CONSOLIDATED DAIRY PRODUCTS CO., JESUS B. BITO AND FEDERICO B. GUILAS, AS ACTING TRUSTEES OF CONSOLIDATED PHILIPPINES, INC. AND DAIRY EXPORT CO., INC., PETITIONERS, VS. THE COUR…

This is a petition for review on certiorari of the
decision of the Court of Appeals in CA-G.R. CV No. 01644 entitled “Consolidated
Dairy Products Co., et al., versus The Court of Appeals and Standard Investment
Corporation,” which affirmed in toto the decision of the then
Court of First Instance (now Regional Trial Court) of Rizal (Pasay City).

The facts of the case as summarized by the trial court and
adopted by the Court of Appeals are as follows:

“Sometime in 1956 Consolidated Dairy Products Company, Inc., a
foreign corporation in Seattle, Washington, U.S.A. (hereinafter referred to as
Consolidated Seattle), agreed with Santiago Syjuco, Inc. (hereinafter referred
to as Syjuco, Inc.) to go into a joint venture to manufacture and sell Darigold
milk and other dairy products in this country. To achieve this purpose, they organized and incorporated defendant
Consolidated Philippines, Inc. (hereinafter referred to as Consolidated
Philippines), with offices at Parañaque, Rizal. Consolidated Seattle owned 51% of the capital stock while the
remaining 49% of the capital stock was owned by the Syjuco Inc. Thereafter, Consolidated Seattle extended to
Consolidated Philippines the exclusive right to use the tradename Darigold in
the Philippines. In turn, Consolidated
Philippines began processing and distributing Darigold evaporated filled milk
in the Philippines.

“At the start of its operation, Consolidated Philippines was
importing its can requirements from the United States. However, due to economic policy then prevailing in the country, Consolidated
Philippines was constrained to secure its can requirement from local
sources. Hence, on April 2,
1959, Consolidated Philippines entered into a contract with plaintiff Standard
Investment Corporation (hereinafter referred to as Standard), operating under
the tradename Standard Can Company. Under the said can supply agreement, Consolidated Philippines agreed to
purchase from the latter all its requirements of can up to May 31, 1969
(Exhibit C). Pursuant to this
agreement, plaintiff constructed a can-making plant and purchased the required
machineries and equipment and sent technicians to train in the United States
under and for the account of Consolidated Philippines.

“In 1966, Dairy Export Company (hereinafter referred to as Dexco),
a subsidiary of Consolidated Seattle and also holding office at 635 Elliot
Avenue West, Seattle, Washington, U.S.A. with Consolidated Seattle, applied for
a license to do business in the Philippines which was approved by the
Securities and Exchange Commission. It
held office in the very office of Consolidated Philippines. Thereafter, on September 30, 1966, Dexco
entered into a contract with Consolidated Philippines whereby the latter agreed
to purchase from the former packaged sweetened condensed filled milk.

“On May 6, 1968, plaintiff Standard, Consolidated Philippines, and
Dexco signed a memorandum of agreement by
virtue of which the tenure of the can supply agreement of April 2, 1959
between the plaintff and Consolidated Philippines was extended up to December
31, 1981.

“On January 12, 1972, Consolidated Seattle thru Louis Arrigoni,
notified Consolidated Philippines that the former was placing the control and
licensing of the Darigold trademark in the Orient, including the Republic of
the Philippines, into the hands of Dexco (Exhibit 8).

“On August 28, 1974, Consolidated Seattle, through its President,
Dr. Louis Arrigoni, wrote Mr. Augusto Syjuco of Syjuco, Inc, a personal and
confidential letter offering to sell to him the interest of Consolidated
Seattle in Consolidated Philippines, alleging a great many economies could be
made by a single management and production organization running the three
organizations, the Standard, Consolidated Philippines and Dexco, as the set up
then existing will ultimately result in the demise of Consolidated Philippines
(Exhibit O). This was refused by Mr.
Augusto Syjuco.

