Lanuza vs. BF Corporation

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, as the determination of whether to pierce the veil of corporate fiction must be made in a single proceeding participated in by all parties involved.

The case involves a construction dispute between BF Corporation (contractor) and Shangri-La Properties, Inc. (owner) regarding the construction of a mall and multilevel parking structure along EDSA. The dispute arose when Shangri-La allegedly defaulted on progress payments, prompting BF Corporation to file a collection suit not only against the corporation but also against its individual directors for alleged bad faith in directing the corporation's affairs under Section 31 of the Corporation Code.

• BF Corporation entered into agreements with Shangri-La Properties, Inc. on December 11, 1989 and May 30, 1991 for the construction of a mall and multilevel parking structure along EDSA.
• The construction contract contained an arbitration clause requiring disputes to be referred to arbitration in accordance with the rules and procedures of the Philippine Arbitration Law, with the arbitral award being final and binding on the parties.
• Shangri-La initially paid according to progress billings but started defaulting by October 1991.
• BF Corporation alleged that Shangri-La induced it to continue construction using its own funds and credit by misrepresenting that funds were available and that delays were merely procedural matters of delayed processing.
• BF Corporation completed the construction, but Shangri-La allegedly took possession while still owing an outstanding balance despite repeated demands.
• BF Corporation filed a collection complaint against Shangri-La and its directors (petitioners Lanuza and Olbes, among others), alleging that the directors were in bad faith in directing Shangri-La's affairs and should be held jointly and severally liable under Section 31 of the Corporation Code.
• Petitioners alleged they had resigned as directors as of July 15, 1991, prior to the alleged default.
• After the Supreme Court affirmed the order to submit to arbitration, the trial court directed that all defendants, including the individual directors, be served with demands for arbitration as necessary parties.
• The Arbitral Tribunal eventually rendered a decision on July 31, 2007, absolving petitioners from liability, which rendered the case moot but the Supreme Court proceeded to resolve the issue for guidance.

• Petitioners argued that they cannot be held personally liable for corporate acts or obligations because a corporation has a separate and distinct personality from its directors and officers under Section 2 of the Corporation Code.
• They contended that they did not personally bind themselves nor undertake to shoulder Shangri-La's obligations, and BF Corporation failed to establish fraud or bad faith on their part.
• They asserted that as non-signatories to the contract between BF Corporation and Shangri-La, they are third parties who cannot be compelled to submit to arbitration under the principle that arbitration agreements bind only parties to the contract, citing Heirs of Augusto Salas, Jr. and Del Monte Corporation-USA.
• They emphasized that arbitration laws were enacted to promote party autonomy, and compelling them to arbitrate would violate this purpose and amount to stipulating for them without their consent.
• They claimed they had already resigned as directors as of July 15, 1991, before the alleged default occurred, and thus could not be liable for acts committed after their resignation.

• BF Corporation argued that the courts' ruling directing arbitration clearly contemplated the inclusion of the directors, who were impleaded under Section 31 of the Corporation Code for solidary liability due to fraud, gross negligence, and bad faith.
• BF Corporation contended that petitioners were not really third parties because they were being sued as Shangri-La's representatives under Section 31 of the Corporation Code, making them necessary parties to the arbitration proceedings.
• BF Corporation maintained that because petitioners were impleaded for their solidary liability, they are necessary parties to ensure complete resolution of the controversy and avoid multiplicity of suits.
• Shangri-La argued that petitioners were impleaded for their solidary liability under Section 31 of the Corporation Code and that their exclusion would result in multiplicity of suits, which is not favored in this jurisdiction.
• Shangri-La maintained that the case had become moot because the arbitration proceedings had already terminated and petitioners actively participated therein, and BF Corporation only assailed the correctness of the award against Shangri-La, not the part absolving the directors.

• Procedural Issues:
  • Whether the Supreme Court should resolve the petition despite the case having become moot and academic due to the Arbitral Tribunal's decision absolving petitioners from liability.
  • Whether petitioners' inclusion in the arbitration proceedings was proper given their claim of being non-parties to the arbitration agreement.
• Substantive Issues:
  • Whether corporate directors who are not signatories to an arbitration agreement may be compelled to submit to arbitration proceedings when they are impleaded for alleged bad faith or malice in directing corporate affairs.
  • Whether the doctrine of piercing the veil of corporate fiction applies to subject non-signatory directors to arbitration under an agreement entered into by the corporation.

• Procedural:
  • The Supreme Court held that while the case was moot and academic because the Arbitral Tribunal had already rendered a decision on July 31, 2007 absolving petitioners from liability, it nevertheless proceeded to resolve the issue to establish principles for the guidance of the bench, bar, and public.
  • The Court cited De la Camara v. Hon. Enage for the principle that mootness should not preclude the Court from setting forth clear obligations when necessary for guidance.
• Substantive:
  • The Court ruled that 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.
  • The Court held that while as a general rule only parties to an arbitration agreement may be compelled to arbitrate, an exception exists when there are allegations that warrant piercing the veil of corporate fiction.
  • When directors are impleaded for bad faith or malice under Section 31 of the Corporation Code, the complainant effectively alleges that the directors and the corporation are not acting as separate entities, and the issue of whether to pierce the corporate veil must be determined in the same proceeding to avoid multiplicity of suits.
  • The Court affirmed the Court of Appeals' decision that petitioners may be compelled to submit to arbitration, ruling that the determination of whether circumstances exist to disregard the distinction between the corporation and its representatives must be made by one tribunal in a proceeding participated in by all parties involved.

