Case Digest: REPUBLIC OF THE PHILIPPINES v. INSTITUTE FOR SOCIAL CONCERN, et al . 449 SCRA 512 (2005)

REPUBLIC OF THE PHILIPPINES v. INSTITUTE FOR SOCIAL CONCERN, et al . 449 SCRA 512 (2005)

The veil of corporate fiction may be disregarded only upon showing that it is used to perpetrate fraud.
On September 28, 1989, the Government of the Republic of the Philippines, through the Office of the President (the Republic), and the respondent Institute for Social Concern (ISC), represented by its Executive Director Ramon Garcia, entered into a Memorandum of Agreement (MOA) wherein ISC, for a consideration of P8,488,880.00, undertook to construct 45 one storey two-classroom school buildings in the Cordillera Autonomous Region, Region 2 and Region 5. It was made clear in the MOA that ISC would deliver those two buildings within 90 days from the release of funds and should it fail to comply therewith, petitioner may exact liquidated damages equivalent to 0.1% of the total amount for each day of delay. ISC failed to comply with its obligation, it having been found that the construction of school buildings was lagging behind the schedule. Even after the full payment to respondent and amendment of the MOA, ISC failed to honor its commitment, pushing the Republic to file a complaint for damages against ISC et al. ISC and Suzara failed to show up at the pre-trial and were thus declared in default. They appealed the decision and cited some errors one of which was the issue of the case. ISC wanted to include both the chairman and executive board of the ISC, Suzara and Garcia, respectively, as joint and solidarily liable as well. The trial court arrived at the conclusion that petition to include Suzara, together with Garcia as jointly and solidarily liable with ISC must be dismissed for lack of merit. On appeal, the Court of Appeals affirmed the dismissal. Hence, this petition.

ISSUE:

Whether or not the Court of Appeals is correct in not applying the Doctrine of Piercing the Veil of Corporate Entity.

HELD:

To infer from the above-specified documents, as what the Republic did in its brief before the appellate and this Court, that Suzara being then Chairman of ISC “clearly assented to a patently unlawful act” by agreeing “to divert the funds intended for the construction of 45 school buildings” is a non sequitor. Parenthetically, the allegation of fraud involving Suzara in the complaint was one arising from misrepresentation of financial capability and technical expertise and experience to construct the school buildings, not from “diversion.” In fine, the participation, if any, by Suzara in the alleged diversion is not unexplainable. Unfortunately, he was declared as in default. At all events, it is speculatory. As such, fraud as the Republic’s basis in urging the piercing the veil of corporate fiction does not lie. The Supreme Court would not also hold Suzara personally liable for, as correctly found by the appellate court which cited Tramat Mercantile, Inc. v. CA enumerating instances when personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may, as a rule, attach, none of those or of analogous instances is present in Suzara’s case.