Arnold v. Willits

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-!"# Ma$ch "%& "'(
G. C. ARNOL)& plaintiff-appellant&
*s.
+,LL,TS - PATTERSON& LT).& .efen.ant-appellee.
/ishe$& )e+itt& Pe$0ins an. B$a.1 fo$ appellant.
Ross an. La2$ence fo$ appellee.
STATEMENT
/o$ a nu3be$ of 1ea$s p$io$ to the ti3es alle4e. in the co3plaint& the plaintiff 2as in the e3plo1
of the ,nte$national Ban0in4 Co$po$ation of Manila& an. it is conce.e. that he is a co3petent
an. e5pe$ience. business 3an. 6ul1 ("& "'"7& C. ). +illits an. ,. L. Patte$son 2e$e pa$tne$s
.oin4 business in San /$ancisco& Califo$nia& un.e$ the na3e of +illits - Patte$son. The plaintiff
2as then in San /$ancisco& an. as a $esult of ne4otiations the plaintiff an. the fi$3 ente$e. into
a 2$itten cont$act& 0no2n in the $eco$. as E5hibit A& b1 2hich the plaintiff 2as e3plo1e. as the
a4ent of the fi$3 in the Philippine ,slan.s fo$ ce$tain pu$poses fo$ the pe$io. of fi*e 1ea$s at a
3ini3u3 sala$1 of 8!! pe$ 3onth an. t$a*ellin4 e5penses. The plaintiff $etu$ne. to Manila an.
ente$e. on the .ischa$4e of his .uties un.e$ the cont$act. As a $esult of plaintiff9s e3plo13ent
an. the 2o$l. 2a$ con.itions& the business of the fi$3 in the Philippines *e$1 $api.l1 inc$ease.
an. 4$e2 be1on. the fon.est hopes of eithe$ pa$t1. A .ispute a$ose bet2een the plaintiff an. the
fi$3 as to the const$uction of E5hibit A as to the a3ount 2hich plaintiff shoul. $ecei*e fo$ his
se$*ices. Mean2hile Patte$son $eti$e. f$o3 the fi$3 an. +illits beca3e the sole o2ne$ of its
assets. /o$ con*enience of ope$ation an. to se$*e his o2n pu$pose& +illits o$4ani:e. a
co$po$ation un.e$ the la2s of Califo$nia 2ith its p$incipal office at San /$ancisco& in an. b1
2hich he subsc$ibe. fo$& an. beca3e the e5clusi*e o2ne$ of all the capital stoc0 e5cept a fe2
sha$es fo$ o$4ani:ation pu$poses onl1& an. the na3e of the fi$3 2as use. as the na3e of the
co$po$ation. A sho$t ti3e afte$ that +illits ca3e to Manila an. o$4ani:e. a co$po$ation he$e
0no2n as +illits - Patte$son& Lt..& in an. to 2hich he a4ain subsc$ibe. fo$ all of the capital stoc0
e5cept the no3inal sha$es necessa$1 to ;ualif1 the .i$ecto$s. ,n le4al effect& the San /$ancisco
co$po$ation too0 o*e$ an. ac;ui$e. all of the assets an. liabilities of the Manila co$po$ation. At
the ti3e that +illits 2as in Manila an. 2hile to all intents an. pu$poses he 2as the sole o2ne$ of
the stoc0 of co$po$ations& the$e 2as a confe$ence bet2een hi3 an. the plaintiff o*e$ the
.ispute. const$uction of E5hibit A. As a $esult of 2hich anothe$ inst$u3ent& 0no2n in the $eco$.
as E5hibit B& 2as p$epa$e. in the fo$3 of a lette$ 2hich the plaintiff a..$esse. to +illits at Manila
on No*e3be$ "!& "'"'& the pu$pose of 2hich 2as to 3o$e clea$l1 .efine an. specif1 the
co3pensation 2hich the plaintiff 2as to $ecei*e fo$ his se$*ices. +illits $ecei*e. an. confi$3e.
