Case Summary (G.R. No. 174938)
Factual Background
BF CORPORATION contracted with SHANGRI-LA PROPERTIES, INC. to construct a mall and a multilevel parking structure under agreements dated December 11, 1989 and May 30, 1991. Shangri-La initially paid in accordance with progress billings but allegedly began defaulting by October 1991. BF Corporation asserted that Shangri-La induced continued work despite nonpayment by misrepresenting its ability to pay, and that Shangri-La took possession of the completed structures while an outstanding balance remained unpaid. BF Corporation sued Shangri-La and its directors, alleging that the directors acted in bad faith and should be held jointly and severally liable with Shangri-La for the unpaid obligations and consequential damages.
Arbitration Clause and Early Motions
The construction contract contained an arbitration clause providing that disputes between the owner and contractor be referred to arbitration and that the arbitrators’ award be final and a condition precedent to legal action. In August 1993, Shangri-La and several directors moved to suspend the trial court proceedings pending arbitration. The trial court denied the motion in November 1993. The directors answered in December 1993, asserting resignation as of July 15, 1991, and pleading that they were not parties to the arbitration agreement.
Procedural History to the Supreme Court
After denial of reconsideration by the RTC, Shangri-La and its directors obtained relief from the Court of Appeals on April 28, 1995, which ordered submission to arbitration. This Court affirmed that order on March 27, 1998. Disputes later arose over procedural matters in arbitration, including the governing law and whether Shangri-La’s directors should be served with separate demands for arbitration. The RTC on July 28, 2003 directed that demands for arbitration be served upon all defendants, reasoning that the directors were interested parties who must be given the opportunity to be heard. The RTC denied the directors’ motion for reconsideration on January 19, 2005. The directors filed a petition for certiorari with the Court of Appeals, which dismissed it on May 11, 2006 and denied reconsideration in an October 5, 2006 resolution. Petitioners then filed a Rule 45 petition with this Court.
The Parties’ Contentions
Petitioners maintained that they were distinct persons from the corporation and could not be compelled to arbitrate because they did not sign the contract and were third parties to it. They asserted absence of allegations proving fraud, bad faith, or any personal undertaking to shoulder corporate obligations. Petitioners also relied on precedents holding that arbitration clauses bind only parties and their assigns or heirs. BF CORPORATION and Shangri-La countered that the directors were impleaded under Section 31 of the Corporation Code for willful, grossly negligent, or bad faith acts and therefore were necessary parties to arbitration. BF Corporation argued that the dispute alleged that the directors acted in representation of the corporation and that excluding them from arbitration would produce multiplicity of suits and impede complete adjudication.
Arbitration Proceedings and Arbitral Award
An Arbitral Tribunal conducted proceedings in which petitioners participated despite their objection. The Tribunal promulgated its award on July 31, 2007 and denied BF Corporation’s claims against the directors, absolving petitioners and other directors from liability for Shangri-La’s contractual obligations. Petitioners informed the Court that they participated ex abundante ad cautela and sought to preserve their objections while also notifying the RTC that any action on the arbitral award should be without prejudice to the present case.
Issue Presented
The primary legal issue was whether petitioners, as corporate directors sued with Shangri-La for alleged bad faith in directing corporate affairs, may be compelled to submit to arbitration under the arbitration clause in the contract between BF Corporation and Shangri-La.
Ruling of the Supreme Court
The Court denied the petition and affirmed the Court of Appeals’ May 11, 2006 decision and October 5, 2006 resolution. The Court held that petitioners could be compelled to submit to arbitration in order to determine whether the corporate personality should be disregarded and whether the directors should be held jointly and severally liable with the corporation. The Court further held that the Arbitral Tribunal’s decision absolving petitioners from liability, rendered with their participation, bound them.
