Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 174938 October 1, 2014

GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,

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

DECISION

LEONEN, J.:

Corporate representatives may be compelled to submit to arbitration proceedings

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

This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and
October 5, 2006 resolution. The Court of Appeals affirmed the trial court's decision
holding that petitioners, as director, should submit themselves as parties tothe arbitration
proceedings between BF Corporation and Shangri-La Properties, Inc. (Shangri-La).

In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against
Shangri-Laand the members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco,
Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos.1

BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it
entered into agreements with Shangri-La wherein it undertook to construct for Shangri-La
a mall and a multilevel parking structure along EDSA.2

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

BF Corporation alleged that Shangri-La induced BF Corporation to continue with the

construction of the buildings using its own funds and credit despite Shangri-La’s
default.5 According to BF Corporation, ShangriLa misrepresented that it had funds to pay
for its obligations with BF Corporation, and the delay in payment was simply a matter of
delayed processing of BF Corporation’s progress billing statements.6

BF Corporation eventually completed the construction of the buildings.7 Shangri-La

allegedly took possession of the buildings while still owing BF Corporation an outstanding
balance.8

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

On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco

III, and Benjamin C. Ramos filed a motion to suspend the proceedings in view of BF
Corporation’s failure to submit its dispute to arbitration, in accordance with the arbitration
clauseprovided in its contract, quoted in the motion as follows:11

35. Arbitration
(1) Provided always that in case any dispute or difference shall arise between the Owner
or the Project Manager on his behalf and the Contractor, either during the progress or
after the completion or abandonment of the Works as to the construction of this Contract
or as to any matter or thing of whatsoever nature arising there under or inconnection
therewith (including any matter or thing left by this Contract to the discretion of the
Project Manager or the withholding by the Project Manager of any certificate to which the
Contractor may claim to be entitled or the measurement and valuation mentioned in
clause 30(5)(a) of these Conditions or the rights and liabilities of the parties under clauses
25, 26, 32 or 33 of these Conditions), the owner and the Contractor hereby agree to exert
all efforts to settle their differences or dispute amicably. Failing these efforts then such
dispute or difference shall be referred to arbitration in accordance with the rules and
procedures of the Philippine Arbitration Law.

xxx xxx xxx

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

On August 19, 1993, BF Corporation opposed the motion to suspend proceedings.13

In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend
proceedings.14

On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with

compulsory counter claim against BF Corporation and crossclaim against Shangri-
La.15 They alleged that they had resigned as members of Shangri-La’s board of directors
as of July 15, 1991.16

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

On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered the
submission of the dispute to arbitration.18

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

Another issue arose after BF Corporation had initiated arbitration proceedings. BF

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

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

Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that
they be excluded from the arbitration proceedings for being non-parties to Shangri-La’s
and BF Corporation’s agreement.24

On July 28, 2003, the trial court issued the order directing service of demands for
arbitration upon all defendants in BF Corporation’s complaint. 25 According to the trial
court, Shangri-La’s directors were interested parties who "must also be served with a
demand for arbitration to give them the opportunity to ventilate their side of the
controversy, safeguard their interest and fend off their respective positions."26 Petitioners’
motion for reconsideration ofthis order was denied by the trial court on January 19,
2005.27
Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse of
discretion in the issuance of orders compelling them to submit to arbitration proceedings
despite being third parties to the contract between Shangri-La and BF Corporation.28

In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners’ petition for
certiorari. The Court of Appeals ruled that ShangriLa’s directors were necessary parties in
the arbitration proceedings.30 According to the Court of Appeals:

[They were] deemed not third-parties tothe contract as they [were] sued for their acts in
representation of the party to the contract pursuant to Art. 31 of the Corporation Code,
and that as directors of the defendant corporation, [they], in accordance with Art. 1217 of
the Civil Code, stand to be benefited or injured by the result of the arbitration
proceedings, hence, being necessary parties, they must be joined in order to have
complete adjudication of the controversy. Consequently, if [they were] excluded as parties
in the arbitration proceedings and an arbitral award is rendered, holding [Shangri-La] and
its board of directors jointly and solidarily liable to private respondent BF Corporation, a
problem will arise, i.e., whether petitioners will be bound bysuch arbitral award, and this
will prevent complete determination of the issues and resolution of the controversy.31

The Court of Appeals further ruled that "excluding petitioners in the arbitration
proceedings . . . would be contrary to the policy against multiplicity of suits."32

The dispositive portion of the Court of Appeals’ decision reads:

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

The Court of Appeals denied petitioners’ motion for reconsideration in the October 5, 2006
resolution.34

On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of
Appeals decision and the October 5, 2006 Court of Appeals resolution.35

The issue in this case is whether petitioners should be made parties to the arbitration
proceedings, pursuant to the arbitration clause provided in the contract between BF
Corporation and Shangri-La.

Petitioners argue that they cannot be held personally liable for corporate acts or
obligations.36 The corporation is a separate being, and nothing justifies BF Corporation’s
allegation that they are solidarily liable with Shangri-La.37Neither did they bind themselves
personally nor did they undertake to shoulder Shangri-La’s obligations should it fail in its
obligations.38 BF Corporation also failed to establish fraud or bad faith on their part.39

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

Petitioners point out thatour arbitration laws were enacted to promote the autonomy of
parties in resolving their disputes.43 Compelling them to submit to arbitration is against
this purpose and may be tantamount to stipulating for the parties.44

Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco

III, Alfredo C.Ramos and Benjamin C. Ramos.45

Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners
that Shangri-La’sdirectors, being non-parties to the contract, should not be made
personally liable for Shangri-La’s acts.46Since the contract was executed only by BF
Corporation and Shangri-La, only they should be affected by the contract’s
stipulation.47 BF Corporation also failed to specifically allege the unlawful acts of the
directors that should make them solidarily liable with Shangri-La for its obligations.48
Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the parties
should undergo arbitration "clearly contemplated the inclusion of the directors of the
corporation[.]"49 BF Corporation also argued that while petitioners were not parties to the
agreement, they were still impleaded under Section 31 of the Corporation Code.50 Section
31 makes directors solidarily liable for fraud, gross negligence, and bad faith.51Petitioners
are not really third parties to the agreement because they are being sued as Shangri-La’s
representatives, under Section 31 of the Corporation Code.52

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

In the manifestation dated September 6, 2007, petitioners informed the court that the
Arbitral Tribunal had already promulgated its decision on July 31, 2007.55 The Arbitral
Tribunal denied BF Corporation’s claims against them.56Petitioners stated that "[they]
were included by the Arbitral Tribunal in the proceedings conducted . . . notwithstanding
[their] continuing objection thereto. . . ."57 They also stated that "[their] unwilling
participation in the arbitration case was done ex abundante ad cautela, as manifested
therein on several occasions."58 Petitioners informed the court that they already
manifested with the trial court that "any action taken on [the Arbitral Tribunal’s decision]
should be without prejudice to the resolution of [this] case."59

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

In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary
liability under Section 31 of the Corporation Code. Shangri-La added that their exclusion
from the arbitration proceedings will result in multiplicity of suits, which "is not favored in
this jurisdiction."60 It pointed out that the case had already been mooted by the
termination of the arbitration proceedings, which petitioners actively participated
in.61 Moreover, BF Corporation assailed only the correctness of the Arbitral Tribunal’s
award and not the part absolving Shangri-La’s directors from liability.62

BF Corporation filed a counter-manifestation with motion to dismiss63 in lieu of the

required memorandum.

In its counter-manifestation, BF Corporation pointed out that since "petitioners’

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

The petition must fail.

The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding effect
on BF Corporation, have rendered this case moot and academic.

The mootness of the case, however, had not precluded us from resolving issues so that
principles may be established for the guidance of the bench, bar, and the public. In De la
Camara v. Hon. Enage,66 this court disregarded the fact that petitioner in that case
already escaped from prison and ruled on the issue of excessive bails:

While under the circumstances a ruling on the merits of the petition for certiorari is
notwarranted, still, as set forth at the opening of this opinion, the fact that this case is
moot and academic should not preclude this Tribunal from setting forth in language clear
and unmistakable, the obligation of fidelity on the part of lower court judges to the
unequivocal command of the Constitution that excessive bail shall not be required.67
This principle was repeated in subsequent cases when this court deemed it proper to
clarify important matters for guidance.68

Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings
in accordance with Shangri-Laand BF Corporation’s agreement, in order to determine if
the distinction between Shangri-La’s personality and their personalities should be
disregarded.

This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to
avoid litigation and settle disputes amicably and more expeditiously by themselves and
through their choice of arbitrators.

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

As a corollary to the question regarding the existence of an arbitration agreement,

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

In view of our policy to adopt arbitration as a manner of settling disputes, arbitration

clauses are liberally construed to favor arbitration. Thus, in LM Power Engineering
Corporation v. Capitol Industrial Construction Groups, Inc.,73this court said:

Being an inexpensive, speedy and amicable method of settling disputes, arbitration —

along with mediation, conciliation and negotiation — is encouraged by the Supreme Court.
Aside from unclogging judicial dockets, arbitration also hastens the resolution of disputes,
especially of the commercial kind. It is thus regarded as the "wave of the future" in
international civil and commercial disputes. Brushing aside a contractual agreement calling
for arbitration between the parties would be a step backward.

Consistent with the above-mentioned policy of encouraging alternative dispute resolution

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

A more clear-cut statement of the state policy to encourage arbitration and to favor
interpretations that would render effective an arbitration clause was later expressed in
Republic Act No. 9285:75

SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively
promote party autonomy in the resolution of disputes or the freedom of the party to make
their own arrangements to resolve their disputes. Towards this end, the State shall
encourage and actively promote the use of Alternative Dispute Resolution (ADR) as an
important means to achieve speedy and impartial justice and declog court dockets. As
such, the State shall provide means for the use of ADR as an efficient tool and an
alternative procedure for the resolution of appropriate cases. Likewise, the State shall
enlist active private sector participation in the settlement of disputes through ADR. This
Act shall be without prejudice to the adoption by the Supreme Court of any ADR system,
such as mediation, conciliation, arbitration, or any combination thereof as a means of
achieving speedy and efficient means of resolving cases pending before all courts in the
Philippines which shall be governed by such rules as the Supreme Court may approve
from time to time.

....

SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due
regard to the policy of the law in favor of arbitration.Where action is commenced by or
against multiple parties, one or more of whomare parties who are bound by the
arbitration agreement although the civil action may continue as to those who are not
bound by such arbitration agreement. (Emphasis supplied)

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

Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate
and distinct from Shangri-La.

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

Section 36. Corporate powers and capacity.– Every corporation incorporated under this
Code has the power and capacity:

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

2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate ofincorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this

Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend
or repeal the same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell

treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,

mortgage and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful
business of the corporation may reasonably and necessarily require, subject to
the limitations prescribed by law and the Constitution;
 8. To enter into merger or consolidation with other corporations as provided in
this Code;

9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That
no corporation, domestic or foreign, shall give donations in aid of any political
party or candidate or for purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and

11. To exercise such other powers asmay be essential or necessary to carry out
its purpose or purposes as stated in its articles of incorporation. (13a)

Because a corporation’s existence is only by fiction of law, it can only exercise its rights
and powers through itsdirectors, officers, or agents, who are all natural persons. A
corporation cannot sue or enter into contracts without them.

A consequence of a corporation’s separate personality is that consent by a corporation

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

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

Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving
their disputes. This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty
Corporation79 that an arbitration clause shall not apply to persons who were neither
parties to the contract nor assignees of previous parties, thus:

A submission to arbitration is a contract. As such, the Agreement, containing the

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

Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court ruled:

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

This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals
Co., Inc.83 and Stanfilco Employees v. DOLE Philippines, Inc., et al.84

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

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

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

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

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

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty
of gross negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees shall
be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.

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

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

a) The director or trustee willfully and knowingly voted for or assented to a

patently unlawful corporate act;

b) The director or trustee was guilty of gross negligence or bad faith in directing
corporate affairs; and

c) The director or trustee acquired personal or pecuniary interest in conflict with

his or her duties as director or trustee.

Solidary liability with the corporation will also attach in the following instances:

a) "When a director or officer has consented to the issuance of watered stocks or

who, having knowledge thereof, did not forthwith file with the corporate
secretary his written objection thereto";87

b) "When a director, trustee or officer has contractually agreed or stipulated to

hold himself personally and solidarily liable with the corporation";88 and

c) "When a director, trustee or officer is made, by specific provision of law,

personally liable for his corporate action."89

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

Hence, when the directors, as in this case, are impleaded in a case against a corporation,
alleging malice orbad faith on their part in directing the affairs of the corporation,
complainants are effectively alleging that the directors and the corporation are not acting
as separate entities. They are alleging that the acts or omissions by the corporation that
violated their rights are also the directors’ acts or omissions.90 They are alleging that
contracts executed by the corporation are contracts executed by the directors.
Complainants effectively pray that the corporate veilbe pierced because the cause of
action between the corporation and the directors is the same.

In that case, complainants have no choice but to institute only one proceeding against the
parties.1âwphi1 Under the Rules of Court, filing of multiple suits for a single cause of
action is prohibited. Institution of more than one suit for the same cause of action
constitutes splitting the cause of action, which is a ground for the dismissal ofthe others.
Thus, in Rule 2:

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

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

It is because the personalities of petitioners and the corporation may later be found to be
indistinct that we rule that petitioners may be compelled to submit to arbitration.

However, in ruling that petitioners may be compelled to submit to the arbitration

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

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

However, when the courts disregard the corporation’s distinct and separate personality
from its directors or officers, the courts do not say that the corporation, in all instances
and for all purposes, is the same as its directors, stockholders, officers, and agents. It
does not result in an absolute confusion of personalities of the corporation and the
persons composing or representing it. Courts merely discount the distinction and treat
them as one, in relation to a specific act, in order to extend the terms of the contract and
the liabilities for all damages to erring corporate officials who participated in the
corporation’s illegal acts. This is done so that the legal fiction cannot be used to
perpetrate illegalities and injustices.
Thus, in cases alleging solidary liability with the corporation or praying for the piercing of
the corporate veil, parties who are normally treated as distinct individuals should be made
to participate in the arbitration proceedings in order to determine ifsuch distinction should
indeed be disregarded and, if so, to determine the extent of their liabilities.

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

WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006 and
resolution of October 5, 2006 are AFFIRMED.

SO ORDERED.
SERENO, C.J.:
The instant case is an offshoot of this Court's Decision dated 13 January 2004 (2004
Decision) in a related case entitled Information Technology Foundation of the Philippines
v. Commission on Elections.[1]

In the 2004 case, We declared void the automation contract executed by respondent
Mega Pacific eSolutions, Inc. (MPEI) and the Commission on Elections (COMELEC) for the
supply of automated counting machines (ACMs) for the 2004 national elections.

The present case involves the attempt of petitioner Republic of the Philippines to cause
the attachment of the properties owned by respondent MPEI, as well as by its
incorporators and stockholders (individual respondents in this case), in order to secure
petitioner's interest and to ensure recovery of the payments it made to respondents for
the invalidated automation contract.

At bench is a Rule 45 Petition assailing the Amended Decision dated 22 September 2008
(Amended Decision) issued by the Court of Appeals (CA) in CA-G.R. SP No. 95988.[2] In
said Amended Decision, the CA directed the remand of the case to the Regional Trial
Court of Makati City, Branch 59 (RTC Makati) for the reception of evidence in relation to
petitioner's application for the issuance of a writ of preliminary attachment. The CA had
reconsidered and set aside its previous Decision dated 31 January 2008 (First
Decision)[3] entitling petitioner to the issuance of said writ.

Summarized below are the relevant facts of the case, some of which have already been
discussed in this Court's 2004 Decision:

The Facts

Republic Act No. 8436 authorized the COMELEC to use an automated election system for
the May 1998 elections. However, the automated system failed to materialize and votes
were canvassed manually during the 1998 and the 2001 elections.

For the 2004 elections, the COMELEC again attempted to implement the automated
election system. For this purpose, it invited bidders to apply for the procurement of
supplies, equipment, and services. Respondent MPEI, as lead company, purportedly
formed a joint venture - known as the Mega Pacific Consortium (MPC) - together with We
Solv, SK C & C, ePLDT, Election.com and Oracle. Subsequently, MPEI, on behalf of MPC,
submitted its bid proposal to COMELEC.

The COMELEC evaluated various bid offers and subsequently found MPC and another
company eligible to participate in the next phase of the bidding process.[4] The two
companies were referred to the Department of Science and Technology (DOST) for
technical evaluation. After due assessment, the Bids and Awards Committee (BAC)
recommended that the project be awarded to MPC. The COMELEC favorably acted on the
recommendation and issued Resolution No. 6074, which awarded the automation project
to MPC.

Despite the award to MPC, the COMELEC and MPEI executed on 2 June 2003 the
Automated Counting and Canvassing Project Contract (automation contract)[5] for the
aggregate amount of P1,248,949,088. MPEI agreed to supply and deliver 1,991 units of
ACMs and such other equipment and materials necessary for the computerized electoral
system in the 2004 elections. Pursuant to the automation contract, MPEI delivered 1,991
ACMs to the COMELEC. The latter, for its part, made partial payments to MPEI in the
aggregate amount of P1.05 billion.

The full implementation of the automation contract was rendered impossible by the fact
that, after a painstaking legal battle, this Court in its 2004 Decision declared the contract
null and void.[6] We held that the COMELEC committed a clear violation of law and
jurisprudence, as well as a reckless disregard of its own bidding rules and procedure. In
addition, the COMELEC entered into the contract with inexplicable haste, and without
adequately checking and observing mandatory financial, technical, and legal
requirements. In a subsequent Resolution, We summarized the COMELEC's grave abuse
of discretion as having consisted of the following:[7]
 1. By a formal Resolution, it awarded the project to "Mega Pacific Consortium," an
entity that had notparticipated in the bidding. Despite this grant, Comelec
entered into the actual Contract with "Mega Pacific eSolutions, Inc." (MPEI), a
company that joined the bidding process but did not meet the eligibility
requirements.

2. Comelec accepted and irregularly paid for MPEI's ACMs that had failed the
accuracy requirement of 99.9995 percent set up by the Comelec bidding rules.
Acknowledging that this rating could have been too steep, the Court nonetheless
noted that "the essence of public bidding is violated by the practice of requiring
very high standards or unrealistic specifications that cannot be met, x x x only to
water them down after the award is made. Such scheme, which discourages
the entry of bona fidebidders, is in fact a sure indication of fraud in the
bidding, designed to eliminate fair competition."

3. The software program of the counting machines likewise failed to detect

previously downloaded precinct results and to prevent them from being
reentered. This failure, which has not been corrected x x x, would have allowed
unscrupulous persons to repeatedly feed into the computers the results favorable
to a particular candidate, an act that would have translated into massive election
fraud by just a few key strokes.

4. Neither were the ACMs able to print audit trails without loss of data - a
mandatory requirement under Section 7 of Republic Act No. 8436. Audit trails
would enable the Comelec to document the identities of the ACM operators
responsible for data entry and downloading, as well as the times when the
various data were processed, in order to forestall fraud and to identify the
perpetrators. The absence of audit trails would have posed a serious threat to
free and credible elections.

5. Comelec failed to explain satisfactorily why it had ignored its own bidding rules
and requirements. It admitted that the software program used to test the ACMs
was merely a "demo" version, and that the final one to be actually used in the
elections was still being developed. By awarding the Contract and irregularly
paying for the supply of the ACMs without having seen — much less, evaluated
— the final product being purchased, Comelec desecrated the law on public
bidding. It would have allowed the winner to alter its bid substantially, without
any public bidding.

All in all, Comelec subverted the essence of public bidding: to give the public an
opportunity for fair competition and a clear basis for a precise comparison of
bids.[8] (Emphasis supplied)
As a consequence of the nullification of the automation contract, We directed the Office of
the Ombudsman to determine the possible criminal liability of persons responsible for the
contract.[9] This Court likewise directed the Office of the Solicitor General to protect the
government from the ill effects of the illegal disbursement of public funds in relation to
the automation contract.[10]

After the declaration of nullity of the automation contract, the following incidents
transpired:

1. Private respondents in the 2004 case moved for reconsideration of the 2004
Decision, but the motion was denied by this Court in a Resolution dated 17
February 2004 (2004 Resolution).[11]

2. The COMELEC filed a "Most Respectful Motion for Leave to Use the Automated
Counting Machines in the Custody of the Commission on Elections for use in the
8 August 2005 Elections in the Autonomous Region for Muslim Mindanao" dated
9 December 2004 (Motion for Leave to Use ACMs), which was denied by this
Court in its Resolution dated 15 June 2005 (2005 Resolution).

3. Atty. Romulo B. Macalintal (Macalintal) filed an "Omnibus Motion for Leave of

Court (1) to Reopen the Case; and (2) to Intervene and Admit the Attached
Petition in Intervention," which was denied by this Court in its Resolution dated
 22 August 2006 (2006 Resolution); and

4. Respondent MPEI filed a Complaint for Damages[12] (Complaint) with the RTC
Makati, from which the instant case arose.

The above-mentioned incidents are discussed in more detail below.

BACKGROUND PROCEEDINGS

Private respondents' Motion for Reconsideration

Private respondents in the 2004 case moved for reconsideration of the 2004 Decision.
Aside from reiterating the procedural and substantive arguments they had raised, they
also argued that the 2004 Decision had exposed them to possible criminal prosecution.[13]

This Court denied the motion in its 2004 Resolution and ruled that no prejudgment had
been made on private respondents' criminal liability. We further ruled that although the
2004 Decision stated that the Ombudsman shall "determine the criminal liability, if any, of
the public officials (and conspiring private individuals, if any) involved in the subject
Resolution and Contract," We did not make any premature conclusion on any wrongdoing,
but precisely directed the Ombudsman to make that determination after conducting
appropriate proceedings and observing due process.