“On November 13, 1974, Dexco wrote Consolidated Philippines that it
was cancelling effective January 25, 1975 the license granted to Consolidated
Philippines to use the tradename Darigold (Exhibit P).

“Mr. Augusto Syjuco, in his behalf and in behalf of Syjuco, Inc.,
the minority stockholder in Consolidated Philippines, protested the
cancellation of the license. (Exhibit
Q).

“Subsequently, Dr. Louis Arrigoni, speaking as President of
Consolidated Seattle, offered Syjuco, Inc. to sell (sic) Consolidated Seattle’s
share in Consolidated Philippines for P1.00
or to buy Syjuco, Inc.’s share in Consolidated Philippines or to
file bankruptcy proceedings for Consolidated Philippines.

“Left with no better choice, Syjuco, Inc. chose to sell its 49%
equity in Consolidated Philippines to Consolidated Seattle. Consequently, on October 8, 1976, Syjuco,
Inc. executed a memorandum agreement by virtue of which it agreed to sell to
Consolidated Seattle all its interest in Consolidated Philippines and to
dissolve Consolidated Philippines, subject to the condition that the right of
plaintiff to submit claims it may have shall be respected in case Consolidated
Philippines is not dissolved (Exhibit E).

“Accordingly, Consolidated Seattle bought the entire interest of
Syjuco, Inc. and its stockholdings Consolidated Philippines and proceeded to
dissolve Consolidated Philippines (TSN, October 22, 1979, p. 20).

“Before Consolidated Philippines could be dissolved, however, Dexco
the wholly owned subsidiary of Consolidated Seattle took over the marketing
activities of Consolidated Philippines (Exhibits A and A-1) and proceeded to
sell milk under the tradename Darigold upon the dissolution of Consolidated
Philippines (TSN, October 22, 1979, pp. 31 and 105; Exhibits AA, AA-1, AA-2,
AA-4, BB, BB-1 and BB-3).

“Earlier, however, on November 3, 1976, E.L. Benitez, then general
manager of Consolidated Philippines, notified plaintiff that it was cancelling
the can supply contract of April 2, 1959 (Exhibit B), prompting plaintiff to
demand reimbursement for the separation pay of the employees concerned due to
the cessation of their operation on November 15, 1976 in the amount of
P1,022.472.59 and payment of unrealized profits (Exhibits H, I and N).

“Since plaintiff’s demands were rejected (Exhibit 11), it was
constrained to file this case and to engage the services of counsel for 25% of
all recoveries (Exhibit X).

“After summons have been validly served an the defendants, defendant Dexco in its answer claims that
plaintiff Standard had no cause of action against it considering that the basis
for its instant action was the can supply contract between the said plaintiff
and Consolidated Philippines wherein Dexco was not a party and therefore no(t)
privy (to the) contract existing between them, and that assuming that it was
bound by the can supply contract and liable to the plaintiff, this action was
premature as no demand relative thereto was made.

“Defendant Consolidated Philippines, through its trustees,
defendant Jesus Bito and Federico Guilas, claims that the plaintiff’s action
was premature as the same never referred to an impartial referee which was
provided for by can supply agreement, that the dissolution and liquidation of
Consolidated Philippines was mutually agreed upon by the Consolidated Seattle
and Syjuco, Inc., and that the dissolution and liquidation of Consolidated
Philippines extinguished its obligation under the can supply contract, and
finally that the guarantee extended by Consolidated Seattle for Consolidated
Philippines’ liability under the can supply contract covered only laibilities
for cans already supplied and not liabilities accruing subsequent to the
execution of the memorandum agreement of Ootober 8. In both answers Consolidated Philippines as well as Dexco filed
Counterclaims which were denied by the plaintiff.

