corporate contract law: ateneo law journal€¦ · .illustrative ofthis principle is the case of...

ATENEO LAW JOURNAL F A C U L T Y ADVISERS

JESUS DE VEYRA 1951-54

JEREMIAS U. MONTEMAYOR 1954-56

AMEUTO R MUTUC 1956-59

FEDERICO B. MORENO 1959-63

RODOLFO U. JIMENEZ 1963-68

REYNALDO G. GERONIMO 1970-74

HECTOR L. HOFILENA 1974-81

ExEQUIEL B. ]A VIER 1981-90

JACINTO D. JIMENEZ 1990-94

1

CORPORATE CONTRACT LAW: Unif:;-ing Theme on Theories Relating to

· .. Promoter's Contracts, De Facto Corporations, Corporation by Estoppel, Articles of Incorporation, By-Laws, and Ultra Vires Acts

CESAR L. VILLANUEVA*

INTRODUCTION

The corporate entity is a medium, one of many available to businessmen, by which commercial activities can efficiently be under-taken. Under Section 2 of the Corporation Code, a corporation is a juridical entity with a personality separate and distinct from the members or stockholders that compose it. In reality, however, a corporation is but a fiction extended by the law to investors, managers and businessmen by which to conduct their affairs in the business world.

The statutory definition of the corporation is essentially a narrow and antiquated view of the corporate vehicle. At most, it looks at only one aspect of the multifaceted relationships between corporations and their environment - that between the corporation and the State. It views the corporation merely as a creature of the law, when in fact juridical personality i.s merely one aspect of corporflte existence. The corporate setting itself embodies a contractual relationship of varying degrees with principles of Contract Law enmeshed with those of Corporate Law, the resulting interaction creating tension and hybrid legal products that continue to animate the Philippine legal system. The object of this paper is to study doctrines which have emerged from the merging of Contract Law with Corporate Law, and the resulting consequences thereof.

• The author is a founding partner of the law firm Villanueva Bernardo & Gabionza Law Offices and is also a professorial lecturer in Corporation Law at the Ateneo College of Law.

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I. TRI-LEVEL ExiSTENCE OF A CoRPORATION

Tayag v. Benguet Consolidated, Inc. 1 expressly denied tion of the genossenchaft theory enunciated by Friedmann2which a corporation as "the reality of the group as a social and legal independent of state recognition and concession."3 Tayag held that a corporation being a creature of the law "owes its life to the its birth being purely dependent on its will; it is a creature any existence until it has received the imprimatur of the Sfate according to law." A corporation will have no rights and of a higher priority than that of its creator and "cannot refuse to yield obedience to acts of its state organs, certainly not exclucl..iiigc·' the judiciary whenever called upon to do so."4

In Ang Pue & Co. v. Sec. of Commerce and Industry, 5 the Supreme Court held that to "organize a corporation or a partnership that could claim a juridical personality of its own and transact business as suchi is not a matter of absolute right but a privilege which may be enjoye,d OI"l:lY under such terms as the State may deem necessary to impose:1f .

Nevertheless, the fiction of corporate personality created unless there is an enterprise or group upon whom it may conferred. But the grant is only by virtue of a primary franchise give{\. by the State and it is the State which will determine whether it wHI be granted or not. Once granted, however, and enterprise or group. acquires juridical personality, the latter does not become merely solely a creature of the State's own volition, possessed o( a personality. Thus, the State cannot destroy either the group or tJ;l;[ business without observing thedu.e process clause of the

.Illustrative ofthis principle is the case of Bache & Co. (Phil.), v. Ruiz,6 where the Court held that a corporation is entitled ,,,_ immunity against unreasonable searches and seizures. "A corp is, after aU, but an association of individuals under an assumed and with a distinct legal entity. In organizing itself as a colh:-. ..

I 26 (1969). 2 LEGAL THEORY, 164-68 (1947); also Holdsworth, English Corporation Law, 31 YALE L.J. 382 3 ld. at 253.

' Id. 5 5 SCRA 645, 647 (1962). ' 37 SCRA 823 (1971).

1994 CoRPORATE CoNTRACT LAw 3

body it waives no constitutional immunities appropriate for such body. · Its property cannot be taken without compensation. It can only be proceeded against by due process of law, and is protected against unlawful discrimination."7

Essentially, therefore, the existence of a corporation encompasses three levels: First, the corporation is a juridical entity or a juridical fiction. Second, the corporate setting at the same time involves contractual relationships on four (4) levels:

(a) between the corporation and its agents or representatives to act in the real world, such as its directors and its officers;

(b) between the corporation and its shareholders or members;

(c) between and among the shareholders in a common venture; and

(d) between the corporation and third-parties or" outsiders," which is essentially governed by Contract Law.

Third, the corporation becomes in its operation a business economic unit, or what is called in accounting a "going concern."8

The tri-level existence of the corporation explains the varying and interweaving doctrines prevailing in the corporate world. Although the Supreme Court has declared that there is a need "to put an end to the fiction that corporations are people,"9 nevertheless, it has made coporations liable for torts, 10 or pierced the veil of corporate fiction and made the individual members of the corporation answerable for

-forporate liabilities, even if justice could have Leen obtained without doing so .

In practice, the piercing of the veil of corporate fiction is a recognition of the underlying association of individuals in the corporate setting because piercing is achieved only by looking at the corporation as an aggrupation of individuals doing business. "Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice

7 ld. at 837, quoting Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652 (1906). 8 1 VALIX AND PERALTA, fiNANCIAL ACCOUNTING 13, 18 (1976). ' Luwn Brokerage Co., Inc. v. Maritime Building Co., btc., 86 SCRA 305 (1978).

10 Philippine National Bank v. Court of Appeals, 83 SCRA 237 (1978).


and inequity." 11 In the first case12 where the Court applied the doctrine, it in fact conceded the necessary existence of individ a corporate setting:

The proposition that a corporation has an existence separate and distinct from its membership has its limitations. It must be noted that this separate existence is fo'r particular purposes. It must also . be remembered that there can be no corporate existence without persons to compose it; there can be no association without associates x x xY

Thus, the entity commonly known as a "corporate entity" its being from the reality of the underlying enterprise which has formed or is in the process of formation. The State's grant of coroorafe; personality establishes a prima facie determination that the liabilities and operations of the corporation are those of the But where the corporate entity is defective or is otherwise its existence, extent and consequences may be determined by the existence and operations of the underlying enterprise, which by very qualities and operations acquires an entity of its own, by law.14 , ·

,_.;:;£': . This view of the corporation as an economic enterprise

the "enterprise theory" which governs situations where courts . either erected a corporate personality which the State had not grant€-dt or disregarded corporate personality where the State had grantedAt:. In either case, the purpose is to give legal effect to factual relationship$· set up between an economic entity and an outsider. 15 The Court itself has, on occasion, recognized that "[t]he corporation;1( emerging as an enterprise bounded by economics, rather than artificial personality bounded by forms of words in a charter, minMtf books, and books of account."16 -,:;;::

Although generally the enterprise entity theory has been in American jurisprudence, its basic flaw may not pertain Philippine setting, because we follow a different principle of

11 Tan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988). 12 Arnold v. Willits &· Patterson, Ltd., 44 Phil. 634 (1923). 13 [d. at 644, quoting 1 THOMPSON ON CORPORATIONS, 2d ed., section 10. 14 Berle, The Theory of Enterprise, 47 Cot. L. REv. No. 3 (April, 1947). 15 ld., at 345. 16 ld.


personality. While under American common law, a partnership does not have a personality separate and distinct from the partners, under Philippine civil law, although a partnership is inherently a contractual relationship, the Civil Code grants to it a personality separate and distinct from that of the partnersY Thus, other than by a general code provision granting it a juridical personality, the partnership person-ality becomes a reality when two or more persons decide to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves.18

II. MERGING oF CoRPORATION LAw AND CoNTRACT LAw PRINCIPLES

As juridical persons, corporations can deal with third parties and enter into valid and binding contracts with them. The creation of legal relationships between corporations and third parties has led to a merging of the two legal disciplines concerning contracts and corporations. The merger of these two legal areas has created a conflict between the policies set forth by each of the disciplines.

Under the law on contracts, for a contract to be valid and binding, three essential requisites must concur: (a) consent of the contracting parties; (b) subject matter of the contract; and (c) cause or consideration.19

The essential requisite of consent requires two parties who are not only legally capacitated to bind themselves, but who also should not represent the same interests. Article 1305 of the Civil Code defines a contract as "a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or t0 render some service." In addition Article 1305 of the same Code provides that a "contract must bind both contracting parties; its validity nor compliance cannot be left to the will of one of them." The very form of the consent has requisites, laid down in Article 1319 of the Civil Code, which requires two parties not representing the same interests, thus: "Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the

· contract."

