G.R. No. 175048
February 10, 2009
EXCELLENT QUALITY APPAREL, INC., Petitioner,
vs.
WIN MULTI RICH BUILDERS, INC., represented by its President, WILSON G. CHUA, Respondent.
DECISION
TINGA, J.:
Before us is a Rule 45 petition1 seeking the reversal of the Decision2 and Resolution3 of the Court of
Appeals in CA-G.R. SP No. 84640. The Court of Appeals had annulled two orders 4 of the Regional Trial
Court (RTC), Branch 32, of Manila in Civil Case No. 04-108940. This case involves a claim for a sum of
money which arose from a construction dispute.
On 26 March 1996, petitioner Excellent Quality Apparel, Inc. (petitioner) then represented by Max L.F.
Ying, Vice-President for Productions, and Alfiero R. Orden, Treasurer, entered into a contract 5 with MultiRich Builders (Multi-Rich) represented by Wilson G. Chua (Chua), its President and General Manager, for
the construction of a garment factory within the Cavite Philippine Economic Zone Authority (CPEZ). 6 The
duration of the project was for a maximum period of five (5) months or 150 consecutive calendar days.
Included in the contract is an arbitration clause which is as follows:
Article XIX : ARBITRATION CLAUSE
Should there be any dispute, controversy or difference between the parties arising out of this Contract
that may not be resolved by them to their mutual satisfaction, the matter shall be submitted to an
Arbitration Committee of three (3) members; one (1) chosen by the OWNER; one (1) chosen by the
CONTRACTOR; and the Chairman thereof to be chosen by two (2) members. The decision of the
Arbitration Committee shall be final and binding on both the parties hereto. The Arbitration shall be
governed by the Arbitration Law (R.A. [No.] 876). The cost of arbitration shall be borned [sic] jointly by
both CONTRACTOR and OWNER on 50-50 basis.7
The construction of the factory building was completed on 27 November 1996.
Respondent Win Multi-Rich Builders, Inc. (Win) was incorporated with the Securities and Exchange
Commission (SEC) on 20 February 19978 with Chua as its President and General Manager. On 26
January 2004, Win filed a complaint for a sum of money9 against petitioner and Mr. Ying amounting to
₱8,634,448.20. It also prayed for the issuance of a writ of attachment claiming that Mr. Ying was about to
abscond and that petitioner was about to close. Win obtained a surety bond10 issued by Visayan Surety &
Insurance Corporation. On 10 February 2004, the RTC issued the Writ of Attachment 11 against the
properties of petitioner.
On 16 February 2004, Sheriff Salvador D. Dacumos of the RTC of Manila, Branch 32, went to the office of
petitioner in CPEZ to serve the Writ of Attachment, Summons 12 and the Complaint. Petitioner issued
Equitable PCIBank (PEZA Branch) Check No. 160149, dated 16 February 2004, in the amount of
₱8,634,448.20, to prevent the Sheriff from taking possession of its properties. 13 The check was made
payable to the Office of the Clerk of Court of the RTC of Manila as a guarantee for whatever liability there
may be against petitioner.
Petitioner filed an Omnibus Motion14 claiming that it was neither about to close. It also denied owing
anything to Win, as it had already paid all its obligations to it. Lastly, it questioned the jurisdiction of the
trial court from taking cognizance of the case. Petitioner pointed to the presence of the Arbitration Clause
and it asserted that the case should be referred to the Construction Industry Arbitration Commission
(CIAC) pursuant to Executive Order (E.O.) No. 1008.
In the hearing held on 10 February 2004, the counsel of Win moved that its name in the case be changed
from "Win Multi-Rich Builders, Inc." to "Multi-Rich Builders, Inc." It was only then that petitioner apparently
became aware of the variance in the name of the plaintiff. In the Reply15 filed by petitioner, it moved to
dismiss the case since Win was not the contractor and neither a party to the contract, thus it cannot
institute the case. Petitioner obtained a Certificate of Non-Registration of Corporation/Partnership16 from
the SEC which certified that the latter did not have any records of a "Multi-Rich Builders, Inc." Moreover,
Win in its Rejoinder17 did not
oppose the allegations in the Reply. Win admitted that it was only incorporated on 20 February 1997
while the construction contract was executed on 26 March 1996. Likewise, it admitted that at the time of
execution of the contract, Multi-Rich was a registered sole proprietorship and was issued a business
permit18 by the Office of the Mayor of Manila.