this lette$ b1 si4nin4 the na3e of +illits - Patte$son& B1 C... +illits. At the ti3e both
co$po$ations 2e$e le4all1 o$4ani:e.& an. the$e is nothin4 in the co$po$ate 3inutes to sho2 that
E5hibit B 2as e*e$ fo$3all1 $atifie. o$ app$o*e. b1 eithe$ co$po$ation. Afte$ its o$4ani:ation& the
Manila co$po$ation e3plo1e. a $e4ula$ accountant 2hose .ut1 it 2as to au.it the accounts of
the co3pan1 an. $en.e$ financial state3ents both fo$ the use of the local ban0s an. the local
an. pa$ent co$po$ations at San /$ancisco. /$o3 ti3e to ti3e an. in the o$.ina$1 cou$se of
"
business such state3ents of account 2e$e p$epa$e. b1 the accountant an. .ul1 fo$2a$.e. to
the ho3e office& an. a3on4 othe$ thin4s 2as a state3ent of 6ul1 ("& "'"& sho2in4 that the$e
2as .ue an. o2in4 the plaintiff un.e$ E5hibit B the su3 of P"!7&%%.<!. A sho$t ti3e p$e*ious
to that .ate& the San /$ancisco co$po$ation beca3e in*ol*e. in financial t$ouble& an. all of its
assets 2e$e tu$ne. o*e$ to a =c$e.ito$s9 co33ittee.= +hen this state3ent 2as $ecei*e.& the
=c$e.ito$s9 co33ittee= i33e.iatel1 p$oteste. its allo2ance. An atte3pt 2as 3a.e 2ithout
success to a.>ust the 3atte$ on a f$ien.l1 basis an. 2ithout liti4ation. 6anua$1 "!& "'& the
plaintiff b$ou4ht this action to $eco*e$ f$o3 the .efen.ant the su3 of P"!7&%%.<! 2ith le4al
inte$est an. costs& an. 2$itten inst$u3ents 0no2n in the $eco$. as E5hibits A an. B 2e$e
attache. to& an. 3a.e a pa$t of& the co3plaint.
/o$ ans2e$& the .efen.ant a.3its the fo$3al pa$ts of the co3plaint& the e5ecution of E5hibit A
an. .enies each an. e*e$1 othe$ alle4ation& e5cept as specificall1 a.3itte.& an. alle4es that
2hat is 0no2n as E5hibit B 2as si4ne. b1 +illits 2ithout the autho$it1 of the .efen.ant
co$po$ation o$ the fi$3 of +illits - Patte$son& an. that it is not an a4$ee3ent 2hich 2as e*e$
ente$e. into 2ith the plaintiff b1 the .efen.ant o$ the fi$3& an.& as a sepa$ate .efense an.
counte$clai3& it alle4es that on the (!th of 6une& "'!& the$e 2as a balance .ue an. o2in4 the
plaintiff f$o3 the .efen.ant un.e$ the cont$act E5hibit A of the su3 of P?&%#".!<. That his sala$1
f$o3 6une (!& "'!& to 6ul1 ("& "'"& un.e$ E5hibit A 2as 8#!! pe$ 3onth& o$ a total of
P"!&#!!. That about 6ul1 7& "'"& the plaintiff 2$on4full1 too0 P(!&!!! f$o3 the assets of the
fi$3& an. that he is no2 in.ebte. to the fi$3 in the su3 of P"!&?<?.'<& 2ith inte$est an. costs&
f$o3 2hich it p$a1s >u.4e3ent.
The plaintiff a.3its that he 2ith.$e2 the P(!&!!!& but alle4es that it 2as 2ith the consent an.
autho$it1 of the .efen.ant& an. .enies all othe$ ne2 3atte$ in the ans2e$.
Upon such issues a t$ial 2as ha.& an. the lo2e$ cou$t $en.e$e. >u.43ent in fa*o$ of the
.efen.ant as p$a1e. fo$ in its counte$clai3& f$o3 2hich the plaintiff appeals& conten.in4 that the
t$ial cou$t e$$e. in not hol.in4 that the cont$act bet2een the pa$ties is that 2hich is e3bo.ie. in
E5hibits A an. B& an. that the .efen.ant assu3e. all pa$tne$ship obli4ations& an. in failin4 to
$en.e$ >u.43ent fo$ the plaintiff& as p$a1e. fo$& an. in .is3issin4 his co3plaint& an. .en1in4
plaintiff9s 3otion fo$ a ne2 t$ial.
6O@NS& 6.A
,n thei$ $especti*e b$iefs opposin4 counsel a4$ee that the i3po$tant ;uestions in*ol*e. a$e =2hat
2as the cont$act un.e$ 2hich the plaintiff $en.e$e. se$*ices fo$ fi*e 1ea$s en.in4 6ul1 ("& "'"&=
an. =2hat is .ue the plaintiff un.e$ that cont$act.= Plaintiff conten.s that his se$*ices 2e$e
pe$fo$3e. un.e$ E5hibits A an. B& an. that the .efen.ant assu3e. all of the obli4ations of the
o$i4inal pa$tne$ship un.e$ E5hibit A& an. is no2 see0in4 to .en1 its liabilit1 un.e$& an. $epu.iate&
E5hibit B. The .efen.ant a.3its that E5hibit A 2as the o$i4inal cont$act bet2een A$nol. an. the
fi$3 of +illits - Patte$son b1 2hich he ca3e to the Philippine ,slan.s& an. that it 2as the$ein
a4$ee. that he 2as to be e3plo1e. fo$ a pe$io. of fi*e 1ea$s as the a4ent of +illits - Patte$son
in the Philippine ,slan.s to ope$ate a ce$tain oil 3ill& an. to .o such othe$ business as 3i4ht be
.ee3e. a.*isable fo$ 2hich he 2as to $ecei*e& fi$st& the t$a*ellin4 e5penses of his 2ife an. self
f$o3 San /$ancisco to Manila& secon.& the 3ini3u3 sala$1 of 8!! pe$ 3onth& thi$.& a
b$o0e$a4e of " pe$ cent upon all pu$chases an. sales of 3e$chan.ise& e5cept fo$ the account of
the coconut oil 3ill& fou$th& one-half of the p$ofits on an1 t$ansaction in the na3e of the fi$3 o$

hi3self not p$o*i.e. fo$ in the a4$ee3ent. That the a4$ee3ent also p$o*i.e. that if it be foun.
