held that in case the parties fail to
prove either abandonment or termination, the
employer should order the employee to report
back for work, accept the latter, and reinstate the
employee to the latters former position. However,
an award for backwages is not warranted, as the
parties must bear the burden of their own loss.28
Dissatisfied with the ruling of the NLRC,
Rodriguez filed a Rule 65 Petition for Certiorari
with the CA.

After a review of the records, the CA concluded

that the NLRC acted with grave abuse of
discretion in rendering the assailed decision. The
appellate court ruled that, in termination cases, it
is the employer who bears the burden of proving
that
the
employee
was
not
illegally
dismissed.29 Here, the CA found that ALPS
Transportation failed to present convincing
evidence that Rodriguez had indeed collected bus
fares without issuing corresponding tickets to
passengers. The appellate court held that the
irregularity reports were mere allegations, the
truth of which had not been established by
evidence.30

Moreover, the CA gave no credence to ALPS

Transportations argument that Rodriguez had not
yet been terminated when he filed the illegal
dismissal complaint, as he had not yet received
any notice of termination.31The appellate court

Full Text Assign.#1

70

explained that, before the illegal dismissal

complaint was filed, more than six months had
lapsed since respondent was last given a bus
assignment by ALPS Transportation.32 Thus, the
CA concluded that the argument of the bus
company was only an excuse to cover up the
latters mistake in terminating him without due
process of law.33

The CA then ordered ALPS Transportation to

reinstate Rodriguez and to pay him full
backwages, viz:

WHEREFORE, the petition is GRANTED.

Alfredo Perez is declared guilty of having
committed illegal dismissal. Accordingly, only
the portions of the assailed dispositions
ordering the reinstatement of Elpidio
Rodriguez to his former position without loss
of seniority rights is AFFIRMED and the
phrase,
"but
without
backwages"
is
ANNULLED and SET ASIDE. In lieu thereof,
Alfredo Perez is ORDERED to pay Elpidio
Rodriguez backwages computed from the
time he was illegally dismissed until his actual
reinstatement. No costs.

1. Whether respondent Rodriguez was validly

dismissed; and
2. Assuming that respondent was illegally
dismissed, whether ALPS Transportation
and/or Alfredo E. Perez is liable for the
dismissal.

THE COURTS RULING

We uphold the assailed Decision and Resolution

and rule that respondent Rodriguez has been
illegally dismissed.

For a dismissal to be valid, the rule is that the

employer must comply with both substantive and
procedural
due
process
requirements.
Substantive due process requires that the
dismissal must be pursuant to either a just or an
authorized cause under Articles 282, 283 or 284
of the Labor Code.36 Procedural due process, on
the other hand, mandates that the employer must
observe the twin requirements of notice and
hearing before a dismissal can be effected.37

SO ORDERED.34

Aggrieved by the appellate courts decision,

petitioners filed the instant Rule 45 Petition before
this Court.

THE ISSUES

As culled from the records and the submissions of

the parties, the issues in this case are as follows:

Corporation Law

Thus, to determine the validity of Rodriguezs

dismissal, we first discuss whether his
employment was terminated for a just cause.

Petitioners argue that the dismissal of Rodriguez

was brought about by his act of collecting fare
from a passenger without issuing the
corresponding ticket.38 This was not the first
irregularity report issued against respondent, as
similar reports had been issued against him on 26
April 200339 and 12 October 2003.40 Thus, the
company had lost trust and confidence in him, as
he had committed serious misconduct by stealing

Full Text Assign.#1

71

company revenue.41Petitioners therefore submit

that the dismissal was valid under Article 282 of
the Labor Code.42

For his part, Rodriguez denies the contents of the

irregularity report.43 He states that the report
consists of a mere charge, but is bereft of the
necessary proof.44 Moreover, he submits that
while the bus company filed a criminal complaint
against him for the same act, the complaint was
dismissed pursuant to an Affidavit of Desistance,
in which the bus company stated that "the incident
arose out of a misunderstanding between
them."45 Finally, he contends that the companys
invocation of the 2003 irregularity reports to
support his dismissal effected in 2005 was a mere
afterthought.46 In any event, he maintains that
even those alleged infractions were not duly
supported by evidence.47

We find for respondent and rule that the employer

failed to prove that the dismissal was due to a just
cause.

