Case Summary (G.R. No. 204944-45)
Contractual suspension provision at issue
Clause II of the management agreement provided that in the event of force majeure—examples given being war, insurrection, flood, earthquake, and similar events—Nielson should report the occurrence to Lepanto and the agreement would remain “in suspense, wholly or partially during the terms of such inability” without liability for breach. The Court analyzed the clause’s prerequisites: (1) the force majeure must be reasonably beyond Nielson’s control, and (2) it must adversely affect mining and milling operations.
Impact of World War II on Lepanto’s operations
Documentary evidence and judicial notice established that in February 1942 the U.S. Army destroyed Lepanto’s mill, power plant, supplies, equipment and related facilities to prevent enemy use; the Japanese subsequently occupied and operated the mines until liberation in August 1945. Lepanto then undertook extensive rehabilitation and reconstruction that culminated in official resumption of operations on June 26, 1948.
Court’s finding on suspension period
The Court concluded that the contract was suspended by force majeure starting in February 1942 and that the suspension did not end on liberation (August 1, 1945) because extensive rehabilitation followed; the suspension continued until operations resumed on June 26, 1948. The Court accepted the suspension period February 1942–June 26, 1948 as the time for which the contract was inoperative under Clause II.
Evidence on whether suspension extended the contract
Nielson offered testimony from George T. Scholey and Mark Nestle—long‑time mining officers and corporate officers—stating that the understood effect of the force majeure suspension in mining contracts was to extend the contract by the period of suspension so that the manager could recover investments and perform obligations. The Court treated this evidence, and contemporaneous internal corporate minutes, as persuasive proof of the parties’ mutual intent or industry usage.
Board minutes, DeWitt’s statements, and contemporaneous conduct
Minutes of a March 10, 1945 Lepanto board meeting showed Chairman C. A. DeWitt stating that the contract would soon expire unless suspended and expressing the belief that the suspension provision or the law would suspend the contract and thereby extend its term. The Court favored DeWitt’s contemporaneous board statement—given before his later, inconsistent October 20, 1945 letter to Nielson—because the earlier statement was made in the presence of others and against Lepanto’s later litigation interest.
Appellee’s counterarguments and cited precedents
Lepanto argued the clause did not extend the contract, cited prior Supreme Court decisions holding war does not automatically extend contract terms, and objected to evidence of industry custom as not pleaded or insufficiently proven. The Court distinguished the cited precedents on their facts, emphasizing that in those cases there was no evidence of the parties’ intent or industry usage to treat suspension as extension; by contrast, the present record contained contemporaneous acts and testimony showing such an understanding here.
Contract interpretation principle applied
The Court applied the fundamental rule that the parties’ intention governs contract interpretation, invoking contemporaneous and subsequent acts (Civil Code Article 1371 and Rule 130, sec. 10 of the Rules of Court) as admissible evidence of intent. Given the uncontradicted testimony and board minutes showing the parties’ understanding, the Court held the suspension operated to extend the contract for the period of suspension.
Laches defense and the Court’s analysis
Lepanto pleaded laches and prescription. The Court reviewed the four elements of laches as set out in Go Chi Gun v. Go Cho and found laches inapplicable. Although Nielson knew of Lepanto’s refusal to permit resumption and that operations resumed in 1948, the Court found delay in filing the 1958 complaint justified by prior insistence on rights, arbitration and negotiations, ongoing claims and communications, and that Lepanto had notice that Nielson would assert its rights. The Court emphasized that the delay largely stemmed from protracted negotiations and arbitration efforts, and equity would not permit Lepanto to benefit from the delay it partly caused.
Prescription (statute of limitations) and the 10% share claim
On prescription, Lepanto contended a shorter period applied to some claims. The Court treated the August 21, 1940 board minutes (modifying the profit participation mechanics) as a written agreement for statute‑of‑limitations purposes even though unsigned, finding an unsigned adopted writing may suffice. Under Act No. 190 §43 (ten‑year prescription for written contracts), the cause of action for the 1941 profit participation (which accrued December 31, 1941) was covered. The Court held the action had not prescribed because: (1) the Moratorium Law (Executive Order No. 32) suspended prescription for war sufferers; and (2) the arbitration clause required arbitration before suit, and arbitration efforts continued until June 25, 1957, leaving less than the prescriptive period between final denial and filing.
