Republic of the Philippines 35.
Arbitration
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 174938 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.:
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 tothe 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
Shangri-La had been consistent in paying BF Corporation in accordance with its progress billing
statements.3However, by October 1991, Shangri-La 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-La’s 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 a matter of
delayed processing of BF Corporation’s progress billing statements.6
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-La’s directors were in bad faith in directing Shangri-La’s 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-La’s 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 Corporation’s failure to submit its dispute to arbitration, in
accordance with the arbitration clauseprovided in its contract, quoted in the motion as follows:11
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(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 inconnection
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
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 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)
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 Corporation’s complaint, with compulsory counter claim
against BF Corporation and crossclaim against Shangri-La.15 They alleged that they had resigned as members of
Shangri-La’s 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
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.19On March 27, 1998, this court affirmed the Court of Appeals’ decision, directing that the dispute be submitted
for arbitration.20
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
Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification, both seeking to clarify the
term, "parties," and whether Shangri-La’s directors should be included in the arbitration proceedings and served with
separate demands for arbitration.23
Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that they be excluded from
the arbitration proceedings for being non-parties to Shangri-La’s and BF Corporation’s agreement.24
On July 28, 2003, the trial court issued the order directing service of demands for arbitration upon all defendants in
BF Corporation’s complaint.25 According to the trial court, Shangri-La’s 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 for reconsideration ofthis order
was denied by the trial court on January 19, 2005.27
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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 ShangriLa’s directors were necessary parties in the arbitration proceedings. 30 According to the Court of
Appeals:
[They were] deemed not third-parties tothe 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 bysuch 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
The dispositive portion of the Court of Appeals’ decision reads:
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 Corporation’s allegation that they are solidarily liable with Shangri-
La.37Neither did they bind themselves personally nor did they undertake to shoulder Shangri-La’s obligations should
it fail in its obligations.38 BF Corporation also failed to establish fraud or bad faith on their part.39
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 thatour 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 werefiled 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-La’sdirectors,
being non-parties to the contract, should not be made personally liable for Shangri-La’s acts.46 Since the contract
was executed only by BF Corporation and Shangri-La, only they should be affected by the contract’s stipulation.47 BF
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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.50Section 31 makes directors solidarily liable for fraud, gross negligence, and bad faith.51 Petitioners are not
really third parties to the agreement because they are being sued as Shangri-La’s representatives, under Section 31
of the Corporation Code.52
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 Corporation’s claims against
them.56Petitioners 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 Tribunal’s
decision] should be without prejudice to the resolution of [this] case." 59
Upon the court’s 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-La’s 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 participated in. 61 Moreover, BF Corporation
assailed only the correctness of the Arbitral Tribunal’s award and not the part absolving Shangri-La’s directors from
liability.62
BF Corporation filed a counter-manifestation with motion to dismiss63 in lieu of the required memorandum.
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 orpersonality 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 court’s decision in this case will no
longer have any effect on the issue of petitioners’ inclusion in the arbitration proceedings. 65
The petition must fail.
The Arbitral Tribunal’s 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:
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While under the circumstances a ruling on the merits of the petition for certiorari is notwarranted, 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
This principle was repeated in subsequent cases when this court deemed it proper to clarify important matters for
guidance.68
Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings in accordance with Shangri-
Laand BF Corporation’s agreement, in order to determine if the distinction between Shangri-La’s personality and
their personalities should be disregarded.
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 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
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 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
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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.
....
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 whomare 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 ofavoiding 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-à-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-Laat 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
corporation’s powers, thus:
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 ofincorporation;
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 non-stock
corporation;
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 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, 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;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees; and
11. To exercise such other powers asmay be essential or necessary to carry out its purpose or purposes
as stated in its articles of incorporation. (13a)
Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers through
itsdirectors, officers, or agents, who are all natural persons. A corporation cannot sue or enter into contracts without
them.
A consequence of a corporation’s 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 corporation’s 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.
Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving their disputes. This court
recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty Corporation79 that an arbitration clause shall not apply to
persons who were neither parties to the contract nor assignees of previous parties, thus:
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)
Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court ruled:
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 corporation’s 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.
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.
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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 treatedas 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:
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 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:
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
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 towarrant the courts or tribunals to disregard the distinction between the corporation and the persons
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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 sameas 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 corporation’s 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.
a specific act, in order to extend the terms of the contract and the liabilities for all damages to erring corporate
officials who participated in the corporation’s 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 ifsuch distinction should indeed be disregarded and, if so, to determine the extent of their liabilities.

Hence, when the directors, as in this case, are impleaded in a case against a corporation, alleging malice orbad 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 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 veilbe 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.1âwphi1 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 ofthe others. Thus,
in Rule 2:
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-La’s
other directors were not liable for the contractual obligations of Shangri-La to BF Corporation. The Arbitral Tribunal’s
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.

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 recognizedthat 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 assignor’s rights and
obligations are transferred to them upon assignment. In other words, the assignor’s rights and obligations become
their own rights and obligations. In the same way, the corporation’s obligations are treated as the representative’s
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
delay."91 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 thatcase, it did not prohibit courts from allowing the case to proceed to arbitration, when circumstances
warrant.

Hence, the issue of whether the corporation’s acts in violation of complainant’s 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 corporation’s 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

