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G.R. No.

167552 April 23, 2007

EUROTECH INDUSTRIAL TECHNOLOGIES, INC., Petitioner,


vs.
EDWIN CUIZON and ERWIN CUIZON, Respondents.

DECISION

CHICO-NAZARIO, J.:

Before Us is a petition for review by certiorari assailing the Decision1 of the Court of Appeals dated
10 August 2004 and its Resolution2 dated 17 March 2005 in CA-G.R. SP No. 71397 entitled,
"Eurotech Industrial Technologies, Inc. v. Hon. Antonio T. Echavez." The assailed Decision and
Resolution affirmed the Order3 dated 29 January 2002 rendered by Judge Antonio T. Echavez
ordering the dropping of respondent EDWIN Cuizon (EDWIN) as a party defendant in Civil Case No.
CEB-19672.

The generative facts of the case are as follows:

Petitioner is engaged in the business of importation and distribution of various European industrial
equipment for customers here in the Philippines. It has as one of its customers Impact Systems
Sales ("Impact Systems") which is a sole proprietorship owned by respondent ERWIN Cuizon
(ERWIN). Respondent EDWIN is the sales manager of Impact Systems and was impleaded in the
court a quo in said capacity.

From January to April 1995, petitioner sold to Impact Systems various products allegedly amounting
to ninety-one thousand three hundred thirty-eight (₱91,338.00) pesos. Subsequently, respondents
sought to buy from petitioner one unit of sludge pump valued at ₱250,000.00 with respondents
making a down payment of fifty thousand pesos (₱50,000.00).4 When the sludge pump arrived from
the United Kingdom, petitioner refused to deliver the same to respondents without their having fully
settled their indebtedness to petitioner. Thus, on 28 June 1995, respondent EDWIN and Alberto de
Jesus, general manager of petitioner, executed a Deed of Assignment of receivables in favor of
petitioner, the pertinent part of which states:

1.) That ASSIGNOR5 has an outstanding receivables from Toledo Power Corporation in the
amount of THREE HUNDRED SIXTY FIVE THOUSAND (₱365,000.00) PESOS as payment
for the purchase of one unit of Selwood Spate 100D Sludge Pump;

2.) That said ASSIGNOR does hereby ASSIGN, TRANSFER, and CONVEY unto the
ASSIGNEE6 the said receivables from Toledo Power Corporation in the amount of THREE
HUNDRED SIXTY FIVE THOUSAND (₱365,000.00) PESOS which receivables the
ASSIGNOR is the lawful recipient;

3.) That the ASSIGNEE does hereby accept this assignment.7

Following the execution of the Deed of Assignment, petitioner delivered to respondents the sludge
pump as shown by Invoice No. 12034 dated 30 June 1995.8

Allegedly unbeknownst to petitioner, respondents, despite the existence of the Deed of Assignment,
proceeded to collect from Toledo Power Company the amount of ₱365,135.29 as evidenced by
Check Voucher No. 09339prepared by said power company and an official receipt dated 15 August
1995 issued by Impact Systems.10Alarmed by this development, petitioner made several demands
upon respondents to pay their obligations. As a result, respondents were able to make partial
payments to petitioner. On 7 October 1996, petitioner’s counsel sent respondents a final demand
letter wherein it was stated that as of 11 June 1996, respondents’ total obligations stood at
₱295,000.00 excluding interests and attorney’s fees.11 Because of respondents’ failure to abide by
said final demand letter, petitioner instituted a complaint for sum of money, damages, with
application for preliminary attachment against herein respondents before the Regional Trial Court of
Cebu City.12

On 8 January 1997, the trial court granted petitioner’s prayer for the issuance of writ of preliminary
attachment.13

On 25 June 1997, respondent EDWIN filed his Answer14 wherein he admitted petitioner’s allegations
with respect to the sale transactions entered into by Impact Systems and petitioner between January
and April 1995.15 He, however, disputed the total amount of Impact Systems’ indebtedness to
petitioner which, according to him, amounted to only ₱220,000.00.16

By way of special and affirmative defenses, respondent EDWIN alleged that he is not a real party in
interest in this case. According to him, he was acting as mere agent of his principal, which was the
Impact Systems, in his transaction with petitioner and the latter was very much aware of this fact. In
support of this argument, petitioner points to paragraphs 1.2 and 1.3 of petitioner’s Complaint stating

1.2. Defendant Erwin H. Cuizon, is of legal age, married, a resident of Cebu City. He is the
proprietor of a single proprietorship business known as Impact Systems Sales ("Impact
Systems" for brevity), with office located at 46-A del Rosario Street, Cebu City, where he
may be served summons and other processes of the Honorable Court.

1.3. Defendant Edwin B. Cuizon is of legal age, Filipino, married, a resident of Cebu City. He
is the Sales Manager of Impact Systems and is sued in this action in such capacity.17

On 26 June 1998, petitioner filed a Motion to Declare Defendant ERWIN in Default with Motion for
Summary Judgment. The trial court granted petitioner’s motion to declare respondent ERWIN in
default "for his failure to answer within the prescribed period despite the opportunity granted"18 but it
denied petitioner’s motion for summary judgment in its Order of 31 August 2001 and scheduled the
pre-trial of the case on 16 October 2001.19 However, the conduct of the pre-trial conference was
deferred pending the resolution by the trial court of the special and affirmative defenses raised by
respondent EDWIN.20

After the filing of respondent EDWIN’s Memorandum21 in support of his special and affirmative
defenses and petitioner’s opposition22 thereto, the trial court rendered its assailed Order dated 29
January 2002 dropping respondent EDWIN as a party defendant in this case. According to the trial
court –

