Excellent Quality Apparel, Inc. vs. Win Multi-Rich Builders, Inc.

A corporation cannot institute a collection suit for receivables arising from a contract entered into by a sole proprietorship unless it proves it acquired the assets and liabilities of that sole proprietorship. Additionally, the RTC does not have jurisdiction over construction disputes where the parties agreed to submit the same to voluntary arbitration, as the CIAC has original and exclusive jurisdiction over such disputes pursuant to Section 4 of E.O. No. 1008.

Petitioner Excellent Quality Apparel, Inc. entered into a construction contract with Multi-Rich Builders, a sole proprietorship, for the construction of a garment factory within the Cavite Philippine Economic Zone Authority. The contract contained an arbitration clause providing for submission of disputes to an Arbitration Committee governed by the Arbitration Law (R.A. No. 876). Respondent Win Multi Rich Builders, Inc. was incorporated with the Securities and Exchange Commission on 20 February 1997, after the construction contract had been executed on 26 March 1996.

On 26 March 1996, petitioner Excellent Quality Apparel, Inc., represented by Max L.F. Ying, Vice-President for Productions, and Alfiero R. Orden, Treasurer, entered into a contract with Multi-Rich Builders, represented by Wilson G. Chua, its President and General Manager, for the construction of a garment factory within the Cavite Philippine Economic Zone Authority. The project duration was for a maximum period of five months or 150 consecutive calendar days. The contract included an arbitration clause (Article XIX) providing that any dispute arising out of the contract shall be submitted to an Arbitration Committee of three members, with the decision to be final and binding on both parties, governed by the Arbitration Law (R.A. No. 876). The construction of the factory building was completed on 27 November 1996.

Respondent Win Multi-Rich Builders, Inc. was incorporated with the Securities and Exchange Commission on 20 February 1997, with Chua as its President and General Manager. On 26 January 2004, Win filed a complaint for a sum of money against petitioner and Mr. Ying amounting to ₱8,634,448.20, also praying for the issuance of a writ of attachment on the claim that Mr. Ying was about to abscond and that petitioner was about to close. Win obtained a surety bond from Visayan Surety & Insurance Corporation, and on 10 February 2004, the RTC issued the Writ of Attachment against petitioner's properties.

On 16 February 2004, Sheriff Salvador D. Dacumos went to petitioner's office in CPEZ to serve the Writ of Attachment, Summons, and the Complaint. Petitioner issued Equitable PCIBank (PEZA Branch) Check No. 160149, dated 16 February 2004, in the amount of ₱8,634,448.20, to prevent the Sheriff from taking possession of its properties. The check was made payable to the Office of the Clerk of Court of the RTC of Manila as a guarantee for whatever liability there may be against petitioner.

Petitioner filed an Omnibus Motion claiming it was not about to close, denying owing anything to Win since it had already paid all its obligations, and questioning the jurisdiction of the trial court due to the presence of the Arbitration Clause, asserting the case should be referred to the CIAC pursuant to E.O. No. 1008. In the hearing held on 10 February 2004, Win's counsel moved to change the plaintiff's name from "Win Multi-Rich Builders, Inc." to "Multi-Rich Builders, Inc." Petitioner then moved to dismiss the case on the ground that Win was not the contractor and neither a party to the contract. Petitioner obtained a Certificate of Non-Registration of Corporation/Partnership from the SEC certifying that the latter had no records of a "Multi-Rich Builders, Inc." Win admitted it was only incorporated on 20 February 1997 while the construction contract was executed on 26 March 1996, and that at the time of execution, Multi-Rich was a registered sole proprietorship with a business permit from the Office of the Mayor of Manila.

The RTC denied petitioner's motion in an Order dated 12 April 2004. Win filed a Motion to deposit the garnished amount to the court, which the RTC granted in an Order dated 20 April 2004. Win then filed a motion to release the garnished amount to it, which petitioner opposed. On 18 June 2004, petitioner filed a petition for review on certiorari under Rule 65 before the Court of Appeals, questioning the RTC's jurisdiction and challenging its orders. Petitioner later filed a Supplemental Manifestation and Motion alleging that the money deposited with the RTC was turned over to Win, which Win admitted. On 14 March 2006, the Court of Appeals rendered its Decision annulling the 12 April and 20 April 2004 orders of the RTC but ruling that the RTC had jurisdiction over the case since it is a suit for collection of sum of money. Petitioner's Motion for Reconsideration was denied, hence this petition.

