CRANSON v. I.B.M. CORP. 234 Md. 477 (1964) 200 A.2d 33 CRANSON v. INTERNATIONAL BUSINESS MACHINES CORPORATION [No.

245, September Term, 1963.] Court of Appeals of Maryland. Decided April 30, 1964. The cause was argued before HENDERSON, HAMMOND, HORNEY, MARBURY and SYBERT, JJ. William J. Brannan, Jr., with whom were Kardy, Brannan & Neumann on the brief, for the appellant. Henry J. Noyes for the appellee. HORNEY, J., delivered the opinion of the Court. On the theory that the Real Estate Service Bureau was neither a de jure nor a de facto corporation and that Albion C. Cranson, Jr., was a partner in the business conducted by the Bureau and as such was personally liable for its debts, the International Business Machines Corporation brought this action against Cranson for the balance due on electric typewriters purchased by the Bureau. At the same time it moved for summary judgment and supported the motion by affidavit. In due course, Cranson filed a general issue plea and an affidavit in opposition to summary judgment in which he asserted in effect that the Bureau was a de facto corporation and that he was not personally liable for its debts. The agreed statement of facts shows that in April 1961, Cranson was asked to invest in a new business corporation which was about to be created. Towards this purpose he met with other interested individuals and an attorney and agreed to purchase stock and become an officer and director. Thereafter, upon being advised by the attorney that the corporation had been formed under the laws of Maryland, he paid for and received a stock certificate evidencing ownership of shares in the corporation, and was shown the corporate seal and minute book. The business of the new venture was conducted as if it were a corporation, through corporate bank accounts, with auditors maintaining corporate books and records, and under a lease [ 234 Md. 480 ] entered into by the corporation for the office from which it operated its business. Cranson was elected president and all transactions conducted by him for the corporation, including the dealings with I.B.M., were made as an officer of the corporation. At no time did he assume any personal obligation or pledge his individual credit to I.B.M. Due to an oversight on the part of the attorney, of which Cranson was not aware, the certificate of incorporation, which had been signed and acknowledged prior to May 1, 1961, was not filed until November 24, 1961.

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Between May 17 and November 8, the Bureau purchased eight typewriters from I.B.M., on account of which partial payments were made, leaving a balance due of $4,333.40, for which this suit was brought. Although a question is raised as to the propriety of making use of a motion for summary judgment as the means of determining the issues presented by the pleadings, we think the motion was appropriate. Since there was no genuine dispute as to the material facts, the only question was whether I.B.M. was entitled to judgment as a matter of law. The trial court found that it was, but we disagree. The fundamental question presented by the appeal is whether an officer1 of a defectively incorporated association may be subjected to personal liability under the circumstances of this case. We think not. Traditionally, two doctrines have been used by the courts to clothe an officer of a defectively incorporated association with the corporate attribute of limited liability. The first, often referred to as the doctrine of de facto corporations, has been applied in those cases where there are elements showing: (1) the existence of law authorizing incorporation: (2) an effort in good faith to incorporate under the existing law; and (3) actual user or exercise of corporate powers. Ballantine, Private Corporations, 23; 8 Fletcher, Cyclopedia of the Law of Private [ 234 Md. 481 ] Corporations, 3777; 13 Am. Jur., Corporations, 49-56; 18 C.J.S., Corporations, 99. The second, the doctrine of estoppel to deny the corporate existence, is generally employed where the person seeking to hold the officer personally liable has contracted or otherwise dealt with the association in such a manner as to recognize and in effect admit its existence as a corporate body. Ballantine, op.cit., 29; Machen, Modern Law of Corporations, 278-282; 18 C.J.S., op.cit., 109. It is not at all clear what Maryland has done with respect to the two doctrines. There have been no recent cases in this State on the subject and some of the seemingly irreconcilable earlier cases offer little to clarify the problem.2 In one line of cases, the Court, in determining the rights and liabilities of a defectively organized corporation, or a member or stockholder thereof, seems to have drawn a distinction between those acts or requirements which are a condition precedent to corporate existence and those acts prescribed by law to be done after incorporation. In so doing, it has been generally held that where there had been a failure to comply with a requirement which the law declared to be a condition precedent to the existence of the corporation, the corporation was not a legal entity and was therefore precluded from suing or being sued as such. Boyce v. M.E. Church, 46 Md. 359 (1877); Regester v. Medcalf, 71 Md. 528, 18 Atl. 966 (1889); Bonaparte v. Lake Roland R.R. Co., 75 Md. 340, 23 Atl. 784 (1892); Jones v. Linden Building Asso., 79 Md. 73, 29 Atl. 76 (1894); Maryland Tube Works v. West End Imp. Co., 87 Md. 207, 39 Atl. 620 (1898); Cleaveland v. Mullin, 96 Md. 598, [ 234 Md. 482 ] 54 Atl. 665 (1903); National Shutter Bar Co. v. Zimmerman, 110 Md. 313, 73 Atl. 19 (1909). These cases appear to stand for the proposition that substantial compliance with those formalities of the corporation law, which are made a condition precedent to corporate existence, was not only necessary for the creation of a corporation de jure, but was also a prerequisite to the existence of a de facto corporation or a corporation by estoppel. In the Boyce case, an action in assumpsit against a defectively incorporated religious society, the Court (at p. 373 and p. 374), in holding that the society was not estopped to deny its corporate existence, said: "We think it would be extending the doctrine of estoppel to an extent, not justified by the principles of public policy, to allow it to operate through the conduct of the