17 Civil Code of the Philippines, R. A. No. 386, art. 1768 (1950). 11 ld., art. 1767. " ld., art. 1318.

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Although the corporate entity is a juridical person, being a fiction, it cannot act in the world except through its duly au officers or representatives. As a result, two issues involving the of Corporate Law arise which impinge on the Law on

(1) Those contracts entered into where the corporation either not been legally constituted, or has been defectively tuted; and

(2) Contracts involving duly constituteq coprorations, but were entered into by officers who either were not authorized, or who exceeded the scope of their au

When a corporation has not been constituted by law, there yet no juridical person which can validly enter into a contract. .. civil law would consider a contract entered into in behalf of a non· existent corporation as a void contract for lack of the essential of consent being given by two contracting parties. However, in f}fe Corporate Law, such contracts would have binding effects dependjJyg on the prevailing circumstances. Moreover, a distinction has drawn between a situation where such a contract is entered into Wi.fh the parties knowing fully well that a corporation does not yet exist, and the other situation where least one of the parties is that a corporation has not been duly constituted. The first situat'j'§n: refers to what the author would generically term as contracts. The second situation is what is termed as contracts into with a defectively formed corporation; this would include facto corporation and the corporation by estoppel.

III. PRE-INcoRPoRATioN STAGEs: PRoMoTER's CoNTRACT

It is not the Corporation Code, but rather the Revised Act20 that defines a promoter to be:

(a) any person who, acting alone or in conjunction with more other persons, directly or indirectly, takes initia founding and organizing the business or enterprise issuer; or

"' Batas Pambasa Big. 178 (1982).


(b) any person who, in connection with the founding and orga-nizing of the business of an issuer, directly or indirectly, receives in consideration of services or property or both services or property ten percent (10%) or more of any class of secu· rities of the issuer or ten percent (10%} or more of the proceeds from the sale of any class of such secur.ities. 21

Promoters, as the visionaries or trailblazers in founding corporate enterprises, are certainly not in the same category as carpetbaggers. Their activities are deemed beneficial to society and therefore are regulated by law. No formal recognition is accorded to promoter's contracts in the Corporation Code, except under Sections 60 and 61 thereof, which deal with pre·incorporation subscription:

Sec. oO. Subscription co.ntract.-Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract.

Sec. 61. Pre·incorporation subscription.-A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exch:mge Commission.

As discussed hereunder, Sections 60 and 61 have effectively adopted in our jurisdiction a fused version of both the" contract theory" and the "offer theory" in defining the nature of pre-incorporation subscription agreements.

On the one hand, under the offer theory subscription agreements are considered merely as continuing offers to proposed corporations. These offers do not ripen into a contract until accepted by the corporation when it is finally organized. 22 The obvious result of the

21 /d., sec. 2(r). 22 Navarro, Two Points of Reform of Philippi"" Corporal<' Law, 27 PHIL L). 669 (1952). "The 'offer'

theory is worked out from the law of contracts. The analogy, however, fails for while in ordinary contracts, there are both offerors and offerees, in our case the contemplated corporation has not yet come into existence. To consider the offer as continuing and, therefore, as if


offer theory is that subscribers are allowed to withdraw before corporation comes into existence and accepts the offer. the contract theory, on the other hand, a subscription agreement several persons to take shares in a proposed corporation becumes binding contract and is irrevocable from the time of subscription, cancelled by all the parties before acceptance by the corpora

It can therefore be concluded that Sections 60 and 61 have the essential features of both theories in their provisions. A tion contract is essentially a contract between the corporation and subscribing person. In the case of a pie-:incorporation agreement, contract law would consider the subscription contract because one of the parties of the contract, the corporation, does . exist. Yet Sections 60 and 61, as special provisions in the Corporatipn. Code, override the general provisions of contract law, and mandate that pre-incorporation contracts are valid and enforceable. In fa<;:t, Section 61 goes to the extent of saying that pre-incorporation tion agreements are irrevocable for a period of six (6) months from. the date of subscription. In addition, there is no necessity Section 61 for the corporation to accept the subscription and it seems to bind the corporation upon formation, as much binds the subscriber.

Subscription agreements are "special contracts" in the sense they go beyond ordinary contracts. Although subscription are· contracts between the subscriber and the corporation, they are ,, ... the same time deemed to be contracts among the stockholders of corporation. Such a "special relationship" among ihe subscribers a corporation can be sustained only if we look beyond the pale of····---· corporate fiction and see that actually, beneath the corporate an association of warm-bodied persons who decide to band in the corporation to pursue a business. This is clear from the that under Section 61, a pre-incorporation agreement is irrevocable within the stipulated six-month period "unless all of other subscribers consent to the revocation."

made at the time the corporation wmes into existence is a twisting of the facts, for so made in fact. Neither may analogy be. drawn between the contemplated .cornorahOI a conceived child for no one ever imagines contracting with ii, except, perhaps, to it, which does not come within the purview of contract law. It is not any the subscriptions as made with an agent of the proposed corporation, for t: be an agent for a principal that does not exist. Again, if we grant the legal possibllll) there being an agent of a non-exisiting principal, this destroys t:he theory, as the becomes a perfected contract between two able parties. x x x"


Other than the subscription agreements, which are essential in· the process of organizing a corporation, there are other contracts necessary in founding the "business of the corporation." These are contracts

·_entered into in the name of the intended corporation by the promoters or organizers of the corporation. An example of this type of contract are deeds of assign..'ll.ent entered into by subscribers who transfer their property holdings to the corporation as payment for their paid-up capital subscription, under the provisions for tax-free exchanges of property of the National Internal Revenue Code.23 The validity of such contracts, and their binding power over the corporation, are notions that come to us as common law doctrine; Contract Law would consider

promoter's contracts void.

In Cagayan Fishing Development Co., Inc. v. Teodoro Sandiko/4 four parcels of land were sold to a corporation which was in the process of under specific terms whereby the outstanding mortgage loan on the properties would have to be fully paid by the corporation. The corporation was finally incorporated, but the mortgage loan was not paid. The corporation then sold the parcels of land to Sandiko with the condition that the latter would shoulder the mortgage debts.

_ When Sandiko failed to comply with his obligation, the corporation · · ·filed a recovery suit. In dismissing the case, the trial court held that

the contract was void since it was entered into with a corporation that had no corporate existence at the time the properties were transferred to it. The Supreme Court upheld the dismissal of the case holding:

That a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of contract or transact any business, would seem to be self-evident. x x x A corporation, until organized, has no being, franchises, or faculties. Nor do those engaged in bringing it into being have any power to bind it by contract, unless so authorized by the charter. Until organized as authorized by the· charter there is not a corpo-ration, nor does it possess franchises or faculties for it or others to exercise, until it acquires a complete existence.25

But more importantly, while the Court conceded that there are circumstances where "the acts of promoters of a corporation [may]

21 Sec. 34(c)(2), NIRC. " 65 PhiL 223 (1937). 15 ld. at 227-228, quoting Gent v. Manufacturers and Merchants' Mutual lnsuranCt' Company, 107

IlL G52, 658.

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be ratified by the corporation if and when subsequently org""""''" x x x but under the peculiar facts and circumstances of the case we decline to extend the doctrine of ratification which result in the commission of injustice or fraud to the candid and unwary. The Supreme Court elaborated thus:

Boiled down to its naked reality, the contract here (Exhibit A) was entered into not only between Manuel Tabora and a non-existent corporation but between Manuel Tabora as owner of four parcels of land on the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a corporation on the other hand. for reasons that are self-evident, these promoters could not have acted as agents for a projected corporation since that which had no legal existence could have no agent. A corporation, until organized,· has no life and therefore no faculties. It is, as it were, a child in

CoRPORATE CoNTRACT LAw 11

·ground that at the time the application was filed, the corporation was only in the process of incorporation. In dismissing the action, the

.. Supreme Court held that although a franchise may be treated as a· the eventual incorporation of the applicant corporation after

the grant of the franchise, "and its acceptance of the franchise as shown by its action in prosecuting the application filed with the Commission

-for the approval of said franchise, not only perfected a contract between ._the respondent municipality and Morang Electric but cured the de-ficiency pointed out by the petitioner in the application of Morang

' Electric ."29

ventre sa mereY

The Supreme Court also clarified in Rizal Light that in deciding Cagayan Fishing "this Court did not say in that case that the rule is absolute and that under no circumstances may the acts of promoters of a corporation be ratified or accepted by the corporation if and when

A . , . . . . subsequently organized. Of course, there are exceptions. It will be . . readmg of s ruhng m Caga_yan Ftshmg would seem.__ noted that American courts generally hold that a contract made by

to md1cate rabflcahon 1s_the key m upholding the validity the promoters of a corporation on its behalf may be adopted, accepted ?f s W1thout rahflcahon by a corporation after or ratified by the corporation when organized."30

1ts due mcorporahon, a contract entered into in behalf of a _·. yet _to be organized or.stillin the process of incorporation is void as::./. In Caram, ]r. v. Court of Appeals?1 the Court stated that it wo':ld agamst the corporation. In Cagayan Fishing, the Supreme Court found''"\;"" not resolve the issue of whether it is the promoters or the corporatwn significant the fact that the deals involving the properties were treated:: · itself that shall be responsible for the expenses incurred in connection not as corporate assets but as the personal assets of the Taboras and·__ with such organization. Nevertheless, it ruled that investors who were that the titles of the parcels of land were not even registered in the - not the "moving spirit" behind the organization of the corporation,

of the corporation: "[i]n fact, to this day, the lands remain inscribed _- but who were merely convinced to invest in the proposed corporate m Tabora's name. The defendant always regarded Tabora as the owner __ · venture on the basis of a feasibility study, are not liable personally of the He dealt with Tabora directly. Jose Ventura, president with the corporation for the cost of such feasibility studr "The most of plamhff corporation, intervened only to signthe contract, Exhibit that can be said is that they benefited from such services .. but that B, m behalf of the plaintiff. Even the Philippine National Bank, mortgagee.. surely is no justification to hold them personally liable therefor. Otherwise, of the four parcels of land, always treated Tabora as the owner of the all the other stockholders of the corporation, including those who came same." These all pointed to a lack of a bona fide ratification of the'' .. in later, and regardless of the amount of their shareholdings, deed of sale of the properties in favor of the corporation. · be equally and personally liable also with the petitioners for the claims

· · . . . . . . · of the private respondents." 32

In Ltght & Ice Co. v. Mumctpaltty ofMorong, Rtzal/8 a franchise :; awarded m favor of a corporation was sought to be annulled on the J

26 [d. at 227-228, citing 1 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS, nPrmanenl ed., sees. 207 et seq. (1931).

