Verga vs. Harbor Star Shipping Services, Inc.

An oral contract for the sale of corporate shares is perfected by mere consent, and the price need not be fixed at the time of contracting if it can be determined by a third‑party audit under Article 1469 of the Civil Code; the seller’s failure to deliver the stock certificates because of a subsequent divestment constitutes a substantial breach that justifies rescission and obligates the seller to return the purchase price received, with interest at six percent per annum from extrajudicial demand under Article 2209, not the higher rate for forbearances of money.

Harbor Star Shipping Services, Inc. and Davao Tugboat and Allied Services, Inc. (DATASI) were competitors in the tugboat and towage business in Davao. Petitioner Captain Ramon R. Verga, Jr. was a shareholder of DATASI and of Davtug Multi‑Purpose Cooperative (DAVTUG), which had been organized by DATASI’s shareholders to acquire more tugboats. Beginning in November 2006, Harbor Star repeatedly sought business collaboration with DATASI, proposing merger, partnership, or a joint venture. Negotiations eventually narrowed to Harbor Star’s acquisition of the DATASI shares held by Verga and two other pilots.

• The Parties and the Business Context: Harbor Star is a domestic corporation engaged in harbor assistance, towing, salvage, repairs, and dry dock. Verga was a shareholder of DATASI, a competitor in the same business in Davao, and of DAVTUG, a cooperative organized by DATASI shareholders. Between November 2006 and May 2008, Harbor Star wrote to DATASI proposing merger, partnership, or a joint venture, aiming to penetrate the Davao market.

• The Alleged Oral Agreement: Harbor Star alleged that during the second semester of 2008, it persuaded Verga and two other pilots to sell their DATASI shares. The parties agreed in principle on a PHP 6,000,000 initial valuation for Verga’s shares, subject to adjustment after a final audit of DATASI’s books. Harbor Star prepared a draft Memorandum of Agreement, but it was never signed. Despite the absence of a written contract, Harbor Star made several installment payments to Verga from September 2008 to July 2009 totaling PHP 4,000,000.

• Documentary Evidence of the Payment’s Purpose: Several payment vouchers issued by Harbor Star described the remittances as partial payment for DATASI shares. One voucher receipt for PHP 250,000, signed by Verga, explicitly stated “Partial Payment for DATASI Shares.” The draft Memorandum of Agreement likewise referred to the sale of Verga’s “interests in the tug company (DATASI)” for PHP 6,000,000.

• Verga’s Defense and Counter‑Narrative: Verga denied any contract of sale. He claimed the PHP 4,000,000 was an incentive for his resignation from DATASI and DAVTUG—a marketing tool to entice ship‑owners to use Harbor Star’s services. He asserted that Harbor Star spread rumors of commissions to sow dissension among cooperative members. Verga resigned from DAVTUG on July 11, 2009, but insisted he was still owed a PHP 2,000,000 balance of the “resignation incentive” and filed a counterclaim.

• Divestment and Demand: In 2012, Harbor Star discovered that Verga had sold his DATASI shares back to the corporation, making it impossible for him to transfer them to Harbor Star. By letter dated February 21, 2012, received by Verga on March 22, 2012, Harbor Star demanded the return of the PHP 4,000,000. Verga refused and instead demanded the additional PHP 2,000,000.

• Lower Courts’ Findings: The RTC found that the parties entered into an oral contract for the sale of Verga’s DATASI shares, relying on the testimony of Harbor Star’s Chief Operating Officer Rodrigo Bella, the payment vouchers, and the draft memorandum. It ruled that the Statute of Frauds did not apply because the contract had been partially executed. The CA affirmed but characterized the agreement as a contract to sell, holding that finalization was subject to a condition precedent—completion of the audit. The CA also reduced attorney’s fees and modified the interest award.

• Absence of a Contract of Sale: Petitioner maintained that Harbor Star failed to prove the existence of an oral contract for the acquisition of his DATASI shares by preponderance of evidence. The vouchers did not indicate “investments” but merely “trade payable” or “AP Trade,” and the phrase “Partial Payment for DATASI Shares” was intercalated. He invoked Lao v. Lao to argue that a written document was required to prove the acquisition of shares.

• Unenforceability under the Statute of Frauds: Petitioner argued that under Article 1403(2)(d) of the Civil Code, an oral agreement for the sale of shares at a price exceeding PHP 500 is unenforceable absent a written memorandum. Since no written contract existed, the agreement could not be enforced.

• Lack of Corporate Authority: Petitioner contended that Harbor Star failed to secure a Board of Directors’ resolution approving the buyout, in violation of Section 42 of the Corporation Code. The subsequent ratification by stockholders during a 2009 annual meeting was ineffective without a prior board resolution to ratify.

• Improper Award of Attorney’s Fees and Damages: Petitioner argued that the CA had no basis in fact or law to award attorney’s fees to Harbor Star. Instead, he claimed entitlement to moral damages, exemplary damages, and attorney’s fees because the suit caused him great embarrassment among Davao pilots.

