Joint Venture - Auback vs.

Sanitary Wares Manufacturing Corporation (189 SCRA 130) CORPO

THIRD DIVISION that, on the other hand, the Filipino stockholders can nominate only six (6)
candidates and
G.R. No. 75875 December 15, 1989
in the event they cannot agree on the six (6) nominees, they shall vote only
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and among themselves to determine who the six (6) nominees will be, with
CHARLES CHAMSAY, petitioners, cumulative voting to be allowed but without interference from ASI.
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. The antecedent facts can be summarized as follows:
LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO,
GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. On August 15, 1962, ASI, a foreign corporation domiciled in Delaware, United
CRUZ, respondents. States entered into an Agreement with Saniwares and some Filipino investors
whereby ASI and the Filipino investors agreed to participate in the ownership of
G.R. No. 75951 December 15, 1989 an enterprise which would engage primarily in the business of manufacturing in
the Philippines and selling here and abroad vitreous china and sanitary wares.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R.
LAGDAMEO, ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, The parties agreed that the business operations in the Philippines shall be
BALDWIN YOUNG and AVELINO V. CRUX, petitioners, carried on by an incorporated enterprise and that the name of the corporation
vs. shall initially be "Sanitary Wares Manufacturing Corporation."
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID
P. WHITTINGHAM, CHARLES CHAMSAY and LUCIANO The Agreement has the following provisions relevant to the issues in these
SALAZAR, respondents. cases on the nomination and election of the directors of the corporation:

G.R. Nos. 75975-76 December 15, 1989 3. Articles of Incorporation

LUCIANO E. SALAZAR, petitioner, (a) The Articles of Incorporation of the Corporation shall be

vs. substantially in the form annexed hereto as Exhibit A and,
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. insofar as permitted under Philippine law, shall specifically
LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, provide for
GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ
and the COURT OF APPEALS, respondents. (1) Cumulative voting for directors:

These consolidated petitions seek the review of the amended decision of the xxx xxx xxx
Court of Appeals in CA-G.R. SP Nos. 05604 and 05617 which set aside the
earlier decision dated June 5, 1986, of the then Intermediate Appellate Court
5. Management
and directed that in all subsequent elections for directors of Sanitary Wares
Manufacturing Corporation (Saniwares), American Standard Inc. (ASI) cannot
nominate more than three (3) directors; (a) The management of the Corporation shall be vested in a
Board of Directors, which shall consist of nine individuals. As
long as American-Standard shall own at least 30% of the
that the Filipino stockholders shall not interfere in ASI's choice of its three (3)
outstanding stock of the Corporation, three of the nine
nominees;
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Joint Venture - Auback vs. Sanitary Wares Manufacturing Corporation (189 SCRA 130) CORPO
directors shall be designated by American-Standard, and the persons nominated, namely, Luciano E. Salazar and Charles
other six shall be designated by the other stockholders of the Chamsay.
Corporation. (pp. 51 & 53, Rollo of 75875)
The ASI representative, Mr. Jaqua protested the decision of
Later, the 30% capital stock of ASI was increased to 40%. The corporation was the Chairman and announced that all votes accruing to ASI
also registered with the Board of Investments for availment of incentives with shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No.
the condition that at least 60% of the capital stock of the corporation shall be 05617) were being cumulatively voted for the three ASI
owned by Philippine nationals. nominees and Charles Chamsay, and instructed the
Secretary to so vote.
On March 8, 1983, the annual stockholders' meeting was held.
Luciano E. Salazar and other proxy holders announced that
the stockholders then proceeded to the election of the members of the board of all the votes owned by and or represented by them 467,197
directors. shares (p. 27, Rollo, AC-G.R. SP No. 05617) were being
voted cumulatively in favor of Luciano E. Salazar.
The ASI group nominated three persons namely; Wolfgang Aurbach, John
Griffin and David P. Whittingham. The Chairman, Baldwin Young, nevertheless instructed the
Secretary to cast all votes equally in favor of the three ASI
The Philippine investors nominated six, namely; Ernesto Lagdameo, Sr., Raul A. nominees, namely, Wolfgang Aurbach, John Griffin and
Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young. David Whittingham and the six originally nominated by
Rogelio Vinluan, namely, Ernesto Lagdameo, Sr., Raul
Boncan, Ernesto Lagdameo, Jr., Enrique Lagdameo, George
Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in turn
F. Lee, and Baldwin Young.
nominated Mr. Charles Chamsay.
The Secretary then certified for the election of the following
The chairman, Baldwin Young ruled the last two nominations out of order on the
Wolfgang Aurbach, John Griffin, David Whittingham Ernesto
basis of section 5 (a) of the Agreement,
Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo,
George F. Lee, Raul A. Boncan, Baldwin Young.
... There were protests against the action of the Chairman
and heated arguments ensued. An appeal was made by the
The representative of ASI then moved to recess the meeting
ASI representative to the body of stockholders present that a
which was duly seconded. There was also a motion to
vote be taken on the ruling of the Chairman.
adjourn (p. 28, Rollo, AC-G.R. SP No. 05617). This motion to
adjourn was accepted by the Chairman, Baldwin Young, who
The Chairman, Baldwin Young, declared the appeal out of announced that the motion was carried and declared the
order and no vote on the ruling was taken. meeting adjourned. Protests against the adjournment were
registered and having been ignored, Mr. Jaqua the ASI
The Chairman then instructed the Corporate Secretary to representative, stated that the meeting was not adjourned
cast all the votes present and represented by proxy equally but only recessed and that the meeting would be reconvened
for the 6 nominees of the Philippine Investors and the 3 in the next room.
nominees of ASI, thus effectively excluding the 2 additional

