178 - The Board of Liquidators V - Heirs of Kalaw
178 - The Board of Liquidators V - Heirs of Kalaw
178 - The Board of Liquidators V - Heirs of Kalaw
KALAW
G.R. No. L-18805, August 14, 1967
FACTS: The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit
governmental organization on May 7, 1940 by Commonwealth Act 518 avowedly for the protection,
preservation and development of the coconut industry in the Philippines. NACOCO, after the passage of
Republic Act 5, embarked on copra trading activities. Amongst the scores of contracts executed by
general manager Kalaw are the disputed contracts, for the delivery of copra. An unhappy chain of events
conspired to deter NACOCO from fulfilling these contracts. Nature supervened. Four devastating
typhoons visited the Philippines. One buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before
the Court of First Instance of Manila, upon claims. NACOCO settled for P1,343,274.52, which it
subsequently sought to recover from general manager and board chairman Maximo M. Kalaw, and
directors Juan Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under Article
1902 of the old Civil Code (now Article 2176, new Civil Code); and defendant board members, including
Kalaw, with bad faith and/or breach of trust for having approved the contracts. The lower court
dismissed the complaint. Plaintiff appealed direct to the Supreme Court.
ISSUE: W/N Maximo Kalaw, the general manager, acted with bad faith and/or breach of trust for
entering contracts without prior board approval
RULING: No. In the case at bar, the practice of the corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading activities for and in NACOCO's behalf without prior
board approval. If the by-laws were to be literally followed, the board should give its stamp of prior
approval on all corporate contracts. But that board itself, by its acts and through acquiescence,
practically laid aside the by-law requirement of prior approval. By corporate confirmation, the contracts
executed by Kalaw are valid corporate acts and are thus purged of whatever vice or defect they may
have.
Even in the face of an express by-law requirement of prior approval, the law on corporations is not to be
held so rigid and inflexible as to fail to recognize equitable considerations. And, the conclusion inevitably
is that the embattled contracts remain valid. It is a well known rule of law that questions of policy of
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 the judgment 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."The decision of the lower court is affirmed.