" ld. at 305. · .. 30 ld. at 306, citing 1 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CoRPORATIONS 681 (1931).

77 Id. at 228. " 151 SCRA 372 (1987).

"" 25 SCRA 285 (1968). " ld. at 375.

12 A TEN EO LAW I OURNAL

Although Justice Cruz in Caram, Jr. stated at the onset ;'[f]or purposes of resolving this case· before us, it is not to determine whether it is the promoters of the proposed ration, or the corporation itself after its organization, that responsible for the expenses incurred in connection with organization," the issue was in fact resolved in the case. The decision, it will }?e noted, took pains to point out that the investing incorporators were not included in the definition "promoter:"

The above finding bolsters the conclusion that the petitioners were not involved in the initial stages of the organization of the ·airline, which were being directed by Barreto as the main promoter. It was he who was putting all the pieces together, so to speak. The petitioners were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline.33 _

If indeed, the question of whether or not one is a promoterJs· irrelevant in determining one's liability for the expenses, then it would have been unnecessary in Caram, Jr. determine that the majority investing incorporators were not prom,(ff_ ... ers in order to absolve them from any liability on the ·· tional expenses. ;!;;.

What is of further significance L'1. Caram, Jr. is the finding of Qie Court that since there was no representation that the corporation 'i!li . fictitious, there was no justification to hold the stockholders personally liable. This is a doctrine that has an effect similar doctrine of corporation by estoppel: ·.

33 Id. 34 ld.

Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did hot have a separate juridical personality, to justify making the petitioners, as principal stock- · holders thereof,. responsible for its obligations. As a bona fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts as duly authorized by its officers and directors. 34

1994 CoRPORATE CoNTRACT LAw

IV. CONTRACTS WITH DEFECTIVELY-FORMED OR NoN-ExiSTENT CoRPORATioNs

A. De Facto Corporation

13

It should be borne in mind that the de facto doctrine is not limited in its application to Corporate Law alone; it is also well-developed in the laws on public corporations and public officers. The common feature of the de facto doctrine in all these legal fields is that it prevents any party from raising the defect of authority as a means to avoid fulfillment of a contract or a transaction.

Tayko v. Capistrano,35 which discussed the policy of the doctrine as applied to public officers, held that "[t]he principle is one founded in policy and convenience, for the right of one claiming a title or interest under or through the proceedings of an officer having an apparent authority to act would be safe, if it were necessary in every case to examine the legality of the title of such officer up to its original source, and the title or interest of such person were held to be in-validated by some accidental defect or flaw in the appointment, elec-tion or qualification of such officer, or in the rights of those from whom

·his appointment or election emanated; nor could the supremacy of the laws be maintained, or their execution enforced, if the acts of the judge having a colorable, but not a legal title, were to be deemed invalid."36

The de facto doctrine's real essence, therefore, is to protect the sanctity of dealings by the public with persons or entities whose authority emanates from the State by allowing the public to take such authority at face value, provided nothing is clearly shown to be defective in such authority. Even if it is proven that such authority was indeed defective, any such defect cannot be used as a basis to set aside a relationship or transaction entered into in good faith.

In the field of Corporate Law, the de facto corporation doctrine is likewise used to protect the sanctity of corporate dealings and contracts, and to allow the public to take at face value the authority of the corporation to enter into valid and binding contracts. As a result, the application of the de facto doctrine provides a healthy system which encourages the public to dea:l with corporate entities.

35 53 Phil. 866 (1928); see also Gamboa v. Court of Appeals, 108 SCRA 1 (1981).

" ld. at 873.

16 A TEN EO LAW I OURNAL CoRPORATE CoNTRACT LAw 17

however, had existed even prior to this statutory definition, In brushing aside the contention of the corporate borrower, the based on the common law principle of estoppel. Therefore, despf--:-f 'Court held that the "general rule is that in the absence of a person the language of Section 21, it shouid be expected that the who has contracted or otherwise dealt with an association m such a by estoppel doctrine being a means to render justice, it will continil¥·:,:;: .way as to recognize and in effect admit its legal existence as a corporate to evolve and to be developed by judicial and quasi-judicial · body is thereby estopped to deny its corporate existence in any action to make it an optimum means for rendering justice. leading out of or involving such contract or dealing, unless its exist-

. . . . .. ence is attacked for causes which have arisen since making the contract doctrme to contractual parties to theu __ or other dealing relied on as an estoppel and this applies to foreign

sentahons or expec.ahons at the hme a contract 1s perfected. It - 11 t d t"c poratt"ons "44 · . . ' as we as o omes 1 cor _ . to prevent parties from pleadmg a basic defect -lack of one . . party- as a means to avoid the enforcement of the contract. It shou}gO:C- In Asia Banking, the defendant corporate borrower, havmg be noted that the doctrine has evolved in Corporate Law -recognized the corporate existence of the plaintiff by making a as a rule to promote the integrity of commercial contracts. Its bas-w:' promissory note in its favor and making partial payments on the same, role is to promote the public's underlying faith in contracts drawn with was estopped from denying the plaintiff's corporate existence, and also corporate entities, rather than to promote corporate principles. Fo:r from denying its own corporate existence. Evidence to establish these this reason, the doctrine as it has evolved in Section 21 facts was therefore unnecessary. convoluted from a strict Corporate law point of view; or at least, U\g . . . . . . basic elements of the doctrine as expressed in Section 21 seem to ljf_ '?-sza Bankmg affu·_med the first element of the estoppel contradictory or antithetical. 0';';_ ·..• doctrme now found m the second paragraph of 21. one who

assumes an obligation to an ostensible corporatiOn as such, cannot A review of jurisprudential history up to the adoption of ·- · resist performance thereof on the ground that there was in fact no

21 clearly shows that an uneven path had to be followed by our j:orporation." In fact, at the time of Asia Banking, this was the only in applyj_ng the original versions of the doctrine. The courts ' element of the doctrine. The effect of the estoppel is to prevent the unable to provide an adequate solution through the use of declaration of nullity of a contract on the ground that one of the parties legal principles prevailing at the time of these cases, Section 21 cal} thereto, a purported corporate entity, does not in fact exist. be seen as a means which cut through the logical maze to .. . . . dictate a solution long sought by the courts. /;%, If one were to further thts doctnne, however,

one would note that m order to upholo the vahdtty of a contract, both The case of Asia Banking Corporation v. Standard Products of the parties must recognize the existence of the corporate party even

reiterated the estoppel principie upheld by the earlier decisionsg:f when one does not exist. Consequently, upholding the contract's validity, the Supreme Court in Behn, Meyer & Co. v. Rosatzin42 and thus implying the recognition of a corporate entity when in fact none of Commerce v. Pua Te Ching. 43 In Asia Banking, a ·collection slif%£; . exists, would lead to the application of the doctrine that the "corporate was brought by the bank on a promissory note issued in •' entity" has a personality separate and distinct from the stockholders of the corporate borrower. At the trial, the bank failed to . or members who compose it. The existence of a separate juridical affirmatively the corporate existence of the parties, and on personality likewise requires that officers and stockholders acting for the defendant corporate borrower insisted that the the "corporation" cannot be held personally liable for corporate debts rendered against it was wrong. ..-JfG and liabilities. The conclusion is -that the persons who purport to act

for a non-existent corporation would be held to the existence of such corporate entity. Logically, therefore, the recognition of the "corpo-

" 46 Phil. 144 (1924). " 5 Phil. 660 (1906). " 14 Phil. 222 (1909).

" ld. at 145, citing 14 C.). 227 and C!Ji11ese C/Ulmber of Commerce v. Pua Te Clri11g, 14 Phil. 222 (1909).

18 ATENEO LAw JouRNAL

ration" means that the corporate contract cannot be enforced them because of the "corporation's" separate juridical ·

This was the _logical wall tl}at faced the courts with the of the then version of the corporation by estoppel doctrine, demonstrated in Hall v. Piccio45 previously discussed above. The Court four1d in Piccio that all parties to the contract were the certificate of incorporation had not yet been issued. The also held that the parties knew, or ought to have known, personality of a corporation begins to exist only from the moment certificate is issued. Since "nobody was led to believe his prejudice or damage, the principle of estoppel does not x x x [ o ]bviously this is not an instance requiring the a contract with the corporation through the rule of estoppel."