The Labor Code provides that the burden of

proving that the termination of an employee was
for a just or authorized cause lies with the
employer.48 If the employer fails to meet this
burden, the conclusion would be that the
dismissal was unjustified and, therefore, illegal.49
Here, we agree with Rodriguezs position that the
26 January 2005 irregularity report, which served
as the basis of his dismissal, may only be
considered as an uncorroborated allegation if
unsupported by substantial evidence. On this
matter, we quote with favor the ruling of the
appellate court:

conductors job is to collect exact fares from the

passengers and remit his collections to the
company. Evidence
must,
therefore,
be
substantial and not based on mere surmises or
conjectures for to allow an employer to terminate
the employment of a worker based on mere
allegations places the latter in an uncertain
situation and at the sole mercy of the employer.
An accusation that is not substantiated will not
ripen into a holding that there is just cause for
dismissal. A mere accusation of wrongdoing or a
mere pronouncement of lack of confidence is not
sufficient cause for a valid dismissal of an
employee. Thus, the failure of the petitioners to
convincingly
show
that
the
respondent
misappropriated the bus fares renders the
dismissal to be without a valid cause. To add,
jurisprudence dictates that if doubt exists between
the evidence presented by the employer and the
employee, the scales of justice must be tilted in
favor of the latter.50 (Citations omitted)
Thus, we rule that petitioners have failed to prove
that the termination of Rodriguezs employment
was due to a just cause.

Turning to the issue of procedural due process,

both parties are in agreement that Rodriguez was
not given a written notice specifying the grounds
for his termination and giving him a reasonable
opportunity to explain his side; a hearing which
would have given him the opportunity to respond
to the charge and present evidence in his favor;
and a written notice of termination indicating that
after
considering
all
the
circumstances,
management has concluded that his dismissal is
warranted. Clearly, therefore, the inescapable
conclusion is that procedural due process is
wanting in the case at bar.

Having found that Rodriguez was illegally

dismissed, we now rule on petitioners liabilities
and respondents entitlements under the law.
The nature of work of a bus conductor involves
inherent or normal occupational risks of incurring
money shortages and uncollected fares. A

Corporation Law

Full Text Assign.#1

72

An illegally dismissed employee is entitled to the

twin remedies of reinstatement and payment of
full backwages. In Santos v. National Labor
Relations Commission,51 we explained:

The normal consequences of a finding that an

employee has been illegally dismissed are,
firstly, that the employee becomes entitled to
reinstatement to his former position without
loss of seniority rights and, secondly, the
payment of backwages corresponding to the
period from his illegal dismissal up to actual
reinstatement. The statutory intent on this
matter is clearly discernible. Reinstatement
restores the employee who was unjustly
dismissed to the position from which he was
removed, that is, to his status quo ante
dismissal, while the grant of backwages
allows the same employee to recover from the
employer that which he had lost by way of
wages as a result of his dismissal. These twin
remedies reinstatement and payment of
backwages make the dismissed employee
whole who can then look forward to continued
employment. Thus, do these two remedies
give meaning and substance to the
constitutional right of labor to security of
tenure. (Citations omitted)

Thus, the CA committed no reversible error in

upholding the NLRCs order to reinstate
Rodriguez and in directing the payment of his full
backwages, from the time he was illegally
dismissed until his actual reinstatement.

As to who should bear the burden of satisfying

respondents lawful claims, petitioners submit that
since Rodriguez was an employee of Contact
Tours, the latter is liable for the settlement of his
claims.

"The presumption is that a contractor is a laboronly contractor unless he overcomes the burden
of proving that it has substantial capital,
investment, tools, and the like." 52 While ALPS
Transportation is not the contractor itself, since it
is invoking Contact Tours status as a legitimate
job contractor in order to avoid liability, it bears the
burden of proving that Contact Tours is an
independent contractor.53

It is thus incumbent upon ALPS Transportation to

present sufficient proof that Contact Tours has
substantial capital, investment and tools in order
to successfully impute liability to the latter.
However, aside from making bare assertions and
offering the Kasunduan between Rodriguez and
Contact Tours in evidence,54 ALPS Transportation
has failed to present any proof to substantiate the
former's status as a legitimate job contractor.
Hence, the legal presumption that Contact Tours
is a labor-only contractor has not been overcome.
As a labor-only contractor, therefore, Contact
Tours is deemed to be an agent of ALPS
Transportation.55 Thus, the latter is responsible to
Contact Tours' employees in the same manner
and to the same extent as if they were directly
employed by the bus company.56

