Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION 

G.R. No. 120465 September 9, 1999

WILLIAM UY and RODEL ROXAS, petitioners,

vs.
COURT OF APPEALS, HON. ROBERT BALAO and NATIONAL HOUSING
AUTHORITY, respondents. 

KAPUNAN, J.:

Petitioners William Uy and Rodel Roxas are agents authorized to sell eight parcels of
land by the owners thereof. By virtue of such authority, petitioners offered to sell the
lands, located in Tuba, Tadiangan, Benguet to respondent National Housing Authority
(NHA) to be utilized and developed as a housing project.

On February 14, 1989, the NHA Board passed Resolution No. 1632 approving the
acquisition of said lands, with an area of 31.8231 hectares, at the cost of P23.867 million,
pursuant to which the parties executed a series of Deeds of Absolute Sale covering the
subject lands. Of the eight parcels of land, however, only five were paid for by the NHA
because of the report 1 it received from the Land Geosciences Bureau of the Department
of Environment and Natural Resources (DENR) that the remaining area is located at an
active landslide area and therefore, not suitable for development into a housing project.

On 22 November 1991, the NHA issued Resolution No. 2352 cancelling the sale over the
three parcels of land. The NHA, through Resolution No. 2394, subsecguently offered the
amount of P1.225 million to the landowners as daños perjuicios.

On 9 March 1992, petitioners filed before the Regional Trial Court (RTC) of Quezon City
a Complaint for Damages against NHA and its General Manager Robert Balao.

After trial, the RTC rendered a decision declaring the cancellation of the contract to be
justified. The trial court nevertheless awarded damages to plaintiffs in the sum of P1.255
million, the same amount initially offered by NHA to petitioners as
damages.1âwphi1.nêt

Upon appeal by petitioners, the Court of Appeals reversed the decision of the trial court
and entered a new one dismissing the complaint. It held that since there was "sufficient
justifiable basis" in cancelling the sale, "it saw no reason" for the award of damages. The
Court of Appeals also noted that petitioners were mere attorneys-in-fact and, therefore,
not the real parties-in-interest in the action before the trial court.
 . . . In paragraph 4 of the complaint, plaintiffs alleged themselves to
be "sellers' agents" for the several owners of the 8 lots subject
matter of the case. Obsviously, William Uy and Rodel Roxas in
filing this case acted as attorneys-in-fact of the lot owners who are
the real parties in interest but who were omitted to be pleaded as
party-plaintiffs in the case. This omission is fatal. Where the action
is brought by an attorney-in-fact of a land owner in his name, (as in
our present action) and not in the name of his principal, the action
was properly dismissed (Ferrer vs. Villamor, 60 SCRA 406 [1974];
Marcelo vs. de Leon, 105 Phil. 1175) because the rule is that every
action must be prosecuted in the name of the real parties-in-
interest (Section 2, Rule 3, Rules of Court).

When plaintiffs UY and Roxas sought payment of damages in their

favor in view of the partial rescission of Resolution No. 1632 and
the Deed of Absolute Sale covering TCT Nos. 10998, 10999 and
11292 (Prayer complaint, page 5, RTC records), it becomes
obviously indispensable that the lot owners be included, mentioned
and named as party-plaintiffs, being the real party-in-interest. UY
and Roxas, as attorneys-in-fact or apoderados, cannot by
themselves lawfully commence this action, more so, when the
supposed special power of attorney, in their favor, was never
presented as an evidence in this case. Besides, even if herein
plaintiffs Uy and Roxas were authorized by the lot owners to
commence this action, the same must still be filed in the name of
the principal, (Filipino Industrial Corporation vs. San Diego, 23
SCRA 706 [1968]). As such indispensable party, their joinder in the
action is mandatory and the complaint may be dismissed if not so
impleaded (NDC vs. CA, 211 SCRA 422 [1992]). 2

Their motion for reconsideration having been denied, petitioners seek relief from this
Court contending that:

I. THE RESPONDENT CA ERRED IN DECLARING THAT

RESPONDENT NHA HAD ANY LEGAL BASIS FOR RESCINDING
THE SALE INVOLVING THE LAST THREE (3) PARCELS
COVERED BY NHA RESOLUTION NO. 1632.

