Paz vs. New International Environmental Universality, Inc.

A party who enters into a contract recognizing the other party as a corporation is estopped from denying its corporate existence to avoid contractual liability under Section 21 of the Corporation Code, even if the corporation was not yet incorporated at the time of the contract's execution, provided the party dealt with the ostensible corporation as such.

• On March 1, 2000, petitioner Priscilo B. Paz, as officer-in-charge of the Aircraft Hangar at Davao International Airport, entered into a Memorandum of Agreement (MOA) with Captain Allan J. Clarke, who signed as "President of International Environmental University."
• The MOA allowed the use of hangar space for four years, exclusively for "company aircraft/helicopter," unless pre-terminated with six months' advance notice.
• The hangar space was previously leased to Liberty Aviation Corporation, which assigned its rights to petitioner.
• On August 19, 2000, petitioner complained that the space was being used for trucks, equipment, and fabrication instead of aircraft, threatening cancellation if the activities did not stop.
• On January 16, 2001, petitioner sent another letter reiterating that the space must be for aircraft use only and offering an alternative space along the airport road.
• On July 19, 2002, petitioner demanded that Clarke vacate the premises due to damage caused by an Isuzu van to an aircraft wing.
• On July 23, 2002, petitioner sent a final letter strongly demanding immediate vacation and threatening electrical disconnection to compel desistance from operations.
• On September 4, 2002, respondent New International Environmental Universality, Inc. filed a complaint for breach of contract, alleging that petitioner disconnected electric and telephone lines, blocked entry with barbed wire, and violated the MOA by taking over the space without the required six-month notice.
• Respondent was issued a Certificate of Incorporation on September 3, 2001, under the name "New International Environmental Universality, Inc.," but the SEC Extension Office in Davao City erroneously used "New International Environmental University, Inc." in subsequent amendments dated November 14, 2001 and July 11, 2002.
• The RTC found that the MOA was executed by the parties not only in their personal capacities but also in representation of their respective corporations, and that respondent was effectively evicted between July and August 2002 when petitioner placed gates, disconnected utilities, and prevented access.

• The trial court should have dismissed the cases outright for failure of respondent to satisfy the essential requisites of being a party to an action, namely legal personality, legal capacity to sue or be sued, and real interest in the subject matter.
• The MOA was executed between petitioner and Capt. Clarke in the latter's personal capacity, not with the respondent corporation.
• Capt. Clarke should have been impleaded as an indispensable party to the action.
• The cases should be dismissed for lack of jurisdiction and lack of factual and legal bases for the RTC Decision.
• The appeal should be consolidated with the separate petition for review (G.R. No. 202826) concerning the indirect contempt aspect.
• Capt. Clarke's death extinguished the cause of action or warranted dismissal of the case.

• The motion to consolidate is moot because the contempt case (G.R. No. 202826) had already been denied with finality by the Supreme Court.
• Capt. Clarke was merely an agent of the respondent corporation; as a mere representative, he acquired no rights and incurred no liabilities arising from the contract, and was therefore not an indispensable party.
• The doctrine of corporation by estoppel applies because petitioner recognized respondent as a corporate entity in the MOA (referring to "company aircraft/helicopter") and in subsequent letters demanding that the "company" vacate the premises.
• Petitioner issued checks for rental payments in respondent's name, not in Capt. Clarke's personal name, proving recognition of the corporate existence.
• Petitioner is bound by his obligation under the MOA not only by estoppel but by express provision of Section 21 of the Corporation Code.
• Petitioner effectively evicted respondent without the required six-month advance notice and by taking the law into his own hands, making him liable for breach of contract.

• Procedural Issues:
  • Whether the petition for review should be consolidated with the separate case involving the indirect contempt ruling (G.R. No. 202826).
  • Whether Capt. Allan J. Clarke was an indispensable party whose non-impleading warranted dismissal of the case.
  • Whether Capt. Clarke's death extinguished the respondent's right to sue.
• Substantive Issues:
  • Whether the respondent had legal capacity to sue given that it was not yet incorporated at the time of the MOA's execution on March 1, 2000.
  • Whether petitioner was liable for breach of contract for terminating the MOA prior to its expiration in 2004.

