.R. No. 174938 October 1, 2014 On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G.
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and
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
1
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.19On March 27, 1998, this court affirmed the Court of Appeals’ decision, directing that
the dispute be submitted for arbitration.20
Another issue arose after BF Corporation had initiated arbitration proceedings. BF Corporation and
Shangri-La failed to agree as to the law that should govern the arbitration proceedings.21 On
October 27, 1998, the trial court issued the order directing the parties to conduct the proceedings in
accordance with Republic Act No. 876.22
Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification, both
seeking to clarify the term, "parties," and whether Shangri-La’s directors should be included in the
arbitration proceedings and served with separate demands for arbitration. 23
Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that they be
excluded from the arbitration proceedings for being non-parties to Shangri-La’s and BF
Corporation’s agreement.24
On July 28, 2003, the trial court issued the order directing service of demands for arbitration upon
all defendants in BF Corporation’s complaint.25 According to the trial court, Shangri-La’s directors
were interested parties who "must also be served with a demand for arbitration to give them the
opportunity to ventilate their side of the controversy, safeguard their interest and fend off their
respective positions."26 Petitioners’ motion for reconsideration ofthis order was denied by the trial
court on January 19, 2005.27
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:
2
WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and January
19, 2005 of public respondent RTC, Branch 157, Pasig City, in Civil Case No. 63400, are
AFFIRMED.33
The Court of Appeals denied petitioners’ motion for reconsideration in the October 5, 2006
resolution.34
On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of Appeals
decision and the October 5, 2006 Court of Appeals resolution.35
The issue in this case is whether petitioners should be made parties to the arbitration proceedings,
pursuant to the arbitration clause provided in the contract between BF Corporation and Shangri-La.
Petitioners argue that they cannot be held personally liable for corporate acts or obligations. 36 The
corporation is a separate being, and nothing justifies BF Corporation’s allegation that they are
solidarily liable with Shangri-La.37Neither did they bind themselves personally nor did they
undertake to shoulder Shangri-La’s obligations should it fail in its obligations. 38 BF Corporation also
failed to establish fraud or bad faith on their part.39
Petitioners also argue that they are third parties to the contract between BF Corporation and
Shangri-La.40Provisions including arbitration stipulations should bind only the parties. 41 Based on
our arbitration laws, parties who are strangers to an agreement cannot be compelled to arbitrate. 42
Petitioners point out thatour arbitration laws were enacted to promote the autonomy of parties in
resolving their disputes.43 Compelling them to submit to arbitration is against this purpose and may
be tantamount to stipulating for the parties.44
Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco III, Alfredo
C.Ramos and Benjamin C. Ramos.45
Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners that
Shangri-La’sdirectors, being non-parties to the contract, should not be made personally liable for
Shangri-La’s acts.46 Since the contract was executed only by BF Corporation and Shangri-La, only
they should be affected by the contract’s stipulation.47 BF Corporation also failed to specifically
allege the unlawful acts of the directors that should make them solidarily liable with Shangri-La for
its obligations.48
Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the parties should
undergo arbitration "clearly contemplated the inclusion of the directors of the corporation[.]" 49 BF
Corporation also argued that while petitioners were not parties to the agreement, they were still
impleaded under Section 31 of the Corporation Code. 50Section 31 makes directors solidarily liable
for fraud, gross negligence, and bad faith.51 Petitioners are not really third parties to the agreement
because they are being sued as Shangri-La’s representatives, under Section 31 of the Corporation
Code.52
BF Corporation further argued that because petitioners were impleaded for their solidary liability,
they are necessary parties to the arbitration proceedings.53 The full resolution of all disputes in the
arbitration proceedings should also be done in the interest of justice. 54
In the manifestation dated September 6, 2007, petitioners informed the court that the Arbitral
Tribunal had already promulgated its decision on July 31, 2007. 55 The Arbitral Tribunal denied BF
Corporation’s claims against them.56Petitioners stated that "[they] were included by the Arbitral
Tribunal in the proceedings conducted . . . notwithstanding [their] continuing objection thereto. . .
."57 They also stated that "[their] unwilling participation in the arbitration case was done ex
abundante ad cautela, as manifested therein on several occasions." 58 Petitioners informed the court
that they already manifested with the trial court that "any action taken on [the Arbitral Tribunal’s
decision] should be without prejudice to the resolution of [this] case." 59
Upon the court’s order, petitioners and Shangri-La filed their respective memoranda. Petitioners and
Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos reiterated their arguments that
they should not be held liable for Shangri-La’s default and made parties to the arbitration
proceedings because only BF Corporation and Shangri-La were parties to the contract.
In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary liability
under Section 31 of the Corporation Code. Shangri-La added that their exclusion from the
arbitration proceedings will result in multiplicity of suits, which "is not favored in this jurisdiction." 60 It
pointed out that the case had already been mooted by the termination of the arbitration
proceedings, which petitioners actively participated in.61 Moreover, BF Corporation assailed only the
correctness of the Arbitral Tribunal’s award and not the part absolving Shangri-La’s directors from
liability.62
BF Corporation filed a counter-manifestation with motion to dismiss63 in lieu of the required
memorandum.
In its counter-manifestation, BF Corporation pointed out that since "petitioners’ counterclaims were
already dismissed with finality, and the claims against them were likewise dismissed with finality,
they no longer have any interest orpersonality in the arbitration case. Thus, there is no longer any
need to resolve the present Petition, which mainly questions the inclusion of petitioners in the
arbitration proceedings."64 The court’s decision in this case will no longer have any effect on the
issue of petitioners’ inclusion in the arbitration proceedings.65
The petition must fail.
The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding effect on BF
Corporation, have rendered this case moot and academic.
The mootness of the case, however, had not precluded us from resolving issues so that principles
may be established for the guidance of the bench, bar, and the public. In De la Camara v. Hon.
3
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.,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.
4
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.
5
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)
6
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.
G.R. No. 184666, June 27, 2016
REPUBLIC OF THE PHILIPPINES, Petitioner, v. MEGA PACIFIC ESOLUTIONS, INC., WILLY U.
YU, BONNIE S. YU, ENRIQUE T. TANSIPEK, ROSITA Y. TANSIPEK, PEDRO O. TAN,
JOHNSON W. FONG, BERNARD I. FONG, AND *LAURIANO A. BARRIOS, Respondents.
DECISION
SERENO, C.J.:
The instant case is an offshoot of this Court's Decision dated 13 January 2004 (2004 Decision) in a
related case entitled Information Technology Foundation of the Philippines v. Commission on
Elections.1chanrobleslaw
In the 2004 case, We declared void the automation contract executed by respondent Mega Pacific
eSolutions, Inc. (MPEI) and the Commission on Elections (COMELEC) for the supply of automated
counting machines (ACMs) for the 2004 national elections.
The present case involves the attempt of petitioner Republic of the Philippines to cause the
attachment of the properties owned by respondent MPEI, as well as by its incorporators and
stockholders (individual respondents in this case), in order to secure petitioner's interest and to
ensure recovery of the payments it made to respondents for the invalidated automation contract.
At bench is a Rule 45 Petition assailing the Amended Decision dated 22 September 2008
(Amended Decision) issued by the Court of Appeals (CA) in CA-G.R. SP No. 95988.2 In said
Amended Decision, the CA directed the remand of the case to the Regional Trial Court of Makati
City, Branch 59 (RTC Makati) for the reception of evidence in relation to petitioner's application for
the issuance of a writ of preliminary attachment. The CA had reconsidered and set aside its
previous Decision dated 31 January 2008 (First Decision) 3 entitling petitioner to the issuance of said
writ.
Summarized below are the relevant facts of the case, some of which have already been discussed
in this Court's 2004 Decision:
7
chanRoblesvirtualLawlibrary
The Facts
Republic Act No. 8436 authorized the COMELEC to use an automated election system for the May
1998 elections. However, the automated system failed to materialize and votes were canvassed
manually during the 1998 and the 2001 elections.
For the 2004 elections, the COMELEC again attempted to implement the automated election
system. For this purpose, it invited bidders to apply for the procurement of supplies, equipment, and
services. Respondent MPEI, as lead company, purportedly formed a joint venture - known as the
Mega Pacific Consortium (MPC) - together with We Solv, SK C & C, ePLDT, Election.com and
Oracle. Subsequently, MPEI, on behalf of MPC, submitted its bid proposal to COMELEC.
The COMELEC evaluated various bid offers and subsequently found MPC and another company
eligible to participate in the next phase of the bidding process. 4 The two companies were referred to
the Department of Science and Technology (DOST) for technical evaluation. After due assessment,
the Bids and Awards Committee (BAC) recommended that the project be awarded to MPC. The
COMELEC favorably acted on the recommendation and issued Resolution No. 6074, which
awarded the automation project to MPC.
Despite the award to MPC, the COMELEC and MPEI executed on 2 June 2003 the Automated
Counting and Canvassing Project Contract (automation contract) 5 for the aggregate amount of
P1,248,949,088. MPEI agreed to supply and deliver 1,991 units of ACMs and such other equipment
and materials necessary for the computerized electoral system in the 2004 elections. Pursuant to
the automation contract, MPEI delivered 1,991 ACMs to the COMELEC. The latter, for its part,
made partial payments to MPEI in the aggregate amount of P1.05 billion.
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 not participated in the bidding. Despite this grant, Comelec entered into
the actual Contract with "Mega Pacific eSolutions, Inc." (MPEI), a company that joined the
bidding process but did not meet the eligibility requirements.
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 fide bidders, 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.10chanrobleslaw
After the declaration of nullity of the automation contract, the following incidents
transpired:ChanRoblesVirtualawlibrary
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).11chanrobleslaw
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
8
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 cralawlawlibrary
4. Respondent MPEI filed a Complaint for Damages12 (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. 13chanrobleslaw
This Court denied the motion in its 2004 Resolution and ruled that no prejudgment had been made
on private respondents' criminal liability. We further ruled that although the 2004 Decision stated
that the Ombudsman shall "determine the criminal liability, if any, of the public officials (and
conspiring private individuals, if any) involved in the subject Resolution and Contract," We did not
make any premature conclusion on any wrongdoing, but precisely directed the Ombudsman to
make that determination after conducting appropriate proceedings and observing due process.
Similarly, it appears from the record that several criminal and administrative Complaints had indeed
been filed with the Ombudsman in relation to the declaration of nullity of the automation
contract.14 The Complaints were filed against several public officials and the individual respondents
in this case.15chanrobleslaw
In a Resolution issued on 28 June 2006,16 the Ombudsman recommended the filing of informations
before the Sandiganbayan against some of the public officials and the individual 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.19chanrobleslaw
With this development, a Petition for Certiorari was filed with this Court on 13 October 2006 and
docketed as G.R. No. 174777.20 In the Petition, several individuals21 assailed the September
Resolution of the Ombudsman finding no probable cause to hold respondents criminally liable. The
case remains pending with this Court as of this date.
COMELEC's Motion for Leave to Use ACMs in the ARMM Elections
To muddle the issue, Comelec keeps on saying that the "winning" bidder presented a lower
The COMELEC filed a motion with this Court requesting permission to use the 1,991 ACMs price than the only other bidder. It ignored the fact that the whole bidding process was VOID
previously delivered by respondent MPEI, for the ARMM elections, then slated to be held on 8 and FRAUDULENT. How then could there have been a "winning" bid?22 (Emphasis supplied)
August 2005. In its motion, the COMELEC claimed that automation of the ARMM elections was THE INSTANT CASE
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. 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
This Court denied the Motion in Our 2005 Resolution. We ruled that allowing the use of the ACMs instant case arose
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 Upon the finality of the declaration of nullity of the automation contract, respondent MPEI filed a
prohibited from doing under the 2004 Decision. This Court also ruled that the grant of the motion Complaint for Damages before the RTC Makati, arguing that, notwithstanding the nullification of the
would bar or jeopardize the recovery of government funds paid to respondents. Considering that the automation contract, the COMELEC was still bound to pay the amount of P200,165,681.89. This
COMELEC did not present any evidence to prove that the defects had been addressed, We held amount represented the difference between the value of the ACMs and the support services
that the use of the ACMs and the software would expose the ARMM elections to the same electoral delivered on one hand, and on the other, the payment previously made by the
ills pointed out in the 2004 Decision. COMELEC.23chanrobleslaw

Atty. Macalintal's Omnibus Motion Petitioner filed its Answer with Counterclaim24 and argued that respondent MPEI could no longer
recover the unpaid balance from the void automation contract, since the payments made were
Atty. Romulo Macalintal sought to reopen the 2004 case in order that he may be allowed to illegal disbursements of public funds. It contended that a null and void contract vests no rights and
intervene as a taxpayer and citizen. His purpose for intervening was to seek another testing of the creates no obligations, and thus produces no legal effect at all. Petitioner further posited that
ACMs with the ultimate objective of allowing the COMELEC to use them, this time for the 2007 respondent MPEI could not hinge its claim upon the principles of unjust enrichment and quasi-
national elections. contract, because such presume that the acts by which the authors thereof become obligated to
each other are lawful, which was not the case herein.25cralawredchanrobleslaw
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 By way of a counterclaim, petitioner demanded from respondents the return of the payments made
reliefs sought. We in fact found that, after Our determination that the ACMs had failed to pass pursuant to the automation contract.26 It argued that individual respondents, being the incorporators
legally mandated technical requirements in 2004, they were simply put in storage. The ACMs had of MPEI, likewise ought to be impleaded and held accountable for MPEI's liabilities. The creation of
remained idle and unused since the last evaluation, at which they failed to hurdle crucial tests. MPC was, after all, merely an ingenious scheme to feign eligibility to bid. 27chanrobleslaw
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, Pursuant to Section 1(d) of Rule 57 of the Rules of Court, petitioner prayed for the issuance of a writ
considering that nothing was done to correct the flaws that had been previously underscored in the of preliminary attachment against the properties of MPEI and individual respondents. The
2004 Decision. We held that granting the motion would be tantamount to rendering the 2004 application was grounded upon the fraudulent misrepresentation of respondents as to their eligibility
Decision totally ineffective and nugatory. to participate in the bidding for the COMELEC automation project and the failure of the ACMs to
comply with mandatory technical requirements.28chanrobleslaw
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 Subsequently, the trial court denied the prayer for the issuance of a writ of preliminary
rendered nonsensical. Thus:ChanRoblesVirtualawlibrary attachment,29 ruling that there was an absence of factual allegations as to how the fraud was
We stress once again that the Contract entered into by the Comelec for the supply of the ACMs was actually committed.
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 The allegations of petitioner were found to be unreliable, as the latter merely copied from the
addition, the poll body entered into the Contract with inexplicable haste, without adequately declarations of the Supreme Court in Information Technology Foundation of the Phils, v.
checking and observing mandatory financial, technical and legal requirements. As explained in our COMELEC the factual allegations of MPEI's lack of qualification and noncompliance with bidding
Decision, Comelec's gravely abusive acts consisted of the following: 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
chanRoblesvirtualLawlibraryx x x x automation contract. It was likewise held that there was no evidence that respondents harbored a

9
preconceived plan not to comply with the obligation; neither was there any evidence that MPEI's ACMs.39 It directed petitioner to present proof of respondents' intent to defraud COMELEC during
corporate fiction was used to perpetrate fraud. Thus, it found no sufficient basis to pierce the veil of the execution of the automation contract.40 The CA likewise emphasized that the Joint Affidavit
corporate fiction or to cause the attachment of the properties owned by individual respondents. 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
Petitioner moved to set aside the trial court's Order denying the writ of attachment, 30 but its motion justify the piercing of the corporate veil of respondent MPEI. 42chanrobleslaw
was denied.31chanrobleslaw
The CA further clarified that the 2004 Decision did not make a definite finding as to the identities of
Appeal before the CA and the First Decision 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
Aggrieved, petitioner filed an appeal with the CA, arguing that the trial court had acted with grave attachment should issue, the illegal, imprudent and hasty acts in awarding the automation contract
abuse of discretion in denying the application for a writ of attachment. 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
As mentioned earlier, the CA in its First Decision32 reversed and set aside the trial court's Orders with respondent MPEI, the company that joined the bidding without meeting the eligibility
and ruled that there was sufficient basis for the issuance of a writ of attachment in favor of requirement.44chanrobleslaw
petitioner.
Rule 45 Petition before Us
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 Consequently, petitioner filed the instant Rule 45 Petition,45 arguing that the CA erred in ordering
trial court erred in disregarding the following findings of fact, which remained unaltered and the remand of the case to the trial court for the reception of evidence to determine the presence of
unreversed: (1) COMELEC bidding rules provided that the eligibility and capacity of a bidder may be fraud. Petitioner contends that this Court's 2004 Decision was sufficient proof of the fraud committed
proved through financial documents including, among others, audited financial statements for the by respondents in the execution of the voided automation contract.46Respondents allegedly
last three years; (2) MPEI was incorporated only on 27 February 2003, or 11 days prior to the committed fraud by securing the automation contract, although MPEI was not qualified to bid in the
bidding itself; (3) in an attempt to disguise its ineligibility, MPEI participated in the bidding as lead first place.47 Their claim that the members of MPC bound themselves to the automation contract
company of MPC, a putative consortium, and submitted the incorporation papers and financial was an indication of bad faith as the contract was executed by MPEI alone. 48 Neither could they
statements of the members of the consortium; and (4) no proof of the joint venture agreement, deny that the software submitted during the bidding process was not the same one that would be
consortium agreement, memorandum of agreement, or business plan executed among the used on election day.49 They could not dissociate themselves from telltale signs such as purportedly
members of the purported consortium was ever submitted to the COMELEC.33chanrobleslaw supplying software that later turned out to be non-existent.50chanrobleslaw