Finally, the CA correctly ruled that since ALPS

Transportation is a sole proprietorship owned by
petitioner Alfredo Perez, it is he who must be held
liable for the payment of backwages to
Rodriguez.57 A sole proprietorship does not
possess a juridical personality separate and
distinct from that of the owner of the
enterprise.58 Thus, the owner has unlimited
personal liability for all the debts and obligations
of the business, and it is against him that a
decision for illegal dismissal is to be enforced.59

We do not agree.

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WHEREFORE, the instant Rule 45 Petition for

Review is DENIED. The assailed Decision and
Resolution of the Court of Appeals in CA-G.R. SP
No. 100163 are hereby AFFIRMED.

SO ORDERED.

G.R. No. 194062

June 17, 2013

REPUBLIC GAS CORPORATION, ARNEL U. TY,

MARI ANTONETTE N. TY, ORLANDO REYES,
FERRER SUAZO and ALVIN U.
TV, Petitioners, vs. PETRON CORPORATION,
PILIPINAS SHELL PETROLEUM
CORPORATION, and SHELL INTERNATIONAL
PETROLEUM COMPANY LIMITED, respondents.

DECISION

PERALTA, J.:
This resolves the Petition for Review on Certiorari
under Rule 45 of the Rules of Court filed by
petitioners seeking the reversal of the
Decision1 dated
July
2,
2010,
and
2
Resolution dated October 11, 2010 of the Court
of Appeals (CA) in CA-G.R. SP No. 106385.

Stripped of non-essentials, the facts of the case,

as summarized by the CA, are as follows:

Corporation Law

Petitioners Petron Corporation ("Petron" for

brevity) and Pilipinas Shell Petroleum Corporation
("Shell" for brevity) are two of the largest bulk
suppliers and producers of LPG in the Philippines.
Petron is the registered owner in the Philippines of
the trademarks GASUL and GASUL cylinders
used for its LGP products. It is the sole entity in
the Philippines authorized to allow refillers and
distributors to refill, use, sell, and distribute
GASUL LPG containers, products and its
trademarks.

Pilipinas Shell, on the other hand, is the

authorized user in the Philippines of the
tradename, trademarks, symbols or designs of its
principal, Shell International Petroleum Company
Limited, including the marks SHELLANE and
SHELL device in connection with the production,
sale and distribution of SHELLANE LPGs. It is the
only corporation in the Philippines authorized to
allow refillers and distributors to refill, use, sell and
distribute SHELLANE LGP containers and
products. Private respondents, on the other hand,
are the directors and officers of Republic Gas
Corporation ("REGASCO" for brevity), an entity
duly licensed to engage in, conduct and carry on,
the business of refilling, buying, selling,
distributing and marketing at wholesale and retail
of Liquefied Petroleum Gas ("LPG").

LPG Dealers Associations, such as the Shellane

Dealers Association, Inc., Petron Gasul Dealers
Association,
Inc.
and
Totalgaz
Dealers
Association, received reports that certain entities
were engaged in the unauthorized refilling, sale
and distribution of LPG cylinders bearing the
registered tradenames and trademarks of the
petitioners. As a consequence, on February 5,
2004, Genesis Adarlo (hereinafter referred to as
Adarlo), on behalf of the aforementioned dealers
associations, filed a letter-complaint in the
National Bureau of Investigation ("NBI") regarding
the alleged illegal trading of petroleum products
and/or underdelivery or underfilling in the sale of
LPG products.

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74

Acting on the said letter-complaint, NBI Senior

Agent Marvin E. De Jemil (hereinafter referred to
as "De Jemil") was assigned to verify and confirm
the allegations contained in the letter-complaint.
An investigation was thereafter conducted,
particularly within the areas of Caloocan,
Malabon, Novaliches and Valenzuela, which
showed
that
several
persons
and/or
establishments, including REGASCO, were
suspected of having violated provisions of Batas
Pambansa Blg. 33 (B.P. 33). The surveillance
revealed that REGASCO LPG Refilling Plant in
Malabon was engaged in the refilling and sale of
LPG cylinders bearing the registered marks of the
petitioners without authority from the latter. Based
on its General Information Sheet filed in the
Securities
and
Exchange
Commission,
REGASCOs members of its Board of Directors
are: (1) Arnel U. Ty President, (2) Marie
Antoinette Ty Treasurer, (3) Orlando Reyes
Corporate Secretary, (4) Ferrer Suazo and (5)
Alvin Ty (hereinafter referred to collectively as
private respondents).

