G.R. No.

159333 July 31, 2006

ARSENIO T. MENDIOLA, petitioner,

vs.
COURT OF APPEALS, NATIONAL LABOR RELATIONS COMMISSION, PACIFIC FOREST
RESOURCES, PHILS., INC. and/or CELLMARK AB, respondents.

DECISION

PUNO, J.:

On appeal are the Decision1 and Resolution2 of the Court of Appeals, dated January 30, 2003 and
July 30, 2003, respectively, in CA-G.R. SP No. 71028, affirming the ruling3 of the National Labor
Relations Commission (NLRC), which in turn set aside the July 30, 2001 Decision4 of the labor
arbiter. The labor arbiter declared illegal the dismissal of petitioner from employment and awarded
separation pay, moral and exemplary damages, and attorney's fees.

The facts are as follows:

Private respondent Pacific Forest Resources, Phils., Inc. (Pacfor) is a corporation organized and
existing under the laws of California, USA. It is a subsidiary of Cellulose Marketing International, a
corporation duly organized under the laws of Sweden, with principal office in Gothenburg, Sweden.

Private respondent Pacfor entered into a "Side Agreement on Representative Office known as
Pacific Forest Resources (Phils.), Inc."5 with petitioner Arsenio T. Mendiola (ATM), effective May 1,
1995, "assuming that Pacfor-Phils. is already approved by the Securities and Exchange Commission
[SEC] on the said date."6 The Side Agreement outlines the business relationship of the parties with
regard to the Philippine operations of Pacfor. Private respondent will establish a Pacfor
representative office in the Philippines, to be known as Pacfor Phils, and petitioner ATM will be its
President. Petitioner's base salary and the overhead expenditures of the company shall be borne by
the representative office and funded by Pacfor/ATM, since Pacfor Phils. is equally owned on a 50-50
equity by ATM and Pacfor-usa.

On July 14, 1995, the SEC granted the application of private respondent Pacfor for a license to
transact business in the Philippines under the name of Pacfor or Pacfor Phils.7 In its application,
private respondent Pacfor proposed to establish its representative office in the Philippines with the
purpose of monitoring and coordinating the market activities for paper products. It also designated
petitioner as its resident agent in the Philippines, authorized to accept summons and processes in all
legal proceedings, and all notices affecting the corporation.8

In March 1997, the Side Agreement was amended through a "Revised Operating and Profit Sharing
Agreement for the Representative Office Known as Pacific Forest Resources (Philippines),"9 where
the salary of petitioner was increased to $78,000 per annum. Both agreements show that the
operational expenses will be borne by the representative office and funded by all parties "as equal
partners," while the profits and commissions will be shared among them.

In July 2000, petitioner wrote Kevin Daley, Vice President for Asia of Pacfor, seeking confirmation of
his 50% equity of Pacfor Phils.10 Private respondent Pacfor, through William Gleason, its President,
replied that petitioner is not a part-owner of Pacfor Phils. because the latter is merely Pacfor-USA's
representative office and not an entity separate and distinct from Pacfor-USA. "It's simply a
'theoretical company' with the purpose of dividing the income 50-50."11 Petitioner presumably knew
of this arrangement from the start, having been the one to propose to private respondent Pacfor the
setting up of a representative office, and "not a branch office" in the Philippines to save on taxes.12

Petitioner claimed that he was all along made to believe that he was in a joint venture with them. He
alleged he would have been better off remaining as an independent agent or representative of
Pacfor-USA as ATM Marketing Corp.13 Had he known that no joint venture existed, he would not
have allowed Pacfor to take the profitable business of his own company, ATM Marketing
Corp.14 Petitioner raised other issues, such as the rentals of office furniture, salary of the employees,
company car, as well as commissions allegedly due him. The issues were not resolved, hence, in
October 2000, petitioner wrote Pacfor-USA demanding payment of unpaid commissions and office
furniture and equipment rentals, amounting to more than one million dollars.15

On November 27, 2000, private respondent Pacfor, through counsel, ordered petitioner to turn over
to it all papers, documents, files, records, and other materials in his or ATM Marketing Corporation's
possession that belong to Pacfor or Pacfor Phils.16 On December 18, 2000, private respondent
Pacfor also required petitioner to remit more than three hundred thousand-peso Christmas giveaway
fund for clients of Pacfor Phils.17 Lastly, private respondent Pacfor withdrew all its offers of
settlement and ordered petitioner to transfer title and turn over to it possession of the service car.18

