G.R. No. L-18805. August 14, 1967
THE BOARD OF LIQUIDATORS,
SANCHEZ, J.:
The National Coconut Corporation (NACOCO, for short) was
chartered as a non-profit governmental organization on May 7, 1940 by Commonwealth Act 518 avowedly for
the protection, preserÂvation and development of the coconut industry in the Philippines. On August 1, 1946, NACOCO’s
charter was amended [Republic Act 5] to grant that corporation the express
power “to buy, sell, barter, export, and in any other manner deal in,
coconut, copra, and dessicated coconut, as well as
their by-products, and to act as agent, broker or commission merchant of the
producers, dealers or merchants” thereof.
The charter amendment was enacted to stabilize copra prices, to serve
coconut producers by securing advantageous prices for them, to cut down to a
minimum, if not altogether eliminate, the margin of middlemen, mostly aliens.[4]
General manager and board chairman was Maximo
M. Kalaw; defendants Juan Bocar
and Casimiro Garcia were members of the Board;
defendant Leonor Moll became director only on December 22, 1947.
NACOCO, after the passage of Republic Act 5, embarked on copra
trading activities. Amongst the scores
of contracts executed by general manager Kalaw are
the disputed contracts, for the delivery of copra, viz:
(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long
tons, $167.00 per ton, f.o.b., delivery:
August and September, 1947. This
contract was later assigned to Louis Dreyfus & Co. (Overseas) Ltd.
(b) August 14, 1947: Alexander Adamson & Co.,
for 2,000 long tons, $145.00 per long ton, f.o.b., Philippine ports, to be
shipped: September/October, 1947. This contract was also assigned to Louis
Dreyfus & Co. (Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons,
$137.50 per ton, delivery: September,
1947.
(d) September 5, 1947: Spencer Kellog
& Sons, for 1,000 long tons, $160.00 per ton, c.i.f., Los
Angeles, California,
delivery: November, 1947.
(e) September 9, 1947:
Franklin Baker Division of General Foods Corporation, for 1,500 long
tons, $164.00 per ton, c.i.f., New York, to be shipped in November, 1947.
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons, $154.00
per ton, f.o.b., 3 Philippine ports, delivery:
November, 1947.
(g) September 13, 1947:
Juan Cojuangco, for 2,000 tons, $175.00 per
ton, delivery: November and December,
1947. This contract was assigned to
Pacific Vegetable Co.
(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton,
c.i.f., Pacific ports, delivery: December,
1947 and January, 1948. This contract
was assigned to Pacific Vegetable Co.
(i) October 28, 1947: Fairwood & Co.,
for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery: January, 1948. This contract was assigned to Pacific Vegetable
Co.
An unhappy chain of events conspired to deter NACOCO from
fulfilling these contracts. Nature
supervened. Four devastating typhoons
visited the Philippines: the first in
October, the second and third in November, and the fourth in December, 1947. Coconut trees throughout the country suffered
extensive damage. Copra production
decreased. Prices spiralled. Warehouses were destroyed. Cash requirements doubled. Deprivation of export facilities increased
the time necessary to accumulate shiploads of copra. Quick turnovers became impossible, financing
a problem.
When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board for approval. It was not until December 22, 1947 when the membership was
completed. Defendant Moll took her oath
on that date. A meeting was then
held. Kalaw
made a full disclosure of the situation, apprised the board of the impending
heavy losses. No action was taken on the
contracts. Neither did the board vote
thereon at the meeting of January 7, 1948 following. Then, on January 11, 1948, President Roxas
made a statement that the NACOCO head did his best to avert the losses,
emphasized that government concerns faced the same risks that confronted
private companies, that NACOCO was recouping its losses, and that Kalaw was to remain in his post. Not long thereÂafter, that is, on January 30, 1948, the board met again
with Kalaw, Bocar, Garcia
and Moll in attendance. They unanimously
approved the contracts hereinbefore enumerated.
As was to be expected, NACOCO but partially performed the
contracts, as follows:
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The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil Co., in copra delivered
by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00; Spencer Kellog & Sons, P159,040.00.
But one buyer, Louis Dreyfus & Co. (Overseas) Ltd., did in fact sue before the
Court of First Instance of Manila, upon claims as follows: For the undelivered copra under the July 30
contract (Civil Case 4459), P287,028.00; for the balance on the August 14
contract (Civil Case 4398), P75,098.63; for that per the September 12 contract
reduced to judgment (Civil Case 4322, appealed to this Court in L-2829),
P447,908.40. These cases culminated in
an out-of-court amicable settlement – when the Kalaw
management was already out. The
corporation thereunder paid Dreyfus P567,024.52 representing
70% of the total claims. With particular
reference to the Dreyfus claims, NACOCO put up the defenses that: (1) the
contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to do
business here; and (2) failure to deliver was due to force majeure, the typhoons. To project the utter unreasonableness of this
compromise, we reproduce in haec verba this finding below:
“x x x However,
in similar cases brought by the same claimant [Louis Dreyfus & Co. (Overseas) Ltd.] against Santiago Syjuco for non-delivery of copra also involving a claim of
P345,654.68 wherein defendant set up same defenses as above,
plaintiff accepted a promise of P5,000.00 only (Exhs.