A study of Annex "G" to the complaint shows that in the Deed of Assignment, defendant Edwin B.
Cuizon acted in behalf of or represented [Impact] Systems Sales; that [Impact] Systems Sale is a
single proprietorship entity and the complaint shows that defendant Erwin H. Cuizon is the
proprietor; that plaintiff corporation is represented by its general manager Alberto de Jesus in the
contract which is dated June 28, 1995. A study of Annex "H" to the complaint reveals that [Impact]
Systems Sales which is owned solely by defendant Erwin H. Cuizon, made a down payment of
₱50,000.00 that Annex "H" is dated June 30, 1995 or two days after the execution of Annex "G",
thereby showing that [Impact] Systems Sales ratified the act of Edwin B. Cuizon; the records further
show that plaintiff knew that [Impact] Systems Sales, the principal, ratified the act of Edwin B.
Cuizon, the agent, when it accepted the down payment of ₱50,000.00. Plaintiff, therefore, cannot
say that it was deceived by defendant Edwin B. Cuizon, since in the instant case the principal has
ratified the act of its agent and plaintiff knew about said ratification. Plaintiff could not say that the
subject contract was entered into by Edwin B. Cuizon in excess of his powers since [Impact]
Systems Sales made a down payment of ₱50,000.00 two days later.

In view of the Foregoing, the Court directs that defendant Edwin B. Cuizon be dropped as party
defendant.23

Aggrieved by the adverse ruling of the trial court, petitioner brought the matter to the Court of
Appeals which, however, affirmed the 29 January 2002 Order of the court a quo. The dispositive
portion of the now assailed Decision of the Court of Appeals states:

WHEREFORE, finding no viable legal ground to reverse or modify the conclusions reached by the
public respondent in his Order dated January 29, 2002, it is hereby AFFIRMED.24

Petitioner’s motion for reconsideration was denied by the appellate court in its Resolution
promulgated on 17 March 2005. Hence, the present petition raising, as sole ground for its allowance,
the following:

THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT RULED THAT


RESPONDENT EDWIN CUIZON, AS AGENT OF IMPACT SYSTEMS SALES/ERWIN CUIZON, IS
NOT PERSONALLY LIABLE, BECAUSE HE HAS NEITHER ACTED BEYOND THE SCOPE OF HIS
AGENCY NOR DID HE PARTICIPATE IN THE PERPETUATION OF A FRAUD.25

To support its argument, petitioner points to Article 1897 of the New Civil Code which states:

Art. 1897. The agent who acts as such is not personally liable to the party with whom he contracts,
unless he expressly binds himself or exceeds the limits of his authority without giving such party
sufficient notice of his powers.

Petitioner contends that the Court of Appeals failed to appreciate the effect of ERWIN’s act of
collecting the receivables from the Toledo Power Corporation notwithstanding the existence of the
Deed of Assignment signed by EDWIN on behalf of Impact Systems. While said collection did not
revoke the agency relations of respondents, petitioner insists that ERWIN’s action repudiated
EDWIN’s power to sign the Deed of Assignment. As EDWIN did not sufficiently notify it of the extent
of his powers as an agent, petitioner claims that he should be made personally liable for the
obligations of his principal.26

Petitioner also contends that it fell victim to the fraudulent scheme of respondents who induced it into
selling the one unit of sludge pump to Impact Systems and signing the Deed of Assignment.
Petitioner directs the attention of this Court to the fact that respondents are bound not only by their
principal and agent relationship but are in fact full-blooded brothers whose successive contravening
acts bore the obvious signs of conspiracy to defraud petitioner.27

In his Comment,28 respondent EDWIN again posits the argument that he is not a real party in interest
in this case and it was proper for the trial court to have him dropped as a defendant. He insists that
he was a mere agent of Impact Systems which is owned by ERWIN and that his status as such is
known even to petitioner as it is alleged in the Complaint that he is being sued in his capacity as the
sales manager of the said business venture. Likewise, respondent EDWIN points to the Deed of
Assignment which clearly states that he was acting as a representative of Impact Systems in said
transaction.

We do not find merit in the petition.

In a contract of agency, a person binds himself to render some service or to do something in


representation or on behalf of another with the latter’s consent.29 The underlying principle of the
contract of agency is to accomplish results by using the services of others – to do a great variety of
things like selling, buying, manufacturing, and transporting.30 Its purpose is to extend the personality
of the principal or the party for whom another acts and from whom he or she derives the authority to
act.31 It is said that the basis of agency is representation, 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.32 By this legal fiction, the actual or real absence of
the principal is converted into his legal or juridical presence – qui facit per alium facit per se.33

The elements of the contract 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 himself; (4) the agent acts within the scope of his
authority.34

In this case, the parties do not dispute the existence of the agency relationship between respondents
ERWIN as principal and EDWIN as agent. The only cause of the present dispute is whether
respondent EDWIN exceeded his authority when he signed the Deed of Assignment thereby binding
himself personally to pay the obligations to petitioner. Petitioner firmly believes that respondent
EDWIN acted beyond the authority granted by his principal and he should therefore bear the effect
of his deed pursuant to Article 1897 of the New Civil Code.

We disagree.

Article 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally liable
to the party with whom he contracts. The same provision, however, presents two instances when an
agent becomes personally liable to a third person. The first is when he expressly binds himself to the
obligation and the second is when he exceeds his authority. In the last instance, the agent can be
held liable if he does not give the third party sufficient notice of his powers. We hold that respondent
EDWIN does not fall within any of the exceptions contained in this provision.