• Lack of Legal Personality: Petitioner argued that Win was not the contractor and neither a party to the contract, and thus cannot institute the case. Petitioner obtained a Certificate of Non-Registration of Corporation/Partnership from the SEC certifying that the latter had no records of a "Multi-Rich Builders, Inc."
• Lack of Jurisdiction: Petitioner argued that the RTC had no jurisdiction over the case because of the presence of the Arbitration Clause, and that the case should be referred to the CIAC pursuant to E.O. No. 1008.
• Impropriety of Attachment: Petitioner argued that the issuance of the writ of attachment and the subsequent garnishment were improper.

• Change of Plaintiff's Name: Win's counsel moved that its name in the case be changed from "Win Multi-Rich Builders, Inc." to "Multi-Rich Builders, Inc."
• Admission of Facts: Win admitted that it was only incorporated on 20 February 1997 while the construction contract was executed on 26 March 1996, and that at the time of execution, Multi-Rich was a registered sole proprietorship with a business permit from the Office of the Mayor of Manila.
• Motion to Release Garnished Amount: Win filed a motion to release the garnished amount to it, which was granted by the RTC.

• Legal Personality: Whether Win has a legal personality to institute the present case.
• Jurisdiction: Whether the RTC has jurisdiction over the case notwithstanding the presence of the arbitration clause.
• Propriety of Attachment: Whether the issuance of the writ of attachment and the subsequent garnishment was proper.

• Legal Personality: No. Win is not a real party in interest because it failed to prove that it acquired the assets and liabilities of Multi-Rich, the sole proprietorship that was a party to the construction contract.
• Jurisdiction: No. The RTC does not have jurisdiction over the construction dispute because the presence of the arbitration clause vested jurisdiction in the CIAC over all construction disputes between petitioner and Multi-Rich, pursuant to Section 4 of E.O. No. 1008.
• Propriety of Attachment: No. The RTC did not have jurisdiction to issue the questioned writ of attachment and to order the release of the garnished funds, and Win cannot retain the garnished amount.

• Legal Personality: A suit may only be instituted by the real party in interest, defined under Section 2, Rule 3 of the Rules of Court as "the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit." Win admitted that the contract was executed between Multi-Rich and petitioner, and that Multi-Rich was a sole proprietorship. Citing Mangila vs. Court of Appeals, the Court noted that "there is no law authorizing sole proprietorships to file a suit in court" and that a sole proprietorship "does not possess a juridical personality separate and distinct from the personality of the owner of the enterprise." The Court held that the change of plaintiff's name from a corporation to a sole proprietorship cannot be countenanced. Citing Corpus Juris Secundum, the Court stated that for a corporation to file suit and claim the receivables of its predecessor in business, it must show proof that it had acquired the assets and liabilities of the sole proprietorship. Win could have presented a deed of assignment or similar document but failed to do so. Thus, the Court cannot presume that Multi-Rich is the predecessor-in-business of Win.

• Jurisdiction: Section 4 of E.O. No. 1008 provides that the CIAC "shall have original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in the Philippines, whether the disputes arises before or after the completion of the contract, or after the abandonment or breach thereof." The Court held that there is nothing in the law which limits the exercise of jurisdiction to complex or difficult cases, and E.O. No. 1008 does not distinguish between claims involving payment of money or not. The CIAC acquires jurisdiction over a construction contract by the mere fact that the parties agreed to submit to voluntary arbitration. The law does not preclude parties from stipulating a preferred forum or arbitral body, but they may not divest the CIAC of jurisdiction as provided by law. The arbitration clause is a commitment on the part of the parties to submit to arbitration the disputes covered, and they are expected to abide by it in good faith. Thus, the RTC should not have taken cognizance of the collection suit.

• Propriety of Attachment: Based on the foregoing, there is no need to discuss the propriety of the issuance of the writ of attachment. However, the Court cannot allow Win to retain the garnished amount which was turned over by the RTC, since the RTC did not have jurisdiction to issue the questioned writ of attachment and to order the release of the garnished funds.

• Real Party in Interest — Under Section 2, Rule 3 of the Rules of Court, a real party in interest is "the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit." A corporation cannot institute a collection suit for receivables arising from a contract entered into by a sole proprietorship unless it proves it acquired the assets and liabilities of that sole proprietorship. The Court applied this doctrine to hold that Win, having failed to present any document showing acquisition of Multi-Rich's assets and liabilities, lacked standing to sue.