31 & 32-Heirs). Following the same
proportion, the claim of Dreyfus against NACOCO should have been compromised
for only P10,000.00, if at all. Now, why
should defendant be held liable for the large sum paid as compromise by the
Board of Liquidators? This is just a sample to
show how unjust it would be to
hold defendants liable for the readiness
with which the Board of Liquidators disposed
of the NACOCO funds, altho
there was much possibility of successfully
resisting the claims, or at least settlement
for nominal sums like what happened in
the Syjuco case.”[5]
All the settlements sum up to P1,343,274.52.
In this suit started in February, 1949, NACOCO seeks to recover
the above sum of P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors
Juan Bocar, Casimiro Garcia
and Leonor Moll. It charges Kalaw
with negligence under Article 1902 of the old Civil Code (now Article 2176, new
Civil Code); and defendant board members, including Kalaw,
with bad faith and/or breach of trust for having approved the contracts. The fifth amended complaint, on which this
case was tried, was filed on July 2,
1959. Defendants resisted
the action upon defenses hereinÂafter in this opinion to be discussed.
The lower court came out with a judgment dismissing the complaint
without costs as well as defendants’ counterclaims, except that plaintiff was
ordered to pay the heirs of Maximo Kalaw the sum of P2,601.94 for unpaid salaries and cash
deposit due the deceased Kalaw from NACOCO.
Plaintiff appealed direct to this Court.
Plaintiff’s brief did not question the judgment on Kalaw’s counterclaim for the sum of P2,601.94.
Right at the outset, two preliminary questions raised before, but
adversely decided by, the court below, arrest our attention. On appeal, defendants renew their bid. And this, upon established jurisprudence that
an appellate court may base its decision of affirmance
of the judgment below on a point or points ignored by the trial court or in
which said court was in error.[6]
1. First of the threshold questions is that advanced by
defendants that plaintiff Board of Liquidators has lost its legal personality
to continue with this suit.
Accepted in this jurisdiction are three methods by which a
corporation may wind up its affairs: (1)
under Section 3, Rule 104, of the Rules of Court [which superseded Section 66
of the Corporation Law][7]
whereby, upon voluntary dissolution of a corporation, the court may direct
“such disposition of its assets as justice requires, and may appoint a
receiver to collect such assets and pay the debts of the corporation;” (2)
under Section 77 of the Corporation Law, whereby a corporation whose corporate
existence is terminated, “shall nevertheless be continued as a body
corporate for three years after the time when it would have been so dissolved,
for the purpose of prosecuting and defending suits by or against it and of
enabling it gradually to settle and close its affairs, to dispose of and convey
its property and to divide its capital stock, but not for the purpose of
continuing the business for which it was established”; and (3) under
Section 78 of the Corporation Law, by virtue of which the corporation, within
the three-year period just mentioned, “is authorized and empowered to
convey all of its property to trustees for the benefit of members,
stockholders, creditors, and others interested.”[8]
It is defendants’ pose that their case comes within the coverage
of the second method. They reason out
that suit was commenced in February, 1949; that by Executive Order 372, dated
November 24, 1950, NACOCO, together with other government-owned corÂporations,
was abolished, and the Board of Liquidators was entrusted with the function of
settling and closing its affairs; and that, since the three-year period has
elapsed, the Board of Liquidators may not now continue with, and prosecute, the
present case to its conÂclusion, because Executive Order 372 provides in
Section 1 thereof that –
“SECTION 1. The
National Abaca and Other Fibers Corporation, the National Coconut Corporation,
the National Tobacco Corporation, the National Food Products Corporation and
the former enemy-owned or controlled corporations or associations, x x x are hereby abolished. The said corporations shall be liquidated in
accordance with law, the provisions of this Order, and/or in such manner as the
President of the Philippines may direct; Provided, however, That
each of the said corporations shall nevertheless be continued as a body
corporate for a period of three (3) years from the effective date of this
Executive Order for the purpose of prosecuting and defending suits by or
against it and of enabling the Board of Liquidators gradually to settle and
close its affairs, to dispose of and convey its property in the manner
hereinafter provided.”
Citing Mr. Justice Fisher, defendants proceed to argue that even
where it may be found impossible within the 3-year period to reduce disputed
claims to judgment, nonetheless, “suits by or against a corporation abate
when it ceases to be an entity capable of suing or being sued” (Fisher,
The Philippine Law of Stock Corporations, pp. 390-391). Corpus Juris
Secundum likewise is authority for the statement
that “[t]he dissolution of a corporation ends its existence so that there
must be statutory authority for prolongation of its life even for
purposes of pending litigation“;[9]
and that suit “cannot be continued or revived; nor can a valid judgment be
rendered therein, and a judgment, if rendered, is not only erroneous, but void
and subject to collateral attack.”[10]
So it is, that abatement of pending actions follows as a matter of course upon
the expiration of the legal period for liquidation,[11]
unless the statute merely requires a commencement of suit within the added
time.[12]
For, the court cannot extend the time allotted by statute.[13]
We, however, express the view that the executive order abolishing
NACOCO and creating the Board of Liquidators should be examined in
context. The proviso in Section 1 of
Executive Order 372, whereby the corporate existence of NACOCO was conÂtinued
for a period of three years from the effectivity of
the order for “the purpose of prosecuting and defending suits by or
against it and of enabling the Board of Liquidators gradually to settle and
close its affairs, to dispose of and convey its property in the manner
hereinafter provided”, is to be read not as an isolated provision but in
conjunction with the whole. So reading,
it will be readily observed that no time limit has been tackled to the
existence of the Board of Liquidators and its function of closing the affairs
of the various government-owned corporations, including NACOCO.
