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Republic of the Philippines
SUPREME COURT

SECOND DIVISION

G.R. No. 151438 July 15, 2005

JARDINE DAVIES, INC., Petitioners,
vs.
JRB REALTY, INC., Respondent.

D E C I S I O N

CALLEJO, SR., J.:

Before us is a petition for review of the Decision¹ of the Court of Appeals (CA) in CA-G.R. CV No. 54201 affirming in toto that of the Regional Trial Court (RTC) in Civil Case No. 90-237 for specific performance; and the Resolution dated January 11, 2002 denying the motion for reconsideration thereof.

The facts are as follows:

In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named Blanco Center, on its parcel of land located at 119 Alfaro St., Salcedo Village, Makati City. An air conditioning system was needed for the Blanco Law Firm housed at the second floor of the building. On March 13, 1980, the respondent’s Executive Vice-President, Jose R. Blanco, accepted the contract quotation of Mr. A.G. Morrison, President of Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of Fedders Adaptomatic 30,000 kcal (Code: 10-TR) air conditioning equipment with a net total selling price of ₱99,586.00.² Thereafter, two (2) brand new packaged air conditioners of 10 tons capacity each to deliver 30,000 kcal or 120,000 BTUH³ were installed by Aircon. When the units with rotary compressors were installed, they could not deliver the desired cooling temperature. Despite several adjustments and corrective measures, the respondent conceded that Fedders Air Conditioning USA’s technology for rotary compressors for big capacity conditioners like those installed at the Blanco Center had not yet been perfected. The parties thereby agreed to replace the units with reciprocating/semi-hermetic compressors instead. In a Letter dated March 26, 1981,⁴ Aircon stated that it would be replacing the units currently installed with new ones using rotary compressors, at the earliest possible time. Regrettably, however, it could not specify a date when delivery could be effected.

TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance of the units, inclusive of parts and services. In October 1987, the respondent learned, through newspaper ads,⁵ that Maxim Industrial and Merchandising Corporation (Maxim, for short) was the new and exclusive licensee of Fedders Air Conditioning USA in the Philippines for the manufacture, distribution, sale, installation and maintenance of Fedders air conditioners. The respondent requested that Maxim honor the obligation of Aircon, but the latter refused. Considering that the ten-year period of prescription was fast approaching, to expire on March 13, 1990, the respondent then instituted, on January 29, 1990, an action for specific performance with damages against Aircon & Refrigeration Industries, Inc., Fedders Air Conditioning USA, Inc., Maxim Industrial & Merchandising Corporation and petitioner Jardine Davies, Inc.⁶ The latter was impleaded as defendant, considering that Aircon was a subsidiary of the petitioner. The respondent prayed that judgment be rendered, as follows:

1. Ordering the defendants to jointly and severally at their account and expense deliver, install and place in operation two
brand new units of each 10-tons capacity Fedders unitary packaged air conditioners with Fedders USA’s technology perfected rotary compressors to always deliver 30,000 kcal or 120,000 BTUH to the second floor of the Blanco Center building at 119 Alfaro St., Salcedo Village, Makati, Metro Manila;

2. Ordering defendants to jointly and severally reimburse plaintiff not only the sums of ₱415,118.95 for unsaved electricity from 21st October 1981 to 7th January 1990 and ₱99,287.77 for repair costs of the two service units from 7th March 1987 to 11th January 1990, with legal interest thereon from the filing of this Complaint until fully reimbursed, but also like unsaved electricity costs and like repair costs therefrom until Prayer No. 1 above shall have been complied with;

3. Ordering defendants to jointly and severally pay plaintiff’s ₱150,000.00 attorney’s fees and other costs of litigation, as well as exemplary damages in an amount not less than or equal to Prayer 2 above; and

4. Granting plaintiff such other and further relief as shall be just and equitable in the premises.⁷

Of the four defendants, only the petitioner filed its Answer. The court did not acquire jurisdiction over Aircon because the latter ceased operations, as its corporate life ended on December 31, 1986.⁸ Upon motion, defendants Fedders Air Conditioning USA and Maxim were declared in default.⁹

On May 17, 1996, the RTC rendered its Decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered ordering defendants Jardine Davies, Inc., Fedders Air Conditioning USA, Inc. and Maxim Industrial and Merchandising Corporation, jointly and severally:

1. To deliver, install and place into operation the two (2) brand new units of Fedders unitary packaged airconditioning units each of 10 tons capacity with rotary compressors to deliver 30,000 kcal or 120,000 BTUH to the second floor of the Blanco Center building, or to pay plaintiff the current price for two such units;

2. To reimburse plaintiff the amount of ₱556,551.55 as and for the unsaved electricity bills from October 21, 1981 up to April 30, 1995; and another amount of ₱185,951.67 as and for repair costs;

3. To pay plaintiff ₱50,000.00 as and for attorney’s fees; and

4. Cost of suit.¹⁰

The petitioner filed its notice of appeal with the CA, alleging that the trial court erred in holding it liable because it was not a party to the contract between JRB Realty, Inc. and Aircon, and that it had a personality separate and distinct from that of Aircon.

