Title
Consolidated Dairy Products Co. vs. Court of Appeals
Case
G.R. No. 100401
Decision Date
Aug 24, 1992
A foreign corporation and its subsidiary were held liable for breaching a can supply agreement, with the court piercing the corporate veil to impose damages for fraudulent termination.
consolidated dairy products co
court of appeals
joint venture
A

Case Summary (G.R. No. 100401)

Factual Background

In 1956, Consolidated Dairy Products Company, Inc.—described as a foreign corporation based in Seattle, Washington, U.S.A.—agreed with Santiago Syjuco, Inc. to enter a joint venture to manufacture and sell Darigold dairy products in the Philippines. The parties organized and incorporated Consolidated Philippines, Inc., with offices at Paranaque, Rizal. Ownership was structured so that Consolidated Seattle held 51% and Syjuco, Inc. held 49%. Consolidated Seattle granted Consolidated Philippines the exclusive right to use the Darigold trademark in the Philippines, and Consolidated Philippines processed and distributed Darigold evaporated filled milk using that trademark.

At the outset of operations, Consolidated Philippines imported can requirements from the United States. Due to then prevailing economic policy, it was constrained to source cans locally. On April 2, 1959, Consolidated Philippines entered into a can supply agreement with Standard (operating under the tradename Standard Can Company) under which Consolidated Philippines agreed to purchase all its can requirements from Standard up to May 31, 1969. Under the agreement, Standard constructed a can-making plant, purchased necessary machinery and equipment, and sent technicians for training in the United States for and on account of Consolidated Philippines.

In 1966, Dairy Export Company (Dexco), described as a subsidiary of Consolidated Seattle, applied for and obtained a license to do business in the Philippines, and it held office in the same office space as Consolidated Philippines. On September 30, 1966, Dexco entered into a contract with Consolidated Philippines under which the latter agreed to purchase packaged sweetened condensed filled milk from Dexco. Later, on May 6, 1968, Standard, Consolidated Philippines, and Dexco signed a memorandum of agreement that extended the can supply agreement dated April 2, 1959 up to December 31, 1981.

The contractual and corporate dynamics later shifted. On January 12, 1972, Consolidated Seattle, through Louis Arrigoni, informed Consolidated Philippines that control and licensing of the Darigold trademark in the Orient, including the Philippines, would be placed in the hands of Dexco. On November 13, 1974, Dexco notified Consolidated Philippines that it would cancel, effective January 25, 1975, the license granted to Consolidated Philippines to use the Darigold tradename. The Syjuco-side representatives protested the cancellation. Later, Dr. Louis Arrigoni made offers involving the disposition of shares and possible bankruptcy, and Syjuco, Inc. eventually sold its 49% equity interest to Consolidated Seattle. On October 8, 1976, Syjuco, Inc. executed a memorandum agreement to sell its interest to Consolidated Seattle and to dissolve Consolidated Philippines, subject to the condition that Standard’s right to submit claims would be respected if Consolidated Philippines was not dissolved.

Following the acquisition, Consolidated Seattle bought Syjuco, Inc.’s shares and proceeded to dissolve Consolidated Philippines. Before dissolution, however, Dexco took over marketing activities and proceeded to sell milk under the Darigold tradename upon the dissolution of Consolidated Philippines. In November 1976, E.L. Benitez, general manager of Consolidated Philippines, notified Standard that the can supply contract dated April 2, 1959 would be cancelled. The cessation took effect with employees being separated on November 15, 1976. Standard demanded reimbursement for separation pay and payment of unrealized profits; when these demands were rejected, it filed the case.

Trial Court Proceedings

After summons were served, Dexco argued in its answer that Standard had no cause of action against it because its complaint was based on the can supply contract between Standard and Consolidated Philippines, and Dexco was not a party, hence not privy to that contract. Dexco further argued that, even if bound, the action was premature for lack of demand. Consolidated Philippines, represented by trustees Jesus Bito and Federico Guilas, likewise argued prematurity based on an impartial referee provision, maintained that dissolution and liquidation were mutually agreed, and asserted that dissolution extinguished its obligations under the can supply contract. It also claimed that any guarantee by Consolidated Seattle covered only liabilities for cans already supplied, not liabilities accruing after the memorandum agreement of October 8, 1976.