The implication in Piccio is that the doctrine of corporation QY estoppel applies only when at least one party to a contract was undgjo the impression that the other corporate party was a duly entity. When both parties, as in Piccio, are aware that a has not been duly organized, then the corporation by estoppel does not apply. Piccio therefore establishes another element. of doctrine: that at least one of the contracting parties was under impression or belief that the corporate entity party to the contract duly incorporated. ..

But if we were to take Piccio to its logical conclusion then, tically speaking, the doctrine of corporation by estoppel will ney¢t apply, since under Piccio all parties, whether incorporating ers or third-parties, were mandated by law to be aware that existence begins only upon the issuance of the certificate of ration by the Securities and Exchange Commission.46 The non-issuance of a certifiCate of incorporation being a matter of record, even third parties are charged with constructive of the fact of such non-issuance. · In fact, it would seem to obligation of one who deals with a corporate entity to know such certificate has been issued, since this is easily verifiable Securities and Exchange Commission.

If a certificate of incorporation has been issued but there is a in the incorporation process of a contracting corporate entity,

45 86 Phil. 603 (1950). " The Corporation Code of the Philippines, B.P. 68, sec. 19 (1980).


to Piccio, the doctrine of de facto corporation would come into play. However, if no such cerificate of incorporation has been issued, then the corporation by estoppel doctrine would be inapplicable, because

. both the associates in the purported corporation and the other party to the contract cannot plead ignorance of the fact that no corporation existed, both parties being charged with the know ledge of the non-issuance.

The conclusion that can be drawn from all this is that, following Piccio, the corporation by estoppel doctrine cannot apply when no certificate has been issued. It can only apply when a certificate is issued but where, for lack of the other criteria, the de facto corporation doctrine cannot apply. This does not seem to be a good doctrine. The most reasonable conclusion that can be drawn from Piccio is that the non-issuance of a certificate of incorporation affects the good faith only of the corporate insiders, mainly the incorporating stockholders or members. The lack of the certificate does not prevent the application of the estoppel doctrine in favor of (or as against) a third party who entered into a contract with the purported corporation, believing it to be duly incorporated.

Can one therefore conclude that Piccio meant to apply the certificate of i..'"lcorporation requirement within the de facto doctrine only with respect to corporate insiders, and that as to third parties who act in good faith, the absence of the certificate of incorporation would make the de facto corporation doctrine applicable? Piccio, however, is clear in stating the proposition that in a purported corporation setting, when the de facto corporation doctrinE' cannot be applied, it does not necessarily mean that the corporation by estoppel doctrine becomes the applicable doctrine.

Subsequently, in Vda. de Salvatierra v. Han. Garlitos,47 the Court added a new twist. Salvatierra, as owner of a piece of land, entered into a contract of lease with a corporation allegedly "duly organized and existing under the laws of the Philippines," represented by its president. When the obligations imposed under the contract of lease on the corporate lessee were not complied with, Salvatierra brought an action for accounting, rescission and damages. Judgment was rendered against the corporation. When a writ of execution was sought to be enforced, no properties in the name of the corporation could be located,

" 103 Phil. 757 (1958).


and consequently, properties registered ip the name of its pies were levied upon. The president sought'to have the levy against properties lifted, since he was not even a party to the case aga the corporation. Salvatierra showed that the case was brought aga the corporation in the belief that it was duly incorporated, and she found out only after judgment that it had not been duly regis with the Securitites and Exchange Commission.

Under those proven facts, the Supreme Court held the p personally liable on the contract entered into on behalf of the p ported corporation. It is interesting to note that in resolving the the Court in Salvatierra refused to apply the corporation by oc:tnnnal'c

doctrine:

x x x While as a general rule a person who has contracted or dealt with a corporate body is estopped from denying the same in an action arising out of such transaction or dealing x x x, 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 i:he Philippine Fibers Pro-ducers 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.48

Clearly, Salvatierra recognized the then logical effect of the doctrine, that once a non-existent corporation is recognized to as a corporate entity capable of executing a valid and binding contra£:{;;;· then it has a separate personality, and its obligations under the contr(lff cafl.not be ascribed to its agents. Thus, Salvatierra reasoned out

There can be no question that a cbrporation when 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 x x x and conversely, a stockholder or member cannot be held personally liable for any financial obligation by the corporation in excess of his unpaid subscription. But the rule is understood to refer merely to registered corporations and cannot be made applicable to liability of members of an unincor-porated association. The reason behind this doctrine is obvious

.. ld. at 763.

1994 CoRPORATE CoNTRACT LAw

- 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 attributes 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 rep-resentatives 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 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 becomes personally liable for contracts entered into for other acts performed as such agent. x x x49

21

In Salvatierra, the Court, having problems with the logical repercussions of the corporation by estoppel doctrine as it stood at the time, refused to apply it. Instead it relied upon a principle of the law on agency: that an agent who enters into a contract outside of his authority or for a non-existent principal is deemed to be the principal in said contract. In other words, using the agency principle, Salvatierra was able to prevent frustration of enforcement of a contract on the

. mere ground that one contracting party is missing.

What is intriguing about Salvatierra is that although it refused to apply the estoppel doctrine, the principle it used to make individuals personally liable for the contract has been adopted under Section 21, as an integral part of the corporation by estoppel doctrine: "All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof."

There is, therefore, an irreconcilable contradiction in Section 21. While the heart of the estoppel doctrine lies in recognizing a corpo-ration as party to a contract where none in fact exists, under Section 21 the legal consequence of upholding the contract's validity is that actors are made personally liable for contracts entered into in behalf of the corporation.

The question then is why was there a need to merge both Asia Banking and Salvatierra in the corporation by estoppel doctrine under Section 21? Why not just adopt Salvatierra's agency doctrine by itself,

" ld.


since it accomplishes both objectives without illogical results? (a) it validates the contract in question by supplying the contracting party in the person of the agent (i.e., acting officer of p\lrported corporation); and (b) it makes the perpetrator of misrepresentation personally liable for the contract.

Later, Albert v. University Publishing Co., Inc. 50 gave new input the then version of the estoppel doctrine. Albert sued the U Publishing Co., Inc. for :his share in the publication of a book a contract entered into by the parties, with the corporation represented in the contract by its president, Jose M. Aruego. was rendered in favor of Albert against the corporation. judgment was sought to be enforced against the corporation, it. wcr§c"'E discovered that it had never been registered with the Securitites and. Exchange Commission. The judgment was then sought to be enforced against Aruego in his personal capacity. Aruego raised the point that the contract was not a personal contract but one with a juridical entity.: The Court ruled,

x x x [p)recisely, however, on account of the non-registration it cannot be considered a corporation, not even a corporation de facto (Hall v. Piccio, 86 Phil. 603). It has therefore no personality separate from Jose M. Aruego; it cannot be sued independently.51

However, the Court also rejected appHcation of the corporation by estoppel doctrine to resolve the issue: ·

The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is inapplicable here. Aruego represented a non-existent entity and induced not only the plaintiff but even the court to believe in such a representation. He signed the contract as 'Presi-dent' of 'University Publishing Co., Inc.,' stating that this was a 'corporation duly organized and existing under the laws of the Philippines,' and obviously misled plaintiff (Mariano A. Albert) into believing the same. One who has induced another to act upon his willful misrepresentation that a corporation was duly organized and existing under the law, cannot thereafter set up against his victim the principle of corporation by estoppel (Salvatiera [sic] v. Garlitos, 56 O.G. 3069).52

50 13 SCRA 84 (1965). 51 ld. at 86-87. 52 Id. at 87 [emphasis supplied) ..


In Albert, however, the Court discussed how the then version of the estoppel doctrine could be applied to hold the actors behind the purported corporation, personally liable for the contract, at the same time that corporate liability was upheld:

Even with regard to corporations duly organized and existing under the law, we have in many a case pierced the veil of corporate fiction to administer the ends of justice. and in Snlvatiera (sic) vs. Garlitos, supra, p. 3073, we ruled: 'A person acting or purporting to act on behalf of a corporation which has no valid existence o.ssumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent. x x x53

The implication of Albert is clear: that even with the then version of the estoppel doctrine, the validity and enforceability of a contract can be upheld by upholding the fiction of the contracting corporation's existence, (although in fact it cannot exist); but nonetheless, under the piercing doctrine, we can pierce the veil of the recognized corporate party and make the actors liable personally for the obligations arising from the contract.

Although Albert itself refused to apply the estoppel doctrine, it was such a thesis that eventually found itself embodied as the cor-poration by estoppel doctrine in Section 21. Albert therefore offers us the "philosophical bridge" between the two doctrines: the first, that a corporation can be deemed to exist when in fflct none may exist, in order to validate a contract; and the second, that although the veil of corporate fiction is set up, it will be pierced to enforce the contract, to hold the actors behind such misrepresentation liable for the obligations arising from such contract.

The remaining issue is the need to adopt such a criss-crossing estoppel doctrine at all under Section 21; when Salvatierra's agency doctrine - that of making the agent of an inexistent principal liable on the contract - already achieves with clearer logic the same ends sought to be achieved by Section 21?

The reason is that Salvatierra is sufficient only when there is fraud or misrepresentation on the part of one of the contracting parties. It has no application to a situation where both parties to the contract acted in the honest belief that a contracting corporate entity did exist.

" /d. at 87-88.