II. GRANTING ARGUENDO THAT THE RESPONDENT NHA HAD

LEGAL BASIS TO RESCIND THE SUBJECT SALE, THE
RESPONDENT CA NONETHELESS ERRED IN DENYING
HEREIN PETITIONERS' CLAIM TO DAMAGES, CONTRARY TO
THE PROVISIONS OF ART. 1191 OF THE CIVIL CODE.

III. THE RESPONDENT CA ERRED IN DISMISSING THE

SUBJECT COMPLAINT FINDING THAT THE PETITIONERS
 FAILED TO JOIN AS INDISPENSABLE PARTY PLAINTIFF THE
SELLING LOT-OWNERS. 3

We first resolve the issue raised in the the third assignment of error.

Petitioners claim that they lodged the complaint not in behalf of their principals but in
their own name as agents directly damaged by the termination of the contract. The
damages prayed for were intended not for the benefit of their principals but to
indemnify petitioners for the losses they themselves allegedly incurred as a result of
such termination. These damages consist mainly of "unearned income" and
advances. 4 Petitioners, thus, attempt to distinguish the case at bar from those involving
agents or apoderedos instituting actions in their own name but in behalf of their
principals. 5 Petitioners in this case purportedly brought the action for damages in their
own name and in their own behalf.

We find this contention unmeritorious.

Sec. 2, Rule 3 of the Rules of Court requires that every action must be prosecuted and
defended in the name of the real party-in-interest. The real party-in-interest is the party
who stands to be benefited or injured by the judgment or the party entitled to the avails
of the suit. "Interest, within the meaning of the rule, means material interest, an interest
in the issue and to be affected by the decree, as distinguished from mere interest in the
question involved, or a mere incidental interest. 6 Cases construing the real party-in-
interest provision can be more easily understood if it is borne in mind that the true
meaning of real party-in-interest may be summarized as follows: An action shall be
prosecuted in the name of the party who, by the substantive law, has the right sought to
be enforced. 7

Do petitioners, under substantive law, possess the right they seek to enforce? We rule in
the negative.

The applicable substantive law in this case is Article 1311 of the Civil Code, which states:

Contracts take effect only between the parties, their assigns, and
heirs, except in case where the rights and obligations arising from
the contract are not transmissible by their nature, or by stipulation,
or by provision of law. . . .

If a contract should contain some stipulation in favor of a third

person, he may demand its fulfillment provided he communicated
his acceptance to the obligor before its revocation. A mere
incidental benefit or interest of a person is not sufficient. The
contracting parties must have clearly and deliberately conferred a
favor upon a third person. (Emphasis supplied.)

Petitioners are not parties to the contract of sale between their principals and NHA.
They are mere agents of the owners of the land subject of the sale. As agents, they only
render some service or do something in representation or on behalf of their
principals. 8 The rendering of such service did not make them parties to the contracts of
sale executed in behalf of the latter. Since a contract may be violated only by the parties
thereto as against each other, the real parties-in-interest, either as plaintiff or
defendant, in an action upon that contract must, generally, either be parties to said
contract. 9

Neither has there been any allegation, much less proof, that petitioners are the heirs of
their principals.

Are petitioners assignees to the rights under the contract of sale? In McMicking vs.
Banco Español-Filipino, 10 we held that the rule requiring every action to be prosecuted
in the name of the real party-in-interest.

. . . recognizes the assignments of rights of action and also

recognizes that when one has a right of action assigned to him he is
then the real party in interest and may maintain an action upon
such claim or right. The purpose of [this rule] is to require the
plaintiff to be the real party in interest, or, in other words, he must
be the person to whom the proceeds of the action shall belong, and
to prevent actions by persons who have no interest in the result of
the same. . . .

Thus, an agent, in his own behalf, may bring an action founded on a contract made for
his principal, as an assignee of such contract. We find the following declaration in
Section 372 (1) of the Restatement of the Law on Agency (Second): 11

Sec. 372. Agent as Owner of Contract Right

(1) Unless otherwise agreed, an agent who has or who acquires an

interest in a contract which he makes on behalf of his principal can,
although not a promisee, maintain such action thereon maintain
such action thereon as might a transferee having a similar interest.