The trial court ruled for Standard, denying counterclaims of Consolidated Philippines and Dexco for lack of merit. The dispositive portion ordered the defendants—Consolidated Dairy Products Company of Seattle and/or its alleged alter ego Dexco, and Consolidated Philippines, represented by its acting trustees—to pay, jointly and severally: separation pay reimbursement of P1,022,472.59 with 6% interest; unrealized profits of P8,107,931.13 with 6% interest; inventory losses of P1,150,197.80 with 6% interest; and P1,000,000.00 as exemplary damages, plus 25% of all recoveries as attorneys’ fees. The trial court emphasized that the damages were tied to fraudulent termination and a scheme allegedly used to cause harm to Standard.

The Court of Appeals Ruling

On appeal, the Court of Appeals affirmed the trial court’s decision in toto, sustaining both liability and the awards, though the appellate decision later became the touchstone for the review of sufficiency of pleadings, contractual defenses, and the computation and categories of damages.

Issues Raised in the Petition

The petitioners sought reversal and dismissal, assigning, among others: that the amended complaint failed to state a cause of action against Dexco; that Standard had knowledge of and approved the dissolution of Consolidated Philippines, which would necessarily terminate the can supply contract and extinguish obligations; that Standard’s action was premature for failure to refer the claim first to an impartial referee; errors in awards for unrealized profits and inventory losses; and error in awarding exemplary damages and attorneys’ fees.

Legal Basis and Reasoning

The Court first addressed the procedural limitation under Rule 45: only questions of law may be raised, while factual findings of the Court of Appeals are binding absent arbitrariness or speculation. It then reviewed whether the pleadings were sufficient and whether defenses raised were legally tenable given the established factual foundation adopted by the lower courts.

Sufficiency of the Amended Complaint as to Dexco

On the petitioners’ first assigned error, the Court held that the allegations in the amended complaint were sufficient to establish a potential basis for holding Dexco liable. It reiterated that a cause of action requires a plaintiff’s primary right and the corresponding duty of the defendant, violated by a wrongful act or omission. The amended complaint alleged, in substance, that Dexco took over the business of Consolidated Philippines, that both corporations were effectively one and the same under the doctrine of piercing the veil of corporate entity, and that Consolidated Seattle used Dexco as a vehicle to evade liabilities owed to Standard under the can supply arrangements and related memoranda. The Court reasoned that if those allegations were proven, liability could attach to Dexco through corporate veil principles.

The Court also rejected Dexco’s insistence on lack of privity. While it was accepted that Dexco was not a party to the original April 2, 1959 can supply agreement, it was noted that before that contract’s expiration, Dexco was already an organized entity licensed to do business in the Philippines and later signed the May 6, 1968 memorandum extending the can supply agreement through December 31, 1981. The Court found it implausible for Dexco to deny participation in the extended arrangement while simultaneously signing and approving it. The extension agreement’s terms were treated as incorporating the framework of the original can supply contract, thereby placing Dexco as an active participating party to the continuation of the contractual relationship.

Alleged Estoppel and Approval of Dissolution

With respect to the second assigned error, the petitioners argued that Standard could not demand damages because Syjuco, Inc. and Standard supposedly had identical officers and Syjuco allegedly accepted dissolution of Consolidated Philippines and thus necessarily acquiesced in the termination of the can supply obligations. The Court did not accept the petitioners’ estoppel theory in view of the factual circumstance that Syjuco, Inc. was left with no choice but to sell its equity to Consolidated Seattle, and that Consolidated Philippines could not continue to exist due to the cancellation of its Darigold tradename license. The Court treated the memorandum sale and dissolution arrangement as subject to a guarantee that Standard’s claims would be respected, thus undercutting any claim that dissolution automatically extinguished Standard’s remedies. It also emphasized that Syjuco, Inc. signed the dissolution agreement because of a condition that Consolidated Seattle guaranteed full payment of Consolidated Philippines’ liabilities under the can supply contract.

The Court further treated the petitioners’ narrow reading of the guarantee as legally insufficient. It addressed the clause on the guarantee—stating that it guaranteed full payment of Consolidated Philippines’ liability to Standard for cans already supplied, while not precluding Standard from submitting other claims under the can supply contract. It held that the agreement’s language did not legally support the petitioners’ attempted limitation to only claims already due and owing at the time of dissolution. The Court considered the terms clear and not requiring strained interpretation.

Alleged Prematurity Based on an Impartial Referee

On the third assigned error, the Court held that Stan

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