G.R. No. 125778 - Inter-Asia Investments Industries Inc. vs. Court of Appeals

Case Summary (G.R. No. 125778)

Factual Background

On September 1, 1978, Inter-Asia Investments Industries, Inc. sold to Asia Industries, Inc. all its outstanding shares of FARMACOR, Inc. for P19,500,000.00 under a Stock Purchase Agreement signed by the respective presidents of the parties. The Agreement contained express warranties and representations by petitioner concerning FARMACOR’s audited financial statements and a guaranteed minimum net worth of Twelve Million Pesos (P12,000,000.00) as of September 30, 1978. The Agreement’s closing date and payment modalities were later amended; pending submission by SGV of FARMACOR’s audited financial statements as of October 31, 1978, respondent was permitted to retain P7,500,000.00 from the purchase price to cover any shortfall against the guaranteed net worth.

Audited Financial Statements and Computation of Shortfall

SGV submitted an audit dated November 28, 1978, which showed that for the ten months ended October 31, 1978 FARMACOR had a deficit of P11,244,225.00. The report reflected stockholders’ equity of P10,000,000.00, yielding a net worth deficiency of P1,244,225.00. The opinion recited that the guaranteed net worth shortfall thus amounted to P13,244,225.00 after adding that deficiency to the P12,000,000.00 minimum guaranteed net worth, and that the adjusted contract price therefore amounted to P6,225,775.00, producing a claimed refund entitlement to respondent of P5,744,225.00. These computations and the resulting refund claim underpinned respondent’s later suit.

Settlement Negotiations and Petitioner’s Undertaking

By letter of January 24, 1980, signed by petitioner’s president, petitioner proposed to reduce respondent’s refund claim to P4,093,993.00 on condition that petitioner would pay the cost of certain superstructures owned by Northern Cotabato Industries, Inc. (NOCOSII) in the amount of P759,570.00. Respondent accepted the proposal. Petitioner thereafter failed to perform the promised payment, leaving a total asserted liability of P4,853,503.00 exclusive of interest as prayed in the complaint.

Trial Court Proceedings and Judgment

Respondent filed a complaint on April 5, 1983 in the Regional Trial Court of Makati seeking recovery of the asserted liability. Petitioner denied the claim and counterclaimed for unpaid balance of the purchase price. The trial court found for respondent and, by decision dated November 27, 1991, ordered petitioner to pay P4,853,503.00 plus legal interest from filing, awarded P30,000.00 as attorney’s fees and costs, and dismissed the counterclaim.

Court of Appeals Disposition

On appeal, petitioner argued inter alia that the trial court erred in holding it liable under the first cause of action, in awarding attorney’s fees without justification, and that respondent had not established breach of warranties and representations. The Court of Appeals affirmed the trial court’s decision in a judgment dated January 25, 1996, and denied petitioner’s motion for reconsideration by resolution of July 11, 1996.

Issues Presented to the Supreme Court

Petitioner’s petition for review on certiorari challenged the CA rulings on several grounds: that the January 24, 1980 letter signed by petitioner’s president was ultra vires and not binding on the corporation; that the letter could not constitute an admission or waiver by the corporation; that respondent failed to prove breach of warranties and representations; and that the award of attorney’s fees and dismissal of the counterclaim were erroneous.

Analysis of Corporate Authority and Enforceability of the Letter

The Court addressed petitioner’s contention that the president lacked authority to bind the corporation absent board authorization. The Court noted the general rule in Sec. 23, Corporation Code that corporate powers are exercised by the board of directors, but reiterated the established doctrine that the board may delegate authority and that officers may bind the corporation by apparent authority, which arises from the manner in which a corporation holds out an officer or by acquiescence in his acts. Relying on People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, the Court concluded that by permitting its president to sign the Stock Purchase Agreement, petitioner clothed him with the apparent capacity to perform obligations arising from that Agreement, and thus the January 24, 1980 letter signed by the president was valid and binding on petitioner.

Analysis of Warranties, SGV Audit and Estoppel

The Court examined petitioner’s argument that respondent had accepted FARMACOR’s financial statements at the time of contract execution and could not thereafter rely on the SGV audit, and petitioner’s contention that SGV’s report was self-serving because SGV was engaged by respondent. The Court emphasized the Agreement’s express warranties, notably that the audited financial statements “fairly pr

Case Syllabus (G.R. No. 125778)

Parties and Posture

Inter-Asia Investments Industries, Inc. was the petitioner and seller in the underlying stock purchase transaction and appellant in the Court of Appeals and petitioner before the Supreme Court.
Asia Industries, Inc. was the private respondent and purchaser in the stock purchase transaction and plaintiff in the trial court action.
The Court of Appeals was a respondent in the present petition for review on certiorari after it affirmed the trial court decision.
The Supreme Court reviewed the Court of Appeals Decision of January 25, 1996 and its Resolution of July 11, 1996 by a petition for certiorari.

Key Facts

On September 1, 1978, Inter-Asia Investments Industries, Inc. sold all its shares in FARMACOR, INC. under a Stock Purchase Agreement for P19,500,000.00.
The Agreement expressly warranted that audited financial statements of FARMACOR prepared by SGV “fairly present or will present” FARMACOR’s financial position and that the Minimum Guaranteed Net Worth as of September 30, 1978 was P12,000,000.00.
The Closing Date was moved to October 31, 1978 and private respondent was authorized to retain P7,500,000.00 from the purchase price pending submission of SGV’s audited statements.
Private respondent paid a total of P12,000,000.00 to petitioner, consisting of P5,000,000.00 upon signing and P7,000,000.00 on November 2, 1978.
SGV’s financial report dated November 28, 1978 showed a ten-month deficit of P11,244,225.00 and shareholders’ equity of P10,000,000.00, yielding a net worth deficiency of P1,244,225.00.
The parties calculated the guaranteed net worth shortfall as P13,244,225.00, adjusted the contract price to P6,225,775.00, and concluded that private respondent was entitled to a refund of P5,744,225.00 from amounts already paid.
By letter dated January 24, 1980 petitioner’s president proposed to reduce respondent’s refund claim to P4,093,993.00 upon petitioner’s promise to pay P759,570.00 for NOCOSII superstructures, and private respondent accepted the proposal.
Petitioner failed to perform the promise, leaving a claimed liability of P4,853,503.00 exclusive of interest, which private respondent sued to recover on April 5, 1983.

Contract Terms

Paragraph 7 of the Agreement contained seller warranties including that the SGV-audited financial statements “fairly present or will present” the financial position and that receivables were collectible.
Paragraph 7 also guaranteed a Minimum Guaranteed Net Worth of P12,000,000.00 as of September 30, 1978.
The amended Agreement allowed private respondent to withhold P7,500,000.00 pending SGV’s audited financial statements as of October 31, 1978 and to deduct any shortfall from that retained amount.
The Agreement required petitioner to pay any deficiency in the Minimum Guaranteed Net Worth within five days of receipt of the audited financial statements if the retained amount was insufficient.

Procedural History

The Regional Trial Court of Makati rendered judgment on November 27, 1991 in favor of private respondent ordering pe