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G.R. No. 184666, June 27, 2016
REPUBLIC OF THE PHILIPPINES, Petitioner, v. MEGA PACIFIC ESOLUTIONS, INC., WILLY U. YU, BONNIE S.
YU, ENRIQUE T. TANSIPEK, ROSITA Y. TANSIPEK, PEDRO O. TAN, JOHNSON W. FONG, BERNARD I. FONG,
AND *LAURIANO A. BARRIOS, Respondents.
DECISION
SERENO, C.J.:
The instant case is an offshoot of this Court's Decision dated 13 January 2004 (2004 Decision) in a related case
entitled Information Technology Foundation of the Philippines v. Commission on Elections.1chanrobleslaw
In the 2004 case, We declared void the automation contract executed by respondent Mega Pacific eSolutions, Inc.
(MPEI) and the Commission on Elections (COMELEC) for the supply of automated counting machines (ACMs) for
the 2004 national elections.
The present case involves the attempt of petitioner Republic of the Philippines to cause the attachment of the
properties owned by respondent MPEI, as well as by its incorporators and stockholders (individual respondents in
this case), in order to secure petitioner's interest and to ensure recovery of the payments it made to respondents for
the invalidated automation contract.
At bench is a Rule 45 Petition assailing the Amended Decision dated 22 September 2008 (Amended Decision)
issued by the Court of Appeals (CA) in CA-G.R. SP No. 95988.2 In said Amended Decision, the CA directed the
remand of the case to the Regional Trial Court of Makati City, Branch 59 (RTC Makati) for the reception of evidence
in relation to petitioner's application for the issuance of a writ of preliminary attachment. The CA had reconsidered
and set aside its previous Decision dated 31 January 2008 (First Decision)3 entitling petitioner to the issuance of
said writ.
Summarized below are the relevant facts of the case, some of which have already been discussed in this Court's
2004 Decision:
chanRoblesvirtualLawlibrary
The Facts
Republic Act No. 8436 authorized the COMELEC to use an automated election system for the May 1998 elections.
However, the automated system failed to materialize and votes were canvassed manually during the 1998 and the
2001 elections.
For the 2004 elections, the COMELEC again attempted to implement the automated election system. For this
purpose, it invited bidders to apply for the procurement of supplies, equipment, and services. Respondent MPEI, as
lead company, purportedly formed a joint venture - known as the Mega Pacific Consortium (MPC) - together with We
Solv, SK C & C, ePLDT, Election.com and Oracle. Subsequently, MPEI, on behalf of MPC, submitted its bid proposal
to COMELEC.
The COMELEC evaluated various bid offers and subsequently found MPC and another company eligible to
participate in the next phase of the bidding process.4 The two companies were referred to the Department of
Science and Technology (DOST) for technical evaluation. After due assessment, the Bids and Awards Committee
(BAC) recommended that the project be awarded to MPC. The COMELEC favorably acted on the recommendation
and issued Resolution No. 6074, which awarded the automation project to MPC.
Despite the award to MPC, the COMELEC and MPEI executed on 2 June 2003 the Automated Counting and
Canvassing Project Contract (automation contract)5 for the aggregate amount of P1,248,949,088. MPEI agreed to
supply and deliver 1,991 units of ACMs and such other equipment and materials necessary for the computerized
electoral system in the 2004 elections. Pursuant to the automation contract, MPEI delivered 1,991 ACMs to the
COMELEC. The latter, for its part, made partial payments to MPEI in the aggregate amount of P1.05 billion.
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The full implementation of the automation contract was rendered impossible by the fact that, after a painstaking legal
battle, this Court in its 2004 Decision declared the contract null and void.6 We held that the COMELEC committed a
clear violation of law and jurisprudence, as well as a reckless disregard of its own bidding rules and procedure. In
addition, the COMELEC entered into the contract with inexplicable haste, and without adequately checking and
observing mandatory financial, technical, and legal requirements. In a subsequent Resolution, We summarized the
COMELEC's grave abuse of discretion as having consisted of the following:7
By a formal Resolution, it awarded the project to "Mega Pacific Consortium," an entity that had not participated in the
bidding. Despite this grant, Comelec entered into the actual Contract with "Mega Pacific eSolutions, Inc." (MPEI), a
company that joined the bidding process but did not meet the eligibility requirements.
Comelec accepted and irregularly paid for MPEI's ACMs that had failed the accuracy requirement of 99.9995 percent
set up by the Comelec bidding rules. Acknowledging that this rating could have been too steep, the Court
nonetheless noted that "the essence of public bidding is violated by the practice of requiring very high standards or
unrealistic specifications that cannot be met, x x x only to water them down after the award is made. Such scheme,
which discourages the entry of bona fide bidders, is in fact a sure indication of fraud in the bidding, designed to
eliminate fair competition."
The software program of the counting machines likewise failed to detect previously downloaded precinct results and
to prevent them from being reentered. This failure, which has not been corrected x x x, would have allowed
unscrupulous persons to repeatedly feed into the computers the results favorable to a particular candidate, an act
that would have translated into massive election fraud by just a few key strokes.
Neither were the ACMs able to print audit trails without loss of data - a mandatory requirement under Section 7 of
Republic Act No. 8436. Audit trails would enable the Comelec to document the identities of the ACM operators
responsible for data entry and downloading, as well as the times when the various data were processed, in order to
forestall fraud and to identify the perpetrators. The absence of audit trails would have posed a serious threat to free
and credible elections.
Comelec failed to explain satisfactorily why it had ignored its own bidding rules and requirements. It admitted that the
software program used to test the ACMs was merely a "demo" version, and that the final one to be actually used in
the elections was still being developed. By awarding the Contract and irregularly paying for the supply of the ACMs
without having seen — much less, evaluated — the final product being purchased, Comelec desecrated the law on
public bidding. It would have allowed the winner to alter its bid substantially, without any public bidding.
All in all, Comelec subverted the essence of public bidding: to give the public an opportunity for fair competition and
a clear basis for a precise comparison of bids.8 (Emphasis supplied)
As a consequence of the nullification of the automation contract, We directed the Office of the Ombudsman to
determine the possible criminal liability of persons responsible for the contract.9 This Court likewise directed the
Office of the Solicitor General to protect the government from the ill effects of the illegal disbursement of public funds
in relation to the automation contract.10chanrobleslaw
After the declaration of nullity of the automation contract, the following incidents
transpired:ChanRoblesVirtualawlibrary
Private respondents in the 2004 case moved for reconsideration of the 2004 Decision, but the motion was denied by
this Court in a Resolution dated 17 February 2004 (2004 Resolution).11chanrobleslaw
The COMELEC filed a "Most Respectful Motion for Leave to Use the Automated Counting Machines in the Custody
of the Commission on Elections for use in the 8 August 2005 Elections in the Autonomous Region for Muslim
Mindanao" dated 9 December 2004 (Motion for Leave to Use ACMs), which was denied by this Court in its
Resolution dated 15 June 2005 (2005 Resolution).
Atty. Romulo B. Macalintal (Macalintal) filed an "Omnibus Motion for Leave of Court (1) to Reopen the Case; and (2)
to Intervene and Admit the Attached Petition in Intervention," which was denied by this Court in its Resolution dated
22 August 2006 (2006 Resolution); and cralawlawlibrary
Respondent MPEI filed a Complaint for Damages12 (Complaint) with the RTC Makati, from which the instant case
arose.
MJRTB
The above-mentioned incidents are discussed in more detail below.
BACKGROUND PROCEEDINGS
Private respondents' Motion for Reconsideration
Private respondents in the 2004 case moved for reconsideration of the 2004 Decision. Aside from reiterating the
procedural and substantive arguments they had raised, they also argued that the 2004 Decision had exposed them
to possible criminal prosecution.13chanrobleslaw
This Court denied the motion in its 2004 Resolution and ruled that no prejudgment had been made on private
respondents' criminal liability. We further ruled that although the 2004 Decision stated that the Ombudsman shall
"determine the criminal liability, if any, of the public officials (and conspiring private individuals, if any) involved in the
subject Resolution and Contract," We did not make any premature conclusion on any wrongdoing, but precisely
directed the Ombudsman to make that determination after conducting appropriate proceedings and observing due
process.
Similarly, it appears from the record that several criminal and administrative Complaints had indeed been filed with
the Ombudsman in relation to the declaration of nullity of the automation contract.14 The Complaints were filed
against several public officials and the individual respondents in this case.15chanrobleslaw
In a Resolution issued on 28 June 2006,16 the Ombudsman recommended the filing of informations before the
Sandiganbayan against some of the public officials and the individual respondents17 for violation of Section 3(e) of
Republic Act No. 3019 (the Anti-Graft and Corrupt Practices Act). However, on 27 September 2006,18 upon
reconsideration, the Ombudsman reversed its earlier ruling in a Supplemental Resolution (September Resolution),
directing the dismissal of the criminal cases against the public officials, as well as the individual respondents, for lack
of probable cause.19chanrobleslaw
With this development, a Petition for Certiorari was filed with this Court on 13 October 2006 and docketed as G.R.
No. 174777.20 In the Petition, several individuals21 assailed the September Resolution of the Ombudsman finding
no probable cause to hold respondents criminally liable. The case remains pending with this Court as of this date.
COMELEC's Motion for Leave to Use ACMs in the ARMM Elections
The COMELEC filed a motion with this Court requesting permission to use the 1,991 ACMs previously delivered by
respondent MPEI, for the ARMM elections, then slated to be held on 8 August 2005. In its motion, the COMELEC
claimed that automation of the ARMM elections was mandated by Republic Act No. 9333, and since the government
had no available funds to finance the automation of those elections, the ACMs could be utilized for the 2005
elections.
This Court denied the Motion in Our 2005 Resolution. We ruled that allowing the use of the ACMs would have the
effect of illegally reversing and subverting a final decision We had promulgated. We further ruled that the COMELEC
was asking for permission to do what it had precisely been prohibited from doing under the 2004 Decision. This
Court also ruled that the grant of the motion would bar or jeopardize the recovery of government funds paid to
respondents. Considering that the COMELEC did not present any evidence to prove that the defects had been
addressed, We held that the use of the ACMs and the software would expose the ARMM elections to the same
electoral ills pointed out in the 2004 Decision.
Atty. Macalintal's Omnibus Motion
Atty. Romulo Macalintal sought to reopen the 2004 case in order that he may be allowed to intervene as a taxpayer
and citizen. His purpose for intervening was to seek another testing of the ACMs with the ultimate objective of
allowing the COMELEC to use them, this time for the 2007 national elections.
This Court denied his motion in Our 2006 Resolution, ruling that Atty. Macalintal failed to demonstrate that certain
supervening events and legal circumstances had transpired to justify the reliefs sought. We in fact found that, after
Our determination that the ACMs had failed to pass legally mandated technical requirements in 2004, they were
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simply put in storage. The ACMs had remained idle and unused since the last evaluation, at which they failed to
hurdle crucial tests. Consequently, We ruled that if the ACMs were not good enough for the 2004 national elections
or the 2005 ARMM elections, then neither would they be good enough for the 2007 national elections, considering
that nothing was done to correct the flaws that had been previously underscored in the 2004 Decision. We held that
granting the motion would be tantamount to rendering the 2004 Decision totally ineffective and nugatory.
Moreover, because of our categorical ruling that the whole bidding process was void and fraudulent, the proposal to
use the illegally procured, demonstratively defective, and fraud-prone ACMs was rendered nonsensical.
Thus:ChanRoblesVirtualawlibrary
We stress once again that the Contract entered into by the Comelec for the supply of the ACMs was declared VOID
by the Court in its Decision, because of clear violations of law and jurisprudence, as well as the reckless disregard by
the Commission of its own bidding rules and procedure. In addition, the poll body entered into the Contract with
inexplicable haste, without adequately checking and observing mandatory financial, technical and legal
requirements. As explained in our Decision, Comelec's gravely abusive acts consisted of the following:
chanRoblesvirtualLawlibraryx x x x
To muddle the issue, Comelec keeps on saying that the "winning" bidder presented a lower price than the only other
bidder. It ignored the fact that the whole bidding process was VOID and FRAUDULENT. How then could there have
been a "winning" bid?22 (Emphasis supplied)
THE INSTANT CASE
Complaint for Damages filed by respondents with the RTC Makati and petitioner's Answer with Counterclaim, with an
application for a writ of preliminary attachment, from which the instant case arose
Upon the finality of the declaration of nullity of the automation contract, respondent MPEI filed a Complaint for
Damages before the RTC Makati, arguing that, notwithstanding the nullification of the automation contract, the
COMELEC was still bound to pay the amount of P200,165,681.89. This amount represented the difference between
the value of the ACMs and the support services delivered on one hand, and on the other, the payment previously
made by the COMELEC.23chanrobleslaw
Petitioner filed its Answer with Counterclaim24 and argued that respondent MPEI could no longer recover the unpaid
balance from the void automation contract, since the payments made were illegal disbursements of public funds. It
contended that a null and void contract vests no rights and creates no obligations, and thus produces no legal effect
at all. Petitioner further posited that respondent MPEI could not hinge its claim upon the principles of unjust
enrichment and quasi-contract, because such presume that the acts by which the authors thereof become obligated
to each other are lawful, which was not the case herein.25cralawredchanrobleslaw
By way of a counterclaim, petitioner demanded from respondents the return of the payments made pursuant to the
automation contract.26 It argued that individual respondents, being the incorporators of MPEI, likewise ought to be
impleaded and held accountable for MPEI's liabilities. The creation of MPC was, after all, merely an ingenious
scheme to feign eligibility to bid.27chanrobleslaw
Pursuant to Section 1(d) of Rule 57 of the Rules of Court, petitioner prayed for the issuance of a writ of preliminary
attachment against the properties of MPEI and individual respondents. The application was grounded upon the
fraudulent misrepresentation of respondents as to their eligibility to participate in the bidding for the COMELEC
automation project and the failure of the ACMs to comply with mandatory technical requirements.28chanrobleslaw
Subsequently, the trial court denied the prayer for the issuance of a writ of preliminary attachment,29 ruling that there
was an absence of factual allegations as to how the fraud was actually committed.
The allegations of petitioner were found to be unreliable, as the latter merely copied from the declarations of the
Supreme Court in Information Technology Foundation of the Phils, v. COMELEC the factual allegations of MPEI's
lack of qualification and noncompliance with bidding requirements. The trial court further ruled that the allegations of
fraud on the part of MPEI were not supported by the COMELEC, the office in charge of conducting the bidding for
the election automation contract. It was likewise held that there was no evidence that respondents harbored a
preconceived plan not to comply with the obligation; neither was there any evidence that MPEI's corporate fiction
MJRTB
was used to perpetrate fraud. Thus, it found no sufficient basis to pierce the veil of corporate fiction or to cause the
attachment of the properties owned by individual respondents.
Petitioner moved to set aside the trial court's Order denying the writ of attachment,30 but its motion was
denied.31chanrobleslaw
Appeal before the CA and the First Decision
Aggrieved, petitioner filed an appeal with the CA, arguing that the trial court had acted with grave abuse of discretion
in denying the application for a writ of attachment.
As mentioned earlier, the CA in its First Decision32 reversed and set aside the trial court's Orders and ruled that
there was sufficient basis for the issuance of a writ of attachment in favor of petitioner.
The appellate court explained that the averments of petitioner in support of the latter's application actually reflected
pertinent conclusions reached by this Court in its 2004 Decision. It held that the trial court erred in disregarding the
following findings of fact, which remained unaltered and unreversed: (1) COMELEC bidding rules provided that the
eligibility and capacity of a bidder may be proved through financial documents including, among others, audited
financial statements for the last three years; (2) MPEI was incorporated only on 27 February 2003, or 11 days prior to
the bidding itself; (3) in an attempt to disguise its ineligibility, MPEI participated in the bidding as lead company of
MPC, a putative consortium, and submitted the incorporation papers and financial statements of the members of the
consortium; and (4) no proof of the joint venture agreement, consortium agreement, memorandum of agreement, or
business plan executed among the members of the purported consortium was ever submitted to the
COMELEC.33chanrobleslaw
According to the CA, the foregoing were glaring indicia or badges of fraud, which entitled petitioner to the issuance of
the writ. It further ruled that there was sufficient reason to pierce the corporate veil of MPEI. Thus, the CA allowed the
attachment of the properties belonging to both MPEI and individual respondents.34 The CA likewise ruled that even
if the COMELEC committed grave abuse of discretion in capriciously disregarding the rules on public bidding, this
should not preclude or deter petitioner from pursuing its claim against respondents. After all, the State is not
estopped by the mistake of its officers and employees.35chanrobleslaw
Respondents moved for reconsideration36 of the First Decision of the CA.
Motion for Reconsideration before the CA and the Amended Decision
Upon review, the CA reconsidered its First Decision37 and directed the remand of the case to the RTC Makati for the
reception of evidence of allegations of fraud and to determine whether attachment should necessarily
issue.38chanrobleslaw
The CA explained in its Amended Decision that respondents could not be considered to have fostered a fraudulent
intent to dishonor their obligation, since they had delivered 1,991 units of ACMs.39 It directed petitioner to present
proof of respondents' intent to defraud COMELEC during the execution of the automation contract.40 The CA
likewise emphasized that the Joint Affidavit submitted in support of petitioner's application for the writ contained
allegations that needed to be substantiated.41 It added that proof must likewise be adduced to verify the requisite
fraud that would justify the piercing of the corporate veil of respondent MPEI.42chanrobleslaw
The CA further clarified that the 2004 Decision did not make a definite finding as to the identities of the persons
responsible for the illegal disbursement or of those who participated in the fraudulent dealings.43 It instructed the
trial court to consider, in its determination of whether the writ of attachment should issue, the illegal, imprudent and
hasty acts in awarding the automation contract by the COMELEC. In particular, these acts consisted of: (1) awarding
the automation contract to MPC, an entity that did not participate in the bidding; and (2) signing the actual
automation contract with respondent MPEI, the company that joined the bidding without meeting the eligibility
requirement.44chanrobleslaw
Rule 45 Petition before Us
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Consequently, petitioner filed the instant Rule 45 Petition,45 arguing that the CA erred in ordering the remand of the
case to the trial court for the reception of evidence to determine the presence of fraud. Petitioner contends that this
Court's 2004 Decision was sufficient proof of the fraud committed by respondents in the execution of the voided
automation contract.46 Respondents allegedly committed fraud by securing the automation contract, although MPEI
was not qualified to bid in the first place.47 Their claim that the members of MPC bound themselves to the
automation contract was an indication of bad faith as the contract was executed by MPEI alone.48 Neither could they
deny that the software submitted during the bidding process was not the same one that would be used on election
day.49 They could not dissociate themselves from telltale signs such as purportedly supplying software that later
turned out to be non-existent.50chanrobleslaw
In their respective Comments, respondents Willy Yu, Bonnie Yu, Enrique Tansipek, and Rosita Tansipek counter51
that this Court never ruled that individual respondents were guilty of any fraud or bad faith in connection with the
automation contract, and that it was incumbent upon petitioner to present evidence on the allegations of fraud to
justify the issuance of the writ.52 They likewise argue that the 2004 Decision cannot be invoked against them, since
petitioner and MPEI were co-respondents in the 2004 case and not adverse parties therein.53 Respondents further
contend that the allegations of fraud are belied by their actual delivery of 1,991 units of ACMs to the COMELEC,
which they claim is proof that they never had any intention to evade performance.54chanrobleslaw
They further allege that this Court, in its 2004 Decision, even recognized that it had not found any wrongdoing on
their part, and that the Ombudsman had already made a determination that no probable cause existed with respect
to charges of violation of Anti-Graft and Corrupt Practices Act.55chanrobleslaw
Echoing the other respondents' arguments on the lack of particularity in the allegations of fraud,56 respondents
MPEI, Johnson Wong, Bernard Fong, Pedro Tan, and Lauriano Barrios likewise argue that they were not parties to
the 2004 case; thus, the 2004 Decision thereon is not binding on them.57 Individual respondents likewise argue that
the findings of fact in the 2004 Decision were not conclusive,58 considering that eight (8) of the fifteen (15) justices
allegedly refused to go along with the factual findings as stated in the majority opinion.59 Thereafter, petitioner filed
its Reply to the Comments.60chanrobleslaw
Based on the submissions of both parties, the following issues are presented to this Court for resolution:
Whether petitioner has sufficiently established fraud on the part of respondents to justify the issuance of a writ of
preliminary attachment in its favor; and cralawlawlibrary
Whether a writ of preliminary attachment may be issued against the properties of individual respondents, considering
that they were not parties to the 2004 case.
The Court's Ruling
The Petition is meritorious. A writ of preliminary attachment should issue in favor of petitioner over the properties of
respondents MPEI, Willy Yu (Willy) and the remaining individual respondents, namely: Bonnie S. Yu (Bonnie),
Enrique T. Tansipek (Enrique), Rosita Y. Tansipek (Rosita), Pedro O. Tan (Pedro), Johnson W. Fong (Johnson),
Bernard I. Fong (Bernard), and Lauriano Barrios (Lauriano). The bases for the writ are the following:
Fraud on the part of respondent MPEI was sufficiently established by the factual findings of this Court in its 2004
Decision and subsequent pronouncements.
A writ of preliminary attachment may issue over the properties of the individual respondents using the doctrine of
piercing the corporate veil.
The factual findings of this Court that have become final cannot be modified or altered, much less reversed, and are
controlling in the instant case.
The delivery of 1,991 units of ACMs does not negate fraud on the part of respondents MPEI and Willy.
Estoppel does not lie against the state when it acts to rectify mistakes, errors or illegal acts of its officials and agents.
The findings of the Ombudsman are not controlling in the instant case.
DISCUSSION
MJRTB
I.
Fraud on the part of respondent MPEI was sufficiently established by the factual findings of this Court in the latter's
2004 Decision and subsequent pronouncements.
Petitioner argues that the findings of this Court in the 2004 Decision serve as sufficient basis to prove that, at the
time of the execution of the automation contract, there was fraud on the part of respondents that justified the
issuance of a writ of attachment. Respondents, however, argue the contrary. They claim that fraud had not been
sufficiently established by petitioner.
We rule in favor of petitioner. Fraud on the part of respondents MPEI and Willy, as well as of the other individual
respondents — Bonnie, Enrique, Rosita, Pedro, Johnson, Bernard, and Lauriano — has been established.
A writ of preliminary attachment is a provisional remedy issued upon the order of the court where an action is
