January 2012 Philippine Supreme Court Decisions on Commercial Law

Here are selected January 2012 rulings of the Supreme Court of the Philippines on commercial law:

Contract; insurance surety.  Section 175 of the Insurance Code defines a suretyship as a contract or agreement whereby a party, called the surety, guarantees the performance by another party, called the principal or obligor, of an obligation or undertaking in favor of a third party, called the obligee. It includes official recognizances, stipulations, bonds or undertakings issued under Act 536, as amended.  Suretyship arises upon the solidary binding of a person – deemed the surety – with the principal debtor, for the purpose of fulfilling an obligation.  Such undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although the contract of a surety is in essence secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom.  And notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular party to the undertaking.  First Lepanto-Taisho Insurance Corporation (now known as FLT Prime Insurance Corporation) vs. Chevron Philippines, inc. (formerly known as Caltex Philippines, Inc.), G.R. No. 177839,  January 18, 2012.

Corporation; piercing the corporate veil.  A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons.

Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application.

Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. After all, the concept of corporate entity was not meant to promote unfair objectives.

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.  Timoteo H. Sarona vs. National Labor Relations Commission, Royale Security Agency, et al.,  G.R. No. 185280, January 18, 2012.

Corporation; circumstances justifying piercing.  Evidence abound showing that Royale is a mere continuation or successor of Sceptre and fraudulent objectives are behind Royale’s incorporation and the petitioner’s subsequent employment therein. These are plainly suggested by events that the respondents do not dispute and which the CA, the NLRC and LA Gutierrez accept as fully substantiated but misappreciated as insufficient to warrant the use of the equitable weapon of piercing.

As correctly pointed out by the petitioner, it was Aida who exercised control and supervision over the affairs of both Sceptre and Royale. Contrary to the submissions of the respondents that Roso had been the only one in sole control of Sceptre’s finances and business affairs, Aida took over as early as 1999 when Roso assigned his license to operate Sceptre on May 3, 1999. As further proof of Aida’s acquisition of the rights as Sceptre’s sole proprietor, she caused the registration of the business name “Sceptre Security & Detective Agency” under her name with the DTI a few months after Roso abdicated his rights to Sceptre in her favor. As far as Royale is concerned, the respondents do not deny that she has a hand in its management and operation and possesses control and supervision of its employees, including the petitioner. As the petitioner correctly pointed out, that Aida was the one who decided to stop giving any assignments to the petitioner and summarily dismiss him is an eloquent testament of the power she wields insofar as Royale’s affairs are concerned. The presence of actual common control coupled with the misuse of the corporate form to perpetrate oppressive or manipulative conduct or evade performance of legal obligations is patent; Royale cannot hide behind its corporate fiction.

Aida’s control over Sceptre and Royale does not, by itself, call for a disregard of the corporate fiction. There must be a showing that a fraudulent intent or illegal purpose is behind the exercise of such control to warrant the piercing of the corporate veil. However, the manner by which the petitioner was made to resign from Sceptre and how he became an employee of Royale suggest the perverted use of the legal fiction of the separate corporate personality. It is undisputed that the petitioner tendered his resignation and that he applied at Royale at the instance of Karen and Cesar and on the impression they created that these were necessary for his continued employment. They orchestrated the petitioner’s resignation from Sceptre and subsequent employment at Royale, taking advantage of their ascendancy over the petitioner and the latter’s lack of knowledge of his rights and the consequences of his actions. Furthermore, that the petitioner was made to resign from Sceptre and apply with Royale only to be unceremoniously terminated shortly thereafter leads to the ineluctable conclusion that there was intent to violate the petitioner’s rights as an employee, particularly his right to security of tenure. The respondents’ scheme reeks of bad faith and fraud and compassionate justice dictates that Royale and Sceptre be merged as a single entity, compelling Royale to credit and recognize the petitioner’s length of service with Sceptre. The respondents cannot use the legal fiction of a separate corporate personality for ends subversive of the policy and purpose behind its creation or which could not have been intended by law to which it owed its being.  Timoteo H. Sarona vs. National Labor Relations Commission, Royale Security Agency, et al.,  G.R. No. 185280, January 18, 2012.