Legal Basis and Reasoning
The Court reiterated the strong state policy favoring arbitration and party autonomy as reflected in the Civil Code arbitration articles and in Republic Act No. 876, and later reinforced by Republic Act No. 9285, which directs courts to give due regard to the policy in favor of arbitration. Arbitration clauses are to be liberally construed and any doubt resolved in favor of arbitration. The Court recognized the general rule that a corporation’s juridical personality is distinct from its directors, officers, and agents. It cited Section 36 of the Corporation Code on corporate powers and affirmed precedents that an arbitration clause binds only the parties thereto and their assigns or heirs.
The Court reconciled these principles with the doctrine of piercing the corporate veil. It explained that when corporate representatives are alleged to have acted in bad faith, gross negligence, or to have perpetrated fraud, courts must determine whether the distinct personalities should be disregarded. Such a determination cannot be made without a proceeding in which all potentially affected persons participate. The Court relied on Section 31 of the Corporation Code, which makes directors liable for willful, grossly negligent, or bad faith acts, and on the Rule 2 prohibition against splitting a single cause of action. The Court reasoned that where the complaint alleges that the directors and the corporation acted indis
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Case Syllabus (G.R. No. 174938)
Parties and Posture
- Gerardo Lanuza, Jr. and Antonio O. Olbes were petitioners who served as directors of Shangri-La Properties, Inc. and were impleaded in a collection action filed by BF Corporation.
- BF Corporation was the plaintiff and contracting party who sought payment for construction work performed for Shangri-La Properties, Inc..
- Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and Benjamin C. Ramos were co-respondent directors of Shangri-La Properties, Inc. who joined in resisting the petition.
- The present recourse was a Rule 45 petition assailing the Court of Appeals decision and resolution ordering petitioners to submit to arbitration.
Key Factual Allegations
- BF Corporation contracted to construct a mall and multilevel parking for Shangri-La Properties, Inc. and initially received payments in accordance with progress billings.
- Shangri-La allegedly began defaulting on payments by October 1991 and induced BF Corporation to continue work by misrepresenting that funds existed to pay their obligations.
- BF Corporation completed the works and alleged that Shangri-La took possession while leaving an outstanding balance despite repeated demands.
- BF Corporation alleged that Shangri-La’s directors acted in bad faith and sought to hold them jointly and severally liable under allegations amounting to piercing the corporate veil.
Arbitration Clause
- The construction contract contained an arbitration clause providing that disputes between the Owner and the Contractor shall be referred to arbitration and that an arbitrators’ award shall be final and a condition precedent to any right of legal action.
- The arbitration clause was invoked by Shangri-La and certain directors as the basis to suspend court proceedings and to compel arbitration.
Procedural History
- The Regional Trial Court denied the motion to suspend the proceedings on November 18, 1993, and denied reconsideration on February 11, 1994.
- The Court of Appeals granted certiorari on April 28, 1995 and ordered submission to arbitration, which this Court affirmed on March 27, 1998 regarding arbitration between BF Corporation and Shangri-La.
- The trial court later directed service of demands for arbitration upon all defendants, including the directors, on July 28, 2003, and denied petitioners’ motion for reconsideration on January 19, 2005.
- The Court of Appeals dismissed petitioners’ certiorari petition on May 11, 2006 and denied reconsideration on October 5, 2006, which prompted the present Rule 45 petition.
Issue Presented
- The sole issue was whether petitioners, as directors of Shangri-La Properties, Inc., may be compelled to submit to arbitration pursuant to the arbitration clause in the contract between BF Corporation and Shangri-La.
Petitioners’ Contentions
- Petitioners contended that they were not parties to the arbitration agreement and could not be bound personally by a contract executed solely by the corporation.
- Petitioners asserted that they never consented to personal liability nor undertook to guarantee corporate obligations, and that BF Corporation failed to allege fraud, gross negligence, or bad faith sufficient to pierce the corporate veil.
- Petitioners argued that compelling them to arbitrate would violate the autonomy principle underlying arbitration and would amount to forcing non-parties into arbitration.