Case Summary (G.R. No. 240184)
Agreement Terms and Roles
The written agreement (Exhibit A) provided that the parties would organize a partnership for bottling and distribution of Mission soft drinks, with plaintiff as industrial partner/manager and defendant as capitalist. Material provisions: defendant would decide general policy; plaintiff would operate and develop the bottling plant and secure the Mission franchise on behalf of the partnership; plaintiff’s remuneration was fixed at 30% of net profits.
Negotiations, Drafts, and the Franchise Option
Negotiations involved counsel for both parties. Plaintiff had earlier obtained from Mission Dry Corporation a thirty-day option for exclusive bottling and distribution rights for the Philippines (Exhibit J) after requesting a short-term exclusive right to facilitate bargaining with a financier. Multiple drafts existed: plaintiff’s early draft (Exhibit II/OO) described the manager as the exclusive grantee; defendant’s counsel prepared another draft (Exhibit HH) that became the main basis for the final agreement.
Execution of Franchise and Commencement of Operations
The partnership agreement was signed December 3, 1947; both parties then traveled to the United States where, on December 10, 1947, a franchise agreement (Exhibit V) was executed granting defendant the exclusive right to produce, bottle, distribute, and sell Mission beverages in the Philippines. The parties returned to the Philippines; plaintiff reported for duty January 1948 and operations commenced in the first week of February 1948.
Performance and Early Adjustments
Plaintiff received advances on account of profits (P2,000 in January and February; P1,000 in March) and the use of a car (retracted March 9, 1948). Plaintiff thereafter demanded execution of formal partnership papers; defendant delayed, conditioned execution on increased sales to P50,000, and eventually curtailed allowances, prompting negotiations and then suit by plaintiff seeking enforcement of partnership formation, accounting, 30% share, and P200,000 damages. Defendant counterclaimed P200,000 alleging plaintiff’s false representation regarding franchise ownership.
Trial Court Findings
The trial court denied enforcement (specific performance) of the partnership formation but ordered an accounting and awarded plaintiff 15% of net profits. It found fraud not proved and reasoned that prior drafts were integrated into the final instrument and that fraud must be proven; the assistance of counsel made fraud improbable.
Relevance of Parol Evidence and Prior Statements
The Supreme Court rejected the trial court’s exclusion of prior drafts and statements on the ground of integration. It held that prior drafts and pre-contractual statements were admissible to show representations and inducements bearing on alleged fraud; these matters are exceptions to the parol evidence rule and may be proved when the instrument’s validity or the existence of fraud is put in issue by the pleadings (Rule 123, sec. 22(a)).
Determination that Plaintiff Made Misrepresentations
On the evidence—including plaintiff’s own early draft, correspondence with Mission Dry Corporation (Exhibit H), and testimony of counsel—the court concluded plaintiff did represent to defendant that he was the exclusive grantee of the franchise. The court found it improbable that plaintiff would have disclosed merely a 30-day option or an expired option in negotiations, and that defendant reasonably relied on plaintiff’s representation when agreeing to enter the venture and travel to California.
Legal Effect of the False Representation: Causal versus Incidental Fraud
Applying Article 1270 (Spanish Civil Code) and established doctrine distinguishing causal fraud (dolo causante) from incidental deceit (dolo incidente), the Court analyzed whether plaintiff’s misrepresentation vitiated defendant’s consent to the partnership agreement. The Court concluded that while the representation was a significant inducement, it was not the principal cause of defendant’s assent to form the partnership; the primary mutual undertaking was to organize and operate the bottling/distribution business with plaintiff to secure the franchise for the partnership. However, the misrepresentation was the operative factor in securing plaintiff’s unusually large contractual share (30%) and therefore constituted incidental fraud: it affected an “accident” or particular term of the contract (the profit share) rather than voiding the entire agreement.
Enforceability: Specific Performance Not Ordered for Personal Obligation
The Court affirmed that the agreement to execute partnership papers was an obligation to do of a highly personal character (obligatio faciendi pe
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Case Citation and Court
- 93 Phil. 526 [G. R. No. L-4811. July 31, 1953].
- Decision authored by Justice Labrador.
- Concurring: Paras, C. J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo and Bautista Angelo, JJ.
Parties, Roles and Procedural Posture
- Plaintiff and appellant: Charles F. Woodhouse.
