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SECOND DIVISION
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.
Sandoval-Gutierrez, Corona, Azcuna, Garcia, J.J., concur.

Footnotes
1 CA rollo, pp. 1058-1072.

2 Id. at 1105.

3 Id. at 28-37.

4 Id. at 118-139.

5 Id. at 682-683.

6 Id. at 683.

7 Rollo, p. 63.

8 Id. at 64.

9 CA rollo, p. 684. Other terms of the revised agreement include:

a) ATM and Pacfor-USA shall jointly manage Pacfor Phils.


b) Pacfor-Phils. will earn commissions at 1.5% of F.O.B. value,
the computation of which shall be shown in a credit memo
issued by Cellmark/Pacfor.
c) Losses, if any, will be reimbursed by Cellmark/Pacfor to
ATM for ATM's share of the loss, for two consecutive years
beginning with the first year of loss.
d) The revised agreement shall take effect on January 1, 1997.
e) Cash paid to the representative office by Pacific Paper
belongs to Pacfor and will be held in trust by ATM.
10 Id. at 685.

11 Rollo, p. 528.

12 Id. at 527.

13 Ibid.

14 Id. at 532.

15 Id. at 539.

16 Id. at 541.

17 Id. at 544.

18 Id. at 545.

19 CA rollo, p. 829.

20 Id. at 828.

21 Rollo, pp. 546-550.

22 Id. at 553.

23 Id. at 546-550.

24 Id. at 560.

25 Id. at 554-558.

26 Id. at 560.

27 Id. at 561.

28 CA rollo, p. 652.

29 Rollo, pp. 562-563.

30 Id. at 150.

31 Id. at 231-240.

32 CA rollo, pp. 333-335.

33 Id. at 84-86.

34 Rollo, pp. 14-36.

35 Id. at 27.

36 Esteban B. Bautista, Treatise on Philippine Partnership Law,


1978 ed., citing Nelson v. Abraham, 177 P.2d 931 (1947); Henry v.
Darnall, 246 Ill.App. 250 (1927), cited in Notes of Decisions, 7
U.L.A. 15 (1949).
37 Esteban B. Bautista, Treatise on Philippine Partnership Law,
1978 ed., citing Darden v. Cox, 123 So.2d 68 (1960).
38 Art. 1811 (1st par.).

39 Esteban B. Bautista, Treatise on Philippine Partnership Law,


1978 ed.
40 Fortis v. Gutierrez Hermanos, 6 Phil. 100 (1906).

41 J.M. Tuason v. Bolanos, 95 Phil. 106 (1954); Esteban B.


Bautista, Treatise on Philippine Partnership Law, 1978 ed., citing
60 A.L.R.2d 917; 6 Fletcher, Cyclopedia of Corporations, Sec.
2520 (1950).
42 Esteban B. Bautista, Treatise on Philippine Partnership Law,
1978 ed., citing 13 Am.Jur. 830; 60 A.L.R.2d 913.
43 Sy v. Court of Appeals, G.R. No. 142293, February 27, 2003,
398 SCRA 301, citing Caurdanetaan Piece Workers Union v.
Laguesma, 286 SCRA 401, 420 (1998); Maraguinot, Jr. v. NLRC,
284 SCRA 539, 552 (1998); APP Mutual Benefit Association, Inc.
v. NLRC, 267 SCRA 47, 57 (1997); Aurora Land Projects Corp. v.
NLRC, 266 SCRA 48, 59 (1997); Encyclopedia Britannica (Phils.),
Inc. v. NLRC, 264 SCRA 1, 6-7 (1996).
44 Feati University v. Bautista, G.R. No. L-21278, December 27,
1966, 18 SCRA 1191, 1217, citing Amalgamated Roofing Co. v.
Travelers' Ins. Co., 133 N.E. 259, 261; 300 Ill. 487.
45 CA rollo, pp. 724-733.

46 Philippine Japan Active Carbon Corp. v. NLRC, G.R. No.


83239, March 8, 1989, 171 SCRA 164.
47 Unicorn Safety Glass, Inv. v. Basarte, G.R. No. 154689,
November 25, 2004, 444 SCRA 287.
48 Ibid.

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