Prime White Cement Corporation vs. IAC

A contract between a corporation and one of its own directors is voidable at the option of the corporation unless it is proven to be fair and reasonable under the circumstances and has been ratified by a vote of the stockholders representing at least two-thirds of the outstanding capital stock, with full disclosure of the director's adverse interest.

Alejandro Te, a member of the Board of Directors and Auditor of Prime White Cement Corporation, entered into a "dealership agreement" with the corporation in July 1969. The agreement appointed Te as the exclusive dealer for the corporation's white cement in the entire Mindanao region for a term of five years, commencing in September 1970. The contract stipulated a fixed price of P9.70 per bag, with the corporation obligated to supply 20,000 bags monthly. Prior to the commencement of deliveries, the corporation's board imposed new, more onerous conditions and later entered into a similar exclusive dealership with another party, prompting Te to file a suit for specific performance and damages.

• Nature of the Agreement: On July 16, 1969, Alejandro Te, a director and auditor of Prime White Cement Corporation, entered into a "dealership agreement" with the corporation, represented by its President and Chairman of the Board. The contract appointed Te as the exclusive dealer and distributor of the corporation's white cement in Mindanao for five years, starting September 1970, with a fixed supply of 20,000 bags per month at a fixed price of P9.70 per bag.
• Te's Reliance and Sub-Dealerships: Relying on the agreement, Te advertised his exclusive dealership and entered into sub-dealer contracts with several hardware stores in Davao and Cagayan de Oro to resell his anticipated allocation.
• Corporation's Unilateral Alteration: In August 1970, the corporation's board of directors informed Te of new conditions: delivery would commence in November 1970, be limited to 8,000 bags per month for only three months, the price increased to P13.30 per bag, and other restrictive terms.
• Breach and Alternative Dealings: The corporation refused Te's demands to comply with the original agreement. Subsequently, it entered into an exclusive dealership agreement with another party, Napoleon Co, for the marketing of white cement in Mindanao.
• Lower Court Findings: The trial court found the dealership agreement valid and binding, holding the corporation liable for actual and moral damages. The appellate court affirmed, applying the principle of estoppel against the corporation.

• Lack of Board Authority: Petitioner argued that its President and Chairman of the Board lacked the authority to enter into the dealership agreement without prior approval from the Board of Directors, rendering the contract unenforceable under the Corporation Law.
• Violation of Fiduciary Duty: Petitioner maintained that the contract was voidable because it was a self-dealing transaction where Director Te's personal interests conflicted with his fiduciary duty to the corporation. The contract was grossly disadvantageous to the corporation.
• Contract Unfairness: Petitioner contended the fixed-price term for five years was unfair and unreasonable, especially given the volatile market for cement, and that Te had protected himself in subsequent resale contracts but not the corporation.
• Improper Award of Damages: Petitioner argued that the awards for actual and moral damages were improper, as moral damages are not recoverable by a corporation in the absence of proof of besmirched reputation or similar injury.

• Apparent Authority and Estoppel: Respondent Te countered that the President and Chairman were duly authorized to sign the contract, as indicated on its face, and the corporation was estopped from denying their authority after having induced him to rely on the agreement.
• Validity of the Contract: Respondent argued that the dealership agreement possessed all the essential requisites of a valid contract and was entered into in the ordinary course of business.
• Entitlement to Damages: Respondent maintained that he was entitled to actual damages for lost profits and moral damages for the besmirched reputation and social humiliation caused by the corporation's refusal to honor the contract.

• Validity of Self-Dealing Contract: Whether the dealership agreement entered into by the corporation with its own director, Alejandro Te, is valid and enforceable.
• Award of Damages: Whether the award of actual and moral damages in favor of Te was proper.

• Validity of Self-Dealing Contract: The contract is voidable and unenforceable. A director occupies a fiduciary position and owes a duty of loyalty to the corporation. A contract between the corporation and its director is voidable unless it is shown to be fair and reasonable and has been ratified by the stockholders with full disclosure of the director's adverse interest. The fixed-price term for five years was grossly unfair to the corporation, as market prices rose significantly during that period. There was no showing of stockholder ratification.
• Award of Damages: The award of actual damages to Te was improper because his claim was based on an unenforceable contract. The award of moral damages was also improper, as a corporation, being an artificial person, cannot recover moral damages in the absence of proof of specific injury to its reputation, which was not sufficiently proven here.

• Fiduciary Duty of Directors in Self-Dealing Transactions — A director stands in a fiduciary relationship with the corporation. Contracts between the corporation and a director are scrutinized for fairness. Such contracts are voidable at the option of the corporation unless the following conditions are met: (1) the director's presence was not necessary for a quorum; (2) the director's vote was not necessary for approval; (3) the contract is fair and reasonable; and (4) in the case of an officer, prior board authorization. If the first two conditions are absent, ratification by a two-thirds vote of the stockholders, with full disclosure, is required.
• Corporate Liability on Contracts Signed by Officers — While corporate powers are vested in the Board of Directors, a president or other officer may bind the corporation in the ordinary course of business if reasonably necessary. However, this general rule does not apply with the same force to self-dealing transactions, where stricter standards of fairness and ratification apply.

• "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."
• "He cannot utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly."
• "The fixed price of P9.70 per bag for a period of five years was not fair and reasonable. Respondent Te, himself, when he subsequently entered into contracts to resell the cement to his 'new dealers'... stipulated [a higher, adjustable price]... Why did he not protect the corporation in the same manner when he entered into the 'dealership agreement'?"

• Gokongwei v. Securities and Exchange Commission, 89 SCRA 336 (1979) — Cited to emphasize the strict fiduciary duty of corporate directors and the prohibition against self-dealing and using corporate office for personal aggrandizement.
• Pepper v. Litton, 308 U.S. 295 (1939) — Quoted extensively to articulate the equitable limitations on a director's power and the principle that a director cannot use the corporate form to gain an unfair advantage over the corporation or its creditors.
• Acuña v. Batac Producers Cooperative Marketing Association, Inc., 20 SCRA 526 (1967) — Cited for the principle that a corporate board may impliedly ratify a contract entered into by its president.
• Yu Chuck v. "Kong Li Po", 46 Phil. 608 (1924) — Cited for the rule that a president may bind the corporation by a contract in the ordinary course of business.

• Section 28, Corporation Law (Act 1459) & Section 23, Corporation Code (B.P. Blg. 68) — These provisions state that corporate powers shall be exercised by the Board of Directors. The Court used this as the foundational principle for analyzing the authority of corporate officers.
• Section 32, Corporation Code (B.P. Blg. 68) — This provision, which codifies the rules on voidable contracts between a corporation and its directors/officers, was applied by analogy despite the case arising under the old Corporation Law, as it embodies well-settled principles.
• Article 1317, New Civil Code — Cited in the petitioner's arguments regarding unenforceable contracts (those entered into without authority), though the Court's ruling was based more on voidability due to unfairness in a fiduciary context.
• Articles 2217 et seq., New Civil Code — Cited to support the ruling that a corporation cannot, as a general rule, recover moral damages.

• Chief Justice Andres R. Narvasa
• Justice Florentino P. Feliciano
• Justice Teodoro R. Padilla
• Justice Alfredo L. Regalado
• Justice Ricardo J. Francisco
• Justice Carolina C. Griño-Aquino
• Justice Jose A.R. Melo
• Justice Santiago M. Kapunan
• Justice Jose C. Campos, Jr. (Ponente)
• Justice Carolina C. Griño-Aquino
• Justice Irene R. Cortes
• Justice Camilo D. Quiason

N/A — The decision was unanimous.