In an Order19 dated 12 April 2004, the RTC denied the motion and stated that the issues can be
answered in a full-blown trial. Upon its denial, petitioner filed its Answer and prayed for the dismissal of
the case.20 Win filed a Motion21 to deposit the garnished amount to the court to protect its legal rights. In a
Manifestation,22 petitioner vehemently opposed the deposit of the garnished amount. The RTC issued an
Order23 dated 20 April 2004, which granted the motion to deposit the garnished amount. On the same
date, Win filed a motion24 to release the garnished amount to it. Petitioner filed its opposition25 to the
motion claiming that the release of the money does not have legal and factual basis.
On 18 June 2004, petitioner filed a petition for review on certiorari26 under Rule 65 before the Court of
Appeals, which questioned the jurisdiction of the RTC and challenged the orders issued by the lower
court with a prayer for the issuance of a temporary retraining order and a writ of preliminary injunction.
Subsequently, petitioner filed a Supplemental Manifestation and Motion 27 and alleged that the money
deposited with the RTC was turned over to Win. Win admitted that the garnished amount had already
been released to it. On 14 March 2006, the Court of Appeals rendered its Decision 28 annulling the 12 April
and 20 April 2004 orders of the RTC.1avvphi1 It also ruled that the RTC had jurisdiction over the case
since it is a suit for collection of sum of money. Petitioner filed a Motion for Reconsideration 29 which was
subsequently denied in a resolution.30
Hence this petition.
Petitioner raised the following issues to wit: (1) does Win have a legal personality to institute the present
case; (2) does the RTC have jurisdiction over the case notwithstanding the presence of the arbitration
clause; and (3) was the issuance of the writ of attachment and the subsequent garnishment proper.
A suit may only be instituted by the real party in interest. Section 2, Rule 3 of the Rules of Court defines
"parties in interest" in this manner:
A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the
party entitled to the avails of the suit. Unless otherwise authorized by law or these Rules, every action
must be prosecuted or defended in the name of the real party in interest.
Is Win a real party in interest? We answer in the negative.
Win admitted that the contract was executed between Multi-Rich and petitioner. It further admitted that
Multi-Rich was a sole proprietorship with a business permit issued by the Office of the Mayor of Manila. A
sole proprietorship is the oldest, simplest, and most prevalent form of business enterprise.31 It is an
unorganized business owned by one person. The sole proprietor is personally liable for all the debts and
obligations of the business.32 In the case of Mangila v. Court of Appeals,33 we held that:
x x x In fact, there is no law authorizing sole proprietorships to file a suit in court.
A sole proprietorship does not possess a juridical personality separate and distinct from the personality of
the owner of the enterprise. The law merely recognizes the existence of a sole proprietorship as a form of
business organization conducted for profit by a single individual and requires its proprietor or owner to
secure licenses and permits, register its business name, and pay taxes to the national government. The
law does not vest a separate legal personality on the sole proprietorship or empower it to file or defend an
action in court.
The original petition was instituted by Win, which is a SEC-registered corporation. It filed a collection of
sum of money suit which involved a construction contract entered into by petitioner and Multi-Rich, a sole
proprietorship. The counsel of Win wanted to change the name of the plaintiff in the suit to Multi-Rich. The
change cannot be countenanced. The plaintiff in the collection suit is a corporation. The name cannot be
changed to that of a sole proprietorship. Again, a sole proprietorship is not vested with juridical
personality to file or defend an action.34
Petitioner had continuously contested the legal personality of Win to institute the case. Win was given
ample opportunity to adduce evidence to show that it had legal personality. It failed to do so. Corpus Juris
Secundum, notes:
x x x where an individual or sole trader organizes a corporation to take over his business and all his
assets, and it becomes in effect merely an alter ego of the incorporator, the corporation, either on the
grounds of implied assumption of the debts or on the grounds that the business is the same and is merely
being conducted under a new guise, is liable for the incorporator's preexisting debts and liabilities.
