PRIME WHITE CEMENT VS IAC

In July 1969, Zosimo Falcon and Justo Trazo entered into an agreement with Alejandro Te
whereby it was agreed that from 1970 to 1976, Te shall be the sole dealer of 20,000 bags Prime
White cement in Mindanao. Falcon was the president of Prime White Cement Corporation
(PWCC) and Trazo was a board member thereof. Te was likewise a board member of PWCC. It
was agreed that the selling price for a bag of cement shall be P9.70. Before the bags of cement
can be delivered, Te already made known to the public that he is the sole dealer of cements in
Mindanao. Various hardwares then approached him to be his sub-dealers, hence, Te entered
into various contracts with them. But then apparently, Falcon and Trazo were not authorized by
the Board of PWCC to enter into such contract. Nevertheless, the Board wished to retain the
contract but they wanted some amendment which includes the increase of the selling price per
bag to P13.30 and the decrease of the total amount of cement bags from 20k to 8k only plus the
contract shall only be effective for a period of three months and not 6 years. Te refused the
counter-offer. PWCC then awarded the contract to someone else. Te then sued PWCC for
damages. PWCC filed a counterclaim and in said counterclaim, it is claiming for moral damages
the basis of which is the claim that Te’s filing of a civil case against PWCC destroyed the
company’s goodwill. The lower court ruled in favor Te.

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

HELD: No. Te is what can be called as a self-dealing director – he deals business with the same
corporation in which he is a director. There is nothing wrong per se with that. However, Sec. 32
provides that: SEC. 32. Dealings of directors, trustees or officers with the corporation. —- A
contract of the corporation with one or more of its directors or trustees or officers is voidable, at
the option of such corporation, unless all the following conditions are present: 1. That the
presence of such director or trustee in the board meeting in which the contract was approved
was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or
trustee was not necessary for the approval of the contract; 3. That the contract is fair and
reasonable under the circumstances; and 4. That in the case of an officer, the contract with the
officer has been previously authorized by the Board of Directors. In this particular case, the
Supreme Court focused on the fact that the contract between PWCC and Te through Falcon
and Trazo was not reasonable. Hence, PWCC has all the rights to void the contract and look for
someone else, which it did. The contract is unreasonable because of the very low selling price.
The Price at that time was at least P13.00 per bag and the original contract only stipulates
P9.70. Also, the original contract was for 6 years and there’s no clause in the contract which
protects PWCC from inflation. As a director, Te in this transaction should protect the
corporation’s interest more than his personal interest. His failure to do so is disloyalty to the
corporation. Anent the issue of moral damages, there is no question that PWCC’s goodwill and
reputation had been prejudiced due to the filing of this case. However, there can be no award
for moral damages under Article 2217 of the Civil Code in favor of a corporation.