• Preponderance of Evidence Established a Contract to Sell: Respondent countered that the uniform factual findings of the RTC and CA, supported by Bella’s testimony and the payment vouchers, sufficiently proved the oral contract. The Petition raised purely factual issues beyond the scope of a Rule 45 review.

• Perfection by Consent and Inapplicability of the Statute of Frauds: Respondent maintained that a contract to sell is perfected by consent and need not be reduced to writing. The Statute of Frauds was inapplicable because the contract had been partially executed through payment of PHP 4,000,000.

• Sufficient Corporate Ratification: Respondent argued that the general ratification of all corporate acts by the stockholders during the June 3, 2009 annual meeting satisfied Section 42 of the Corporation Code. Moreover, the president, who was the majority stockholder, had apparent authority to bind the corporation.

• Justification for Attorney’s Fees: Respondent insisted that the award of attorney’s fees was justified because it was constrained to litigate to recover what Verga unjustifiably refused to return.

• Nature of the Agreement: Whether the parties entered into an oral contract for the sale of Verga’s DATASI shares, and if so, whether it was a contract of sale or a contract to sell.

• Certainty of the Price and Perfection: Whether the oral agreement was void or unenforceable for lack of a fixed price and because it was not reduced to writing under the Statute of Frauds.

• Corporate Authority: Whether Harbor Star’s purchase of the DATASI shares required ratification by two‑thirds of its outstanding capital stock under Section 42 of the Corporation Code.

• Breach and Remedies: Whether Verga’s divestment of his DATASI shares made him liable to return the PHP 4,000,000 partial payment, and whether the award of attorney’s fees and the interest rate imposed by the CA were proper.

• Nature of the Agreement: The evidence showed that the parties entered into an oral contract of sale, not a contract to sell, covering Verga’s DATASI shares alone. The draft Memorandum of Agreement, the payment vouchers—one signed by Verga expressly as “Partial Payment for DATASI Shares”—and the parties’ prior correspondence all pointed to a sale of shares, not a resignation incentive. The CA’s characterization as a contract to sell was erroneous; the agreement itself contained no reservation of ownership until full payment, and the final audit merely served to adjust the price, not to perfect the contract.

• Certainty of the Price and Perfection: The contract of sale was perfected by mere consent under Article 1475 of the Civil Code. The price was sufficiently certain under Article 1469, as the parties agreed on an initial valuation of PHP 6,000,000 subject to determination by a final audit conducted by a “special person” (the auditor). The absence of a written agreement did not affect validity. The Statute of Frauds did not bar enforcement because the contract had been partially executed through the payment of PHP 4,000,000, which constituted ratification by acceptance of benefits under Article 1405.

• Corporate Authority: Section 42 of the Corporation Code was inapplicable because the investment in DATASI shares was in pursuit of Harbor Star’s primary purpose; only board approval was required, not stockholder ratification. Even under Section 42, the stockholders’ general ratification during the June 3, 2009 annual meeting sufficed. More fundamentally, Verga could not retain the benefits of the contract while impugning its validity; a party who accepts benefits under a contract is estopped from asserting its invalidity.

• Breach and Remedies: Verga’s divestment of his DATASI shares and the sell‑back to the corporation made it impossible for him to deliver the stock certificates, which is a substantial breach of a contract of sale. Harbor Star properly elected rescission under Article 1191 of the Civil Code. Rescission obligates Verga to return the PHP 4,000,000 purchase price under Article 1385. The award of attorney’s fees was justified under Article 2208 because Verga acted in bad faith by stubbornly refusing to return the money. However, the compensatory interest should be six percent per annum under Article 2209, not twelve percent, because the obligation arose from the rescission of a contract of sale—not from a loan or forbearance of money. The interest runs from the date of extrajudicial demand, March 22, 2012, until full payment.

• Perfection of a Sale with Price Determinable by a Third Party — A contract of sale is perfected even if the exact price is not fixed at the time of execution, provided it is determinable by reference to a third person or a future event, such as a final audit, under Article 1469 of the Civil Code. The price may be subject to adjustment without rendering the contract imperfect.

• Inapplicability of the Statute of Frauds to Partially Executed Contracts — The Statute of Frauds applies only to executory contracts, not to those that have been partially or totally consummated. Partial performance, such as payment of part of the purchase price, constitutes ratification by acceptance of benefits under Article 1405 of the Civil Code and removes the contract from the statute’s coverage.

• Substantial Breach in the Sale of Corporate Shares — In a contract of sale of corporate shares, the seller’s failure to physically deliver the stock certificates—made impossible by the seller’s own divestment—constitutes a substantial breach. The injured buyer may elect rescission under Article 1191 and recover the purchase price paid, with interest.

• Corporate Investment in Furtherance of Primary Purpose — When a corporation purchases shares in another corporation in pursuit of its primary purpose as stated in its articles of incorporation, only the approval of the board of directors is required; stockholder ratification under Section 42 of the Corporation Code is unnecessary.