Clearly, where the corporation assumes or accepts the debt of its predecessor in business it is liable and
if the transfer of assets is in fraud of creditors it will be liable to the extent of the assets transferred. The
corporation is not liable on an implied assumption of debts from the receipt of assets where the
incorporator retains sufficient assets to pay the indebtedness, or where none of his assets are transferred
to the corporation, or where, although all the assets of the incorporator have been transferred, there is a
change in the persons carrying on the business and the corporation is not merely an alter ego of the
person to whose business it succeeded.35
In order for a corporation to be able to file suit and claim the receivables of its predecessor in business, in
this case a sole proprietorship, it must show proof that the corporation had acquired the assets and
liabilities of the sole proprietorship. Win could have easily presented or attached any document e.g., deed
of assignment which will show whether the assets, liabilities and receivables of Multi-Rich were acquired
by Win. Having been given the opportunity to rebut the allegations made by petitioner, Win failed to use
that opportunity. Thus, we cannot presume that Multi-Rich is the predecessor-in-business of Win and hold
that the latter has standing to institute the collection suit.
Assuming arguendo that Win has legal personality, the petition will still be granted.
Section 4 of E.O. No. 100836 provides for the jurisdiction of the Construction Industry Arbitration
Commission, to wit:
Section 4. Jurisdiction.—The CIAC shall have original and exclusive jurisdiction over disputes arising
from, or connected with, contracts entered into by parties involved in construction in the Philippines,
whether the disputes arises before or after the completion of the contract, or after the abandonment or
breach thereof. These disputes may involve government or private contracts. For the Board to acquire
jurisdiction, the parties to a dispute must agree to submit the same to voluntary arbitration.
The jurisdiction of the CIAC may include but is not limited to violation of specifications for materials and
workmanship; violation of the terms of agreement; interpretation and/or application of contractual time
and delays; amount of damages and penalties; commencement time and delays; maintenance and
defects; payment, default of employer or contractor and changes in contract cost.
Excluded from the coverage of this law are disputes from employer-employee relationships which shall
continue to be covered by the Labor Code of the Philippines.
There is nothing in the law which limits the exercise of jurisdiction to complex or difficult cases. E.O. No.
1008 does not distinguish between claims involving payment of money or not. 37 The CIAC acquires
jurisdiction over a construction contract by the mere fact that the parties agreed to submit to voluntary
arbitration.38 The law does not preclude parties from stipulating a preferred forum or arbitral body but they
may not divest the CIAC of jurisdiction as provided by law.39 Arbitration is an alternative method of
dispute resolution which is highly encouraged.40 The arbitration clause is a commitment on the part of the
parties to submit to arbitration the disputes covered since that clause is binding, and they are expected to
abide by it in good faith.41 Clearly, the RTC should not have taken cognizance of the collection suit. The
presence of the arbitration clause vested jurisdiction to the CIAC over all construction disputes between
Petitioner and Multi-Rich. The RTC does not have jurisdiction.42
Based on the foregoing, there is no need to discuss the propriety of the issuance of the writ of
attachment. However, we cannot allow Win to retain the garnished amount which was turned over by the
RTC. The RTC did not have jurisdiction to issue the questioned writ of attachment and to order the
release of the garnished funds.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals is hereby MODIFIED.
Civil Case No. 04-108940 is DISMISSED. Win Multi-Rich Builders, Inc. is ORDERED to return the
garnished amount of EIGHT MILLION SIX HUNDRED THIRTY-FOUR THOUSAND FOUR HUNDRED
FORTY-EIGHT PESOS AND FORTY CENTAVOS (₱8,634,448.40),
which was turned over by the Regional Trial Court, to petitioner with legal interest of 12 percent (12%) per
annum upon finality of this Decision until payment.
SO ORDERED.