De Jemil, with other NBI operatives, then

conducted a test-buy operation on February 19,
2004 with the former and a confidential asset
going undercover. They brought with them four (4)
empty LPG cylinders bearing the trademarks of
SHELLANE and GASUL and included the same
with the purchase of J&S, a REGASCOs regular
customer. Inside REGASCOs refilling plant, they
witnessed that REGASCOs employees carried
the empty LPG cylinders to a refilling station and
refilled the LPG empty cylinders. Money was then
given as payment for the refilling of the J&Ss
empty cylinders which included the four LPG
cylinders brought in by De Jemil and his
companion. Cash Invoice No. 191391 dated
February 19, 2004 was issued as evidence for the
consideration paid.

After leaving the premises of REGASCO LPG

Refilling Plant in Malabon, De Jemil and the other
NBI operatives proceeded to the NBI
headquarters for the proper marking of the LPG
cylinders. The LPG cylinders refilled by

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REGASCO were likewise found later to be

underrefilled.

Thus, on March 5, 2004, De Jemil applied for the

issuance of search warrants in the Regional Trial
Court, Branch 24, in the City of Manila against the
private respondents and/or occupants of
REGASCO LPG Refilling Plant located at
Asucena Street, Longos, Malabon, Metro Manila
for alleged violation of Section 2 (c), in relation to
Section 4, of B.P. 33, as amended by PD 1865. In
his sworn affidavit attached to the applications for
search warrants, Agent De Jemil alleged as
follows:

"x x x.

"4. Respondents REGASCO LPG Refilling

Plant-Malabon is not one of those entities
authorized to refill LPG cylinders bearing the
marks of PSPC, Petron and Total Philippines
Corporation. A Certification dated February 6,
2004 confirming such fact, together with its
supporting documents, are attached as Annex
"E" hereof.

6. For several days in the month of February

2004, the other NBI operatives and I
conducted surveillance and investigation on
respondents REGASCO LPG refilling PlantMalabon. Our surveillance and investigation
revealed that respondents REGASCO LPG
Refilling Plant-Malabon is engaged in the
refilling and sale of LPG cylinders bearing the
marks of Shell International, PSPC and
Petron.

x x x.

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8. The confidential asset and I, together with

the other operatives of the NBI, put together a
test-buy operation. On February 19, 2004, I,
together with the confidential asset, went
undercover and executed our testbuy
operation. Both the confidential assets and I
brought with us four (4) empty LPG cylinders
branded as Shellane and Gasul. x x x in order
to have a successful test buy, we decided to
"ride-on" our purchases with the purchase of
Gasul and Shellane LPG by J & S, one of
REGASCOs regular customers.

9. We proceeded to the location of

respondents REGASCO LPG Refilling PlantMalabon and asked from an employee of
REGASCO inside the refilling plant for refill of
the empty LPG cylinders that we have brought
along, together with the LPG cylinders
brought by J & S. The REGASCO employee,
with some assistance from other employees,
carried the empty LPG cylinders to a refilling
station and we witnessed the actual refilling of
our empty LPG cylinders.

10. Since the REGASCO employees were

under the impression that we were together
with J & S, they made the necessary refilling
of our empty LPG cylinders alongside the
LPG cylinders brought by J & S. When we
requested for a receipt, the REGASCO
employees naturally counted our LPG
cylinders together with the LPG cylinders
brought by J & S for refilling. Hence, the
amount stated in Cash Invoice No. 191391
dated February 19, 2004, equivalent to
Sixteen Thousand Two Hundred Eighty-Six
and 40/100 (Php16,286.40), necessarily
included the amount for the refilling of our four
(4) empty LPG cylinders. x x x.

the said LPG cylinders. Immediately, we

proceeded to our headquarters and made the
proper markings of the illegally refilled LPG
cylinders purchased from respondents
REGASCO LPG Refilling Plant-Malabon by
indicating therein where and when they were
purchased. Since REGASCO is not an
authorized refiller, the four (4) LPG cylinders
illegally refilled by respondents REGASCO
LPG Refilling Plant-Malabon, were without
any seals, and when weighed, were
underrefilled. Photographs of the LPG
cylinders illegally refilled from respondents
REGASCO LPG Refilling Plant-Malabon are
attached as Annex "G" hereof. x x x."