By Section 2 of the executive order, while the boards of
directors of the various corporations were abolished, their powers and
functions and duties under existing laws were to be assumed and exercised by
the Board of Liquidators. The President
thought it best to do away with the boards of directors of the defunct corÂporations;
at the same time, however, the President had chosen to see to it that the Board
of Liquidators step into the vacuum. And
nowhere in the executive order was there any mention of the lifespan of the
Board of Liquidators. A glance at the
other proÂvisions of the executive order buttresses our conclusion. Thus, liquidation by the Board of Liquidators
may, under section 1, proceed in accordance with law, the provisions of the
executive order, “and/or in such manner
as the President of the Philippines
may direct.” By Section 4, when any property, fund, or
project is transferred to any governmental instrumentality “for adminisÂtration
or continuance of any project”, the necessary funds therefor
shall be taken from the corresponding special fund created in SecÂtion 5. Section 5, in turn, talks of special funds
established from the “net proceeds of the liquidation” of the various
corporations abolished. And by Section 7,
fifty per centum of the fees collected from the copra standardization and
inspection service shall accrue “to the special fund created in section 5
hereof for the rehabilitation and development of the coconut industry.”
Implicit in all these, is that the term of life of the Board of Liquidators is
without time limit. Contemporary history
gives us the fact that the Board of Liquidators still exists as an office with
officials and numerous employees continuing the job of liquidation and
prosecution of several court actions.
Not that our views on the power of the Board of Liquidators to
proceed to the final determination of the present case is without
jurisprudential support. The first
judicial test before this Court is National Abaca and Other Fibers Corporation
vs. Pore, L-16779, August 16, 1961. In that case, the corporation, already
dissolved, commenced suit within the three-year extended period for liquiÂdation. That suit was for recovery of money advanced
to defendant for the purchase of hemp in behalf of the corporation. She failed to account for that money. Defendant moved to dismiss, questioned the
corporation’s capacity to sue. The lower
court ordered plainÂtiff to include as co-party plaintiff, The Board
of Liquidators, to which the corporation’s liquidation was
entrusted by Executive Order 372. Plaintiff failed to effect inclusion. The lower court dismissed the suit. Plaintiff moved to reconsider. Ground: excusable negligence, in that its
counsel prepared the amended complaint, as directed, and instructed the board’s
incoming and outgoing corresÂpondence clerk, Mrs. Receda
Vda. de Ocampo, to mail the
original thereof to the court and a copy of the same to defendant’s
counsel. She mailed the copy to the
latter but failed to send the original to the court. This motion was rejected below. Plaintiff came to this Court on appeal. We there said that “the rule appears to
be well settled that, in the absence of statutory provision to the contrary,
pending actions by or against a corporation are abated upon expiration of the
period allowed by law for the liquidation of its affairs.” We there noted
that “[o]ur Corporation Law contains no
provision authorÂizing a corporation, after three (3) years from the expiration
of its lifetime, to continue in its corporate name actions instituted by it
within said period of three (3) years.”[14]
However, these precepts notwithstanding, we, in effect, held in that case that
the Board of Liquidators escapes from the operation thereof for the reason that
“[o]bviously, the complete loss
of plaintiff’s corporate existence after the
expiration of the period of three (3)
years for the settleÂment of its affairs
is what impelled the President to create
a Board of Liquidators, to continue the
management of such matters as may then
be pending.”[15]
We accordingly directed the record of said case to be returned to the lower
court, with instructions to admit plaintiff’s amended complaint to include, as
party plaintiff, The Board of Liquidators.
Defendant’s position is vulnerable to attack from another
direction.
By Executive Order 372, the government, the sole
stockholder, abolished NACOCO, and placed its assets in the hands of the Board
of Liquidators. The Board of Liquidators
thus became the trustee on behalf of the government. It was an express trust. The legal interest became vested in the
trustee – the Board of Liquidators. The beneficial interest remained
with the sole stockholder the government.
At no time had the government withdrawn the property, or the authority
to continue the present suit, from the Board of Liquidators. If for this reason alone, we cannot stay the
hand of the Board of Liquidators from prosecuting this case to its final
conclusion.[16]
The provisions of Section 78 of the Corporation Law – the third method of
winding up corporate affairs – find application.
We, accordingly, rule that the Board of Liquidators has
personality to proceed as party-plaintiff in this case.
2. Defendant’s second poser is that the action is unenforceable
against the heirs of Kalaw.
Appellee heirs of Kalaw
raised in their motion to dismiss,[17]
which was overruled, and in their nineteenth special defense, that plaintiff’s
action is personal to the deceased Maximo M. Kalaw, and may not be deemed to have survived after his
death.[18]
They say that the controlling statute is Section 5, Rule 87, of the 1940 Rules
of Court,[19]
which provides that “[a]ll claims for money
against the decedent, arising from contract, express or implied”, must be
filed in the estate proceedings of the deceased. We disagree.