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parties concerned, to create substantially a de facto corporation, with just such powers as the parties may by their acts give to it. *** "The statute law of the State, expressly requiring certain prescribed acts to be done to constitute a corporation, to permit parties indirectly, or upon the principle of estoppel, virtually to create a corporation for any purpose, or to have acts so construed, would be in manifest opposition to the statute law, and clearly against its policy, and justified upon no sound principle in the administration of justice." In the Maryland Tube case, an action by a corporation for specific performance of a contract to convey land which it had entered into prior to its becoming a legal entity, the Court, having cited (at p. 217) the statements in Jones v. Aspen Hardware Co., 40 Pac. 457 (Colo. 1895),3 with approval for the [ 234 Md. 483 ] proposition that "`the doctrine of estoppel cannot be successfully invoked, unless the corporation has at least a de facto existence,'" that "`a de facto corporation can never be recognized in violation of a positive law'" and that "`there is a broad distinction between those acts made necessary by the statute as a prerequisite to the exercise of corporate powers, and those acts required of individuals seeking incorporation but not made prerequisite to the exercise of such powers,'" went on to say (at p. 218) that "these principles were clearly recognized and applied" in the Boyce case. In the National Shutter Bar case, an action by a corporation for an alleged libel which had occurred before the performance of a condition precedent necessary for legal incorporation, it was held citing the Maryland Tube case for the proposition that statutory conditions precedent must have been complied with to give existence to corporations formed under general laws that the corporation had no legal existence at the time of the alleged libel. In referring to the Boyce case, it was said (at p. 320) that "it has been held by our predecessors that a corporation cannot be actually or virtually created by estoppel in Maryland." And, on the basis of the statements in Jones v. Aspen Hardware Co., supra (also relied on in the Maryland Tube case), it was concluded that the corporation could not maintain the action. On the other hand, where the corporation has obtained legal existence but has failed to comply with a condition subsequent to corporate existence, this Court has held that such nonperformance afforded the State the right to institute proceedings for the forfeiture of the charter, but that such neglect or omission could never be set up by the corporation itself, or by its members and stockholders, as a defense to an action to enforce their liabilities. C. & O. Canal Co. v. B. & O. Railroad Co., 4 G. & J. 1 (1832); Hammond v. Straus, 53 Md. 1 (1880); Murphy v. Wheatley, 102 Md. 501, 63 Atl. 62 (1906). [ 234 Md. 484 ] In the Hammond case, an action by a creditor against a stockholder of a state bank on his statutory liability, the Court, after stating that a corporation or a stockholder could not defeat an action by showing noncompliance with the requirements of the corporation law unless the acts required are conditions precedent to corporate existence, said (at p. 15): "By holding otherwise, parties might avail themselves of the powers and privileges of a corporation, without in any manner subjecting themselves to its duties and obligations, and might set up their own neglect of duty, of wilful omission to comply with the requirements of the statute, as means of discharge from all their just obligations under the law. This is forbidden by every principle of law and justice, and hence such a defense could never be tolerated." It seems clear therefore that when a defect in the incorporation process resulted from a failure to comply with a condition subsequent, the doctrine of estoppel

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may be applied for the benefit of a creditor to estop the corporation, or the members or stockholders thereof, from denying its corporate existence. See Brune (Herbert M., Jr.), Maryland Corporation Law and Practice (rev. ed.), 339. In another line of Maryland cases which determined the rights and liabilities of a defectively organized corporation, or a member or stockholder thereof, the Court, apparently disregarding the distinction made between those requirements which are conditions precedent and those which are conditions subsequent to corporate existence, has generally precluded, on the grounds of estoppel or collateral attack, inquiry into the question of corporate existence. Maltby v. Northwestern Va. R.R. Co., 16 Md. 422 (1860); Franz v. Teutonia Building Asso., 24 Md. 259 (1866); Grape Sugar & Vinegar Mfg. Co. v. Small, 40 Md. 395 (1874); Laflin & Rand Powder Co. v. Sinsheimer, 46 Md. 315 (1877); Keene v. Van Reuth, 48 Md. 184 (1878); Bartlett v. Wilbur, 53 Md. 485 (1880); Pott & Co. v. Schmucker, 84 Md. 535, 36 Atl. 592 (1897). In the Grape Sugar case, an action against a defectively organized corporation to [ 234 Md. 485 ] recover the balance due for work done and materials furnished, the Court said (at p. 