Similarly, it appears from the record that several criminal and administrative Complaints
had indeed been filed with the Ombudsman in relation to the declaration of nullity of the
automation contract.[14] The Complaints were filed against several public officials and the
individual respondents in this case.[15]

In a Resolution issued on 28 June 2006,[16] the Ombudsman recommended the filing of

informations before the Sandiganbayan against some of the public officials and the
individual respondents[17] for violation of Section 3(e) of Republic Act No. 3019 (the Anti-
Graft and Corrupt Practices Act). However, on 27 September 2006,[18] upon
reconsideration, the Ombudsman reversed its earlier ruling in a Supplemental Resolution
(September Resolution), directing the dismissal of the criminal cases against the public
officials, as well as the individual respondents, for lack of probable cause. [19]

With this development, a Petition for Certiorari was filed with this Court on 13 October
2006 and docketed as G.R. No. 174777.[20] In the Petition, several individuals[21] assailed
the September Resolution of the Ombudsman finding no probable cause to hold
respondents criminally liable. The case remains pending with this Court as of this date.

COMELEC's Motion for Leave to Use ACMs in the ARMM Elections

The COMELEC filed a motion with this Court requesting permission to use the 1,991 ACMs
previously delivered by respondent MPEI, for the ARMM elections, then slated to be held
on 8 August 2005. In its motion, the COMELEC claimed that automation of the ARMM
elections was mandated by Republic Act No. 9333, and since the government had no
available funds to finance the automation of those elections, the ACMs could be utilized
for the 2005 elections.

This Court denied the Motion in Our 2005 Resolution. We ruled that allowing the use of
the ACMs would have the effect of illegally reversing and subverting a final decision We
had promulgated. We further ruled that the COMELEC was asking for permission to do
what it had precisely been prohibited from doing under the 2004 Decision. This Court also
ruled that the grant of the motion would bar or jeopardize the recovery of government
funds paid to respondents. Considering that the COMELEC did not present any evidence to
prove that the defects had been addressed, We held that the use of the ACMs and the
software would expose the ARMM elections to the same electoral ills pointed out in the
2004 Decision.

Atty. Macalintal's Omnibus Motion

Atty. Romulo Macalintal sought to reopen the 2004 case in order that he may be allowed
to intervene as a taxpayer and citizen. His purpose for intervening was to seek another
testing of the ACMs with the ultimate objective of allowing the COMELEC to use them, this
time for the 2007 national elections.

This Court denied his motion in Our 2006 Resolution, ruling that Atty. Macalintal failed to
demonstrate that certain supervening events and legal circumstances had transpired to
justify the reliefs sought. We in fact found that, after Our determination that the ACMs
had failed to pass legally mandated technical requirements in 2004, they were simply put
in storage. The ACMs had remained idle and unused since the last evaluation, at which
they failed to hurdle crucial tests. Consequently, We ruled that if the ACMs were not good
enough for the 2004 national elections or the 2005 ARMM elections, then neither would
they be good enough for the 2007 national elections, considering that nothing was done
to correct the flaws that had been previously underscored in the 2004 Decision. We held
that granting the motion would be tantamount to rendering the 2004 Decision totally
ineffective and nugatory.

Moreover, because of our categorical ruling that the whole bidding process was void
and fraudulent, the proposal to use the illegally procured, demonstratively defective, and
fraud-prone ACMs was rendered nonsensical. Thus:

We stress once again that the Contract entered into by the Comelec for the supply of the
ACMs was declared VOID by the Court in its Decision, because of clear violations of law
and jurisprudence, as well as the reckless disregard by the Commission of its own bidding
rules and procedure. In addition, the poll body entered into the Contract with inexplicable
haste, without adequately checking and observing mandatory financial, technical and legal
requirements. As explained in our Decision, Comelec's gravely abusive acts consisted of
the following:

xxxx

To muddle the issue, Comelec keeps on saying that the "winning" bidder
presented a lower price than the only other bidder. It ignored the fact that the
whole bidding process was VOID and FRAUDULENT. How then could there have
been a "winning" bid?[22] (Emphasis supplied)
THE INSTANT CASE

Complaint for Damages filed by respondents with the RTC Makati and
petitioner's Answer with Counterclaim, with an application for a writ of
preliminary attachment, from which the instant case arose

Upon the finality of the declaration of nullity of the automation contract, respondent MPEI
filed a Complaint for Damages before the RTC Makati, arguing that, notwithstanding the
nullification of the automation contract, the COMELEC was still bound to pay the amount
of P200,165,681.89. This amount represented the difference between the value of the
ACMs and the support services delivered on one hand, and on the other, the payment
previously made by the COMELEC.[23]

Petitioner filed its Answer with Counterclaim[24] and argued that respondent MPEI could
no longer recover the unpaid balance from the void automation contract, since the
payments made were illegal disbursements of public funds. It contended that a null and
void contract vests no rights and creates no obligations, and thus produces no legal effect
at all. Petitioner further posited that respondent MPEI could not hinge its claim upon the
principles of unjust enrichment and quasi-contract, because such presume that the acts
by which the authors thereof become obligated to each other are lawful, which was not
the case herein.[25]

By way of a counterclaim, petitioner demanded from respondents the return of the

payments made pursuant to the automation contract.[26] It argued that individual
respondents, being the incorporators of MPEI, likewise ought to be impleaded and held
accountable for MPEI's liabilities. The creation of MPC was, after all, merely an ingenious
scheme to feign eligibility to bid.[27]

Pursuant to Section 1(d) of Rule 57 of the Rules of Court, petitioner prayed for the
issuance of a writ of preliminary attachment against the properties of MPEI and individual
respondents. The application was grounded upon the fraudulent misrepresentation of
respondents as to their eligibility to participate in the bidding for the COMELEC
automation project and the failure of the ACMs to comply with mandatory technical
requirements.[28]

Subsequently, the trial court denied the prayer for the issuance of a writ of preliminary
attachment,[29] ruling that there was an absence of factual allegations as to how the fraud
was actually committed.

The allegations of petitioner were found to be unreliable, as the latter merely copied from
the declarations of the Supreme Court in Information Technology Foundation of the Phils,
v. COMELEC the factual allegations of MPEI's lack of qualification and noncompliance with
bidding requirements. The trial court further ruled that the allegations of fraud on the part
of MPEI were not supported by the COMELEC, the office in charge of conducting the
bidding for the election automation contract. It was likewise held that there was no
evidence that respondents harbored a preconceived plan not to comply with the
obligation; neither was there any evidence that MPEI's corporate fiction was used to
perpetrate fraud. Thus, it found no sufficient basis to pierce the veil of corporate fiction or
to cause the attachment of the properties owned by individual respondents.

Petitioner moved to set aside the trial court's Order denying the writ of attachment, [30] but
its motion was denied.[31]

Appeal before the CA and the First Decision

Aggrieved, petitioner filed an appeal with the CA, arguing that the trial court had acted
with grave abuse of discretion in denying the application for a writ of attachment.

As mentioned earlier, the CA in its First Decision[32] reversed and set aside the trial court's
Orders and ruled that there was sufficient basis for the issuance of a writ of attachment in
favor of petitioner.

The appellate court explained that the averments of petitioner in support of the latter's
application actually reflected pertinent conclusions reached by this Court in its 2004
Decision. It held that the trial court erred in disregarding the following findings of fact,
which remained unaltered and unreversed: (1) COMELEC bidding rules provided that the
eligibility and capacity of a bidder may be proved through financial documents including,
among others, audited financial statements for the last three years; (2) MPEI was
incorporated only on 27 February 2003, or 11 days prior to the bidding itself; (3) in an
attempt to disguise its ineligibility, MPEI participated in the bidding as lead company of
MPC, a putative consortium, and submitted the incorporation papers and financial
statements of the members of the consortium; and (4) no proof of the joint venture
agreement, consortium agreement, memorandum of agreement, or business plan
executed among the members of the purported consortium was ever submitted to the
COMELEC.[33]

According to the CA, the foregoing were glaring indicia or badges of fraud, which entitled
petitioner to the issuance of the writ. It further ruled that there was sufficient reason to
pierce the corporate veil of MPEI. Thus, the CA allowed the attachment of the properties
belonging to both MPEI and individual respondents.[34] The CA likewise ruled that even if
the COMELEC committed grave abuse of discretion in capriciously disregarding the rules
on public bidding, this should not preclude or deter petitioner from pursuing its claim
against respondents. After all, the State is not estopped by the mistake of its officers and
employees.[35]

Respondents moved for reconsideration[36] of the First Decision of the CA.

Motion for Reconsideration before the CA and the Amended Decision

Upon review, the CA reconsidered its First Decision[37] and directed the remand of the
case to the RTC Makati for the reception of evidence of allegations of fraud and to
determine whether attachment should necessarily issue.[38]

The CA explained in its Amended Decision that respondents could not be considered to
have fostered a fraudulent intent to dishonor their obligation, since they had delivered
1,991 units of ACMs.[39] It directed petitioner to present proof of respondents' intent to
defraud COMELEC during the execution of the automation contract.[40] The CA likewise
emphasized that the Joint Affidavit submitted in support of petitioner's application for the
writ contained allegations that needed to be substantiated.[41] It added that proof must
likewise be adduced to verify the requisite fraud that would justify the piercing of the
corporate veil of respondent MPEI.[42]

The CA further clarified that the 2004 Decision did not make a definite finding as to the
identities of the persons responsible for the illegal disbursement or of those who
participated in the fraudulent dealings.[43] It instructed the trial court to consider, in its
determination of whether the writ of attachment should issue, the illegal, imprudent and
hasty acts in awarding the automation contract by the COMELEC. In particular, these acts
consisted of: (1) awarding the automation contract to MPC, an entity that did not
participate in the bidding; and (2) signing the actual automation contract with respondent
MPEI, the company that joined the bidding without meeting the eligibility requirement.[44]

Rule 45 Petition before Us

Consequently, petitioner filed the instant Rule 45 Petition,[45] arguing that the CA erred in
ordering the remand of the case to the trial court for the reception of evidence to
determine the presence of fraud. Petitioner contends that this Court's 2004 Decision was
sufficient proof of the fraud committed by respondents in the execution of the voided
automation contract.[46] Respondents allegedly committed fraud by securing the
automation contract, although MPEI was not qualified to bid in the first place.[47] Their
claim that the members of MPC bound themselves to the automation contract was an
indication of bad faith as the contract was executed by MPEI alone.[48] Neither could they
deny that the software submitted during the bidding process was not the same one that
would be used on election day.[49] They could not dissociate themselves from telltale signs
such as purportedly supplying software that later turned out to be non-existent.[50]

In their respective Comments, respondents Willy Yu, Bonnie Yu, Enrique Tansipek, and
Rosita Tansipek counter[51] that this Court never ruled that individual respondents were
guilty of any fraud or bad faith in connection with the automation contract, and that it
was incumbent upon petitioner to present evidence on the allegations of fraud to justify
the issuance of the writ.[52] They likewise argue that the 2004 Decision cannot be invoked
against them, since petitioner and MPEI were co-respondents in the 2004 case and not
adverse parties therein.[53] Respondents further contend that the allegations of fraud are
belied by their actual delivery of 1,991 units of ACMs to the COMELEC, which they claim is
proof that they never had any intention to evade performance.[54]

They further allege that this Court, in its 2004 Decision, even recognized that it had not
found any wrongdoing on their part, and that the Ombudsman had already made a
determination that no probable cause existed with respect to charges of violation of Anti-
Graft and Corrupt Practices Act.[55]

Echoing the other respondents' arguments on the lack of particularity in the allegations of
fraud,[56]respondents MPEI, Johnson Wong, Bernard Fong, Pedro Tan, and Lauriano
Barrios likewise argue that they were not parties to the 2004 case; thus, the 2004
Decision thereon is not binding on them.[57] Individual respondents likewise argue that the
findings of fact in the 2004 Decision were not conclusive,[58] considering that eight (8) of
the fifteen (15) justices allegedly refused to go along with the factual findings as stated in
the majority opinion.[59] Thereafter, petitioner filed its Reply to the Comments.[60]

Based on the submissions of both parties, the following issues are presented to this Court
for resolution:

1. Whether petitioner has sufficiently established fraud on the part of respondents

to justify the issuance of a writ of preliminary attachment in its favor; and

2. Whether a writ of preliminary attachment may be issued against the properties

of individual respondents, considering that they were not parties to the 2004
case.

The Court's Ruling

The Petition is meritorious. A writ of preliminary attachment should issue in favor of

petitioner over the properties of respondents MPEI, Willy Yu (Willy) and the remaining
individual respondents, namely: Bonnie S. Yu (Bonnie), Enrique T. Tansipek (Enrique),
Rosita Y. Tansipek (Rosita), Pedro O. Tan (Pedro), Johnson W. Fong (Johnson), Bernard I.
Fong (Bernard), and Lauriano Barrios (Lauriano). The bases for the writ are the following:

1. Fraud on the part of respondent MPEI was sufficiently established by the factual
findings of this Court in its 2004 Decision and subsequent pronouncements.

2. A writ of preliminary attachment may issue over the properties of the individual
respondents using the doctrine of piercing the corporate veil.

3. The factual findings of this Court that have become final cannot be modified or
altered, much less reversed, and are controlling in the instant case.

4. The delivery of 1,991 units of ACMs does not negate fraud on the part of
respondents MPEI and Willy.

5. Estoppel does not lie against the state when it acts to rectify mistakes, errors or
illegal acts of its officials and agents.

6. The findings of the Ombudsman are not controlling in the instant case.

DISCUSSION

I.
Fraud on the part of respondent MPEI was sufficiently established by the
factual findings of this Court in the latter's 2004 Decision and subsequent
pronouncements.

Petitioner argues that the findings of this Court in the 2004 Decision serve as sufficient
basis to prove that, at the time of the execution of the automation contract, there was
fraud on the part of respondents that justified the issuance of a writ of attachment.
Respondents, however, argue the contrary. They claim that fraud had not been
sufficiently established by petitioner.

We rule in favor of petitioner. Fraud on the part of respondents MPEI and Willy, as well as
of the other individual respondents — Bonnie, Enrique, Rosita, Pedro, Johnson, Bernard,
and Lauriano — has been established.

A writ of preliminary attachment is a provisional remedy issued upon the order of the
court where an action is pending. Through the writ, the property or properties of the
defendant may be levied upon and held thereafter by the sheriff as security for the
satisfaction of whatever judgment might be secured by the attaching creditor against the
defendant.[61] The provisional remedy of attachment is available in order that the
defendant may not dispose of the property attached, and thus prevent the satisfaction of
any judgment that may be secured by the plaintiff from the former.[62]

The purpose and function of an attachment or garnishment is twofold. First, it seizes upon
property of an alleged debtor in advance of final judgment and holds it subject to
appropriation, thereby preventing the loss or dissipation of the property through fraud or
other means. Second, it subjects the property of the debtor to the payment of a creditor's
claim, in those cases in which personal service upon the debtor cannot be
obtained.[63] This remedy is meant to secure a contingent lien on the defendant's property
until the plaintiff can, by appropriate proceedings, obtain a judgment and have the
property applied to its satisfaction, or to make some provision for unsecured debts in
cases in which the means of satisfaction thereof are liable to be removed beyond the
jurisdiction, or improperly disposed of or concealed, or otherwise placed beyond the reach
of creditors.[64]

Petitioner relied upon Section 1(d), Rule 57 of the Rules of Court as basis for its
application for a writ of preliminary attachment. This provision states:

Section 1. Grounds upon which attachment may issue. At the commencement of the
action or at any time before entry of judgment, a plaintiff or any proper party may have
the property of the adverse party attached as security for the satisfaction of any judgment
that may be recovered in the following cases:

xxxx

(d) In an action against a party who has been guilty of a fraud in contracting the
debt or incurring the obligation upon which the action is brought, or in
the performance thereof. (Emphasis supplied)
For a writ of preliminary attachment to issue under the above-quoted rule, the applicant
must sufficiently show the factual circumstances of the alleged fraud.[65] In Metro, Inc. v.
Lara's Gift and Decors, Inc.,[66] We explained:

To sustain an attachment on this ground, it must be shown that the debtor in contracting
the debt or incurring the obligation intended to defraud the creditor. The fraud must
relate to the execution of the agreement and must have been the reason which
induced the other party into giving consent which he would not have otherwise
given. To constitute a ground for attachment in Section 1(d), Rule 57 of the Rules of
Court, fraud should be committed upon contracting the obligation sued upon. A debt is
fraudulently contracted if at the time of contracting it the debtor has a preconceived plan
or intention not to pay, as it is in this case. x x x.
The applicant for a writ of preliminary attachment must sufficiently show the factual
circumstances of the alleged fraud because fraudulent intent cannot be inferred from the
debtor's mere non-payment of the debt or failure to comply with his obligation. (Emphasis
supplied)
An amendment to the Rules of Court added the phrase "in the performance thereof" to
include within the scope of the grounds for issuance of a writ of preliminary attachment
those instances relating to fraud in the performance of the obligation.[67]

Fraud is a generic term that is used in various senses and assumes so many different
degrees and forms that courts are compelled to content themselves with comparatively
few general rules for its discovery and defeat. For the same reason, the facts and
circumstances peculiar to each case are allowed to bear heavily on the conscience and
judgment of the court or jury in determining the presence or absence of fraud. In fact,
the fertility of man's invention in devising new schemes of fraud is so great that courts
have always declined to define it, thus, reserving for themselves the liberty to deal with it
in whatever form it may present itself.[68]

Fraud may be characterized as the voluntary execution of a wrongful act or a wilful

omission, while knowing and intending the effects that naturally and necessarily arise
from that act or omission.[69] In its general sense, fraud is deemed to comprise anything
calculated to deceive—including all acts and omission and concealment involving a breach
of legal or equitable duty, trust, or confidence justly reposed—resulting in damage to or in
undue advantage over another.[70] Fraud is also described as embracing all multifarious
means that human ingenuity can device, and is resorted to for the purpose of securing an
advantage over another by false suggestions or by suppression of truth; and it includes all
surprise, trick, cunning, dissembling, and any other unfair way by which another is
cheated.[71]

While fraud cannot be presumed, it need not be proved by direct evidence and can well
be inferred from attendant circumstances.[72] Fraud by its nature is not a thing susceptible
of ocular observation or readily demonstrable physically; it must of necessity be proved in
many cases by inferences from circumstances shown to have been involved in the
transaction in question.[73]

In the case at bar, petitioner has sufficiently discharged the burden of demonstrating the
commission of fraud by respondent MPEI in the execution of the automation contract in
the two ways that were enumerated earlier and discussed below:

A. Respondent MPEI had perpetrated a scheme against petitioner to secure the

automation contract by using MPC as supposed bidder and eventually
succeeding in signing the automation contract as MPEI alone, an entity which
was ineligible to bid in the first place.

To avoid any confusion relevant to the basis of fraud, We quote herein the pertinent
portions of this Court's 2004 Decision with regard to the identity, existence, and eligibility
of MPC as bidder:[74]

On the question of the identity and the existence of the real bidder, respondents insist
that, contrary to petitioners' allegations, the bidder was not Mega Pacific eSolutions, Inc.
(MPEI), which was incorporated only on February 27, 2003, or 11 days prior to
the bidding itself. Rather, the bidder was Mega Pacific Consortium (MPC), of which
MPEI was but a part. As proof thereof, they point to the March 7, 2003 letter of intent to
bid, signed by the president of MPEI allegedly for and on behalf of MPC. They also call
attention to the official receipt issued to MPC, acknowledging payment for the bidding
documents, as proof that it was the "consortium" that participated in the bidding process.

We do not agree. The March 7, 2003 letter, signed by only one signatory — "Willy U. Yu,
President, Mega Pacific eSolutions, Inc., (Lead Company/Proponent) For: Mega Pacific
Consortium" — and without any further proof, does not by itself prove the existence of
the consortium. It does not show that MPEI or its president have been duly pre-
authorized by the other members of the putative consortium to represent them, to bid on
their collective behalf and, more important, to commit them jointly and severally to the
bid undertakings. The letter is purely self-serving and uncorroborated.

Neither does an official receipt issued to MPC, acknowledging payment for the bidding
documents, constitute proof that it was the purported consortium that participated in the
bidding. Such receipts are issued by cashiers without any legally sufficient inquiry as to
the real identity or existence of the supposed payor.

To assure itself properly of the due existence (as well as eligibility and qualification) of the
putative consortium, Comelec's BAC should have examined the bidding documents
submitted on behalf of MPC. They would have easily discovered the following fatal flaws.

xxxx

The Eligibility Envelope was to contain legal documents such as articles of incorporation, x
x x to establish the bidder's financial capacity.

In the case of a consortium or joint venture desirous of participating in the bidding, it

goes without saying that the Eligibility Envelope would necessarily have to include a copy
of the joint venture agreement, the consortium agreement or memorandum of agreement
— or a business plan or some other instrument of similar import — establishing the due
existence, composition and scope of such aggrupation. Otherwise, how would Comelec
know who it was dealing with, and whether these parties are qualified and capable of
delivering the products and services being offered for bidding?

In the instant case, no such instrument was submitted to Comelec during the
bidding process. x x x

xxxx

However, there is no sign whatsoever of any joint venture agreement,

consortium agreement, memorandum of agreement, or business plan executed
among the members of the purported consortium.