The Comment on subsection (1) states:

a. Agent a transferee. One who has made a contract on behalf of

another may become an assignee of the contract and bring suit
against the other party to it, as any other transferee. The customs of
business or the course of conduct between the principal and the
agent may indicate that an agent who ordinarily has merely a
security interest is a transferee of the principals rights under the
contract and as such is permitted to bring suit. If the agent has
settled with his principal with the understanding that he is to collect
the claim against the obligor by way of reimbursing himself for his
advances and commissions, the agent is in the position of an
assignee who is the beneficial owner of the chose in action. He has
 an irrevocable power to sue in his principal's name. . . . And, under
the statutes which permit the real party in interest to sue, he can
maintain an action in his own name. This power to sue is not
affected by a settlement between the principal and the obligor if the
latter has notice of the agent's interest. . . . Even though the agent
has not settled with his principal, he may, by agreement with the
principal, have a right to receive payment and out of the proceeds to
reimburse himself for advances and commissions before turning
the balance over to the principal. In such a case, although there is
no formal assignment, the agent is in the position of a transferee of
the whole claim for security; he has an irrevocable power to sue in
his principal's name and, under statutes which permit the real party
in interest to sue, he can maintain an action in his own name.

Petitioners, however, have not shown that they are assignees of their principals to the
subject contracts. While they alleged that they made advances and that they suffered
loss of commissions, they have not established any agreement granting them "the right
to receive payment and out of the proceeds to reimburse [themselves] for advances and
commissions before turning the balance over to the principal[s]."

Finally, it does not appear that petitioners are beneficiaries of a stipulation pour

autrui under the second paragraph of Article 1311 of the Civil Code. Indeed, there is no
stipulation in any of the Deeds of Absolute Sale "clearly and deliberately" conferring a
favor to any third person.

That petitioners did not obtain their commissions or recoup their advances because of
the non-performance of the contract did not entitle them to file the action below against
respondent NHA. Section 372 (2) of the Restatement of the Law on Agency (Second)
states:

(2) An agent does not have such an interest in a contract as to entitle him
to maintain an action at law upon it in his own name merely because he is
entitled to a portion of the proceeds as compensation for making it or
because he is liable for its breach.

The following Comment on the above subsection is illuminating:

The fact that an agent who makes a contract for his principal will gain or
suffer loss by the performance or nonperformance of the contract by the
principal or by the other party thereto does not entitle him to maintain an
action on his own behalf against the other party for its breach. An agent
entitled to receive a commission from his principal upon the performance
of a contract which he has made on his principal's account does not, from
this fact alone, have any claim against the other party for breach of the
contract, either in an action on the contract or otherwise. An agent who is
not a promisee cannot maintain an action at law against a purchaser
 merely because he is entitled to have his compensation or advances paid
out of the purchase price before payment to the principal. . . .

Thus, in Hopkins vs. Ives, 12 the Supreme Court of Arkansas, citing Section 372 (2)
above, denied the claim of a real estate broker to recover his alleged commission against
the purchaser in an agreement to purchase property.

In Goduco vs. Court of appeals, 13 this Court held that:

. . . granting that appellant had the authority to sell the property,

the same did not make the buyer liable for the commission she
claimed. At most, the owner of the property and the one who
promised to give her a commission should be the one liable to pay
the same and to whom the claim should have been directed. . . .

As petitioners are not parties, heirs, assignees, or beneficiaries of a stipulation pour

autrui under the contracts of sale, they do not, under substantive law, possess the right
they seek to enforce. Therefore, they are not the real parties-in-interest in this case.

Petitioners not being the real parties-in-interest, any decision rendered herein would be
pointless since the same would not bind the real parties-in-
interest. 14

Nevertheless, to forestall further litigation on the substantive aspects of this case, we

shall proceed to rule on me merits. 15

Petitioners submit that respondent NHA had no legal basis to "rescind" the sale of the
subject three parcels of land. The existence of such legal basis, notwithstanding,
petitioners argue that they are still entitled to an award of damages.

Petitioners confuse the cancellation of the contract by the NHA as a rescission of the
contract under Article 1191 of the Civil Code. The right of rescission or, more accurately,
resolution, of a party to an obligation under Article 1191 is predicated on a breach of
faith by the other party that violates the reciprocity between them. 16 The power to
rescind, therefore, is given to the injured party. 17 Article 1191 states:

The power to rescind obligations is implied in reciprocal ones, in case one

of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.