According to the CA, the foregoing were glaring indicia or badges of fraud, which entitled petitioner In their respective Comments, respondents Willy Yu, Bonnie Yu, Enrique Tansipek, and Rosita
to the issuance of the writ. It further ruled that there was sufficient reason to pierce the corporate Tansipek counter51 that this Court never ruled that individual respondents were guilty of any fraud or
veil of MPEI. Thus, the CA allowed the attachment of the properties belonging to both MPEI and bad faith in connection with the automation contract, and that it was incumbent upon petitioner to
individual respondents.34 The CA likewise ruled that even if the COMELEC committed grave abuse present evidence on the allegations of fraud to justify the issuance of the writ. 52They likewise argue
of discretion in capriciously disregarding the rules on public bidding, this should not preclude or that the 2004 Decision cannot be invoked against them, since petitioner and MPEI were co-
deter petitioner from pursuing its claim against respondents. After all, the State is not estopped by respondents in the 2004 case and not adverse parties therein. 53Respondents further contend that
the mistake of its officers and employees.35chanrobleslaw the allegations of fraud are belied by their actual delivery of 1,991 units of ACMs to the COMELEC,
which they claim is proof that they never had any intention to evade performance. 54chanrobleslaw
Respondents moved for reconsideration36 of the First Decision of the CA.
They further allege that this Court, in its 2004 Decision, even recognized that it had not found any
Motion for Reconsideration before the CA and the Amended Decision 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
Upon review, the CA reconsidered its First Decision37 and directed the remand of the case to the Act.55chanrobleslaw
RTC Makati for the reception of evidence of allegations of fraud and to determine whether
attachment should necessarily issue.38chanrobleslaw 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
The CA explained in its Amended Decision that respondents could not be considered to have likewise argue that they were not parties to the 2004 case; thus, the 2004 Decision thereon is not
fostered a fraudulent intent to dishonor their obligation, since they had delivered 1,991 units of binding on them.57 Individual respondents likewise argue that the findings of fact in the 2004

10
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. 59Thereafter, petitioner
filed its Reply to the Comments.60chanrobleslaw
Based on the submissions of both parties, the following issues are presented to this Court for
resolution:
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 cralawlawlibrary
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
11
prove that, at the time of the execution of the automation contract, there was fraud on the part of
respondents that justified the issuance of a writ of attachment. Respondents, however, argue the
contrary. They claim that fraud had not been sufficiently established by petitioner.
We rule in favor of petitioner. Fraud on the part of respondents MPEI and Willy, as well as of the
other individual respondents — Bonnie, Enrique, Rosita, Pedro, Johnson, Bernard, and Lauriano —
has been established.
A writ of preliminary attachment is a provisional remedy issued upon the order of the court where an
action is pending. Through the writ, the property or properties of the defendant may be levied upon
and held thereafter by the sheriff as security for the satisfaction of whatever judgment might be
secured by the attaching creditor against the defendant.61 The provisional remedy of attachment is
available in order that the defendant may not dispose of the property attached, and thus prevent the
satisfaction of any judgment that may be secured by the plaintiff from the former. 62chanrobleslaw
The purpose and function of an attachment or garnishment is twofold. First, it seizes upon property
of an alleged debtor in advance of final judgment and holds it subject to appropriation, thereby
preventing the loss or dissipation of the property through fraud or other means. Second, it subjects
the property of the debtor to the payment of a creditor's claim, in those cases in which personal
service upon the debtor cannot be obtained.63 This remedy is meant to secure a contingent lien on
the defendant's property until the plaintiff can, by appropriate proceedings, obtain a judgment and
have the property applied to its satisfaction, or to make some provision for unsecured debts in
cases in which the means of satisfaction thereof are liable to be removed beyond the jurisdiction, or
improperly disposed of or concealed, or otherwise placed beyond the reach of
creditors.64chanrobleslaw
Petitioner relied upon Section 1(d), Rule 57 of the Rules of Court as basis for its application for a
writ of preliminary attachment. This provision states:ChanRoblesVirtualawlibrary
Section 1. Grounds upon which attachment may issue. At the commencement of the action or at
any time before entry of judgment, a plaintiff or any proper party may have the property of the
adverse party attached as security for the satisfaction of any judgment that may be recovered in the
following cases:
chanRoblesvirtualLawlibrary
xxxx
(d) In an action against a party who has been guilty of a fraud in contracting the debt or incurring
the obligation upon which the action is brought, or in theperformance thereof. (Emphasis supplied)
For a writ of preliminary attachment to issue under the above-quoted rule, the applicant must
sufficiently show the factual circumstances of the alleged fraud. 65 In Metro, Inc. v. Lara's Gift and
Decors, Inc.,66 We explained:ChanRoblesVirtualawlibrary
To sustain an attachment on this ground, it must be shown that the debtor in contracting the debt or
incurring the obligation intended to defraud the creditor. The fraud must relate to the execution of
the agreement and must have been the reason which induced the other party into giving
consent which he would not have otherwise given. To constitute a ground for attachment in
Section 1(d), Rule 57 of the Rules of Court, fraud should be committed upon contracting the
obligation sued upon. A debt is fraudulently contracted if at the time of contracting it the debtor has bidder was Mega Pacific Consortium (MPC), of which MPEI was but a part. As proof thereof, they
a preconceived plan or intention not to pay, as it is in this case. x x x. 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
The applicant for a writ of preliminary attachment must sufficiently show the factual circumstances
payment for the bidding documents, as proof that it was the "consortium" that participated in the
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) bidding process.
An amendment to the Rules of Court added the phrase "in the performance thereof" to include
We do not agree. The March 7, 2003 letter, signed by only one signatory — "Willy U. Yu, President,
within the scope of the grounds for issuance of a writ of preliminary attachment those instances
Mega Pacific eSolutions, Inc., (Lead Company/Proponent) For: Mega Pacific Consortium" — and
relating to fraud in the performance of the obligation. 67chanrobleslaw
without any further proof, does not by itself prove the existence of the consortium. It does not show
Fraud is a generic term that is used in various senses and assumes so many different degrees and that MPEI or its president have been duly pre-authorized by the other members of the putative
forms that courts are compelled to content themselves with comparatively few general rules for its 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.
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
Neither does an official receipt issued to MPC, acknowledging payment for the bidding documents,
presence or absence of fraud. In fact, the fertility of man's invention in devising new schemes of
constitute proof that it was the purported consortium that participated in the bidding. Such receipts
fraud is so great that courts have always declined to define it, thus, reserving for themselves the
liberty to deal with it in whatever form it may present itself. 68chanrobleslaw are issued by cashiers without any legally sufficient inquiry as to the real identity or existence of the
supposed payor.
Fraud may be characterized as the voluntary execution of a wrongful act or a wilful omission, while
To assure itself properly of the due existence (as well as eligibility and qualification) of the putative
knowing and intending the effects that naturally and necessarily arise from that act or omission. 69 In
consortium, Comelec's BAC should have examined the bidding documents submitted on behalf of
its general sense, fraud is deemed to comprise anything calculated to deceive—including all acts
MPC. They would have easily discovered the following fatal flaws.
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 x x x x
for the purpose of securing an advantage over another by false suggestions or by suppression of
The Eligibility Envelope was to contain legal documents such as articles of incorporation, x x x to
truth; and it includes all surprise, trick, cunning, dissembling, and any other unfair way by which
establish the bidder's financial capacity.
another is cheated.71chanrobleslaw

While fraud cannot be presumed, it need not be proved by direct evidence and can well be inferred In the case of a consortium or joint venture desirous of participating in the bidding, it goes without
from attendant circumstances.72 Fraud by its nature is not a thing susceptible of ocular observation 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
or readily demonstrable physically; it must of necessity be proved in many cases by inferences from
some other instrument of similar import — establishing the due existence, composition and scope of
circumstances shown to have been involved in the transaction in question. 73chanrobleslaw
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 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
In the instant case, no such instrument was submitted to Comelec during the bidding
ways that were enumerated earlier and discussed below:
process. x x x
chanRoblesvirtualLawlibraryA. Respondent MPEI had perpetrated a scheme against petitioner
x x x x
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
However, there is no sign whatsoever of any joint venture agreement, consortium
to bid in the first place.
agreement, memorandum of agreement, or business plan executed among the members of
the purported consortium.
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
The only logical conclusion is that no such agreement was ever submitted to the Comelec
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 for its consideration, as part of the bidding process.
incorporated only on February 27, 2003, or 11 days prior to the bidding itself. Rather, the

12
It thus follows that, prior the award of the Contract, there was no documentary or other basis Sufficiency of the Four Agreements
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 Instead of one multilateral agreement executed by, and effective and binding on, all the five
exact relationships between and among these firms; their diverse roles, undertakings and "consortium members" — as earlier claimed by Commissioner Tuason in open court — it turns out
prestations, if any, relative to the prosecution of the project, the extent of their respective that what was actually executed were four (4) separate and distinct bilateral
investments (if any) in the supposed consortium or in the project; and the precise nature and extent Agreements. Obviously, Comelec was furnished copies of these Agreements only after the
of their respective liabilities with respect to the contract being offered for bidding. And apart from the bidding process had been terminated, as these were not included in the Eligibility
self-serving letter of March 7, 2003, there was not even any indication that MPEI was the lead Documents. x x x
company duly authorized to act on behalf of the others.
x x x x
x x x x
At this point, it must be stressed most vigorously that the submission of the four bilateral
Hence, had the proponent MPEI been evaluated based solely on its own experience, financial Agreements to Comelec after the end of the bidding process did nothing to eliminate the
and operational track record or lack thereof, it would surely not have qualified and would grave abuse of discretion it had already committed on April 15, 2003.
have been immediately considered ineligible to bid, as respondents readily admit.
Deficiencies Have Not Been "Cured"
x x x x
In any event, it is also claimed that the automation Contract awarded by Comelec incorporates all
At this juncture, one might ask: What, then, if there are four MOAs instead of one or none at all? documents executed by the "consortium" members, even if these documents are not referred to
Isn't it enough that there are these corporations coming together to carry out the automation therein. x x x
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 x x x x
joint venture. x x x
Thus, it is argued that whatever perceived deficiencies there were in the supplementary contracts -
x x x x 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
The problem is not that there are four agreements instead of only one. The problem is that Comelec prevented from arising as a result of the above-quoted provisions, from which it can be immediately
never bothered to check. It never based its decision on documents or other proof that would established that each of the members of MPC assumes the same joint and several liability as the
concretely establish the existence of the claimed consortium or joint venture or agglomeration. other members.

x x x x 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
True, copies of financial statements and incorporation papers of the alleged "consortium" members the alleged consortium, MPC. To repeat, it is MPEI - not MPC - that is a party to the
were submitted. But these papers did not establish the existence of a consortium, as they could Contract. Nowhere in that Contract is there any mention of a consortium or joint venture, of
have been provided by the companies concerned for purposes other than to prove that they were members thereof, much less of joint and several liability. Supposedly executed sometime in
part of a consortium or joint venture. 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
x x x x 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;
In brief, despite the absence of competent proof as to the existence and eligibility of the nothing whatsoever is said about any consortium or joint venture or partnership.
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 xxxx
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 Eligibility of a Consortium Based on the Collective Qualifications of Its Members
contained in its RFP. Therein lies Comclec's grave abuse of discretion.
Respondents declare that, for purposes of assessing the eligibility of the bidder, the members of

13
MPC should be evaluated on a collective basis. Therefore, they contend, the failure of MPEI to taken together, constitute badges of fraud that We simply cannot ignore. MPC was considered an
submit financial statements (on account of its recent incorporation) should not by itself illegitimate entity, because its existence as a joint venture had not been established. Notably, the
disqualify MPC, since the other members of the "consortium" could meet the criteria set out essential document/s that would have shown its eligibility as a joint venture/consortium were not
in the RFP. 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
x x x x 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
Unfortunately, this argument seems to assume that the "collective" nature of the undertaking of the envelope?
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 Likewise notable is the fact that these supposed agreements, allegedly among the supposed
consortium; and to be evaluated accordingly on the basis of the members' collective qualifications consortium members, were belatedly provided to the COMELEC after the bidding process had been
when, in fact, the evidence before the Court suggest otherwise. 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
x x x x parties in the first place, but were actually individual agreements executed by each member of the
supposed consortium with respondent MPEI.
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 - More startling to the dispassionate mind is the incongruence between the supposed actual bidder
but by MPEI, period. The said Contract contains no mention whatsoever of any consortium MPC, on one hand, and, on the other, respondent MPEI, which executed the automation contract.
or members thereof. This fact alone seems to contradict all the suppositions about a joint Significantly, respondent MPEI was not even eligible and qualified to bid in the first place; and yet,
undertaking that would normally apply to a joint venture or consortium: that it is a the automation contract itself was executed and signed singly by respondent MPEI, not on behalf of
commercial enterprise involving a community of interest, a sharing of risks, profits and the purported bidder MPC, without any mention whatsoever of the members of the supposed
losses, and so on. consortium.

x x x x
To the Court, this strange and beguiling arrangement of MPEI with the other companies does not
qualify them to be treated as a consortium or joint venture, at least of the type that government
agencies like the Comelec should be dealing with. With more reason is it unable to agree to the
proposal to evaluate the members of MPC on a collective basis. (Emphases supplied)
These findings found their way into petitioner's application for a writ of preliminary attachment, 75 in
which it claimed the following as bases for fraud: (1) respondents committed fraud by securing the
election automation contract and, in order to perpetrate the fraud, by misrepresenting the actual
bidder as MPC and MPEI as merely acting on MPC's behalf; (2) while knowing that MPEI was not
qualified to bid for the automation contract, respondents still signed and executed the contract; and
(3) respondents acted in bad faith when they claimed that they had bound themselves to the
automation contract, because it was not executed by MPC—or by MPEI on MPC's behalf—but by
MPEI alone.76chanrobleslaw
We agree with petitioner that respondent MPEI committed fraud by securing the election automation
contract; and, in order to perpetrate the fraud, by misrepresenting that the actual bidder was MPC
and not MPEI, which was only acting on behalf of MPC. We likewise rule that respondent MPEI has
defrauded petitioner, since the former still executed the automation contract despite knowing that it
was not qualified to bid for the same.
The established facts surrounding the eligibility, qualification and existence of MPC — and of MPEI
for that matter — and the subsequent execution of the automation contract with the latter, when all
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. 78chanrobleslaw
Fraud has been defined to include an inducement through insidious machination. Insidious
machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists where
the party, with intent to deceive, conceals or omits to state material facts and, by reason of such
omission or concealment, the other party was induced to give consent that would not otherwise
have been given.79chanrobleslaw

14
One form of inducement is covered within the scope of the crime of estafa under Article 315, bid as a joint venture. The Invitation to Bid, as quoted in our 2004 Decision, could not have been
paragraph 2, of the Revised Penal Code, in which, any person who defrauds another by using any clearer when it stated that only bids from qualified entities, such as a joint venture, would be
fictitious name, or falsely pretends to possess power, influence, qualifications, property, credit, entertained:ChanRoblesVirtualawlibrary
agency, business or imaginary transactions, or by means of similar deceits executed prior to or INVITATION TO APPLY FOR ELIGIBILITY AND TO BID
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, The Commission on Elections (COMELEC), pursuant to the mandate of Republic Act Nos. 8189
in this wise:ChanRoblesVirtualawlibrary and 8436, invites interested offerers, vendors, suppliers or lessors to apply for eligibility and to bid
What needs to be determined therefore is whether or not the element of defraudation by means of for the procurement by purchase, lease, lease with option to purchase, or otherwise, supplies,
deceit has been established beyond reasonable doubt. 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
In the case of People v. Menil, Jr., the Court has defined fraud and deceit in this consolidation of votes, and (c) electronic transmission of election results, with an approved budget
wise:ChanRoblesVirtualawlibrary of TWO BILLION FIVE HUNDRED MILLION (Php2,500,000,000) Pesos.
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 Only bids from the following entities shall be entertained:
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 x x x x
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 d. Manufacturers, suppliers and/or distributors forming themselves into a joint venture, i.e., a
unfair way by which another is cheated. On the other hand, deceit is the false representation of group of two (2) or more manufacturers, suppliers and/or distributors that intend to be jointly
a matter of fact, whether by words or conduct, by false or misleading allegations, or by and severally responsible or liable for a particular contract, provided that Filipino ownership
concealment of that which should have been disclosed which deceives or is intended to thereof shall be at least sixty percent (60%); and cralawlawlibrary
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 e. Cooperatives duly registered with the Cooperatives Development Authority. 86 (Emphases
complaining witnesses to have the capacity to send them to Italy for employment, even as they did supplied)
not have the authority or license for the purpose. It was such misrepresentation that induced the No reasonable mind would argue that documents showing the very existence of a joint venture need
complainants to part with their hard-earned money for placement and medical fees. Both accused- not be included in the bidding envelope showing its existence, qualification, and eligibility to
appellants were criminally held liable for estafa. 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
In American jurisprudence, fraud may be predicated on a false introduction or project.87chanrobleslaw
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 As found by this Court in its 2004 Decision, it appears that the documents that were submitted after
she forged their name on charge slips as revealed by the exhibits of the plaintiff. The sale of the the bidding, which respondents claimed would prove the existence of the relationship among the
merchandise was induced by these representations, resulting in injury to the plaintiff. 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,
In Raser v. Moomaw,84 it was ruled that the essential elements necessary to constitute actionable considering that each of the four different and separate bilateral Agreements was valid and binding
fraud and deceit were present in the complaint. It was alleged that, to induce plaintiff to procure a only between MPEI and the other contracting party, leaving the other "consortium" members total
loan, defendant introduced him to a woman who was falsely represented to be Annie L. Knowles of strangers thereto. Consequently, the other consortium members had nothing to do with one
Seattle, Washington, the owner of the property, and that plaintiff had no means of ascertaining her another, as each one dealt only with MPEI.88chanrobleslaw
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 Considering that they merely showed MPEI's individual agreements with the other supposed
client to make the loan, and had since been compelled to repay it. In the same case, the Court ruled members, these agreements confirm to our mind the fraudulent intent on the part of respondent
that false representations as to the identity of a person are actionable, if made to induce another to MPEI to deceive the relevant officials about MPC. The intent was to cure the deficiency of the
act thereon, and such other does so act thereon to his prejudice. 85chanrobleslaw 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
In this case, analogous to the fraud and deceit exhibited in the above-mentioned circumstances, bid proposals were opened on November 10, 1989. The basic rule in public bidding is that bids
respondent MPEI had no excuse not to be forthright with the documents showing MPC's eligibility to should be evaluated based on the required documents submitted before and not after the