that the business 2as ope$ate. at a loss& A$nol. shoul. $ecei*e a 3onthl1 sala$1 of 8#!! .u$in4
such pe$io.. That the business 2as ope$ate. at a loss f$o3 6une (!& "'!& to 6ul1 ("& "'"&
an. that fo$ such $eason& he 2as entitle. to nothin4 3o$e than a sala$1 of 8#!! pe$ 3onth& o$ fo$
that pe$io. P"!&#!!. A..in4 this a3ount to the P?&%#".!<& 2hich the .efen.ant a.3its he o2e.
A$nol. on 6une (!& "'!& 3a0es a total of P"'&"#".!<& lea*in4 a balance .ue the .efen.ant as
set out in the counte$clai3. ,n othe$ 2o$.s& that the plaintiff9s co3pensation 2as 3easu$e. b1&
an. li3ite. to& the abo*e specifie. p$o*isions in the cont$act E5hibit A& an. that the .efen.ant
co$po$ation is not boun. b1 the te$3s o$ p$o*isions of E5hibit B& 2hich is as follo2sA
+,LL,TS - PATTERSON& LT).
MAN,LA& P. ,.& No*. "!& "'"'.
C@AS. ). +,LL,TS& Es;.&
P$esent.
)EAR MR. +,LL,TSA M1 un.e$stan.in4 of the intent of 31 a4$ee3ent 2ith +illits - Patte$son is
as un.e$A
Co33issions. +illits - Patte$son& San /$ancisco& pa1 3e a co33ission of one pe$ cent on all
pu$chases 3a.e fo$ the3 in the Philippines o$ sales 3a.e to the3 b1 Manila an. one pe$ cent
on all sales 3a.e fo$ the3 in the Philippines& o$ pu$chases 3a.e f$o3 the3 b1 Manila. ,f such
pu$chases o$ sales a$e on an f. o. b. basis the co33ission is on the f. o. b. p$iceB if on a c. i. f.
basis the co33ission is co3pute. on the c. i. f. p$ice
These co33issions a$e c$e.ite. to 3e in San /$ancisco.
, .o not pa$ticipate in an1 p$ofits on business t$ansacte. bet2een +illits - Patte$son& San
/$ancisco& an. +illits - Patte$son& Lt..& Manila.
P$ofits. On all business t$ansacte. bet2een +illits - Patte$son& Lt.. an. othe$s than +illits -
Patte$son& San /$ancisco& half the p$ofits a$e to be c$e.ite. to 31 account an. half to the P$ofit
- Loss account of +illits - Patte$son& Lt..& Manila.
On all othe$ business& such as the Coope$ati*e Coconut P$o.ucts Co. account& o$ an1 othe$
business 2e 3a1 un.e$ta0e as a4ents o$ 3ana4e$s& half the p$ofits a$e to be c$e.ite. to 31
account an. half to the P$ofit - Loss account of +illits - Patte$son& Lt..& Manila.
+he$e +illits - Patte$son& San /$ancisco& o$ +illits - Patte$son& Lt..& Manila& ha*e thei$ o2n
fun.s in*este. in the capital stoc0 o$ a co$po$ation& , of cou$se .o not pa$ticipate in the ea$nin4s
of such stoc0& an1 3o$e than +illits - Patte$son 2oul. pa$ticipate in the ea$nin4s of stoc0 hel.
b1 3e on 31 account.
,f the fo$e4oin4 confo$3s to 1ou$ un.e$stan.in4 of ou$ a4$ee3ent& please confi$3 belo2.
Cou$s faithfull1&
DS4..E G. C. ARNOL)
(
Confi$3e.A
+,LL,TS - PATTERSON
B1 DS4..E C@AS. ). +,LL,TS
There is no dispute about any of the following facts: That at the inception C.). +illits an. ,.