On March 23, 2000, the CA affirmed the trial court’s ruling in toto; hence, this petition.

The petitioner raises the following assignment of errors:

I.

THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE FOR THE ALLEGED CONTRACTUAL BREACH OF AIRCON SOLELY BECAUSE THE LATTER WAS FORMERLY JARDINE’S SUBSIDIARY.

II.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINE’S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT DECLARING AIRCON’S OBLIGATION TO DELIVER THE TWO (2) AIRCONDITIONING UNITS TO JRB AS HAVING BEEN SUBSTANTIALLY COMPLIED WITH IN GOOD FAITH.

III.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINE’S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT DECLARING JRB’S CAUSES OF ACTION AS HAVING BEEN BARRED BY LACHES.

IV.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINE’S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN FINDING JRB ENTITLED TO RECOVER ALLEGED UNSAVED ELECTRICITY EXPENSES.

V.

THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY ATTORNEY’S FEES.

VI.

THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO JARDINE FOR DAMAGES.¹¹

It is the well-settled rule that factual findings of the trial court, as affirmed by the CA, are accorded high respect, even finality at times. However, considering that the factual findings of the CA and the RTC were based on speculation and conjectures, unsupported by substantial evidence, the Court finds that the instant case falls under one of the excepted instances. There is, thus, a need to correct the error.

The trial court ruled that Aircon was a subsidiary of the petitioner, and concluded, thus:

Plaintiff’s documentary evidence shows that at the time it contracted with Aircon on March 13, 1980 (Exhibit "D") and on the date the revised agreement was reached on March 26, 1981, Aircon was a subsidiary of Jardine. The phrase "A subsidiary of Jardine Davies, Inc." was printed on Aircon’s letterhead of its March 13, 1980 contract with plaintiff (Exhibit "D-1"), as well as the Aircon’s letterhead of Jardine’s Director and Senior Vice-President A.G. Morrison and Aircon’s President in his March 26, 1981 letter to plaintiff (Exhibit "J-2") confirming the revised agreement. Aircon’s newspaper ads of April 12 and 26, 1981 and a press release on August 30, 1982 (Exhibits "E," "F" and "L") also show that defendant Jardine publicly represented Aircon to be its subsidiary.

Records from the Securities and Exchange Commission (SEC) also reveal that as per Jardine’s December 31, 1986 and 1985 Financial Statements that "The company acts as general manager of its subsidiaries" (Exhibit "P"). Jardine’s Consolidated Balance Sheet as of December 31, 1979 filed with the SEC listed Aircon as its subsidiary by owning 94.35% of Aircon (Exhibit "P-1"). Also, Aircon’s reportorial General Information Sheet as of April 1980 and April 1981 filed with the SEC show that Jardine was 94.34% owner of Aircon (Exhibits "Q" and "R") and that out of seven members of the Board of Directors of Aircon, four (4) are also of Jardine.

Defendant Jardine’s witness, Atty. Fe delos Santos-Quiaoit admitted that defendant Aircon, renamed Aircon & Refrigeration Industries, Inc. "is one of the subsidiaries of Jardine Davies" (TSN, September 22, 1995, p. 12). She also testified that Jardine nominated, elected, and appointed the controlling majority of the Board of Directors and the highest officers of Aircon (Ibid, pp. 10,13-14).

The foregoing circumstances provide justifiable basis for this Court to disregard the fiction of corporate entity and treat defendant Aircon as part of the instrumentality of co-defendant Jardine.¹²

The respondent court arrived at the same conclusion basing its ruling on the following documents, to wit:

(a) Contract/Quotation #78-No. 80-1639 dated March 03, 1980 (Exh. D-1);

(b) Newspaper Advertisements (Exhs. E-1 and F-1);

(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon, to Atty. J.R. Blanco (Exh. J);

(d) News items of Bulletin Today dated August 30, 1982 (Exh. L);

(e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979 listing Aircon as one of its subsidiaries (Exh. P);

(f) Financial Statement of Aircon as of December 31, 1982 and 1981 (Exh. S);

(g) Financial Statement of Aircon as of December 31, 1981 (Exh. S-1).¹³

Applying the doctrine of piercing the veil of corporate fiction, both the respondent and trial courts conveniently held the petitioner liable for the alleged omissions of Aircon, considering that the latter was its instrumentality or corporate alter ego. The petitioner is now before us, reiterating its defense of separateness, and the fact that it is not a party to the contract.