400): "The second prayer proceeds upon the assumption that the [corporation] is not liable, provided the work was done prior to the recording of the certificate of incorporation. It is true, that under the general incorporation law of this State, the recording of the certificate was necessary to constitute the [corporation] a body politic. If, however, the contract was made with the [creditor] through * * * [the] President of the [corporation], after the certificate had been signed by the members of the proposed corporation, but before it was recorded, and the company, after its incorporation was complete, accepted the work done under the contract, it will be estopped, both in law and equity, from denying its liability, on account of the same." Cf. Hammond v. Straus, supra. And see to the contrary Boyce v. M.E. Church, supra, which might be distinguishable in that it involved an effort to impose liability on a religious society and not a business corporation. In the Laflin & Rand case, decided in the same year (1877) as the Boyce case, the Court, in an action against certain members of a corporation to make them individually liable for goods sold and delivered to the corporation, said (at p. 321): "[The company] has been clothed with all the forms of a corporation by the laws of a neighboring State, and was in the exercise and use of the franchises conferred upon it. It was a corporation de facto at the time the goods were sold and delivered to it * * * and its existence as a corporation cannot be collaterally drawn into question. "To permit a recovery against the defendants, and thereby to say that they are to be regarded in law as a voluntary unincorporated association, would be a departure from all the cases. The debt was not created with them individually, but with a company acting [ 234 Md. 486 ] under a formal incorporation, and in the exercise of its corporate powers. This [creditor] dealt with it and gave it credit as a corporation. If its assets are not ample to pay, it is the misfortune of the creditor."4 See also the Franz case at p. 270 (of 24 Md.) and the Bartlett case at p. 498 (of 53 Md.) for similar statements of the law. From these cases it appears that where the parties have assumed corporate existence and dealt with each other on that basis, the Court will apply the estoppel doctrine on the theory that the parties by recognizing the organization as a corporation were thereafter prevented from raising a question as to its corporate existence. When summarized, the law in Maryland pertaining to the de facto and estoppel doctrines reveals that the cases seem to fall into one or the other of two

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categories. In one line of cases, the Court, choosing to disregard the nature of the dealings between the parties, refused to recognize both doctrines where there had been a failure to comply with a condition precedent to corporate existence, but, whenever such noncompliance concerned a condition subsequent to incorporation, the Court often applied the estoppel doctrine. In the other line of cases, the Court, choosing to make no distinction between defects which [ 234 Md. 487 ] were conditions precedent and those which were conditions subsequent, emphasized the course of conduct between the parties and applied the estoppel doctrine when there had been substantial dealings between them on a corporate basis. Whether or not the decisions in the Boyce and Maryland Tube cases had the effect of repudiating the de facto doctrine in this state, as some of the text writers seem to think, is a question we do not reach in this case and therefore need not consider at this time. On the other hand, since it is clear that the Maryland Tube and National Shutter Bar cases are inconsistent with other Maryland cases insofar as they held (in relying on the statements in Jones v. Aspen Hardware Co., supra) that the doctrine of estoppel cannot be invoked unless a corporation has at least a de facto existence, both cases Maryland Tube and National Shutter Bar should be, and are hereby, overruled to the extent of the inconsistency. There is, as we see it, a wide difference between creating a corporation by means of the de facto doctrine and estopping a party, due to his conduct in a particular case, from setting up the claim of no incorporation. Although some cases tend to assimilate the doctrines of incorporation de facto and by estoppel, each is a distinct theory and they are not dependent on one another in their application. See 8 Fletcher, op.cit., 3763; France on Corporations (2nd ed.), 29; 18 C.J.S., op.cit., 111h. Where there is a concurrence of the three elements necessary for the application of the de facto corporation doctrine, there exists an entity which is a corporation de jure against all persons but the state. On the other hand, the estoppel theory is applied only to the facts of each particular case and may be invoked even where there is no corporation de facto. Accordingly, even though one or more of the requisites of a de facto corporation are absent, we think that this factor does not preclude the application of the estoppel doctrine5 in a proper case, such as the one at bar. [ 234 Md. 488 ] I.B.M. contends that the failure of the Bureau to file its certificate of incorporation debarred all corporate existence. But, in spite of the fact that the omission might have prevented the Bureau from being either a corporation de jure or de facto,6Jones v. Linden Building Asso., supra, we think that I.B.M. having dealt with the Bureau as if it were a corporation and relied on its credit rather than that of Cranson, is estopped to assert that the Bureau was not incorporated at the time the typewriters were purchased. Laflin & Rand Powder Co. v. Sinsheimer, supra. See also Tulane Improvement Co. v. S.A. Chapman & Co., 56 So. 509 (La. 1911). In 1 Clark and Marshall, Private Corporations, 89, it is stated: "The doctrine in relation to estoppel is based upon the ground that it would generally be inequitable to [ 234 Md. 489 ] permit the corporate existence of an association to be denied by persons who have represented it to be a corporation, or held it out as a corporation, or by any persons who have recognized it as a corporation by dealing with it as such; and by the overwhelming weight of authority, therefore, a person may be estopped to deny the legal incorporation of an association which is not even a corporation de facto."