pending. Through the writ, the property or properties of the defendant may be levied upon and held thereafter by the
sheriff as security for the satisfaction of whatever judgment might be secured by the attaching creditor against the
defendant.61 The provisional remedy of attachment is available in order that the defendant may not dispose of the
property attached, and thus prevent the satisfaction of any judgment that may be secured by the plaintiff from the
former.62chanrobleslaw
The purpose and function of an attachment or garnishment is twofold. First, it seizes upon property of an alleged
debtor in advance of final judgment and holds it subject to appropriation, thereby preventing the loss or dissipation of
the property through fraud or other means. Second, it subjects the property of the debtor to the payment of a
creditor's claim, in those cases in which personal service upon the debtor cannot be obtained.63 This remedy is
meant to secure a contingent lien on the defendant's property until the plaintiff can, by appropriate proceedings,
obtain a judgment and have the property applied to its satisfaction, or to make some provision for unsecured debts in
cases in which the means of satisfaction thereof are liable to be removed beyond the jurisdiction, or improperly
disposed of or concealed, or otherwise placed beyond the reach of creditors.64chanrobleslaw
Petitioner relied upon Section 1(d), Rule 57 of the Rules of Court as basis for its application for a writ of preliminary
attachment. This provision states:ChanRoblesVirtualawlibrary
Section 1. Grounds upon which attachment may issue. At the commencement of the action or at any time before
entry of judgment, a plaintiff or any proper party may have the property of the adverse party attached as security for
the satisfaction of any judgment that may be recovered in the following cases:
chanRoblesvirtualLawlibrary
xxxx
(d) In an action against a party who has been guilty of a fraud in contracting the debt or incurring the obligation upon
which the action is brought, or in the performance thereof. (Emphasis supplied)
For a writ of preliminary attachment to issue under the above-quoted rule, the applicant must sufficiently show the
factual circumstances of the alleged fraud.65 In Metro, Inc. v. Lara's Gift and Decors, Inc.,66 We
explained:ChanRoblesVirtualawlibrary
To sustain an attachment on this ground, it must be shown that the debtor in contracting the debt or incurring the
obligation intended to defraud the creditor. The fraud must relate to the execution of the agreement and must have
been the reason which induced the other party into giving consent which he would not have otherwise given. To
constitute a ground for attachment in Section 1(d), Rule 57 of the Rules of Court, fraud should be committed upon
contracting the obligation sued upon. A debt is fraudulently contracted if at the time of contracting it the debtor has a
preconceived plan or intention not to pay, as it is in this case. x x x.
The applicant for a writ of preliminary attachment must sufficiently show the factual circumstances of the alleged
fraud because fraudulent intent cannot be inferred from the debtor's mere non-payment of the debt or failure to
comply with his obligation. (Emphasis supplied)
An amendment to the Rules of Court added the phrase "in the performance thereof" to include within the scope of
the grounds for issuance of a writ of preliminary attachment those instances relating to fraud in the performance of
the obligation.67chanrobleslaw
Fraud is a generic term that is used in various senses and assumes so many different degrees and forms that courts
are compelled to content themselves with comparatively few general rules for its discovery and defeat. For the same
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reason, the facts and circumstances peculiar to each case are allowed to bear heavily on the conscience and
judgment of the court or jury in determining the presence or absence of fraud. In fact, the fertility of man's invention in
devising new schemes of fraud is so great that courts have always declined to define it, thus, reserving for
themselves the liberty to deal with it in whatever form it may present itself.68chanrobleslaw
Fraud may be characterized as the voluntary execution of a wrongful act or a wilful omission, while knowing and
intending the effects that naturally and necessarily arise from that act or omission.69 In its general sense, fraud is
deemed to comprise anything calculated to deceive—including all acts and omission and concealment involving a
breach of legal or equitable duty, trust, or confidence justly reposed—resulting in damage to or in undue advantage
over another.70 Fraud is also described as embracing all multifarious means that human ingenuity can device, and is
resorted to for the purpose of securing an advantage over another by false suggestions or by suppression of truth;
and it includes all surprise, trick, cunning, dissembling, and any other unfair way by which another is
cheated.71chanrobleslaw
While fraud cannot be presumed, it need not be proved by direct evidence and can well be inferred from attendant
circumstances.72 Fraud by its nature is not a thing susceptible of ocular observation or readily demonstrable
physically; it must of necessity be proved in many cases by inferences from circumstances shown to have been
involved in the transaction in question.73chanrobleslaw
In the case at bar, petitioner has sufficiently discharged the burden of demonstrating the commission of fraud by
respondent MPEI in the execution of the automation contract in the two ways that were enumerated earlier and
discussed below:
chanRoblesvirtualLawlibraryA. Respondent MPEI had perpetrated a scheme against petitioner to secure the
automation contract by using MPC as supposed bidder and eventually succeeding in signing the automation contract
as MPEI alone, an entity which was ineligible to bid in the first place.
To avoid any confusion relevant to the basis of fraud, We quote herein the pertinent portions of this Court's 2004
Decision with regard to the identity, existence, and eligibility of MPC as bidder:74
On the question of the identity and the existence of the real bidder, respondents insist that, contrary to petitioners'
allegations, the bidder was not Mega Pacific eSolutions, Inc. (MPEI), which was incorporated only on February 27,
2003, or 11 days prior to the bidding itself. Rather, the bidder was Mega Pacific Consortium (MPC), of which MPEI
was but a part. As proof thereof, they point to the March 7, 2003 letter of intent to bid, signed by the president of
MPEI allegedly for and on behalf of MPC. They also call attention to the official receipt issued to MPC,
acknowledging payment for the bidding documents, as proof that it was the "consortium" that participated in the
bidding process.
We do not agree. The March 7, 2003 letter, signed by only one signatory — "Willy U. Yu, President, Mega Pacific
eSolutions, Inc., (Lead Company/Proponent) For: Mega Pacific Consortium" — and without any further proof, does
not by itself prove the existence of the consortium. It does not show that MPEI or its president have been duly pre-
authorized by the other members of the putative consortium to represent them, to bid on their collective behalf and,
more important, to commit them jointly and severally to the bid undertakings. The letter is purely self-serving and
uncorroborated.
Neither does an official receipt issued to MPC, acknowledging payment for the bidding documents, constitute proof
that it was the purported consortium that participated in the bidding. Such receipts are issued by cashiers without any
legally sufficient inquiry as to the real identity or existence of the supposed payor.
To assure itself properly of the due existence (as well as eligibility and qualification) of the putative consortium,
Comelec's BAC should have examined the bidding documents submitted on behalf of MPC. They would have easily
discovered the following fatal flaws.
xxxx
The Eligibility Envelope was to contain legal documents such as articles of incorporation, x x x to establish the
bidder's financial capacity.
MJRTB
In the case of a consortium or joint venture desirous of participating in the bidding, it goes without saying that the
Eligibility Envelope would necessarily have to include a copy of the joint venture agreement, the consortium
agreement or memorandum of agreement — or a business plan or some other instrument of similar import —
establishing the due existence, composition and scope of such aggrupation. Otherwise, how would Comelec know
who it was dealing with, and whether these parties are qualified and capable of delivering the products and services
being offered for bidding?
In the instant case, no such instrument was submitted to Comelec during the bidding process. x x x
xxxx
However, there is no sign whatsoever of any joint venture agreement, consortium agreement, memorandum of
agreement, or business plan executed among the members of the purported consortium.
The only logical conclusion is that no such agreement was ever submitted to the Comelec for its consideration, as
part of the bidding process.
It thus follows that, prior the award of the Contract, there was no documentary or other basis for Comelec to
conclude that a consortium had actually been formed amongst MPEI, SK C&C and WeSolv, along with Election.com
and ePLDT. Neither was there anything to indicate the exact relationships between and among these firms; their
diverse roles, undertakings and prestations, if any, relative to the prosecution of the project, the extent of their
respective investments (if any) in the supposed consortium or in the project; and the precise nature and extent of
their respective liabilities with respect to the contract being offered for bidding. And apart from the self-serving letter
of March 7, 2003, there was not even any indication that MPEI was the lead company duly authorized to act on
behalf of the others.
xxxx
Hence, had the proponent MPEI been evaluated based solely on its own experience, financial and operational track
record or lack thereof, it would surely not have qualified and would have been immediately considered ineligible to
bid, as respondents readily admit.
xxxx
At this juncture, one might ask: What, then, if there are four MOAs instead of one or none at all? Isn't it enough that
there are these corporations coming together to carry out the automation project? Isn't it true, as respondent aver,
that nowhere in the RFP issued by Comelec is it required that the members of the joint venture execute a single
written agreement to prove the existence of a joint venture. x x x
xxxx
The problem is not that there are four agreements instead of only one. The problem is that Comelec never bothered
to check. It never based its decision on documents or other proof that would concretely establish the existence of the
claimed consortium or joint venture or agglomeration.
xxxx
True, copies of financial statements and incorporation papers of the alleged "consortium" members were submitted.
But these papers did not establish the existence of a consortium, as they could have been provided by the
companies concerned for purposes other than to prove that they were part of a consortium or joint venture.
xxxx
In brief, despite the absence of competent proof as to the existence and eligibility of the alleged consortium (MPC),
its capacity to deliver on the Contract, and the members' joint and several liability therefor, Comelec nevertheless
assumed that such consortium existed and was eligible. It then went ahead and considered the bid of MPC, to which
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the Contract was eventually awarded, in gross violation of the former's own bidding rules and procedures contained
in its RFP. Therein lies Comclec's grave abuse of discretion.
Sufficiency of the Four Agreements
Instead of one multilateral agreement executed by, and effective and binding on, all the five "consortium members"
— as earlier claimed by Commissioner Tuason in open court — it turns out that what was actually executed were
four (4) separate and distinct bilateral Agreements. Obviously, Comelec was furnished copies of these Agreements
only after the bidding process had been terminated, as these were not included in the Eligibility Documents. x x x
xxxx
At this point, it must be stressed most vigorously that the submission of the four bilateral Agreements to Comelec
after the end of the bidding process did nothing to eliminate the grave abuse of discretion it had already committed
on April 15, 2003.
Deficiencies Have Not Been "Cured"
In any event, it is also claimed that the automation Contract awarded by Comelec incorporates all documents
executed by the "consortium" members, even if these documents are not referred to therein. x x x
xxxx
Thus, it is argued that whatever perceived deficiencies there were in the supplementary contracts - those entered
into by MPEI and the other members of the "consortium" as regards their joint and several undertakings — have
been cured. Better still, such deficiencies have supposedly been prevented from arising as a result of the above-
quoted provisions, from which it can be immediately established that each of the members of MPC assumes the
same joint and several liability as the other members.
The foregoing argument is unpersuasive. First, the contract being referred to, entitled "The Automated Counting and
Canvassing Project Contract," is between Comelec and MPEI, not the alleged consortium, MPC. To repeat, it is
MPEI - not MPC - that is a party to the Contract. Nowhere in that Contract is there any mention of a consortium or
joint venture, of members thereof, much less of joint and several liability. Supposedly executed sometime in May
2003, the Contract bears a notarization date of June 30, 2003, and contains the signature of Willy U. Yu signing as
president of MPEI (not for and on behalf of MPC), along with that of the Comelec chair. It provides in Section 3.2 that
MPEI (not MPC) is to supply the Equipment and perform the Services under the Contract, in accordance with the
appendices thereof; nothing whatsoever is said about any consortium or joint venture or partnership.
xxxx
Eligibility of a Consortium Based on the Collective Qualifications of Its Members
Respondents declare that, for purposes of assessing the eligibility of the bidder, the members of MPC should be
evaluated on a collective basis. Therefore, they contend, the failure of MPEI to submit financial statements (on
account of its recent incorporation) should not by itself disqualify MPC, since the other members of the "consortium"
could meet the criteria set out in the RFP.
xxxx
Unfortunately, this argument seems to assume that the "collective" nature of the undertaking of the members of
MPC, their contribution of assets and sharing of risks, and the "community" of their interest in the performance of the
Contract entitle MPC to be treated as a joint venture or consortium; and to be evaluated accordingly on the basis of
the members' collective qualifications when, in fact, the evidence before the Court suggest otherwise.
xxxx
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Going back to the instant case, it should be recalled that the automation Contract with Comelec was not executed by
the "consortium" MPC - or by MPEI for and on behalf of MPC - but by MPEI, period. The said Contract contains no
mention whatsoever of any consortium or members thereof. This fact alone seems to contradict all the suppositions
about a joint undertaking that would normally apply to a joint venture or consortium: that it is a commercial enterprise
involving a community of interest, a sharing of risks, profits and losses, and so on.
xxxx
To the Court, this strange and beguiling arrangement of MPEI with the other companies does not qualify them to be
treated as a consortium or joint venture, at least of the type that government agencies like the Comelec should be
dealing with. With more reason is it unable to agree to the proposal to evaluate the members of MPC on a collective
basis. (Emphases supplied)
These findings found their way into petitioner's application for a writ of preliminary attachment,75 in which it claimed
the following as bases for fraud: (1) respondents committed fraud by securing the election automation contract and,
in order to perpetrate the fraud, by misrepresenting the actual bidder as MPC and MPEI as merely acting on MPC's
behalf; (2) while knowing that MPEI was not qualified to bid for the automation contract, respondents still signed and
executed the contract; and (3) respondents acted in bad faith when they claimed that they had bound themselves to
the automation contract, because it was not executed by MPC—or by MPEI on MPC's behalf—but by MPEI
alone.76chanrobleslaw
We agree with petitioner that respondent MPEI committed fraud by securing the election automation contract; and, in
order to perpetrate the fraud, by misrepresenting that the actual bidder was MPC and not MPEI, which was only
acting on behalf of MPC. We likewise rule that respondent MPEI has defrauded petitioner, since the former still
executed the automation contract despite knowing that it was not qualified to bid for the same.
The established facts surrounding the eligibility, qualification and existence of MPC — and of MPEI for that matter —
and the subsequent execution of the automation contract with the latter, when all taken together, constitute badges
of fraud that We simply cannot ignore. MPC was considered an illegitimate entity, because its existence as a joint
venture had not been established. Notably, the essential document/s that would have shown its eligibility as a joint
venture/consortium were not presented to the COMELEC at the most opportune time, that is, during the qualification
stage of the bidding process. The concealment by respondent MPEI of the essential documents showing its eligibility
to bid as part a joint venture is too obvious to be missed. How could it not have known that the very document
showing MPC as a joint venture should have been included in their eligibility envelope?
Likewise notable is the fact that these supposed agreements, allegedly among the supposed consortium members,
were belatedly provided to the COMELEC after the bidding process had been terminated; these were not included in
the Eligibility Documents earlier submitted by MPC. Similarly, as found by this Court, these documents did not prove
any joint venture agreement among the parties in the first place, but were actually individual agreements executed by
each member of the supposed consortium with respondent MPEI.
More startling to the dispassionate mind is the incongruence between the supposed actual bidder MPC, on one
hand, and, on the other, respondent MPEI, which executed the automation contract. Significantly, respondent MPEI
was not even eligible and qualified to bid in the first place; and yet, the automation contract itself was executed and
signed singly by respondent MPEI, not on behalf of the purported bidder MPC, without any mention whatsoever of
the members of the supposed consortium.
From these established facts, We can surmise that in order to secure the automation contract, respondent MPEI
perpetrated a scheme against petitioner by using MPC as supposed bidder and eventually succeeding in signing the
automation contract as MPEI alone. Worse, it was respondent MPEI alone, an entity that was ineligible to bid in the
first place, that eventually executed the automation contract.
To a reasonable mind, the entire situation reeks of fraud, what with the misrepresentation of identity and
misrepresentation as to creditworthiness. It is in these kinds of fraudulent instances, when the ability to abscond is
greatest, to which a writ of attachment is precisely responsive.
Further, the failure to attach the eligibility documents is tantamount to failure on the part of respondent MPEI to
disclose material facts. That omission constitutes fraud.
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Pursuant to Article 1339 of the Civil Code,77 silence or concealment does not, by itself, constitute fraud, unless there
is a special duty to disclose certain facts, or unless the communication should be made according to good faith and
the usages of commerce.78chanrobleslaw
Fraud has been defined to include an inducement through insidious machination. Insidious machination refers to a
deceitful scheme or plot with an evil or devious purpose. Deceit exists where the party, with intent to deceive,
conceals or omits to state material facts and, by reason of such omission or concealment, the other party was
induced to give consent that would not otherwise have been given.79chanrobleslaw
One form of inducement is covered within the scope of the crime of estafa under Article 315, paragraph 2, of the
Revised Penal Code, in which, any person who defrauds another by using fictitious name, or falsely pretends to
possess power, influence, qualifications, property, credit, agency, business or imaginary transactions, or by means of
similar deceits executed prior to or simultaneously with the commission of fraud is held criminally liable. In Joson v.
People,80 this Court explained the element of defraudation by means of deceit, by giving a definition of fraud and
deceit, in this wise:ChanRoblesVirtualawlibrary
What needs to be determined therefore is whether or not the element of defraudation by means of deceit has been
established beyond reasonable doubt.
In the case of People v. Menil, Jr., the Court has defined fraud and deceit in this wise:ChanRoblesVirtualawlibrary
Fraud, in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal or equitable duty, trust, or confidence justly reposed, resulting in damage to
another, or by which an undue and unconscientious advantage is taken of another. It is a generic term embracing all
multifarious means which human ingenuity can devise, and which are resorted to by one individual to secure an
advantage over another by false suggestions or by suppression of truth and includes all surprise, trick, cunning,
dissembling and any unfair way by which another is cheated. On the other hand, deceit is the false representation of
a matter of fact, whether by words or conduct, by false or misleading allegations, or by concealment of that which
should have been disclosed which deceives or is intended to deceive another so that he shall act upon it to his legal
injury. (Emphases supplied)
For example, in People v. Comila,81 both accused-appellants therein represented themselves to the complaining
witnesses to have the capacity to send them to Italy for employment, even as they did not have the authority or
license for the purpose. It was such misrepresentation that induced the complainants to part with their hard-earned
money for placement and medical fees. Both accused-appellants were criminally held liable for estafa.
In American jurisprudence, fraud may be predicated on a false introduction or identification.82 In Union Co. v.
Cobb,83 the defendant therein procured the merchandise by misrepresenting that she was Mrs. Taylor Ray and at
another time she was Mrs. Ben W. Chiles, and she forged their name on charge slips as revealed by the exhibits of
the plaintiff. The sale of the merchandise was induced by these representations, resulting in injury to the plaintiff.
In Raser v. Moomaw,84 it was ruled that the essential elements necessary to constitute actionable fraud and deceit
were present in the complaint. It was alleged that, to induce plaintiff to procure a loan, defendant introduced him to a
woman who was falsely represented to be Annie L. Knowles of Seattle, Washington, the owner of the property, and
that plaintiff had no means of ascertaining her true identity. On the other hand, defendant knew, or in the exercise of
reasonable caution should have known, that she was an impostor, and that plaintiff relied on the representations,
induced his client to make the loan, and had since been compelled to repay it. In the same case, the Court ruled that
false representations as to the identity of a person are actionable, if made to induce another to act thereon, and such
other does so act thereon to his prejudice.85chanrobleslaw
In this case, analogous to the fraud and deceit exhibited in the above-mentioned circumstances, respondent MPEI
had no excuse not to be forthright with the documents showing MPC's eligibility to bid as a joint venture. The
Invitation to Bid, as quoted in our 2004 Decision, could not have been any clearer when it stated that only bids from
qualified entities, such as a joint venture, would be entertained:ChanRoblesVirtualawlibrary
INVITATION TO APPLY FOR ELIGIBILITY AND TO BID
The Commission on Elections (COMELEC), pursuant to the mandate of Republic Act Nos. 8189 and 8436, invites
interested offerers, vendors, suppliers or lessors to apply for eligibility and to bid for the procurement by purchase,
lease, lease with option to purchase, or otherwise, supplies, equipment, materials and services needed for a
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comprehensive Automated Election System, consisting of three (3) phases: (a) registration/verification of voters, (b)
automated counting and consolidation of votes, and (c) electronic transmission of election results, with an approved
budget of TWO BILLION FIVE HUNDRED MILLION (Php2,500,000,000) Pesos.
Only bids from the following entities shall be entertained:
xxxx
d. Manufacturers, suppliers and/or distributors forming themselves into a joint venture, i.e., a group of two (2) or more
manufacturers, suppliers and/or distributors that intend to be jointly and severally responsible or liable for a particular
contract, provided that Filipino ownership thereof shall be at least sixty percent (60%); and cralawlawlibrary
e. Cooperatives duly registered with the Cooperatives Development Authority.86 (Emphases supplied)
No reasonable mind would argue that documents showing the very existence of a joint venture need not be included
in the bidding envelope showing its existence, qualification, and eligibility to undertake the project, considering that
the purpose of prequalification in any public bidding is to determine, at the earliest opportunity, the ability of the
bidder to undertake the project.87chanrobleslaw
As found by this Court in its 2004 Decision, it appears that the documents that were submitted after the bidding,
which respondents claimed would prove the existence of the relationship among the members of the consortium,
were actually separate agreements individually executed by the supposed members with MPEI. We had ruled that