24 ATENEO LAW JouRNAL

In such a case, Salvatierra cannot apply, since only an agent who that his purported principal did not exist can be held personally In a no-fraud or no-misrepresentation case, since the "agent" be held as principal to the contract to validate it, there is an issue,. to the validity and enforceability of a contract where a contracting--party is missing. fe--

lt is in such no-fraud or no-misrepresentation cases that Salva - ' is clearly inadequate. This is where the present statutory version Y-"'-5 ,,:= the corporation by estoppel doctrine applies, since its applica does not require fault or conscious misrepresentation.

On the one hand, Section 21, as a fusion of the strict doctrine and the Albert rationale for piercing, amply covers both fraud and no-fraud cases. When fraud or misrepresentation occurs with the perfection of the contract with a purported corporation, then Section 21 makes the actor personally on the contract as a general partner, On the other hand, when no fraud or misrepresentation although it does not make persons acting for the purported corporation liable personally, it would prevent both sides from raising the now- ' existence of the corporation as a means to. avoid enforcement of contract.

.. 1994 CoRPORATE CoNTRACT LAw 25

purported corporate venture. Thus, in cases where there is neither fraud nor misrepresentation, one who acts for a purported corporation not knowing in good faith that it had no authority to do so would

-be lial,Jle, by way of distinction, only as a limited partner. He would therefore be liable only to the extent of his investment or promised investment in the purported corporate venture. This logically ties in

- with the limited liability feature of a purported corporation given legal .. _ recognition in the estoppel doctrine.

C. Cases Outside the De Facto Corporation and Corporation by Estoppel Doctrines

As discussed previously, there are instances when the de facto doctrine cannot be applied because of the lack of one of its re(j_uisites. There are also cases where the corporation by estoppel doctrine cannot be applied, such as when both parties knew that the corporate party to the contract does not exist. Obviously, even the old version of the estoppel doctrine in Asia Banking is not applicable, since there is no element of misrepresentation in such cases. What then is the applicable doctrine?

In no-fraud or no-misrepresentation cases, the estoppel -' _ P: possible solution would be application of the pari delicto under Section 21 would create a corporation when none exists to uphol9,: In such a case, one harks back to Piccio which applied pari

validity and enforceability of the contract. But ultimately, does delzcto where both_ the de facto and doctrines It not make the persons acting for the purported corporation could not However, It 1s not clear m Pzcczo how exactly If so, how can enforcement be made effectively on a contract again§( the part delzcto doctnne was applicable; rather, the ruling expounded a corpo_ration that does not exist? On these issues, the special wordirl]L more on the lack of cause of action than on the pari delicto doctrine. of Section 21 seems to provide an answer .- .. ; - · · · '', A further difficulty is that, bothArticles 1411 and 1412 of the Civil

Section 21 uses the word "liable as general partners" · _ Code on pari delicto cover only situations when there is outright "illegality "liable personally," in defining the liability of persons who assurfi_f , of the cause or object of the contract." They do not apply in the cases to act as a corporation knowing it to be without authority to do _ ; under consideration, where there is no illegality in the cause or object !'fad Section 21 used the words "liable personally," then the of_ th_e contract, but where one of the requisites of a valid contract is

would be that persons who act for a purported corporati£/:lf':-:.-0(£ consent from an existing party. In addition, the pari delicto

Without knowing it to be without authority to do so would noY.m;£;;:i does not square with the intention of the parties of entering liable for the debts, liabilities and damages mto a contract, for the intention is not in itself illegal. If we were

ansmg from the contract.- to look at the contractual motivation of the pnrties who used a non-. · . . existent corporation, evidently they expected to be bound by their

Section 21, by using the term "general partners," implies who knows that a corporation does not exist will be liable not · with what he purported to invest in the venture, but also with properties not actually invested or promised to be invested in " Articles 1411 and 1412 of the f:ivil Code provide that neither contracting parties may recover

What he has given by virtue of the contract, or demand the performance of the other's undertaking.


contract, and the more appropriate doctrine to apply would be a rlPTi""" of the unenforceable contract doctrine.

Under Article 1403 of the Civil Code, unless ratified, a i'& is unenforceable when it has been "entered into in the name of person by one .who has been given no authority or legal repr or who has acted beyond his powers." Clearly, for the cases consideration, the actor for the purported corporation is without a11thn,;;·H; from a principal. Nevertheless, the contract can be enforced it has been "ratified" by the other party, who entered into the .. knowing fully well that the "representative" had no authority to for the purported corporate party. This is further reinforced by belief of both parties that the contract would anyway be · · ,.> ·· -" as between them.

This solution finds rational support in the Salvatierra case. Unlike Salvatierra, however, which applies only the representing party doc-trine, the proposed solution applies to both parties to the contract who knew that the corporate party did not exist.

Therefore, to paraphrase Salvatierra,S5 since a non-existent org4'; · nization has no juridical personality and is incompetent to act aritl appropriate for itself the powers and attributes of a corporation, }t cannot create agents or confer authority on another to act in its behalf. Thus, in contracts entered into for such purported corporations, where both parties knew that no such corporation existed, the actors enter the contract without authority and at their own risk. An elementary principle of law is then applied: :when actors to a contract act or alloW others to act as agents without authority or without a principal, the . law considers such agents as principals, possessed of all the rights subject to all the liabilities of a principal. These agents may theref6!e be considered by all of the actors as having assumed the and obligations of the purported principal corporation. They are · .. personally liable for contracts entered into, or for other acts per by them as such agents.

55 103 Phil. 757, at 763-64.

1994 CoRPORATE CoNtRACT LAW 27

V. ARTICLES OF INCORPORATION AND BY-LAWS

In corporation law; the articles of incorporation is a basic docu-ment defining the charter of the corpori'ltion. Early on, Government of the P.I. v. Manila Railroad Co.56 characterized the charter of the corporation as a contract between the corporation and the State, and stated that "the state and the grantee of a charter are equally bound by its provisions."57 It described the corporate charter as a contract between three parties: (a) between the State and the corporation; (b) between the stockholders and the and (c) between the corporation and its stockholders.58

The reverence of the law, and of the courts, for the binding effect of the provisions of the articles of incorporation on the parties thereto is such that not only can amendments thereto be made under the strict provisions of the Corporation Code,59 but also, its contents are strictly regulated by legal mandate. 6° For instance, the use of a corporate name other than that provided for in the articles was not allowed in Red Line Trans. Co. v. Rural Transit Co.61 In that case, the Court held that the incorporators "constitute a body politic and corporate under the name stated in the certificate" and that a corporation has the power "of succession by its corporate name" and by "that name alone is it authorized to transact business." 62

Unlike the articles of incorporation, the by-laws are meant to be an intramural document governing the relationship between and among the members of a corporate family. As declared by the Court in Rural Bank of Salinas v. Court of Appeals,63 "[b]y-laws are intended merely for the protection of the corporation, and prescribe rPgul<ltion, not restrictions." Thus, Rural Bank of Salinas held that restrictions affecting

" 52 Phil. 699 (1929). 57 ld. at 702. " Id. at 703. 59 B.P. Big. 68, sec. 16 (1980). "' B.P. Big. 68, sec. 14. " 60 Phil. 549 (1934). " Id. at 554-555. Parenthetically, thoug)l, the Supreme Court has stated in Republic Plantt'rs Bank

v. Court of Appeals, 216 SCRA 738 (1992), that a change in the corporate name when approved by the SEC does not make a new corporation, and has no effect on the identity of the corporativn, or on its property, rights, or liabilities.

"' 210 SCRA 510 (1992).


the assignment or transfer of shares cannot validly be provided in the corporation's by-laws, and any such provisions in the are void.

7;;7

The rule, therefore, is that although the power of the to adopt by-laws is an inherent right, by-law provisions cannot travene the law.64 The validity or reasonableness of a by-law prov· · is a question of law, the issue regarding the by-laws being wh<>tn.,·;. a by-law provision conflicts with a provision of law, or with the of the corporation, or is in the legal sense unreasonable and unlawful.65

-·--'-'·-··

On the basis of their nature and their functions, one may conclude that provisions of the articles of incorporation prevail ovei' by-law provisions. This seems, however, to be a sweeping statement, because of the repercussions that such a notion would have on the

of corporations with third parties. On the one hand, the articles of incorporation being definitive of the corporation's powers and purposes as it deals with the world, they would bind a third person dealing with the corporation, regardless of such person's knowledge of its provisions.

On the other hand, by-law provisions being intramural in nature and not meant to bind outside parties, it stands to reason that tlfe · public dealing with the corporation is not supposed to be interested in .the provisions of the corporation's by-laws, and therefore should not be bound thereby. This seems to be the principle followed in ultql vires cases decided by the Supreme Court, especially as ultra vires goes;. into the power and authority of corporate officers. · ·


The Pefia case involved the nullification of a board resolution· ':: selling the corporation's right to redeem certain property, as well as

the subsequent sale thereof. According to the Supreme Court, the _resolution being adopted in a manner contrary to the procedure outlined in the corporation's by-laws for special meetings, it was thus null and void.

It is important to note that Pefia was a suit between corporate "outsiders," with the highest bidder in a public auction of corporate property on the one hand, and the buyer of the right of redemption of the corporation on the other. Thus, Pefia would seem to elevate by-law provisions tci the level of provisions of the articles of incor-poration, giving them the same binding effect as regards third parties dealing with the corporation.

