THIRD DIVISION

PHILEX MINING G.R. No. 148187

CORPORATION,
Petitioner, Present:
Ynares-Santiago, J. (Chairperson),
- versus - Carpio Morales, *
Chico-Nazario,

Nachura, and,
Reyes, JJ.

COMMISSIONER OF
INTERNAL REVENUE, Promulgated:
Respondent.
April 16, 2008
x ---------------------------------------------------------------------------------------- x
DECISION
YNARES-SANTIAGO, J.:

This is a petition for review on certiorari of the June 30, 2000 Decision [1] of the Court of Appeals in CA-G.R. SP No.
49385, which affirmed the Decision[2] of the Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is the April 3,
2001 Resolution[3] denying the motion for reconsideration.

The facts of the case are as follows:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an agreement [4] with
Baguio Gold Mining Company (Baguio Gold) for the former to manage and operate the latters mining claim, known
as the Sto. Nino mine, located in Atok and Tublay, Benguet Province. The parties agreement was denominated as
Power of Attorney and provided for the following terms:

4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available to
the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such amounts
as from time to time may be required by the MANAGERS within the said 3-year period, for use in
the MANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00)
shall be deemed, for internal audit purposes, as the owners account in the Sto. Nino PROJECT. Any
part of any income of the PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino
PROJECT, shall be added to such owners account.
5. Whenever the MANAGERS shall deem it necessary and convenient in connection with the
MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to the Sto.
Nino PROJECT, in accordance with the following arrangements:
(a) The properties shall be appraised and, together with the cash, shall be carried by the Sto. Nino
PROJECT as a special fund to be known as the MANAGERS account.
(b) The total of the MANAGERS account shall not exceed P11,000,000.00, except with prior
approval of the PRINCIPAL; provided, however, that if the compensation of the MANAGERS as
herein provided cannot be paid in cash from the Sto. Nino PROJECT, the amount not so paid in
cash shall be added to the MANAGERS account.

(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino PROJECT until
termination of this Agency.
(d) The MANAGERS account shall not accrue interest. Since it is the desire of the PRINCIPAL to
extend to the MANAGERS the benefit of subsequent appreciation of property, upon a projected
termination of this Agency, the ratio which the MANAGERS account has to the owners account will
be determined, and the corresponding proportion of the entire assets of the STO. NINO MINE,
excluding the claims, shall be transferred to the MANAGERS, except that such transferred assets
shall not include mine development, roads, buildings, and similar property which will be valueless,
or of slight value, to the MANAGERS. The MANAGERS can, on the other hand, require at their
option that property originally transferred by them to the Sto. Nino PROJECT be re-transferred to
them. Until such assets are transferred to the MANAGERS, this Agency shall remain subsisting.
xxxx
12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the Sto.
Nino PROJECT before income tax. It is understood that the MANAGERS shall pay income tax on
their compensation, while the PRINCIPAL shall pay income tax on the net profit of the Sto. Nino
PROJECT after deduction therefrom of the MANAGERS compensation.
xxxx
16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the future,
may incur other obligations in favor of the MANAGERS. This Power of Attorney has been executed
as security for the payment and satisfaction of all such obligations of the PRINCIPAL in favor of the
MANAGERS and as a means to fulfill the same. Therefore, this Agency shall be irrevocable while
any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the
MANAGERS account. After all obligations of the PRINCIPAL in favor of the MANAGERS have been
paid and satisfied in full, this Agency shall be revocable by the PRINCIPAL upon 36-month notice
to the MANAGERS.
17. Notwithstanding any agreement or understanding between the PRINCIPAL and the MANAGERS
to the contrary, the MANAGERS may withdraw from this Agency by giving 6-month notice to the
PRINCIPAL. The MANAGERS shall not in any manner be held liable to the PRINCIPAL by reason
alone of such withdrawal. Paragraph 5(d) hereof shall be operative in case of the MANAGERS
withdrawal.
x x x x[5]

In the course of managing and operating the project, Philex Mining made advances of cash and property in
accordance with paragraph 5 of the agreement. However, the mine suffered continuing losses over the years which
resulted to petitioners withdrawal as manager of the mine on January 28, 1982 and in the eventual cessation of
mine operations on February 20, 1982.[6]

Thereafter, on September 27, 1982, the parties executed a Compromise with Dation in Payment [7] wherein Baguio
Gold admitted an indebtedness to petitioner in the amount of P179,394,000.00 and agreed to pay the same in three
segments by first assigning Baguio Golds tangible assets to petitioner, transferring to the latter Baguio Golds
equitable title in its Philodrill assets and finally settling the remaining liability through properties that Baguio Gold
may acquire in the future.

On December 31, 1982, the parties executed an Amendment to Compromise with Dation in Payment [8] where the
parties determined that Baguio Golds indebtedness to petitioner actually amounted to P259,137,245.00, which sum
included liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor. These liabilities
pertained to long-term loans amounting to US$11,000,000.00 contracted by Baguio Gold from the Bank of America
NT & SA and Citibank N.A. This time, Baguio Gold undertook to pay petitioner in two segments by first assigning its
tangible assets for P127,838,051.00 and then transferring its equitable title in its Philodrill assets for
P16,302,426.00. The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to
petitioner in the amount of P114,996,768.00.

Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio
Gold by charging P112,136,000.00 to allowances and reserves that were set up in 1981 and P2,860,768.00 to the
1982 operations.

In its 1982 annual income tax return, petitioner deducted from its gross income the amount of P112,136,000.00 as
loss on settlement of receivables from Baguio Gold against reserves and allowances. [9] However, the Bureau of
Internal Revenue (BIR) disallowed the amount as deduction for bad debt and assessed petitioner a deficiency
income tax of P62,811,161.39.

Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt
deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt was ascertained to be
worthless; and (c) it was charged off within the taxable year when it was determined to be worthless.

Petitioner emphasized that the debt arose out of a valid management contract it entered into with Baguio Gold. The
bad debt deduction represented advances made by petitioner which, pursuant to the management contract, formed
part of Baguio Golds pecuniary obligations to petitioner. It also included payments made by petitioner as guarantor

of Baguio Golds long-term loans which legally entitled petitioner to be subrogated to the rights of the original
creditor.

Petitioner also asserted that due to Baguio Golds irreversible losses, it became evident that it would not be
able to recover the advances and payments it had made in behalf of Baguio Gold. For a debt to be considered
worthless, petitioner claimed that it was neither required to institute a judicial action for collection against the
debtor nor to sell or dispose of collateral assets in satisfaction of the debt. It is enough that a taxpayer exerted
diligent efforts to enforce collection and exhausted all reasonable means to collect.

On October 28, 1994, the BIR denied petitioners protest for lack of legal and factual basis. It held that the
alleged debt was not ascertained to be worthless since Baguio Gold remained existing and had not filed a petition
for bankruptcy; and that the deduction did not consist of a valid and subsisting debt considering that, under the
management contract, petitioner was to be paid fifty percent (50%) of the projects net profit. [10]

Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as follows:

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby DENIED
for lack of merit. The assessment in question, viz: FAS-1-82-88-003067 for deficiency income tax
in the amount of P62,811,161.39 is hereby AFFIRMED.
ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY
respondent Commissioner of Internal Revenue the amount of P62,811,161.39, plus, 20%
delinquency interest due computed from February 10, 1995, which is the date after the 20-day
grace period given by the respondent within which petitioner has to pay the deficiency amount x
x x up to actual date of payment.
SO ORDERED.[11]

The CTA rejected petitioners assertion that the advances it made for the Sto. Nino mine were in the nature
of a loan. It instead characterized the advances as petitioners investment in a partnership with Baguio Gold for the
development and exploitation of the Sto. Nino mine. The CTA held that the Power of Attorney executed by petitioner
and Baguio Gold was actually a partnership agreement. Since the advanced amount partook of the nature of an
investment, it could not be deducted as a bad debt from petitioners gross income.

The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of Baguio Gold
could not be allowed as a bad debt deduction. At the time the payments were made, Baguio Gold was not in default
since its loans were not yet due and demandable. What petitioner did was to pre-pay the loans as evidenced by the
notice sent by Bank of America showing that it was merely demanding payment of the installment and interests
due. Moreover, Citibank imposed and collected a pre-termination penalty for the pre-payment.

The Court of Appeals affirmed the decision of the CTA.[12] Hence, upon denial of its motion for
reconsideration,[13] petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:

I.
The Court of Appeals erred in construing that the advances made by Philex in the management of
the Sto. Nino Mine pursuant to the Power of Attorney partook of the nature of an investment
rather than a loan.
II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto. Nino
Mine indicates that Philex is a partner of Baguio Gold in the development of the Sto. Nino Mine
notwithstanding the clear absence of any intent on the part of Philex and Baguio Gold to form a
partnership.
III.
The Court of Appeals erred in relying only on the Power of Attorney and in completely disregarding
the Compromise Agreement and the Amended Compromise Agreement when it construed the
nature of the advances made by Philex.
IV.
The Court of Appeals erred in refusing to delve upon the issue of the propriety of the bad debts
write-off.[14]

Petitioner insists that in determining the nature of its business relationship with Baguio Gold, we should not
only rely on the Power of Attorney, but also on the subsequent Compromise with Dation in Payment and Amended
Compromise with Dation in Payment that the parties executed in 1982. These documents, allegedly evinced the
parties intent to treat the advances and payments as a loan and establish a creditor-debtor relationship between
them.

The petition lacks merit.

The lower courts correctly held that the Power of Attorney is the instrument that is material in determining
the true nature of the business relationship between petitioner and Baguio Gold. Before resort may be had to the
two compromise agreements, the parties contractual intent must first be discovered from the expressed language
of the primary contract under which the parties business relations were founded. It should be noted that the
compromise agreements were mere collateral documents executed by the parties pursuant to the termination of
their business relationship created under the Power of Attorney. On the other hand, it is the latter which established
the juridical relation of the parties and defined the parameters of their dealings with one another.

The execution of the two compromise agreements can hardly be considered as a subsequent or
contemporaneous act that is reflective of the parties true intent. The compromise agreements were executed

eleven years after the Power of Attorney and merely laid out a plan or procedure by which petitioner could recover
the advances and payments it made under the Power of Attorney. The parties entered into the compromise
agreements as a consequence of the dissolution of their business relationship. It did not define that relationship or
indicate its real character.

An examination of the Power of Attorney reveals that a partnership or joint venture was indeed intended by
the parties. Under a contract of partnership, two or more persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of dividing the profits among themselves. [15] While a corporation,
like petitioner, cannot generally enter into a contract of partnership unless authorized by law or its charter, it has
been held that it may enter into a joint venture which is akin to a particular partnership:

The legal concept of a joint venture is of common law origin. It has no precise legal
definition, but it has been generally understood to mean an organization formed for some
temporary purpose. x x x It is in fact hardly distinguishable from the partnership, since their
elements are similar community of interest in the business, sharing of profits and losses, and a
mutual right of control. x x x The main distinction cited by most opinions in common law
jurisdictions is that the partnership contemplates a general business with some degree of
continuity, while the joint venture is formed for the execution of a single transaction, and is thus
of a temporary nature. x x x This observation is not entirely accurate in this jurisdiction, since
under the Civil Code, a partnership may be particular or universal, and a particular partnership
may have for its object a specific undertaking. x x x It would seem therefore that under Philippine
law, a joint venture is a form of partnership and should be governed by the law of partnerships.
The Supreme Court has however recognized a distinction between these two business forms, and
has held that although a corporation cannot enter into a partnership contract, it may however
engage in a joint venture with others. x x x (Citations omitted) [16]

Perusal of the agreement denominated as the Power of Attorney indicates that the parties had intended to
create a partnership and establish a common fund for the purpose.They also had a joint interest in the profits of the
business as shown by a 50-50 sharing in the income of the mine.

Under the Power of Attorney, petitioner and Baguio Gold undertook to contribute money, property and
industry to the common fund known as the Sto. Nio mine. [17] In this regard, we note that there is a substantive
equivalence in the respective contributions of the parties to the development and operation of the mine. Pursuant
to paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold were to contribute equally to the joint venture
assets under their respective accounts. Baguio Gold would contribute P11Munder its owners account plus any of

its income that is left in the project, in addition to its actual mining claim. Meanwhile, petitioners contribution
would consist of itsexpertise in the management and operation of mines, as well as the managers account which is
comprised of P11M in funds and property and petitioners compensation as manager that cannot be paid in cash.

However, petitioner asserts that it could not have entered into a partnership agreement with Baguio Gold
because it did not bind itself to contribute money or property to the project; that under paragraph 5 of the
agreement, it was only optional for petitioner to transfer funds or property to the Sto. Nio project (w)henever the
MANAGERS shall deem it necessary and convenient in connection with the MANAGEMENT of the STO. NIO MINE. [18]

The wording of the parties agreement as to petitioners contribution to the common fund does not detract
from the fact that petitioner transferred its funds and property to the project as specified in paragraph 5, thus
rendering effective the other stipulations of the contract, particularly paragraph 5(c) which prohibits petitioner from
withdrawing the advances until termination of the parties business relations. As can be seen, petitioner became
bound by its contributions once the transfers were made. The contributions acquired an obligatory nature as soon
as petitioner had chosen to exercise its option under paragraph 5.

There is no merit to petitioners claim that the prohibition in paragraph 5(c) against withdrawal of advances
should not be taken as an indication that it had entered into a partnership with Baguio Gold; that the stipulation
only showed that what the parties entered into was actually a contract of agency coupled with an interest which is
not revocable at will and not a partnership.

In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the
principal due to an interest of a third party that depends upon it, or the mutual interest of both principal and
agent.[19] In this case, the non-revocation or non-withdrawal under paragraph 5(c) applies to the advances made by
petitioner who is supposedly the agent and not the principal under the contract. Thus, it cannot be inferred from
the stipulation that the parties relation under the agreement is one of agency coupled with an interest and not a
partnership.

Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the parties
was one of agency and not a partnership. Although the said provision states that this Agency shall be irrevocable
while any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS account,
it does not necessarily follow that the parties entered into an agency contract coupled with an interest that cannot
be withdrawn by Baguio Gold.

It should be stressed that the main object of the Power of Attorney was not to confer a power in favor of
petitioner to contract with third persons on behalf of Baguio Gold but to create a business relationship between
petitioner and Baguio Gold, in which the former was to manage and operate the latters mine through the
parties mutual contribution of material resources and industry. The essence of an agency, even one that is coupled
with interest, is the agents ability to represent his principal and bring about business relations between the latter
and third persons.[20] Where representation for and in behalf of the principal is merely incidental or necessary for the
proper discharge of ones paramount undertaking under a contract, the latter may not necessarily be a contract of
agency, but some other agreement depending on the ultimate undertaking of the parties. [21]

In this case, the totality of the circumstances and the stipulations in the parties agreement indubitably
lead to the conclusion that a partnership was formed between petitioner and Baguio Gold.

First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made by
petitioner under the agreement. Paragraph 5 (d) thereof provides that upon termination of the parties business
relations, the ratio which the MANAGERS account has to the owners account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding the claims shall be transferred to
petitioner.[22] As pointed out by the Court of Tax Appeals, petitioner was merely entitled to a proportionate return of
the mines assets upon dissolution of the parties business relations. There was nothing in the agreement that would
require Baguio Gold to make payments of the advances to petitioner as would be recognized as an item of
obligation or accounts payable for Baguio Gold.

Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the Sto.
Nio mine upon termination, a provision that is more consistent with a partnership than a creditor-debtor
relationship. It should be pointed out that in a contract of loan, a person who receives a loan or money or any
fungible thing acquires ownership thereof and is bound to pay the creditor an equal amount of the same kind and
quality.[23] In this case, however, there was no stipulation for Baguio Gold to actually repay petitioner the cash and
property that it had advanced, but only the return of an amount pegged at a ratio which the managers account had
to the owners account.

In this connection, we find no contractual basis for the execution of the two compromise agreements in
which Baguio Gold recognized a debt in favor of petitioner, which supposedly arose from the termination of their
business relations over the Sto. Nino mine. The Power of Attorney clearly provides that petitioner would only be
entitled to the return of a proportionate share of the mine assets to be computed at a ratio that the managers
account had to the owners account. Except to provide a basis for claiming the advances as a bad debt deduction,
there is no reason for Baguio Gold to hold itself liable to petitioner under the compromise agreements, for any
amount over and above the proportion agreed upon in the Power of Attorney.

Next, the tax court correctly observed that it was unlikely for a business corporation to lend hundreds of
millions of pesos to another corporation with neither security, or collateral, nor a specific deed evidencing the terms
and conditions of such loans. The parties also did not provide a specific maturity date for the advances to become
due and demandable, and the manner of payment was unclear. All these point to the inevitable conclusion that the
advances were not loans but capital contributions to a partnership.

The strongest indication that petitioner was a partner in the Sto Nio mine is the fact that it would receive
50% of the net profits as compensation under paragraph 12 of the agreement. The entirety of the parties
contractual stipulations simply leads to no other conclusion than that petitioners compensation is actually its share
in the income of the joint venture.

Article 1769 (4) of the Civil Code explicitly provides that the receipt by a person of a share in the profits of
a business is prima facie evidence that he is a partner in the business. Petitioner asserts, however, that no such
inference can be drawn against it since its share in the profits of the Sto Nio project was in the nature of
compensation or wages of an employee, under the exception provided in Article 1769 (4) (b). [24]

On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold who will be
paid wages pursuant to an employer-employee relationship. To begin with, petitioner was the manager of the
project and had put substantial sums into the venture in order to ensure its viability and profitability. By pegging its
compensation to profits, petitioner also stood not to be remunerated in case the mine had no income. It is hard to
believe that petitioner would take the risk of not being paid at all for its services, if it were truly just an ordinary
employee.

Consequently, we find that petitioners compensation under paragraph 12 of the agreement actually
constitutes its share in the net profits of the partnership. Indeed, petitioner would not be entitled to an equal share
in the income of the mine if it were just an employee of Baguio Gold. [25] It is not surprising that petitioner was to
receive a 50% share in the net profits, considering that the Power of Attorney also provided for an almost equal
contribution of the parties to the St. Nino mine. The compensation agreed upon only serves to reinforce the notion
that the parties relations were indeed of partners and not employer-employee.

All told, the lower courts did not err in treating petitioners advances as investments in a partnership known
as the Sto. Nino mine. The advances were not debts of Baguio Gold to petitioner inasmuch as the latter was under
no unconditional obligation to return the same to the former under the Power of Attorney. As for the amounts that
petitioner paid as guarantor to Baguio Golds creditors, we find no reason to depart from the tax courts factual
finding that Baguio Golds debts were not yet due and demandable at the time that petitioner paid the same. Verily,
petitioner pre-paid Baguio Golds outstanding loans to its bank creditors and this conclusion is supported by the
evidence on record.[26]

In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions
for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer,
who must prove by convincing evidence that he is entitled to the deduction claimed. [27] In this case, petitioner failed
to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its
gross income. Consequently, it could not claim the advances as a valid bad debt deduction.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP No. 49385 dated June 30,
2000, which affirmed the decision of the Court of Tax Appeals in C.T.A. Case No. 5200 is AFFIRMED. Petitioner
Philex Mining Corporation is ORDERED to PAY the deficiency tax on its 1982 income in the amount of
P62,811,161.31, with 20% delinquency interest computed from February 10, 1995, which is the due date given for
the payment of the deficiency income tax, up to the actual date of payment.

SO ORDERED.

G.R. No. 174978

July 31, 2013

SALLY YOSHIZAKI, Petitioner,

vs.
JOY TRAINING CENTER OF AURORA, INC., Respondent.
DECISION
BRION, J.:
We resolve the petition for review on certiorari1 filed by petitioner Sally Yoshizaki to challenge the February 14, 2006
Decision2 and the October 3, 2006 Resolution 3 of the Court of Appeals (CA) in CA-G.R. CV No. 83773.
The Factual Antecedents

Respondent Joy Training Center of Aurora, Inc. (Joy Training) is a non-stock, non-profit religious educational
institution. It was the registered owner of a parcel of land and the building thereon (real properties) located in San
Luis Extension Purok No. 1, Barangay Buhangin, Baler, Aurora. The parcel of land was designated as Lot No. 125-L
and was covered by Transfer Certificate of Title (TCT) No. T-25334. 4
On November 10, 1998, the spouses Richard and Linda Johnson sold the real properties, a Wrangler jeep, and other
personal properties in favor of the spouses Sally and Yoshio Yoshizaki. On the same date, a Deed of Absolute
Sale5 and a Deed of Sale of Motor Vehicle6 were executed in favor of the spouses Yoshizaki. The spouses Johnson
were members of Joy Trainings board of trustees at the time of sale. On December 7, 1998, TCT No. T-25334 was
cancelled and TCT No. T-260527 was issued in the name of the spouses Yoshizaki.
On December 8, 1998, Joy Training, represented by its Acting Chairperson Reuben V. Rubio, filed an action for the
Cancellation of Sales and Damages with prayer for the issuance of a Temporary Restraining Order and/or Writ of
Preliminary Injunction against the spouses Yoshizaki and the spouses Johnson before the Regional Trial Court of
Baler, Aurora (RTC).8 On January 4, 1999, Joy Training filed a Motion to Amend Complaint with the attached
Amended Complaint. The amended complaint impleaded Cecilia A. Abordo, officer-in-charge of the Register of
Deeds of Baler, Aurora, as additional defendant. The RTC granted the motion on the same date. 9
In the complaint, Joy Training alleged that the spouses Johnson sold its properties without the requisite authority
from the board of directors.10 It assailed the validity of a board resolution dated September 1, 1998 11 which
purportedly granted the spouses Johnson the authority to sell its real properties. It averred that only a minority of
the board, composed of the spouses Johnson and Alexander Abadayan, authorized the sale through the resolution.
It highlighted that the Articles of Incorporation provides that the board of trustees consists of seven members,
namely: the spouses Johnson, Reuben, Carmencita Isip, Dominador Isip, Miraflor Bolante, and Abelardo Aquino. 12
Cecilia and the spouses Johnson were declared in default for their failure to file an Answer within the reglementary
period.13 On the other hand, the spouses Yoshizaki filed their Answer with Compulsory Counterclaims on June 23,
1999. They claimed that Joy Training authorized the spouses Johnson to sell the parcel of land. They asserted that a
majority of the board of trustees approved the resolution. They maintained that the actual members of the board of
trustees consist of five members, namely: the spouses Johnson, Reuben, Alexander, and Abelardo. Moreover, Connie
Dayot, the corporate secretary, issued a certification dated February 20, 1998 14 authorizing the spouses Johnson to
act on Joy Trainings behalf. Furthermore, they highlighted that the Wrangler jeep and other personal properties
were registered in the name of the spouses Johnson. 15 Lastly, they assailed the RTCs jurisdiction over the case.
They posited that the case is an intra-corporate dispute cognizable by the Securities and Exchange Commission
(SEC).16
After the presentation of their testimonial evidence, the spouses Yoshizaki formally offered in evidence photocopies
of the resolution and certification, among others. 17 Joy Training objected to the formal offer of the photocopied
resolution and certification on the ground that they were not the best evidence of their contents. 18 In an
Order19 dated May 18, 2004, the RTC denied the admission of the offered copies.
The RTC Ruling
The RTC ruled in favor of the spouses Yoshizaki. It found that Joy Training owned the real properties. However, it held
that the sale was valid because Joy Training authorized the spouses Johnson to sell the real properties. It recognized
that there were only five actual members of the board of trustees; consequently, a majority of the board of trustees
validly authorized the sale. It also ruled that the sale of personal properties was valid because they were registered
in the spouses Johnsons name.20
Joy Training appealed the RTC decision to the CA.
The CA Ruling
The CA upheld the RTCs jurisdiction over the case but reversed its ruling with respect to the sale of real properties.
It maintained that the present action is cognizable by the RTC because it involves recovery of ownership from third
parties.
It also ruled that the resolution is void because it was not approved by a majority of the board of trustees. It stated
that under Section 25 of the Corporation Code, the basis for determining the composition of the board of trustees is
the list fixed in the articles of incorporation. Furthermore, Section 23 of the Corporation Code provides that the
board of trustees shall hold office for one year and until their successors are elected and qualified. Seven trustees
constitute the board since Joy Training did not hold an election after its incorporation.

