JARDINE DAVIES, INC., PETITIONER, VS. JRB REALTY, INC., RESPONDENT.

Jardine Davies versus JRB Realty

The Case

This is a petition for review brought by Jardine Davies, Incorporated against JRB Realty, Incorporated, arising from a complaint for specific performance with damages concerning two air conditioning units installed at the Blanco Center building in Makati City. JRB Realty sued several defendants, among them Jardine Davies, which was impleaded only because Aircon and Refrigeration Industries, Incorporated, the company that actually sold and installed the units, was its subsidiary. The case matters because it is a clean illustration of the strict limits of piercing the veil of corporate fiction: majority stock ownership, interlocking directors, and even public representation of a subsidiary are not enough, absent clear and convincing proof that the corporate fiction was used to commit fraud or wrong.

Procedural History

JRB Realty filed its complaint for specific performance with damages before the Regional Trial Court against Aircon and Refrigeration Industries, Incorporated, Fedders Air Conditioning USA, Incorporated, Maxim Industrial and Merchandising Corporation, and Jardine Davies, Incorporated. Only Jardine Davies filed an answer; the trial court did not acquire jurisdiction over Aircon because its corporate life had ended, and Fedders and Maxim were declared in default. The trial court rendered judgment holding Jardine Davies, Fedders, and Maxim jointly and severally liable, and it justified disregarding the separate corporate personality of Aircon. Jardine Davies appealed to the Court of Appeals, which affirmed the trial court in full. Jardine Davies then came to the Supreme Court by petition for review, and the Court granted the petition, reversed and set aside the decision of the Court of Appeals, and dismissed the complaint.

Facts

In 1979 and 1980, JRB Realty built the nine-storey Blanco Center on its land in Salcedo Village, Makati City. Needing air conditioning for the Blanco Law Firm on the second floor, its executive vice-president accepted the contract quotation of Aircon and Refrigeration Industries, Incorporated for two Fedders air conditioning units with a net selling price of 99,586 pesos. Two brand new packaged units of ten tons capacity each were installed, but the units with rotary compressors could not deliver the desired cooling temperature. Despite adjustments, the parties conceded that the technology for rotary compressors of that capacity had not yet been perfected, and they agreed to replace the units with reciprocating or semi-hermetic compressors. Aircon later substituted serviceable units that delivered the needed cooling, and JRB Realty enjoyed their cooling power for about ten years.

In October 1987, JRB Realty learned through newspaper advertisements that Maxim was the new and exclusive licensee of Fedders in the Philippines. JRB Realty asked Maxim to honor what it claimed was Aircon's obligation, but Maxim refused. With the ten-year prescriptive period about to expire, JRB Realty sued in January 1990. Jardine Davies was impleaded as a defendant solely on the ground that Aircon was its subsidiary.

The trial court found that Aircon's letterheads described it as a subsidiary of Jardine Davies, that Jardine Davies owned about ninety-four percent of Aircon's capital stock, that four of Aircon's seven directors were also directors of Jardine Davies, and that Jardine Davies nominated and elected the controlling majority of Aircon's board and its highest officers. On these facts, both the trial court and the Court of Appeals pierced the veil of corporate fiction and held Jardine Davies liable for Aircon's alleged breach.

Issues

• Whether or not the Court of Appeals erred in holding Jardine Davies liable for the contractual breach of Aircon solely because the latter was formerly its subsidiary.
• Whether or not, assuming Aircon was Jardine Davies's alter ego, Aircon had substantially complied with its obligation in good faith.
• Whether or not, on the same assumption, JRB Realty's causes of action were barred by laches.
• Whether or not, on the same assumption, JRB Realty was entitled to recover alleged unsaved electricity expenses.
• Whether or not the Court of Appeals erred in holding Jardine Davies liable for attorney's fees.

Applicable Provisions

The decision rests on the elementary 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. The Court states the doctrine of piercing the veil in these terms:

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.

This principle governs the whole case, because it fixes the only circumstance in which a parent corporation may be held answerable for the acts of its subsidiary.

The Court also lays down the requisites that must be established before the doctrine may be applied:

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.

These requisites are the measure of the case, and the Court found that none of them was satisfied.

Finally, on the claim for damages, the Court applies the rule on proof of actual damages:

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.

This rule disposes of the awards for unsaved electricity and maintenance costs, which rested on estimates and a self-serving schedule.

Ruling

On the first issue, the Court ruled in favor of Jardine Davies. A subsidiary has an independent and separate juridical personality distinct from that of its parent, so a claim against the parent does not bind the subsidiary, and the reverse is equally true. Mere ownership of a majority of capital stock does not amount to the control contemplated by the doctrine, and the records showed no management agreement and no proof that Jardine Davies managed Aircon's business affairs. Interlocking directors, corporate officers, and shareholders are not enough justification to pierce the veil in the absence of fraud or public policy considerations. The Court stressed that any piercing must be done with caution, that the wrongdoing must be clearly and convincingly established, and that it cannot be presumed. There was no evidence that Aircon was formed or used to defraud creditors or evade its contracts.

On the second issue, the Court found that Aircon had complied in good faith. It delivered the units, made adjustments, and substituted serviceable units that delivered the needed cooling temperature, which JRB Realty enjoyed for about ten years. JRB Realty itself had conceded that the rotary compressor technology had not yet been perfected and had agreed to the substitution.

On the fourth issue, the Court held that the award of 556,551 pesos and 55 centavos for unsaved electricity and 185,951 pesos and 67 centavos for maintenance had no basis. The thirty percent savings figure came from newspaper advertisements for window-type units, which are far different from the large capacity units installed. The electric meter was a unilateral act of JRB Realty to which Aircon never agreed, and the amounts were mere estimates, too speculative and conjectural. The maintenance schedule was prepared by JRB Realty's own accountant, with no receipts or vouchers to substantiate the payments.

On the fifth issue, with the principal liability gone, the award of attorney's fees could not stand. The Court also held that Jardine Davies, never having been a party to the contract, could not be held liable, since privity of contract takes effect only between the parties, their successors-in-interest, heirs, and assigns.

Doctrine

A corporation has a personality separate and distinct from its stockholders and from other corporations to which it may be connected. A subsidiary therefore has an independent and separate juridical personality from its parent, and a suit against one does not bind the other. The veil of corporate fiction may be pierced only when the corporate entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. Three requisites must concur: control, not merely majority or complete stock control; use of that control to commit fraud or wrong, to perpetuate a violation of a statutory or positive legal duty, or dishonest acts in contravention of the plaintiff's rights; and proximate causation of the injury complained of. Majority stock ownership, interlocking directors and officers, and public representation of the subsidiary as such do not by themselves justify piercing; the wrongdoing must be clearly and convincingly established and cannot be presumed. Finally, actual or compensatory damages must be proved with a reasonable degree of certainty upon competent proof, and speculative estimates will not support an award.

Disposition

The petition was granted; the decision of the Court of Appeals affirming the trial court was reversed and set aside, the complaint of JRB Realty was dismissed, and costs were taxed against JRB Realty.

Remember This

Memorize the three requisites of piercing the veil, and remember that stock control plus interlocking directors is not enough without clear and convincing proof of fraud or wrong. Examiners use this case to test whether a candidate will hold a parent corporation liable for its subsidiary's contracts on the mere strength of ownership and common officers.