L. Patte$son constitute. the fi$3 of +illits - Patte$son .oin4 business in the Cit1 of San
/$anciscoB that late$ Patte$son $eti$e. f$o3 the fi$3& an. +illits ac;ui$e. all of his inte$ests an.
the$eafte$ continue. the business un.e$ the na3e an. st1le of +illits - Patte$sonB that the
o$i4inal cont$act E5hibit A 2as 3a.e bet2een the plaintiff an. the ol. fi$3 at San /$ancisco on
6ul1 ("& "'"7& to co*e$ a pe$io. of fi*e 1ea$s f$o3 that .ateB that plaintiff ente$e. upon the
.ischa$4e. of his .uties an. continue. his se$*ices in the Philippine ,slan.s to so3eone fo$ the
pe$io. of fi*e 1ea$sB that on No*e3be$ "!& "'"'& an. as a $esult of confe$ences bet2een +illits
an. the plaintiff& E5hibit B 2as a..$esse. an. si4ne. in the 3anne$ an. fo$3 abo*e state. in
the Cit1 of Manila. A sho$t ti3e p$io$ to that .ate +illits o$4ani:e. a co$po$ation in San
/$ancisco& in the State of Califo$nia& 2hich too0 o*e$ an. ac;ui$e. all of the assets of the fi$39s
business in Califo$nia then bein4 con.ucte. un.e$ the na3e an. st1le of +illits - Patte$sonB
that he subsc$ibe. fo$ all of the capital stoc0 of the co$po$ation& an. that in t$uth an. in fact he
2as the o2ne$ of all of its capital stoc0. Afte$ this 2as .one he cause. a ne2 co$po$ation to be
o$4ani:e. un.e$ the la2s of the Philippine ,slan.s 2ith p$incipal office at Manila& 2hich too0 o*e$
an. ac;ui$e. all the business an. assets of the fi$3 of +illits - Patte$son in the Philippine
,slan.s& in an. to 2hich& in le4al effect& he subsc$ibe. fo$ all of its capital stoc0& an. 2as the
o2ne$ of all of its stoc0. Afte$ both co$po$ations 2e$e o$4ani:e. the abo*e lette$ 2as .$afte. an.
si4ne.. The plaintiff conten.s that the si4nin4 of E5hibit B in the 3anne$ an. un.e$ the
con.itions in 2hich it 2as si4ne.& an. th$ou4h the subse;uent acts an. con.uct of the pa$ties&
2as $atifie. an.& in le4al effect& beca3e an. is no2 bin.in4 upon the .efen.ant.
,t 2ill be note. that E5hibit B 2as e5ecute. in Manila& an. that at the ti3e it 2as si4ne. b1
+illits& he 2as to all intents an. pu$poses the le4al o2ne$ of all the stoc0 in both co$po$ations. ,t
also appea$s f$o3 the e*i.ence that the pa$ent co$po$ation at San /$ancisco too0 o*e$ an.
ac;ui$e. all of the assets an. liabilities of the local co$po$ation at Manila. That afte$ it 2as
o$4ani:e. the Manila co$po$ation 0ept sepa$ate $eco$.s an. account boo0s of its o2n& an. that
f$o3 ti3e to ti3e financial state3ents 2e$e 3a.e an. fo$2a$.e. to the ho3e office& f$o3 2hich
it conclusi*el1 appea$s that plaintiff 2as basin4 his clai3 fo$ se$*ices upon E5hibit A& as it 2as
3o.ifie. b1 E5hibit B. That at no ti3e afte$ E5hibit B 2as si4ne. 2as the$e e*e$ an1 .ispute
bet2een plaintiff an. +illits as to the co3pensation fo$ plaintiff9s se$*ices. That is to sa1& as
bet2een the plaintiff an. +illits& E5hibit B 2as app$o*e.& follo2e. an. at all ti3es in fo$ce an.
effect& afte$ it 2as si4ne. No*e3be$ "!& "'"'. ,t appea$s f$o3 an anal1sis of E5hibit B that it
2as fo$ the 3utual inte$est of both pa$ties. /$o3 a s3all be4innin4& the business 2as then in a
*e$1 flou$ishin4 con.itions an. 4$o2in4 fast& an. the p$ofits 2e$e *e$1 la$4e an. 2e$e $unnin4
into bi4 3one1.
A3on4 othe$ thin4s& E5hibit A p$o*i.e.A =DaE That the net p$ofits f$o3 sai. coconut oil business
shall be .i*i.e. in e;ual sha$es bet2een the sai. pa$ties he$etoB DbE that A$nol. shoul. $ecei*e
a b$o0e$a4e of " pe$ cent f$o3 all pu$chases an. sales of 3e$chan.ise& e5cept fo$ the account
of the coconut 3illsB DcE that the net p$ofits f$o3 all othe$ business shoul. be .i*i.e. in e;ual
half sha$es bet2een the pa$ties he$eto.=
#
Un.e$ the abo*e p$o*isions& the plaintiff 3i4ht 2ell conten. that he 2as entitle. to one-half of all
the p$ofits an. a b$o0e$a4e of " pe$ cent f$o3 all pu$chases an. sales& e5cept those fo$ the
account of the coconut oil 3ills& 2hich un.e$ the *olu3e of business then e5istin4 2oul. $un into
a *e$1 la$4e su3 of 3one1. ,t 2as fo$ such $eason an. afte$ pe$sonal confe$ences bet2een
the3& an. to settle all .ispute. ;uestions& that E5hibit B 2as p$epa$e. an. si4ne..