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 ShangriLa 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.3 However, 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.37 Neither 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 ShangriLa.40 Provisions 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 ShangriLa’sdirectors, being non-parties to the contract, should not be made personally liable for Shangri-La’s
acts.46 Since the contract was executed only by BF Corporation and Shangri-La, only they should be
affected by the contract’s stipulation.47 BF 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.51 Petitioners are not really third parties to the agreement because they are being sued as
Shangri-La’s representatives, under Section 31 of the Corporation Code.52
BF Corporation further argued that because petitioners were impleaded for their solidary liability, they are
necessary parties to the arbitration proceedings.53 The full resolution of all disputes in the arbitration
proceedings should also be done in the interest of justice.54
In the manifestation dated September 6, 2007, petitioners informed the court that the Arbitral Tribunal had
already promulgated its decision on July 31, 2007.55 The Arbitral Tribunal denied BF Corporation’s claims
against them.56 Petitioners stated that "[they] were included by the Arbitral Tribunal in the proceedings
conducted . . . notwithstanding [their] continuing objection thereto. . . ." 57 They also stated that "[their]
unwilling participation in the arbitration case was done ex abundante ad cautela, as manifested therein on
several occasions."58 Petitioners informed the court that they already manifested with the trial court that
"any action taken on [the Arbitral 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 ShangriLa’s personality and their personalities should be disregarded.
This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to avoid litigation and
settle disputes amicably and more expeditiously by themselves and through their choice of arbitrators.
The policy in favor of arbitration has been affirmed in our Civil Code,69 which was approved as early as
1949. It was later institutionalized by the approval of Republic Act No. 876, 70 which expressly authorized,
made valid, enforceable, and irrevocable parties’ decision to submit their controversies, including
incidental issues, to arbitration. This court recognized this policy in Eastboard Navigation, Ltd. v. Ysmael
and Company, Inc.:71
As a corollary to the question regarding the existence of an arbitration agreement, defendant raises the
issue that, even if it be granted that it agreed to submit its dispute with plaintiff to arbitration, said
agreement is void and without effect for it amounts to removing said dispute from the jurisdiction of the
courts in which the parties are domiciled or where the dispute occurred. It is true that there are authorities
which hold that "a clause in a contract providing that all matters in dispute between the parties shall be
referred to arbitrators and to them alone, is contrary to public policy and cannot oust the courts of
jurisdiction" (Manila Electric Co. vs. Pasay Transportation Co., 57 Phil., 600, 603), however, there are
authorities which favor "the more intelligent view that arbitration, as an inexpensive, speedy and amicable
method of settling disputes, and as a means of avoiding litigation, should receive every encouragement
from the courts which may be extended without contravening sound public policy or settled law" (3 Am.
Jur., p. 835). Congress has officially adopted the modern view when it reproduced in the new Civil Code
the provisions of the old Code on Arbitration. And only recently it approved Republic Act No. 876
expressly authorizing arbitration of future disputes.72 (Emphasis supplied)
In view of our policy to adopt arbitration as a manner of settling disputes, arbitration clauses are liberally
construed to favor arbitration. Thus, in LM Power Engineering Corporation v. Capitol Industrial
Construction Groups, Inc.,73 this court said:
Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along with
mediation, conciliation and negotiation — is encouraged by the Supreme Court. Aside from unclogging
judicial dockets, arbitration also hastens the resolution of disputes, especially of the commercial kind. It is
thus regarded as the "wave of the future" in international civil and commercial disputes. Brushing aside a
contractual agreement calling for arbitration between the parties would be a step backward.
Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods, courts
should liberally construe arbitration clauses. Provided such clause is susceptible of an interpretation that
covers the asserted dispute, an order to arbitrate should be granted. Any doubt should be resolved in
favor of arbitration.74 (Emphasis supplied)
A more clear-cut statement of the state policy to encourage arbitration and to favor interpretations that
would render effective an arbitration clause was later expressed in Republic Act No. 9285: 75
SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively promote party
autonomy in the resolution of disputes or the freedom of the party to make their own arrangements to
resolve their disputes. Towards this end, the State shall encourage and actively promote the use of
Alternative Dispute Resolution (ADR) as an 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 Corporation 79 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.
EN BANC
[G.R. Nos. 84132-33 : December 10, 1990.]
192 SCRA 257
NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC., Petitioners, vs. PHILIPPINE
VETERANS BANK, THE EX-OFFICIO SHERIFF and GODOFREDO QUILING, in his capacity as
Deputy Sheriff of Calamba, Laguna, Respondents.