The CA did not also give any probative value to the certification. It stated that the certification failed to indicate the
date and the names of the trustees present in the meeting. Moreover, the spouses Yoshizaki did not present the
minutes that would prove that the certification had been issued pursuant to a board resolution. 21 The CA also
denied22 the spouses Yoshizakis motion for reconsideration, prompting Sally 23 to file the present petition.
The Petition
Sally avers that the RTC has no jurisdiction over the case. She points out that the complaint was principally for the
nullification of a corporate act. The transfer of the SECs original and exclusive jurisdiction to the RTC 24 does not
have any retroactive application because jurisdiction is a substantive matter.
She argues that the spouses Johnson were authorized to sell the parcel of land and that she was a buyer in good
faith because she merely relied on TCT No. T-25334. The title states that the spouses Johnson are Joy Trainings
representatives.
She also argues that it is a basic principle that a party dealing with a registered land need not go beyond the
certificate of title to determine the condition of the property. In fact, the resolution and the certification are mere
reiterations of the spouses Johnsons authority in the title to sell the real properties. She further claims that the
resolution and the certification are not even necessary to clothe the spouses Johnson with the authority to sell the
disputed properties. Furthermore, the contract of agency was subsisting at the time of sale because Section 108 of
Presidential Decree No. (PD) 1529 requires that the revocation of authority must be approved by a court of
competent jurisdiction and no revocation was reflected in the certificate of title. 25
The Case for the Respondent
In its Comment26 and Memorandum,27 Joy Training takes the opposite view that the RTC has jurisdiction over the
case. It posits that the action is essentially for recovery of property and is therefore a case cognizable by the RTC.
Furthermore, Sally is estopped from questioning the RTCs jurisdiction because she seeks to reinstate the RTC ruling
in the present case.
Joy Training maintains that it did not authorize the spouses Johnson to sell its real properties. TCT No. T-25334 does
not specifically grant the authority to sell the parcel of land to the spouses Johnson. It further asserts that the
resolution and the certification should not be given any probative value because they were not admitted in
evidence by the RTC. It argues that the resolution is void for failure to comply with the voting requirements under
Section 40 of the Corporation Code. It also posits that the certification is void because it lacks material particulars.
The Issues
The case comes to us with the following issues:
1) Whether or not the RTC has jurisdiction over the present case; and
2) Whether or not there was a contract of agency to sell the real properties between Joy Training and the
spouses Johnson.
3) As a consequence of the second issue, whether or not there was a valid contract of sale of the real
properties between Joy Training and the spouses Yoshizaki.
Our Ruling
We find the petition unmeritorious.
The RTC has jurisdiction over disputes concerning the application of the Civil Code
Jurisdiction over the subject matter is the power to hear and determine cases of the general class to which the
proceedings before a court belong.28 It is conferred by law. The allegations in the complaint and the status or
relationship of the parties determine which court has jurisdiction over the nature of an action. 29 The same test
applies in ascertaining whether a case involves an intra-corporate controversy. 30

The CA correctly ruled that the RTC has jurisdiction over the present case. Joy Training seeks to nullify the sale of
the real properties on the ground that there was no contract of agency between Joy Training and the spouses
Johnson. This was beyond the ambit of the SECs original and exclusive jurisdiction prior to the enactment of
Republic Act No. 8799 which only took effect on August 3, 2000. The determination of the existence of a contract of
agency and the validity of a contract of sale requires the application of the relevant provisions of the Civil Code. It is
a well-settled rule that "disputes concerning the application of the Civil Code are properly cognizable by courts of
general jurisdiction."31 Indeed, no special skill requiring the SECs technical expertise is necessary for the disposition
of this issue and of this case.
The Supreme Court may review questions of fact in a petition for review on certiorari when the findings of fact by
the lower courts are conflicting
We are aware that the issues at hand require us to review the pieces of evidence presented by the parties before
the lower courts. As a general rule, a petition for review on certiorari precludes this Court from entertaining factual
issues; we are not duty-bound to analyze again and weigh the evidence introduced in and considered by the lower
courts. However, the present case falls under the recognized exception that a review of the facts is warranted when
the findings of the lower courts are conflicting.32 Accordingly, we will examine the relevant pieces of evidence
presented to the lower court.
There is no contract of agency between Joy Training and the spouses Johnson to sell the parcel of land with its
improvements
Article 1868 of the Civil Code defines a contract of agency as a contract whereby a person "binds himself to render
some service or to do something in representation or on behalf of another, with the consent or authority of the
latter." It may be express, or implied from the acts of the principal, from his silence or lack of action, or his failure to
repudiate the agency, knowing that another person is acting on his behalf without authority.
As a general rule, a contract of agency may be oral. However, it must be written when the law requires a specific
form.33 Specifically, Article 1874 of the Civil Code provides that the contract of agency must be written for the
validity of the sale of a piece of land or any interest therein. Otherwise, the sale shall be void. A related provision,
Article 1878 of the Civil Code, states that special powers of attorney are necessary to convey real rights over
immovable properties.
The special power of attorney mandated by law must be one that expressly mentions a sale or that includes a sale
as a necessary ingredient of the authorized act. We unequivocably declared in Cosmic Lumber Corporation v. Court
of Appeals34 that a special power of attorneymust express the powers of the agent in clear and unmistakable
language for the principal to confer the right upon an agent to sell real estate. When there is any reasonable doubt
that the language so used conveys such power, no such construction shall be given the document. The purpose of
the law in requiring a special power of attorney in the disposition of immovable property is to protect the interest of
an unsuspecting owner from being prejudiced by the unwarranted act of another and to caution the buyer to assure
himself of the specific authorization of the putative agent.35
In the present case, Sally presents three pieces of evidence which allegedly prove that Joy Training specially
authorized the spouses Johnson to sell the real properties: (1) TCT No. T-25334, (2) the resolution, (3) and the
certification. We quote the pertinent portions of these documents for a thorough examination of Sallys claim. TCT
No. T-25334, entered in the Registry of Deeds on March 5, 1998, states:
A parcel of land x x x is registered in accordance with the provisions of the Property Registration Decree in the
name of JOY TRAINING CENTER OF AURORA, INC., Rep. by Sps. RICHARD A. JOHNSON and LINDA S. JOHNSON, both
of legal age, U.S. Citizen, and residents of P.O. Box 3246, Shawnee, Ks 66203, U.S.A. 36(emphasis ours)
On the other hand, the fifth paragraph of the certification provides:
Further, Richard A. and Linda J. Johnson were given FULL AUTHORITY for ALL SIGNATORY purposes for the
corporation on ANY and all matters and decisions regarding the property and ministry here. They will follow
guidelines set forth according to their appointment and ministerial and missionary training and in that, they will
formulate and come up with by-laws which will address and serve as governing papers over the center and
corporation. They are to issue monthly and quarterly statements to all members of the corporation. 37 (emphasis
ours)
The resolution states:

We, the undersigned Board of Trustees (in majority) have authorized the sale of land and building owned by spouses
Richard A. and Linda J. Johnson (as described in the title SN No. 5102156 filed with the Province of Aurora last 5th
day of March, 1998. These proceeds are going to pay outstanding loans against the project and the dissolution of
the corporation shall follow the sale. This is a religious, non-profit corporation and no profits or stocks are
issued.38 (emphasis ours)
The above documents do not convince us of the existence of the contract of agency to sell the real properties. TCT
No. T-25334 merely states that Joy Training is represented by the spouses Johnson. The title does not explicitly
confer to the spouses Johnson the authority to sell the parcel of land and the building thereon. Moreover, the phrase
"Rep. by Sps. RICHARD A. JOHNSON and LINDA S. JOHNSON" 39 only means that the spouses Johnson represented Joy
Training in land registration.
The lower courts should not have relied on the resolution and the certification in resolving the case.1wphi1 The
spouses Yoshizaki did not produce the original documents during trial. They also failed to show that the production
of pieces of secondary evidence falls under the exceptions enumerated in Section 3, Rule 130 of the Rules of
Court.40 Thus, the general rule that no evidence shall be admissible other than the original document itself when
the subject of inquiry is the contents of a document applies. 41
Nonetheless, if only to erase doubts on the issues surrounding this case, we declare that even if we consider the
photocopied resolution and certification, this Court will still arrive at the same conclusion.
The resolution which purportedly grants the spouses Johnson a special power of attorney is negated by the phrase
"land and building owned by spouses Richard A. and Linda J. Johnson." 42 Even if we disregard such phrase, the
resolution must be given scant consideration. We adhere to the CAs position that the basis for determining the
board of trustees composition is the trustees as fixed in the articles of incorporation and not the actual members of
the board. The second paragraph of Section 2543 of the Corporation Code expressly provides that a majority of the
number of trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate
business.
Moreover, the certification is a mere general power of attorney which comprises all of Joy Trainings
business.44Article 1877 of the Civil Code clearly states that "an agency couched in general terms comprises only
acts of administration, even if the principal should state that he withholds no power or that the agent may execute
such acts as he may consider appropriate, or even though the agency should authorize a general and unlimited
management."45
The contract of sale is unenforceable
Necessarily, the absence of a contract of agency renders the contract of sale unenforceable; 46 Joy Training
effectively did not enter into a valid contract of sale with the spouses Yoshizaki. Sally cannot also claim that she was
a buyer in good faith. She misapprehended the rule that persons dealing with a registered land have the legal right
to rely on the face of the title and to dispense with the need to inquire further, except when the party concerned
has actual knowledge of facts and circumstances that would impel a reasonably cautious man to make such
inquiry.47 This rule applies when the ownership of a parcel of land is disputed and not when the fact of agency is
contested.
At this point, we reiterate the established principle that persons dealing with an agent must ascertain not only the
fact of agency, but also the nature and extent of the agents authority. 48 A third person with whom the agent wishes
to contract on behalf of the principal may require the presentation of the power of attorney, or the instructions as
regards the agency.49 The basis for agency is representation and a person dealing with an agent is put upon inquiry
and must discover on his own peril the authority of the agent. 50 Thus, Sally bought the real properties at her own
risk; she bears the risk of injury occasioned by her transaction with the spouses Johnson.
WHEREFORE, premises considered, the assailed Decision dated February 14, 2006 and Resolution dated October 3,
2006 of the Court of Appeals are hereby AFFIRMED and the petition is hereby DENIED for lack of merit.
SO ORDERED.

SECOND DIVISION

SPOUSES FERNANDO

G.R. No. 188288

and LOURDES VILORIA,

Present:

Petitioners,

CARPIO, J.,
Chairperson,
PEREZ,
SERENO,
- versus -

REYES, and
BERNABE, JJ.

Promulgated:

CONTINENTAL AIRLINES, INC.,

January 16, 2012
Respondent.

x------------------------------------------------------------------------------------x

DECISION

REYES, J.:

This is a petition for review under Rule 45 of the Rules of Court from the January 30, 2009 Decision 1 of the
Special Thirteenth Division of the Court of Appeals (CA) in CA-G.R. CV No. 88586 entitled Spouses Fernando and
Lourdes Viloria v. Continental Airlines, Inc., the dispositive portion of which states:

WHEREFORE, the Decision of the Regional Trial Court, Branch 74, dated 03 April 2006,
awarding US$800.00 or its peso equivalent at the time of payment, plus legal rate of interest from
21 July 1997 until fully paid, [P]100,000.00 as moral damages, [P]50,000.00 as exemplary
damages, [P]40,000.00 as attorneys fees and costs of suit to plaintiffs-appellees is
herebyREVERSED and SET ASIDE.

Defendant-appellants counterclaim is DENIED.

Costs against plaintiffs-appellees.

SO ORDERED.2

On April 3, 2006, the Regional Trial Court of Antipolo City, Branch 74 (RTC) rendered a Decision, giving due
course to the complaint for sum of money and damages filed by petitioners Fernando Viloria (Fernando) and
Lourdes Viloria (Lourdes), collectively called Spouses Viloria, against respondent Continental Airlines, Inc. (CAI). As
culled from the records, below are the facts giving rise to such complaint.

On or about July 21, 1997 and while in the United States, Fernando purchased for himself and his wife,
Lourdes, two (2) round trip airline tickets from San Diego, California to Newark, New Jersey on board Continental

Airlines. Fernando purchased the tickets at US$400.00 each from a travel agency called Holiday Travel and was
attended to by a certain Margaret Mager (Mager). According to Spouses Viloria, Fernando agreed to buy the said
tickets after Mager informed them that there were no available seats at Amtrak, an intercity passenger train service
provider in the United States. Per the tickets, Spouses Viloria were scheduled to leave for Newark on August 13,
1997 and return to San Diego on August 21, 1997.

Subsequently, Fernando requested Mager to reschedule their flight to Newark to an earlier date or August
6, 1997. Mager informed him that flights to Newark via Continental Airlines were already fully booked and offered
the alternative of a round trip flight via Frontier Air. Since flying with Frontier Air called for a higher fare of
US$526.00 per passenger and would mean traveling by night, Fernando opted to request for a refund. Mager,
however, denied his request as the subject tickets are non-refundable and the only option that Continental Airlines
can offer is the re-issuance of new tickets within one (1) year from the date the subject tickets were issued.
Fernando decided to reserve two (2) seats with Frontier Air.

As he was having second thoughts on traveling via Frontier Air, Fernando went to the Greyhound Station
where he saw an Amtrak station nearby. Fernando made inquiries and was told that there are seats available and he
can travel on Amtrak anytime and any day he pleased. Fernando then purchased two (2) tickets for Washington,
D.C.

From Amtrak, Fernando went to Holiday Travel and confronted Mager with the Amtrak tickets, telling her
that she had misled them into buying the Continental Airlines tickets by misrepresenting that Amtrak was already
fully booked. Fernando reiterated his demand for a refund but Mager was firm in her position that the subject tickets
are non-refundable.

Upon returning to the Philippines, Fernando sent a letter to CAI on February 11, 1998, demanding a refund
and alleging that Mager had deluded them into purchasing the subject tickets. 3

In a letter dated February 24, 1998, Continental Micronesia informed Fernando that his complaint had been
referred to the Customer Refund Services of Continental Airlines at Houston, Texas. 4

In a letter dated March 24, 1998, Continental Micronesia denied Fernandos request for a refund and
advised him that he may take the subject tickets to any Continental ticketing location for the re-issuance of new
tickets within two (2) years from the date they were issued. Continental Micronesia informed Fernando that the
subject tickets may be used as a form of payment for the purchase of another Continental ticket, albeit with a reissuance fee.5

On June 17, 1999, Fernando went to Continentals ticketing office at Ayala Avenue, Makati City to have the
subject tickets replaced by a single round trip ticket to Los Angeles, California under his name. Therein, Fernando
was informed that Lourdes ticket was non-transferable, thus, cannot be used for the purchase of a ticket in his
favor. He was also informed that a round trip ticket to Los Angeles was US$1,867.40 so he would have to pay what
will not be covered by the value of his San Diego to Newark round trip ticket.

In a letter dated June 21, 1999, Fernando demanded for the refund of the subject tickets as he no longer
wished to have them replaced. In addition to the dubious circumstances under which the subject tickets were

issued, Fernando claimed that CAIs act of charging him with US$1,867.40 for a round trip ticket to Los Angeles,
which other airlines priced at US$856.00, and refusal to allow him to use Lourdes ticket, breached its undertaking
under its March 24, 1998 letter.6

On September 8, 2000, Spouses Viloria filed a complaint against CAI, praying that CAI be ordered to refund
the money they used in the purchase of the subject tickets with legal interest from July 21, 1997 and to
pay P1,000,000.00 as moral damages, P500,000.00 as exemplary damages and P250,000.00 as attorneys fees.7

CAI interposed the following defenses: (a) Spouses Viloria have no right to ask for a refund as the subject
tickets are non-refundable; (b) Fernando cannot insist on using the ticket in Lourdes name for the purchase of a
round trip ticket to Los Angeles since the same is non-transferable; (c) as Mager is not a CAI employee, CAI is not
liable for any of her acts; (d) CAI, its employees and agents did not act in bad faith as to entitle Spouses Viloria to
moral and exemplary damages and attorneys fees. CAI also invoked the following clause printed on the subject
tickets:

3. To the extent not in conflict with the foregoing carriage and other services performed by each
carrier are subject to: (i) provisions contained in this ticket, (ii) applicable tariffs, (iii) carriers
conditions of carriage and related regulations which are made part hereof (and are available on
application at the offices of carrier), except in transportation between a place in the United States
or Canada and any place outside thereof to which tariffs in force in those countries apply. 8

According to CAI, one of the conditions attached to their contract of carriage is the non-transferability and
non-refundability of the subject tickets.

The RTCs Ruling

Following a full-blown trial, the RTC rendered its April 3, 2006 Decision, holding that Spouses Viloria are
entitled to a refund in view of Magers misrepresentation in obtaining their consent in the purchase of the subject
tickets.9 The relevant portion of the April 3, 2006 Decision states:

Continental Airlines agent Ms. Mager was in bad faith when she was less candid and
diligent in presenting to plaintiffs spouses their booking options. Plaintiff Fernando clearly wanted
to travel via AMTRAK, but defendants agent misled him into purchasing Continental Airlines
tickets instead on the fraudulent misrepresentation that Amtrak was fully booked. In fact,
defendant Airline did not specifically denied (sic) this allegation.

Plainly, plaintiffs spouses, particularly plaintiff Fernando, were tricked into buying
Continental Airline tickets on Ms. Magers misleading misrepresentations. Continental Airlines
agent Ms. Mager further relied on and exploited plaintiff Fernandos need and told him that they
must book a flight immediately or risk not being able to travel at all on the couples preferred
date. Unfortunately, plaintiffs spouses fell prey to the airlines and its agents unethical tactics for
baiting trusting customers.10

Citing Articles 1868 and 1869 of the Civil Code, the RTC ruled that Mager is CAIs agent, hence, bound by
her bad faith and misrepresentation. As far as the RTC is concerned, there is no issue as to whether Mager was CAIs
agent in view of CAIs implied recognition of her status as such in its March 24, 1998 letter.

The act of a travel agent or agency being involved here, the following are the pertinent
New Civil Code provisions on agency:

Art. 1868. By the contract of agency a person binds himself to render

some service or to do something in representation or on behalf of another, with
the consent or authority of the latter.

Art. 1869. Agency may be express, or implied from the acts of the
principal, from his silence or lack of action, or his failure to repudiate the
agency, knowing that another person is acting on his behalf without authority.

Agency may be oral, unless the law requires a specific form.

As its very name implies, a travel agency binds itself to render some service or to do
something in representation or on behalf of another, with the consent or authority of the latter.
This court takes judicial notice of the common services rendered by travel agencies that represent
themselves as such, specifically the reservation and booking of local and foreign tours as well as
the issuance of airline tickets for a commission or fee.

The services rendered by Ms. Mager of Holiday Travel agency to the plaintiff spouses on
July 21, 1997 were no different from those offered in any other travel agency. Defendant airline
impliedly if not expressly acknowledged its principal-agent relationship with Ms. Mager by its offer
in the letter dated March 24, 1998 an obvious attempt to assuage plaintiffs spouses hurt
feelings.11

Furthermore, the RTC ruled that CAI acted in bad faith in reneging on its undertaking to replace the subject
tickets within two (2) years from their date of issue when it charged Fernando with the amount of US$1,867.40 for a
round trip ticket to Los Angeles and when it refused to allow Fernando to use Lourdes ticket. Specifically:

Tickets may be reissued for up to two years from the original date of issue. When defendant
airline still charged plaintiffs spouses US$1,867.40 or more than double the then going rate of
US$856.00 for the unused tickets when the same were presented within two (2) years from date
of issue, defendant airline exhibited callous treatment of passengers.12

The Appellate Courts Ruling

On appeal, the CA reversed the RTCs April 3, 2006 Decision, holding that CAI cannot be held liable for
Magers act in the absence of any proof that a principal-agent relationship existed between CAI and Holiday Travel.
According to the CA, Spouses Viloria, who have the burden of proof to establish the fact of agency, failed to present
evidence demonstrating that Holiday Travel is CAIs agent. Furthermore, contrary to Spouses Vilorias claim, the
contractual relationship between Holiday Travel and CAI is not an agency but that of a sale.

Plaintiffs-appellees assert that Mager was a sub-agent of Holiday Travel who was in turn
a ticketing agent of Holiday Travel who was in turn a ticketing agent of Continental Airlines.
Proceeding from this premise, they contend that Continental Airlines should be held liable for the
acts of Mager. The trial court held the same view.

We do not agree. By the contract of agency, a person binds him/herself to render some
service or to do something in representation or on behalf of another, with the consent or authority
of the latter. The elements of agency are: (1) consent, express or implied, of the parties to
establish the relationship; (2) the object is the execution of a juridical act in relation to a third
person; (3) the agent acts as a representative and not for him/herself; and (4) the agent acts
within the scope of his/her authority. As the basis of agency is representation, there must be, on
the part of the principal, an actual intention to appoint, an intention naturally inferable from the
principals words or actions. In the same manner, there must be an intention on the part of the
agent to accept the appointment and act upon it. Absent such mutual intent, there is generally no
agency. It is likewise a settled rule that persons dealing with an assumed agent are bound at their
peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is controverted, the burden of proof is upon
them to establish it. Agency is never presumed, neither is it created by the mere use of the word
in a trade or business name. We have perused the evidence and documents so far presented. We
find nothing except bare allegations of plaintiffs-appellees that Mager/Holiday Travel was acting in
behalf of Continental Airlines. From all sides of legal prism, the transaction in issue was simply a
contract of sale, wherein Holiday Travel buys airline tickets from Continental Airlines and then,
through its employees, Mager included, sells it at a premium to clients. 13

The CA also ruled that refund is not available to Spouses Viloria as the word non-refundable was clearly
printed on the face of the subject tickets, which constitute their contract with CAI. Therefore, the grant of their
prayer for a refund would violate the proscription against impairment of contracts.

Finally, the CA held that CAI did not act in bad faith when they charged Spouses Viloria with the higher
amount of US$1,867.40 for a round trip ticket to Los Angeles. According to the CA, there is no compulsion for CAI to

charge the lower amount of US$856.00, which Spouses Viloria claim to be the fee charged by other airlines. The
matter of fixing the prices for its services is CAIs prerogative, which Spouses Viloria cannot intervene. In particular:

It is within the respective rights of persons owning and/or operating business entities to peg the
premium of the services and items which they provide at a price which they deem fit, no matter
how expensive or exhorbitant said price may seem vis--vis those of the competing companies.
The Spouses Viloria may not intervene with the business judgment of Continental Airlines. 14

The Petitioners Case

In this Petition, this Court is being asked to review the findings and conclusions of the CA, as the latters
reversal of the RTCs April 3, 2006 Decision allegedly lacks factual and legal bases. Spouses Viloria claim that CAI
acted in bad faith when it required them to pay a higher amount for a round trip ticket to Los Angeles considering
CAIs undertaking to re-issue new tickets to them within the period stated in their March 24, 1998 letter. CAI
likewise acted in bad faith when it disallowed Fernando to use Lourdes ticket to purchase a round trip to Los
Angeles given that there is nothing in Lourdes ticket indicating that it is non-transferable. As a common carrier, it is
CAIs duty to inform its passengers of the terms and conditions of their contract and passengers cannot be bound
by such terms and conditions which they are not made aware of. Also, the subject contract of carriage is a contract
of adhesion; therefore, any ambiguities should be construed against CAI. Notably, the petitioners are no longer
questioning the validity of the subject contracts and limited its claim for a refund on CAIs alleged breach of its
undertaking in its March 24, 1998 letter.

The Respondents Case

In its Comment, CAI claimed that Spouses Vilorias allegation of bad faith is negated by its willingness to
issue new tickets to them and to credit the value of the subject tickets against the value of the new ticket Fernando
requested. CAI argued that Spouses Vilorias sole basis to claim that the price at which CAI was willing to issue the
new tickets is unconscionable is a piece of hearsay evidence an advertisement appearing on a newspaper stating
that airfares from Manila to Los Angeles or San Francisco cost US$818.00. 15 Also, the advertisement pertains to
airfares in September 2000 and not to airfares prevailing in June 1999, the time when Fernando asked CAI to apply
the value of the subject tickets for the purchase of a new one. 16 CAI likewise argued that it did not undertake to
protect Spouses Viloria from any changes or fluctuations in the prices of airline tickets and its only obligation was to
apply the value of the subject tickets to the purchase of the newly issued tickets.

With respect to Spouses Vilorias claim that they are not aware of CAIs restrictions on the subject tickets
and that the terms and conditions that are printed on them are ambiguous, CAI denies any ambiguity and alleged
that its representative informed Fernando that the subject tickets are non-transferable when he applied for the
issuance of a new ticket. On the other hand, the word non-refundable clearly appears on the face of the subject
tickets.

CAI also denies that it is bound by the acts of Holiday Travel and Mager and that no principal-agency
relationship exists between them. As an independent contractor, Holiday Travel was without capacity to bind CAI.

Issues

To determine the propriety of disturbing the CAs January 30, 2009 Decision and whether Spouses Viloria
have the right to the reliefs they prayed for, this Court deems it necessary to resolve the following issues:

a. Does a principal-agent relationship exist between CAI and Holiday Travel?

b. Assuming that an agency relationship exists between CAI and Holiday Travel, is CAI bound by
the acts of Holiday Travels agents and employees such as Mager?

c. Assuming that CAI is bound by the acts of Holiday Travels agents and employees, can the
representation of Mager as to unavailability of seats at Amtrak be considered fraudulent
as to vitiate the consent of Spouse Viloria in the purchase of the subject tickets?

d. Is CAI justified in insisting that the subject tickets are non-transferable and non-refundable?

e. Is CAI justified in pegging a different price for the round trip ticket to Los Angeles requested by
Fernando?

f. Alternatively, did CAI act in bad faith or renege its obligation to Spouses Viloria to apply the
value of the subject tickets in the purchase of new ones when it refused to allow
Fernando to use Lourdes ticket and in charging a higher price for a round trip ticket to
Los Angeles?

This Courts Ruling

I. A principal-agent relationship exists between CAI

and Holiday Travel.

With respect to the first issue, which is a question of fact that would require this Court to review and reexamine the evidence presented by the parties below, this Court takes exception to the general rule that the CAs
findings of fact are conclusive upon Us and our jurisdiction is limited to the review of questions of law. It is wellsettled to the point of being axiomatic that this Court is authorized to resolve questions of fact if confronted with
contrasting factual findings of the trial court and appellate court and if the findings of the CA are contradicted by
the evidence on record.17

According to the CA, agency is never presumed and that he who alleges that it exists has the burden of
proof. Spouses Viloria, on whose shoulders such burden rests, presented evidence that fell short of indubitably
demonstrating the existence of such agency.

We disagree. The CA failed to consider undisputed facts, discrediting CAIs denial that Holiday Travel is one
of its agents. Furthermore, in erroneously characterizing the contractual relationship between CAI and Holiday
Travel as a contract of sale, the CA failed to apply the fundamental civil law principles governing agency and
differentiating it from sale.

In Rallos v. Felix Go Chan & Sons Realty Corporation, 18 this Court explained the nature of an agency and
spelled out the essential elements thereof:

Out of the above given principles, sprung the creation and acceptance of the relationship
of agency whereby one party, called the principal (mandante), authorizes another, called the
agent (mandatario), to act for and in his behalf in transactions with third persons. The essential

elements of agency are: (1) there is consent, express or implied of the parties to establish the
relationship; (2) the object is the execution of a juridical act in relation to a third person; (3) the
agent acts as a representative and not for himself, and (4) the agent acts within the scope of his
authority.

Agency is basically personal, representative, and derivative in nature. The authority of

the agent to act emanates from the powers granted to him by his principal; his act is the act of
the principal if done within the scope of the authority. Qui facit per alium facit se. "He who acts
through another acts himself."19

Contrary to the findings of the CA, all the elements of an agency exist in this case. The first and second
elements are present as CAI does not deny that it concluded an agreement with Holiday Travel, whereby Holiday
Travel would enter into contracts of carriage with third persons on CAIs behalf. The third element is also present as
it is undisputed that Holiday Travel merely acted in a representative capacity and it is CAI and not Holiday Travel
who is bound by the contracts of carriage entered into by Holiday Travel on its behalf. The fourth element is also
present considering that CAI has not made any allegation that Holiday Travel exceeded the authority that was
granted to it. In fact, CAI consistently maintains the validity of the contracts of carriage that Holiday Travel executed
with Spouses Viloria and that Mager was not guilty of any fraudulent misrepresentation. That CAI admits the
authority of Holiday Travel to enter into contracts of carriage on its behalf is easily discernible from its February 24,
1998 and March 24, 1998 letters, where it impliedly recognized the validity of the contracts entered into by Holiday
Travel with Spouses Viloria. When Fernando informed CAI that it was Holiday Travel who issued to them the subject
tickets, CAI did not deny that Holiday Travel is its authorized agent.

Prior to Spouses Vilorias filing of a complaint against it, CAI never refuted that it gave Holiday Travel the
power and authority to conclude contracts of carriage on its behalf. As clearly extant from the records, CAI
recognized the validity of the contracts of carriage that Holiday Travel entered into with Spouses Viloria and
considered itself bound with Spouses Viloria by the terms and conditions thereof; and this constitutes an
unequivocal testament to Holiday Travels authority to act as its agent. This Court cannot therefore allow CAI to take

an altogether different position and deny that Holiday Travel is its agent without condoning or giving imprimatur to
whatever damage or prejudice that may result from such denial or retraction to Spouses Viloria, who relied on good
faith on CAIs acts in recognition of Holiday Travels authority. Estoppel is primarily based on the doctrine of good
faith and the avoidance of harm that will befall an innocent party due to its injurious reliance, the failure to apply it
in this case would result in gross travesty of justice.20 Estoppel bars CAI from making such denial.

As categorically provided under Article 1869 of the Civil Code, [a]gency may be express, or implied from
the acts of the principal, from his silence or lack of action, or his failure to repudiate the agency, knowing that
another person is acting on his behalf without authority.

Considering that the fundamental hallmarks of an agency are present, this Court finds it rather peculiar
that the CA had branded the contractual relationship between CAI and Holiday Travel as one of sale. The
distinctions between a sale and an agency are not difficult to discern and this Court, as early as 1970, had already
formulated the guidelines that would aid in differentiating the two (2) contracts. In Commissioner of Internal
Revenue v. Constantino,21 this Court extrapolated that the primordial differentiating consideration between the two
(2) contracts is the transfer of ownership or title over the property subject of the contract. In an agency, the
principal retains ownership and control over the property and the agent merely acts on the principals behalf and
under his instructions in furtherance of the objectives for which the agency was established. On the other hand, the
contract is clearly a sale if the parties intended that the delivery of the property will effect a relinquishment of title,
control and ownership in such a way that the recipient may do with the property as he pleases.