The $eco$. $ecites that =the .efen.ant a.3its that f$o3 6ul1 ("& "'"7 to 6ul1 ("& "'"& the
plaintiff faithfull1 pe$fo$3e. all the .uties incu3bent upon hi3 un.e$ his cont$act of e3plo13ent&
it bein4 un.e$stoo.& ho2e*e$& that this a.3ission .oes not inclu.e an a.3ission that the plaintiff
place. a p$ope$ inte$p$etation upon his $i4ht to $e3une$ation un.e$ sai. cont$act of
e3plo13ent.=
,t bein4 a.3itte. that the plaintiff 2o$0e. =un.e$ his cont$act of e3plo13ent= fo$ the pe$io. of
fi*e 1ea$s& the ;uestion natu$all1 a$ises& fo$ 2ho3 2as he 2o$0in4F @is cont$act 2as 3a.e 2ith
the o$i4inal fi$3 of +illits - Patte$son& an. that fi$3 2as .issol*e. an. it cease. to e5ist& an. all
of its assets 2e$e 3e$4e. in& an. ta0en o*e$ b1& the pa$ent co$po$ation at San /$ancisco. ,n the
*e$1 natu$e of thin4s& afte$ the co$po$ation 2as fo$3e.& the plaintiff coul. not an. .i. not
continue to 2o$0 fo$ the fi$3& an.& 1et& he continue. his e3plo13ent fo$ the full pe$io. of fi*e
1ea$s. /o$ 2ho3 .i. he 2o$0 afte$ the pa$tne$ship 2as 3e$4e. in the co$po$ation an. cease. to
e5istF
,t is *e$1 appa$ent that& un.e$ the con.itions then e5istin4& the si4nin4 of E5hibit B 2as fo$ the
3utual inte$ests of both pa$ties& an. that if the cont$act E5hibit A 2as to be enfo$ce. acco$.in4
to its te$3s& that A$nol. 3i4ht 2ell conten. fo$ a 3uch la$4e$ su3 of 3one1 fo$ his se$*ices. ,n
t$uth an. in fact +illits an. both co$po$ations $eco4ni:e. his e3plo13ent an. accepte. the
benefits of his se$*ices. @e continue. his e3plo13ent an. $en.e$e. his se$*ices afte$ the
co$po$ation 2e$e o$4ani:e. an. E5hibit B 2as si4ne. >ust the sa3e as he .i. befo$e& an. both
co$po$ations $eco4ni:e. an. accepte. his se$*ices. Althou4h the plaintiff 2as p$esi.ent of the
local co$po$ation& the testi3on1 is conclusi*e that both of the3 2e$e 2hat is 0no2n as a one
3an co$po$ation& an. +illits& as the o2ne$ of all of the stoc0& 2as the fo$ce an. .o3inant po2e$
2hich cont$olle. the3. Afte$ E5hibit B 2as si4ne. it 2as $eco4ni:e. b1 +illits that the plaintiff9s
se$*ices 2e$e to be pe$fo$3e. an. 3easu$e. b1 its te$3 an. p$o*isions& an. the$e ne*e$ 2as
an1 .ispute bet2een plaintiff an. +illits upon that ;uestion.
The cont$o*e$s1 fi$st a$ose afte$ the co$po$ation 2as in financial t$ouble an. the appoint3ent of
2hat is 0no2n in the $eco$. as a =c$e.ito$s9 co33ittee.= The$e is no clai3 o$ p$etense that the$e
2as an1 f$au. o$ collusion bet2een plaintiff an. +illits& an. it is *e$1 appa$ent that E5hibit B 2as
to the 3utual inte$est of both pa$ties. ,t is ele3enta$1 la2 that if E5hibit B is a bin.in4 cont$act
bet2een the plaintiff an. +illits an. the co$po$ations& it is e;uall1 bin.in4 upon the c$e.ito$s9
co33ittee. ,t 2oul. not ha*e an1 hi4he$ o$ bette$ le4al $i4ht than the co$po$ation itself& an.
