G.R. No. 174938, 1 October 2014

FACTS:

Petitioners seek to reverse the ruling of the Trial Court and the CA that they should also be bound personally by the arbitration proceeding between Shangri-La, where they were directors, and the respondent who was employed to construct certain edifices. They state they cannot be bound by the same as the company has a distinct and separate personality from them.

Respondent avers that Shangri-La’s directors were in bad faith in directing the company’s affairs and should be held solidarily liable with it.

The Trial Court ruled that Petitioners were interested parties who “must also be served with a demand for arbitration to give them the opportunity to ventilate their side of the controversy, safeguard their interest and fend off their respective positions.

This was agreed upon by the CA which stated that Petitioners stand to be benefited or injured by the result of the arbitration proceedings, hence, being necessary parties, they must be joined in order to have complete adjudication of the controversy.

ISSUE:

the Petitioners be held personally liable?

RULING:

Yes, they may be held liable.

A corporation’s representatives are generally not bound by the terms of the contract executed by the corporation. They are not personally liable for obligations and liabilities incurred on or in behalf of the corporation.

However, there are instances when the distinction between personalities of directors, officers, and representatives, and of the corporation, are disregarded. We call this piercing the veil of corporate fiction.

When the directors, as in this case, are impleaded in a case against a corporation, alleging malice or bad faith on their part in directing the affairs of the corporation, complainants are effectively alleging that the directors and the corporation are not acting as separate entities. They are alleging that the acts or omissions by the corporation that violated their rights are also the directors’ acts or omissions.

They are alleging that contracts executed by the corporation are contracts executed by the directors. Complainants effectively pray that the corporate veil be pierced because the cause of action between the corporation and the directors is the same. In that case, complainants have no choice but to institute only one proceeding against the parties. Under the Rules of Court, filing of multiple suits for a single cause of action is prohibited.

It is because the personalities of petitioners and the corporation may later be found to be indistinct that we rule that petitioners may be compelled to submit to arbitration. This is the case since corporation’s obligations are treated as the representative’s obligations when the corporate veil is pierced.

*Case digest by Roger Angielo V. Atenta, JD-IV, Andres Bonifacio College, SY 2019-2020