The Deed of Assignment clearly states that respondent EDWIN signed thereon as the sales
manager of Impact Systems. As discussed elsewhere, the position of manager is unique in that it
presupposes the grant of broad powers with which to conduct the business of the principal, thus:

The powers of an agent are particularly broad in the case of one acting as a general agent or
manager; such a position presupposes a degree of confidence reposed and investiture with liberal
powers for the exercise of judgment and discretion in transactions and concerns which are incidental
or appurtenant to the business entrusted to his care and management. In the absence of an
agreement to the contrary, a managing agent may enter into any contracts that he deems
reasonably necessary or requisite for the protection of the interests of his principal entrusted to his
management. x x x.35

Applying the foregoing to the present case, we hold that Edwin Cuizon acted well-within his authority
when he signed the Deed of Assignment. To recall, petitioner refused to deliver the one unit of
sludge pump unless it received, in full, the payment for Impact Systems’ indebtedness.36 We may
very well assume that Impact Systems desperately needed the sludge pump for its business since
after it paid the amount of fifty thousand pesos (₱50,000.00) as down payment on 3 March 1995,37 it
still persisted in negotiating with petitioner which culminated in the execution of the Deed of
Assignment of its receivables from Toledo Power Company on 28 June 1995.38 The significant
amount of time spent on the negotiation for the sale of the sludge pump underscores Impact
Systems’ perseverance to get hold of the said equipment. There is, therefore, no doubt in our mind
that respondent EDWIN’s participation in the Deed of Assignment was "reasonably necessary" or
was required in order for him to protect the business of his principal. Had he not acted in the way he
did, the business of his principal would have been adversely affected and he would have violated his
fiduciary relation with his principal.

We likewise take note of the fact that in this case, petitioner is seeking to recover both from
respondents ERWIN, the principal, and EDWIN, the agent. It is well to state here that Article 1897 of
the New Civil Code upon which petitioner anchors its claim against respondent EDWIN "does not
hold that in case of excess of authority, both the agent and the principal are liable to the other
contracting party."39 To reiterate, the first part of Article 1897 declares that the principal is liable in
cases when the agent acted within the bounds of his authority. Under this, the agent is completely
absolved of any liability. The second part of the said provision presents the situations when the
agent himself becomes liable to a third party when he expressly binds himself or he exceeds the
limits of his authority without giving notice of his powers to the third person. However, it must be
pointed out that in case of excess of authority by the agent, like what petitioner claims exists here,
the law does not say that a third person can recover from both the principal and the agent.40

As we declare that respondent EDWIN acted within his authority as an agent, who did not acquire
any right nor incur any liability arising from the Deed of Assignment, it follows that he is not a real
party in interest who should be impleaded in this case. A real party in interest is one who "stands to
be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit."41 In
this respect, we sustain his exclusion as a defendant in the suit before the court a quo.

WHEREFORE, premises considered, the present petition is DENIED and the Decision dated 10
August 2004 and Resolution dated 17 March 2005 of the Court of Appeals in CA-G.R. SP No.
71397, affirming the Order dated 29 January 2002 of the Regional Trial Court, Branch 8, Cebu City,
is AFFIRMED.

Let the records of this case be remanded to the Regional Trial Court, Branch 8, Cebu City, for the
continuation of the proceedings against respondent Erwin Cuizon.

SO ORDERED.

G.R. No. 188288 January 16, 2012

SPOUSES FERNANDO and LOURDES VILORIA, Petitioners,


vs.
CONTINENTAL AIRLINES, INC.,

DECISION

REYES, J.:

This is a petition for review under Rule 45 of the Rules of Court from the January 30, 2009
Decision1 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, [₱]100,000.00 as moral damages, [₱]50,000.00 as exemplary damages,
[₱]40,000.00 as attorney’s fees and costs of suit to plaintiffs-appellees is
hereby REVERSED and SET ASIDE.

Defendant-appellant’s 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 Fernando’s 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 re-issuance fee.5

On June 17, 1999, Fernando went to Continental’s 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 CAI’s 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 ₱1,000,000.00 as moral damages, ₱500,000.00 as exemplary damages and
₱250,000.00 as attorney’s 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 attorney’s
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) carrier’s
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 RTC’s 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 Mager’s 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 defendant’s 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. Mager’s misleading misrepresentations. Continental Airlines agent Ms. Mager further
relied on and exploited plaintiff Fernando’s need and told him that they must book a flight
immediately or risk not being able to travel at all on the couple’s preferred date. Unfortunately,
plaintiffs spouses fell prey to the airline’s and its agent’s unethical tactics for baiting trusting
customers."10

Citing Articles 1868 and 1869 of the Civil Code, the RTC ruled that Mager is CAI’s 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 CAI’s agent in view of CAI’s 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 Court’s Ruling

On appeal, the CA reversed the RTC’s April 3, 2006 Decision, holding that CAI cannot be held liable
for Mager’s 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 CAI’s agent.
Furthermore, contrary to Spouses Viloria’s 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 principal’s 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 CAI’s 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-à-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
latter’s reversal of the RTC’s 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 CAI’s 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 CAI’s 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 CAI’s alleged breach of its undertaking in its March 24, 1998 letter.

The Respondent’s Case

In its Comment, CAI claimed that Spouses Viloria’s 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 Viloria’s 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 Viloria’s claim that they are not aware of CAI’s 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 CA’s 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 Travel’s agents and employees such as Mager?

c. Assuming that CAI is bound by the acts of Holiday Travel’s 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 Court’s 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
re-examine the evidence presented by the parties below, this Court takes exception to the general
rule that the CA’s findings of fact are conclusive upon Us and our jurisdiction is limited to the review
of questions of law. It is well-settled 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 CAI’s 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
agencywhereby 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. 1av vphi1

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 CAI’s
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 Viloria’s 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 Travel’s 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 CAI’s
acts in recognition of Holiday Travel’s 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 principal’s 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 agent’s 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 CAI’s agent, does it necessarily follow that CAI is liable for the
fault or negligence of Holiday Travel’s employees? Citing China Air Lines, Ltd. v. Court of Appeals,
et al.,23CAI 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 Court’s pronouncements in China Air Lines will reveal that an airline company
is not completely exonerated from any liability for the tort committed by its agent’s employees. A
prior determination of the nature of the passenger’s cause of action is necessary. If the passenger’s
cause of action against the airline company is premised on culpa aquiliana or quasi-delict for a tort
committed by the employee of the airline company’s 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
company’s 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 agent’s 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 agent’s employees. Article 2180 of the Civil Code does not
make the principal vicariously liable for the tort committed by its agent’s employees and the
principal-agency relationship per se does not make the principal a party to such tort; hence, the need
to prove the principal’s own fault or negligence.

