McArthur v. Times Printing Co., Supreme Court of Minnesota, 51 N.W. 216 (1892)Nimrocks and others were promoters of a corporation to publish a newspaper, and contracted with plaintiff to be advertising solicitor for one year after the company was formed. The corporation after formation never formally adopted the contract, although all the stockholders, directors, and officers of the corporation knew of the contract and didn't object, but instead retained plaintiff as an employee. Is a corporation liable for promoters' contracts to which the corporation implicitly accepts?

Held Yes. A corporation is not bound to a contract made by promoters before the company's organization, but the corporation can adopt a contract as if it were making the contract originally: by acceptance by the board of directors. The contract must be one the corporation would have made and one for which the agents of the corporation would have express or implied authority to make. Here the plaintiff's employment contract was inferred from acts and/or acquiescence on the part of the corporation.

Does the statute of frauds make the contract void because its performance was to be completed more than a year from the date the promoters created it?

Held No. Such a theory assumes ratification under a theory of agency. Ratification is not appropriate, because it creates the contract at a time in which the corporation did not exist. In reality, the time of the start of the contract was when the corporation adopted the contract, after the formation of the corporation, which allowed less than a year for fulfillment of performance.

Cagayan Fishing Development Co., Inc., vs. Sandiko

Facts:Manuel Tabora is the registered owner of four parcels of land. To guarantee the payment of two loans, Manuel Tabora, executed in favor of PNB two mortgages over the four parcels of land between August, 1929, and April 1930. Later, a third mortgage on the same lands was executed also on April, 1930 in favor of Severina Buzon to whom Tabora was indebted.

On May, 1930, Tabora executed a public document entitled "Escritura de Transpaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by him was sold to the plaintiff company, said to under process of incorporation. The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry only on October, 1930 (Exhibit 2).

A year later, the board of directors of said company adopted a resolution authorizing its president to sell the four parcels of lands in question to Teodoro Sandiko. Exhibits B, C and D were thereafter made and executed. Exhibit B is a deed of sale where the plaintiff sold ceded and transferred to the defendant all its right, titles, and interest in and to the four parcels of land. Exhibit C is a promissory note drawn by the defendant in favor of the plaintiff, payable after one year from the date thereof. Exhibit D is a deed of mortgage executed where the four parcels of land were given a security for the payment of the promissory note, Exhibit C.

The defendant having failed to pay the sum stated in the promissory note, plaintiff, brought this action in the Court of First Instance of Manila praying that judgment be rendered against the defendant for the sum stated in the promissory note. After trial, the court rendered judgment absolving the defendant. Plaintiff presented a motion for new trial, which motion was denied by the trial court. After due exception and notice, plaintiff has appealed to this court and makes an assignment of various errors.

Issue: Whether Exhibit B, the deed of sale executed in favor of Teodoro Sandiko, was valid.

Held: No, it was not.

The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was affected on May 31, 1930 (Exhibit A) and the actual incorporation of said company was affected later on October 22, 1930 (Exhibit 2). In other words, the transfer was made almost five months before the incorporation of the company.

Unquestionably, a duly organized corporation has the power to purchase and hold such real property as the purposes for which such corporation was formed may permit and for this purpose may enter into such contracts as may be necessary. But before a corporation may be said to be lawfully organized, many things have to be done. Among other things, the law requires the filing of articles of incorporation.

In the case before us it can not be denied that the plaintiff was not yet incorporated when it entered into a contract of sale, Exhibit A. Not being in legal existence then, it did not possess juridical capacity to enter into the contract.

Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between Manuel Tabora and a non-existent corporation but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a corporations on the other hand.

For reasons that are self-evident, these promoters could not have acted as agent for a projected corporation since that which no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties.

This is not saying that under no circumstances may the acts of promoters of a corporation be ratified by the corporation if and when subsequently organized.

There are, of course, exceptions, but under the peculiar facts and circumstances of the present case we decline to extend the doctrine of ratification which would result in the commission of injustice or fraud to the candid and unwary.

