[G.R. No. 113032. August 21, 1997]

WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS, DIMAS ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F. VILLASIS, petitioners, vs. RICARDO T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS & HON. JUDGE PORFIRIO PARIAN, respondents.

D E C I S I O N

HERMOSISIMA, JR., J.:

Up for review on certiorari are: (1) the Decision September 6, 1993 and (2) the order dated November 23, 1993 of Branch 33 of the Regional Trial Court of Iloilo City in Criminal Cases Nos. 37097 and 37098 for estafa and falsification of a public document, respectively. The judgment acquitted the private respondents of both charges, but petitioners seek to hold them civilly liable.

Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the same family, are the majority and controlling members of the Board of Trustees of Western Institute of Technology, Inc. (WIT, for short), a stock corporation engaged in the operation, among others, of an educational institution. According to petitioners, the minority stockholders of WIT, sometime on June 1, 1986 in the principal office of WIT at La Paz, Iloilo City, a Special Board meeting was held. In attendance were other members of the Board including one of the petitioners Reginald Villasis. Prior to aforesaid Special Board Meeting, copies of notice thereof, dated May 24, 1986, were distributed to all Board Members. The notice allegedly indicated that the meeting to be held on June 1, 1986 included item No. 6 which states:

"Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of Western Institute of Technology, Inc. on compensation of all officers of the corporation." [1]

In said meeting, the Board of Trustees passed Resolution No. 48, s. 1986, granting monthly compensation to the private respondents as corporate officers retroactive June 1, 1985, viz.:

“Resolution No. 48 s. 1986

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad Tubilleja (accused), it was unanimously resolved that:

‘The Officers of the Corporation be granted monthly compensation for services rendered as follows: Chairman - P9,000.00/month, Vice-Chairman - P3,500.00/month, Corporate Treasurer - P3,500.00/month and Corporate Secretary - P3,500.00/month, retroactive June 1, 1985 and the ten percentum of the net profits shall be distributed equally among the ten members of the Board of Trustees. This shall amend and superceed(sic) any previous resolution.’

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the Board of Trustees of Western Institute of Technology, Inc. held on March 30, 1986 is true and correct to the best of my knowledge and belief.

(Sgd) ANTONIO S. SALAS

Corporate Secretary”[2]

A few years later, that is, on March 13, 1991, petitioners Homero Villasis, Preston Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against private respondents before the Office of the City Prosecutor of Iloilo, as a result of which two (2) separate criminal informations, one for falsification of a public document under Article 171 of the Revised Penal Code and the other for estafa under Article 315, par. 1(b) of the RPC, were filed before Branch 33 of the Regional Trial Court of Iloilo City. The charge for falsification of public document was anchored on the private respondents’ submission of WIT’s income statement for the fiscal year 1985-1986 with the Securities and Exchange Commission (SEC) reflecting therein the disbursement of corporate funds for the compensation of private respondents based on Resolution No. 4, series of 1986, making it appear that the same was passed by the board on March 30, 1986, when in truth, the same was actually passed on June 1, 1986, a date not covered by the corporation’s fiscal year 1985-1986 (beginning May 1, 1985 and ending April 30, 1986). The information for falsification of a public document states:

“The undersigned City Prosecutor accuses RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS and RICHARD S. SALAS (whose dates and places of birth cannot be ascertained) of the crime of FALSIFICATION OF A PUBLC DOCUMENT, Art. 171 of the Revised Penal Code, committed as follows:

That on or about the 10th day of June, 1986, in the City of Iloilo, Philippines and within the jurisdiction of this Honorable Court, the above-named accused, being then the Chairman, Vice-Chairman, Treasurer, Secretary and Trustee (who later became the secretary), respectively, of the board of trustees of the Western Institute of Technology, Inc., a corporation duly organized and existing under the laws of the Republic of the Philippines, conspiring and confederating together and mutually helping one another, to better realized (sic) their purpose, did then and there wilfully, unlawfully and criminally prepare and execute and subsequently cause to be submitted to the Securities and Exchange Commission an income statement of the corporation for the fiscal year 1985-1986, the same being required to be submitted every end of the corporation fiscal year by the aforesaid Commission and therefore, a public document, including therein the disbursement of the retroactive compensation of accused corporate officers in the amount of P186,470.70, by then and there making it appear that the basis thereof Resolution No. 4, Series of 1986 was passed by the board of trustees on March 30, 1986, a date covered by the corporation’s fiscal year 1985-1986 (i.e., from May 1, 1985 to April 30, 1986), when in truth and in fact, as said accused well knew, no such Resolution No. 48, Series of 1986 was passed on March 30, 1986.

CONTRARY TO LAW.

Iloilo City, Philippines, November 22,1991.”[3] [Underscoring ours].

The Information, on the other hand, for estafa reads:

“The undersigned City Prosecutor accuses RICARDO SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS (whose dates and places of birth cannot be ascertained) of the crime of ESTAFA, Art. 315, par 1(b) of the Revised Penal Code, committed as follows:

That on or about the 1st day of June, 1986, in the City of Iloilo, Philippines and within the jurisdiction of this Honorable Court, the above-named accused, being then the Chairman, Vice-Chairman,

Leyah Josef Corpo 4th set Page | 1

Treasurer, Secretary and Trustee (who later became the secretary), respectively, of the board of trustees of the Western Institute of Technology, Inc., a corporation duly organized and existing under the laws of the Republic of the Philippines, conspiring and confederating together and mutually helping one another, to better realize their purpose, did then and there wilfully, unlawfully and feloniously defraud the said corporation (and its stockholders) in the following manner, to wit: herein accused, knowing fully well that they have no sufficient, lawful authority to disburse--- let alone violation of applicable laws and jurisprudence, disbursed the funds of the corporation by effecting payment of their retroactive salaries in the amount of P186,470.70 and subsequently paying themselves every 15th and 30thof the month starting June 15, 1986 until the present, in the amount of P19,500.00 per month, as if the same were their own, and when herein accused were informed of the illegality of these disbursements by the minority stockholders by way of objections made in an annual stockholders’ meeting held on June 14, 1986 and every year thereafter, they refused, and still refuse, to rectify the same to the damage and prejudice of the corporation (and its stockholders) in the total sum of P1,453,970.79 as of November 15, 1991.

CONTRARY TO LAW.

Iloilo City, Philippines, November 22,1991.”[4] [Underscoring ours]

Thereafter, trial for the two criminal cases, docketed as Criminal Cases Nos. 37097 and 37098, was consolidated. After a full-blown hearing, Judge Porfirio Parian handed down a verdict of acquittal on both counts[5] dated September 6, 1993 without imposing any civil liability against the accused therein.

Petitioners filed a Motion for Reconsideration[6] of the civil aspect of the RTC Decision which was, however, denied in an Order dated November 23, 1993.[7]

Hence, the instant petition.

Significantly on December 8, 1994, a Motion for Intervention, dated December 2, 1994, was filed before this Court by Western Institute of Technology, Inc., supposedly one of the petitioners herein, disowning its inclusion in the petition and submitting that Atty. Tranquilino R. Gale, counsel for the other petitioners, had no authority whatsoever to represent the corporation in filing the petition. Intervenor likewise

prayed for the dismissal of the petition for being utterly without merit. The Motion for Intervention was granted on January 16, 1995.[8]

Petitioners would like us to hold private respondents civilly liable despite their acquittal in Criminal Cases Nos. 37097 and 37098. They base their claim on the alleged illegal issuance by private respondents of Resolution No. 48, series of 1986 ordering the disbursement of corporate funds in the amount of P186,470.70 representing the retroactive compensation as of June 1, 1985 in favor of private respondents, board members of WIT, plusP1,453,970.79 for the subsequent collective salaries of private respondent every 15th and 30th of the month until the filing of the criminal complaints against them on March 1991. Petitioners maintain that this grant of compensation to private respondents is proscribed under Section 30 of the Corporation Code. Thus, private respondents are obliged to return these amounts to the corporation with interest.

We cannot sustain the petitioners. The pertinent section of the Corporation Code provides:

“Sec. 30. Compensation of directors.--- In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation (other than per diems) may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.” [Underscoring ours]

There is no argument that directors or trustees, as the case may be, are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office. This rule is founded upon a presumption that directors /trustees render service gratuitously and that the return upon their shares adequately furnishes the motives for service, without compensation[9] Under the foregoing section, there are only two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the stockholders representing a majority of the outstanding capital stock at a regular or special stockholders’ meeting agree to give it to them.

This proscription, however, against granting compensation to directors/trustees of a corporation is not a sweeping rule. Worthy of note is the clear phraseology of Section 30 which states: “xxx [T]he directors shall not receive any compensation, as such directors, xxx.” The phrase as such directors is not without significance for it delimits the scope of the prohibition to compensation given to them for services performed purely in their capacity as directors or trustees. The unambiguous implication is that members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors/trustees.[10] In the case at bench, Resolution No. 48, s. 1986 granted monthly compensation to private respondents not in their capacity as members of the board, but rather as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of Technology. We quote once more Resolution No. 48, s. 1986 for easy reference, viz.:

“Resolution No. 48 s. 1986

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad Tubilleja (accused), it was unanimously resolved that:

‘The Officers of the Corporation be granted monthly compensation for services rendered as follows: Chairman - P9,000.00/month, Vice-Chairman - P3,500.00/month, Corporate Treasurer - P3,500.00/month and Corporate Secretary -P3,500.00/month, retroactive June 1, 1985 and the ten percentum of the net profits shall be distributed equally among the ten members of the Board of Trustees. This shall amend and superceed(sic) any previous resolution.’

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the Board of Trustees of Western Institute of Technology, Inc. held on March 30, 1986 is true and correct to the best of my knowledge and belief.

(Sgd) ANTONIO S. SALAS

Corporate Secretary”[11] [Underscoring ours]

Leyah Josef Corpo 4th set Page | 2

Clearly, therefore , the prohibition with respect to granting compensation to corporate directors/trustees as such under Section 30 is not violated in this particular case. Consequently, the last sentence of Section 30 which provides:

“xxx xxx. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.” [Underscoring ours]

does not likewise find application in this case since the compensation is being given to private respondents in their capacity as officers of WIT and not as board members.

Petitioners assert that the instant case is a derivative suit brought by them as minority shareholders of WIT for and on behalf of the corporation to annul Resolution No. 48, s. 1986 which is prejudicial to the corporation.

We are unpersuaded. A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against it, for which the directors refuse to sue.[12] It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority.[13] Here, however, the case is not a derivative suit but is merely an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public document. Among the basic requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf of the corporation must allege his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join.[14] This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is the allegations in the complaint that vests jurisdiction upon the court or quasi-judicial body concerned over the subject matter and nature of the action.[15] This was not complied with by the petitioners either in their complaint before the court a quo nor in the instant petition which, in part, merely states that “this is a petition for review on certiorari on pure questions of law to set aside a portion of the RTC decision in Criminal Cases Nos. 37097 and 37098”[16] since the trial court’s judgment of acquittal failed to impose any civil liability against the private respondents. By no amount of equity considerations, if at all

deserved, can a mere appeal on the civil aspect of a criminal case be treated as a derivative suit.

Granting, for purposes of discussion, that this is a derivative suit as insisted by petitioners, which it is not, the same is outrightly dismissible for having been wrongfully filed in the regular court devoid of any jurisdiction to entertain the complaint. The case should have been filed with the Securities and Exchange Commission (SEC) which exercises original and exclusive jurisdiction over derivative suits, they being intra-corporate disputes, per Section 5(b) of P.D. No. 902-A:

“In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:

xxx xxx xxx

b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity;

xxx xxx xxx.” [Underscoring ours]

Once the case is decided by the SEC, the losing party may file a petition for review before the Court of Appeals raising questions of fact, of law, or mixed questions of fact and law.[17] It is only after the case has ran this course, and not earlier, can it be brought to us via a petition for review on certiorari under Rule 45 raising only pure questions of law.[18] Petitioners, in pleading that we treat the instant petition as a derivative suit, are trying to short-circuit the entire process which we cannot here sanction.

