IV.

Corporate Contract Law

C. In Pari Delicto Cases
Case No. 1 Hall vs Piccio
Petitioners Arnold Hall, Bradley Hall and Private Respondents
Fred Brown, Emma Brown, Hipolita Chapman and Ceferino
Abella signed and acknowledged the articles of
incorporation of the Far Eastern Lumber and Commercial Co.,
Inc. organized to engage in a general lumber business to
carry on as general contractors, operators and managers.
Attached to the articles was an affidavit of the treasurer
stating that 23, 428 shares of stock had been subscribed and
fully paid with certain properties transferred to the
corporation.
Immediately after the execution of the articles of
incorporation, the corporation proceeded to do business with
the adoption of by-laws and the election of its officers.
Then, the articles of incorporation were filed in SEC for the
issuance of the corresponding certificate of incorporation.
Pending action on the articles of incorporation, Fred Brown,
Emma Brown, Hipolita Chapman and Ceferino Abella filed
a civil caseagainst the Halls alleging among other things that
Far Eastern Lumber and Commercial Co, was an unregistered
partnership and that they wished to have it dissolved
because of bitter dissension among the members,
mismanagement and fraud by the managers and heavy
financial losses.
The Halls filed a Motion to Dismiss contesting the courts
jurisdiction and the sufficiency of the cause of action but
Judge Piccio ordered the dissolution of the company and
appointed a receiver.
Issues:
(1) Whether or not the court had jurisdiction to decree the
dissolution of the company because it being a de
facto corporation, dissolution may only be ordered in a quo
warranto proceeding in accordance with Section 19.
(2) Inasmuch as the Browns had signed the articles of
incorporation, whether or not they are estopped from
claiming that it is not a corporation but only a partnership.

Held:
(1) YES. The court had jurisdiction but Section 19 does not
apply.
First, not having obtained the certificate of incorporation, the
Far Eastern Lumber and Commercial Co. even its
stockholders may not probably claim in good faith to be a
corporation.
The immunity of collateral attack is granted to corporations
claiming in good faith to be corporation under this act.
Such a claim is compatible with the existence of errors and
irregularities but not with a total or substantial disregard of
the law. Unless there has been an evident attempt to comply
with the law, the claim to be a corporation under this act
could not be made in good faith.
Second, this is not a suit in which the corporation is a party.
This is a litigation between stockholders of the alleged
corporation for the purpose of obtaining its dissolution. Even
the existence of a de jurecorporation may be terminated in a
private suit for its dissolution between stockholders, without
the intervention of the state.
(2) NO. The Browns are not estopped. Because the SEC has
not yet issued the corresponding certificate of incorporation,
all of them know or ought to know that the personality of a
corporation begins to exist only from the moment such
certificate is issued and not before.
The complaining associates have not represented to the
others that they were incorporated any more than the latter
had made similar representations to them.
And as nobody was led to believe anything to his prejudice
and damage, the principle of estoppel does not apply. This is
not an instance requiring the enforcement of contracts with
the corporation through the rule of estoppel.
Case No.2 Inrl Express Travel vs CA

Facts: In 1989, International Express Travel & Tour Services,

Inc. (IETTI), offered to the Philippine Football Federation (PFF)
its travel services for the South East Asian Games. PFF,

