EDSA Shangri-la Hotel and Resort, Inc. vs. BF Corporation

Corporate directors and officers are not personally liable for obligations incurred by the corporation acting through them; solidary liability may attach only under exceptional circumstances, such as when directors act with malice or bad faith, or when the separate corporate personality is abused to commit fraud or evade obligations. Furthermore, a court decision imposing personal liability on a corporate director must clearly and distinctly express the facts and law on which such liability is based, as required by the Constitution and rules of procedure.

The dispute originated from a construction contract executed on May 1, 1991, between BF Corporation (contractor) and Edsa Shangri-La Hotel and Resort, Inc. (ESHRI) for the construction of the EDSA Shangri-La Hotel. The contract provided for monthly progress payments based on accomplished work certified by ESHRI. After ESHRI failed to pay progress billings Nos. 14 to 19 despite BF Corporation's continuous work, BF filed suit for collection of sum of money and damages. The trial court ruled in favor of BF Corporation and held ESHRI and its individual directors jointly and severally liable, leading to these consolidated appeals.

• BF Corporation and ESHRI executed a construction contract on May 1, 1991, for the EDSA Shangri-La Hotel Project, stipulating payment based on monthly progress billings certified by ESHRI.
• From May 1991 to June 1992, BF submitted 19 progress billings; ESHRI paid Billings Nos. 1 to 13 totaling PhP 86,501,834.05 but refused to pay Billings Nos. 14 to 19 despite BF's continuous work.
• ESHRI allegedly assured BF that payment certificates were being processed, inducing BF to continue working, but later claimed overpayment for earlier billings and defective work without sufficient proof.
• Cynthia Roxas-del Castillo was a member of the Board of Directors of ESHRI but had ceased to be a director as of July 1992, prior to the emergence of the dispute regarding the unpaid billings.
• The RTC decision included Roxas-del Castillo in the dispositive portion as jointly and severally liable but failed to state in the body of the decision any specific factual or legal basis for her personal liability.
• During trial, BF presented photocopies of Progress Billing Nos. 14 to 19, Project Manager's Instructions (PMIs), and Work Variation Orders (WVOs) as secondary evidence after ESHRI refused to produce the originals despite notice.
• The RTC found ESHRI guilty of evident bad faith for refusing to pay valid claims and awarded moral damages, exemplary damages, and attorney's fees.

• ESHRI, et al. (G.R. No. 145842): The CA committed grave abuse of discretion in admitting photocopies of progress billings without requiring BF to lay the basis for secondary evidence under the best evidence rule; the CA erred in not finding BF guilty of delay and defective workmanship; the CA erred in finding petitioners guilty of malice and bad faith and in awarding damages; and the CA erred in setting aside its August 13, 1999 Resolution granting restitution of garnished funds.
• Roxas-del Castillo (G.R. No. 145873): The RTC decision is void for failing to state the factual and legal basis for holding her personally liable, violating due process and Article VIII, Section 14 of the Constitution; as a former director who had already severed ties with ESHRI when the dispute arose, she cannot be held personally liable for corporate contract breaches; no malice or bad faith was attributed to her; and she cannot be held liable for moral damages, exemplary damages, or attorney's fees.

• BF Corporation defended the admission of photocopies, arguing that it complied with the laying-the-basis requirement under Rule 130, Sections 3 and 6 of the Rules of Court since the originals were in ESHRI's possession and ESHRI refused to produce them despite reasonable notice.
• BF maintained that the factual findings of the RTC and CA regarding ESHRI's delay, lack of defective workmanship, and bad faith were conclusive and binding upon the Supreme Court under Rule 45.
• BF argued that the corporate veil should be pierced and directors held personally liable based on principles of justice and equity, and that Roxas-del Castillo's liability attached due to her position as a director during the contract period.

• Procedural:
  • Whether the CA committed grave abuse of discretion in admitting photocopies of documents as secondary evidence without strict compliance with the best evidence rule.
  • Whether the CA erred in denying ESHRI's application for restitution of garnished funds after the underlying judgment was affirmed.
• Substantive Issues:
  • Whether corporate directors may be held jointly and severally liable with the corporation for breach of contract absent a showing of malice, bad faith, or basis for piercing the corporate veil.
  • Whether the RTC decision validly imposed personal liability on Roxas-del Castillo despite failing to state the factual and legal basis therefor in the body of the decision.
  • Whether Roxas-del Castillo, as a former director who had severed her relationship with the corporation prior to the breach, could be held liable for corporate obligations.