After conducting a personal examination under

oath of Agent De Jemil and his witness, Joel Cruz,
and upon reviewing their sworn affidavits and
other attached documents, Judge Antonio M.
Eugenio, Presiding Judge of the RTC, Branch 24,
in the City of Manila found probable cause and
correspondingly issued Search Warrants Nos. 045049 and 04-5050.

Upon the issuance of the said search warrants,

Special Investigator Edgardo C. Kawada and
other NBI operatives immediately proceeded to
the REGASCO LPG Refilling Station in Malabon
and served the search warrants on the private
respondents. After searching the premises of
REGASCO, they were able to seize several empty
and filled Shellane and Gasul cylinders as well as
other allied paraphernalia.

Subsequently, on January 28, 2005, the NBI

lodged a complaint in the Department of Justice
against the private respondents for alleged
violations of Sections 155 and 168 of Republic Act
(RA) No. 8293, otherwise known as the
Intellectual Property Code of the Philippines.

11. After we accomplished the purchase of the

illegally
refilled
LPG
cylinders
from
respondents REGASCO LPG Refilling PlantMalabon, we left its premises bringing with us

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On January 15, 2006, Assistant City Prosecutor

Armando C. Velasco recommended the dismissal
of the complaint. The prosecutor found that there
was no proof introduced by the petitioners that
would show that private respondent REGASCO
was engaged in selling petitioners products or
that it imitated and reproduced the registered
trademarks of the petitioners. He further held that
he saw no deception on the part of REGASCO in
the conduct of its business of refilling and
marketing LPG. The Resolution issued by
Assistant City Prosecutor Velasco reads as
follows in its dispositive portion:

"WHEREFORE, foregoing considered, the

undersigned finds the evidence against the
respondents to be insufficient to form a wellfounded belief that they have probably
committed violations of Republic Act No.
9293. The DISMISSAL of this case is hereby
respectfully recommended for insufficiency of
evidence."

On appeal, the Secretary of the Department of

Justice affirmed the prosecutors dismissal of the
complaint in a Resolution dated September 18,
2008, reasoning therein that:

"In some instances, the empty cylinders were

merely swapped by customers for those which
are already filled. In this case, the end-users
know fully well that the contents of their
cylinders are not those produced by
complainants. And the reason is quite simple
it is an independent refilling station.

"At any rate, it is settled doctrine that a

corporation has a personality separate and
distinct from its stockholders as in the case of
herein respondents. To sustain the present
allegations, the acts complained of must be
shown to have been committed by
respondents in their individual capacity by
clear and convincing evidence. There being
none, the complaint must necessarily fail. As it
were, some of the respondents are even
gainfully employed in other business pursuits.
x x x."3

Dispensing with the filing of a motion for

reconsideration, respondents sought recourse to
the CA through a petition for certiorari.

In a Decision dated July 2, 2010, the CA granted

respondents certiorari petition. The fallo states:
"x x x, the empty Shellane and Gasul LPG
cylinders were brought by the NBI agent
specifically for refilling. Refilling the same
empty cylinders is by no means an offense in
itself it being the legitimate business of
Regasco to engage in the refilling and
marketing of liquefied petroleum gas. In other
words, the empty cylinders were merely filled
by the employees of Regasco because they
were brought precisely for that purpose. They
did not pass off the goods as those of
complainants as no other act was done other
than to refill them in the normal course of its
business.

Corporation Law

WHEREFORE, in view of the foregoing

premises, the petition filed in this case is
hereby GRANTED. The assailed Resolution
dated September 18, 2008 of the Department
of Justice in I.S. No. 2005-055 is hereby
REVERSED and SET ASIDE.

SO ORDERED.4

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77

Petitioners then filed a motion for reconsideration.

