Woodhouse v Halili

No. L-4811 (1953)

J. Labrador / pab

SUBJECT MATTER: Breach of Obligation > Modes of Breach > Fraud

CASE SUMMARY:

Woodhouse and Halili agreed to establish a partnership for a bottling and distributorship of a famous soft
drink brand. Woodhouse falsely represented to Halili that he has acquired an exclusive franchise for the
said brand, which induced Halili to agree that Woodhouse be entitled to 30% of the profits of the
partnership. Eventually, Halili discovered the misrepresentation and decided not to push through with the
partnership agreement. Woodhouse filed a case to compel Halili to push through with their partnership
agreement.

SC ruled in favor of Halili (i.e. that he cannot be compelled to honor the partnership agreement) but Halili
is liable for damages to Woodhouse for lost potential revenue, equivalent to the 30% of the profits.
However, since Woodhouse is guilty of fraud due to the false misrepresentation, he is also liable for
damages to Halili for said false misrepresentation and his share in the profits is reduced to 15%.

DOCTRINES:

In fraud as a mode of breach of obligations, it is dolo causante that vitiates consent and which serves as a
ground for the annulment of contract. Dolo incidente, however, may still serve as a basis for the award of
damages to the injured party.

FACTS:

Charles Woodhouse (plaintiff) came to Fortunato F. Halili (defendant) to ask the latter to invest in
a partnership for an exclusive bottling and distributorship franchise of an international beverage
brand, Mission soft drinks.

Before proposing and entering into agreement with defendant, plaintiff informed the parent
company, Mission Dry Corporation of Los Angeles, California, USA that he was able to interest
an financier (defendant) to invest half a million dollars for the franchise and requested bottling
and distribution rights for a limited time until it can be transferred to the corporation that was to
be formed. He was granted a thirty day right option.

Negotiations began on 27 November 1947 at the Manila Hotel with the parties meeting along
with their own lawyers. The initial draft of plaintiff had to be modified by defendants lawyer
since they were forming a partnership only instead of a corporation as was proposed by plaintiff.
On 29 November, the parties entered into an agreement some of the most important provisions of
which are:

A partnership will be formed for the bottling and distribution of Mission soft drinks with
plaintiff as industrial partner/manager and defendant as capitalist;
Matters of general policy were to be decided by defendant while plaintiff was to attend
to operations and development of bottling plant;
 Plaintiff was to secure Mission Soft Drinks franchise for and in behalf of the proposed
partnership; and
Plaintiff was to receive 30% of net profits.

Plaintiff signed the agreement on 3 December 1947 and on the same day they went to the United
States. A week later (10 December), a franchise agreement was granted to defendant for the
exclusive right, license, and authority to produce the beverages in the Philippines.

Operations were supposed to commence on January 1948 but it only begun on February. Plaintiff
was given Php 2,000.00 in January and February plus the use of a car, but in March he was only
given Php 1,000.00 and the car privilege was withdrawn.

Plaintiff then demanded that the agreement between him and defendant be executed. Defendant
excused himself at first and promised to do so after the earnings reach Php 50,000.00. After
Halilis failure to keep his promise and refused to give further allowances, Woodhouse instituted
the action.

Plaintiff asked for:

(1) the execution of the partnership agreement;

(2) the accounting of the profits;
(3) share of 30 percent of the said profits;
(4) damages in the amount of P200,000

Defendant on the other hand claimed:

(1) That the defendants consent to the agreement, was secured by the representation of
plaintiff that he was the owner, or was about to become owner of an exclusive bottling
franchise, which representation was false, and that plaintiff did not secure the franchise
but was given to defendant himself;
(2) That he did not fail to carry out his undertakings, but that it was plaintiff who failed;
(3) That the plaintiff agreed to contribute to the exclusive franchise to the partnership, but
plaintiff failed to do so;
(4) Counterclaim for P200,00 as damages

CFI ruled in favor of plaintiff, ordering the a) accounting of profits and to pay plaintiff 15 % of
the profits (instead of the 30% initially agreed upon); b) execution of contract cannot be enforced
upon parties; and c) declared that the charges of fraud werent proven

ISSUES:

1) WON plaintiff falsely represented that he had an exclusive franchise to bottle Mission beverages

2) WON the false representation, if it existed, annuls the agreement to form the partnership
HELD:

1) Yes.
2) No.

RATIO:

1) Yes. When plaintiff approached defendant, he presented himself as if he was already in

possession of or at least was about to be in possession of the exclusive rights in order to convince
defendant to invest in the partnership he proposes. Woodhouse did not reveal to Halili that what
he had were rights given by Mission Dry Corp. for a limited period until such time a franchisee
was incorporated and that at the time of their agreement the said limited grant had already
expired.

2) No. The false representation made by plaintiff was merely incidental fraud (dolo incidente) as
opposed to causal fraud (dolo causante). Thus, the contract remains in force. However, both
parties are entitled to damages.

[A]rticle 1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the causal
fraud, which may be a ground for the annulment of a contract, and the incidental deceit, which
only renders the party who employs it liable for damages. This Court had held that in order that
fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo
incidente), inducement to the making of the contract.

The principal obligation Woodhouse entered was to transfer the Mission Soft Drinks franchise to
the partnership. Although Woodhouse is guilty of misrepresentation, it was not the cause of
Halilis consent. Rather, what it caused was the latters consent to the 30 percent share in profits
to be enjoyed by Woodhouse. This is merely incidental to the agreement.

Halili cannot be compelled to execute the partnership against his will. Thus, the obligation is
converted to one for damages for lost revenue. This fact notwithstanding, Halili is also entitled to
damages due to Woodhouses incidental fraud.

The court held that the 15 percent diminution of Woodhouses share in the profits is the correct
amount of damages taking compensation into account.

DISPOSITIVE: Petition partly granted.