The only logical conclusion is that no such agreement was ever submitted to
the Comelec for its consideration, as part of the bidding process.

It thus follows that, prior the award of the Contract, there was no documentary
or other basis for Comelec to conclude that a consortium had actually been
formed amongst MPEI, SK C&C and WeSolv, along with Election.com and
ePLDT. Neither was there anything to indicate the exact relationships between and
among these firms; their diverse roles, undertakings and prestations, if any, relative to
the prosecution of the project, the extent of their respective investments (if any) in the
supposed consortium or in the project; and the precise nature and extent of their
respective liabilities with respect to the contract being offered for bidding. And apart from
the self-serving letter of March 7, 2003, there was not even any indication that MPEI was
the lead company duly authorized to act on behalf of the others.

xxxx
Hence, had the proponent MPEI been evaluated based solely on its own
experience, financial and operational track record or lack thereof, it would
surely not have qualified and would have been immediately considered
ineligible to bid, as respondents readily admit.

xxxx

At this juncture, one might ask: What, then, if there are four MOAs instead of one or none
at all? Isn't it enough that there are these corporations coming together to carry out the
automation project? Isn't it true, as respondent aver, that nowhere in the RFP issued by
Comelec is it required that the members of the joint venture execute a single written
agreement to prove the existence of a joint venture. x x x

xxxx

The problem is not that there are four agreements instead of only one. The problem is
that Comelec never bothered to check. It never based its decision on documents or other
proof that would concretely establish the existence of the claimed consortium or joint
venture or agglomeration.

xxxx

True, copies of financial statements and incorporation papers of the alleged "consortium"
members were submitted. But these papers did not establish the existence of a
consortium, as they could have been provided by the companies concerned for purposes
other than to prove that they were part of a consortium or joint venture.

xxxx

In brief, despite the absence of competent proof as to the existence and

eligibility of the alleged consortium (MPC), its capacity to deliver on the
Contract, and the members' joint and several liability therefor, Comelec
nevertheless assumed that such consortium existed and was eligible. It then
went ahead and considered the bid of MPC, to which the Contract was
eventually awarded, in gross violation of the former's own bidding rules and
procedures contained in its RFP. Therein lies Comclec's grave abuse of
discretion.

Sufficiency of the Four Agreements

Instead of one multilateral agreement executed by, and effective and binding on, all the
five "consortium members" — as earlier claimed by Commissioner Tuason in open court —
it turns out that what was actually executed were four (4) separate and distinct bilateral
Agreements. Obviously, Comelec was furnished copies of these Agreements
only after the bidding process had been terminated, as these were not included
in the Eligibility Documents. x x x

xxxx

At this point, it must be stressed most vigorously that the submission of the four
bilateral Agreements to Comelec after the end of the bidding process did
nothing to eliminate the grave abuse of discretion it had already committed on
April 15, 2003.

Deficiencies Have Not Been "Cured"

In any event, it is also claimed that the automation Contract awarded by Comelec
incorporates all documents executed by the "consortium" members, even if these
documents are not referred to therein. x x x

xxxx

Thus, it is argued that whatever perceived deficiencies there were in the supplementary
contracts - those entered into by MPEI and the other members of the "consortium" as
regards their joint and several undertakings — have been cured. Better still, such
deficiencies have supposedly been prevented from arising as a result of the above-quoted
provisions, from which it can be immediately established that each of the members of
MPC assumes the same joint and several liability as the other members.

The foregoing argument is unpersuasive. First, the contract being referred to,
entitled "The Automated Counting and Canvassing Project Contract," is
between Comelec and MPEI, not the alleged consortium, MPC. To repeat, it
is MPEI - not MPC - that is a party to the Contract. Nowhere in that Contract is
there any mention of a consortium or joint venture, of members thereof, much
less of joint and several liability. Supposedly executed sometime in May 2003,
the Contract bears a notarization date of June 30, 2003, and contains the
signature of Willy U. Yu signing as president of MPEI (not for and on behalf of
MPC), along with that of the Comelec chair. It provides in Section 3.2 that
MPEI (not MPC) is to supply the Equipment and perform the Services under the
Contract, in accordance with the appendices thereof; nothing whatsoever is
said about any consortium or joint venture or partnership.

xxxx

Eligibility of a Consortium Based on the Collective Qualifications of Its Members

Respondents declare that, for purposes of assessing the eligibility of the bidder, the
members of MPC should be evaluated on a collective basis. Therefore, they contend,
the failure of MPEI to submit financial statements (on account of its recent
incorporation) should not by itself disqualify MPC, since the other members of
the "consortium" could meet the criteria set out in the RFP.

xxxx

Unfortunately, this argument seems to assume that the "collective" nature of the
undertaking of the members of MPC, their contribution of assets and sharing of risks, and
the "community" of their interest in the performance of the Contract entitle MPC to be
treated as a joint venture or consortium; and to be evaluated accordingly on the basis of
the members' collective qualifications when, in fact, the evidence before the Court
suggest otherwise.

xxxx

Going back to the instant case, it should be recalled that the automation
Contract with Comelec was not executed by the "consortium" MPC - or by MPEI
for and on behalf of MPC - but by MPEI, period. The said Contract contains no
mention whatsoever of any consortium or members thereof. This fact alone
seems to contradict all the suppositions about a joint undertaking that would
normally apply to a joint venture or consortium: that it is a commercial
enterprise involving a community of interest, a sharing of risks, profits and
losses, and so on.

xxxx

To the Court, this strange and beguiling arrangement of MPEI with the other companies
does not qualify them to be treated as a consortium or joint venture, at least of the type
that government agencies like the Comelec should be dealing with. With more reason is it
unable to agree to the proposal to evaluate the members of MPC on a collective basis.
(Emphases supplied)
These findings found their way into petitioner's application for a writ of preliminary
attachment,[75] in which it claimed the following as bases for fraud: (1) respondents
committed fraud by securing the election automation contract and, in order to perpetrate
the fraud, by misrepresenting the actual bidder as MPC and MPEI as merely acting on
MPC's behalf; (2) while knowing that MPEI was not qualified to bid for the automation
contract, respondents still signed and executed the contract; and (3) respondents acted in
bad faith when they claimed that they had bound themselves to the automation contract,
because it was not executed by MPC—or by MPEI on MPC's behalf—but by MPEI alone.[76]

We agree with petitioner that respondent MPEI committed fraud by securing the election
automation contract; and, in order to perpetrate the fraud, by misrepresenting that the
actual bidder was MPC and not MPEI, which was only acting on behalf of MPC. We
likewise rule that respondent MPEI has defrauded petitioner, since the former still
executed the automation contract despite knowing that it was not qualified to bid for the
same.

The established facts surrounding the eligibility, qualification and existence of MPC — and
of MPEI for that matter — and the subsequent execution of the automation contract with
the latter, when all taken together, constitute badges of fraud that We simply cannot
ignore. MPC was considered an illegitimate entity, because its existence as a joint venture
had not been established. Notably, the essential document/s that would have shown its
eligibility as a joint venture/consortium were not presented to the COMELEC at the most
opportune time, that is, during the qualification stage of the bidding process. The
concealment by respondent MPEI of the essential documents showing its eligibility to bid
as part a joint venture is too obvious to be missed. How could it not have known that the
very document showing MPC as a joint venture should have been included in their
eligibility envelope?

Likewise notable is the fact that these supposed agreements, allegedly among the
supposed consortium members, were belatedly provided to the COMELEC after the
bidding process had been terminated; these were not included in the Eligibility Documents
earlier submitted by MPC. Similarly, as found by this Court, these documents did not
prove any joint venture agreement among the parties in the first place, but were actually
individual agreements executed by each member of the supposed consortium with
respondent MPEI.

More startling to the dispassionate mind is the incongruence between the supposed actual
bidder MPC, on one hand, and, on the other, respondent MPEI, which executed the
automation contract. Significantly, respondent MPEI was not even eligible and qualified to
bid in the first place; and yet, the automation contract itself was executed and
signed singly by respondent MPEI, not on behalf of the purported bidder MPC, without
any mention whatsoever of the members of the supposed consortium.

From these established facts, We can surmise that in order to secure the automation
contract, respondent MPEI perpetrated a scheme against petitioner by using MPC as
supposed bidder and eventually succeeding in signing the automation contract as MPEI
alone. Worse, it was respondent MPEI alone, an entity that was ineligible to bid in the first
place, that eventually executed the automation contract.

To a reasonable mind, the entire situation reeks of fraud, what with the misrepresentation
of identity and misrepresentation as to creditworthiness. It is in these kinds of fraudulent
instances, when the ability to abscond is greatest, to which a writ of attachment is
precisely responsive.

Further, the failure to attach the eligibility documents is tantamount to failure on the part
of respondent MPEI to disclose material facts. That omission constitutes fraud.

Pursuant to Article 1339 of the Civil Code,[77] silence or concealment does not, by itself,
constitute fraud, unless there is a special duty to disclose certain facts, or unless the
communication should be made according to good faith and the usages of commerce.[78]

Fraud has been defined to include an inducement through insidious machination. Insidious
machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit
exists where the party, with intent to deceive, conceals or omits to state material
facts and, by reason of such omission or concealment, the other party was induced to
give consent that would not otherwise have been given.[79]

One form of inducement is covered within the scope of the crime of estafa under Article
315, paragraph 2, of the Revised Penal Code, in which, any person who defrauds another
by using fictitious name, or falsely pretends to possess power, influence, qualifications,
property, credit, agency, business or imaginary transactions, or by means of similar
deceits executed prior to or simultaneously with the commission of fraud is held criminally
liable. In Joson v. People,[80] this Court explained the element of defraudation by means
of deceit, by giving a definition of fraud and deceit, in this wise:

What needs to be determined therefore is whether or not the element of defraudation by

means of deceit has been established beyond reasonable doubt.
In the case of People v. Menil, Jr., the Court has defined fraud and deceit in this wise:

Fraud, in its general sense, is deemed to comprise anything calculated to deceive,

including all acts, omissions, and concealment involving a breach of legal or equitable
duty, trust, or confidence justly reposed, resulting in damage to another, or by which an
undue and unconscientious advantage is taken of another. It is a generic term embracing
all multifarious means which human ingenuity can devise, and which are resorted to by
one individual to secure an advantage over another by false suggestions or by
suppression of truth and includes all surprise, trick, cunning, dissembling and any unfair
way by which another is cheated. On the other hand, deceit is the false
representation of a matter of fact, whether by words or conduct, by false or
misleading allegations, or by concealment of that which should have been
disclosed which deceives or is intended to deceive another so that he shall act
upon it to his legal injury. (Emphases supplied)
For example, in People v. Comila,[81] both accused-appellants therein represented
themselves to the complaining witnesses to have the capacity to send them to Italy for
employment, even as they did not have the authority or license for the purpose. It was
such misrepresentation that induced the complainants to part with their hard-earned
money for placement and medical fees. Both accused-appellants were criminally held
liable for estafa.

In American jurisprudence, fraud may be predicated on a false introduction or

identification.[82] In Union Co. v. Cobb,[83] the defendant therein procured the merchandise
by misrepresenting that she was Mrs. Taylor Ray and at another time she was Mrs. Ben
W. Chiles, and she forged their name on charge slips as revealed by the exhibits of the
plaintiff. The sale of the merchandise was induced by these representations, resulting in
injury to the plaintiff.

In Raser v. Moomaw,[84] it was ruled that the essential elements necessary to constitute
actionable fraud and deceit were present in the complaint. It was alleged that, to induce
plaintiff to procure a loan, defendant introduced him to a woman who was falsely
represented to be Annie L. Knowles of Seattle, Washington, the owner of the property,
and that plaintiff had no means of ascertaining her true identity. On the other hand,
defendant knew, or in the exercise of reasonable caution should have known, that she
was an impostor, and that plaintiff relied on the representations, induced his client to
make the loan, and had since been compelled to repay it. In the same case, the Court
ruled that false representations as to the identity of a person are actionable, if made to
induce another to act thereon, and such other does so act thereon to his prejudice.[85]

In this case, analogous to the fraud and deceit exhibited in the above-mentioned
circumstances, respondent MPEI had no excuse not to be forthright with the documents
showing MPC's eligibility to bid as a joint venture. The Invitation to Bid, as quoted in our
2004 Decision, could not have been any clearer when it stated that only bids from
qualified entities, such as a joint venture, would be entertained:

INVITATION TO APPLY FOR ELIGIBILITY AND TO BID

The Commission on Elections (COMELEC), pursuant to the mandate of Republic Act Nos.
8189 and 8436, invites interested offerers, vendors, suppliers or lessors to apply for
eligibility and to bid for the procurement by purchase, lease, lease with option to
purchase, or otherwise, supplies, equipment, materials and services needed for a
comprehensive Automated Election System, consisting of three (3) phases: (a)
registration/verification of voters, (b) automated counting and consolidation of votes, and
(c) electronic transmission of election results, with an approved budget of TWO BILLION
FIVE HUNDRED MILLION (Php2,500,000,000) Pesos.

Only bids from the following entities shall be entertained:

xxxx

d. Manufacturers, suppliers and/or distributors forming themselves into a joint

venture,i.e., a group of two (2) or more manufacturers, suppliers and/or
distributors that intend to be jointly and severally responsible or liable for a
particular contract, provided that Filipino ownership thereof shall be at least
sixty percent (60%); and
e. Cooperatives duly registered with the Cooperatives Development
Authority.[86] (Emphases supplied)
No reasonable mind would argue that documents showing the very existence of a joint
venture need not be included in the bidding envelope showing its existence, qualification,
and eligibility to undertake the project, considering that the purpose of prequalification in
any public bidding is to determine, at the earliest opportunity, the ability of the bidder to
undertake the project.[87]

As found by this Court in its 2004 Decision, it appears that the documents that were
submitted after the bidding, which respondents claimed would prove the existence of the
relationship among the members of the consortium, were actually separate agreements
individually executed by the supposed members with MPEI. We had ruled that these
documents were highly irregular, considering that each of the four different and separate
bilateral Agreements was valid and binding only between MPEI and the other contracting
party, leaving the other "consortium" members total strangers thereto. Consequently, the
other consortium members had nothing to do with one another, as each one dealt only
with MPEI.[88]

Considering that they merely showed MPEI's individual agreements with the other
supposed members, these agreements confirm to our mind the fraudulent intent on the
part of respondent MPEI to deceive the relevant officials about MPC. The intent was to
cure the deficiency of the winning bid, which intent miserably failed. Said this Court:[89]

We are unconvinced, PBAC was guided by the rules, regulations or guidelines existing
before the bid proposals were opened on November 10, 1989. The basic rule in public
bidding is that bids should be evaluated based on the required documents
submitted before and not after the opening of bids. Otherwise, the foundation
of a fair and competitive public bidding would be defeated. Strict observance of
the rules, regulations, and guidelines of the bidding process is the only
safeguard to a fair, honest and competitive public bidding.

In underscoring the Court's strict application of the pertinent rules, regulations and
guidelines of the public bidding process, We have ruled in C & C Commercial vs. Menor (L-
28360, January 27, 1983, 120 SCRA 112), that Nawasa properly rejected a bid of C & C
Commercial to supply asbestos cement pressure which bid did not include a tax clearance
certificate as required by Administrative Order No. 66 dated June 26, 1967. In Caltex
(Phil.) Inc., et. al. vs. Delgado Brothers, Inc. et. al., (96 Phil. 368, 375), We stressed that
public biddings are held for the protection of the public and the public should be given the
best possible advantages by means of open competition among the bidders.

xxxx

INTER TECHNICAL's failure to comply with what is perceived to be an

elementary and customary practice in a public bidding process, that is, to
enclose the Form of Bid in the original and eight separate copies of the bidding
documents submitted to the bidding committee is fatal to its cause. All the four
pre-qualified bidders which include INTER TECHNICAL were subject to Rule IB 2.1 of the
Implementing Rules and Regulations of P.D. 1594 in the preparation of bids, bid bonds,
and pre-qualification statement and Rule IB 2.8 which states that the Form of Bid, among
others, shall form part of the contract. INTER TECHNICAL's explanation that its bid form
was inadvertently left in the office (p. 6, Memorandum for Private Respondent, p.
355, Rollo) will not excuse compliance with such a simple and basic requirement in the
public bidding process involving a multi-million project of the Government. There should
be strict application of the pertinent public bidding rules, otherwise the
essential requisites of fairness, good faith, and competitiveness in the public
bidding process would be rendered meaningless. (Emphases supplied)
All these circumstances, taken together, reveal a scheme on the part of respondent MPEI
to perpetrate fraud against the government. The purpose of the scheme was to ensure
that MPEI, an entity that was ineligible to bid in the first place, would eventually be
awarded the contract. While respondent argues that it was merely a passive participant in
the bidding process, We cannot ignore its cavalier disregard of its participation in the now
voided automation contract.

B. Fraud on the part of respondent MPEI was further shown by the fact that
despite the failure of its ACMs to pass the tests conducted by the DOST,
respondent still acceded to being awarded the automation contract.

Another token of fraud is established by Our findings in relation to the failure of the ACMs
to pass the tests of the DOST. We quote herein the pertinent portions of this Court's 2004
Decision in relation thereto:

After respondent "consortium" and the other bidder, TIM, had submitted their respective
bids on March 10, 2003, the Comelec's BAC — through its Technical Working Group
(TWG) and the DOST — evaluated their technical proposals.

xxxx

According to respondents, it was only after the TWG and the DOST had conducted their
separate tests and submitted their respective reports that the BAC, on the basis of these
reports formulated its comments/recommendations on the bids of the consortium and
TIM.

The BAG, in its Report dated April 21, 2003, recommended that the Phase II project
involving the acquisition of automated counting machines be awarded to MPEI. x x x

xxxx

The BAC, however, also stated on page 4 of its Report: "Based on the 14 April
2003 report (Table 6) of the DOST, it appears that both Mega-Pacific and TIM
(Total Information Management Corporation) failed to meet some of the
requirements. x x x

xxxx

Failure to Meet the Required Accuracy Rating

The first of the key requirements was that the counting machines were to have an
accuracy rating of at least 99.9995 percent. The BAC Report indicates that both
Mega Pacific and TIM failed to meet this standard.

The key requirement of accuracy rating happens to be part and parcel of the
Comelec's Request for Proposal (RFP). x x x

xxxx

x x x Whichever accuracy rating is the right standard — whether 99.995 or 99.9995

percent — the fact remains that the machines of the so-called "consort him" failed to even
reach the lesser of the two. On this basis alone, it ought to have been disqualified and its
bid rejected outright.

At this point, the Court stresses that the essence of public bidding is violated
by the practice of requiring very high standards or unrealistic specifications
that cannot be met — like the 99.9995 percent accuracy rating in this case —
only to water them down after the bid has been award.[sic] Such scheme,
which discourages the entry of prospective bona fidebidders, is in fact a sure
indication of fraud in the bidding, designed to eliminate fair competition.
Certainly, if no bidder meets the mandatory requirements, standards or
specifications, then no award should be made and a failed bidding declared.

xxxx

Failure of Software to Detect Previously Downloaded Data

Furthermore, on page 6 of the BAC Report, it appears that the "consortium" as

well as TIM failed to meet another key requirement — for the counting
machine's software program to be able to detect previously downloaded
precinct results and to prevent these from being entered again into the
counting machine. This same deficiency on the part of both bidders reappears on page
7 of the BAC Report, as a result of the recurrence of their failure to meet the said key
requirement.
That the ability to detect previously downloaded data at different canvassing or
consolidation levels is deemed of utmost importance can be seen from the fact that it is
repeated three times in the RFP. x x x.

Once again, though, Comelec chose to ignore this crucial deficiency, which should have
been a cause for the gravest concern. x x x.

xxxx

Inability to Print the Audit Trail

But that grim prospect is not all. The BAC Report, on pages 6 and 7, indicate that the
ACMs of both bidders were unable to print the audit trail without any loss of data. In the
case of MPC, the audit trail system was "not yet incorporated" into its ACMs.

xxxx

Thus, the RFP on page 27 states that the ballot counting machines and ballot counting
software must print an audit trail of all machine operations for documentation
and verification purposes. Furthermore, the audit trail must be stored on the internal
storage device and be available on demand for future printing and verifying. On pages 30-
31, the RFP also requires that the city/municipal canvassing system software be able to
print an audit trail of the canvassing operations, including therein such data as the
date and time the canvassing program was started, the log-in of the authorized users (the
identity of the machine operators), the date and time the canvass data were downloaded
into the canvassing system, and so on and so forth. On page 33 of the RFP, we find the
same audit trail requirement with respect to the provincial/district canvassing system
software; and again on pages 35-36 thereof, the same audit trail requirement with
respect to the national canvassing system software.

xxxx

The said provision which respondents have quoted several times, provides that ACMs are
to possess certain features divided into two classes: those that the statute itself
considers mandatory and other features or capabilities that the law deems
optional. Among those considered mandatory are "provisions for audit trails"! x
x x.

In brief, respondents cannot deny that the provision requiring audit trails is
indeed mandatory, considering the wording of Section 7 of RA 8436. Neither can
Respondent Comelec deny that it has relied on the BAC Report, which indicates that the
machines or the software was deficient in that respect. And yet, the Commission simply
disregarded this shortcoming and awarded the Contract to private respondent, thereby
violating the very law it was supposed to implement.[90] (Emphases supplied)
The above-mentioned findings were further echoed by this Court in its 2006 Resolution
with a categorical conclusion that the bidding process was void and fraudulent.[91]

Again, these factual findings found their way into the application of petitioner for a writ of
preliminary attachment,[92] as it claimed that respondents could not dissociate themselves
from their telltale acts of supplying defective machines and nonexistent software.[93] The
latter offered no defense in relation to these claims.