We find merit in the petition.

It is an elementary and fundamental principle of corporation law that a corporation is an artificial being invested by law with a personality separate and distinct from its stockholders and from other corporations to which it may be connected. While a corporation is allowed to exist solely for a lawful purpose, the law will regard it as an association of persons or in case of two corporations, merge them into one, when this corporate legal entity is used as a cloak for fraud or illegality.¹⁴ This is the doctrine of piercing the veil of corporate
fiction which applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.¹⁵ The rationale behind piercing a corporation’s identity is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities.¹⁶

While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that Aircon’s corporate legal existence can just be disregarded. In Velarde v. Lopez, Inc.,¹⁷ the Court categorically held that a subsidiary has an independent and separate juridical personality, distinct from that of its parent company; hence, any claim or suit against the latter does not bind the former, and vice versa. In applying the doctrine, the following requisites must be established: (1) control, not merely majority or complete stock control; (2) such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest acts in contravention of plaintiff’s legal rights; and (3) the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.¹⁸

The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired Aircon’s majority of capital stock. It, however, does not exercise complete control over Aircon; nowhere can it be gathered that the petitioner manages the business affairs of Aircon. Indeed, no management agreement exists between the petitioner and Aircon, and the latter is an entirely different entity from the petitioner.¹⁹

Jardine Davies, Inc., incorporated as early as June 28, 1946,²⁰ is primarily a financial and trading company. Its Articles of Incorporation states among many others that the purposes for which the said corporation was formed, are as follows:

(a) To carry on the business of merchants, commission merchants, brokers, factors, manufacturers, and agents;

(b) Upon complying with the requirements of law applicable thereto, to act as agents of companies and underwriters doing and engaging in any and all kinds of insurance business.²¹

On the other hand, Aircon, incorporated on December 27, 1952,²² is a manufacturing firm. Its Articles of Incorporation states that its purpose is mainly -

To carry on the business of manufacturers of commercial and household appliances and accessories of any form, particularly to manufacture, purchase, sell or deal in air conditioning and refrigeration products of every class and description as well as accessories and parts thereof, or other kindred articles; and to erect, or buy, lease, manage, or otherwise acquire manufactories, warehouses, and depots for manufacturing, assemblage, repair and storing, buying, selling, and dealing in the aforesaid appliances, accessories and products. …²³

The existence of interlocking directors, corporate officers and shareholders, which the respondent court considered, is not enough justification to pierce the veil of corporate fiction, in the absence of fraud or other public policy considerations.²⁴ But even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.²⁵ To warrant resort to this extraordinary remedy, there must be proof that the corporation is being used as a cloak or cover for fraud or illegality, or to work injustice.²⁶ Any piercing of the corporate veil has to be done with caution.²⁷ The wrongdoing must be clearly and convincingly established. It cannot just be presumed.²⁸

In the instant case, there is no evidence that Aircon was formed or utilized with the intention of defrauding its creditors or evading its contracts and obligations. There was nothing fraudulent in the acts of Aircon in this case. Aircon, as a manufacturing firm of air
conditioners, complied with its obligation of providing two air conditioning units for the second floor of the Blanco Center in good faith, pursuant to its contract with the respondent. Unfortunately, the performance of the air conditioning units did not satisfy the respondent despite several adjustments and corrective measures. In a Letter²⁹ dated October 22, 1980, the respondent even conceded that Fedders Air Conditioning USA has not yet perhaps perfected its technology of rotary compressors, and agreed to change the compressors with the semi-hermetic type. Thus, Aircon substituted the units with serviceable ones which delivered the cooling temperature needed for the law office. After enjoying ten (10) years of its cooling power, respondent cannot now complain about the performance of these units, nor can it demand a replacement thereof.

Moreover, it was reversible error to award the respondent the amount of ₱556,551.55 representing the alleged 30% unsaved electricity costs and ₱185,951.67 as maintenance cost without showing any basis for such award. To justify a grant of actual or compensatory damages, it is necessary to prove with a reasonable degree of certainty, premised upon competent proof and on the best evidence obtainable by the injured party, the actual amount of loss.³⁰ The respondent merely based its cause of action on Aircon’s alleged representation that Fedders air conditioners with rotary compressors can save as much as 30% on electricity compared to other brands. Offered in evidence were newspaper advertisements published on April 12 and 26, 1981. The respondent then recorded its electricity consumption from October 21, 1981 up to April 3, 1995 and computed 30% thereof, which amounted to ₱556,551.55. The Court rules that this amount is highly speculative and merely hypothetical, and for which the petitioner can not be held accountable.