“Defendant Consolidated Seatlle did not file any answer. (pp. 1-4, Decision; p. 14, Record)” (pp.
53-56, Rollo)

After the parties presented their respective evidence, the trial
court rendered judgment in favor of Standard. The dispositive portion of which reads:

“IN VIEW OF THE FOREGOING, this Court hereby orders the defendants,
namely, Consolidated Dairy Products Company of Seattle, Washington, U.S.A.
and/or its alter ego Dairy Export Company Inc., as well as Consolidated
Philippines, Inc. (represented by its Acting Trustees Jesus B. Bito and
Federico B. Guilas) to pay plaintiff, jointly and severally, the following:

a) P1,022,472.59
representing the separation pay that plaintiff had to pay its employees plus 6% interest per annum computed from the
date of the filing of this case on April 4, 1977 until the defendants fully pay
their obligation;

b) P8,107,931.13
representing plaintiff’s aggregate unrealized profit from the years 1974 to
1981 plus 6% interest per annum computed from April 4, 1977, the date of the
filing of this case until defendants fully pay their obligation;

c) P1,150,197.80 representing inventory losses suffered by
plaintiff plus 6% interest per annum computed from April 4, 1977 until
defendants fully settle their obligation; and

d) P1,000,000.00 as exemplary damages, considering the damages
caused the plaintiff and the fraudulent scheme used by   the defendants, plus 25% of all the abovementioned amounts as
attorney’s fees.

“The counterclaim of the defendants Consolidated Philippines and
Dexco are denied for lack of merit. (pp. 9-10, Decision; pp. 564-565, Record)”

Not satisfied with the decision of the trial court, Consolidated
Seattle and Consolidated Philippines, thru its acting trustees, appealed to the
Court of Appeals. On April 19, 1991,
the Court of Appeals rendered a decision affirming the decision of the trial
court in toto.

In this petition for review, Consolidated Seattle and
Consolidated Philippines pray for the reversal of the decision of the Court of
Appeals and the dismissal of the complaint of Standard. The following assignment of errors were
raised:

“FIRST ASSIGNMENT OF ERROR

“THE LOWER COURT ERRED IN NOT DISMISSING THE AMENDED COMPLAINT FOR
FAILURE TO STATE A CAUSE OF ACTION AGAINST DEFENDANT DAIRY EXPORT COMPANY INC.
(DEXCO).

“SECOND ASSIGNMENT OF ERROR

“THE LOWER COURT ERRED IN NOT RULING THAT PLAINTIFF HAD KNOWLEDGE
OF AND APPROVED, OR AT LEAST, AGREED TO, THE DISSOLUTION OF CONSOLIDATED
PHILIPPINES INC. (CPI) WHICH WOULD NECESSARILY HAVE THE EFFECT OF TERMINATING
THE CAN SUPPLY CONTRACT (EXHIBIT ‘C’) AND EXTINGUISHING CPI’S OBLIGATIONS UNDER
SAID CONTRACT.

“THIRD ASSIGNMENT OF ERROR

“THE LOWER COURT ERRED IN NOT RULING THAT PLAINTIFF’S ACTION IS
PREMATURE FOR FAILURE OF PLAINTIFF TO FIRST REFER ITS CLAIM TO AN IMPARTIAL
REFEREE AS CALLED FOR UNDER THE CAN SUPPLY CONTRACT.

“FOURTH ASSIGNMENT OF ERROR

“THE LOWER COURT ERRED IN SUSTAINING PLAINTIFF’S CLAIM FOR
UNREALIZED PROFITS.

“FIFTH ASSIGNMENT OF ERROR

“THE LOWER COURT ERRED IN AWARDING PLAINTIFF INVENTORY LOSSES IN
THE SUM OF P1,150,197.00

“SIXTH ASSIGNMENT OF ERROR

“THE LOWER COURT ERRED IN AWARDING EXEMPLARY DAMAGES AND ATTORNEY’S
FEES IN FAVOR OF PLAINTIFF.” (pp. 15-16, Rollo)

It is a settled rule that only questions of law may be raised in
a petition for certiorari under Rule 45 of the Rules of
Court. Findings of fact of the Court of
Appeals are final and binding upon this Court unless it is shown that they are
grounded entirely on speculations, surmises or conjectures. In this case, We have carefully reviewed the
records and found that the findings of facts of both the court a quo and the appellate court
are supported by evidence.

