THIRD DIVISION

[G.R. No. 66394. February 5, 1990.]

PARADISE SAUNA, MASSAGE CORPORATION AND JUANITO UY, UY plaintiff-

appellee, vs. ALEJANDRO NG AND THE INTERMEDIATE APPELLATE
COURT defendants-appellants.
COURT,

Augusto J. Salas for plaintiff-appellee.

Armando Marcelo for defendant-appellant.

DECISION

JR. J :
GUTIERREZ, JR., p

Whether or not the contract between the petitioners and the private respondent is a lease
or a management contract is the issue in this petition for review. The petitioners assail the
decision of the then Intermediate Appellate Court in AC-GR CV No. 65264 which affirmed
in toto the judgment of the Court of First Instance of Manila, Branch XII declaring the said
contract as one of lease.
The disputed letter-contract signed by petitioner Juanito Uy in his capacity as President of
the petitioner corporation reads:
"Mr. Alejandro Ng
No. 8-A Boston Street
Quezon City

Dear Mr. Ng,

By authority of the Board of Directors, you are hereby appointed to MANAGE and
ADMINISTER the PARADISE SAUNA and MASSAGE CORPORATION effective
January 1, 1976, under a commission basis over and above the amount of EIGHT
THOUSAND PESOS (P8,000.00) which should be remitted to us not later than the
first five (5) days of each month starting January 1, 1976.

In addition, you are to fulfill the following terms and conditions:

1. You are to remit the amount of Sixteen Thousand Pesos

(P16,000.00) immediately after accepting this appointment as a guarantee
bond for the faithful performance of your duties and responsibilities.
However, this amount shall be returned to you after the duration of your
appointment which will be up to September 30, 1979. Otherwise, it will be
forfeited if you do not comply with all your duties and responsibilities.

2. Further, all government licenses, permits, utilities and services

in the premises such as water, gas, electricity, telephone, additional air
conditioning units and the installation and repairs thereof and all other
repairs therein during your management shall be for your account;

3. The sole control and management of the premises shall

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 belong to you and you are not responsible to Anybody nor to Any Board of
Directors except to me alone;

4. You are empowered to make any renovation, repairs and

improvements but expenses shall be for your account as well as to change
or add personnels therein;

5. Please take all good care of all the equipment and facilities
presently existing therein and see to it that they are always in good working
condition; Otherwise, the loss and damage on any of this equipment and
facilities shall be borne by you;

6. In case, however, that you will not be in a position to continue

Managing and Administering the business profitably due to any
Government Rules, Decree or Regulations or Force Majeure, this
appointment shall be suspended for a period of 3 months for the purpose
of determining whether or not you can still continue managing the same.

Hoping that you find the same satisfactory and good luck.

(Sgd) JUANITO A. UY
President/Director" (Rollo, p. 135)

This case arose from the petitioners' act of allegedly terminating the respondent's
appointment as manager-administrator as a result of his alleged failure to comply with the
terms and conditions of his appointment. The termination took effect on January 15, 1977.
Private respondent Ng, on January 21, 1977 filed with the Court of First Instance of Manila,
Branch XII, a case for specific performance and damages with prayer for a writ of
preliminary mandatory injunction and attorney's fees against the petitioner. The case was
docketed as Civil Case No. 106511.
On January 28, 1977, the private respondent amended his complaint to one for breach of
contract with damages with the same prayer for a writ of preliminary injunction and
attorney's fees.
The amended complaint alleged, among others, that on December 30, 1975, the
petitioners agreed to lease in favor of the private respondent their business called
"Paradise Sauna and Massage Corporation" located at E. Rodriguez, Sr. Avenue, Quezon
City and that they entered into a contract whereby the latter shall have full control and
management of the said business effective January 1, 1976 until September 30, 1979; that
as lessee of the said business with full and sole control thereof, private respondent's
principal obligation consists of only paying the petitioners the sum of eight thousand
pesos (P8,000.00) not later than the first five (5) days of each month as rentals and
remitting to the latter the sum of sixteen thousand pesos (P16,000.00) as guarantee bond;
that as such lessee, the private respondent assumed control and management of the
petitioner's business on January 1, 1976, hired and paid personnel to beef up its
operations and tried religiously to comply with his obligations like paying for his account
all government licenses, permits, utilities and services in the premises such as water, gas,
electricity and telephone; that the private respondent paid all the monthly rentals due the
petitioners until December 1976; that the petitioner refused to accept the rental for
January 1977 and asked the private respondent to vacate and leave the premises instead
thereby terminating his services and forfeiting his guarantee bond of sixteen thousand
pesos (P16,000.00); that on January 16, 1977, the petitioners, assisted by Metrocom
soldiers, entered the private respondent's office and through intimidations, forcibly ejected
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 him from the premises, assumed full control and supervision of the business and put
another person in his place who immediately took possession of all cash sales for the day;
that the private respondent returned to the business premises the following day but he
was refused entry and there was a notice to all the employees in front of the premises
signed by the petitioners to the effect that the private respondent's services had been
terminated and that another person had been appointed to take his place; that for having
breached their contract, the private respondent suffered damages in the amount of not
less than P100,000.00 representing unrealized profits from the operation of the business,
forfeiture of the guarantee bond and value of his personal properties placed in the
business which the petitioners appropriated to themselves; that the private respondent
shall prove further actual damages in the course of the trial resulting from the petitioners'
failure to reinstate the former immediately; and that the private respondent is entitled to
moral damages in the amount of P50,000.00 and attorney's fees in the amount of
P30,000.00. cdphil

