G.R. No. 174938 - Lanuza, Jr. vs. BF Corp.

Case Summary (G.R. No. 174938)

Procedural History

BF Corporation filed a collection complaint in 1993 against Shangri‑La and its directors, alleging breach of contract and bad faith by the directors such that they should be held jointly and severally liable. Shangri‑La and some directors moved to suspend proceedings asserting the arbitration clause in the construction contract; the trial court initially denied suspension. The Court of Appeals ordered submission to arbitration, a decision this Court affirmed in 1998. Subsequent disputes arose regarding whether the directors should be included as parties in the arbitration; the trial court ordered service of demands for arbitration upon all defendants (including the directors). The Court of Appeals dismissed certiorari seeking to set aside that order, and the petitioners elevated the matter to the Supreme Court. An Arbitral Tribunal later rendered an award (promulgated July 31, 2007) denying BF Corporation’s claims against the directors; petitioners nonetheless sought relief from the court orders compelling their submission to arbitration.

Contractual Arbitration Clause and Core Issue

The construction contract contained an arbitration clause providing that disputes between the Owner (Shangri‑La) and the Contractor (BF Corporation) would be referred to arbitration and that the arbitrators’ award would be final and a condition precedent to any legal action. The core legal issue presented to the Court was whether the corporate directors (petitioners) could be compelled to submit to arbitration under an agreement executed solely by the corporation and the contractor, given allegations that the directors acted in bad faith or malice and were impleaded under Section 31 of the Corporation Code.

Parties’ Principal Arguments

Petitioners’ position: they were not parties to the arbitration agreement and did not personally bind themselves to the contract; the corporation’s separate juridical personality precludes imposition of personal liability or compulsion to arbitrate absent proof that they personally consented or that fraud/bad faith was established. They contended they had resigned as directors by July 15, 1991 and that BF Corporation failed to prove bad faith.
BF Corporation and Shangri‑La’s position: the directors were impleaded under Sec. 31 of the Corporation Code for alleged bad faith/gross negligence and thus were not mere strangers to the controversy; inclusion of the directors in arbitration was necessary to prevent multiplicity of suits and to permit a complete adjudication of the dispute, including the incidental question whether the corporate veil should be pierced.

Jurisprudential and Statutory Policy Favoring Arbitration

The Court reiterated the strong public policy favoring arbitration reflected in historical Civil Code provisions, RA 876, and RA 9285. Arbitration clauses are to be liberally construed to effectuate party autonomy and to promote expeditious, amicable dispute resolution. Precedents cited emphasize that doubts should be resolved in favor of arbitration and that courts should avoid interpretations that nullify an arbitration agreement when a reasonable construction can render it effective.

Legal Principle: Separate Corporate Personality and Its Limits

The Court acknowledged the general rule that a corporation has a separate juridical personality distinct from its directors, officers, stockholders, and agents; representatives who do not personally bind themselves to a contract are ordinarily not parties to the corporation’s arbitration agreement and cannot be compelled to arbitrate solely by virtue of their corporate office. The Court also reiterated established exceptions—piercing the corporate veil—where the corporate form is exploited to perpetrate fraud, illegal acts, evade obligations, or where the corporation is an alter ego or mere instrumentality. In such circumstances, the separate personality may be disregarded and those who control the corporation treated as if they were the corporation for specific liabilities.

Section 31 of the Corporation Code and Grounds for Personal Liability

Section 31 was outlined: directors/trustees/officers may be held jointly and severally liable for damages when they willfully and knowingly vote for or assent to patently unlawful corporate acts, are guilty of gross negligence or bad faith in directing corporate affairs, or acquire personal/pecuniary interests in conflict with their duties. The Court emphasized that allegations of bad faith or malice in directing corporate affairs raise the question whether the corporate veil should be pierced and whether the directors’ personalities are to be treated as indistinct from the corporation’s for purposes of liability.

Necessity of Determination in a Single Proceeding and Joinder for Complete Adjudication

The Court explained that when plaintiffs effectively allege that the directors’ acts are the corporation’s acts (i.e., seeking to pierce the veil or impose solidary liability), those claims and the contractual dispute are of the same cause of action and should be resolved together to prevent multiplicity of suits. Because the determination whether to disregard corporate personality involves factual findings that cannot be premised on merely theoretical distinctions, all implicated parties (the corporation and its representatives) should participate in the same proceeding so one tribunal can decide both the contractual dispute and the incidental question of piercing the corporate veil.