On the other hand, if the passenger’s 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 company’s 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 non-performance by the
carrier."

Spouses Viloria’s cause of action on the basis of Mager’s 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 CAI’s alleged liability can be
substantiated. Apart from their claim that CAI must be held liable for Mager’s supposed fraud
because Holiday Travel is CAI’s agent, Spouses Viloria did not present evidence that CAI was a
party or had contributed to Mager’s 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 CAI’s behalf, in order to
deny Spouses Viloria’s request for a refund or Fernando’s use of Lourdes’ ticket for the re-issuance
of a new one, and simultaneously claim that they are not bound by Mager’s supposed
misrepresentation for purposes of avoiding Spouses Viloria’s 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 Mager’s acts, which were performed in compliance with Holiday Travel’s obligations
as CAI’s agent.

However, a person’s 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 Travel’s
employees or that CAI was equally at fault, no liability can be imposed on CAI for Mager’s 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. Mager’s 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 Fernando’s 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 Mager’s
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 Mager’s
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 Mager’s alleged fraud, which is Fernando’s 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 Mager’s 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 Fernando’s vitiated consent, Spouses
Viloria likewise asked for a refund based on CAI’s 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 defendant’s
breach of faith, a violation of the reciprocity between the parties37 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 party’s 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 CAI’s
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 Fernando’s 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 CAI’s letter from which the restriction on the
non-transferability 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 CAI’s 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) carrier’s 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 Fernando’s
purchase of a new ticket.
CAI’s 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 CAI’s 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 CAI’s failure to comply is not essential to its
fulfillment of its undertaking to issue new tickets upon Spouses Viloria’s surrender of the subject
tickets. This Court takes note of CAI’s willingness to perform its principal obligation and this is to
apply the price of the ticket in Fernando’s 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, CAI’s 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 Viloria’s 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 ticket"42 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 CAI’s 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. 1avv phi 1

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, CAI’s liability for damages for its refusal to accept Lourdes’ ticket for the purchase of
Fernando’s round trip ticket is offset by Spouses Viloria’s 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 ₱17,000.00 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 ₱17,000.00 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.48 The 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.

G.R. No. 166044 June 18, 2012

COUNTRY BANKERS INSURANCE CORPORATION, Petitioner,


vs.
KEPPEL CEBU SHIPYARD, UNIMARINE SHIPPING LINES, INC., PAUL RODRIGUEZ, PETER
RODRIGUEZ, ALBERT HONTANOSAS, and BETHOVEN QUINAIN, Respondents.
DECISION

LEONARDO-DE CASTRO, J.:

This is a petition for review on certiorari1 to reverse and set aside the January 29, 2004 Decision2 and
October 28, 2004 Resolution3 of the Court of Appeals in CA-G.R. CV No. 58001, wherein the Court of
Appeals affirmed with modification the February 10, 1997 Decision4 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 ₱4,486,052.00.6 Negotiations between Cebu Shipyard and Unimarine
led to the reduction of this amount to ₱3,850,000.00. The terms of this agreement were embodied in
Cebu Shipyard’s 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 ₱3,850,000.00 excluding
VAT.

Unimarine Shipping Lines, Inc. ("Unimarine") will pay the above amount of [₱3,850,000.00] 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 Amount Due Date


1st Installment ₱2,350,000.00 30 May 1992
2nd Installment ₱1,500,000.00 30 Jun 1992

Unimarine will deposit post-dated checks equivalent to the above amounts in Philippine Peso and an
additional check amount of ₱385,000.00, representing 10% [Value Added Tax] VAT on the above bill
of ₱3,850,000.00. 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 (₱385,000.00) 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 ₱4,620,000.00.

Yours faithfully,

CEBU SHIPYARD & ENG'G WORKS, INC. Conforme:


(SGD) (SGD)
SEET KENG TAT
Treasurer/VP-Admin. PAUL RODRIGUEZ
Unimarine Shipping
Lines, Inc.7

In compliance with the agreement, Unimarine, through Paul Rodriguez, secured from Country
Bankers Insurance Corp. (CBIC), through the latter’s agent, Bethoven Quinain (Quinain), CBIC
Surety Bond No. G (16) 294198 (the surety bond) on January 15, 1992 in the amount of
₱3,000,000.00. The expiration of this surety bond was extended to January 15, 1993, through
Endorsement No. 331529 (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)-0036510 in the amount of
₱1,620,000.00.

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
₱2,350,000.00. 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 message14 to Unimarine, to confirm Paul
Rodriguez’s promise that Unimarine will pay in full the ₱3,850,000.00, 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 faxed15 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 of ₱4,859,458.00, 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: 189,888.00


Debit Note No. 02381
Debit Note No. 02382 434,570.00
--------------------
4,859,458.0017

Due to Unimarine’s failure to heed Cebu Shipyard’s repeated demands, Cebu Shipyard, through
counsel, wrote the sureties CBIC18 on November 18, 1992, and Plaridel,19 on November 19, 1992, to
inform them of Unimarine’s 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 Shipyard’s 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 Shipyard’s claim had already been paid or extinguished when Unimarine executed an
Assignment of Claims23 of the proceeds of the sale of its vessel M/V Headline in favor of Cebu
Shipyard. CBIC also averred that Cebu Shipyard’s claim had already prescribed as the endorsement
that extended the surety bond’s 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, attorney’s fees, and costs of litigation.24

Subsequently, CBIC filed a Motion to Admit Cross and Third Party Complaint25 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 ₱500,000.00
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 Shipyard’s allegations and produced in court
the documents to support Cebu Shipyard’s claim. She also testified that while it was true that the
proceeds of the sale of Unimarine’s 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 CBIC’s office within one
week from the date of issuance. She further stated that the surety bond issued in favor of Unimarine
was issued beyond Quinain’s 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 ₱4,620,000.00 equivalent to the value of the surety bonds;