DECISION
CRUZ, J.:
This case involves the constitutionality of a presidential decree which, like all other issuances of President
Marcos during his regime, was at that time regarded as sacrosanct. It is only now, in a freer atmosphere,
that his acts are being tested by the touchstone of the fundamental law that even then was supposed to
limit presidential action.:
The particular enactment in question is Pres. Decree No. 1717, which ordered the rehabilitation of the Agrix
Group of Companies to be administered mainly by the National Development Company. The law outlined
the procedure for filing claims against the Agrix companies and created a Claims Committee to process
these claims. Especially relevant to this case, and noted at the outset, is Sec. 4(1) thereof providing that
"all mortgages and other liens presently attaching to any of the assets of the dissolved corporations are
hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of private respondent Philippine Veterans
Bank a real estate mortgage dated July 7, 1978, over three (3) parcels of land situated in Los Baños,
Laguna. During the existence of the mortgage, AGRIX went bankrupt. It was for the expressed purpose of
salvaging this and the other Agrix companies that the aforementioned decree was issued by President
Marcos.
Pursuant thereto, the private respondent filed a claim with the AGRIX Claims Committee for the payment
of its loan credit. In the meantime, the New Agrix, Inc. and the National Development Company, petitioners
herein, invoking Sec. 4 (1) of the decree, filed a petition with the Regional Trial Court of Calamba, Laguna,
for the cancellation of the mortgage lien in favor of the private respondent. For its part, the private
respondent took steps to extrajudicially foreclose the mortgage, prompting the petitioners to file a second
case with the same court to stop the foreclosure. The two cases were consolidated.
After the submission by the parties of their respective pleadings, the trial court rendered the impugned
decision. Judge Francisco Ma. Guerrero annulled not only the challenged provision, viz., Sec. 4 (1), but the
entire Pres. Decree No. 1717 on the grounds that: (1) the presidential exercise of legislative power was a
violation of the principle of separation of powers; (2) the law impaired the obligation of contracts; and (3)
the decree violated the equal protection clause. The motion for reconsideration of this decision having been
denied, the present petition was filed.:
The petition was originally assigned to the Third Division of this Court but because of the constitutional
questions involved it was transferred to the Court en banc. On August 30, 1988, the Court granted the
petitioner's prayer for a temporary restraining order and instructed the respondents to cease and desist
from conducting a public auction sale of the lands in question. After the Solicitor General and the private
respondent had filed their comments and the petitioners their reply, the Court gave due course to the petition
and ordered the parties to file simultaneous memoranda. Upon compliance by the parties, the case was
deemed submitted.
The petitioners contend that the private respondent is now estopped from contesting the validity of the
decree. In support of this contention, it cites the recent case of Mendoza v. Agrix Marketing, Inc., 1 where
the constitutionality of Pres. Decree No. 1717 was also raised but not resolved. The Court, after noting that
the petitioners had already filed their claims with the AGRIX Claims Committee created by the decree, had
simply dismissed the petition on the ground of estoppel.
The petitioners stress that in the case at bar the private respondent also invoked the provisions of Pres.
Decree No. 1717 by filing a claim with the AGRIX Claims Committee. Failing to get results, it sought to
foreclose the real estate mortgage executed by AGRIX in its favor, which had been extinguished by the
decree. It was only when the petitioners challenged the foreclosure on the basis of Sec. 4 (1) of the decree,
that the private respondent attacked the validity of the provision. At that stage, however, consistent with
Mendoza, the private respondent was already estopped from questioning the constitutionality of the decree.
The Court does not agree that the principle of estoppel is applicable.
It is not denied that the private respondent did file a claim with the AGRIX Claims Committee pursuant to
this decree. It must be noted, however, that this was done in 1980, when President Marcos was the absolute
ruler of this country and his decrees were the absolute law. Any judicial challenge to them would have been
futile, not to say foolhardy. The private respondent, no less than the rest of the nation, was aware of that
reality and knew it had no choice under the circumstances but to conform.:
It is true that there were a few venturesome souls who dared to question the dictator's decisions before the
courts of justice then. The record will show, however, that not a single act or issuance of President Marcos
was ever declared unconstitutional, not even by the highest court, as long as he was in power. To rule now
that the private respondent is estopped for having abided with the decree instead of boldly assailing it is to
close our eyes to a cynical fact of life during that repressive time.