Private respondent Pacfor likewise sent letters to its clients in the Philippines, advising them not to
deal with Pacfor Phils. In its letter to Intercontinental Paper Industries, Inc., dated November 21,
2000, private respondent Pacfor stated:

Until further notice, please course all inquiries and communications for Pacific Forest
Resources (Philippines) to:

Pacific Forest Resources

200 Tamal Plaza, Suite 200
Corte Madera, CA, USA 94925
(415) 927 1700 phone
(415) 381 4358 fax

Please do not send any communication to Mr. Arsenio "Boy" T. Mendiola or to the offices of
ATM Marketing Corporation at Room 504, Concorde Building, Legaspi Village, Makati City,
Philippines.19

In another letter addressed to Davao Corrugated Carton Corp. (DAVCOR), dated December 2000,
private respondent directed said client "to please communicate directly with us on any further
questions associated with these payments or any future business. Do not communicate with [Pacfor]
and/or [ATM]."20

Petitioner construed these directives as a severance of the "unregistered partnership" between him
and Pacfor, and the termination of his employment as resident manager of Pacfor Phils.21 In a
memorandum to the employees of Pacfor Phils., dated January 29, 2001, he stated:

I received a letter from Pacific Forest Resources, Inc. demanding the turnover of all records
to them effective December 19, 2000. The company records were turned over only on
January 26, 2001. This means our jobs with Pacific Forest were terminated effective
December 19, 2000. I am concerned about your welfare. I would like to help you by offering
you to work with ATM Marketing Corporation.

Please let me know if you are interested.22

On the basis of the "Side Agreement," petitioner insisted that he and Pacfor equally own Pacfor
Phils. Thus, it follows that he and Pacfor likewise own, on a 50/50 basis, Pacfor Phils.' office furniture
and equipment and the service car. He also reiterated his demand for unpaid commissions, and
proposed to offset these with the remaining Christmas giveaway fund in his
possession.23 Furthermore, he did not renew the lease contract with Pulp and Paper, Inc., the lessor
of the office premises of Pacfor Phils., wherein he was the signatory to the lease agreement.24

On February 2, 2001, private respondent Pacfor placed petitioner on preventive suspension and
ordered him to show cause why no disciplinary action should be taken against him. Private
respondent Pacfor charged petitioner with willful disobedience and serious misconduct for his refusal
to turn over the service car and the Christmas giveaway fund which he applied to his alleged unpaid
commissions. Private respondent also alleged loss of confidence and gross neglect of duty on the
part of petitioner for allegedly allowing another corporation owned by petitioner's relatives, High End
Products, Inc. (HEPI), to use the same telephone and facsimile numbers of Pacfor, to possibly steal
and divert the sales and business of private respondent for HEPI's principal, International Forest
Products, a competitor of private respondent.25

Petitioner denied the charges. He reiterated that he considered the import of Pacfor President
William Gleason's letters as a "cessation of his position and of the existence of Pacfor Phils." He
likewise informed private respondent Pacfor that ATM Marketing Corp. now occupies Pacfor Phils.'
office premises,26 and demanded payment of his separation pay.27 On February 15, 2001, petitioner
filed his complaint for illegal dismissal, recovery of separation pay, and payment of attorney's fees
with the NLRC.28

In the meantime, private respondent Pacfor lodged fresh charges against petitioner. In a
memorandum dated March 5, 2001, private respondent directed petitioner to explain why he should
not be disciplined for serious misconduct and conflict of interest. Private respondent charged
petitioner anew with serious misconduct for the latter's alleged act of fraud and misrepresentation in
authorizing the release of an additional peso salary for himself, besides the dollar salary agreed
upon by the parties. Private respondent also accused petitioner of disloyalty and representation of
conflicting interests for having continued using the Pacfor Phils.' office for operations of HEPI. In
addition, petitioner allegedly solicited business for HEPI from a competitor company of private
respondent Pacfor.29

Labor Arbiter Felipe Pati ruled in favor of petitioner, finding there was constructive dismissal. By
directing petitioner to turn over all office records and materials, regardless of whether he may have
retained copies, private respondent Pacfor virtually deprived petitioner of his job by the gradual
diminution of his authority as resident manager. Petitioner's position as resident manager whose
duty, among others, was to maintain the security of its business transactions and communications
was rendered meaningless. The dispositive portion of the decision of the Labor Arbiter reads:

WHEREFORE, premises considered, judgment is hereby rendered ordering herein

respondents Cellmark AB and Pacific Forest Resources, Inc., jointly and severally to
compensate complainant Arsenio T. Mendiola separation pay equivalent to at least one
month for every year of service, whichever is higher (sic), as reinstatement is no longer
feasible by reason of the strained relations of the parties equivalent to five (5) months in the
amount of $32,000.00 plus the sum of P250,000.00; pay complainant the sum
of P500,000.00 as moral and exemplary damages and ten percent (10%) of the amounts
awarded as and for attorney's fees.