coul. not 3a0e an1 .efense 2hich it coul. not 3a0e. ,t is *e$1 si4nificant that the clai3 o$
.efense 2hich is no2 inte$pose. b1 the c$e.ito$s9 co33ittee 2as ne*e$ 3a.e o$ asse$te. at an1
p$e*ious ti3e b1 the .efen.ant& an. that it ne*e$ 2as 3a.e b1 +illits& an. it is *e$1 appa$ent
that if he ha. $e3aine. in cont$ol of the co$po$ation& it 2oul. ne*e$ ha*e 3a.e the .efense
2hich is no2 3a.e b1 the c$e.ito$s9 co33ittee. The $eco$. is conclusi*e that at the ti3e he
si4ne. E5hibit B& +illits 2as& in le4al effect& the o2ne$ an. hol.e$ of all the stoc0 in both
co$po$ations& an. that he app$o*e. it in thei$ inte$est& an. to p$otect the3 f$o3 the plaintiff
ha*in4 an. 3a0in4 a 3uch la$4e$ clai3 un.e$ E5hibit A. As a 3atte$ of fact& it appea$s f$o3 the
state3ent of M$. La$0in& the accountant& in the $eco$. that if plaintiff9s cause of action 2as no2
foun.e. upon E5hibit A& he 2oul. ha*e a clai3 fo$ 3o$e than P"7!&!!!.
<
Tho3pson on Co$po$ations& . e..& *ol. ,& section "!& sa1sA
The p$oposition that a co$po$ation has an e5istence sepa$ate an. .istinct f$o3 its 3e3be$ship
has its li3itations. ,t 3ust be note. that this sepa$ate e5istence is fo$ pa$ticula$ pu$poses. ,t 3ust
also be $e3e3be$e. that the$e can be no co$po$ate e5istence 2ithout pe$sons to co3pose itB
the$e can be no association 2ithout associates. This sepa$ate e5istence is to a ce$tain e5tent a
le4al fiction. +hene*e$ necessa$1 fo$ the inte$ests of the public o$ fo$ the p$otection o$
enfo$ce3ent of the $i4hts of the 3e3be$ship& cou$ts 2ill .is$e4a$. this le4al fiction an. ope$ate
upon both the co$po$ation an. the pe$sons co3posin4 it.
,n the sa3e section& the autho$ ;uotes f$o3 a .ecision in #' Ohio State& "(%"B "< L. R. A.& "#<&
in 2hich the Sup$e3e Cou$t of Ohio sa1sA
=So lon4 as a p$ope$ use is 3a.e of the fiction that a co$po$ation is an entit1 apa$t f$o3 its
sha$ehol.e$s& it is ha$3less& an.& because con*enient& shoul. not be calle. in ;uestionB but
2he$e it is u$4e. to an en. sub*e$si*e of its polic1& o$ such is the issue& the fiction 3ust be
i4no$e.& an. the ;uestion .ete$3ine. 2hethe$ the act in ;uestion& thou4h .one b1 sha$ehol.e$s&
G that is to sa1& b1 the pe$sons unitin4 in one bo.1& G 2as .one si3pl1 as in.i*i.uals& an. 2ith
$espect to thei$ in.i*i.ual inte$est as sha$ehol.e$s& o$ 2as .one ostensibl1 as such& but& as a
3atte$ of fact& to cont$ol the co$po$ation& an. affect the t$ansaction of its business& in the sa3e
3anne$ as if the act ha. been clothe. 2ith all the fo$3alities of a co$po$ate act. This 3ust be so&
because& the stoc0hol.e$s ha*in4 a .ual capacit1& an. capable of actin4 in eithe$& an. a
possible inte$est to conceal thei$ cha$acte$ 2hen actin4 in thei$ co$po$ate capacit1& the absence
of the fo$3al e*i.ence of the cha$acte$ of the act cannot p$eclu.e >u.icial in;ui$1 on the sub>ect.
,f it 2e$e othe$2ise& then in that .epa$t3ent of the la2 f$au. 2oul. en>o1 an i33unit1 a2a$.e.
to it in no othe$.=
+he$e the stoc0 of a co$po$ation is o2ne. b1 one pe$son 2he$eb1 the co$po$ation functions
onl1 fo$ the benefit of such in.i*i.ual o2ne$& the co$po$ation an. the in.i*i.ual shoul. be
.ee3e. to be the sa3e. DU. S. G1psu3 Co. *s. Mac0a1 +all Plaste$ Co.& "'' Pac.& #'.E
Rulin4 Case La2& *ol. %& section 77(& sa1sA
+hile of cou$se a co$po$ation cannot $atif1 a cont$act 2hich is st$ictl1 ult$a *i$es& an. 2hich it in
the fi$st instance coul. not ha*e 3a.e& it 3a1 b1 $atification $en.e$ bin.in4 on it a cont$act&
ente$e. into on its behalf b1 its office$s o$ a4ents 2ithout autho$it1. As a 4ene$al $ule such
$atification nee. not be 3anifeste. b1 an1 *ote. o$ fo$3al $esolution of the co$po$ation o$ be
authenticate. b1 the co$po$ate sealB no hi4he$ .e4$ee of e*i.ence is $e;uisite in establishin4
$atification on the pa$t of a co$po$ation& than is $e;uisite in sho2in4 an antece.ent autho$i:ation.