through Henri Kahn, its president, agreed. IETTI then

delivered the plane tickets to PFF, PFF in turn made a down
payment. However, PFF was not able to complete the full
payment in subsequent installments despite repeated
demands from IETTI. IETTI then sued PFF and Kahn was
impleaded as a co-defendant.
Kahn averred that he should not be impleaded because he
merely acted as an agent of PFF which he averred is a
corporation with separate and distinct personality from him.
The trial court ruled against Kahn and held him personally
liable for the said obligation (PFF was declared in default for
failing to file an answer). The trial court ruled that Kahn failed
to prove that PFF is a corporation. The Court of Appeals
however reversed the decision of the trial court. The Court of
Appeals took judicial notice of the existence of PFF as a
national sports association; that as such, PFF is empowered
to enter into contracts through its agents; that PFF is
therefore liable for the contract entered into by its agent
Kahn. The CA further ruled that IETTI is in estoppel; that it
cannot now deny the corporate existence of PFF because it
had contracted and dealt with PFF in such a manner as to
recognize and in effect admit its existence.
ISSUE: Whether or not the Court of Appeals is correct.
HELD: No. PFF, upon its creation, is not automatically
considered a national sports association. It must first be
recognized and accredited by the Philippine Amateur Athletic
Federation and the Department of Youth and Sports
Development. This fact was never substantiated by Kahn. As
such, PFF is considered as an unincorporated sports
association. And under the law, any person acting or
purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and becomes
personally liable for contract entered into or for other acts
performed as such agent. Kahn is therefore personally liable
for the contract entered into by PFF with IETTI.

There is also no merit on the finding of the CA that IETTI is in

estoppel. The application of the doctrine of corporation by
estoppel applies to a third party only when he tries to escape
liability on a contract from which he has benefited on the
irrelevant ground of defective incorporation. In the case at
bar, IETTI is not trying to escape liability from the contract
but rather is the one claiming from the contract.

Case No. 3 Lozano vs de los Santos

Facts:
Reynaldo Lozano was the president of KAMAJDA (Kapatirang
Mabalacat-Angeles Jeepney Drivers Association, Inc.).
Antonio Anda was the president of SAMAJODA (Samahang
Angeles-Mabalacat
Jeepney
Operators
and
Drivers
Association, Inc.). In 1995, the two agreed to consolidate the
two corporations, thus, UMAJODA (Unified Mabalacat-Angeles
Jeepney Operators and Drivers Association, Inc.). In the
same year, elections for the officers of UMAJODA were held.
Lozano and Anda both ran for president. Lozano won but
Anda alleged fraud and the elections and thereafter he
refused to participate with UMAJODA. Anda continued to
collect fees from members of SAMAJODA and refused to
recognize Lozano as president of UMAJODA. Lozano then filed
a complaint for damages against Anda with the MCTC of
Mabalacat (and Magalang), Pampanga. Anda moved for the
dismissal of the case for lack of jurisdiction. The MCTC judge
denied Andas motion. On certiorari, Judge Eliezer De Los
Santos of RTC Angeles City reversed and ordered the
dismissal of the case on the ground that what is involved is
an intra-corporate dispute which should be under the
jurisdiction
of
the Securities
and
Exchange
Commission (SEC).
ISSUE: Whether or not the RTC Judge is correct.

HELD: No. The regular courts have jurisdiction over the case.
The case between Lozano and Anda is not an intra-corporate
dispute. UMAJODA is not yet incorporated. It is yet to submit
its articles of incorporation to the SEC. It is not even a
dispute between KAMAJDA or SAMAJODA. The controversy
between Lozano and Anda does not arise from intracorporate relations but rather from a mere conflict from their
plan to merge the two associations.
NOTE: Regular courts can now hear intra-corporate disputes
(expanded jurisdiction).
V. Articles of Incorporation
A. Ultra Vires Doctrine
Case No. 4 Montelibano vs Bacolod-Murcia Milling
Facts: Plaintiffs-appellants, Alfredo Montelibano, Alejandro
Montelibano, and the Limited co-partnership Gonzaga and
Company, had been and are sugar planters adhered to the
defendant-appellees sugar central mill under identical
milling contracts. Originally executed in 1919, said contracts
were stipulated to be in force for 30 years starting with the
1920-21 crop, and provided that the resulting product should
be divided in the ratio of 45% for the mill and 55% for the
planters. Sometime in 1936, it was proposed to execute
amended milling contracts, increasing the planters share to
60% of the manufactured sugar and resulting molasses,
besides other concessions, but extending the operation of
the milling contract from the original 30 years to 45 years.
The Board of Directors of the appellee Bacolod-Murcia Milling
Co., Inc., adopted a resolution granting further concessions to
the planters over and above those contained in the printed
Amended Milling Contract. The appellants initiated the
present action, contending that three Negros sugar centrals
with a total annual production exceeding one-third of the
production of all the sugar central mills in the province, had
already granted increased participation (of 62.5%)to their