The suit here revolves around the alleged negligent acts of Kalaw for having entered into the questioned contracts
without prior approval of the board of directors, to the damage and preÂjudice
of plaintiff; and is against Kalaw and the other
directors for having subsequently approved the said contracts in bad faith
and/or breach of trust. Clearly then,
the present case is not a mere action for the recovery of money nor a claim for
money arising from conÂtract. The suit
involves alleged tortious acts. And the action is embraced in suits filed
“to recover damages for an injury to person or property, real or
personal”, which survive.[20]
The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962. There, plaintiffs sought to recover damages
from defendant Llemos. The complaint averred that Llemos had served plaintiff by registered mail with a copy
of a petition for a writ of possession in Civil Case 4824 of the Court of First
Instance at Catbalogan, Samar,
with notice that the same would be submitted to the Samar
court on February 23, 1960 at 8:00 a.m.; that in view of the copy and notice
served, plaintiffs proceeded to the said court of Samar
from their residence in Manila accompanied by their lawyers, only to discover
that no such petition had been filed; and that defendant Llemos
maliciously failed to appear in court, so that plaintiffs’ expenditure and
trouble turned out to be in vain, causing them mental anguish and undue
embarrassment. Defendant died before he
could answer the comÂplaint. Upon leave
of court, plaintiffs amended their complaint to include the heirs of the
deceased. The heirs moved to
dismiss. The court dismissed the
complaint on the ground that the legal representative, and not the heirs,
should have been made the party defendant; and that, anyway, the action being
for recovery of money, testate or intestate proceedings should be initiated and
the claim filed therein. This Court,
thru Mr. Justice Jose B. L. Reyes, there declared:
“Plaintiffs argue with considerable cogency that contrasting
the correlated provisions of the Rules of Court, those concerning claims that
are barred if not filed in the estate settlement proceedings (Rule 87, sec. 5)
and those defining actions that survive and may be prosecuted against the
executor or administrator (Rule 88, sec. 1), it is apparent that actions for
damages caused by tortious conduct of a defendant (as
in the case at bar) survive the death of the latter. Under Rule 87, section 5, the actions that
are abated by death are: (1) claims for
funeral expenses and those for the last sickness of the decedent; (2) judgments
for money; and (3) ‘all claims for money against the decedent, arising from
contract express or implied.’ None of these includes that of the
plaintiffs-appellants; for it is not enough that the claim against the deceased
party be for money, but it must arise from ‘contract express or implied’, and
these words (also used by the Rules in connection with attachments and derived
from the common law) were construed in Leung Ben vs. O’Brien, 38 Phil. 182,
189-194,
‘to include all purely personal obligations other than
those which have their source in delict or tort.’
Upon the other hand, Rule 88, section 1,
enumerates actions that survive against a decedent’s executors or
administrators, and they are: (1)
actions to recover real and personal property from the estate; (2) actions to
enforce a lien thereon; and (3) actions to recover damages for an injury to
person or property. The present suit is
one for damages under the last class, it having been held that ‘injury to
property’ is not limited to injuries to specific property, but extends to other
wrongs by which personal estate is injured or diminished (Baker vs. Crandall,
47 Am. Rep. 126; also 171 A.L.R., 1395).
To maliciously cause a party to incur unnecessary exÂpenses, as charged
in this case, is certainly injury to that party’s property (Javier vs. Araneta, L-4369, Aug. 31, 1953).”
The ruling in the preceding case was hammered out of facts
comparable to those of the present. No
cogent reason exists why we should break away from the views just
expressed. And, the conclusion remains: Action against the Kalaw
heirs and, for that matter, against the Estate of Casimiro
Garcia, survives.
The preliminaries out of the way, we now go to the core of the
controversy.
3. Plaintiff levelled a major attack on
the lower court’s holding that Kalaw justifiedly entered into the controverted
conÂtracts without the prior approval of the corporation’s directorate. Plaintiff leans heavily on NACOCO’s corporate by-laws.
Article IV (b), Chapter III thereof, recites, as amongst the duties of
the general manager, the obligation:
“(b) To perform or execute on behalf of the Corporation upon prior
approval of the Board, all contracts necessary and essential to the proper
accomplishment for which the Corporation was organized.”
Not of de minimis
importance in a proper approach to the problem at hand, is the nature of a
general manager’s position in the corporate structure. A rule that has gained acceptance through the
years is that a corporate officer “intrusted
with the general management and control of its business, has implied authority
to make any contract or do any other act which is necessary or appropriate to
the conduct of the ordinary business of the corporation.”[21]
As such officer, “he may, without any special authority from the Board of
Directors, perform all acts of an ordinary nature, which by usage or necessity
are incident to his office, and may bind the corporation by contracts in
matters arising in the usual course of business.”[22]
The problem, therefore, is whether the case at bar is to be taken
out of the general concept of the powers of a general manager, given the cited provision
of the NACOCO by-laws requiring prior directorate approval of NACOCO contracts.
The peculiar nature of copra trading, at this point, deserves
express articulation. Ordinary in this
enterprise are copra sales for future delivery.
The movement of the market requires that sales agreements be entered
into, even though the goods are not yet in the hands of the seller. Known in business parlance as forward sales,
it is concededly the practice of the trade.
A certain amount of speculation is inherent in the undertaking. NACOCO was much more conservative than the
exporters with big capital. This short
selling was inevitable at the time in the light of other factors, such as
availability of vessels, the quantity required before being accepted for loading,
the labor needed to prepare and sack the copra for market. To NACOCO, forward sales were a
necessity. Copra could not stay long in
its hands; it would lose weight, its value decrease. Above all, NACOCO’s
limited funds necessitated a quick turnover.