Application to Arbitration: Compelling Corporate Representatives to Arbitrate

Applying the foregoing principles, the Court held that where a claim against a corporation includes allegations that its directors acted in bad faith or malice such that their personalities may be deemed the

Case Syllabus (G.R. No. 174938)

Procedural Posture

Petitioners filed a Rule 45 petition assailing the Court of Appeals' May 11, 2006 decision and October 5, 2006 resolution affirming the trial court's orders compelling petitioners (directors) to submit to arbitration proceedings between BF Corporation and Shangri-La Properties, Inc. (Shangri-La).
BF Corporation originally filed a collection complaint in 1993 in the Regional Trial Court (RTC) against Shangri-La and members of its board of directors, including the petitioners.
Shangri-La and certain directors moved to suspend trial court proceedings and compel arbitration pursuant to an arbitration clause in the contract between BF Corporation and Shangri-La; the RTC denied the motion on November 18, 1993.
After denial of reconsideration, the Court of Appeals granted certiorari on April 28, 1995 and ordered submission to arbitration; the Supreme Court affirmed that order on March 27, 1998, directing arbitration.
Disputes later arose over the law governing arbitration proceedings and whether Shangri‑La’s directors should be served separately and included as parties in arbitration.
The RTC ordered service of demands for arbitration upon all defendants on July 28, 2003; petitioners’ motion for reconsideration was denied on January 19, 2005.
Petitioners filed certiorari with the Court of Appeals alleging grave abuse of discretion; the Court of Appeals dismissed the petition on May 11, 2006 and denied reconsideration on October 5, 2006.
Petitioners filed a petition for review with the Supreme Court on November 24, 2006; the Arbitral Tribunal had promulgated its decision on July 31, 2007, denying BF Corporation’s claims against the directors.
The Supreme Court resolved the petition, affirmed the Court of Appeals decision and denial of the petition, and denied the petition to compel relief.

Factual Background

BF Corporation alleged that on December 11, 1989 and May 30, 1991 it contracted with Shangri‑La to construct a mall and multilevel parking structure along EDSA.
Initially, Shangri‑La consistently paid BF Corporation according to progress billings; by October 1991, Shangri‑La began defaulting in payments.
BF Corporation alleged that, despite default, Shangri‑La induced BF Corporation to continue construction using BF Corporation's funds and credit by representing that delays were due to processing of progress billings and that Shangri‑La had funds to pay.
BF Corporation completed construction; Shangri‑La allegedly took possession while still owing an outstanding balance and allegedly refused to pay despite repeated demands.
BF Corporation alleged that Shangri‑La’s directors acted in bad faith in directing Shangri‑La’s affairs and should therefore be held jointly and severally liable with the corporation for obligations and damages.

Arbitration Clause at Issue

The contract between BF Corporation and Shangri‑La contained an arbitration clause (clause 35) requiring parties to exert efforts to settle amicably and, failing that, to refer disputes to arbitration in accordance with the rules and procedures of the Philippine Arbitration Law.
The clause expressly provided that the award of the arbitrators shall be final and binding and that the decision of the arbitrators is a condition precedent to any right of legal action either party may have against the other.
The arbitration clause language was quoted in the respondents’ motion to suspend proceedings as the basis for compelling arbitration.

Core Legal Issue

Whether petitioners (directors) should be made parties to and compelled to submit to arbitration proceedings pursuant to the arbitration clause between BF Corporation and Shangri‑La, notwithstanding that petitioners did not personally sign the contract or arbitration agreement.

Petitioners’ Principal Arguments

Petitioners contended they could not be held personally liable for corporate acts or obligations; the corporation is a separate juridical person and nothing justified holding them solidarily liable with Shangri‑La.
They argued they neither bound themselves personally nor undertook to shoulder Shangri‑La’s obligations, and BF Corporation failed to establish fraud, bad faith, or other grounds for personal liability.
Petitioners asserted they were third parties to the contract and that arbitration stipulations bind only contracting parties; Philippine arbitration laws do not compel strangers to an agreement to arbitrate.
They maintained compelling them to arbitrate would contravene party autonomy and could amount to stipulating for non‑parties.
Petitioners also asserted they had resigned as directors as of July 15, 1991.

Respondents’ Arguments (BF Corporation and Others)

BF Corporation argued the courts’ order directing arbitration contemplated inclusion of Shangri‑La’s directors.
BF Corporation maintained that petitioners were impleaded under Section 31 of the Corporation Code and could be held solidarily liable for fraud, gross negligence, or bad faith.
BF Corporation argued that petitioners were being sued as Shangri‑La’s representatives and were therefore not true third parties to the contract.
BF Corporation contended that because petitioners were impleaded for solidary liability, they were necessary parties to arbitration; full resolution requires their inclusion to avoid multiplicity of suits.
Shangri‑La argued petitioners were impleaded for solidary liability under Section 31, and that excluding them would result in multiplicity of suits and duplicate proceedings; it pointed to the case’s mootness after arbitration but still favored inclusion in arbitration when warranted.

Relevant Statutory and Doctrinal Authorities Cited

Republic Act No. 876 (Arbitration Law) — authorized arbitration of civil contro