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In cases similar to the one at bar, involving a failure to file articles of incorporation, the courts of other jurisdictions have held that where one has recognized the corporate existence of an association, he is estopped to assert the contrary with respect to a claim arising out of such dealings. See, for example, Tarbell v. Page, 24 Ill. 46 (1860); Magnolia Shingle Co. v. J. Zimmern's Co., 58 So. 90 (Ala. 1912); Lockwood v. Wynkoop, 144 N.W. 846 (Mich. 1914); John Lucas Co. v. Bernhardt's Estate, 100 So. 399 (La. 1924). Since I.B.M. is estopped to deny the corporate existence of the Bureau, we hold that Cranson was not liable for the balance due on account of the typewriters. Judgment reversed; the appellee to pay the costs.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-11442 May 23, 1958

MANUELA T. VDA. DE SALVATIERRA, petitioner, vs. HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte, Branch II, and SEGUNDINO REFUERZO, respondents. Jimenez, Tantuico, Jr. and Tolete for petitioner. Francisco Astilla for respondent Segundino Refuerzo. FELIX, J.: This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order of the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving Segundino Refuerzo of liability for the contract entered into between the former and the Philippine Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the case are as follows: Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a contract of lease with the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly organized and existing under the laws of the Philippines, domiciled at Burauen, Leyte, Philippines, and with business address therein, represented in this instance by Mr. Segundino Q. Refuerzo, the President". It was provided in said contract, among other things, that the lifetime of the lease would be for a period of 10 years; that the land would be planted to kenaf, ramie or other crops suitable to the soil; that the lessor would be entitled to 30 per cent of the net income accruing from the harvest of any, crop without being responsible for the cost of production thereof; and that after every harvest, the lessee was bound to declare at the earliest possible time the income derived therefrom and to deliver the corresponding share due the lessor. Apparently, the aforementioned obligations imposed on the alleged corporation were not complied with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of First Instance of Leyte a complaint against the Philippine Fibers Producers Co., Inc., and Segundino Q. Refuerzo, for accounting, rescission and damages (Civil Case No. 1912). She averred that sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased property which crop was, at the time of the commencement of the action, already

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harvested, processed and sold by defendants; that notwithstanding that fact, defendants refused to render an accounting of the income derived therefrom and to deliver the lessor's share; that the estimated gross income was P4,500, and the deductible expenses amounted to P1,000; that as defendants' refusal to undertake such task was in violation of the terms of the covenant entered into between the plaintiff and defendant corporation, a rescission was but proper. As defendants apparently failed to file their answer to the complaint, of which they were allegedly notified, the Court declared them in default and proceeded to receive plaintiff's evidence. On June 8, 1955, the lower Court rendered judgment granting plaintiff's prayer, and required defendants to render a complete accounting of the harvest of the land subject of the proceeding within 15 days from receipt of the decision and to deliver 30 per cent of the net income realized from the last harvest to plaintiff, with legal interest from the date defendants received payment for said crop. It was further provide that upon defendants' failure to abide by the said requirement, the gross income would be fixed at P4,200 or a net income of P3,200 after deducting the expenses for production, 30 per cent of which or P960 was held to be due the plaintiff pursuant to the aforementioned contract of lease, which was declared rescinded. No appeal therefrom having been perfected within the reglementary period, the Court, upon motion of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte caused the attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No property of the Philippine Fibers Producers Co., Inc., was found available for attachment. On January 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decision rendered in said Civil Case No. 1912 was null and void with respect to him, there being no allegation in the complaint pointing to his personal liability and thus prayed that an order be issued limiting such liability to defendant corporation. Over plaintiff's opposition, the Court a quo granted the same and ordered the Provincial Sheriff of Leyte to release all properties belonging to the movant that might have already been attached, after finding that the evidence on record made no mention or referred