15
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 According to respondents, it was only after the TWG and the DOST had conducted their separate
is the only safeguard to a fair, honest and competitive public bidding. 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.
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, The BAG, in its Report dated April 21, 2003, recommended that the Phase II project involving the
120 SCRA 112), that Nawasa properly rejected a bid of C & C Commercial to supply asbestos acquisition of automated counting machines be awarded to MPEI. x x x
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 x x x x
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 The BAC, however, also stated on page 4 of its Report: "Based on the 14 April 2003 report
bidders. (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
x x x x
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 Failure to Meet the Required Accuracy Rating
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 The first of the key requirements was that the counting machines were to have an accuracy rating of
TECHNICAL were subject to Rule IB 2.1 of the Implementing Rules and Regulations of P.D. 1594 in at least 99.9995 percent. The BAC Report indicates that both Mega Pacific and TIM failed to
the preparation of bids, bid bonds, and pre-qualification statement and Rule IB 2.8 which states that meet this standard.
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. The key requirement of accuracy rating happens to be part and parcel of the Comelec's
355, Rollo) will not excuse compliance with such a simple and basic requirement in the public Request for Proposal (RFP). x x x
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 x x x x
fairness, good faith, and competitiveness in the public bidding process would be rendered
meaningless. (Emphases supplied) x x x Whichever accuracy rating is the right standard — whether 99.995 or 99.9995 percent — the
All these circumstances, taken together, reveal a scheme on the part of respondent MPEI to fact remains that the machines of the so-called "consort him" failed to even reach the lesser of the
perpetrate fraud against the government. The purpose of the scheme was to ensure that MPEI, an two. On this basis alone, it ought to have been disqualified and its bid rejected outright.
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 At this point, the Court stresses that the essence of public bidding is violated by the practice
its cavalier disregard of its participation in the now voided automation contract. 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
B. Fraud on the part of respondent MPEI was further shown by the fact that despite the been award.[sic] Such scheme, which discourages the entry of prospective bona
failure of its ACMs to pass the tests conducted by the DOST, respondent still acceded to fide bidders, is in fact a sure indication of fraud in the bidding, designed to eliminate fair
being awarded the automation contract. competition. Certainly, if no bidder meets the mandatory requirements, standards or
specifications, then no award should be made and a failed bidding declared.
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 x x x x
relation thereto:ChanRoblesVirtualawlibrary
After respondent "consortium" and the other bidder, TIM, had submitted their respective bids on Failure of Software to Detect Previously Downloaded Data
March 10, 2003, the Comelec's BAC — through its Technical Working Group (TWG) and the DOST
— evaluated their technical proposals. 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
x x x x be able to detect previously downloaded precinct results and to prevent these from being

16
entered again into the counting machine. This same deficiency on the part of both bidders The above-mentioned findings were further echoed by this Court in its 2006 Resolution with a
reappears on page 7 of the BAC Report, as a result of the recurrence of their failure to meet the categorical conclusion that the bidding process was void and fraudulent. 91chanrobleslaw
said key requirement.
Again, these factual findings found their way into the application of petitioner for a writ of preliminary
That the ability to detect previously downloaded data at different canvassing or consolidation levels attachment,92 as it claimed that respondents could not dissociate themselves from their telltale acts
is deemed of utmost importance can be seen from the fact that it is repeated three times in the RFP. of supplying defective machines and nonexistent software. 93 The latter offered no defense in
x x x. relation to these claims.

Once again, though, Comelec chose to ignore this crucial deficiency, which should have been a We see no reason to deviate from our finding of fraud on the part of respondent MPEI in the 2004
cause for the gravest concern. x x x. 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
xxxx circumstances reveal its ploy to gain undue advantage over the other bidders in general, even to the
extent of cheating the government.
Inability to Print the Audit Trail
The word "bidding" in its comprehensive sense means making an offer or an invitation to
But that grim prospect is not all. The BAC Report, on pages 6 and 7, indicate that the ACMs of both prospective contractors, whereby the government manifests its intention to make proposals for the
bidders were unable to print the audit trail without any loss of data. In the case of MPC, the audit purpose of securing supplies, materials, and equipment for official business or public use, or for
trail system was "not yet incorporated" into its ACMs. 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
x x x x regulation of the matter, which excludes any of these factors, destroys the distinctive character of
the system and thwarts the purpose of its adoption.95chanrobleslaw
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 In the instant case, We infer from the circumstances that respondent MPEI welcomed and allowed
purposes. Furthermore, the audit trail must be stored on the internal storage device and be the award of the automation contract, as it executed the contract despite the full knowledge that it
available on demand for future printing and verifying. On pages 30-31, the RFP also requires that had not met the mandatory requirements set forth in the RFP. Respondent acceded to and
the city/municipal canvassing system software be able to print an audit trail of the canvassing benefitted from the watering down of these mandatory requirements, resulting in undue advantage
operations, including therein such data as the date and time the canvassing program was started, in its favor. The fact that there were numerous mandatory requirements that were simply set aside
the log-in of the authorized users (the identity of the machine operators), the date and time the to pave the way for the award of the automation contract does not escape the attention of this
canvass data were downloaded into the canvassing system, and so on and so forth. On page 33 of Court. Respondent MPEI, through respondent Willy, signed and executed the automation contract
the RFP, we find the same audit trail requirement with respect to the provincial/district canvassing with COMELEC. It is therefore preposterous for respondent argue that it was a "passive participant"
system software; and again on pages 35-36 thereof, the same audit trail requirement with respect to in the whole bidding process.
the national canvassing system software.
We reject the CA's denial of petitioner's plea for the ancillary remedy of preliminary attachment,
x x x x 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
The said provision which respondents have quoted several times, provides that ACMs are to deducible from the 2004 Decision and further upheld in the 2006 Resolution. It was incongruous,
possess certain features divided into two classes: those that the statute itself therefore, for the CA to have denied the application for a writ of preliminary attachment, when the
considers mandatory and other features or capabilities that the law deems optional. Among those evidence on record was the same that was used to demonstrate the propriety of the issuance of the
considered mandatory are "provisions for audit trails"! x x x. 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
In brief, respondents cannot deny that the provision requiring audit trails is indeed not be right for this Court to ignore these illegal transactions, as to do so would be tantamount to
mandatory, considering the wording of Section 7 of RA 8436. Neither can Respondent Comelec abandoning its constitutional duty of safeguarding public interest.
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 II.
the Contract to private respondent, thereby violating the very law it was supposed to Application of the piercing doctrine justifies the issuance of a writ of preliminary attachment
implement.90 (Emphases supplied) over the properties of the individual respondents.

17
 Overly Narrow Specifications
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, The World Bank's Fraud and Corruption Awareness Handbook: A Handbook for Civil Servants
they are not bound by the judgment rendered by this Court. 97 They claim that their fundamental right Involved in Public Procurement, (Handbook) identifies an assortment of fraud and corruption
to due process would be violated if their properties were to be attached for a purported corporate indicators and relevant schemes in public procurement.101 One of the schemes recognized by the
debt on the basis of a court ruling in a case in which they were not given the right or opportunity to Handbook is rigged specifications:ChanRoblesVirtualawlibrary
be heard.98chanrobleslaw 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
We cannot subscribe to this argument. In the first place, it could not be reasonably expected that scrutiny. For example, specifications that are too narrow can be used to exclude other qualified
individual respondents would be impleaded in the 2004 case. As admitted by respondents, the bidders or justify improper sole source awards. Unduly vague or broad specifications can allow
issues resolved in the 2004 Decision were limited to the following: (1) whether to declare Resolution an unqualified bidder to compete or justify fraudulent change orders after the contract is awarded.
No. 6074 of the COMELEC null and void; (2) whether to enjoin the implementation of any further Sometimes, project officials will go so far as to allow the favored bidder to draft the
contract that may have been entered into by COMELEC with MPC or MPEI; and (3) whether to specifications.102chanroblesvirtuallawlibrary
compel COMELEC to conduct a rebidding of the project. To implead individual respondents then In Our 2004 Decision, We identified a red flag of rigged bidding in the form of overly narrow
was improper, considering that the automation contract was entered into by respondent MPEI. This specifications. As already discussed, the accuracy requirement of 99.9995 percent was set up by
Court even acknowledged this fact by directing that the liabilities of persons responsible for the COMELEC bidding rules. This Court recognized that this rating was "too high and was a sure
nullity of the contract be determined in another appropriate proceeding and by directing the OSG to indication of fraud in the bidding, designed to eliminate fair competition."103Indeed, "the
undertake measures to protect the interests of the government. 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
At any rate, individual respondents have been fully afforded the right to due process by being award(ed)."104chanrobleslaw
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, Unjustified Recommendations and Unjustified Winning Bidders
remains vulnerable to the piercing of its corporate veil.
Questionable evaluation in a Bid Evaluation Report (BER) is an indicator of bid rigging. The
A. There are red flags indicating that MPEI was used to perpetrate the fraud against Handbook expounds:ChanRoblesVirtualawlibrary
petitioner, thus allowing the piercing of its corporate veil. 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
Petitioner seeks the issuance of a writ of preliminary attachment over the personal assets of the implementing agency its BER, which describes the results and the process by which the
individual respondents, notwithstanding the doctrine of separate juridical personality. 99 It invokes the BEC has evaluated the bids received. The BER may include a number of indicators of bid
use of the doctrine of piercing the corporate veil, to which the canon of separate juridical personality rigging, e.g., questionable disqualifications, and unusual bid
is vulnerable, as a way to reach the personal properties of the individual respondents. Petitioner patterns.105chanroblesvirtuallawlibrary
paints a picture of a sham corporation set up by all the individual respondents for the purpose of The Handbook lists unjustified recommendations and unjustified winning bidders as red flags of a
securing the automation contract. rigged bidding.106chanrobleslaw

We agree with petitioner. 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
Veil-piercing in fraud cases requires that the legal fiction of separate juridical personality is used for that actually participated in the bidding process, but it was not qualified to be a bidder in the first
fraudulent or wrongful ends.100 For reasons discussed below, We see red flags of fraudulent place. Moreover, its ACMs failed the accuracy requirement set by COMELEC. Yet, MPC — the
schemes in public procurement, all of which were established in the 2004 Decision, the totality of nonentity — obtained a favorable recommendation from the BAC, and the automation contract was
which strongly indicate that MPEI was a sham corporation formed merely for the purpose of awarded to the former.
perpetrating a fraudulent scheme.
Failure to Meet Contract Terms
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 Failure to meet the terms of a contract is regarded as a fraud by the
company. We shall discuss each in detail. Handbook:ChanRoblesVirtualawlibrary

18
Scheme: Failure to meet contract terms. Firms may deliberately fail to comply with contract invitation to bid and the date of the bidding (11 days) provides a strong indicium of the intent to use
requirements. The contractor will attempt to conceal such actions often by falsifying or forging the corporate vehicle for fraudulent purposes. This proximity unmistakably indicates that the
supporting documentation and bill for the work as if it were done in accordance with specifications. automation contract served as motivation for the formation of MPEI: a corporation had to be
In many cases, the contractors must bribe inspection or project personnel to accept the substandard organized so it could participate in the bidding by claiming to be an agent of a pretended joint
goods or works, or supervision agents are coerced to approve substandard work. x x venture.
x107chanroblesvirtuallawlibrary
As mentioned earlier, this Court already found the ACMs to be below the standards set by the The timing of the formation of MPEI did not escape the scrutiny of Justice Angelina Sandoval-
COMELEC. We reiterated their noncompliant status in Our 2005 and 2006 Resolutions. Gutierrez, who made this observation in her Concurring Opinion in the 2004
Decision:ChanRoblesVirtualawlibrary
As early as 2005, when the COMELEC sought permission from this Court to utilize the ACMs in the At this juncture, it bears stressing that MPEI was incorporated only on February 27, 2003 as
then scheduled ARMM elections, We declared that the proposed use of the machines would expose evidenced by its Certificate of Incorporation. This goes to show that from the time the COMELEC
the ARMM elections to the same dangers of massive electoral fraud that would have been inflicted issued its Invitation to Bid (January 28, 2003) and Request for Proposal (February 17, 2003) up to
by the projected automation of the 2004 national elections. We based this pronouncement on the the time it convened the Pre-bid Conference (February 18, 2003), MPEI was literally a non-existent
fact that the COMELEC failed to show that the deficiencies had been cured.108 Yet again, this entity. It came into being only on February 27, 2003 or eleven (11) days prior to the submission of
Court in 2006 blocked another attempt to use the ACMs, this time for the 2007 elections. We its bid, i.e. March 10, 2003. This poses a legal obstacle to its eligibility as a bidder. The
reiterated that because the ACMs had merely remained idle and unused since their last evaluation, Request for Proposal requires the bidder to submit financial documents that will establish to the
in which they failed to hurdle the crucial tests, then their defects and deficiencies could not have BAC's satisfaction its financial capability which include:ChanRoblesVirtualawlibrary
been cured by then.109chanrobleslaw (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
Based on the foregoing, the ACMs delivered were plagued with defects that made them fail the manufacture and supply of Goods called for and a statement or record of volumes of sales;
requirements set for the automation project.
(2) Balance Sheet;
Shell or fictitious company
(3) Income Statement; and cralawlawlibrary
The Handbook regards a shell or fictitious company as a "serious red flag," a concept that it
elaborates upon:ChanRoblesVirtualawlibrary (4) Statement of Cash Flow.
Fictitious companies are by definition fraudulent and may also serve as fronts for government As correctly pointed out by petitioners, how could MPEI comply with the above requirement of
officials. The typical scheme involves corrupt government officials creating a fictitious company that audited financial statements for the last three (3) calendar years if it came into existence only eleven
will serve as a "vehicle" to secure contract awards. Often, the fictitious—or ghost— company will (11) days prior to the bidding?
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. 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
Shell companies have no significant assets, staff or operational capacity. They pose a serious red capabilities and long time existence of the alleged members of the MP CONSORTIUM, namely,
flag as a bidder on public contracts, because they often hide the interests of project or government Election.Com, WeSolv, SK CeC, ePLDT and Oracle. It wants this Court to believe that it is MP
officials, concealing a conflict of interest and opportunities for money laundering. Also, by CONSORTIUM who was actually dealing with the COMELEC and that its (MPEI) participation is
definition, they have no experience.110chanroblesvirtuallawlibrary merely that of a "lead company and proponent" of the joint venture. This is hardly convincing. For
MPEI qualifies as a shell or fictitious company. It was nonexistent at the time of the invitation to bid; one, the contract for the supply and delivery of ACM was between COMELEC and MPEI, not MP
to be precise, it was incorporated only 11 days before the bidding. It was a newly formed CONSORTIUM. As a matter of fad, there cannot be found in the contract any reference to the MP
corporation and, as such, had no track record to speak of. 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.
Further, MPEI misrepresented itself in the bidding process as "lead company" of the supposed joint Worse, MPEI cannot produce the agreement as to the "joint and several liability" of the alleged
venture. The misrepresentation appears to have been an attempt to justify its lack of experience. As members of the MP CONSORTIUM as required by this Court in its Resolution dated October 7,
a new company, it was not eligible to participate as a bidder. It could do so only by pretending that it 2003.111chanroblesvirtuallawlibrary
was acting as an agent of the putative consortium. Respondent MPEI was formed to perpetrate the fraud against petitioner.

The timing of the incorporation of MPEI is particularly noteworthy. Its close nexus to the date of the The totality of the red flags found in this case leads Us to the inevitable conclusion that MPEI was

19
nothing but a sham corporation formed for the purpose of defrauding petitioner. Its ultimate by corporate fiction. Such persons' individual liability shall now be determined with respect to the
objective was to secure the P1,248,949,088 automation contract. The scheme was to put up a matter at hand.
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. 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
Without the incorporation of MPEI, the defraudation of the government would not have been signature that appears on the voided contract. As far back as in the 2004 Decision, his participation
possible. The formation of MPEI paved the way for its participation in the bid, through its claim that it as a signatory' to the automation contract was already established:ChanRoblesVirtualawlibrary
was an agent of a supposed joint venture, its misrepresentations to secure the automation contract, The foregoing argument is unpersuasive. First, the contract being referred to, entitled "The
its misrepresentation at the time of the execution of the contract, its delivery of the defective ACMs, Automated Counting and Canvassing Project Contract," is between Comelec and MPEI, not the
and ultimately its acceptance of the benefits under the automation contract. 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
The foregoing considered, veil-piercing is justified in this case. 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
We shall next consider the question of whose assets shall be reached by the application of the president of MPEI (not for and on behalf of MPC), along with that of the Comelec chair. It
piercing doctrine. 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
B. Because all the individual respondents actively participated in the perpetration of the any consortium or joint venture or partnership. x x x (Emphasis supplied)
fraud against petitioner, their personal assets may be subject to a writ of preliminary That his signature appears on the automation contract means that he agreed and acceded to its
attachment by piercing the corporate veil. terms.116 His participation in the fraud involves his signing and executing the voided contract.