All other claims are dismissed for lack of basis.

 SO ORDERED.30

Private respondent Pacfor appealed to the NLRC which ruled in its favor. On December 20, 2001,
the NLRC set aside the July 30, 2001 decision of the labor arbiter, for lack of jurisdiction and lack of
merit.31 It held there was no employer-employee relationship between the parties. Based on the two
agreements between the parties, it concluded that petitioner is not an employee of private
respondent Pacfor, but a full co-owner (50/50 equity).

The NLRC denied petitioner's Motion for Reconsideration.32

Petitioner was not successful on his appeal to the Court of Appeals. The appellate court upheld the
ruling of the NLRC.

Petitioner's Motion for Reconsideration33 of the decision of the Court of Appeals was denied.

Hence, this appeal.34

Petitioner assigns the following errors:

A. The Respondent Court of Appeals committed reversible error and abused its discretion in
rendering judgment against petitioner since jurisdiction has been acquired over the subject
matter of the case as there exists employer-employee relationship between the parties.

B. The Respondent Court of Appeals committed reversible error and abused its discretion in
ruling that jurisdiction over the subject matter cannot be waived and may be alleged even for
the first time on appeal or considered by the court motu prop[r]io.35

The first issue is whether an employer-employee relationship exists between petitioner and private
respondent Pacfor.

Petitioner argues that he is an industrial partner of the partnership he formed with private respondent
Pacfor, and also an employee of the partnership. Petitioner insists that an industrial partner may at
the same time be an employee of the partnership, provided there is such an agreement, which, in
this case, is the "Side Agreement" and the "Revised Operating and Profit Sharing Agreement." The
Court of Appeals denied the appeal of petitioner, holding that "the legal basis of the complaint is not
employment but perhaps partnership, co-ownership, or independent contractorship." Hence, the
Labor Code cannot apply.

We hold that petitioner is an employee of private respondent Pacfor and that no partnership or co-
ownership exists between the parties.

In a partnership, the members become co-owners of what is contributed to the firm capital and of all
property that may be acquired thereby and through the efforts of the members.36 The property or
stock of the partnership forms a community of goods, a common fund, in which each party has a
proprietary interest.37 In fact, the New Civil Code regards a partner as a co-owner of specific
partnership property.38 Each partner possesses a joint interest in the whole of partnership property. If
the relation does not have this feature, it is not one of partnership.39 This essential element, the
community of interest, or co-ownership of, or joint interest in partnership property is absent in the
relations between petitioner and private respondent Pacfor. Petitioner is not a part-owner of Pacfor
Phils. William Gleason, private respondent Pacfor's President established this fact when he said that
Pacfor Phils. is simply a "theoretical company" for the purpose of dividing the income 50-50. He
stressed that petitioner knew of this arrangement from the very start, having been the one to
propose to private respondent Pacfor the setting up of a representative office, and "not a branch
office" in the Philippines to save on taxes. Thus, the parties in this case, merely shared profits. This
alone does not make a partnership.40

Besides, a corporation cannot become a member of a partnership in the absence of express

authorization by statute or charter.41 This doctrine is based on the following considerations: (1) that
the mutual agency between the partners, whereby the corporation would be bound by the acts of
persons who are not its duly appointed and authorized agents and officers, would be inconsistent
with the policy of the law that the corporation shall manage its own affairs separately and
exclusively; and, (2) that such an arrangement would improperly allow corporate property to become
subject to risks not contemplated by the stockholders when they originally invested in the
corporation.42 No such authorization has been proved in the case at bar.

Be that as it may, we hold that on the basis of the evidence, an employer-employee relationship is
present in the case at bar. The elements to determine the existence of an employment relationship
are: (a) the selection and engagement of the employee; (b) the payment of wages; (c) the power of
dismissal; and (d) the employer's power to control the employee's conduct. The most important
element is the employer's control of the employee's conduct, not only as to the result of the work to
be done, but also as to the means and methods to accomplish it.43

In the instant case, all the foregoing elements are present. First, it was private respondent Pacfor
which selected and engaged the services of petitioner as its resident agent in the Philippines.
Second, as stipulated in their Side Agreement, private respondent Pacfor pays petitioner his salary
amounting to $65,000 per annum which was later increased to $78,000. Third, private respondent
Pacfor holds the power of dismissal, as may be gleaned through the various memoranda it issued
against petitioner, placing the latter on preventive suspension while charging him with various
offenses, including willful disobedience, serious misconduct, and gross neglect of duty, and ordering
him to show cause why no disciplinary action should be taken against him.