Since the company retained ownership of the goods, even as it delivered possession unto
the dealer for resale to customers, the price and terms of which were subject to the company's
control, the relationship between the company and the dealer is one of agency, tested under the
following criterion:

The difficulty in distinguishing between contracts of sale and the creation of an

agency to sell has led to the establishment of rules by the application of which this
difficulty may be solved. The decisions say the transfer of title or agreement to transfer it
for a price paid or promised is the essence of sale. If such transfer puts the transferee in
the attitude or position of an owner and makes him liable to the transferor as a debtor
for the agreed price, and not merely as an agent who must account for the proceeds of a
resale, the transaction is a sale; while the essence of an agency to sell is the delivery to
an agent, not as his property, but as the property of the principal, who remains the
owner and has the right to control sales, fix the price, and terms, demand and receive
the proceeds less the agent's commission upon sales made. 1 Mechem on Sales, Sec. 43;
1 Mechem on Agency, Sec. 48; Williston on Sales, 1; Tiedeman on Sales, 1. (Salisbury v.
Brooks, 94 SE 117, 118-119)22

As to how the CA have arrived at the conclusion that the contract between CAI and Holiday Travel is a sale
is certainly confounding, considering that CAI is the one bound by the contracts of carriage embodied by the tickets
being sold by Holiday Travel on its behalf. It is undisputed that CAI and not Holiday Travel who is the party to the
contracts of carriage executed by Holiday Travel with third persons who desire to travel via Continental Airlines, and
this conclusively indicates the existence of a principal-agent relationship. That the principal is bound by all the
obligations contracted by the agent within the scope of the authority granted to him is clearly provided under
Article 1910 of the Civil Code and this constitutes the very notion of agency.

II. In actions based on quasi-delict, a principal can only

be held liable for the tort committed by its agents
employees if it has been established by preponderance
of evidence that the principal was also at fault or
negligent or that the principal exercise control and
supervision over them.

Considering that Holiday Travel is CAIs agent, does it necessarily follow that CAI is liable for the fault or
negligence of Holiday Travels employees? Citing China Air Lines, Ltd. v. Court of Appeals, et al.,23 CAI argues that it
cannot be held liable for the actions of the employee of its ticketing agent in the absence of an employer-employee
relationship.

An examination of this Courts pronouncements in China Air Lines will reveal that an airline company is not
completely exonerated from any liability for the tort committed by its agents employees. A prior determination of
the nature of the passengers cause of action is necessary. If the passengers cause of action against the airline
company is premised onculpa aquiliana or quasi-delict for a tort committed by the employee of the airline
companys agent, there must be an independent showing that the airline company was at fault or negligent or has
contributed to the negligence or tortuous conduct committed by the employee of its agent. The mere fact that the
employee of the airline companys agent has committed a tort is not sufficient to hold the airline company liable.
There is no vinculum juris between the airline company and its agents employees and the contractual relationship
between the airline company and its agent does not operate to create a juridical tie between the airline company
and its agents employees. Article 2180 of the Civil Code does not make the principal vicariously liable for the tort
committed by its agents employees and the principal-agency relationship per se does not make the principal a
party to such tort; hence, the need to prove the principals own fault or negligence.

On the other hand, if the passengers cause of action for damages against the airline company is based on
contractual breach or culpa contractual, it is not necessary that there be evidence of the airline companys fault or
negligence. As this Court previously stated in China Air Lines and reiterated in Air France vs. Gillego,24 in an action
based on a breach of contract of carriage, the aggrieved party does not have to prove that the common carrier was
at fault or was negligent. All that he has to prove is the existence of the contract and the fact of its nonperformance by the carrier.

Spouses Vilorias cause of action on the basis of Magers alleged fraudulent misrepresentation is clearly
one of tort or quasi-delict, there being no pre-existing contractual relationship between them. Therefore, it was
incumbent upon Spouses Viloria to prove that CAI was equally at fault.

However, the records are devoid of any evidence by which CAIs alleged liability can be substantiated.
Apart from their claim that CAI must be held liable for Magers supposed fraud because Holiday Travel is CAIs
agent, Spouses Viloria did not present evidence that CAI was a party or had contributed to Magers complained act
either by instructing or authorizing Holiday Travel and Mager to issue the said misrepresentation.

It may seem unjust at first glance that CAI would consider Spouses Viloria bound by the terms and
conditions of the subject contracts, which Mager entered into with them on CAIs behalf, in order to deny Spouses
Vilorias request for a refund or Fernandos use of Lourdes ticket for the re-issuance of a new one, and
simultaneously claim that they are not bound by Magers supposed misrepresentation for purposes of avoiding
Spouses Vilorias claim for damages and maintaining the validity of the subject contracts. It may likewise be argued
that CAI cannot deny liability as it benefited from Magers acts, which were performed in compliance with Holiday
Travels obligations as CAIs agent.

However, a persons vicarious liability is anchored on his possession of control, whether absolute or
limited, on the tortfeasor. Without such control, there is nothing which could justify extending the liability to a
person other than the one who committed the tort. As this Court explained in Cangco v. Manila Railroad Co.:25

With respect to extra-contractual obligation arising from negligence, whether of act or

omission, it is competent for the legislature to elect and our Legislature has so elected to
limit such liability to cases in which the person upon whom such an obligation is imposed is
morally culpable or, on the contrary, for reasons of public policy, to extend that liability,
without regard to the lack of moral culpability, so as to include responsibility for the
negligence of those persons whose acts or omissions are imputable, by a legal
fiction, to others who are in a position to exercise an absolute or limited control over
them. The legislature which adopted our Civil Code has elected to limit extra-contractual liability
with certain well-defined exceptions to cases in which moral culpability can be directly
imputed to the persons to be charged. This moral responsibility may consist in having failed to
exercise due care in one's own acts, or in having failed to exercise due care in the selection and
control of one's agent or servants, or in the control of persons who, by reasons of their status,

occupy a position of dependency with respect to the person made liable for their
conduct.26 (emphasis supplied)

It is incumbent upon Spouses Viloria to prove that CAI exercised control or supervision over Mager by
preponderant evidence. The existence of control or supervision cannot be presumed and CAI is under no obligation
to prove its denial or nugatory assertion. Citing Belen v. Belen,27 this Court ruled in Jayme v. Apostol,28 that:

In Belen v. Belen, this Court ruled that it was enough for defendant to deny an alleged
employment relationship. The defendant is under no obligation to prove the negative averment.
This Court said:

It is an old and well-settled rule of the courts that the burden of

proving the action is upon the plaintiff, and that if he fails satisfactorily to show
the facts upon which he bases his claim, the defendant is under no obligation to
prove his exceptions. This [rule] is in harmony with the provisions of Section 297
of the Code of Civil Procedure holding that each party must prove his own
affirmative allegations, etc.29 (citations omitted)

Therefore, without a modicum of evidence that CAI exercised control over Holiday Travels employees or that CAI
was equally at fault, no liability can be imposed on CAI for Magers supposed misrepresentation.

III.

Even on the assumption that CAI may be held

liable for the acts of Mager, still, Spouses
Viloria are not entitled to a refund. Magers
statement cannot be considered a causal fraud
that would justify the annulment of the subject
contracts that would oblige CAI to indemnify
Spouses Viloria and return the money they
paid for the subject tickets.

Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of the contracting
parties was obtained through fraud, the contract is considered voidable and may be annulled within four (4) years
from the time of the discovery of the fraud. Once a contract is annulled, the parties are obliged under Article 1398
of the same Code to restore to each other the things subject matter of the contract, including their fruits and
interest.

On the basis of the foregoing and given the allegation of Spouses Viloria that Fernandos consent to the
subject contracts was supposedly secured by Mager through fraudulent means, it is plainly apparent that their
demand for a refund is tantamount to seeking for an annulment of the subject contracts on the ground of vitiated
consent.

Whether the subject contracts are annullable, this Court is required to determine whether Magers alleged
misrepresentation constitutes causal fraud. Similar to the dispute on the existence of an agency, whether fraud
attended the execution of a contract is factual in nature and this Court, as discussed above, may scrutinize the
records if the findings of the CA are contrary to those of the RTC.

Under Article 1338 of the Civil Code, there is fraud when, through insidious words or machinations of one
of the contracting parties, the other is induced to enter into a contract which, without them, he would not have
agreed to. 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. 30 In Samson v. Court of Appeals,31 causal fraud was
defined as a deception employed by one party prior to or simultaneous to the contract in order to secure the
consent of the other.32

Also, fraud must be serious and its existence must be established by clear and convincing evidence. As
ruled by this Court in Sierra v. Hon. Court of Appeals, et al.,33 mere preponderance of evidence is not adequate:

Fraud must also be discounted, for according to the Civil Code:

Art. 1338. There is fraud when, through insidious words or

machinations of one of the contracting parties, the other is induced to enter into
a contract which without them, he would not have agreed to.

Art. 1344. In order that fraud may make a contract voidable, it should
be serious and should not have been employed by both contracting parties.

To quote Tolentino again, the misrepresentation constituting the fraud must be

established by full, clear, and convincing evidence, and not merely by a preponderance thereof.
The deceit must be serious. The fraud is serious when it is sufficient to impress, or to lead an
ordinarily prudent person into error; that which cannot deceive a prudent person cannot be a
ground for nullity. The circumstances of each case should be considered, taking into account the
personal conditions of the victim.34

After meticulously poring over the records, this Court finds that the fraud alleged by Spouses Viloria has
not been satisfactorily established as causal in nature to warrant the annulment of the subject contracts. In fact,
Spouses Viloria failed to prove by clear and convincing evidence that Magers statement was fraudulent.
Specifically, Spouses Viloria failed to prove that (a) there were indeed available seats at Amtrak for a trip to New
Jersey on August 13, 1997 at the time they spoke with Mager on July 21, 1997; (b) Mager knew about this; and (c)
that she purposely informed them otherwise.

This Court finds the only proof of Magers alleged fraud, which is Fernandos testimony that an Amtrak had
assured him of the perennial availability of seats at Amtrak, to be wanting. As CAI correctly pointed out and as
Fernando admitted, it was possible that during the intervening period of three (3) weeks from the time Fernando
purchased the subject tickets to the time he talked to said Amtrak employee, other passengers may have cancelled
their bookings and reservations with Amtrak, making it possible for Amtrak to accommodate them. Indeed, the
existence of fraud cannot be proved by mere speculations and conjectures. Fraud is never lightly inferred; it is good
faith that is. Under the Rules of Court, it is presumed that "a person is innocent of crime or wrong" and that "private
transactions have been fair and regular."35 Spouses Viloria failed to overcome this presumption.

IV. Assuming the contrary, Spouses Viloria are

nevertheless deemed to have ratified the subject
contracts.

Even assuming that Magers representation is causal fraud, the subject contracts have been impliedly
ratified when Spouses Viloria decided to exercise their right to use the subject tickets for the purchase of new ones.
Under Article 1392 of the Civil Code, ratification extinguishes the action to annul a voidable contract.

Ratification of a voidable contract is defined under Article 1393 of the Civil Code as follows:

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit
ratification if, with knowledge of the reason which renders the contract voidable and such reason
having ceased, the person who has a right to invoke it should execute an act which necessarily
implies an intention to waive his right.

Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval
or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. 36

Simultaneous with their demand for a refund on the ground of Fernandos vitiated consent, Spouses Viloria
likewise asked for a refund based on CAIs supposed bad faith in reneging on its undertaking to replace the subject
tickets with a round trip ticket from Manila to Los Angeles.

In doing so, Spouses Viloria are actually asking for a rescission of the subject contracts based on
contractual breach. Resolution, the action referred to in Article 1191, is based on the defendants breach of faith, a
violation of the reciprocity between the parties 37 and in Solar Harvest, Inc. v. Davao Corrugated Carton
Corporation,38 this Court ruled that a claim for a reimbursement in view of the other partys failure to comply with
his obligations under the contract is one for rescission or resolution.

However, annulment under Article 1390 of the Civil Code and rescission under Article 1191 are two (2)
inconsistent remedies. In resolution, all the elements to make the contract valid are present; in annulment, one of
the essential elements to a formation of a contract, which is consent, is absent. In resolution, the defect is in the
consummation stage of the contract when the parties are in the process of performing their respective obligations;
in annulment, the defect is already present at the time of the negotiation and perfection stages of the contract.
Accordingly, by pursuing the remedy of rescission under Article 1191, the Vilorias had impliedly admitted the
validity of the subject contracts, forfeiting their right to demand their annulment. A party cannot rely on the
contract and claim rights or obligations under it and at the same time impugn its existence or validity. Indeed,
litigants are enjoined from taking inconsistent positions. 39

V. Contracts cannot be rescinded for a slight or casual

breach.

CAI cannot insist on the non-transferability of the subject

tickets.

Considering that the subject contracts are not annullable on the ground of vitiated consent, the next
question is: Do Spouses Viloria have the right to rescind the contract on the ground of CAIs supposed breach of its
undertaking to issue new tickets upon surrender of the subject tickets?

Article 1191, as presently worded, states:

The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.

The injured party may choose between the fulfilment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.

This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

According to Spouses Viloria, CAI acted in bad faith and breached the subject contracts when it refused to
apply the value of Lourdes ticket for Fernandos purchase of a round trip ticket to Los Angeles and in requiring him
to pay an amount higher than the price fixed by other airline companies.

In its March 24, 1998 letter, CAI stated that non-refundable tickets may be used as a form of payment
toward the purchase of another Continental ticket for $75.00, per ticket, reissue fee ($50.00, per ticket, for tickets
purchased prior to October 30, 1997).

Clearly, there is nothing in the above-quoted section of CAIs letter from which the restriction on the nontransferability of the subject tickets can be inferred. In fact, the words used by CAI in its letter supports the position
of Spouses Viloria, that each of them can use the ticket under their name for the purchase of new tickets whether
for themselves or for some other person.

Moreover, as CAI admitted, it was only when Fernando had expressed his interest to use the subject tickets
for the purchase of a round trip ticket between Manila and Los Angeles that he was informed that he cannot use the
ticket in Lourdes name as payment.

Contrary to CAIs claim, that the subject tickets are non-transferable cannot be implied from a plain
reading of the provision printed on the subject tickets stating that [t]o the extent not in conflict with the foregoing
carriage and other services performed by each carrier are subject to: (a) provisions contained in this ticket, x x x (iii)
carriers conditions of carriage and related regulations which are made part hereof (and are available on application
at the offices of carrier) x x x. As a common carrier whose business is imbued with public interest, the exercise of

extraordinary diligence requires CAI to inform Spouses Viloria, or all of its passengers for that matter, of all the
terms and conditions governing their contract of carriage. CAI is proscribed from taking advantage of any ambiguity
in the contract of carriage to impute knowledge on its passengers of and demand compliance with a certain
condition or undertaking that is not clearly stipulated. Since the prohibition on transferability is not written on the
face of the subject tickets and CAI failed to inform Spouses Viloria thereof, CAI cannot refuse to apply the value of
Lourdes ticket as payment for Fernandos purchase of a new ticket.

CAIs refusal to accept Lourdes ticket for the purchase

of a new ticket for Fernando is only a casual breach.

Nonetheless, the right to rescind a contract for non-performance of its stipulations is not absolute. The
general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such
substantial and fundamental violations as would defeat the very object of the parties in making the
agreement.40 Whether a breach is substantial is largely determined by the attendant circumstances. 41

While CAIs refusal to allow Fernando to use the value of Lourdes ticket as payment for the purchase of a
new ticket is unjustified as the non-transferability of the subject tickets was not clearly stipulated, it cannot,
however be considered substantial. The endorsability of the subject tickets is not an essential part of the underlying
contracts and CAIs failure to comply is not essential to its fulfillment of its undertaking to issue new tickets upon
Spouses Vilorias surrender of the subject tickets. This Court takes note of CAIs willingness to perform its principal
obligation and this is to apply the price of the ticket in Fernandos name to the price of the round trip ticket between
Manila and Los Angeles. CAI was likewise willing to accept the ticket in Lourdes name as full or partial payment as
the case may be for the purchase of any ticket, albeit under her name and for her exclusive use. In other words,

CAIs willingness to comply with its undertaking under its March 24, 1998 cannot be doubted, albeit tainted with its
erroneous insistence that Lourdes ticket is non-transferable.

Moreover, Spouses Vilorias demand for rescission cannot prosper as CAI cannot be solely faulted for the
fact that their agreement failed to consummate and no new ticket was issued to Fernando. Spouses Viloria have no
right to insist that a single round trip ticket between Manila and Los Angeles should be priced at around $856.00
and refuse to pay the difference between the price of the subject tickets and the amount fixed by CAI. The
petitioners failed to allege, much less prove, that CAI had obliged itself to issue to them tickets for any flight
anywhere in the world upon their surrender of the subject tickets. In its March 24, 1998 letter, it was clearly stated
that [n]on-refundable tickets may be used as a form of payment toward the purchase of another Continental
ticket42 and there is nothing in it suggesting that CAI had obliged itself to protect Spouses Viloria from any
fluctuation in the prices of tickets or that the surrender of the subject tickets will be considered as full payment for
any ticket that the petitioners intend to buy regardless of actual price and destination. The CA was correct in
holding that it is CAIs right and exclusive prerogative to fix the prices for its services and it may not be compelled
to observe and maintain the prices of other airline companies. 43

The conflict as to the endorsability of the subject tickets is an altogether different matter, which does not
preclude CAI from fixing the price of a round trip ticket between Manila and Los Angeles in an amount it deems
proper and which does not provide Spouses Viloria an excuse not to pay such price, albeit subject to a reduction
coming from the value of the subject tickets. It cannot be denied that Spouses Viloria had the concomitant
obligation to pay whatever is not covered by the value of the subject tickets whether or not the subject tickets are
transferable or not.

There is also no showing that Spouses Viloria were discriminated against in bad faith by being charged
with a higher rate. The only evidence the petitioners presented to prove that the price of a round trip ticket
between Manila and Los Angeles at that time was only $856.00 is a newspaper advertisement for another airline
company, which is inadmissible for being hearsay evidence, twice removed. Newspaper clippings are hearsay if
they were offered for the purpose of proving the truth of the matter alleged. As ruled in Feria v. Court of Appeals,:44

[N]ewspaper articles amount to hearsay evidence, twice removed and are therefore not only
inadmissible but without any probative value at all whether objected to or not, unless offered for a
purpose other than proving the truth of the matter asserted. In this case, the news article is
admissible only as evidence that such publication does exist with the tenor of the news therein
stated.45 (citations omitted)

The records of this case demonstrate that both parties were equally in default; hence, none of them can
seek judicial redress for the cancellation or resolution of the subject contracts and they are therefore bound to their
respective obligations thereunder. As the 1st sentence of Article 1192 provides:
Art. 1192. In case both parties have committed a breach of the obligation, the
liability of the first infractor shall be equitably tempered by the courts. If it cannot be
determined which of the parties first violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages. (emphasis supplied)

Therefore, CAIs liability for damages for its refusal to accept Lourdes ticket for the purchase of Fernandos
round trip ticket is offset by Spouses Vilorias liability for their refusal to pay the amount, which is not covered by
the subject tickets. Moreover, the contract between them remains, hence, CAI is duty bound to issue new tickets for
a destination chosen by Spouses Viloria upon their surrender of the subject tickets and Spouses Viloria are obliged
to pay whatever amount is not covered by the value of the subject tickets.

This Court made a similar ruling in Central Bank of the Philippines v. Court of Appeals.46 Thus:

Since both parties were in default in the performance of their respective reciprocal
obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the entire
loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt
within 3 years as stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach
of their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the
courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire
loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and
surcharges, for not paying his overdue P17,000.00 debt. x x x.47

Another consideration that militates against the propriety of holding CAI liable for moral damages is the
absence of a showing that the latter acted fraudulently and in bad faith. Article 2220 of the Civil Code requires
evidence of bad faith and fraud and moral damages are generally not recoverable in culpa contractual except when
bad faith had been proven.48The award of exemplary damages is likewise not warranted. Apart from the
requirement that the defendant acted in a wanton, oppressive and malevolent manner, the claimant must prove his
entitlement to moral damages.49

WHEREFORE, premises considered, the instant Petition is DENIED.

SO ORDERED.

THIRD DIVISION

PURITA PAHUD, SOLEDAD PAHUD, and IAN LEE CASTILLA

(represented by Mother and Attorney-in-Fact VIRGINIA
CASTILLA),
Petitioners,

G.R. No. 160346

- versus COURT OF APPEALS, SPOUSES ISAGANI BELARMINO and

LETICIA OCAMPO, EUFEMIA SAN AGUSTIN-MAGSINO,
ZENAIDA SAN AGUSTIN-McCRAE, MILAGROS SAN
AGUSTIN-FORTMAN, MINERVA SAN AGUSTIN-ATKINSON,
FERDINAND SAN AGUSTIN, RAUL SAN AGUSTIN,
ISABELITA SAN AGUSTIN-LUSTENBERGER and VIRGILIO
SAN AGUSTIN,
Respondents.

Present:
CARPIO MORALES, J.,*
CHICO-NAZARIO,**
Acting Chairperson,
VELASCO, JR.,
NACHURA, and
PERALTA, JJ.
Promulgated:
August 25, 2009

x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:

For our resolution is a petition for review on certiorari assailing the April 23, 2003 Decision[1] and October 8, 2003
Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV No. 59426. The appellate court, in the said decision and
resolution, reversed and set aside the January 14, 1998 Decision [3] of the Regional Trial Court (RTC), which ruled in
favor of petitioners.

The dispute stemmed from the following facts.

During their lifetime, spouses Pedro San Agustin and Agatona Genil were able to acquire a 246-square meter parcel
of land situated in Barangay Anos, Los Baos, Laguna and covered by Original Certificate of Title (OCT) No. O-(1655)
0-15.[4] Agatona Genil died on September 13, 1990 while Pedro San Agustin died on September 14, 1991. Both died
intestate, survived by their eight (8) children: respondents Eufemia, Raul, Ferdinand, Zenaida, Milagros, Minerva,
Isabelita and Virgilio.

Sometime in 1992, Eufemia, Ferdinand and Raul executed a Deed of Absolute Sale of Undivided Shares [5] conveying
in favor of petitioners (the Pahuds, for brevity) their respective shares from the lot they inherited from their
deceased parents for P525,000.00.[6] Eufemia also signed the deed on behalf of her four (4) other co-heirs, namely:
Isabelita on the basis of a special power of attorney executed on September 28, 1991, [7] and also for Milagros,
Minerva, and Zenaida but without their apparent written authority. [8] The deed of sale was also not notarized.[9]
On July 21, 1992, the Pahuds paid P35,792.31 to the Los Baos Rural Bank where the subject property was
mortgaged.[10] The bank issued a release of mortgage and turned over the owners copy of the OCT to the Pahuds.
[11]

Over the following months, the Pahuds made more payments to Eufemia and her siblings totaling

to P350,000.00.[12] They agreed to use the remaining P87,500.00[13] to defray the payment for taxes and the

expenses in transferring the title of the property. [14] When Eufemia and her co-heirs drafted an extra-judicial
settlement of estate to facilitate the transfer of the title to the Pahuds, Virgilio refused to sign it. [15]

On July 8, 1993, Virgilios co-heirs filed a complaint [16] for judicial partition of the subject property before the RTC of
Calamba, Laguna. On November 28, 1994, in the course of the proceedings for judicial partition, a Compromise
Agreement[17] was signed with seven (7) of the co-heirs agreeing to sell their undivided shares to Virgilio
forP700,000.00. The compromise agreement was, however, not approved by the trial court because Atty. Dimetrio
Hilbero, lawyer for Eufemia and her six (6) co-heirs, refused to sign the agreement because he knew of the previous
sale made to the Pahuds.[18]

On December 1, 1994, Eufemia acknowledged having received P700,000.00 from Virgilio.[19] Virgilio then sold the
entire property to spouses Isagani Belarmino and Leticia Ocampo (Belarminos) sometime in 1994. The Belarminos
immediately constructed a building on the subject property.

Alarmed and bewildered by the ongoing construction on the lot they purchased, the Pahuds immediately confronted
Eufemia who confirmed to them that Virgilio had sold the property to the Belarminos. [20] Aggrieved, the Pahuds filed
a complaint in intervention[21] in the pending case for judicial partition.

After trial, the RTC upheld the validity of the sale to petitioners. The dispositive portion of the decision reads:

WHEREFORE, the foregoing considered, the Court orders:

1.
the sale of the 7/8 portion of the property covered by OCT No. O (1655) O-15 by
the plaintiffs as heirs of deceased Sps. Pedro San Agustin and Agatona Genil in favor of the
Intervenors-Third Party plaintiffs as valid and enforceable, but obligating the Intervenors-Third
Party plaintiffs to complete the payment of the purchase price of P437,500.00 by paying the
balance of P87,500.00 to defendant Fe (sic) San Agustin Magsino. Upon receipt of the balance, the
plaintiff shall formalize the sale of the 7/8 portion in favor of the Intervenor[s]-Third Party
plaintiffs;
2.
declaring the document entitled Salaysay sa Pagsang-ayon sa Bilihan (Exh. 2-a)
signed by plaintiff Eufemia San Agustin attached to the unapproved Compromise Agreement (Exh.
2) as not a valid sale in favor of defendant Virgilio San Agustin;
3.
declaring the sale (Exh. 4) made by defendant Virgilio San Agustin of the property
covered by OCT No. O (1655)-O-15 registered in the names of Spouses Pedro San Agustin and

Agatona Genil in favor of Third-party defendant Spouses Isagani and Leticia Belarmino as not a
valid sale and as inexistent;
4.
declaring the defendant Virgilio San Agustin and the Third-Party defendants
spouses Isagani and Leticia Belarmino as in bad faith in buying the portion of the property already
sold by the plaintiffs in favor of the Intervenors-Third Party Plaintiffs and the Third-Party Defendant
Sps. Isagani and Leticia Belarmino in constructing the two-[storey] building in (sic) the property
subject of this case; and
5.
declaring the parties as not entitled to any damages, with the parties shouldering
their respective responsibilities regarding the payment of attorney[]s fees to their respective
lawyers.
No pronouncement as to costs.
SO ORDERED.[22]

Not satisfied, respondents appealed the decision to the CA arguing, in the main, that the sale made by
Eufemia for and on behalf of her other co-heirs to the Pahuds should have been declared void and inexistent for
want of a written authority from her co-heirs. The CA yielded and set aside the findings of the trial court. In
disposing the issue, the CA ruled:

WHEREFORE, in view of the foregoing, the Decision dated January 14, 1998, rendered by the
Regional Trial Court of Calamba, Laguna, Branch 92 in Civil Case No. 2011-93-C for Judicial
Partition is hereby REVERSED and SET ASIDE, and a new one entered, as follows:
(1)

The case for partition among the plaintiffs-appellees and appellant Virgilio is now considered
closed and terminated;

(2)

Ordering plaintiffs-appellees to return to intervenors-appellees the total amount they

received from the latter, plus an interest of 12% per annum from the time the complaint [in]
intervention was filed on April 12, 1995 until actual payment of the same;

(3)

Declaring the sale of appellant Virgilio San Agustin to appellants spouses, Isagani and Leticia
Belarmino[,] as valid and binding;

(4)

Declaring appellants-spouses as buyers in good faith and for value and are the owners of the
subject property.

