ALTERNATIVE DISPUTE RESOLUTION | LANUZA JR. VS. BF CORPORATION G.R. NO. 174938, OCTOBER 1, 2014

LANUZA JR. VS. BF CORPORATION

G.R. NO. 174938, OCTOBER 1, 2014

 

TOPIC/DOCTRINE

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. Section 31 of the Corporation Code provides the instances when directors, trustees, or officers may become liable for corporate acts.

 

FACTS

In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-La and 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.

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. However, by October 1991, Shangri-La started defaulting in payment. BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance owed to it. 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.

The Court of Appeals affirmed the trial court’s decision holding that petitioners, as directors, should submit themselves as parties to the arbitration proceedings between BF Corporation and Shangri-La Properties, Inc. (Shangri-La).

 

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-La at the time of the alleged default.

 

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

Yes.

 

The court ruled that 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. 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. 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. 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.” 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 if such distinction should indeed be disregarded and, if so, to determine the extent of their liabilities.

 

Here, 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.

 







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