This case must be distinguished from Mendoza, where the petitioners, after filing their claims with the
AGRIX Claims Committee, received in settlement thereof shares of stock valued at P40,000.00 without
protest or reservation. The herein private respondent has not been paid a single centavo on its claim, which
was kept pending for more than seven years for alleged lack of supporting papers. Significantly, the validity
of that claim was not questioned by the petitioner when it sought to restrain the extrajudicial foreclosure of
the mortgage by the private respondent. The petitioner limited itself to the argument that the private
respondent was estopped from questioning the decree because of its earlier compliance with its provisions.
Independently of these observations, there is the consideration that an affront to the Constitution cannot be
allowed to continue existing simply because of procedural inhibitions that exalt form over substance.
The Court is especially disturbed by Section 4(1) of the decree, quoted above, extinguishing all mortgages
and other liens attaching to the assets of AGRIX. It also notes, with equal concern, the restriction in
Subsection (ii) thereof that all "unsecured obligations shall not bear interest" and in Subsection (iii) that "all
accrued interests, penalties or charges as of date hereof pertaining to the obligations, whether secured or
unsecured, shall not be recognized."
These provisions must be read with the Bill of Rights, where it is clearly provided in Section 1 that "no
person shall be deprived of life, liberty or property without due course of law nor shall any person be denied
the equal protection of the law" and in Section 10 that "no law impairing the obligation of contracts shall be
passed."
In defending the decree, the petitioners argue that property rights, like all rights, are subject to regulation
under the police power for the promotion of the common welfare. The contention is that this inherent power
of the state may be exercised at any time for this purpose so long as the taking of the property right, even
if based on contract, is done with due process of law.
This argument is an over-simplification of the problem before us. The police power is not a panacea for all
constitutional maladies. Neither does its mere invocation conjure an instant and automatic justification for
every act of the government depriving a person of his life, liberty or property.
A legislative act based on the police power requires the concurrence of a lawful subject and a lawful method.
In more familiar words, a) the interests of the public generally, as distinguished from those of a particular
class, should justify the interference of the state; and b) the means employed are reasonably necessary for
the accomplishment of the purpose and not unduly oppressive upon individuals.
Applying these criteria to the case at bar, the Court finds first of all that the interests of the public are not
sufficiently involved to warrant the interference of the government with the private contracts of AGRIX. The
decree speaks vaguely of the "public, particularly the small investors," who would be prejudiced if the
corporation were not to be assisted. However, the record does not state how many there are of such
investors, and who they are, and why they are being preferred to the private respondent and other creditors
of AGRIX with vested property rights.:
The public interest supposedly involved is not identified or explained. It has not been shown that by the
creation of the New Agrix, Inc. and the extinction of the property rights of the creditors of AGRIX, the
interests of the public as a whole, as distinguished from those of a particular class, would be promoted or
protected. The indispensable link to the welfare of the greater number has not been established. On the
contrary, it would appear that the decree was issued only to favor a special group of investors who, for
reasons not given, have been preferred to the legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court still finds that the means employed to
rehabilitate AGRIX fall far short of the requirement that they shall not be unduly oppressive. The
oppressiveness is patent on the face of the decree. The right to property in all mortgages, liens, interests,
penalties and charges owing to the creditors of AGRIX is arbitrarily destroyed. No consideration is paid for
the extinction of the mortgage rights. The accrued interests and other charges are simply rejected by the
decree. The right to property is dissolved by legislative fiat without regard to the private interest violated
and, worse, in favor of another private interest.
A mortgage lien is a property right derived from contract and so comes under the protection of the Bill of
Rights. So do interests on loans, as well as penalties and charges, which are also vested rights once they
accrue. Private property cannot simply be taken by law from one person and given to another without
compensation and any known public purpose. This is plain arbitrariness and is not permitted under the
Constitution.
