Case Digest (G.R. No. 7991) Core Legal Reasoning Model
Core Legal Reasoning Model
Facts:
In early 1911, the retail book and stationery firm John R. Edgar & Co. faced financial distress. Its creditors, among them Leon J. Lambert (plaintiff and appellant) and T.J. Fox (defendant and appellee), agreed to assume the business by incorporating a new entity, John R. Edgar & Co., Incorporated, and to accept stock in payment of their credits. Lambert and Fox became the two largest shareholders. A few days after incorporation, on an unstated date in 1911, they executed a written one-year non-alienation agreement: neither would “sell, transfer, or otherwise dispose of” any shares for one year, and either party breaching this promise would pay the other ₱1,000 as liquidated damages, unless written consent was obtained. Despite protesting Lambert’s warnings, Fox sold his shares on October 19, 1911, to a competitor’s agent and offered Lambert the same price minus ₱1,000. Lambert sued in the lower court to recover the penalty. The trial court dismissed the complaint, holding that Case Digest (G.R. No. 7991) Expanded Legal Reasoning Model
Expanded Legal Reasoning Model
Facts:
- Background and Incorporation
- Early 1911, the firm John R. Edgar & Co., engaged in retail books and stationery, became financially insolvent.
- Major creditors, including plaintiff Leon J. Lambert and defendant T.J. Fox, agreed to take over the business, incorporate as John R. Edgar & Co., Inc., and accept corporate stock in settlement of their claims.
- Stock‐Retention Agreement
- Shortly after incorporation, Lambert and Fox—being the two largest stockholders—entered into a written agreement: neither would sell, transfer, or dispose of any of their shares for one year, under penalty of P1,000 each for breach unless prior written consent was obtained.
- The explicit purpose was to ensure stability and success of the newly formed corporation during its first year.
- Alleged Breach
- On October 19, 1911—before the one‐year term expired—Fox sold his shares to E.C. McCullough & Co., a direct competitor, despite Lambert’s protests and warning that the penalty would be enforced.
- Fox offered to rescind the sale and sell to Lambert at the same price less the P1,000 penalty, but proceeded with the sale to McCullough.
- Trial Court Proceedings
- The trial court held that the agreement’s purpose was fulfilled once the corporation attained financial soundness, which occurred before the one‐year term ended, thus discharging Fox from liability.
- Consequently, the court dismissed Lambert’s complaint on the merits.
Issues:
- Contract Interpretation
- Whether the one‐year duration must be enforced literally or is limited to the period required for the corporation to attain financial stability.
- Enforceability of Liquidated Damages
- Whether Lambert must prove actual damages despite the P1,000 penalty stipulated for breach.
- Legality of Restraint on Alienation
- Whether the one‐year suspension of the right to sell shares constitutes an unreasonable restraint of trade contrary to public policy.
Ruling:
- (Subscriber-Only)
Ratio:
- (Subscriber-Only)
Doctrine:
- (Subscriber-Only)