• Piercing the Veil of Corporate Fiction — This doctrine allows courts to disregard the separate juridical personality of a corporation when it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation. In this case, the Court held that when directors are impleaded for bad faith or malice under Section 31 of the Corporation Code, the issue of whether to pierce the corporate veil must be determined in the arbitration proceedings to ascertain if the directors should be treated as one with the corporation.
• Doctrine of Corporate Personality — A corporation is an artificial entity with a personality distinct and separate from its stockholders, officers, directors, and representatives. The Court reaffirmed this general rule but recognized exceptions when representatives may be treated as the corporation itself.
• Policy in Favor of Arbitration — Courts must liberally construe arbitration clauses to favor arbitration as an inexpensive, speedy, and amicable method of settling disputes. This policy, institutionalized in RA 876 and RA 9285, supports compelling all necessary parties to participate in arbitration to ensure complete resolution of controversies.
• Doctrine of Necessary Parties — Parties who stand to be benefited or injured by the result of arbitration proceedings must be joined to ensure complete adjudication of the controversy and to avoid multiplicity of suits.

• "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." — Opening statement establishing the primary holding of the case.
• "When there are allegations of bad faith or malice against corporate directors or representatives, it becomes the duty of courts or tribunals to determine if these persons and the corporation should be treated as one." — Explaining the rationale for compelling non-signatory directors to arbitrate.
• "Thus, the issue of whether the corporation's acts in violation of complainant's rights, and the incidental issue of whether piercing of the corporate veil is warranted, should be determined in a single proceeding." — Emphasizing the necessity of unified proceedings to avoid multiplicity of suits.
• "Courts merely discount the distinction and treat them as one, in relation to a specific act, in order to extend the terms of the contract and the liabilities for all damages to erring corporate officials who participated in the corporation's illegal acts." — Clarifying that piercing the veil does not result in absolute confusion of personalities but is limited to specific acts.

• Heirs of Augusto Salas, Jr. v. Laperal Realty Corporation — Cited for the principle that an arbitration clause binds only the parties thereto, as well as their assigns and heirs, but not strangers to the contract. The Court distinguished this case by noting that when piercing the veil is alleged, the directors are effectively not strangers but may be treated as the corporation itself.
• Del Monte Corporation-USA v. Court of Appeals — Cited to support the rule that only parties to an arbitration agreement are bound by it and its arbitration clause as they are the only signatories thereto.
• De la Camara v. Hon. Enage — Cited for the principle that the fact that a case is moot and academic should not preclude the Court from setting forth clear and unmistakable obligations for the guidance of lower courts.
• Eastboard Navigation, Ltd. v. Ysmael and Company, Inc. — Cited for the policy in favor of arbitration as an inexpensive, speedy, and amicable method of settling disputes that should receive encouragement from courts.
• LM Power Engineering Corporation v. Capitol Industrial Construction Groups, Inc. — Cited for the principle that arbitration clauses should be liberally construed and any doubt should be resolved in favor of arbitration.
• Heirs of Fe Tan Uy v. International Exchange Bank — Cited for the definition and application of piercing the veil of corporate fiction when the separate personality is used to perpetrate fraud or illegal acts.

• Section 31 of the Corporation Code (Batas Pambansa Blg. 68) — Provides for the liability of directors, trustees, or officers who willfully and knowingly vote for or assent to patently unlawful acts, or who are guilty of gross negligence or bad faith in directing the affairs of the corporation. This provision was the basis for impleading petitioners as solidarily liable with the corporation.
• Republic Act No. 876 (The Arbitration Law) — The law providing for the authorization of arbitration agreements and the procedure for arbitration in civil controversies. The Court cited this to emphasize the policy favoring arbitration.
• Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004) — Specifically Section 2 (Declaration of Policy) and Section 25 (Interpretation of the Act), which mandate that courts should have due regard to the policy of the law in favor of arbitration and should liberally interpret arbitration clauses.
• Civil Code, Articles 2028-2046 — Provisions on arbitration that were approved as early as 1949, showing the long-standing policy favoring arbitration as a means of settling disputes.
• Section 36 of the Corporation Code — Enumerates the corporate powers and capacity, including the power to sue and be sued in its corporate name, supporting the principle of separate corporate personality.
• Rule 2, Sections 3 and 4 of the Rules of Court — Provisions on one suit for a single cause of action and the effect of splitting a single cause of action, cited to support the necessity of joining all necessary parties in one proceeding to avoid multiplicity of suits.