WPM International Trading, Inc. v. Labayen
REITERATIONFacts
The Antecedents: Fe Corazon Labayen (respondent) was engaged by WPM International Trading, Inc. (WPM), through its president Warlito P. Manlapaz (Manlapaz), to manage and rehabilitate its restaurant, Quickbite. Respondent engaged CLN Engineering Services (CLN) for the renovation of Quickbite-Divisoria for ₱432,876.02. The renovation was completed, and possession was delivered to respondent. However, only ₱320,000.00 was paid to CLN, leaving a balance of ₱112,876.02. Procedural History: CLN filed a complaint for sum of money against respondent and Manlapaz (later excluded Manlapaz). Respondent was declared in default and ordered to pay CLN ₱112,876.02 with interest and attorney's fees. Subsequently, respondent filed a complaint for damages against WPM and Manlapaz, seeking reimbursement for the amount paid to CLN, plus interest, attorney's fees, and moral damages. WPM was declared in default. The RTC found Manlapaz personally liable to reimburse respondent, piercing the corporate veil of WPM. The CA affirmed with modification, also piercing the corporate veil. Petitioners appealed to the Supreme Court. The Petition: Petitioners argued that the CA erred in piercing the corporate veil, as there was no clear and convincing proof that WPM was used to avoid liability or commit fraud. They also contended that any liability should be limited to the principal amount of ₱112,876.02, excluding interest, damages, and attorney's fees.
Issue(s)
Whether WPM is a mere instrumentality, alter-ego, and business conduit of Manlapaz; and whether piercing the veil of corporate fiction is warranted. Whether Manlapaz is jointly and severally liable with WPM to the respondent for reimbursement, damages, and interest; and whether the award of moral damages is proper.
Ruling
The Supreme Court modified the decision of the Court of Appeals, absolving Warlito P. Manlapaz from any liability under the renovation agreement. Only WPM International Trading, Inc. was held liable to indemnify the respondent.
Ratio Decidendi
On the issue of piercing the veil of corporate fiction: The Court held that the application of the principle of piercing the veil of corporate fiction was unwarranted. The rule is that a corporation has a personality separate and distinct from its officers and stockholders. This separate personality can only be disregarded in exceptional circumstances, such as when the corporate fiction is used to defeat public convenience, evade an obligation, commit fraud, or when the corporation is a mere alter ego or business conduit. Piercing the corporate veil based on the alter ego theory requires a concurrence of three elements: (1) control, not mere majority or complete stock control, but complete domination of finances, policy and business practice; (2) such control must have been used to commit fraud or wrong, or to perpetuate a violation of a statutory or other positive legal duty, or a dishonest and unjust act; and (3) the control and breach of duty must have proximately caused the injury or unjust loss. The absence of any of these elements prevents piercing the corporate veil. In this case, the Court found that the attendant circumstances did not establish that WPM was a mere alter ego of Manlapaz. The mere fact that Manlapaz was the principal stockholder, concurrently held positions as president, chairman, and treasurer, or that his residence was the registered principal office, were insufficient to prove complete domination. There was no proof that WPM was formed to defraud CLN or the respondent, or that Manlapaz was guilty of bad faith or fraud. The evidence showed that CLN and the respondent knew they were dealing with WPM, not Manlapaz personally. The Court also observed that the CA failed to demonstrate how WPM's separate personality was used by Manlapaz to defeat the respondent's right for reimbursement, nor was there any showing that WPM attempted to avoid liability or had no property against which to proceed. Since no harm was proximately caused by Manlapaz for which he could be held solidarily liable, and there was no proof of WPM's insufficient funds, the ruling holding Manlapaz jointly and severally liable was without sufficient justification. Therefore, only WPM is liable to indemnify the respondent. On the issue of Manlapaz's liability and the award of moral damages: The Court found the award of moral damages to be in order, based on WPM's unjustified refusal to pay a just debt. Article 2220 of the New Civil Code allows for moral damages in cases of breach of contract where the defendant acted fraudulently or in bad faith, or was guilty of gross negligence amounting to bad faith. In this case, WPM's denial of authorization and refusal to pay the balance of the renovation cost, when demanded, constituted a breach of contract in bad faith. Hence, the CA's order to pay moral damages was affirmed.
Main Doctrine
The doctrine of piercing the corporate veil requires a concurrence of three elements: (1) control, not mere majority or complete stock control, but complete domination of finances, policy and business practice; (2) such control must have been used to commit fraud or wrong, or to perpetuate a violation of a statutory or other positive legal duty, or a dishonest and unjust act; and (3) the control and breach of duty must have proximately caused the injury or unjust loss. The absence of any of these elements prevents piercing the corporate veil. Mere ownership of stock, concurrent positions as president, chairman, and treasurer, or the principal office being at the owner's residence, are insufficient to establish the alter ego relationship.