• Sole Proprietorship Lacks Juridical Personality — A sole proprietorship does not possess a juridical personality separate and distinct from the personality of the owner of the enterprise. The law merely recognizes the existence of a sole proprietorship as a form of business organization conducted for profit by a single individual and requires its proprietor or owner to secure licenses and permits, register its business name, and pay taxes. The law does not vest a separate legal personality on the sole proprietorship or empower it to file or defend an action in court. The Court applied this doctrine to reject the attempted change of plaintiff's name from a corporation to a sole proprietorship.

• CIAC Exclusive Jurisdiction over Construction Disputes — Under Section 4 of E.O. No. 1008, the CIAC shall have original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in the Philippines. The CIAC acquires jurisdiction over a construction contract by the mere fact that the parties agreed to submit to voluntary arbitration. The law does not preclude parties from stipulating a preferred forum or arbitral body, but they may not divest the CIAC of jurisdiction as provided by law. The Court applied this doctrine to hold that the RTC lacked jurisdiction over the collection suit despite its characterization as a suit for sum of money.

• "A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise authorized by law or these Rules, every action must be prosecuted or defended in the name of the real party in interest." — This quotation from Section 2, Rule 3 of the Rules of Court defines the controlling standard for determining who may institute a suit, which the Court applied to deny Win's standing.

• "A sole proprietorship does not possess a juridical personality separate and distinct from the personality of the owner of the enterprise. The law merely recognizes the existence of a sole proprietorship as a form of business organization conducted for profit by a single individual and requires its proprietor or owner to secure licenses and permits, register its business name, and pay taxes to the national government. The law does not vest a separate legal personality on the sole proprietorship or empower it to file or defend an action in court." — This passage from Mangila v. Court of Appeals, quoted by the Court, establishes the doctrine that a sole proprietorship cannot sue or be sued in court, which was central to the Court's ruling on Win's lack of legal personality.

• "The CIAC acquires jurisdiction over a construction contract by the mere fact that the parties agreed to submit to voluntary arbitration. The law does not preclude parties from stipulating a preferred forum or arbitral body but they may not divest the CIAC of jurisdiction as provided by law." — This passage articulates the rule on CIAC's exclusive jurisdiction, which the Court applied to hold that the RTC lacked jurisdiction over the construction dispute.

• Mangila vs. Court of Appeals, 435 Phil. 870, 886 (2002) — Controlling precedent on the lack of juridical personality of sole proprietorships and their inability to file suits in court. The Court quoted this case extensively to support its ruling that Win lacked legal personality.

• National Irrigation Authority vs. Court of Appeals, 376 Phil. 362, 375 (1999) — Cited to support the proposition that the CIAC acquires jurisdiction over a construction contract by the mere fact that the parties agreed to submit to voluntary arbitration.

• China Chang Jiang Energy Corporation vs. Rosal Infrastructure Builders, G.R. No. 125706, 30 September 1996 — Cited to support the rule that parties may not divest the CIAC of jurisdiction as provided by law.

• Home Bankers Savings and Trust Company vs. Court of Appeals, 376 Phil. 669 (1999) — Cited to support the proposition that arbitration is an alternative method of dispute resolution which is highly encouraged.

• LM Power Engineering Corporation vs. Capitol Industrial Construction Groups, Inc., 447 Phil. 705, 716 (2003) — Cited to support the rule that the arbitration clause is a commitment on the part of the parties to submit to arbitration, and they are expected to abide by it in good faith.

• Berman Memorial Park, Inc. vs. Cheng, G.R. No. 154630, 6 May 2005, 458 SCRA 112 — Cited to support the proposition that a sole proprietorship is not vested with juridical personality to file or defend an action.

• Section 2, Rule 3, Rules of Court — Defines "real party in interest" as "the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit." The Court applied this provision to determine that Win was not the real party in interest in the collection suit.

• Section 4, Executive Order No. 1008 — Provides that the CIAC "shall have original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in the Philippines, whether the disputes arises before or after the completion of the contract, or after the abandonment or breach thereof." The Court applied this provision to hold that the RTC lacked jurisdiction over the construction dispute.

• Article XIX, Construction Contract — The arbitration clause in the contract between petitioner and Multi-Rich, which provided for submission of disputes to an Arbitration Committee of three members governed by the Arbitration Law (R.A. No. 876). The Court held that this clause vested jurisdiction in the CIAC.

• Section 39, Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004) — Cited in the footnote, providing that a Regional Trial Court before which a construction dispute is filed shall, upon becoming aware that the parties had entered into an arbitration agreement, dismiss the case and refer the parties to arbitration to be conducted by the CIAC.

• Justice Leonardo A. Quisumbing (Chairperson)
• Justice Conchita Carpio Morales
• Justice Presbitero J. Velasco, Jr.
• Justice Arturo D. Brion