A corporation's privilege of being treated as an entity distinct and separate from the stockholders is The execution of the automation contract with a non-eligible entity and the subsequent award of the
confined to legitimate uses, and is subject to equitable limitations to prevent its being exercised for contract despite the failure to meet the mandatory requirements were "badges of fraud" in the
fraudulent, unfair, or illegal purposes.112 As early as the 19th century, it has been held procurement process that should have been recognized by the CA to justify the issuance of the writ
that:ChanRoblesVirtualawlibrary of preliminary attachment against the properties of respondent Willy.
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, With respect to the other individual respondents, petitioner, in its Answer with Counterclaim,
existing only in idea, is well understood, and not controverted by any one who pretends to accurate alleged:ChanRoblesVirtualawlibrary
knowledge on the subject. It has been introduced for the convenience of the company in making 30. Also, inasmuch as MPEI is in truth a mere shell corporation with no real assets in its name,
contracts, in acquiring property for corporate purposes, in suing and being sued, and to preserve incorporated merely to feign eligibility for the bidding of the automated contract when it in fact had
the limited liability of the stockholder by distinguishing between the corporate debts and property of none, to the great prejudice of the Republic, plaintiffs individual incorporators should likewise
the company and of the stockholders in their capacity as individuals. All fictions of law have been be made liable together with MPEI for the automated contract amount paid to and received by the
introduced for the purpose of convenience, and to subserve the ends of justice. It is in this latter. The following circumstances altogether manifest that the individual incorporators merely
sense that the maxim in fictione juris subsistit aequitasis used, and the doctrine of fictions cloaked themselves with the veil of corporate fiction to perpetrate a fraud and to eschew liability
applied. But when they are urged to an intent and purpose not within the reason and policy of therefor, thus:
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 chanRoblesvirtualLawlibraryx x x x
the end for which it was invented, but for every other purpose it may be contradicted." Johnson v.
Smith, 2 Burr, 962.113chanroblesvirtuallawlibrary
The main effect of disregarding the corporate fiction is that stockholders will be held personally f. From the time it was incorporated until today, MPEI has not complied with the reportorial
liable for the acts and contracts of the corporation, whose existence, at least for the purpose of the requirements of the Securities and Exchange Commission;
particular situation involved, is ignored.114chanrobleslaw

We have consistently held that when the notion of legal entity is used to defeat public convenience, g. Individual incorporators, acting fraudulently through MPEI, and in violation of the
justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of bidding rules, then subcontracted the automation contract to four (4) other
persons.115 Thus, considering that We find it justified to pierce the corporate veil in the case before corporations, namely: WeSolve Corporation, SK C&C, ePLDT and election.com, to comply
Us, MPEI must, perforce, be treated as a mere association of persons whose assets are unshielded with the capital requirements, requisite five (5)-year corporate standing and the technical

20

qualifications of the Request for Proposal;
x x x x117chanroblesvirtuallawlibrary
In response to petitioner's allegations, respondents Willy and Bonnie stated in their Reply and
Answer (Re: Answer with Counterclaim dated 28 June 2004):118
3.3 As far as plaintiff MPEI and defendants-in-counterclaim are concerned, they dealt with the
COMELEC with full transparency and in utmost good faith. All documents support its eligibility
to bid for the supply of the ACMs and their peripheral services, were submitted to the COMELEC for
its evaluation in full transparency. Pertinently, neither plaintiff MPEI nor any of its directors,
stockholders, officers or employees had any participation in the evaluation of the bids and eventual
choice of the winning bidder.119chanroblesvirtuallawlibrary
Respondents Johnson's and Bernard's denials were made in paragraphs 2.17 and 3.3 of their
Answer with Counterclaim to the Republic's Counterclaim, to wit:120
2.17 The erroneous conclusion of fact and law in paragraph 30 (f) and (g) of the Republic's answer
is denied, having been pleaded in violation of the requirement, that only ultimate facts arc to be
stated in the pleadings and they are falsehoods. The truth of the matter is that there could not have
been fraud, as these agreements were submitted to the COMELEC for its evaluation and
assessment, as to the qualification of the Consortium as a bidder, a showing of transparency in
plaintiffs dealings with the Republic.121chanrobleslaw
3.3 As far as plaintiff MPEI and defendants-in-counterclaim are concerned, they dealt with the
COMELEC with full transparency and in utmost good faith. All documents support its eligibility
to bid for the supply of the automated counting machines and its peripheral services, were
submitted to the COMELEC for its evaluation in full transparency. Pertinently, the plaintiff or any of
its directors, stockholders, officers or employees had no participation in the evaluation of the bids
and eventual choice of the winning bidder.122chanroblesvirtuallawlibrary
As regards Enrique and Rosita, the relevant paragraphs in the Answer with Counterclaim to the
Republic's Counterclaim 123 are quoted below:ChanRoblesVirtualawlibrary
2.17. The erroneous conclusion of fact and law in paragraph 30 (F) and (G) of the Republic's
answer is denied, having been pleaded in violation of the requirement, that only ultimate facts are to
be stated in the pleadings and they are falsehoods. The truth of the matter is that there could not
have been fraud, as these agreements were submitted to the COMELEC for its evaluation and
assessment, as to the qualification of the Consortium as a bidder, a showing of transparency in
plaintiffs dealings with the Republic.124chanrobleslaw
3.3. As far as the plaintiff and herein answering defendants-in-counterclaim are concerned,
they dealt with the Commission on Elections with full transparency and in utmost good
faith. All documents in support of its eligibility to bid for the supply of the automated counting
machines and its peripheral services were submitted to the Commission on Elections for its
evaluation in full transparency. Pertinently, the plaintiff or any of its directors, stockholders, officers
or employees had no participation in the evaluation of the bids and eventual choice of the winning
bidder.125chanroblesvirtuallawlibrary
Pedro and Laureano offer a similar defense in paragraph 3.3 of their Reply and Answer with
Counterclaim to the Republic's Counterclaim 126 dated 28 June 2004, which
reads:ChanRoblesVirtualawlibrary
21
3.3. As far as plaintiff MPEI and defendants-in-counterclaim are concerned, they dealt with the
COMELEC with full transparency and in utmost good faith. All documents support its eligibility
to bid for the supply of the ACMs and their peripheral services, were submitted to the COMELEC for
its evaluation in full transparency. Pertinently, neither plaintiff MPEI nor any of its directors,
stockholders, officers or employees had any participation in the evaluation of the bids and eventual
choice of the winning bidder.127chanroblesvirtuallawlibrary
It can be seen from the above-quoted paragraphs that the individual respondents never denied their
participation in the questioned transactions of MPEI, merely raising the defense of good faith and
shifting the blame to the COMELEC. The individual respondents have, in effect, admitted that they
had knowledge of and participation in the fraudulent subcontracting of the automation contract to
the four corporations.
It bears stressing that the remaining individual respondents, together with respondent Willy,
incorporated MPEI. As incorporators, they are expected to be involved in the management of the
corporation and they are charged with the duty of care. This is one of the reasons for the
requirement of ownership of at least one share of stock by an
incorporator:ChanRoblesVirtualawlibrary
The reason for this, as explained by the lawmakers, is to avoid the confusion and/or ambiguities
arising in a situation under the old corporation law where there exists one set of incorporators who
are not even shareholders and another set of directors/incorporators who must all be
shareholders of the corporation. The people who deal with said corporation at such an early
stage are confused as to who are the persons or group really authorized to act in behalf of the
corporation. (Proceedings of the Batasan Pambansa on the Proposed Corporation Code). Another
reason may be anchored on the presumption that when an incorporator has pecuniary
interest in the corporation, no matter how minimal, he will be more involved in the
management of corporate affairs and to a greater degree, be concerned with the welfare of
the corporation.128chanroblesvirtuallawlibrary
As incorporators and businessmen about to embark on a new business venture involving a sizeable
capital (P300 million), the remaining individual respondents should have known of Willy's scheme to
perpetrate the fraud against petitioner, especially because the objective was a billion peso
automation contract. Still, they proceeded with the illicit business venture.
It is clear to this Court that inequity would result if We do not attach personal liability to all the
individual respondents. With a definite finding that MPEI was used to perpetrate the fraud against
the government, it would be a great injustice if the remaining individual respondents would enjoy the
benefits of incorporation despite a clear finding of abuse of the corporate vehicle. Indeed, to allow
the corporate fiction to remain intact would not subserve, but instead subvert, the ends of justice.
III.
The factual findings of this Court that have become final cannot be modified or altered, much
less reversed, and are controlling in the instant case.
Respondents argue that the 2004 Decision did not resolve and could not have resolved the factual
issue of whether they had committed any fraud, as the Supreme Court is not a trier of facts; and the
2004 case, being a certiorari case, did not deal with questions of fact. 129chanrobleslaw
Further, respondents argue that the findings of this Court ought to be confined only to those issues
actually raised and resolved in the 2004 case, in accordance with the principle of conclusiveness of
judgment.130 They explain that the issues resolved in the 2004 Decision were only limited to the
following: (1) whether to declare COMELEC Resolution No. 6074 null and void; (2) whether to
enjoin the implementation of any further contract that may have been entered into by COMELEC
with MPC or MPEI; and (3) whether to compel COMELEC to conduct a rebidding of the
project.131chanrobleslaw
It is obvious that respondents are merely trying to escape the implications or effects of the nullity of
the automation contract that they had executed. Section 1, Rule 65 of the Rules of Court, clearly
sets forth the instances when a petition for certiorari can be used as a proper
remedy:ChanRoblesVirtualawlibrary
Section 1. Petition for certiorari. — When any tribunal, board or officer exercising judicial or quasi-
judicial functions has acted without or in excess of its jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction, and there is no appeal, or any plain, speedy, and
adequate remedy in the ordinary course of law. a person aggrieved thereby may file a verified
petition in the proper court, alleging the facts with certainty and praying that judgment be rendered
annulling or modifying the proceedings of such tribunal, board or officer, and granting such
incidental reliefs as law and justice may require.
The term "grave abuse of discretion" has a specific meaning. An act of a court or tribunal can only
be considered to have been committed with grave abuse of discretion when the act is done in a
"capricious or whimsical exercise of judgment as is equivalent to lack of jurisdiction." 132 The abuse
of discretion must be so patent and gross as to amount to an "evasion of a positive duty or to a
virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law, as where the
power is exercised in an arbitrary and despotic manner by reason of passion and
hostility."133 Furthermore, the use of a petition for certiorari is restricted only to "truly extraordinary
cases wherein the act of the lower court or quasi-judicial body is wholly void."134 From the foregoing
definition, it is clear that the special civil action of certiorari under Rule 65 can only strike down an
act for having been done with grave abuse of discretion if the petitioner could manifestly show that
such act was patent and gross.135chanrobleslaw
We had to ascertain from the evidence whether the COMELEC committed grave abuse of
discretion, and in the process, were justified in making some factual findings. The conclusions
derived from the factual findings are inextricably intertwined with this Court's determination of grave
abuse of discretion. They have a direct bearing and are in fact necessary to illustrate that the award
of the automation contract was done hastily and in direct violation of law. This Court has indeed
made factual findings based on the evidence presented before it; in turn, these factual findings
constitute the controlling legal rule between the parties that cannot be modified or amended by any
of them. This Court is bound to consider the factual findings made in the 2004 Decision in order to
declare that there is fraud for the purpose of issuing the writ of preliminary attachment.
Respondents appear to have misunderstood the implications of the principle of conclusiveness of
judgment on their cause. Contrary to their claims, the factual findings are conclusive and have been
established as the controlling legal rule in the instant case, on the basis of the principle of res
judicata—more particularly, the principle of conclusiveness of judgment.
22
This doctrine of res judicata which is set forth in Section 47 of Rule 39 of the Rules of Court136 lays
down two main rules, namely: (1) the judgment or decree of a court of competent jurisdiction on the
merits concludes the litigation between the parties and their privies and constitutes a bar to a new
action or suit involving the same cause of action either before the same or any other tribunal; and
(2) any right, fact, or matter in issue directly adjudicated or necessarily involved in the determination
of an action before a competent court in which a judgment or decree is rendered on the merits is
conclusively settled by the judgment therein and cannot again be litigated between the parties and
their privies whether or not the claims or demands, purposes, or subject matters of the two suits are
the same.137chanrobleslaw
These two main rules mark the distinction between the principles governing the two typical cases in
which a judgment may operate as evidence.138 The first general rule stated above and
corresponding to the afore-quoted paragraph (b) of Section 47, Rule 39 of the Rules of Court, is
referred to as "bar by former judgment"; while the second general rule, which is embodied in
paragraph (c) of the same section and rule, is known as "conclusiveness of
judgment."139chanrobleslaw
In Calalang v. Register of Deeds of Quezon City,140 We discussed the concept of conclusiveness of
judgment as pertaining even to those matters essentially connected with the subject of litigation in
the first action. This Court explained therein that the bar on re-litigation extends to those
questions necessarily implied in the final judgment, although no specific finding may have been
made in reference thereto, and although those matters were directly referred to in the pleadings and
were not actually or formally presented. If the record of the former trial shows that the judgment
could not have been rendered without deciding a particular matter, it will be considered as having
settled that matter as to all future actions between the parties; and if a judgment necessarily
presupposes certain premises, they are as conclusive as the judgment
itself:ChanRoblesVirtualawlibrary
The second concept — conclusiveness of judgment — states that a fact or question which
was in issue in a former suit and was there judicially passed upon and determined by a court
of competent jurisdiction, is conclusively settled by the judgment therein as far as the
parties to that action and persons in privity with them are concerned and cannot be again
litigated in any future action between such parties or their privies, in the same court or any
other court of concurrent jurisdiction on either the same or different cause of action, while
the judgment remains unreversed by proper authority. It has been held that in order that a
judgment in one action can be conclusive as to a particular matter in another action between the
same parties or their privies, it is essential that the issue be identical. If a particular point or
question is in issue in the second action, and the judgment will depend on the determination
of that particular point or question, a former judgment between the same parties or their
privies will be final and conclusive in the second if that same point or question was in issue
and adjudicated in the first suit (Nabus v. Court of Appeals, 193 SCRA 732 [1991]). Identity of
cause of action is not required but merely identity of issue.
Justice Fcliciano, in Smith Bell & Company (Phils.), Inc. v. Court of Appeals (197 SCRA 201, 210
[1991]), reiterated Lopez v. Reyes (76 SCRA 179 [1977]) in regard to the distinction between bar by
former judgment which bars the prosecution of a second action upon the same claim, demand, or
cause of action, and conclusiveness of judgment which bars the relitigation of particular facts or
issues in another litigation between the same parties on a different claim or cause of action.
The general rule precluding the re-litigation of material facts or questions which were in
issue and adjudicated in former action are commonly applied to all matters essentially
connected with the subject matter of the litigation. Thus, it extends to questions necessarily
implied in the final judgment, although no specific finding may have been made in reference
thereto and although such matters were directly referred to in the pleadings and were not
actually or formally presented. Under this rule, if the record of the former trial shows that the
judgment could not have been rendered without deciding the particular matter, it will be
considered as having settled that matter as to all future actions between the parties and if a
judgment necessarily presupposes certain premises, they are as conclusive as the judgment
itself.141 (Emphases supplied)
The foregoing disquisition finds application to the case at bar.
Undeniably, the present case is merely an adjunct of the 2004 case, in which the automation
contract was declared to be a nullity. Needless to say, the 2004 Decision has since become final.
As earlier explained, this Court arrived at several factual findings showing the illegality of the
automation contract; in turn, these findings were used as basis to justify the declaration of nullity.
A closer scrutiny of the 2004 Decision would reveal that the judgment could not have been rendered
without deciding particular factual matters in relation to the following: (1) identity, existence and
eligibility of MPC as a bidder; (2) failure of the ACMs to pass DOST technical tests; and (3) remedial
measures undertaken by the COMELEC after the award of the automation contract. Under the
principle of conclusiveness of judgment, We are precluded from re-litigating these facts, as these
were essential to the question of nullity. Otherwise stated, the judgment could not have been
rendered without necessarily deciding on the above-enumerated factual matters.
Thus, under the principle of conclusiveness of judgment, those material facts became binding and
conclusive on the parties, in this case MPEI and, ultimately, the persons that comprised it. When a
right or fact has been judicially tried and determined by a court of competent jurisdiction, or when an
opportunity for that trial has been given, the judgment of the court—as long as it remains
unreversed—should be conclusive upon the parties and those in privity with them.142 Thus,
the CA should not have required petitioner to present further evidence of fraud on the part of
respondent Willy and MPEI, as it was already necessarily adjudged in the 2004 case.
To allow respondents to argue otherwise would be violative of the principle of immutability of
judgment. When a final judgment becomes executory, it becomes immutable and unalterable and
may no longer undergo any modification, much less any reversal. 143 In Navarro v. Metropolitan Bank
& Trust Company144 this Court explained that the underlying reason behind this principle is to avoid
delay in the administration of justice and to avoid allowing judicial controversies to drag on
indefinitely, viz.:ChanRoblesVirtualawlibrary
No other procedural law principle is indeed more settled than that once a judgment becomes
final, it is no longer subject to change, revision, amendment or reversal, except only for
correction of clerical errors, or the making of nunc pro tunc entries which cause no prejudice
to any party, or where the judgment itself is void. The underlying reason for the rule is two-fold:
(1) to avoid delay in the administration of justice and thus make orderly the discharge of judicial
23
business, and (2) to put judicial controversies to an end, at the risk of occasional errors, inasmuch
as controversies cannot be allowed to drag on indefinitely and the rights and obligations of every
litigant must not hang in suspense for an indefinite period of time. As the Court declared in Yau v.
Silverio,
Litigation must end and terminate sometime and somewhere, and it is essential to an effective and
efficient administration of justice that, once a judgment has become final, the winning party be, not
through a mere subterfuge, deprived of the fruits of the verdict. Courts must therefore guard against
any scheme calculated to bring about that result. Constituted as they are to put an end to
controversies, courts should frown upon any attempt to prolong them.
Indeed, just as a losing party has the right to file an appeal within the prescribed period, the winning
party also has the correlative right to enjoy the finality of the resolution of his case by the execution
and satisfaction of the judgment. Any attempt to thwart this rigid rule and deny the prevailing litigant
his right to savor the fruit of his victory must immediately be struck down. x x x. (Emphasis
supplied)145chanroblesvirtuallawlibrary
In the instant case, adherence to respondents' position would mean a complete disregard of the
factual findings We made in the 2004 Decision, and would certainly be tantamount to reversing the
same. This would invariably cause further delay in the efforts to recover the amounts of government
money illegally disbursed to respondents back in 2004.
Next, respondents argue that the findings of fact in the 2004 Decision are not
conclusive146 considering that eight (8) of the fifteen (15) justices of this Court refused to go along
with the factual findings as stated in the majority opinion.147 This argument fails to convince.
Fourteen (14) Justices participated in the promulgation of the 2004 Decision. Out of the fourteen
(14) Justices, three (3) Justices registered their dissent, 148 and two (2) Justices wrote their Separate
Opinions, each recommending the dismissal of the Petition. 149 Of the nine (9) Justices who voted to
grant the Petition, four (4) joined the ponente in his disposition of the case,150 and two (2) Justices
wrote Separate Concurring Opinions.151 As to the remaining two (2) Justices, one (1)
Justice152 merely concurred in the result, while the other joined another Justice in her Separate
Opinion.153chanrobleslaw
Contrary to the allegations of respondents, an examination of the voting shows that nine (9) Justices
voted in favor of the majority opinion, without any qualification regarding the factual findings made
therein. In fact, the two (2) Justices who wrote their own Concurring Opinions echoed the lack of
eligibility of MPC and the failure of the ACMs to pass the mandatory requirements.
Finally, respondents cannot argue that, from the line of questioning of then Justice Leonardo A.
Quisumbing during the oral arguments in the 2004 case, he did not agree with the factual findings of
this Court. Oral arguments before this Court are held precisely to test the soundness of each
proponent's contentions. The questions and statements propounded by Justices during such an
exercise are not to be construed as their definitive opinions. Neither are they indicative of how a
Justice shall vote on a particular issue; indeed, Justice Quisumbing clearly states in the 2004
Decision that he concurs in the results. At any rate, statements made by Our Members during oral
arguments are not stare decisis; what is conclusive are the decisions reached by the majority of the
Court.
IV.
The delivery of 1,991 units of ACMs does not negate fraud on the part of respondents Willy
and MPEI.
The CA in its Amended Decision explained that respondents could not be considered to have
fostered a fraudulent intent to not honor their obligation, since they delivered 1,991 units of
ACMs.154 In turn, respondents argue that respondent MPEI had every intention of fulfilling its
obligation, because it in fact delivered the ACMs as required by the automation
contract.155chanrobleslaw
We disagree with the CA and respondents. The fact that the ACMs were delivered cannot induce
this Court to disregard the fraud respondent MPEI had employed in securing the award of the
automation contract, as established above. Furthermore, they cannot cite the fact of delivery in their
favor, considering that the ACMs delivered were substandard and noncompliant with the
requirements initially set for the automation project.
In Our 2004 Decision, We already found the ACMs to be below the standards set by the
COMELEC. The noncompliant status of these ACMs was reiterated by this Court in its 2005 and
2006 Resolutions. The CA therefore gravely erred in considering the delivery of 1,991 ACMs as
evidence of respondents' willingness to perform the obligation (and thus, their lack of fraud)
considering that, as exhaustively discussed earlier, the ACMs delivered were plagued with defects
and failed to meet the requirements set for the automation project.
Under Article 1233 of the New Civil Code, a debt shall not be understood to have been paid, unless
the thing or service in which the obligation consists has been completely delivered or rendered. In
this case, respondents cannot be considered to have performed their obligation, because the ACMs
were defective.
V.
Estoppel does not lie against the State when it acts to rectify the mistakes, errors or illegal
acts of its officials and agents.
Respondents claim that the 2004 Decision may not be invoked against them, since the petitioner
and the respondents were co-respondents and not adverse parties in the 2004 case. Respondents
further explain that since petitioner and respondents were on the same side at the time, had the
same interest, and took the same position on the validity and regularity of the automation contract,
petitioner cannot now invoke the 2004 Decision against them.156chanrobleslaw
Contrary to respondents' contention, estoppel generally finds no application against the State when
it acts to rectify mistakes, errors, irregularities, or illegal acts of its officials and agents, irrespective
of rank. This principle ensures the efficient conduct of the affairs of the State without any hindrance
to the implementation of laws and regulations by the government. This holds true even if its agents'
prior mistakes or illegal acts shackle government operations and allow others—some by malice—to
profit from official error or misbehavior, and even if the rectification prejudices parties who have
meanwhile received benefit.157 Indeed, in the 2004 Decision, this Court even directed the
Ombudsman to determine the possible criminal liability of public officials and private persons
24
responsible for the contract, and the OSG to undertake measures to protect the government from
the ill effects of the illegal disbursement of public funds. 158chanrobleslaw
The equitable doctrine of estoppel for the prevention of injustice and is for the protection of those
who have been misled by that which on its face was fair and whose character, as represented,
parties to the deception will not, in the interest of justice, be heard to deny. 159 It cannot therefore be
utilized to insulate from liability the very perpetrators of the injustice complained of.
VI.
The findings of the Office of the Ombudsman are not controlling in the instant case.
Respondents further claim that this Court has recognized the fact that it did not determine or
adjudge any fraud that may have been committed by individual respondents. Rather, it referred the
matter to the Ombudsman for the determination of criminal liability.160 The Ombudsman in fact made
its own determination that there was no probable cause to hold individual respondents criminally
liable.161chanrobleslaw
Respondents miss the point. The main issue in the instant case is whether respondents are guilty of
fraud in obtaining and executing the automation contract, to justify the issuance of a writ of
preliminary attachment in petitioner's favor. Meanwhile, the issue relating to the proceedings before
the Ombudsman (and this Court in G.R. No. 174777) pertains to the finding of lack of probable
cause for the possible criminal liability of respondents under the Anti-Graft and Corrupt Practices
Act.
The matter before Us involves petitioner's application for a writ of preliminary attachment in relation
to its recovery of the expended amount under the voided contract, and not the determination of
whether there is probable cause to hold respondents liable for possible criminal liability due to the
nullification of the automation contract. Whether or not the Ombudsman has found probable cause
for possible criminal liability on the part of respondents is not controlling in the instant case.
CONCLUSION
If the State is to be serious in its obligation to develop and implement coordinated anti-corruption
policies that promote proper management of public affairs and public property, integrity,
transparency and accountability,162 it needs to establish and promote effective practices aimed at
the prevention of corruption,163 as well as strengthen our efforts at asset recovery. 164chanrobleslaw
As a signatory to the United Nations Convention Against Corruption (UNCAC), 165 the Philippines
acknowledges its obligation to establish appropriate systems of procurement based on
transparency, competition and objective criteria in decision-making that are effective in preventing
corruption.166 To promote transparency, and in line with the country's efforts to curb corruption, it is
useful to identify certain fraud indicators or "red flags" that can point to corrupt activity. 167 This case -
arguably the first to provide palpable examples of what could be reasonably considered as "red
flags" of fraud and malfeasance in public procurement - is the Court's contribution to the nation's
continuing battle against corruption, in accordance with its mandate to dispense justice and
safeguard the public interest.
WHEREFORE, premises considered, the Petition is GRANTED. The Amended Decision dated 22
September 2008 of the Court of Appeals in CA-G.R. SP. No. 95988 is ANNULLED AND SET
ASIDE. A new one is entered DIRECTING the Regional Trial Court of Makati City, Branch 59,
to ISSUE in Civil Case No. 04-346, entitled Mega Pacific eSolutions, Inc., vs. Republic of the
Philippines, the Writ of Preliminary Attachment prayed for by petitioner Republic of the Philippines
against the properties of respondent Mega Pacific eSolutions, Inc., and Willy U. Yu, Bonnie S. Yu,
Enrique T. Tansipek, Rosita Y. Tansipek, Pedro O. Tan, Johnson W. Fong, Bernard I. Fong and
Lauriano Barrios.