And not only is there arbitrary taking, there is discrimination as well. In extinguishing the mortgage and
other liens, the decree lumps the secured creditors with the unsecured creditors and places them on the
same level in the prosecution of their respective claims. In this respect, all of them are considered
unsecured creditors. The only concession given to the secured creditors is that their loans are allowed to
earn interest from the date of the decree, but that still does not justify the cancellation of the interests earned
before that date. Such interests, whether due to the secured or the unsecured creditors, are all extinguished
by the decree. Even assuming such cancellation to be valid, we still cannot see why all kinds of creditors,
regardless of security, are treated alike.
Under the equal protection clause, all persons or things similarly situated must be treated alike, both in the
privileges conferred and the obligations imposed. Conversely, all persons or things differently situated
should be treated differently. In the case at bar, persons differently situated are similarly treated, in
disregard of the principle that there should be equality only among equals.
One may also well wonder why AGRIX was singled out for government help, among other corporations
where the stockholders or investors were also swindled. It is not clear why other companies entitled to
similar concern were not similarly treated. And surely, the stockholders of the private respondent, whose
mortgage lien had been cancelled and legitimate claims to accrued interests rejected, were no less
deserving of protection, which they did not get. The decree operated, to use the words of a celebrated case,
3 "with an evil eye and an uneven hand."
On top of all this, New Agrix, Inc. was created by special decree notwithstanding the provision of Article
XIV, Section 4 of the 1973 Constitution, then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the formation, organization,
or regulation of private corporations, unless such corporations are owned or controlled by the Government
or any subdivision or instrumentality thereof.
The new corporation is neither owned nor controlled by the government. The National Development
Corporation was merely required to extend a loan of not more than P10,000,000.00 to New Agrix, Inc.
Pending payment thereof, NDC would undertake the management of the corporation, but with the obligation
of making periodic reports to the Agrix board of directors. After payment of the loan, the said board can
then appoint its own management. The stocks of the new corporation are to be issued to the old investors
and stockholders of AGRIX upon proof of their claims against the abolished corporation. They shall then
be the owners of the new corporation. New Agrix, Inc. is entirely private and so should have been organized
under the Corporation Law in accordance with the above-cited constitutional provision.
The Court also feels that the decree impairs the obligation of the contract between AGRIX and the private
respondent without justification. While it is true that the police power is superior to the impairment clause,
the principle will apply only where the contract is so related to the public welfare that it will be considered
congenitally susceptible to change by the legislature in the interest of the greater number. 5 Most presentday contracts are of that nature. But as already observed, the contracts of loan and mortgage executed by
AGRIX are purely private transactions and have not been shown to be affected with public interest. There
was therefore no warrant to amend their provisions and deprive the private respondent of its vested property
rights.
It is worth noting that only recently in the case of the Development Bank of the Philippines v. NLRC, 6 we
sustained the preference in payment of a mortgage creditor as against the argument that the claims of
laborers should take precedence over all other claims, including those of the government. In arriving at this
ruling, the Court recognized the mortgage lien as a property right protected by the due process and contract
clauses notwithstanding the argument that the amendment in Section 110 of the Labor Code was a proper
exercise of the police power.:
The Court reaffirms and applies that ruling in the case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of the police power, not being in
conformity with the traditional requirements of a lawful subject and a lawful method. The extinction of the
mortgage and other liens and of the interest and other charges pertaining to the legitimate creditors of
AGRIX constitutes taking without due process of law, and this is compounded by the reduction of the
secured creditors to the category of unsecured creditors in violation of the equal protection clause.
Moreover, the new corporation, being neither owned nor controlled by the Government, should have been
created only by general and not special law. And insofar as the decree also interferes with purely private
agreements without any demonstrated connection with the public interest, there is likewise an impairment
of the obligation of the contract.
With the above pronouncements, we feel there is no more need to rule on the authority of President Marcos
to promulgate Pres. Decree No. 1717 under Amendment No. 6 of the 1973 Constitution. Even if he had
such authority, the decree must fall just the same because of its violation of the Bill of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is declared UNCONSTITUTIONAL. The
temporary restraining order dated August 30, 1988, is LIFTED. Costs against the petitioners.- nad
SO ORDERED.