Copra contracts then had to be executed on short notice – at times
within twenty-four hours. To be
appreciated then is the difficulty of calling a formal meeting of the board.
Such were the environmental circumstances when Kalaw went into copra trading.
Long before the disputed contracts came into being, Kalaw contracted – by himself alone as general manager –
for forward sales of copra. For the fiscal
year ending June 30,
1947, Kalaw signed some 60 such
contracts for the sale of copra to divers parties. During that period, from those copra sales,
NACOCO reaped a gross profit of P3,631,181.48.
So pleased was NACOCO’s board of directors
that, on December 5, 1946, in Kalaw’s absence, it
voted to grant him a special bonus “in recognition of the
signal achievement rendered by him in putting the Corporation’s business on a
self-sufficient basis within a few months after assuming office, despite
numerous handicaps and difficulties.”
These previous contracts, it should be stressed, were signed by Kalaw without prior authority from the
board. Said contracts were known all
along to the board members. Nothing was
said by them. The aforesaid contracts
stand to prove one thing. Obviously,
NACOCO board met the difficulties attendant to forward sales by leaving the
adoption of means to end, to the sound discretion of NACOCO’s
general manager Maximo M. Kalaw.
Liberally spread on the record are instances of contracts
executed by NACOCO’s general manager and submitted to
the board after their consummation, not before.
These agreements were not Kalaw’s alone. One at least was executed by a predecessor
way back in 1940, soon after NACOCO was chartered. It was a contract of lease executed on November 16, 1940 by the then
general manager and board chairman, Maximo Rodriguez,
and A. Soriano y Cia., for
the lease of a space in Soriano
Building. On November
14, 1946, NACOCO, thru its general manager Kalaw,
sold 3,000 tons of copra to the Food Ministry, London,
thru Sebastian Palanca. On December
22, 1947, when the controversy over the present contracts cropped
up, the board voted to approve a lease contract previously executed between Kalaw and Fidel Isberto and Ulpiana Isberto covering a
warehouse of the latter. On the same
date, the board gave its nod to a contract for renewal of the services of Dr.
Manuel L. Roxas.
In fact, also on that date, the board requested Kalaw
to report for action all copra contracts signed by him
“at the meeting immediately following the
signing of the contracts.” This practice was
observed in a later instance when, on January
7, 1948, the board approved two previous contracts for the sale of
1,000 tons of copra each to a certain “SCAP” and a certain
“GNAPO.”
And more. On December 19, 1946, the board
resolved to ratify the brokerage commission of 2% of Smith Bell and Co., Ltd.,
in the sale of 4,300 long tons of copra to the French Government. Such ratification was necessary because, as
stated by Kalaw in that same meeting, “under an
existing resolution he is authorized to give a brokerage fee of only 1% on
sales of copra made through brokers.” On January 15, 1947, the brokerage fee agreements of 1-1/2%
on three export contracts, and 2% on three others, for the sale of copra were
approved by the board with a proviso authorizing the general manager to pay a
commission up to the amount of 1-1/2% “without further action
by the Board.” On February 5, 1947, the brokerage fee of 2% of J. Cojuangco & Co. on the sale of 2,000 tons of copra was
favorably acted upon by the board. On March 19, 1947, a 2% brokerage
commission was similarly approved by the board for Pacific Trading Corporation
on the sale of 2,000 tons of copra.
It is to be noted in the foregoing cases that only the brokerage
fee agreements were passed upon by the board, not the sales conÂtracts
themselves. And even those fee
agreements were submitted only when the commission exceeded the ceiling
fixed by the board.
Knowledge by the board is also discernible from other recorded
instances.
When the board met on May
10, 1947, the directors discussed the copra price situation: There was a slow downward trend but belief
was entertained that the nadir might have already been reached and an
improvement in prices was expected. In
view thereof, Kalaw informed the board that “he
intends to wait until he has signed conÂtracts
to sell before starting to buy copra.”[23]
In the board meeting of July 29, 1947, Kalaw
reported on the copra price conditions then current: The copra market appeared to have become
fairly steady; it was not expected that copra prices would again rise very high
as in the unprecedented boom during January-April, 1947; the prices seemed to
oscillate between $140 to $150 per ton; a radical rise or decrease was not
indicated by the trends. Kalaw continued to say that “the Corporation
has been closing contracts for the sale
of copra generally with a margin of P5.00 to P7.00 per hundred
kilos.[24]
We now lift the following excerpts from the minutes of that same
board meeting of July 29, 1947:
“521. In connection with the buying and selling of copra the
Board inquired whether it is the practice of
the Management to close contracts of sale
first before buying.
The General Manager replied that this practice is generally
followed but that it is not always possible to do so for two reasons:
(1) The role of the Nacoco to stabilize
the prices of copra requires that it should not cease buying even when it does
not have actual contracts of sale since the susÂpension of buying by the Nacoco will result in middlemen taking advantage of the
temporary inactivity of the Corporation to lower the prices to the detriment of
the producers.
(2) The movement of the market is such that it may not be practical
always to wait for the consummation of contracts of sale before beginning to
buy copra.
The General Manager explained that in this connection a certain
amount of speculation is unavoidable.