No costs.

SO ORDERED.chanRoblesvirtualLawlibrary

25
HIRD DIVISION the Decision.13 The motion quoted from a portion of the Sheriffs Return, which states:
chanRoblesvirtualLawlibrary
G.R. No. 198967, March 07, 2016
On September 12, 2002, the undersigned proceeded at the stated present business office address
JOSE EMMANUEL P. GUILLERMO, Petitioner, v. CRISANTO P. USON, Respondent. 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
DECISION 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
PERALTA, J.: 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
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to respondent's (sic) corporation has been dissolved.
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 On the succeeding day, as per [advice] by the [complainant's] counsel that the respondent has an
Labor Relations Commission (NLRC). 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
The facts of the case follow. day stating that the respondent [does] not have an account with the
branch.14ChanRoblesVirtualawlibrary
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 On December 26, 2002, Labor Arbiter Irenarco R. Rimando issued an Order 15 granting the motion
the position of accounting supervisor, with a salary of Php13,000.00 a month, until he was allegedly 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
dismissed from employment on December 20, 2000. 4
them so even if the said officers were not parties to the case when the judgment in favor of the
employees was rendered.16Thus, the Labor Arbiter pierced the veil of corporate fiction of Royal
On March 2, 2001, Uson filed with the Sub-Regional Arbitration . Branch No. 1, Dagupan City, of the
Class Venture and held herein petitioner Jose Emmanuel Guillermo (Guillermo), in his personal
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 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
Royal Class Venture did not make an appearance in the case despite its receipt of summons. 6
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
On May 15, 2001, Uson filed his Position Paper 7 as complainant.
arbiters before her and even castigated Guillenno for his unexplained absence in the prior
On October 22, 2001, Labor Arbiter Jose G. De Vera rendered a Decision8 in favor of the proceedings despite notice, effectively putting responsibility on Guillermo for the case's outcome
complainant Uson and ordering therein respondent Royal Class Venture to reinstate him to his against him.19
former position and pay his backwages, 13th month pay as well as moral and exemplary damages
On January 5, 2004, Guillermo filed a Motion for Reconsideration of the above Order, 20 but the
and attorney's fees.
same was promptly denied by the Labor Arbiter in an Order dated January 7, 2004.21
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 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
Arbiter's decision.
On May 18, 2004, the Labor Arbiter issued an Order 24 granting Uson's Motion for the Issuance of an
On May 17, 2002, an Alias Writ of Execution11 was issued. But with the judgment still unsatisfied, a
Alias Writ of Execution and rejecting Guillermo's arguments posed in his Comment and Opposition.
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 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
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

26
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 Decision 28 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 Resolution 37 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.
27
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
28
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. 69 Guillermo's knowledge of the case's
filing and existence and his unexplained refusal to participate in it as the responsible official of his
company, again is an indicia of his bad faith and malicious intent to evade the judgment of the labor
tribunals.
Finally, the records likewise bear that Guillermo dissolved Royal Class Venture and helped
incorporate a new firm, located in the same address as the former, wherein he is again a
stockl1older. This is borne by the Sherif11s Return which reported: that at Royal Class Venture's
business address at Minien East, Sta. Barbara, Pangasinan, there is a new establishment named
"Joel and Sons Corporation," a family corporation owned by the Guillermos in which Jose
Emmanuel F. Guillermo is again one of the stockholders; that Guillermo received the writ of
execution but used the nickname "Joey" and denied being Jose Emmanuel F. Guillermo and,
instead, pretended to be Jose's brother; that the guard on duty confirmed that Jose and Joey are
one and the same person; and that the respondent corporation 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. 73In 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
G.R. No. 198967
March 07, 2016
PERALTA, J.:
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
29
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
G.R. No. 161759 July 2, 2014
COMMISSIONER OF CUSTOMS, Petitioner,
vs.
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.2
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.
30
In applying for and in expediting the transfer of the operator’s name for the Customs Bonded
Warehouse thenoperated by URC, Esther Magleo, the Vice-President and General Manager of
URC, sent a letter dated January 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
₱289,287,486.60 for the Value-Added Taxes (VAT), special duties and excisetaxes 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 ₱119,223,541.71 representing URC’s special duties, VAT,and Excise
Taxes that it had failed to pay at the time of the release of its 17 oil shipments that had arrived in the
Sub-port of Mariveles from January 1, 1991 to September 7, 1995.
On December 21, 1998, Commissioner Mendoza wrote again to require URC to pay deficiency
taxes but in the reduced sum of ₱99,216,580.10.
On December 23, 1998, upon his assumption of office, Customs Commissioner Nelson Tan
transmitted another demand letter to URC affirming the assessment of ₱99,216,580.10 by
Commissioner Mendoza.
On January 18, 1999, Magleo, in behalf of URC, replied by letter to Commissioner Tan’s affirmance
by denying liability, insisting instead that only ₱28,933,079.20 should be paid by way of
compromise.
On March 26, 1999, Commissioner Tan responded by rejecting Magleo’s proposal, and directed
URC to pay ₱99,216,580.10.
On May 24, 1999, Manuel Co, URC’s President, conveyed to Commissioner Tan URC’s willingness
to pay only ₱94,216,580.10, of which the initial amount of ₱28,264,974.00 would be taken from the
collectibles of Oilink from the National Power Corporation, and the balance to be paid in monthly
installments over a period ofthree 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 ₱138,060,200.49
upon URC and Oilink.
On July 8, 1999, Co requested from Commissioner Tan a complete finding of the facts and law in
support ofthe 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 ₱138,060,200.49 demanded as
Oilink’s tax liability befirst 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:
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.3
The Commissioner of Customs seasonably filed a motion for reconsideration, 4 but the CTA denied
the motion for lack of merit.5
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:
x x x the case at bar is very much within the purview of the jurisdiction of the Court ofTax Appeals
since it is undisputed that what is involved herein is the respondent’s liability for payment of money
31
to the Government as evidenced by the demand letters sent by the petitioner. Hence, the Court of
Tax Appeals did noterr in taking cognizance of the petition for review filed by the respondent.
xxxx
We find the petitioner’s submission untenable. The principle of non-exhaustion of administrative
remedy is not an iron-clad rule for there are instances that immediate resort to judicial action may
be proper. Verily, a cursory examination of the factual milieu of the instant case indeed reveals that
exhaustion ofadministrative remedy would be unavailing because it was the Commissioner of
Customs himself who was demanding from the respondent payment of tax liability. In addition, it
may be recalled that a crucial issue inthe petition for review filed by the respondent before the CTA
is whether or not the doctrine of piercing the veil of corporate fiction validly applies. Indubitably, this
is purely a question of law where judicial recourse may certainly be resorted to. 6
As to whether or not the Commissioner of Customs could lawfully pierce the veil of corporate fiction
in order to treat Oilink as the mere alter ego of URC, the CA concurred with the CTA, quoting the
latter’s following findings:
In the case at bar, the said wrongdoing was not clearly and convincingly established by
Respondent. He did not submit any evidence to support his allegations but merely submitted the
case for decision based on the pleadings and evidence presented by petitioner. Stated otherwise,
should the Respondent sufficiently provethat OILINK was merely set up in order to avoid the
payment of taxes or for some other purpose which will defeat public convenience, justify wrong,
protect fraud or defend crime, this Court will not hesitate to pierce the veil of corporate fiction by
URC and OILINK.7
Issues
Hence, this appeal, whereby the Commissioner of Customs reiterates the issues raised in the CA.
Ruling of the Court
We affirm the judgment of the CA.
1.
The CTA had jurisdiction over the controversy
There is no question that the CTA had the jurisdiction over the case. Republic Act No. 1125, the law
creating the CTA, defined the appellate jurisdiction of the CTA as follows:
Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to
review by appeal, as herein provided:
xxxx
2. Decisions of the Commissioner ofCustoms in cases involving liability for Customs duties, fees or
other money charges; seizure, detention or release of property affected; fines, forfeitures or other
penalties imposed in relation thereto;or other matters arising under the Customs Law or other law or
part of law administered by the Bureau of Customs;
xxxx
Nonetheless, the Commissioner of Customs contends that the CTA should not take cognizance of
the casebecause of the lapse of the 30-day period within which to appeal, arguing that on
November 25, 1998 URC had already received the BoC’s final assessment demanding payment of
the amount due within 10 days, but filed the petition only on July 30, 1999.8
We rule against the Commissioner of Customs. The CTA correctly ruled that the reckoning date for
Oilink’s appeal was July 12, 1999, not July 2, 1999, because it was on the former date that the
Commissioner of Customs denied the protest of Oilink.Clearly, the filing of the petition on July 30,
1999 by Oilink was well within its reglementary period to appeal. The insistence by the
Commissioner of Customs on reckoning the reglementary period to appeal from November 25,
1998, the date when URC received the final demand letter, is unwarranted. We note that the
November 25, 1998 final demand letter of the BoC was addressed to URC, not to Oilink. As such,
the final demand sentto URC did not bind Oilink unless the separate identities of the corporations
were disregarded in order to consider them as one.
2.
Oilink had a valid cause of action
The Commissioner of Customs positsthat the final demand letter dated July 2, 1999 from which
Oilink appealed was not the final "action" or "ruling" from which an appeal could be taken as
contemplated by Section 2402 of the Tariff and Customs Code; that what Section 7 of RA No. 1125
referred to as a decision that was appealable to the CTA was a judgment or order of the
Commissioner of Customs that was final in nature, not merely an interlocutory one; that Oilink did
notexhaust its administrative remedies under Section 2308 of the Tariff and Customs Code by
paying the assessment under protest; that only when the ensuing decision of the Collector and then
the adverse decision of the Commissioner of Customs would it be proper for Oilink to seek judicial
relief from the CTA; and that, accordingly, the CTA should have dismissed the petition for lack of
cause of action.
The position of the Commissioner of Customs lacks merit.
The CA correctly held that the principle of non-exhaustion of administrative remedies was not an
iron-clad rule because there were instances in which the immediate resort to judicial action was
proper. This was one such exceptional instance when the principle did not apply. As the records
32
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 viceversa. The separate and distinct personality of the corporation is, however,
a mere fiction established by law for convenience and to promote the ends of justice. It may not be
used or invoked for ends that subvert the policy and purpose behind its establishment, or intended
by law to which the corporation owes its being. This is true particularly when the fiction is used to
defeat public convenience, to justify wrong, to protectfraud, to defend crime, to confuse legitimate
legal or judicial issues, to perpetrate deception or otherwise to circumvent the law. This is likewise
true where the corporate entity is being used as an alter ego, adjunct, or business conduit for the
sole benefit of the stockholders or of another corporate entity. In such instances, the veil of
corporate entity will be pierced or disregarded with reference to the particular transaction involved.9
In Philippine National Bank v. Ritratto Group, Inc.,10 the Court has outlined the following
circumstances thatare useful in the determination of whether a subsidiary is a mere instrumentality
of the parent-corporation, viz:
1. Control, not mere majority or complete control, but complete domination, not only of finances
butof policy and business practice in respect to the transaction attacked so that the corporate entity
as to this transaction had at the time no separatemind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the
violation of a statutory or other positive legal duty, or dishonest and, unjust act incontravention of
plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.
In applying the "instrumentality" or"alter ego" doctrine, the courts are concerned with reality, not
form, and with how the corporation operated and the individual defendant's relationship to the
operation.11 Consequently, the absence of any one of the foregoing elements disauthorizes the
piercing of the corporate veil.
Indeed, the doctrine of piercing the corporate veil has no application here because the
Commissioner of Customs did not establish that Oilink had been set up to avoid the payment of
taxes or duties, or for purposes that would defeat public convenience, justify wrong, protect fraud,
defend crime, confuse legitimate legal or judicial issues, perpetrate deception or otherwise
circumvent the law. It is also noteworthy that from the outset the Commissioner of Customs sought
to collect the deficiency taxes and duties from URC, and that it was only on July 2, 1999 when the
Commissioner of Customs sent the demand letter to both URC and Oilink. That was revealing,
because the failure of the Commissioner of Customs to pursue the remedies against Oilink from the
outset manifested that its belated pursuit of Oilink was only an afterthought. WHEREFORE, the
Court AFFIRMS the decision promulgated by the Court of Appeals on September 29, 2003.