these documents were highly irregular, considering that each of the four different and separate bilateral Agreements
was valid and binding only between MPEI and the other contracting party, leaving the other "consortium" members
total strangers thereto. Consequently, the other consortium members had nothing to do with one another, as each
one dealt only with MPEI.88chanrobleslaw
Considering that they merely showed MPEI's individual agreements with the other supposed members, these
agreements confirm to our mind the fraudulent intent on the part of respondent MPEI to deceive the relevant officials
about MPC. The intent was to cure the deficiency of the winning bid, which intent miserably failed. Said this Court:89
We are unconvinced, PBAC was guided by the rules, regulations or guidelines existing before the bid proposals were
opened on November 10, 1989. The basic rule in public bidding is that bids should be evaluated based on the
required documents submitted before and not after the opening of bids. Otherwise, the foundation of a fair and
competitive public bidding would be defeated. Strict observance of the rules, regulations, and guidelines of the
bidding process is the only safeguard to a fair, honest and competitive public bidding.
In underscoring the Court's strict application of the pertinent rules, regulations and guidelines of the public bidding
process, We have ruled in C & C Commercial vs. Menor (L-28360, January 27, 1983, 120 SCRA 112), that Nawasa
properly rejected a bid of C & C Commercial to supply asbestos cement pressure which bid did not include a tax
clearance certificate as required by Administrative Order No. 66 dated June 26, 1967. In Caltex (Phil.) Inc., et. al. vs.
Delgado Brothers, Inc. et. al., (96 Phil. 368, 375), We stressed that public biddings are held for the protection of the
public and the public should be given the best possible advantages by means of open competition among the
bidders.
xxxx
INTER TECHNICAL's failure to comply with what is perceived to be an elementary and customary practice in a
public bidding process, that is, to enclose the Form of Bid in the original and eight separate copies of the bidding
documents submitted to the bidding committee is fatal to its cause. All the four pre-qualified bidders which include
INTER TECHNICAL were subject to Rule IB 2.1 of the Implementing Rules and Regulations of P.D. 1594 in the
preparation of bids, bid bonds, and pre-qualification statement and Rule IB 2.8 which states that the Form of Bid,
among others, shall form part of the contract. INTER TECHNICAL's explanation that its bid form was inadvertently
left in the office (p. 6, Memorandum for Private Respondent, p. 355, Rollo) will not excuse compliance with such a
simple and basic requirement in the public bidding process involving a multi-million project of the Government. There
should be strict application of the pertinent public bidding rules, otherwise the essential requisites of fairness, good
faith, and competitiveness in the public bidding process would be rendered meaningless. (Emphases supplied)
All these circumstances, taken together, reveal a scheme on the part of respondent MPEI to perpetrate fraud against
the government. The purpose of the scheme was to ensure that MPEI, an entity that was ineligible to bid in the first
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place, would eventually be awarded the contract. While respondent argues that it was merely a passive participant in
the bidding process, We cannot ignore its cavalier disregard of its participation in the now voided automation
contract.
B. Fraud on the part of respondent MPEI was further shown by the fact that despite the failure of its ACMs to pass
the tests conducted by the DOST, respondent still acceded to being awarded the automation contract.
Another token of fraud is established by Our findings in relation to the failure of the ACMs to pass the tests of the
DOST. We quote herein the pertinent portions of this Court's 2004 Decision in relation
thereto:ChanRoblesVirtualawlibrary
After respondent "consortium" and the other bidder, TIM, had submitted their respective bids on March 10, 2003, the
Comelec's BAC — through its Technical Working Group (TWG) and the DOST — evaluated their technical
proposals.
xxxx
According to respondents, it was only after the TWG and the DOST had conducted their separate tests and
submitted their respective reports that the BAC, on the basis of these reports formulated its
comments/recommendations on the bids of the consortium and TIM.
The BAG, in its Report dated April 21, 2003, recommended that the Phase II project involving the acquisition of
automated counting machines be awarded to MPEI. x x x
xxxx
The BAC, however, also stated on page 4 of its Report: "Based on the 14 April 2003 report (Table 6) of the DOST, it
appears that both Mega-Pacific and TIM (Total Information Management Corporation) failed to meet some of the
requirements. x x x
xxxx
Failure to Meet the Required Accuracy Rating
The first of the key requirements was that the counting machines were to have an accuracy rating of at least 99.9995
percent. The BAC Report indicates that both Mega Pacific and TIM failed to meet this standard.
The key requirement of accuracy rating happens to be part and parcel of the Comelec's Request for Proposal (RFP).
xxx
xxxx
x x x Whichever accuracy rating is the right standard — whether 99.995 or 99.9995 percent — the fact remains that
the machines of the so-called "consort him" failed to even reach the lesser of the two. On this basis alone, it ought to
have been disqualified and its bid rejected outright.
At this point, the Court stresses that the essence of public bidding is violated by the practice of requiring very high
standards or unrealistic specifications that cannot be met — like the 99.9995 percent accuracy rating in this case —
only to water them down after the bid has been award.[sic] Such scheme, which discourages the entry of prospective
bona fide bidders, is in fact a sure indication of fraud in the bidding, designed to eliminate fair competition. Certainly,
if no bidder meets the mandatory requirements, standards or specifications, then no award should be made and a
failed bidding declared.
xxxx
Failure of Software to Detect Previously Downloaded Data
MJRTB
Furthermore, on page 6 of the BAC Report, it appears that the "consortium" as well as TIM failed to meet another
key requirement — for the counting machine's software program to be able to detect previously downloaded precinct
results and to prevent these from being entered again into the counting machine. This same deficiency on the part of
both bidders reappears on page 7 of the BAC Report, as a result of the recurrence of their failure to meet the said
key requirement.
That the ability to detect previously downloaded data at different canvassing or consolidation levels is deemed of
utmost importance can be seen from the fact that it is repeated three times in the RFP. x x x.
Once again, though, Comelec chose to ignore this crucial deficiency, which should have been a cause for the
gravest concern. x x x.
xxxx
Inability to Print the Audit Trail
But that grim prospect is not all. The BAC Report, on pages 6 and 7, indicate that the ACMs of both bidders were
unable to print the audit trail without any loss of data. In the case of MPC, the audit trail system was "not yet
incorporated" into its ACMs.
xxxx
Thus, the RFP on page 27 states that the ballot counting machines and ballot counting software must print an audit
trail of all machine operations for documentation and verification purposes. Furthermore, the audit trail must be
stored on the internal storage device and be available on demand for future printing and verifying. On pages 30-31,
the RFP also requires that the city/municipal canvassing system software be able to print an audit trail of the
canvassing operations, including therein such data as the date and time the canvassing program was started, the
log-in of the authorized users (the identity of the machine operators), the date and time the canvass data were
downloaded into the canvassing system, and so on and so forth. On page 33 of the RFP, we find the same audit trail
requirement with respect to the provincial/district canvassing system software; and again on pages 35-36 thereof, the
same audit trail requirement with respect to the national canvassing system software.
xxxx
The said provision which respondents have quoted several times, provides that ACMs are to possess certain
features divided into two classes: those that the statute itself considers mandatory and other features or capabilities
that the law deems optional. Among those considered mandatory are "provisions for audit trails"! x x x.
In brief, respondents cannot deny that the provision requiring audit trails is indeed mandatory, considering the
wording of Section 7 of RA 8436. Neither can Respondent Comelec deny that it has relied on the BAC Report, which
indicates that the machines or the software was deficient in that respect. And yet, the Commission simply
disregarded this shortcoming and awarded the Contract to private respondent, thereby violating the very law it was
supposed to implement.90 (Emphases supplied)
The above-mentioned findings were further echoed by this Court in its 2006 Resolution with a categorical conclusion
that the bidding process was void and fraudulent.91chanrobleslaw
Again, these factual findings found their way into the application of petitioner for a writ of preliminary attachment,92
as it claimed that respondents could not dissociate themselves from their telltale acts of supplying defective
machines and nonexistent software.93 The latter offered no defense in relation to these claims.
We see no reason to deviate from our finding of fraud on the part of respondent MPEI in the 2004 Decision and 2006
Resolution. Despite its failure to meet the mandatory requirements set forth in the bidding procedure, respondent still
acceded to being awarded the contract. These circumstances reveal its ploy to gain undue advantage over the other
bidders in general, even to the extent of cheating the government.
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The word "bidding" in its comprehensive sense means making an offer or an invitation to prospective contractors,
whereby the government manifests its intention to make proposals for the purpose of securing supplies, materials,
and equipment for official business or public use, or for public works or repair.94 Three principles involved in public
bidding are as follows: (1) the offer to the public; (2) an opportunity for competition, and (3) a basis for an exact
comparison of bids. A regulation of the matter, which excludes any of these factors, destroys the distinctive character
of the system and thwarts the purpose of its adoption.95chanrobleslaw
In the instant case, We infer from the circumstances that respondent MPEI welcomed and allowed the award of the
automation contract, as it executed the contract despite the full knowledge that it had not met the mandatory
requirements set forth in the RFP. Respondent acceded to and benefitted from the watering down of these
mandatory requirements, resulting in undue advantage in its favor. The fact that there were numerous mandatory
requirements that were simply set aside to pave the way for the award of the automation contract does not escape
the attention of this Court. Respondent MPEI, through respondent Willy, signed and executed the automation
contract with COMELEC. It is therefore preposterous for respondent argue that it was a "passive participant" in the
whole bidding process.
We reject the CA's denial of petitioner's plea for the ancillary remedy of preliminary attachment, considering that the
cumulative effect of the factual findings of this Court establishes a sufficient basis to conclude that fraud had
attended the execution of the automation contract. Such fraud is deducible from the 2004 Decision and further
upheld in the 2006 Resolution. It was incongruous, therefore, for the CA to have denied the application for a writ of
preliminary attachment, when the evidence on record was the same that was used to demonstrate the propriety of
the issuance of the writ of preliminary attachment. This was the same evidence that We had already considered and
passed upon, and on which We based Our 2004 Decision to nullify the automation contract. It would not be right for
this Court to ignore these illegal transactions, as to do so would be tantamount to abandoning its constitutional duty
of safeguarding public interest.
II.
Application of the piercing doctrine justifies the issuance of a writ of preliminary attachment over the properties of the
individual respondents.
Individual respondents argue that since they were not parties to the 2004 case, any factual findings or conclusions
therein should not be binding upon them.96 Since they were strangers to that case, they are not bound by the
judgment rendered by this Court.97 They claim that their fundamental right to due process would be violated if their
properties were to be attached for a purported corporate debt on the basis of a court ruling in a case in which they
were not given the right or opportunity to be heard.98chanrobleslaw
We cannot subscribe to this argument. In the first place, it could not be reasonably expected that individual
respondents would be impleaded in the 2004 case. As admitted by respondents, the issues resolved in the 2004
Decision were limited to the following: (1) whether to declare Resolution No. 6074 of the COMELEC null and void; (2)
whether to enjoin the implementation of any further contract that may have been entered into by COMELEC with
MPC or MPEI; and (3) whether to compel COMELEC to conduct a rebidding of the project. To implead individual
respondents then was improper, considering that the automation contract was entered into by respondent MPEI.
This Court even acknowledged this fact by directing that the liabilities of persons responsible for the nullity of the
contract be determined in another appropriate proceeding and by directing the OSG to undertake measures to
protect the interests of the government.
At any rate, individual respondents have been fully afforded the right to due process by being impleaded and heard
in the subsequent proceedings before the courts a quo. Finally, they cannot argue violation of due process, as
respondent MPEI, of which they are incorporators/stockholders, remains vulnerable to the piercing of its corporate
veil.
A. There are red flags indicating that MPEI was used to perpetrate the fraud against petitioner, thus allowing the
piercing of its corporate veil.
Petitioner seeks the issuance of a writ of preliminary attachment over the personal assets of the individual
respondents, notwithstanding the doctrine of separate juridical personality.99 It invokes the use of the doctrine of
piercing the corporate veil, to which the canon of separate juridical personality is vulnerable, as a way to reach the
MJRTB
personal properties of the individual respondents. Petitioner paints a picture of a sham corporation set up by all the
individual respondents for the purpose of securing the automation contract.
We agree with petitioner.
Veil-piercing in fraud cases requires that the legal fiction of separate juridical personality is used for fraudulent or
wrongful ends.100 For reasons discussed below, We see red flags of fraudulent schemes in public procurement, all
of which were established in the 2004 Decision, the totality of which strongly indicate that MPEI was a sham
corporation formed merely for the purpose of perpetrating a fraudulent scheme.
The red flags are as follows: (1) overly narrow specifications; (2) unjustified recommendations and unjustified winning
bidders; (3) failure to meet the terms of the contract; and (4) shell or fictitious company. We shall discuss each in
detail.
Overly Narrow Specifications
The World Bank's Fraud and Corruption Awareness Handbook: A Handbook for Civil Servants Involved in Public
Procurement, (Handbook) identifies an assortment of fraud and corruption indicators and relevant schemes in public
procurement.101 One of the schemes recognized by the Handbook is rigged
specifications:ChanRoblesVirtualawlibrary
Scheme: Rigged specifications. In a competitive market for goods and services, any specifications that seem to be
drafted in a way that favors a particular company deserve closer scrutiny. For example, specifications that are too
narrow can be used to exclude other qualified bidders or justify improper sole source awards. Unduly vague or broad
specifications can allow an unqualified bidder to compete or justify fraudulent change orders after the contract is
awarded. Sometimes, project officials will go so far as to allow the favored bidder to draft the
specifications.102chanroblesvirtuallawlibrary
In Our 2004 Decision, We identified a red flag of rigged bidding in the form of overly narrow specifications. As
already discussed, the accuracy requirement of 99.9995 percent was set up by COMELEC bidding rules. This Court
recognized that this rating was "too high and was a sure indication of fraud in the bidding, designed to eliminate fair
competition."103 Indeed, "the essence of public bidding is violated by the practice of requiring very high standards or
unrealistic specifications that cannot be met...only to water them down after the bid has been
award(ed)."104chanrobleslaw
Unjustified Recommendations and Unjustified Winning Bidders
Questionable evaluation in a Bid Evaluation Report (BER) is an indicator of bid rigging. The Handbook
expounds:ChanRoblesVirtualawlibrary
Questionable evaluation and unusual bid patterns may emerge in the BER. After the completion of the evaluation
process, the Bid Evaluation Committee should present to the implementing agency its BER, which describes the
results and the process by which the BEC has evaluated the bids received. The BER may include a number of
indicators of bid rigging, e.g., questionable disqualifications, and unusual bid patterns.105chanroblesvirtuallawlibrary
The Handbook lists unjustified recommendations and unjustified winning bidders as red flags of a rigged
bidding.106chanrobleslaw
The red flags of questionable recommendation and unjustified awards are raised in this case. As earlier discussed,
the project was awarded to MPC, which proved to be a nonentity. It was MPEI that actually participated in the
bidding process, but it was not qualified to be a bidder in the first place. Moreover, its ACMs failed the accuracy
requirement set by COMELEC. Yet, MPC — the nonentity — obtained a favorable recommendation from the BAC,
and the automation contract was awarded to the former.
Failure to Meet Contract Terms
Failure to meet the terms of a contract is regarded as a fraud by the Handbook:ChanRoblesVirtualawlibrary
Scheme: Failure to meet contract terms. Firms may deliberately fail to comply with contract requirements. The
contractor will attempt to conceal such actions often by falsifying or forging supporting documentation and bill for the
work as if it were done in accordance with specifications. In many cases, the contractors must bribe inspection or
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project personnel to accept the substandard goods or works, or supervision agents are coerced to approve
substandard work. x x x107chanroblesvirtuallawlibrary
As mentioned earlier, this Court already found the ACMs to be below the standards set by the COMELEC. We
reiterated their noncompliant status in Our 2005 and 2006 Resolutions.
As early as 2005, when the COMELEC sought permission from this Court to utilize the ACMs in the then scheduled
ARMM elections, We declared that the proposed use of the machines would expose the ARMM elections to the
same dangers of massive electoral fraud that would have been inflicted by the projected automation of the 2004
national elections. We based this pronouncement on the fact that the COMELEC failed to show that the deficiencies
had been cured.108 Yet again, this Court in 2006 blocked another attempt to use the ACMs, this time for the 2007
elections. We reiterated that because the ACMs had merely remained idle and unused since their last evaluation, in
which they failed to hurdle the crucial tests, then their defects and deficiencies could not have been cured by
then.109chanrobleslaw
Based on the foregoing, the ACMs delivered were plagued with defects that made them fail the requirements set for
the automation project.
Shell or fictitious company
The Handbook regards a shell or fictitious company as a "serious red flag," a concept that it elaborates
upon:ChanRoblesVirtualawlibrary
Fictitious companies are by definition fraudulent and may also serve as fronts for government officials. The typical
scheme involves corrupt government officials creating a fictitious company that will serve as a "vehicle" to secure
contract awards. Often, the fictitious—or ghost— company will subcontract work to lower cost and sometimes
unqualified firms. The fictitious company may also utilize designated losers as subcontractors to deliver the work,
thus indicating collusion.
Shell companies have no significant assets, staff or operational capacity. They pose a serious red flag as a bidder on
public contracts, because they often hide the interests of project or government officials, concealing a conflict of
interest and opportunities for money laundering. Also, by definition, they have no
experience.110chanroblesvirtuallawlibrary
MPEI qualifies as a shell or fictitious company. It was nonexistent at the time of the invitation to bid; to be precise, it
was incorporated only 11 days before the bidding. It was a newly formed corporation and, as such, had no track
record to speak of.
Further, MPEI misrepresented itself in the bidding process as "lead company" of the supposed joint venture. The
misrepresentation appears to have been an attempt to justify its lack of experience. As a new company, it was not
eligible to participate as a bidder. It could do so only by pretending that it was acting as an agent of the putative
consortium.
The timing of the incorporation of MPEI is particularly noteworthy. Its close nexus to the date of the invitation to bid
and the date of the bidding (11 days) provides a strong indicium of the intent to use the corporate vehicle for
fraudulent purposes. This proximity unmistakably indicates that the automation contract served as motivation for the
formation of MPEI: a corporation had to be organized so it could participate in the bidding by claiming to be an agent
of a pretended joint venture.
The timing of the formation of MPEI did not escape the scrutiny of Justice Angelina Sandoval-Gutierrez, who made
this observation in her Concurring Opinion in the 2004 Decision:ChanRoblesVirtualawlibrary
At this juncture, it bears stressing that MPEI was incorporated only on February 27, 2003 as evidenced by its
Certificate of Incorporation. This goes to show that from the time the COMELEC issued its Invitation to Bid (January
28, 2003) and Request for Proposal (February 17, 2003) up to the time it convened the Pre-bid Conference
(February 18, 2003), MPEI was literally a non-existent entity. It came into being only on February 27, 2003 or eleven
(11) days prior to the submission of its bid, i.e. March 10, 2003. This poses a legal obstacle to its eligibility as a
bidder. The Request for Proposal requires the bidder to submit financial documents that will establish to the BAC's
satisfaction its financial capability which include:ChanRoblesVirtualawlibrary
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(1) audited financial statements of the Bidder's firm for the last three (3) calendar years, stamped "RECEIVED" by
the appropriate government agency, to show its capacity to finance the manufacture and supply of Goods called for
and a statement or record of volumes of sales;
(2) Balance Sheet;
(3) Income Statement; and cralawlawlibrary
(4) Statement of Cash Flow.
As correctly pointed out by petitioners, how could MPEI comply with the above requirement of audited financial
statements for the last three (3) calendar years if it came into existence only eleven (11) days prior to the bidding?
To do away with such complication, MPEI asserts that it was MP CONSORTIUM who submitted the bid on March 10,
2003. It pretends compliance with the requirements by invoking the financial capabilities and long time existence of
the alleged members of the MP CONSORTIUM, namely, Election.Com, WeSolv, SK CeC, ePLDT and Oracle. It
wants this Court to believe that it is MP CONSORTIUM who was actually dealing with the COMELEC and that its
(MPEI) participation is merely that of a "lead company and proponent" of the joint venture. This is hardly convincing.
For one, the contract for the supply and delivery of ACM was between COMELEC and MPEI, not MP
CONSORTIUM. As a matter of fad, there cannot be found in the contract any reference to the MP CONSORTIUM or
any member thereof for that matter. For another, the agreements among the alleged members of MP CONSORTIUM
do not show the existence of a joint-venture agreement. Worse, MPEI cannot produce the agreement as to the "joint
and several liability" of the alleged members of the MP CONSORTIUM as required by this Court in its Resolution
dated October 7, 2003.111chanroblesvirtuallawlibrary
Respondent MPEI was formed to perpetrate the fraud against petitioner.
The totality of the red flags found in this case leads Us to the inevitable conclusion that MPEI was nothing but a
sham corporation formed for the purpose of defrauding petitioner. Its ultimate objective was to secure the
P1,248,949,088 automation contract. The scheme was to put up a corporation that would participate in the bid and
enter into a contract with the COMELEC, even if the former was not qualified or authorized to do so.
Without the incorporation of MPEI, the defraudation of the government would not have been possible. The formation
of MPEI paved the way for its participation in the bid, through its claim that it was an agent of a supposed joint
venture, its misrepresentations to secure the automation contract, its misrepresentation at the time of the execution
of the contract, its delivery of the defective ACMs, and ultimately its acceptance of the benefits under the automation
contract.
The foregoing considered, veil-piercing is justified in this case.
We shall next consider the question of whose assets shall be reached by the application of the piercing doctrine.
B. Because all the individual respondents actively participated in the perpetration of the fraud against petitioner, their
personal assets may be subject to a writ of preliminary attachment by piercing the corporate veil.