As an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 for falsification of public document and estafa, which this petition truly is, we have to deny the petition just the same. It will be well to quote the respondent court’s ratiocinations acquitting the private respondents on both counts:

“The prosecution wants this Court to believe and agree that there is falsification of public document because, as claimed by the prosecution, Resolution No. 48, Series of 1986 (Exh. ‘1-E-1’) was not taken up and passed during the Regular Meeting of the Board of Trustees of the western Institute of Technology (WIT), Inc. on March 30, 1986, but on June 1, 1986 special meeting of the same board of trustees.

This Court is reluctant to accept this claim of falsification. The prosecution omitted to submit the complete minutes of the regular meeting of the Board of Trustees on March 30, 1986. It only presented in evidence Exh. ‘C’, which is page 5 or the last page of the said minutes. Had the complete minutes (Exh. “1’ consisting of five (5) pages, been submitted, it can readily be seen and understood that Resolution No. 48, Series of 1986 (Exh. ‘1-E-1’) giving compensation to corporate officers, was indeed included in Other Business, No. 6 of the Agenda, and was taken up and passed on March 30, 1986.  The mere fact of existence of Exh. ‘C’ also proves that it was passed on March 30, 1986 for Exh,. ‘C’ is a part and parcel of the whole minutes of the Board of Trustees Regular Meeting on March 30, 1986.  No better and more credible proof can be considered other than the Minutes (Exh. ‘1’) itself of the Regular Meeting of the Board of Trustees on March 30, 1986.  The imputation that said Resolution No.48 was neither taken up nor passed on March 30, 1986 because the matter regarding compensation was not specifically stated or written in the Agenda and that the words ‘possible implementation of said Resolution No. 48, was expressly written in the Agenda for the Special Meeting of the Board on June 1, 1986, is simply  an implication. This evidence by implication to the mind of the court cannot prevail over the Minutes (Exh. ‘1’) and cannot ripen into proof beyond reasonable doubt which is demanded in all criminal prosecutions.

This Court finds that under the Eleventh Article (Exh. ‘3-D-1’) of the Articles of Incorporation (Exh. ‘3-B’) of the Panay Educational Institution, Inc., now the Western Institute of Technology, Inc., the officers of the corporation shall receive such compensation as the Board of Directors may provide. These Articles of Incorporation was adopted on May 17, 1957 (Exh. ‘3-E’). The Officers of the corporation and their corresponding duties are enumerated and stated in Sections 1, 2, 3 and 4 of Art. III of the Amended By-Laws of the Corporation (Exh. ‘4-A’) which was adopted on May 31, 1957. According to Sec. 6, Art. III of the same By-Laws, all officers shall receive such compensation as may be fixed by the Board of Directors.

Leyah Josef Corpo 4th set Page | 3

It is the perception of this Court that the grant of compensation or salary to the accused in their capacity as officers of the corporation, through Resolution No. 48, enacted on March 30, 1986 by the Board of Trustees, is authorized by both the Articles of Incorporation and the By-Laws of the Corporation. To state otherwise is to depart from the clear terms of the said articles and by-laws. In their defense the accused have properly and rightly asserted that the grant of salary is not for directors, but for their being officers of the corporation who oversee the day to day activities and operations of the school.

xxx xxx xxx

xxx [O]n the question of whether or not the accused can be held liable for estafa under Sec. 1 (b) of Art. 315 of the Revised Penal Code, it is perceived by this Court that the receipt and the holding of the money by the accused as salary on basis of the authority granted by the Articles and By-Laws of the corporation are not tainted with abuse of confidence.  The money they received belongs to them and cannot be said to have been converted and/or misappropriated by them.

xxx xxx xxx.”[19] [Underscoring ours]

From the foregoing factual findings, which we find to be amply substantiated by the records, it is evident that there is simply no basis to hold the accused, private respondents herein, civilly liable. Section 2(b) of Rule 111 on the New Rules on Criminal Procedure provides:

“SEC. 2. Institution of separate civil action.

xxx xxx xxx

(b) Extinction of the penal action does not carry with it extinction of the civil, unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist.” [Underscoring ours]

Likewise, the last paragraph of Section 2, Rule 120 reads:

“SEC. 2. Form and contents of judgment.

xxx xxx xxx

In case of acquittal, unless there is a clear showing that the act from which the civil liability might arise did not exist, the judgment shall

make a finding on the civil liability of the accused in favor of the offended party.” [Underscoring ours]

The acquittal in Criminal Cases Nos. 37097 and 37098 is not merely based on reasonable doubt but rather on a finding that the accused-private respondents did not commit the criminal acts complained of. Thus, pursuant to the above rule and settled jurisprudence, any civil action ex delicto cannot prosper. Acquittal in a criminal action bars the civil action arising therefrom where the judgment of acquittal holds that the accused did not commit the criminal acts imputed to them.[20]

WHEREFORE, the instant petition is hereby DENIED with costs against petitioners.

SO ORDERED.

Western Institute of Technology Inc. vs. Salas

[GR 113032, 21 August 1997]First Division, Hermosisima Jr. (J): 4 concur

Facts:

Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja, Antonio S. Salas, and Richard S. Salas,belonging to the same family, are the majority and controlling members of the Board of Trustees of WesternInstitute of Technology, Inc. (WIT), a stock corporation engaged in the operation, among others, of aneducational institution. According to Homero L. Villasis, Dimas Enriquez, peston F. Villasis, and Reginald F.Villasis, the minority stockholders of WIT, sometime on 1 June 1986 in the principal office of WIT at La Paz,Iloilo City, a Special Board Meeting was held. In attendance were other members of the Board includingReginald Villasis. Prior to said Special Board Meeting, copies of notice thereof, dated 24 May 1986, weredistributed to all Board Members. The notice allegedly indicated that the meeting to be held on 1 June 1986included Item 6 which states that "Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of Western Institute of Technology, Inc. on compensation of all officers of the corporation." In said meeting, theBoard of Trustees passed Resolution 48, series 1986, granting monthly compensation to Salas, et. al. ascorporate officers retroactive 1 June 1985, in the following amounts: ³Chairman 9,000.00/month, ViceChairman P3,500.00/month, Corporate Treasurer P3,500.00/month and Corporate Secretary

P3,500.00/month,retroactive June 1, 1985 and the ten percentum of the net profits shall be distributed equally among the tenmembers of the Board of Trustees. This shall amend and supercede any previous resolution.´ A few yearslater, or on 13 March 1991, Homero Villasis, Preston Villasis, Reginald Villasis and Dimas Enriquez filed anaffidavit-complaint against Salas, et. al. before the Office of the City Prosecutor of Iloilo, as a result of which2 separate criminal informations, one for falsification of a public document under Article 171 of the RevisedPenal Code and the other for estafa under Article 315, par. 1(b) of the RPC, were filed before Branch 33 of theRegional Trial Court of Iloilo City. The charge for falsification of public document was anchored on Salas, et.al.'s submission of WIT's income statement for the fiscal year 1985-1986 with the Securities and ExchangeCommission (SEC) reflecting therein the disbursement of corporate funds for the compensation of Salas, et.al. based on Resolution 4, series of 1986, making it appear that the same was passed by the board on 30 March1986, when in truth, the same was actually passed on 1 June 1986, a date not covered by the corporation'sfiscal year 1985-1986 (beginning May 1, 1995 and ending April 30, 1986). Thereafter, trial for the twocriminal cases (Criminal Cases 37097 and 37098), was consolidated. After a full-blown hearing, JudgePorfirio Parian handed down a verdict of acquittal on both counts dated 6 September 1993 without imposingany civil liability against the accused therein. Villasis, et. al. filed a Motion for Reconsideration of the civilaspect of the RTC Decision which was, however, denied in an Order dated 23 November 1993. Villasis, et. al.filed the petition for review on certiorari. Significantly on 8 December 1994, a Motion for Intervention, dated2 December 1994, was filed before this Court by Western Institute of Technology, Inc., disowning itsinclusion in the petition and submitting that Atty. Tranquilino R. Gale, counsel for Villasis, et. al., had noauthority whatsoever to represent the corporation in filing the petition. Intervenor likewise prayed for thedismissal of the petition for being utterly without merit. The Motion for Intervention was granted on 16January 1995.

Issue:

Whether the grant of compensation to Salas, et. al. is proscribed under Section 30 of the CorporationCode.

Held:

Directors or trustees, as the case may be, are not entitled to salary or other compensation when theyperform nothing more than the usual

Leyah Josef Corpo 4th set Page | 4

and ordinary duties of their office. This rule is founded upon apresumption that directors/trustees render service gratuitously, and that the return upon their shares adequatelyfurnishes the motives for service, without compensation. Under Section 30 of the Corporation Code, there areonly two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the stockholdersrepresenting a majority of the outstanding capital stock at a regular or special stockholders' meeting agree togive it to them. Also, the proscription, however, against granting compensation to director/trustees of acorporation is not a sweeping rule. Worthy of note is the clear phraseology of Section 30 which state: "[T]hedirectors shall not receive any compensation, as such directors." The phrase as such directors is not withoutsignificance for it delimits the scope of the prohibition to compensation given to them for services performedpurely in their capacity as directors or trustees. The unambiguous implication is that members of the boardmay receive compensation, in addition to reasonable per diems, when they render services to the corporationin a capacity other than as directors/trustees. Herein, resolution 48, s. 1986 granted monthly compensation toSalas, et. al. not in their capacity as members of the board, but rather as officers of the corporation, moreparticularly as Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of Technology.Clearly, therefore, the prohibition with respect to granting compensation to corporate directors/trustees as such under Section 30 is not violated in this particular case. Consequently, the last sentence of Section 30which provides that "In no case shall the total yearly compensation of directors, as such directors, exceed ten(10%) percent of the net income before income tax of the corporation during the preceding year" does notlikewise find application in this case since the compensation is being given to Salas, et. al. in their capacity asofficers of WIT and not as board members.

[G.R. No. 101699. March 13, 1996]

BENJAMIN A. SANTOS, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION, HON. LABOR ARBITER FRUCTUOSO T. AURELLANO and MELVIN D. MILLENA,respondents.

D E C I S I O N

VITUG, J.:

In a petition for certiorari under Rule 65 of the Rules of Court, petitioner Benjamin A. Santos, former President of the Mana Mining and Development Corporation (“MMDC”), questions the resolution of the National Labor Relations Commission (“NLRC”) affirming the decision of the Labor Arbiter Fructouso T. Aurellano who, having held illegal the termination of employment of private respondent Melvin D. Millena, has ordered petitioner MMDC, as well as its president (herein petitioner) and the executive vice-president in their personal capacities, to pay Millena his monetary claims.

Private respondent, on 01 October 1985, was hired to be the project accountant for MMDC’s mining operations in Gatbo, Bacon, Sorsogon. On 12 August 1986, private respondent sent to Mr. Gil Abaño, the MMDC corporate treasurer, a memorandum calling the latter’s attention to the failure of the company to comply with the withholding tax requirements of, and to make the corresponding monthly remittances to, the Bureau of Internal Revenue (“BIR”) on account of delayed payments of accrued salaries to the company’s laborers and employees.[1]

In a letter, dated 08 September 1986, Abano advised private respondent thusly:

“Regarding Gatbo operations, as you also are aware, the rainy season is now upon us and the peace and order condition in Sorsogon has deteriorated. It is therefore, the board’s decision that it would be useless for us to continue operations, especially if we will always be in the ‘hole,’ so to speak. Our first funds receipts will be used to pay all our debts. We will stop production until the advent of the dry season, and until the insurgency problem clears. We will undertake only necessary maintenance and repair work and will keep our overhead down to the minimum manageable level. Until we resume full-scale operations, we will not need a project accountant as there will be very little paper work at the site, which can be easily handled at Makati.