No pronouncement as to costs.
SO ORDERED.[23]

Petitioners now come to this Court raising the following arguments:

I.

The Court of Appeals committed grave and reversible error when it did not apply the
second paragraph of Article 1317 of the New Civil Code insofar as ratification is
concerned to the sale of the 4/8 portion of the subject property executed by respondents
San Agustin in favor of petitioners;

II.

The Court of Appeals committed grave and reversible error in holding that respondents
spouses Belarminos are in good faith when they bought the subject property from
respondent Virgilio San Agustin despite the findings of fact by the court a quo that they
were in bad faith which clearly contravenes the presence of long line of case laws
upholding the task of giving utmost weight and value to the factual findings of the trial
court during appeals; [and]

III.

The Court of Appeals committed grave and reversible error in holding that respondents
spouses Belarminos have superior rights over the property in question than petitioners
despite the fact that the latter were prior in possession thereby misapplying the
provisions of Article 1544 of the New Civil Code. [24]

The focal issue to be resolved is the status of the sale of the subject property by Eufemia and her co-heirs
to the Pahuds. We find the transaction to be valid and enforceable.

Article 1874 of the Civil Code plainly provides:

Art. 1874. When a sale of a piece of land or any interest therein is through an agent, the authority
of the latter shall be in writing; otherwise, the sale shall be void.

Also, under Article 1878,[25] a special power of attorney is necessary for an agent to enter into a contract by
which the ownership of an immovable property is transmitted or acquired, either gratuitously or for a valuable
consideration. Such stringent statutory requirement has been explained in Cosmic Lumber Corporation v. Court of
Appeals:[26]

[T]he authority of an agent to execute a contract [of] sale of real estate must be conferred in
writing and must give him specific authority, either to conduct the general business of the
principal or to execute a binding contract containing terms and conditions which are in the
contract he did execute. A special power of attorney is necessary to enter into any contract by
which the ownership of an immovable is transmitted or acquired either gratuitously or for a
valuable consideration. The express mandate required by law to enable an appointee of an
agency (couched) in general terms to sell must be one that expressly mentions a sale or
that includes a sale as a necessary ingredient of the act mentioned. For the principal to
confer the right upon an agent to sell real estate, a power of attorney must so express the powers
of the agent in clear and unmistakable language. When there is any reasonable doubt that the
language so used conveys such power, no such construction shall be given the document. [27]

In several cases, we have repeatedly held that the absence of a written authority to sell a piece of land
is, ipso jure, void,[28] precisely to protect the interest of an unsuspecting owner from being prejudiced by the
unwarranted act of another.

Based on the foregoing, it is not difficult to conclude, in principle, that the sale made by Eufemia, Isabelita
and her two brothers to the Pahuds sometime in 1992 should be valid only with respect to the 4/8 portion of the
subject property. The sale with respect to the 3/8 portion, representing the shares of Zenaida, Milagros, and

Minerva, is voidbecause Eufemia could not dispose of the interest of her co-heirs in the said lot absent any written
authority from the latter, as explicitly required by law. This was, in fact, the ruling of the CA.

Still, in their petition, the Pahuds argue that the sale with respect to the 3/8 portion of the land should have
been deemed ratified when the three co-heirs, namely: Milagros, Minerva, and Zenaida, executed their respective
special power of attorneys[29] authorizing Eufemia to represent them in the sale of their shares in the subject
property.[30]

While the sale with respect to the 3/8 portion is void by express provision of law and not susceptible to
ratification,[31] we nevertheless uphold its validity on the basis of the common law principle of estoppel.

Article 1431 of the Civil Code provides:

Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying thereon.

True, at the time of the sale to the Pahuds, Eufemia was not armed with the requisite special power of
attorney to dispose of the 3/8 portion of the property. Initially, in their answer to the complaint in intervention,
[32]

Eufemia and her other co-heirs denied having sold their shares to the Pahuds. During the pre-trial conference,

however, they admitted that they had indeed sold 7/8 of the property to the Pahuds sometime in 1992. [33] Thus, the
previous denial was superseded, if not accordingly amended, by their subsequent admission. [34] Moreover, in their
Comment,[35] the said co-heirs again admitted the sale made to petitioners.[36]

Interestingly, in no instance did the three (3) heirs concerned assail the validity of the transaction made by
Eufemia to the Pahuds on the basis of want of written authority to sell. They could have easily filed a case for
annulment of the sale of their respective shares against Eufemia and the Pahuds. Instead, they opted to remain
silent and left the task of raising the validity of the sale as an issue to their co-heir, Virgilio, who is not privy to the
said transaction. They cannot be allowed to rely on Eufemia, their attorney-in-fact, to impugn the validity of the first

transaction because to allow them to do so would be tantamount to giving premium to their sisters dishonest and
fraudulent deed. Undeniably, therefore, the silence and passivity of the three co-heirs on the issue bar them from
making a contrary claim.

It is a basic rule in the law of agency that a principal is subject to liability for loss caused to another by the
latters reliance upon a deceitful representation by an agent in the course of his employment (1) if the
representation is authorized; (2) if it is within the implied authority of the agent to make for the principal; or (3) if it
is apparently authorized, regardless of whether the agent was authorized by him or not to make the representation.
[37]

By their continued silence, Zenaida, Milagros and Minerva have caused the Pahuds to believe that they
have indeed clothed Eufemia with the authority to transact on their behalf. Clearly, the three co-heirs are now
estopped from impugning the validity of the sale from assailing the authority of Eufemia to enter into such
transaction.

Accordingly, the subsequent sale made by the seven co-heirs to Virgilio was void because they no longer
had any interest over the subject property which they could alienate at the time of the second transaction. [38] Nemo
dat quod non habet. Virgilio, however, could still alienate his 1/8 undivided share to the Belarminos.

The Belarminos, for their part, cannot argue that they purchased the property from Virgilio in good faith. As
a general rule, a purchaser of a real property is not required to make any further inquiry beyond what the certificate
of title indicates on its face.[39] But the rule excludes those who purchase with knowledge of the defect in the title of
the vendor or of facts sufficient to induce a reasonable and prudent person to inquire into the status of the property.
[40]

Such purchaser cannot close his eyes to facts which should put a reasonable man on guard, and later claim that

he acted in good faith on the belief that there was no defect in the title of the vendor. His mere refusal to believe
that such defect exists, or his obvious neglect by closing his eyes to the possibility of the existence of a defect in
the vendors title, will not make him an innocent purchaser for value, if afterwards it turns out that the title was, in

fact, defective. In such a case, he is deemed to have bought the property at his own risk, and any injury or
prejudice occasioned by such transaction must be borne by him. [41]

In the case at bar, the Belarminos were fully aware that the property was registered not in the name of the
immediate transferor, Virgilio, but remained in the name of Pedro San Agustin and Agatona Genil.[42] This fact alone
is sufficient impetus to make further inquiry and, thus, negate their claim that they are purchasers for value in good
faith.[43] They knew that the property was still subject of partition proceedings before the trial court, and that the
compromise agreement signed by the heirs was not approved by the RTC following the opposition of the counsel for
Eufemia and her six other co-heirs.[44] The Belarminos, being transferees pendente lite, are deemed buyers in mala
fide,and they stand exactly in the shoes of the transferor and are bound by any judgment or decree which may be
rendered for or against the transferor.[45] Furthermore, had they verified the status of the property by asking the
neighboring residents, they would have been able to talk to the Pahuds who occupy an adjoining business
establishment[46] and would have known that a portion of the property had already been sold. All these existing and
readily verifiable facts are sufficient to suggest that the Belarminos knew that they were buying the property at
their own risk.

WHEREFORE, premises considered, the April 23, 2003 Decision of the Court of Appeals as well as its
October 8, 2003 Resolution in CA-G.R. CV No. 59426, areREVERSED and SET ASIDE. Accordingly, the January 14,
1998 Decision of Branch 92 of the Regional Trial Court of Calamba, Laguna
is REINSTATED with theMODIFICATION that the sale made by respondent Virgilio San Agustin to respondent
spouses Isagani Belarmino and Leticia Ocampo is valid only with respect to the 1/8 portion of the subject
property. The trial court is ordered to proceed with the partition of the property with dispatch.

SO ORDERED.

SECOND DIVISION

YUN KWAN BYUNG,

Petitioner,

- versus -

PHILIPPINE AMUSEMENT AND GAMING

CORPORATION,
Respondent.

G.R. No. 163553

Present:
CARPIO, J., Chairperson,
CARPIO MORALES,*
LEONARDO-DE CASTRO,**
DEL CASTILLO, and
ABAD, JJ.
Promulgated:
December 11, 2009

x---------------------------------------------------x
DECISION
CARPIO, J.:
The Case

Yun Kwan Byung (petitioner) filed this Petition for Review[1]assailing the Court of Appeals Decision[2]dated 27 May
2003 in CA-G.R. CV No. 65699 as well as the Resolution[3]dated 7 May 2004 denying the Motion for Reconsideration.
In the assailed decision, the Court of Appeals (CA) affirmed the Regional Trial Courts Decision [4]dated6 May 1999.
The Regional Trial Court of Manila, Branch 13 (trial court), dismissed petitioners demand against respondent
Philippine Amusement and Gaming Corporation (PAGCOR) for the redemption of gambling chips.

The Facts

PAGCOR is a government-owned and controlled corporation tasked to establish and operate gambling clubs and
casinos as a means to promote tourism and generate sources of revenue for the government. To achieve these
objectives, PAGCOR is vested with the power to enter into contracts of every kind and for any lawful purpose that
pertains to its business. Pursuant to this authority, PAGCOR launched its Foreign Highroller Marketing Program
(Program). The Program aims to invite patrons from foreign countries to play at the dollar pit of designated PAGCORoperated casinos under specified terms and conditions and in accordance with industry practice. [5]

The Korean-based ABS Corporation was one of the international groups that availed of the Program. In a letteragreement dated 25 April 1996 (Junket Agreement), ABS Corporation agreed to bring in foreign players to play at
the five designated gaming tables of the Casino Filipino Silahis at the Grand Boulevard Hotel in Manila (Casino
Filipino). The relevant stipulations of the Junket Agreement state:

1.

PAGCOR will provide ABS Corporation with separate junket

chips. The junket chips will be distinguished from the chips being used by other players
in the gaming tables.
ABS Corporation will distribute these junket chips to its players and at the end of the playing period, ABS
Corporation will collect the junket chips from its players and make an accounting to the casino treasury.
2.

ABS Corporation will assume sole responsibility to pay the

winnings of its foreign players and settle the collectibles from losing players.
3.

ABS Corporation shall hold PAGCOR absolutely free and

harmless from any damage, claim or liability which may arise from any cause in
connection with the Junket Agreement.

5. In providing the gaming facilities and services to these foreign players, PAGCOR is entitled to
receive from ABS Corporation a 12.5% share in the gross winnings of ABS Corporation or
1.5 million US dollars, whichever is higher, over a playing period of 6 months. PAGCOR
has the option to extend the period.[6]

Petitioner, a Korean national, alleges that from November 1996 to March 1997, he came to the Philippines four
times to play for high stakes at the Casino Filipino.[7]Petitioner claims that in the course of the games, he was able to
accumulate gambling chips worth US$2.1 million. Petitioner presented as evidence during the trial gambling chips
with a face value of US$1.1 million. Petitioner contends that when he presented the gambling chips for encashment
with PAGCORs employees or agents, PAGCOR refused to redeem them. [8]

Petitioner brought an action against PAGCOR seeking the redemption of gambling chips valued at US$2.1 million.
Petitioner claims that he won the gambling chips at the Casino Filipino, playing continuously day and night.
Petitioner alleges that every time he would come to Manila, PAGCOR would extend to him amenities deserving of a
high roller. A PAGCOR official who meets him at the airport would bring him to Casino Filipino, a casino managed
and operated by PAGCOR. The card dealers were all PAGCOR employees, the gambling chips, equipment and
furnitures belonged to PAGCOR, and PAGCOR enforced all the regulations dealing with the operation of foreign
exchange gambling pits. Petitioner states that he was able to redeem his gambling chips with the cashier during his
first few winning trips. But later on, the casino cashier refused to encash his gambling chips so he had no recourse
but to deposit his gambling chips at the Grand Boulevard Hotels deposit box, every time he departed from Manila. [9]

PAGCOR claims that petitioner, who was brought into the Philippines by ABS Corporation, is a junket player who
played in the dollar pit exclusively leased by ABS Corporation for its junket players. PAGCOR alleges that it provided
ABS Corporation with distinct junket chips. ABS Corporation distributed these chips to its junket players. At the end
of each playing period, the junket players would surrender the chips to ABS Corporation. Only ABS Corporation
would make an accounting of these chips to PAGCORs casino treasury. [10]

As additional information for the junket players playing in the gaming room leased to ABS Corporation, PAGCOR
posted a notice written in English and Korean languages which reads:

NOTICE
This GAMING ROOM is exclusively operated by ABS under arrangement with PAGCOR, the former
is solely accountable for all PLAYING CHIPS wagered on the tables. Any
financialARRANGEMENT/TRANSACTION between PLAYERS and ABS shall only be binding upon said
PLAYERS and ABS.[11]

PAGCOR claims that this notice is a standard precautionary measure [12]to avoid confusion between junket players of
ABS Corporation and PAGCORs players.

PAGCOR argues that petitioner is not a PAGCOR player because under PAGCORs gaming rules, gambling chips
cannot be brought outside the casino. The gambling chips must be converted to cash at the end of every gaming
period as they are inventoried every shift. Under PAGCORs rules, it is impossible for PAGCOR players to accumulate
two million dollars worth of gambling chips and to bring the chips out of the casino premises. [13]
Since PAGCOR disclaimed liability for the winnings of players recruited by ABS Corporation and refused to encash
the gambling chips, petitioner filed a complaint for a sum of money before the trial court. [14]PAGCOR filed a
counterclaim against petitioner. Then, trial ensued.

On 6 May 1999, the trial court dismissed the complaint and counterclaim. Petitioner appealed the trial courts
decision to the CA. On 27 May 2003, the CA affirmed the appealed decision. On 27 June 2003, petitioner moved for
reconsideration which was denied on 7 May 2004.
Aggrieved by the CAs decision and resolution, petitioner elevated the case before this Court.

The Ruling of the Trial Court

The trial court ruled that based on PAGCORs charter,[15]PAGCOR has no authority to lease any portion of the
gambling tables to a private party like ABS Corporation. Section 13 of Presidential Decree No. 1869 or the PAGCORs
charter states:

Sec. 13. Exemptions -

xxx

(4)
Utilization of Foreign Currencies The Corporation shall have the right
and authority, solely and exclusively in connection with the operations of the casino(s),
to purchase, receive, exchange and disburse foreign exchange, subject to the following
terms and conditions:
(a) A specific area in the casino(s) or gaming pit shall be put up solely and exclusively for
players and patrons utilizing foreign currencies;
(b) The Corporation shall appoint and designate a duly accredited commercial bank agent of the Central Bank, to
handle, administer and manage the use of foreign currencies in the casino(s);
(c) The Corporation shall provide an office at casino(s) exclusively for the employees of the designated bank, agent
of the Central Bank, where the Corporation shall maintain a dollar account which will be utilized exclusively for the
above purpose and the casino dollar treasury employees;
(d) Only persons with foreign passports or certificates of identity (for Hong Kong patron only) duly issued by the
government or country of their residence will be allowed to play in the foreign exchange gaming pit;
(e) Only foreign exchange prescribed to form part of the Philippine International Reserve and the following foreign
exchange currencies: Australian Dollar, Singapore Dollar, Hong Kong Dollar, shall be used in this gaming pit;
(f) The disbursement, administration, management and recording of foreign exchange currencies used in the
casino(s) shall be carried out in accordance with existing foreign exchange regulations, and periodical reports of the
transactions in such foreign exchange currencies by the Corporation shall be duly recorded and reported to the
Central Bank thru the designated Agent Bank; and

(g) The Corporation shall issue the necessary rules and regulations for the guidance and information of players
qualified to participate in the foreign exchange gaming pit, in order to make certain that the terms and conditions
as above set forth are strictly complied with.

The trial court held that only PAGCOR could use foreign currency in its gaming tables. When PAGCOR accepted only
a fixed portion of the dollar earnings of ABS Corporation in the concept of a lease of facilities, PAGCOR shared its
franchise with ABS Corporation in violation of the PAGCORs charter. Hence, the Junket Agreement is void. Since the
Junket Agreement is not permitted by PAGCORs charter, the mutual rights and obligations of the parties to this case
would be resolved based on agency and estoppel. [16]

The trial court found that the petitioner wanted to redeem gambling chips that were specifically used by ABS
Corporation at its gaming tables. The gambling chips come in distinctive orange or yellow colors with stickers
bearing denominations of 10,000 or 1,000. The 1,000 gambling chips are smaller in size and the words no cash
value marked on them. The 10,000 gambling chips do not reflect the no cash value sign. The senior treasury head
of PAGCOR testified that these were the gambling chips used by the previous junket operators and PAGCOR merely
continued using them. However, the gambling chips used in the regular casino games were of a different quality. [17]

The trial court pointed out that PAGCOR had taken steps to warn players brought in by all junket operators,
including ABS Corporation, that they were playing under special rules. Apart from the different kinds of gambling
chips used, the junket players were confined to certain gaming rooms. In these rooms, notices were posted that

gambling chips could only be encashed there and nowhere else. A photograph of one such notice, printed in Korean
and English, stated that the gaming room was exclusively operated by ABS Corporation and that ABS Corporation
was solely accountable for all the chips wagered on the gaming tables. Although petitioner denied seeing this
notice, this disclaimer has the effect of a negative evidence that can hardly prevail against the positive assertions
of PAGCOR officials whose credibility is also not open to doubt. The trial court concluded that petitioner had been
alerted to the existence of these special gambling rules, and the mere fact that he continued to play under the
same restrictions over a period of several months confirms his acquiescence to them. Otherwise, petitioner could
have simply chose to stop gambling.[18]

In dismissing petitioners complaint, the trial court concluded that petitioners demand against PAGCOR for the
redemption of the gambling chips could not stand. The trial court stated that petitioner, a stranger to the
agreement between PAGCOR and ABS Corporation, could not under principles of equity be charged with notice
other than of the apparent authority with which PAGCOR had clothed its employees and agents in dealing with
petitioner. Since petitioner was made aware of the special rules by which he was playing at the Casino Filipino,
petitioner could not now claim that he was not bound by them. The trial court explained that in an unlawful
transaction, the courts will extend equitable relief only to a party who was unaware of all its dimensions and whose
ignorance of them exposed him to the risk of being exploited by the other. Where the parties enter into such a
relationship with the opportunity to know all of its ramifications, as in this case, there is no room for equitable
considerations to come to the rescue of any party. The trial court ruled that it would leave the parties where they
are.[19]

The Ruling of the Court of Appeals

In dismissing the appeal, the appellate court addressed the four errors assigned by petitioner.

First, petitioner maintains that he was never a junket player of ABS Corporation. Petitioner also denies seeing a
notice that certain gaming rooms were exclusively operated by entities under special agreement. [20]

The CA ruled that the records do not support petitioners theory. Petitioners own testimony reveals that he enjoyed
special accommodations at the Grand Boulevard Hotel. This similar accommodation was extended to players
brought in by ABS Corporation and other junket operators. Petitioner cannot disassociate himself from ABS
Corporation for it is unlikely that an unknown high roller would be accorded choice accommodations by the hotel
unless the accommodation was facilitated by a junket operator who enjoyed such privilege. [21]

The CA added that the testimonies of PAGCORs employees affirming that notices were posted in English and Korean
in the gaming areas are credible in the absence of any convincing proof of ill motive. Further, the specified gaming
areas used only special chips that could be bought and exchanged at certain cashier booths in that area. [22]

Second, petitioner attacks the validity of the contents of the notice. Since the Junket Agreement is void, the notice,
which was issued pursuant to the Junket Agreement, is also void and cannot affect petitioner. [23]

The CA reasoned that the trial court never declared the notice valid and neither did it enforce the contents thereof.
The CA emphasized that it was the act of cautioning and alerting the players that was upheld. The trial court ruled
that signs and warnings were in place to inform the public, petitioner included, that special rules applied to certain
gaming areas even if the very agreement giving rise to these rules is void. [24]

Third, petitioner takes the position that an implied agency existed between PAGCOR and ABS Corporation. [25]

The CA disagreed with petitioners view. A void contract has no force and effect from the very beginning. It produces
no effect either against or in favor of anyone. Neither can it create, modify or extinguish the juridical relation to
which it refers. Necessarily, the Junket Agreement, being void from the beginning, cannot give rise to an implied
agency. The CA explained that it cannot see how the principle of implied agency can be applied to this case. Article
1883[26]of the Civil Code applies only to a situation where the agent is authorized by the principal to enter into a
particular transaction, but instead of contracting on behalf of the principal, the agent acts in his own name. [27]

The CA concluded that no such legal fiction existed between PAGCOR and ABS Corporation. PAGCOR entered into a
Junket Agreement to lease to ABS Corporation certain gaming areas. It was never PAGCORs intention to deal with
the junket players. Neither did PAGCOR intend ABS Corporation to represent PAGCOR in dealing with the junket
players. Representation is the basis of agency but unfortunately for petitioner none is found in this case. [28]

The CA added that the special gaming chips, while belonging to PAGCOR, are mere accessories in the void Junket
Agreement with ABS Corporation. In Article 1883, the phrase things belonging to the principal refers only to those
things or properties subject of a particular transaction authorized by the principal to be entered into by its
purported agent. Necessarily, the gambling chips being mere incidents to the void lease agreement cannot fall
under this category.[29]

The CA ruled that Article 2152[30]of the Civil Code is also not applicable. The circumstances relating to negotiorum
gestio are non-existent to warrant an officious manager to take over the management and administration of
PAGCOR.[31]

Fourth, petitioner asks for equitable relief.[32]

The CA explained that although petitioner was never a party to the void Junket Agreement, petitioner cannot deny
or feign blindness to the signs and warnings all around him. The notices, the special gambling chips, and the
separate gaming areas were more than enough to alert him that he was playing under different terms. Petitioner
persisted and continued to play in the casino. Petitioner also enjoyed the perks extended to junket players of ABS
Corporation. For failing to heed these signs and warnings, petitioner can no longer be permitted to claim equitable
relief. When parties do not come to court with clean hands, they cannot be allowed to profit from their own wrong
doing.[33]

Petitioners raise three issues in this petition:

The Issues

1. Whether the CA erred in holding that PAGCOR is not liable to petitioner, disregarding the doctrine of
implied agency, or agency by estoppel;

2. Whether the CA erred in using intent of the contracting parties as the test for creation of agency,
when such is not relevant since the instant case involves liability of the presumed principal in
implied agency to a third party; and

3. Whether the CA erred in failing to consider that PAGCOR ratified, or at least adopted, the acts of the
agent, ABS Corporation.[34]
The Ruling of the Court

The petition lacks merit.

Courts will not enforce debts arising from illegal gambling

Gambling is prohibited by the laws of the Philippines as specifically provided in Articles 195 to 199 of the Revised
Penal Code, as amended. Gambling is an act beyond the pale of good morals, [35]and is thus prohibited and punished
to repress an evil that undermines the social, moral, and economic growth of the nation. [36] Presidential Decree No.
1602 (PD 1602),[37]which modified Articles 195-199 of the Revised Penal Code and repealed inconsistent provisions,
[38]

prescribed stiffer penalties on illegal gambling.[39]

As a rule, all forms of gambling are illegal. The only form of gambling allowed by law is that stipulated under
Presidential Decree No. 1869, which gave PAGCOR its franchise to maintain and operate gambling casinos. The
issue then turns on whether PAGCOR can validly share its franchise with junket operators to operate gambling
casinos in the country. Section 3(h) of PAGCORs charter states:
Section 3. Corporate Powers. - The Corporation shall have the following powers and functions,
among others:
xxx
h) to enter into, make, perform, and carry out contracts of every kind and for any lawful purpose
pertaining to the business of the Corporation, or in any manner incident thereto, as principal,
agent or otherwise, with any person, firm, association, or corporation.
xxx

The Junket Agreement would be valid if under Section 3(h) of PAGCORs

charter, PAGCOR could share its gambling franchise with another entity. In Senator Jaworski v. Phil. Amusement and

Gaming Corp.,[40]the Court discussed the extent of the grant of the legislative franchise to PAGCOR on its authority
to operate gambling casinos:

A legislative franchise is a special privilege granted by the state to corporations. It is a

privilege of public concern which cannot be exercised at will and pleasure, but should be reserved
for public control and administration, either by the government directly, or by public agents,
under such conditions and regulations as the government may impose on them in the interest of
the public. It is Congress that prescribes the conditions on which the grant of the franchise may
be made. Thus the manner of granting the franchise, to whom it may be granted, the mode of
conducting the business, the charter and the quality of the service to be rendered and the duty of
the grantee to the public in exercising the franchise are almost always defined in clear and
unequivocal language.
After a circumspect consideration of the foregoing discussion and the contending positions
of the parties, we hold that PAGCOR has acted beyond the limits of its authority when it
passed on or shared its franchise to SAGE.
In the Del Mar case where a similar issue was raised when PAGCOR entered into a joint
venture agreement with two other entities in the operation and management of jai alai games,
the Court, in an En Banc Resolution dated 24 August 2001, partially granted the motions for
clarification filed by respondents therein insofar as it prayed that PAGCOR has a valid franchise,
but only by itself (i.e. not in association with any other person or entity), to operate, maintain
and/or manage the game of jai-alai.
In the case at bar, PAGCOR executed an agreement with SAGE whereby the former grants
the latter the authority to operate and maintain sports betting stations and Internet gaming
operations. In essence, the grant of authority gives SAGE the privilege to actively participate,
partake and share PAGCORs franchise to operate a gambling activity. The grant of franchise is a
special privilege that constitutes a right and a duty to be performed by the grantee. The grantee
must not perform its activities arbitrarily and whimsically but must abide by the limits set by its
franchise and strictly adhere to its terms and conditionalities. A corporation as a creature of the
State is presumed to exist for the common good. Hence, the special privileges and franchises it
receives are subject to the laws of the State and the limitations of its charter. There is therefore a
reserved right of the State to inquire how these privileges had been employed, and whether they
have been abused. (Emphasis supplied)

THUS, PAGCOR HAS THE SOLE AND EXCLUSIVE AUTHORITY TO OPERATE A GAMBLING ACTIVITY. WHILE
PAGCOR IS ALLOWED UNDER ITS CHARTER TO ENTER INTO OPERATORS OR MANAGEMENT CONTRACTS, PAGCOR IS
NOT ALLOWED UNDER THE SAME CHARTER TO RELINQUISH OR SHARE ITS FRANCHISE. PAGCOR CANNOT DELEGATE
ITS POWER IN VIEW OF THE LEGAL PRINCIPLE OF DELEGATA POTESTAS DELEGARE NON POTEST, INASMUCH AS
THERE IS NOTHING IN THE CHARTER TO SHOW THAT IT HAS BEEN EXPRESSLY AUTHORIZED TO DO SO. [41]

Similarly, in this case, PAGCOR, by taking only a percentage of the earnings of ABS Corporation from its
foreign currency collection, allowed ABS Corporation to operate gaming tables in the dollar pit. The Junket
Agreement is in direct violation of PAGCORs charter and is therefore void.

Since the Junket Agreement violates PAGCORs charter, gambling between the junket player and the junket
operator under such agreement is illegal and may not be enforced by the courts. Article 2014[42]of the Civil Code,
which refers to illegal gambling, states that no action can be maintained by the winner for the collection of what he
has won in a game of chance.