Investment contract; definition.    The Securities Regulation Code treats investment contracts as “securities” that have to be registered with the SEC before they can be distributed and sold.  An investment contract is a contract, transaction, or scheme where a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others.

Apart from the definition, which the Implementing Rules and Regulations provide, Philippine jurisprudence has so far not done more to add to the same.  Of course, the United States Supreme Court, grappling with the problem, has on several occasions discussed the nature of investment contracts.  That court’s rulings, while not binding in the Philippines, enjoy some degree of persuasiveness insofar as they are logical and consistent with the country’s best interests.

The United States Supreme Court held in Securities and Exchange Commission v. W.J. Howey Co. that, for an investment contract to exist, the following elements, referred to as the Howey test must concur: (1) a contract, transaction, or scheme; (2) an investment of money; (3) investment is made in a common enterprise; (4) expectation of profits; and (5) profits arising primarily from the efforts of others.   Thus, to sustain the SEC position in this case, PCI’s scheme or contract with its buyers must have all these elements.

An example that comes to mind would be the long-term commercial papers that large companies, like San Miguel Corporation (SMC), offer to the public for raising funds that it needs for expansion.  When an investor buys these papers or securities, he invests his money, together with others, in SMC with an expectation of profits arising from the efforts of those who manage and operate that company.  SMC has to register these commercial papers with the SEC before offering them to investors.

Here, PCI’s clients do not make such investments.  They buy a product of some value to them: an Internet website of a 15-MB capacity.  The client can use this website to enable people to have internet access to what he has to offer to them, say, some skin cream.  The buyers of the website do not invest money in PCI that it could use for running some business that would generate profits for the investors.  The price of US$234.00 is what the buyer pays for the use of the website, a tangible asset that PCI creates, using its computer facilities and technical skills.  Securities and Exchange Commission vs. Prosperity.Com, Inc., G.R. No. 164197, January 25, 2012.

Rehabilitation;  property covered by rehabilitation.  Cash dividends held by Belson and claimed by both the Alcantaras and Advent Capital does not constitute corporate assets of the latter that the rehabilitation court may, upon motion, require to be conveyed to the rehabilitation receiver for his disposition.

Advent Capital asserts that the cash dividends in Belson’s possession formed part of its assets based on paragraph 9 of its Trust Agreement with the Alcantaras,

According to Advent Capital, it could automatically deduct its management fees from the Alcantaras’ portfolio that they entrusted to it.  Paragraph 9 of the Trust Agreement provides that Advent Capital could automatically deduct its trust fees from the Alcantaras’ portfolio, “at the end of each calendar quarter,” with the corresponding duty to submit to the Alcantaras a quarterly accounting report within 20 days after.

But the problem is that the trust fees that Advent Capital’s receiver was claiming were for past quarters. Based on the stipulation, these should have been deducted as they became due.  As it happened, at the time Advent Capital made its move to collect its supposed management fees, it neither had possession nor control of the money it wanted to apply to its claim.  Belson, a third party, held the money in the Alcantaras’ names.  Whether it should deliver the same to Advent Capital or to the Alcantaras is not clear.  What is clear is that the issue as to who should get the same has been seriously contested.

The real owner of the trust property is the trustor-beneficiary.  In this case, the trustors-beneficiaries are the Alcantaras.  Thus, Advent Capital could not dispose of the Alcantaras’ portfolio on its own. The income and principal of the portfolio could only be withdrawn upon the Alcantaras’ written instruction or order to Advent Capital.   The latter could not also assign or encumber the portfolio or its income without the written consent of the Alcantara.   All these are stipulated in the Trust Agreement.  Advent Capital and Finance Corporation vs. Nicasio I. Alcantara and Editha I. Alcantara, G.R. No. 183050, January 25, 2012.

