Salgado v. St. Louis Dry Goods Store
REITERATIONFacts
The Antecedents: Plaintiffs German Salgado and Pablo Martinez were employed as submanagers by The St. Louis Dry Goods Store, Inc. for a period of two years (1914-1915) under written contracts. These contracts stipulated their duties, a salary of P200 per month, and a share of 17.5% of the net profits after allowing for depreciation of stock and bad debts. A crucial clause (fifth clause) stated that plaintiffs must unconditionally accept the yearly or half-yearly balances as determined by the board of directors. On February 26, 1915, plaintiffs quit, alleging breach of contract. They filed separate suits claiming an accounting for their share of net profits from June 17, 1913, to February 26, 1915, asserting that the amounts set aside for depreciation and bad debts were excessive. They also claimed damages for injury to reputation due to the company's intention to appoint a manager with supervisory authority over them. Procedural History: The lower court rendered judgment in favor of the plaintiffs, finding that the depreciation allowed on December 31, 1914, was excessive and should be returned to the profit and loss account. The court also ruled that the company was not liable for unearned salary or damages to reputation. The court also considered counterclaims from the defendant. The Petition: Both parties appealed the lower court's decision. The plaintiffs appealed the dismissal of their claims for profits and damages, while the defendant appealed the award of profits to the plaintiffs.
Issue(s)
Whether the amounts set aside for depreciation of stock and bad and doubtful debts by the board of directors were excessive and prejudicial to the plaintiffs' share of net profits. Whether the plaintiffs were entitled to damages for injury to their reputation and unearned salary due to the company's intention to appoint a manager with supervisory authority. Whether the plaintiffs were bound by the balances presented by the board of directors, particularly the fifth clause of their contract. Whether the counterclaims of the defendant against the plaintiffs for advances and loans were correctly determined.
Ruling
The Supreme Court reversed the judgment of the lower court. It ruled that the defendant company was not liable to the plaintiffs for their claimed share of profits, nor for unearned salary or damages to reputation. The Court entered judgment in favor of the defendant company against German Salgado for P2,125 and against Pablo Martinez for P100, representing their net indebtedness after crediting their respective shares in the P5,000 profit from the period ending December 31, 1913.
Ratio Decidendi
On the issue of depreciation and bad debts: The Court held that the lower court erred in concluding that the depreciation was excessive. The plaintiffs were bound by the fifth clause of their contract, which required them to unconditionally accept the balances as determined by the board of directors. To impeach the board's action, the plaintiffs needed to prove bad faith, which they failed to do. The Court noted that the percentage of depreciation actually decreased over time, which was favorable to the plaintiffs, and that the amounts set aside absorbed apparent profits, reflecting the business's potential difficulties rather than bad faith. The Court also clarified that depreciation at the beginning of a period is favorable to profit and loss, while at the end it is unfavorable, and intermediate points can offset each other over successive periods. On the issue of damages for injury to reputation and unearned salary: The Court affirmed the lower court's ruling that the defendant company was not liable. The contract did not expressly grant the plaintiffs exclusive control, and the term "submanager" implied the board's right to appoint a manager with superior authority. Therefore, the company's intention to place a manager in charge did not constitute a breach of contract or entitle the plaintiffs to damages or unearned salary. On the binding effect of the contract's fifth clause: The Court emphasized that the fifth clause, requiring unconditional acceptance of the board's balances, was binding on the plaintiffs. While not a shield against proven bad faith, it placed the burden on the plaintiffs to demonstrate such bad faith before they could challenge the board's determination of depreciation. The evidence presented did not establish bad faith on the part of the board. On the counterclaims: The Court found the counterclaims to be substantially correct, with minor adjustments. The plaintiff Salgado was found indebted to the company for P3,000, and Martinez for P975. However, both were credited with their share (17.5%) of the P5,000 profit from the period ending December 31, 1913, which amounted to P875 each. This resulted in Salgado owing P2,125 and Martinez owing P100 to the company.
Main Doctrine
The clause in an employment contract obligating employees to unconditionally accept the yearly or half-yearly balances of the corporation as made up and accepted by the board of directors is binding, and employees must show bad faith on the part of the board to impeach its action in determining depreciation, absent which, the company's actions are upheld.