Likewise, in Yao Ka Sin Trading v. Court of Appeals,68 the Supreme Court also made binding on a third party the provisions of a corporation's by-laws. In that case, the Court nullified a contract entered into by the corporation's President and Chairman which had not been autho-rized by board resolution, the corporate by-laws expressly requiring such a resolution. However, it should be noted that before the contract _could be implemented, the board did pass a resolution expressly repudiating the same.

Be that as it may, the "limiting" effect of provisions of the articles of incorporation and by-laws on corporate contracts with the public, has been tempered by the Supreme Court by its application of the ultra vires doctrine.

VI. ULTRA VIRES DocTRINE The fairly recent case of Pefia v. Court of Appeals/'6 however, seer(it

to negate the non-binding character of by-laws vis-a-vis. third In that case, the Supreme Court ruled that the "by-laws of a corpo"'::, ration are its own privai:e laws which substantially have the same as the laws of the corporation. They are, in effect, written into

0

charter. In this sense, they become part of the fundamental law ""h---·•

Section 45 of the Corporation Code embodies in statutory form the ultra vires doctrine, providing that "[n]o corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred."

the corporation with which the corporation and its directors and must comply."67

" Government of tire Plrilippine lslauds v. El Hogar Filipirw, 50 Phil. 399 (1927). "' Gokongwei v. Securities and Exc/rauge Commission, 89 SCRA 336, 361-362 (1979). " 193 SCRA 717 (1991). " ld. at 729, citing 8 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS, 750 to 751

The ultra vires doctrine is based on two corporate principles. First, the ultra vires doctrine stems in part from the principle that a corpo-ration is a creature of the law, and has only such powers and privileges

" 209 SCRA 763 (1992).


as are granted it by the State. This being the case, it is accommodate within the doctrine the notion that a corporation be inore than just an entity of limited capacities and powers, and c hold powers or privileges not emanating from the State. In words, the ultra vires doctrine is really a product of the old of concession,. which is expressed in the Corporation Code's luvian definition of a corporation in Section 2. One can therefore ,_

why much of the vigor of the ultra vires doctrine has dissipated, Second, the ultra vires doctrine uphoids the duty of trust

loyalty owed by the corporation's directors to the stockholders members. The duty of loyalty dictates that the corporation only in transactions to which the stockholders and members themselves, by way of the provisions of the purpose clause of articles of incorporation.

The ultra vires doctrine may be viewed as a creature of an time, when society was unfamiliar with the corporate shell as a of doing business. Suspicious of the mischief that the corporate mediup:t made possible, society decided it was prudent that it be controJ!K and regulated as much as possible. d.

Today, however, the use of the corporate entity as a qusinesf medium has become commonplace. There now exist-nUI!'ffirous doli:-trines and mechanisms by which the State and society temper the corporation's self-serving, profit-motivated nature to promote arid business welfare. Currently, the attitude is to give business much more freedom to deal with the world through the corporate mediull}· .

As jurisprudential history has shown, the strict application of t}le principle of ultra vires has undermined corporate contracts and com mercial transactions. As a consequence, courts have tended . to down the application of the doctrine when doing so would public trust and confidence in corporate contracts.

Types of Ultra Vires Cases -There are three (3) types of ultra acts, namely:

(a) Acts or contracts which are per se illegal as being to law;

(b) Acts done beyond the powers of the corporation as, for in the law or its. articles of incorporation; and

(c) Acts or contracts entered into in behalf of the co by persons who have no corporate authority.

1994 CoRPORATE CoNTRACT· LAw 31

In the case of Montelibano v. Bacolod-Murcia Milling Co., Inc.,69 the Supreme Court clarified the extent of the application of the ultra vires doctrine. At issue in Montelibano was the validity and binding effect on the corporation of an amended milling contract that granted fa-vorable terms to planters. Although the amended contracts were approved by the board of directors, it was interposed for the corporation that the resolution was null and void ab initio, for they amounted to donations and were thus beyond the powers of the corporate directors to adopt. The Court upheld the authority of the board, acting for the corporation, to modify the terms of the contracts since the purpose of amending them was to make their terms more acceptable to the planters. It thus provided the formula for determining the applicability of the ultra vires doctrine:

It is a question, therefore, in each case of the logical relation of the act to the corporate purpose expressed in the charter. If that act is one which is iawful in itself, and Dot otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote and fanciful it may fairly be considered within charter powers. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation's business ,fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not.70

It will be noted that, on the one hand, the test uses the rather stringent terms "direct and immediate" only with reference to the business of the corporation. On the other hand, it uses the rather liberal terms of" fairly incident" and "reasonably necessary" with reference to powers of the corporation.

When the business of a corporation is used as the reference point, much latitude is given to the corporation to enter into various contracts as long as they have a logical relation to the pursuit of such business. Thus, in one early case/1 the Supreme Court upheld a purpose clause in the articles of incorporation which allowed the corporation to engage in activities broadly referred to as "mercantile purposes." The Court construed this as meaning to "engage in such incidental business as

•• 5 SCRA 36 (1962). 711 [d. at 42, quoting 6 FLETCHER CYCLOPEDIA ON CORPORATIONS 266-68 (1950) (emphasis supplied).

71 Uy Siulrmg v. Director of Commerce a11d /l!dustry, 40 Phil. 541 (1919).

32 ATENEo LAw JouRNAL VOL. 38

may be necessary and advisable to give effect to, and aid in, successful operation and conduct of the principal business."72

When, however, the purpose clause of a corporation's articles incorporation;has unwittingly used limiting words, such as describing its business as "transportation by water," the Court will£ hold the corporation bound by this limitation. It will refuse to the restrictive purpose clause in such a manner that would allow corporation to engage in the land transportation business.73 In instances, the corporation has no one but itself (and perhaps its counsel who prepared the articles of incorporation) to blame for tyingtt;. its own hands. · ·

As the Montelibano test shows, the attitude of courts towards corporate· acts and contracts which are not per se illegal or prohibited, is quite liberal. This stems from the application of two areas of public policy, one in the realm of Contract Law, the other in the of Corporate Law.

First, if corporate contracts could be nullified by merely s,howing;-that they do not fall within the language of the purpose clause of the·;;-articles of incorporation, then the public dealing with corporations would be wary of entering into contracts with corporate entities. It_. and when the public would deal with corporate entities, they would·:: be constrained to engage costly and time-consuming verification an4 contractual safeguards (such as making the officers and jointly and severally liable on the contract) ensuring that they woulg.;, be afforded adequate relief in case the issue of ultra vires comes ill;:

More importantly, setting aside the corporate contract on the ground,, that the .corporation has no express authority, would contravene expectations of both parties to be bound by their contract. As the Col!rf,;: has aptly stated, "[t]he defense of ultra rests on violation of or duty toward stockholders, and should not -be entertained where allowance will do greater wrong to innocent parties dealing with corporation."74

Second, the trend has been to move away from holding corp acts and cc>ntracts as ultra vires, because of the philosophy

n ld. at 544. 73 Luneta Motor Company v. A.D. Santos, Inc., 5 SCRA 809 (1962). 7' Republic r•. Acoje Mining Co., Inc., 7 SCRA 3(,} (1963).


the "business judgment rule." Under the business judgment rule; corporate directors, in the exercise oftheir business judgment, should be given as much leeway as possible to adopt corporate policies and to engage in transactions as they deem best for the corporation. The courts, generally, will not substitute their business judgment for that of the directors. Therefore, as a general proposition, actions under-taken by directors cannot be impugned by claiming that they are beyond their powers or are ultra vires. ·

Montelibano itself said that "[a]s 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."75 "It is a well-known rule of law that questions of policy or management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment [for that] of the board of directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts."76

Further, the demands of bu.siness are such that it is impossible . to anticipate all possible contingencies at the time the articles of

incorporation are drafted. In the face of an unreasonably strict application of ultra vires principles, there would be a need for corporations to continually amend or revise charters simply to keep abreast with the various aspects of the very businesses they were meant to engage in.

Montelibano indicates clearly that there is a difference in treatment between an ultra vires act which is per se illegal, and one that is not. Obviously, a1l act that is per se illegal or prohibited by law cannot be given much latitude and is generally void. An act or contract of a corporation which is not per se illegal or prohibited by law is subjected to a test to determine whether it is intra vires or ultra vires.

The distinctions between acts and contracts which are illegal per se, and those which are not, as to their legal effects, have been recognized in Pirovano v. De la Rama Steamship Co.77 In that case it was held that "illegal acts" of a corporation contemplate the doing

15 Montelibano, 5 SCRA at 42. " [d., quoting from 2 fLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS 390. n 96 Phil. 335 (1954).

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of an act which is contrary to law, morals, or public order, or travenes some rules of public policy or public duty and, like transactions between individuals, are void. On the one hand, . acts or contracts cannot serve as basis of a court action, nor do they,.¥-· acquire validity by performance, ratification, or estoppel. On the othec. hand, ultra vires acts or those which are not illegal and void ab initio but are merely within the scope of the articles of incorporation, merely voidable and may become binding and enforceable when by stockholders. , "'

Pirovano held that the ratification by stockholders of an ultra vireS::: :; act which is not illegal, cures the infirmity of the corporate act, inakinif.G_., the act perfectly valid and enforceable. This is particularly the .cas1E< if the act or contract is not merely executory but has been executed c

and consummated, and no creditors are prejudiced.