planters, and that under the resolution the appellee had

become obligated to grant similar concessions to the
plaintiffs. The appellee Bacolod-Murcia Milling Co., inc.,
resisted the claim, and defended by urging that the
stipulations contained in the resolution were made without
consideration; that the resolution in question was, therefore,
null and void ab initio, being in effect a donation that
was ultra vires and beyond the powers of the corporate
directors to adopt.
Issue: WON the board resolution is an ultra vires act and in
effect a donation from the board of directors?
Held: No. There can be no doubt that the directors of the
appellee company had authority to modify the proposed
terms of the Amended Milling Contract for the purpose of
making its terms more acceptable to the other contracting
parties. As the resolution in question was passed in good
faith by the board of directors, it is valid and binding, and
whether or not it will cause losses or decrease the profits of
the central, the court has no authority to review them.
Whether the business of a corporation should be operated at
a loss during depression, or close down at a smaller loss, is a
purely business and economic problem to be determined by
the directors of the corporation and not by the court. The
appellee Bacolod-Murcia Milling Company is, under the terms
of its Resolution of August 20, 1936, duty bound to grant
similar increases to plaintiffs-appellants herein.
Case No 5 Phil Realty vs Ley Construction
The Court finds that the signature of Abcede is sufficient to
bind PRHC. As its construction manager, his very act of
signing a letter embodying the P 36 million escalation
agreement produced legal effect, even if there was a blank
space for a higher officer of PHRC to indicate approval
thereof. At the very least, he indicated authority to make
such
representation
on
behalf
of
PRHC.
On
directexamination, Abcede admitted that, as the construction

manager, he represented PRHC in running its affairs with

regard to the execution of the aforesaid projects. Abcede had
signed, on behalf of PRHC, other documents that were almost
identical to the questioned letter-agreement. PRHC does not
question the validity of these agreements; it thereby
effectively admits that this individual had actual authority to
sign on its behalf with respect to these construction projects.

checks. When the checks were issued, Hi-Cement has

sufficient funds to cover the P2 million.
As a rule, there are four instances that will make a corporate
director, trustee or officer along (although not necessarily)
with the corporation personally liable to certain obligations.
They are:
1.

He assents (a) to a patently unlawful act of

the corporation, or (b) for bad faith or gross negligence
in directing its affairs, or (c) for conflict of interest,
resulting in damages to the corporation, its stockholders or
other persons;

2.

He consents to the issuance of watered down stocks or

who, having knowledge thereof, does not forthwith file with
the corporate secretary his written objection thereto;

3.

He agrees to hold himself personally and solidarily

liable with the corporation; or

4.

He is made, by a specific provision of law, to

personally answer for his corporate action.

Case No. 6 Atrium Management vs CA

Facts:
In 1981, Hi-Cement Corporation through Lourdes De Leon (its
Treasurer) and Antonio De Las Alas (its Chairman, now
deceased) issued four postdated checks to E.T. Henry and Co.
The checks amount to P2 million. The checks are crossed
checks and are only made payable to E.T. Henrys account.
However, E.T. Henry still indorsed the checks to Atrium
Management Corporation (AMC). AMC then made sure that
the checks were validly issued by requesting E.T. Henry to
get some confirmation from Atrium. Interestingly, De Leon
confirmed the checks and advised that the checks are okay
to be rediscounted by AMC notwithstanding the fact that the
checks are crossed checks payable to no other accounts but
that of E.T. Henry. So when AMC presented the check, it was
dishonored because Hi-Cement stopped payment. Eventually,
AMC sued Hi-Cement, E.T. Henry, and De Leon. The trial court
ruled in favor of AMC and made all the respondents liable.
On appeal, Hi-Cement averred that De Leons act in signing
the check was ultra vires hence De Leon should be
personally liable for the check. De Leon, on the other hand,
insisted that the checks were authorized by the corporation.
ISSUE: Whether or not De Leons act of signing the check
constitutes an ultra vires act hence making her personally
liable.
HELD: No, the act is not ultra vires but De Leon is still
personally liable. The act is not ultra vires because the act of
issuing the checks was well within the ambit of a valid
corporate act. De Leon as treasurer is authorized to sign