“We appreciate the work you have done for Mana and we will not hesitate to take you back when we resume work at Gatbo. However it would be unfair to you if we kept you in the payroll and deprive you of the opportunity to earn more, during this period of Mana’s crisis.”[2]

Private respondent expressed “shock” over the termination of his employment. He complained that he would not have resigned from the Sycip, Gorres & Velayo accounting firm, where he was already a senior staff auditor, had it not been for the assurance of a “continuos job” by MMDC’s Engr. Rodillano E. Velasquez. Private respondent requested that he be reimbursed the “advances” he had made for the company and be paid his “accrued salaries/claims.”[3]

The claim was not heeded; on 20 October 1986, private respondent filed with the NLRC Regional Arbitration, Branch No. V, in Legazpi City, a complaint for illegal dismissal, unpaid salaries, 13th month pay, overtime pay, separation pay and incentive leave pay against MMDC and its two top officials, namely, herein petitioner Benjamin A. Santos (the President) and Rodillano A. Velasquez (the executive vice-president). In his complaint-affidavit (position paper), submitted on 27 October 1986, Millena alleged, among other things, that his dismissal was merely an offshoot of his letter of 12 August 1986 to Abaño about the company’s inability to pay its workers and to remit withholding taxes to the BIR.[4]

A copy of the notice and summons was served on therein respondent (MMDC, Santos and Velasquez) on 29 October 1986.[5] At the initial hearing on 14 November 1986 before the Labor Arbiter, only the complaint, Millena, appeared; however, Atty. Romeo Perez, in representation of the respondents, requested by telegram that the hearing be reset to 01 December 1986. Although the request was granted by the Labor Arbiter, private respondent was allowed, nevertheless, to present his evidence ex-parte at that initial hearing.

The scheduled 01st December 1986 hearing was itself later reset to 19 December 1986. On 05 December 1986, the NLRC in Legazpi City again received a telegram from Atty. Perez asking for fifteen (15) days within which to submit the respondents’ position paper. On 19 December 1986, Atty. Perez sent yet another telegram seeking a further postponement of the hearing and asking for a period until 15 January 1987 within which to submit the position paper.

On 15 January 1987, Atty. Perez advised the NLRC in Legazpi City that the position paper had finally been transmitted through the mail and that he was submitting the case for resolution without further hearing. The position paper was received by the Legazpi City NLRC office on 19 January 1987. Complainant Millena filed, on 26 February 1987, his rejoinder to the position paper.

On 27 July 1988, Labor Arbiter Fructouso T. Aurellano, finding no valid cause for terminating complainant’s employment, ruled, citing this Court’s pronouncement in Construction & Development Corporation of the   Philippines   vs.   Leogardo,   Jr.[6] that a partial closure of an establishment due to losses was a retrenchment measure that rendered the employer liable for unpaid salaries and other monetary claims. The Labor Arbiter adjudged:

“WHEREFORE, the respondents are hereby ordered to pay the petitioner the amount of P37,132.25 corresponding to the latter’s unpaid salaries and advances: P5,400.00 for petitioner’s 13th month pay; P3,340.95 as service incentive leave pay; and P5,400.00 as

Leyah Josef Corpo 4th set Page | 5

separation pay. The respondents are further ordered to pay the petitioner 10% of the monetary awards as attorney’s fees.

“All other claims are dismissed for lack of sufficient evidence.

“SO ORDERED.”[7]

Alleging abuse of discretion by the Labor Arbiter, the company and its co-respondents filed a “motion for reconsideration and/or appeal.”[8] The motion/ appeal was forthwith indorsed to the Executive Director of the NLRC inManila.

In a resolution, dated 04 September 1989, the NLRC[9] affirmed the decision of the Labor Arbiter. It held that the reasons relied upon by MMDC and its co-respondents in the dismissal of Millena, i.e., the rainy season, deteriorating peace and order situation and little paperwork, were “not causes mentioned under Article 282 of the Labor Code of the Philippines” and that Millena, being a regular employee, was “shielded by the tenurial clause mandated under the law.”[10]

A writ of execution correspondingly issued; however, it was returned unsatisfied for the failure of the sheriff to locate the offices of the corporation in the address indicated. Another writ of execution and an order of garnishment was thereupon served on petitioner at his residence.

Contending that he had been denied due process, petitioner filed a motion for reconsideration of the NLRC’ s resolution along with a prayer for the quashal of the writ of execution and order of garnishment. He averred that he had never received any notice, summons or even a copy of the complaint; hence, he said, the Labor Arbiter at no time had acquired jurisdiction over him.

On 16 August 1991, the NLRC[11] dismissed the motion for reconsideration. Citing Section 2, Rule 13,[12] and Section 13, Rule 14,[13] of the Rules of Court, it ruled that the Regional Arbitration office had not, in fact, been remiss in the observance of the legal processes for acquiring jurisdiction over the case and over the persons of the respondents therein. The NLRC was also convinced that Atty. Perez had been the authorized counsel of MMDC and its two most ranking officers.

In holding petitioner personally liable for private respondent’s claim, the NLRC cited Article 289[14] of the Labor Code and the ruling in A.C. Ransom Labor Union-CCLU vs. NLRC[15] to the effect that “(t)he responsible officer of an employer corporation (could) be held personally, not to say even criminally, liable for non-payment of backwages,” and that of Gudez vs. NLRC[16] which amplified that “where the employer corporation (was) no longer existing and unable to satisfy

the judgment in favor of the employee, the officer should be liable for acting on behalf of the corporation.”

In the instant petition for certiorari, petitioner Santos reiterates that he should not have been adjudged personally liable by public respondents, the latter not having validly acquired jurisdiction over his person whether by personal service of summons or by substituted service under Rule 19 of the Rules of Court.

Petitioner’ s contention is unacceptable. The fact that Atty. Romeo B. Perez has been able to timely ask for a deferment of the initial hearing on 14 November 1986, coupled with his subsequent active participation in the proceedings, should disprove the supposed want of service of legal process. Although as a rule, modes of service of summons are strictly followed in order that the court may acquire jurisdiction over the person of a defendant, [17]such procedural modes, however, are liberally construed in quasi-judicial proceedings, substantial compliance with the same being considered adequate.[18] Moreover, jurisdiction over the person of the defendant in civil cases is acquired not only by service of summons but also by voluntary appearance in court and submission to its authority.[19] “Appearance” by a legal advocate is such “voluntary submission to a court’s jurisdiction.”[20] It may be made not only by actual physical appearance but likewise by the submission of pleadings in compliance with the order of the court or tribunal.

To say that petitioner did not authorize Atty. Perez to represent him in the case[21] is to unduly tax credulity. Like the Solicitor General, the Court likewise considers it unlikely that Atty. Perez would have been so irresponsible as to represent petitioner if he were not, in fact, authorized.[22] Atty. Perez is an officer of the court, and he must be presumed to have acted with due propriety. The employment of a counsel or the authority to employ an attorney, it might be pointed out, need not be proved in writing; such fact could inferred from circumstantial evidence.[23] Petitioner was not just an ordinary official of the MMDC; he was the President of the company.

Petitioner, in any event, argues that public respondents have gravely abused their discretion “in finding petitioner solidarily liable with MMDC even (in) the absence of bad faith and malice on his part.”[24] There is merit in this plea.

A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. Nevertheless, being a mere fiction of law, peculiar situations or valid grounds can exist to warrant, albeit done sparingly, the disregard of its independent being and the lifting of the corporate veil.[25] As a rule, this situation might arise when a corporation is used to

evade a just and due obligation or to justify a wrong, [26] to shield or perpetrate fraud,[27] to carry out similar other unjustifiable aims or intentions, or as a subterfuge to commit injustice and so circumvent the law.[28] In Tramat Mercantile, Inc., vs. Court of Appeals,[29] the Court has collated the settled instances when, without necessarily piercing the veil of corporate fiction, personal civil liability can also be said to lawfully attach to a corporate director, trustee or officer; to wit: When –

“(1) He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;

“(2) He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

“(3) He agrees to hold himself personally and solidarily liable with the corporation; or

“(4) He is made, by a specific provision of law, to personally answer for his corporate action.”

The case of petitioner is way off these exceptional instances. It is not even shown that petitioner has had a direct hand in the dismissal of private respondent enough to attribute to him (petitioner) a patently’ unlawful act while acting for the corporation. Neither can Article 289[30] of the Labor Code be applied since this law specifically refers only to the imposition of penalties under the Code. It is undisputed that the termination of petitioner’s employment has, instead, been due, collectively, to the need for a further mitigation of losses, the onset of the rainy season, the insurgency problem in Sorsogon and the lack of funds to further support the mining operation in Gatbo.

It is true, there were various cases when corporate officers were themselves held by the Court to be personally accountable for the payment of wages and money claims to its employees. In A.C. Ransom Labor Union-CCLU vs. NLRC,[31] for instance, the Court ruled that under the Minimum Wage Law, the responsible officer of an employer corporation could be held personally liable for nonpayment of backwages for “(i)f the policy of the law were otherwise, the corporation employer (would) have devious ways for evading payment of backwages.” In the absence of a clear identification of the officer directly responsible for failure to pay the backwages, the Court considered the President of the corporation as such officer. The case was cited in Chua   vs.   NLRC[32] in holding personally liable the vice-president of the company, being the highest and most ranking official of

Leyah Josef Corpo 4th set Page | 6

the corporation next to the President who was dismissed for the latter’s claim for unpaid wages.

A review of the above exceptional cases would readily disclose the attendance of facts and circumstances that could rightly sanction personal liability on the part of the company officer. In A.C. Ransom, the corporate entity was a family corporation and execution against it could not be implemented because of the disposition posthaste of its leviable assets evidently in order to evade its just and due obligations. The doctrine of “piercing the veil of corporate fiction” was thus clearly appropriate. Chua likewise involved another family corporation, and this time the conflict was between two brothers occupying the highest ranking positions in the company. There were incontrovertible facts which pointed to extreme personal animosity that resulted, evidently in bad faith, in the easing out from the company of one of the brothers by the other.

The basic rule is still that which can be deduced from the Court’s pronouncement in Sunio   vs.   National   Labor   Relations   Commission;[33] thus:

“We come now to the personal liability of petitioner, Sunio, who was made jointly and severally responsible with petitioner company and CIPI for the payment of the backwages of private respondents. This is reversible error. The Assistant Regional Director’s Decision failed to disclose the reason why he was made personally liable. Respondents, however, alleged as grounds thereof, his being the owner of one-half (½) interest of said corporation, and his alleged arbitrary dismissal of private respondents.

“Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of petitioner corporation. There appears to be no evidence on record that he acted maliciously or in bad faith in terminating the services of private respondents. His act, therefore, was within the scope of his authority and was a corporate act.

“It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. 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. Petitioner Sunio, therefore, should not have been made personally answerable for the payment of private respondents’ back salaries.”

The Court, to be sure, did appear to have deviated somewhat in Gudez   vs. NLRC;[34] however, it should be clear from our recent

pronouncement in Mam Realty Development Corporation and Manuel Centeno vs. NLRC[35]that the Sunio doctrine still prevails.

WHEREFORE, the instant petition for certiorari is given DUE COURSE and the decision of the Labor Arbiter, affirmed by the NLRC, is hereby MODIFIED insofar as it holds herein petitioner Benjamin Santos personally liable with Mana Mining and Development Corporation, which portion of the questioned judgment is now SET ASIDE. In all other respects, the questioned decision remains unaffected. No costs.

SO ORDERED.