to any fact which might hold movant personally liable therein. As plaintiff's petition for relief from said order was denied, Manuela T. Vda. de Salvatierra instituted the instant action asserting that the trial Judge in issuing the order complained of, acted with grave abuse of discretion and prayed that same be declared a nullity. From the foregoing narration of facts, it is clear that the order sought to be nullified was issued by tile respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of the Rules of Court. Section 3 of said Rule, however, in providing for the period within which such a motion may be filed, prescribes that: SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. A petition provided for in either of the preceding sections of this rule must be verified, filed within sixty days after the petitioner learns of the judgment, order, or other proceeding to be set aside, and not more than six months after such judgment or order was entered, or such proceeding was taken; and must be must be accompanied with affidavit showing the fraud, accident, mistake, or excusable negligence relied upon, and the facts constituting the petitioner is good and substantial cause of action or defense, as the case may be, which he may prove if his petition be granted". (Rule 38) The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the judgment, and not more than 6 months after the judgment or order was rendered, both of which must be satisfied. As the decision in the case at bar was under date of June 8, 1955, whereas the motion filed by respondent Refuerzo was dated January 31, 1956, or after the lapse of 7 months and 23 days, the filing of the aforementioned motion was clearly made beyond the prescriptive period provided for by the rules. The remedy allowed by Rule 38 to a party adversely affected by a decision or order is certainly an alert of grace or

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benevolence intended to afford said litigant a penultimate opportunity to protect his interest. Considering the nature of such relief and the purpose behind it, the periods fixed by said rule are non-extendible and never interrupted; nor could it be subjected to any condition or contingency because it is of itself devised to meet a condition or contingency (Palomares vs. Jimenez,* G.R. No. L-4513, January 31, 1952). On this score alone, therefore, the petition for a writ of certiorari filed herein may be granted. However, taking note of the question presented by the motion for relief involved herein, We deem it wise to delve in and pass upon the merit of the same. Refuerzo, in praying for his exoneration from any liability resulting from the nonfulfillment of the obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed the defense that the complaint filed with the lower court contained no allegation which would hold him liable personally, for while it was stated therein that he was a signatory to the lease contract, he did so in his capacity as president of the corporation. And this allegation was found by the Court a quo to be supported by the records. Plaintiff on the other hand tried to refute this averment by contending that her failure to specify defendant's personal liability was due to the fact that all the time she was under the impression that the Philippine Fibers Producers Co., Inc., represented by Refuerzo was a duly registered corporation as appearing in the contract, but a subsequent inquiry from the Securities and Exchange Commission yielded otherwise. While as a general rule a person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such transaction or dealing, (Asia Banking Corporation vs. Standard Products Co., 46 Phil., 114; Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship Pompey, 49 Phil., 117), yet this doctrine may not be held to be applicable where fraud takes a part in the said transaction. In the instant case, on plaintiff's charge that she was unaware of the fact that the Philippine Fibers Producers Co., Inc., had no juridical personality, defendant Refuerzo gave no confirmation or denial and the circumstances surrounding the execution of the contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was really made to believe that such corporation was duly organized in accordance with law. There can be no question that a corporation with registered has a juridical personality separate and distinct from its component members or stockholders and officers such that a corporation cannot be held liable for the personal indebtedness of a stockholder even if he should be its president (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or member cannot be held personally liable for any financial obligation be, the corporation in excess of his unpaid subscription. But this rule is understood to refer merely to registered corporations and cannot be made applicable to the liability of members of an unincorporated association. The reason behind this doctrine is obvious-since an organization which before the law is non-existent has no personality and would be incompetent to act and appropriate for itself the powers and attribute of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the rights and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and comes personally liable for contracts entered into or for other acts performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690). Considering that defendant Refuerzo, as president of the unregistered corporation Philippine Fibers Producers Co., Inc., was the moving spirit behind the consummation of the lease agreement by acting as its representative, his liability cannot be limited or restricted that imposed upon corporate shareholders. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights, if any, arising out of such transaction.