The lat.itude with which the courts extend to corporate acts and contracts that do not squarely fall within the purpose clause of the corporate charter, has permeated Supreme Court decisions down through . the years. Thus, the Court has held that when a corporation by its·: charter has the power to issue bonds, then it is deemed also to have '·· the implied power to guarantee them in order to place them upon market under better and more advantageous conditions, thereby securing the profit derived from their sale.78 The Court has also construed the word "deal" in the charter to be broad enough to include al)y : manner of disposition of corporate assets, including a donation of· money not immediately required by the corporation. 79 It has likewise · validated a board resolution making the corporation a guarantor for liabilities of a corporate postmaster with respect to funds received- · · the latter to service the mails of corporate employees. 8° Finally, it held that the charter authority to write-off loans and advances incluut:: the power to waive penalty charges on past due loans, which are a lesser category. 81

Significantly, the Corporation Code in Section 36 expressly certain powers to corporations. These powers were previously

" Carlos v. Mindoro Sugar Co., 57 Phil. 343 (1932). 79 Pirovano v. De Ia Rama Steamship Co., 96 Phil: 335 (1954). 80 Republic v. Acoje Mining Co., Inc., 7 SCRA 361 (1963). " Land Bank of the Philippines v. Commission 01: Audit, 190 SCRA 154 (1990).


_· subject of great controversy, and much literature has been written on - the subject powers, such as the power of the corporation to make

reasonable donations,82 and to establish pension, retirement and other _plans for the benefit of directors, trustees, officers and employees.

But even when a particular corporate transaction does not pass the lenient Montelibano test and is held ultra vires, the transaction would nevertheless be held binding on the corporation under doctrine of estoppel. Carlos v. Mindoro Sugar Co. 83 laid down the following pre-sumption:

When a contract is not on its face necessarily beyond the scope of the power of the corporation by which it was made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations are presumed to contract within their powers. The doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong.84

In Carlos, the Supreme Court explained the legal attitude towards the ultra vires doctrine: "The defense is by some courts regarded as an ungracious and odious one, to be sustained only where the most persuasive considerations of public policy are involved, and there are numerous decisions and dicta to effect that the plea should not as a general rule prevail whether interposed for or against the corporation, where it will not advance justice but on the contrary will accomplish a legal wrong." 85

The Carlos case pointed out that the great weight of authority is to the effect that, where a transaction is merely ultra vires and not malum in se or malum prohibitum, the transaction is, lf performed by one party, not void as between the parties. Thus, an action may be brought directly upon the transaction and relief had according to its terms, even if the transaction itself may be a basis for the forfeiture of the corporate charter or for the corporation's dissolution.86

12 See Pirovano v. De Ia Rama Steamship Co. 96 Phil. 335 (1954), where the Supreme Court had \o go through several hair-splitting distinctions to validate a donation given by the corporation to the minor children of its late president who was to a large extent for the rapid and very successful development and expansion of the activities of the corporation.

13 57 Phil. 343 (1932). " !d. at 352. 15 Id., citing 14-A C.J., at 319-320. " Id.


Therefore, even in the case of ultra vires acts which are not se illegal, a corporation cannot claim that it is not liable for the of its board, on the basis of estoppel by representation. In Repu v. Acoje Mining Co., Inc.,87 the Court, in making a distinction ultra vires acts and illegal acts, held:

x x x The term ultra vires should be distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. It being merely voidable, an ultra vires act can be enforced or validated if there are equitable grounds for taking such action. Here it is fair that the resoh\tion be upheld at least on the ground of estoppel. x x x 88

Curiously enough, even when confronted with what was obviously an illegal act or a contraCt contrary to law, and thus void ab initio, the Court has upheld the result of the contract with respect to the contracting parties. In Harden v. Benguet Consolidated Mining Co., 89 the mining company, Benguet Consolidated was violating the express prohibitions of the then Corporation Law by holding . of stock in another corporation, the Balatoc Mining The shareholders of Balatoc Mining filed an action against Bengtiit . Mining to annul the certificates of stock issued in favor of the and to recover money collected by the latter from the

In upholding the dismissal of the complaint by the trial court, the Supreme Court noted that, although the contract between the two mining companies was illegal, the statutory provision which was violated was adopted by the legislature with the intention that public _ should be controlling in the granting of mining rights. The Court sai4 that the violation of the prohibition is of such a nature that it can b.E proceeded upon only by way of a criminal prosecution, or by of quo warranto, which can be maintained only by the State. The observed that, insofar as the parties were concerned, no civil had been committed between them, and if public wrong had committed, then the directors of Balatoc Mining Company and plaintiff Harden himself, were the active inducers of the of that wrong. More importantly, however, the Court stated:

•1 7 SCRA 361 (1963). " Id. at 365. 19 58 Phil. 140 (1933).

1994 CORPORATE CONTRACT LAW

x x x. The contract, supposing it to have been unlawful in fact, has been performed on both sides, by the building of the Balatoc plant by the Benguet Company and the delivery to the latter of the certificate of 600,000 shares of the Ba!atoc Company. There is no possibility of really undoing what has been done. Nobody would suggest the demolition of the mill. The Balatoc Company is secure in the possession of that improvement,. and talk about putting the parties in status quo ante by restoring the consideration with interest, while the Balatoc Company remains in possession of what is obtained by the use of that Benguet Company in many millions of dollars in favor of individuals who have not the slight-est equitable right to that money, is a proposition to which no court can give a ready assent. 911 ·

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The lesson from Harden therefore is that, even where corporate contracts are illegal per se, when only public or government policy is at stake and no private wrong is committed, the courts will leave the parties as they are, in accordance with their original contractual expectations.

The third type of ultra vires acts, regarding the authority of persons who act for corporations, has received uneven jurisprudential deve-lopment. The early case of Ramirez v. Orientalist Co. 91 adopted the principle that when an action is brought against a corporation upon an alleged contract, if the corporation desires to set up the defense that the contract was executed by one not authorized as its agent, it must plead such fact:

A corporation can not avail itself of the defense that it had no power to enter into the obligation to enforce on which the suit is brought, unless it pleads that defense. This principle applies equally where the defendant intends to challenge the power of its officer or agent to execute in its behalf the contract upon which the acHon is brought and where it intends to defend on the ground of a total want of power in the corporation to make such a contract.92

In Ramirez, the corporation was sought to be held liable on film distribution contracts entered into in its name by its director-treasurer. Although the corporation did not deny tinder oath the contracts pleaded in the complaint, it alleged that its officer did not have authority to

00 ld. at 149-150. " 38 Phil. 634 (1918). " ld. at 644.


sign the contracts for the corporation. In brushing aside such a ut:rt:nsE the Court discussed the rationale for the doctrine of apparent granted to corporate officers. This · apparent authority with . corporate officers are vested would be sufficient to bind the ration for:

In dealing with corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found acting for a corporation with the external indicia of authority, any person, not having notice of want of authority, may usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had acqui-esced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted.93

The Court, in Ramirez, further held that the public is neither suppose9.:. nor required to know the transactions which happen around the table where the corporate board of directors or the stockholders are front time to time convoked. Whether a particular officer actually possesse{' the authority which he assumes to exercise is frequently known ti:f! •·.· ... vary, for proof is usually not readily accessible to. the stranger whQ''' deals with the corporation on the faith of the ostensible authoritY. • exercised by some of the corporate officers.94 It is therefore reasonable; in a case where an officer of a corporation has made a contraCt in itS name, that the corporation should be required, if it denies his author-ity, to state such defense in its answer, since by that means the plaintiff, is apprised of the fact that the agent's authority IS contested; and he is given an opportunity to adduce evidence showing either that the authority existed or that the contract was ratified and approved.

In Francisco v. Government Service Insurance System,96 the issue ;..,.,n,vP, the binding effect of an acceptance telegram sent by the general of G.S.I.S., containing provisions contrary to the terms approved the board of directors, covering the terms of settlement of an 6 tion. In upholding the binding effect of the acceptance telegram the corporation, the Court held:

93 [d. citing 6 THOMPSON ON CORPORATIONS, sec. 7631 '(1st ed.). "' Id. at 645-646. 95 ld. •• 7 SCRA 577 (1963).

1994 CoRPORATE CoNTRACT· LAw

x x x Assuming this to be true, how was appellee to know it? Corporate transactions would speedily come to a standstill were every person dealing with a corporation held duty-bound to disbelieve every act of its responsible officer, no m,atter how regular they ·should appear on their faces. x x x97

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The Francisco case held that if a corporation intentionally or negligently clothes its officers or _agents with apparent power to perform acts for it, the corporation willbe estopped to deny that such apparent authority is real, as to innocent third persons dealing in good faith with such officers or agents.98 Since a corporation cannot see, or know, anything except through its officers, then knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his employment, and in relation to matters within the scope of his authority, is notice to the corporation, whether he communicates such knowledge or not. 99

The case also explained why the public generally cannot be required to look beyond apparent authority of officers acting for a corporation:

A very large part of the business of the country is carried on by corporations. It certainly is not the practice of persons dealing with officers or agents who assume to act for such entities to insist on being shown the resolution of the board of directors authorizing the particular officer or agent to transact the particular business which he assumes to conduct. A person who knows that the officer or agent of the corporation habitually transacts certain kinds of business for such corporation under circumstances which necessarily show knowledge on the part of those charged with conduct of the corporate business assumes, as he has the right to assume, that such agent or officer is acting within the scope of his authority.100

The case of Yao Ka Sin Trading v. Court of Appeals,101 however, presents what seems to be a reversal of the Ramirez doctrine. In Yao Ka Sin, the Court invalidated a contract to supply cement entered into for a cement company by Mr. Maglana, its President and Chairman

97 ld. at 583. " ld. at 584. 99 [d. at 584-85 quoting BALLANTINE, LAW ON CoRPORATIONS, sec. 112. 100 ld. at 583-584 quoting from Curtis Land & Loan Co. v. Interior Land Co., 137 Wis. 341, 118 N.W.