In this case, the NHA did not rescind the contract. Indeed, it did not have the right to do
so for the other parties to the contract, the vendors, did not commit any breach, much
less a substantial breach, 18 of their obligation. Their obligation was merely to deliver the
parcels of land to the NHA, an obligation that they fulfilled. The NHA did not suffer any
injury by the performance thereof.

The cancellation, therefore, was not a rescission under Article 1191. Rather, the
cancellation was based on the negation of the cause arising from the realization that the
lands, which were the object of the sale, were not suitable for housing.1âwphi1.nêt

Cause is the essential reason which moves the contracting parties to enter into it. 19 In
other words, the cause is the immediate, direct and proximate reason which justifies the
creation of an obligation through the will of the contracting parties. 20 Cause, which is
the essential reason for the contract, should be distinguished from motive, which is the
particular reason of a contracting party which does not affect the other party. 21

For example, in a contract of sale of a piece of land, such as in this case, the cause of the
vendor (petitioners' principals) in entering into the contract is to obtain the price. For
the vendee, NHA, it is the acquisition of the land. 22 The motive of the NHA, on the other
hand, is to use said lands for housing. This is apparent from the portion of the Deeds of
Absolute Sale 23 stating:

WHEREAS, under the Executive Order No. 90 dated December 17, 1986,
the VENDEE is mandated to focus and concentrate its efforts and
resources in providing housing assistance to the lowest thirty percent
(30%) of urban income earners, thru slum upgrading and development of
sites and services projects;

WHEREAS, Letters of Instructions Nos. 555 and 557 [as] amended by

Letter of Instruction No. 630, prescribed slum improvement and
upgrading, as well as the development of sites and services as the principal
housing strategy for dealing with slum, squatter and other blighted
communities;

xxx xxx xxx

WHEREAS, the VENDEE, in pursuit of and in compliance with the above-

stated purposes offers to buy and the VENDORS, in a gesture of their
willing to cooperate with the above policy and commitments, agree to sell
the aforesaid property together with all the existing improvements there or
belonging to the VENDORS;

NOW, THEREFORE, for and in consideration of the foregoing premises

and the terms and conditions hereinbelow stipulated, the VENDORS
hereby, sell, transfer, cede and convey unto the VENDEE, its assigns, or
successors-in-interest, a parcel of land located at Bo. Tadiangan, Tuba,
Benguet containing a total area of FIFTY SIX THOUSAND EIGHT
HUNDRED NINETEEN (56,819) SQUARE METERS, more or less . . . .
Ordinarily, a party's motives for entering into the contract do not affect the contract.
However, when the motive predetermines the cause, the motive may be regarded as the
cause. In Liguez vs. Court of Appeals, 24 this Court, speaking through Justice J.B.L.
REYES, HELD:

. . . it is well to note, however, that Manresa himself (Vol. 8, pp. 641-

642), while maintaining the distinction and upholding the
inoperativeness of the motives of the parties to determine the
validity of the contract, expressly excepts from the rule those
contracts that are conditioned upon the attainment of the motives
of either party.

The same view is held by the Supreme Court of Spain, in its

decisions of February 4, 1941, and December 4, 1946, holding that
the motive may be regarded as causa when it predetermines the
purpose of the contract.

In this case, it is clear, and petitioners do not dispute, that NHA would not have entered
into the contract were the lands not suitable for housing. In other words, the quality of
the land was an implied condition for the NHA to enter into the contract. On the part of
the NHA, therefore, the motive was the cause for its being a party to the sale.

Were the lands indeed unsuitable for housing as NHA claimed?

We deem the findings contained in the report of the Land Geosciences Bureau dated 15
July 1991 sufficient basis for the cancellation of the sale, thus:

In Tadiangan, Tuba, the housing site is situated in an area of

moderate topography. There [are] more areas of less sloping
ground apparently habitable. The site is underlain by . . . thick slide
deposits (4-45m) consisting of huge conglomerate boulders (see
Photo No. 2) mix[ed] with silty clay materials. These clay particles
when saturated have some swelling characteristics which is
dangerous for any civil structures especially mass housing
development. 25

Petitioners contend that the report was merely "preliminary," and not conclusive, as
indicated in its title:

