Case Summary (G.R. No. 7991)
Petitioner
Leon J. Lambert, who seeks enforcement of the agreed‐upon penalty for Fox’s breach of the one-year non-transfer obligation.
Respondent
T. J. Fox, who sold his shares within the prohibited period and defended on the ground that the contract’s purpose had been fulfilled before one year elapsed.
Key Dates
• Early 1911: Incorporation of John R. Edgar & Co., Inc., and execution of the one‐year non-sale agreement.
• October 19, 1911: Fox sells his shares to a competitor, E. C. McCullough & Co.
• January 29, 1914: Decision by the Supreme Court of the Philippines.
Applicable Law
• Philippine Organic Act of 1902 (organic law under the U.S. insular government)
• Civil Code of the Philippines (Act No. 3815), Articles 1152–1155 (on stipulations of penalties and liquidated damages)
Facts
Lambert and Fox promised in writing not to “sell, transfer, or otherwise dispose of any part of their present holdings” in John R. Edgar & Co., Inc., for one year from the date of their agreement, with a P1,000 penalty for breach unless prior written consent were obtained. Despite protest and an offer to sell his shares to Lambert minus the P1,000 penalty, Fox sold to McCullough, a direct competitor. The trial court held that the contract’s objective (financial stability) was achieved before one year, so Fox’s obligation ended early and dismissed Lambert’s complaint.
Issue
Whether (1) the one-year non-transfer provision must be strictly enforced as written, (2) a stipulated penalty under the Civil Code may be recovered without proof of actual damage, and (3) the restriction on selling shares improperly restrains trade.
Construction and Duration of the Agreement
The Supreme Court reaffirmed that contractual intent is determined first and foremost by the clear language of the agreement. Since the parties expressly fixed the term at one year, the Court refused to rewrite or shorten it. No ambiguity justified interpretive construction; courts apply plain words unless impossible or inadequate.
Enforceability of the Penalty Clause
Under Articles 1152–1155 of the Civil Code, competent parties may freely stipulate penalties or liquidated damages. In Philippine jurisprudence, penalties and liquidated damages are treated identically: the obligee need not prove actual loss. The only circumstance permitting judicial red
...continue readingCase Syllabus (G.R. No. 7991)
Case Parties and Procedural History
- Plaintiff-Appellant: Leon J. Lambert, creditor and one of the largest stockholders in John R. Edgar & Co., Inc.
- Defendant-Appellee: T.J. Fox, creditor and co–major stockholder in the same corporation.
- Origin of Dispute: Formation of John R. Edgar & Co., Inc. in early 1911 to take over an insolvent retail book and stationery business.
- Incorporation Agreement: Creditors, including Lambert and Fox, exchanged their claims for corporate stock; Lambert and Fox became the two largest shareholders.
- Action Brought: Lambert sued Fox for P1,000 as liquidated damages for breach of a one-year non-transfer covenant.
Contractual Agreement at Issue
- Parties: Leon J. Lambert and T.J. Fox, as major shareholders in John R. Edgar & Co., Inc.
- Recitals:
- Recognition that corporate success depended on major shareholders’ stability for at least one year.
- Covenant Terms:
- Reciprocal promise not to sell, transfer, or otherwise dispose of any present stock holdings for one year from date of agreement.
- Liquidated damages clause: P1,000 payable by the breaching party to the non-breaching party, unless prior written consent to transfer is obtained.
Breach of Contract and Plaintiff’s Claim
- Breach Occurrence: On October 19, 1911, Fox sold his shares to E.C. McCullough & Co., a known competitor, without Lambert’s consent.
- Plaintiff’s Protest: Lambert objected at the time of sale, warning Fox of contractual liability.
- Offer by Defendant: Fox offered to sell to Lambert at the McCullough price minus the P1,000 penalty.
- Legal Action: Lambert demanded enforcement of the penalty clause; Fox refused, prompting suit.
Trial Court’s Ruling
- Judgment for Defendant: Trial court dismissed the complaint on the merits.
- Ground of Decision