Lastly and most important, private respondent Pacfor has the power of control over the means and
method of petitioner in accomplishing his work.

The power of control refers merely to the existence of the power, and not to the actual exercise
thereof. The principal consideration is whether the employer has the right to control the manner of
doing the work, and it is not the actual exercise of the right by interfering with the work, but the right
to control, which constitutes the test of the existence of an employer-employee relationship.44 In the
case at bar, private respondent Pacfor, as employer, clearly possesses such right of control.
Petitioner, as private respondent Pacfor's resident agent in the Philippines, is, exactly so, only an
agent of the corporation, a representative of Pacfor, who transacts business, and accepts service on
its behalf.

This right of control was exercised by private respondent Pacfor during the period of November to
December 2000, when it directed petitioner to turn over to it all records of Pacfor Phils.; when it
ordered petitioner to remit the Christmas giveaway fund intended for clients of Pacfor Phils.; and,
when it withdrew all its offers of settlement and ordered petitioner to transfer title and turn over to it
the possession of the service car. It was also during this period when private respondent Pacfor sent
letters to its clients in the Philippines, particularly Intercontinental Paper Industries, Inc. and
DAVCOR, advising them not to deal with petitioner and/or Pacfor Phils. In its letter to DAVCOR,
private respondent Pacfor replied to the client's request for an invoice payment extension, and
formulated a revised payment program for DAVCOR. This is one unmistakable proof that private
respondent Pacfor exercises control over the petitioner.
Next, we shall determine if petitioner was constructively dismissed from employment.

The evidence shows that when petitioner insisted on his 50% equity in Pacfor Phils., and would not
quit however, private respondent Pacfor began to systematically deprive petitioner of his duties and
benefits to make him feel that his presence in the company was no longer wanted. First, private
respondent Pacfor directed petitioner to turn over to it all records of Pacfor Phils. This would
certainly make the work of petitioner very difficult, if not impossible. Second, private respondent
Pacfor ordered petitioner to remit the Christmas giveaway fund intended for clients of Pacfor Phils.
Then it ordered petitioner to transfer title and turn over to it the possession of the service car. It also
advised its clients in the Philippines, particularly Intercontinental Paper Industries, Inc. and
DAVCOR, not to deal with petitioner and/or Pacfor Phils. Lastly, private respondent Pacfor appointed
a new resident agent for Pacfor Phils.45

Although there is no reduction of the salary of petitioner, constructive dismissal is still present
because continued employment of petitioner is rendered, at the very least, unreasonable.46 There is
an act of clear discrimination, insensibility or disdain by the employer that continued employment
may become so unbearable on the part of the employee so as to foreclose any choice on his part
except to resign from such employment.47

The harassing acts of the private respondent are unjustified. They were undertaken when petitioner
sought clarification from the private respondent about his supposed 50% equity on Pacfor Phils.
Private respondent Pacfor invokes its rights as an owner. Allegedly, its issuance of the foregoing
directives against petitioner was a valid exercise of management prerogative. We remind private
respondent Pacfor that the exercise of management prerogative is not absolute. "By its very nature,
encompassing as it could be, management prerogative must be exercised in good faith and with due
regard to the rights of labor verily, with the principles of fair play at heart and justice in mind." The
exercise of management prerogative cannot be utilized as an implement to circumvent our laws and
oppress employees.48

As resident agent of private respondent corporation, petitioner occupied a position involving trust
and confidence. In the light of the strained relations between the parties, the full restoration of an
employment relationship based on trust and confidence is no longer possible. He should be awarded
separation pay, in lieu of reinstatement.

IN VIEW WHEREOF, the petition is GRANTED. The Court of Appeals' January 30, 2003 Decision in
CA-G.R. SP No. 71028 and July 30, 2003 Resolution, affirming the December 20, 2001 Decision of
the National Labor Relations Commission, are ANNULED and SET ASIDE. The July 30, 2001
Decision of the Labor Arbiter is REINSTATED with the MODIFICATION that the amount
of P250,000.00 representing an alleged increase in petitioner's salary shall be deducted from the
grant of separation pay for lack of evidence.

SO ORDERED.