Prime White Cement Corporation v. Honorable Intermediate Appellate Court
REITERATIONFacts
The Antecedents: Petitioner Prime White Cement Corporation (PWCC) and respondent Alejandro Te entered into a dealership agreement on July 16, 1969. Te was obligated to act as the exclusive dealer of PWCC's white cement in Mindanao for five years. PWCC was to supply 20,000 bags per month starting September 1970, at P9.70 per bag, FOB Davao and Cagayan de Oro ports, with payment via irrevocable letter of credit upon loading. Te advertised his exclusive dealership and entered into sub-dealer agreements. On August 18, 1970, Te informed PWCC of his preparations for the initial delivery. PWCC, however, replied with new conditions: delivery to start end of November 1970, only 8,000 bags for three months, price increased to P13.30 per bag subject to unilateral readjustment, delivery at Asturias, letter of credit only with Prudential Bank Makati, and advance payment as guaranty for foreign letter of credit. Te made several demands, but PWCC refused to comply. PWCC subsequently entered into an exclusive dealership agreement with Napoleon Co for Mindanao, violating the agreement with Te. Procedural History: The trial court adjudged PWCC liable to Te for P3,302,400.00 in actual damages, P100,000.00 in moral damages, and P10,000.00 for attorney's fees and costs. The Intermediate Appellate Court (IAC) affirmed the trial court's decision in toto. The Petition: PWCC filed a Petition for Review on Certiorari, assailing the IAC's decision, arguing that corporate officers could only enter into contracts with prior board approval, that the IAC disregarded the fiduciary duty of officers, and that the contract was unenforceable under Article 1317 of the Civil Code. PWCC also questioned the award of damages.
Issue(s)
Whether the dealership agreement entered into by the President and Chairman of the Board of petitioner corporation is a valid and enforceable contract, considering that respondent Alejandro Te was also a director and auditor of the corporation. Whether the contract was fair and reasonable under the circumstances. Whether the corporation is liable for damages.
Ruling
The Supreme Court set aside the Decision and Resolution of the Intermediate Appellate Court. Private respondent Alejandro Te was ordered to pay petitioner corporation the sum of P20,000.00 for attorney's fees, plus the cost of suit and expenses of litigation.
Ratio Decidendi
On the validity and enforceability of the dealership agreement: The Court held that while corporate powers are exercised by the Board of Directors, contracts entered into by the President on behalf of the corporation may bind it if ratified expressly or impliedly, or if within the ordinary course of business and reasonable. However, the situation changes when a director or officer deals with his own corporation, especially when he has an adverse interest. Alejandro Te was not an ordinary stockholder but a member of the Board of Directors and Auditor, making him a "self-dealing" director. Directors owe a duty of loyalty to the corporation and cannot sacrifice its interests for their own benefit. The Court cited Gokongwei v. Securities and Exchange Commission and Pepper v. Litton to emphasize that a director cannot serve two masters or use their position for personal advantage to the detriment of the corporation. The contract, therefore, was not valid and enforceable under these circumstances. On the fairness and reasonableness of the contract: The Court found the dealership agreement to be neither fair nor reasonable. The agreement stipulated a fixed price of P9.70 per bag for white cement for five years, commencing 14 months after the contract date. Given that prices of commodities, particularly cement, were not stable and expected to rise significantly within that period, the fixed price was disadvantageous to the corporation. Respondent Te, as a director, should have protected the corporation by including provisions for price adjustments, similar to the contracts he entered into with his own sub-dealers where he stipulated prices not less than P14.00 per bag and protected himself from market fluctuations. The Court concluded that the fixed price was not fair and reasonable, and Te was guilty of disloyalty, attempting to enrich himself at the corporation's expense. On the corporation's liability for damages: The Court ruled that since the dealership agreement was found to be invalid and unenforceable due to the self-dealing nature of respondent Te and the unfair terms, the corporation could not be held liable for damages. Furthermore, the Court stated that there can be no award for moral damages in favor of a corporation under the Civil Code. Consequently, the awards for actual and moral damages granted by the lower courts were set aside. The Court, however, ordered respondent Te to pay petitioner corporation P20,000.00 for attorney's fees, plus costs and expenses of litigation, as a result of the action proven to be without legal basis.
Main Doctrine
A contract entered into by a corporate officer with the corporation, where the officer is also a director and has an adverse interest, is voidable unless it meets specific conditions of fairness, reasonableness, and proper authorization or ratification by the board or stockholders, with full disclosure of adverse interest. A contract that is unfair and unreasonable, especially when entered into by a self-dealing director, may be voided to prevent unjust enrichment at the corporation's expense.