No pronouncement on costs of suit.

33
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
resolution3 dated 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.
34
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
35
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.
36
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.
HILIPPINE NATIONAL BANK, Petitioner, v. HYDRO RESOURCES CONTRACTORS Hercon, Inc., the latter found that NMIC still has an unpaid balance of P8,370,934.74.10 Hercon, Inc.
CORPORATION,Respondent. made several demands on NMIC, including a letter of final demand dated August 12, 1986, and
when these were not heeded, a complaint for sum of money was filed in the RTC of Makati, Branch
136 seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the amount owing Hercon,
Inc.11 The case was docketed as Civil Case No. 15375.
G.R. NO. 167561
Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This
ASSET PRIVATIZATION TRUST, Petitioner, v. HYDRO RESOURCES CONTRACTORS prompted the amendment of the complaint to substitute HRCC for Hercon,
CORPORATION, Respondent. Inc.12chanroblesvirtualawlibrary

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.
Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50
creating the APT for the expeditious disposition and privatization of certain government corporations
and/or the assets thereof. Pursuant to the said Proclamation, on February 27, 1987, DBP and PNB
executed their respective deeds of transfer in favor of the National Government assigning,
transferring and conveying certain assets and liabilities, including their respective stakes in
NMIC.13 In turn and on even date, the National Government transferred the said assets and
liabilities to the APT as trustee under a Trust Agreement.14 Thus, the complaint was amended for
the second time to implead and include the APT as a defendant.
In its answer,15 NMIC claimed that HRCC had no cause of action. It also asserted that its contract
with HRCC was entered into by its then President without any authority. Moreover, the said contract
allegedly failed to comply with laws, rules and regulations concerning government contracts. NMIC
further claimed that the contract amount was manifestly excessive and grossly disadvantageous to
the government. NMIC made counterclaims for the amounts already paid to Hercon, Inc. and
attorney's fees, as well as payment for equipment rental for four trucks, replacement of parts and
other services, and damage to some of NMIC's properties.16chanroblesvirtualawlibrary
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

Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the PNB's answer19 also invoked lack of cause of action against it. It also raised estoppel on HRCC's
properties of Marinduque Mining and Industrial Corporation (MMIC). As a result of the foreclosure, part and laches as defenses, claiming that the inclusion of PNB in the complaint was the first time a
DBP and PNB acquired substantially all the assets of MMIC and resumed the business operations demand for payment was made on it by HRCC. PNB also invoked the separate juridical personality
of the defunct MMIC by organizing NMIC.7 DBP and PNB owned 57% and 43% of the shares of of NMIC and made counterclaims for moral damages and attorney's
NMIC, respectively, except for five qualifying shares. 8 As of September 1984, the members of the fees.20chanroblesvirtualawlibrary
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 APT set up the following defenses in its answer21: lack of cause of action against it, lack of privity
between Hercon, Inc. and APT, and the National Government's preferred lien over the assets of
Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC's Mine Stripping and Road NMIC.22chanroblesvirtualawlibrary
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

37
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
38
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.37 It has a personality separate and distinct from that of its stockholders and from that of
other corporations to which it may be connected.38 As a consequence of its status as a distinct legal
entity and as a result of a conscious policy decision to promote capital formation, 39 a corporation
incurs its own liabilities and is legally responsible for payment of its obligations. 40 In other words, by
virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the
debt or credit of the stockholder.41This protection from liability for shareholders is the principle of
limited liability.42chanroblesvirtualawlibrary
Equally well-settled is the principle that the corporate mask may be removed or the corporate veil
pierced when the corporation is just an alter ego of a person or of another corporation. For reasons
of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it
becomes a shield for fraud, illegality or inequity committed against third
persons.43chanroblesvirtualawlibrary
However, the rule is that a court should be careful in assessing the milieu where the doctrine of the
corporate veil may be applied. Otherwise an injustice, although unintended, may result from its
erroneous application.44 Thus, cutting through the corporate cover requires an approach
characterized by due care and caution:chanroblesvirtualawlibrary
Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A
court should be mindful of the milieu where it is to be applied. It must be certain that the corporate
fiction was misused to such an extent that injustice, fraud, or crime was committed against another,
in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be
presumed. x x x.45(Emphases supplied; citations omitted.)
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

39
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
40
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.69Nevertheless, 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
41
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.

42
G.R. No. 203355, August 18, 2015 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
LEO R. ROSALES, EDGAR SOLIS JONATHAN G. RANIOLA, LITO FELICIANO, RAYMUNDO closed effective 15 March 2010 due to lack of capital caused by enormous uncollected
DIDAL, JR., NESTOR SALIN, ARNULFO S. ABRIL, RUBEN FLORES, DANTE FERMA AND receivables/debts and the necessity for the plant to undergo general repairs and maintenance.
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 x x x x
AVELINO AWAYAN, Respondents.
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
DECISION
that we are properly guided by the provisions of law in this undertaking.10 (Emphasis supplied)
VELASCO JR., J.: 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
executed Quitclaims and Release before Labor Arbiter Melchisedek A. Guan (LA Guan) of NLRC
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
SRAB-IV San Pablo Office.11cralawrednad
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
On March 27, 2010, petitioner Leo Rosales (Rosales) similarly received his separation pay from
28, 20112 and February 28, 20123 in NLRC-LAC Case No. 07-001796-11.
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
Respondent New ANJH Enterprises (New ANJH) is a sole proprietorship owned by respondent Noel
(Ranola), and Dante Ferma (Ferma) also received their separation benefits and signed their
Awayan (Noel). Petitioners are its former employees who worked as machine operators, drivers,
respective Quitclaims and Release and check vouchers.13cralawrednad
helpers, lead and boiler men.
Following the payments thus made to petitioners and their execution of Quitclaims and Release, LA
Allegedly due to dwindling capital, on February 11, 2010, Noel wrote the Director of the Department
Guan issued four (4) Orders, to wit: three Orders all dated March 22, 2010 for petitioners Feliciano,
of Labor and Employment (DOLE) Region IV-A a letter regarding New ANJH's impending cessation
Solis, and Salin;14 and one Order dated April 8, 2010 for petitioners Abril, Flores, Didal, Ferma,
of operations and the sale of its assets to respondent NH Oil Mill Corporation (NH Oil), as well as
Rosales, Selga and Ranola.15 In the said Orders, LA Guan declared the "labor dispute" between
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 New ANJH and petitioners as "dismissed with prejudice on ground of settlement." 16cralawrednad
date, he gave the employees uniformly-worded Notices dated February 12, 20106 informing them of
Petitioners, however, filed a complaint for illegal dismissal, docketed as NLRC Case No. RAB-IV-
the cessation of operations of New ANJH effective March 15, 2010 and the sale of its assets to a
04-00649-10-L, with NLRC Regional Arbitration Branch IV (NLRC-RAB-IV) in Calamba City. They
corporation. Noel also offered the employees, including petitioners, their separation pay.
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
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 management.17 Petitioners thus claimed that the sale of the assets of New ANJH to NH Oil was a
circumvention of their security of tenure.
for P950,000 to NH Oil, as represented by respondent Heidi A. Ilagan (Heidi), Noel's
sister.7cralawrednad
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
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 of One Million Six Thousand Forty-Five and 87/100 Pesos (P1,006,045.87) corresponding to the
remaining shares had been subscribed by Heidi and other members of the Awayan 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
family.9cralawrednad
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
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," and can validly justify the termination of the petitioners.
which was docketed as SRAB-IV-03-5066-10-L. The letter request reads:cralawlawlibrary
Respondents filed their Notice of Appeal with Appeal Memorandum 19 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

43
appeal bond.21cralawrednad bond for purposes of perfecting an appeal. In Garcia v. KJ Commercial,31 this Court
explained:cralawlawlibrary
Meanwhile, petitioners also filed a Memorandum of Partial Appeal contending that ELA Santos The filing of a motion to reduce bond and compliance with the two conditions stop the running of the
erred in failing to award them moral and exemplary damages. 22cralawrednad period to perfect an appeal. x x x

On September 24, 2011, the NLRC issued a Decision23 denying respondents' Verified Motion to x x x x
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 The NLRC has full discretion to grant or deny the motion to reduce bond, and it may rule on
include the award of P20,000.00 to each petitioner as moral and exemplary the motion beyond the 10-day period within which to perfect an appeal. Obviously, at the time
damages.24cralawrednad 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
Respondents filed their Motion for Reconsideration with Motion to Admit Additional Appeal Cash bond he or she posted is of a "reasonable amount." Thus, the appellant always runs the risk of
Bond25cralawredwith corresponding payment of additional cash bond. 26cralawrednad failing to perfect an appeal.

While the motion was opposed by petitioners,27 the NLRC, in its Resolution dated December 28,
2011,28reversed 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.
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.

In the assailed Decision,30 the appellate court denied the petition for certiorari, thereby affirming the x x x
NLRC's Resolutions dated December 28, 2011 and February 28, 2012.
In any case, the rule that the filing of a motion to reduce bond shall not stop the running of the
In its Decision, the appellate court held that private respondents had substantially complied with the period to perfect an appeal is not absolute. The Court may relax the rule. In Intertranz Container
rule requiring the posting of an appeal bond equivalent to the total award given to the employees. Lines, Inc. v. Bautista, the Court held:cralawlawlibrary
More importantly, so the CA held, the Orders rendered by LA Guan in NLRC Case No. SRAB IV-03- "Jurisprudence tells us that in labor cases, an appeal from a decision involving a monetary award
5066-10-L were considered final and binding upon the parties and had the force and effect of a may be perfected only upon the posting of cash or surety bond. The Court, however, has relaxed
judgment rendered by the labor arbiter. Thus, the appellate court declared that the petitioners' this requirement under certain exceptional circumstances in order to resolve controversies on their
complaint for illegal dismissal was already barred by res judicata. 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
Aggrieved by the CA's Decision, petitioners are now before this Court on a petition for review on case combined with its legal merits, and the amount and the issue involved."32 (emphasis and
certiorari. underscoring supplied)
In this case, the NLRC had reconsidered its original position and declared that the 60% bond was
We find the petition to be with merit. 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
The suspension of the period to perfect the appeal upon the filing of a motion to reduce Cash Bond. The CA affirmed the merits of the grounds cited by respondents in their motions and
bond 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
On the issue of perfecting the appeal, the CA was correct when it pointed out that Rule VI of the provisional cash or surety bond equivalent to ten percent (10%) of the monetary award subject of
New Rules of Procedure of the NLRC provides that a motion to reduce bond shall be entertained the appeal is sufficient provided that there is meritorious ground therefor, viz:cralawlawlibrary
"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

44
[O]n the matter of the filing and acceptance of motions to reduce appeal bond, as provided in guided in the payment thereof is clearly a labor dispute under the Labor Code.
Section 6, Rule VI of the 2011 NLRC Rules of Procedure, the Court hereby RESOLVES that
henceforth, the following guidelines shall be observed:cralawlawlibrary The proper payment of separation pay further falls under the jurisdiction of the labor arbiter pursuant
(a) The filing of a motion to reduce appeal bond shall be entertained by the NLRC subject to the to Art. 224 (previously Art. 217) of the Labor Code, as it is mandated as a necessary condition for
following conditions: (1) there is meritorious ground; and (2) a bond in a reasonable amount is the termination of employees, viz,:cralawlawlibrary
posted; Art. 224. Jurisdiction of the Labor Arbiters and the Commission.

(b) For purposes of compliance with condition no. (2), a motion shall be accompanied by the posting (a) Except as otherwise provided under this Code,the Labor Arbiters shall have original and
of a provisional cash or surety bond equivalent to ten percent (10%) of the monetary award exclusive jurisdiction to hear and decide, within thirty (30) calendar days after the submission of the
subject of the appeal, exclusive of damages and attorney's fees; 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
(c) Compliance with the foregoing conditions shall suffice to suspend the running of the 10-day agricultural:ChanRoblesvirtualLawlibrary
reglementary period to perfect an appeal from the labor arbiter's decision to the NLRC;
1. Unfair labor practice cases;
(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 2. Termination disputes;
meritorious grounds and reasonable amount; and
xxxx
(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 6. Except claims for employees compensation, social security, medicare and maternity
ten (10) days from notice of the NLRC order within which to perfect the appeal by posting the benefits, all other claims arising from employer-employee relations, including those of
required appeal bond.34 emphasis and underscoring added) persons in domestic or household service, involving an amount exceeding five thousand
It is noted that the respondents have eventually posted the full amount of the award ordered by the pesos (P5,000.00) regardless of whether accompanied with a claim for reinstatement.
labor arbiter. Thus, given the absence of grave abuse of discretion on the part of the NLRC and the (Emphasis supplied)
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.
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
Res Judicata does not bar the filing of the complaints for illegal dismissal
cases.
On the matter of the application of the doctrine of res judicata, however, this Court is loath to sustain
The third requisite, however, is not present. The Orders rendered by LA Guan cannot be considered
the finding of the appellate court and the NLRC. For res judicata to apply, the concurrence of the
as constituting a judgment on the merits. The Orders simply manifest that petitioners "are amenable
following requisites must be verified: (1) the former judgment is final; (2) it is rendered by a court
to the computations made by the company respecting their separation pay." Nothing more. They do
having jurisdiction over the subject matter and the parties; (3) it is a judgment or an order on the
not clearly state the petitioners' right or New ANJH's corresponding duty as a result of the
merits; (4) there is-between the first and the second actions-identity of parties, of subject matter, termination.36cralawrednad
and of causes of action.35cralawrednad
Similarly, the fourth requisite is- also absent. While there may be substantial identity of the parties,
The petitioners dispute the existence of all of the foregoing requisites. First, petitioners contend that there is no identity of subject matter or cause of action. In SME Bank, Inc. v. De Guzman,37 this
LA Guan does not have jurisdiction to issue the Orders in SRAB-IV-03-5066-10-L since, in the first
Court held that the acceptance of separation pay is an issue distinct from the legality of the
place, Noel's letter request for guidance in the payment of separation pay is allegedly not a "labor dismissal of the employees. We held:cralawlawlibrary
dispute." 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
Article 219 (previously Article 212) of the Labor Code defines a "labor dispute" as "any controversy dismissal. Acceptance of separation pay does not bar the employees from subsequently
or matter concerning terms and conditions of employment or the association or representation
contesting the legality of their dismissal, nor does it estop them from challenging the legality of
of persons in negotiating, fixing, maintaining, changing or arranging the terms and conditions of their separation from the service.38 (Emphasis supplied)
employment, regardless of whether the disputants stand in the proximate relation of employer and In the absence of the third and fourth requisites, the appellate court should have proceeded to rule
employee." As separation pay concerns a term and condition of employment, Noel's request to be on the validity of petitioners' termination.

45
 that [for] the consideration of Nine Hundred Fifty Thousand Pesos (Php950,000.00), Noel sold to
Piercing the veil of corporate existence is justified in the present case. 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
The application of the doctrine of piercing the veil of corporate fiction is frowned upon. However, this of sale by the seller to a distinct and separate entity.
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 x x x x

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.
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.chanrobles virtuallawlibrary

