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Case digest · Self-dealing director; fair and reasonable contract
Prime White Cement Corporation vs. Intermediate Appellate Court
A cement company had not even begun making white cement when it made one of its own directors its exclusive dealer for Mindanao, at a price fixed for five years. When the board balked, he sued, and won twice.
Facts
July 1969
On or about July 16, 1969, Prime White Cement Corporation, through its President and its Chairman of the Board, made Alejandro Te its exclusive dealer for the entire Mindanao area for five years. Starting September 1970, it was to supply him 20,000 bags of white cement a month at P9.70 a bag. Te was a member of the corporation’s Board of Directors and its Auditor. The corporation had not even begun manufacturing white cement, which is why deliveries were to start only 14 months later.
August–December 1969
Te advertised in the Manila Chronicle that he was the corporation’s exclusive dealer in Mindanao. In September, October and December 1969, he signed agreements with hardware stores in Davao and Cagayan de Oro to resell the cement, at a price to be mutually determined but never less than P14.00 a bag.
August 1970
When Te wrote that he was preparing the letter of credit for the first delivery, the board imposed new conditions: deliveries from the end of November 1970, only 8,000 bags a month for three months, at P13.30 a bag subject to unilateral readjustment, with payment in advance.
The suit
Te demanded compliance with the original agreement, and the corporation refused. It then made another person its exclusive dealer for white cement in Mindanao, and Te sued.
The lower courts
The trial court held the corporation liable to Te for P3,302,400.00 in actual damages, P100,000.00 in moral damages and P10,000.00 in attorney’s fees and costs. The Intermediate Appellate Court affirmed in toto, reasoning that the President and the Chairman appeared to be authorized, so the corporation was estopped from avoiding the agreement.
Issue
Was the dealership agreement between the corporation and Te, one of its own directors, a valid and enforceable contract?
Ruling
No. The contract was not valid. The Court set aside the decision and resolution of the Intermediate Appellate Court and ordered Te to pay the corporation P20,000.00 in attorney’s fees, plus the cost of suit and expenses of litigation.
The usual rules on a president’s authority apply when an officer deals for the corporation with an outsider; the Court held that the situation is different when a director deals with his own corporation. The old Corporation Law that governed the case had no provision on such contracts, but the Court found that Sec. 32 of the Corporation Code (now Sec. 31 of the Revised Corporation Code) substantially incorporates well-settled principles. First, the contract was neither fair nor reasonable. Te, a businessman, must be presumed to have known that prices were expected to rise, yet the price was pegged at P9.70 a bag for the whole five years, with no provision for an increase. By his own Memorandum, the price was P14.50 a bag in September 1970 and P37.50 by the middle of 1975. In each of his resale contracts he protected himself from any increase in the market price, but he did not protect the corporation in the same way. Second, there was no showing that the stockholders ratified the agreement or were fully aware of its provisions. The Court held that he was guilty of disloyalty to the corporation, and that it could not allow him to reap the fruits of that disloyalty. Although the suit had prejudiced the corporation’s reputation and goodwill, the Court held that moral damages under Article 2217 and the succeeding articles of the Civil Code cannot be awarded to a corporation.
“The situation is quite different where a director or officer is dealing with his own corporation. In the instant case respondent Te was not an ordinary stockholder; he was a member of the Board of Directors and Auditor of the corporation as well. He was what is often referred to as a ‘self-dealing’ director.”
Doctrine
“A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit.” But a self-dealing contract is not automatically void: “On the other hand, a director's contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made.” Today the rule is Sec. 31 of the Revised Corporation Code.
Compare: valid
In Mead vs. McCullough, G.R. No. 6217, December 26, 1911, the transfer of a failing company’s contract to its own president was upheld, because the other directors acted without him: “It was not necessary for the president, McCullough, to vote. There was a quorum without him: a quorum of the directors, and at the same time a majority of the stockholders.”
Bar tip
A director’s contract with his own corporation is judged more strictly than a deal with an outsider. Test fairness first: a price fixed for years with no room for increase, while the director protects himself in his own resales, is not fair and reasonable. Ratification by stockholders representing at least two-thirds of the outstanding capital stock, with full disclosure, can save it only if the contract is fair and reasonable.
Hear it explained
Self-Dealing Director, Podcast Ep. 7, at 3:57
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This digest is general legal information for education, not legal advice, and it is not a substitute for reading the decision. Quoted passages are taken word for word from the full text.