• Procedural:
  • The Court denied the motion to consolidate because G.R. No. 202826 (the indirect contempt case) had already been denied with finality by the Supreme Court in a Resolution dated October 22, 2012, and an Entry of Judgment was issued on May 8, 2013; thus, further elucidation would be superfluous.
  • Capt. Clarke was not an indispensable party. While his name and signature appeared on the MOA, he participated only as a representative or agent of the respondent corporation. As a mere agent, he acquired no rights and incurred no liabilities arising from the contract between the principal parties. Therefore, his death extinguished only the agency relationship, not the corporation's right to sue or the appeal against petitioner.
• Substantive:
  • Respondent had legal capacity to sue under the doctrine of corporation by estoppel. Section 21 of the Corporation Code explicitly provides that one who assumes an obligation to an ostensible corporation cannot resist performance on the ground that there was in fact no corporation. From the language of the MOA itself, which referred to the use of the hangar for "company aircraft/helicopter," and from petitioner's letters referring to the "company" occupying the space, petitioner is estopped from denying that he contracted with respondent as a corporation. This is further evidenced by checks issued by petitioner to respondent, not to Capt. Clarke personally.
  • Petitioner is liable for breach of contract. The lower courts correctly found that petitioner effectively evicted respondent from the leased premises between July and August 2002, long before the MOA's expiration in 2004, by placing gates, disconnecting utilities, and preventing access, all without the required six-month advance notice. Courts have no power to relieve parties from obligations they voluntarily assumed simply because their contracts turn out to be disastrous deals; petitioner should have sought judicial rescission rather than taking the law into his own hands.

• Corporation by Estoppel — Defined under Section 21 of the Corporation Code, this doctrine holds that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners, and one who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in fact no corporation. In this case, the Court applied the doctrine to bind petitioner to the MOA despite the respondent's subsequent incorporation, because petitioner had dealt with and recognized the respondent as a corporate entity.
• Indispensable Party — An indispensable party is one who has such an interest in the controversy or subject matter that a final adjudication cannot be made without his participation. The Court ruled that an agent who signs a contract on behalf of a disclosed principal is not an indispensable party because he neither acquires rights nor incurs liabilities under the contract.
• Self-Help Doctrine — Parties to a contract cannot resort to extra-judicial self-help measures to terminate contractual relations; they must seek judicial intervention for rescission or specific performance. The Court emphasized that petitioner should have gone to court to seek rescission of the MOA rather than unilaterally evicting the respondent.

• "One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation." — The Court's citation of Section 21 of the Corporation Code to establish that petitioner is bound by the MOA despite the respondent's lack of incorporation at the time of execution.
• "It is settled that courts have no power to relieve parties from obligations they voluntarily assumed, simply because their contracts turn out to be disastrous deals or unwise investments." — The Court's rejection of petitioner's attempt to avoid liability due to the business relationship turning sour.
• "[Petitioner] should have gone to court to make the [former] refrain from its 'illegal' activities or seek rescission of the [MOA], rather than taking the law into his own hands." — The Court's affirmation of the RTC's reasoning that petitioner was not justified in using self-help measures to terminate the lease.

• Chua v. Total Office Products and Services, Inc. — Cited for the principle that an agent who represents a principal in a contract does not become an indispensable party to the case because he acquires no rights nor incurs liabilities from the contract.
• Sps. Saraza v. Francisco — Cited for the rule that the Supreme Court is not a trier of facts and is not duty-bound to analyze and weigh evidence already considered by lower tribunals.
• Sps. Binua v. Ong — Cited for the exceptions to the rule that findings of fact by the Court of Appeals are conclusive and binding on the parties.
• Fernandez v. Sps. Tarun — Cited for the principle that courts cannot relieve parties from obligations they voluntarily assumed simply because the contract becomes a disastrous deal.

• Section 21 of the Corporation Code (Batas Pambansa Blg. 68) — Provides for the doctrine of corporation by estoppel, stating that one who assumes an obligation to an ostensible corporation cannot resist performance on the ground of lack of corporate personality.
• Rule 131, Section 3(d) of the Rules of Court — Presumption that a person takes ordinary care of his concerns.
• Rule 131, Section 3(p) of the Rules of Court — Presumption that all private transactions have been fair and regular.