MEMORANDUM

TO: EDWIN G. DOMINGO

Chief, Lands Geology Division

FROM: ARISTOTLE A. RILLON

 Geologist II

SUBJECT: Preliminary Assessment of

Tadiangan Housing Project in Tuba, Benguet 26

Thus, page 2 of the report states in part:

x x x           x x x          x x x

Actually there is a need to conduct further geottechnical [sic]

studies in the NHA property. Standard Penetration Test (SPT) must
be carried out to give an estimate of the degree of compaction (the
relative density) of the slide deposit and also the bearing capacity of
the soil materials. Another thing to consider is the vulnerability of
the area to landslides and other mass movements due to thick soil
cover. Preventive physical mitigation methods such as surface and
subsurface drainage and regrading of the slope must be done in the
area. 27

We read the quoted portion, however, to mean only that further tests are required to
determine the "degree of compaction," "the bearing capacity of the soil materials," and
the "vulnerability of the area to landslides," since the tests already conducted were
inadequate to ascertain such geological attributes. It is only in this sense that the
assessment was "preliminary."

Accordingly, we hold that the NHA was justified in canceling the contract. The
realization of the mistake as regards the quality of the land resulted in the negation of
the motive/cause thus rendering the contract inexistent. 28 Article 1318 of the Civil Code
states that:

Art. 1318. There is no contract unless the following requisites

concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established. (Emphasis

supplied.)

Therefore, assuming that petitioners are parties, assignees or beneficiaries to the

contract of sale, they would not be entitled to any award of damages.

WHEREFORE, the instant petition is hereby DENIED.

SO ORDERED.
 FIRST DIVISION

G.R. No. 142616. July 31, 2001

PHILIPPINE NATIONAL BANK, Petitioner, v. RITRATO GROUP

INC., RIATTO INTERNATIONAL, INC., and DADASAN GENERAL
MERCHANDISE, Respondent.

DECISION

KAPUNAN, J.:

In a petition for review on certiorari under Rule 45 of the Revised Rules of

Court, petitioner seeks to annul and set aside the Court of Appeals' decision in
C.A. G.R. S.P. No. 55374 dated March 27, 2000, affirming the Order issuing a
writ of preliminary injunction of the Regional Trial Court of Makati, Branch
147, dated June 30, 1999, and its Order dated October 4, 1999, which denied
petitioner's motion to dismiss.

The antecedents of this case are as follows:

Petitioner Philippine National Bank is a domestic corporation organized and

existing under Philippine law. Meanwhile, respondents Ritratto Group, Inc.,
Riatto International, Inc. and Dadasan General Merchandise are domestic
corporations, likewise, organized and existing under Philippine law.

On May 29, 1996, PNB International Finance Ltd. (PNB-IFL), a subsidiary

company of PNB, organized and doing business in Hong Kong, extended a
letter of credit in favor of the respondents in the amount of US$300,000.00
secured by real estate mortgages constituted over four (4) parcels of land in
Makati City. This credit facility was later increased successively to
US$1,140,000.00 in September 1996; to US$1,290,000.00 in November
1996; to US$1,425,000.00 in February 1997; and decreased to
US$1,421,316.18 in April 1998. Respondents made repayments of the loan
incurred by remitting those amounts to their loan account with PNB-IFL in
Hong Kong.

However, as of April 30, 1998, their outstanding obligations stood at

US$1,497,274.70. Pursuant to the terms of the real estate mortgages, PNB-
IFL, through its attorney-in-fact PNB, notified the respondents of the
foreclosure of all the real estate mortgages and that the properties subject
thereof were to be sold at a public auction on May 27, 1999 at the Makati City
Hall.

On May 25, 1999, respondents filed a complaint for injunction with prayer for
the issuance of a writ of preliminary injunction and/or temporary restraining
order before the Regional Trial Court of Makati. The Executive Judge of the
Regional Trial Court of Makati issued a 72-hour temporary restraining order.
On May 28, 1999, the case was raffled to Branch 147 of the Regional Trial
Court of Makati. The trial judge then set a hearing on June 8, 1999. At the
hearing of the application for preliminary injunction, petitioner was given a
period of seven days to file its written opposition to the application. On June
15, 1999, petitioner filed an opposition to the application for a writ of
preliminary injunction to which the respondents filed a reply. On June 25,
1999, petitioner filed a motion to dismiss on the grounds of failure to state a
cause of action and the absence of any privity between the petitioner and
respondents. On June 30, 1999, the trial court judge issued an Order for the
issuance of a writ of preliminary injunction, which writ was correspondingly
issued on July 14, 1999. On October 4, 1999, the motion to dismiss was denied
by the trial court judge for lack of merit.