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Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on this matter and ordering the Provincial Sheriff of Leyte to release any and all properties of movant therein which might have been attached in the execution of such judgment, is hereby set aside and nullified as if it had never been issued. With costs against respondent Segundino Refuerzo. It is so ordered. Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., and Endencia, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-9300 April 18, 1958

MARIANO A. ALBERT, plaintiff-appellee, vs. UNIVERSITY PUBLISHING CO., INC., defendant-appellant. Antonio M. Molina, for appellee. Pedro C. Mendiola, Borgonio E. Cruz, and Jose M. Aruego for appellant. PADILLA, J.: This is an appeal from a judgment rendered by the Court of First Instance of Manila, ordering the defendant corporation to pay, to the Administrator of the estate of the late, Mariano A. Albert, who died during the pendency of the case, the sum of P23,000, interest thereon from the date of the filing, of the complaint, and costs, and dismissing the defendant's counterclaim, certified to this Court by the, Court of Appeals for the reason that the total amount sought to be recovered by the defendant corporation exceeds P50,000. On 19 July 1948 the plaintiff and the defendant corporation entered into a contract whereby, for and in consideration of the exclusive right to publish or cause to be published a manuscript containing commentaries on "The Revised Penal Code of the Philippines, amended until July 15, 1948," written by the plaintiff, for a period of five years from the date of execution of the contract; of the liquidated balance due the plaintiff as his share in the sale of the reprinted copies of the book as stipulated in a contract executed on 21 May 1946 by and between him and the defendant corporation (Exhibit 1) ; and of the liquidated share of the plaintiff in the sale of 1,500, reprinted copies of the book, the defendant corporation undertook to pay the plaintiff the sum of P30,000 in eight quarterly installments of P3,750 each, beginning 15 July 1948 (Exhibit A). The most important stipulations of the contract, are the following: 1. That the PARTY OF THE FIRST PART is the author and sole proprietor of a manuscript which is his revised commentaries of "The Revised Penal Code of the Philippines" as amended until July 15, 1948;

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2. That the PARTY OF THE FIRST PART hereby grants to the PARTY OF THE SECOND PART the exclusive right to publish or cause to be published the said manuscript with, in a period of 5 years from the execution of this document, provided that the total number of copies to be printed within said period shall not be more than 4,000 copies; 4. That the PARTY OF THE SECOND PART hereby agrees to pay to the PARTY OF THE FIRST PART, for the exclusive right to publish the manuscript, object of this contract, for a period of 5 years counted from the date of execution of this document; for the liquidated balance due him as his share in the sales of the reprinted copies of the first edition of this book as per contract between both parties dated May 21, 1946; and for his liquidated share in the sales of another 1,500 reprinted copies in 1948 of said book, now in the press: the total amount of P30,000 payable in 8 quarters at the rate of P3,750 a quarter, the first quarter to begin from July 1948. It is also agreed that should the PARTY OF THE, SECOND PART fail to pay to the PARTY OF THE FIRST PART any one of the eight installments referred to when due, the rest of the installments shall be deemed due and payable, whether there is judicial or extrajudicial demand made by the PARTY OF THE FIRST PART. In this event, the PARTY OF THE FIRST PART shall take charge of the publication of this book, and in case it has already been published, will take over the sale and distribution of the printed book, without any right on the part of the PARTY OF THE SECOND PART to participate in its proceeds: 7. That the PARTY OF THE FIRST PART obligates himself to deliver to the PARTY OF THE SECOND PART the manuscript in its final form not later than December 31, 1948; provided, however, that the PARTY OF THE SECOND PART Shall have no right to make any change in the manuscript as prepared by the PARTY OF THE FIRST PART who, if the circumstances do permit, must stamp his approval in the printer's final proof. In the event of the impossibility for the PARTY OF THE FIRST PART to deliver the manuscript complete by December 31, 1948, the PARTY OF THE SECOND PART shall no longer be under obligation to pay the installments remaining payable by virtue of the provisions of the contract, unless the PARTY OF THE SECOND PART undertakes to complete the same by inserting the latest decisions