Santos vs. National Labor Relations Commission [GR 101699, 13 March 1996]

?, Vitug (J): 4 concur

Facts: Melvin D. Millena, on 1 October 1985, was hired to be the project accountant for Mana Mining andDevelopment Corporation's (MMDC) mining operations in Gatbo, Bacon, Sorsogon. On 12 August 1986, Millena sent to Mr. Gil Abaño, the MMDC corporate treasurer, a memorandum calling the latter's attention to the failure of the company to comply with the withholding tax requirements of, and to make the corresponding monthly remittances to, the Bureau of Internal Revenue (BIR) on account of delayed payments of accrued salaries to the company's laborers and employees. In a letter, dated 8 September 1986, Abaño advised Millena that it was the board's decision that it stop porduction (operation) in Sorsogon due to the upcoming rainy seasons and the deterioration of the peace and order in the said area; that the corporation will undertake only necessary maintenance and repair work and will keep overhead down to the minimum manageable level; and that the corporation will not need a project accountant until the corporaton resumes full-scale operations. Millena expressed "shock" over the termination of his employment. He complained that he would not have resigned from the Sycip, Gores & Velayo accounting firm, where he was already a senior staff auditor, had it not been for the assurance of a "continuous job" by MMDC's Eng. Rodillano E. Velasquez. Millena requested that he be reimbursed the "advances" he had made for the company and be paid his "accrued salaries/claims." The claim was not heeded. On October 1986, Millena filed with the NLRC Regional Arbitration, Branch No. V, in Legazpi City, a complaint for illegal dismissal, unpaid salaries, 13th month pay, overtime pay, separation pay and incentive leave pay against MMDC and its two top officials,namely, Benjamin A Santos (the President) and Rodillano A. Velasquez (the executive vice-president). In

his complaint-affidavit (position paper), submitted on 27 October 1986, Millena alleged, among other things, that his dismissal was merely an offshoot of his letter of 12 August 1986 to Abaño about the company's inability to pay its workers and to remit withholding taxes to the BIR. On 27 July 1988, Labor Arbiter Fructouso T.

Aurellano, finding no valid cause for terminating complaint's employment, ruledthat a partial closure of anestablishment due to losses was a retrenchment measure that rendered the employer liable for unpaid salaries and other monetary claims. The Labor Arbiter ordered Santos, et. al. to pay Millena the amount of P37,132.25 corresponding to the latter's unpaid salaries and advances: P5,400.00 for petitioner's 13th month pay; P3,340.95 as service incentive leave pay; and P5, 400.00 as separation pay. Santos, et. al. were further ordered to pay Millena 10% of the monetary awards as attorney's fees. Alleging abuse of discretion by the Labor Arbiter, the company and its co-respondents filed a "motion for reconsideration and /or appeal." 8 The motion/appeal was forthwith indorsed to the Executive Director of the NLRC in Manila. In a resolution, dated 04 September 1989, the NLRC affirmed the decision of the Labor Arbiter. A writ of execution correspondingly issued; however, it was returned unsatisfied for the failure of the sheriff to locate the offices of the corporation in the addressed indicated. Another writ of execution and an order of garnishment was

thereupon served on Santos at his residence. Contending that he had been denied due process, Santos filed a motion for reconsideration of the NLRC's resolution along with a prayer for the quashal of the writ of execution and order of garnishment. He averred that he had never received any notice, summons or even a copy of the complaint; hence, he said, the Labor Arbiter at no time had acquired jurisdiction over him. On 16 August 1991, the NLRC dismissed the motion for reconsideration. Santos filed the petition for certiorari.

Issue: Whether Santos should be made solidarily liable with MMDC.

Held: A corporation is a judicial entity with legal personality separated and distinct from those acting for and in its behalf and, in general, from the people comprising it. The rule is that obligations incurred by thecorporation, acting through its directors, officers and employees, are its sole liabilities. Nevertheless, being a mere fiction of law, peculiar situations or valid grounds can exist to warrant, albeit done sparingly, the disregard of its independent being and the lifting of the corporate

Leyah Josef Corpo 4th set Page | 7

veil. As a rule, this situation might arise a corporation is used to evade a just and due obligation or to justify a wrong, to shield or perpetrate fraud, to Commercial Law - Corporation Law, 2005 ( 39 )Narratives (Berne Guerrero)

carry out similar other unjustifiable aims or intentions, or as a subterfuge to commit injustice and so circumvent the law. Without necessarily piercing the veil of corporate fiction, personal civil liability can also be said to lawfully attach to a corporate director, trustee or officer; to wit: When (1) He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (b)for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; (2) He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) He agrees to hold himself personally and solidarily liable with the corporation; or (4) He is made, by a specific provision of law, to personally answer for his corporate fiction. The case of Santos is way of these exceptional instances. It is not even shown that Santos has had a direct hand in the dismissal of Millena enough to attribute to Santos a patently unlawful act while acting for the corporation. Neither can Article 289 of the Labor Code be applied since this specifically refers only to the imposition of penalties under the Code. It is undisputed that the termination of Millena's employment has, instead, been due, collectively, to the need for a further mitigation of losses, the onset of the rainy season, the insurgency problem, in Sorsogon and the lack of funds to further support the mining operation in Gatbo. It is basic that a corporation is invested by law with a personally separate and distinct from those of the persons composing it as well as from that of any, other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personally. Similar to the case of Sunio vs. National Labor Relations Commission, Santos should not have been made personally answerable for the payment of Millena's back salaries.

[G.R. No. 159795. July 30, 2004]

SPOUSES ROBERTO & EVELYN DAVID and COORDINATED GROUP, INC., petitioners, vs. CONSTRUCTION INDUSTRY AND ARBITRATION COMMISSION and SPS. NARCISO & AIDA QUIAMBAO, respondents.

D E C I S I O N

PUNO, J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court, assailing the Decision and Resolution of the Court of Appeals, dated June 30, 2003 and August 27, 2003, respectively, in CA-G.R. SP No. 72736.

Petitioner COORDINATED GROUP, INC. (CGI) is a corporation engaged in the construction business, with petitioner-spouses ROBERTO and EVELYN DAVID as its President and Treasurer, respectively.

The records reveal that on October 7, 1997, respondent-spouses NARCISO and AIDA QUIAMBAO engaged the services of petitioner CGI to design and construct a five-storey concrete office/residential building on their land in Tondo, Manila. The Design/Build Contract of the parties provided that: (a) petitioner CGI shall prepare the working drawings for the construction project; (b) respondents shall pay petitioner CGI the sum of Seven Million Three Hundred Nine Thousand Eight Hundred Twenty-One and 51/100 Pesos (P7,309,821.51) for the construction of the building, including the costs of labor, materials and equipment, and Two Hundred Thousand Pesos (P200,000.00) for the cost of the design; and (c) the construction of the building shall be completed within nine (9) months after securing the building permit.

The completion of the construction was initially scheduled on or before July 16, 1998 but was extended to November 15, 1998 upon agreement of the parties. It appears, however, that petitioners failed to follow the specifications and plans as previously agreed upon. Respondents demanded the correction of the errors but petitioners failed to act on their complaint. Consequently, respondents rescinded the contract on October 31, 1998, after paying 74.84% of the cost of construction.

Respondents then engaged the services of another contractor, RRA and Associates, to inspect the project and assess the actual accomplishment of petitioners in the construction of the building. It was found that petitioners revised and deviated from the structural plan of the building without notice to or approval by the respondents.[1]

Respondents filed a case for breach of contract against petitioners before the Regional Trial Court (RTC) of Manila. At the pre-trial conference, the parties agreed to submit the case for arbitration to the CONSTRUCTION INDUSTRY ARBITRATION COMMISSION (CIAC). Respondents filed a request[2] for arbitration with the CIAC and nominated Atty. Custodio O. Parlade as arbitrator. Atty. Parlade was appointed by the CIAC as sole arbitrator to resolve the dispute. With the agreement of the parties, Atty. Parlade designated Engr. Loreto C. Aquino to assist him in assessing the technical aspect of the case. The

RTC of Manila then dismissed the case and transmitted its records to the CIAC.[3]

After conducting hearings and two (2) ocular inspections of the construction site, the arbitrator rendered judgment against petitioners, thus:

AWARD

In summary, award is hereby made in favor of the Quiambaos against the Respondents, jointly and severally, as follows:

Lost Rentals - P1,680,000.00Cost to Complete, Rectification, etc. - 2,281,028.71Damages due to erroneous staking - 117,000.00Professional fees for geodeticsurveys, etc. - 72,500.00Misc. expenses/ professionalfees of engineers - 118,642.50Bills for water and electricity, PLDT - 15,247.68Attorney’s Fees - 100,000.00Moral Damages - 250,000.00Exemplary Damages - 250,000.00

-----------------

TOTAL P4,884,418.89

There is likewise an award in favor of the Respondents (petitioners herein) and against the Claimants (respondents herein) for the value of the materials and equipment left at (the) site (in) the amount of P238,372.75. Respondent CGI is likewise credited with an 80% accomplishment having a total value of P5,847,857.20.

Leyah Josef Corpo 4th set Page | 8

All other claims and counterclaims are hereby dismissed for lack of merit.

To recapitulate: Payments alreadymade to CGI - P5,275,041.00Amount awardedabove to Claimants - 4,864,418.89

---------------------

Total 10,159,459.89

Payments due CGI for 80%work accomplishment - P5,847,857.20Cost of materials andequipment - 238,372.75

--

------------------

Total : P6,086,299.95

Deducting this amount of P6,086,229.95 from P10,159,459.89, the result is a net award in favor the Claimants of (sic) the amount of P4,073,229.94.

WHEREFORE, the Respondents are hereby ordered to pay, jointly and severally, the Claimants the amount of P4,073,229.94 with interest at 6% per annum from the date of the promulgation of this Award, and 12% per annum of the net award, including accrued interest, from the time it becomes final and executory until it is fully paid.

Each party is hereby directed to pay to the Commission P15,000.00 as such party’s share in the expert’s fees paid to Engr. Loreto C. Aquino.

SO ORDERED.[4]

Petitioners appealed to the Court of Appeals which affirmed the arbitrator’s Decision but deleted the award for lost rentals.[5]

Unsatisfied, petitioners filed this petition for review on certiorari, raising the following issues:

I. THERE WAS NO BASIS, IN FACT AND IN LAW, TO ALLOW RESPONDENTS TO UNILATERALLY RESCIND THE DESIGN/BUILT CONTRACT, AFTER PETITIONERS HAVE (SIC) SUBSTANTIALLY PERFORMED THEIR OBLIGATION UNDER THE SAID CONTRACT.

II. THE HONORABLE COURT OF APPEALS ERRED IN FINDING PETITIONERS JOINTLY AND SEVERALLY LIABLE WITH CO-PETITIONER COORDINATED (GROUP, INC.), IN CLEAR VIOLATION OF THE DOCTRINE OF SEPARATE JURIDICAL PERSONALITY.

We find no merit in the petition.

Executive Order No. 1008 entitled, “Construction Industry Arbitration Law” provided for an arbitration mechanism for the speedy resolution of construction disputes other than by court litigation. It recognized the role of the construction industry in the country’s economic progress as it utilizes a large segment of the labor force and contributes substantially to the gross national product of the country.[6] Thus, E.O. No. 1008 vests on the Construction Industry Arbitration Commission (CIAC) original and exclusive jurisdiction over disputes arising from or connected with construction contracts entered into by parties who have agreed to submit their case to voluntary arbitration. Section 19 of E.O. No. 1008 provides that its arbitral award shall be appealable to the Supreme Court only on questions of law.[7]

There is a question of law when the doubt or difference in a given case arises as to what the law is on a certain set of facts, and there is a question of fact when the doubt arises as to the truth or falsity of the alleged facts.[8]Thus, for a question to be one of law, it must not involve an examination of the probative value of the evidence presented by the parties and there must be no doubt as to the veracity or falsehood of the facts alleged.[9]

In the case at bar, it is readily apparent that petitioners are raising questions of fact. In their first assigned error, petitioners claim that at the time of rescission, they had completed 80% of the construction work and still have 15 days to finish the project. They likewise insist that they constructed the building in accordance with the contract and any modification on the plan was with the consent of the respondents.