2. Ordering further defendant Unimarine to pay plaintiff the amount of ₱259,458.00 to


complete its entire obligation of ₱4,859,458.00;

3. To pay plaintiff jointly and severally the amount of ₱100,000.00 in attorney’s 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 CBIC’s 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 agent’s 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 Unimarine’s
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 Appellant’s Brief,40 claimed that the RTC erred in enforcing its liability on the surety bond
as it was issued in excess of Quinain’s authority. Moreover, CBIC averred, its liability under such
surety had been extinguished by reasons of novation, payment, and prescription. CBIC also
questioned the RTC’s order, holding it jointly and severally liable with Unimarine and Plaridel for the
amount of ₱4,620,000.00, 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-Defendant-
Appellant 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,
CBIC’s 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 Defendants-


Appellants 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 ₱100,000.00


in attorney’s 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 former’s M/V Pacific Fortune. The Court of Appeals dismissed CBIC’s
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 Quinain’s representation, as
CBIC’s 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 Hontanosas’s 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 attorney’s 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

CBIC48 and Unimarine, together with third party defendants-appellants49 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 ATTORNEY’S FEES IN THE AMOUNT OF ₱100,000.00.51
Issue

The crux of the controversy lies in CBIC’s 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 latter’s 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 Comment56 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 latter’s 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 Quinain’s 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 Quinain’s
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 principal’s ratification.

Art. 1900. So far as third persons are concerned, an act is deemed to have been performed within
the scope of the agent’s 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 agent’s
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 Quinain’s act of issuing Surety Bond No. G (16) 29419 is deemed to 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
₱500,000.00, 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 8th 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:

- SCHEDULE OF LIMITS -

a. FIRE:

xxxx

b. PERSONAL ACCIDENT:

xxxx

c. MOTOR CAR:

xxxx

d. MARINE:

xxxx

e. BONDS:

xxxx

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


Highways, Nat’l. 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. CBIC’s 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 Quinain’s authority, and Quinain has indeed exceeded them.
Under Articles 1898 and 1910, an agent’s 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 principal’s 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 CBIC’s 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 Quinain’s 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 agent’s 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 CBIC’s 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 Quinain’s 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 agent’s 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 latter’s 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 agent’s 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 Quinain’s 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 Quinain’s 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 CBIC’s liability on Surety
Bond No. G (16) 29419 and Endorsement No. 33152.

SO ORDERED.

G.R. No. L-24332 January 31, 1978

RAMON RALLOS, Administrator of the Estate of CONCEPCION RALLOS, petitioner,


vs.
FELIX GO CHAN & SONS REALTY CORPORATION and COURT OF APPEALS, respondents.

Seno, Mendoza & Associates for petitioner.

Ramon Duterte for private respondent.

MUÑOZ PALMA, J.:

This is a case of an attorney-in-fact, Simeon Rallos, who after of his death of his principal,
Concepcion Rallos, sold the latter's undivided share in a parcel of land pursuant to a power of
attorney which the principal had executed in favor. The administrator of the estate of the went to
court to have the sale declared uneanforceable and to recover the disposed share. The trial court
granted the relief prayed for, but upon appeal the Court of Appeals uphold the validity of the sale and
the complaint.

Hence, this Petition for Review on certiorari.

The following facts are not disputed. Concepcion and Gerundia both surnamed Rallos were sisters
and registered co-owners of a parcel of land known as Lot No. 5983 of the Cadastral Survey of Cebu
covered by Transfer Certificate of Title No. 11116 of the Registry of Cebu. On April 21, 1954, the
sisters executed a special power of attorney in favor of their brother, Simeon Rallos, authorizing him
to sell for and in their behalf lot 5983. On March 3, 1955, Concepcion Rallos died. On September 12,
1955, Simeon Rallos sold the undivided shares of his sisters Concepcion and Gerundia in lot 5983
to Felix Go Chan & Sons Realty Corporation for the sum of P10,686.90. The deed of sale was
registered in the Registry of Deeds of Cebu, TCT No. 11118 was cancelled, and a new transfer
certificate of Title No. 12989 was issued in the named of the vendee.

On May 18, 1956 Ramon Rallos as administrator of the Intestate Estate of Concepcion Rallos filed a
complaint docketed as Civil Case No. R-4530 of the Court of First Instance of Cebu, praying (1) that
the sale of the undivided share of the deceased Concepcion Rallos in lot 5983 be d unenforceable,
and said share be reconveyed to her estate; (2) that the Certificate of 'title issued in the name of
Felix Go Chan & Sons Realty Corporation be cancelled and another title be issued in the names of
the corporation and the "Intestate estate of Concepcion Rallos" in equal undivided and (3) that
plaintiff be indemnified by way of attorney's fees and payment of costs of suit. Named party
defendants were Felix Go Chan & Sons Realty Corporation, Simeon Rallos, and the Register of
Deeds of Cebu, but subsequently, the latter was dropped from the complaint. The complaint was
amended twice; defendant Corporation's Answer contained a crossclaim against its co-defendant,
Simon Rallos while the latter filed third-party complaint against his sister, Gerundia Rallos While the
case was pending in the trial court, both Simon and his sister Gerundia died and they were
substituted by the respective administrators of their estates.
After trial the court a quo rendered judgment with the following dispositive portion:

A. On Plaintiffs Complaint —

(1) Declaring the deed of sale, Exh. "C", null and void insofar as the
one-half pro-indiviso share of Concepcion Rallos in the property in
question, — Lot 5983 of the Cadastral Survey of Cebu — is
concerned;

(2) Ordering the Register of Deeds of Cebu City to cancel Transfer


Certificate of Title No. 12989 covering Lot 5983 and to issue in lieu
thereof another in the names of FELIX GO CHAN & SONS REALTY
CORPORATION and the Estate of Concepcion Rallos in the
proportion of one-half (1/2) share each pro-indiviso;

(3) Ordering Felix Go Chan & Sons Realty Corporation to deliver the
possession of an undivided one-half (1/2) share of Lot 5983 to the
herein plaintiff;

(4) Sentencing the defendant Juan T. Borromeo, administrator of the


Estate of Simeon Rallos, to pay to plaintiff in concept of reasonable
attorney's fees the sum of P1,000.00; and

(5) Ordering both defendants to pay the costs jointly and severally.