We see no reason to deviate from our finding of fraud on the part of respondent MPEI in
the 2004 Decision and 2006 Resolution. Despite its failure to meet the mandatory
requirements set forth in the bidding procedure, respondent still acceded to being
awarded the contract. These circumstances reveal its ploy to gain undue advantage over
the other bidders in general, even to the extent of cheating the government.

The word "bidding" in its comprehensive sense means making an offer or an invitation to
prospective contractors, whereby the government manifests its intention to make
proposals for the purpose of securing supplies, materials, and equipment for official
business or public use, or for public works or repair.[94] Three principles involved in public
bidding are as follows: (1) the offer to the public; (2) an opportunity for competition, and
(3) a basis for an exact comparison of bids. A regulation of the matter, which excludes
any of these factors, destroys the distinctive character of the system and thwarts the
purpose of its adoption.[95]

In the instant case, We infer from the circumstances that respondent MPEI welcomed and
allowed the award of the automation contract, as it executed the contract despite the full
knowledge that it had not met the mandatory requirements set forth in the RFP.
Respondent acceded to and benefitted from the watering down of these mandatory
requirements, resulting in undue advantage in its favor. The fact that there were
numerous mandatory requirements that were simply set aside to pave the way for the
award of the automation contract does not escape the attention of this Court. Respondent
MPEI, through respondent Willy, signed and executed the automation contract with
COMELEC. It is therefore preposterous for respondent argue that it was a "passive
participant" in the whole bidding process.

We reject the CA's denial of petitioner's plea for the ancillary remedy of preliminary
attachment, considering that the cumulative effect of the factual findings of this Court
establishes a sufficient basis to conclude that fraud had attended the execution of the
automation contract. Such fraud is deducible from the 2004 Decision and further upheld in
the 2006 Resolution. It was incongruous, therefore, for the CA to have denied the
application for a writ of preliminary attachment, when the evidence on record was the
same that was used to demonstrate the propriety of the issuance of the writ of
preliminary attachment. This was the same evidence that We had already considered and
passed upon, and on which We based Our 2004 Decision to nullify the automation
contract. It would not be right for this Court to ignore these illegal transactions, as to do
so would be tantamount to abandoning its constitutional duty of safeguarding public
interest.

II.
Application of the piercing doctrine justifies the issuance of a writ of
preliminary attachment over the properties of the individual respondents.

Individual respondents argue that since they were not parties to the 2004 case, any
factual findings or conclusions therein should not be binding upon them.[96] Since they
were strangers to that case, they are not bound by the judgment rendered by this
Court.[97] They claim that their fundamental right to due process would be violated if their
properties were to be attached for a purported corporate debt on the basis of a court
ruling in a case in which they were not given the right or opportunity to be heard.[98]

We cannot subscribe to this argument. In the first place, it could not be reasonably
expected that individual respondents would be impleaded in the 2004 case. As admitted
by respondents, the issues resolved in the 2004 Decision were limited to the following: (1)
whether to declare Resolution No. 6074 of the COMELEC null and void; (2) whether to
enjoin the implementation of any further contract that may have been entered into by
COMELEC with MPC or MPEI; and (3) whether to compel COMELEC to conduct a rebidding
of the project. To implead individual respondents then was improper, considering that the
automation contract was entered into by respondent MPEI. This Court even acknowledged
this fact by directing that the liabilities of persons responsible for the nullity of the
contract be determined in another appropriate proceeding and by directing the OSG to
undertake measures to protect the interests of the government.

At any rate, individual respondents have been fully afforded the right to due process by
being impleaded and heard in the subsequent proceedings before the courts a quo.
Finally, they cannot argue violation of due process, as respondent MPEI, of which they are
incorporators/stockholders, remains vulnerable to the piercing of its corporate veil.

A. There are red flags indicating that MPEI was used to perpetrate the fraud
against petitioner, thus allowing the piercing of its corporate veil.

Petitioner seeks the issuance of a writ of preliminary attachment over the personal assets
of the individual respondents, notwithstanding the doctrine of separate juridical
personality.[99] It invokes the use of the doctrine of piercing the corporate veil, to which
the canon of separate juridical personality is vulnerable, as a way to reach the personal
properties of the individual respondents. Petitioner paints a picture of a sham corporation
set up by all the individual respondents for the purpose of securing the automation
contract.
We agree with petitioner.

Veil-piercing in fraud cases requires that the legal fiction of separate juridical personality is
used for fraudulent or wrongful ends.[100] For reasons discussed below, We see red flags
of fraudulent schemes in public procurement, all of which were established in the 2004
Decision, the totality of which strongly indicate that MPEI was a sham corporation
formed merely for the purpose of perpetrating a fraudulent scheme.

The red flags are as follows: (1) overly narrow specifications; (2) unjustified
recommendations and unjustified winning bidders; (3) failure to meet the terms of the
contract; and (4) shell or fictitious company. We shall discuss each in detail.

Overly Narrow Specifications

The World Bank's Fraud and Corruption Awareness Handbook: A Handbook for Civil
Servants Involved in Public Procurement, (Handbook) identifies an assortment of fraud
and corruption indicators and relevant schemes in public procurement.[101] One of the
schemes recognized by the Handbook is rigged specifications:

Scheme: Rigged specifications. In a competitive market for goods and services, any
specifications that seem to be drafted in a way that favors a particular company
deserve closer scrutiny. For example, specifications that are too narrow can be
used to exclude other qualified bidders or justify improper sole source awards. Unduly
vague or broad specifications can allow an unqualified bidder to compete or justify
fraudulent change orders after the contract is awarded. Sometimes, project officials will
go so far as to allow the favored bidder to draft the specifications.[102]
In Our 2004 Decision, We identified a red flag of rigged bidding in the form of overly
narrow specifications. As already discussed, the accuracy requirement of 99.9995 percent
was set up by COMELEC bidding rules. This Court recognized that this rating was "too
high and was a sure indication of fraud in the bidding, designed to eliminate
fair competition."[103] Indeed, "the essence of public bidding is violated by the practice
of requiring very high standards or unrealistic specifications that cannot be met...only to
water them down after the bid has been award(ed)."[104]

Unjustified Recommendations and Unjustified Winning Bidders

Questionable evaluation in a Bid Evaluation Report (BER) is an indicator of bid rigging.

The Handbook expounds:

Questionable evaluation and unusual bid patterns may emerge in the BER.
After the completion of the evaluation process, the Bid Evaluation Committee
should present to the implementing agency its BER, which describes the results
and the process by which the BEC has evaluated the bids received. The BER
may include a number of indicators of bid rigging, e.g., questionable
disqualifications, and unusual bid patterns.[105]
The Handbook lists unjustified recommendations and unjustified winning bidders as red
flags of a rigged bidding.[106]

The red flags of questionable recommendation and unjustified awards are raised in this
case. As earlier discussed, the project was awarded to MPC, which proved to be a
nonentity. It was MPEI that actually participated in the bidding process, but it was not
qualified to be a bidder in the first place. Moreover, its ACMs failed the accuracy
requirement set by COMELEC. Yet, MPC — the nonentity — obtained a favorable
recommendation from the BAC, and the automation contract was awarded to the former.

Failure to Meet Contract Terms

Failure to meet the terms of a contract is regarded as a fraud by the Handbook:

Scheme: Failure to meet contract terms. Firms may deliberately fail to comply with
contract requirements. The contractor will attempt to conceal such actions often by
falsifying or forging supporting documentation and bill for the work as if it were done in
accordance with specifications. In many cases, the contractors must bribe inspection or
project personnel to accept the substandard goods or works, or supervision agents are
coerced to approve substandard work. x x x[107]
As mentioned earlier, this Court already found the ACMs to be below the standards set by
the COMELEC. We reiterated their noncompliant status in Our 2005 and 2006 Resolutions.

As early as 2005, when the COMELEC sought permission from this Court to utilize the
ACMs in the then scheduled ARMM elections, We declared that the proposed use of the
machines would expose the ARMM elections to the same dangers of massive electoral
fraud that would have been inflicted by the projected automation of the 2004 national
elections. We based this pronouncement on the fact that the COMELEC failed to show
that the deficiencies had been cured.[108] Yet again, this Court in 2006 blocked
another attempt to use the ACMs, this time for the 2007 elections. We reiterated that
because the ACMs had merely remained idle and unused since their last evaluation, in
which they failed to hurdle the crucial tests, then their defects and deficiencies could not
have been cured by then.[109]

Based on the foregoing, the ACMs delivered were plagued with defects that made them
fail the requirements set for the automation project.

Shell or fictitious company

The Handbook regards a shell or fictitious company as a "serious red flag," a concept
that it elaborates upon:

Fictitious companies are by definition fraudulent and may also serve as fronts for
government officials. The typical scheme involves corrupt government officials creating a
fictitious company that will serve as a "vehicle" to secure contract awards. Often, the
fictitious—or ghost— company will subcontract work to lower cost and sometimes
unqualified firms. The fictitious company may also utilize designated losers as
subcontractors to deliver the work, thus indicating collusion.

Shell companies have no significant assets, staff or operational capacity. They pose
a serious red flag as a bidder on public contracts, because they often hide the interests
of project or government officials, concealing a conflict of interest and opportunities for
money laundering. Also, by definition, they have no experience.[110]
MPEI qualifies as a shell or fictitious company. It was nonexistent at the time of the
invitation to bid; to be precise, it was incorporated only 11 days before the bidding. It was
a newly formed corporation and, as such, had no track record to speak of.

Further, MPEI misrepresented itself in the bidding process as "lead company" of the
supposed joint venture. The misrepresentation appears to have been an attempt to justify
its lack of experience. As a new company, it was not eligible to participate as a bidder. It
could do so only by pretending that it was acting as an agent of the putative consortium.

The timing of the incorporation of MPEI is particularly noteworthy. Its close nexus to the
date of the invitation to bid and the date of the bidding (11 days) provides a strong
indicium of the intent to use the corporate vehicle for fraudulent purposes. This proximity
unmistakably indicates that the automation contract served as motivation for the
formation of MPEI: a corporation had to be organized so it could participate in the bidding
by claiming to be an agent of a pretended joint venture.

The timing of the formation of MPEI did not escape the scrutiny of Justice Angelina
Sandoval-Gutierrez, who made this observation in her Concurring Opinion in the 2004
Decision:

At this juncture, it bears stressing that MPEI was incorporated only on February 27,
2003 as evidenced by its Certificate of Incorporation. This goes to show that from the
time the COMELEC issued its Invitation to Bid (January 28, 2003) and Request for
Proposal (February 17, 2003) up to the time it convened the Pre-bid Conference (February
18, 2003), MPEI was literally a non-existent entity. It came into being only on February
27, 2003 or eleven (11) days prior to the submission of its bid, i.e. March 10, 2003. This
poses a legal obstacle to its eligibility as a bidder. The Request for Proposal
requires the bidder to submit financial documents that will establish to the BAC's
satisfaction its financial capability which include:

(1) audited financial statements of the Bidder's firm for the last three (3) calendar years,
stamped "RECEIVED" by the appropriate government agency, to show its capacity to
finance the manufacture and supply of Goods called for and a statement or record of
volumes of sales;

(2) Balance Sheet;

(3) Income Statement; and

(4) Statement of Cash Flow.

As correctly pointed out by petitioners, how could MPEI comply with the above
requirement of audited financial statements for the last three (3) calendar years if it came
into existence only eleven (11) days prior to the bidding?

To do away with such complication, MPEI asserts that it was MP CONSORTIUM who
submitted the bid on March 10, 2003. It pretends compliance with the requirements by
invoking the financial capabilities and long time existence of the alleged members of the
MP CONSORTIUM, namely, Election.Com, WeSolv, SK CeC, ePLDT and Oracle. It wants
this Court to believe that it is MP CONSORTIUM who was actually dealing with the
COMELEC and that its (MPEI) participation is merely that of a "lead company and
proponent" of the joint venture. This is hardly convincing. For one, the contract for the
supply and delivery of ACM was between COMELEC and MPEI, not MP CONSORTIUM. As a
matter of fad, there cannot be found in the contract any reference to the MP
CONSORTIUM or any member thereof for that matter. For another, the agreements
among the alleged members of MP CONSORTIUM do not show the existence of a joint-
venture agreement. Worse, MPEI cannot produce the agreement as to the "joint and
several liability" of the alleged members of the MP CONSORTIUM as required by this Court
in its Resolution dated October 7, 2003.[111]
Respondent MPEI was formed to perpetrate the fraud against petitioner.

The totality of the red flags found in this case leads Us to the inevitable conclusion that
MPEI was nothing but a sham corporation formed for the purpose of defrauding
petitioner. Its ultimate objective was to secure the P1,248,949,088 automation contract.
The scheme was to put up a corporation that would participate in the bid and enter into a
contract with the COMELEC, even if the former was not qualified or authorized to do so.

Without the incorporation of MPEI, the defraudation of the government would not have
been possible. The formation of MPEI paved the way for its participation in the bid,
through its claim that it was an agent of a supposed joint venture, its misrepresentations
to secure the automation contract, its misrepresentation at the time of the execution of
the contract, its delivery of the defective ACMs, and ultimately its acceptance of the
benefits under the automation contract.

The foregoing considered, veil-piercing is justified in this case.

We shall next consider the question of whose assets shall be reached by the application of
the piercing doctrine.

B. Because all the individual respondents actively participated in the

perpetration of the fraud against petitioner, their personal assets may be
subject to a writ of preliminary attachment by piercing the corporate veil.

A corporation's privilege of being treated as an entity distinct and separate from the
stockholders is confined to legitimate uses, and is subject to equitable limitations to
prevent its being exercised for fraudulent, unfair, or illegal purposes.[112] As early as the
19th century, it has been held that:

The general proposition that a corporation is to be regarded as a legal entity, existing

separate and apart from the natural persons composing it, is not disputed; but that the
statement is a mere fiction, existing only in idea, is well understood, and not controverted
by any one who pretends to accurate knowledge on the subject. It has been introduced
for the convenience of the company in making contracts, in acquiring property for
corporate purposes, in suing and being sued, and to preserve the limited liability of the
stockholder by distinguishing between the corporate debts and property of the company
and of the stockholders in their capacity as individuals. All fictions of law have been
introduced for the purpose of convenience, and to subserve the ends of
justice. It is in this sense that the maxim in fictione juris subsistit aequitas is used, and
the doctrine of fictions applied. But when they are urged to an intent and purpose
not within the reason and policy of the fiction, they have always been
disregarded by the courts. Broom's, Legal Maxims 130. "It is a certain rule," says Lord
Mansfield, C.J., "that a fiction of law never be contradicted so as to defeat the end for
which it was invented, but for every other purpose it may be contradicted." Johnson v.
Smith, 2 Burr, 962.[113]
The main effect of disregarding the corporate fiction is that stockholders will be held
personally liable for the acts and contracts of the corporation, whose existence, at least
for the purpose of the particular situation involved, is ignored.[114]

We have consistently held that when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons.[115]Thus, considering that We find it justified to
pierce the corporate veil in the case before Us, MPEI must, perforce, be treated as a mere
association of persons whose assets are unshielded by corporate fiction. Such persons'
individual liability shall now be determined with respect to the matter at hand.

Contrary to respondent Willy's claims, his participation in the fraud is clearly established
by his unequivocal agreement to the execution of the automation contract with the
COMELEC, and his signature that appears on the voided contract. As far back as in the
2004 Decision, his participation as a signatory' to the automation contract was already
established:

The foregoing argument is unpersuasive. First, the contract being referred to, entitled
"The Automated Counting and Canvassing Project Contract," is between Comelec and
MPEI, not the alleged consortium, MPC. To repeat, it is MPEI - not MPC - that is a party to
the Contract. Nowhere in that Contract is there any mention of a consortium or joint
venture, of members thereof much less of joint and several liability. Supposedly executed
sometime in May 2003, the Contract bears a notarization date of June 30, 2003, and
contains the signature of Willy U. Yu signing as president of MPEI (not for and
on behalf of MPC), along with that of the Comelec chair. It provides in Section 3.2
that MPEI (not MPC) is to supply the Equipment and perform the Services under the
Contract, in accordance with the appendices thereof; nothing whatsoever is said about
any consortium or joint venture or partnership. x x x (Emphasis supplied)
That his signature appears on the automation contract means that he agreed and acceded
to its terms.[116]His participation in the fraud involves his signing and executing the voided
contract.

The execution of the automation contract with a non-eligible entity and the subsequent
award of the contract despite the failure to meet the mandatory requirements were
"badges of fraud" in the procurement process that should have been recognized by the CA
to justify the issuance of the writ of preliminary attachment against the properties of
respondent Willy.

With respect to the other individual respondents, petitioner, in its Answer with
Counterclaim, alleged:

30. Also, inasmuch as MPEI is in truth a mere shell corporation with no real assets in its
name, incorporated merely to feign eligibility for the bidding of the automated contract
when it in fact had none, to the great prejudice of the Republic, plaintiffs individual
incorporators should likewise be made liable together with MPEI for the
automated contract amount paid to and received by the latter. The following
circumstances altogether manifest that the individual incorporators merely cloaked
themselves with the veil of corporate fiction to perpetrate a fraud and to eschew liability
therefor, thus:

xxxx

From the time it was incorporated until today, MPEI has not complied with the
f.
reportorial requirements of the Securities and Exchange Commission;
Individual incorporators, acting fraudulently through MPEI, and in violation
of the bidding rules, then subcontracted the automation contract to four
g. (4) other corporations, namely: WeSolve Corporation, SK C&C, ePLDT and
election.com, to comply with the capital requirements, requisite five (5)-year
corporate standing and the technical qualifications of the Request for Proposal;

x x x x[117]
In response to petitioner's allegations, respondents Willy and Bonnie stated in their Reply
and Answer (Re: Answer with Counterclaim dated 28 June 2004):[118]

3.3 As far as plaintiff MPEI and defendants-in-counterclaim are concerned, they

dealt with the COMELEC with full transparency and in utmost good faith. All
documents support its eligibility to bid for the supply of the ACMs and their peripheral
services, were submitted to the COMELEC for its evaluation in full transparency.
Pertinently, neither plaintiff MPEI nor any of its directors, stockholders, officers or
employees had any participation in the evaluation of the bids and eventual choice of the
winning bidder.[119]
Respondents Johnson's and Bernard's denials were made in paragraphs 2.17 and 3.3 of
their Answer with Counterclaim to the Republic's Counterclaim, to wit:[120]

2.17 The erroneous conclusion of fact and law in paragraph 30 (f) and (g) of the
Republic's answer is denied, having been pleaded in violation of the requirement, that
only ultimate facts arc to be stated in the pleadings and they are falsehoods. The truth of
the matter is that there could not have been fraud, as these agreements were submitted
to the COMELEC for its evaluation and assessment, as to the qualification of the
Consortium as a bidder, a showing of transparency in plaintiffs dealings with the
Republic.[121]

3.3 As far as plaintiff MPEI and defendants-in-counterclaim are concerned, they

dealt with the COMELEC with full transparency and in utmost good faith. All
documents support its eligibility to bid for the supply of the automated counting machines
and its peripheral services, were submitted to the COMELEC for its evaluation in full
transparency. Pertinently, the plaintiff or any of its directors, stockholders, officers or
employees had no participation in the evaluation of the bids and eventual choice of the
winning bidder.[122]
As regards Enrique and Rosita, the relevant paragraphs in the Answer with Counterclaim
to the Republic's Counterclaim[123] are quoted below:

2.17. The erroneous conclusion of fact and law in paragraph 30 (F) and (G) of the
Republic's answer is denied, having been pleaded in violation of the requirement, that
only ultimate facts are to be stated in the pleadings and they are falsehoods. The truth of
the matter is that there could not have been fraud, as these agreements were submitted
to the COMELEC for its evaluation and assessment, as to the qualification of the
Consortium as a bidder, a showing of transparency in plaintiffs dealings with the
Republic.[124]

3.3. As far as the plaintiff and herein answering defendants-in-counterclaim are

concerned, they dealt with the Commission on Elections with full transparency
and in utmost good faith. All documents in support of its eligibility to bid for the supply
of the automated counting machines and its peripheral services were submitted to the
Commission on Elections for its evaluation in full transparency. Pertinently, the plaintiff or
any of its directors, stockholders, officers or employees had no participation in the
evaluation of the bids and eventual choice of the winning bidder.[125]
Pedro and Laureano offer a similar defense in paragraph 3.3 of their Reply and Answer
with Counterclaim to the Republic's Counterclaim[126] dated 28 June 2004, which reads:

3.3. As far as plaintiff MPEI and defendants-in-counterclaim are concerned, they dealt
with the COMELEC with full transparency and in utmost good faith. All
documents support its eligibility to bid for the supply of the ACMs and their peripheral
services, were submitted to the COMELEC for its evaluation in full transparency.
Pertinently, neither plaintiff MPEI nor any of its directors, stockholders, officers or
employees had any participation in the evaluation of the bids and eventual choice of the
winning bidder.[127]
It can be seen from the above-quoted paragraphs that the individual respondents never
denied their participation in the questioned transactions of MPEI, merely raising the
defense of good faith and shifting the blame to the COMELEC. The individual respondents
have, in effect, admitted that they had knowledge of and participation in the fraudulent
subcontracting of the automation contract to the four corporations.