These claims of petitioners are refuted by the evidence on record. In holding that respondents were justified in rescinding the contract, the Court of Appeals upheld the factual findings of the sole arbitrator, thus:

x x x

(A)s the Building was taking shape, they noticed deviations from the approved plans and specifications for the Building. Most noticeable were two (2) concrete columns in the middle of the basement which effectively and permanently obstructed the basement for the parking of vehicles x x x. In addition, three (3) additional concrete columns were constructed from the ground floor to the roof deck x x x which

Leyah Josef Corpo 4th set Page | 9

affected the overall dimension of the building such as altering the specified beam depths, passageways and windows. In addition, Mrs. Quiambao provided a virtual litany of alleged defects, to wit: (a) the Building was not vertically plumbed xxx; (b) provisions for many architectural members were not provided for, such as, (i) the recesses for window plant boxes are lacking xxx, (ii) provisions for precast molding are lacking xxx, (iii) canopies are also lacking x x x; (c) misaligned walls, ugly discrepancies and gaps; (d) skewed walls to floors/landings; (e) low head clearances and truncated beams x x x; (f) narrow and disproportionate stairs xxx one (1) instead of two (2) windows at the fire exit x x x, (g) absence of water-proofing along the basement wall x x x and at the roof deck which caused leaks that damages the mezzanine floor x x x; (h) the use of smaller diagonal steel trusses at the penthouse. x x x There were others which were shown during the site inspection such as: (1) L-shaped kitchen counters instead of the required U-shaped counters x x x; (2) failure to provide marble tops for the kitchen counters; (3) installation of single-tub sinks where the plans called for double-type stainless kitchen sinks x x x; (4) installation of much smaller windows than those required; (5) misaligned window easements to wall, (6) floors were damaged by roof leaks, (6) poor floor finish, misaligned tiles, floors with “kapak” and disproportionate drawers and cabinets. A more comprehensive list of alleged defects, deviations and complaints of the Quiambaos is found in a report marked Exhibit C-144. Many of these defects were seen during the site inspection and the only defense and comment of CGI was that these were punch-list items which could have been corrected prior to completion and turn-over of the Building had the Contract not been terminated by the Claimants (respondents here). x x x Thus, x x x (petitioner) CGI argued that: “In any construction work, before a contractor turns-over the project to the owner, punchlisting of defects is done so as to ensure compliance and satisfaction of both the contractor and the owner.  Punch listing means that the contractor will list all major and minor defects and rectifies them before the turnover of the project to the owner.  After all defects had been arranged, the project is now turned over to the owner.  For this particular project, no turn over was made by the contractor to the owner yet.  Actually, we were already pinpointing these defects for punch listing before we were terminated illegally.  As alleged by the owner, the deficiencies mentioned are stubouts of water closets at toilets, roofing and framing, doors, cabinets, ceiling and stairs and other were not yet completed and rectified by us.  In fact we were counting on our project engineer in charge x x x to do this in as much as this is one of his duties to do for the company.  x x x” Confirmatory of this assertion of CGI that it was willing to undertake the appropriate corrective works (whether or not the items are punch-list items) is Exhibit C-88 which is a letter prepared by CGI’s Windell F. Vizconde, checked by CGI’s Gary M. Garcia and noted by CGI’s Benjie Lipardo, addressed to the Quiambaos which stated that:

“As per our discussion during the last meeting dated Sept. 28, 1998 the following items was (sic) confirmed and clarified.  These are described as follows:

“1.  All ceiling cornices shall be installed as per plan specification which is 1” x 4” in size.

“2.  All baseboards shall be installed as per plan specification which is wood 1” x 4” in size.

“3.  Electrical Meter center and main panel breaker should be retained to its present location.

“4.  Elevation of office, dining and stair lobby of ground floor shall be 4” higher than the elevation of parking area (subject for verification).

“5.  All door jambs at C.R. has (sic) to be replaced with concrete framing jambs.

“6.  All ceilings mailers should be 2 x 2 in size.

“7.  All plywood ceiling that was damaged by rain water shall be replaced.

“8.  Provide a pipe chase for the enclosure of soil stack pipe and water line pipe at the ground floor level between grid line 3-4 along the light well area.

“9.  Front side elevation view shall be follow (sic) as per plan specialy (sic) at 4th flr.

“10.  One column at basement floor along grid line 2# B has to be verified by the structural designer if ever it is safe to removed (sic) the column and what will be their (sic) recommendation to support the load.  

“11.  Existing doors D-2 and D-3 shall be replaced a (sic) new one.”

While Mrs. Quiambao appeared not to have given her conformity, this document from CGI is an admission by CGI of the deficiencies in the construction of the Building which needed to be corrected.

It appears that concrete samples taken from the basement, ground floor, mezzanine and 2nd floor of the Building were subjected to a concrete core test by Geotesting International, Inc., geotechnical and

materials testing engineers. A report dated January 20, 1999 x x x showed x x x that (5) samples x x x failed the test. Sample S2 while it showed a comprehensive strength of 3147 psi, the corrective strength in psi was below the specified comprehensive strength of 3000 psi. CGI failed to produce evidence of similar tests during the construction of the Building although it is normal construction practice for the contractor to provide samples for concrete core tests.

Deformed reinforcing steel bar specimens from the building were subjected to physical tests. These tests were conducted at the Materials Testing Laboratory of the Department of Civil Engineering, College of Engineering, University of the Philippines. x x x There were 18 samples and x x x 8 failed the test although all of them passed the cold bend test. x x x CGI submitted Quality Test Certificates issued by Steel Asia certifying to the mechanical test results and chemical composition of the steel materials tested x x x. However, the samples were provided by the manufacturer, not by CGI, to Steel Asia, and there is no showing that the materials supplied by the manufacturer to CGI for the Building formed part of the steel materials, part of which was tested.

x x x

Regarding the additional columns at the basement and at the first floor to the roof deck of the Building, which effectively restricted the use of the basement as a parking area, and likewise reduced the area which could be used by the Quiambaos in the different floors of the Building, Engr. Roberto J. David admitted that these represented a design change which was made and implemented by CGI without the conformnity of the Claimants. The Contract specifically provided in Article II that “the CONTRACTOR shall submit to the OWNER all designs for the OWNER’S approval.” This implies necessarily that all changes in the approved design shall likewise be submitted to the OWNER for approval. This change, in my view, is the single most serious breach of the Contract committed by CGI which justified the decision of the Claimants to terminate the Contract. x x x (T)here is no evidence to show that the Quiambaos approved the revision of the structural plans to provide for the construction of the additional columns. x x x

x x x Engr. Villasenor defended his structural design as adequate. He admitted that the revision of the plans which resulted in the construction of additional columns was in pursuance of the request of Engr. David to revise the structural plans to provide for a significant reduction of the cost of construction. When Engr. David was asked for the justification for the revision for the plans, he confirmed that he wanted to reduce the cost of construction. In any case, whether the cause of revision of the plans was the under-design of the foundation or for reasons of economy, it is CGI which is at fault. CGI prepared the

Leyah Josef Corpo 4th set Page | 10

structural plans and quoted the price for constructing the Building. The Quiambaos accepted both the plans and the price. If CGI made a mistake in designing the foundation or in estimating the cost of construction, it was at fault. It cannot correct that mistake by revising the plans and implementing the revisions without informing the Quiambaos and obtaining their unequivocal approval of such changes.

In addition, CGI admitted that no relocation survey was made by it prior to the construction of the Building. Consequently, a one-meter portion of the Building was constructed beyond the property line. In justification, Engr. Barba V. Santos declared that CGI made the layout of the proposed structure based on the existing fence. x x x (I)t is understood that a contractor, in constructing a building, must first conduct a relocation survey before construction precisely to avoid the situation which developed here, that the Building was not properly constructed within the owner’s property line. x x x This resulted in the under-utilization of the property, small as it is, and the exposure of the Quiambaos to substantial damages to the owner of the adjoining property encroached upon.

A third major contested issue concerned the construction of the cistern. x x x A cistern is an underground tank used to collect water for drinking purposes. The contentious points regarding the construction of the cistern are: first, that the cistern was designed to accumulate up to 10,000 gallons of water; as constructed, its capacity was less than the design capacity. Second, there is no internal partition separating the cistern from the sump pit. x x x

Considering that the cistern is a receptacle for the collection of drinking water, it is incomprehensible why the Respondents (herein petitioners), in the design and construction of the cistern, has (sic) not taken the necessary measures to make certain that the water in the cistern will be free from contamination. x x x

Thus, granting the arguments of the Respondents (herein petitioners) that the observed defects in the Building could be corrected before turn-over and acceptance of the Building if CGI had been allowed to complete its construction, the construction of additional columns, the construction of the Building such that part of it is outside the property line established a sufficient legal and factual basis for the decision of the Quiambaos to terminate the Contract. The fact that five (5) of nine (9) the (sic) concrete samples subjected to a core test, and eight (8) of eighteen (18) deformed reinforcing steel bar specifics subjected to physical tests failed the tests and the under-design of the cistern was established after the Contract was terminated also served to confirm the justified suspicion of the Quiambaos that the Building was

defective or was not constructed according to approved plans and specifications.[10] (emphases supplied)

These are technical findings of fact made by expert witnesses and affirmed by the arbitrator. They were also affirmed by the Court of Appeals. We find no reason to revise them.

The second assigned error likewise involves a question of fact. It is contended that petitioner-spouses David cannot be held jointly and severally liable with petitioner CGI in the payment of the arbitral award as they are merely its corporate officers.

At first glance, the issue may appear to be a question of law as it would call for application of the law on the separate liability of a corporation. However, the law can be applied only after establishing a factual basis, i.e., whether petitioner-spouses as corporate officers were grossly negligent in ordering the revisions on the construction plan without the knowledge and consent of the respondent-spouses. On this issue, the Court of Appeals again affirmed the factual findings of the arbitrator, thus:

As a general rule, the officers of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority. However, the personal liability of a corporate director, trustee or officer, along with corporation, may so validly attach when he assents to a patently unlawful act of the corporation or for bad faith or gross negligence in directing its affairs.

The following findings of public respondent (CIAC) would support its ruling in holding petitioners severally and jointly liable with the Corporation:

“ x x x When asked whether the Building was underdesigned considering the poor quality of the soil, Engr. Villasenor defended his structural design as adequate. He admitted that the revision of the plans which resulted in the construction of additional columns was in pursuance of the request of Engr. David to revise the structural plans to provide for a significant reduction of the cost of construction. When Engr. David was asked for the justification for the revision of the plans, he confirmed that he wanted to reduce the cost of construction. x x x” (emphases supplied)[11]

Clearly, the case at bar does not raise any genuine issue of law. We reiterate the rule that factual findings of construction arbitrators are final and conclusive and not reviewable by this Court on appeal, except when the petitioner proves affirmatively that: (1) the award was procured by corruption, fraud or other undue means; (2)

there was evident partiality or corruption of the arbitrators or of any of them; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; (4) one or more of the arbitrators were disqualified to act as such under section nine of Republic Act No. 876 and willfully refrained from disclosing such disqualifications or of any other misbehavior by which the rights of any party have been materially prejudiced; or (5) the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final and definite award upon the subject matter submitted to them was not made.[12] Petitioners failed to show that any of these exceptions applies to the case at bar.

