AURBACH v. SANITARY WARES MFG. CORP.

G.R. No. 75875, Dec. 15, 1989, per Gutierrez, Jr., J.

Summary
Saniwares investors (Lagdameo & Young group) and American Standard, Inc. investors (ASI
group) organized the Sanitary Wares Mfg. Corp. (SWMC) through an Agreement (70-30 equity)
which stipulated that directorship nomination: 6 for Lagdameo/Young group and 3 for ASI group.
ASI later increased SWMC shares to 70% and in one board meeting, nominated 2 more due to
the additional equity. An intra-corporate dispute arose on who the legitimate SWMC directors are.

Holding
“[T]he 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.”

Facts
Sanitary Wares Mfg. Corp., a Philippine corporation engaged in production and sale of vitreous
china and sanitary wares, was created through an Agreement between Saniwares and American
Standard, Inc. investors. SWMC’s Articles of Incorporation provides: “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 outstanding stock of the Corporation,
three of the nine directors shall be designated by American-Standard, and the other six shall be
designated by the other stockholders of the Corporation.” (§5) ASI’s shares were later increased
to 40% (additional 10% equity). Subsequently, disagreements arose between the two sets of
investors as regards expansion of SWMC export; which culminated in 1983 at an annual
stockholder’s meeting where, during the election of board of director, ASI nominated 3 and
Philippine investors nominated 6 (“Lagdameo & Young group”). But, raising its +10% ASI shares,
ASI group nominated 2 more. The Chairman excluded the 2 additional nominations with
objections from ASI Group. The Chairman adjourned the meeting but ASI et al. (allegedly
representing 53-54% of Saniwares shares) continued it, nominating their 5 directors. The incident
triggered the filing of 2 petitions to the SEC. SEC upheld the election of the Lagdameo & Young
group; IAC remanded the case directing that a new meeting be convoked. Hence, these petitions.

Issues and Ratio

1. On who were the duly elected directors of Saniwards: hinges on (a) whether SWMC is a
joint venture or a corporation, (b) if ASI Group may vote their +10% equity.

(a) On the one hand, ASI group argues that the Agreement intended to create a corporation,
raising a contract provision which reads: “nothing herein contained shall be construed to
constitute any of the parties hereto partners or joint venturers in respect of any transaction
hereunder.” On the other hand, the Lagdameo & Young group presented parol evidence saying
that the Agreement failed to express the true intent of the parties, raising that their
contemporaneous and subsequent acts show that the intent was to enter into a joint venture
enterprise. Held: The Agreement was 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.”
Specifically, their acts are consistent with commercial custom where Filipino entrepreneurs seek
technology and marketing assistance from foreign multinational corporations. Likewise, “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.” Finally, “ASI in its communications referred to the enterprise as joint venture.”

(b) ASI group et al. raised that they have right to vote additional equity under §24 of the
Corporation Code “which gives the stockholders of a corporation the right to cumulate their votes
in electing directors.” Held: “[E]xpress arrangements between corporate joint ventures should be
construed with less emphasis on the ordinary rules of law usually applied to corporate entities and
with more consideration given to the nature of the agreement between the joint venturers.” “[T]he
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 Agreement, §5, is clear as to
6-3 nomination. Furthermore, “[t]o 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 status as
agreed upon by the parties.” Petitions dismissed.