It bears stressing that the remaining individual respondents, together with respondent
Willy, incorporated MPEI. As incorporators, they are expected to be involved in the
management of the corporation and they are charged with the duty of care. This is one of
the reasons for the requirement of ownership of at least one share of stock by an
incorporator:

The reason for this, as explained by the lawmakers, is to avoid the confusion and/or
ambiguities arising in a situation under the old corporation law where there exists one set
of incorporators who are not even shareholders and another set of
directors/incorporators who must all be shareholders of the corporation. The
people who deal with said corporation at such an early stage are confused as to who are
the persons or group really authorized to act in behalf of the corporation. (Proceedings of
the Batasan Pambansa on the Proposed Corporation Code). Another reason may be
anchored on the presumption that when an incorporator has pecuniary interest
in the corporation, no matter how minimal, he will be more involved in the
management of corporate affairs and to a greater degree, be concerned with
the welfare of the corporation.[128]
As incorporators and businessmen about to embark on a new business venture involving a
sizeable capital (P300 million), the remaining individual respondents should have known of
Willy's scheme to perpetrate the fraud against petitioner, especially because the objective
was a billion peso automation contract. Still, they proceeded with the illicit business
venture.

It is clear to this Court that inequity would result if We do not attach personal liability to
all the individual respondents. With a definite finding that MPEI was used to perpetrate
the fraud against the government, it would be a great injustice if the remaining individual
respondents would enjoy the benefits of incorporation despite a clear finding of abuse of
the corporate vehicle. Indeed, to allow the corporate fiction to remain intact would not
subserve, but instead subvert, the ends of justice.

III.
The factual findings of this Court that have become final cannot be modified or
altered, much less reversed, and are controlling in the instant case.

Respondents argue that the 2004 Decision did not resolve and could not have resolved
the factual issue of whether they had committed any fraud, as the Supreme Court is not a
trier of facts; and the 2004 case, being a certiorari case, did not deal with questions of
fact.[129]

Further, respondents argue that the findings of this Court ought to be confined only to
those issues actually raised and resolved in the 2004 case, in accordance with the
principle of conclusiveness of judgment.[130]They explain that the issues resolved in the
2004 Decision were only limited to the following: (1) whether to declare COMELEC
Resolution No. 6074 null and void; (2) whether to enjoin the implementation of any
further contract that may have been entered into by COMELEC with MPC or MPEI; and (3)
whether to compel COMELEC to conduct a rebidding of the project.[131]

It is obvious that respondents are merely trying to escape the implications or effects of
the nullity of the automation contract that they had executed. Section 1, Rule 65 of the
Rules of Court, clearly sets forth the instances when a petition for certiorari can be used
as a proper remedy:

Section 1. Petition for certiorari. — When any tribunal, board or officer exercising judicial
or quasi-judicial functions has acted without or in excess of its jurisdiction, or with grave
abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, or
any plain, speedy, and adequate remedy in the ordinary course of law. a person
aggrieved thereby may file a verified petition in the proper court, alleging the facts with
certainty and praying that judgment be rendered annulling or modifying the proceedings
of such tribunal, board or officer, and granting such incidental reliefs as law and justice
may require.
The term "grave abuse of discretion" has a specific meaning. An act of a court or tribunal
can only be considered to have been committed with grave abuse of discretion when the
act is done in a "capricious or whimsical exercise of judgment as is equivalent to lack of
jurisdiction."[132] The abuse of discretion must be so patent and gross as to amount to an
"evasion of a positive duty or to a virtual refusal to perform a duty enjoined by law, or to
act at all in contemplation of law, as where the power is exercised in an arbitrary and
despotic manner by reason of passion and hostility."[133] Furthermore, the use of a
petition for certiorari is restricted only to "truly extraordinary cases wherein the act of the
lower court or quasi-judicial body is wholly void."[134] From the foregoing definition, it is
clear that the special civil action of certiorari under Rule 65 can only strike down an act
for having been done with grave abuse of discretion if the petitioner could manifestly
show that such act was patent and gross.[135]

We had to ascertain from the evidence whether the COMELEC committed grave abuse of
discretion, and in the process, were justified in making some factual findings. The
conclusions derived from the factual findings are inextricably intertwined with this Court's
determination of grave abuse of discretion. They have a direct bearing and are in fact
necessary to illustrate that the award of the automation contract was done hastily and in
direct violation of law. This Court has indeed made factual findings based on the evidence
presented before it; in turn, these factual findings constitute the controlling legal rule
between the parties that cannot be modified or amended by any of them. This Court is
bound to consider the factual findings made in the 2004 Decision in order to declare that
there is fraud for the purpose of issuing the writ of preliminary attachment.

Respondents appear to have misunderstood the implications of the principle of

conclusiveness of judgment on their cause. Contrary to their claims, the factual findings
are conclusive and have been established as the controlling legal rule in the instant case,
on the basis of the principle of res judicata—more particularly, the principle of
conclusiveness of judgment.

This doctrine of res judicata which is set forth in Section 47 of Rule 39 of the Rules of
Court[136] lays down two main rules, namely: (1) the judgment or decree of a court of
competent jurisdiction on the merits concludes the litigation between the parties and their
privies and constitutes a bar to a new action or suit involving the same cause of action
either before the same or any other tribunal; and (2) any right, fact, or matter in issue
directly adjudicated or necessarily involved in the determination of an action before a
competent court in which a judgment or decree is rendered on the merits is conclusively
settled by the judgment therein and cannot again be litigated between the parties and
their privies whether or not the claims or demands, purposes, or subject matters of the
two suits are the same.[137]

These two main rules mark the distinction between the principles governing the two
typical cases in which a judgment may operate as evidence.[138] The first general rule
stated above and corresponding to the afore-quoted paragraph (b) of Section 47, Rule 39
of the Rules of Court, is referred to as "bar by former judgment"; while the second
general rule, which is embodied in paragraph (c) of the same section and rule, is known
as "conclusiveness of judgment."[139]

In Calalang v. Register of Deeds of Quezon City,[140] We discussed the concept of

conclusiveness of judgment as pertaining even to those matters essentially
connected with the subject of litigation in the first action. This Court explained therein
that the bar on re-litigation extends to those questions necessarily implied in the final
judgment, although no specific finding may have been made in reference thereto, and
although those matters were directly referred to in the pleadings and were not actually or
formally presented. If the record of the former trial shows that the judgment could not
have been rendered without deciding a particular matter, it will be considered as having
settled that matter as to all future actions between the parties; and if a judgment
necessarily presupposes certain premises, they are as conclusive as the judgment itself:

The second concept — conclusiveness of judgment — states that a fact or

question which was in issue in a former suit and was there judicially passed
upon and determined by a court of competent jurisdiction, is conclusively
settled by the judgment therein as far as the parties to that action and persons
in privity with them are concerned and cannot be again litigated in any future
action between such parties or their privies, in the same court or any other
court of concurrent jurisdiction on either the same or different cause of action,
while the judgment remains unreversed by proper authority. It has been held
that in order that a judgment in one action can be conclusive as to a particular matter in
another action between the same parties or their privies, it is essential that the issue be
identical. If a particular point or question is in issue in the second action, and
the judgment will depend on the determination of that particular point or
question, a former judgment between the same parties or their privies will be
final and conclusive in the second if that same point or question was in issue
and adjudicated in the first suit (Nabus v. Court of Appeals, 193 SCRA 732 [1991]).
Identity of cause of action is not required but merely identity of issue.
Justice Fcliciano, in Smith Bell & Company (Phils.), Inc. v. Court of Appeals (197 SCRA
201, 210 [1991]), reiterated Lopez v. Reyes (76 SCRA 179 [1977]) in regard to the
distinction between bar by former judgment which bars the prosecution of a second
action upon the same claim, demand, or cause of action, and conclusiveness of judgment
which bars the relitigation of particular facts or issues in another litigation between the
same parties on a different claim or cause of action.

The general rule precluding the re-litigation of material facts or questions

which were in issue and adjudicated in former action are commonly applied to
all matters essentially connected with the subject matter of the litigation.
Thus, it extends to questions necessarily implied in the final judgment,
although no specific finding may have been made in reference thereto and
although such matters were directly referred to in the pleadings and were not
actually or formally presented. Under this rule, if the record of the former trial
shows that the judgment could not have been rendered without deciding the
particular matter, it will be considered as having settled that matter as to all
future actions between the parties and if a judgment necessarily presupposes
certain premises, they are as conclusive as the judgment itself.[141](Emphases
supplied)
The foregoing disquisition finds application to the case at bar.

Undeniably, the present case is merely an adjunct of the 2004 case, in which the
automation contract was declared to be a nullity. Needless to say, the 2004 Decision has
since become final. As earlier explained, this Court arrived at several factual findings
showing the illegality of the automation contract; in turn, these findings were used as
basis to justify the declaration of nullity.

A closer scrutiny of the 2004 Decision would reveal that the judgment could not have
been rendered without deciding particular factual matters in relation to the following: (1)
identity, existence and eligibility of MPC as a bidder; (2) failure of the ACMs to pass DOST
technical tests; and (3) remedial measures undertaken by the COMELEC after the award
of the automation contract. Under the principle of conclusiveness of judgment, We are
precluded from re-litigating these facts, as these were essential to the question of nullity.
Otherwise stated, the judgment could not have been rendered without necessarily
deciding on the above-enumerated factual matters.

Thus, under the principle of conclusiveness of judgment, those material facts became
binding and conclusive on the parties, in this case MPEI and, ultimately, the persons that
comprised it. When a right or fact has been judicially tried and determined by a court of
competent jurisdiction, or when an opportunity for that trial has been given, the judgment
of the court—as long as it remains unreversed—should be conclusive upon the
parties and those in privity with them.[142] Thus, the CA should not have required
petitioner to present further evidence of fraud on the part of respondent Willy and MPEI,
as it was already necessarily adjudged in the 2004 case.

To allow respondents to argue otherwise would be violative of the principle of

immutability of judgment. When a final judgment becomes executory, it becomes
immutable and unalterable and may no longer undergo any modification, much less any
reversal.[143] In Navarro v. Metropolitan Bank & Trust Company[144] this Court explained
that the underlying reason behind this principle is to avoid delay in the administration of
justice and to avoid allowing judicial controversies to drag on indefinitely, viz.:

No other procedural law principle is indeed more settled than that once a
judgment becomes final, it is no longer subject to change, revision,
amendment or reversal, except only for correction of clerical errors, or the
making of nunc pro tunc entries which cause no prejudice to any party, or
where the judgment itself is void. The underlying reason for the rule is two-fold: (1)
to avoid delay in the administration of justice and thus make orderly the discharge of
judicial business, and (2) to put judicial controversies to an end, at the risk of occasional
errors, inasmuch as controversies cannot be allowed to drag on indefinitely and the rights
and obligations of every litigant must not hang in suspense for an indefinite period of
time. As the Court declared in Yau v. Silverio,

Litigation must end and terminate sometime and somewhere, and it is essential to an
effective and efficient administration of justice that, once a judgment has become final,
the winning party be, not through a mere subterfuge, deprived of the fruits of the verdict.
Courts must therefore guard against any scheme calculated to bring about that result.
Constituted as they are to put an end to controversies, courts should frown upon any
attempt to prolong them.
Indeed, just as a losing party has the right to file an appeal within the prescribed period,
the winning party also has the correlative right to enjoy the finality of the resolution of his
case by the execution and satisfaction of the judgment. Any attempt to thwart this rigid
rule and deny the prevailing litigant his right to savor the fruit of his victory must
immediately be struck down. x x x. (Emphasis supplied)[145]
In the instant case, adherence to respondents' position would mean a complete disregard
of the factual findings We made in the 2004 Decision, and would certainly be tantamount
to reversing the same. This would invariably cause further delay in the efforts to recover
the amounts of government money illegally disbursed to respondents back in 2004.

Next, respondents argue that the findings of fact in the 2004 Decision are not
conclusive[146] considering that eight (8) of the fifteen (15) justices of this Court refused to
go along with the factual findings as stated in the majority opinion.[147] This argument fails
to convince.

Fourteen (14) Justices participated in the promulgation of the 2004 Decision. Out of the
fourteen (14) Justices, three (3) Justices registered their dissent,[148] and two (2) Justices
wrote their Separate Opinions, each recommending the dismissal of the Petition.[149] Of
the nine (9) Justices who voted to grant the Petition, four (4) joined the ponente in his
disposition of the case,[150] and two (2) Justices wrote Separate Concurring
Opinions.[151] As to the remaining two (2) Justices, one (1) Justice[152] merely concurred in
the result, while the other joined another Justice in her Separate Opinion.[153]

Contrary to the allegations of respondents, an examination of the voting shows that nine
(9) Justices voted in favor of the majority opinion, without any qualification regarding the
factual findings made therein. In fact, the two (2) Justices who wrote their own
Concurring Opinions echoed the lack of eligibility of MPC and the failure of the ACMs to
pass the mandatory requirements.

Finally, respondents cannot argue that, from the line of questioning of then Justice
Leonardo A. Quisumbing during the oral arguments in the 2004 case, he did not agree
with the factual findings of this Court. Oral arguments before this Court are held precisely
to test the soundness of each proponent's contentions. The questions and statements
propounded by Justices during such an exercise are not to be construed as their definitive
opinions. Neither are they indicative of how a Justice shall vote on a particular issue;
indeed, Justice Quisumbing clearly states in the 2004 Decision that he concurs in the
results. At any rate, statements made by Our Members during oral arguments are
not stare decisis; what is conclusive are the decisions reached by the majority of the
Court.

IV.
The delivery of 1,991 units of ACMs does not negate fraud on the part of
respondents Willy and MPEI.

The CA in its Amended Decision explained that respondents could not be considered to
have fostered a fraudulent intent to not honor their obligation, since they delivered 1,991
units of ACMs.[154] In turn, respondents argue that respondent MPEI had every intention
of fulfilling its obligation, because it in fact delivered the ACMs as required by the
automation contract.[155]

We disagree with the CA and respondents. The fact that the ACMs were delivered cannot
induce this Court to disregard the fraud respondent MPEI had employed in securing the
award of the automation contract, as established above. Furthermore, they cannot cite
the fact of delivery in their favor, considering that the ACMs delivered were substandard
and noncompliant with the requirements initially set for the automation project.

In Our 2004 Decision, We already found the ACMs to be below the standards set by the
COMELEC. The noncompliant status of these ACMs was reiterated by this Court in its 2005
and 2006 Resolutions. The CA therefore gravely erred in considering the delivery of 1,991
ACMs as evidence of respondents' willingness to perform the obligation (and thus, their
lack of fraud) considering that, as exhaustively discussed earlier, the ACMs delivered were
plagued with defects and failed to meet the requirements set for the automation project.

Under Article 1233 of the New Civil Code, a debt shall not be understood to have been
paid, unless the thing or service in which the obligation consists has been completely
delivered or rendered. In this case, respondents cannot be considered to
have performed their obligation, because the ACMs were defective.

V.
Estoppel does not lie against the State when it acts to rectify the mistakes,
errors or illegal acts of its officials and agents.

Respondents claim that the 2004 Decision may not be invoked against them, since the
petitioner and the respondents were co-respondents and not adverse parties in the 2004
case. Respondents further explain that since petitioner and respondents were on the
same side at the time, had the same interest, and took the same position on the validity
and regularity of the automation contract, petitioner cannot now invoke the 2004 Decision
against them.[156]

Contrary to respondents' contention, estoppel generally finds no application against the

State when it acts to rectify mistakes, errors, irregularities, or illegal acts of its officials
and agents, irrespective of rank. This principle ensures the efficient conduct of the affairs
of the State without any hindrance to the implementation of laws and regulations by the
government. This holds true even if its agents' prior mistakes or illegal acts shackle
government operations and allow others—some by malice—to profit from official error or
misbehavior, and even if the rectification prejudices parties who have meanwhile received
benefit.[157] Indeed, in the 2004 Decision, this Court even directed the Ombudsman to
determine the possible criminal liability of public officials and private persons responsible
for the contract, and the OSG to undertake measures to protect the government from the
ill effects of the illegal disbursement of public funds.[158]

The equitable doctrine of estoppel for the prevention of injustice and is for the protection
of those who have been misled by that which on its face was fair and whose character, as
represented, parties to the deception will not, in the interest of justice, be heard to
deny.[159] It cannot therefore be utilized to insulate from liability the very perpetrators of
the injustice complained of.

VI.
The findings of the Office of the Ombudsman are not controlling in the instant
case.

Respondents further claim that this Court has recognized the fact that it did not determine
or adjudge any fraud that may have been committed by individual respondents. Rather, it
referred the matter to the Ombudsman for the determination of criminal liability.[160] The
Ombudsman in fact made its own determination that there was no probable cause to hold
individual respondents criminally liable.[161]

Respondents miss the point. The main issue in the instant case is whether respondents
are guilty of fraud in obtaining and executing the automation contract, to justify the
issuance of a writ of preliminary attachment in petitioner's favor. Meanwhile, the issue
relating to the proceedings before the Ombudsman (and this Court in G.R. No. 174777)
pertains to the finding of lack of probable cause for the possible criminal liability of
respondents under the Anti-Graft and Corrupt Practices Act.

The matter before Us involves petitioner's application for a writ of preliminary attachment
in relation to its recovery of the expended amount under the voided contract, and not the
determination of whether there is probable cause to hold respondents liable for possible
criminal liability due to the nullification of the automation contract. Whether or not the
Ombudsman has found probable cause for possible criminal liability on the part of
respondents is not controlling in the instant case.

CONCLUSION

If the State is to be serious in its obligation to develop and implement coordinated anti-
corruption policies that promote proper management of public affairs and public property,
integrity, transparency and accountability,[162] it needs to establish and promote effective
practices aimed at the prevention of corruption,[163] as well as strengthen our efforts at
asset recovery.[164]

As a signatory to the United Nations Convention Against Corruption (UNCAC),[165] the

Philippines acknowledges its obligation to establish appropriate systems of procurement
based on transparency, competition and objective criteria in decision-making that are
effective in preventing corruption.[166] To promote transparency, and in line with the
country's efforts to curb corruption, it is useful to identify certain fraud indicators or "red
flags" that can point to corrupt activity.[167] This case - arguably the first to provide
palpable examples of what could be reasonably considered as "red flags" of fraud and
malfeasance in public procurement - is the Court's contribution to the nation's continuing
battle against corruption, in accordance with its mandate to dispense justice and
safeguard the public interest.

WHEREFORE, premises considered, the Petition is GRANTED. The Amended Decision

dated 22 September 2008 of the Court of Appeals in CA-G.R. SP. No. 95988
is ANNULLED AND SET ASIDE. A new one is entered DIRECTING the Regional Trial
Court of Makati City, Branch 59, to ISSUE in Civil Case No. 04-346, entitled Mega Pacific
eSolutions, Inc., vs. Republic of the Philippines, the Writ of Preliminary Attachment prayed
for by petitioner Republic of the Philippines against the properties of respondent Mega
Pacific eSolutions, Inc., and Willy U. Yu, Bonnie S. Yu, Enrique T. Tansipek, Rosita Y.
Tansipek, Pedro O. Tan, Johnson W. Fong, Bernard I. Fong and Lauriano Barrios.

No costs.

SO ORDERED.
THIRD DIVISION

G.R. No. 198967, March 07, 2016

JOSE EMMANUEL P. GUILLERMO, Petitioner, v. CRISANTO P. USON, Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking to annul and set aside the Court of Appeals Decision1 dated June 8, 2011 and
Resolution2 dated October 7, 2011 in CA G.R. SP No. 115485, which affirmed in toto the
decision of the National Labor Relations Commission (NLRC).

The facts of the case follow.

On March 11, 1996, respondent Crisanto P. Uson (Uson) began his employment with
Royal Class Venture Phils., Inc. (Royal Class Venture) as an accounting clerk.3 Eventually,
he was promoted to the position of accounting supervisor, with a salary of Php13,000.00
a month, until he was allegedly dismissed from employment on December 20, 2000.4

On March 2, 2001, Uson filed with the Sub-Regional Arbitration . Branch No. 1, Dagupan
City, of the NLRC a Complaint for Illegal Dismissal, with prayers for backwages,
reinstatement, salaries and 13thmonth pay, moral and exemplary damages and attorney's
fees against Royal Class Venture.5

Royal Class Venture did not make an appearance in the case despite its receipt of
summons.6

On May 15, 2001, Uson filed his Position Paper7 as complainant.

On October 22, 2001, Labor Arbiter Jose G. De Vera rendered a Decision8 in favor of the
complainant Uson and ordering therein respondent Royal Class Venture to reinstate him
to his former position and pay his backwages, 13th month pay as well as moral and
exemplary damages and attorney's fees.

Royal Class Venture, as the losing party, did not file an appeal of the
decision.9 Consequently, upon Uson's motion, a Writ of Execution10 dated February 15,
2002 was issued to implement the Labor Arbiter's decision.

On May 17, 2002, an Alias Writ of Execution11 was issued. But with the judgment still
unsatisfied, a Second Alias Writ of Execution12 was issued on September 11, 2002.

Again, it was reported in the Sheriff's Return that the Second Alias Writ of Execution
dated September 11, 2002 remained "unsatisfied." Thus, on November 14, 2002, Uson
filed a Motion for Alias Writ of Execution and to Hold Directors and Officers of Respondent
Liable for Satisfaction of the Decision.13The motion quoted from a portion of the Sheriffs
Return, which states:
chanRoblesvirtualLawlibrary

On September 12, 2002, the undersigned proceeded at the stated present business office
address of the respondent which is at Minien East, Sta. Barbara, Pangasinan to serve the
writ of execution. Upon arrival, I found out that the establishment erected thereat is not
[in] the respondent's name but JOEL and SONS CORPORATION, a family corporation
owned by the Guillermos of which, Jose Emmanuel F. Guillermo the General Manager of
the respondent, is one of the stockholders who received the writ using his nickname
"Joey," [and who] concealed his real identity and pretended that he [was] the brother of
Jose, which [was] contrary to the statement of the guard-on-duty that Jose and Joey
[were] one and the same person. The former also informed the undersigned that the
respondent's (sic) corporation has been dissolved.