Finally, it bears to remind petitioners of this Court’s ruling in the 1993 case of Hi-Precision Steel Center, Inc. vs. Lim Kim Steel Builders, Inc.[13] which emphasized the rationale for limiting appeal to legal questions in construction cases resolved through arbitration, thus:

x x x Consideration of the animating purpose of voluntary arbitration in general, and arbitration under the aegis of the CIAC in particular, requires us to apply rigorously the above principle embodied in Section 19 that the Arbitral Tribunal’s findings of fact shall be final and inappealable (sic).

Voluntary arbitration involves the reference of a dispute to an impartial body, the members of which are chosen by the parties themselves, which parties freely consent in advance to abide by the arbitral award issued after proceedings where both parties had the opportunity to be heard. The basic objective is to provide a speedy and inexpensive method of settling disputes by allowing the parties to avoid the formalities, delay, expense and aggravation which commonly accompany ordinary litigation, especially litigation which goes through the entire hierarchy of courts. Executive Order No. 1008 created an arbitration facility to which the construction industry in the Philippines can have recourse. The Executive Order was enacted to encourage the early and expeditious settlement of disputes in the construction industry, a public policy the implementation of which is necessary and important for the realization of the national development goals.

Aware of the objective of voluntary arbitration in the labor field, in the construction industry, and in other area for that matter, the Court will not assist one or the other or even both parties in any effort to subvert or defeat that objective for their private purposes. The Court will not review the factual findings of an arbitral tribunal upon the artful allegation that such body had “misapprehended facts” and will not pass upon issues which are, at bottom, issues of fact, no matter how cleverly disguised they might be as “legal questions.” The parties here had recourse to arbitration and chose the arbitrators themselves; they must

Leyah Josef Corpo 4th set Page | 11

have had confidence in such arbitrators. The Court will not, therefore, permit the parties to relitigate before it the issues of facts previously presented and argued before the Arbitral Tribunal, save only where a clear showing is made that, in reaching its factual conclusions, the Arbitral Tribunal committed an error so egregious and hurtful to one party as to constitute a grave abuse of discretion resulting in lack or loss of jurisdiction. Prototypical examples would be factual conclusions of the Tribunal which resulted in deprivation of one or the other party of a fair opportunity to present its position before the Arbitral Tribunal, and an award obtained through fraud or the corruption of arbitrators. Any other more relaxed rule would result in setting at naught the basic objective of a voluntary arbitration and would reduce arbitration to a largely inutile institution. (emphases supplied)

IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. Costs against petitioners.

SO ORDERED.

[G.R. No. 113907. April 20, 2001]

MALAYANG SAMAHAN NG MGA MANGGAGAWA SA M. GREENFIELD (MSMG-UWP), ITS PRESIDENT BEDA MAGDALENA VILLANUEVA,

R E S O L U T I O N

GONZAGA-REYES, J.:

Before us is petitioners’ motion for partial reconsideration of our decision dated February 28, 2000,[1] the dispositive portion of which reads:[2]

“WHEREFORE, the petition is GRANTED; the decision of the National Labor Relations Commission in Case No. NCR-00-09-04199-89 is REVERSED and SET ASIDE; and the respondent company is hereby ordered to immediately reinstate the petitioners to their respective positions. Should reinstatement be not feasible, respondent company shall pay separation pay of one month salary for every year of service. Since petitioners were terminated without the requisite written notice at least 30 days prior to their termination, following the recent ruling in the case of Ruben Serrano vs. National Labor Relations Commission and Isetann Department Store, the respondent company is hereby ordered to pay full backwages to petitioner-employees while the Federation is also ordered to pay full backwages to petitioner-union officers who were dismissed upon its instigation. Since the dismissal of petitioners was without cause, backwages shall be computed from the

time the herein petitioner employees and union officers were dismissed until their actual reinstatement. Should reinstatement be not feasible, their backwages shall be computed from the time petitioners were terminated until the finality of this decision. Costs against the respondent company.

SO ORDERED.”

Petitioners allege that this Court committed patent and palpable error in holding that “the respondent company officials cannot be held personally liable for damages on account of employees’ dismissal because the employer corporation has a personality separate and distinct from its officers who merely acted as its agents” whereas the records clearly established that respondent company officers Saul Tawil, Carlos T. Javelosa and Renato C. Puangco have caused the hasty, arbitrary and unlawful dismissal of petitioners from work; that as top officials of the respondent company who handed down the decision dismissing the petitioners, they are responsible for acts of unfair labor practice; that these respondent corporate officers should not be considered as mere agents of the company but the wrongdoers. Petitioners further contend that while the case was pending before the public respondents, the respondent company, in the early part of February 1990, began removing its machineries and equipment from its plant located at Merville Park, Paranaque and began diverting jobs intended for the regular employees to its sub-contractor/satellite branches;[3] that the respondent company officials are also the officers and incorporators of these satellite companies as shown in their articles of incorporation and the general information sheet. They added that during their ocular inspection of the plant site of the respondent company, they found that the same is being used by other unnamed business entities also engaged in the manufacture of garments. Petitioners further claim that the respondent company no longer operates its plant site as M. Greenfield thus it will be very difficult for them to fully enforce and implement the court’s decision. In their subsequent motion filed on the same day, petitioners also pray for the (A) inclusion of the names of employees listed in Annex “D” of the petition which they inadvertently omitted in the caption of the case, to wit: (1) Amores, Imelda (2) Andres, Josefina (3)Aragon, Felicidad (4) Arias, Genevive (5) Arroyo, Salvacion (6) Arceo, Elizabeth (7) Anonuevo, Monica (8) Abellada, Josefina (9) Advincula, Harmelina (10) Ajayo, Rosario (11) Alilay, Marilyn (12) Almario, Anliza (13) Almario, Angelita (14) Almazan, Marilou (15) Almonte, Rosalina

(16) Alvaran, Marites (17) Alvarez, Edna (18) Ampo, Anacorita (19) Aquino, Leonisa (20) Bactat, Celia (21) Carpio, Azucena G. (22) Cruz, Amelia (23) Glifonia, Eugenia (24) Escurel, Evelyn F. (25) Hilario, Bonifacio G. (26) Payuan, Adoracion (27) Perez, Mercedita (28) Rempis, Zenaida (29) Rosario, Margie deL (30) Salvador, Norma (31) Sambayanan, Olivia (32) Tiaga, Aida (33) Torbela, Maria (34) Trono, Nenevina (35) Varona, Asuncion (36) Vasquez, Elisa M. (37) Villanueva, Milagros (38) Villapondo, Eva C. (39) Villon, Adeliza T.; (B) correction of their own typographical errors of the names of employees appearing in the caption, which should be as follows: Manuela Avelin, Belen Barquio, Lita Buquid, Violeta C. Ciervo, Marilou Dejocos, Maximina Faustino, Primitiva Gomez, Myrna Palaca, Mercedita Perez, Rebecca Poceran, Amorlita Rotairo, Emma Saludario, Tita Senis, Salvacion Wilson,[4] Anita Ahillon, Gregoria Arguelles, Tessie Balbis, Betty Borja, Rodrigo Buella, Celsa Doropan, Maria Enicame, Josephine Lasco, Julita Maniba, Juanita Osuyos, Juana Overencio, Azucena Postigo, Cristina Rapinan, Roselyn Rivero, Edeltrudes Romero, Rodelia Royandoyon, Fausta Segundo, Teodora Sulit, Elena Tebis, Paulina Valdez,[5] Susan Abogona, Diana Adovas, Carmen Rosimo Basco, Macaria Barrion, Maria Fe Berezo, Matilde de Blas, Rufina Bugnot, Aurora Bravo, Jovita Cera, Precila Carta, Amalia Eugenio, Milagros Fonseca, Jose Irlanda, Rowena Jarabejo, Regina Lapidario, Josie Marcos, Shirley Melegrito, Noemi Menguillo, Teresita Nierves, Ricardo Paloga, Florenia Ragos, Leonila Rodil, Emma Saludario, Narcisa Songuad, Josie Sumarsar, Evangeline Tayco;[6] (C) inclusion of other employees similarly situated whose names were not included in Annex “D” or in the caption of the case, to wit: (1) Dionisa Aban, (2) Alicia Aragon, (3) Vicky Francia, (4) Nelita F. Gelongos, (5) Erlinda San Juan, (6) Erlinda Baby Patungan Manalo, (7) Jenette Patungan,[7] (8) Blandina Simbahan,[8] (9) Asuncion Varona,[9] (10) Josefina Andres, (11) Teresita Arales, (12) Alice Artikulo, (13) Esther Cometa, (14) Eliza Cabiting, (15) Erlinda Dalut, (16) Edna Fernandez, (17) Emily Inocencio, (18) Esperanza Jalocon, (19) Imelda Jarabe, (20) Mercedes Pabadora, (21) Venerado Pastoral, (22) Cristina Perlas, (23) Margie del Rosario.[10]

In their Comment, the Solicitor General interposes no objection to petitioners’ prayer for the inclusion of omitted and similarly situated employees and the correction of employees’ names in the caption of the case.

On the other hand, private respondent company officials Carlos Javelosa and Remedios Caoleng, in their Comment, state that

Leyah Josef Corpo 4th set Page | 12

considering that petitioners admitted having knowledge of the fact that private respondent officers are also holding key positions in the alleged satellite companies, they should have presented the pertinent evidence with the public respondents; thus it is too late for petitioners to require this Court to admit and evaluate evidence not presented during the trial; that the supposed proof of satellite companies hardly constitute newly discovered evidence. Respondent officials interpose no objection to the inclusion of employees inadvertently excluded in the caption of the case but object to the inclusion of employees who were allegedly similarly situated for the reason that these employees had not been parties to the case, hence should not be granted any relief from the court. Respondent company failed to file its comment.[11]

Petitioners’ contention that respondent company officials should be made personally liable for damages on account of petitioners’ dismissal is not impressed with merit. A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general from the people comprising it.[12] The rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities.[13] True, solidary liabilities may at times be incurred but only when exceptional circumstances warrant such as, generally, in the following cases:[14]

1. When directors and trustees or, in appropriate cases, the officers of a corporation –

(a) Vote for or assent to patently unlawful acts of the corporation;

(b) act in bad faith or with gross negligence in directing the corporate affairs;

(c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons.[15]

(2) When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto.[16]

(3) When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the Corporation.[17]

(4) When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.[18]

In labor cases, particularly, the Court has held corporate directors and officers solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith.[19] Bad faith or negligence is a question of fact and is evidentiary.[20] It has been held that bad faith does not connote bad judgement or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes of the nature of fraud.[21]

In the instant case, there is nothing substantial on record to show that respondent officers acted in patent bad faith or were guilty of gross negligence in terminating the services of petitioners so as to warrant personal liability. As held in Sunio vs. NLRC,[22]

“We now come to the personal liability of petitioner, Sunio, who was made jointly and severally responsible with petitioner company and CIPI for the payment of the backwages of private respondents. This is reversible error. The Assistant Regional Director’s Decision failed to disclose the reason why he was made personally liable. Respondents, however, alleged as grounds thereof, his being the owner of one half (1/2) interest of said corporation, and his alleged arbitrary dismissal of private respondents.

Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of petitioner corporation. There appears to be no evidence on record that he acted maliciously or in bad faith in terminating the services of private respondents. His act, therefore, was within the scope of his authority and was a corporate act.

It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. 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. Petitioner Sunio, therefore, should nor have been made personally answerable for the payment of private respondents’ back salaries.”