However, the same was denied by the CA in a
Resolution dated October 11, 2010.

Accordingly, petitioners filed the instant Petition for

Review on Certiorari raising the following issues
for our resolution:

Whether the Petition for Certiorari filed by

RESPONDENTS should have been denied
outright.

Whether sufficient evidence was presented to

prove that the crimes of Trademark Infringement
and Unfair Competition as defined and penalized
in Section 155 and Section 168 in relation to
Section 170 of Republic Act No. 8293 (The
Intellectual Property Code of the Philippines) had
been committed.

Whether probable cause exists to hold

INDIVIDUAL PETITIONERS liable for the offense
charged.5

However, this rule is not absolute as jurisprudence

has laid down several recognized exceptions
permitting a resort to the special civil action for
certiorari without first filing a motion for
reconsideration, viz.:

(a) Where the order is a patent nullity, as

where the court a quo has no jurisdiction;
(b) Where the questions raised in the
certiorari proceedings have been duly
raised and passed upon by the lower
court, or are the same as those raised
and passed upon in the lower court.
(c) Where there is an urgent necessity for the
resolution of the question and any further
delay would prejudice the interests of the
Government or of the petitioner or the
subject matter of the petition is
perishable;
(d) Where, under the circumstances, a
motion for reconsideration would be
useless;
(e) Where petitioner was deprived of due
process and there is extreme urgency for
relief;
(f) Where, in a criminal case, relief from an
order of arrest is urgent and the granting
of such relief by the trial court is
improbable;

Let us discuss the issues in seriatim.

Anent the first issue, the general rule is that a
motion for reconsideration is a condition sine qua
non before a certiorari petition may lie, its purpose
being to grant an opportunity for the court a quo to
correct any error attributed to it by re-examination
of the legal and factual circumstances of the
case.6

(g) Where the proceedings in the lower court

are a nullity for lack of due process;
(h) Where the proceeding was ex parte or in
which the petitioner had no opportunity to
object; and,
(i) Where the issue raised is one purely of
law or public interest is involved.7

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In the present case, the filing of a motion for

reconsideration may already be dispensed with
considering that the questions raised in this
petition are the same as those that have already
been squarely argued and passed upon by the
Secretary of Justice in her assailed resolution.

packages, wrappers, receptacles or

advertisements intended to be used in
commerce upon or in connection with the
sale, offering for sale, distribution, or
advertising of goods or services on or in
connection with which such use is likely to
cause confusion, or to cause mistake, or
to deceive, shall be liable in a civil action
for infringement by the registrant for the
remedies hereinafter set forth: Provided,
That the infringement takes place at the
moment any of the acts stated in
Subsection 155.1 or this subsection are
committed regardless of whether there is
actual sale of goods or services using the
infringing material.8

Apropos the second and third issues, the same

may be simplified to one core issue: whether
probable cause exists to hold petitioners liable for
the crimes of trademark infringement and unfair
competition as defined and penalized under
Sections 155 and 168, in relation to Section 170
of Republic Act (R.A.) No. 8293.

Section 155 of R.A. No. 8293 identifies the acts

constituting trademark infringement as follows:

Section 155. Remedies; Infringement. Any

person who shall, without the consent of the
owner of the registered mark:

155.1 Use in commerce any reproduction,

counterfeit, copy or colorable imitation of
a registered mark of the same container
or a dominant feature thereof in
connection with the sale, offering for sale,
distribution, advertising of any goods or
services including other preparatory steps
necessary to carry out the sale of any
goods or services on or in connection with
which such use is likely to cause
confusion, or to cause mistake, or to
deceive; or

155.2 Reproduce, counterfeit, copy or

colorably imitate a registered mark or a
dominant feature thereof and apply such
reproduction,
counterfeit,
copy
or
colorable imitation to labels, signs, prints,

Corporation Law

From the foregoing provision, the Court in a very

similar case, made it categorically clear that the
mere unauthorized use of a container bearing a
registered trademark in connection with the sale,
distribution or advertising of goods or services
which is likely to cause confusion, mistake or
deception among the buyers or consumers can be
considered as trademark infringement.9

Here, petitioners have actually committed

trademark infringement when they refilled, without
the respondents consent, the LPG containers
bearing the registered marks of the respondents.
As noted by respondents, petitioners acts will
inevitably confuse the consuming public, since
they have no way of knowing that the gas
contained in the LPG tanks bearing respondents
marks is in reality not the latters LPG product
after the same had been illegally refilled. The
public will then be led to believe that petitioners
are authorized refillers and distributors of
respondents LPG products, considering that they
are accepting empty containers of respondents
and refilling them for resale.