853, 129 Am. St. Rep. 1068; as cited in 2 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CoRPORATIONS 263, Perm. ed. (1931).

101 209 SCRA 763 (1992).

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of the board oi directors. It was established, however, that the laws of the cement company did not give the President the au•hn..ol to enter into contracts without prior board approval. More • ....... . tantly, the Court held that in applying the doctrine of apparent authority1c. · the burden is upon the outsider dealing with a corporation to establish . a basis for the existence of such apparent authority. According to the" Court, "[i]t was incumbent upon the petitioner to prove that the private respondent had clothed Mr. Maglana with apparent . _ . to execute Exhibit 'A' or any similar contract. This could have easily done by evidence of similar acts executed whether in its favo:l'· or in favor of other· parties. Petitioner miserably failed to do Upon the other hand, private respondent's evidence overwhelmingly' shows that no contract can be signed by the president without first being approved by the Board of Directors."102

Of great importance in Yao Ka Sin was the fact that within a number of days (23 days) from the execution of the President of the. unauthorized contract, the Board of the cement company passed a resolution repudiating the contract. The Board likewise gave due notice of the repudiation to the .other party while the· contract was·· still in the executory stage. In other words, there was no omissio11· or misconduCt on the part of the board in Yao Kti Sin for the doctrirte: of estoppel or ratification to be applicable,

One's first impression upon reading Yizo Ka Sin would be that it reversed the Ramirez doctrine by shifting the from the ration to the other contracting party vis-a-vis the doctrine of apparent authority. Taken in its entirety, however, Yilo Ka Sin did not Ramirez, but rather, completed the cycle.

The Court's decision in Yao Ka Sin did not repudiate the in Ramirez that if the corporation desires to set up the defense that the contract was executed by one not authorized as its agent, it plead and prove such fact. Thus, under Ramirez the burden is initially_ on the shoulders of the corporation. In Yiw Ka Sin, however, the - -as they reached the Supreme Court established that the cement pany had already discharged this initial burden by providing evidence that its President was not so authorized. Interpreted in of this fact, Yao Ka Sin therefore holds that once the corporation discharged its obligation under the Ramirez doctrine to show that acting officer was not in fact authorized, the burden of proof now

102 Id. at 784.

1994 Co:RPORATE CoNTRACT LAw 41

to the other contracting party. The latter must thus show that by previous acts and actuations the acting officer had been clothed by the corporation with apparent authority for the public to have taken such authority at face value.

In Vicente v. Gemldez/03 the Supreme Court considered as not bindLng on the corporation a compromise agreement entered into by its counsel without a prior special power of attorney having been granted by the corporation. While it was shown that the corporation's admin-istrative manager had signed the compromise or had pursued an act pursuant to the compromise agreement, the Court refused to apply the doctrine of estoppel or ratification. It ruled that it is only the board of directors of the corporation which has the power to ratify a previously unauthorized corporate att. The Court held that "ratification can never be made on the part of the corporation by the same persons who wrongfully assume the power to make the contract, but the ratification must be by the officer or governing body having authority to make such contract and, as we have seen, must be with full knowledge." 104

The Vicente case is in reality, not a radical departure since it involved the power to compromise suits, which is governed by par-

. ticular provisions of the Rules of Court. This being the case, it cannot be expected that proceedings on compromise, especially involving a corporate party, would proceed on the basis of apparent authority. The Court held that "the Rules require for attorneys to compromise the litigation of their clients, a special authority. And while the same does not state that the special authority be in writing the court has every reason to expect that, if not in writing, the same be duly es-tablished by evidence other than the self-serving assertion of counsel himself that such authority was verbally given him." 105

Finally, in Crisologo-]ose v. Court of Appeals,106 the Court held that accommodation contracts on negotiable instruments executed on behalf of the corporation would not bind the corporation without previous board authorization. 107 The issue or indorsement, without consider-ation, of negotiable instruments in the name of a corporation and for

103 52 SCRA 210 (1973). 101 [d. at 229, quoting from 2 FLETCHER, CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS 1067-1069

(1969). 105 Id. at 225. 10' 177 SCRA 594 (1989). 107 Id. citing Oppml1cim v. Simon Reigel Cigar Co., 90 N.Y.S. 355, cited in 11 C.J.S. 309.

42 :A TENEO LAW JOURNAL

the accommodation of another was deemed to be ultra vires. to the Court,. the person who takes the instrument with of the accommodation nature thereof cannot recover against a ration which is only an accommodation party.108

It can therefore be seen that in the realm of contract enforcement,',' the ultra vires doctrine has found very little application. The has become more of a technical defense· raised by or against -·.··. corporation, which courts have readily brushed aside. But the vires doctrine, as a principle of Corporate Law, still reigns . in cases where protagonists remain within the corporate .. · or where the contract with an outsider is ·still executory and has nof:;" yet caused damage to the latter. In these situations the doctrine been applied by courts with vigor, for indeed it goes into the root of corporate relationship. ·

VII. FINAL OBSERVAtiONS

What is clear from all the foregoing is that in the field of com-mercial transactions involving corporate entities, the principles oL Corporate Law are harmonized with those of other disciplines in order ... to sustain the validity of contracts and transactions· entered into bx;; corporations with the public. In sustaining the validity of these" -transactions, emphasis is placed in the legitimate contractual ... expectations of the parties that the corporations would be bound thereby, . without the need of costly and protracted verification regarding the powers and authority of such corporations, and the persons who act' in their behalf. Rarely will the courts apply purely corporate doctrLnes: . on their own merits, and these doctrines will not be applied at all whel}; doing so would serve to promote injustice. Courts will · ·· · allow parties to skirt contractual obligations which they assumed when the contracts were drawn.

Even in the case of acts or contracts of corporations which illegal per se, the State has often declined to fuse public interests private affairs. Courts have refused to enforce State or public to invalidate the effects of such contracts on the parties where contract has created no private :wrongs. It is left to the State to its own cause against the erring corporation, usually by having corporation's charter forfeited through quo warranto proceedings.

108 Id. at 599, citing 11 C.J.S. 309, 14A C.J. 732.

ANTITRUST PoLICY FOR A GLOBAL EcoNOMY

JoHN J.P. HowLEY.

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Antitrust and competition laws have experienced a resurgence in recent years. In Eastern Europe, the former communist states of Bulgaria, Hungary, Poland, the Czech and Slovak Republics, and Russia have each adopted antitrust and competition laws as a means of dismantling government-controlled monopolies and encouraging competition among private enterprises.1 Similarly, developing nations that once embraced socialism, such as India, Mexico, Ke.nya, Pakistan, Peru, Sri Lanka, Venezuela and Zimbabwe, have also adopted antitrust laws as an integral part of their movement from state-dominated economies to free markets.2 Both groups of nations recognize that emerging free markets require antitrust and competition laws to protect small com-petitors, to promote a competitive marketplace, and to ensure that the

· privatization of inefficient state-controlled monopolies does not merely result in the creation of inefficient privately-controlled monopolies.3

Antitrust laws have also become an important part of interna-tional economic treaties and agreements. In addition to the antitrust and competition laws enacted by individual Western European nations to regulate business conduct within their borders, the member states of the European Community have included in the Treaty of Rome a comprehensive competition law and enforcement authority governing

• John J.P. Howley is an attorney in the Litigation-Antitrust Department of the international law firm of Kaye, Scholer, Fierman, Hays & Handler in New York. He is also Editor of Antitrust Law Developments (Fourtlo), a leading treatise on U.S. antitrust law. He served as Chairman of the Plenary Session on lntemationnl Economic Stmclures/Law at the 1993 World Law Conference in Manila, and as Chairman of the 1994 Conference on NAFTA and GATT in Washington, D.C.

1 See E. Fox & J. Ordover, Free Enterprise mod Competition Policy fo•· Central and Eastern Europe and the Soz•iet Union, PRIVATIZATION IN CENTRAL AND EASTERN EuROPE 85 (1992); E. Fox, Antitrust, Trade and the Twenty First Centony - Rounding the Circle, The Annual Handler Lecture at the Association of the Bar of the City of New York (May 26, 1993) at 2, 21-24.

' Sec W. Kovacic, Competition Policy, Economic Dwelopment, and the Transition to Free Markets in the Third World: The Case of Zimbabwe, 61 ANTITRUST L. J. 253 (Summer 1992).

' See, e.g., FTC Clulirrnan Finds Progress in Global Antitmsl EnfO!ament, 65 Antitrust & Trade Reg. Rptr. 568 (1993).

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