x x x x

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

46
.R. No. 195580 April 21, 2014
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
DECISION
VELASCO, JR., J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and
Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur
Mining Inc. (McArthur), which seeks to reverse the October 1, 2010 Decision 1 and the February 15,
2011 Resolution of the Court of Appeals (CA).
The Facts
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a
domestic corporation organized and existing under Philippine laws, took interest in mining and
exploring certain areas of the province of Palawan. After inquiring with the Department of
Environment and Natural Resources (DENR), it learned that the areas where it wanted to undertake
exploration and mining activities where already covered by Mineral Production Sharing Agreement
(MPSA) applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an
application for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau
(MGB), Region IV-B, Office of the Department of Environment and Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in
Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which includes
an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and EP were
then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned to
petitioner McArthur.2
Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and
Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an application
for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992. Through the said application,
the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in barangays Calategas and
San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC conveyed, transferred and/or
assigned its rights and interests over the MPSA application in favor of Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-
IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja,
47
Municipality of Narra, Province of Palawan. SMMI subsequently conveyed, transferred and
assigned its rights and interest over the said MPSA application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3)
separate petitions for the denial of petitioners’ applications for MPSA designated as AMA-IVB-153,
AMA-IVB-154 and MPSA IV-1-12.
In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and
Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation.
Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it was the driving
force behind petitioners’ filing of the MPSAs over the areas covered by applications since it knows
that it can only participate in mining activities through corporations which are deemed Filipino
citizens. Redmont argued that given that petitioners’ capital stocks were mostly owned by MBMI,
they were likewise disqualified from engaging in mining activities through MPSAs, which are
reserved only for Filipino citizens.
In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of
Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which provided:
Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether in
singular or plural, shall mean:
xxxx
(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a
corporation, partnership, association, or cooperative organized or authorized for the purpose of
engaging in mining, with technical and financial capability to undertake mineral resources
development and duly registered in accordance with law at least sixty per cent (60%) of the capital
of which is owned by citizens of the Philippines: Provided, That a legally organized foreign-owned
corporation shall be deemed a qualified person for purposes of granting an exploration permit,
financial or technical assistance agreement or mineral processing permit.
Additionally, they stated that their nationality as applicants is immaterial because they also applied
for Financial or Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for
McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to foreign-owned
corporations. Nevertheless, they claimed that the issue on nationality should not be raised since
McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their capital is owned by
citizens of the Philippines. They asserted that though MBMI owns 40% of the shares of PLMC
(which owns 5,997 shares of Narra),3 40% of the shares of MMC (which owns 5,997 shares of
McArthur)4 and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro), 5 the
shares of MBMI will not make it the owner of at least 60% of the capital stock of each of petitioners.
They added that the best tool used in determining the nationality of a corporation is the "control
test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991. They also claimed
that the POA of DENR did not have jurisdiction over the issues in Redmont’s petition since they are
not enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont has no personality to
sue them because it has no pending claim or application over the areas applied for by petitioners.
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs.
It held:
[I]t is clearly established that respondents are not qualified applicants to engage in mining activities.
On the other hand, [Redmont] having filed its own applications for an EPA over the areas earlier
covered by the MPSA application of respondents may be considered if and when they are qualified
under the law. The violation of the requirements for the issuance and/or grant of permits over mining
areas is clearly established thus, there is reason to believe that the cancellation and/or revocation of
permits already issued under the premises is in order and open the areas covered to other qualified
applicants.
xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro Mining
and Development, Inc., and Narra Nickel Mining and Development Corp. as, DISQUALIFIED for
being considered as Foreign Corporations. Their Mineral Production Sharing Agreement (MPSA)
are hereby x x x DECLARED NULL AND VOID.6
The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a
100% Canadian company and declared their MPSAs null and void. In the same Resolution, it gave
due course to Redmont’s EPAs. Thereafter, on February 7, 2008, the POA issued an
Order7 denying the Motion for Reconsideration filed by petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of
Appeal8 and Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra
separately filed its Notice of Appeal10 and Memorandum of Appeal.11
In their respective memorandum, petitioners emphasized that they are qualified persons under the
law. Also, through a letter, they informed the MAB that they had their individual MPSA applications
converted to FTAAs. McArthur’s FTAA was denominated as AFTA-IVB-0912 on May 2007, while
Tesoro’s MPSA application was converted to AFTA-IVB-0813 on May 28, 2007, and Narra’s FTAA
was converted to AFTA-IVB-0714 on March 30, 2006.
Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a
Complaint15 with the Securities and Exchange Commission (SEC), seeking the revocation of the
certificates for registration of petitioners on the ground that they are foreign-owned or controlled
corporations engaged in mining in violation of Philippine laws. Thereafter, Redmont filed on
September 1, 2008 a Manifestation and Motion to Suspend Proceeding before the MAB praying for
the suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.
48
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon
City, Branch 92 (RTC) a Complaint16 for injunction with application for issuance of a temporary
restraining order (TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 08-63379.
Redmont prayed for the deferral of the MAB proceedings pending the resolution of the Complaint
before the SEC.
But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the
MAB issued an Order on September 10, 2008, finding the appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and
SETS ASIDE the Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B
(MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07
February 2008 denying the Motions for Reconsideration of the Appellants. The Petition filed by
Redmont Consolidated Mines Corporation on 02 January 2007 is hereby ordered DISMISSED. 17
Belatedly, on September 16, 2008, the RTC issued an Order 18 granting Redmont’s application for a
TRO and setting the case for hearing the prayer for the issuance of a writ of preliminary injunction
on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration 19 of the September
10, 2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for Reconsideration 20 on
September 29, 2008.
Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion for
Reconsideration, Redmont filed before the RTC a Supplemental Complaint21 in Civil Case No. 08-
63379.
On October 6, 2008, the RTC issued an Order 22 granting the issuance of a writ of preliminary
injunction enjoining the MAB from finally disposing of the appeals of petitioners and from resolving
Redmont’s Motion for Reconsideration and Supplement Motion for Reconsideration of the MAB’s
September 10, 2008 Resolution.
On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for
Reconsideration and Supplemental Motion for Reconsideration and resolving the appeals filed by
petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the
MAB. On October 1, 2010, the CA rendered a Decision, the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10,
2008 and July 1, 2009 of the Mining Adjudication Board are reversed and set aside. The findings of
the Panel of Arbitrators of the Department of Environment and Natural Resources that respondents
McArthur, Tesoro and Narra are foreign corporations is upheld and, therefore, the rejection of their
applications for Mineral Product Sharing Agreement should be recommended to the Secretary of
the DENR.
With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or
Technical Assistance Agreement (FTAA) or conversion of their MPSA applications to FTAA, the
matter for its rejection or approval is left for determination by the Secretary of the DENR and the
President of the Republic of the Philippines.
SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by
petitioners.
After a careful review of the records, the CA found that there was doubt as to the nationality of
petitioners when it realized that petitioners had a common major investor, MBMI, a corporation
composed of 100% Canadians. Pursuant to the first sentence of paragraph 7 of Department of
Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented
the requirement of the Constitution and other laws pertaining to the exploitation of natural
resources, the CA used the "grandfather rule" to determine the nationality of petitioners. It provided:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital stock or
capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be
recorded as belonging to aliens.24(emphasis supplied)
In determining the nationality of petitioners, the CA looked into their corporate structures and their
corresponding common shareholders. Using the grandfather rule, the CA discovered that MBMI in
effect owned majority of the common stocks of the petitioners as well as at least 60% equity interest
of other majority shareholders of petitioners through joint venture agreements. The CA found that
through a "web of corporate layering, it is clear that one common controlling investor in all mining
corporations involved x x x is MBMI."25 Thus, it concluded that petitioners McArthur, Tesoro and
Narra are also in partnership with, or privies-in-interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA
applications suspicious in nature and, as a consequence, it recommended the rejection of
petitioners’ MPSA applications by the Secretary of the DENR.
With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the
POA has jurisdiction over them and that it also has the power to determine the of nationality of
49
petitioners as a prerequisite of the Constitution prior the conferring of rights to "co-production, joint
venture or production-sharing agreements" of the state to mining rights. However, it also stated that
the POA’s jurisdiction is limited only to the resolution of the dispute and not on the approval or
rejection of the MPSAs. It stipulated that only the Secretary of the DENR is vested with the power to
approve or reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which
considered petitioners McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA
determined that the POA’s declaration that the MPSAs of McArthur, Tesoro and Narra are void is
highly improper.
While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a
petition dated May 7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a
Decision26 on April 6, 2011, wherein it canceled and revoked petitioners’ FTAAs for violating and
circumventing the "Constitution x x x[,] the Small Scale Mining Law and Environmental Compliance
Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584." 27 The OP, in
affirming the cancellation of the issued FTAAs, agreed with Redmont stating that petitioners
committed violations against the abovementioned laws and failed to submit evidence to negate
them. The Decision further quoted the December 14, 2007 Order of the POA focusing on the
alleged misrepresentation and claims made by petitioners of being domestic or Filipino corporations
and the admitted continued mining operation of PMDC using their locally secured Small Scale
Mining Permit inside the area earlier applied for an MPSA application which was eventually
transferred to Narra. It also agreed with the POA’s estimation that the filing of the FTAA applications
by petitioners is a clear admission that they are "not capable of conducting a large scale mining
operation and that they need the financial and technical assistance of a foreign entity in their
operation, that is why they sought the participation of MBMI Resources, Inc."28 The Decision further
quoted:
The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage in
mining. The filing of the FTAA application conversion which is allowed foreign corporation of the
earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc.
furnished its stockholders in their head office in Canada suggest that they are conducting operation
only through their local counterparts.29
The Motion for Reconsideration of the Decision was further denied by the OP in a
Resolution30 dated July 6, 2011. Petitioners then filed a Petition for Review on Certiorari of the OP’s
Decision and Resolution with the CA, docketed as CA-G.R. SP No. 120409. In the CA Decision
dated February 29, 2012, the CA affirmed the Decision and Resolution of the OP. Thereafter,
petitioners appealed the same CA decision to this Court which is now pending with a different
division.
Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners put
forth the following errors of the CA:
 I.
The Court of Appeals erred when it did not dismiss the case for mootness despite the fact
that the subject matter of the controversy, the MPSA Applications, have already been
converted into FTAA applications and that the same have already been granted.
II.
The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction
considering that the Panel of Arbitrators has no jurisdiction to determine the nationality of
Narra, Tesoro and McArthur.
III.
The Court of Appeals erred when it did not dismiss the case on account of Redmont’s willful
forum shopping.
IV.
The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign corporations
based on the "Grandfather Rule" is contrary to law, particularly the express mandate of the
Foreign Investments Act of 1991, as amended, and the FIA Rules.
V.
The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.
VI.
The Court of Appeals erred when it concluded that the conversion of the MPSA Applications
into FTAA Applications were of "suspicious nature" as the same is based on mere
conjectures and surmises without any shred of evidence to show the same.31
We find the petition to be without merit.
This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant case as moot is without merit.
Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable
controversy by virtue of supervening events, so that a declaration thereon would be of no practical
use or value."32 Thus, the courts "generally decline jurisdiction over the case or dismiss it on the
ground of mootness."33
50
The "mootness" principle, however, does accept certain exceptions and the mere raising of an issue
of "mootness" will not deter the courts from trying a case when there is a valid reason to do so. In
David v. Macapagal-Arroyo (David), the Court provided four instances where courts can decide an
otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and paramount public interest is involved;
3.) When constitutional issue raised requires formulation of controlling principles to guide
the bench, the bar, and the public; and
4.) The case is capable of repetition yet evading review.34
All of the exceptions stated above are present in the instant case. We of this Court note that a grave
violation of the Constitution, specifically Section 2 of Article XII, is being committed by a foreign
corporation right under our country’s nose through a myriad of corporate layering under different,
allegedly, Filipino corporations. The intricate corporate layering utilized by the Canadian company,
MBMI, is of exceptional character and involves paramount public interest since it undeniably affects
the exploitation of our Country’s natural resources. The corresponding actions of petitioners during
the lifetime and existence of the instant case raise questions as what principle is to be applied to
cases with similar issues. No definite ruling on such principle has been pronounced by the Court;
hence, the disposition of the issues or errors in the instant case will serve as a guide "to the bench,
the bar and the public."35 Finally, the instant case is capable of repetition yet evading review, since
the Canadian company, MBMI, can keep on utilizing dummy Filipino corporations through various
schemes of corporate layering and conversion of applications to skirt the constitutional prohibition
against foreign mining in Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error presented by petitioners since both
involve the conversion of MPSA applications to FTAA applications. Petitioners propound that the CA
erred in ruling against them since the questioned MPSA applications were already converted into
FTAA applications; thus, the issue on the prohibition relating to MPSA applications of foreign mining
corporations is academic. Also, petitioners would want us to correct the CA’s finding which deemed
the aforementioned conversions of applications as suspicious in nature, since it is based on mere
conjectures and surmises and not supported with evidence.
We disagree.
The CA’s analysis of the actions of petitioners after the case was filed against them by respondent
is on point. The changing of applications by petitioners from one type to another just because a
case was filed against them, in truth, would raise not a few sceptics’ eyebrows. What is the reason
for such conversion? Did the said conversion not stem from the case challenging their citizenship
and to have the case dismissed against them for being "moot"? It is quite obvious that it is
petitioners’ strategy to have the case dismissed against them for being "moot."
Consider the history of this case and how petitioners responded to every action done by the court or
appropriate government agency: on January 2, 2007, Redmont filed three separate petitions for
denial of the MPSA applications of petitioners before the POA. On June 15, 2007, petitioners filed a
conversion of their MPSA applications to FTAAs. The POA, in its December 14, 2007 Resolution,
observed this suspect change of applications while the case was pending before it and held:
The filing of the Financial or Technical Assistance Agreement application is a clear admission that
the respondents are not capable of conducting a large scale mining operation and that they need
the financial and technical assistance of a foreign entity in their operation that is why they sought
the participation of MBMI Resources, Inc. The participation of MBMI in the corporation only proves
the fact that it is the Canadian company that will provide the finances and the resources to operate
the mining areas for the greater benefit and interest of the same and not the Filipino stockholders
who only have a less substantial financial stake in the corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage in
mining. The filing of the FTAA application conversion which is allowed foreign corporation of the
earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc.
furnished its stockholders in their head office in Canada suggest that they are conducting operation
only through their local counterparts.36
On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing and
setting aside the September 10, 2008 and July 1, 2009 Orders of the MAB. In the said Decision, the
CA upheld the findings of the POA of the DENR that the herein petitioners are in fact foreign
corporations thus a recommendation of the rejection of their MPSA applications were recommended
to the Secretary of the DENR. With respect to the FTAA applications or conversion of the MPSA
applications to FTAAs, the CA deferred the matter for the determination of the Secretary of the
DENR and the President of the Republic of the Philippines.37
In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal of
the petition asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed and
issued in their favor FTAA No. 05-2010-IVB, which rendered the petition moot and academic.
However, the CA, in a Resolution dated February 15, 2011 denied their motion for being a mere
"rehash of their claims and defenses."38 Standing firm on its Decision, the CA affirmed the ruling that
petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners elevated the case to us via
a Petition for Review on Certiorari under Rule 45, questioning the Decision of the CA. Interestingly,
the OP rendered a Decision dated April 6, 2011, a day after this petition for review was filed,
cancelling and revoking the FTAAs, quoting the Order of the POA and stating that petitioners are
foreign corporations since they needed the financial strength of MBMI, Inc. in order to conduct large
51
scale mining operations. The OP Decision also based the cancellation on the misrepresentation of
facts and the violation of the "Small Scale Mining Law and Environmental Compliance Certificate as
well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584."39 On July 6, 2011, the OP
issued a Resolution, denying the Motion for Reconsideration filed by the petitioners.
Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact of
the OP’s Decision and Resolution. In their Reply, petitioners chose to ignore the OP Decision and
continued to reuse their old arguments claiming that they were granted FTAAs and, thus, the case
was moot. Petitioners filed a Manifestation and Submission dated October 19, 2012, 40 wherein they
asserted that the present petition is moot since, in a remarkable turn of events, MBMI was able to
sell/assign all its shares/interest in the "holding companies" to DMCI Mining Corporation (DMCI), a
Filipino corporation and, in effect, making their respective corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have this case dismissed for being
"moot." Their final act, wherein MBMI was able to allegedly sell/assign all its shares and interest in
the petitioner "holding companies" to DMCI, only proves that they were in fact not Filipino
corporations from the start. The recent divesting of interest by MBMI will not change the stand of
this Court with respect to the nationality of petitioners prior the suspicious change in their corporate
structures. The new documents filed by petitioners are factual evidence that this Court has no
power to verify.
The only thing clear and proved in this Court is the fact that the OP declared that petitioner
corporations have violated several mining laws and made misrepresentations and falsehood in their
applications for FTAA which lead to the revocation of the said FTAAs, demonstrating that petitioners
are not beyond going against or around the law using shifty actions and strategies. Thus, in this
instance, we can say that their claim of mootness is moot in itself because their defense of
conversion of MPSAs to FTAAs has been discredited by the OP Decision.
Grandfather test
The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or
foreign. In their previous petitions, they had been adamant in insisting that they were Filipino
corporations, until they submitted their Manifestation and Submission dated October 19, 2012
where they stated the alleged change of corporate ownership to reflect their Filipino ownership.
Thus, there is a need to determine the nationality of petitioner corporations.
Basically, there are two acknowledged tests in determining the nationality of a corporation: the
control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting
the 1967 SEC Rules which implemented the requirement of the Constitution and other laws
pertaining to the controlling interests in enterprises engaged in the exploitation of natural resources
owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital stock or
capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be
counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as
of Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the
second part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent
grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the application of the
"control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign
Investments Act (FIA), rather than using the stricter grandfather rule. The pertinent provision under
Sec. 3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by the citizens of the Philippines; a corporation organized under the laws
of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled
to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the
fund will accrue to the benefit of Philippine nationals: Provided, That were a corporation and its non-
Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each
of both corporations must be owned and held by citizens of the Philippines and at least sixty percent
(60%) of the members of the Board of Directors, in order that the corporation shall be considered a
Philippine national. (emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the
definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further claim
that the grandfather rule "has been abandoned and is no longer the applicable rule." 41 They also
opined that the last portion of Sec. 3 of the FIA admits the application of a "corporate layering"
scheme of corporations. Petitioners claim that the clear and unambiguous wordings of the statute
preclude the court from construing it and prevent the court’s use of discretion in applying the law.
They said that the plain, literal meaning of the statute meant the application of the control test is
obligatory.
52
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the
Constitution and pertinent laws, then it becomes illegal. Further, the pronouncement of petitioners
that the grandfather rule has already been abandoned must be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all
forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural
resources are owned by the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and utilization of natural resources
shall be under the full control and supervision of the State. The State may directly undertake such
activities, or it may enter into co-production, joint venture or production-sharing agreements with
Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned
by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable
for not more than twenty-five years, and under such terms and conditions as may be provided by
law.
xxxx
The President may enter into agreements with Foreign-owned corporations involving either
technical or financial assistance for large-scale exploration, development, and utilization of minerals,
petroleum, and other mineral oils according to the general terms and conditions provided by law,
based on real contributions to the economic growth and general welfare of the country. In such
agreements, the State shall promote the development and use of local scientific and technical
resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into different types of
agreements for the exploration, development, and utilization of natural resources with entities who
are deemed Filipino due to 60 percent ownership of capital is pertinent to this case, since the issues
are centered on the utilization of our country’s natural resources or specifically, mining. Thus, there
is a need to ascertain the nationality of petitioners since, as the Constitution so provides, such
agreements are only allowed corporations or associations "at least 60 percent of such capital is
owned by such citizens." The deliberations in the Records of the 1986 Constitutional Commission
shed light on how a citizenship of a corporation will be determined:
Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national
economy is freedom from undue foreign control? What is the meaning of undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and
the welfare of the Filipino in the economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply
freedom from foreign control? I think that is the meaning of independence, because as phrased, it
still allows for foreign control.
MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the
60/40 possibility in the cultivation of natural resources, 40 percent involves some control; not total
control, but some control.
MR. BENNAGEN: In any case, I think in due time we will propose some amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation’? Will the Committee please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP
Law Center who provided us with a draft. The phrase that is contained here which we adopted from
the UP draft is ‘60 percent of the voting stock.’
MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS: That is right.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with 60-
40 percent equity invests in another corporation which is permitted by the Corporation Code, does
the Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
53
MR. VILLEGAS: Yes.42 (emphasis supplied)
It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in
cases where corporate layering is present.
Elementary in statutory construction is when there is conflict between the Constitution and a statute,
the Constitution will prevail. In this instance, specifically pertaining to the provisions under Art. XII of
the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no place of
application. As decreed by the honorable framers of our Constitution, the grandfather rule prevails
and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a
corporation for purposes, among others, of determining compliance with nationality requirements
(the ‘Investee Corporation’). Such manner of computation is necessary since the shares in the
Investee Corporation may be owned both by individual stockholders (‘Investing Individuals’) and by
corporations and partnerships (‘Investing Corporation’). The said rules thus provide for the
determination of nationality depending on the ownership of the Investee Corporation and, in certain
instances, the Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in determining the nationality of the
Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control Test
in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules
which states, ‘(s)hares belonging to corporations or partnerships at least 60% of the capital of which
is owned by Filipino citizens shall be considered as of Philippine nationality.’ Under the liberal
Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino
stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned
is considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in
said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership
in the corporation or partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine nationality." Under the Strict Rule or Grandfather Rule
Proper, the combined totals in the Investing Corporation and the Investee Corporation must be
traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the
Investing Corporation and added to the shares directly owned in the Investee Corporation x x x.
xxxx
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second
part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e.,
in cases where the joint venture corporation with Filipino and foreign stockholders with less than Inc.
60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 60-40%
Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
ownership is not in doubt, the Grandfather Rule will not apply. (emphasis supplied)
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
After a scrutiny of the evidence extant on record, the Court finds that this case calls for the
application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
prevails and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt is
present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro, since their Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
common investor, the 100% Canadian corporation––MBMI, funded them. However, petitioners also Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
claim that there is "doubt" only when the stockholdings of Filipinos are less than 60%. 43
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails (emphasis supplied)
to convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only made an
example of an instance where "doubt" as to the ownership of the corporation exists. It would be Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure
ludicrous to limit the application of the said word only to the instances where the stockholdings of and composition as McArthur. In fact, it would seem that MBMI is also a major investor and
non-Filipino stockholders are more than 40% of the total stockholdings in a corporation. The "controls"45 MBMI and also, similar nominal shareholders were present, i.e. Fernando B. Esguerra
corporations interested in circumventing our laws would clearly strive to have "60% Filipino (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):
Ownership" at face value. It would be senseless for these applying corporations to state in their
respective articles of incorporation that they have less than 60% Filipino stockholders since the
Madridejos Mining Corporation
applications will be denied instantly. Thus, various corporate schemes and layerings are utilized to
circumvent the application of the Constitution.
Name Nationality Number of Amount Amount Paid
Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders Shares Subscribed
to circumvent the law, creating a cloud of doubt in the Court’s mind. To determine, therefore, the
Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0
actual participation, direct or indirect, of MBMI, the grandfather rule must be used.