Single proprietorship; applicability of piercing the corporate veil.  For the piercing doctrine to apply, it is of no consequence if Sceptre is a sole proprietorship. As ruled in Prince Transport, Inc., et al. v. Garcia, et al., it is the act of hiding behind the separate and distinct personalities of juridical entities to perpetuate fraud, commit illegal acts, evade one’s obligations that the equitable piercing doctrine was formulated to address and prevent:

A settled formulation of the doctrine of piercing the corporate veil is that when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that these two entities are distinct and treat them as identical or as one and the same. In the present case, it may be true that Lubas is a single proprietorship and not a corporation. However, petitioners’ attempt to isolate themselves from and hide behind the supposed separate and distinct personality of Lubas so as to evade their liabilities is precisely what the classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy.

Also, Sceptre and Royale have the same principal place of business. As early as October 14, 1994, Aida and Wilfredo became the owners of the property used by Sceptre as its principal place of business by virtue of a Deed of Absolute Sale they executed with Roso. Royale, shortly after its incorporation, started to hold office in the same property. These, the respondents failed to dispute.

The respondents do not likewise deny that Royale and Sceptre share the same officers and employees. Karen assumed the dual role of Sceptre’s Operation Manager and incorporator of Royale. With respect to the petitioner, even if he has already resigned from Sceptre and has been employed by Royale, he was still using the patches and agency cloths of Sceptre during his assignment at Highlight Metal.

Royale also claimed a right to the cash bond which the petitioner posted when he was still with Sceptre. If Sceptre and Royale are indeed separate entities, Sceptre should have released the petitioner’s cash bond when he resigned and Royale would have required the petitioner to post a new cash bond in its favor.

Taking the foregoing in conjunction with Aida’s control over Sceptre’s and Royale’s business affairs, it is patent that Royale was a mere subterfuge for Aida. Since a sole proprietorship does not have a separate and distinct personality from that of the owner of the enterprise, the latter is personally liable. This is what she sought to avoid but cannot prosper. Timoteo H. Sarona vs. National Labor Relations Commission, Royale Security Agency, et al.,  G.R. No. 185280, January 18, 2012.

Surety; liability.    The extent of a surety’s liability is determined by the language of the suretyship contract or bond itself.  It cannot be extended by implication, beyond the terms of the contract.  Thus, to determine whether petitioner is liable to respondent under the surety bond, it becomes necessary to examine the terms of the contract itself.

The law is clear that a surety contract should be read and interpreted together with the contract entered into between the creditor and the principal.  Section 176 of the Insurance Code states:

Sec. 176.  The liability of the surety or sureties shall be joint and several with the obligor and shall be limited to the amount of the bond.  It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee.

A surety contract is merely a collateral one, its basis is the principal contract or undertaking which it secures. Necessarily, the stipulations in such principal agreement must at least be communicated or made known to the surety particularly in this case where the bond expressly guarantees the payment of respondent’s fuel products withdrawn by Fumitechniks in accordance with the terms and conditions of their agreement.  The bond specifically makes reference to a written agreement. It is basic that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. Moreover, being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary debtor. Having accepted the bond, respondent as creditor must be held bound by the recital in the surety bond that the terms and conditions of its distributorship contract be reduced in writing or at the very least communicated in writing to the surety.  Such non-compliance by the creditor (respondent) impacts not on the validity or legality of the surety contract but on the creditor’s right to demand performance. First Lepanto-Taisho Insurance Corporation (now known as FLT Prime Insurance Corporation) vs. Chevron Philippines, inc. (formerly known as Caltex Philippines, Inc.), G.R. No. 177839,  January 18, 2012.  

(Hector thanks Mary Caroline A. Tan for her assistance to Lexoterica.)