- Defendant and appellant: Fortunato F. Halili.
- Trial court: Court of First Instance rendered judgment ordering defendant to render an accounting and to pay plaintiff 15% of net profits; refused to compel execution of partnership papers; found fraud not proved.
- Both parties appealed the trial court judgment.
Underlying Agreement (Exhibit A) — Principal Provisions
- Date of initial written agreement: November 29, 1947 (contract ultimately signed December 3, 1947).
- Main provisions included:
- Parties to organize a partnership for bottling and distribution of Mission soft drinks.
- Plaintiff to act as industrial partner/manager; defendant to act as capitalist furnishing capital.
- Defendant to decide matters of general policy; plaintiff to attend to operation and development of the bottling plant.
- Plaintiff to secure the Mission Soft Drinks franchise for and on behalf of the proposed partnership.
- Plaintiff to receive 30% of the net profits of the business.
- Paragraph 3 and paragraph 11 of Exhibit A addressed use of an exclusive franchise by the capitalist/partnership and reassignment of franchise to the manager upon dissolution/termination of partnership.
Pre-contract Negotiations, Drafts and Documentary Background
- Preliminary negotiations and conferences were held with assistance of respective attorneys.
- Plaintiff’s lawyer prepared an earlier draft (Exhibit II or OO) prior to a Manila Hotel meeting on November 27, 1947; that draft contemplated a corporation and expressly represented plaintiff as the exclusive grantee of a franchise (language: manager is the exclusive grantee; manager shall transfer his exclusive right upon organization).
- Defendant’s lawyer prepared a draft after the Manila Hotel meeting (Exhibit HH); this draft appears to be the main basis for the final agreement, Exhibit A.
- The trial court initially declined to consider prior drafts for determining intent on the ground of integration; the Supreme Court found the principle of integration inapplicable for the limited purpose of proving representations or inducements preceding the agreement.
Franchise Option and Communications with Mission Dry Corporation
- Plaintiff informed Mission Dry Corporation (Los Angeles) that he had interested a prominent financier (defendant) willing to invest and requested a limited-time right to bottle and distribute to close the deal (Exhibit H).
- As a result, plaintiff was given "a thirty days' option on exclusive bottling and distribution rights for the Philippines" (Exhibit J), with option granted on October 14, 1947.
- Plaintiff requested the exclusive bottling and distributing rights for a limited period so he might consummate plans with the prospective investor.
Trip to the United States and Franchise Grant
- Plaintiff and defendant went to the United States on December 3, 1947; on December 10, 1947 a franchise agreement (Exhibit V) was entered into between Mission Dry Corporation and "Fortunato F. Halili and/or Charles F. Woodhouse," granting defendant the exclusive right, license and authority to produce, bottle, distribute and sell Mission beverages in the Philippines.
- After the franchise agreement in California, both returned to the Philippines and operations began in early 1948.
Operational Timeline, Compensation and Early Course of Business
- Plaintiff reported for duty in January 1948, though plant operations began in the first week of February 1948.
- Advances to plaintiff (on account of profits): January P2,000 plus use of car; February P2,000; March P1,000.
- Car provided to plaintiff was withdrawn on March 9, 1948.
- Plaintiff later demanded execution of formal partnership papers; defendant delayed, citing no hurry and later promising to do so after sales increased to P50,000.
- Defendant refused to give further allowances; parties attempted settlement through attorneys without success; plaintiff instituted the present action.
Claims, Defenses and Counterclaim
- Plaintiff’s complaint sought:
- Execution/enforcement of the contract of partnership.
- Accounting of profits and 30% share of net profits.
- Damages in amount of P200,000.
- Defendant’s answer and counterclaim alleged:
- Plaintiff had represented he was owner or about to become owner of an exclusive bottling franchise; representation was false and the franchise was actually given to defendant.
- Defendant did not fail in undertakings; plaintiff failed to perform.
- Plaintiff had agreed to contribute the exclusive franchise but failed to do so.
- Counter-claim for P200,000 as damages.
Trial Court Findings
- Ordered defendant to render accounting and to pay plaintiff 15% of net profits.
- Held execution of partnership contract could not be enforced against defendant (could not compel defendant to sign partnership papers).
- Found that fraud was not proved.
- Reasoned that prior drafts had become integrated into final agreement and were not to be considered for altering terms, and that presence of counsel made fraud improbable; also noted