Development
McArthur Mining, Inc.

Corp.
To establish the actual ownership, interest or participation of MBMI in each of petitioners’ corporate
structure, they have to be "grandfathered." MBMI Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00
Resources,
As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its
application from SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided Inc.
into 10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed to by the
following:44 Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Name Nationality Number of Amount Amount Paid
Shares Subscribed Esguerra
Madridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00 Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Corporation
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00
MBMI Resources, Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60

54
 Name Nationality Number of Amount Amount Paid
Hernando
Shares Subscribed
Michael T. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Mining, Inc.
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00
MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60
(emphasis supplied)
Resources, Inc.
Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with
respect to the number of shares they subscribed to in the corporation, which is quite absurd since Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Olympic is the major stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why Olympic
failed to pay any amount with respect to the number of shares it subscribed to. It states that Olympic Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
entered into joint venture agreements with several Philippine companies, wherein it holds directly
and indirectly a 60% effective equity interest in the Olympic Properties. 46 Quoting the said Annual Esguerra
report:
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic")
entered into a series of agreements including a Property Purchase and Development Agreement Agcaoili
(the Transaction Documents) with respect to three nickel laterite properties in Palawan, Philippines
(the "Olympic Properties"). The Transaction Documents effectively establish a joint venture between Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
the Company and Olympic for purposes of developing the Olympic Properties. The Company holds
directly and indirectly an initial 60% interest in the joint venture. Under certain circumstances and Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
upon achieving certain milestones, the Company may earn up to a 100% interest, subject to a 2.5%
net revenue royalty.47 (emphasis supplied) Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company (emphasis supplied)
layering was utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more than
60% or more equity interest in McArthur, making the latter a foreign corporation.
Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as
the corporate structure of petitioner McArthur, down to the last centavo. All the other shareholders
Tesoro Mining and Development, Inc.
are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under
"Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same.
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos Delving deeper, we scrutinize SMMI’s corporate structure:
(PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per share, as
demonstrated below:
Sara Marie Mining, Inc.

[[reference
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]] = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

55
 Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in
Name Nationality Number of Amount Amount Paid
SMMI’s corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more
equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus,
Shares Subscribed disqualifies it to participate in the exploitation, utilization and development of our natural resources.
Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0
Narra Nickel Mining and Development Corporation
Development
Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA
application, whose corporate structure’s arrangement is similar to that of the first two petitioners
Corp. discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which is divided into
ten thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share, shown as
MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00 follows:

Inc. [[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00 Name Nationality Number of Amount Amount Paid

Esguerra Shares Subscribed

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00 Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00 Mining &

Hernando Development
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Corp.
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00
Resources, Inc.
(emphasis supplied)
Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the glaring Mendoza, Jr.
similarity between SMMI and MMC’s corporate structure. Again, the presence of identical
stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00
Mason and Cawkell. The figures under the headings "Nationality," "Number of Shares," "Amount
Subscribed," and "Amount Paid" are exactly the same except for the amount paid by MBMI which Fernandez
now reflects the amount of two million seven hundred ninety four thousand pesos (PhP 2,794,000).
Oddly, the total value of the amount paid is two million eight hundred nine thousand nine hundred Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
pesos (PhP 2,809,900).

56
 Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Agcaoili Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00 Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP PhP
Bocalan 10,000,000.00 2,708,174.60
(emphasis
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00 supplied)
Robert L. American 1 PhP 1,000.00 PhP 1,000.00
Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount of
McCurdy money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources and
Development Corp. (PASRDC), is zero.
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains the
Total 10,000 PhP 10,000,000.00 PhP 2,800,000.00 reason behind the intricate corporate layering that MBMI immersed itself in:
(emphasis supplied)
JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in the
acquisition, exploration and development of mineral properties in the Philippines is described as
Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present
follows:
in this corporate structure.

(a) Olympic Group

Patricia Louise Mining & Development Corporation
The Philippine companies holding the Olympic Property, and the ownership and interests therein,
Using the grandfather method, we further look and examine PLMDC’s corporate structure:
are as follows:

Name Nationality Number of Amount Amount Paid Olympic- Philippines (the "Olympic Group")
Shares Subscribed
Palawan Alpha South Resources Filipino 6,596 PhP PhP 0 Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Development Corporation 6,596,000.00
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
MBMI Resources, Canadian 3,396 PhP PhP
3,396,000.00 2,796,000.00
Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an
Inc. effective equity interest in the Olympic Property of 60.0%. Pursuant to a shareholders’ agreement,
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00 the Company exercises joint control over the companies in the Olympic Group.

Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00 (b) Alpha Group
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
The Philippine companies holding the Alpha Property, and the ownership interests therein, are as
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00 follows:
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Alpha- Philippines (the "Alpha Group")

57
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Narra Nickel Mining & Development Corporation (Narra) 60.4%
Under a joint venture agreement the Company holds directly and indirectly an effective equity
interest in the Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company
exercises joint control over the companies in the Alpha Group.48 (emphasis supplied)
Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and
Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity
interests. Such conclusion is derived from grandfathering petitioners’ corporate owners, namely:
MMI, SMMI and PLMDC. Going further and adding to the picture, MBMI’s Summary of Significant
Accounting Policies statement– –regarding the "joint venture" agreements that it entered into with
the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra. Noticeably, the
ownership of the "layered" corporations boils down to MBMI, Olympic or corporations under the
"Alpha" group wherein MBMI has joint venture agreements with, practically exercising majority
control over the corporations mentioned. In effect, whether looking at the capital structure or the
underlying relationships between and among the corporations, petitioners are NOT Filipino
nationals and must be considered foreign since 60% or more of their capital stocks or equity
interests are owned by MBMI.
Application of the res inter alios acta rule
Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission by co-
partner or agent" rule and "admission by privies" under the Rules of Court in the instant case, by
pointing out that statements made by MBMI should not be admitted in this case since it is not a
party to the case and that it is not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the party
within the scope of his authority and during the existence of the partnership or agency, may be
given in evidence against such party after the partnership or agency is shown by evidence other
than such act or declaration itself. The same rule applies to the act or declaration of a joint owner,
joint debtor, or other person jointly interested with the party.
Sec. 31. Admission by privies.- Where one derives title to property from another, the act,
declaration, or omission of the latter, while holding the title, in relation to the property, is evidence
against the former.
Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership
relation must be shown, and that proof of the fact must be made by evidence other than the
admission itself."49 Thus, petitioners assert that the CA erred in finding that a partnership
relationship exists between them and MBMI because, in fact, no such partnership exists.
58
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They
challenged the conclusion of the CA which pertains to the close characteristics of
"partnerships" and "joint venture agreements." Further, they asserted that before this particular
partnership can be formed, it should have been formally reduced into writing since the capital
involved is more than three thousand pesos (PhP 3,000). Being that there is no evidence of written
agreement to form a partnership between petitioners and MBMI, no partnership was created.
We disagree.
A partnership is defined as two or more persons who bind themselves to contribute money,
property, or industry to a common fund with the intention of dividing the profits among
themselves.50 On the other hand, joint ventures have been deemed to be "akin" to partnerships
since it is difficult to distinguish between joint ventures and partnerships. Thus:
[T]he relations of the parties to a joint venture and the nature of their association are so similar and
closely akin to a partnership that it is ordinarily held that their rights, duties, and liabilities are to be
tested by rules which are closely analogous to and substantially the same, if not exactly the same,
as those which govern partnership. In fact, it has been said that the trend in the law has been to blur
the distinctions between a partnership and a joint venture, very little law being found applicable to
one that does not apply to the other.51
Though some claim that partnerships and joint ventures are totally different animals, there are very
few rules that differentiate one from the other; thus, joint ventures are deemed "akin" or similar to a
partnership. In fact, in joint venture agreements, rules and legal incidents governing partnerships
are applied.52
Accordingly, culled from the incidents and records of this case, it can be assumed that the
relationships entered between and among petitioners and MBMI are no simple "joint venture
agreements." As a rule, corporations are prohibited from entering into partnership agreements;
consequently, corporations enter into joint venture agreements with other corporations or
partnerships for certain transactions in order to form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI was
executed to circumvent the legal prohibition against corporations entering into partnerships, then the
relationship created should be deemed as "partnerships," and the laws on partnership should be
applied. Thus, a joint venture agreement between and among corporations may be seen as similar
to partnerships since the elements of partnership are present.
Considering that the relationships found between petitioners and MBMI are considered to be
partnerships, then the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.
Panel of Arbitrators’ jurisdiction
We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The
POA has jurisdiction to settle disputes over rights to mining areas which definitely involve the
petitions filed by Redmont against petitioners Narra, McArthur and Tesoro. Redmont, by filing its
petition against petitioners, is asserting the right of Filipinos over mining areas in the Philippines
against alleged foreign-owned mining corporations. Such claim constitutes a "dispute" found in Sec.
77 of RA 7942:
Within thirty (30) days, after the submission of the case by the parties for the decision, the panel
shall have exclusive and original jurisdiction to hear and decide the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits
We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.: 53
The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or
opposition to an application for mineral agreement. The POA therefore has the jurisdiction to
resolve any adverse claim, protest, or opposition to a pending application for a mineral agreement
filed with the concerned Regional Office of the MGB. This is clear from Secs. 38 and 41 of the
DENR AO 96-40, which provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of publication/posting/radio announcements, the
authorized officer(s) of the concerned office(s) shall issue a certification(s) that the
publication/posting/radio announcement have been complied with. Any adverse claim, protest,
opposition shall be filed directly, within thirty (30) calendar days from the last date of
publication/posting/radio announcement, with the concerned Regional Office or through any
concerned PENRO or CENRO for filing in the concerned Regional Office for purposes of its
resolution by the Panel of Arbitrators pursuant to the provisions of this Act and these implementing
rules and regulations. Upon final resolution of any adverse claim, protest or opposition, the Panel of
Arbitrators shall likewise issue a certification to that effect within five (5) working days from the date
of finality of resolution thereof. Where there is no adverse claim, protest or opposition, the Panel of
Arbitrators shall likewise issue a Certification to that effect within five working days therefrom.
59
xxxx
No Mineral Agreement shall be approved unless the requirements under this Section are fully
complied with and any adverse claim/protest/opposition is finally resolved by the Panel of
Arbitrators.
Sec. 41.
xxxx
Within fifteen (15) working days form the receipt of the Certification issued by the Panel of
Arbitrators as provided in Section 38 hereof, the concerned Regional Director shall initially evaluate
the Mineral Agreement applications in areas outside Mineral reservations. He/She shall thereafter
endorse his/her findings to the Bureau for further evaluation by the Director within fifteen (15)
working days from receipt of forwarded documents. Thereafter, the Director shall endorse the same
to the secretary for consideration/approval within fifteen working days from receipt of such
endorsement.
In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15)
working days from receipt of the Certification issued by the Panel of Arbitrators as provided for in
Section 38 hereof, the same shall be evaluated and endorsed by the Director to the Secretary for
consideration/approval within fifteen days from receipt of such endorsement. (emphasis supplied)
It has been made clear from the aforecited provisions that the "disputes involving rights to mining
areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a
mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application
is further elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of
Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said sections
may also be filed directly with the Panel of Arbitrators within the concerned periods for filing such
claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the application
on the bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s)
and municipality(ies), copy furnished the barangays where the proposed contract area is located
once a week for two (2) consecutive weeks in a language generally understood in the locality. After
forty-five (45) days from the last date of publication/posting has been made and no adverse claim,
protest or opposition was filed within the said forty-five (45) days, the concerned offices shall issue a
certification that publication/posting has been made and that no adverse claim, protest or opposition
of whatever nature has been filed. On the other hand, if there be any adverse claim, protest or
opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional Offices concerned, or through the Department’s Community
Environment and Natural Resources Officers (CENRO) or Provincial Environment and Natural
Resources Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of
Arbitrators. However previously published valid and subsisting mining claims are exempted from
posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and resolved
by the Panel of Arbitrators. (Emphasis supplied.)
It has been made clear from the aforecited provisions that the "disputes involving rights to mining
areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a
mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application
is further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of
Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said sections
may also be filed directly with the Panel of Arbitrators within the concerned periods for filing such
claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the application
on the bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s)
and municipality(ies), copy furnished the barangays where the proposed contract area is located
once a week for two (2) consecutive weeks in a language generally understood in the locality. After
forty-five (45) days from the last date of publication/posting has been made and no adverse claim,
protest or opposition was filed within the said forty-five (45) days, the concerned offices shall issue a
certification that publication/posting has been made and that no adverse claim, protest or opposition
of whatever nature has been filed. On the other hand, if there be any adverse claim, protest or
opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional offices concerned, or through the Department’s Community
Environment and Natural Resources Officers (CENRO) or Provincial Environment and Natural
Resources Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of
Arbitrators. However, previously published valid and subsisting mining claims are exempted from
posted/posting required under this Section.
60
No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and resolved
by the Panel of Arbitrators. (Emphasis supplied.)
These provisions lead us to conclude that the power of the POA to resolve any adverse claim,
opposition, or protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only to
adverse claims, conflicts and oppositions relating to applications for the grant of mineral rights.
POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions
and it has no authority to approve or reject said applications. Such power is vested in the DENR
Secretary upon recommendation of the MGB Director. Clearly, POA’s jurisdiction over "disputes
involving rights to mining areas" has nothing to do with the cancellation of existing mineral
agreements. (emphasis ours)
Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve
disputes over MPSA applications subject of Redmont’s petitions. However, said jurisdiction does not
include either the approval or rejection of the MPSA applications, which is vested only upon the
Secretary of the DENR. Thus, the finding of the POA, with respect to the rejection of petitioners’
MPSA applications being that they are foreign corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the
POA, that has jurisdiction over the MPSA applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the statute in force at the time of the
commencement of the action.54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization
Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original
jurisdiction:
1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.—
x x x Within thirty (30) days, after the submission of the case by the parties for the decision,
the panel shall have exclusive and original jurisdiction to hear and decide the following:
 (c) Disputes involving rights to mining areas
(d) Disputes involving mineral agreements or permits
It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights
to mining areas. One such dispute is an MPSA application to which an adverse claim, protest or
opposition is filed by another interested applicant.1âwphi1 In the case at bar, the dispute arose or
originated from MPSA applications where petitioners are asserting their rights to mining areas
subject of their respective MPSA applications. Since respondent filed 3 separate petitions for the
denial of said applications, then a controversy has developed between the parties and it is POA’s
jurisdiction to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the
DENR Regional Office or any concerned DENRE or CENRO are MPSA applications. Thus POA has
jurisdiction.
petitioners, allegedly a Philippine-owned corporation due to the sale of MBMI's shareholdings to
DMCI, are allowed to enter into FTAAs with the State is a non-issue in this case.
In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is
a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to
undertake the exploration, development and utilization of the natural resources of the Philippines.
When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the
case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the "grandfather
rule."
WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals
Decision dated October 1, 2010 and Resolution dated February 15, 2011 are hereby AFFIRMED.
SO ORDERED.

Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary
jurisdiction. Euro-med Laboratories v. Province of Batangas55 elucidates:

The doctrine of primary jurisdiction holds that if a case is such that its determination requires the
expertise, specialized training and knowledge of an administrative body, relief must first be obtained
in an administrative proceeding before resort to the courts is had even if the matter may well be
within their proper jurisdiction.

Whatever may be the decision of the POA will eventually reach the court system via a resort to the
CA and to this Court as a last recourse.

Selling of MBMI’s shares to DMCI

As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would want us
to declare the instant petition moot and academic due to the transfer and conveyance of all the
shareholdings and interests of MBMI to DMCI, a corporation duly organized and existing under
Philippine laws and is at least 60% Philippine-owned.56 Petitioners reasoned that they now cannot
be considered as foreign-owned; the transfer of their shares supposedly cured the "defect" of their
previous nationality. They claimed that their current FTAA contract with the State should stand since
"even wholly-owned foreign corporations can enter into an FTAA with the State." 57Petitioners stress
that there should no longer be any issue left as regards their qualification to enter into FTAA
contracts since they are qualified to engage in mining activities in the Philippines. Thus, whether the
"grandfather rule" or the "control test" is used, the nationalities of petitioners cannot be doubted
since it would pass both tests.

The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and
said fact should be disregarded. The manifestation can no longer be considered by us since it is
being tackled in G.R. No. 202877 pending before this Court.1âwphi1 Thus, the question of whether

61