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Joint Venture - Auback vs. Sanitary Wares Manufacturing Corporation (189 SCRA 130) CORPO
The Chairman then threatened to have the stockholders who The two petitions were consolidated and tried jointly by a hearing officer who
did not agree to the decision of the Chairman on the casting rendered a decision upholding the election of the Lagdameo Group and
of votes bodily thrown out. dismissing the quo warranto petition of Salazar and Chamsay. The ASI Group
and Salazar appealed the decision to the SEC en banc which affirmed the
The ASI Group, Luciano E. Salazar and other stockholders, hearing officer's decision.
allegedly representing 53 or 54% of the shares of Saniwares,
decided to continue the meeting at the elevator lobby of the The SEC decision led to the filing of two separate appeals with the Intermediate
American Standard Building. Appellate Court by Wolfgang Aurbach, John Griffin, David Whittingham and
Charles Chamsay (docketed as AC-G.R. SP No. 05604) and by Luciano E.
The continued meeting was presided by Luciano E. Salazar, Salazar (docketed as AC-G.R. SP No. 05617). The petitions were consolidated
while Andres Gatmaitan acted as Secretary. and the appellate court in its decision ordered the remand of the case to the
Securities and Exchange Commission with the directive that a new
On the basis of the cumulative votes cast earlier in the stockholders' meeting of Saniwares be ordered convoked as soon as possible,
meeting, the ASI Group nominated its four nominees; under the supervision of the Commission.
Wolfgang Aurbach, John Griffin, David Whittingham and
Charles Chamsay. Upon a motion for reconsideration filed by the appellees Lagdameo Group) the
appellate court (Court of Appeals) rendered the questioned amended decision.
Luciano E. Salazar voted for himself, thus the said five Petitioners Wolfgang Aurbach, John Griffin, David P. Whittingham and Charles
directors were certified as elected directors by the Acting Chamsay in G.R. No. 75875 assign the following errors:
Secretary, Andres Gatmaitan, with the explanation that there
was a tie among the other six (6) nominees for the four (4) I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE
remaining positions of directors and that the body decided ALLEGED ELECTION OF PRIVATE RESPONDENTS AS
not to break the tie. (pp. 37-39, Rollo of 75975-76) MEMBERS OF THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE WAS NO ELECTION
These incidents triggered off the filing of separate petitions by the parties with AT ALL.
the Securities and Exchange Commission (SEC).
II. THE COURT OF APPEALS PROHIBITS THE
The first petition filed was for preliminary injunction by Saniwares, Emesto V. STOCKHOLDERS FROM EXERCISING THEIR FULL
Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique VOTING RIGHTS REPRESENTED BY THE NUMBER OF
Lagdameo and George F. Lee against Luciano Salazar and Charles Chamsay. SHARES IN SANIWARES, THUS DEPRIVING
The case was denominated as SEC Case No. 2417. PETITIONERS AND THE CORPORATION THEY
REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT
DUE PROCESS OF LAW.
The second petition was for quo warranto and application for receivership by
Wolfgang Aurbach, John Griffin, David Whittingham, Luciano E. Salazar and
Charles Chamsay against the group of Young and Lagdameo (petitioners in III. THE COURT OF APPEALS IMPOSES CONDITIONS
SEC Case No. 2417) and Avelino F. Cruz. The case was docketed as SEC AND READS PROVISIONS INTO THE AGREEMENT OF
Case No. 2718. Both sets of parties except for Avelino Cruz claimed to be the THE PARTIES WHICH WERE NOT THERE, WHICH
legitimate directors of the corporation. ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)