A corporation's privilege of being treated as an entity distinct and separate from the stockholders is confined to
legitimate uses, and is subject to equitable limitations to prevent its being exercised for fraudulent, unfair, or illegal
purposes.112 As early as the 19th century, it has been held that:ChanRoblesVirtualawlibrary
The general proposition that a corporation is to be regarded as a legal entity, existing separate and apart from the
natural persons composing it, is not disputed; but that the statement is a mere fiction, existing only in idea, is well
understood, and not controverted by any one who pretends to accurate knowledge on the subject. It has been
introduced for the convenience of the company in making contracts, in acquiring property for corporate purposes, in
suing and being sued, and to preserve the limited liability of the stockholder by distinguishing between the corporate
debts and property of the company and of the stockholders in their capacity as individuals. All fictions of law have
been introduced for the purpose of convenience, and to subserve the ends of justice. It is in this sense that the
maxim in fictione juris subsistit aequitas is used, and the doctrine of fictions applied. But when they are urged to an
intent and purpose not within the reason and policy of the fiction, they have always been disregarded by the courts.
Broom's, Legal Maxims 130. "It is a certain rule," says Lord Mansfield, C.J., "that a fiction of law never be
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contradicted so as to defeat the end for which it was invented, but for every other purpose it may be contradicted."
Johnson v. Smith, 2 Burr, 962.113chanroblesvirtuallawlibrary
The main effect of disregarding the corporate fiction is that stockholders will be held personally liable for the acts and
contracts of the corporation, whose existence, at least for the purpose of the particular situation involved, is
ignored.114chanrobleslaw
We have consistently held that when the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an association of persons.115 Thus, considering
that We find it justified to pierce the corporate veil in the case before Us, MPEI must, perforce, be treated as a mere
association of persons whose assets are unshielded by corporate fiction. Such persons' individual liability shall now
be determined with respect to the matter at hand.
Contrary to respondent Willy's claims, his participation in the fraud is clearly established by his unequivocal
agreement to the execution of the automation contract with the COMELEC, and his signature that appears on the
voided contract. As far back as in the 2004 Decision, his participation as a signatory' to the automation contract was
already established:ChanRoblesVirtualawlibrary
The foregoing argument is unpersuasive. First, the contract being referred to, entitled "The Automated Counting and
Canvassing Project Contract," is between Comelec and MPEI, not the alleged consortium, MPC. To repeat, it is
MPEI - not MPC - that is a party to the Contract. Nowhere in that Contract is there any mention of a consortium or
joint venture, of members thereof much less of joint and several liability. Supposedly executed sometime in May
2003, the Contract bears a notarization date of June 30, 2003, and contains the signature of Willy U. Yu signing as
president of MPEI (not for and on behalf of MPC), along with that of the Comelec chair. It provides in Section 3.2 that
MPEI (not MPC) is to supply the Equipment and perform the Services under the Contract, in accordance with the
appendices thereof; nothing whatsoever is said about any consortium or joint venture or partnership. x x x (Emphasis
supplied)
That his signature appears on the automation contract means that he agreed and acceded to its terms.116 His
participation in the fraud involves his signing and executing the voided contract.
The execution of the automation contract with a non-eligible entity and the subsequent award of the contract despite
the failure to meet the mandatory requirements were "badges of fraud" in the procurement process that should have
been recognized by the CA to justify the issuance of the writ of preliminary attachment against the properties of
respondent Willy.
With respect to the other individual respondents, petitioner, in its Answer with Counterclaim,
alleged:ChanRoblesVirtualawlibrary
30. Also, inasmuch as MPEI is in truth a mere shell corporation with no real assets in its name, incorporated merely
to feign eligibility for the bidding of the automated contract when it in fact had none, to the great prejudice of the
Republic, plaintiffs individual incorporators should likewise be made liable together with MPEI for the automated
contract amount paid to and received by the latter. The following circumstances altogether manifest that the
individual incorporators merely cloaked themselves with the veil of corporate fiction to perpetrate a fraud and to
eschew liability therefor, thus:
chanRoblesvirtualLawlibraryx x x x
f.
From the time it was incorporated until today, MPEI has not complied with the reportorial requirements of the
Securities and Exchange Commission;
g.
Individual incorporators, acting fraudulently through MPEI, and in violation of the bidding rules, then subcontracted
the automation contract to four (4) other corporations, namely: WeSolve Corporation, SK C&C, ePLDT and
election.com, to comply with the capital requirements, requisite five (5)-year corporate standing and the technical
qualifications of the Request for Proposal;
x x x x117chanroblesvirtuallawlibrary
In response to petitioner's allegations, respondents Willy and Bonnie stated in their Reply and Answer (Re: Answer
with Counterclaim dated 28 June 2004):118
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3.3 As far as plaintiff MPEI and defendants-in-counterclaim are concerned, they dealt with the COMELEC with full
transparency and in utmost good faith. All documents support its eligibility to bid for the supply of the ACMs and their
peripheral services, were submitted to the COMELEC for its evaluation in full transparency. Pertinently, neither
plaintiff MPEI nor any of its directors, stockholders, officers or employees had any participation in the evaluation of
the bids and eventual choice of the winning bidder.119chanroblesvirtuallawlibrary
Respondents Johnson's and Bernard's denials were made in paragraphs 2.17 and 3.3 of their Answer with
Counterclaim to the Republic's Counterclaim, to wit:120
2.17 The erroneous conclusion of fact and law in paragraph 30 (f) and (g) of the Republic's answer is denied, having
been pleaded in violation of the requirement, that only ultimate facts arc to be stated in the pleadings and they are
falsehoods. The truth of the matter is that there could not have been fraud, as these agreements were submitted to
the COMELEC for its evaluation and assessment, as to the qualification of the Consortium as a bidder, a showing of
transparency in plaintiffs dealings with the Republic.121chanrobleslaw
3.3 As far as plaintiff MPEI and defendants-in-counterclaim are concerned, they dealt with the COMELEC with full
transparency and in utmost good faith. All documents support its eligibility to bid for the supply of the automated
counting machines and its peripheral services, were submitted to the COMELEC for its evaluation in full
transparency. Pertinently, the plaintiff or any of its directors, stockholders, officers or employees had no participation
in the evaluation of the bids and eventual choice of the winning bidder.122chanroblesvirtuallawlibrary
As regards Enrique and Rosita, the relevant paragraphs in the Answer with Counterclaim to the Republic's
Counterclaim123 are quoted below:ChanRoblesVirtualawlibrary
2.17. The erroneous conclusion of fact and law in paragraph 30 (F) and (G) of the Republic's answer is denied,
having been pleaded in violation of the requirement, that only ultimate facts are to be stated in the pleadings and
they are falsehoods. The truth of the matter is that there could not have been fraud, as these agreements were
submitted to the COMELEC for its evaluation and assessment, as to the qualification of the Consortium as a bidder,
a showing of transparency in plaintiffs dealings with the Republic.124chanrobleslaw
3.3. As far as the plaintiff and herein answering defendants-in-counterclaim are concerned, they dealt with the
Commission on Elections with full transparency and in utmost good faith. All documents in support of its eligibility to
bid for the supply of the automated counting machines and its peripheral services were submitted to the Commission
on Elections for its evaluation in full transparency. Pertinently, the plaintiff or any of its directors, stockholders,
officers or employees had no participation in the evaluation of the bids and eventual choice of the winning
bidder.125chanroblesvirtuallawlibrary
Pedro and Laureano offer a similar defense in paragraph 3.3 of their Reply and Answer with Counterclaim to the
Republic's Counterclaim126 dated 28 June 2004, which reads:ChanRoblesVirtualawlibrary
3.3. As far as plaintiff MPEI and defendants-in-counterclaim are concerned, they dealt with the COMELEC with full
transparency and in utmost good faith. All documents support its eligibility to bid for the supply of the ACMs and their
peripheral services, were submitted to the COMELEC for its evaluation in full transparency. Pertinently, neither
plaintiff MPEI nor any of its directors, stockholders, officers or employees had any participation in the evaluation of
the bids and eventual choice of the winning bidder.127chanroblesvirtuallawlibrary
It can be seen from the above-quoted paragraphs that the individual respondents never denied their participation in
the questioned transactions of MPEI, merely raising the defense of good faith and shifting the blame to the
COMELEC. The individual respondents have, in effect, admitted that they had knowledge of and participation in the
fraudulent subcontracting of the automation contract to the four corporations.
It bears stressing that the remaining individual respondents, together with respondent Willy, incorporated MPEI. As
incorporators, they are expected to be involved in the management of the corporation and they are charged with the
duty of care. This is one of the reasons for the requirement of ownership of at least one share of stock by an
incorporator:ChanRoblesVirtualawlibrary
The reason for this, as explained by the lawmakers, is to avoid the confusion and/or ambiguities arising in a situation
under the old corporation law where there exists one set of incorporators who are not even shareholders and another
set of directors/incorporators who must all be shareholders of the corporation. The people who deal with said
corporation at such an early stage are confused as to who are the persons or group really authorized to act in behalf
of the corporation. (Proceedings of the Batasan Pambansa on the Proposed Corporation Code). Another reason may
be anchored on the presumption that when an incorporator has pecuniary interest in the corporation, no matter how
minimal, he will be more involved in the management of corporate affairs and to a greater degree, be concerned with
the welfare of the corporation.128chanroblesvirtuallawlibrary
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As incorporators and businessmen about to embark on a new business venture involving a sizeable capital (P300
million), the remaining individual respondents should have known of Willy's scheme to perpetrate the fraud against
petitioner, especially because the objective was a billion peso automation contract. Still, they proceeded with the
illicit business venture.
It is clear to this Court that inequity would result if We do not attach personal liability to all the individual respondents.
With a definite finding that MPEI was used to perpetrate the fraud against the government, it would be a great
injustice if the remaining individual respondents would enjoy the benefits of incorporation despite a clear finding of
abuse of the corporate vehicle. Indeed, to allow the corporate fiction to remain intact would not subserve, but instead
subvert, the ends of justice.
III.
The factual findings of this Court that have become final cannot be modified or altered, much less reversed, and are
controlling in the instant case.
Respondents argue that the 2004 Decision did not resolve and could not have resolved the factual issue of whether
they had committed any fraud, as the Supreme Court is not a trier of facts; and the 2004 case, being a certiorari
case, did not deal with questions of fact.129chanrobleslaw
Further, respondents argue that the findings of this Court ought to be confined only to those issues actually raised
and resolved in the 2004 case, in accordance with the principle of conclusiveness of judgment.130 They explain that
the issues resolved in the 2004 Decision were only limited to the following: (1) whether to declare COMELEC
Resolution No. 6074 null and void; (2) whether to enjoin the implementation of any further contract that may have
been entered into by COMELEC with MPC or MPEI; and (3) whether to compel COMELEC to conduct a rebidding of
the project.131chanrobleslaw
It is obvious that respondents are merely trying to escape the implications or effects of the nullity of the automation
contract that they had executed. Section 1, Rule 65 of the Rules of Court, clearly sets forth the instances when a
petition for certiorari can be used as a proper remedy:ChanRoblesVirtualawlibrary
Section 1. Petition for certiorari. — When any tribunal, board or officer exercising judicial or quasi-judicial functions
has acted without or in excess of its jurisdiction, or with grave abuse of discretion amounting to lack or excess of
jurisdiction, and there is no appeal, or any plain, speedy, and adequate remedy in the ordinary course of law. a
person aggrieved thereby may file a verified petition in the proper court, alleging the facts with certainty and praying
that judgment be rendered annulling or modifying the proceedings of such tribunal, board or officer, and granting
such incidental reliefs as law and justice may require.
The term "grave abuse of discretion" has a specific meaning. An act of a court or tribunal can only be considered to
have been committed with grave abuse of discretion when the act is done in a "capricious or whimsical exercise of
judgment as is equivalent to lack of jurisdiction."132 The abuse of discretion must be so patent and gross as to
amount to an "evasion of a positive duty or to a virtual refusal to perform a duty enjoined by law, or to act at all in
contemplation of law, as where the power is exercised in an arbitrary and despotic manner by reason of passion and
hostility."133 Furthermore, the use of a petition for certiorari is restricted only to "truly extraordinary cases wherein
the act of the lower court or quasi-judicial body is wholly void."134 From the foregoing definition, it is clear that the
special civil action of certiorari under Rule 65 can only strike down an act for having been done with grave abuse of
discretion if the petitioner could manifestly show that such act was patent and gross.135chanrobleslaw
We had to ascertain from the evidence whether the COMELEC committed grave abuse of discretion, and in the
process, were justified in making some factual findings. The conclusions derived from the factual findings are
inextricably intertwined with this Court's determination of grave abuse of discretion. They have a direct bearing and
are in fact necessary to illustrate that the award of the automation contract was done hastily and in direct violation of
law. This Court has indeed made factual findings based on the evidence presented before it; in turn, these factual
findings constitute the controlling legal rule between the parties that cannot be modified or amended by any of them.
This Court is bound to consider the factual findings made in the 2004 Decision in order to declare that there is fraud
for the purpose of issuing the writ of preliminary attachment.
Respondents appear to have misunderstood the implications of the principle of conclusiveness of judgment on their
cause. Contrary to their claims, the factual findings are conclusive and have been established as the controlling legal
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rule in the instant case, on the basis of the principle of res judicata—more particularly, the principle of conclusiveness
of judgment.
This doctrine of res judicata which is set forth in Section 47 of Rule 39 of the Rules of Court136 lays down two main
rules, namely: (1) the judgment or decree of a court of competent jurisdiction on the merits concludes the litigation
between the parties and their privies and constitutes a bar to a new action or suit involving the same cause of action
either before the same or any other tribunal; and (2) any right, fact, or matter in issue directly adjudicated or
necessarily involved in the determination of an action before a competent court in which a judgment or decree is
rendered on the merits is conclusively settled by the judgment therein and cannot again be litigated between the
parties and their privies whether or not the claims or demands, purposes, or subject matters of the two suits are the
same.137chanrobleslaw
These two main rules mark the distinction between the principles governing the two typical cases in which a
judgment may operate as evidence.138 The first general rule stated above and corresponding to the afore-quoted
paragraph (b) of Section 47, Rule 39 of the Rules of Court, is referred to as "bar by former judgment"; while the
second general rule, which is embodied in paragraph (c) of the same section and rule, is known as "conclusiveness
of judgment."139chanrobleslaw
In Calalang v. Register of Deeds of Quezon City,140 We discussed the concept of conclusiveness of judgment as
pertaining even to those matters essentially connected with the subject of litigation in the first action. This Court
explained therein that the bar on re-litigation extends to those questions necessarily implied in the final judgment,
although no specific finding may have been made in reference thereto, and although those matters were directly
referred to in the pleadings and were not actually or formally presented. If the record of the former trial shows that the
judgment could not have been rendered without deciding a particular matter, it will be considered as having settled
that matter as to all future actions between the parties; and if a judgment necessarily presupposes certain premises,
they are as conclusive as the judgment itself:ChanRoblesVirtualawlibrary
The second concept — conclusiveness of judgment — states that a fact or question which was in issue in a former
suit and was there judicially passed upon and determined by a court of competent jurisdiction, is conclusively settled
by the judgment therein as far as the parties to that action and persons in privity with them are concerned and cannot
be again litigated in any future action between such parties or their privies, in the same court or any other court of
concurrent jurisdiction on either the same or different cause of action, while the judgment remains unreversed by
proper authority. It has been held that in order that a judgment in one action can be conclusive as to a particular
matter in another action between the same parties or their privies, it is essential that the issue be identical. If a
particular point or question is in issue in the second action, and the judgment will depend on the determination of that
particular point or question, a former judgment between the same parties or their privies will be final and conclusive
in the second if that same point or question was in issue and adjudicated in the first suit (Nabus v. Court of Appeals,
193 SCRA 732 [1991]). Identity of cause of action is not required but merely identity of issue.
Justice Fcliciano, in Smith Bell & Company (Phils.), Inc. v. Court of Appeals (197 SCRA 201, 210 [1991]), reiterated
Lopez v. Reyes (76 SCRA 179 [1977]) in regard to the distinction between bar by former judgment which bars the
prosecution of a second action upon the same claim, demand, or cause of action, and conclusiveness of judgment
which bars the relitigation of particular facts or issues in another litigation between the same parties on a different
claim or cause of action.
The general rule precluding the re-litigation of material facts or questions which were in issue and adjudicated in
former action are commonly applied to all matters essentially connected with the subject matter of the litigation.
Thus, it extends to questions necessarily implied in the final judgment, although no specific finding may have been
made in reference thereto and although such matters were directly referred to in the pleadings and were not actually
or formally presented. Under this rule, if the record of the former trial shows that the judgment could not have been
rendered without deciding the particular matter, it will be considered as having settled that matter as to all future
actions between the parties and if a judgment necessarily presupposes certain premises, they are as conclusive as
the judgment itself.141 (Emphases supplied)
The foregoing disquisition finds application to the case at bar.
Undeniably, the present case is merely an adjunct of the 2004 case, in which the automation contract was declared
to be a nullity. Needless to say, the 2004 Decision has since become final. As earlier explained, this Court arrived at
several factual findings showing the illegality of the automation contract; in turn, these findings were used as basis to
justify the declaration of nullity.
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A closer scrutiny of the 2004 Decision would reveal that the judgment could not have been rendered without deciding
particular factual matters in relation to the following: (1) identity, existence and eligibility of MPC as a bidder; (2)
failure of the ACMs to pass DOST technical tests; and (3) remedial measures undertaken by the COMELEC after the
award of the automation contract. Under the principle of conclusiveness of judgment, We are precluded from re-
litigating these facts, as these were essential to the question of nullity. Otherwise stated, the judgment could not
have been rendered without necessarily deciding on the above-enumerated factual matters.
Thus, under the principle of conclusiveness of judgment, those material facts became binding and conclusive on the
parties, in this case MPEI and, ultimately, the persons that comprised it. When a right or fact has been judicially tried
and determined by a court of competent jurisdiction, or when an opportunity for that trial has been given, the
judgment of the court—as long as it remains unreversed—should be conclusive upon the parties and those in privity
with them.142 Thus, the CA should not have required petitioner to present further evidence of fraud on the part of
respondent Willy and MPEI, as it was already necessarily adjudged in the 2004 case.
To allow respondents to argue otherwise would be violative of the principle of immutability of judgment. When a final
judgment becomes executory, it becomes immutable and unalterable and may no longer undergo any modification,
much less any reversal.143 In Navarro v. Metropolitan Bank & Trust Company144 this Court explained that the
underlying reason behind this principle is to avoid delay in the administration of justice and to avoid allowing judicial
controversies to drag on indefinitely, viz.:ChanRoblesVirtualawlibrary
No other procedural law principle is indeed more settled than that once a judgment becomes final, it is no longer
subject to change, revision, amendment or reversal, except only for correction of clerical errors, or the making of
nunc pro tunc entries which cause no prejudice to any party, or where the judgment itself is void. The underlying
reason for the rule is two-fold: (1) to avoid delay in the administration of justice and thus make orderly the discharge
of judicial business, and (2) to put judicial controversies to an end, at the risk of occasional errors, inasmuch as
controversies cannot be allowed to drag on indefinitely and the rights and obligations of every litigant must not hang
in suspense for an indefinite period of time. As the Court declared in Yau v. Silverio,
Litigation must end and terminate sometime and somewhere, and it is essential to an effective and efficient
administration of justice that, once a judgment has become final, the winning party be, not through a mere
subterfuge, deprived of the fruits of the verdict. Courts must therefore guard against any scheme calculated to bring
about that result. Constituted as they are to put an end to controversies, courts should frown upon any attempt to
prolong them.
Indeed, just as a losing party has the right to file an appeal within the prescribed period, the winning party also has
the correlative right to enjoy the finality of the resolution of his case by the execution and satisfaction of the
judgment. Any attempt to thwart this rigid rule and deny the prevailing litigant his right to savor the fruit of his victory
must immediately be struck down. x x x. (Emphasis supplied)145chanroblesvirtuallawlibrary
In the instant case, adherence to respondents' position would mean a complete disregard of the factual findings We
made in the 2004 Decision, and would certainly be tantamount to reversing the same. This would invariably cause
further delay in the efforts to recover the amounts of government money illegally disbursed to respondents back in
2004.
Next, respondents argue that the findings of fact in the 2004 Decision are not conclusive146 considering that eight
(8) of the fifteen (15) justices of this Court refused to go along with the factual findings as stated in the majority
opinion.147 This argument fails to convince.
Fourteen (14) Justices participated in the promulgation of the 2004 Decision. Out of the fourteen (14) Justices, three
(3) Justices registered their dissent,148 and two (2) Justices wrote their Separate Opinions, each recommending the
dismissal of the Petition.149 Of the nine (9) Justices who voted to grant the Petition, four (4) joined the ponente in his
disposition of the case,150 and two (2) Justices wrote Separate Concurring Opinions.151 As to the remaining two (2)
Justices, one (1) Justice152 merely concurred in the result, while the other joined another Justice in her Separate
Opinion.153chanrobleslaw
Contrary to the allegations of respondents, an examination of the voting shows that nine (9) Justices voted in favor of