Arbitration clause and its delaying effect
Clause XIII obliged submission of profit disputes to arbitration before court action. The Court held that this condition was valid and binding, that an arbitration committee was in fact constituted, and that arbitration interrupted or delayed the right to sue until the arbitration failed June 25, 1957—further supporting non‑prescription of Nielson’s claims filed February 6, 1958.
Specific claims allowing recovery: 1941 dividends and January 1942 fee
The Court found Nielson entitled to: (1) 10% of the cash dividend declared December 1941—P17,500—with legal interest from filing date; and (2) management fee for January 1942 of P2,500 with legal interest, because last payments had been for November–December 1941 and the contract suspension began in February 1942.
Management fees for the extended period (June 27, 1948–June 26, 1953)
Because the contract was held extended for the period of suspension, the Court found Nielson entitled to the P2,500 monthly management fee for the sixty‑month extension—P150,000 total—with legal interest from the date of filing, reasoning that Nielson was ready and insisted on resuming management but was prevented by Lepanto, creating a constructive fulfillment of Nielson’s obligations (citing Article 1186 principle).
Post‑resumption cash dividends (period of extension)
Lepanto’s 1954 report documented post‑war cash dividends aggregated to P14,000,000 for the years covered by the extension. Under the contract as modified, Nielson was entitled to 10% of paid cash dividends during the contract period. The Court awarded P1,400,000 (10% of P14,000,000) with legal interest from filing.
Stock dividends and entitlement to stock and fruits
Two stock dividends during the extension (50% declared November 28, 1949 equal to P1,000,000 in stock; and 66 2/3% declared August 22, 1950 equal to P2,000,000 in stock) gave rise to Nielson’s entitlement under the modified contract to 10% of those stock dividends in kind, not cash. The Court ordered delivery of shares equivalent to P100,000 and P200,000 respectively, together with all fruits accruing thereto from declaration dates; if sufficient shares are not available, Lepanto must pay the market value at appropriate times as specified in the judgment.
Depletion reserves awarded
The Court analyzed depletion reserves set up during the extension years and apportioned partial‑year amounts for 1948 and 1953 because the extension covered halves of those years. Total depletion reserves for the extended period were P539,298.81; Nielson’s 10% share was P53,928.88, awarded with legal interest from filing.
Capital account (expenses for capital account) award
Using fixed assets valuations and incremental capital expenditures as recorded in the corporate reports, the Court computed the increase in fixed assets between mid‑1948 and mid‑1953 and found the increase to be P6,943,647.69; Nielson’s 10% share of capital account e
Case Syllabus (G.R. No. 204944-45)
Citation and Decision
- 125 Phil. 204; G.R. No. L-21601; Decision dated December 17, 1966.
- Opinion by Justice Zaldivar; concurred by Concepcion, C.J., Regala, Makalintal, Bengzon, J.P., Sanchez and Ruiz Castro, JJ.
Parties, Cause of Action and Relief Sought
- Plaintiff-Appellant: Nielson & Company, Inc. (hereafter "Nielson").
- Defendant-Appellee: Lepanto Consolidated Mining Company (hereafter "Lepanto").
- Nielson sued to recover sums allegedly due under a management contract dated January 30, 1937 (monthly management fees and 10% participation in net profits), including attorney's fees and costs, based on Lepanto's refusal to comply with the contract post-World War II.
- Lepanto denied material allegations and pleaded special defenses including prescription and laches, and asserted it had resumed exclusive management postwar.
Procedural History
- Case filed in the Court of First Instance of Manila on February 6, 1958.
- Trial produced testimonial and documentary evidence; trial court dismissed plaintiff's complaint with costs and dismissed defendant's counterclaim for lack of proof.
- Nielson appealed directly to the Supreme Court due to the amount involved.
Original Contract Terms (Exhibit C) — Key Clauses
- Contract executed January 30, 1937, for five (5) years; renewed in late 1941 purportedly for another five years.
- Compensation: monthly management fee of P2,500 plus 10% participation in net profits (Clause V and related provisions).
- Clause II (force majeure / suspension provision): contract “shall remain in suspense, wholly or partially during the terms of such inability” in events including war, insurrection, civil commotion, organized strike, riot, injury to machinery or other events reasonably beyond Nielson’s control that adversely affect mining and milling operations.
- Clause XIII: arbitration clause requiring disagreements as to amounts of profits to be submitted to arbitration before court action.