In their answer, the petitioners counter-alleged, among others, that the petitioner
corporation is the operator of the sauna bath and massage establishment in question, that
petitioner Uy was the former manager and administrator of the said establishment which
was then fully equipped and staffed with more than thirty (30) personnel consisting of
hospitality attendants and boy-helpers; that the petitioner corporation is paying P4,000.00
as lease rentals for the premises occupied by it, that in his capacity as President-Director
of the petitioner corporation and in his desire to expand the operations of the same,
petitioner Uy relinquished his position as manager-administrator of the said establishment
in favor of the private respondent as evidenced by the letter dated December 30, 1975
addressed to the latter; that private respondent's appointment as manager-administrator
was terminated on January 15, 1977 for violations of the terms and conditions of his
appointment, namely, failure to pay water and electric bills, failure to pay the salaries of the
employees of the petitioner corporation, failure to supply the provisions necessary for the
conduct of the petitioners' sauna and massage business like lotion, towels and blankets,
failure to perform efficiently as manager-administrator of the petitioner corporation by
managing the Rajah Sauna Bath in Ermita, Manila simultaneously with his management of
the petitioner corporation and by inducing the petitioners' customers to patronize the said
Rajah Sauna Bath instead of the petitioner corporation.
After trial, the lower court, on December 23, 1978 rendered judgment in favor of the private
respondent with the following dispositive portion:
"IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court hereby renders
judgment:

(a) declaring the letter-contract, Exhibit A, as a contract of lease covering the

paradise sauna bath and massage clinic, and not a contract of employment;

(b) directing defendants to forthwith return the management and operation of

the paradise sauna bath and massage clinic to the plaintiff, so that plaintiff can
operate and manage the same for the unexpired term of the lease of Two (2)
Years, Eight (8) Months and Fifteen (15) days;

(c) declaring the forfeiture by defendants of the plaintiff's deposit of

P16,000.00 as null and void and declaring it as subsisting for the purpose of
which it was put up by plaintiff, if Exhibit A is made to continue, as decreed in par.
(b) hereof, otherwise, if or for any reason Exhibit A can not continue to be in force,
directing defendants to jointly and severally pay to plaintiff the said sum of
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 P16,000.00.;

(d) directing the defendants to account for and return to the plaintiff all the
articles listed in Exhibit R, consisting of pages 1, 2 and 3, or in default thereof, to
jointly and severally pay to the plaintiff in the following manner and in the
following amount, as far as it is practicable, to wit:

(1) P4,650.00 for the cost of two television (sic) and the
refrigerator, with an allowance of 30% for depreciation costs, with interest
thereon at the legal rate from date of this decision until it is fully paid;

(2) P11,540.30 — Cost price of certain items listed in page 1 of

Exhibit R as recited elsewhere in the body of this decision, with interest
thereon at the legal rate from the date of this decision until it is fully paid;
LexLib

(e) directing the defendants to account for and to return to the plaintiff one
rice cooker, one gas lantern, one medicine cabinet with assorted medicines, one
Akai Tape Recorder, Sixteen glass tumblers, five coffee cups, four intercom, two
telephone hands (sic), one Video, one color vibrator, eight drawerlocks, one
electric fan with stand, one steel cabinet with lock, 40 pieces nameplates with
pictures, 30 cans Acaho, and two speakers with cabinet, all of which are listed on
page 1 of Exhibit R, and in default of such delivery, directing defendants to pay
jointly and severally the reasonable value thereof taking into consideration the
present costs of such items, with allowances of at least thirty per cent for their
depreciation costs, with interests thereon at 6% per annum from date of this
decision until it is fully paid;