Petitioners’ claim that the jobs intended for the respondent company’s regular employees were diverted to its satellite companies where the respondent company officers are holding key positions is not substantiated and was raised for the first time in this motion for

reconsideration. Even assuming that the respondent company officials are also officers and incorporators of the satellite companies, such circumstance does not in itself amount to fraud. The documents attached to petitioners’ motion for reconsideration show that these satellite companies[23] were established prior to the filing of petitioners’ complaint against private respondents with the Department of Labor and Employment on September 6, 1989 and that these corporations have different sets of incorporators aside from the respondent officers and are holding their principal offices at different locations. Substantial identity of incorporators between respondent company and these satellite companies does not necessarily imply fraud.[24] In such a case, respondent company’s corporate personality remains inviolable.[25]

Although there were earlier decisions of this Court in labor cases where corporate officers were held to be personally liable for the payment of wages and other money claims to its employees, we find those rulings inapplicable to this case. In La Campana Coffee Factory, Inc. vs. Kaisahan ng Manggagawa sa La Campana (KKM),[26] La Campana Coffee Factory, Inc. and La Campana Gaugau Packing were substantially owned by the same person. They had one office, one management, and a single payroll for both businesses. The laborers of the gaugau factory and the coffee factory were also interchangeable, i.e., the workers in one factory worked also in the other factory.

In Claparols vs. Court of Industrial Relations,[27] the Claparol Steel and Nail Plant which was ordered to pay its workers backwages, ceased operations on June 30, 1957 and was succeeded on the next day, July 1, 1957 by the Claparols Steel Corporation. Both corporations were substantially owned and controlled by the same person and there was no break or cessation in operations. Moreover, all the assets of the steel and nail plant were transferred to the new corporation.

Notably, in the above-mentioned cases, a new corporation was created, owned by the same family, engaged in the same business and operating in the same compound, a situation which is not obtaining in the instant case.

In AC Ransom Labor Union-CCLU vs. NLRC,[28] the Court ruled that under the Minimum Wage Law, the responsible officer of an employer corporation can be held personally liable for non-payment of backwages for “if the policy of the law were otherwise, the corporation employer would have devious ways for evading of back wages.” This Court said:

Leyah Josef Corpo 4th set Page | 13

“In the instant case, it would appear that RANSOM, in 1969, foreseeing the possibility or probability of payment of backwages to the 22 strikers, organized ROSARIO to replace RANSOM, with the latter to be eventually phased out if the 22 strikers win their case. RANSOM actually ceased operations on May 1, 1973, after the December 19, 1972 Decision of the Court of Industrial Relations was promulgated against RANSOM.”

Clearly, the situation in AC Ransom does not obtain in this case, where the alleged satellite companies were established even prior to the filing of petitioners’ complaint with the Department of Labor.

Petitioners’ prayer for the inclusion of employees listed in Annex “D” whose names were admittedly inadvertently excluded in the caption of the case and for the correction of typographical errors of the employees’ names appearing in the caption, is well taken and is hereby granted. However, petitioners’ prayer for the inclusion of other employees allegedly similarly situated but whose names were not included either in Annex “D” or in the caption of the case must be denied. A judgment cannot bind persons who are not parties to the action.[29] It is elementary that strangers to a case are not bound by the judgment rendered by the court and such judgment is not available as an adjudication either against or in favor of such other person.[30] Petitioners failed to explain why these employees allegedly similarly situated were not included in the submitted list filed before us. Such inclusion would be tantamount to a substantial amendment which cannot be allowed at this late stage of the proceedings as it will definitely work to the prejudice and disadvantage of the private respondents.[31]

WHEREFORE, petitioners’ motion for reconsideration is partially granted so as to include the names of employees listed in Annex “D” which petitioners inadvertently omitted in the caption of this case, to wit: (1) Amores, Imelda (2) Andres, Josefina (3) Aragon, Felicidad (4) Arias, Genevive (5) Arroyo, Salvacion (6) Arceo, Elizabeth (7) Anonuevo, Monica (8) Abellada, Josefina (9) Advincula, Harmelina (10) Ajayo, Rosario (11) Alilay, Marilyn (12) Almario, Anliza (13) Almario, Angelita (14) Almazan, Marilou (15) Almonte, Rosalina (16) Alvaran, Marites (17) Alvarez, Edna (18) Ampo, Anacorita (19) Aquino, Leonisa (20) Bactat, Celia (21) Carpio, Azucena G. (22) Cruz, Amelia (23) Glifonia, Eugenia (24) Escurel, Evelyn F. (25) Hilario, Bonifacio G. (26) Payuan, Adoracion (27) Perez, Mercedita (28) Rempis, Zenaida (29) Rosario, Margie del (30) Salvador, Norma (31) Sambayanan, Olivia (32) Tiaga,

Aida (33) Torbela, Maria (34) Trono, Nenevina (35) Varona, Asuncion (36) Vasquez, Elisa M. (37) Villanueva, Milagros (38) Villapondo, Eva C. (39) Villon, Adeliza T.; and to correct the typographical errors of the names of employees appearing in the caption, as follows: Manuela Avelin, Belen Barquio, Lita Buquid, Violeta C. Ciervo, Marilou Dejocos, Maximina Faustino, Primitiva Gomez, Myrna Palaca, Mercedita Perez, Rebecca Poceran, Amorlita Rotairo, Emma Saludario, Tita Senis, Salvacion Wilson, Anita Ahillon, Gregoria Arguelles, Tessie Balbis, Betty Borja, Rodrigo Buella, Celsa Doropan, Maria Enicame, Josephine Lasco, Julita Maniba, Juanita Osuyos, Juana Overencio, Azucena Postigo, Cristina Rapinan, Roselyn Rivero, Edeltrudes Romero, Rodelia Royandoyon, Fausta Segundo, Teodora Sulit, Elena Tebis, Paulina Valdez, Susan Abogona, Diana Adovas, Carmen Rosimo Basco, Macaria Barrion, Maria Fe Berezo, Matilde de Blas, Rufina Bugnot, Aurora Bravo, Jovita Cera, Precila Carta, Amalia Eugenio, Milagros Fonseca, Jose Irlanda, Rowena Jarabejo, Regina Lapidario, Josie Marcos, Shirley Melegrito, Noemi Menguillo, Teresita Nierves, Ricardo Paloga, Florenia Ragos, Leonila Rodil, Emma Saludario, Narcisa Songuad, Josie Sumarsar, Evangeline Tayco.

SO ORDERED.

G.R. No. L-68555 March 19, 1993

PRIME WHITE CEMENT CORPORATION, petitioner, vs.HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents.

De Jesus & Associates for petitioner.

Padlan, Sutton, Mendoza & Associates for private respondent.

CAMPOS, JR., J.:

Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement Corporation seeking the reversal of the decision * of the then Intermediate Appellate Court, the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed in toto. 1

The facts, as found by the trial court and as adopted by the respondent Court are hereby quoted, to wit:

On or about the 16th day of July, 1969, plaintiff and defendant corporation thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the Board, entered into a dealership agreement (Exhibit A) whereby said plaintiff was obligated to act as the exclusive dealer and/or distributor of the said defendant corporation of its cement products in the entire Mindanao area for a term of five (5) years and proving (sic) among others that:

a. The corporation shall, commencing September, 1970, sell to and supply the plaintiff, as dealer with 20,000 bags (94 lbs/bag) of white cement per month;

b. The plaintiff shall pay the defendant corporation P9.70, Philippine Currency, per bag of white cement, FOB Davao and Cagayan de Oro ports;

c. The plaintiff shall, every time the defendant corporation is ready to deliver the good, open with any bank or banking institution a confirmed, unconditional, and irrevocable letter of credit in favor of the corporation and that upon certification by the boat captain on the bill of lading that the goods have been loaded on board the vessel bound for Davao the said bank or banking institution shall release the corresponding amount as payment of the goods so shipped.

Right after the plaintiff entered into the aforesaid dealership agreement, he placed an advertisement in a national, circulating newspaper the fact of his being the exclusive dealer of the defendant corporation's white cement products in Mindanao area, more particularly, in the Manila Chronicle dated August 16, 1969 (Exhibits R and R-1) and was even congratulated by his business associates, so much so, he was asked by some of his businessmen friends and close associates if they can be hissub-dealer in the Mindanao area.

Relying heavily on the dealership agreement, plaintiff sometime in the months of September, October, and December, 1969, entered into a written agreement with several hardware stores dealing in buying and selling white cement in the Cities of Davao and Cagayan de Oro which would thus enable him to sell his allocation of 20,000 bags regular supply of the said commodity, by September, 1970 (Exhibits O, O-1, O-

Leyah Josef Corpo 4th set Page | 14

2, P, P-1, P-2, Q, Q-1 and Q-2). After the plaintiff was assured by his supposed buyer that his allocation of 20,000 bags of white cement can be disposed of, he informed the defendant corporation in his letter dated August 18, 1970 that he is making the necessary preparation for the opening of the requisite letter of credit to cover the price of the due initial delivery for the month of September, 1970 (Exhibit B), looking forward to the defendant corporation's duty to comply with the dealership agreement. In reply to the aforesaid letter of the plaintiff, the defendant corporation thru its corporate secretary, replied that the board of directors of the said defendant decided to impose the following conditions:

a. Delivery of white cement shall commence at the end of November, 1970;

b. Only 8,000 bags of white cement per month for only a period of three (3) months will be delivered;

c. The price of white cement was priced at P13.30 per bag;

d. The price of white cement is subject to readjustment unilaterally on the part of the defendant;

e. The place of delivery of white cement shall be Austurias (sic);

f. The letter of credit may be opened only with the Prudential Bank, Makati Branch;

g. Payment of white cement shall be made in advance and which payment shall be used by the defendant as guaranty in the opening of a foreign letter of credit to cover costs and expenses in the procurement of materials in the manufacture of white cement. (Exhibit C).

xxx xxx xxx

Several demands to comply with the dealership agreement (Exhibits D, E, G, I, R, L, and N) were made by the plaintiff to the defendant, however, defendant refused to comply with the same, and plaintiff by force of circumstances was constrained to cancel his agreement for the supply of white cement with third parties, which were concluded in anticipation of, and pursuant to the said dealership agreement.

Notwithstanding that the dealership agreement between the plaintiff and defendant was in force and subsisting, the defendant corporation,

in violation of, and with evident intention not to be bound by the terms and conditions thereof, entered into an exclusive dealership agreement with a certain Napoleon Co for the marketing of white cement in Mindanao (Exhibit T) hence, this suit. (Plaintiff's Record on Appeal, pp. 86-90). 2

After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of P3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000.00 as and for attorney's fees and costs. The appellate court affirmed the said decision mainly on the following basis, and We quote:

There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed the dealership agreement Exhibit "A", they were the President and Chairman of the Board, respectively, of defendant-appellant corporation. Neither is the genuineness of the said agreement contested. As a matter of fact, it appears on the face of the contract itself that both officers were duly authorized to enter into the said agreement and signed the same for and in behalf of the corporation. When they, therefore, entered into the said transaction they created the impression that they were duly clothed with the authority to do so. It cannot now be said that the disputed agreement which possesses all the essential requisites of a valid contract was never intended to bind the corporation as this avoidance is barred by the principle of estoppel. 3

In this petition for review, petitioner Prime White Cement Corporation made the following assignment of errors. 4

I

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE UNPRECEDENTED DEPARTURES FROM THE CODIFIED PRINCIPLE THAT CORPORATE OFFICERS COULD ENTER INTO CONTRACTS IN BEHALF OF THE CORPORATION ONLY WITH PRIOR APPROVAL OF THE BOARD OF DIRECTORS.

II

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE CONTRARY TO THE ESTABLISHED JURISPRUDENCE, PRINCIPLE AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND OFFICERS OF THE CORPORATION.

III

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE, PRINCIPLE AND RULE ON UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL CODE.

IV

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TO WHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER.

V

IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITH COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS CLEARLY DEPARTED FROM THE ACCEPTED USUAL, COURSE OF JUDICIAL PROCEEDINGS.

There is only one legal issue to be resolved by this Court: whether or not the "dealership agreement" referred by the President and Chairman of the Board of petitioner corporation is a valid and enforceable contract. We do not agree with the conclusion of the respondent Court that it is.