Although not raised as an issue by petitioner, we deem it necessary to discuss the applicability of Republic
Act No. 9487[43](RA 9487) to the present case.

RA 9487 amended the PAGCOR charter, granting PAGCOR the power to enter into special agreement with
third parties to share the privileges under its franchise for the operation of gambling casinos:

Section 1. The Philippine Amusement and

Gaming Corporation (PAGCOR) franchise granted under Presidential Decree No. 1869 otherwise
known as the PAGCOR Charter, is hereby further amended to read as follows:
XXX
(2) SECTION 3(H) IS HEREBY AMENDED TO READ AS FOLLOWS:
SEC. 3. CORPORATE POWERS. xxx
(h) to enter into, make, conclude, perform, and carry out contracts of
every kind and nature and for any lawful purpose which are necessary,
appropriate, proper or incidental to any business or purpose of the
PAGCOR, including but not limited to investment agreements, joint
venture agreements, management agreements, agency
agreements, whether as principal or as an agent, manpower supply
agreements, or any other similar agreements or arrangements with
any person, firm, association or corporation. (Boldfacing supplied)

PAGCOR sought the amendment of its charter precisely to address and remedy the legal impediment raised
in Senator Jaworski v. Phil. Amusement and Gaming Corp.

Unfortunately for petitioner, RA 9487 cannot be applied to the present case. The Junket Agreement was
entered into between PAGCOR and ABS Corporation on 25 April 1996 when the PAGCOR charter then prevailing (PD
1869) prohibited PAGCOR from entering into any arrangement with a third party that would allow such party to
actively participate in the casino operations.

It is a basic principle that laws should only be applied prospectively unless the legislative intent to give
them retroactive effect is expressly declared or is necessarily implied from the language used. [44]RA 9487 does not
provide for any retroactivity of its provisions. All laws operate prospectively absent a clear contrary language in the
text,[45]and that in every case of doubt, the doubt will be resolved against the retroactive operation of laws. [46]

Thus, petitioner cannot avail of the provisions of RA 9487 as this was not the law when the acts giving rise
to the claimed liabilities took place. This makes the gambling activity participated in by petitioner illegal. Petitioner
cannot sue PAGCOR to redeem the cash value of the gambling chips or recover damages arising from an illegal
activity for two reasons. First, petitioner engaged in gambling with ABS Corporation and not with PAGCOR. Second,
the court cannot assist petitioner in enforcing an illegal act. Moreover, for a court to grant petitioners prayer would
mean enforcing the Junket Agreement, which is void.

Now, to address the issues raised by petitioner in his petition, petitioner claims that he is a third party proceeding
against the liability of a presumed principal and claims relief, alternatively, on the basis of implied agency or
agency by estoppel.

Article 1869 of the Civil Code states that implied agency is derived from the acts of the principal, from his
silence or lack of action, or his failure to repudiate the agency, knowing that another person is acting on his behalf
without authority. Implied agency, being an actual agency, is a fact to be proved by deductions or inferences from
other facts.[47]

On the other hand, apparent authority is based on estoppel and can arise from two instances. First, the principal
may knowingly permit the agent to hold himself out as having such authority, and the principal becomes estopped
to claim that the agent does not have such authority. Second, the principal may clothe the agent with the indicia of
authority as to lead a reasonably prudent person to believe that the agent actually has such authority. [48]In an
agency by estoppel, there is no agency at all, but the one assuming to act as agent has apparent or ostensible,
although not real, authority to represent another. [49]

The law makes no presumption of agency and proving its existence, nature and extent is incumbent upon
the person alleging it.[50]Whether or not an agency has been created is a question to be determined by the fact that
one represents and is acting for another.

[51]

Acts and conduct of PAGCOR negates the existence of an implied agency or an agency by estoppel
Petitioner alleges that there is an implied agency. Alternatively, petitioner claims that even assuming that no actual
agency existed between PAGCOR and ABS Corporation, there is still an agency by estoppel based on the acts and
conduct of PAGCOR showing apparent authority in favor of ABS Corporation. Petitioner states that one factor which
distinguishes agency from other legal precepts is control and the following undisputed facts show a relationship of
implied agency:

1. Three floors of the Grand Boulevard Hotel [52]were leased to PAGCOR for conducting gambling
operations;[53]
2. Of the three floors, PAGCOR allowed ABS Corporation to use one whole floor for foreign exchange gambling,
conducted by PAGCOR dealers using PAGCOR facilities, operated by PAGCOR employees and using PAGCOR chips
bearing the PAGCOR logo;[54]
3. PAGCOR controlled the release, withdrawal and return of all the gambling chips given to ABS
Corporation in that part of the casino and at the end of the day, PAGCOR conducted an
inventory of the gambling chips;[55]
4. ABS Corporation accounted for all gambling chips with the Commission on Audit (COA), the
official auditor of PAGCOR;[56]
5. PAGCOR enforced, through its own manager, all the rules and regulations on the operation of
the gambling pit used by ABS Corporation.[57]

Petitioners argument is clearly misplaced. The basis for agency is representation,[58]that is, the agent acts for and on
behalf of the principal on matters within the scope of his authority and said acts have the same legal effect as if
they were personally executed by the principal. [59]On the part of the principal, there must be an actual intention to
appoint or an intention naturally inferable from his words or actions, while on the part of the agent, there must be
an intention to accept the appointment and act on it.[60]Absent such mutual intent, there is generally no agency.[61]

There is no implied agency in this case because PAGCOR did not hold out to the public as the principal of
ABS Corporation. PAGCORs actions did not mislead the public into believing that an agency can be implied from the
arrangement with the junket operators, nor did it hold out ABS Corporation with any apparent authority to represent
it in any capacity. The Junket Agreement was merely a contract of lease of facilities and services.

The players brought in by ABS Corporation were covered by a different set of rules in acquiring and
encashing chips. The players used a different kind of chip than what was used in the regular gaming areas of
PAGCOR, and that such junket players played specifically only in the third floor area and did not mingle with the
regular patrons of PAGCOR. Furthermore, PAGCOR, in posting notices stating that the players are playing under
special rules, exercised the necessary precaution to warn the gaming public that no agency relationship exists.

For the second assigned error, petitioner claims that the intention of the parties cannot apply to him as he
is not a party to the contract.

We disagree. The Court of Appeals correctly used the intent of the contracting parties in determining
whether an agency by estoppel existed in this case. An agency by estoppel, which is similar to the doctrine of
apparent authority requires proof of reliance upon the representations, and that, in turn, needs proof that the
representations predated the action taken in reliance.[62]

There can be no apparent authority of an agent without acts or conduct on the part of the principal and
such acts or conduct of the principal must have been known and relied upon in good faith and as a result of the
exercise of reasonable prudence by a third person as claimant, and such must have produced a change of position
to its detriment.[63]Such proof is lacking in this case.

In the entire duration that petitioner played in Casino Filipino, he was dealing only with ABS Corporation,
and availing of the privileges extended only to players brought in by ABS Corporation. The facts that he enjoyed
special treatment upon his arrival in Manila and special accommodations in Grand Boulevard Hotel, and that he was
playing in special gaming rooms are all indications that petitioner cannot claim good faith that he believed he was

dealing with PAGCOR. Petitioner cannot be considered as an innocent third party and he cannot claim entitlement to
equitable relief as well.

For his third and final assigned error, petitioner asserts that PAGCOR ratified the acts of ABS Corporation.

The trial court has declared, and we affirm, that the Junket Agreement is void. A void or inexistent contract
is one which has no force and effect from the very beginning. Hence, it is as if it has never been entered into and
cannot be validated either by the passage of time or by ratification. [64]Article 1409 of the Civil Code provides that
contracts expressly prohibited or declared void by law, such as gambling contracts, cannot be ratified. [65]

WHEREFORE, we DENY the petition. We AFFIRM the Court of Appeals Decision dated 27 May 2003 as well as the
Resolution dated 7 May 2004 as modified by this Decision.
SO ORDERED.

G.R. No. 75640

April 5, 1990

NATIONAL FOOD AUTHORITY, (NFA), petitioner,

vs.
INTERMEDIATE APPELLATE COURT, SUPERIOR (SG) SHIPPING CORPORATION, respondents.
Zapanta, Gloton & Ulejorada for petitioner.
Sison, Ortiz & Associates for private respondents.

PARAS, J.:
This is a petition for review on certiorari made by National Food Authority (NFA for brevity) then known as the
National Grains Authority or NGA from the decision 1 of the Intermediate Appellate Court affirming the decision 2of
the trial court, the decretal portion of which reads:
WHEREFORE, defendants Gil Medalla and National Food Authority are ordered to pay jointly and severally
the plaintiff:
a. the sum of P25,974.90, with interest at the legal rate from October 17, 1979 until the same is
fully paid; and,
b. the sum of P10,000.00 as and for attorney's fees.
Costs against both defendants.
SO ORDERED. (p. 22, Rollo)
Hereunder are the undisputed facts as established by the then Intermediate Appellate Court (now Court of
Appeals), viz:
On September 6, 1979 Gil Medalla, as commission agent of the plaintiff Superior Shipping Corporation,
entered into a contract for hire of ship known as "MV Sea Runner" with defendant National Grains
Authority. Under the said contract Medalla obligated to transport on the "MV Sea Runner" 8,550 sacks of
rice belonging to defendant National Grains Authority from the port of San Jose, Occidental Mindoro, to
Malabon, Metro Manila.
Upon completion of the delivery of rice at its destination, plaintiff on October 17, 1979, wrote a letter
requesting defendant NGA that it be allowed to collect the amount stated in its statement of account
(Exhibit "D"). The statement of account included not only a claim for freightage but also claims for
demurrage and stevedoring charges amounting to P93,538.70.
On November 5, 1979, plaintiff wrote again defendant NGA, this time specifically requesting that the
payment for freightage and other charges be made to it and not to defendant Medalla because plaintiff
was the owner of the vessel "MV Sea Runner" (Exhibit "E"). In reply, defendant NGA on November 16, 1979
informed plaintiff that it could not grant its request because the contract to transport the rice was entered
into by defendant NGA and defendant Medalla who did not disclose that he was acting as a mere agent of
plaintiff (Exhibit "F"). Thereupon on November 19, 1979, defendant NGA paid defendant Medalla the sum
of P25,974.90, for freight services in connection with the shipment of 8,550 sacks of rice (Exhibit "A").
On December 4, 1979, plaintiff wrote defendant Medalla demanding that he turn over to plaintiff the
amount of P27,000.00 paid to him by defendant NFA. Defendant Medalla, however, "ignored the demand."
Plaintiff was therefore constrained to file the instant complaint.
Defendant-appellant National Food Authority admitted that it entered into a contract with Gil Medalla
whereby plaintiffs vessel "MV Sea Runner" transported 8,550 sacks of rice of said defendant from San Jose,
Mindoro to Manila.

For services rendered, the National Food Authority paid Gil Medalla P27,000.00 for freightage.
Judgment was rendered in favor of the plaintiff. Defendant National Food Authority appealed to this court
on the sole issue as to whether it is jointly and severally liable with defendant Gil Medalla for freightage.
(pp. 61-62, Rollo)
The appellate court affirmed the judgment of the lower court, hence, this appeal by way of certiorari, petitioner NFA
submitting a lone issue to wit: whether or not the instant case falls within the exception of the general rule provided
for in Art. 1883 of the Civil Code of the Philippines.
It is contended by petitioner NFA that it is not liable under the exception to the rule (Art. 1883) since it had no
knowledge of the fact of agency between respondent Superior Shipping and Medalla at the time when the contract
was entered into between them (NFA and Medalla). Petitioner submits that "(A)n undisclosed principal cannot
maintain an action upon a contract made by his agent unless such principal was disclosed in such contract. One
who deals with an agent acquires no right against the undisclosed principal."
Petitioner NFA's contention holds no water. It is an undisputed fact that Gil Medalla was a commission agent of
respondent Superior Shipping Corporation which owned the vessel "MV Sea Runner" that transported the sacks of
rice belonging to petitioner NFA. The context of the law is clear. Art. 1883, which is the applicable law in the case at
bar provides:
Art. 1883. If an agent acts in his own name, the principal has no right of action against the persons with
whom the agent has contracted; neither have such persons against the principal.
In such case the agent is the one directly bound in favor of the person with whom he has contracted, as if
the transaction were his own, except when the contract involves things belonging to the principal.
The provision of this article shall be understood to be without prejudice to the actions between the
principal and agent.
Consequently, when things belonging to the principal (in this case, Superior Shipping Corporation) are dealt with,
the agent is bound to the principal although he does not assume the character of such agent and appears acting in
his own name. In other words, the agent's apparent representation yields to the principal's true representation and
that, in reality and in effect, the contract must be considered as entered into between the principal and the third
person (Sy Juco and Viardo v. Sy Juco, 40 Phil. 634). Corollarily, if the principal can be obliged to perform his duties
under the contract, then it can also demand the enforcement of its rights arising from the contract.
WHEREFORE, PREMISES CONSIDERED, the petition is hereby DENIED and the appealed decision is hereby
AFFIRMED.
SO ORDERED.
Melencio-Herrera, Padilla, Sarmiento and Regalado, JJ., concur.
G.R. No. 83122 October 19, 1990
ARTURO P. VALENZUELA and HOSPITALITA N. VALENZUELA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, BIENVENIDO M. ARAGON, ROBERT E. PARNELL, CARLOS K.
CATOLICO and THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., respondents.
Albino B. Achas for petitioners.
Angara, Abello, Concepcion, Regala & Cruz for private respondents.

GUTIERREZ, JR., J.:

This is a petition for review of the January 29, 1988 decision of the Court of Appeals and the April 27, 1988
resolution denying the petitioners' motion for reconsideration, which decision and resolution reversed the decision
dated June 23,1986 of the Court of First Instance of Manila, Branch 34 in Civil Case No. 121126 upholding the
petitioners' causes of action and granting all the reliefs prayed for in their complaint against private respondents.
The antecedent facts of the case are as follows:
Petitioner Arturo P. Valenzuela (Valenzuela for short) is a General Agent of private respondent Philippine American
General Insurance Company, Inc. (Philamgen for short) since 1965. As such, he was authorized to solicit and sell in
behalf of Philamgen all kinds of non-life insurance, and in consideration of services rendered was entitled to receive
the full agent's commission of 32.5% from Philamgen under the scheduled commission rates (Exhibits "A" and "1").
From 1973 to 1975, Valenzuela solicited marine insurance from one of his clients, the Delta Motors, Inc. (Division of
Electronics Airconditioning and Refrigeration) in the amount of P4.4 Million from which he was entitled to a
commission of 32% (Exhibit "B"). However, Valenzuela did not receive his full commission which amounted to P1.6
Million from the P4.4 Million insurance coverage of the Delta Motors. During the period 1976 to 1978, premium
payments amounting to P1,946,886.00 were paid directly to Philamgen and Valenzuela's commission to which he is
entitled amounted to P632,737.00.
In 1977, Philamgen started to become interested in and expressed its intent to share in the commission due
Valenzuela (Exhibits "III" and "III-1") on a fifty-fifty basis (Exhibit "C"). Valenzuela refused (Exhibit "D").
On February 8, 1978 Philamgen and its President, Bienvenido M. Aragon insisted on the sharing of the commission
with Valenzuela (Exhibit E). This was followed by another sharing proposal dated June 1, 1978. On June 16,1978,
Valenzuela firmly reiterated his objection to the proposals of respondents stating that: "It is with great reluctance
that I have to decline upon request to signify my conformity to your alternative proposal regarding the payment of
the commission due me. However, I have no choice for to do otherwise would be violative of the Agency Agreement
executed between our goodselves." (Exhibit B-1)
Because of the refusal of Valenzuela, Philamgen and its officers, namely: Bienvenido Aragon, Carlos Catolico and
Robert E. Parnell took drastic action against Valenzuela. They: (a) reversed the commission due him by not crediting
in his account the commission earned from the Delta Motors, Inc. insurance (Exhibit "J" and "2"); (b) placed agency
transactions on a cash and carry basis; (c) threatened the cancellation of policies issued by his agency (Exhibits "H"
to "H-2"); and (d) started to leak out news that Valenzuela has a substantial account with Philamgen. All of these
acts resulted in the decline of his business as insurance agent (Exhibits "N", "O", "K" and "K-8"). Then on December
27, 1978, Philamgen terminated the General Agency Agreement of Valenzuela (Exhibit "J", pp. 1-3, Decision Trial
Court dated June 23, 1986, Civil Case No. 121126, Annex I, Petition).
The petitioners sought relief by filing the complaint against the private respondents in the court a quo (Complaint of
January 24, 1979, Annex "F" Petition). After due proceedings, the trial court found:
xxx xxx xxx
Defendants tried to justify the termination of plaintiff Arturo P. Valenzuela as one of defendant
PHILAMGEN's General Agent by making it appear that plaintiff Arturo P. Valenzuela has a
substantial account with defendant PHILAMGEN particularly Delta Motors, Inc.'s Account, thereby
prejudicing defendant PHILAMGEN's interest (Exhibits 6,"11","11- "12- A"and"13-A").
Defendants also invoked the provisions of the Civil Code of the Philippines (Article 1868) and the
provisions of the General Agency Agreement as their basis for terminating plaintiff Arturo P.
Valenzuela as one of their General Agents.
That defendants' position could have been justified had the termination of plaintiff Arturo P.
Valenzuela was (sic) based solely on the provisions of the Civil Code and the conditions of the
General Agency Agreement. But the records will show that the principal cause of the termination
of the plaintiff as General Agent of defendant PHILAMGEN was his refusal to share his Delta
commission.
That it should be noted that there were several attempts made by defendant Bienvenido M.
Aragon to share with the Delta commission of plaintiff Arturo P. Valenzuela. He had persistently
pursued the sharing scheme to the point of terminating plaintiff Arturo P. Valenzuela, and to make
matters worse, defendants made it appear that plaintiff Arturo P. Valenzuela had substantial
accounts with defendant PHILAMGEN.

Not only that, defendants have also started (a) to treat separately the Delta Commission of
plaintiff Arturo P. Valenzuela, (b) to reverse the Delta commission due plaintiff Arturo P. Valenzuela
by not crediting or applying said commission earned to the account of plaintiff Arturo P.
Valenzuela, (c) placed plaintiff Arturo P. Valenzuela's agency transactions on a "cash and carry
basis", (d) sending threats to cancel existing policies issued by plaintiff Arturo P. Valenzuela's
agency, (e) to divert plaintiff Arturo P. Valenzuela's insurance business to other agencies, and (f)
to spread wild and malicious rumors that plaintiff Arturo P. Valenzuela has substantial account
with defendant PHILAMGEN to force plaintiff Arturo P. Valenzuela into agreeing with the sharing of
his Delta commission." (pp. 9-10, Decision, Annex 1, Petition).
xxx xxx xxx
These acts of harrassment done by defendants on plaintiff Arturo P. Valenzuela to force him to
agree to the sharing of his Delta commission, which culminated in the termination of plaintiff
Arturo P. Valenzuela as one of defendant PHILAMGEN's General Agent, do not justify said
termination of the General Agency Agreement entered into by defendant PHILAMGEN and plaintiff
Arturo P. Valenzuela.
That since defendants are not justified in the termination of plaintiff Arturo P. Valenzuela as one of
their General Agents, defendants shall be liable for the resulting damage and loss of business of
plaintiff Arturo P. Valenzuela. (Arts. 2199/2200, Civil Code of the Philippines). (Ibid, p. 11)
The court accordingly rendered judgment, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against defendants
ordering the latter to reinstate plaintiff Arturo P. Valenzuela as its General Agent, and to pay
plaintiffs, jointly and severally, the following:
1. The amount of five hundred twenty-one thousand nine hundred sixty four and 16/100 pesos
(P521,964.16) representing plaintiff Arturo P. Valenzuela's Delta Commission with interest at the
legal rate from the time of the filing of the complaint, which amount shall be adjusted in
accordance with Article 1250 of the Civil Code of the Philippines;
2. The amount of seventy-five thousand pesos (P75,000.00) per month as compensatory damages
from 1980 until such time that defendant Philamgen shall reinstate plaintiff Arturo P. Valenzuela
as one of its general agents;
3. The amount of three hundred fifty thousand pesos (P350,000.00) for each plaintiff as moral
damages;
4. The amount of seventy-five thousand pesos (P75,000.00) as and for attorney's fees;
5. Costs of the suit. (Ibid., P. 12)
From the aforesaid decision of the trial court, Bienvenido Aragon, Robert E. Parnell, Carlos K.
Catolico and PHILAMGEN respondents herein, and defendants-appellants below, interposed an
appeal on the following:
ASSIGNMENT OF ERRORS
I
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF ARTURO P. VALENZUELA HAD NO
OUTSTANDING ACCOUNT WITH DEFENDANT PHILAMGEN AT THE TIME OF THE TERMINATION OF
THE AGENCY.
II
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF ARTURO P. VALENZUELA IS ENTITLED TO
THE FULL COMMISSION OF 32.5% ON THE DELTA ACCOUNT.

III
THE LOWER COURT ERRED IN HOLDING THAT THE TERMINATION OF PLAINTIFF ARTURO P.
VALENZUELA WAS NOT JUSTIFIED AND THAT CONSEQUENTLY DEFENDANTS ARE LIABLE FOR
ACTUAL AND MORAL DAMAGES, ATTORNEYS FEES AND COSTS.
IV
ASSUMING ARGUENDO THAT THE AWARD OF DAMAGES AGAINST DEFENDANT PHILAMGEN WAS
PROPER, THE LOWER COURT ERRED IN AWARDING DAMAGES EVEN AGAINST THE INDIVIDUAL
DEFENDANTS WHO ARE MERE CORPORATE AGENTS ACTING WITHIN THE SCOPE OF THEIR
AUTHORITY.
V
ASSUMING ARGUENDO THAT THE AWARD OF DAMAGES IN FAVOR OF PLAINTIFF ARTURO P.
VALENZUELA WAS PROPER, THE LOWER COURT ERRED IN AWARDING DAMAGES IN FAVOR OF
HOSPITALITA VALENZUELA, WHO, NOT BEING THE REAL PARTY IN INTEREST IS NOT TO OBTAIN
RELIEF.
On January 29, 1988, respondent Court of Appeals promulgated its decision in the appealed case. The dispositive
portion of the decision reads:
WHEREFORE, the decision appealed from is hereby modified accordingly and judgment is hereby
rendered ordering:
1. Plaintiff-appellee Valenzuela to pay defendant-appellant Philamgen the sum of one million nine
hundred thirty two thousand five hundred thirty-two pesos and seventeen centavos
(P1,902,532.17), with legal interest thereon from the date of finality of this judgment until fully
paid.
2. Both plaintiff-appellees to pay jointly and severally defendants-appellants the sum of fifty
thousand pesos (P50,000.00) as and by way of attorney's fees.
No pronouncement is made as to costs. (p. 44, Rollo)
There is in this instance irreconcilable divergence in the findings and conclusions of the Court of Appeals, vis-avisthose of the trial court particularly on the pivotal issue whether or not Philamgen and/or its officers can be held
liable for damages due to the termination of the General Agency Agreement it entered into with the petitioners. In
its questioned decision the Court of Appeals observed that:
In any event the principal's power to revoke an agency at will is so pervasive, that the Supreme
Court has consistently held that termination may be effected even if the principal acts in bad
faith, subject only to the principal's liability for damages (Danon v. Antonio A. Brimo & Co., 42 Phil.
133; Reyes v. Mosqueda, 53 O.G. 2158 and Infante V. Cunanan, 93 Phil. 691, cited in Paras, Vol. V,
Civil Code of the Philippines Annotated [1986] 696).
The lower court, however, thought the termination of Valenzuela as General Agent improper
because the record will show the principal cause of the termination of the plaintiff as General
Agent of defendant Philamgen was his refusal to share his Delta commission. (Decision, p. 9; p.
13, Rollo, 41)
Because of the conflicting conclusions, this Court deemed it necessary in the interest of substantial justice to
scrutinize the evidence and records of the cases. While it is an established principle that the factual findings of the
Court of Appeals are final and may not be reviewed on appeal to this Court, there are however certain exceptions to
the rule which this Court has recognized and accepted, among which, are when the judgment is based on a
misapprehension of facts and when the findings of the appellate court, are contrary to those of the trial court
(Manlapaz v. Court of Appeals, 147 SCRA 236 [1987]); Guita v. Court of Appeals, 139 SCRA 576 [1986]). Where the
findings of the Court of Appeals and the trial court are contrary to each other, this Court may scrutinize the
evidence on record (Cruz v. Court of Appeals, 129 SCRA 222 [1984]; Mendoza v. Court of Appeals, 156 SCRA 597
[1987]; Maclan v. Santos, 156 SCRA 542 [1987]). When the conclusion of the Court of Appeals is grounded entirely
on speculation, surmises or conjectures, or when the inference made is manifestly mistaken, absurd or impossible,

or when there is grave abuse of discretion, or when the judgment is based on a misapprehension of facts, and when
the findings of facts are conflict the exception also applies (Malaysian Airline System Bernad v. Court of Appeals,
156 SCRA 321 [1987]).
After a painstaking review of the entire records of the case and the findings of facts of both the court a quo and
respondent appellate court, we are constrained to affirm the trial court's findings and rule for the petitioners.
We agree with the court a quo that the principal cause of the termination of Valenzuela as General Agent of
Philamgen arose from his refusal to share his Delta commission. The records sustain the conclusions of the trial
court on the apparent bad faith of the private respondents in terminating the General Agency Agreement of
petitioners. It is axiomatic that the findings of fact of a trial judge are entitled to great weight (People v. Atanacio,
128 SCRA 22 [1984]) and should not be disturbed on appeal unless for strong and cogent reasons, because the trial
court is in a better position to examine the evidence as well as to observe the demeanor of the witnesses while
testifying (Chase v. Buencamino, Sr., 136 SCRA 365 [1985]; People v. Pimentel, 147 SCRA 25 [1987]; and Baliwag
Trans., Inc. v. Court of Appeals, 147 SCRA 82 [1987]). In the case at bar, the records show that the findings and
conclusions of the trial court are supported by substantial evidence and there appears to be no cogent reason to
disturb them (Mendoza v. Court of Appeals. 156 SCRA 597 [1987]).
As early as September 30,1977, Philamgen told the petitioners of its desire to share the Delta Commission with
them. It stated that should Delta back out from the agreement, the petitioners would be charged interests through
a reduced commission after full payment by Delta.
On January 23, 1978 Philamgen proposed reducing the petitioners' commissions by 50% thus giving them an
agent's commission of 16.25%. On February 8, 1978, Philamgen insisted on the reduction scheme followed on June
1, 1978 by still another insistence on reducing commissions and proposing two alternative schemes for reduction.
There were other pressures. Demands to settle accounts, to confer and thresh out differences regarding the
petitioners' income and the threat to terminate the agency followed. The petitioners were told that the Delta
commissions would not be credited to their account (Exhibit "J"). They were informed that the Valenzuela agency
would be placed on a cash and carry basis thus removing the 60-day credit for premiums due. (TSN., March 26,
1979, pp. 54-57). Existing policies were threatened to be cancelled (Exhibits "H" and "14"; TSN., March 26, 1979,
pp. 29-30). The Valenzuela business was threatened with diversion to other agencies. (Exhibit "NNN"). Rumors were
also spread about alleged accounts of the Valenzuela agency (TSN., January 25, 1980, p. 41). The petitioners
consistently opposed the pressures to hand over the agency or half of their commissions and for a treatment of the
Delta account distinct from other accounts. The pressures and demands, however, continued until the agency
agreement itself was finally terminated.
It is also evident from the records that the agency involving petitioner and private respondent is one "coupled with
an interest," and, therefore, should not be freely revocable at the unilateral will of the latter.
In the insurance business in the Philippines, the most difficult and frustrating period is the solicitation and
persuasion of the prospective clients to buy insurance policies. Normally, agents would encounter much
embarrassment, difficulties, and oftentimes frustrations in the solicitation and procurement of the insurance
policies. To sell policies, an agent exerts great effort, patience, perseverance, ingenuity, tact, imagination, time and
money. In the case of Valenzuela, he was able to build up an Agency from scratch in 1965 to a highly productive
enterprise with gross billings of about Two Million Five Hundred Thousand Pesos (P2,500,000.00) premiums per
annum. The records sustain the finding that the private respondent started to covet a share of the insurance
business that Valenzuela had built up, developed and nurtured to profitability through over thirteen (13) years of
patient work and perseverance. When Valenzuela refused to share his commission in the Delta account, the boom
suddenly fell on him.
The private respondents by the simple expedient of terminating the General Agency Agreement appropriated the
entire insurance business of Valenzuela. With the termination of the General Agency Agreement, Valenzuela would
no longer be entitled to commission on the renewal of insurance policies of clients sourced from his agency. Worse,
despite the termination of the agency, Philamgen continued to hold Valenzuela jointly and severally liable with the
insured for unpaid premiums. Under these circumstances, it is clear that Valenzuela had an interest in the
continuation of the agency when it was unceremoniously terminated not only because of the commissions he
should continue to receive from the insurance business he has solicited and procured but also for the fact that by
the very acts of the respondents, he was made liable to Philamgen in the event the insured fail to pay the premiums
due. They are estopped by their own positive averments and claims for damages. Therefore, the respondents
cannot state that the agency relationship between Valenzuela and Philamgen is not coupled with interest. "There
may be cases in which an agent has been induced to assume a responsibility or incur a liability, in reliance upon the
continuance of the authority under such circumstances that, if the authority be withdrawn, the agent will be
exposed to personal loss or liability" (See MEC 569 p. 406).