In its first assigned error, petitioner faulted respondent
appellate court in affirming the decision of the trial court denying Dexco’s
motion to dismiss amended complaint filed by respondent-plaintiff Standard on
the ground that in the amended complaint Standard impleaded as additional
defendant herein petitioner Dexco but said amended complaint did not state any
cause of action against the latter.

The pertinent allegations in the amended complaint which tended
to show Dexco’s participation in the transactions subject of this case states:

“15. That subsequent to the
arbitrary termination of the Can Supply Contract by CPI*, defendant Dexco took
over the business of CPI with E.L. Benitez, the Manager of CPI being appointed
by Dr. Loius Arrigoni, the President of defendant CDPC and defendant DEXCO in
the United States of America, as the new General Manager of the Dexco branch in
the Philippines;

“16. That the dissolution
of CPI which prejudiced plaintiff Standard was caused by defendant CDPC in
order for its Dexco branch in the Philippines to be able to take over the
business of CPI;

“17. That the act of
defendants CDPC and Dexco mentioned above, constituted a breach of contract
with plaintiff, in bad faith;

“18. That defendant Dexco
is not only a subsidiary of defendant CDPC, but also an alter ego of the
latter, defendant CDPC making use of defendant Dexco as a vehicle for the
evasion of its obligation under the ‘Can Supply Contract’ and Memorandum
Agreement (Annexes ‘A’ and ‘B’ hereof);

“19. That, therefore,
defendant Dexco and defendant CDPC being one and the same juridical person, the
liability of defendant CDPC to plaintiff for evading its obligation is,
likewise, the liability of defendant Dexco; x x x.” (p. 20, Rollo).

A cause of action is the fact or combination of facts which
affords a party a right to judicial interference in his behalf. The cause of action must always consist of
two (2) elements: (1) the plaintiff’s
primary right and the defendant’s corresponding primary duty, whatever may be
the subject to which they relate — person, character, property or contract;
and (2) the delict or wrongful act or omission of the defendant, by which the
primary right and duty have been violated (De Guzman, Jr., v. CA, G.R. No.
92029-30, 20 December 1990). The
allegations in the amended complaint were sufficient to make out a case against
Dexco. It alleged that Dexco took over
the business of Consolidated Philippines and that both corporations are
actually one and the same, the former being the alter ego of the latter and
that Dexco was used as a vehicle for the evasion by Consolidated Seattle (the
mother company of Consolidated Philippines in Seattle) of its liabilities to
Standard. Indeed, if these allegations
are proven, Dexco can be held liable to Standard by applying the doctrine of
piercing the veil of corporate entity. The applicable law to the set of facts stated in the complaint need not
be set out directly. In this case, it
is sufficient that Standard claimed it had a right against Consolidated
Philippines by virtue of the can supply contract it executed with them and that
the termination of Consolidated Philippines was only a ploy to escape from its
liabilities in favor of Standard because in truth, Consolidated Philippines
continued to do its business thru Dexco, which is an alter ego of the
former. The test of sufficiency of the
facts alleged is whether or not the Court could render a valid judgment as
prayed for, accepting as true the exclusive facts set forth in the
complaint (Sumalinog v. Doronio, G.R. No. 42281, 6 April 1990).

The petitioners further argue that Dexco cannot be held liable
because it was not privy to the can supply contract between Standard and
Consolidated Philippines. It is true
that in the agreement whereby Standard undertook to supply cans to Consolidated
Philipines, Dexco was not a party. The
said agreement dated April 2, 1959 was for Standard to supply and Consolidated
Philippines to buy. It should be noted
that before the expiration of the first can supply contract in 1969 Dexco,
another subsidiary of Consolidated Seattle, was already organized and was
licensed to do business in the Philippines in 1966. Thus, on May 6, 1968, the said can supply agreement was extended
to December 31, 1981 and Dexco was a party to this extension. Dexco, in this extension agreement was in
fact an active party. As held by
respondent appellate court:

