Aurbach VS Sanitary Wares Corp

Aurbach VS Sanitary Wares Corp, 180 SCRA 130
Facts:
Saniwares, a domestic corporation, was incorporated for the primary purpose of

manufacturing and marketing sanitary wares. One of the incorporators, Mr. Young went
abroad to look for foreign partners.
ASI, a foreign corporation domiciled in the US entered into an agreement with Saniwares
and some Filipino investors whereby ASI and the Filipino investors agreed to participate in
the ownership of an enterprise which would engage primarily in the business of
manufacturing in the Philippines and selling here and abroad China and sanitarywares.
The parties agreed that the business operations in the Philippines shall be carried on by an
incorporated enterprise which name shall be Sanitary Wares Manufacturing Corporation.
The agreement has the provision that the management of the corporation shall be vested in
the Board of Directors (BOD) which shall consists of 9 individuals. And as long as ASI will
own 30% of the outstanding capital stock, 3 of the 9 directors shall be designated by ASI
and the other directors by the other stockholders.
Veto power was also given to ASI which is designed to protect it as a minority group. The
joint enterprise prospered. However, disagreements came up due to objection of ASI of the
desired expansion of the Filipino group. When the time came to elect the BOD, instead of 9
nominees, 11 were nominated contrary to the usual practice. The meeting was
subsequently adjourned.ASI, other stockholders and Salazar, one of the nominees as
director continued the meeting at the elevator lobb of ASI Building and consequently, 5
directors were elected as certified by the acting secretary.
ISSUE:
Whether or not the directors as nominated by the ASI group are valid members of the BOD
of Saniwares
HELD:
No. A corporation cannot enter into a partnership contract but may engage in a joint
venture with other. Since the relationship is a joint venture, the agreement of the parties
governs.
1. COMMERCIAL LAW; JOINT VENTURE; WHETHER THERE EXISTS A JOINT VENTURE

DEPENDS UPON THE PARTIES' ACTUAL INTENTION WHICH IS DETERMINED IN
ACCORDANCE WITH THE RULES COVERING THE INTERPRETATION AND CONSTRUCTION
OF CONTRACTS. — The rule is that whether the parties to a particular contract have
thereby established among themselves a joint venture or some other relation depends
upon their actual intention which is determined in accordance with the rules governing the
interpretation and construction of contracts. (Terminal Shares, 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)
2. ID.; ID.; ESTABLISHED IN CASE AT BAR. — In the instant cases, our examination of
important provisions of the Agreement as well as the testimonial evidence presented by
the Lagdameo and Young Group shows that the parties agreed to establish a joint venture
and not a corporation. The history of the organization of Saniwares and the unusual
arrangements which govern its policy making body are all consistent with a joint venture
and not with an ordinary corporation. Section 5 (a) of the agreement uses the word
"designated" and not "nominated" or "elected" in the selection of the nine directors on a six
to three ratio. Each group is assured of a fixed number of directors in the board. Moreover,
ASI in its communications referred to the enterprise as joint venture. Baldwin Young also
testified that Section 16(c) of the Agreement that "Nothing herein contained shall be
construed to constitute any of the parties hereto partners or joint venturers in respect of
any transaction hereunder" was merely to obviate the possibility of the enterprise being
treated as partnership for tax purposes and liabilities to third parties.
3. ID.; ID.; CONCEPT OF JOINT VENTURE; DISTINGUISHED FROM PARTNERSHIP. — The
point of query, however, is whether or not that provision is applicable to a joint venture
with clearly defined agreements: "The legal concept of a joint venture is of common law
origin. It has no precise legal definition, but it has been generally understood to mean an
organization formed for some temporary purpose. (Gates v. Megargel, 266 Fed. 811
[1920]) It is in fact hardly distinguishable from the partnership, since their elements are
similar — community of interest in the business, sharing of profits and losses, and a mutual
right of control. (Blackner v. McDermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95
P. 2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242
[1955]). The main distinction cited by most opinions in common law jurisdictions is that
the partnership contemplates a general business with some degree of continuity, while the
joint venture is formed for the execution of a single transaction, and is thus of a temporary
nature. (Tufts v. Mann. 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill.
595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This observation is not
entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be
particular or universal, and a particular partnership may have for its object a specific
undertaking. (Art. 1783, Civil Code). It would seem therefore that under Philippine law, a
joint venture is a form of partnership and should thus be governed by the law of
partnerships. The Supreme Court has however recognized a distinction between these two
business forms, and has held that although a corporation cannot enter into a partnership
contract, it may however engage in a joint venture with others. (At p. 12, Tuazon v. Bolañ os,
95 Phil. 906 [1954]) (Campos and Lopez — Campos Comments, Notes and Selected Cases,
Corporation Code 1981). Moreover, the usual rules as regards the construction and
operations of contracts generally apply to a contract of joint venture. (O'Hara v. Harman 14
App. Dev. (167) 43 NYS 556).
4. ID.; ID.; RIGHT OF STOCKHOLDERS TO CUMULATE VOTES IN ELECTING DIRECTORS

LIES IN THE AGREEMENT OF PARTIES. — 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 lies in the agreement of the parties. 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 "Agreement," and the right of each group of stockholders to cumulative
voting in the process of determining who the group's nominees would be under Section
3(a) (1) of the "Agreement." As pointed out by SEC,
Section 5(a) of the Agreement relates to the manner of nominating the members of the
board of directors while Section 3 (a) (1) relates to the manner of voting for these
nominees.
5. ID.; ANTI-DUMMY; LIMITS THE ELECTION OF ALIENS AS MEMBERS OF THE BOARD OF

DIRECTORS IN PROPORTION TO THEIR ALLOWANCE PARTICIPATION OF THE ENTITY. —
Equally important as the consideration of the contractual intent of the parties is the
consideration as regards the possible domination by the foreign investors of the enterprise
in violation of the nationalization requirements enshrined in the Constitution and
circumvention of the Anti- Dummy Act. In this regard, petitioner Salazar's position is that
the Anti-Dummy Act allows the ASI group to elect board directors in proportion to their
share in the capital of the entity. It is to be noted, however, that the same law also limits the
election of aliens as members of the board of directors in proportion to their allowance
participation of said entity.

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Aurbach VS Sanitary Wares Corp, 180 SCRA 130

Saniwares, a domestic corporation, was incorporated for the primary purpose of

1. COMMERCIAL LAW; JOINT VENTURE; WHETHER THERE EXISTS A JOINT VENTURE

4. ID.; ID.; RIGHT OF STOCKHOLDERS TO CUMULATE VOTES IN ELECTING DIRECTORS

5. ID.; ANTI-DUMMY; LIMITS THE ELECTION OF ALIENS AS MEMBERS OF THE BOARD OF

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