G.R. No. L-11775; July 15, 1918
GERMAN SALGADO and PABLO MARTINEZ, plaintiffs-appellants, vs. THE ST. LOUIS DRY GOODS STORE (INC.), defendant-appellant.

FACTS:
The St. Louis Dry Goods Store (Inc.), a corporation, employed German Salgado and Pablo Martinez as “submanagers” under identical written contracts for the years 1914 and 1915. Their compensation was a monthly salary plus 17.5% of the actual net profits of the business, after allowances for depreciation of stock, bad, and doubtful debts. The contracts stipulated that the plaintiffs must accept the yearly or half-yearly balances as made up and accepted by the board of directors, with no right to question the amounts set aside for depreciation and bad debts.

The plaintiffs left their employment on February 26, 1915, alleging a breach of contract. They filed separate actions seeking: (1) an accounting and recovery of their 17.5% profit share, claiming the amounts set aside for depreciation by the board were excessive and improperly reduced their participation; and (2) damages for breach of contract, contending that the defendant’s act of placing a manager with supervisory authority over them was derogatory and violated their contracts, entitling them to unearned salary and damages for injury to reputation. The defendant, in turn, filed counterclaims for various sums it alleged the plaintiffs owed the company.

ISSUE:
1. Whether the board of directors’ determination of the amounts for depreciation of stock was made in bad faith, thereby improperly reducing the plaintiffs’ profit share.
2. Whether the defendant committed a breach of contract by placing a supervisory manager over the plaintiffs, justifying their resignation and claim for damages.

RULING:
1. On the Profit Share (Depreciation): The Supreme Court ruled in favor of the defendant. The contract expressly bound the plaintiffs to accept the balances determined by the board of directors. In the absence of proof of bad faith or abuse of authority by the board in fixing the depreciation allowances, the plaintiffs could not impeach those determinations. The evidence failed to establish bad faith, even though the depreciation allowances resulted in no distributable profits. The initial conservative valuation of stock at the start of the business could not prejudice the plaintiffs’ profit share, as profits are calculated based on periodic inventories, not initial capital. Therefore, the plaintiffs were not entitled to the additional profit shares they claimed.

DISPOSITIVE:
The judgment of the lower court was reversed. Judgment was rendered in favor of The St. Louis Dry Goods Store (Inc.):
Against German Salgado for the sum of P2,125 (after crediting his profit share for 1913 against his indebtedness to the company).
Against Pablo Martinez for the sum of P100 (after a similar credit).
Interest was allowed on both sums from February 1, 1916, until paid. No costs were awarded.