On the succeeding day, as per [advice] by the [complainant's] counsel that the
respondent has an account at the Bank of Philippine Islands Magsaysay Branch, A.B.
Fernandez Ave., Dagupan City, the undersigned immediately served a notice of
garnishment, thus, the bank replied on the same day stating that the respondent [does]
not have an account with the branch.14ChanRoblesVirtualawlibrary
On December 26, 2002, Labor Arbiter Irenarco R. Rimando issued an Order15 granting the
motion filed by Uson. The order held that officers of a corporation are jointly and severally
liable for the obligations of the corporation to the employees and there is no denial of due
process in holding them so even if the said officers were not parties to the case when the
judgment in favor of the employees was rendered.16 Thus, the Labor Arbiter pierced the
veil of corporate fiction of Royal Class Venture and held herein petitioner Jose Emmanuel
Guillermo (Guillermo), in his personal capacity, jointly and severally liable with the
corporation for the enforcement of the claims of Uson.17

Guillermo filed, by way of special appearance, a Motion for Reconsideration/To Set Aside
the Order of December 26, 2002.18 The same, however, was not granted as, this time, in
an Order dated November 24, 2003, Labor Arbiter Niña Fe S. Lazaga-Rafols sustained the
findings of the labor arbiters before her and even castigated Guillenno for his unexplained
absence in the prior proceedings despite notice, effectively putting responsibility on
Guillermo for the case's outcome against him.19

On January 5, 2004, Guillermo filed a Motion for Reconsideration of the above

Order,20 but the same was promptly denied by the Labor Arbiter in an Order dated
January 7, 2004.21

On January 26, 2004, Uson filed a Motion for Alias Writ of Execution,22 to which Guillermo
filed a Comment and Opposition on April 2, 2004.23

On May 18, 2004, the Labor Arbiter issued an Order24 granting Uson's Motion for the
Issuance of an Alias Writ of Execution and rejecting Guillermo's arguments posed in his
Comment and Opposition.

Guillermo elevated the matter to the NLRC by filing a Memorandum of Appeal with Prayer
for a (Writ of) Preliminary Injunction dated June 10, 2004.25cralawred

In a Decision26 dated May 11, 2010, the NLRC dismissed Guillermo's appeal and denied
his prayers for injunction.

On August 20, 2010, Guillermo filed a Petition for Certiorari27 before the Court of Appeals,
assailing the NLRC decision.

On June 8, 2011, the Court of Appeals rendered its assailed Decision28 which denied
Guillermo's petition and upheld all the findings of the NLRC.

The appellate court found that summons was in fact served on Guillermo as President and
General Manager of Royal Class Venture, which was how the Labor Arbiter acquired
jurisdiction over the company.29 But Guillermo subsequently refused to receive all notices
of hearings and conferences as well as the order to file Royal Class Venture's position
paper.30 Then, it was learned during execution that Royal Class Venture had been
dissolved.31 However, the Court of Appeals held that although the judgment had become
final and executory, it may be modified or altered "as when its execution becomes
impossible or unjust."32 It also noted that the motion to hold officers and directors like
Guillermo personally liable, as well as the notices to hear the same, was sent to them by
registered mail, but no pleadings were submitted and no appearances were made by
anyone of them during the said motion's pendency.33 Thus, the court held Guillermo
liable, citing jurisprudence that hold the president of the corporation liable for the latter's
obligation to illegally dismissed employees.34 Finally, the court dismissed Guillermo's
allegation that the case is an intra-corporate controversy, stating that jurisdiction is
determined by the allegations in the complaint and the character of the relief sought.35

From the above decision of the appellate court, Guillermo filed a Motion for
Reconsideration36 but the same was again denied by the said court in the assailed
Resolution37 dated October 7, 2011.

Hence, the instant petition.

Guillermo asserts that he was impleaded in the case only more than a year after its
Decision had become final and executory, an act which he claims to be unsupported in
law and jurisprudence.38 He contends that the decision had become final, immutable and
unalterable and that any amendment thereto is null and void.39 Guillermo assails the so-
called "piercing the veil" of corporate fiction which allegedly discriminated against him
when he alone was belatedly impleaded despite the existence of other directors and
officers in Royal Class Venture.40 He also claims that the Labor Arbiter has no jurisdiction
because the case is one of an intra-corporate controversy, with the complainant Uson also
claiming to be a stockholder and director of Royal Class Venture.41

In his Comment,42 Uson did not introduce any new arguments but merely
cited verbatim the disquisitions of the Court of Appeals to counter Guillermo's assertions
in his petition.

To resolve the case, the Court must confront the issue of whether an officer of a
corporation may be included as judgment obligor in a labor case for the first time only
after the decision of the Labor Arbiter had become final and executory, and whether the
twin doctrines of "piercing the veil of corporate fiction" and personal liability of company
officers in labor cases apply.

The petition is denied.

In the earlier labor cases of Claparols v. Court of Industrial Relations43 and A.C. Ransom
Labor Union-CCLU v. NLRC,44 persons who were not originally impleaded in the case were,
even during execution, held to be solidarity liable with the employer corporation for the
latter's unpaid obligations to complainant-employees. These included a newly-formed
corporation which was considered a mere conduit or alter ego of the originally impleaded
corporation, and/or the officers or stockholders of the latter corporation.45 Liability
attached, especially to the responsible officers, even after final judgment and during
execution, when there was a failure to collect from the employer corporation the
judgment debt awarded to its workers.46 In Naguiat v. NLRC,47 the president of the
corporation was found, for the first time on appeal, to be solidarily liable to the dismissed
employees. Then, in Reynoso v. Court of Appeals,48 the veil of corporate fiction was
pierced at the stage of execution, against a corporation not previously impleaded, when it
was established that such corporation had dominant control of the original party
corporation, which was a smaller company, in such a manner that the latter's closure was
done by the former in order to defraud its creditors, including a former worker.

The rulings of this Court in A.C. Ransom, Naguiat, and Reynoso, however, have since
been tempered, at least in the aspects of the lifting of the corporate veil and the
assignment of personal liability to directors, trustees and officers in labor cases. The
subsequent cases of McLeod v. NLRC,49Spouses Santos v. NLRC50 and Carag v.
NLRC,51 have all established, save for certain exceptions, the primacy of Section 3152 of
the Corporation Code in the matter of assigning such liability for a corporation's debts,
including judgment obligations in labor cases. According to these cases, a corporation is
still an artificial being invested by law with a personality separate and distinct from that of
its stockholders and from that of other corporations to which it may be connected.53 It is
not in every instance of inability to collect from a corporation that the veil of corporate
fiction is pierced, and the responsible officials are made liable. Personal liability attaches
only when, as enumerated by the said Section 31 of the Corporation Code, there is a
wilfull and knowing assent to patently unlawful acts of the corporation, there is gross
negligence or bad faith in directing the affairs of the corporation, or there is a conflict of
interest resulting in damages to the corporation.54 Further, in another labor
case,Pantranco Employees Association (PEA-PTGWO), et al. v. NLRC, et al.,55 the doctrine
of piercing the corporate veil is held to apply only in three (3) basic areas, namely: ( 1)
defeat of public convenience as when the corporate fiction is used as a vehicle for the
evasion of an existing obligation; (2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or (3)alter ego cases, where a
corporation is merely a farce since it is a mere alter ego or business conduit of a person,
or where the corporation is so organized and controlled and its affairs are so conducted as
to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
In the absence of malice, bad faith, or a specific provision of law making a corporate
officer liable, such corporate officer cannot be made personally liable for corporate
liabilities.56 Indeed, in Reahs Corporation v. NLRC,57 the conferment of liability on officers
for a corporation's obligations to labor is held to be an exception to the general doctrine
of separate personality of a corporation.
It also bears emphasis that in cases where personal liability attaches, not even all officers
are made accountable. Rather, only the "responsible officer," i.e., the person directly
responsible for and who "acted in bad faith" in committing the illegal dismissal or any act
violative of the Labor Code, is held solidarily liable, in cases wherein the corporate veil is
pierced.58 In other instances, such as cases of so-called corporate tort of a close
corporation, it is the person "actively engaged" in the management of the corporation
who is held liable.59 In the absence of a clearly identifiable officer(s) directly responsible
for the legal infraction, the Court considers the president of the corporation as such
officer.60

The common thread running among the aforementioned cases, however, is that the veil
of corporate fiction can be pierced, and responsible corporate directors and officers or
even a separate but related corporation, may be impleaded and held answerable solidarily
in a labor case, even after final judgment and on execution, so long as it is established
that such persons have deliberately used the corporate vehicle to unjustly evade the
judgment obligation, or have resorted to fraud, bad faith or malice in doing so. When the
shield of a separate corporate identity is used to commit wrongdoing and opprobriously
elude responsibility, the courts and the legal authorities in a labor case have not hesitated
to step in and shatter the said shield and deny the usual protections to the offending
party, even after final judgment. The key element is the presence of fraud, malice or bad
faith. Bad faith, in this instance, does not connote bad judgment or negligence but
imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it
means breach of a known duty through some motive or interest or ill will; it partakes of
the nature of fraud.61

As the foregoing implies, there is no hard and fast rule on when corporate fiction may be
disregarded; instead, each case must be evaluated according to its peculiar
circumstances.62 For the case at bar, applying the above criteria, a finding of personal and
solidary liability against a corporate officer like Guillermo must be rooted on a satisfactory
showing of fraud, bad

faith or malice, or the presence of any of the justifications for disregarding the corporate
fiction. As stated in McLeod,63 bad faith is a question of fact and is evidentiary, so that the
records must first bear evidence of malice before a finding of such may be made.

It is our finding that such evidence exists in the record. Like the A. C. Ransom,
and Naguiat cases, the case at bar involves an apparent family corporation. As in those
two cases, the records of the present case bear allegations and evidence that Guillermo,
the officer being held liable, is the person responsible in the actual running of the
company and for the malicious and illegal dismissal of the complainant; he, likewise, was
shown to have a role in dissolving the original obligor company in an obvious "scheme to
avoid liability" which jurisprudence has always looked upon with a suspicious eye in order
to protect the rights of labor.64

Part of the evidence on record is the second page of the verified Position Paper of
complainant (herein respondent) Crisanto P. Uson, where it was clearly alleged that Uson
was "illegally dismissed by the President/General Manager of respondent corporation
(herein petitioner) Jose Emmanuel P. Guillermo when Uson exposed the practice of the
said President/General Manager of dictating and undervaluing the shares of stock of the
corporation."65 The statement is proof that Guillermo was the responsible officer in charge
of running the company as well as the one who dismissed Uson from employment. As this
sworn allegation is uncontroverted - as neither the company nor Guillermo appeared
before the Labor Arbiter despite the service of summons and notices - such stands as a
fact of the case, and now functions as clear evidence of Guillermo's bad faith in his
dismissal of Uson from employment, with the motive apparently being anger at the latter's
reporting of unlawful activities.

Then, it is also clearly reflected in the records that it was Guillermo himself, as President
and General Manager of the company, who received the summons to the case, and who
also subsequently and without justifiable cause refused to receive all notices and orders of
the Labor Arbiter that followed.66This makes Guillermo responsible for his and his
company's failure to participate in the entire proceedings before the said office. The fact is
clearly narrated in the Decision and Orders of the Labor Arbiter, Uson's Motions for the
Issuance of Alias Writs of Execution, as well as in the Decision of the NLRC and the
assailed Decision of the Court of Appeals,67 which Guillermo did not dispute in any of his
belated motions or pleadings, including in his petition for certiorari before the Court of
Appeals and even in the petition currently before this Court. 68 Thus, again, the same now
stands as a finding of fact of the said lower tribunals which binds this Court and which it
has no power to alter or revisit.69Guillermo's knowledge of the case's filing and existence
and his unexplained refusal to participate in it as the responsible official of his company,
again is an indicia of his bad faith and malicious intent to evade the judgment of the labor
tribunals.

Finally, the records likewise bear that Guillermo dissolved Royal Class Venture and helped
incorporate a new firm, located in the same address as the former, wherein he is again a
stockl1older. This is borne by the Sherif11s Return which reported: that at Royal Class
Venture's business address at Minien East, Sta. Barbara, Pangasinan, there is a new
establishment named "Joel and Sons Corporation," a family corporation owned by the
Guillermos in which Jose Emmanuel F. Guillermo is again one of the stockholders; that
Guillermo received the writ of execution but used the nickname "Joey" and denied being
Jose Emmanuel F. Guillermo and, instead, pretended to be Jose's brother; that the guard
on duty confirmed that Jose and Joey are one and the same person; and that the
respondent corporation Royal Class Venture had been dissolved.70 Again, the facts
contained in the Sheriffs Return were not disputed nor controverted by Guillermo, either
in the hearings of Uson's Motions for Issuance of Alias Writs of Execution, in subsequent
motions or pleadings, or even in the petition before this Court. Essentially, then, the facts
form part of the records and now stand as further proof of Guillermo's bad faith and
malicious intent to evade the judgment obligation.

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

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

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

SO ORDERED.cralawlawlibrary
FIRST DIVISION

G.R. No. 161759, July 02, 2014

COMMISSIONER OF CUSTOMS, Petitioner, v. OILINK INTERNATIONAL

CORPORATION,Respondent.

DECISION

BERSAMIN, J.:

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

Antecedents

The antecedents are summarized in the assailed decision.2cralawred

On September 15, 1966, Union Refinery Corporation (URC) was established under
the Corporation Code of the Philippines. In the course of its business undertakings,
particularly in the period from 1991 to 1994, URC imported oil products into the country.

On January 11, 1996, Oilink was incorporated for the primary purpose of manufacturing,
importing, exporting, buying, selling or dealing in oil and gas, and their refinements and
by-products at wholesale and retail of petroleum. URC and Oilink had interlocking
directors when Oilink started its business.

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

On March 4, 1998, Oscar Brillo, the District Collector of the Port of Manila, formally
demanded that URC pay the taxes and duties on its oil imports that had arrived between
January 6, 1991 and November 7, 1995 at the Port of Lucanin in Mariveles, Bataan.

On April 16, 1998, Brillo made another demand letter to URC for the payment of the
reduced sum of P289,287,486.60 for the Value-Added Taxes (VAT), special duties and
excise taxes for the years 1991-1995.

On April 23, 1998, URC, through its counsel, responded to the demands by seeking the
landed computations of the assessments, and challenged the inconsistencies of the
demands.

On November 25, 1998, then Customs Commissioner Pedro C. Mendoza formally directed
that URC pay the amount of P119,223,541.71 representing URC’s special duties, VAT,
and Excise Taxes that it had failed to pay at the time of the release of its 17 oil shipments
that had arrived in the Sub-port of Mariveles from January 1, 1991 to September 7, 1995.

On December 21, 1998, Commissioner Mendoza wrote again to require URC to pay
deficiency taxes but in the reduced sum of P99,216,580.10.

On December 23, 1998, upon his assumption of office, Customs Commissioner Nelson Tan
transmitted another demand letter to URC affirming the assessment of P99,216,580.10 by
Commissioner Mendoza.

On January 18, 1999, Magleo, in behalf of URC, replied by letter to Commissioner Tan’s
affirmance by denying liability, insisting instead that only P28,933,079.20 should be paid
by way of compromise.

On March 26, 1999, Commissioner Tan responded by rejecting Magleo’s proposal, and
directed URC to pay P99,216,580.10.

On May 24, 1999, Manuel Co, URC’s President, conveyed to Commissioner Tan URC’s
willingness to pay only P94,216,580.10, of which the initial amount of P28,264,974.00
would be taken from the collectibles of Oilink from the National Power Corporation, and
the balance to be paid in monthly installments over a period of three years to be secured
with corresponding post-dated checks and its future available tax credits.

On July 2, 1999, Commissioner Tan made a final demand for the total liability of
P138,060,200.49 upon URC and Oilink.

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

Also on July 8, 1999, Oilink formally protested the assessment on the ground that it was
not the party liable for the assessed deficiency taxes.

On July 12, 1999, after receiving the July 8, 1999 letter from Co, Commissioner Tan
communicated in writing the detailed computation of the tax liability, stressing that the
Bureau of Customs (BoC) would not issue any clearance to Oilink unless the amount of
P138,060,200.49 demanded as Oilink’s tax liability be first paid, and a performance bond
be posted by URC/Oilink to secure the payment of any adjustments that would result
from the BIR’s review of the liabilities for VAT, excise tax, special duties, penalties, etc.

Thus, on July 30, 1999, Oilink appealed to the CTA, seeking the nullification of the
assessment for having been issued without authority and with grave abuse of discretion
tantamount to lack of jurisdiction because the Government was thereby shifting the
imposition from URC to Oilink.

Decision of the CTA

On July 9, 2001, the CTA rendered its decision declaring as null and void the assessment
of the Commissioner of Customs, to wit:chanRoblesvirtualLawlibrary

IN THE LIGHT OF ALL THE FOREGOING, the petition is hereby GRANTED. The
assailed assessment issued by Respondent against

herein Petitioner OILINK INTERNATIONAL CORPORATION is hereby declared NULL and

VOID.

SO ORDERED.3chanrobleslaw

The Commissioner of Customs seasonably filed a motion for reconsideration, 4 but the CTA
denied the motion for lack of merit.5cralawred

Judgment of the CA

Aggrieved, the Commissioner of Customs brought a petition for review in the CA upon the
following issues, namely: (a) the CTA gravely erred in holding that it had jurisdiction over
the subject matter; (b) the CTA gravely erred in holding that Oilink had a cause of action;
and (c) the CTA gravely erred in holding that the Commissioner of Customs could not
pierce the veil of corporate fiction.

On the issue of the jurisdiction of the CTA, the CA held:chanRoblesvirtualLawlibrary

x x x the case at bar is very much within the purview of the jurisdiction of the Court of
Tax Appeals since it is undisputed that what is involved herein is the respondent’s liability
for payment of money to the Government as evidenced by the demand letters sent by the
petitioner. Hence, the Court of Tax Appeals did not err in taking cognizance of the petition
for review filed by the respondent.

xxxx

We find the petitioner’s submission untenable. The principle of non-exhaustion of

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

As to whether or not the Commissioner of Customs could lawfully pierce the veil of
corporate fiction in order to treat Oilink as the mere alter ego of URC, the CA concurred
with the CTA, quoting the latter’s following findings:chanRoblesvirtualLawlibrary

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

Issues

Hence, this appeal, whereby the Commissioner of Customs reiterates the issues raised in
the CA.

Ruling of the Court

We affirm the judgment of the CA.

1.
The CTA had jurisdiction over the controversy

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

Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate
jurisdiction to review by appeal, as herein provided:cralawlawlibrary

xxxx

2. Decisions of the Commissioner of Customs in cases involving liability for Customs

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

x x x xchanrobleslaw

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

We rule against the Commissioner of Customs. The CTA correctly ruled that the reckoning
date for Oilink’s appeal was July 12, 1999, not July 2, 1999, because it was on the former
date that the Commissioner of Customs denied the protest of Oilink. Clearly, the filing of
the petition on July 30, 1999 by Oilink was well within its reglementary period to appeal.
The insistence by the Commissioner of Customs on reckoning the reglementary period to
appeal from November 25, 1998, the date when URC received the final demand letter, is
unwarranted. We note that the November 25, 1998 final demand letter of the BoC was
addressed to URC, not to Oilink. As such, the final demand sent to URC did not bind Oilink
unless the separate identities of the corporations were disregarded in order to consider
them as one.

2.
Oilink had a valid cause of action

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

The position of the Commissioner of Customs lacks merit.

The CA correctly held that the principle of non-exhaustion of administrative remedies was
not an iron-clad rule because there were instances in which the immediate resort to
judicial action was proper. This was one such exceptional instance when the principle did
not apply. As the records indicate, the Commissioner of Customs already decided to deny
the protest by Oilink on July 12, 1999, and stressed then that the demand to pay was
final. In that instance, the exhaustion of administrative remedies would have been an
exercise in futility because it was already the Commissioner of Customs demanding the
payment of the deficiency taxes and duties.

3.
There was no ground to pierce
the veil of corporate existence

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

In Philippine National Bank v. Ritratto Group, Inc.,10 the Court has outlined the following
circumstances that are useful in the determination of whether a subsidiary is a mere
instrumentality of the parent-corporation, viz:chanRoblesvirtualLawlibrary

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

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetrate the violation of a statutory or other positive legal duty, or dishonest and,
unjust act in contravention of plaintiff's legal rights; andChanRoblesVirtualawlibrary

3. The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of.chanrobleslaw

In applying the “instrumentality” or “alter ego” doctrine, the courts are concerned with
reality, not form, and with how the corporation operated and the individual defendant’s
relationship to the operation.11 Consequently, the absence of any one of the foregoing
elements disauthorizes the piercing of the corporate veil.

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

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

No pronouncement on costs of suit.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 182770 September 17, 2014

WPM INTERNATIONAL TRADING, INC. and WARLITO P. MANLAPAZ, Petitioners,

vs.
FE CORAZON LABAYEN, Respondent.

DECISION

BRION, J.:

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

The Factual Background

The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems Consultants, a

management and consultant firm. The petitioner, WPM International Trading, Inc. (WPM),
is a domestic corporation engaged in the restaurant business, while Warlito P. Manlapaz
(Manlapaz) is its president.