of the Supreme Court as digested and/or commented upon by the PARTY OF THE FIRST PART. The defendant corporation paid P1,000 to the plaintiff on 31 July 1948 (Exhibits B and 2) ; P1,000 on 10 September 1948 (Exhibit 2-A) ; P2,000 on 10 November 1948 (Exhibits C, C-1 and 2-B); P2,000 on 29 November 1948 (Exhibit 3); and P1,000 on 24 December 1948 (Exhibit 3-A), or a totaled P7.000. The defendant corporation made no other or further payment to the plaintiff on account of the contract. The evidence for the plaintiff shows that on 16 December 1948 he wrote a letter advising the defendant corporation that "The manuscript of my Commentaries on the Revised Penal Code, subject matter of our Contract executed on the 19th of July this year, is now at your disposal." (Exhibit D.) The plaintiff claims that the defendant, corporation breached the contract when it failed to pay the full amount of the installment for the first quarter on or before 15 October 1948, the last day within which to pay it. The defendant corporation contends that the plaintiff failed to deliver to it the manuscript in its final form not later than 31 December 1948 as stipulated in paragraph 7 of the contract (Exhibit A). The first point then to determine is whether the plaintiff had performed his part of the contract as stipulated in paragraph 7 of the aforesaid contract. Upon plaintiff's demand and defendant's failure to produce and exhibit the original of the letter dated 16 December 1948 already referred to, the plaintiff read in evidence the contents of a copy

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of said letter (Exhibit D). Concepcion K. de Vera, the stenographer who took down by shorthand the dictation of the plaintiff, identified it as the carbon copy of the original and testified that the original was sent to the defendant corporation. On cross-examination she exhibited and read to the Court the notes from which she typed the original letter. The President of the defendant corporation denies having received not only the original of the letter dated 16 December 1948 but also the original of a letter dated 27 April 1949 (Exhibit E) writ by the plaintiff to the defendant corporation. In the letter reference to the preceding letter of 16 December 48 (Exhibit D) was made and a demand for payment of installments due and unpaid was also made. The defendant corporation admits, however, the receipt of the original of the letters dated 15 August 1949 (Exhibit F) and 6 June 1949 (Exhibit G). In the first letter (Exhibit F) the plaintiff reminded the defendant corporation of its promise to settle the installment due on 15 April and 15 July and the balance of the installment due and unpaid 15 December (January); and in the second (Exhibit G) the plaintiff reminded the defendant of its due and paid installments and stated that, in view of the aparrent inability of the defendant corporation to fulfill its part of the contract, he would consider the contract rescinded and would publish the revised edition next month (July) at his expense. The defendant corporation has not answered these two letters. The mere denial by the President of the defendant corporation is not sufficient to outweigh and overcome the evidence showing that the plaintiff advised the defendant corporation that the manuscript of the commentaries on Revised Penal Code, subject matter of the contract executed on 19 July 1948, was ready for delivery to, and the disposal of, the defendant corporation for publication. The defendant corporation failed to pay on or before 15 October 1948 the first installment due, because it d paid only P1,000 on 31 July 1948 and another P1,000 on 10 September 1948. When the defendant corporation and P2,000 on 10 November 1948, it was after the last fixed for the payment of the first installment. But that delay in the payment of the first quarterly installment 37 not amount to a breach to justify the enforcement of the stipulation set forth in paragraph 4 of the contract (Exhibit A) because the plaintiff accepted the payment of P2,000 on 10 November 1948, which completed and paid the full amount of the first installment due and left a balance of P250 to be credited to the second installment due on 15 January 1949. On this last mentioned date the total amount paid by the defendant corporation, including the sum of in excess of the amount paid for the first quarterly installment, was P3,250 or P500 short of the total amount due on such date corresponding to the second quarterly installment. As the defendant corporation has made no further payment, the stipulation in paragraph 4 of the contract has to be enforced. The defendant corporation argues that the fact that the mimeographed copies of plaintiff's book or commentaries op the Revised Penal Code published by the PHILAW Publishing Company does not contain cases decided