Petitioner, thereafter, in a petition for certiorari and prohibition assailed the

issuance of the writ of preliminary injunction before the Court of Appeals. In
the impugned decision, 1 the appellate court dismissed the petition. Petitioner
thus seeks recourse to this Court and raises the following errors:

1.

THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING

THE COMPLAINT A QUO, CONSIDERING THAT BY THE
ALLEGATIONS OF THE COMPLAINT, NO CAUSE OF ACTION
EXISTS AGAINST PETITIONER, WHICH IS NOT A REAL PARTY IN
INTEREST BEING A MERE ATTORNEY-IN-FACT AUTHORIZED TO
ENFORCE AN ANCILLARY CONTRACT.

2.

THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE

TRIAL COURT TO ISSUE IN EXCESS OR LACK OF JURISDICTION A
WRIT OF PRELIMINARY INJUNCTION OVER AND BEYOND WHAT
WAS PRAYED FOR IN THE COMPLAINT A QUO CONTRARY
TO CHIEF OF STAFF, AFP VS. GUADIZ, JR., 101 SCRA 827.2 cräläwvirtualibräry
Petitioner prays, inter alia, that the Court of Appeals' Decision dated March
27, 2000 and the trial court's Orders dated June 30, 1999 and October 4, 1999
be set aside and the dismissal of the complaint in the instant case. 3 cräläwvirtualibräry

In their Comment, respondents argue that even assuming arguendo that

petitioner and PNB-IFL are two separate entities, petitioner is still the party-
in-interest in the application for preliminary injunction because it is tasked to
commit acts of foreclosing respondents' properties. 4 Respondents maintain
that the entire credit facility is void as it contains stipulations in violation of
the principle of mutuality of contracts. 5 In addition, respondents justified the
act of the court a quo in applying the doctrine of "Piercing the Veil of
Corporate Identity" by stating that petitioner is merely an alter ego or a
business conduit of PNB-IFL. 6 cräläwvirtualibräry

The petition is impressed with merit.

Respondents, in their complaint, anchor their prayer for injunction on alleged

invalid provisions of the contract:

GROUNDS

THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO

THE SOLE DISCRETION OF THE DEFENDANT PNB
CONTRAVENES THE PRINICIPAL OF MUTUALITY OF CONTRACTS.

II

THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT

THE RATE OF INTEREST AGREED UPON MAY BE UNILATERALLY
MODIFIED BY DEFENDANT, THERE WAS NO STIPULATION THAT
THE RATE OF INTEREST SHALL BE REDUCED IN THE EVENT
THAT THE APPLICABLE MAXIMUM RATE OF INTEREST IS
REDUCED BY LAW OR BY THE MONETARY BOARD.7 cräläwvirtualibräry

Based on the aforementioned grounds, respondents sought to enjoin and

restrain PNB from the foreclosure and eventual sale of the property in order to
protect their rights to said property by reason of void credit facilities as bases
for the real estate mortgage over the said property. 8cräläwvirtualibräry

The contract questioned is one entered into between respondent and PNB-
IFL, not PNB. In their complaint, respondents admit that petitioner is a mere
attorney-in-fact for the PNB-IFL with full power and authority to, inter alia,
foreclose on the properties mortgaged to secure their loan obligations with
PNB-IFL. In other words, herein petitioner is an agent with limited authority
and specific duties under a special power of attorney incorporated in the real
estate mortgage. It is not privy to the loan contracts entered into by
respondents and PNB-IFL.

The issue of the validity of the loan contracts is a matter between PNB-IFL, the
petitioner's principal and the party to the loan contracts, and the respondents.
Yet, despite the recognition that petitioner is a mere agent, the respondents in
their complaint prayed that the petitioner PNB be ordered to re-compute the
rescheduling of the interest to be paid by them in accordance with the terms
and conditions in the documents evidencing the credit facilities, and crediting
the amount previously paid to PNB by herein respondents. 9 cräläwvirtualibräry

Clearly, petitioner not being a party to the contract has no power to re-
compute the interest rates set forth in the contract. Respondents, therefore do
not have any cause of action against petitioner.

