Held:
NOT A PARTY, NO LIABILITY
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. 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.
The rationale behind piercing a corporations 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.
While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that
Aircons corporate legal existence can just be disregarded. In Velarde v. Lopez, Inc., 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 plaintiffs legal
rights; and (3) the aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
The records bear out that Aircon is a subsidiary of the petitioner only because the latter
acquired Aircons 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.
We sustain the petitioners 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. 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.
Jardine v JRB Realty
FACTS:
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 respondents 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 P99,586.00. Two (2) brand new
packaged air conditioners of 10 tons capacity each to deliver 30,000 kcal or 120,000 BTUH
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 USAs 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. 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, 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. The latter was impleaded as defendant, considering that Aircon was a
subsidiary of the petitioner.
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.
Issue:
W/N the petitioner is not a party to the contract and thus not liable as alleged