B. On GO CHANTS Cross-Claim:

(1) Sentencing the co-defendant Juan T. Borromeo, administrator of


the Estate of Simeon Rallos, to pay to defendant Felix Co Chan &
Sons Realty Corporation the sum of P5,343.45, representing the
price of one-half (1/2) share of lot 5983;

(2) Ordering co-defendant Juan T. Borromeo, administrator of the


Estate of Simeon Rallos, to pay in concept of reasonable attorney's
fees to Felix Go Chan & Sons Realty Corporation the sum of
P500.00.

C. On Third-Party Complaint of defendant Juan T. Borromeo administrator of Estate


of Simeon Rallos, against Josefina Rallos special administratrix of the Estate of
Gerundia Rallos:

(1) Dismissing the third-party complaint without prejudice to filing either a complaint
against the regular administrator of the Estate of Gerundia Rallos or a claim in the
Intestate-Estate of Cerundia Rallos, covering the same subject-matter of the third-
party complaint, at bar. (pp. 98-100, Record on Appeal)

Felix Go Chan & Sons Realty Corporation appealed in due time to the Court of Appeals from the
foregoing judgment insofar as it set aside the sale of the one-half (1/2) share of Concepcion Rallos.
The appellate tribunal, as adverted to earlier, resolved the appeal on November 20, 1964 in favor of
the appellant corporation sustaining the sale in question. 1 The appellee administrator, Ramon
Rallos, moved for a reconsider of the decision but the same was denied in a resolution of March 4,
1965. 2

What is the legal effect of an act performed by an agent after the death of his principal? Applied
more particularly to the instant case, We have the query. is the sale of the undivided share of
Concepcion Rallos in lot 5983 valid although it was executed by the agent after the death of his
principal? What is the law in this jurisdiction as to the effect of the death of the principal on the
authority of the agent to act for and in behalf of the latter? Is the fact of knowledge of the death of the
principal a material factor in determining the legal effect of an act performed after such death?

Before proceedings to the issues, We shall briefly restate certain principles of law relevant to the
matter tinder consideration.

1. It is a basic axiom in civil law embodied in our Civil Code that no one may contract in the name of
another without being authorized by the latter, or unless he has by law a right to represent him. 3 A
contract entered into in the name of another by one who has no authority or the legal representation
or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed, before it is revoked by the other
contracting party.4 Article 1403 (1) of the same Code also provides:

ART. 1403. The following contracts are unenforceable, unless they are justified:

(1) Those entered into in the name of another person by one who hi - been given no
authority or legal representation or who has acted beyond his powers; ...

Out of the above given principles, sprung the creation and acceptance of the relationship of
agency whereby one party, caged 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 agents acts as a
representative and not for himself, and (4) the agent acts within the scope of his authority. 5

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". 6

2. There are various ways of extinguishing agency, 7 but her We are concerned only with one cause
— death of the principal Paragraph 3 of Art. 1919 of the Civil Code which was taken from Art. 1709
of the Spanish Civil Code provides:

ART. 1919. Agency is extinguished.

xxx xxx xxx

3. By the death, civil interdiction, insanity or insolvency of the principal or of the


agent; ... (Emphasis supplied)

By reason of the very nature of the relationship between Principal and agent, agency is extinguished
by the death of the principal or the agent. This is the law in this jurisdiction.8
Manresa commenting on Art. 1709 of the Spanish Civil Code explains that the rationale for the law is
found in the juridical basis of agency which is representation Them being an in. integration of the
personality of the principal integration that of the agent it is not possible for the representation to
continue to exist once the death of either is establish. Pothier agrees with Manresa that by reason of
the nature of agency, death is a necessary cause for its extinction. Laurent says that the juridical tie
between the principal and the agent is severed ipso jure upon the death of either without necessity
for the heirs of the fact to notify the agent of the fact of death of the former. 9

The same rule prevails at common law — the death of the principal effects instantaneous and
absolute revocation of the authority of the agent unless the Power be coupled with an interest. 10 This
is the prevalent rule in American Jurisprudence where it is well-settled that a power without an
interest confer. red upon an agent is dissolved by the principal's death, and any attempted execution
of the power afterward is not binding on the heirs or representatives of the deceased. 11

3. Is the general rule provided for in Article 1919 that the death of the principal or of the agent
extinguishes the agency, subject to any exception, and if so, is the instant case within that
exception? That is the determinative point in issue in this litigation. It is the contention of respondent
corporation which was sustained by respondent court that notwithstanding the death of the principal
Concepcion Rallos the act of the attorney-in-fact, Simeon Rallos in selling the former's sham in the
property is valid and enforceable inasmuch as the corporation acted in good faith in buying the
property in question.

Articles 1930 and 1931 of the Civil Code provide the exceptions to the general rule afore-mentioned.

ART. 1930. The agency shall remain in full force and effect even after the death of
the principal, if it has been constituted in the common interest of the latter and of the
agent, or in the interest of a third person who has accepted the stipulation in his
favor.

ART. 1931. Anything done by the agent, without knowledge of the death of the
principal or of any other cause which extinguishes the agency, is valid and shall be
fully effective with respect to third persons who may have contracted with him in
good. faith.

Article 1930 is not involved because admittedly the special power of attorney executed in favor of
Simeon Rallos was not coupled with an interest.

Article 1931 is the applicable law. Under this provision, an act done by the agent after the death of
his principal is valid and effective only under two conditions, viz: (1) that the agent acted without
knowledge of the death of the principal and (2) that the third person who contracted with the agent
himself acted in good faith. Good faith here means that the third person was not aware of the death
of the principal at the time he contracted with said agent. These two requisites must concur the
absence of one will render the act of the agent invalid and unenforceable.