The trial court, however, in its Order dated October 4, 1994, ruled that since
PNB-IFL is a wholly owned subsidiary of defendant Philippine National Bank,
the suit against the defendant PNB is a suit against PNB-IFL. 10 In justifying its
ruling, the trial court, citing the case of Koppel Phil Inc. vs. Yatco, 11 reasoned
that the corporate entity may be disregarded where a corporation is the mere
alter ego, or business conduit of a person or where the corporation is so
organized and controlled and its affairs are so conducted, as to make it merely
an instrumentality, agency, conduit or adjunct of another corporation. 12 cräläwvirtualibräry

We disagree.

The general rule is that as a legal entity, a corporation has a personality

distinct and separate from its individual stockholders or members, and is not
affected by the personal rights, obligations and transactions of the
latter. 13 The mere fact that a corporation owns all of the stocks of another
corporation, taken alone is not sufficient to justify their being treated as one
entity. If used to perform legitimate functions, a subsidiary's separate
existence may be respected, and the liability of the parent corporation as well
as the subsidiary will be confined to those arising in their respective business.
The courts may in the exercise of judicial discretion step in to prevent the
abuses of separate entity privilege and pierce the veil of corporate entity.
We find, however, that the ruling in Koppel finds no application in the case at
bar. In said case, this Court disregarded the separate existence of the parent
and the subsidiary on the ground that the latter was formed merely for the
purpose of evading the payment of higher taxes. In the case at bar,
respondents failed to show any cogent reason why the separate entities of the
PNB and PNB-IFL should be disregarded.

While there exists no definite test of general application in determining when

a subsidiary may be treated as a mere instrumentality of the parent
corporation, some factors have been identified that will justify the application
of the treatment of the doctrine of the piercing of the corporate veil. The case
of Garrett vs. Southern Railway Co 14 is enlightening. The case involved a suit
against the Southern Railway Company. Plaintiff was employed by Lenoir Car
Works and alleged that he sustained injuries while working for Lenoir. He,
however, filed a suit against Southern Railway Company on the ground that
Southern had acquired the entire capital stock of Lenoir Car Works, hence, the
latter corporation was but a mere instrumentality of the former. The
Tennessee Supreme Court stated that as a general rule the stock ownership
alone by one corporation of the stock of another does not thereby render the
dominant corporation liable for the torts of the subsidiary unless the separate
corporate existence of the subsidiary is a mere sham, or unless the control of
the subsidiary is such that it is but an instrumentality or adjunct of the
dominant corporation. Said court then outlined the circumstances which may
be useful in the determination of whether the subsidiary is but a mere
instrumentality of the parent-corporation:

The Circumstances rendering the subsidiary an instrumentality. It is

manifestly impossible to catalogue the infinite variations of fact that can arise
but there are certain common circumstances which are important and which,
if present in the proper combination, are controlling.

These are as follows:

(a) The parent corporation owns all or most of the capital stock of the
subsidiary.

(b) The parent and subsidiary corporations have common directors or officers.

(c) The parent corporation finances the subsidiary.

(d) The parent corporation subscribes to all the capital stock of the subsidiary
or otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.

(f) The parent corporation pays the salaries and other expenses or losses of the
subsidiary.

(g) The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent
corporation.

(h) In the papers of the parent corporation or in the statements of its officers,
the subsidiary is described as a department or division of the parent
corporation, or its business or financial responsibility is referred to as the
parent corporation's own.

(i) The parent corporation uses the property of the subsidiary as its own.

(j) The directors or executives of the subsidiary do not act independently in

the interest of the subsidiary but take their orders from the parent
corporation.

(k) The formal legal requirements of the subsidiary are not observed.

The Tennessee Supreme Court thus ruled:

In the case at bar only two of the eleven listed indicia occur, namely, the
ownership of most of the capital stock of Lenoir by Southern, and possibly
subscription to the capital stock of Lenoir The complaint must be dismissed.

Similarly, in this jurisdiction, we have held that the doctrine of piercing the
corporate veil is an equitable doctrine developed to address situations where
the separate corporate personality of a corporation is abused or used for
wrongful purposes. The doctrine applies when the corporate fiction is used to
defeat public convenience, justify wrong, protect fraud or defend crime, or
when it is made as a shield to confuse the legitimate issues, or where a
corporation is the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as
to make it merely an instrumentality, agency, conduit or adjunct of another
corporation. 15
cräläwvirtualibräry

In Concept Builders, Inc. v. NLRC, 16 we have laid the test in determining the
applicability of the doctrine of piercing the veil of corporate fiction, to wit:
1. Control, not mere majority or complete control, but complete domination,
not only of finances but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own.