by the supreme Court up to 1948 is proof that contrary to plaintiff's claim the manuscript which the plaintiff bound himself to write and finish on or before 31 December 1948 was not ready for publication on 16 or 31 December 1948. There is no evidence, however, that the mimeographed copies of the book published and sold in November 1949 by the plaintiff or the PHILAW Publication Company were the same as that offered for delivery by the plaintiff to the defendant corporation on 16 December 1948. Besides, there is no stipulation in the contract that the commentaries would include cases decided by the Supreme Court up to 1948. Nowhere in the contract may such stipulation be found. The action brought by the plaintiff is not for recission of a contract, under which theory or belief both parties seem to have proceeded and labored, but for a resolution of reciprocal obligations because one of the obligors failed to comply with that which was incumbent upon him. The injured party could choose between requiring specific performance of the obligation or its resolution with indemnity for losses and payment of interest1 . The stipulation in paragraph 4 of the contract (Exhibit A) may be considered is liquidated damages to be paid in case of breach of the contract.2 The defendant corporation has not paid the share of plaintiff in the proceeds of the sale of the first 1,000 copies of the book printed and sold by the defendant corporation as agreed upon in the contract entered into by and between the parties on 21 May 1946 (Exhibit A). In the original and amended answers of the defendant corporation it is alleged that said copies remained unsold, but on the witness stand Jose M. Aruego, President of the defendant corporation,

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admitted that 800 copies thereof had been sold. There is also a share due the plaintiff in the sale of 1,500 reprinted copies of the book. But how much that share amounts to, the evidence does not throw any light, in like manner that there is no evidence to show how much is due the plaintiff as, his share in the sale of 800 copies of the book. The counterclaim of the defendant was correctly dismissed by the trial court, because it found that the one who had breached the contract is the defendant corporation. Such being the case, the defendant corporation cannot claim any damage against the plaintiff. Aside from that, it is difficult to believe that from 1946 to the time when the contract of 16 July 1948 was signed, the defendant corporation could not and had not disposed of the 1,000 copies of the book. Such is the import of the letter of 13 June 1948 written by the plaintiff to Jose M. Aruego, President of the defendant corporation (Exhibit H). It is also difficult to believe that not a single copy of the 1,500 copies of the book subsequently reprinted was sold, because of the publication and sale by the PHILAW Publishing Company of the mimeographed copies of the book. From 1948 to November 1949 when the mimeographed copies of the book were sold, there was sufficient time for the sale and, disposition of the 1,500 reprinted copies of the book. There is no evidence that long before November 1949 there had been an announcement or publication that copies of commentaries on the Revised Penal Code by the plaintiff would be mimeographed and ready for distribution and sale. Although the defendant corporation breached the contract, as found for a trial court, and there is no reason which may find court in the evidence for disturbing such finding, yet we believe that in the absence of evidence to show the amount that should accrue to the plaintiff as his share in the proceeds of the sale of 1,000 copies of the book and of 1,500 copies of the reprinted book that were in press when the contract of 19 July 1948 was entered into, and the amount of profits that the plaintiff would derive from the sale of the books to be printed, as agreed upon in the contract of 19 July 1948, the amount of liquidated damages is rather excessive, because even if the books were sold at P40, P35 or P30, as hinted by Jose M. Aruego, the president of the defendant corporation, in his testimony, the cost of paper, printing, binding, advertising, sale promotion and other incidental disbursements should be deducted from the gross proceeds. For that reason and in accordance with the provisions of article 2227 of the new Civil Code, the reasonable amount of liquidated damages that must be awarded to the plaintiff as a result of the breach by the defendant corporation of the contract is equitably reduced to P15,000. With this modification as to the amount of liquidated damages, the judgment appealed from is affirmed, with costs against the appellant. Paras, C.J., Montemayor, Reyes, A., Bautista Angelo, Concepcion, Reyes, J.B.L., Endencia and Felix., JJ., concur.