In the case at bar, De Leon is negligent. She was aware that

the checks were only payable to E.T. Henrys account yet she
sent a confirmation to Atrium to the effect that the checks
can be negotiated to them (Atrium) by E.T. Henry. Therefore,
she may be held personally liable along with E.T. Henry (but
not with Hi-Cement where she is an officer).
Case No. 7 Rural Bank of Milaor vs Ocfemia

FACTS: Several parcels of land were mortgaged by the

respondents during the lifetime of the respondents
grandparents to the Rural bank of Milaor as shown by the
Deed of Real Estate Mortgage and the Promissory Note.
Spouses Felicisimo Ocfemia and Juanita Ocfemia, one of the
respondents,
were
not
able
to
redeem
the mortgaged properties consisting of seven parcels of land

and so the mortgage was foreclosed and thereafter

ownership was transferred to the petitioner bank. Out of the
seven parcels of land that were foreclosed, five of them are
in the possession of the respondents because these five
parcels of land were sold by the petitioner bank to the
respondents as evidenced by a Deed of Sale. However, the
five parcels of land cannot be transferred in the name of the
parents of Merife Nino, one of the respondents, because
there is a need to have the document of sale registered.
The Register of deeds, however, said that the document of
sale cannot be registered without the board resolution of the
petitioner bank confirming both the Deed of sale and the
authority of the bank manager, Fe S. Tena, to enter such
transaction.
The petitioner bank refused her request for a board
resolution and made many alibis. Respondents initiated the
present proceedings so that they could transfer to their
names the subject five parcel of land and subsequently
mortgage said lots and to use the loan proceeds for
themedical
expenses of
their
ailing
mother.
ISSUE: May the Board of Directors of a rural banking
corporation be compelled to confirm a deed of absolute sale
of real property owned by the corporation which deed of sale
was executed by the bank manager without prior authority of
the board of directors of the rural banking corporation?
HELD: YES. The bank acknowledges, by its own acts or
failure to act, the authority of Fe S. Tena to enter into binding
contracts. After the execution of the Deed of Sale,
respondents occupied the properties in dispute and paid the
real estate taxes. If the bank management believed that it
had title to the property, it should have taken measured to

prevent the infringement and invasion of title thereto and

possession thereof. Likewise, Tena had previously transacted
business on behalf of the bank, and the latter had
acknowledged her authority. A bank is liable to innocent third
persons where representation is made in the course of
its normalbusiness by an agent like Manager Tena even
though such agent is abusing her authority. Clearly, persons
dealing with her could not be blamed for believing that she
was authorized to transact business for and on behalf of the
bank.
The bank is estopped from questioning the authority of the
bank to enter into contract of sale. If a corporation knowingly
permits one of its officers or any other agent to act within the
scope of an apparent authority, it holds the agent out to the
public as possessing the power to do those acts; thus, the
corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from
denying the agents authority
Case No. 8 Advance Paper Corp vs Arma Traders
Corporations; doctrine of apparent authority. The doctrine of
apparent authority provides that a corporation will be
estopped from denying the agents authority if it knowingly
permits one of its officers or any other agent to act within the
scope of an apparent authority, and it holds him out to the
public as possessing the power to do those acts. The
doctrine of apparent authority does not apply if the principal
did not commit any acts or conduct which a third party knew
and relied upon in good faith as a result of the exercise of
reasonable prudence. Moreover, the agents acts or conduct
must have produced a change of position to the third partys
detriment. Advance Paper Corporation and George Haw, in
his capacity as President of Advance Paper Corporation v.
Arma Traders Corporation, Manuel Ting, et al., G.R. No.
176897, December 11, 2013.