Sometime in 1990, WPM entered into a management agreement with the respondent, by
virtue of which the respondent was authorized to operate, manage and rehabilitate
Quickbite, a restaurant owned and operated by WPM. As part of her tasks, the respondent
looked for a contractor who would renovate the two existing Quickbite outlets in Divisoria,
Manila and Lepanto St., University Belt, Manila. Pursuant to the agreement, the
respondent engaged the services of CLN Engineering Services (CLN) to renovate
Quickbite-Divisoria at the cost of ₱432,876.02.

On June 13, 1990, Quickbite-Divisoria’s renovation was finally completed, and its
possession was delivered to the respondent. However, out of the ₱432,876.02 renovation
cost, only the amount of ₱320,000.00 was paid to CLN, leaving a balance of ₱112,876.02.

Complaint for Sum of Money (Civil Case No. Q-90-7013)

On October 19, 1990, CLN filed a complaint for sum of money and damages before the
RTC against the respondent and Manlapaz, which was docketed as Civil Case No. Q-90-
7013. CLN later amended the complaint to exclude Manlapaz as defendant. The
respondent was declared in default for her failure to file a responsive pleading.

The RTC, in its January 28, 1991 decision, found the respondent liable to pay CLN actual
damages inthe amount of ₱112,876.02 with 12% interest per annum from June 18,1990
(the date of first demand) and 20% of the amount recoverable as attorney’s fees.

Complaint for Damages (Civil Case No. Q-92-13446)

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

In her prayer, the respondent sought indemnification in the amount of ₱112,876.60 plus
interest at 12%per annum from June 18, 1990 until fully paid; and 20% of the award as
attorney’s fees. She likewise prayed that an award of ₱100,000.00 as moral damages and
₱20,000.00 as attorney’s fees be paid to her.

In his defense, Manlapaz claims that it was his fellow incorporator/director Edgar
Alcansajewho was in-charge with the daily operations of the Quickbite outlets; that when
Alcansaje left WPM, the remaining directors were compelled to hire the respondent as
manager; that the respondent had entered intothe renovation agreement with CLN in her
own personal capacity; that when he found the amount quoted by CLN too high, he
instructed the respondent to either renegotiate for a lower price or to look for another
contractor; that since the respondent had exceeded her authority as agent of WPM, the
renovation agreement should only bind her; and that since WPM has a separate and
distinct personality, Manlapaz cannot be made liable for the respondent’s claim.

Manlapaz prayed for the dismissal of the complaint for lack of cause of action, and by way
of counterclaim, for the award of ₱350,000.00 as moral and exemplary damages and
₱50,000.00 attorney’s fees.

The RTC, through an order dated March 2, 1993 declared WPM in default for its failure to
file a responsive pleading.

The Decision of the RTC

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

The petitioners appealed the RTC decision with the CA. There, they argued that in view of
the respondent’s act of entering into a renovation agreement with CLN in excess of her
authority as WPM’s agent, she is not entitled to indemnity for the amount she paid.
Manlapaz also contended that by virtue ofWPM’s separate and distinct personality, he
cannot be madesolidarily liable with WPM.

The Ruling of the Court of Appeals

On September 28, 2007, the CA affirmed, with modification on the award of attorney’s
fees, the decision of the RTC.The CA held that the petitioners are barred from raising as a
defense the respondent’s alleged lack of authority to enter into the renovation agreement
in view of their tacit ratification of the contract.

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

After the CA's denial of their motion for reconsideration, the petitioners filed the present
petition for review on certiorari under Rule 45 of the Rules of Court.

The Petition
The petitioners submit that the CA gravely erred in sustaining the RTC’s application of the
principle of piercing the veil of corporate fiction. They argue that the legal fiction of
corporate personality could only be discarded upon clear and convincing proof that the
corporation is being used as a shield to avoid liability or to commit a fraud. Since the
respondent failed to establish that any of the circumstances that would warrant the
piercing is present, Manlapaz claims that he cannot be made solidarily liable with WPM to
answerfor damages allegedly incurred by the respondent.

The petitioners further argue that, assuming they may be held liable to reimburse to the
respondentthe amount she paid in Civil Case No. Q-90-7013, such liability is only limited
to the amount of ₱112,876.02, representing the balance of the obligation to CLN, and
should not include the twelve 12% percent interest, damages and attorney’s fees.

The Issues

The core issues are: (1) whether WPM is a mere instrumentality, alter-ego, and business
conduit of Manlapaz; and (2) whether Manlapaz is jointly and severally liable with WPM to
the respondent for reimbursement, damages and interest.

Our Ruling

We find merit in the petition.

We note, at the outset, that the question of whether a corporation is a mere

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

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

We have reviewed the records and found that the application of the principle of piercing
the veil of corporate fiction is unwarranted in the present case.

On the Application ofthe Principle of Piercing the Veil of Corporate Fiction

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

Incidentally, the doctrine of piercing the corporate veil applies only in three (3) basic
instances, namely: a) when the separate and distinct corporate personality defeats public
convenience, as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; b) in fraud cases, or when the corporate entity is used to justify a
wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a
corporation is essentially a farce, since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs so
conducted as to make it merely aninstrumentality, agency, conduit or adjunct of another
corporation.11

Piercing the corporate veil based on the alter ego theory requires the concurrence of
three elements, namely:

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

(2) Such control must have beenused by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiff’s legal right; and

(3) The aforesaid control and breach of duty must have proximately caused the
injury or unjust loss complained of.

The absence of any ofthese elements prevents piercing the corporate veil.12

In the present case, the attendantcircumstances do not establish that WPM is a mere alter
ego of Manlapaz.

Aside from the fact that Manlapaz was the principal stockholder of WPM, records do not
show that WPM was organized and controlled, and its affairs conducted in a manner that
made it merely an instrumentality, agency, conduit or adjunct ofManlapaz. As held in
Martinez v. Court of Appeals,13 the mere ownership by a singlestockholder of even all or
nearly all of the capital stocks ofa corporation is not by itself a sufficient ground to
disregard the separate corporate personality. To disregard the separate juridical
personality of a corporation, the wrongdoing must be clearly and convincingly
established.14

Likewise, the records of the case do not support the lower courts’ finding that Manlapaz
had control or domination over WPM or its finances. That Manlapaz concurrentlyheld the
positions of president, chairman and treasurer, or that the Manlapaz’s residence is the
registered principal office of WPM, are insufficient considerations to prove that he had
exercised absolutecontrol over WPM.

In this connection, we stress thatthe control necessary to invoke the instrumentality or

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

Here, the respondent failed to prove that Manlapaz, acting as president, had absolute
control over WPM.1âwphi1 Even granting that he exercised a certain degree of control
over the finances, policies and practices of WPM, in view of his position as president,
chairman and treasurer of the corporation, such control does not necessarily warrant
piercing the veil of corporate fiction since there was not a single proof that WPM was
formed to defraud CLN or the respondent, or that Manlapaz was guilty of bad faith or
fraud.

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

This Court also observed that the CA failed to demonstrate how the separate and distinct
personalityof WPM was used by Manlapaz to defeat the respondent’s right for
reimbursement. Neither was there any showing that WPM attempted to avoid liability or
had no property against which to proceed.

Since no harm could be said to have been proximately caused by Manlapaz for which the
latter could be held solidarily liable with WPM, and considering that there was no proof
that WPM had insufficient funds, there was no sufficient justification for the RTC and the
CA to have ruled that Manlapaz should be held jointly and severally liable to the
respondent for the amount she paid to CLN. Hence, only WPM is liable to indemnify the
respondent.
Finally, we emphasize that the piercing of the veil of corporate fiction is frowned upon and
thus, must be done with caution.15 It can only be done if it has been clearly established
that the separate and distinct personality of the corporation is used to justify a wrong,
protect fraud, or perpetrate a deception. The court must be certain that the corporate
fiction was misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of its rights; it cannot be presumed.

On the Award of Moral Damages

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

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

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

SO ORDERED.
FIRST DIVISION

G.R. NO. 167530 : March 13, 2013

PHILIPPINE NATIONAL BANK, Petitioner, v. HYDRO RESOURCES CONTRACTORS

CORPORATION,Respondent.

G.R. NO. 167561

ASSET PRIVATIZATION TRUST, Petitioner, v. HYDRO RESOURCES CONTRACTORS

CORPORATION, Respondent.

G.R. NO. 167603

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, v. HYDRO RESOURCES

CONTRACTORS CORPORATION, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the Decision2 dated November 30, 2004
and the Resolution3 dated March 22, 2005 of the Court of Appeals in CA-G.R. CV No.
57553. The said Decision affirmed the Decision4 dated November 6, 1995 of the Regional
Trial Court (RTC) of Makati City, Branch 62, granting a judgment award of P8,370,934.74,
plus legal interest, in favor of respondent Hydro Resources Contractors Corporation
(HRCC) with the modification that the Privatization and Management Office (PMO),
successor of petitioner Asset Privatization Trust (APT),5 has been held solidarily liable with
Nonoc Mining and Industrial Corporation (NMIC)6 and petitioners Philippine National Bank
(PNB) and Development Bank of the Philippines (DBP), while the Resolution denied
reconsideration separately prayed for by PNB, DBP, and APT.

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

Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC's Mine Stripping and
Road Construction Program in 1985 for a total contract price of P35,770,120. After
computing the payments already made by NMIC under the program and crediting the
NMIC's receivables from

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

Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a
merger. This prompted the amendment of the complaint to substitute HRCC for Hercon,
Inc.12chanroblesvirtualawlibrary
Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation
No. 50 creating the APT for the expeditious disposition and privatization of certain
government corporations and/or the assets thereof. Pursuant to the said Proclamation, on
February 27, 1987, DBP and PNB executed their respective deeds of transfer in favor of
the National Government assigning, transferring and conveying certain assets and
liabilities, including their respective stakes in NMIC.13In turn and on even date, the
National Government transferred the said assets and liabilities to the APT as trustee under
a Trust Agreement.14 Thus, the complaint was amended for the second time to implead
and include the APT as a defendant.

In its answer,15 NMIC claimed that HRCC had no cause of action. It also asserted that its
contract with HRCC was entered into by its then President without any authority.
Moreover, the said contract allegedly failed to comply with laws, rules and regulations
concerning government contracts. NMIC further claimed that the contract amount was
manifestly excessive and grossly disadvantageous to the government. NMIC made
counterclaims for the amounts already paid to Hercon, Inc. and attorney's fees, as well as
payment for equipment rental for four trucks, replacement of parts and other services,
and damage to some of NMIC's properties.16chanroblesvirtualawlibrary

For its part, DBP's answer17 raised the defense that HRCC had no cause of action against
it because DBP was not privy to HRCC's contract with NMIC. Moreover, NMIC's juridical
personality is separate from that of DBP. DBP further interposed a counterclaim for
attorney's fees.18chanroblesvirtualawlibrary

PNB's answer19 also invoked lack of cause of action against it. It also raised estoppel on
HRCC's part and laches as defenses, claiming that the inclusion of PNB in the complaint
was the first time a demand for payment was made on it by HRCC. PNB also invoked the
separate juridical personality of NMIC and made counterclaims for moral damages and
attorney's fees.20chanroblesvirtualawlibrary

APT set up the following defenses in its answer 21: lack of cause of action against it, lack of
privity between Hercon, Inc. and APT, and the National Government's preferred lien over
the assets of NMIC.22chanroblesvirtualawlibrary

After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of
HRCC. It pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with
NMIC:chanroblesvirtualawlibrary

On the issue of whether or not there is sufficient ground to pierce the veil of corporate
fiction, this Court likewise finds for the plaintiff.

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

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

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

From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego
of both DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC
for the latter's unpaid obligations to plaintiff.23chanroblesvirtualawlibrary
Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the
Decision of the trial court reads:chanroblesvirtualawlibrary

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the

plaintiff HYDRO RESOURCES CONTRACTORS CORPORATION and against the defendants
NONOC

MINING AND INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF THE PHILIPPINES

and PHILIPPINE NATIONAL BANK, ordering the aforenamed defendants, to pay the
plaintiff jointly and severally, the sum of P8,370,934.74 plus legal interest thereon from
date of demand, and attorney's fees equivalent to 25% of the judgment award.

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

DBP and PNB filed their respective appeals in the Court of Appeals. Both insisted that it
was wrong for the RTC to pierce the veil of NMIC's corporate personality and hold DBP
and PNB solidarily liable with NMIC.25chanroblesvirtualawlibrary

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

In the case before Us, it is indubitable that [NMIC] was owned by appellants DBP and PNB
to the extent of 57% and 43% respectively; that said two (2) appellants are the only
stockholders, with the qualifying stockholders of five (5) consisting of its own officers and
included in its charter merely to comply with the requirement of the law as to number of
incorporators; and that the directorates of DBP, PNB and [NMIC] are interlocked.

xxx

We find it therefore correct for the lower court to have ruled

that:chanroblesvirtualawlibrary

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

The Court of Appeals then concluded that, "in keeping with the concept of justice and fair
play," the corporate veil of NMIC should be pierced,
ratiocinating:chanroblesvirtualawlibrary

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

The dispositive portion of the Decision of the Court of Appeals

reads:chanroblesvirtualawlibrary

WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. The
judgment in favor of appellee Hydro Resources Contractors Corporation in the amount
of P8,370,934.74 with legal interest from date of demand is hereby AFFIRMED, but the
dismissal of the case as against Assets Privatization Trust is REVERSED, and its successor
the Privatization and Management Office is INCLUDED as one of those jointly and
severally liable for such indebtedness. The award of attorney's fees is DELETED.

All other claims and counter-claims are hereby DISMISSED.

Costs against appellants.28chanroblesvirtualawlibrary

The respective motions for reconsideration of DBP, PNB, and APT were
denied.29chanroblesvirtualawlibrary

Hence, these consolidated petitions.30chanroblesvirtualawlibrary

All three petitioners assert that NMIC is a corporate entity with a juridical personality
separate and distinct from both PNB and DBP. They insist that the majority ownership by
DBP and PNB of NMIC is not a sufficient ground for disregarding the separate corporate
personality of NMIC because NMIC was not a mere adjunct, business conduit or alter ego
of DBP and PNB. According to them, the application of the doctrine of piercing the
corporate veil is unwarranted as nothing in the records would show that the ownership
and control of the shareholdings of NMIC by DBP and PNB were used to commit fraud,
illegality or injustice. In the absence of evidence that the stock control by DBP and PNB
over NMIC was used to commit some fraud or a wrong and that said control was the
proximate cause of the injury sustained by HRCC, resort to the doctrine of "piercing the
veil of corporate entity" is misplaced.31chanroblesvirtualawlibrary

DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to
pay NMIC's exclusive and separate corporate indebtedness to HRCC, such liability of the
two banks was transferred to and assumed by the National Government through the APT,
now the PMO, under the respective deeds of transfer both dated February 27, 1997
executed by DBP and PNB pursuant to Proclamation No. 50 dated December 8, 1986 and
Administrative Order No. 14 dated February 3, 1987.32

For its part, the APT contends that, in the absence of an unqualified assumption by the
National Government of all liabilities incurred by NMIC, the National Government through
the APT could not be held liable for NMIC's contractual liability. The APT asserts that
HRCC had not sufficiently shown that the APT is the successor-in-interest of all the
liabilities of NMIC, or of DBP and PNB as transferors, and that the adjudged liability is
included among the liabilities assigned and transferred by DBP and PNB in favor of the
National Government.33

HRCC counters that both the RTC and the CA correctly applied the doctrine of "piercing
the veil of corporate fiction." It claims that NMIC was the alter ego of DBP and PNB which
owned, conducted and controlled the business of NMIC as shown by the following
circumstances: NMIC was owned by DBP and PNB, the officers of DBP and PNB were also
the officers of NMIC, and DBP and PNB financed the operations of NMIC. HRCC further
argues that a parent corporation may be held liable for the contracts or obligations of its
subsidiary corporation where the latter is a mere agency, instrumentality or adjunct of the
parent corporation.34chanroblesvirtualawlibrary

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

SECTION 2. TRANSFER OF BANK'S LIABILITIES

xxx

2.02 With respect to the Bank's liabilities which are contingent and those liabilities where
the Bank's creditors consent to the transfer thereof is not obtained, said liabilities shall
remain in the books of the BANK with the GOVERNMENT funding the payment
thereof.36chanroblesvirtualawlibrary

After a careful review of the case, this Court finds the petitions impressed with merit.
A corporation is an artificial entity created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly authorized by law or
incident to its existence.37It has a personality separate and distinct from that of its
stockholders and from that of other corporations to which it may be connected.38 As a
consequence of its status as a distinct legal entity and as a result of a conscious policy
decision to promote capital formation,39 a corporation incurs its own liabilities and is
legally responsible for payment of its obligations.40 In other words, by virtue of the
separate juridical personality of a corporation, the corporate debt or credit is not the debt
or credit of the stockholder.41 This protection from liability for shareholders is the principle
of limited liability.42chanroblesvirtualawlibrary

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

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

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

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

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

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

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

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

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

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

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

The third prong is the "harm" test. This test requires the plaintiff to show that the
defendant's control, exerted in a fraudulent, illegal or otherwise unfair manner toward it,
caused the harm suffered.59 A causal connection between the fraudulent conduct
committed through the instrumentality of the subsidiary and the injury suffered or the
damage incurred by the plaintiff should be established. The plaintiff must prove that,
unless the corporate veil is pierced, it will have been treated unjustly by the defendant's
exercise of control and improper use of the corporate form and, thereby, suffer
damages.60chanroblesvirtualawlibrary

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

This Court finds that none of the tests has been satisfactorily met in this case.

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

Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the
corporate cover of NMIC based on two factors: (1) the ownership by DBP and PNB of
effectively all the stocks of NMIC, and (2) the alleged interlocking directorates of DBP,
PNB and NMIC.65 Unfortunately, the conclusion of the trial and appellate courts that the
DBP and PNB fit the alter ego theory with respect to NMIC's transaction with HRCC on the
premise of complete stock ownership and interlocking directorates involved a quantum
leap in logic and law exposing a gap in reason and fact.

While ownership by one corporation of all or a great majority of stocks of another

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

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

In this case, nothing in the records shows that the corporate finances, policies and
practices of NMIC were dominated by DBP and PNB in such a way that NMIC could be
considered to have no separate mind, will or existence of its own but a mere conduit for
DBP and PNB. On the contrary, the evidence establishes that HRCC knew and acted on
the knowledge that it was dealing with NMIC, not with NMIC's stockholders. The letter
proposal of Hercon, Inc., HRCC's predecessor-in-interest, regarding the contract for
NMIC's mine stripping and road construction program was addressed to and accepted by
NMIC.71 The various billing reports, progress reports, statements of accounts and
communications of Hercon, Inc./HRCC regarding NMIC's mine stripping and road
construction program in 1985 concerned NMIC and NMIC's officers, without any indication
of or reference to the control exercised by DBP and/or PNB over NMIC's affairs, policies
and practices.72chanroblesvirtualawlibrary

HRCC has presented nothing to show that DBP and PNB had a hand in the act complained
of, the alleged undue disregard by NMIC of the demands of HRCC to satisfy the unpaid
claims for services rendered by HRCC in connection with NMIC's mine stripping and road
construction program in 1985. On the contrary, the overall picture painted by the
evidence offered by HRCC is one where HRCC was dealing with NMIC as a distinct juridical
person acting through its own corporate officers.73chanroblesvirtualawlibrary

Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were
interlocking has no basis. HRCC's Exhibit "I-5,"74 the initial General Information Sheet
submitted by NMIC to the Securities and Exchange Commission, relied upon by the trial
court and the Court of Appeals may have proven that DBP and PNB owned the stocks of
NMIC to the extent of 57% and 43%, respectively. However, nothing in it supports a
finding that NMIC, DBP, and PNB had interlocking directors as it only indicates that, of the
five members of NMIC's board of directors, four were nominees of either DBP or PNB and
only one was a nominee of both DBP and PNB.75 Only two members of the board of
directors of NMIC, Jose Tengco, Jr. and Rolando Zosa, were established to be members of
the board of governors of DBP and none was proved to be a member of the board of
directors of PNB.76 No director of NMIC was shown to be also sitting simultaneously in the
board of governors/directors of both DBP and PNB.

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

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

In relation to the second element, to disregard the separate juridical personality of a

corporation, the wrongdoing or unjust act in contravention of a plaintiff's legal rights must
be clearly and convincingly established; it cannot be presumed. Without a demonstration
that any of the evils sought to be prevented by the doctrine is present, it does not
apply.80chanroblesvirtualawlibrary

In this case, the Court of Appeals declared:chanroblesvirtualawlibrary

We are not saying that PNB and DBP are guilty of fraud in forming NMIC, nor are we
implying that NMIC was used to conceal fraud. x x x.81chanroblesvirtualawlibrary

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

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

As a general rule, a corporation will be looked upon as a legal entity, unless and until
sufficient reason to the contrary appears. When the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons. Also, the corporate entity may be disregarded in
the interest of justice in such cases as fraud that may work inequities among members of
the corporation internally, involving no rights of the public or third persons. In both
instances, there must have been fraud, and proof of it. For the separate juridical
personality of a corporation to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.

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

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

Even under Section 2.02 of the respective deeds of transfer executed by DBP and PNB
which HRCC invokes, the APT cannot be held liable. The contingent liability for which the
National Government, through the APT, may be held liable under the said provision refers
to contingent liabilities of DBP and PNB. Since DBP and PNB may not be held solidarily
liable with NMIC, no contingent liability may be imputed to the APT as well. Only NMIC as
a distinct and separate legal entity is liable to pay its corporate obligation to HRCC in the
amount of P8,370,934.74, with legal interest thereon from date of demand.