• Estoppel Against a Party Retaining Benefits — A party who accepts and retains benefits under a contract is estopped from subsequently challenging its validity or asserting that it was ultra vires.

• Interest on Refund Arising from Rescission of Sale — Where the monetary award represents a refund of the purchase price following rescission of a contract of sale, the obligation is not one of loan or forbearance of money. The applicable rate of compensatory interest is six percent per annum under Article 2209 of the Civil Code, not the twelve percent rate prescribed by Bangko Sentral ng Pilipinas circulars for forbearances.

• “In order that the price may be considered certain, it shall be sufficient that it be so with reference to another thing certain, or that the determination thereof be left to the judgment of a special person or persons.” (Art. 1469, Civil Code, applied to uphold the validity of the oral sale where the final price depended on an audit.)

• “The Statute of Frauds is applicable only to executory contracts and not to partially or totally consummated ones, and the basis of this rule is the fact that in consummated contracts, there is already a ratification of the contract by acceptance of benefits within the meaning of Article 1405.” (Applied to reject Verga’s defense of unenforceability because Harbor Star had already paid PHP 4,000,000.)

• “For a valid transfer of stocks, the requirements are as follows: (a) there must be delivery of the stock certificate; (b) the certificate must be endorsed by the owner or his attorney‑in‑fact... and (c) to be valid against third parties, the transfer must be recorded in the books of the corporation.” (From Raquel‑Santos v. Court of Appeals, underscoring the buyer’s right to rescind when delivery becomes impossible.)

• “When an obligation arises from a contract of purchase and sale and not from a contract of loan or mutuum, the applicable rate is six percent per annum, as provided in Article 2209 of the Civil Code and not the rate of twelve percent per annum as provided in Central Bank Circular no. 416.” (Basis for modifying the interest rate from twelve to six percent.)

• Robles v. Lizarraga Hermanos, 50 Phil. 387 (1927) — Applied: Contract of sale is binding where the price is to be fixed by appraisers; the parties are obligated to promote the appraisal in good faith. Cited to support the validity of a sale with a price subject to a third‑party audit.

• Raquel‑Santos, et al. v. Court of Appeals, et al., 609 Phil. 630 (2009) — Followed: Failure to deliver stock certificates is a substantial breach giving the buyer the right to rescind and recover the purchase price.

• De la Rama, et al. v. Ma‑Ao Sugar Central Co., Inc., et al., 136 Phil. 418 (1969) — Applied: When a corporation invests in another business in pursuit of its primary purpose, only board approval is needed; stockholder ratification under Section 42 is not required.

• Javier v. Court of Appeals, 262 Phil. 188 (1990) — Applied: The contemporaneous and subsequent acts of the parties are the principal indicia of their true contractual intention.

• Lara’s Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., 860 Phil. 744 (2019) — Distinguished: The CA erroneously relied on this case to impose the BSP‑prescribed interest rate; the monetary award here did not arise from a forbearance of money but from rescission of a sale.

• Article 1371, Civil Code — To judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. Applied to determine that the PHP 4,000,000 was payment for DATASI shares, not a resignation incentive.

• Article 1469, Civil Code — The price in a contract of sale may be left to the determination of a special person. Applied to uphold the oral sale where the final price depended on an auditor’s report.

• Article 1475, Civil Code — A contract of sale is perfected by mere consent upon a determinate thing and a price certain. Applied to conclude that the oral agreement was a perfected contract of sale.

• Article 1403(2)(d) in relation to Article 1405, Civil Code — Statute of Frauds requiring a written agreement for sale of personal property over PHP 500, but ratification by acceptance of benefits removes the contract from the statute’s coverage. Applied because partial payment constituted ratification.

• Article 1191, Civil Code — The power to rescind is implied in reciprocal obligations; the injured party may choose between fulfillment and rescission with damages. Applied to affirm Harbor Star’s right to rescind after Verga’s breach.

• Article 1385, Civil Code — Rescission creates the obligation to return the things which were the object of the contract, together with the price and interest. Applied as the basis for ordering Verga to refund the PHP 4,000,000.

• Section 42, Corporation Code (B.P. Blg. 68) — Power to invest corporate funds requires board approval and, unless the investment is necessary for the primary purpose, ratification by two‑thirds of outstanding capital stock. Held inapplicable because the investment pursued Harbor Star’s primary purpose; even if applicable, ratification was obtained.

• Section 63, Corporation Code (B.P. Blg. 68) — Shares may be transferred by delivery of the certificate endorsed by the owner. Applied to underscore that Verga’s failure to deliver the certificates was a substantial breach.

• Articles 2208, 2209, and 2210, Civil Code — Attorney’s fees may be awarded when the defendant acted in gross and evident bad faith; legal interest for obligations not constituting a loan is six percent per annum; interest on damages for breach of contract is discretionary. Applied to sustain the award of attorney’s fees and to modify the interest rate to six percent from extrajudicial demand.

Caguioa (Chairperson), Gaerlan, and Dimaampao, JJ., concurred. Singh, J., was on official business but left a concurring vote.