Buenaseda vs. Bowen & Co., Inc.

A corporation is bound by an agreement entered into by its president without formal board approval when the Board of Directors, having knowledge of the agreement, acquiesces in and takes advantage of the benefits afforded by said agreement, as such acts are equivalent to an implied ratification that binds the corporation even without a formal resolution passed and recorded.

Bowen & Co., Inc. was a duly organized domestic corporation whose Board of Directors was composed of Geoffrey Bowen, his wife, Francisco U. Buenaseda, and two others, with Bowen and his wife controlling the majority of the corporation's stocks. The corporation sought to secure an ECA order for paints and needed financing to cover the required cash marginal deposit for a letter of credit. The arrangement between the corporation's president and one of its directors, which later became the subject of dispute, arose in this corporate context where the president and his wife held majority control.

On August 11, 1951, the Board of Directors of Bowen & Co., Inc., a duly organized domestic corporation, adopted a resolution appointing one of its directors, Francisco U. Buenaseda, as Managing Director. In the same resolution, Buenaseda was authorized to negotiate for and in behalf of the corporation with the Government for the securing of the ECA order for paints in the sum of $398,000.00, with full powers to arrange the financing of the order and if necessary to the entire assets of the Corporation.

Sometime in the same year, after proper representations and negotiations, an award of P200,000 worth of ECA procurement materials consisting of marine and industrial paints was allocated to the corporation. For the importation of these materials, it was necessary to open a letter of credit in the amount of P100,000.00 with the Philippine National Bank. As the corporation did not have at the time the necessary funds to put up the required cash marginal deposit of P60,000.00, its president, Geoffrey Bowen, obligating the corporation and himself in his personal capacity, offered to pay Buenaseda 37-½% of the profits to be realized from the sale of the ECA procurement materials, should he be able to obtain and produce the amount necessary to cover the cash marginal deposit. Buenaseda accepted the offer and through his business connections, another corporation, E.J.C. Montilla & Co., agreed to put up the cash marginal deposit of P60,000.00.

In consideration thereof, a provisional contract of partnership was entered into by and between E.J.C. Montilla & Co. and Bowen & Co., Inc. The contract provided that, besides the return of P60,000.00, E.J.C. Montilla & Co. shall receive as compensation an amount equivalent to 50% of the total profits that may be realized from the sale of ECA procurement materials. To guarantee the faithful performance of the terms and conditions of the contract by Bowen & Co., Inc., a lien of second mortgage was constituted on certain real property admittedly belonging to Buenaseda, who also guaranteed in his personal capacity, jointly and severally with Bowen & Co., Inc., the faithful performance of all the terms and conditions of the contract.

After the required cash marginal deposit of P60,000.00 had been made, the P200,000.00 worth of ECA procurement materials were subsequently imported and received by Bowen & Co., Inc. From September 27, 1951 to July 9, 1955, part of the said materials were sold, the corporation realizing a net profit of P22,303.98. Of this amount, Buenaseda claimed 37-½% or P8,363.99 on the strength of the promise of Geoffrey Bowen. As the corporation refused to pay, Buenaseda filed the present action in the Court of First Instance of Manila against the corporation and/or its president, Geoffrey Bowen, to recover the said amount of P8,363.99.

The lower court absolved the defendants from the complaint on the theory that the earnings or profits derived from the sale of the imported materials were property of the corporation and that the "commitment" made to plaintiff by defendant Bowen was not approved by the Board of Directors of the defendant corporation. On appeal to the Court of Appeals, the decision was affirmed. Reconsideration of this decision having been denied, Buenaseda filed the present petition for review.

• Binding Effect of the Agreement: Petitioner contended that the Court of Appeals erred in holding that the agreement between him and Geoffrey Bowen was not binding upon the corporation, arguing that the Board of Directors had knowledge of the agreement and did not repudiate it.

• Corporate Assets and Dividend Declaration: Respondents argued that the profits of the corporation form part of its assets and that payment of a certain percentage of the profits requires a declaration of dividends and/or resolution of the Board of Directors.

• Implied Ratification: Whether the agreement between petitioner Buenaseda and Geoffrey Bowen, the corporation's president, was binding upon the corporation despite the absence of a formal resolution approving the same.

• Implied Ratification: Yes. The agreement was binding upon the corporation because the Board of Directors, having knowledge of the agreement, acquiesced in and took advantage of the benefits afforded by said agreement, which acts are equivalent to an implied ratification that binds the corporation even without formal resolution passed and recorded.

• Implied Ratification: The Court found that it was not pretended that the Board of Directors of the defendant corporation had no knowledge of the agreement between Geoffrey Bowen and plaintiff to the effect that the latter was to receive 37-½% of the profits to be realized from the importation and sale of ECA procurement materials. At the time the agreement was made, the Board of Directors was composed of Geoffrey Bowen himself, his wife, Francisco U. Buenaseda, and two others, with Bowen and his wife controlling the majority of the stocks of the corporation. The Board did not repudiate the agreement entered into by Geoffrey Bowen with plaintiff Buenaseda, but, on the contrary, acquiesced in and took advantage of the benefits afforded by said agreement. The Court held that such acts are equivalent to an implied ratification of the agreement by the Board of Directors and binds the corporation even without formal resolution passed and recorded, citing Zamboanga Transportation Co. vs. Bachrach Motors, 52 Phil. 244, and other authorities.

The Court also rejected the respondents' argument that the profits of the corporation form part of its assets and that payment of a certain percentage of the profits requires a declaration of dividends and/or resolution of the Board of Directors. The Court noted that although plaintiff Buenaseda is a stockholder of the corporation, he does not claim a share of the profits as such stockholder, but under an agreement between him and the president of the corporation which has been impliedly ratified by the Board of Directors.

• Implied Ratification of Corporate Contracts — A corporation may be bound by an agreement entered into by its officers without formal board approval when the Board of Directors, with knowledge of the agreement, fails to repudiate it and instead acquiesces in and takes advantage of the benefits afforded by said agreement. Such acts are equivalent to an implied ratification that binds the corporation even without a formal resolution passed and recorded. The Court applied this doctrine to hold the corporation liable for the president's profit-sharing promise to the petitioner.

• "The Board did not repudiate the agreement entered into by Geoffrey Bowen with plaintiff Buenaseda, but, on the contrary, acquiesced in and took advantage of the benefits afforded by said agreement. Such acts are equivalent to an implied ratification of the agreement by the Board of Directors and binds the corporation even without formal resolution passed and recorded." — This passage states the core ratio decidendi: that the Board's knowledge, acquiescence, and acceptance of benefits constitute implied ratification binding the corporation.

• "Although plaintiff Buenaseda is a stockholder of the corporation, he does not, however, claim a share of the profits as such stockholder, but under an agreement between him and the president of the corporation which has been impliedly ratified the Board of Directors." — This passage distinguishes the petitioner's claim from a stockholder's right to dividends, clarifying that the claim was contractual in nature.

• Zamboanga Transportation Co. vs. Bachrach Motors, 52 Phil. 244 — Cited as controlling authority for the proposition that a corporation may be bound by implied ratification of an agreement through the Board's acquiescence and acceptance of benefits, even without a formal resolution.

• N/A — The decision does not cite specific statutory provisions, constitutional articles, or procedural rules.

Paras, C.J., Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera, and Paredes, JJ., concurred.