5 5 5 5 5 5 5 5 5
SEC. 777. The assent o$ app$o*al of a co$po$ation to acts .one on its account 3a1 be infe$$e.
in the sa3e 3anne$ that the absent of a natu$al pe$son 3a1 be& an. it is 2ell settle. that 2he$e
a co$po$ation 2ith full 0no2le.4e of the unautho$i:e. act of its office$ o$ a4ents ac;uiesces in
an. consents to such acts& it the$eb1 $atifies the3& especiall1 2he$e the ac;uiescence $esults in
p$e>u.ice to a thi$. pe$son.
5 5 5 5 5 5 5 5 5
7
SEC. 77'. So& 2hen& in the usual cou$se of business of a co$po$ation& an office$ has been
allo2e. in his official capacit1 to 3ana4e its affai$& his autho$it1 to $ep$esent the co$po$ation 3a1
be infe$$e. f$o3 the 3anne$ in 2hich he has been pe$3itte. b1 the .i$ecto$s to t$ansact its
business.
SEC. 7<7. ,n acco$.ance 2ith a 2ell-0no2n $ule of the la2 of a4enc1& notice to co$po$ate
office$s o$ a4ents 2ithin the scope o$ appa$ent scope of thei$ autho$it1 is att$ibute. to the
co$po$ation.
SEC. 77%. As a 4ene$al $ule& if a co$po$ation 2ith 0no2le.4e of its a4ents unautho$i:e. act
$ecei*e. an. en>o1s the benefits the$eof& it i3plie.l1 $atifies the unautho$i:e. act if it is one
capable of $atification b1 pa$ol.
,n its a$ticle on co$po$ations& Co$pus 6u$is& in section #" sa1sA
Ratification b1 a co$po$ation of a t$ansaction not p$e*iousl1 autho$i:e. is 3o$e easil1 infe$$e.
2he$e the co$po$ation $ecei*es an. $etains p$ope$t1 un.e$ it& an. as a 4ene$al $ule 2he$e a
co$po$ation& th$ou4h its p$ope$ office$s o$ boa$.& ta0es an. $etains the benefits of the
unautho$i:e. act o$ cont$act of an office$ o$ a4ent& 2ith full 0no2le.4e of all the 3ate$ial facts& it
the$eb1 $atifies an. beco3es boun. b1 such act of cont$act& to4ethe$ 2ith all the liabilities an.
bu$.ens $esultin4 the$ef$o3& an. in so3e >u$is.iction this $ule is& in effect& .ecla$e. b1 statute.
Thus the co$po$ation is liable on the 4$oun. of $atification 2he$e& 2ith 0no2le.4e of the facts& it
accepts the benefit of se$*ices $en.e$e. un.e$ an unautho$i:e. cont$act of e3plo13ent . . . .
Appl1in4 the la2 to the facts.
M$. La$0in& an e5pe$ience. accountant& 2as e3plo1e. b1 the local co$po$ation& an. f$o3 ti3e to
ti3e an. in the o$.ina$1 cou$se of business 3a.e an. p$epa$e. financial state3ents sho2in4 its
assets an. liabilities& t$ue copies of 2hich 2e$e sent to the ho3e office in San /$ancisco. ,t
appea$s upon thei$ face that plaintiff9s co3pensation 2as 3a.e an. foun.e. on E5hibit B& an.
that such state3ents 2e$e 3a.e an. p$epa$e. b1 the accountant on the assu3ption that E5hibit
B 2as in full fo$ce an. effect as bet2een the plaintiff an. the .efen.ant. ,n the cou$se of
business in the ea$l1 pa$t of "'!& plaintiff& as 3ana4e$ of the .efen.ant& sol. <!! tons of oil fo$
futu$e .eli*e$1 at P%#! pe$ ton. )ue to b$ea0 in the 3a$0et& plaintiff 2as able to pu$chase the oil
at P(?! pe$ ton o$ a p$ofit of P"?!&!!!.
,t appea$s f$o3 E5hibit B un.e$ the hea.in4 of =P$ofits= thatA
On all the business t$ansacte. bet2een +illits - Patte$son& Lt.. an. othe$s than +illits -
Patte$son& San /$ancisco& half the p$ofit a$e to be c$e.ite. to 3a1 account an. half to the P$ofit
- Loss account +illits - Patte$son& Lt..& Manila.