However he said that the Nacoco is much more
conservative than the other big exporters in this respect.”[25]
Settled jurisprudence has it that where similar acts have been
approved by the directors as a matter of general practice, custom, and policy,
the general manager may bind the company without formal authorization of the
board of directors.[26]
In varying language, existence of such authority is established, by proof of the
course of business, the usages and practices
of the company and by the knowledge which the board of directors has, or
must be presumed to have, of acts and doings of its subordinates in and
about the affairs of the corporation.[27]
So also,
“x x x
authority to act for and bind a corporation may be presumed from acts of
recognition in other instances where the power was in fact exercised.”[28]
“x x x
Thus, when, in the usual course of business of a corporation, an officer has
been allowed in his official capacity to manage its affairs, his authority to
represent the corporation may be implied from the manner in which he has been
permitted by the directors to manage its business.”[29]
In the case at bar, the practice of the corporation has been to
allow its general manager to negotiate and execute contracts in its copra
trading activities for and in NACOCO’s behalf without
prior board approval. If the by-laws
were to be literally followed, the board should give its stamp of prior
approval on all corporate contracts. But
that board itself, by its acts and through acquiescence practically laid aside
the by-law requirement of prior approval.
Under the given circumstances, the Kalaw
contracts are valid corporate acts.
4. But if more were required, we need but turn to the board’s
ratification of the contracts in dispute on January 30, 1948, though it is our (and the lower court’s)
belief that ratification here is nothing more than a mere formality.
Authorities, great in number, are one in the idea that
“ratification by a corporation of an unauthorized act or contract by its
officers or others relates back to the time of the act or contract ratified,
and is equivalent to original authority;” and that “[t]he corporation
and the other party to the transaction are in precisely the same position as if
the act or contract had been authorized at the time.”[30]
The language of one case is expressive: “The adoption or ratification of a
contract by a corÂporation is nothing more nor less than the making of an
original contract. The theory of
corporate ratification is predicated on the right of
a corporation to contract, and any ratification or
adoption is equivalent to a grant of prior
authority.”[31]
Indeed, our law pronounces that “[r]atification
cleanses the contract from all its defects from the moment it was
constituted.”[32]
By corporate confirmation, the contracts executed by Kalaw
are thus purged of whatever vice or defect they may have.[33]
In sum, a case is here presented whereunder,
even in the face of an express by-law requirement of prior approval, the law on
corporations is not to be held so rigid and inflexible as to fail to recognize
equitable considerations. And, the
conclusion inevitably is that the embattled contracts remain valid.
5. It would be difficult, even with hostile eyes, to read the
record in terms of “bad faith and/or breach of trust” in the board’s
ratification of the contracts without prior approval of the board. For, in reality, all that we have on the
government’s side of the scale is that the board knew that the contracts so
confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had
authority to execute the contracts without need of prior approval. Everybody, including Kalaw
himself, thought so, and for a long time.
Doubts were first thrown on the way only when the contracts turned out
to be unprofitÂable for NACOCO.
Rightfully had it been said that bad faith does not simply
connote bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of wrong; it means breach of a known duty
thru some motive or interest or ill will; it partakes of the nature of fraud.[34]
Applying this precept to the given facts herein, we find that there was no
“dishonest purpose”, or “some moral obliquity”, or
“conscious doing of wrong”, or “breach of a known duty”, or
“some motive or interest or ill will” that “partakes of the
nature of fraud.”
Nor was it even intimated here that the NACOCO directors acted
for personal reasons, or to serve their own private interests, or to pocket
money at the expense of the corporation.[35]
We have had occasion to affirm that bad faith contemplates a “state of
mind affirmatively operating with furtive design or with some motive of self-interest
or ill will or for ulterior purpose.”[36]
Briggs vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with
approval from Judge Sharswood (in Spering’s
App., 71 Pa. 11), the following:
“Upon a close examination of all the reported cases, although there
are many dicta not easily reconcilable, yet I have found no judgment or decree
which has held directors to account, except when they have themselves been
personally guilty of some fraud on the corporation, or have known and connived
at some fraud in others, or where such fraud might have been prevented had they
given ordinary attention to their duties. x x x.” Plaintiff did not even dare charge its
defendant-directors with any of these malevolent acts.
Obviously, the board thought that to jettison Kalaw’s
contracts would contravene basic dictates of fairness. They did not think of raising their voice in
protest against past contracts which brought in enormous profits to the
corporation. By the same token, fair
dealing disagrees with the idea that similar contracts, when unprofitÂable,
should not merit the same treatment.
Profit or loss resulting from business ventures is no justification for
turning one’s back on contracts entered into.
The truth, then, of the matter is that – in the words of the trial court
– the ratification of the contracts was “an act of simple justice and
fairness to the general manager and in the best interest of the corporation
whose prestige would have been seriously impaired by a rejection by the board
of those contracts which proved disadvantageous.”[37]
The directors are not liable.[38]
6. To what then may we trace the damage suffered by NACOCO?
The facts yield the answer.
Four typhoons wreaked havoc then on our copra-producing regions. Result:
Copra production was impaired, prices spiralled,
warehouses destroyed. Quick turnovers
could not be expected. NACOCO was not
alone in this misfortune. The record
discloses that private traders, old, experienced,
with bigger facilities, were not spared; also suffered tremendous losses. Roughly estimated, eleven principal trading
concerns did run losses to about P10,300,000.00. PlainÂtiff’s witness Sisenando
Barretto, head of the copra marketing department of
NACOCO, observed that from late 1947 to early 1948 “there were many who
lost money in the trade.”[39]
NACOCO was not immune from such usual business risk.