• Procedural:
  • The admission of photocopies as secondary evidence was proper under Rule 130, Section 3(b) and Section 6 of the Rules of Court. BF gave ESHRI reasonable notice to produce the originals, and ESHRI's failure to produce them despite sufficient time and opportunity justified the presentation of photocopies. The offeror proved the existence of the originals, the cause of their unavailability, and good faith.
  • The denial of restitution was proper under Rule 39, Section 5, which allows restitution only when the executed judgment is reversed or annulled. Since the CA affirmed the RTC decision in toto, the condition for restitution was not met, rendering the prior Supreme Court ruling on the procedural matter of restitution moot and academic.
• Substantive:
  • The Court affirmed the liability of ESHRI and the individual petitioners in G.R. No. 145842 (except Roxas-del Castillo), finding sufficient evidence of bad faith in ESHRI's refusal to pay valid claims.
  • Regarding Roxas-del Castillo, the Court held that the RTC decision violated Article VIII, Section 14 of the Constitution and the requirements of due process by imposing liability on her in the dispositive portion without stating in the decision's body the factual and legal basis for such liability.
  • The Court applied the doctrine of separate corporate personality, emphasizing that ownership of stock or directorship does not, without more, justify piercing the corporate veil. Solidary liability of directors requires exceptional circumstances such as malice or bad faith, or when the corporate fiction is used to commit fraud or evade obligations.
  • The Court found no evidence that Roxas-del Castillo acted with malice or bad faith, or that she participated in any wrongful acts. She was no longer a director when the dispute arose in July 1992, and contracts bind only the parties thereto (Article 1311, Civil Code).
  • Section 31 of the Corporation Code (liability for willfully voting for patently unlawful acts or acquiring conflicting pecuniary interest) was found inapplicable as no such acts were proven against Roxas-del Castillo.
  • The petition in G.R. No. 145842 was dismissed; the petition in G.R. No. 145873 was granted, absolving Roxas-del Castillo from any liability.

• Doctrine of Piercing the Corporate Veil — A corporation possesses a juridical personality separate and distinct from its stockholders and directors. The veil of corporate fiction may be disregarded only when the separate personality is abused or used to commit fraud, perpetrate a social injustice, or evade obligations. Mere ownership of nearly all capital stock by a single person or small group is insufficient to disregard corporate personality.
• Personal Liability of Corporate Directors — Directors or trustees are not personally liable for corporate obligations incurred by the corporation acting through them. Solidary liability may attach only under exceptional circumstances, such as when they act with malice or bad faith, or when they willfully vote for or assent to patently unlawful acts or acquire pecuniary interests in conflict with their duties under Section 31 of the Corporation Code.
• Best Evidence Rule (Secondary Evidence) — When the subject of inquiry is the contents of a document, the original must be produced. However, secondary evidence is admissible when the original is in the custody or under the control of the adverse party who fails to produce it after reasonable notice, provided the offeror proves the existence of the original, the cause of its unavailability, and good faith.
• Requirements for Judicial Decisions — No decision shall be rendered by any court without expressing therein clearly and distinctly the facts and the law on which it is based (Article VIII, Section 14, Constitution). A decision imposing personal liability on a party must contain in its body, not merely in the dispositive portion, the factual and legal rationale for such liability.

• "A corporation, upon coming to existence, is invested by law with a personality separate and distinct from those of the persons composing it. Ownership by a single or a small group of stockholders of nearly all of the capital stock of the corporation is not, without more, sufficient to disregard the fiction of separate corporate personality."
• "Solidary liability on the part of corporate officers may at times attach, but only under exceptional circumstances, such as when they act with malice or in bad faith."
• "Contracts are binding only among parties to an agreement. Art. 1311 of the Civil Code is clear on this point: Contracts take effect only between the parties, their assigns and heirs, except in cases where the rights and obligations are not transmissible by their nature, or by stipulation or by provision of law."
• "The mere fact that the original of the writing is in the custody or control of the party against whom it is offered does not warrant the admission of secondary evidence. The offeror must prove that he has done all in his power to secure the best evidence by giving notice to the said party to produce the document."

• Magdayao v. People, G.R. No. 152881 — Cited for the rule that secondary evidence is admissible when the original is in the adverse party's custody and they fail to produce it after reasonable notice, provided satisfactory proof of existence is offered.
• Union Bank of the Philippines v. Ong, G.R. No. 152347 — Cited for the principle that corporate personality is separate from stockholders and that ownership alone does not justify piercing the veil.
• Petron Corporation v. National Labor Relations Commission, G.R. No. 154532 — Cited for the rule that solidary liability of corporate officers attaches only when they act with malice or bad faith.
• Enriquez Security Services, Inc. v. Cabotaje, G.R. No. 147993 — Cited for the principle that the corporate veil may be pierced when the separate juridical personality is used to evade obligations or commit fraud.
• Allied Banking Corporation v. Quezon City Government, G.R. No. 154126 — Cited for the rule that under Rule 45, only questions of law may be raised and reviewed.
• Dungaran v. Koschnicke, G.R. No. 161048 — Cited for the exceptions to the rule that factual findings of the CA are final and conclusive.

• 1987 Constitution, Article VIII, Section 14 — Requires that no decision shall be rendered without expressing clearly and distinctly the facts and law on which it is based; cited to invalidate the RTC's imposition of liability on Roxas-del Castillo without proper factual and legal basis in the decision body.
• Corporation Code, Section 31 — Provides for the liability of directors who willfully vote for or assent to patently unlawful acts or acquire conflicting pecuniary interests; cited as the statutory basis for potential director liability, which was found inapplicable to Roxas-del Castillo.
• Civil Code, Article 1311 — Establishes the principle that contracts take effect only between the parties thereto; cited to emphasize that Roxas-del Castillo could not be bound by contracts entered into by the corporation after she ceased to be a director.
• Rules of Court, Rule 130, Section 3 (Best Evidence Rule) — Requires production of original documents with exceptions; specifically Section 3(b) allowing secondary evidence when the original is in the adverse party's custody and they fail to produce it after reasonable notice.
• Rules of Court, Rule 130, Section 6 — Governs the procedure for offering secondary evidence when the original is in the adverse party's custody, requiring reasonable notice and satisfactory proof of existence.
• Rules of Court, Rule 39, Section 5 — Provides that restitution of executed judgments is proper only when the judgment is reversed or annulled, not when affirmed.