EXCELLENT QUALITY APPAREL, INC., PETITIONER, VS. WIN MULTI RICH BUILDERS, INC., REPRESENTED BY ITS PRESIDENT, WILSON G. CHUA, RESPONDENT.

Excellent Quality Apparel versus Win Multi-Rich Builders

The Case

This is a petition for review on certiorari brought by Excellent Quality Apparel, Inc. against Win Multi-Rich Builders, Inc., which sued to collect a sum of money arising from a construction contract. The case matters for two reasons that every examinee should carry into the bar room: first, it fixes the rule that a sole proprietorship has no juridical personality and cannot sue in court, and that a corporation later organized by the same proprietor cannot simply take over the suit without proof that it acquired the assets and liabilities of the proprietorship; second, it confirms that where a construction contract carries an arbitration clause, the Construction Industry Arbitration Commission, not the Regional Trial Court, has jurisdiction over the dispute.

Procedural History

Win Multi-Rich Builders, Inc. filed a complaint for a sum of money against Excellent Quality Apparel and its officer before the Regional Trial Court of Manila, Branch 32, together with a prayer for a writ of attachment. The trial court issued the writ, and later denied the petitioner's Omnibus Motion questioning its jurisdiction and granted Win's motion to deposit the garnished amount, and thereafter to release it. Excellent Quality Apparel then filed a petition for review on certiorari under Rule 65 before the Court of Appeals, questioning the trial court's jurisdiction and challenging its orders. The Court of Appeals annulled the two challenged orders but ruled that the trial court had jurisdiction because the suit was one for collection of a sum of money. The petitioner's motion for reconsideration was denied, hence this petition for review on certiorari under Rule 45 before the Supreme Court.

Facts

On 26 March 1996, Excellent Quality Apparel, represented by its vice president for productions and its treasurer, entered into a contract with Multi-Rich Builders, represented by Wilson G. Chua as its president and general manager, for the construction of a garment factory within the Cavite Philippine Economic Zone Authority. The project was to last a maximum of 150 consecutive calendar days, and the construction was completed on 27 November 1996. The contract contained an arbitration clause committing any unresolved dispute to an Arbitration Committee of three members, with the arbitration to be governed by the Arbitration Law.

Win Multi-Rich Builders, Inc. was incorporated with the Securities and Exchange Commission only on 20 February 1997, with Chua as its president and general manager. On 26 January 2004, Win filed a complaint for a sum of money against the petitioner and its officer amounting to 8,634,448.20 pesos, praying for a writ of attachment on the claim that the officer was about to abscond and the petitioner was about to close. The trial court issued the writ, and when the sheriff went to serve it, the petitioner issued a check for the same amount payable to the Office of the Clerk of Court to prevent the sheriff from taking possession of its properties.

The petitioner filed an Omnibus Motion denying any liability and questioning the trial court's jurisdiction, pointing to the arbitration clause and to the Construction Industry Arbitration Commission under Executive Order Number 1008. In the hearing, Win's counsel moved to change the plaintiff's name from Win Multi-Rich Builders, Inc. to Multi-Rich Builders, Inc. The petitioner then obtained a certificate of non-registration from the Securities and Exchange Commission and moved to dismiss, since Win was not the contractor and not a party to the contract. Win admitted that it was incorporated only on 20 February 1997, while the contract was executed on 26 March 1996, and that at that time Multi-Rich was a registered sole proprietorship. The trial court denied the motion, and later granted the deposit and release of the garnished amount to Win.

Issues

• Whether or not Win Multi-Rich Builders, Inc. has legal personality to institute the collection suit.
• Whether or not the Regional Trial Court had jurisdiction over the case notwithstanding the presence of the arbitration clause.
• Whether or not the issuance of the writ of attachment and the subsequent garnishment were proper.

Applicable Provisions

Section 2 of Rule 3 of the Rules of Court defines a real party in interest:

A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise authorized by law or these Rules, every action must be prosecuted or defended in the name of the real party in interest.

This provision governs whether Win, a corporation that was not a party to the construction contract, may bring the collection suit.

Section 4 of Executive Order Number 1008 provides for the jurisdiction of the Construction Industry Arbitration Commission:

Section 4. Jurisdiction.--The CIAC shall have original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in the Philippines, whether the disputes arises before or after the completion of the contract, or after the abandonment or breach thereof. These disputes may involve government or private contracts. For the Board to acquire jurisdiction, the parties to a dispute must agree to submit the same to voluntary arbitration.

This provision is the basis for holding that the arbitration clause in the construction contract vested jurisdiction in the Commission, not in the trial court.

Ruling

On the first issue, the Court answered in the negative. A suit may only be instituted by a real party in interest, and Win was not one. Win admitted that the contract was executed between Multi-Rich, a sole proprietorship, and the petitioner. A sole proprietorship has no juridical personality separate and distinct from its owner, and the law does not vest it with personality to file or defend an action. The Court held that the plaintiff's name cannot simply be changed to that of a sole proprietorship, since a sole proprietorship is not vested with juridical personality to file or defend an action. As to whether Win, as a corporation, could claim the receivables of its predecessor, the Court held that it must show proof that it had acquired the assets and liabilities of the sole proprietorship, such as a deed of assignment. Having been given the opportunity, Win failed to do so, and the Court refused to presume that Multi-Rich was its predecessor in business.

On the second issue, the Court held that even assuming Win had legal personality, the petition would still be granted. The Court stressed that there is nothing in the law limiting the Commission's jurisdiction to complex or difficult cases, and that it does not distinguish between claims involving payment of money or not. The Commission acquires jurisdiction over a construction contract by the mere fact that the parties agreed to submit to voluntary arbitration. The arbitration clause is a commitment binding on the parties, who are expected to abide by it in good faith. Clearly, the trial court should not have taken cognizance of the collection suit, and it had no jurisdiction.

On the third issue, the Court found no need to discuss the propriety of the writ of attachment. However, it could not allow Win to retain the garnished amount, because the trial court had no jurisdiction to issue the writ of attachment and to order the release of the garnished funds.

Doctrine

A sole proprietorship is not a juridical entity separate from its owner and cannot sue or be sued in court; only the real party in interest, as defined in Section 2 of Rule 3, may prosecute an action. A corporation organized by the proprietor cannot claim the receivables of the sole proprietorship unless it proves, by competent evidence such as a deed of assignment, that it acquired the assets and liabilities of the proprietorship. Separately, under Section 4 of Executive Order Number 1008, the Construction Industry Arbitration Commission has original and exclusive jurisdiction over construction disputes where the parties agreed to submit to voluntary arbitration, and the Regional Trial Court must dismiss the case for lack of jurisdiction.

Disposition

The petition was granted; the Decision of the Court of Appeals was modified, the collection case was dismissed, and Win Multi-Rich Builders, Inc. was ordered to return the garnished amount of 8,634,448.40 pesos to the petitioner with legal interest of 12 percent per annum upon finality of the Decision until payment.

Remember This

Memorize the twin rules: a sole proprietorship has no juridical personality to sue, and a construction arbitration clause ousts the Regional Trial Court in favor of the Construction Industry Arbitration Commission. Examiners use this case to test real party in interest under Rule 3 and the exclusive jurisdiction of the Commission under Executive Order Number 1008.