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Joint Venture - Auback vs. Sanitary Wares Manufacturing Corporation (189 SCRA 130) CORPO
The main issue hinges on who were the duly elected directors of Saniwares for The parol evidence Rule under Rule 130 provides:
the year 1983 during its annual stockholders' meeting held on March 8, 1983.
Evidence of written agreements-When the terms of an
To answer this question the following factors should be determined: agreement have been reduced to writing, it is to be
considered as containing all such terms, and therefore, there
(1) the nature of the business established by the parties whether it was a joint can be, between the parties and their successors in interest,
venture or a corporation and no evidence of the terms of the agreement other than the
contents of the writing, except in the following cases:
(2) whether or not the ASI Group may vote their additional 10% equity during
elections of Saniwares' board of directors. (a) Where a mistake or imperfection of the writing, or its
failure to express the true intent and agreement of the parties
The rule is that whether the parties to a particular contract have thereby or the validity of the agreement is put in issue by the
established among themselves a joint venture or some other relation depends pleadings.
upon their actual intention which is determined in accordance with the rules
governing the interpretation and construction of contracts. (Terminal Shares, (b) When there is an intrinsic ambiguity in the writing.
Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales
Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668) Contrary to ASI Group's stand,

The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the the Lagdameo and Young Group pleaded in their Reply and Answer to
actual intention of the parties should be viewed strictly on the "Agreement" Counterclaim in SEC Case No. 2417 that the Agreement failed to express the
dated August 15,1962 wherein it is clearly stated that the parties' intention was true intent of the parties, to wit:
to form a corporation and not a joint venture.
xxx xxx xxx
They specifically mention number 16 under Miscellaneous Provisions which
states:\\ 4. While certain provisions of the Agreement would make it
appear that the parties thereto disclaim being partners or
xxx xxx xxx joint venturers such disclaimer is directed at third parties and
is not inconsistent with, and does not preclude, the existence
c) nothing herein contained shall be construed to constitute of two distinct groups of stockholders in Saniwares one of
any of the parties hereto partners or joint venturers in respect which (the Philippine Investors) shall constitute the majority,
of any transaction hereunder. (At P. 66, Rollo-GR No. 75875) and the other ASI shall constitute the minority stockholder. In
any event, the evident intention of the Philippine Investors
They object to the admission of other evidence which tends to show that the and ASI in entering into the Agreement is to enter into a joint
parties' agreement was to establish a joint venture presented by the Lagdameo venture enterprise, and if some words in the Agreement
and Young Group on the ground that it contravenes the parol evidence rule appear to be contrary to the evident intention of the parties,
under section 7, Rule 130 of the Revised Rules of Court. the latter shall prevail over the former (Art. 1370, New Civil
Code). The various stipulations of a contract shall be
interpreted together attributing to the doubtful ones that
According to them, the Lagdameo and Young Group never pleaded in their
sense which may result from all of them taken jointly (Art.
pleading that the "Agreement" failed to express the true intent of the parties.
1374, New Civil Code). Moreover, in order to judge the
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Joint Venture - Auback vs. Sanitary Wares Manufacturing Corporation (189 SCRA 130) CORPO
intention of the contracting parties, their contemporaneous Premises considered, we believe that under the Agreement
and subsequent acts shall be principally considered. (Art. there are two groups of stockholders who established a
1371, New Civil Code). (Part I, Original Records, SEC Case corporation with provisions for a special contractual
No. 2417) relationship between the parties, i.e., ASI and the other
stockholders. (pp. 4-5)
It has been ruled:
Section 5 (a) of the agreement uses the word "designated" and not "nominated"