the majority opinion, without any qualification regarding the factual findings made therein. In fact, the two (2) Justices
who wrote their own Concurring Opinions echoed the lack of eligibility of MPC and the failure of the ACMs to pass
the mandatory requirements.
MJRTB
Finally, respondents cannot argue that, from the line of questioning of then Justice Leonardo A. Quisumbing during
the oral arguments in the 2004 case, he did not agree with the factual findings of this Court. Oral arguments before
this Court are held precisely to test the soundness of each proponent's contentions. The questions and statements
propounded by Justices during such an exercise are not to be construed as their definitive opinions. Neither are they
indicative of how a Justice shall vote on a particular issue; indeed, Justice Quisumbing clearly states in the 2004
Decision that he concurs in the results. At any rate, statements made by Our Members during oral arguments are not
stare decisis; what is conclusive are the decisions reached by the majority of the Court.
IV.
The delivery of 1,991 units of ACMs does not negate fraud on the part of respondents Willy and MPEI.
The CA in its Amended Decision explained that respondents could not be considered to have fostered a fraudulent
intent to not honor their obligation, since they delivered 1,991 units of ACMs.154 In turn, respondents argue that
respondent MPEI had every intention of fulfilling its obligation, because it in fact delivered the ACMs as required by
the automation contract.155chanrobleslaw
We disagree with the CA and respondents. The fact that the ACMs were delivered cannot induce this Court to
disregard the fraud respondent MPEI had employed in securing the award of the automation contract, as established
above. Furthermore, they cannot cite the fact of delivery in their favor, considering that the ACMs delivered were
substandard and noncompliant with the requirements initially set for the automation project.
In Our 2004 Decision, We already found the ACMs to be below the standards set by the COMELEC. The
noncompliant status of these ACMs was reiterated by this Court in its 2005 and 2006 Resolutions. The CA therefore
gravely erred in considering the delivery of 1,991 ACMs as evidence of respondents' willingness to perform the
obligation (and thus, their lack of fraud) considering that, as exhaustively discussed earlier, the ACMs delivered were
plagued with defects and failed to meet the requirements set for the automation project.
Under Article 1233 of the New Civil Code, a debt shall not be understood to have been paid, unless the thing or
service in which the obligation consists has been completely delivered or rendered. In this case, respondents cannot
be considered to have performed their obligation, because the ACMs were defective.
V.
Estoppel does not lie against the State when it acts to rectify the mistakes, errors or illegal acts of its officials and
agents.
Respondents claim that the 2004 Decision may not be invoked against them, since the petitioner and the
respondents were co-respondents and not adverse parties in the 2004 case. Respondents further explain that since
petitioner and respondents were on the same side at the time, had the same interest, and took the same position on
the validity and regularity of the automation contract, petitioner cannot now invoke the 2004 Decision against
them.156chanrobleslaw
Contrary to respondents' contention, estoppel generally finds no application against the State when it acts to rectify
mistakes, errors, irregularities, or illegal acts of its officials and agents, irrespective of rank. This principle ensures the
efficient conduct of the affairs of the State without any hindrance to the implementation of laws and regulations by
the government. This holds true even if its agents' prior mistakes or illegal acts shackle government operations and
allow others—some by malice—to profit from official error or misbehavior, and even if the rectification prejudices
parties who have meanwhile received benefit.157 Indeed, in the 2004 Decision, this Court even directed the
Ombudsman to determine the possible criminal liability of public officials and private persons responsible for the
contract, and the OSG to undertake measures to protect the government from the ill effects of the illegal
disbursement of public funds.158chanrobleslaw
The equitable doctrine of estoppel for the prevention of injustice and is for the protection of those who have been
misled by that which on its face was fair and whose character, as represented, parties to the deception will not, in the
interest of justice, be heard to deny.159 It cannot therefore be utilized to insulate from liability the very perpetrators of
the injustice complained of.
VI.
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The findings of the Office of the Ombudsman are not controlling in the instant case.
Respondents further claim that this Court has recognized the fact that it did not determine or adjudge any fraud that
may have been committed by individual respondents. Rather, it referred the matter to the Ombudsman for the
determination of criminal liability.160 The Ombudsman in fact made its own determination that there was no probable
cause to hold individual respondents criminally liable.161chanrobleslaw
Respondents miss the point. The main issue in the instant case is whether respondents are guilty of fraud in
obtaining and executing the automation contract, to justify the issuance of a writ of preliminary attachment in
petitioner's favor. Meanwhile, the issue relating to the proceedings before the Ombudsman (and this Court in G.R.
No. 174777) pertains to the finding of lack of probable cause for the possible criminal liability of respondents under
the Anti-Graft and Corrupt Practices Act.
The matter before Us involves petitioner's application for a writ of preliminary attachment in relation to its recovery of
the expended amount under the voided contract, and not the determination of whether there is probable cause to
hold respondents liable for possible criminal liability due to the nullification of the automation contract. Whether or not
the Ombudsman has found probable cause for possible criminal liability on the part of respondents is not controlling
in the instant case.
CONCLUSION
If the State is to be serious in its obligation to develop and implement coordinated anti-corruption policies that
promote proper management of public affairs and public property, integrity, transparency and accountability,162 it
needs to establish and promote effective practices aimed at the prevention of corruption,163 as well as strengthen
our efforts at asset recovery.164chanrobleslaw
As a signatory to the United Nations Convention Against Corruption (UNCAC),165 the Philippines acknowledges its
obligation to establish appropriate systems of procurement based on transparency, competition and objective criteria
in decision-making that are effective in preventing corruption.166 To promote transparency, and in line with the
country's efforts to curb corruption, it is useful to identify certain fraud indicators or "red flags" that can point to
corrupt activity.167 This case - arguably the first to provide palpable examples of what could be reasonably
considered as "red flags" of fraud and malfeasance in public procurement - is the Court's contribution to the nation's
continuing battle against corruption, in accordance with its mandate to dispense justice and safeguard the public
interest.
WHEREFORE, premises considered, the Petition is GRANTED. The Amended Decision dated 22 September 2008
of the Court of Appeals in CA-G.R. SP. No. 95988 is ANNULLED AND SET ASIDE. A new one is entered
DIRECTING the Regional Trial Court of Makati City, Branch 59, to ISSUE in Civil Case No. 04-346, entitled Mega
Pacific eSolutions, Inc., vs. Republic of the Philippines, the Writ of Preliminary Attachment prayed for by petitioner
Republic of the Philippines against the properties of respondent Mega Pacific eSolutions, Inc., and Willy U. Yu,
Bonnie S. Yu, Enrique T. Tansipek, Rosita Y. Tansipek, Pedro O. Tan, Johnson W. Fong, Bernard I. Fong and
Lauriano Barrios.
No costs.
SO ORDERED.
MJRTB
G.R. No. 198967, March 07, 2016
JOSE EMMANUEL P. GUILLERMO, Petitioner, v. CRISANTO P. USON, Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to annul and set
aside the Court of Appeals Decision1 dated June 8, 2011 and Resolution2 dated October 7, 2011 in CA -G.R. SP
No. 115485, which affirmed in toto the decision of the National Labor Relations Commission (NLRC).
The facts of the case follow.
On March 11, 1996, respondent Crisanto P. Uson (Uson) began his employment with Royal Class Venture Phils.,
Inc. (Royal Class Venture) as an accounting clerk.3 Eventually, he was promoted to the position of accounting
supervisor, with a salary of Php13,000.00 a month, until he was allegedly dismissed from employment on December
20, 2000.4
On March 2, 2001, Uson filed with the Sub-Regional Arbitration . Branch No. 1, Dagupan City, of the NLRC a
Complaint for Illegal Dismissal, with prayers for backwages, reinstatement, salaries and 13th month pay, moral and
exemplary damages and attorney's fees against Royal Class Venture.5
Royal Class Venture did not make an appearance in the case despite its receipt of summons.6
On May 15, 2001, Uson filed his Position Paper7 as complainant.
On October 22, 2001, Labor Arbiter Jose G. De Vera rendered a Decision8 in favor of the complainant Uson and
ordering therein respondent Royal Class Venture to reinstate him to his former position and pay his backwages, 13th
month pay as well as moral and exemplary damages and attorney's fees.
Royal Class Venture, as the losing party, did not file an appeal of the decision.9 Consequently, upon Uson's motion,
a Writ of Execution10 dated February 15, 2002 was issued to implement the Labor Arbiter's decision.
On May 17, 2002, an Alias Writ of Execution11 was issued. But with the judgment still unsatisfied, a Second Alias
Writ of Execution12 was issued on September 11, 2002.
Again, it was reported in the Sheriff's Return that the Second Alias Writ of Execution dated September 11, 2002
remained "unsatisfied." Thus, on November 14, 2002, Uson filed a Motion for Alias Writ of Execution and to Hold
Directors and Officers of Respondent Liable for Satisfaction of the Decision.13 The motion quoted from a portion of
the Sheriffs Return, which states:
chanRoblesvirtualLawlibrary
On September 12, 2002, the undersigned proceeded at the stated present business office address of the respondent
which is at Minien East, Sta. Barbara, Pangasinan to serve the writ of execution. Upon arrival, I found out that the
establishment erected thereat is not [in] the respondent's name but JOEL and SONS CORPORATION, a family
corporation owned by the Guillermos of which, Jose Emmanuel F. Guillermo the General Manager of the respondent,
is one of the stockholders who received the writ using his nickname "Joey," [and who] concealed his real identity and
pretended that he [was] the brother of Jose, which [was] contrary to the statement of the guard-on-duty that Jose and
Joey [were] one and the same person. The former also informed the undersigned that the respondent's (sic)
corporation has been dissolved.
On the succeeding day, as per [advice] by the [complainant's] counsel that the respondent has an account at the
Bank of Philippine Islands Magsaysay Branch, A.B. Fernandez Ave., Dagupan City, the undersigned immediately
served a notice of garnishment, thus, the bank replied on the same day stating that the respondent [does] not have
an account with the branch.14ChanRoblesVirtualawlibrary
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On December 26, 2002, Labor Arbiter Irenarco R. Rimando issued an Order15 granting the motion filed by Uson.
The order held that officers of a corporation are jointly and severally liable for the obligations of the corporation to the
employees and there is no denial of due process in holding them so even if the said officers were not parties to the
case when the judgment in favor of the employees was rendered.16 Thus, the Labor Arbiter pierced the veil of
corporate fiction of Royal Class Venture and held herein petitioner Jose Emmanuel Guillermo (Guillermo), in his
personal capacity, jointly and severally liable with the corporation for the enforcement of the claims of Uson.17
Guillermo filed, by way of special appearance, a Motion for Reconsideration/To Set Aside the Order of December 26,
2002.18 The same, however, was not granted as, this time, in an Order dated November 24, 2003, Labor Arbiter
Niña Fe S. Lazaga-Rafols sustained the findings of the labor arbiters before her and even castigated Guillenno for
his unexplained absence in the prior proceedings despite notice, effectively putting responsibility on Guillermo for the
case's outcome against him.19
On January 5, 2004, Guillermo filed a Motion for Reconsideration of the above Order,20 but the same was promptly
denied by the Labor Arbiter in an Order dated January 7, 2004.21
On January 26, 2004, Uson filed a Motion for Alias Writ of Execution,22 to which Guillermo filed a Comment and
Opposition on April 2, 2004.23
On May 18, 2004, the Labor Arbiter issued an Order24 granting Uson's Motion for the Issuance of an Alias Writ of
Execution and rejecting Guillermo's arguments posed in his Comment and Opposition.
Guillermo elevated the matter to the NLRC by filing a Memorandum of Appeal with Prayer for a (Writ of) Preliminary
Injunction dated June 10, 2004.25cralawred
In a Decision26 dated May 11, 2010, the NLRC dismissed Guillermo's appeal and denied his prayers for injunction.
On August 20, 2010, Guillermo filed a Petition for Certiorari27 before the Court of Appeals, assailing the NLRC
decision.
On June 8, 2011, the Court of Appeals rendered its assailed Decision28 which denied Guillermo's petition and
upheld all the findings of the NLRC.
The appellate court found that summons was in fact served on Guillermo as President and General Manager of
Royal Class Venture, which was how the Labor Arbiter acquired jurisdiction over the company.29 But Guillermo
subsequently refused to receive all notices of hearings and conferences as well as the order to file Royal Class
Venture's position paper.30 Then, it was learned during execution that Royal Class Venture had been dissolved.31
However, the Court of Appeals held that although the judgment had become final and executory, it may be modified
or altered "as when its execution becomes impossible or unjust."32 It also noted that the motion to hold officers and
directors like Guillermo personally liable, as well as the notices to hear the same, was sent to them by registered
mail, but no pleadings were submitted and no appearances were made by anyone of them during the said motion's
pendency.33 Thus, the court held Guillermo liable, citing jurisprudence that hold the president of the corporation
liable for the latter's obligation to illegally dismissed employees.34 Finally, the court dismissed Guillermo's allegation
that the case is an intra-corporate controversy, stating that jurisdiction is determined by the allegations in the
complaint and the character of the relief sought.35
From the above decision of the appellate court, Guillermo filed a Motion for Reconsideration36 but the same was
again denied by the said court in the assailed Resolution37 dated October 7, 2011.
Hence, the instant petition.
Guillermo asserts that he was impleaded in the case only more than a year after its Decision had become final and
executory, an act which he claims to be unsupported in law and jurisprudence.38 He contends that the decision had
become final, immutable and unalterable and that any amendment thereto is null and void.39 Guillermo assails the
so-called "piercing the veil" of corporate fiction which allegedly discriminated against him when he alone was
belatedly impleaded despite the existence of other directors and officers in Royal Class Venture.40 He also claims
that the Labor Arbiter has no jurisdiction because the case is one of an intra-corporate controversy, with the
MJRTB
complainant Uson also claiming to be a stockholder and director of Royal Class Venture.41
In his Comment,42 Uson did not introduce any new arguments but merely cited verbatim the disquisitions of the
Court of Appeals to counter Guillermo's assertions in his petition.
To resolve the case, the Court must confront the issue of whether an officer of a corporation may be included as
judgment obligor in a labor case for the first time only after the decision of the Labor Arbiter had become final and
executory, and whether the twin doctrines of "piercing the veil of corporate fiction" and personal liability of company
officers in labor cases apply.
The petition is denied.
In the earlier labor cases of Claparols v. Court of Industrial Relations43 and A.C. Ransom Labor Union-CCLU v.
NLRC,44 persons who were not originally impleaded in the case were, even during execution, held to be solidarity
liable with the employer corporation for the latter's unpaid obligations to complainant-employees. These included a
newly-formed corporation which was considered a mere conduit or alter ego of the originally impleaded corporation,
and/or the officers or stockholders of the latter corporation.45 Liability attached, especially to the responsible officers,
even after final judgment and during execution, when there was a failure to collect from the employer corporation the
judgment debt awarded to its workers.46 In Naguiat v. NLRC,47 the president of the corporation was found, for the
first time on appeal, to be solidarily liable to the dismissed employees. Then, in Reynoso v. Court of Appeals,48 the
veil of corporate fiction was pierced at the stage of execution, against a corporation not previously impleaded, when
it was established that such corporation had dominant control of the original party corporation, which was a smaller
company, in such a manner that the latter's closure was done by the former in order to defraud its creditors, including
a former worker.
The rulings of this Court in A.C. Ransom, Naguiat, and Reynoso, however, have since been tempered, at least in the
aspects of the lifting of the corporate veil and the assignment of personal liability to directors, trustees and officers in
labor cases. The subsequent cases of McLeod v. NLRC,49Spouses Santos v. NLRC50 and Carag v. NLRC,51 have
all established, save for certain exceptions, the primacy of Section 3152 of the Corporation Code in the matter of
assigning such liability for a corporation's debts, including judgment obligations in labor cases. According to these
cases, a corporation is still an artificial being invested by law with a personality separate and distinct from that of its
stockholders and from that of other corporations to which it may be connected.53 It is not in every instance of
inability to collect from a corporation that the veil of corporate fiction is pierced, and the responsible officials are
made liable. Personal liability attaches only when, as enumerated by the said Section 31 of the Corporation Code,
there is a wilfull and knowing assent to patently unlawful acts of the corporation, there is gross negligence or bad
faith in directing the affairs of the corporation, or there is a conflict of interest resulting in damages to the
corporation.54 Further, in another labor case, Pantranco Employees Association (PEA-PTGWO), et al. v. NLRC, et
al.,55 the doctrine of piercing the corporate veil is held to apply 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. In the absence of malice, bad faith, or a specific
provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for
corporate liabilities.56 Indeed, in Reahs Corporation v. NLRC,57 the conferment of liability on officers for a
corporation's obligations to labor is held to be an exception to the general doctrine of separate personality of a
corporation.
It also bears emphasis that in cases where personal liability attaches, not even all officers are made accountable.
Rather, only the "responsible officer," i.e., the person directly responsible for and who "acted in bad faith" in
committing the illegal dismissal or any act violative of the Labor Code, is held solidarily liable, in cases wherein the
corporate veil is pierced.58 In other instances, such as cases of so-called corporate tort of a close corporation, it is
the person "actively engaged" in the management of the corporation who is held liable.59 In the absence of a clearly
identifiable officer(s) directly responsible for the legal infraction, the Court considers the president of the corporation
as such officer.60
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The common thread running among the aforementioned cases, however, is that the veil of corporate fiction can be
pierced, and responsible corporate directors and officers or even a separate but related corporation, may be
impleaded and held answerable solidarily in a labor case, even after final judgment and on execution, so long as it is
established that such persons have deliberately used the corporate vehicle to unjustly evade the judgment
obligation, or have resorted to fraud, bad faith or malice in doing so. When the shield of a separate corporate identity
is used to commit wrongdoing and opprobriously elude responsibility, the courts and the legal authorities in a labor
case have not hesitated to step in and shatter the said shield and deny the usual protections to the offending party,
even after final judgment. The key element is the presence of fraud, malice or bad faith. Bad faith, in this instance,
does not connote bad judgment or negligence but imports a dishonest purpose or some moral obliquity and
conscious doing of wrong; it means breach of a known duty through some motive or interest or ill will; it partakes of
the nature of fraud.61
As the foregoing implies, there is no hard and fast rule on when corporate fiction may be disregarded; instead, each
case must be evaluated according to its peculiar circumstances.62 For the case at bar, applying the above criteria, a
finding of personal and solidary liability against a corporate officer like Guillermo must be rooted on a satisfactory
showing of fraud, bad
faith or malice, or the presence of any of the justifications for disregarding the corporate fiction. As stated in
McLeod,63 bad faith is a question of fact and is evidentiary, so that the records must first bear evidence of malice
before a finding of such may be made.
It is our finding that such evidence exists in the record. Like the A. C. Ransom, and Naguiat cases, the case at bar
involves an apparent family corporation. As in those two cases, the records of the present case bear allegations and
evidence that Guillermo, the officer being held liable, is the person responsible in the actual running of the company
and for the malicious and illegal dismissal of the complainant; he, likewise, was shown to have a role in dissolving
the original obligor company in an obvious "scheme to avoid liability" which jurisprudence has always looked upon
with a suspicious eye in order to protect the rights of labor.64
Part of the evidence on record is the second page of the verified Position Paper of complainant (herein respondent)
Crisanto P. Uson, where it was clearly alleged that Uson was "illegally dismissed by the President/General Manager
of respondent corporation (herein petitioner) Jose Emmanuel P. Guillermo when Uson exposed the practice of the
said President/General Manager of dictating and undervaluing the shares of stock of the corporation."65 The
statement is proof that Guillermo was the responsible officer in charge of running the company as well as the one
who dismissed Uson from employment. As this sworn allegation is uncontroverted - as neither the company nor
Guillermo appeared before the Labor Arbiter despite the service of summons and notices - such stands as a fact of
the case, and now functions as clear evidence of Guillermo's bad faith in his dismissal of Uson from employment,
with the motive apparently being anger at the latter's reporting of unlawful activities.
Then, it is also clearly reflected in the records that it was Guillermo himself, as President and General Manager of the
company, who received the summons to the case, and who also subsequently and without justifiable cause refused
to receive all notices and orders of the Labor Arbiter that followed.66 This makes Guillermo responsible for his and
his company's failure to participate in the entire proceedings before the said office. The fact is clearly narrated in the
Decision and Orders of the Labor Arbiter, Uson's Motions for the Issuance of Alias Writs of Execution, as well as in
the Decision of the NLRC and the assailed Decision of the Court of Appeals,67 which Guillermo did not dispute in
any of his belated motions or pleadings, including in his petition for certiorari before the Court of Appeals and even in
the petition currently before this Court.68 Thus, again, the same now stands as a finding of fact of the said lower
tribunals which binds this Court and which it has no power to alter or revisit.69 Guillermo's knowledge of the case's
filing and existence and his unexplained refusal to participate in it as the responsible official of his company, again is
an indicia of his bad faith and malicious intent to evade the judgment of the labor tribunals.
Finally, the records likewise bear that Guillermo dissolved Royal Class Venture and helped incorporate a new firm,
located in the same address as the former, wherein he is again a stockl1older. This is borne by the Sherif11s Return
which reported: that at Royal Class Venture's business address at Minien East, Sta. Barbara, Pangasinan, there is a
new establishment named "Joel and Sons Corporation," a family corporation owned by the Guillermos in which Jose
Emmanuel F. Guillermo is again one of the stockholders; that Guillermo received the writ of execution but used the
nickname "Joey" and denied being Jose Emmanuel F. Guillermo and, instead, pretended to be Jose's brother; that
the guard on duty confirmed that Jose and Joey are one and the same person; and that the respondent corporation
MJRTB
Royal Class Venture had been dissolved.70 Again, the facts contained in the Sheriffs Return were not disputed nor
controverted by Guillermo, either in the hearings of Uson's Motions for Issuance of Alias Writs of Execution, in
subsequent motions or pleadings, or even in the petition before this Court. Essentially, then, the facts form part of the
records and now stand as further proof of Guillermo's bad faith and malicious intent to evade the judgment
obligation.