BUILDERS DUNTILE CO. (C) v. DUNN MFG. CO. (TP)1) P (Samuels) received some ads from DUNN MFG. CO. (TP) showing that its ‘duntiles’ were fireproof and cheaper.

2) After some correspondence, DUNN MFG. CO. (TP) sent its agent to Paducah to talk to (Samuels).

3) (Samuels) told the agent that he was organizing a C to manufacture these ‘duntiles’.

4) Samuels and agent went to see 1 or 2 of the other promoters.

5) Samuels preferred to organize the C and then make the contract for the machinery.

6) Agent wished that Samuel to order the machinery then go ahead w/ the C afterwards.

7) 23 April- After talking w/ the other Ps in the city P (Samuels) signed the contract ordering “machinery for making a hollow building tile” from Dunn Mfg. Co. (TP).

8) The contract contained a provision: “Dunn Mfg. Co. (TP) agreed to furnish, free of charge, an experienced service man for a period of 5 days to insure proper installation and instruct your force.”

9) 6 June- machinery reached Paducah

June 16- Dunn Mfg. Co. (TP) sends person 1 to set up the machinery

10) June 20- AOI were filed by P and associates

11) Capital stock fixed at $10,000.

12) P (Samuels) has paid out or assumed to pay $5,100 for the machinery and other expenses.

13) C stocks for this amount was ordered issued by P (Samuels).

14) Machinery was making value-less tiles.

15) Dunn Mfg. Co. (TP) sends P2 to fix it. P1 actually set-up machinery wrongly and gave wrong formula.

16) C (Builders Duntile Co.) sues TP (Dunn Mfg. Co.) to recover on written contract signed by P (Samuels). HELD: C can sue on the contract. Though there was no formal assignment of the contract to it, C acts were an adoption of the contract no less than a formal resolution to this effect.

It was the only person having any real interest in the due performance of the contract, and is the proper party to recover for its breach.

To hold otherwise would be to leave a wrong w/o a remedy.

1. It was clearly understood between P (Samuels) and the other promoters and agent of the TP (Dunn Mfg. Co. ) that the Contract was made on behalf of the C w/c they proposed to perform.

2. The Incorporators at once took charge of the plant w/c had been bought for it and gave Samuels stock to the amount of his expenditures.

3. P was one of the promoters and had no intention the machinery for himself.

RIZAL LIGHT & ICE vs. THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE COMMISSIONSeptember 28, 1968 / Zaldivar, J.

Facts: (Note: this decision is a consolidation of 2 cases) Rizal Light & Ice Co. was granted by the Commission a certificate of public

convenience and necessity for the installation, operation and maintenance of an electric light, heat and power service in the municipality of Morong, Rizal

Commission required the petitioner to appear before it to show cause why it should not be penalized for violation of the conditions of its certificate of public convenience and the regulations of the Commission, and for failure to comply with the directives to raise its service voltage and maintain them within the limits prescribed in the Revised Order No. 1 of the Commission, and to acquire and install a kilowattmeter to indicate the load in kilowatts at any particular time of the generating unit

The motion was set for hearing and Mr. Pedro S. Talavera, Chief, Industrial Division of the Commission, was authorized to conduct the hearing for the reception of the evidence of the parties

For failure of the petitioner to appear at the hearing, Commission ordered the cancellation and revocation of petitioner's certificate of public convenience and necessity and the forfeiture of its franchise

Petitioner moved for reconsideration of said order on the ground that its manager was not aware of said hearing