In an action at law, where there is evidence tending to prove or "elected" in the selection of the nine directors on a six to three ratio. Each
that the parties joined their efforts in furtherance of an group is assured of a fixed number of directors in the board.
enterprise for their joint profit, the question whether they
intended by their agreement to create a joint adventure, or to Moreover, ASI in its communications referred to the enterprise as joint venture.
assume some other relation is a question of fact for the jury. Baldwin Young also testified that Section 16(c) of the Agreement that "Nothing
(Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa herein contained shall be construed to constitute any of the parties hereto
v. Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v. George, 27 partners or joint venturers in respect of any transaction hereunder" was merely
Wyo, 423, 200 P 96 33 C.J. p. 871) to obviate the possibility of the enterprise being treated as partnership for tax
purposes and
In the instant cases, our examination of important provisions of the Agreement
as well as the testimonial evidence presented by the Lagdameo and Young In our decision sought to be reconsidered, we opted to
Group shows that the parties agreed to establish a joint venture and not a uphold the second over the first.
corporation.
Upon further reflection, we feel that the proper and just
The history of the organization of Saniwares and the unusual arrangements solution to give due consideration to both factors suggests
which govern its policy making body are all consistent with a joint venture and itself quite clearly.
not with an ordinary corporation.
This Court should recognize and uphold the division of the
It is pertinent to note that the provisions of the Agreement stockholders into two groups, and at the same time uphold
requiring a 7 out of 9 votes of the board of directors for the right of the stockholders within each group to cumulative
certain actions, in effect gave ASI (which designates 3 voting in the process of determining who the group's
directors under the Agreement) an effective veto power. nominees would be.
Furthermore, the grant to ASI of the right to designate certain
officers of the corporation; the super-majority voting In practical terms, as suggested by appellant Luciano E.
requirements for amendments of the articles and by-laws; Salazar himself, this means that if the Filipino stockholders
and most significantly to the issues of tms case, the provision cannot agree who their six nominees will be, a vote would
that ASI shall designate 3 out of the 9 directors and the other have to be taken among the Filipino stockholders only.
stockholders shall designate the other 6, clearly indicate that During this voting, each Filipino stockholder can cumulate his
there are two distinct groups in Saniwares, namely ASI, votes
which owns 40% of the capital stock and the Philippine
National stockholders who own the balance of 60%, and that ASI, however, should not be allowed to interfere in the voting
2) ASI is given certain protections as the minority within the Filipino group. Otherwise, ASI would be able to
stockholder. designate more than the three directors it is allowed to
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Joint Venture - Auback vs. Sanitary Wares Manufacturing Corporation (189 SCRA 130) CORPO
designate under the Agreement, and may even be able to or universal, and a particular partnership may have for its
get a majority of the board seats, a result which is clearly object a specific undertaking. (Art. 1783, Civil Code).
contrary to the contractual intent of the parties.
It would seem therefore that under Philippine law, a joint
Such a ruling will give effect to both the allocation of the venture is a form of partnership and should thus be governed
board seats and the stockholder's right to cumulative voting. by the law of partnerships.
Moreover, this ruling will also give due consideration to the
issue raised by the appellees on possible violation or The Supreme Court has however recognized a distinction
circumvention of the Anti-Dummy Law (Com. Act No. 108, as between these two business forms, and has held that
amended) and the nationalization requirements of the although a corporation cannot enter into a partnership
Constitution and the laws if ASI is allowed to nominate more contract, it may however engage in a joint venture with
than three directors. (Rollo-75875, pp. 38-39) others.

