Nielson & Company, Inc. vs.

Lepanto Consolidated Mining Company

G.R. No. L-21601, December 28, 1968
Zaldivar, J.

Facts:
On January 30, 1937, Lepanto and Nielson entered into a Management Contract, where
Nielson agreed, for a period of five years, with the right to renew for a like period, to
explore, develop and operate the mining claims of Lepanto, and to mine, or mine and
mill, such pay ore as may be found therefrom which may prove to be marketable, as
well as to render for Lepanto other services specified in the contract.

However, in February 1942, the mine, original mill, original power plant, supplies and
equipment, and all installations at the Mankayan mine so Lepanto were destroyed upon
order of the United States Army to prevent their utilization by the Japanese troops.

Issues:
1. Whether or not the Management Contract is a contract of agency or a contract of
lease.

2. Whether or not the Management Contract was suspended, resulting in the extension
the period of the contract on account of the war.

3. Whether or not the claims of Nielson under the Management Contract have
prescribed.

4. Whether or not the Court erred in ordering Lepanto to issue and deliver to Nielson
shares of stock together with fruits thereof.

Held:
1. The Management Contract entered into by and between the parties is not a contract
of agency, but a contract of lease. Based on the statements in the annual report for
1936 and from the provision of paragraph XI of the Management Contract, the
employment by Lepanto of Nielson to operate and manage its mines was principally
in consideration of the know-how and technical services that Nielson offered Lepanto.
By express stipulation of the parties, the Management Contract is not revocable at
the will of Lepanto.

2. Yes. The Management Contract was suspended, thereby extending the period of the
contract equivalent to the time when Nielson was unable to perform the work of
mining and milling because of the adverse effects of the war on the work of mining
and milling. Pursuant to the provision of paragraph II of the Management Contract,
neither party in the contract would be held liable for non-compliance of its obligation
during the period when the adverse effects on the work of mining and milling exist. It
was only on June 26, 1948 that the operation of the mines and the mill was resumed
after the mines, the mill and the installations were reconstructed and rehabilitated.
Consequently, the Management Contract had yet five (5) years to go.

3. No. The claims of Nielson under the Management Contract have not yet prescribed.
The first item of the awards in the Decision of the Court refers to Nielson’s

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 compensation equivalent to ten percent (10%) of the cash dividends declared by
Lepanto in December 1941. This claim accrued on December 31, 1941, and the right
to commence can action thereon started on January 1, 1942. Although the complaint
was filed only on February 6, 1958, or after a lapse of sixteen (16) years and one (1)
month, the claim did not prescribe. It is to be noted that Executive Order (EO) No. 32
was issued on March 10, 1945, covering all debts and other monetary obligations
contracted before the war, or before December 8, 1941, and those contracted
thereafter and during the Japanese occupation. Subsequently, Republic Act (RA) No.
342, which was approved on July 26, 1948, lifted the moratorium provided for in EO
32. However, on May 18, 1953, the Court declared RA 342 as unconstitutional. The
Court declared that from March 10, 1945 to May 18, 1953, or a period of eight (8)
years, two (2) months and eight (8) days, the debt moratorium was in force, and had
the effect of suspending the period of prescription of obligations covered therein.
Thus, the said period should be deducted from counting the prescriptive period of the
claim of Nielson.

5. Yes. The Court erred in ordering Lepanto to issue and deliver to Nielson shares of
stock together with fruits thereof. Pursuant to the modified agreement regarding the
compensation of Neilson, which provides, among others, that Nielson would receive
ten percent (10%) of any dividends declared and paid, when and as paid, Nielson
should be paid ten percent (10%) of the stock dividends declared by Lepanto during
the period of extension of the contract.

However, under Section 16 of the Corporation Law, the consideration for which
shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed
profits. Shares of stock are given the special name “stock dividends” only if they are
issued in lieu of undistributed profits. If the shares of stocks are issued in exchange
of cash or property, such a share of stock issued to pay for services rendered, then
those shares do not fall under the category of “stock dividends.”

A stock dividend of a corporation is a dividend paid in shares of stock instead of

cash, and is properly payable only out of surplus profits. Stock dividends are issued
only to stockholders, who have the right to a proportional share in that part of the
surplus which is declared as dividends. Stock dividends are civil fruits of the original
investment, and to the owners of the shares belong the civil fruits. Thus, stock
dividends cannot be issued to Nielson who is not a stockholder in payment of
services rendered. The understanding between Lepanto and Nielson was simply to
make the cash value of the stock dividends declared as the basis for determining the
amount of compensation that should be paid to Nielson.

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