The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by
Louis Dreyfus & Co. by pleading in its answers force majeure as an affirmative defense, and there
vehemently asserted that “as a result of the said typhoons, exÂtensive
damage was caused to the coconut trees in the copra producing regions of the
Philippines and according to estimates of competent authorities, it will take
about one year until the coconut producing regions will be able to produce
their normal coconut yield, and it will take some time until the price of copra
will reach normal levels”; and that “it had never been the intention
of the contracting parties in entering into the contract in question that, in
the event of a sharp rise in the price of copra in the Philippine market proÂduced
by force majeure or by causes beyond
defendant’s control, the defendant should buy the copra contracted for at
exorbitant prices far beyond the buying price of the plaintiff under the
contract.”[40]
A high regard for normal judicial admissions made in court
pleadings would suffice to deter us from permitting plaintiff to stray away therefrom, to charge now that the damage suffered was
because of Kalaw’s negligence, or for that matter, by
reason of the board’s ratification of the contracts.[41]
Indeed, were it not for the typhoons,[42]
NACOCO could have, with ease, met its contractual obligations. Stock accessiÂbility was no problem. NACOCO had 90 buying agencies spread
throughout the islands. It could
purchase 2,000 tons of copra a day. The
various contracts involved delivery of but 16,500 tons over a five-month
period. Despite the typhoons, NACOCO was
still able to deliver a little short of 50% of the tonnage required under the
contracts.
As the trial court correctly observed, this is a case of damnum absque injuria.
Conjunction of damage and wrong is here absent. There cannot be an actionable wrong if either
one or the other is wanting.[43]
7. On top of all these, is that no assertion is made and no proof
is presented which would link Kalaw’s acts – ratified
by the board – to a matrix for defraudation of the
government. Kalaw
is clear of the stigma of bad faith.
Plaintiff’s corporate counsel[44]
concedes that Kalaw all along thought that he had
authority to enter into the contracts; that he did so in the best interests of
the corÂporation; that he entered into the contracts in pursuance of an overÂall
policy to stabilize prices, to free the producers from the clutches of the
middlemen. The prices for which NACOCO
contracted in the disputed agreements, were at a level calculated to produce
profits and higher than those prevailing in the local market. Plaintiff’s witness, Barretto,
categorically stated that “it would be foolish to think that one would
sign (a) contract when you are going to lose money” and that no contract
was executed “at a price unsafe for the Nacoco.”[45]
Really, on the basis of prices then prevailing, NACOCO envisioned a profit of
around P752,440.00.[46]
Kalaw’s acts were not the result of
haphazard decisions either. Kalaw invariably consulted with NACOCO’s
Chief Buyer, Sisenando Barretto,
or the Assistant General Manager. The
dailies and quotations from abroad were guideposts to him.
Of course, Kalaw could not have been an
insurer of profits. He could not be
expected to predict the coming unpredictable typhoons. And even as typhoons supervened, Kalaw was not remiss in his duty. He exerted efforts to stave off losses. He asked the Philippine National Bank to
implement its commitment to extend a P400,000.00 loan. The bank did not release the loan, not even
the sum of P200,000.00, which, in October, 1947, was approved by the bank’s
board of directors. In frustration, on December 12, 1947, Kalaw turned to the President, complained about the bank’s
short-sighted policy. In the end,
nothing came out of the negotiÂations with the bank. NACOCO eventually faltered in its conÂtractual
obligations.
That Kalaw cannot be tagged with crassa negligentia
or as much as simple negligence, would seem to be supported by the fact that
even as the contracts were being questioned in Congress and in the NACOCO board
itself, President Roxas defended the actuations of Kalaw. On December 27, 1947, President Roxas expressed his desire “that the Board of
Directors should reelect Hon. Maximo M. Kalaw as General Manager of the National Coconut
Corporation.”[47] And, on January 7, 1948, at a time when the contracts had already
been openly disputed, the board, at its regular meeting, appointed Maximo M. Kalaw as acting general
manager of the corporation.
Well may we profit from the following passage from MonteÂlibano vs. Bacolod-Murcia
Milling Co., Inc., L-15092, May 18,
1962:
“‘They (the directors) hold such office charged with the duty
to act for the corporation according to their best judgment, and in so doing
they cannot be controlled in the reasonable exercise and performance of such
duty. Whether the business of a
corporation should be operated at a loss during a business depresÂsion, or
closed down at a smaller loss, is a purely business and economic problem to be
determined by the directors of the corporation, and not by the court. It is a well-known rule of law that questions
of policy of management are left solely to the honest decision of officers and
directors of a corporation, and the court is without authority to substitute
its judgment for the judgment of the board of directors; the board is the business
manager of the corporation, and so long as it acts
in good faith its orders are not
reviewable by the courts.’
(Fletcher on Corporations, Vol. 2, p. 390.)”[48]
Kalaw’s good faith, and that of the
other directors, clinch the case for defendants.[49]
Viewed in the light of the entire record, the judgment
under review must be, as it is hereby, affirmed.
Without costs.
SO ORDERED.
Reyes, J.B.L., Makalintal, Bengzon, Zaldivar, Castro, and Angeles, JJ., concur.
Concepcion, C.J., and Dizon, J., on official leave.