As to the charge of unfair competition, Section

168.3, in relation to Section 170, of R.A. No. 8293

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describes the acts constituting unfair competition

as follows:

in Section 155, Section 168 and Subsection

169.1.

Section 168. Unfair Competition, Rights,

Regulations and Remedies. x x x.

From jurisprudence, unfair competition has been

defined as the passing off (or palming off) or
attempting to pass off upon the public of the
goods or business of one person as the goods or
business of another with the end and probable
effect of deceiving the public.10

168.3 In particular, and without in any way

limiting the scope of protection against
unfair competition, the following shall be
deemed guilty of unfair competition:

(a) Any person, who is selling his goods

and gives them the general appearance
of goods of another manufacturer or
dealer, either as to the goods themselves
or in the wrapping of the packages in
which they are contained, or the devices
or words thereon, or in any other feature
of their appearance, which would be likely
to influence purchasers to believe that the
goods offered are those of a manufacturer
or dealer, other than the actual
manufacturer or dealer, or who otherwise
clothes the goods with such appearance
as shall deceive the public and defraud
another of his legitimate trade, or any
subsequent vendor of such goods or any
agent of any vendor engaged in selling
such goods with a like purpose;

xxxx

Section 170. Penalties. Independent of the

civil and administrative sanctions imposed by
law, a criminal penalty of imprisonment from
two (2) years to five (5) years and a fine
ranging from Fifty thousand pesos (P50,000)
to Two hundred thousand pesos (P200,000),
shall be imposed on any person who is found
guilty of committing any of the acts mentioned

Corporation Law

Passing off (or palming off) takes place where the

defendant, by imitative devices on the general
appearance of the goods, misleads prospective
purchasers into buying his merchandise under the
impression that they are buying that of his
competitors. Thus, the defendant gives his goods
the general appearance of the goods of his
competitor with the intention of deceiving the
public that the goods are those of his competitor.11
In the present case, respondents pertinently
observed that by refilling and selling LPG
cylinders bearing their registered marks,
petitioners are selling goods by giving them the
general appearance of goods of another
manufacturer.

What's more, the CA correctly pointed out that

there is a showing that the consumers may be
misled into believing that the LPGs contained in
the cylinders bearing the marks "GASUL" and
"SHELLANE" are those goods or products of the
petitioners when, in fact, they are not. Obviously,
the mere use of those LPG cylinders bearing the
trademarks "GASUL" and "SHELLANE" will give
the LPGs sold by REGASCO the general
appearance of the products of the petitioners.

In sum, this Court finds that there is sufficient

evidence to warrant the prosecution of petitioners
for trademark infringement and unfair competition,
considering that petitioner Republic Gas

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Corporation, being a corporation, possesses a

personality separate and distinct from the person
of its officers, directors and stockholders.
Petitioners, being corporate officers and/or
directors, through whose act, default or omission
the corporation commits a crime, may themselves
be individually held answerable for the
crime.13 Veritably, the CA appropriately pointed out
that petitioners, being in direct control and
supervision in the management and conduct of
the affairs of the corporation, must have known or
are aware that the corporation is engaged in the
act of refilling LPG cylinders bearing the marks of
the respondents without authority or consent from
the latter which, under the circumstances, could
probably constitute the crimes of trademark
infringement and unfair competition. The
existence of the corporate entity does not shield
from prosecution the corporate agent who
knowingly
and
intentionally
caused
the
corporation to commit a crime. Thus, petitioners

Corporation Law

cannot hide behind the cloak of the separate

corporate personality of the corporation to escape
criminal liability. A corporate officer cannot protect
himself behind a corporation where he is the
actual, present and efficient actor.

WHEREFORE, premises considered, the petition

is hereby DENIED and the Decision dated July 2,
2010 and Resolution dated October 11, 2010 of
the Court of Appeals in CA-G.R. SP No. 106385
are AFFIRMED.

SO ORDERED.

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