(f) directing defendants to account for and return to plaintiffs all the articles
listed in page 2 of Exhibit R, or in default thereof, directing defendants to pay
jointly and severally to plaintiff the sum of P1,313.42, with interest thereon at 6%
per annum from the date of this decision, until it is fully paid;

(g) directing the defendants to account for and return to plaintiff all of Items
1 to 17 listed on page 2 of Exh. R, or in default thereof, to pay jointly and severally
the plaintiff the sum of P2,968.03, with interest thereon of 6% per annum from
date of this decision until it is fully paid;

(h) directing the defendants to account for and return to plaintiff all of the
last six items listed on page 2 of Exhibit R, or in default thereof, to pay jointly and
severally the plaintiff the total costs of P7,999.55, with an allowance of 30% for
their depreciation costs, and with interest thereon at 6% per annum until it is fully
paid;

(i) directing the defendants to account for and return to plaintiff all the
articles listed on page 3 of Exhibit R, or in default thereof, to jointly and severally
pay to the plaintiff the cost price of P1,313.43, with interest thereon at the legal
rate from date of this decision until it is fully paid;

(j) directing the defendants to pay jointly and severally to the plaintiff the
sums of P50,000.00 as more damages and P50,000 as exemplary damages;

(k) directing the plaintiff to pay defendants the sum of P28,572.45, with legal
interest thereon from date of this decision until it is fully paid. This sum shall be
set off and made to reduce plaintiff's entitlement as awarded by this Court;

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 (l) dismissing all other claims which the parties have against each other for
lack of merit;

Costs against defendants."(Pp. 111 to 114, Record on Appeal). (At pp. 24-27,
Rollo)

On appeal, the then Intermediate Appellate Court, on November 29, 1983, affirmed in toto
the decision of the trial court. The subsequent motion for reconsideration by the
petitioners was denied. Hence, this petition which presents three main arguments.
Firstly, the petitioners contend that the respondent Court sanctioned a legal error made by
the trial court which is the reformation of Exhibit A from a management contract to a lease
contract contrary to Art. 1367 of the New Civil Code. In support of their contention, they
averred that when respondent Ng filed an action for specific performance then for breach
of contract later, he should have been presumed to have admitted the due execution and
contents of the letter-contract marked as Exhibit A whereby he was appointed as
manager-administrator of the petitioner corporation and he should never have been
allowed to deny the contents thereof for purposes of reforming the said instrument.
Article 1367 of the Civil Code states that:
"Article 1367 — When one of the parties has brought an action to enforce the
instrument, he cannot subsequently ask for its reformation."

The above quoted provision of law invoked by the petitioners cannot apply to respondent
Ng's case. When Ng amended his original complaint for specific performance which calls
for an enforcement of Exhibit A to one for breach of contract, he did so as a matter of right
since no responsive pleading had been filed yet by the petitioners. The original complaint
was filed on January 21, 1977 and was amended on January 28, 1977. The answer of the
petitioners to the original complaint was filed only on February 4, 1977. Under Section 2,
Rule 10 of the Revised Rules of Court, "a party may amend his pleading once as a matter of
course at any time before a responsive pleading is served . . . ." When a pleading is
amended, the original one is deemed abandoned. Hence, the amended pleading replaces
the original one which no longer forms part of the record and the trial of the case is made
on the basis of the amended pleading only (see Ruymann and Farris v. Director of Lands et
al., 34 Phil. 428 [1916]). In the case at bar, respondent Ng, in his amended complaint
brought an action for breach of contract not to enforce his rights as manager-
administrator but as lessee of the petitioner corporation. In the course of the trial, parol
evidence was introduced to prove that the contract in question was not a management
contract as it appeared on its face but a lease contract.
Rule 130, Sec. 7 of the Revised Rules of Court provides that:
"SEC. 7. Evidence of written agreements. — When the terms of an agreement
have been reduced to writing, it is to be considered as containing all such terms,
and, therefore, there can be, between the parties and their successors-in-interest,
no evidence of the terms of the agreement other than the contents of the writing,
except in the following cases.

(a) Where a mistake or imperfection of the writing, or its failure to express the
true intent and agreement of the parties, or the validity of the agreement is put in
issue by the pleadings;

(b) When there is an intrinsic ambiguity in the writing.