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 and, unjust act 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.

The absence of any one of these elements prevents "piercing the corporate
veil." In applying the "instrumentality" or "alter ego" doctrine, the courts are
concerned with reality and not form, with how the corporation operated and
the individual defendant's relationship to the operation. 17
cräläwvirtualibräry

Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner
PNB, there is now showing of the indicative factors that the former
corporation is a mere instrumentality of the latter are present. Neither is there
a demonstration that any of the evils sought to be prevented by the doctrine of
piercing the corporate veil exist. Inescapably, therefore, the doctrine of
piercing the corporate veil based on the alter ego or instrumentality doctrine
finds no application in the case at bar.

In any case, the parent-subsidiary relationship between PNB and PNB-IFL is

not the significant legal relationship involved in this case since the petitioner
was not sued because it is the parent company of PNB-IFL. Rather, the
petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in
initiating the foreclosure proceedings. A suit against an agent cannot without
compelling reasons be considered a suit against the principal. Under the Rules
of Court, every action must be prosecuted or defended in the name of the real
party-in-interest, unless otherwise authorized by law or these Rules. 18 In
mandatory terms, the Rules require that "parties-in-interest without whom no
final determination can be had, an action shall be joined either as plaintiffs or
defendants." 19 In the case at bar, the injunction suit is directed only against
the agent, not the principal.

Anent the issuance of preliminary injunction, the same must be lifted as it is a

mere provisional remedy but adjunct to the main suit. 20 A writ of preliminary
injunction is an ancillary or preventive remedy that may only be resorted to by
a litigant to protect or preserve his rights or interests and for no other purpose
during the pendency of the principal action. The dismissal of the principal
action thus results in the denial of the prayer for the issuance of the writ.
Further, there is no showing that respondents are entitled to the issuance of
the writ. Section 3, Rule 58, of the 1997 Rules of Civil Procedure provides:

SEC. 3. Grounds for issuance of preliminary injunction.- A preliminary

injunction may be granted when it is established:

(a) That the applicant is entitled to the relief demanded, and the whole or
part of such relief consists in restraining the commission or continuance of
the act or acts complained of, or in requiring the performance of an act or
acts, either for a limited period or perpetually;

(b) That the commission, continuance or non-performance of the acts or

acts complained of during the litigation would probably work injustice to
the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is

attempting to do, or is procuring or suffering to be done, some act or acts
probably in violation of the rights of the applicant respecting the subject of
the action or proceeding, and tending to render the judgment ineffectual.

Thus, an injunctive remedy may only be resorted to when there is a pressing

necessity to avoid injurious consequences which cannot be remedied under
any standard compensation. 21 Respondents do not deny their indebtedness.
Their properties are by their own choice encumbered by real estate mortgages.
Upon the non-payment of the loans, which were secured by the mortgages
sought to be foreclosed, the mortgaged properties are properly subject to a
foreclosure sale. Moreover, respondents questioned the alleged void
stipulations in the contract only when petitioner initiated the foreclosure
proceedings. Clearly, respondents have failed to prove that they have a right
protected and that the acts against which the writ is to be directed are violative
of said right. 22 The Court is not unmindful of the findings of both the trial
court an the appellate court that there may be serious grounds to nullify the
provisions of the loan agreement. However, as earlier discussed, respondents
committed the mistake of filing the case against the wrong party, thus, they
must suffer the consequences of their error.

All told, respondents do not have a cause of action against the petitioner as the
latter is not privy to the contract the provisions of which private respondents
seek to declare void. Accordingly the case before the Regional Trial Court must
be dismissed and the preliminary injunction issued in connection therewith,
must be lifted.

IN VIEW OF THE FOREGOING , the petition is hereby GRANTED. The

assailed decision of the Court of Appeals is hereby REVERSED. The Orders
dated June 30, 1999 and October 4, 1999 of the Regional Trial Court of
Makati, Branch 147 in Civil Case No. 99-1037 are hereby ANNULLED and SET
ASIDE and the complaint in said case DISMISSED.

SO ORDERED.