Corporation Law, Mercantile Law

LANUZA v. BF CORPORATION G.R. No. 174938 October 1, 2014 Piercing the Veil of Corporate Fiction

FACTS:

BF Corporation entered into agreements with Shangri-La wherein it undertook to construct for Shangri-La a mall and a multilevel parking structure along EDSA.

When Shangri-La started defaulting in payment, Shangri-La induced BF Corporation to continue with the construction of the buildings using its own funds and credit. According to BF Corporation, ShangriLa misrepresented that it had funds to pay for its obligations with BF Corporation.

BF Corporation eventually completed the construction of the buildings. Shangri-La allegedly took possession of the buildings while still owing BF Corporation an outstanding balance.

BF Corporation filed a collection complaint Shangri-La and the members of its board of directors. BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance owed to it.

Shangri-La, et al. filed a motion to suspend the proceedings in view of BF Corporation’s failure to submit its dispute to arbitration, in accordance with the arbitration clause provided in its contract. The RTC  denied the motion to suspend proceedings.

Shangri-La, et al. filed a petition for certiorari with the CA.

The CA granted the petition for certiorari and ordered the submission of the dispute to arbitration.

Hence, this petition.

Petitioners argue that they cannot be held personally liable for corporate acts or obligations, and that they are third parties to the contract between BF Corporation and Shangri-La. Provisions including arbitration stipulations should bind only the parties. Based on our arbitration laws, parties who are strangers to an agreement cannot be compelled to arbitrate.

ISSUE:

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.

RULING:

The petition must fail.

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.

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

A corporation, in the legal sense, is an individual with a personality that is distinct and separate from other persons including its stockholders, officers, directors, representatives, and other juridical entities.
Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers through its directors, officers, or agents, who are all natural persons. A corporation cannot sue or enter into contracts without them.

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

A 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.

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.”

Among the persons who may be treated as the corporation itself under certain circumstances are its directors and officers.

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.

Hence, when the directors, as in this case, are impleaded in a case against a corporation, alleging malice or bad 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.

They are alleging that contracts executed by the corporation are contracts executed by the directors. Complainants effectively pray that the corporate veil be pierced because the cause of action between the corporation and the directors are the same.

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.

In ruling that petitioners may be compelled to submit to the arbitration proceedings, we are not overturning.



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