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 The term "agreement" includes wills. (Emphasis supplied)

In the instant case, the failure of a contract to express the true intent and agreement of the
parties is raised. The fact that the allegations of respondent Ng with respect to his rights
as lessee of the petitioner corporation were made on the basis of Exhibit A which was
marked as Annex "A" in the amended complaint meets the procedural requirement that
said failure be put in issue by the pleadings.
In ruling that the subject contract is a lease contract and not a management contract, we
adopt the findings of fact made by the trial court and affirmed by the respondent court.
The claim of the petitioners that respondent Ng is their manager-administrator is
untenable since it fails to pass the control test pertinent to the existence of an employer-
employee relationship. The control test asks whether the employer controls or has
reserved the right to control the employee not only as to the result of the work but also as
to the means and methods by which the said work is to be accomplished (Social Security
System v. Court of Appeals, 156 SCRA 383 [1987]). Such control by the petitioners over
respondent Ng is lacking. Exhibit A is in the nature of a lease contract under Art. 1643 of
the Civil Code which states that:
"Art. 1643. In the lease of things, one of the parties binds himself to give to
another the enjoyment or use of a thing for a price certain, and for a period which
may be definite or indefinite. However, no lease for more than ninety-nine (99)
years shall be valid."

We find no reason to disturb the findings of the two courts below that the disputed
contract is a lease contract. The reasons given are:
(1) The respondent paid the petitioners a fixed P8,000.00 monthly even when
the business suffers a loss. The P8,000.00 was paid at the start of the month with
no attention paid to operating expenses, profits, and losses.

(2) The monthly receipts received by the petitioners from Alejandro Ng state
that they were given for rentals from January to October 1976. The receipts for
November and December substitute the word "commission" for "rental". The
respondent explained the change by stating that petitioner Uy changed the receipt
as he realized that subleasing the premises to Ng was a violation of the contract
with the owner and the latter might discover the violation. The receipts were
prepared by the petitioners but signed in the presence of the respondent when
payment was made.

(3) The respondent was responsible for all licenses, permits, utilities and
services, including the installation and repair of all equipment such as
airconditioning units. He had sole control and management and did not report to
anybody.

Anent the argument that the respondent Court, in holding petitioner Uy severally liable with
the petitioner corporation, departed from the rule that a stockholder or officer of a
corporation has a personality distinct from the corporation, we hold that the corporate
entity theory cannot apply in the instant case where it is being invoked as a cloak or shield
for illegality. (see Tan Boon Bee & Co., Inc. v. Judge Jarencio, 163 SCRA 205 [1988]). There
is proof obtaining in the case at bar as to the real nature of Exhibit A. Thus, being a party to
a simulated contract of management, petitioner Uy cannot be permitted to escape liability
under the said contract by using the corporate entity theory. This is one instance when the
veil of corporate entity has to be pierced to avoid injustice and inequity.
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 Lastly, the petitioners argue that the respondent Court's award of moral and exemplary
damages was contrary to law as there was no showing of bad faith. In this case, the
petitioners' manner of barring respondent Ng from his place of business with the use of
Metrocom soldiers instead of availing of the proper legal action constituted bad faith as
contemplated by law considering that the petitioners were aware of the real nature of the
contract in question. The amount of P8,000.00 given monthly to the petitioners was
received as "rentals" and not as "commissions." Only the later receipts indicated that the
P8,000.00 was for payment of "commission" and respondent Ng explained that the change
in the phraseology of the receipts was due to the fact that petitioner Uy wanted them to be
so written since subleasing would constitute a violation of the latter's contract with the
owner of the business premises. Moral damages are recoverable in cases of breach of
contract where the defendant acted fraudulently or in bad faith (Art. 2220, New Civil Code).
Exemplary damages, as well may be awarded in contracts if the defendant acted in a
wanton, fraudulent, reckless, oppressive or malevolent manner (Art. 2232, New Civil Code).

We feel, however, that the amount of moral and exemplary damages may be reduced
considering the circumstances of the case. Mr. Uy was unhappy about the continued life of
the lease arrangement and Mr. Ng was aware of this. In some instances, rental payments
were not made promptly at the start of the month. Three checks initially bounced. Damage
to the central air conditioning system and other equipment was not repaired. Mr. Ng also
operated another massage and sauna parlor — The Rajah Sauna Bath in Ermita — and Mr.
Uy was convinced that personnel and customers of Paradise Sauna were being enticed by
the respondent to the other place thus eroding the goodwill and patronage of the
complaining establishment. All of these, however, mitigate but do not justify the acts
accompanying the termination of the contract. prLL

WHEREFORE, IN VIEW OF THE FOREGOING, the instant petition is DISMISSED. The

judgment appealed from is AFFIRMED with the MODIFICATION that the award of moral
and exemplary damages is hereby reduced to a total of P20,000. The term of the lease
having expired, the order to return the massage clinic to the private respondent is
DELETED.
SO ORDERED.
Fernan, C.J., Feliciano and Cortes, JJ., concur.
Bidin, J.,No part.

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