Furthermore, there is an exception to the principle that an agency is revocable at will and that is when the agency
has been given not only for the interest of the principal but for the interest of third persons or for the mutual
interest of the principal and the agent. In these cases, it is evident that the agency ceases to be freely revocable by
the sole will of the principal (See Padilla, Civil Code Annotated, 56 ed., Vol. IV p. 350). The following citations are
apropos:
The principal may not defeat the agent's right to indemnification by a termination of the contract
of agency (Erskine v. Chevrolet Motors Co. 185 NC 479, 117 SE 706, 32 ALR 196).
Where the principal terminates or repudiates the agent's employment in violation of the contract
of employment and without cause ... the agent is entitled to receive either the amount of net
losses caused and gains prevented by the breach, or the reasonable value of the services
rendered. Thus, the agent is entitled to prospective profits which he would have made except for
such wrongful termination provided that such profits are not conjectural, or speculative but are
capable of determination upon some fairly reliable basis. And a principal's revocation of the
agency agreement made to avoid payment of compensation for a result which he has actually
accomplished (Hildendorf v. Hague, 293 NW 2d 272; Newhall v. Journal Printing Co., 105 Minn
44,117 NW 228; Gaylen Machinery Corp. v. Pitman-Moore Co. [C.A. 2 NY] 273 F 2d 340)
If a principal violates a contractual or quasi-contractual duty which he owes his agent, the agent
may as a rule bring an appropriate action for the breach of that duty. The agent may in a proper
case maintain an action at law for compensation or damages ... A wrongfully discharged agent
has a right of action for damages and in such action the measure and element of damages are
controlled generally by the rules governing any other action for the employer's breach of an
employment contract. (Riggs v. Lindsay, 11 US 500, 3L Ed 419; Tiffin Glass Co. v. Stoehr, 54 Ohio
157, 43 NE 2798)
At any rate, the question of whether or not the agency agreement is coupled with interest is helpful to the
petitioners' cause but is not the primary and compelling reason. For the pivotal factor rendering Philamgen and the
other private respondents liable in damages is that the termination by them of the General Agency Agreement was
tainted with bad faith. Hence, if a principal acts in bad faith and with abuse of right in terminating the agency, then
he is liable in damages. This is in accordance with the precepts in Human Relations enshrined in our Civil Code that
"every person must in the exercise of his rights and in the performance of his duties act with justice, give every one
his due, and observe honesty and good faith: (Art. 19, Civil Code), and every person who, contrary to law, wilfully or
negligently causes damages to another, shall indemnify the latter for the same (Art. 20, id). "Any person who
wilfully causes loss or injury to another in a manner contrary to morals, good customs and public policy shall
compensate the latter for the damages" (Art. 21, id.).
As to the issue of whether or not the petitioners are liable to Philamgen for the unpaid and uncollected premiums
which the respondent court ordered Valenzuela to pay Philamgen the amount of One Million Nine Hundred ThirtyTwo Thousand Five Hundred Thirty-Two and 17/100 Pesos (P1,932,532,17) with legal interest thereon until fully paid
(Decision-January 20, 1988, p. 16; Petition, Annex "A"), we rule that the respondent court erred in holding
Valenzuela liable. We find no factual and legal basis for the award. Under Section 77 of the Insurance Code, the
remedy for the non-payment of premiums is to put an end to and render the insurance policy not binding
Sec. 77 ... [N]otwithstanding any agreement to the contrary, no policy or contract of insurance is
valid and binding unless and until the premiums thereof have been paid except in the case of a
life or industrial life policy whenever the grace period provision applies (P.D. 612, as amended
otherwise known as the Insurance Code of 1974)
In Philippine Phoenix Surety and Insurance, Inc. v. Woodworks, Inc. (92 SCRA 419 [1979]) we held that the nonpayment of premium does not merely suspend but puts an end to an insurance contract since the time of the
payment is peculiarly of the essence of the contract. And in Arce v. The Capital Insurance and Surety Co. Inc.(117
SCRA 63, [1982]), we reiterated the rule that unless premium is paid, an insurance contract does not take effect.
Thus:
It is to be noted that Delgado (Capital Insurance & Surety Co., Inc. v. Delgado, 9 SCRA 177 [1963]
was decided in the light of the Insurance Act before Sec. 72 was amended by the underscored
portion. Supra. Prior to the Amendment, an insurance contract was effective even if the premium
had not been paid so that an insurer was obligated to pay indemnity in case of loss and
correlatively he had also the right to sue for payment of the premium. But the amendment to Sec.
72 has radically changed the legal regime in that unless the premium is paid there is no
insurance. " (Arce v. Capitol Insurance and Surety Co., Inc., 117 SCRA 66; Emphasis supplied)

In Philippine Phoenix Surety case, we held:

Moreover, an insurer cannot treat a contract as valid for the purpose of collecting premiums and
invalid for the purpose of indemnity. (Citing Insurance Law and Practice by John Alan Appleman,
Vol. 15, p. 331; Emphasis supplied)
The foregoing findings are buttressed by Section 776 of the insurance Code (Presidential Decree
No. 612, promulgated on December 18, 1974), which now provides that no contract of Insurance
by an insurance company is valid and binding unless and until the premium thereof has been
paid, notwithstanding any agreement to the contrary (Ibid., 92 SCRA 425)
Perforce, since admittedly the premiums have not been paid, the policies issued have lapsed. The insurance
coverage did not go into effect or did not continue and the obligation of Philamgen as insurer ceased. Hence, for
Philamgen which had no more liability under the lapsed and inexistent policies to demand, much less sue
Valenzuela for the unpaid premiums would be the height of injustice and unfair dealing. In this instance, with the
lapsing of the policies through the nonpayment of premiums by the insured there were no more insurance contracts
to speak of. As this Court held in the Philippine Phoenix Surety case, supra "the non-payment of premiums does not
merely suspend but puts an end to an insurance contract since the time of the payment is peculiarly of the essence
of the contract."
The respondent appellate court also seriously erred in according undue reliance to the report of Banaria and
Banaria and Company, auditors, that as of December 31, 1978, Valenzuela owed Philamgen P1,528,698.40. This
audit report of Banaria was commissioned by Philamgen after Valenzuela was almost through with the presentation
of his evidence. In essence, the Banaria report started with an unconfirmed and unaudited beginning balance of
account of P1,758,185.43 as of August 20, 1976. But even with that unaudited and unconfirmed beginning balance
of P1,758,185.43, Banaria still came up with the amount of P3,865.49 as Valenzuela's balance as of December 1978
with Philamgen (Exh. "38-A-3"). In fact, as of December 31, 1976, and December 31, 1977, Valenzuela had no
unpaid account with Philamgen (Ref: Annexes "D", "D-1", "E", Petitioner's Memorandum). But even disregarding
these annexes which are records of Philamgen and addressed to Valenzuela in due course of business, the facts
show that as of July 1977, the beginning balance of Valenzuela's account with Philamgen amounted to P744,159.80.
This was confirmed by Philamgen itself not only once but four (4) times on different occasions, as shown by the
records.
On April 3,1978, Philamgen sent Valenzuela a statement of account with a beginning balance of P744,159-80 as of
July 1977.
On May 23, 1978, another statement of account with exactly the same beginning balance was sent to Valenzuela.
On November 17, 1978, Philamgen sent still another statement of account with P744,159.80 as the beginning
balance.
And on December 20, 1978, a statement of account with exactly the same figure was sent to Valenzuela.
It was only after the filing of the complaint that a radically different statement of accounts surfaced in court.
Certainly, Philamgen's own statements made by its own accountants over a long period of time and covering
examinations made on four different occasions must prevail over unconfirmed and unaudited statements made to
support a position made in the course of defending against a lawsuit.
It is not correct to say that Valenzuela should have presented its own records to refute the unconfirmed and
unaudited finding of the Banaria auditor. The records of Philamgen itself are the best refutation against figures
made as an afterthought in the course of litigation. Moreover, Valenzuela asked for a meeting where the figures
would be reconciled. Philamgen refused to meet with him and, instead, terminated the agency agreement.
After off-setting the amount of P744,159.80, beginning balance as of July 1977, by way of credits representing the
commission due from Delta and other accounts, Valenzuela had overpaid Philamgen the amount of P530,040.37 as
of November 30, 1978. Philamgen cannot later be heard to complain that it committed a mistake in its computation.
The alleged error may be given credence if committed only once. But as earlier stated, the reconciliation of
accounts was arrived at four (4) times on different occasions where Philamgen was duly represented by its account
executives. On the basis of these admissions and representations, Philamgen cannot later on assume a different
posture and claim that it was mistaken in its representation with respect to the correct beginning balance as of July
1977 amounting to P744,159.80. The Banaria audit report commissioned by Philamgen is unreliable since its results
are admittedly based on an unconfirmed and unaudited beginning balance of P1,758,185.43 as of August 20,1976.

As so aptly stated by the trial court in its decision:

Defendants also conducted an audit of accounts of plaintiff Arturo P. Valenzuela after the
controversy has started. In fact, after hearing plaintiffs have already rested their case.
The results of said audit were presented in Court to show plaintiff Arturo P. Valenzuela's
accountability to defendant PHILAMGEN. However, the auditor, when presented as witness in this
case testified that the beginning balance of their audit report was based on an unaudited amount
of P1,758,185.43 (Exhibit 46-A) as of August 20, 1976, which was unverified and merely supplied
by the officers of defendant PHILAMGEN.
Even defendants very own Exhibit 38- A-3, showed that plaintiff Arturo P. Valenzuela's balance as
of 1978 amounted to only P3,865.59, not P826,128.46 as stated in defendant Bienvenido M.
Aragon's letter dated December 20,1978 (Exhibit 14) or P1,528,698.40 as reflected in defendant's
Exhibit 46 (Audit Report of Banaria dated December 24, 1980).
These glaring discrepancy (sic) in the accountability of plaintiff Arturo P. Valenzuela to defendant
PHILAMGEN only lends credence to the claim of plaintiff Arturo P. Valenzuela that he has no
outstanding account with defendant PHILAMGEN when the latter, thru defendant Bienvenido M.
Aragon, terminated the General Agency Agreement entered into by plaintiff (Exhibit A) effective
January 31, 1979 (see Exhibits "2" and "2-A"). Plaintiff Arturo P. Valenzuela has shown that as of
October 31, 1978, he has overpaid defendant PHILAMGEN in the amount of P53,040.37 (Exhibit
"EEE", which computation was based on defendant PHILAMGEN's balance of P744,159.80
furnished on several occasions to plaintiff Arturo P. Valenzuela by defendant PHILAMGEN (Exhibits
H-1, VV, VV-1, WW, WW-1 , YY , YY-2 , ZZ and , ZZ-2).
Prescinding from the foregoing, and considering that the private respondents terminated Valenzuela with
evidentmala fide it necessarily follows that the former are liable in damages. Respondent Philamgen has been
appropriating for itself all these years the gross billings and income that it unceremoniously took away from the
petitioners. The preponderance of the authorities sustain the preposition that a principal can be held liable for
damages in cases of unjust termination of agency. In Danon v. Brimo, 42 Phil. 133 [1921]), this Court ruled that
where no time for the continuance of the contract is fixed by its terms, either party is at liberty to terminate it at
will, subject only to the ordinary requirements of good faith. The right of the principal to terminate his authority is
absolute and unrestricted, except only that he may not do so in bad faith.
The trial court in its decision awarded to Valenzuela the amount of Seventy Five Thousand Pesos (P75,000,00) per
month as compensatory damages from June 1980 until its decision becomes final and executory. This award is
justified in the light of the evidence extant on record (Exhibits "N", "N-10", "0", "0-1", "P" and "P-1") showing that
the average gross premium collection monthly of Valenzuela over a period of four (4) months from December 1978
to February 1979, amounted to over P300,000.00 from which he is entitled to a commission of P100,000.00 more or
less per month. Moreover, his annual sales production amounted to P2,500,000.00 from where he was given 32.5%
commissions. Under Article 2200 of the new Civil Code, "indemnification for damages shall comprehend not only
the value of the loss suffered, but also that of the profits which the obligee failed to obtain."
The circumstances of the case, however, require that the contractual relationship between the parties shall be
terminated upon the satisfaction of the judgment. No more claims arising from or as a result of the agency shall be
entertained by the courts after that date.
ACCORDINGLY, the petition is GRANTED. The impugned decision of January 29, 1988 and resolution of April 27, 1988
of respondent court are hereby SET ASIDE. The decision of the trial court dated January 23, 1986 in Civil Case No.
121126 is REINSTATED with the MODIFICATIONS that the amount of FIVE HUNDRED TWENTY ONE THOUSAND NINE
HUNDRED SIXTY-FOUR AND 16/100 PESOS (P521,964.16) representing the petitioners Delta commission shall earn
only legal interests without any adjustments under Article 1250 of the Civil Code and that the contractual
relationship between Arturo P. Valenzuela and Philippine American General Insurance Company shall be deemed
terminated upon the satisfaction of the judgment as modified.
SO ORDERED.

G.R. No. 102300. March 17, 1993.

CITIBANK, N.A., petitioner, vs. HON. SEGUNDINO G. CHUA, SANTIAGO M. KAPUNAN and LUIS L. VICTOR, ASSOCIATE
JUSTICES OF THE HON. COURT OF APPEALS, THIRD DIVISION, MANILA, HON. LEONARDO B. CANARES, Judge of
Regional, Trial Court of Cebu, Branch 10, and SPOUSES CRESENCIO AND ZENAIDA VELEZ, respondents.
SYLLABUS
1. COMMERCIAL LAW; PRIVATE CORPORATIONS; LEVELS OF CONTROL IN CORPORATE HIERARCHY; BOARD OF
DIRECTORS MAY VALIDLY DELEGATE SOME FUNCTIONS TO INDIVIDUAL OFFICERS OR AGENTS. In the corporate
hierarchy, there are three levels of control: (1) the board of directors, which is responsible for corporate policies and
the general management of the business affairs of the corporation; (2) the officers, who in theory execute the
policies laid down by the board, but in practice often have wide latitude in determining the course of business
operations; and (3) the stockholders who have the residual power over fundamental corporate changes, like
amendments of the articles of incorporation. However, just as a natural person may authorize another to do certain
acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual
officers or agents appointed by it.
2. ID.; ID.; HOW CORPORATE POWERS CONFERRED UPON CORPORATE OFFICERS OR AGENTS; EXERCISE OF POWERS
INCIDENTAL TO EXPRESS POWERS CONFERRED. Corporate powers may be directly conferred upon corporate
officers or agents by statute, the articles of incorporation, the by-laws or by resolution or other act of the board of
directors. In addition, an officer who is not a director may also appoint other agents when so authorized by the bylaws or by the board of directors. Such are referred to as express powers. There are also powers incidental to
express powers conferred. It is a fundamental principle in the law of agency that every delegation of authority,
whether general or special, carries with it, unless the contrary be expressed, implied authority to do all of those
acts, naturally and ordinarily done in such cases, which are reasonably necessary and proper to be done in order to
carry into effect the main authority conferred. Since the by-laws are a source of authority for corporate officers and
agents of the corporation, a resolution of the Board of Directors of Citibank appointing an attorney in fact to
represent and bind it during the pre-trial conference of the case at bar is not necessary because its by-laws allow its
officers, the Executing Officer and the Secretary Pro-Tem, to execute a power of attorney to a designated bank
officer, William W. Ferguson in this case, clothing him with authority to direct and manage corporate affairs.
3. ID.; ID.; ADOPTION OF BY-LAWS; PROVISION OF SECTION 46 OF CORPORATION CODE REFERRING TO EFFECTIVITY
OF CORPORATE BY-LAWS APPLICABLE ONLY TO DOMESTIC CORPORATIONS. A corporation can submit its by-laws,
prior to incorporation, or within one month after receipt of official notice of the issuance of its certificate of
incorporation by the SEC. When the third paragraph of the above provision mentions "in all cases", it can only refer
to these two options; i.e., whether adopted prior to incorporation or within one month after incorporation, the bylaws shall be effective only upon the approval of the SEC. But even more important, said provision starts with the
phrase "Every corporation formed under this Code", which can only refer to corporations incorporated in the
Philippines. Hence, Section 46, in so far as it refers to the effectivity of corporate by-laws, applies only to domestic
corporations and not to foreign corporations.
4. ID.; FOREIGN CORPORATIONS; ISSUANCE OF LICENSE TO TRANSACT BUSINESS IN THE PHILIPPINES; REQUISITES;
GRANT OF LICENSE IN EFFECT APPROVAL BY SEC OF FOREIGN CORPORATION'S BY-LAWS. Section 125 of the same
Code requires that a foreign corporation applying for a license to transact business in the Philippines must submit,
among other documents, to the SEC, a copy of its articles of incorporation and by-laws, certified in accordance with
law. Unless these documents are submitted, the application cannot be acted upon by the SEC. In the following
section, the Code specifies when the SEC can grant the license applied for. Section 126 provides in part: "SEC. 126.
Issuance of a license. If the Securities and Exchange Commission is satisfied that the applicant has complied with
all the requirements of this Code and other special laws, rules and regulations, the Commission shall issue a license
to the applicant to transact business in the Philippines for the purpose or purposes specified in such license . . ."
Since the SEC will grant a license only when the foreign corporation has complied with all the requirements of law, it
follows that when it decides to issue such license, it is satisfied that the applicant's by-laws, among the other
documents, meet the legal requirements. This, in effect, is an approval of the foreign corporations by-laws. It may
not have been made in express terms, still it is clearly an approval. Therefore, petitioner bank's by-laws, though
originating from a foreign jurisdiction, are valid and effective in the Philippines.
5. CIVIL LAW; AGENCY; SPECIAL POWER OF ATTORNEY; WHEN POWER OF ATTORNEY COMPREHENSIVE ENOUGH TO
INCLUDE AUTHORITY TO APPEAR AT PRE-TRIAL CONFERENCE. It is also error on the part of the Court of Appeals to
state that the power of attorney given to the four (4) Citibank employees is not a special power of attorney as
required in paragraph 3, Article 1878 of the Civil Code and Section 1 (a), Rule 20 of the Rules of Court. In the case of
Tropical Homes, Inc. vs. Villaluz, the special power of attorney executed by petitioner bank therein contained the
following pertinent terms "to appear for and in its behalf in the above-entitled case in all circumstances where its
appearance is required and to bind it in all said instances". The court ruled that: "Although the power of attorney in
question does not specifically mention the authority of petitioner's counsel to appear and bind the petitioner at the
pre-trial conference, the terms of said power of attorney are comprehensive enough as to include the authority to
appear for the petitioner at the pre-trial conference."

6. ID.; ID.; ID.; LEGAL COUNSEL APPOINTED TO REPRESENT BANK IN COURT PURSUANT TO BY-LAW PROVISION
CONSIDERED AN EMPLOYEE FOR A SPECIAL PURPOSE. Attorney was sufficient under the by-law provision
authorizing Ferguson to delegate any of his functions to any one or more employees of the petitioner bank. A
reasonable interpretation of this provision would include an appointment of a legal counsel to represent the bank in
court, for, under the circumstances, such legal counsel can be considered, and in fact was considered by the
petitioner bank, an employee for a special purpose. Furthermore, Ferguson, who heads the Philippine office
thousands of miles away from its main office in the United States, must be understood to have sufficient powers to
act promptly in order to protect the interests of his principal.
7. REMEDIAL LAW; CIVIL PROCEDURE; PRECIPITATE ORDERS OF DEFAULT FROWNED UPON BY SUPREME COURT;
REASON THEREFOR; WHEN PARTY MAY BE PROPERLY DEFAULTED. We reiterate the previous admonitions of this
Court against "precipitate orders of default as these have the effect of denying the litigant the chance to be heard.
While there are instances, to be sure, when a party may be properly defaulted, these should be the exceptions
rather than the rule and should be allowed only in clear cases of an obstinate refusal or inordinate neglect to
comply with the orders of the court. Absent such a showing, the party must be given every reasonable opportunity
to present his side and to refute the evidence of the adverse party in deference to due process of law".
8. LEGAL ETHICS; AUTHORITY OF ATTORNEYS TO BIND CLIENTS. Under Rule 138, Section 23 of the Rules of Court,
an attorney has authority to bind his client in any case by an agreement in relation thereto made in writing, and this
authority would include taking appeals and all matters of ordinary judicial procedure. But he cannot, without special
authority, compromise his client's litigation or receive anything in discharge of a client's claim but the full amount in
cash. The special powers of attorney separately executed by Florencia Tarriela and William W. Ferguson granted to
J.P. Garcia & Associates are very explicit in their terms as to the counsel's authority in the case at bar.
DECISION
CAMPOS, JR., J p:
Petitioner is a foreign commercial banking corporation duly licensed to do business in the Philippines. Private
respondents, spouses Cresencio and Zenaida Velez, were good clients of petitioner bank's branch in Cebu until
March 14, 1986 when they filed a complaint for specific performance and damages against it in Civil Case No. CEB4751 before the Regional Trial Court of Cebu, Branch 10.
Private respondents alleged in their complaint that the petitioner bank extended to them credit lines sufficiently
secured with real estate and chattel mortgages on equipment. They claim that petitioner offered them special
additional accommodation of Five Million Pesos (P5,000,000.00) to be availed of in the following manner:
"a. Defendant would and did purchase check or checks from the plaintiffs by exchanging it with defendant's
manager's check on a regular daily basis as reflected in the defendant's own ledger furnished to plaintiffs;
b. It was further agreed that on the following day, defendant CITIBANK would again purchase from the plaintiffs,
check or checks, by exchanging the same with defendant's manager's check, which check, however, will be
deposited by the plaintiffs with their other banks to cover the check or checks previously issued by the plaintiffs
mentioned above;
c. The same regular and agreed activity would be undertaken by the plaintiffs and defendant CITIBANK herein every
banking day thereafter;" 1
This arrangement started on September 4, 1985 until March 11, 1986, when private respondents tried to exchange
with petitioner bank six checks amounting to P3,095,000.00 but petitioner bank allegedly refused to continue with
the arrangement even after repeated demands. Instead, petitioner bank suggested to private respondents that the
total amount covered by the "arrangement be restructured to thirty (30) months with prevailing interest rate on the
diminishing balance". 2 Private respondents agreed to such a proposal. Then as a sign of good faith, they issued
and delivered a check for P75,000.00 in favor of petitioner bank which was refused by the latter demanding instead
full payment of the entire amount.
For the failure of petitioner bank to comply with this restructuring agreement private respondents sued for specific
performance and damages.
Petitioner bank has a different version of the business relationship that existed between it and private respondents.
Thus:

". . . starting sometime on September 4 of 1985, he (private respondent Crescencio Velez) deposited his unfunded
personal checks with his current account with the petitioner. But prior to depositing said checks, he would present
his personal checks to a bank officer asking the latter to have his personal checks immediately credited as if it were
a cash deposit and at the same time assuring the bank officer that his personal checks were fully funded. Having
already gained the trust and confidence of the officers of the bank because of his past transactions, the bank's
officer would always accommodate his request. After his requests are granted which is done by way of the bank
officer affixing his signature on the personal checks, private respondent Cresencio Velez would then deposit his
priorly approved personal checks to his current account and at the same time withdraw sums of money from said
current account by way of petitioner bank's manager's check. Private respondent would then deposit petitioner
bank's manager's check to his various current accounts in other commercial banks to cover his previously deposited
unfunded personal checks with petitioner bank. Naturally, petitioner bank and its officers never discovered that his
personal check deposits were unfunded. On the contrary, it gave the petitioner bank the false impression that
private respondent's construction business was doing very well and that he was one big client who could be trusted.
This deceptive and criminal scheme he did every banking day without fail from September 4, 1985 up to March 11,
1986. The amounts that he was depositing and withdrawing during this period (September 4, 1985 to March 11,
1986) progressively became bigger. It started at P46,000.00 on September 4, 1985 and on March 11, 1986 the
amount of deposit and withdrawal already reached over P3,000,000.00. At this point in time (March 11, 1986), the
private respondent Cresencio Velez presumably already feeling that sooner or later he would be caught and that he
already wanted to cash in on his evil scheme, decided to run away with petitioner's money. On March 11, 1986, he
deposited various unfunded personal checks totalling P3,095,000.00 and requested a bank officer that the same be
credited as cash and after securing the approval of said bank officer, deposited his various personal checks in the
amount of P3,095,000.00 with his current account and at the same time withdrew the sum of P3,244,000.00 in the
form of petitioner's manager's check. Instead of using the proceeds of his withdrawals to cover his unfunded
personal checks, he ran away with petitioner bank's money. Thus, private respondent Cresencio Velez's personal
checks deposited with petitioner bank on March 11, 1986 in the total aggregate amount of P3,095,000.00 bounced.
The checks bounced after said personal checks were made the substantial basis of his withdrawing the sum of
P3,244,000.00 from his current account with petitioner bank." 3
Subsequently, on August 19, 1986, petitioner bank filed a criminal complaint against private respondents for
violation of Batas Pambansa Blg. 22 (Bouncing Checks Law) and estafa (six counts) under Article 315 par. 2(d) of
the Revised Penal Code. On April 28, 1988, the investigating fiscal recommended the filing of an information against
private respondents for violations of the mentioned laws.
On June 13, 1989, petitioner bank submitted its answer to the complaint filed by private respondents. In the Order
dated February 20, 1990, the case was set for pre-trial on March 30, 1990 and petitioner bank was directed to
submit its pre-trial brief at least 3 days before the pre-trial conference. Petitioner bank only filed its pre-trial brief on
March 30, 1990.
On March 30, 1990, the date of the pre-trial conference, counsel for petitioner bank appeared, presenting a special
power of attorney executed by Citibank officer Florencia Tarriela in favor of petitioner bank's counsel, the J.P. Garcia
& Associates, to represent and bind petitioner bank at the pre-trial conference of the case at bar.
Inspite of this special power of attorney, counsel for private respondents orally moved to declare petitioner bank as
in default on the ground that the special power of attorney was not executed by the Board of Directors of Citibank.
Petitioner bank was then required to file a written opposition to this oral motion to declare it as in default. In said
opposition petitioner bank attached another special power of attorney made by William W. Ferguson, Vice President
and highest ranking officer of Citibank, Philippines, constituting and appointing the J.P. Garcia & Associates to
represent and bind the BANK at the pre-trial conference and/or trial of the case of "Cresencio Velez, et al. vs.
Citibank, N.A.". 4 In an Order dated April 23, 1990, respondent judge denied private respondents' oral motion to
declare petitioner bank as in default and set the continuation of the pre-trial conference for May 2, 1990.
On the scheduled pre-trial conference, private respondents reiterated, by way of asking for reconsideration, their
oral motion to declare petitioner bank as in default for its failure to appear through an authorized agent and that
the documents presented are not in accordance with the requirements of the law. Petitioner bank again filed on May
14, 1990 its opposition thereto, stating as follows:
". . . While it has been the practice of Citibank to appoint its counsels as its attorney-in-fact in civil cases because it
considers said counsels equivalent to a Citibank employee, yet, in order to avoid further arguments on the matter,
the defendant Citibank will secure another power of attorney from Mr. William W. Ferguson in favor of its employee/s
who will represent the defendant Citibank in the pre-trial conferences of this case. As soon as the said special power
of attorney is secured, the defendant will present it before this Honorable Court and in pursuance therewith, the
defendant hereby makes a reservation to present such document as soon as available." 5

