CASE DIGEST: PRIME WHITE CEMENT CORP. vs. IAC. G.R. No. L-68555. March 19, 1993

FACTS:

Falcon, president of PWCC, and Trazo, Board member of PWCC entered into an agreement with Te, also a Board member of PWCC. They agreed that the latter shall be the sole dealer of Prime White cement in Mindanao. Te already made known to the public that he is the sole dealer of cement in Mindanao before the cement is to be delivered, thus various hardware then approached him to be his sub-dealers and consequently, he entered into various contracts with them.

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, decrease of the total amount of cement bags plus the contract shall only be effective for a period of three months and not 5 years. Te refused the counter-offer. PWCC then awarded the contract to someone else. 

 

ISSUE: 

Whether the dealership agreement entered by Falcon, Trazo and Te is a valid and enforceable contract.

 

RULING: 

No. Te is a self-dealing director as 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 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 because of the very low selling price. The Price at that time was at least P13.00 per bag and the original contract only stipulates P9.70. Also, the original contract was for 5 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. Hence, PWCC has all the rights to void the contract and look for someone else, which it did.

 

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Personal Note: RE: Corporate Power and Self Dealing Director –

The power of the corporation to act and transact is vested and belongs to its board of directors or trustees. But it may be delegated to others such as its corporate officers. The validity and enforceability of corporate acts depend on whether the act is authorized by the board. But this does not mean that the authority to act may be secured only before an officer or board member enters into a contract or transaction. The contract is still valid until rescinded by the corporation’s board of directors or trustees. The contract or transaction it entered is only voidable and may be ratified by the board expressly or impliedly.

A board member may also transact with its corporation provided that the transaction is not prejudicial to the corporation. The law provides conditions for those self-dealing directors for the transaction to be valid.

In this case, the contract that Falcon, Trazo, and Te is a voidable contract until the corporation wishes to ratify Falcon and Trazo’s act imposes a condition which Te denied. Conditions of Te in the contract are found to be unreasonable. It is prejudicial to the corporation and is only favorable to Te thus the former is correct in awarding the contract to other dealers.