The foregoing clearly indicate a pattern or scheme to avoid the obligations to Uson and frustrate the execution of the
judgment award, which this Court, in the interest of justice, will not countenance.

As for Guillermo's assertion that the case is an intra-corporate controversy, the Court sustains the finding of the
appellate court that the nature of an action and the jurisdiction of a tribunal are determined by the allegations of the
complaint at the time of its filing, irrespective of whether or not the plaintiff is entitled to recover upon all or some of
the claims asserted therein.71 Although Uson is also a stockholder and director of Royal Class Venture, it is settled
in jurisprudence that not all conflicts between a stockholder and the corporation are intra-corporate; an examination
of the complaint must be made on whether the complainant is involved in his capacity as a stockholder or director, or
as an employee.72 If the latter is found and the dispute does not meet the test of what qualities as an intra-
-corporate controversy, then the case is a labor case cognizable by the NLRC and is not within the jurisdiction of any
other tribunal.73 In the case at bar, Uson's allegation was that he was maliciously and illegally dismissed as an
Accounting Supervisor by Guillermo, the Company President and General Manager, an allegation that was not even
disputed by the latter nor by Royal Class Venture. It raised no intra-corporate relationship issues between him and
the corporation or Guillermo; neither did it raise any issue regarding the regulation of the corporation. As correctly
found by the appellate court, Uson's complaint and redress sought were centered alone on his dismissal as an
employee, and not upon any other relationship he had with the company or with Guillermo. Thus, the matter is clearly
a labor dispute cognizable by the labor tribunals.chanrobleslaw

WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated June 8, 2011 and Resolution dated
October 7, 2011 in CA- G.R. SP No. 115485 are AFFIRMED.

SO ORDERED.

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G.R. No. 161759 July 2, 2014 On December 23, 1998, upon his assumption of office, Customs Commissioner Nelson Tan transmitted another
demand letter to URC affirming the assessment of ₱99,216,580.10 by Commissioner Mendoza.
COMMISSIONER OF CUSTOMS, Petitioner,
vs. On January 18, 1999, Magleo, in behalf of URC, replied by letter to Commissioner Tan’s affirmance by denying
OILINK INTERNATIONAL CORPORATION, Respondent. liability, insisting instead that only ₱28,933,079.20 should be paid by way of compromise.

DECISION On March 26, 1999, Commissioner Tan responded by rejecting Magleo’s proposal, and directed URC to pay
₱99,216,580.10.
BERSAMIN, J.:
On May 24, 1999, Manuel Co, URC’s President, conveyed to Commissioner Tan URC’s willingness to pay only
₱94,216,580.10, of which the initial amount of ₱28,264,974.00 would be taken from the collectibles of Oilink from the
This appeal is brought by the Commissioner of Customs to seek the review and reversal of the decision promulgated
National Power Corporation, and the balance to be paid in monthly installments over a period ofthree years to be
on September 29, 2003,1 whereby the Court of Appeals (CA) affirmed the adverse ruling of the Court of Tax Appeals
secured with corresponding post-dated checks and its future available tax credits.
(CTA) declaring the assessment for deficiency taxes and duties against Oilink International Corporation (Oilink) null
and void.
On July 2, 1999, Commissioner Tan made a final demand for the total liability of ₱138,060,200.49 upon URC and
Oilink.
Antecedents

On July 8, 1999, Co requested from Commissioner Tan a complete finding of the facts and law in support ofthe
The antecedents are summarized in the assailed decision.2
assessment made in the latter’s July 2, 1999 final demand.

On September 15, 1966, Union Refinery Corporation (URC) was established under the Corporation Code of the
Also on July 8, 1999, Oilink formally protested the assessment on the ground that it was not the party liable for the
Philippines. In the course of its business undertakings, particularly in the period from 1991 to 1994, URC imported oil
assessed deficiency taxes.
products into the country.

On July 12, 1999, after receiving the July 8, 1999 letter from Co, Commissioner Tan communicated in writing the
On January 11, 1996, Oilink was incorporated for the primary purpose of manufacturing, importing, exporting, buying,
detailed computation of the tax liability, stressing that the Bureau of Customs (BoC) would not issue any clearance to
selling or dealing in oil and gas, and their refinements and by-products at wholesale and retail of petroleum. URC
Oilink unless the amount of ₱138,060,200.49 demanded as Oilink’s tax liability befirst paid, and a performance bond
and Oilink had interlocking directors when Oilink started its business.
be posted by URC/Oilink to secure the payment of any adjustments that would result from the BIR’s review of the
liabilities for VAT, excise tax, special duties, penalties, etc.
In applying for and in expediting the transfer of the operator’s name for the Customs Bonded Warehouse
thenoperated by URC, Esther Magleo, the Vice-President and General Manager of URC, sent a letter dated January
Thus, on July 30, 1999, Oilink appealed to the CTA, seeking the nullification of the assessment for having been
15, 1996 to manifest that URC and Oilink had the same Board of Directors and that Oilink was 100% owned by URC.
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.
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
Decision of the CTA
Lucanin in Mariveles, Bataan.

On July 9, 2001, the CTA rendered its decision declaring as null and void the assessment of the Commissioner of
On April 16, 1998, Brillo made another demand letter to URC for the payment of the reduced sum of
Customs, to wit:
₱289,287,486.60 for the Value-Added Taxes (VAT), special duties and excisetaxes for the years 1991-1995.

IN THE LIGHT OF ALL THE FOREGOING, the petition is hereby GRANTED. The assailed assessment issued by
On April 23, 1998, URC, through its counsel, responded to the demands by seeking the landed computations of the
Respondent against herein Petitioner OILINK INTERNATIONAL CORPORATION is hereby declared NULL and
assessments, and challenged the inconsistencies of the demands.
VOID.

On November 25, 1998, then Customs Commissioner Pedro C. Mendoza formally directed that URC pay the amount
SO ORDERED.3
of ₱119,223,541.71 representing URC’s 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. The Commissioner of Customs seasonably filed a motion for reconsideration, 4 but the CTA denied the motion for
lack of merit.5
On December 21, 1998, Commissioner Mendoza wrote again to require URC to pay deficiency taxes but in the
reduced sum of ₱99,216,580.10. Judgment of the CA

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Aggrieved, the Commissioner of Customs brought a petition for review in the CA upon the following issues, namely:
(a) the CTA gravely erred in 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 ofTax Appeals since it is
undisputed that what is involved herein is the respondent’s 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 petitioner’s 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 ofadministrative 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 inthe 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
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 latter’s 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 provethat 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
Issues
Hence, this appeal, whereby the Commissioner of Customs reiterates the issues raised in the CA.
Ruling of the Court
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:
Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal,
as herein provided:
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xxxx
2. Decisions of the Commissioner ofCustoms 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
Nonetheless, the Commissioner of Customs contends that the CTA should not take cognizance of the casebecause
of the lapse of the 30-day period within which to appeal, arguing that on November 25, 1998 URC had already
received the BoC’s final assessment demanding payment of the amount due within 10 days, but filed the petition
only on July 30, 1999.8
We rule against the Commissioner of Customs. The CTA correctly ruled that the reckoning date for Oilink’s 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 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
sentto URC did not bind Oilink unless the separate identities of the corporations were disregarded in order to
consider them as one.
2.
Oilink had a valid cause of action
The Commissioner of Customs positsthat 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 notexhaust 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 non-exhaustion 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
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.
3.
There was no ground to pierce
the veil of corporate existence
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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 viceversa. 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 protectfraud, 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 thatare useful
in the determination of whether a subsidiary is a mere instrumentality of the parent-corporation, viz:

1. Control, not mere majority or complete control, but complete domination, not only of finances butof policy and
business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the
time no separatemind, 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 incontravention 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 from the outset manifested that its belated
pursuit of Oilink was only an afterthought. WHEREFORE, the Court AFFIRMS the decision promulgated by the Court
of Appeals on September 29, 2003.

No pronouncement on costs of suit.

SO ORDERED.

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Republic of the Philippines Thereafter, the respondent instituted a complaint for damages against the petitioners, WPM and Manlapaz. The
SUPREME COURT respondent alleged that in Civil Case No. Q-90-7013, she was adjudged liable for a contract that she entered into for
Manila 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), CLN’s general
manager; that it was actually Manlapaz and Neri who agreed on the terms and conditions of the agreement; that
SECOND DIVISION
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.
G.R. No. 182770 September 17, 2014
In her prayer, the respondent sought indemnification in the amount of ₱112,876.60 plus interest at 12%per annum
WPM INTERNATIONAL TRADING, INC. and WARLITO P. MANLAPAZ, Petitioners, from June 18, 1990 until fully paid; and 20% of the award as attorney’s fees. She likewise prayed that an award of
vs. ₱100,000.00 as moral damages and ₱20,000.00 as attorney’s fees be paid to her.
FE CORAZON LABAYEN, Respondent.
In his defense, Manlapaz claims that it was his fellow incorporator/director Edgar Alcansajewho was in-charge with
DECISION 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 intothe 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
BRION, J.:
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
We review in this petition for review on certiorari1 the decision2 dated September 28, 2007 and the resolution3 dated distinct personality, Manlapaz cannot be made liable for the respondent’s claim.
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. Manlapaz prayed for the dismissal of the complaint for lack of cause of action, and by way of counterclaim, for the
award of ₱350,000.00 as moral and exemplary damages and ₱50,000.00 attorney’s fees.
The Factual Background
The RTC, through an order dated March 2, 1993 declared WPM in default for its failure to file a responsive pleading.
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
The Decision of the RTC
business, while Warlito P. Manlapaz (Manlapaz) is its president.

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 of ₱432,876.02.
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
inconnection with the renovation agreement.

On June 13, 1990, Quickbite-Divisoria’s renovation was finally completed, and its possession was delivered to the
respondent. However, out of the ₱432,876.02 renovation cost, only the amount of ₱320,000.00 was paid to CLN,
leaving a balance of ₱112,876.02.
Complaint for Sum of Money (Civil Case No. Q-90-7013)
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 inthe amount of
₱112,876.02 with 12% interest per annum from June 18,1990 (the date of first demand) and 20% of the amount
recoverable as attorney’s fees.
Complaint for Damages (Civil Case No. Q-92-13446)
The petitioners appealed the RTC decision with the CA. There, they argued that in view of the respondent’s act of
entering into a renovation agreement with CLN in excess of her authority as WPM’s agent, she is not entitled to
indemnity for the amount she paid. Manlapaz also contended that by virtue ofWPM’s separate and distinct
personality, he cannot be madesolidarily liable with WPM.
The Ruling of the Court of Appeals
On September 28, 2007, the CA affirmed, with modification on the award of attorney’s fees, the decision of the
RTC.The CA held that the petitioners are barred from raising as a defense the respondent’s 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)
Manlapaz’s residence is the registered principal office of WPM; and (5) the acronym "WPM" was derived from

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Manlapaz’s 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 WPM’s 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 RTC’s 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
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 answerfor damages allegedly incurred by the
respondent.
The petitioners further argue that, assuming they may be held liable to reimburse to the respondentthe amount she
paid in Civil Case No. Q-90-7013, such liability is only limited to the amount of ₱112,876.02, representing the
balance of the obligation to CLN, and should not include the twelve 12% percent interest, damages and attorney’s
fees.
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 respondentwarrants the application of the piercing the veil of corporate fiction doctrine.6
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.
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 ofthe Principle of Piercing the Veil of Corporate Fiction
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, orother persons acting as corporate agents, are the direct accountabilities ofthe 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.
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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 it merely aninstrumentality, agency, conduit or adjunct of another
corporation.11
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 beenused 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 right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss
complained of.
The absence of any ofthese elements prevents piercing the corporate veil.12
In the present case, the attendantcircumstances 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 ofManlapaz. As held in Martinez v. Court of Appeals,13 the mere ownership by a singlestockholder
of even all or nearly all of the capital stocks ofa 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
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 concurrentlyheld the positions of president, chairman and treasurer, or that
the Manlapaz’s residence is the registered principal office of WPM, are insufficient considerations to prove that he
had exercised absolutecontrol over WPM.
In this connection, we stress thatthe 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 tospeak, 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.
Here, the respondent failed to prove that Manlapaz, acting as president, had absolute control over
WPM.1âwphi1 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.
On the contrary, the evidence establishes that CLN and the respondent knew and acted on the knowledgethat they
were dealing with WPM for the renovation of the latter’s restaurant, and not with Manlapaz. That WPM later reneged
MJRTB
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 personalityof WPM was
used by Manlapaz to defeat the respondent’s 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.

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

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.

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FIRST DIVISION
G.R. NO. 167530 : March 13, 2013
PHILIPPINE NATIONAL BANK, Petitioner, v. HYDRO RESOURCES CONTRACTORS
CORPORATION,Respondent.
G.R. NO. 167561
ASSET PRIVATIZATION TRUST, Petitioner, v. HYDRO RESOURCES CONTRACTORS
CORPORATION, Respondent.
G.R. NO. 167603
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, v. HYDRO RESOURCES CONTRACTORS
CORPORATION, Respondent.
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 Decision4 dated 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)6 and 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.9chanroblesvirtualawlibrary
Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC's Mine Stripping and Road Construction Program in
1985 for a total contract price of P35,770,120. After computing the payments already made by NMIC under the program and
crediting the NMIC's receivables from
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.12chanroblesvirtualawlibrary
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
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
attorney's fees, as well as payment for equipment rental for four trucks, replacement of parts and other services, and
damage to some of NMIC's properties.16chanroblesvirtualawlibrary
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For its part, DBP's answer17 raised the defense that HRCC had no cause of action against it because DBP was not privy to
HRCC's contract with NMIC. Moreover, NMIC's juridical personality is separate from that of DBP. DBP further interposed a
counterclaim for attorney's fees.18chanroblesvirtualawlibrary
PNB's answer19 also invoked lack of cause of action against it. It also raised estoppel on HRCC's 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
attorney's fees.20chanroblesvirtualawlibrary
APT set up the following defenses in its answer21: lack of cause of action against it, lack of privity between Hercon, Inc. and
APT, and the National Government's preferred lien over the assets of NMIC.22chanroblesvirtualawlibrary
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:chanroblesvirtualawlibrary
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.
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 NMIC's 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).
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 latter's unpaid obligations to
plaintiff.23chanroblesvirtualawlibrary
Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the Decision of the trial court
reads:chanroblesvirtualawlibrary
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 of P8,370,934.74 plus legal
interest thereon from date of demand, and attorney's fees equivalent to 25% of the judgment award.
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.24chanroblesvirtualawlibrary
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 NMIC's corporate personality and hold DBP and PNB solidarily liable with NMIC.25chanroblesvirtualawlibrary
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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:chanroblesvirtualawlibrary
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 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.
xxx
We find it therefore correct for the lower court to have ruled that:chanroblesvirtualawlibrary
"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 latter's unpaid obligation to plaintiff."26 (Citation omitted.)
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:chanroblesvirtualawlibrary
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. 27chanroblesvirtualawlibrary
The dispositive portion of the Decision of the Court of Appeals reads:chanroblesvirtualawlibrary
WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. 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 attorney's fees is DELETED.
All other claims and counter-claims are hereby DISMISSED.
Costs against appellants.28chanroblesvirtualawlibrary
The respective motions for reconsideration of DBP, PNB, and APT were denied.29chanroblesvirtualawlibrary
Hence, these consolidated petitions.30chanroblesvirtualawlibrary
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 the doctrine
of "piercing the veil of corporate entity" is misplaced.31chanroblesvirtualawlibrary
DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to pay NMIC's 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
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by DBP and PNB pursuant to Proclamation No. 50 dated December 8, 1986 and Administrative Order No. 14 dated February
3, 1987.32
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 NMIC's 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.33
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.34chanroblesvirtualawlibrary
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:chanroblesvirtualawlibrary
SECTION 2. TRANSFER OF BANK'S LIABILITIES
xxx
2.02 With respect to the Bank's liabilities which are contingent and those liabilities where the Bank's 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.36chanroblesvirtualawlibrary
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 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. 41This protection
from liability for shareholders is the principle of limited liability.42chanroblesvirtualawlibrary
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.43chanroblesvirtualawlibrary
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:chanroblesvirtualawlibrary
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.)
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Sarona v. National Labor Relations Commission46 has defined the scope of application of the doctrine of piercing the
corporate veil:chanroblesvirtualawlibrary
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 three-pronged test to determine the application of the alter ego theory, which is also
known as the instrumentality theory, namely:chanroblesvirtualawlibrary
(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;cralawlibrary
(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 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 corporation's relationship with the subsidiary.52 It 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."54chanroblesvirtualawlibrary
The second prong is the "fraud" test. This test requires that the parent corporation's 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."58chanroblesvirtualawlibrary
The third prong is the "harm" test. This test requires the plaintiff to show that the defendant's control, exerted in a fraudulent,
illegal or otherwise unfair manner toward it, caused the harm suffered.59 A causal connection between the 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
defendant's exercise of control and improper use of the corporate form and, thereby, suffer
damages.60chanroblesvirtualawlibrary
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.61chanroblesvirtualawlibrary
This Court finds that none of the tests has been satisfactorily met in this case.
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In applying the 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.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.64chanroblesvirtualawlibrary
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
directorates of DBP, PNB and NMIC.65 Unfortunately, the conclusion of the trial and appellate courts that the DBP and PNB
fit the alter ego theory with respect to NMIC's 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.
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 latter's 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."67chanroblesvirtualawlibrary
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 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 NMIC's stockholders. The letter proposal of Hercon, Inc., HRCC's predecessor-in-
interest, regarding the contract for NMIC's 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 NMIC's mine stripping and road construction program in 1985 concerned NMIC and NMIC's officers, without any
indication of or reference to the control exercised by DBP and/or PNB over NMIC's affairs, policies and
practices.72chanroblesvirtualawlibrary
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 NMIC's
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.73chanroblesvirtualawlibrary
Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were interlocking has no basis.
HRCC's Exhibit "I-5,"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 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 NMIC's 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.
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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, HRCC's 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.
In relation to the second element, to disregard the separate juridical personality of a corporation, the wrongdoing or unjust
act in contravention of a plaintiff's 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.80chanroblesvirtualawlibrary
In this case, the Court of Appeals declared:chanroblesvirtualawlibrary
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 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.84chanroblesvirtualawlibrary
WHEREFORE, the petitions are hereby GRANTED.
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.
SO ORDERED.

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.81chanroblesvirtualawlibrary

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 plaintiff's 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:chanroblesvirtualawlibrary

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, 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.

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