The pu$chase$s pai. P"!<&!!! on the cont$acts an. 4a*e thei$ notes fo$ P%<&!!!& an. it 2as
a4$ee. that all of the oil pu$chase. shoul. be hel. as secu$it1 fo$ the full pa13ent of the
pu$chase p$ice. As a $esult& the .efen.ant itself $ecei*e. the P"!<&!!! in cash& P%<&!!! in
notes& an. still hol.s the <!! tons of oil as secu$it1 fo$ the balance of the pu$chase p$ice. This
t$ansaction 2as sho2n in the se3i-annual financial state3ent fo$ the pe$io. en.in4 )ece3be$
("& "'!. That is to sa1& the business 2as t$ansacte. b1 an. th$ou4h the plaintiff& an. the
.efen.ant $ecei*e. an. accepte. all of the p$ofits on the .eal& an. the state3ent 2hich 2as
%
$en.e$e. 4a*e hi3 a c$e.it fo$ P'!&%(%.??& o$ half the p$ofit as p$o*i.e. in the cont$act E5hibit
B& 2ith inte$est.
Althou4h the p$e*ious financial state3ents sho2 upon thei$ face that the account of plaintiff 2as
c$e.it 2ith se*e$al s3all ite3s on the sa3e basis& it 2as not until the (. of Ma$ch& "'"& that
an1 ob>ection 2as e*e$ 3a.e b1 an1one& an. ob>ection 2as 3a.e fo$ the fi$st ti3e b1 the
c$e.ito$s9 co33ittee in a cable of that .ate.
As 2e anal1:e the facts E5hibit B 2as& in le4al effect& $atifie. an. app$o*e. an. is no2 bin.in4
upon the .efen.ant co$po$ation& an. the plaintiff is entitle. to $eco*e$ fo$ his se$*ices on that
2$itin4 as it 3o.ifie. the o$i4inal cont$act E5hibit A.
,t appea$s f$o3 the state3ent p$epa$e. b1 accountant La$0in foun.e. upon E5hibit B that the
plaintiff is entitle. to $eco*e$ P"!7&%%.<!. ,t is *e$1 appa$ent that his state3ent 2as base. upon
the assu3ption that the$e 2as a net p$ofit of P"?!&!!! on the <!! tons of oil& of 2hich the
plaintiff 2as entitle. to one-half.
,n the absence of an1 othe$ p$oof& 2e ha*e the $i4ht to assu3e that the <!! tons of oil 2as
2o$th the a3ount 2hich the .efen.ant pai. fo$ the3 at the ti3e of the pu$chase o$ P(?! pe$
ton& an. the $eco$. sho2s that the .efen.ant too0 an. no2 has the possession of all of the oil
secu$e the pa13ent of the p$ice at 2hich it 2as sol.. @ence& the p$ofit on the .eal to the
.efen.ant at the ti3e of the sale 2oul. a3ount to the .iffe$ence bet2een 2hat the .efen.ant
pai. fo$ the oil an. the a3ount 2hich it $ecei*e. fo$ the oil at the ti3e it sol. the oil. ,t appea$s
that at the ti3e of the sale the .efen.ant onl1 $ecei*e. P"!<&!!! in cash& an. that it too0 an.
accepte. the p$o3isso$1 notes of C$u: - Tan Chon4 Sa1& the pu$chase$s& fo$ P%<&!!! 3o$e
2hich ha*e been collecte. an. 3a1 ne*e$ be. @ence& it 3ust follo2 that the a3ount e*i.ence
b1 the notes cannot no2 be .ee3e. o$ t$eate. as p$ofits on the .eal an. cannot be until such
ti3es as the notes a$e pai..
The >u.43ent of the lo2e$ cou$t is $e*e$se.& an. a 3one1 >u.43ent 2ill be ente$e. he$e in fa*o$
of the plaintiff an. a4ainst the .efen.ant fo$ the su3 of P7?&<%.<!& 2ith the$eon at the $ate of 7
pe$ cent pe$ annu3 f$o3 the "!th .a1 of 6anua$1& "'. ,n a..ition the$eto& >u.43ent 2ill be
$en.e$e. a4ainst the .efen.ant in substance an. to the effect that the plaintiff is the o2ne$ of an
un.i*i.e. one-half inte$est in the p$o3isso$1 notes fo$ P%<&!!! 2hich 2e$e e5ecute. b1 C$u: -
Tan Chon4 Sa1& as a pa$t of the pu$chase p$ice of the oil& an. that he is entitle. to ha*e an.
$ecei*e one-half of all the p$ocee.s f$o3 the notes o$ eithe$ of the3& an. that also he ha*e
>u.43ent a4ainst the .efen.ant fo$ costs. So o$.e$e..
A$aullo& C. 6.& St$eet& Malcol3& A*anceHa& Ost$an.& an. Ro3ual.e:& 66.& concu$.
?