Case Summary (G.R. No. 20214)
Original Employment Agreement (Exhibit A)
On July 31, 1916, Arnold and the California partnership of Willits & Patterson executed a five-year written contract. Arnold was to serve as the firm’s Philippine agent at a minimum $200 monthly salary, standard travel expenses, 1% brokerage on most merchandise transactions, and one-half of profits on other business. In case of losses, salary would increase to $400 monthly.
Rapid Business Growth and Dispute
Under Arnold’s administration and wartime demand, the Philippine operations expanded significantly. A disagreement arose as to the calculation of Arnold’s total compensation under Exhibit A. Meanwhile, I. L. Patterson withdrew, and C. D. Willits assumed full ownership of the partnership’s assets.
Corporate Reorganizations
Willits formed two one-man corporations:
• San Francisco corporation, taking over the old partnership’s U.S. assets and liabilities.
• Manila corporation, similarly acquiring the Philippine business.
In both, Willits alone subscribed to all but nominal organizing shares.
Modification Letter (Exhibit B)
November 10, 1919, Arnold addressed a letter to Willits setting out a clarified compensation scheme:
• 1% commission on Philippine-U.S. purchases and sales, credited in San Francisco.
• Exclusion from profits on intra-corporate transactions.
• One-half of profits on all other Philippine dealings.
Willits signed “Willits & Patterson, By C. D. Willits” to confirm. No formal corporate resolution appears, but both parties acted thereafter as if Exhibit B supplanted conflicting terms of Exhibit A.
Accounting Practices and Financial Statements
The Manila corporation’s accountant regularly prepared audited statements for the San Francisco parent. The July 31, 1921 statement, based on Exhibit B, showed P106,277.50 due Arnold. After the San Francisco corporation fell into creditor control, the creditor’s committee protested Arnold’s claim.
Litigation and Counterclaim
Arnold sued on January 10, 1922 for P106,277.50 plus interest. The respondent denied corporate authority for Exhibit B, contending Arnold’s compensation remained subject solely to Exhibit A and asserting a counterclaim:
• Admitted P8,741.05 owed under Exhibit A as of June 30, 1920.
• Claimed losses (including a P30,000 withdrawal by Arnold), seeking net recovery against Arnold of P10,858.95.
Trial Court Ruling and Issues on Appeal
The trial court entered judgment for the defendant on its counterclaim, dismissing Arnold’s complaint. On appeal the sole issues were:
- The true contract governing Arnold’s service term—Exhibit A alone or modified by Exhibit B.
- The amount due Arnold under the operative agreement.
Legal Analysis: Ratification and Corporate Liability
• Successor Liability: The corporate reorganizations did not discharge obligations under the original partnership contract; the parent and local corporations inherited assets, liabilities, and duties.
• Agency and Ratification: A corporation may ratify an unauthorized agent’s act by acquiescence and acceptance of its benefits. Both corporations, fully aware of Exhibit B and benefiting from Arnold’s services measured thereby, treated Exhibit B as binding.
• Single-Shareholder Doctrine: Where one person controls all corporate stock and functions as the corporation, courts may disregard the fiction of separate existence to protect third-party rights.
• Financial Statements as Ratification: Consistent accounting credits for Arnold under Exhibit B constituted corporate recognition and ratification of its terms.
Profit Transaction and Calculation of Recovery
In early 1920 Arnold arranged a sale of 500 tons of oil at
...continue readingCase Syllabus (G.R. No. 20214)
Parties
- Plaintiff and Appellant: G.C. Arnold, a competent and experienced businessman formerly employed by the International Banking Corporation of Manila.
- Defendant and Appellee: Willits & Patterson, Ltd., a Philippine corporation, ultimately controlled by C.D. Willits.
Procedural History
- July 31, 1916: Original written contract (Exhibit A) executed between Arnold and the San Francisco partnership of Willits & Patterson for a five-year agency in the Philippines.
- November 10, 1919: Supplemental letter agreement (Exhibit B) executed in Manila to clarify and redefine Arnold’s compensation.
- July 31, 1921: Accountant’s statement shows P106,277.50 due under Exhibit B.
- January 10, 1922: Arnold files suit for P106,277.50 with interest and costs.
- Lower court renders judgment for defendant on its counterclaim, finding plaintiff indebted.
- Plaintiff appeals to the Supreme Court of the Philippines.
Facts of the Case
- Arnold was hired as agent in Manila at a minimum salary of US$200 per month plus travel expenses, with specified brokerage and profit-sharing under Exhibit A.
- Business grew rapidly during World War I, producing large profits.
- Dispute arose over the interpretation and sufficiency of compensation under Exhibit A.
- Patterson retired; C.D. Willits reorganized the firm first into a California corporation, then into a Philippine corporation, each wholly owned by Willits.
- Arnold and Willits negotiated Exhibit B in Manila; Willits signed “By C.D. Willits” on behalf of the Philippine corporation, though no formal corporate ratification appeared in minutes.
- The Manila corporation’s accountant prepared periodic financial statements, forwarding them to the San Francisco parent, each crediting Arnold’s account based on the terms of Exhibit B.
- In early 1921, the San Francisco corporation fell into financial trouble and assets were placed under a creditors’ committee.
- The creditors’ committee objected to Arnold’s P106,277.50 claim as shown in the July 31, 1921 statement.
Exhibit A (Original Contract)
- Term: Five years from July 31, 1916, as agent in the Philippine Islands.
- Compensation:
- Minimum salary of US$200 per month.
- Travel expenses for Arnold and his wife.
- Brokerage of 1% on all purchases and sales of merchandise (excluding coconut oil mill account).
- One-half of net profits on other transactions.
- Provision: if operations show a loss, salary increases to US$400 per month.
Exhibit B (Letter Agreement)
- Dated: Manila, November 10, 1919.
- Confirmed by: “Willits & Patterson / By C.D. Willits.”
- Clarifications:
- 1% commission on all purchases/sales between Manila and San Francisco offices, computed on FOB or CIF price.
- No participation in profits of tran