“It is argued that the can supply contract dated April 2, 1959 was
executed by Standard Investment Corporation and Consolidated Philippines only
and therefore Dexco should not be bound by
the contents thereof, much less obligated to answer for the undertakings
thereunder by reason of the rule on privity of contracts. Verily, Dexco nonchalantly admitted that it
signed the subsequent agreement on May 6, 1968 with plaintiff-appellee
(Standard) and Consolidated Philippines (Exhibit ‘D’) but its participation
therein was limited only to the contract dated September 30, 1966 between
Consolidated Philippines and Dexco referred to in paragraph 2 of Exhibit ‘D-1’. Pursuing this chain of arguments, if,
indeed, Dexco was never privy to the transaction dated April 2, 1959, it is a
wonder then for Dexco to have signed and approved the extension of that
contract in the Memorandum of Agreement dated May 6, 1968 which principally stipulated:

“1. That certain Agreement
dated April 2, 1959 between the above-named STANIN and the above-named CPI,
relating to the supply of cans by STANIN to CPI (a copy of which agreement is
attached hereto as Exhibit ‘A’ and by this reference incorporated herein) is
hereby extended for a period commencing on its present expiration date and
ending on December 31, 1981, upon the terms and conditions set forth in the
said agreement dated April 2, 1959 (Exhibit D-1).” (p. 63, Rollo)

The petitioners also alleged that Standard should be estopped
from demanding any claim from them because Standard and Syjuco, Inc. had
identical officers. Since the officers
of Syjuco, Inc. voted for the dissolution of Consolidated Philippines and
acceded to the dissolution of Standard, they cannot now complain and ask for
damages in favor of Standard against the petitioners. It is allegedly proper that the veil of corporate fiction of
Standard and Syjuco, Inc. should be pierced and considering that SSI had
knowledge of the dissolution and in fact accepted the dissolution of CPI,
Standard is therefore bound by the dissolution.

The records revealed that Syjuco, Inc. which originally owned 49%
of the shares of stock of Consolidated Philippines (with Consolidated Seattle
owning 51%) was left with no choice but to sell its shares in Consolidated
Philippines to Consolidated Seattle. Consolidated Philippines however, cannot continue its existence because
Consolidated Seattle cancelled the license granted to it to use the tradename
Darigold. With the cancellation of the
license Consolidated Philippines had no more reason to continue its
existence. Moreover, while Syjuco, Inc.
agreed to the subsequent dissolution of CPI, it signed the agreement (Exhibit
E) because of the condition that Consolidated Seattle in Washington will
guarantee the full payment of Consolidated Philippines’ liabilities to Standard
in the can supply contract [Par. 6(d)) of the Memorandum of Agreement].

The appellate court allegedly erred when it ruled that the clause
on Section 6(d) of the Memorandum of Agreement (p. 5, Exhibit “E”) which
provided:

“(d) It guarantees the full
payment under the terms of the Can Supply Contract between CPI and Standard Can
Company, of CPI’s liability to Standard Can Company for cans already supplied by Standard Can Company. This however does not preclude Standard Can
Company from submitting directly to CPI other claims that it may have under the
Can Supply Contract.”

was enough safeguard for the preservation
of Standard’s claims without elaborating on the reason why it held so. It is the opinion of the petitioners that
the above clause referred only to claims already due and owing as of the
effective date of Consolidated Philippines’ dissolution, but does not refer to
claims for reimbursement of separation pay and for loss of expected profits for
the unexpired portion of the can supply contract.

While the first paragraph of the said clause had specific
reference to Consolidated Philippines’ liability to Standard for cans already
supplied, the second part of the clause covers all other claims which Standard
may have against Consolidated Philippines. The terms of the agreement are clear and need no explanation or
interpretation. None could suit
petitioner’s contention legally.