Finding that the failure of the petitioner to appear at the hearing— the sole basis of the revocation of petitioner's certificate — was really due to the illness of its manager, the Commission set aside its order of revocation

municipality formally asked the Commission to revoke petitioner's certificate of public convenience and to forfeit its franchise on the ground, among other things, that it failed to comply with the conditions of said certificate and franchise

inspections had been made of petitioner's electric plant and installations When the case was called for hearing, petitioner failed to appear again so

municipality was then allowed to present its documentary evidence, and thereafter the case was submitted for decision

on the basis of the inspection reports, Commission found that the petitioner had failed to comply with the directives and had violated the conditions of its certificate of public convenience as well as the rules and regulations of the Commission ordered the cancellation and revocation of petitioner's certificate of public convenience and the forfeiture of its franchise

petitioner moved for reconsideration of the decision but before said motion for reconsideration was filed, Morong Electric filed with the Commission an application for a certificate of public convenience and necessity for said service

Petitioner opposed the application of Morong Electric

Issues: (only those relevant to our topic)(1) WON the Commission acted without or in excess of its jurisdiction when it delegated the hearing of the case and the reception of evidence to Mr. Pedro S. Talavera who is not allowed by law to hear the same-petitioner contends that while Mr. Pedro S. Talavera, who conducted the hearings of the case below, is a division chief, he is not a lawyer. As such, under Section 32 of Commonwealth Act No. 146, as amended, the Commission should not have delegated to him the authority to conduct the hearings for the reception of evidence of the parties (2) WON the cancellation of petitioner's certificate of public convenience was unwarranted because no sufficient evidence was adduced against the petitioner and that petitioner was not able to present evidence in its defense-petitioner contends that the evidence consisting of inspection reports upon which the Commission based its decision is insufficient and untrustworthy in that (1) the authors of said reports had not been put to test by way of cross-examination; (2) the reports constitute only one side of the picture as petitioner was not able to present evidence in its defense; (3) judicial notice was not taken of the testimony of Mr. Harry B. Bernardino, former mayor of respondent municipality, to the effect that the petitioner had improved its service before its electric power plant was burned which testimony contradicts the inspection reports; and (4) the Commission acted both as prosecutor and judge — passing judgment over the very same evidence presented by it as prosecutor — a situation "not conducive to the arrival at just and equitable decisions"

Held:

1. YES BUT... Indeed, Mr. Talavera is not a lawyer. Under the second paragraph of Section 32 of Commonwealth Act No. 146, as amended, the Commission can only authorize a division chief to hear and investigate a case filed before it if he is a lawyer. However, the petitioner is raising this question for the first time in this appeal. The record discloses that petitioner never made any objection to the authority of Mr. Talavera to hear the case and to receive the evidence of the parties. On the contrary, petitioner had appeared and submitted evidence at the hearings conducted by Mr. Talavera, particularly the hearings relative to the motion for reconsideration of the order cancelling and revoking its certificate. Through counsel, petitioner had entered into agreements with Mr. Talavera, as hearing officer, and the counsel for respondent municipality, regarding procedure in order to abbreviate the proceedings. It is only after the decision in the case turned out to be adverse to it that petitioner questioned the proceedings held before Mr. Talavera.

Objection to the delegation of authority to hear a case filed before the Commission and to receive the evidence in connection therewith is a procedural, not a jurisdictional point, and is waived by failure to interpose timely the objection and the case had been decided by the Commission. Since petitioner has never raised any objection to the authority of Mr. Talavera before the Commission, it should be deemed to have waived such procedural defect, and consonant with the precedents on the matter, petitioner's claim that the Commission acted without or in excess of jurisdiction in so authorizing Mr. Talavera should be dismissed.

2. NO. Settled is the rule that in reviewing the decision of the Public Service Commission this Court is not required to examine the proof de novo and determine for itself whether or not the preponderance of evidence really justifies the decision. The only function of this Court is to determine whether or not there is evidence before the Commission upon which its decision might reasonably be based. This Court will not substitute its discretion for that of the Commission on questions of fact and will not interfere in the latter's decision unless it clearly appears that there is no evidence to support it. Inasmuch as the only function of this Court in reviewing the decision of the Commission is to determine whether there is sufficient evidence before the Commission upon which its decision can reasonably be based, as it is not required to examine