Factual Background — War, Destruction and Occupation
- December 1941: Pacific War breaks out; parties had agreed to renew contract in late 1941.
- February 1942: U.S. Army ordered destruction of Lepanto’s mill, power plant, supplies, equipment and concentrates to prevent their use by the invading Japanese; thereby operations ceased/suspended.
- Japanese occupation: occupying forces operated the mines during the war until ousted.
- Liberation: Lepanto’s report dated March 13, 1946 indicates liberation date as August 1, 1945 (report notes booby traps remained).
- Rehabilitation and reconstruction took place after liberation; rehabilitation not completed until 1948.
- June 26, 1948: Lepanto officially resumed operations under its exclusive management (Exhibit F-1).
Core Legal Issues Presented
- Whether the management contract was suspended by force majeure during the war and whether such suspension extended the term of the contract by the period of suspension.
- If suspension extended the term: whether Nielson’s claims for management fees, profit participations, dividends, depletion reserves, capital expenditures and related relief remained enforceable and whether laches or prescription bars the action.
- Whether arbitration clause and moratorium law affected accrual and enforceability of claims.
- Appropriate computation of damages, dividends, stock entitlements and attorney’s fees.
Interpretation of Clause II (Force Majeure / Suspension) — Legal Tests
- Two conditions for suspension under Clause II:
- (1) The event constituting force majeure must be reasonably beyond Nielson’s control.
- (2) The event must adversely affect the work of mining and milling that Nielson was to undertake.
- Suspension applies so long as both conditions exist; suspension may have effect on the contract’s life depending on parties’ intention, contemporaneous acts, and industry usage.
Evidence Establishing Suspension (February 1942 – June 26, 1948)
- Documentary evidence and judicial notice confirm war and destruction of essential facilities in February 1942 (Exhibit D; Lepanto Company Mining Report dated March 13, 1946).
- U.S. Army ordered destruction in Feb. 1942: mill, power plant, supplies, equipment and concentrates destroyed.
- Japanese forces occupied and operated the mining properties until liberation on August 1, 1945 with subsequent reconstruction period until June 26, 1948.
- Court concluded the contract was suspended from February 1942 until June 26, 1948 because rehabilitation delays after liberation continued to adversely affect operations.
Evidence and Argument for Extension of Contract Term
- Witnesses for Nielson:
- George T. Scholey (mining engineer, Nielson director, and pre-war Lepanto vice-president): testified the standard force majeure clause in mining contracts was understood to mean that suspension extended lost time.
- Mark Nestle (director, manager, president of Nielson): testified that in mining custom a force majeure suspension results in extension so the party may recover investments and fulfill obligations.
- Contemporaneous corporate act: minutes of Lepanto Board of Directors’ special meeting (March 10, 1945) record Chairman Atty. C. A. DeWitt’s statement that the contract would soon expire unless obligations were suspended and that he believed the suspension provision (and even the law) would suspend the contract on account of war.
- Nielson’s postwar insistence and actions: multiple visits, reports, and offers to resume management documented in Lepanto reports and trial testimony (Exhibit D, other exhibits).
Evidence and Argument Against Extension (Appellee’s Position)
- Lepanto relied on:
- A later letter from Atty. DeWitt to Nielson dated October 20, 1945 in which he expressed the view that the contract was suspended but not extended.
- Prior Supreme Court rulings (Victorias Planters v. Victorias Milling; Rosario S. Vda. de Lacson v. Diaz; Lo Ching y So Young Chong Co. v. Court of Appeals) which Lepanto argued stand for the proposition that war does not extend contractual terms.
- Objections to Nielson’s evidence of custom and usage asserting failure to plead usage, lack of necessary proof of usage elements, and that testimony cannot alter clear written contract terms.
Court’s Analysis on Extension and Intent of Parties
- Rule emphasized: interpretation of contracts seeks the intention of parties; contemporaneous and subsequent acts can evidence such intent (Rule 130, Sec. 10; Art. 1371 Civil Code).
- Court weighed contemporaneous DeWitt statement in Board minutes (given against Lepanto’s interest and before Nielson officials) more heavily than his later self-serving letter (Oct. 20, 1945).
- Nielson’s witnesses’ testimony about industry usage was uncontradicted at trial; Lepanto did not produce contradictory testimony on the point.
- Court distinguished prior precedents cited by Lepanto, finding material facts and presence of evidence of mutual understanding in the present case that were absent in those cases; therefore those precedents were