We agree with respondent appellate court that petitioners had no
right to invoke the defense that the claim must first be referred to an
impartial referee as provided for in the can supply agreement because there was
an outright rejection by the petitioners of private respondent’s claim. The records showed that two (2) letters
dated November 7 and 18, 1976 were sent by private respondent demanding the
payment of separation pay to its employees but petitioners, through the law
offices of Salcedo, del Rosario, Bito, Misa and Lozada, denied the claim
outright (p. 473, Records. Exh. 11) because these claims were allegedly outside
of the cost of the purchased and delivered cans as agreed upon in the contract.

We now go to the propriety of the award of damages. The trial court received evidence to support
private respondent’s claim for damages. It should be emphasized here that the damages claimed by private
respondents do not refer to claims which were already due from the can supply
contract. The claims here are for damages
caused by the fraudulent termination by petitioners of the can supply contract
four (4) years before the end of its term and for such a short notice. We reproduce herein the findings of the
trial court and adopt them with modifications as regards the amount:

“Plaintiff’s first claim is for reimbursement for the separation
pay it paid its employees due to the termination of the can supply agreement in
the amount of P1,022,472.59.

“The evidence supports plaintiff’s claim above (sub-par. A and C,
par. 111 of Exhibit C and Exhibit J-1). The amount actually paid by plaintiffs to the separated employee is
P929,520.54 (Exhibits L and R to R-54). To this was added 10% since 10% must be added to costs of production,
thus making the total of P1,022,472.59 (Exhibit C and I).” (p. 521, Record)

There is no question that Standard paid these amounts to their
separated employees. It was obliged to
do so by virtue of the CBA it signed with the employees.

“The second claim of plaintiff is for
unrealized profit amounting to P8,107,931.13. In support of this claim plaintiff showed that from 1971 to 1975 it made
an aggregate profit of P8,107,931.13 (Exhibits M, U, U-2, U-4, U-6, U-8, U-10,
U-12, U-14, U-16 and U-18), and argued that since the can supply contract had
another five (5) years to go (1977 to 1981) plaintiff would have earned that
much.”

(Ibid.)

Indemnification for damages shall comprehend not only the value
of the loss suffered, but also that of the profits which the obligee failed to
obtain (Art. 2200 NCC). The presumption
that Standard would earn exactly the same profit as it did five (5) years
before its closure is speculative. A
more reasonable amount would be the average of the yearly profit for the five
years preceeding the closure (1971-1975) multiplied by the number of years
remaining as provided for in the contract. The average yearly profit for 1971 to 1975 is P1,041,095.76 (p. 280,
Records). This amount multiplied by five
(years) amounts to P5,205,478.80.

We also affirm the findings of the appellate court on inventory
losses as it is sufficiently supported by evidence, to wit:

“The financial statement of plaintiff further shows that it
incurred inventory losses in the year 1977 (Exhibit V), due to cans which
rusted and could not have been disposed of (TSN, November 27, 1979, p. 13),
administrative expenses connected with the cost of the cans, cost of raw
materials and depreciated portion of the machinery all amounting to
P1,150,197.80 (TSN, November 26, 1979, Exhibit V). These losses were due to the cancellation of the can supply
contract before its agreed expiration date. It is only right that defendants be held liable for them.” (p. 64, Rollo)

There is no doubt that the breach committed by the petitioners
was made in a wanton and fraudulent manner. There was no reason for petitioners to terminate the can supply contract
with Standard. The latter was purposely
organized for the benefit of Consolidated Philippines. Neither was there a need to close Consolidated Philippines because
Consolidated Seattle had all the intentions of continuing its business only
this time to be undertaken by its sole subsidiary, Dexco to the prejudice of
Standard. Where a defendant violates a
contract with plaintiff, the court may award exemplary damages if the defendant
acted in a wanton, fraudulent, reckless, oppressive and malevolent manner (Art.
2232, Civil Code).

The claim for attorney’s fees of 25% percent of all recoveries is
unconscionable. It is hereby reduced to
15%.

ACCORDINGLY, the decision of respondent Court of Appeals
is affirmed with modification on the amount of damages awarded as discussed
above.

SO ORDERED.

Cruz, (Chairman), Grino-Aquino, and
Bellosillo, JJ., concur.

* Consolidated Philippines,
Inc.