the proof de novo, the evidence that should be made the basis of this Court's determination should be only those presented in this case before the Commission. The Commission based its decision on the inspection reports submitted by its engineers who conducted the inspection of petitioner's electric service upon orders of the Commission. Said inspection reports specify in detail the deficiencies incurred, and violations committed, by the petitioner resulting in the inadequacy of its service. SC considers that said reports are sufficient to serve reasonably as bases of the decision in question. It should be emphasized, in this connection that said reports, are not mere documentary proofs presented for the consideration of the Commission, but are the results of the Commission's own observations and investigations which it can rightfully take into consideration, particularly in this case where the petitioner had not presented any evidence in its defense, and speaking of petitioner's failure to present evidence, as well as its failure to cross-examine the authors of the inspection reports, petitioner should not complain because it had waived not only its right to cross-examine but also its right to present evidence.

Petitioner opposed in writing the application of Morong Electric, alleging among other things, that it is a holder of a certificate of public convenience to operate an electric light, heat and power service in the same municipality of Morong, Rizal, and that the approval of said application would not promote public convenience, but would only cause ruinous and wasteful competition. Although the opposition is dated October 6, 1962, it was actually received by the Commission on November 8, 1962, or twenty four days after the order of general default was issued in open court when the application was first called for hearing on October 15, 1962. On November 12, 1962, however, the petitioner filed a motion to lift said order of default. But before said motion could be resolved, petitioner filed another motion, dated January 4, 1963, this time asking for the dismissal of the application upon the ground that applicant Morong Electric had no legal personality when it filed its application on September 10, 1962, because its certificate of incorporation was issued by the Securities and Exchange Commission only on October 17, 1962. This motion to dismiss was denied by the Commission in a formal order issued on January 17, 1963 on the premise that applicant Morong Electric was a de facto corporation. Consequently, the case was heard on the merits and both parties presented

their respective evidence. On the basis of the evidence adduced, the Commission, in its decision dated March 13, 1963, found that there was an absence of electric service in the municipality of Morong and that applicant Morong Electric, a Filipino-owned corporation duly organized and existing under the laws of the Philippines, has the financial capacity to maintain said service. These circumstances, considered together with the denial of the motion for reconsideration filed by petitioner in Case No. 39715 on February, 15, 1963, such that as far as the Commission was concerned the certificate of the petitioner was already declared revoked and cancelled, the Commission approved the application of Morong Electric and ordered the issuance in its favor of the corresponding certificate of public convenience and necessity.

The bulk of petitioner's arguments assailing the personality of Morong Electric dwells on the proposition that since a franchise is a contract, 23 at least two competent parties are necessary to the execution thereof, and parties are not competent except when they are in being. Hence, it is contended that until a corporation has come into being, in this jurisdiction, by the issuance of a certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter into any contract as a corporation. The certificate of incorporation of the Morong Electric was issued by the SEC on October 17, 1962, so only from that date, not before, did it acquire juridical personality and legal existence. Petitioner concludes that the franchise granted to Morong Electric on May 6, 1962 when it was not yet in esse is null and void and cannot be the subject of the Commission's consideration. On the other hand, Morong Electric argues, and to which argument the Commission agrees, that it was a de facto corporation at the time the franchise was granted and, as such, it was not incapacitated to enter into any contract or to apply for and accept a franchise. Not having been incapacitated, Morong Electric maintains that the franchise granted to it is valid and the approval or disapproval thereof can be properly determined by the Commission.

Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when a municipal franchise was granted to it is correct. The juridical personality and legal existence of Morong Electric began only on October 17, 1962 when its certificate of incorporation was issued by the SEC. 24 Before that date, or pending the issuance of said certificate of

incorporation, the incorporators cannot be considered as de facto corporation. 25 But the fact that Morong Electric had no corporate existence on the day the franchise was granted in its name does not render the franchise invalid, because later Morong Electric obtained its certificate of incorporation and then accepted the franchise in accordance with the terms and conditions thereof. This view is sustained by eminent American authorities. Thus, McQuiuin says:

The fact that a company is not completely incorporated at the time the grant is made to it by a municipality to use the streets does not, in most jurisdictions, affect the validity of the grant. But such grant cannot take effect until the corporation is organized. And in Illinois it has been decided that the ordinance granting the franchise may be presented before the corporation grantee is fully organized, where the organization is completed before the passage and acceptance. (McQuillin, Municipal Corporations, 3rd Ed., Vol. 12, Chap. 34, Sec. 34.21)

Fletcher says:While a franchise cannot take effect until the grantee corporation is organized, the franchise may, nevertheless, be applied for before the company is fully organized.

A grant of a street franchise is valid although the corporation is not created until afterwards. (Fletcher, Cyclopedia Corp. Permanent Edition, Rev. Vol. 6-A, Sec. 2881)

And Thompson gives the reason for the rule:(I)n the matter of the secondary franchise the authorities are numerous in support of the proposition that an ordinance granting a privilege to a corporation is not void because the beneficiary of the ordinance is not fully organized at the time of the introduction of the ordinance. It is enough that organization is complete prior to the passage and acceptance of the ordinance. The reason is that a privilege of this character is a mere license to the corporation until it accepts the grant and complies with its terms and conditions. (Thompson on Corporations, Vol. 4, 3rd Ed., Sec. 2929) 26

The incorporation of Morong Electric on October 17, 1962 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 Morong Electric but also cured the deficiency pointed out by the petitioner in the application of Morong EIectric. Thus, the Commission did not err in denying petitioner's motion to dismiss said application and in proceeding to hear the same. The efficacy of the franchise, however, arose only upon its approval by the Commission on March 13, 1963. The reason is that —Under Act No. 667, as amended by Act No. 1022, a municipal council has the power to grant electric franchises, subject to the approval of the provincial board and the President. However, under Section 16(b) of Commonwealth Act No. 146, as amended, the Public Service Commission is empowered "to approve, subject to constitutional limitations any franchise or privilege granted under the provisions of Act No. 667, as amended by Act No. 1022, by any political subdivision of the Philippines when, in the judgment of the Commission, such franchise or privilege will properly conserve the public interests and the Commission shall in so approving impose such conditions as to construction, equipment, maintenance, service, or operation as the public interests and convenience may reasonably require, and to issue certificates of public convenience and necessity when such is required or provided by any law or franchise." Thus, the efficacy of a municipal electric franchise arises, therefore, only after the approval of the Public Service Commission. (Almendras vs. Ramos, 90 Phil. 231) .

The conclusion herein reached regarding the validity of the franchise granted to Morong Electric is not incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc. vs. Teodoro Sandiko 27 upon which the petitioner leans heavily in support of its position. In said case this Court held that a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business. It should be pointed out, however, that this Court did not say in that case that the rule is absolute or that under no circumstances may the acts of promoters of a corporation be ratified or accepted by the corporation if and when subsequently organized. Of course, there are exceptions. It will be noted that American courts generally hold that a contract made by the promoters of a corporation on its behalf may be adopted, accepted or ratified by the corporation when organized

How Associates vs. Boss

Stanley J. How & Associates, Inc. (How) (plaintiff) entered into a contract under which it agreed to provide architecture services for the owner of a building. As originally drafted, the contract stated that Boss Hotels Company Inc. would be known as the “Owner” in the contract, and listed Boss Hotels Co. Inc. on the signature line of the contract. When presented to Edwin Boss (defendant) for signature, he erased the words “Boss Hotels Co. Inc.” on the signature line and replaced it with the words “By: Edwin A. Boss, agent for a Minnesota corporation to be formed who will be the obligor.” Boss then formed an Iowa corporation to handle the project. This corporation sent partial payments to How, but the project was later abandoned after a substantial amount of the architectural work had been completed. How sued Boss to collect the remainder of its fee.