In compliance with the above promise, petitioner bank filed a manifestation, dated May 23, 1990, attaching
therewith a special power of attorney executed by William W. Ferguson in favor of Citibank employees to represent
and bind Citibank on the pre-trial conference of the case at bar. 6
On August 15, 1990, respondent judge issued an order declaring petitioner bank as in default. This order, received
by petitioner bank on September 27, 1990, cited the following as reason for the declaration of default:
"Defendant-bank, although a foreign corporation, is bound by Philippine laws when doing and conducting business
in the Philippines (Sec. 129, B.P. Blg. 68), and its corporate powers could only be exercised by its Board of Directors
(Sec. 23, B.P. Blg. 68). The exercise by the Board of Directors of such power could only be valid if it bears the
approval of the majority of the Board (Sec. 25, par. 2, Corporation Code). The records does not show the requisite
document. The alleged authority (Special Power of Attorney, Annex "A") executed by Mr. William W. Ferguson in
favor of the alleged Citibank employees, assuming the same to be a delegable authority, to represent the
defendant in the pre-trial conference, made no mention of J.P. Garcia & Associates as one of the employees of the
defendant.
It stands to reason therefore, that the defendant-bank has no proper representation during the pre-trial conference
on May 2, 1990 for purposes of Sec. 2, Rule 20 of the Rules of Court." 7
On October 1, 1990, petitioner bank filed a motion for reconsideration of the above order but it was denied on
December 10, 1990.
Petitioner bank then filed a petition for certiorari, prohibition and mandamus with preliminary injunction and/or
temporary restraining order with the Court of Appeals. On June 26, 1991, the Court of Appeals dismissed the
petition on the following grounds:
". . . In the first place, petitioner admitted that it did not and could not present a Board resolution from the bank's
Board of Directors appointing its counsel, Atty. Julius Z. Neri, as its attorney-in-fact to represent and bind it during
the pre-trial conference of this case. This admission is contained on pages 12 and 13 of the instant petition.
In the second place, the "By-Laws" of petitioner which on its face authorizes (sic) the appointment of an attorney-infact to represent it in any litigation, has not been approved by the Securities and Exchange Commission, as required
by Section 46 of the Corporation Code of the Philippines. Apparently, the "By-Laws" in question was (sic) approved
under the laws of the United States, but there is no showing that the same was given the required imprimatur by
the Securities and Exchange Commission. Since petitioner is a foreign corporation doing business in the Philippines,
it is bound by all laws, rules and regulations applicable to domestic corporations (Sec. 129, Corporation Code).
In the third place, no special power of attorney was presented authorizing petitioner's counsel of record, Atty. Julius
Neri and/or J.P. Garcia Associates, to appear for and in behalf of petitioner during the pre-trial.
What petitioner exhibited to the court a quo was a general power of attorney given to one William W. Ferguson who
in turn executed a power of attorney in favor of five (5) (sic) Citibank employees to act as attorney-in-fact in Civil
Case No. CEB-4751. Yet, during the pre-trial not one of said employees appeared, except counsel who is not even a
bank employee.
Furthermore, even assuming the validity of the power of attorney issued by petitioner in favor of Ferguson as well
as the power of attorney he issued to five (5) (sic) Citibank employees, said power of attorney has not been shown
to be a Special Power of Attorney precisely intended not only to represent the bank at the pre-trial of the case on a
certain date but also to enter into any compromise as required in paragraph 3, Article 1878 of the Civil Code and
Section 1 (a), Rule 20, Rules of Court." 8
Hence, this instant petition.
Petitioner bank contends that no board resolution was necessary for its legal counsel, Atty. Julius Z. Neri, or Citibank
employees to act as its attorney-in-fact in the case at bar because petitioner bank's by-laws grant to its Executing
Officer and Secretary Pro-Tem the power to delegate to a Citibank officer, in this case William W. Ferguson, the
authority to represent and defend the bank and its interests.
Furthermore, it contends that the Court of Appeals erred in holding that the by-laws of petitioner bank cannot be
given effect because it did not have the imprimatur of the Securities and Exchange Commission (SEC) as required
by Section 46 of the Corporation Code of the Philippines.

Private respondents refute both contentions. They assail the authority of petitioner bank's legal counsel to appear
at the pre-trial conference on two grounds, namely: first, that the authority did not come from the Board of Directors
which has the exclusive right to exercise corporate powers; and second, that the authority granted to the Executing
Officer in the by-laws was ineffective because the same were not submitted to, nor approved by, the SEC.
There are thus two issues in this case. First, whether a resolution of the board of directors of a corporation is always
necessary for granting authority to an agent to represent the corporation in court cases. And second, whether the
by-laws of the petitioner foreign corporation which has previously been granted a license to do business in the
Philippines, are effective in this jurisdiction. If the by-laws are valid and a board resolution is not necessary as
petitioner bank claims, then the declaration of default would have no basis.
In the corporate hierarchy, there are three levels of control: (1) the board of directors, which is responsible for
corporate policies and the general management of the business affairs of the corporation; (2) the officers, who in
theory execute the policies laid down by the board, but in practice often have wide latitude in determining the
course of business operations; and (3) the stockholders who have the residual power over fundamental corporate
changes, like amendments of the articles of incorporation. However, just as a natural person may authorize another
to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions
to individual officers or agents appointed by it.
Section 23 of the Corporation Code of the Philippines in part provides:
"SEC. 23. The board of directors or trustees. Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1)
year and until their successors are elected and qualified.
xxx xxx xxx" (Emphasis supplied).
Thus, although as a general rule, all corporate powers are to be exercised by the board of directors, exceptions are
made where the Code provides otherwise.
Section 25 of said Code provides that the directors of the corporation shall elect its corporate officers, and further
provides as follows:
"SEC. 25. Corporate officers; quorum. . . . The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and by the by-laws of the corporation . . ."
Furthermore, Section 47 of the same Code enumerates what may be contained in the by-laws, among which is a
provision for the "qualifications, duties and compensation of directors or trustees, officers and employees".
(Emphasis supplied.)
Taking all the above provisions of law together, it is clear that corporate powers may be directly conferred upon
corporate officers or agents by statute, the articles of incorporation, the by-laws or by resolution or other act of the
board of directors. In addition, an officer who is not a director may also appoint other agents when so authorized by
the by-laws or by the board of directors. Such are referred to as express powers. 9 There are also powers incidental
to express powers conferred. It is a fundamental principle in the law of agency that every delegation of authority,
whether general or special, carries with it, unless the contrary be expressed, implied authority to do all of those
acts, naturally and ordinarily done in such cases, which are reasonably necessary and proper to be done in order to
carry into effect the main authority conferred. 10
Since the by-laws are a source of authority for corporate officers and agents of the corporation, a resolution of the
Board of Directors of Citibank appointing an attorney in fact to represent and bind it during the pre-trial conference
of the case at bar is not necessary because its by-laws allow its officers, the Executing Officer and the Secretary ProTem, ** to execute a power of attorney to a designated bank officer, William W. Ferguson in this case, clothing him
with authority to direct and manage corporate affairs. The relevant provision in the general power of attorney
granted to him are as follows:
"A. That the Executing Officer and the Secretary Pro-Tem are of full age, competent to act in the premises, to me
personally known, and that they are authorized to execute this instrument by virtue of the powers granted to them
pursuant to the By-Laws of the Bank and the laws of the United States of America, and that the Executing Officer
said that he, on the one hand, hereby revokes and cancels any instrument of power of attorney previously executed
on behalf of the Bank for use in the PHILIPPINES, in favor of WILLIAM W. FERGUSON (hereinafter referred to as the

"Attorney-in-fact"), of legal age, a Banker, and now residing in the PHILIPPINES, and that he (the Executing Officer),
on the other hand, does hereby authorize and empower the Attorney-in-fact, acting in the name or on behalf of the
Bank, or any of its Branches, or any interest it or they may have or represent, said revocation and authorization to
be effective as of this date as follows:
xxx xxx xxx
XVII. To represent and defend the Bank and its interest before any and all judges and courts, of all classes and
jurisdictions, in any action, suit or proceeding in which the Bank may be a party or may be interested in
administrative, civil, criminal, contentious or contentious-administrative matters, and in all kinds of lawsuits,
recourses or proceedings of any kind or nature, with complete and absolute representation of the Bank, whether as
plaintiff or defendant, or as an interested party for any reason whatsoever . . .
xxx xxx xxx
XXI. To substitute or delegate this Power of Attorney in whole or in part in favor of such one or more employees of
the Bank, as he may deem advisable, but without divesting himself of any of the powers granted to him by this
Power of Attorney; and to grant and execute in favor of any one or more such employees, powers of attorney
containing all or such authorizations, as he may deem advisable. . . " 11
Since paragraph XXI above specifically allows Ferguson to delegate his powers in whole or in part, there can be no
doubt that the special power of attorney in favor, first, of J.P. Garcia & Associates and later, of the bank's
employees, constitutes a valid delegation of Ferguson's express power (under paragraph XVII above) to represent
petitioner bank in the pre-trial conference in the lower court.
This brings us to the second query: whether petitioner bank's by-laws, which constitute the basis for Ferguson's
special power of attorney in favor of petitioner bank's legal counsel are effective, considering that petitioner bank
has been previously granted a license to do business in the Philippines.
The Court of Appeals relied on Section 46 of the Corporation Code to support its conclusion that the by-laws in
question are without effect because they were not approved by the SEC. Said section reads as follows:
"SEC. 46. Adoption of by-laws. Every corporation formed under this Code must, within one (1) month after receipt
of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt
a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation,
the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at
least a majority of the members in the case of non-stock corporations, shall be necessary. The by-laws shall be
signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation,
subject to the inspection of the stockholders or members during office hours; and a copy thereof, duly certified to
by a majority of the directors or trustees and countersigned by the secretary of the corporation, shall be filed with
the Securities and Exchange Commission which shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to
incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to
the Securities and Exchange Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a
certification that the by-laws are not inconsistent with this Code."
A careful reading of the above provision would show that a corporation can submit its by-laws, prior to
incorporation, or within one month after receipt of official notice of the issuance of its certificate of incorporation by
the SEC. When the third paragraph of the above provision mentions "in all cases", it can only refer to these two
options; i.e., whether adopted prior to incorporation or within one month after incorporation, the by-laws shall be
effective only upon the approval of the SEC. But even more important, said provision starts with the phrase "Every
corporation formed under this Code", which can only refer to corporations incorporated in the Philippines. Hence,
Section 46, in so far as it refers to the effectivity of corporate by-laws, applies only to domestic corporations and not
to foreign corporations.
On the other hand, Section 125 of the same Code requires that a foreign corporation applying for a license to
transact business in the Philippines must submit, among other documents, to the SEC, a copy of its articles of
incorporation and by-laws, certified in accordance with law. Unless these documents are submitted, the application
cannot be acted upon by the SEC. In the following section, the Code specifies when the SEC can grant the license
applied for. Section 126 provides in part:

"SEC. 126. Issuance of a license. If the Securities and Exchange Commission is satisfied that the applicant has
complied with all the requirements of this Code and other special laws, rules and regulations, the Commission shall
issue a license to the applicant to transact business in the Philippines for the purpose or purposes specified in such
license . . ."
Since the SEC will grant a license only when the foreign corporation has complied with all the requirements of law, it
follows that when it decides to issue such license, it is satisfied that the applicant's by-laws, among the other
documents, meet the legal requirements. This, in effect, is an approval of the foreign corporations by-laws. It may
not have been made in express terms, still it is clearly an approval. Therefore, petitioner bank's by-laws, though
originating from a foreign jurisdiction, are valid and effective in the Philippines.
In pursuance of the authority granted to him by petitioner bank's by-laws, its Executing Officer appointed William W.
Ferguson, a resident of the Philippines, as its Attorney-in-Fact empowering the latter, among other things, to
represent petitioner bank in court cases. In turn, William W. Ferguson executed a power of attorney in favor of J.P.
Garcia & Associates (petitioner bank's counsel) to represent petitioner bank in the pre-trial conference before the
lower court. This act of delegation is explicity authorized by paragraph XXI of his own appointment, which we have
previously cited.
It is also error for the Court of Appeals to insist that the special power of attorney, presented by petitioner bank
authorizing its counsel, Atty. Julius Neri and/or J.P. Garcia & Associates, to appear for and in behalf of petitioner bank
during the pre-trial, is not valid. The records do not sustain this finding. We quote with approval the contention of
petitioner bank as it is borne by the records, to wit:
". . . The records of this case would show that at the start, the petitioner, thru counsel, presented a special power of
attorney executed by then Citibank Officer Florencio (sic) J. Tarriela which was marked as Exhibit "1" in the pre-trial
of this case . . . This is precisely the reason why the court denied, in an Order dated April 23, 1990 . . . the private
respondent's oral motion to declare the defendant in fault. The said special power of attorney executed by Florencio
(sic) J. Tarriela was granted by Mr. Rafael B. Buenaventura, who was then the Senior Vice-President of Citibank and
the highest ranking office of Citibank in the Philippines. Considering that at the time of the presentation of the said
special power of attorney Rafael B. Buenaventura was no longer connected with Citibank, the petitioner again
presented another special power of attorney executed by William W. Ferguson in favor of J.P. Garcia &
Associates, . . .
Finding that the authority of William W. Ferguson to delegate his authority to act for and in behalf of the bank in any
civil suit is limited to individuals who are employees of the bank the petitioner again on May 23, 1990 presented
another special power of attorney dated May 16, 1990 wherein William W. Ferguson appointed as attorney-in-fact
the following employees of petitioner, namely: Roberto Reyes, Nemesio Solomon, Aimee Yu and Tomas Yap. The said
special power of attorney was filed and presented by the petitioner through its Manifestation filed in the Trial Court
on May 23, 1990, . . ." 12
Under Rule 138, Section 23 of the Rules of Court, an attorney has authority to bind his client in any case by an
agreement in relation thereto made in writing, and this authority would include taking appeals and all matters of
ordinary judicial procedure. But he cannot, without special authority, compromise his client's litigation or receive
anything in discharge of a client's claim but the full amount in cash. The special powers of attorney separately
executed by Florencia Tarriela and William W. Ferguson granted to J.P. Garcia & Associates are very explicit in their
terms as to the counsel's authority in the case at bar. We quote the relevant provisions of the special powers of
attorney showing sufficient compliance with the requirements of Section 23, Rule 138, to wit:
"That the BANK further authorized the said J.P. GARCIA & ASSOCIATES to enter into an amicable settlement,
stipulation of facts and/or compromise agreement with the party or parties involved under such terms and
conditions which the said J.P. GARCIA & ASSOCIATES may deem reasonable (under parameters previously defined by
the principal) and execute and sign said documents as may be appropriate.
HEREBY GIVING AND GRANTING unto J.P. GARCIA & ASSOCIATES full power and authority whatsoever requisite
necessary or proper to be done in or about the premises, as fully to all intents and purposes as the BANK might or
could lawfully do or cause to be done under and by virtue of these presents." 13
It is also error on the part of the Court of Appeals to state that the power of attorney given to the four (4) Citibank
employees is not a special power of attorney as required in paragraph 3, Article 1878 of the Civil Code and Section
1 (a), Rule 20 of the Rules of Court. In the case of Tropical Homes, Inc. vs. Villaluz, 14 the special power of attorney
executed by petitioner bank therein contained the following pertinent terms "to appear for and in its behalf in the
above-entitled case in all circumstances where its appearance is required and to bind it in all said instances". The
court ruled that:

"Although the power of attorney in question does not specifically mention the authority of petitioner's counsel to
appear and bind the petitioner at the pre-trial conference, the terms of said power of attorney are comprehensive
enough as to include the authority to appear for the petitioner at the pre-trial conference."
In the same manner, the power of attorney granted to petitioner bank's employees should be considered a special
power of attorney. The relevant portion reads:
"WHEREAS, the Bank is the Defendant in Civil Case No. CEB-4751, entitled "Cresencio Velez, et al. vs. Citibank,
N.A.," pending before the Regional Trial Court of Cebu City, Branch X;
NOW, THEREFORE, under and by virtue of Article XXI of the Power of Attorney executed by the Bank in favor of the
Attorney-in-Fact (Annex "A"), which provision is quoted above, the Attorney-in-Fact has nominated, designated and
appointed, as by these presents he nominates, designates and appoints, as his substitutes and delegates, with
respect to the said Power of Attorney, ROBERTO REYES, Vice President and/or NEMESIO SOLOMON, JR., Manager,
AIMEE YU, Assistant Vice President and/or TOMAS YAP, Assistant Manager (hereinafter referred to as the
"DELEGATES"), all of legal age, citizens of the Republic of the Philippines and with business address at Citibank
Center, Paseo de Roxas, Makati, Metro Manila, Philippines, the Attorney-in-Fact hereby granting, conferring and
delegating such authorities and binding the Bank in the Pre-Trial Conference and/or Trial of the abovementioned
case, pursuant to Rule 20 of the Revised Rules of Court, to the DELEGATES. The attorney-in-Fact furthermore hereby
ratifying and confirming all that the DELEGATES shall lawfully do or cause to be done under and by virtue of these
presents." 15
From the outset, petitioner bank showed a willingness, if not zeal, in pursuing and defending this case. It even
acceded to private respondent's insistence on the question of proper representation during the pre-trial by
presenting not just one, but three, special powers of attorney. Initially, the special power of attorney was executed
by Florencia Tarriela in favor of J.P. Garcia & Associates, petitioner bank's counsel. Private respondents insisted that
this was not proper authority required by law. To avoid further argument, a second special power of attorney was
presented by petitioner bank, executed by William W. Fersugon, the highest ranking officer of Citibank in the
Philippines, in favor of its counsel J.P. Garcia & Associates. But since the authority to delegate of William A. Fersugon
in favor of an agent is limited to bank employees, another special power of attorney from Wiliam W. Fersugon in
favor of the Citibank employees was presented. But the respondent trial court judge disregarded all these and
issued the assailed default order. There is nothing to show that petitioner bank "miserably failed to oblige"; on the
contrary, three special powers of attorney manifest prudence and diligence on petitioner bank's part.
In fact, there was no need for the third power of attorney because we believe that the second power of attorney
was sufficient under the by-law provision authorizing Fersugon to delegate any of his functions to any one or more
employees of the petitioner bank. A reasonable interpretation of this provision would include an appointment of a
legal counsel to represent the bank in court, for, under the circumstances, such legal counsel can be considered,
and in fact was considered by the petitioner bank, an employee for a special purpose. Furthermore, Fersugon, who
heads the Philippine office thousands of miles away from its main office in the United States, must be understood to
have sufficient powers to act promptly in order to protect the interests of his principal.
We reiterate the previous admonitions of this Court against "precipitate orders of default as these have the effect of
denying the litigant the chance to be heard. While there are instances, to be sure, when a party may be properly
defaulted, these should be the exceptions rather than the rule and should be allowed only in clear cases of an
obstinate refusal or inordinate neglect to comply with the orders of the court. Absent such a showing, the party
must be given every reasonable opportunity to present his side and to refute the evidence of the adverse party in
deference to due process of law". 16
Considering further that petitioner bank has a meritorious defense and that the amount in contest is substantial,
the litigants should be allowed to settle their claims on the arena of the court based on a trial on the merits rather
than on mere technicalities.
WHEREFORE, in view of the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals dated
June 26, 1991 and its resolution denying the motion for reconsideration of petitioner bank dated September 26,
1991 are both REVERSED and SET ASIDE. The order of default issued on August 15, 1990 in Civil Case CEB-4751 of
the Regional Trial Court of Cebu is ANNULLED and SET ASIDE and the case is hereby REMANDED to the court of
origin for further proceedings.
SO ORDERED.

COUNTRY BANKERS
CORPORATION,

INSURANCE

G.R. No. 166044

Petitioner,
Present:

LEONARDO-DE CASTRO,*
Acting Chairperson,
BERSAMIN,
DEL CASTILLO,
VILLARAMA, JR., and
PERLAS-BERNABE,** JJ.

- versus -

Promulgated:
KEPPEL
CEBU
SHIPYARD,
UNIMARINE
SHIPPING LINES, INC., PAUL RODRIGUEZ,
PETER RODRIGUEZ, ALBERT HONTANOSAS,
and BETHOVEN QUINAIN,

June 18, 2012

Respondents.
x--------------------------------------------------x
DECISION
LEONARDO-DE CASTRO, J.:

This is a petition for review on certiorari[1] to reverse and set aside the January 29, 2004 Decision[2] and
October 28, 2004 Resolution[3] of the Court of Appeals in CA-G.R. CV No. 58001, wherein the Court of Appeals
affirmed with modification the February 10, 1997 Decision [4] of the Regional Trial Court (RTC) of Cebu City, Branch 7,
in Civil Case No. CBB-13447.

Hereunder are the undisputed facts as culled from the records of the case.

On January 27, 1992, Unimarine Shipping Lines, Inc. (Unimarine), a corporation engaged in the shipping
industry, contracted the services of Keppel Cebu Shipyard, formerly known as Cebu Shipyard and Engineering
Works, Inc. (Cebu Shipyard), for dry docking and ship repair works on its vessel, the M/V Pacific Fortune. [5]

On February 14, 1992, Cebu Shipyard issued Bill No. 26035 to Unimarine in consideration for its services,
which amounted to P4,486,052.00.[6] Negotiations between Cebu Shipyard and Unimarine led to the reduction of
this amount to P3,850,000.00. The terms of this agreement were embodied in Cebu Shipyards February 18, 1992
letter to the President/General Manager of Unimarine, Paul Rodriguez, who signed his conformity to said letter,
quoted in full below:

18 February 1992
Ref No.: LL92/0383
UNIMARINE SHIPPING LINES, INC.
C/O Autographics, Inc.
Gorordo Avenue, Lahug, Cebu City
Attention: Mr. Paul Rodriguez
President/General Manager
This is to confirm our agreement on the shiprepair bills charged for the repair of MV Pacific
Fortune, our invoice no. 26035.
The shiprepair bill (Bill No. 26035) is agreed at a negotiated amount of P3,850,000.00 excluding
VAT.
Unimarine Shipping Lines, Inc. (Unimarine) will pay the above amount of [P3,850,000.00] in US
Dollars to be fixed at the prevailing USDollar to Philippine Peso exchange rate at the time of
payment. The payment terms to be extended to Unimarine is as follows:
Installments
1st Installment
2nd Installment

Amount
P2,350,000.00
P1,500,000.00

Due Date
30 May 1992
30 Jun 1992

Unimarine will deposit post-dated checks equivalent to the above amounts in Philippine Peso and
an additional check amount of P385,000.00, representing 10% [Value Added Tax] VAT on the
above bill of P3,850,000.00. In the event that Unimarine fails to make full payment on the above
due dates in US Dollars, the post-dated checks will be deposited by CSEW in payment of the
amounts owned by Unimarine and Unimarine agree that the 10% VAT (P385,000.00) shall also
become payable to CSEW.
Unimarine in consideration of the credit terms extended by CSEW and the release of the vessel
before full payment of the above debt, agree to present CSEW surety bonds equal to 120% of the
value of the credit extended. The total bond amount shall be P4,620,000.00.
Yours faithfully,
CEBU SHIPYARD & ENGG WORKS, INC Conforme:
(SGD) (SGD)______
SEET KENG TAT PAUL RODRIGUEZ
Treasurer/VP-Admin. Unimarine Shipping
Lines, Inc.[7]

In compliance with the agreement, Unimarine, through Paul Rodriguez, secured from Country Bankers
Insurance Corp. (CBIC), through the latters agent, Bethoven Quinain (Quinain), CBIC Surety Bond No. G (16)
29419[8] (the surety bond) on January 15, 1992 in the amount of P3,000,000.00. The expiration of this surety bond

was extended to January 15, 1993, through Endorsement No. 33152 [9] (the endorsement), which was later on
attached to and formed part of the surety bond. In addition to this, Unimarine, on February 19, 1992, obtained
another bond from Plaridel Surety and Insurance Co. (Plaridel), PSIC Bond No. G (16)-00365 [10] in the amount
of P1,620,000.00.

On February 17, 1992, Unimarine executed a Contract of Undertaking in favor of Cebu Shipyard. The
pertinent portions of the contract read as follows:

Messrs, Uni-Marine Shipping Lines, Inc. (the Debtor) of Gorordo Avenue, Cebu City hereby
acknowledges that in consideration of Cebu Shipyard & Engineering Works, Inc. (Cebu
Shipyard) at our request agreeing to release the vessel specified in part A of the Schedule (name
of vessel) prior to the receipt of the sum specified in part B of the Schedule (Moneys Payable)
payable in respect of certain works performed or to be performed by Cebu Shipyard and/or its
subcontractors and/or material and equipment supplied or to be supplied by Cebu Shipyard
and/or its subcontractors in connection with the vessel for the party specified in part C of the
Schedule (the Debtor), we hereby unconditionally, irrevocably undertake to make punctual
payment to Cebu Shipyard of the Moneys Payable on the terms and conditions as set out in part B
of the Schedule. We likewise hereby expressly waive whatever right of excussion we may have
under the law and equity.
This contract shall be binding upon Uni-Marine Shipping Lines, Inc., its heirs, executors,
administrators, successors, and assigns and shall not be discharged until all obligation of this
contract shall have been faithfully and fully performed by the Debtor.[11]

Because Unimarine failed to remit the first installment when it became due on May 30, 1992, Cebu Shipyard was
constrained to deposit the peso check corresponding to the initial installment of P2,350,000.00. The check,
however, was dishonored by the bank due to insufficient funds. [12] Cebu Shipyard faxed a message to Unimarine,
informing it of the situation, and reminding it to settle its account immediately. [13]
On June 24, 1992, Cebu Shipyard again faxed a message[14] to Unimarine, to confirm Paul Rodriguezs
promise that Unimarine will pay in full the P3,850,000.00, in US Dollars on July 1, 1992.

