Prime White Cement Corporation vs Intermediate Appellate Court

written by Howard

G.R. No. L-68555 – 220 SCRA 103 – Mercantile Law – Corporation Law – Award of Moral Damages to Corporations – Self-Dealing Director

In July 1969, Zosimo Falcon and Justo Trazo entered into an agreement with Alejandro Te whereby it was agreed that from 1970 to 1976, Te shall be the sole dealer of 20,000 bags Prime White cement in Mindanao. Falcon was the president of Prime White Cement Corporation (PWCC) and Trazo was a board member thereof. Te was likewise a board member of PWCC. It was agreed that the selling price for a bag of cement shall be .

Before the bags of cement can be delivered, Te already made known to the public that he is the sole dealer of cements in Mindanao. Various hardwares then approached him to be his sub-dealers, hence, Te entered into various contracts with them.

But then apparently, Falcon and Trazo were not authorized by the Board of PWCC to enter into such contract. Nevertheless, the Board wished to retain the contract but they wanted some amendment which includes the increase of the selling price per bag to and the decrease of the total amount of cement bags from 20k to 8k only plus the contract shall only be effective for a period of three months and not 6 years.

Te refused the counter-offer. PWCC then awarded the contract to someone else.

Te then sued PWCC for damages. PWCC filed a counterclaim and in said counterclaim, it is claiming for moral damages the basis of which is the claim that Te’s filing of a civil case against PWCC destroyed the company’s goodwill. The lower court ruled in favor Te.

ISSUE: Whether or not the ruling of the lower court is correct.

HELD: No. Te is what can be called as a self-dealing director – he deals business with the same corporation in which he is a director. There is nothing wrong per se with that. However, Sec. 32 provides that:

SEC. 32.  Dealings of directors, trustees or officers with the corporation. —- A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present:

1.  That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;

2.  That the vote of such director or trustee was not necessary for the approval of the contract;

3.  That the contract is fair and reasonable under the circumstances; and

4.  That in the case of an officer, the contract with the officer has been previously authorized by the Board of Directors.

In this particular case, the Supreme Court focused on the fact that the contract between PWCC and Te through Falcon and Trazo was not reasonable. Hence, PWCC has all the rights to void the contract and look for someone else, which it did. The contract is unreasonable because of the very low selling price. The Price at that time was at least per bag and the original contract only stipulates . Also, the original contract was for 6 years and there’s no clause in the contract which protects PWCC from inflation. As a director, Te in this transaction should protect the corporation’s interest more than his personal interest. His failure to do so is disloyalty to the corporation.

Anent the issue of moral damages, there is no question that PWCC’s goodwill and reputation had been prejudiced due to the filing of this case. However, there can be no award for moral damages under Article 2217 of the Civil Code in favor of a corporation.

NOTE: In a later case, Coastal Pacific Trading, Inc. vs Southern Rolling Mills Co., Inc. (July 28, 2006), it was ruled that a corporation may be entitled to moral damages provided that its good reputation was debased resulting in its humiliation in the business realm.

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