Brief Fact Summary. Stanley J. How & Assoc., Inc., (Plaintiff) brought suit against Edwin A. Boss, (Defendant), to recover on a contract for the performance of architectural services. Defendant claims that the parties intended that Boss Hotel Co., Inc. be the sole obligor on the contract.

Synopsis of Rule of Law. The promoter thought he may assume to act on behalf of the projected corporation and not for himself, will be personally liable on his contract unless the other party agreed to look to some other person or fund for payment.

Facts. Defendant, a promoter of a corporation, hired Plaintiff to perform architectural services. The agreement was originally written as between Boss Hotels Company, Inc. and Stanley J. How and Associates, Inc. At signing Defendant, with the consent of How, erased the words “Boss Hotel Co., Inc.” and inserted the language “By: Edwin A. Boss, agent for a Minnesota corporation to be formed who will be the obligor.” The checks set to Plaintiff for partial payments under the contract bore the name of Boss Hotel Co., Inc. The project was ultimately abandoned after substantial work had been performed. Plaintiff brought suit to seek unpaid fees on the contract.

Issue. Whether the contract was an agreement that Defendant was a present obligor.

Held. Yes. The contract was an agreement that Mr. Boss was a present obligor.

Discussion. The words “who will be the obligor,” are not enough to offset the rule that the person signing for the nonexistent corporation is normally to be personally liable. In this case, Defendant was the principal promoter, acting for himself personally and as President of Boss Hotels, Inc. The promoters abandoned their purpose of forming the corporation. This would make the promoter liable to the plaintiff unless the contract be construed to mean: 1) that the plaintiff agreed to look solely to the new corporation for payment, and 2) that the promoter did not have any duty toward the plaintiff to form the corporation and give the corporation the opportunity to assume and pay the liability.

QUAKER HILL, INC. (TP) v. Parr (P) Summary: QUAKER HILL, INC. (a NY C acting thru a local agent) made a sale to a corp. to be formed, and later accepted still another corp. after the formation of the latter.

1) May 58- QUAKER HILL, INC. (TP) (through its salesman Barker) sold a large quantity of “nursery stock” to DENVER MEMORIAL NURSERY, INC.

2) QUAKER HILL, INC. (TP) salesman Barker insisted to Parr that the deal be consummated at once because the growing season was rapidly passing.

3) 14 May 58- an order was signed by Parr, on behalf of DENVER MEMORIAL NURSERY, INC., w/c to the knowledge of QUAKER HILL, INC. (TP) was not yet formed, that fact being noted in the contract.

4) 15 May 58- 2nd order

5) 19 May 58- A sales contract, together w/ a PN was executed w/ DENVER MEMORIAL NURSERY, INC. named as the contracting party in the sales contract and as the maker in the PN.

The contract is signed as:E.D. Parr, Pres.

The PN is signed as:“Denver Memorial Nursery, Inc.E.D. Par, Pres.James P. Presba Sc’y.-Treas.”

6) DENVER MEMORIAL NURSERY, INC. was never formed.

7) 27 May 58- articles of MOUNTAIN VIEW NURSERIES, INC. were executed

8) Neither DENVER MEMORIAL NURSERY, INC. nor MOUNTAIN VIEW NURSERIES, INC ever functioned as going concerns.

9) QUAKER HILL, INC. (TP) sues Parr contending that:a) Parr is personally LB in view of the defunct financial condition of the C, based

upon the fact that the C was not formed at the time the contract was made and on the further ground that the Ds as promoters were liable.

b)ISSUE: WON personal LB can be imposed on the P?

HELD: NO, Liability is on the company! The Plaintiff, acting thru its agent, was well aware of the fact that the Company was not formed and nevertheless urged that the contract be made in the name of the proposed Company. “There is but little evidence indicating intent on the part of the Plaintiff to look to the Defendants for performance or payment.” The single fact supporting the Plaintiff’s theory is the obtaining of an individual balance sheet. On the contrary, the entire transaction contemplated the C as the contracting party. Personal LB does not arise under such circumstances.