Since Unimarine failed to deliver on the above promise, Cebu Shipyard, on July 2, 1992, through a faxed
letter, asked Unimarine if the payment could be picked up the next day. This was followed by another faxed
message on July 6, 1992, wherein Cebu Shipyard reminded Unimarine of its promise to pay in full on July 28,
1992. On August 24, 1992, Cebu Shipyard again faxed [15] Unimarine, to inform it that interest charges will have to

be imposed on their outstanding debt, and if it still fails to pay before August 28, 1992, Cebu Shipyard will have to
enforce payment against the sureties and take legal action.

On November 18, 1992, Cebu Shipyard, through its counsel, sent Unimarine a letter, [16] demanding
payment, within seven days from receipt of the letter, the amount ofP4,859,458.00, broken down as follows:

B#26035 MV PACIFIC FORTUNE 4,486,052.00

LESS: ADJUSTMENT:
CN#00515-03/19/92 (636,052.00)
-----------------3,850,000.00
Add: VAT on repair bill no. 26035 385,000.00
-----------------4,235,000.00
Add: Interest/penalty charges:
Debit Note No. 02381 189,888.00
Debit Note No. 02382 434,570.00
-----------------4,859,458.00[17]

Due to Unimarines failure to heed Cebu Shipyards repeated demands, Cebu Shipyard, through counsel, wrote the
sureties CBIC[18] on November 18, 1992, and Plaridel,[19] on November 19, 1992, to inform them of Unimarines
nonpayment, and to ask them to fulfill their obligations as sureties, and to respond within seven days from receipt
of the demand.

However, even the sureties failed to discharge their obligations, and so Cebu Shipyard filed a Complaint dated
January 8, 1993, before the RTC, Branch 18 of Cebu City, against Unimarine, CBIC, and Plaridel. This was docketed
as Civil Case No. CBB-13447.

CBIC, in its Answer,[20] said that Cebu Shipyards complaint states no cause of action. CBIC alleged that the surety
bond was issued by its agent, Quinain, in excess of his authority. CBIC claimed that Cebu Shipyard should have
doubted the authority of Quinain to issue the surety bond based on the following:

1.

The nature of the bond undertaking (guarantee payment), and the amount involved.

2.

The surety bond could only be issued in favor of the Department of Public Works and Highways, as
stamped on the upper right portion of the face of the bond. [21]This stamp was covered by documentary
stamps.

3.

The issuance of the surety bond was not reported, and the corresponding premiums were not
remitted to CBIC.[22]

CBIC added that its liability was extinguished when, without its knowledge and consent, Cebu Shipyard and
Unimarine novated their agreement several times.Furthermore, CBIC stated that Cebu Shipyards claim had already
been paid or extinguished when Unimarine executed an Assignment of Claims [23] of the proceeds of the sale of its
vessel M/V Headline in favor of Cebu Shipyard. CBIC also averred that Cebu Shipyards claim had already prescribed
as the endorsement that extended the surety bonds expiry date, was not reported to CBIC. Finally, CBIC
asseverated that if it were held to be liable, its liability should be limited to the face value of the bond and not for
exemplary damages, attorneys fees, and costs of litigation.[24]

Subsequently, CBIC filed a Motion to Admit Cross and Third Party Complaint [25] against Unimarine, as cross
defendant; Paul Rodriguez, Albert Hontanosas, and Peter Rodriguez, as signatories to the Indemnity Agreement they
executed in favor of CBIC; and Bethoven Quinain, as the agent who issued the surety bond and endorsement in
excess of his authority, as third party defendants.[26]

CBIC claimed that Paul Rodriguez, Albert Hontanosas, and Peter Rodriguez executed an Indemnity
Agreement, wherein they bound themselves, jointly and severally, to indemnify CBIC for any amount it may sustain
or incur in connection with the issuance of the surety bond and the endorsement. [27] As for Quinain, CBIC alleged
that he exceeded his authority as stated in the Special Power of Attorney, wherein he was authorized to solicit

business and issue surety bonds not exceeding P500,000.00 but only in favor of the Department of Public Works
and Highways, National Power Corporation, and other government agencies. [28]

On August 23, 1993, third party defendant Hontanosas filed his Answer with Counterclaim, to the Cross
and Third Party Complaint. Hontanosas claimed that he had no financial interest in Unimarine and was neither a
stockholder, director nor an officer of Unimarine. He asseverated that his relationship to Unimarine was limited to
his capacity as a lawyer, being its retained counsel. He further denied having any participation in the Indemnity
Agreement executed in favor of CBIC, and alleged that his signature therein was forged, as he neither signed it nor
appeared before the Notary Public who acknowledged such undertaking. [29]

Various witnesses were presented by the parties during the course of the trial of the case. Myrna Obrinaga
testified for Cebu Shipyard. She was the Chief Accountant in charge of the custody of the documents of the
company. She corroborated Cebu Shipyards allegations and produced in court the documents to support Cebu
Shipyards claim.She also testified that while it was true that the proceeds of the sale of Unimarines vessel, M/V
Headline, were assigned to Cebu Shipyard, nothing was turned over to them. [30]

Paul Rodriguez admitted that Unimarine failed to pay Cebu Shipyard for the repairs it did on M/V Pacific
Fortune, despite the extensions granted to Unimarine. He claimed that he signed the Indemnity Agreement because
he trusted Quinain that it was a mere pre-requisite for the issuance of the surety bond. He added that he did not
bother to read the documents and he was not aware of the consequences of signing an Indemnity Agreement. Paul
Rodriguez also alleged to not having noticed the limitation Valid only in favor of DPWH stamped on the surety bond.
[31]

However, Paul Rodriguez did not contradict the fact that Unimarine failed to pay Cebu Shipyard its obligation. [32]

CBIC presented Dakila Rianzares, the Senior Manager of its Bonding Department. Her duties included the
evaluation and approval of all applications for and reviews of bonds issued by their agents, as authorized under the
Special Power of Attorney and General Agency Contract of CBIC. Rianzares testified that she only learned of the
existence of CBIC Surety Bond No. G (16) 29419 when she received the summons for this case. Upon investigation,
she found out that the surety bond was not reported to CBIC by Quinain, the issuing agent, in violation of their
General Agency Contract, which provides that all bonds issued by the agent be reported to CBICs office within one
week from the date of issuance. She further stated that the surety bond issued in favor of Unimarine was issued
beyond Quinains authority. Rianzares added that she was not aware that an endorsement pertaining to the surety
bond was also issued by Quinain.[33]

After the trial, the RTC was faced with the lone issue of whether or not CBIC was liable to Cebu Shipyard
based on Surety Bond No. G (16) 29419.[34]

On February 10, 1997, the RTC rendered its Decision, the fallo of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff Cebu Shipyard & Engineering
Works, Incorporated and against the defendants:

1.
Ordering the defendants Unimarine Shipping Lines, Incorporated, Country Bankers
Insurance Corporation and Plaridel Surety and Insurance Corporation to pay plaintiff jointly and
severally the amount of P4,620,000.00 equivalent to the value of the surety bonds;

2.
Ordering further defendant Unimarine to pay plaintiff the amount of P259,458.00 to
complete its entire obligation of P4,859,458.00;

3.
To pay plaintiff jointly and severally the amount of P100,000.00 in attorneys fees
and litigation expenses;

4.
For Cross defendant Unimarine Shipping Lines, Incorporated and Third party
defendants Paul Rodriguez, Peter Rodriguez and Alber[t] Hontanosas: To indemnify jointly and
severally, cross plaintiff and third party plaintiff Country Bankers Insurance Corporation whatever
amount the latter is made to pay to plaintiff. [35]

The RTC held that CBIC, in its capacity as surety is bound with its principal jointly and severally to the
extent of the surety bond it issued in favor of [Cebu Shipyard] because although the contract of surety is in essence
secondary only to a valid principal obligation, his liability to [the] creditor is said to be direct, primary[,] and
absolute, in other words, he is bound by the principal.[36] The RTC added:

Solidary obligations on the part of Unimarine and CBIC having been established and
expressly stated in the Surety Bond No. 29419 (Exh. C), [Cebu Shipyard], therefore, is entitled to
collect and enforce said obligation against any and or both of them, and if and when CBIC pays, it
can compel its co-defendant Unimarine to reimburse to it the amount it has paid. [37]

The RTC found CBICs contention that Quinain acted in excess of his authority in issuing the surety bond
untenable. The RTC held that CBIC is bound by the surety bond issued by its agent who acted within the apparent
scope of his authority. The RTC said:

[A]s far as third persons are concerned, an act is deemed to have been performed within the
scope of the agents authority, if such act is within the terms of the powers of attorney as written,
even if the agent has in fact exceeded the limits of his authority according to an understanding
between the principal and the agent.[38]

All the defendants appealed this Decision to the Court of Appeals.

Unimarine, Paul Rodriguez, Peter Rodriguez, and Albert Hontanosas argued that Unimarines obligation
under Bill No. 26035 had been extinguished by novation, as Cebu Shipyard had agreed to accept the proceeds of
the sale of the M/V Headline as payment for the ship repair works it did on M/V Pacific Fortune. Paul Rodriguez and
Peter Rodriguez added that such novation also freed them from their liability under the Indemnity Agreement they
signed in favor of CBIC. Albert Hontanosas in turn reiterated that he did not sign the Indemnity Agreement. [39][SC1]

CBIC, in its Appellants Brief,[40] claimed that the RTC erred in enforcing its liability on the surety bond as it
was issued in excess of Quinains authority. Moreover, CBIC averred, its liability under such surety had been

extinguished by reasons of novation, payment, and prescription. CBIC also questioned the RTCs order, holding it
jointly and severally liable with Unimarine and Plaridel for the amount of P4,620,000.00, a sum larger than the face
value of CBIC Surety Bond No. G (16) 29419, and why the RTC did not hold Quinain liable to indemnify CBIC for
whatever amount it was ordered to pay Cebu Shipyard.

On January 29, 2004, the Court of Appeals promulgated its decision, with the following dispositive portion:

WHEREFORE, in view of the foregoing, the respective appeal[s] filed by Defendants-Appellants

Unimarine Shipping Lines, Inc. and Country Bankers Insurance Corporation; Cross-DefendantAppellant Unimarine Shipping Lines, Inc. and; Third-Party Defendants-Appellants Paul Rodriguez,
Peter Rodriguez and Albert Hontanosas are hereby DENIED. The decision of the RTC in Civil Case
No. CEB-13447 dated February 10, 1997 is AFFIRMED with modification that Mr. Bethoven
Quinain, CBICs agent is hereby held jointly and severally liable with CBIC by virtue of Surety Bond
No. 29419 executed in favor of plaintiff-appellee CSEW.[41]

In its decision, the Court of Appeals resolved the following issues, as it had summarized from the parties pleadings:

I.
Whether or not UNIMARINE is liable to [Cebu Shipyard] for a sum of money arising from
the ship-repair contract;

II.
Whether or not the obligation of UNIMARINE to [Cebu Shipyard] has been extinguished by
novation;

III.
Whether or not Defendant-Appellant CBIC, allegedly being the Surety of UNIMARINE is
liable under Surety Bond No. 29419[;]

IV.
Whether or not Cross Defendant-Appellant UNIMARINE and Third-Party DefendantsAppellants Paul Rodriguez, Peter Rodriguez, Albert Hontanosas and Third-Party Defendant
Bethoven Quinain are liable by virtue of the Indemnity Agreement executed between them and
Cross and Third Party Plaintiff CBIC;

V.
Whether or not Plaintiff-Appellee [Cebu Shipyard] is entitled to the award of P100,000.00
in attorneys fees and litigation expenses.[42]

The Court of Appeals held that it was duly proven that Unimarine was liable to Cebu Shipyard for the ship
repair works it did on the formers M/V Pacific Fortune. The Court of Appeals dismissed CBICs contention of novation
for lack of merit.[43] CBIC was held liable under the surety bond as there was no novation on the agreement between
Unimarine and Cebu Shipyard that would discharge CBIC from its obligation. The Court of Appeals also did not allow
CBIC to disclaim liability on the ground that Quinain exceeded his authority because third persons had relied upon
Quinains representation, as CBICs agent.[44] Quinain was, however, held solidarily liable with CBIC under Article 1911
of the Civil Code.[45]

Anent the liability of the signatories to the Indemnity Agreement, the Court of Appeals held Paul Rodriguez,
Peter Rodriguez, and Albert Hontanosas jointly and severally liable thereunder. The Court of Appeals rejected
Hontanosass claim that his signature in the Indemnity Agreement was forged, as he was not able to prove it. [46]

The Court of Appeals affirmed the award of attorneys fees and litigation expenses to Cebu Shipyard since it was
able to clearly establish the defendants liability, which they tried to dodge by setting up defenses to release
themselves from their obligation.[47]

CBIC[48]and Unimarine, together with third party defendants-appellants [49] filed their respective Motions for
Reconsideration. This was, however, denied by the Court of Appeals in its October 28, 2004 Resolution for lack of
merit.

Unimarine elevated its case to this Court via a petition for review on certiorari, docketed as G.R. No. 166023, which
was denied in a Resolution dated January 19, 2005.[50]

The lone petitioner in this case, CBIC, is now before this Court, seeking the reversal of the Court of Appeals
decision and resolution on the following grounds:

A.

THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN APPLYING THE PROVISIONS

OF ARTICLE 1911 OF THE CIVIL CODE TO HOLD PETITIONER LIABLE FOR THE ACTS DONE
BY ITS AGENT IN EXCESS OF AUTHORITY.
B.
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN HOLDING THAT AN
EXTENSION OF THE PERIOD FOR THE PERFORMANCE OF AN OBLIGATION GRANTED BY
THE CREDITOR TO THE PRINCIPAL DEBTOR IS NOT SUFFICIENT TO RELEASE THE
SURETY.
C.
ASSUMING THAT PETITIONER IS LIABLE UNDER THE BOND, THE HONORABLE COURT OF
APPEALS NONETHELESS SERIOUSLY ERRED IN AFFIRMING THE SOLIDARY LIABILITY OF
PETITIONER BEYOND THE VALUE OF THE BOND.
D.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING PETITIONER JOINTLY AND
SEVERALLY LIABLE FOR ATTORNEYS FEES IN THE AMOUNT OFP100,000.00.[51]
Issue

The crux of the controversy lies in CBICs liability on the surety bond Quinain issued to Unimarine, in favor
of Cebu Shipyard.

CBIC avers that the Court of Appeals erred in interpreting and applying the rules governing the contract of
agency. It argued that the Special Power of Attorney granted to Quinain clearly set forth the extent and limits of his
authority with regard to businesses he can transact for and in behalf of CBIC. CBIC added that it was incumbent
upon Cebu Shipyard to inquire and look into the power of authority conferred to Quinain. CBIC said:

The authority to bind a principal as a guarantor or surety is one of those powers which requires a
Special Power of Attorney pursuant to Article 1878 of the Civil Code. Such power could not be
simply assumed or inferred from the mere existence of an agency. A person who enters
into a contract of suretyship with an agent without confirming the extent of the latters authority
does so at his peril. x x x.[52]

CBIC claims that the foregoing is true even if Quinain was granted the authority to transact in the business
of insurance in general, as the authority to bind the principal in a contract of suretyship could
nonetheless never be presumed.[53] Thus, CBIC claims, that:

[T]hird persons seeking to hold the principal liable for transactions entered into by an agent
should establish the following, in case the same is controverted:
6.6.1. The fact or existence of the agency.
6.6.2. The nature and extent of authority.[54]

To go a little further, CBIC said that the correct Civil Code provision to apply in this case is Article
1898. CBIC asserts that Cebu Shipyard was charged with knowledge of the extent of the authority conferred on Mr.
Quinain by its failure to perform due diligence investigations. [55]
Cebu Shipyard, in its Comment[56] first assailed the propriety of the petition for raising factual issues. In
support, Cebu Shipyard claimed that the Court of Appeals application of Article 1911 of the Civil Code was founded
on findings of facts that CBIC now disputes. Thus, the question is not purely of law.
Discussion

The fact that Quinain was an agent of CBIC was never put in issue. What has always been debated by the parties is
the extent of authority or, at the very least, apparent authority, extended to Quinain by CBIC to transact insurance
business for and in its behalf.

In a contract of agency, a person, the agent, binds himself to represent another, the principal, with the
latters consent or authority.[57] Thus, agency is based on representation, where the agent acts for and in behalf of
the principal on matters within the scope of the authority conferred upon him. [58] Such acts have the same legal
effect as if they were personally done by the principal. By this legal fiction of representation, the actual or legal
absence of the principal is converted into his legal or juridical presence. [59]

The RTC applied Articles 1900 and 1911 of the Civil Code in holding CBIC liable for the surety bond. It held
that CBIC could not be allowed to disclaim liability because Quinains actions were within the terms of the special
power of attorney given to him.[60] The Court of Appeals agreed that CBIC could not be permitted to abandon its
obligation especially since third persons had relied on Quinains representations. It based its decision on Article 1911
of the Civil Code and found CBIC to have been negligent and less than prudent in conducting its insurance business
for its failure to supervise and monitor the acts of its agents, to regulate the distribution of its insurance forms, and
to devise schemes to prevent fraudulent misrepresentations of its agents. [61]

This Court does not agree. Pertinent to this case are the following provisions of the Civil Code:

Art. 1898. If the agent contracts in the name of the principal, exceeding the scope of his
authority, and the principal does not ratify the contract, it shall be void if the party with whom the
agent contracted is aware of the limits of the powers granted by the principal. In this case,
however, the agent is liable if he undertook to secure the principals ratification.
Art. 1900. So far as third persons are concerned, an act is deemed to have been
performed within the scope of the agents authority, if such act is within the terms of the power of
attorney, as written, even if the agent has in fact exceeded the limits of his authority according to
an understanding between the principal and the agent.
Art. 1902. A third person with whom the agent wishes to contract on behalf of the
principal may require the presentation of the power of attorney, or the instructions as regards the
agency. Private or secret orders and instructions of the principal do not prejudice third persons
who have relied upon the power of attorney or instructions shown to them.
Art. 1910. The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not
bound except when he ratifies it expressly or tacitly.
Art. 1911. Even when the agent has exceeded his authority, the principal is solidarily
liable with the agent if the former allowed the latter to act as though he had full powers.

Our law mandates an agent to act within the scope of his authority. [62] The scope of an agents authority is
what appears in the written terms of the power of attorney granted upon him. [63] Under Article 1878(11) of the Civil
Code, a special power of attorney is necessary to obligate the principal as a guarantor or surety.

In the case at bar, CBIC could be held liable even if Quinain exceeded the scope of his authority only if
Quinains act of issuing Surety Bond No. G (16) 29419 is deemedto have been performed within the written terms of
the power of attorney he was granted.[64]

However, contrary to what the RTC held, the Special Power of Attorney accorded to Quinain clearly states
the limits of his authority and particularly provides that in case of surety bonds, it can only be issued in favor of the
Department of Public Works and Highways, the National Power Corporation, and other government agencies;
furthermore, the amount of the surety bond is limited to P500,000.00, to wit:

SPECIAL POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:
That, COUNTRY BANKERS INSURANCE CORPORATION, a corporation duly organized and existing
under and by virtue of the laws of the Philippines, with head offices at 8 th Floor, G.F. Antonino
Building, T.M. Kalaw Street, Ermita, Manila, now and hereinafter referred to as the Company
hereby appoints BETHOVEN B. QUINAIN with address at x x x to be its General Agent and

Attorney-in-Fact, for and in its place, name and stead, and for its own use and benefit, to do and
perform the following acts and things:

1.
To conduct, manage, carry on and transact insurance business as usually pertains
to a General Agency of Fire, Personal Accident, Bond, Marine, Motor Car (Except Lancer).

2.
To accept, underwrite and subscribe policies of insurance for and in behalf of the
Company under the terms and conditions specified in the General Agency Contract executed and
entered into by and between it and its said Attorney-in-Fact subject to the following Schedule of
Limits:

a.

FIRE:

xxxx
b.

PERSONAL ACCIDENT:

xxxx

c.

MOTOR CAR:

xxxx

d.

MARINE:

SCHEDULE OF LIMITS -

xxxx

e.

BONDS:

xxxx

Surety Bond (in favor of Dept. of Pub. Works and

Highways, Natl. Power Corp. & other. 500,000.00
Government agencies)[65]

CBIC does not anchor its defense on a secret agreement, mutual understanding, or any verbal instruction
to Quinain. CBICs stance is grounded on its contract with Quinain, and the clear, written terms therein. This Court
finds that the terms of the foregoing contract specifically provided for the extent and scope of Quinains authority,
and Quinain has indeed exceeded them.

Under Articles 1898 and 1910, an agents act, even if done beyond the scope of his authority, may bind the
principal if he ratifies them, whether expressly or tacitly. It must be stressed though that only the principal, and not
the agent, can ratify the unauthorized acts, which the principal must have knowledge of. [66] Expounding on the
concept and doctrine of ratification in agency, this Court said:

Ratification in agency is the adoption or confirmation by one person of an act performed

on his behalf by another without authority. The substance of the doctrine is confirmation after
conduct, amounting to a substitute for a prior authority. Ordinarily, the principal must have full
knowledge at the time of ratification of all the material facts and circumstances relating to the
unauthorized act of the person who assumed to act as agent. Thus, if material facts were
suppressed or unknown, there can be no valid ratification and this regardless of the
purpose or lack thereof in concealing such facts and regardless of the parties between
whom the question of ratification may arise. Nevertheless, this principle does not apply if
the principals ignorance of the material facts and circumstances was willful, or that the principal
chooses to act in ignorance of the facts. However, in the absence of circumstances putting a

reasonably prudent man on inquiry, ratification cannot be implied as against the

principal who is ignorant of the facts.[67] (Emphases supplied.)

Neither Unimarine nor Cebu Shipyard was able to repudiate CBICs testimony that it was unaware of the
existence of Surety Bond No. G (16) 29419 and Endorsement No. 33152. There were no allegations either that CBIC
should have been put on alert with regard to Quinains business transactions done on its behalf. It is clear, and
undisputed therefore, that there can be no ratification in this case, whether express or implied.

Article 1911, on the other hand, is based on the principle of estoppel, which is necessary for the protection
of third persons. It states that the principal is solidarily liable with the agent even when the latter has exceeded his
authority, if the principal allowed him to act as though he had full powers. However, for an agency by estoppel to
exist, the following must be established:

1.

The principal manifested a representation of the agents authority or knowingly allowed the agent to
assume such authority;

2.

The third person, in good faith, relied upon such representation; and

3.

Relying upon such representation, such third person has changed his position to his detriment. [68]

In Litonjua, Jr. v. Eternit Corp.,[69] this Court said that [a]n agency by estoppel, which is similar to the
doctrine of apparent authority, requires proof of reliance upon the representations, and that, in turn, needs proof
that the representations predated the action taken in reliance. [70]

This Court cannot agree with the Court of Appeals pronouncement of negligence on CBICs part. CBIC not
only clearly stated the limits of its agents powers in their contracts, it even stamped its surety bonds with the
restrictions, in order to alert the concerned parties. Moreover, its company procedures, such as reporting
requirements, show that it has designed a system to monitor the insurance contracts issued by its agents. CBIC

cannot be faulted for Quinains deliberate failure to notify it of his transactions with Unimarine. In fact, CBIC did not
even receive the premiums paid by Unimarine to Quinain.

Furthermore, nowhere in the decisions of the lower courts was it stated that CBIC let the public, or
specifically Unimarine, believe that Quinain had the authority to issue a surety bond in favor of companies other
than the Department of Public Works and Highways, the National Power Corporation, and other government
agencies. Neither was it shown that CBIC knew of the existence of the surety bond before the endorsement
extending the life of the bond, was issued to Unimarine. For one to successfully claim the benefit of estoppel on the
ground that he has been misled by the representations of another, he must show that he was not misled through
his own want of reasonable care and circumspection.[71]

It is apparent that Unimarine had been negligent or less than prudent in its dealings with
Quinain. In Manila Memorial Park Cemetery, Inc. v. Linsangan,[72] this Court held:

It is a settled rule that persons dealing with an agent are bound at their peril, if they
would hold the principal liable, to ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the burden of proof is upon them to
establish it. The basis for agency is representation and a person dealing with an agent is put upon
inquiry and must discover upon his peril the authority of the agent. If he does not make such an
inquiry, he is chargeable with knowledge of the agents authority and his ignorance of that
authority will not be any excuse.

In the same case, this Court added:

[T]he ignorance of a person dealing with an agent as to the scope of the latters authority is no
excuse to such person and the fault cannot be thrown upon the principal. A person dealing with
an agent assumes the risk of lack of authority in the agent. He cannot charge the principal by
relying upon the agents assumption of authority that proves to be unfounded. The principal, on
the other hand, may act on the presumption that third persons dealing with his agent will not be
negligent in failing to ascertain the extent of his authority as well as the existence of his agency.
[73]

Unimarine undoubtedly failed to establish that it even bothered to inquire if Quinain was authorized to
agree to terms beyond the limits indicated in his special power of attorney. While Paul Rodriguez stated that he has
done business with Quinain more than once, he was not able to show that he was misled by CBIC as to the extent of

authority it granted Quinain. Paul Rodriguez did not even allege that he asked for documents to prove Quinains
authority to contract business for CBIC, such as their contract of agency and power of attorney. It is also worthy to
note that even with the Indemnity Agreement, Paul Rodriguez signed it on Quinains mere assurance and without
truly understanding the consequences of the terms of the said agreement. Moreover, both Unimarine and Paul
Rodriguez could have inquired directly from CBIC to verify the validity and effectivity of the surety bond and
endorsement; but, instead, they blindly relied on the representations of Quinain. As this Court held in Litonjua, Jr. v.
Eternit Corp.[74]:

A person dealing with a known agent is not authorized, under any circumstances, blindly to trust
the agents; statements as to the extent of his powers; such person must not act negligently but
must use reasonable diligence and prudence to ascertain whether the agent acts within the scope
of his authority. The settled rule is that, persons dealing with an assumed agent are bound at their
peril, and if they would hold the principal liable, to ascertain not only the fact of agency but also
the nature and extent of authority, and in case either is controverted, the burden of proof is upon
them to prove it. In this case, the petitioners failed to discharge their burden; hence, petitioners
are not entitled to damages from respondent EC.[75]

In light of the foregoing, this Court is constrained to release CBIC from its liability on Surety Bond No. G (16) 29419
and Endorsement No. 33152. This Court sees no need to dwell on the other grounds propounded by CBIC in support
of its prayer.

WHEREFORE, this petition is hereby GRANTED and the complaint against CBIC is DISMISSED for lack of
merit. The January 29, 2004 Decision and October 28, 2004 Resolution of the Court of Appeals in CA-G.R. CV No.
58001 is MODIFIED insofar as it affirmed CBICs liability on Surety Bond No. G (16) 29419 and Endorsement No.
33152.

SO ORDERED.