As trustee of the. assets of NMIC, however, the APT should ensure compliance by NMIC
of the judgment against it. The APT itself acknowledges this. 84chanroblesvirtualawlibrary

WHEREFORE, the petitions are hereby GRANTED.

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

SO ORDERED.
EN BANC

G.R. No. 203355, August 18, 2015

LEO R. ROSALES, EDGAR SOLIS JONATHAN G. RANIOLA, LITO FELICIANO,

RAYMUNDO DIDAL, JR., NESTOR SALIN, ARNULFO S. ABRIL, RUBEN FLORES,
DANTE FERMA AND MELCHOR SELGA,Petitioners, v. NEW A.N.J.H. ENTERPRISES
& N.H. OIL MILL CORPORATION, NOEL AWAYAN, MA. FE AWAYAN, BYRON
ILAGAN, HEIDI A. ILAGAN AND AVELINO AWAYAN, Respondents.

DECISION

VELASCO JR., J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
September 5, 2012 Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 124395,
which, in turn, affirmed the Resolutions of the National Labor Relations Commission
(NLRC) dated December 28, 20112 and February 28, 20123 in NLRC-LAC Case No. 07-
001796-11.

Respondent New ANJH Enterprises (New ANJH) is a sole proprietorship owned by

respondent Noel Awayan (Noel). Petitioners are its former employees who worked as
machine operators, drivers, helpers, lead and boiler men.

Allegedly due to dwindling capital, on February 11, 2010, Noel wrote the Director of the
Department of Labor and Employment (DOLE) Region IV-A a letter regarding New ANJH's
impending cessation of operations and the sale of its assets to respondent NH Oil Mill
Corporation (NH Oil), as well as the termination of thirty-three (33) employees by reason
thereof.4 On February 13, 2010, Noel met with the 33 affected employees, which included
petitioners, to inform them of his plan.5 On even date, he gave the employees uniformly-
worded Notices dated February 12, 20106 informing them of the cessation of operations
of New ANJH effective March 15, 2010 and the sale of its assets to a corporation. Noel
also offered the employees, including petitioners, their separation pay.

On March 5, 2010, Noel signed a Deed of Sale selling the equipment, machines, tools
and/or other devices being used by New ANJH Enterprises for the manufacturing and/or
extraction of coconut oil for P950,000 to NH Oil, as represented by respondent Heidi A.
Ilagan (Heidi), Noel's sister.7cralawrednad

Parenthetically, the Articles of Incorporation of NH Oil were prepared on January 27, 2010
with Noel appearing to have more than two-thirds (2/3) of the subscribed capital stock of
the corporation.8 The remaining shares had been subscribed by Heidi and other members
of the Awayan family.9cralawrednad

On March 8, 2010, respondents New ANJH and Noel filed before the NLRC Sub-Regional
Arbitration Branch No. IV (NLRC-SRAB-IV), San Pablo City a "Letter Request for
Intervention," which was docketed as SRAB-IV-03-5066-10-L. The letter request
reads:cralawlawlibrary

Please be informed that the business operations of the New ANJH Enterprises, a single
Proprietorship engaged in oil extraction situated in San Pablo City, will be permanently
closed effective 15 March 2010 due to lack of capital caused by enormous uncollected
receivables/debts and the necessity for the plant to undergo general repairs and
maintenance.

xxxx

In this connection, we respectfully request that we be allowed to effect the payment of

the separation benefits to our employees before your Office and with your kind
intervention to ensure that we are properly guided by the provisions of law in this
undertaking.10 (Emphasis supplied)
On March. 16, 2010, petitioners Lito Feliciano (Feliciano), Edgar Solis (Solis), and Nestor
Salin (Salin) received their respective separation pays, signed the corresponding check
vouchers and executedQuitclaims and Release before Labor Arbiter Melchisedek A. Guan
(LA Guan) of NLRC SRAB-IV San Pablo Office.11cralawrednad

On March 27, 2010, petitioner Leo Rosales (Rosales) similarly received his separation pay
from Noel and signed a Quitclaim and Release.12 On March 29, 2010, the other
petitioners, Amulfo Abril (Abril), Raymundo Didal (Didal), Ruben Flores (Flores), Melchor
Selga (Selga), Jonathan Ranola (Ranola), and Dante Ferma (Ferma) also received their
separation benefits and signed their respective Quitclaims and Release and check
vouchers.13cralawrednad

Following the payments thus made to petitioners and their execution of Quitclaims and
Release, LA Guan issued four (4) Orders, to wit: three Orders all dated March 22, 2010 for
petitioners Feliciano, Solis, and Salin;14 and one Order dated April 8, 2010 for petitioners
Abril, Flores, Didal, Ferma, Rosales, Selga and Ranola.15 In the said Orders, LA Guan
declared the "labor dispute" between New ANJH and petitioners as "dismissed with
prejudice on ground of settlement."16cralawrednad

Petitioners, however, filed a complaint for illegal dismissal, docketed as NLRC Case No.
RAB-IV-04-00649-10-L, with NLRC Regional Arbitration Branch IV (NLRC-RAB-IV) in
Calamba City. They alleged in their complaint that while New ANJH stopped its operations
on March 15, 2010, it resumed its operations as NH Oil using the same machineries and
with the same owners and management.17Petitioners thus claimed that the sale of the
assets of New ANJH to NH Oil was a circumvention of their security of tenure.

In a Decision dated April 29, 2011,18 Executive Labor Arbiter Generoso V. Santos (ELA
Santos) found that petitioners had been illegally dismissed and ordered their
reinstatement and the payment of One Million Six Thousand Forty-Five and 87/100 Pesos
(P1,006,045.87) corresponding to the petitioners' full backwages less the amount paid to
them as their respective "separation pay." In ruling for the petitioners, ELA Santos
ratiocinated that the buyer "in the 'impending sale' undisclosed in the notices of
[petitioners] is divulged by subsequent development to be practically the same as the
seller." Hence, for ELA Santos, it was extremely difficult to conclude that the sale was
genuine and can validly justify the termination of the petitioners.

Respondents filed their Notice of Appeal with Appeal Memorandum19 along with a Verified
Motion to Reduce Bond20 with the NLRC. They also posted 60% of the award ordered by
the LA, or Six Hundred Three Thousand Six Hundred Twenty-Seven and 52/100 Pesos
(P603,627.52), as their appeal bond.21cralawrednad

Meanwhile, petitioners also filed a Memorandum of Partial Appeal contending that ELA
Santos erred in failing to award them moral and exemplary damages.22cralawrednad

On September 24, 2011, the NLRC issued a Decision23 denying respondents' Verified
Motion to Reduce Bond for lack of merit and so dismissing their appeal for non-perfection.
In the same Decision, the NLRC also granted petitioners' partial appeal by modifying ELA
Santos' Decision to include the award of P20,000.00 to each petitioner as moral and
exemplary damages.24cralawrednad

Respondents filed their Motion for Reconsideration with Motion to Admit Additional Appeal
Cash Bond25cralawred with corresponding payment of additional cash
bond.26cralawrednad

While the motion was opposed by petitioners,27 the NLRC, in its Resolution dated
December 28, 2011,28 reversed its earlier Decision and ordered the dismissal of
petitioners' complaint on the ground that it was barred by the Orders issued by LA Guan
under the doctrine of res judicata. Further, the NLRC pointed out that the sale of New
ANJH's assets to NH Oil Mill was in the exercise of sound management prerogative and
there was no proof that it was made to defeat petitioners' security of tenure.

In its Resolution dated February 28, 2012,29 the NLRC denied petitioners' Motion for
Reconsideration. Hence, petitioners filed a petition for certiorari with the CA.

In the assailed Decision,30 the appellate court denied the petition for certiorari, thereby
affirming the NLRC's Resolutions dated December 28, 2011 and February 28, 2012.

In its Decision, the appellate court held that private respondents had substantially
complied with the rule requiring the posting of an appeal bond equivalent to the total
award given to the employees. More importantly, so the CA held, the Orders rendered by
LA Guan in NLRC Case No. SRAB IV-03-5066-10-L were considered final and binding upon
the parties and had the force and effect of a judgment rendered by the labor arbiter.
Thus, the appellate court declared that the petitioners' complaint for illegal dismissal was
already barred by res judicata.

Aggrieved by the CA's Decision, petitioners are now before this Court on a petition for
review on certiorari.

We find the petition to be with merit.

The suspension of the period to perfect the appeal upon the filing of a motion
to reduce bond

On the issue of perfecting the appeal, the CA was correct when it pointed out that Rule VI
of the New Rules of Procedure of the NLRC provides that a motion to reduce bond shall
be entertained "upon the posting of a bond in a reasonable amount in relation to the
monetary award." As to what the "reasonable amount" is, the NLRC has wide discretion in
determining the reasonableness of the bond for purposes of perfecting an appeal.
In Garcia v. KJ Commercial,31 this Court explained:cralawlawlibrary
The filing of a motion to reduce bond and compliance with the two conditions stop the
running of the period to perfect an appeal. x x x

xxxx

The NLRC has full discretion to grant or deny the motion to reduce bond, and it
may rule on the motion beyond the 10-day period within which to perfect an
appeal. Obviously, at the time of the filing of the motion to reduce bond and posting of a
bond in a reasonable amount, there is no assurance whether the appellant's motion is
indeed based on "meritorious ground" and whether the bond he or she posted is of a
"reasonable amount." Thus, the appellant always runs the risk of failing to perfect an
appeal.

x x x In order to give full effect to the provisions on motion to reduce bond, the
appellant must be allowed to wait for the ruling of the NLRC on the motion
even beyond the 10-day period to perfect an appeal. If the NLRC grants the motion
and rules that there is indeed meritorious ground and that the amount of the bond posted
is reasonable, then the appeal is perfected. If the NLRC denies the motion, the
appellant may still file a motion for reconsideration as provided under Section
15, Rule VII of the Rules. If the NLRC grants the motion for reconsideration
and rules that there is indeed meritorious ground and that the amount of the
bond posted is reasonable, then the appeal is perfected. If the NLRC denies the
motion, then the decision of the labor arbiter becomes final and executory.

xxx

In any case, the rule that the filing of a motion to reduce bond shall not stop the running
of the period to perfect an appeal is not absolute. The Court may relax the rule.
InIntertranz Container Lines, Inc. v. Bautista, the Court held:cralawlawlibrary
"Jurisprudence tells us that in labor cases, an appeal from a decision involving a monetary
award may be perfected only upon the posting of cash or surety bond. The Court,
however, has relaxed this requirement under certain exceptional circumstances in order to
resolve controversies on their merits. These circumstances include: (1) fundamental
consideration of substantial justice; (2) prevention of miscarriage of justice or of unjust
enrichment; and (3) special circumstances of the case combined with its legal merits, and
the amount and the issue involved."32(emphasis and underscoring supplied)
In this case, the NLRC had reconsidered its original position and declared that the 60%
bond was reasonable given the merits of the justification provided by respondents in their
Motion to Reduce Bond, as supplemented by their Motion for Reconsideration with Motion
to Admit Additional Appeal Cash Bond. The CA affirmed the merits of the grounds cited by
respondents in their motions and the reasonableness of the bond originally posted by
respondents. This is in accord with the guidelines established in McBurnie v.
Ganzon,33 where this Court declared that the posting of a provisional cash or surety bond
equivalent to ten percent (10%) of the monetary award subject of the appeal is sufficient
provided that there is meritorious ground therefor, viz:cralawlawlibrary
[O]n the matter of the filing and acceptance of motions to reduce appeal bond, as
provided in Section 6, Rule VI of the 2011 NLRC Rules of Procedure, the Court hereby
RESOLVES that henceforth, the following guidelines shall be observed:cralawlawlibrary
(a) The filing of a motion to reduce appeal bond shall be entertained by the NLRC subject
to the following conditions: (1) there is meritorious ground; and (2) a bond in a
reasonable amount is posted;

(b) For purposes of compliance with condition no. (2), a motion shall be accompanied by
the posting of a provisional cash or surety bond equivalent to ten percent (10%) of
the monetary award subject of the appeal, exclusive of damages and attorney's
fees;

(c) Compliance with the foregoing conditions shall suffice to suspend the running of the
10-day reglementary period to perfect an appeal from the labor arbiter's decision to the
NLRC;

(d) The NLRC retains its authority and duty to resolve the motion to reduce bond and
determine the final amount of bond that shall be posted by the appellant, still in
accordance with the standards of meritorious grounds and reasonable amount; and

(e) In the event that the NLRC denies the motion to reduce bond, or requires a
bond that exceeds the amount of the provisional bond, the appellant shall be
given a fresh period of ten (10) days from notice of the NLRC order within
which to perfect the appeal by posting the required appeal bond.34 emphasis and
underscoring added)
It is noted that the respondents have eventually posted the full amount of the award
ordered by the labor arbiter. Thus, given the absence of grave abuse of discretion on the
part of the NLRC and the affirmation of the CA of the reasonableness of the motions and
the amount of bond posted, there is no ground for this Court to reverse the CA's finding
that the appeal had been perfected.

Res Judicata does not bar the filing of the complaints for illegal dismissal

On the matter of the application of the doctrine of res judicata, however, this Court is
loath to sustain the finding of the appellate court and the NLRC. For res judicata to apply,
the concurrence of the following requisites must be verified: (1) the former judgment is
final; (2) it is rendered by a court having jurisdiction over the subject matter and the
parties; (3) it is a judgment or an order on the merits; (4) there is-between the first and
the second actions-identity of parties, of subject matter, and of causes of
action.35cralawrednad

The petitioners dispute the existence of all of the foregoing requisites. First, petitioners
contend that LA Guan does not have jurisdiction to issue the Orders in SRAB-IV-03-5066-
10-L since, in the first place, Noel's letter request for guidance in the payment of
separation pay is allegedly not a "labor dispute."

Article 219 (previously Article 212) of the Labor Code defines a "labor dispute" as "any
controversy ormatter concerning terms and conditions of employment or the
association or representation of persons in negotiating, fixing, maintaining, changing or
arranging the terms and conditions of employment, regardless of whether the disputants
stand in the proximate relation of employer and employee." As separation pay concerns a
term and condition of employment, Noel's request to be guided in the payment thereof is
clearly a labor dispute under the Labor Code.

The proper payment of separation pay further falls under the jurisdiction of the labor
arbiter pursuant to Art. 224 (previously Art. 217) of the Labor Code, as it is mandated as
a necessary condition for the termination of employees, viz,:cralawlawlibrary
Art. 224. Jurisdiction of the Labor Arbiters and the Commission.

(a) Except as otherwise provided under this Code,the Labor Arbiters shall have original
and exclusive jurisdiction to hear and decide, within thirty (30) calendar days after the
submission of the case by the parties for decision without extension, even in the absence
of stenographic notes, the following cases involving all workers, whether agricultural or
non agricultural:ChanRoblesvirtualLawlibrary

1. Unfair labor practice cases;

 2. Termination disputes;

xxxx

6. Except claims for employees compensation, social security, medicare and

maternity benefits, all other claims arising from employer-employee
relations, including those of persons in domestic or household service, involving
an amount exceeding five thousand pesos (P5,000.00) regardless of whether
accompanied with a claim for reinstatement. (Emphasis supplied)

The invocation of the labor arbiter's jurisdiction by way of a letter request instead of a
complaint is of no moment, as it is well-settled that the application of technical rules of
procedure is relaxed in labor cases.

The third requisite, however, is not present. The Orders rendered by LA Guan cannot be
considered as constituting a judgment on the merits. The Orders simply manifest that
petitioners "are amenable to the computations made by the company respecting their
separation pay." Nothing more. They do not clearly state the petitioners' right or New
ANJH's corresponding duty as a result of the termination.36cralawrednad

Similarly, the fourth requisite is- also absent. While there may be substantial identity of
the parties, there is no identity of subject matter or cause of action. In SME Bank, Inc. v.
De Guzman,37 this Court held that the acceptance of separation pay is an issue distinct
from the legality of the dismissal of the employees. We held:cralawlawlibrary
The conformity of the employees to the corporation's act of considering them as
terminated and their subsequent acceptance of separation pay does not remove the taint
of illegal dismissal. Acceptance of separation pay does not bar the employees
from subsequently contesting the legality of their dismissal, nor does it estop
them from challenging the legality of their separation from the service.38(Emphasis
supplied)
In the absence of the third and fourth requisites, the appellate court should have
proceeded to rule on the validity of petitioners' termination.

Piercing the veil of corporate existence is justified in the present case.

The application of the doctrine of piercing the veil of corporate fiction is frowned upon.
However, this Court will not hesitate to disregard the corporate fiction if it is used to such
an extent that injustice, fraud, or crime is committed against another in disregard of his
rights.39cralawrednad

In this case, petitioners advance the application of the doctrine because they were
terminated from employment on the pretext that there will be an impending permanent
closure of the business as a result of an intended sale of its assets to an undisclosed
corporation, and that there will be a change in the management. The termination notices
received by petitioners identically read:cralawlawlibrary
Nais po naming ipaabot sa inyo na ang New ANJH Enterprises ay ihihinto na ang
operasyon dahil sa nagpasya ako bilang may-ari na ipagbili na ang ari-arian nito sa iba
kung kayat magkakaroon ng pagpapalit sa pamumunuan nito.

Kaugnay po nito at ayon sa itinatadhana ng batas ay nais kong ipaabot sa inyo na 30

araw matapos ninyong matanggap ang pasabing ito o simula sa Marso 15, 2010 ay ititigil
na ang operasyon ng New ANJH Enterprises at sa nasabi ring petsa ay matatapos na rin
ang pagtratrabaho o "employment" ninyo sa New ANJH Enterprises.40
Subsequent events, however, revealed that the buyer of the assets of their employer was
a corporation owned by the same employer and members of his family. Furthermore, the
business re-opened in less than a month under the same management.

Admittedly, mere ownership by a single stockholder of all or nearly all of the capital stock
of the corporation does not by itself justify piercing the corporate veil. Nonetheless, in this
case, other circumstances show that the buyer of the assets of petitioners' employer is
none other than his alter ego.41 We quote with approval the observations of ELA
Santos:cralawlawlibrary
Respondents did not allege that they informed complainants neither did they state in the
notices of termination that the buyer in the "impending sale" is NH Oil Mill. Pondering on
these observations, this Office finds it too difficult to surmise that respondents' omission
was not deliberate, and so this Office holds that Noel was not in good faith in dealing with
complainants. The information disclosed by the Certificate of Registration and Articles of
Incorporation of NH Oil Mill explains respondents' motive. Its stockholders are
members of [Noel's] family known to complainants, and Noel is the controlling
stockholder and director. The immediate resumption of operation after cessation of
operation on March 15, 2010 further explains it. While complainants failed to prove that
the stockholders in NH Oil Mill were those who managed ANJH,respondents did not
dispute that there was no change in the management people, premises, tools,
devices, equipment, and machinery under NH Oil Mill. The buyer in the
"impending sale" undisclosed in the notices to complainants is divulged by
subsequent development to be practically the same as the seller. These things
are inconsistent with good faith.

xxxx

Here, complainants' employment was terminated for the alleged sale of assets of ANJH to
NH Oil Mill that would allegedly entail [a] change of management. The Deed of Sale dated
March 5, 2010 [that] respondents presented (Annex "20", respondents position paper) to
prove the "sale," states that [for] the consideration of Nine Hundred Fifty Thousand Pesos
(Php950,000.00), Noel sold to NH Oil Mill the equipment, machines, tool and/or other
devises being used by ANJH for manufacturing and/or extraction of coconut oil. This
Office cannot simply accept it as sufficient proof of sale by the seller to a distinct and
separate entity.

xxxx

The subscribed capital stock of Noel and Heidi [in NH Oil] are worth Php790,000.00 and
Php190,000.00, respectively, or the total of Php980,000.00. Respondents claim that
Noel was managing ANJH and Heidi was its Secretary. The Deed of Sale is
signed by Noel and Heidi, Noel as [sellerl, and Heidi as representative of NH Oil
Mill. Respondents did not enumerate what [were] the equipment etc. subject of the
"sale," and how they were depreciated, and what [were] the equipment/machines owned
by Avelino and rented by NH Oil Mill and for how much? Therefrom, it is extremely
difficult to conclude by quantum of evidence acceptable to [a] reasonable mind, [that] the
"sale to a distinct entity" is genuine. And while the notices of termination state that there
would be [a] change in management, this Office notes that respondents do not
deny that Noel and Heidi continue to manage NH Oil Mill. Therefore, as far as
complainants' employment is concerned, this Office pierces the veil of corporate fiction of
NH Oil Mill and finds that the purported sale thereto of the assets of ANJH is insufficient to
validly terminate such employment. This Office cannot rule otherwise without running
afoul to the mandate of the Constitution securing to the workingman his employment, and
guaranteeing to him full protection. So this Office declares that complainants were illegally
dismissed.42 (emphasis and underscoring supplied)
Clearly, the milieu of the present case compels this Court to remove NH Oil's corporate
mask as it had become, and was used as, a shield for fraud, illegality and inequity against
the petitioners.

WHEREFORE, the instant petition is GRANTED and the Decision dated September 5,
2012 of the Court of Appeals in CA-G.R. SP No. 124395, affirming the Resolutions of the
National Labor Relations Commission (NLRC) dated December 28, 2011 and February 28,
2012 in NLRC-LAC Case No. 07-001796-11, is hereby REVERSED and SET ASIDE. The
Decision of Executive Labor Arbiter Generoso Santos in NLRC Case No. RAB-IV-04-00649-
10-L to the effect that petitioners were illegally dismissed is REINSTATED.

SO ORDERED.