Lanuza Jr.

vs BF Corporation
G.R. No. 174938 October 1, 2014

Facts: In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-La and 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. 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.Shangri-La had been consistent in paying BF Corporation in accordance with its progress billing
statements. However, by October 1991, Shangri-La started defaulting in payment. 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. According to BF Corporation, Shangri-La 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. BF Corporation eventually completed the construction of the buildings. Shangri-La allegedly took possession of
the buildings while still owing BF Corporation an outstanding balance. BF Corporation alleged that despite repeated
demands, Shangri-La refused to pay the balance owed to it.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. 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 clause provided in
its contract. 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.

Issue: Whether or not petitioners as directors of Shangri-La is personally liable for the contractual obligations entered
into by the corporation.

Held: No. Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers through its
directors, officers, or agents, who are all natural persons. A corporation cannot sue or enter into contracts without them.

A consequence of a 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.

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.

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.

A corporation is an artificial entity created by fiction of law. 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, 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. For instance, they have the power to sue and enter into transactions or
contracts.
REPUBLIC V. MEGA PACIFIC ESOLUTIONS, INC., G.R. NO. 184666, [JUNE 27, 2016]

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. 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) 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. 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.
ISSUE: WON THE APPLICATION OF PIERCING THE VEIL OF CORPORATE ENTITY IS PROPER.
HELD: YES. Veil-piercing in fraud cases requires that the legal fiction of separate juridical personality is used for
fraudulent or wrongful ends. 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. 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.
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.” 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).”
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.
The Handbook lists unjustified recommendations and unjustified winning bidders as red flags of a rigged bidding.
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.
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. 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.
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.
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.
JOSE EMMANUEL P. GUILLERMO, Petitioner, v. CRISANTO P. USON, Respondent.

Facts:
Respondent Uson was an accounting supervisor in Royal Class Venture Phils., Inc. (RCVPI) until Dec. 20, 2000 when he
was allegedly dismissed by petitioner Guillermo, the company’s president/general manager, for having exposed the
latter’s practice of dictating and undervaluing the shares of stocks of the corporation. Thereafter he filed a complaint for
illegal dismissal against the corporation, RCVPI.

The Labor Arbiter rendered a decision in favor of Uson, ordering respondent to reinstate him to his former position and
pay his backwages, 13th month pay as well as moral damages, exemplary damages and attorney’s fees. RCVPI did not
file an appeal but repeated issuances of Writs of Execution against the same remained unsatisfied.

Uson filed another Motion for Alias Writ of Execution and to Hold Directors and Officers of Respondent Liable for the
Decision and quoted from the sheriff’s return: a) that at RCVPI’s address (to which the writs are being served) there is a
new establishment named “ Joel and Sons Corporation” which was a family corporation owned by the Guillermos, in
which Jose Emmanuel Guillermo, the President and General Manager of RCVPI, is one of the stockholders; b) that Jose
received the writ using the nickname “Joey” concealing his real identity and pretended to be the brother of Jose; c) that
RCVPI has already been dissolved.

Labor Arbiter granted the motion filed by respondent and held herein petitioner Jose Emmanuel Guillermo, in his personal
capacity jointly and severally liable with the corporation stating that the officers of the corporation are jointly and
severally liable for the obligations of the corporation (“piercing the veil of corporate fiction”) to the employees even if the
said officers were not parties to the case.

Guillermo filed a Motion for Reconsideration/To Set Aside the Order of the labor arbiter. His contentions were a) officers
cannot be included as judgement obligor in a labor case for the first time only after the decision of the Labor Arbiter had
become final and executory b) in piercing the veil of RCVPI, he was allegedly discriminated against when he alone was
belatedly impleaded despite the existence of other officers of RCVPI; c)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 the corporation.

Issues:

1. Whether an officer of a corporation may be included as judgement obligor in a labor case for the first
time only after the decision of the Labor Arbiter had become final and executory.
2. Whether the twin doctrines of “piercing the veil of corporate fiction” and personal liability of company
officers in labor cases apply.

Ruling:

The Petition is denied.

In earlier labor cases, the Court held that 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. 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. 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
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.

In the case at hand, respondent Uson’s sworn allegations stating that Guillermo was the responsible officer in charge of
running the company as well as the one who maliciously and illegally dismissed Uson from employment was
uncontroverted. Furthermore, 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. He, likewise, was shown to have a role in dissolving the original obligor
company in an obvious "scheme to avoid liability".

Essentially, then, the facts form part of the records and stand as further proof of Guillermo's bad faith and malicious
intent to evade the judgment obligation.

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.

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. 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.
Commissioner of Customs v. Oilink International Corporation