Under the Corporation Law, which was then in force at the time this case arose, 5 as well as under the present Corporation Code, all corporate powers shall be exercised by the Board of Directors, except as otherwise provided by law. 6 Although it cannot completely abdicate its power and responsibility to act for the juridical entity, the Board may expressly delegate specific powers to its President or any of its officers. In the absence of such express delegation, a contract entered into by its President, on behalf of the corporation, may still bind the corporation if the board should ratify the same expressly or impliedly. Implied ratification may take various forms — like silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. 7 Furthermore, even in the absence of express or implied authority by ratification, the President as such may, as a general rule, bind the corporation by a contract in the ordinary course of business, provided the same is reasonable under the circumstances. 8 These rules are basic, but are all general and thus quite

Leyah Josef Corpo 4th set Page | 15

flexible. They apply where the President or other officer, purportedly acting for the corporation, is dealing with a third person, i. e., a person outside the corporation.

The situation is quite different where a director or officer is dealing with his own corporation. In the instant case respondent Te was not an ordinary stockholder; he was a member of the Board of Directors and Auditor of the corporation as well. He was what is often referred to as a "self-dealing" director.

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. 9 In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders." 10 In the case of Gokongwei v. Securities and Exchange Commission, this Court quoted with favor from Pepper v. Litton, 11 thus:

. . . He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. . . . He cannot utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis. . . . .

On the other hand, a director's contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made. Section 32 of the Corporation Code provides, thus:

Sec. 32. Dealings of directors, trustees or officers with the corporation. — A contract of the corporation with one or more of its directors or

trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in the case of an officer, the contract with the officer has been previously authorized by the Board of Directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances.

Although the old Corporation Law which governs the instant case did not contain a similar provision, yet the cited provision substantially incorporates well-settled principles in corporate law. 12

Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if entered into with a person other than a director or officer of the corporation, the fact that the other party to the contract was a Director and Auditor of the petitioner corporation changes the whole situation. First of all, We believe that the contract was neither fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000 bags of white cement per month, for five years starting September, 1970, at thefixed price of P9.70 per bag. Respondent Te is a businessman himself and must have known, or at least must be presumed to know, that at that time, prices of commodities in general, and white cement in particular, were not stable and were expected to rise. At the time of the contract, petitioner corporation had not even commenced the manufacture of white cement, the reason why delivery was not to begin until 14 months later. He must have known that within that period of

six years, there would be a considerable rise in the price of white cement. In fact, respondent Te's own Memorandum shows that in September, 1970, the price per bag was P14.50, and by the middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow for an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per bag for the whole five years of the contract. Fairness on his part as a director of the corporation from whom he was to buy the cement, would require such a provision. In fact, this unfairness in the contract is also a basis which renders a contract entered into by the President, without authority from the Board of Directors, void or voidable, although it may have been in the ordinary course of business. We believe that the fixed price of P9.70 per bag for a period of five years was not fair and reasonable. Respondent Te, himself, when he subsequently entered into contracts to resell the cement to his "new dealers" Henry Wee 13 and Gaudencio Galang 14 stipulated as follows:

The price of white cement shall be mutually determined by us but in no case shall the same be less than P14.00 per bag (94 lbs).

The contract with Henry Wee was on September 15, 1969, and that with Gaudencio Galang, on October 13, 1967. A similar contract with Prudencio Lim was made on December 29, 1969. 15 All of these contracts were entered into soon after his "dealership agreement" with petitioner corporation, and in each one of them he protected himself from any increase in the market price of white cement. Yet, except for the contract with Henry Wee, the contracts were for only two years from October, 1970. Why did he not protect the corporation in the same manner when he entered into the "dealership agreement"? For that matter, why did the President and the Chairman of the Board not do so either? As director, specially since he was the other party in interest, respondent Te's bounden duty was to act in such manner as not to unduly prejudice the corporation. In the light of the circumstances of this case, it is to Us quite clear that he was guilty of disloyalty to the corporation; he was attempting in effect, to enrich himself at the expense of the corporation. There is no showing that the stockholders ratified the "dealership agreement" or that they were fully aware of its provisions. The contract was therefore not valid and this Court cannot allow him to reap the fruits of his disloyalty.

As a result of this action which has been proven to be without legal basis, petitioner corporation's reputation and goodwill have been prejudiced. However, there can be no award for moral damages under

Leyah Josef Corpo 4th set Page | 16

Article 2217 and succeeding articles on Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.

In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court dated March 30, 1984 and August 6, 1984, respectively, are hereby SET ASIDE. Private respondent Alejandro Te is hereby ordered to pay petitioner corporation the sum of P20,000.00 for attorney's fees, plus the cost of suit and expenses of litigation.

SO ORDERED.

Prime White Cement Corporation vs. Intermediate Appellate Court

[GR 68555, 19 March 1993]Second Division, Campos Jr. (J): 4 concur

Facts:

On or about 16 July 1969, Alejandro Te and Prime White Cement Corporation (PWCC) thru itsPresident, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the Board, entered into a dealershipagreement whereby Te was obligated to act as the exclusive dealer and/or distributor of PWCC of its cementproducts in the entire Mindanao area for a term of 5 years and providing among others that (a) the corporationshall, commencing September, 1970, sell to and supply Te, as dealer with 20,000 bags (94 lbs/bag) of whitecement per month; (b) Te shall pay PWCC P9.70, Philippine Currency, per bag of white cement, FOB Davaoand Cagayan de Oro ports; (c) Te shall every time PWCC is ready to deliver the good, open with any bank or banking institution a confirmed, unconditional, and irrevocable letter of credit in favor of PWCC and thatupon certification by the boat captain on the bill of lading that the goods have been loaded on board the vesselbound for Davao the said bank or banking institution shall release the corresponding amount as payment of the goods so shipped." Right after Te entered into the dealership agreement, he placed an advertisement in anational, circulating newspaper the fact of his being the exclusive dealer of PWWC's white cement products inMindanao area, more particularly, in the Manila Chronicle dated 16 August 1969 and was even congratulatedby his business associates, so much so, he was asked by some of his businessmen friends and close associatesif they can be his sub-dealer in the Mindanao area. Relying heavily on the dealership agreement, Te sometimein the months of September, October, and December, 1969, entered into a written agreement with

severalhardware stores dealing in buying and selling white cement in the Cities of Davao and Cagayan de Oro whichwould thus enable him to sell his allocation of 20,000 bags regular supply of the said commodity, bySeptember, 1970. After Te was assured by his supposed buyer that his allocation of 20,000 bags of whitecement can be disposed of, he informed the defendant corporation in his letter dated 18 August 1970 that he ismaking the necessary preparation for the opening of the requisite letter of credit to cover the price of the dueinitial delivery for the month of September 1970, looking forward to PWCC's duty to comply with thedealership agreement. In reply to the aforesaid letter of Te, PWCC thru its corporate secretary, replied that theboard of directors of PWCC decided to impose the following conditions: (a) Delivery of white cement shallcommence at the end of November, 1970; (b) Only 8,000 bags of white cement per month for only a period of three (3) months will be delivered; (c) The price of white cement was priced at P13.30 per bag; (d) The priceof white cement is subject to readjustment unilaterally on the part of the defendant; (e) The place of deliveryof white cement shall be Austurias (sic); (f) The letter of credit may be opened only with the Prudential Bank,Makati Branch; (g) Payment of white cement shall be made in advance and which payment shall be used bythe defendant as guaranty in the opening of a foreign letter of credit to cover costs and expenses in theprocurement of materials in the manufacture of white cement. Several demands to comply with the dealershipagreement were made by Te to PWCC, however, PWCC refused to comply with the same, and Te by force of circumstances was constrained to cancel his agreement for the supply of white cement with third parties,which were concluded in anticipation of, and pursuant to the said dealership agreement. Notwithstanding thatthe dealership agreement between Te and PWCC was in force and subsisting, PWCC, in violation of, and withevident intention not to be bound by the terms and conditions thereof, entered into an exclusive dealershipagreement with a certain Napoleon Co for the marketing of white cement in Mindanao. Te filed suit. After trial, the trial court adjudged PWCC liable to Alejandro Te in the amount of P3,302,400.00 as actual damages,P100,000.00 as moral damages, and P10,000 00 as and for attorney's fees and costs. The appellate courtaffirmed the said decision. Hence, PWCC filed the petition for review on certiorari.

Issue:

Whether the "dealership agreement" referred by the President and Chairman of the Board of PWCC is avalid and enforceable contract.

Held:

The ³dealership agreement´ is not valid and unenforceable. Under the Corporation Law, which wasthen in force at the time the case arose, as well as under the present Corporation Code, all corporate powersshall be exercised by the Board of Directors, except as otherwise provided by law. Although it cannotcompletely abdicate its power and responsibility to act for the juridical entity, the Board may expresslydelegate specific powers to its President or any of its officers. In the absence of such express delegation, acontract entered into by its President, on behalf of the corporation, may still bind the corporation if the boardshould ratify the same expressly or impliedly. Implied ratification may take various forms ² like silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefitsflowing therefrom. Furthermore, even in the absence of express or implied authority by ratification, thePresident as such may, as a general rule, bind the corporation by a contract in the ordinary course of business,provided the same is reasonable under the circumstances. These rules are basic, but are all general and thusquite flexible. They apply where the President or other officer, purportedly acting for the corporations, is dealing with a third person, i.e., a person outside the corporation. The situation is quite different where adirector or officer is dealing with his own corporation. Herein, Te was not an ordinary stockholder; he was amember of the Board of Directors and Auditor of the corporation as well. He was what is often referred to as a"self-dealing" director. A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice thelatter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximumamount of profits for the corporation. A director's contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by the stockholdersprovided a full disclosure of his adverse interest is made.Granting arguendo that the "dealership agreement" would be valid and enforceable if entered into with aperson other than a director or officer of the corporation, the fact that the other party to the contract was aDirector and Auditor of PWCC changes the whole situation. First of all, the contract was neither fair nor reasonable. The "dealership agreement" entered into in July 1969,

Leyah Josef Corpo 4th set Page | 17

was to sell and supply to Te 20,000 bags of white cement per month, for 5 years starting September 1970, at the fixed price of P9.70 per bag. Te is abusinessman himself and must have known, or at least must be presumed to know, that at that time, prices of commodities in general, and white cement in particular, were not stable and were expected to rise. At the timeof the contract, PWCC had not even commenced the manufacture of white cement, the reason why deliverywas not to begin until 14 months later. He must have known that within that period of 6 years, there would bea considerable rise in the price of white cement. In fact, Te's own Memorandum shows that in September 1970, the price per bag was P14.50, and by the middle of 1975, it was already P37.50 per bag. Despite this, noprovision was made in the "dealership agreement" to allow for an increase in price mutually acceptable to theparties. Instead, the price was pegged at P9.70 per bag for the whole 5 years of the contract. Fairness on hispart as a director of the corporation from whom he was to buy the cement, would require such a provision. Infact, this unfairness in the contract is also a basis which renders a contract entered into by the President,without authority from the Board of Directors, void or voidable, although it may have been in the ordinarycourse of business. The fixed price of P9.70 per bag for a period of 5 years was not fair and reasonable. Asdirector, specially since he was the other party in interest, Te's bounden duty was to act in such manner as notto unduly prejudice the corporation. In the light of the circumstances of this case, it is to Us quite clear that hewas guilty of disloyalty to the corporation; he was attempting in effect, to enrich himself at the expense of thecorporation. There is no showing that the stockholders ratified the "dealership agreement" or that they werefully aware of its provisions. The contract was therefore not valid and the Court cannot allow him to reap thefruits of his disloyalty.

Leyah Josef Corpo 4th set Page | 18