The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Moreover, the usual rules as regards the construction and operations of
Group has the right to vote their additional equity pursuant to Section 24 of the contracts generally apply to a contract of joint venture.
Corporation Code which gives the stockholders of a corporation the right to
cumulate their votes in electing directors. Bearing these principles in mind, the correct view would be that the resolution of
the question of whether or not the ASI Group may vote their additional equity
The ASI Group's argument is correct within the context of Section 24 of the lies in the agreement of the parties.
Corporation Code. The point of query, however, is whether or not that provision
is applicable to a joint venture with clearly defined agreements: Necessarily, the appellate court was correct in upholding the agreement of the
parties as regards the allocation of director seats under Section 5 (a) of the
The legal concept of a joint venture is of common law origin. "Agreement," and the right of each group of stockholders to cumulative voting in
It has no precise legal definition but it has been generally the process of determining who the group's nominees would be under Section 3
understood to mean an organization formed for some (a) (1) of the "Agreement." As pointed out by SEC, Section 5 (a) of the
temporary purpose. (Gates v. Megargel, 266 Fed. 811 Agreement relates to the manner of nominating the members of the board of
[1920]) It is in fact hardly distinguishable from the directors while Section 3 (a) (1) relates to the manner of voting for these
partnership, since their elements are similar community of nominees.
interest in the business, sharing of profits and losses, and a
mutual right of control. To allow the ASI Group to vote their additional equity to help elect even a
Filipino director who would be beholden to them would obliterate their minority
The main distinction cited by most opinions in common law status as agreed upon by the parties. As aptly stated by the appellate court:
jurisdictions is that the partnership contemplates a general
business with some degree of continuity, while the joint With these findings, we upheld the decisions of the SEC Hearing Officer and
venture is formed for the execution of a single transaction, SEC which were impliedly affirmed by the appellate court declaring Messrs.
and is thus of a temporary nature. Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto V. Lagdameo,
Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo,
This observation is not entirely accurate in this jurisdiction, and George F. Lee as the duly elected directors of Saniwares at the March
since under the Civil Code, a partnership may be particular 8,1983 annual stockholders' meeting.

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Joint Venture - Auback vs. Sanitary Wares Manufacturing Corporation (189 SCRA 130) CORPO
The insinuation that the ASI Group may be able to control the enterprise under
the cumulative voting procedure cannot, however, be ignored. The validity of the
cumulative voting procedure is dependent on the directors thus elected being
genuine members of the Filipino group, not voters whose interest is to increase
the ASI share in the management of Saniwares. The joint venture character of
the enterprise must always be taken into account, so long as the company
exists under its original agreement. Cumulative voting may not be used as a
device to enable ASI to achieve stealthily or indirectly what they cannot
accomplish openly. There are substantial safeguards in the Agreement which
are intended to preserve the majority status of the Filipino investors as well as to
maintain the minority status of the foreign investors group as earlier discussed.
They should be maintained.

WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are
DISMISSED and the petition in G.R. No. 75951 is partly GRANTED. The
amended decision of the Court of Appeals is MODIFIED in that Messrs.
Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo,
Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo,
and George F. Lee are declared as the duly elected directors of Saniwares at
the March 8,1983 annual stockholders' meeting. In all other respects, the
questioned decision is AFFIRMED. Costs against the petitioners in G.R. Nos.
75975-76 and G.R. No. 75875.

SO ORDERED.
The Lawphil Project - Arellano Law Foundation

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