Case Summary (G.R. No. 68555)
Subsequent Correspondence and Supplier’s Conditions
When respondent Te informed the corporation of preparations to open the letter of credit, the corporation allegedly replied through its corporate secretary that the board had imposed new conditions: that delivery would commence at the end of November 1970, that only 8,000 bags per month would be delivered for three months, that the price would be P13.30 per bag and subject to unilateral readjustment, that delivery place would be Asturias, that the letter of credit must be opened with a specific bank (Prudential Bank, Makati Branch), and that payment would be made in advance to be used as a guaranty for a foreign L/C for procurement costs.
Trial Court Ruling and Appellate Affirmation
After trial the trial court awarded respondent Te P3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000.00 for attorneys’ fees and costs. The Intermediate Appellate Court affirmed that judgment in toto, reasoning that the dealership agreement was signed by corporate officers (President and Chairman) who, on the face of the contract, appeared to be duly authorized and that the estoppel principle prevented the corporation from denying its validity.
Issue Presented
The sole legal issue presented to the Supreme Court was whether the dealership agreement signed by the President and Chairman constituted a valid and enforceable contract binding the corporation.
Governing Principles on Corporate Authority and Ratification
The Court reiterated fundamental corporate-law principles: corporate powers are exercised by the board of directors except as otherwise provided or expressly delegated; absent express delegation, a president’s contract may bind the corporation if the board ratifies it expressly or impliedly (by silence, acquiescence, acts indicating approval, or by accepting benefits). Additionally, a president may bind the corporation by contract made in the ordinary course of business if reasonable under the circumstances. These are general but flexible rules that apply especially to transactions with third persons.
Special Rule for Directors’ Self-Dealing
The Court emphasized that a different and more exacting standard applies where the contracting party is a director or officer dealing with his own corporation. A director occupies a fiduciary position and owes a duty of loyalty; where the director’s interests conflict with the corporation’s, he cannot sacrifice corporate interests for personal gain. The Court cited Pepper v. Litton and Philippine jurisprudence to underscore that fiduciaries cannot use corporate power to advantage themselves to the detriment of stockholders or creditors. The Court also discussed Section 32 of the Corporation Code, which sets conditions under which contracts between a corporation and its directors or officers are voidable unless all statutory safeguards (absence of necessity for quorum or vote, fairness of the contract, and prior board authorization for officers) are met; if board approval conditions are absent, stockholder ratification with full disclosure and requisite majorities is required.
Application to the Dealership Agreement — Authority and Fairness
Applying these principles, the Court found the dealership agreement unenforceable because (1) the other party to the contract, respondent Te, was a director and auditor of the corporation (a self-dealing director), and (2) the contract was not fair and reasonable under the circumstances. The agreement fixed the price at P9.70 per bag for five years, despite foreseeable and actual substantial market price increases before the start of deliveries and thereafter (evidence showed market prices of P14.50 per bag in September 1970 and P37.50 by mid-1975). The Court observed that Te himself, when contracting with downstream dealers shortly after the dealership agreement, included price-protection clauses (a floor not less than P14.00 per bag), demonstrating that he appreciated market volatility and could have protected the corporation similarly.
Finding of Disloyalty and Lack of Ratification
The Court concluded that Te’s conduct evidenced disloyalty: by entering into a long-term fixed-price contract without protecting the corporation from foreseeable market increases, and by failing to secure board authorization or stockholder ratification with full disclosure, he attempted effectively to enrich himself at the corporation’s expense. There was no showing
...continue readingCase Syllabus (G.R. No. 68555)
Citation and Court
- Reported at 292-A Phil. 198, Second Division.
- G.R. No. 68555.
- Decision rendered March 19, 1993.
- Petition for Review on Certiorari by Prime White Cement Corporation from the decision of the then Intermediate Appellate Court (AC-G.R. No. CV-69947-R, March 30, 1984, penned by Associate Justice Marcelino R. Veloso; concurring Justices Porfirio V. Sison, Abdulwahid A. Bidin, and Desiderio P. Jurado).
- Supreme Court opinion authored by Justice Campos, Jr.; Narvasa, C.J., Padilla, Regalado, and Nocon, JJ., concurred.
Procedural History
- Trial court found in favor of respondent Alejandro Te and adjudged petitioner corporation liable to Te: P3,302,400.00 actual damages; P100,000.00 moral damages; and P10,000.00 attorneys’ fees and costs.
- Intermediate Appellate Court affirmed the trial court’s decision in toto (Decision dated March 30, 1984; Resolution dated August 6, 1984).
- Petitioner Prime White Cement Corporation filed the present Petition for Review on Certiorari seeking reversal of the Intermediate Appellate Court’s decision.
- The dispositive portion of the Intermediate Appellate Court’s ruling: “WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed in toto.” (Rollo, p. 58).
Facts as Found by the Trial Court and Adopted by the Appellate Court
- On or about July 16, 1969, plaintiff (Alejandro Te) and the defendant corporation (Prime White Cement Corporation), through its President Zosimo Falcon and Chairman Justo C. Trazo, entered into a dealership agreement (Exhibit A).
- Principal obligations under the dealership agreement included:
- (a) Commencing September 1970, the corporation shall sell to and supply the plaintiff, as dealer, 20,000 bags (94 lbs/bag) of white cement per month.
- (b) Plaintiff shall pay the defendant P9.70 per bag, FOB Davao and Cagayan de Oro ports.
- (c) For each delivery, plaintiff shall open a confirmed, unconditional, and irrevocable letter of credit; upon certification by the boat captain on the bill of lading that goods were loaded, the corresponding bank shall release payment.
- After execution of the dealership agreement, plaintiff advertised in a national newspaper (Manila Chronicle, August 16, 1969; Exhibits R and R-1) that he was the exclusive dealer for Mindanao; this led to business associates seeking to be his sub-dealers.
- Relying on the dealership agreement, in September, October, and December 1969 plaintiff entered into written agreements with several hardware stores in Davao and Cagayan de Oro to enable resale of his 20,000-bag monthly allocation (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1, Q-2).
- Plaintiff wrote defendant on August 18, 1970 (Exhibit B) notifying preparations to open the required letter of credit for initial delivery in September 1970.
- Defendant, through its corporate secretary, replied imposing new and unilateral conditions (Exhibit C), including:
- (a) Delivery to commence at the end of November 1970;
- (b) Only 8,000 bags per month for a period of three months;
- (c) Price raised to P13.30 per bag;
- (d) Price subject to unilateral readjustment by defendant;
- (e) Place of delivery to be Austurias (sic);
- (f) Letter of credit to be opened only with Prudential Bank, Makati Branch;
- (g) Payment to be made in advance and used by defendant as guaranty for opening a foreign letter of credit for procurement of materials.
- Plaintiff made several demands for compliance with the original dealership agreement (Exhibits D, E, G, I, R, L, N); defendant refused to comply.
- Plaintiff, forced by circumstances, cancelled supply agreements with third parties that had been concluded in anticipation of the dealership agreement.
- Notwithstanding the subsisting dealership agreement, defendant entered into an exclusive dealership agreement with Napoleon Co for marketing white cement in Mindanao (Exhibit T), prompting this suit. (Plaintiff’s Record on Appeal, pp. 86–90).
Trial and Appellate Findings
- Trial court awarded substantial actual and moral damages and attorneys’ fees to Alejandro Te.
- Intermediate Appellate Court affirmed the trial court’s judgment, reasoning in part that:
- Falcon (President) and Trazo (Chairman) were duly authorize