First. The respondent merely relied on the newspaper advertisements showing the Fedders window-type air conditioners, which are far different from the big capacity air conditioning units installed at Blanco Center.

Second. After such print advertisements, the respondent informed Aircon that it was going to install an electric meter to register its electric consumption so as to determine the electric costs not saved by the presently installed units with semi-hermetic compressors. Contrary to the allegations of the respondent that this was in pursuance to their Revised Agreement, no proof was adduced that Aircon agreed to the respondent’s proposition. It was a unilateral act on the part of the respondent, which Aircon did not oblige or commit itself to pay.

Third. Needless to state, the amounts computed are mere estimates representing the respondent’s self-serving claim of unsaved electricity cost, which is too speculative and conjectural to merit consideration. No other proofs, reports or bases of comparison showing that Fedders Air Conditioning USA could indeed cut down electricity cost by 30% were adduced.

Likewise, there is no basis for the award of ₱185,951.67 representing maintenance cost. The respondent merely submitted a schedule³¹ prepared by the respondent’s accountant, listing the alleged repair costs from March 1987 up to June 1994. Such evidence is self-serving and can not also be given probative weight, considering that there are no proofs of receipts, vouchers, etc., which would substantiate the amounts paid for such services. Absent any more convincing proof, the Court finds that the respondent’s claims are without basis, and cannot, therefore, be awarded.

We sustain the petitioner’s separateness from that of Aircon in this case. It bears stressing that the petitioner was never a party to the contract. Privity of contracts take effect only between parties, their successors-in-interest, heirs and assigns.³² The petitioner, which has a
separate and distinct legal personality from that of Aircon, cannot, therefore, be held liable.

IN VIEW OF THE FOREGOING, the petition is GRANTED. The assailed decision of the Court of Appeals, affirming the decision of the Regional Trial Court is REVERSED and SET ASIDE. The complaint of the respondent is DISMISSED. Costs against the respondent.

SO ORDERED.

ROMEO J. CALLEJO, SR.
Associate Justice

WE CONCUR:

REYNATO S. PUNO

Associate Justice

Chairman

MA. ALICIA AUSTRIA-MARTINEZ DANTE O. TINGA
Associate Justice Associate Justice

MINITA V. CHICO-NAZARIO

Associate Justice

ATTESTATION

I attest that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Associate Justice
Chairman, Second Division

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairman’s Attestation, it is hereby certified that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

HILARIO G. DAVIDE, JR.

Chief Justice

Footnotes

¹ Penned by Associate Justice Demetrio G. Demetria, with Associate Justices Ramon A. Mabutas, Jr. (retired) and Jose L. Sabio, Jr., concurring.

² Exhibit "D," Records, p. 223.

³ (Kcal) kilocalories, (BTUH) British Thermal Units, TSN, 26 July 1995, p. 13.

⁴ Exhibit "J," Records, p. 233.

⁵ Exhibit "V," Records, p. 321.

⁶ Records, p. 1.

⁷ Records, pp. 8-9.

⁸ Exhibit "T," Records, p. 318.

⁹ Records, p. 77.

¹⁰ Records, p. 536.

¹¹ Rollo, p. 17.

¹² Records, pp. 534-535.

¹³ Rollo, p. 39.

¹⁴ Development Bank of the Philippines v. Court of Appeals, G.R. No. 126200, 16 August 2001, 363 SCRA, 307, citing Yutivo Sons Hardware v. Court of Tax Appeals, 1 SCRA 160 (1961).

¹⁵ Id. at 319.

¹⁶ Velarde v. Lopez, Inc., G.R. No. 153886, 14 January 2004, 419 SCRA 422.

¹⁷ Ibid.

¹⁸ Id. at 431.

¹⁹ TSN, 22 September 1995, p. 13.

²⁰ Exhibit "6," Records, p. 391.

²¹ Exhibit "6-A," Records, p. 402.

²² Records, p. 420.

²³ Exhibit "7-B," Records, p. 414.

²⁴ Velarde v. Lopez, Inc. supra.

²⁵ Reynoso IV v. Court of Appeals, G.R. Nos. 116124-25, 22 November 2000, 345 SCRA 335.

²⁶ Gala vs. Ellice Agro-Industrial Corporation, G.R. No. 156819, 11 December 2003, 418 SCRA 431.

²⁷ Reynoso IV v. Court of Appeals, supra.

²⁸ DBP v. CA, supra.

²⁹ Exhibit "G." Records, pp. 229-230.

³⁰ Integrated Packaging Corporation v. Court of Appeals, G.R. No. 115117, 8 June 2000, 333 SCRA 170.

³¹ Exhibit "U," Records, p. 319.

³² Josefa v. Zhandong Trading Corporation, G.R. No. 150903, 8 December 2003, 417 SCRA 269.

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