Fernando, J., did not take
part.
[1]Original
plaintiff, National Coconut Corporation, was dissolved on November 24, 1950 by the President’s Executive
Order 372 which created the Board of Liquidators. Hence, the substitution of party plaintiff.
[2]
Defendant Maximo M. Kalaw
died in March of 1955 before trial.
[3]
Substituted for defendant Casimiro Garcia, deceased.
[4]
Explanatory Note of House Bill 295, 1st Session, 2nd Congress, later Republic
Act 5; Congressional Record, House of Representatives, July 22, 1946; Minutes
of the NACOCO Directors’ Meeting of July 2, 1946, Exh.
4-Heirs.
[5]
R.A., p. 238; underscoring supplied.
[6]
Garcia Valdez vs. Tuason, 40 Phil. 943, 951-952; Lucero vs. Guzman, 45
Phil. 852, 879; Relativo vs. Castro, 76 Phil.
563, 567-568.
[7]
III Agbayani, Corporation Law, 1964 ed., p. 1679.
[8]
Government vs. Wise & Co., Ltd. (C.A.),
37 O.G. No. 26, pp. 545, 546.
[9]
19 C.J.S., p. 1503; emphasis supplied.
[10] 1 C.J.S., p. 141.
[11] Id.,
p. 143; 16 Fletcher, p. 901.
[12] 16
Fletcher, p. 902.
[13]
Service & Wright Lumber Co. vs. Sumpter
Valley Ry. Co., 152 P. 262, 265.
[14]
Citing Sumera vs. Valencia,
67 Phil. 721, 726-727.
[15]
Underscoring ours.
[16]
See: Section 3, Rule 3, Rules of Court.
[17]
Record on Appeal, pp. 21-25.
[18] Id.,
p. 154.
[19]
Now Section 5, Rule 83.
[20]
Section 1, Rule 88 of the 1940 Rules of Court; now Section 1, Rule 87.
[21]
2 Fletcher Cyclopedia Corporations, p. 607. See: Yu Chuck vs. Kong Li Po, 46 Phil. 608,
614.
[22] Sparks
vs. Despatch Transfer Co., 15 S.W. 417, 419;
Pacific Concrete Products Corporation vs. Dimmick,
289 P. 2d 501, 504; Massachussets Bonding & Ins.
Co. vs. Transamerican Freight Lines, 281 N. W.
584, 588-589; Sealy Oil Mill & Mfg. Co. vs. Bishop Mfg. Co., 235
S.W. 850, 852.
[23]
Emphasis supplied.
[24]
Emphasis supplied.
[25]
Emphasis supplied.
[26] Harris
vs. H. C. Talton Wholesale Grocery Co., 123
So. 480, 482.
[27]
Van Denburgh vs. Tungsten Reef Mines Co., 67
P. (2d) 360, 361, citing First National Fin. Corp. vs. Five-O
Drilling Co., 289 P. 844, 845.
[28]
McIntosh vs. Dakota Trust Co., 204 N.W. 318, 824.
[29]
Murphy vs. W. H. & F. W. Cane, 82 Atl.
854, 856. See Martin vs. Webb, 110 U.S. 7, 14-15, 28 L. ed. 49,
52. See also Victory Investment Corporation vs. Muskogee Electric
T. Co., 150 F. 2d. 889, 893.
[30]
2 Fletcher, p. 858, citing cases.
[31] Kridelbaugh vs. Aldrehn
Theatres Co., 191 N.W. 803, 804, citing cases; emphasis supplied.
[32]
Article 1313, old Civil Code; now Article 1396, new Civil Code.
[33] Tagaytay Development Co. vs. Osorio, 69 Phil. 180,
184.
[34]
Spiegel vs. Beacon Participations, 8 N.E. (2d) 895, 907, citing cases.
[35]
See: 3 Fletcher, Sec. 850, pp. 162-165.
[36]
Air France vs. Carrascoso, L-21438, September 28,
1966.
[37]
R. A., pp. 234-235.
[38] 3 Fletcher, pp. 450-452, citing cases.
Cf. Angeles vs. Santos, 64 Phil. 697, 707.
[39] Tr.,
p. 30, August 29, 1960.
[40] See
Exhibit 29-Heirs, NACOCO’s Second Amended Answer in
Civil Case 4322, Court of First Instance of Manila, entitled “Louis
Dreyfus & Co. (Overseas) Limited, plaintiff, versus National Coconut
Corporation, defendant.”
[41]
Section 2, Rule 129, Rules of Court; 20 Am. Jur., pp.
469-470.
[42]
The time for delivery of copra under the July 30, 1947 contract was extended. Fifth Amended Complaint, R.A„ p. 15. See
also Exhibit 26-Heirs.
[43]
Churchill and Tait vs. Rafferty, 32 Phil. 580,
605; Ladrera vs. Secretary of Agriculture and
Natural Resources, L-13385, April 28,
1960.
[44]
Memorandum of Government Corporate Counsel Marcial P.
Lichauco dated February
9, 1949, addressed to the Secretary of Justice, 8 days after the
original complaint herein was filed in court R.A., pp. 69, 90-112.
[45]
Tr., pp. 18, 29, August 29, 1960.
[46] See
Exhibit 20-Heirs.
[47]
Exhibit 25-Heirs.
[48]
Underscoring supplied.
[49] 3 Fletcher, pp. 450-452, supra.