In the instant case, it cannot be questioned that the agent, Simeon Rallos, knew of the death of his
principal at the time he sold the latter's share in Lot No. 5983 to respondent corporation. The
knowledge of the death is clearly to be inferred from the pleadings filed by Simon Rallos before the
trial court. 12 That Simeon Rallos knew of the death of his sister Concepcion is also a finding of fact of
the court a quo 13 and of respondent appellate court when the latter stated that Simon Rallos 'must
have known of the death of his sister, and yet he proceeded with the sale of the lot in the name of
both his sisters Concepcion and Gerundia Rallos without informing appellant (the realty corporation)
of the death of the former. 14
On the basis of the established knowledge of Simon Rallos concerning the death of his principal
Concepcion Rallos, Article 1931 of the Civil Code is inapplicable. The law expressly requires for its
application lack of knowledge on the part of the agent of the death of his principal; it is not enough
that the third person acted in good faith. Thus in Buason & Reyes v. Panuyas, the Court applying
Article 1738 of the old Civil rode now Art. 1931 of the new Civil Code sustained the validity , of a sale
made after the death of the principal because it was not shown that the agent knew of his principal's
demise. 15 To the same effect is the case of Herrera, et al., v. Luy Kim Guan, et al., 1961, where in
the words of Justice Jesus Barrera the Court stated:

... even granting arguemendo that Luis Herrera did die in 1936, plaintiffs presented
no proof and there is no indication in the record, that the agent Luy Kim Guan was
aware of the death of his principal at the time he sold the property. The death 6f the
principal does not render the act of an agent unenforceable, where the latter had no
knowledge of such extinguishment of the agency. (1 SCRA 406, 412)

4. In sustaining the validity of the sale to respondent consideration the Court of Appeals reasoned
out that there is no provision in the Code which provides that whatever is done by an agent having
knowledge of the death of his principal is void even with respect to third persons who may have
contracted with him in good faith and without knowledge of the death of the principal. 16

We cannot see the merits of the foregoing argument as it ignores the existence of the general rule
enunciated in Article 1919 that the death of the principal extinguishes the agency. That being the
general rule it follows a fortiorithat any act of an agent after the death of his principal is void ab
initio unless the same fags under the exception provided for in the aforementioned Articles 1930 and
1931. Article 1931, being an exception to the general rule, is to be strictly construed, it is not to be
given an interpretation or application beyond the clear import of its terms for otherwise the courts will
be involved in a process of legislation outside of their judicial function.

5. Another argument advanced by respondent court is that the vendee acting in good faith relied on
the power of attorney which was duly registered on the original certificate of title recorded in the
Register of Deeds of the province of Cebu, that no notice of the death was aver annotated on said
certificate of title by the heirs of the principal and accordingly they must suffer the consequences of
such omission. 17

To support such argument reference is made to a portion in Manresa's Commentaries which We


quote:

If the agency has been granted for the purpose of contracting with certain persons,
the revocation must be made known to them. But if the agency is general iii nature,
without reference to particular person with whom the agent is to contract, it is
sufficient that the principal exercise due diligence to make the revocation of the
agency publicity known.

In case of a general power which does not specify the persons to whom represents'
on should be made, it is the general opinion that all acts, executed with third persons
who contracted in good faith, Without knowledge of the revocation, are valid. In such
case, the principal may exercise his right against the agent, who, knowing of the
revocation, continued to assume a personality which he no longer had. (Manresa
Vol. 11, pp. 561 and 575; pp. 15-16, rollo)

The above discourse however, treats of revocation by an act of the principal as a mode of
terminating an agency which is to be distinguished from revocation by operation of law such as
death of the principal which obtains in this case. On page six of this Opinion We stressed that by
reason of the very nature of the relationship between principal and agent, agency is
extinguished ipso jure upon the death of either principal or agent. Although a revocation of a power
of attorney to be effective must be communicated to the parties concerned, 18 yet a revocation by
operation of law, such as by death of the principal is, as a rule, instantaneously effective inasmuch
as "by legal fiction the agent's exercise of authority is regarded as an execution of the
principal's continuing will. 19 With death, the principal's will ceases or is the of authority is
extinguished.

The Civil Code does not impose a duty on the heirs to notify the agent of the death of the principal
What the Code provides in Article 1932 is that, if the agent die his heirs must notify the principal
thereof, and in the meantime adopt such measures as the circumstances may demand in the
interest of the latter. Hence, the fact that no notice of the death of the principal was registered on the
certificate of title of the property in the Office of the Register of Deeds, is not fatal to the cause of the
estate of the principal

6. Holding that the good faith of a third person in said with an agent affords the former sufficient
protection, respondent court drew a "parallel" between the instant case and that of an innocent
purchaser for value of a land, stating that if a person purchases a registered land from one who
acquired it in bad faith — even to the extent of foregoing or falsifying the deed of sale in his favor —
the registered owner has no recourse against such innocent purchaser for value but only against the
forger. 20

To support the correctness of this respondent corporation, in its brief, cites the case of Blondeau, et
al., v. Nano and Vallejo, 61 Phil. 625. We quote from the brief:

In the case of Angel Blondeau et al. v. Agustin Nano et al., 61 Phil. 630, one Vallejo
was a co-owner of lands with Agustin Nano. The latter had a power of attorney
supposedly executed by Vallejo Nano in his favor. Vallejo delivered to Nano his land
titles. The power was registered in the Office of the Register of Deeds. When the
lawyer-husband of Angela Blondeau went to that Office, he found all in order
including the power of attorney. But Vallejo denied having executed the power The
lower court sustained Vallejo and the plaintiff Blondeau appealed. Reversing the
decision of the court a quo, the Supreme Court, quoting the ruling in the case
of Eliason v. Wilborn, 261 U.S. 457, held:

But there is a narrower ground on which the defenses of the


defendant- appellee must be overruled. Agustin Nano had
possession of Jose Vallejo's title papers. Without those title papers
handed over to Nano with the acquiescence of Vallejo, a fraud could
not have been perpetuated. When Fernando de la Canters, a
member of the Philippine Bar and the husband of Angela Blondeau,
the principal plaintiff, searched the registration record, he found them
in due form including the power of attorney of Vallajo in favor of
Nano. If this had not been so and if thereafter the proper notation of
the encumbrance could not have been made, Angela Blondeau would
not have sent P12,000.00 to the defendant Vallejo.' An executed
transfer of registered lands placed by the registered owner thereof in
the hands of another operates as a representation to a third party that
the holder of the transfer is authorized to deal with the land.
As between two innocent persons, one of whom must suffer the
consequence of a breach of trust, the one who made it possible by
his act of coincidence bear the loss. (pp. 19-21)

The Blondeau decision, however, is not on all fours with the case before Us because here We are
confronted with one who admittedly was an agent of his sister and who sold the property of the latter
after her death with full knowledge of such death. The situation is expressly covered by a provision
of law on agency the terms of which are clear and unmistakable leaving no room for an interpretation
contrary to its tenor, in the same manner that the ruling in Blondeau and the cases cited therein
found a basis in Section 55 of the Land Registration Law which in part provides:

xxx xxx xxx

The production of the owner's duplicate certificate whenever any voluntary


instrument is presented for registration shall be conclusive authority from the
registered owner to the register of deeds to enter a new certificate or to make a
memorandum of registration in accordance with such instruments, and the new
certificate or memorandum Shall be binding upon the registered owner and upon all
persons claiming under him in favor of every purchaser for value and in good
faith: Provided however, That in all cases of registration provided by fraud, the owner
may pursue all his legal and equitable remedies against the parties to such fraud
without prejudice, however, to the right, of any innocent holder for value of a
certificate of title. ... (Act No. 496 as amended)

7. One last point raised by respondent corporation in support of the appealed decision is an 1842
ruling of the Supreme Court of Pennsylvania in Cassiday v. McKenzie wherein payments made to an
agent after the death of the principal were held to be "good", "the parties being ignorant of the
death". Let us take note that the Opinion of Justice Rogers was premised on the statement that
the parties were ignorant of the death of the principal. We quote from that decision the following:

... Here the precise point is, whether a payment to an agent when the Parties are
ignorant of the death is a good payment. in addition to the case in Campbell before
cited, the same judge Lord Ellenboruogh, has decided in 5 Esp. 117, the general
question that a payment after the death of principal is not good. Thus, a payment of
sailor's wages to a person having a power of attorney to receive them, has been held
void when the principal was dead at the time of the payment. If, by this case, it is
meant merely to decide the general proposition that by operation of law the death of
the principal is a revocation of the powers of the attorney, no objection can be taken
to it. But if it intended to say that his principle applies where there was 110 notice of
death, or opportunity of twice I must be permitted to dissent from it.

... That a payment may be good today, or bad tomorrow, from the accident
circumstance of the death of the principal, which he did not know, and which by no
possibility could he know? It would be unjust to the agent and unjust to the debtor. In
the civil law, the acts of the agent, done bona fide in ignorance of the death of his
principal are held valid and binding upon the heirs of the latter. The same rule holds
in the Scottish law, and I cannot believe the common law is so unreasonable... (39
Am. Dec. 76, 80, 81; emphasis supplied)

To avoid any wrong impression which the Opinion in Cassiday v. McKenzie may evoke, mention
may be made that the above represents the minority view in American jurisprudence. Thus
in Clayton v. Merrett, the Court said.—
There are several cases which seem to hold that although, as a general principle,
death revokes an agency and renders null every act of the agent thereafter
performed, yet that where a payment has been made in ignorance of the death, such
payment will be good. The leading case so holding is that of Cassiday v. McKenzie, 4
Watts & S. (Pa) 282, 39 Am. 76, where, in an elaborate opinion, this view ii broadly
announced. It is referred to, and seems to have been followed, in the case of Dick v.
Page, 17 Mo. 234, 57 AmD 267; but in this latter case it appeared that the estate of
the deceased principal had received the benefit of the money paid, and therefore the
representative of the estate might well have been held to be estopped from suing for
it again. . . . These cases, in so far, at least, as they announce the doctrine under
discussion, are exceptional. The Pennsylvania Case, supra (Cassiday v. McKenzie 4
Watts & S. 282, 39 AmD 76), is believed to stand almost, if not quite, alone in
announcing the principle in its broadest scope. (52, Misc. 353, 357, cited in 2 C.J.
549)

So also in Travers v. Crane, speaking of Cassiday v. McKenzie, and pointing out that the opinion,
except so far as it related to the particular facts, was a mere dictum, Baldwin J. said:

The opinion, therefore, of the learned Judge may be regarded more as an


extrajudicial indication of his views on the general subject, than as the adjudication of
the Court upon the point in question. But accordingly all power weight to this opinion,
as the judgment of a of great respectability, it stands alone among common law
authorities and is opposed by an array too formidable to permit us to following it. (15
Cal. 12,17, cited in 2 C.J. 549)

Whatever conflict of legal opinion was generated by Cassiday v. McKenzie in American


jurisprudence, no such conflict exists in our own for the simple reason that our statute, the Civil
Code, expressly provides for two exceptions to the general rule that death of the principal revokes
ipso jure the agency, to wit: (1) that the agency is coupled with an interest (Art 1930), and (2) that
the act of the agent was executed without knowledge of the death of the principal and the third
person who contracted with the agent acted also in good faith (Art. 1931). Exception No. 2 is the
doctrine followed in Cassiday, and again We stress the indispensable requirement that the agent
acted without knowledge or notice of the death of the principal In the case before Us the agent
Ramon Rallos executed the sale notwithstanding notice of the death of his principal Accordingly, the
agent's act is unenforceable against the estate of his principal.

IN VIEW OF ALL THE FOREGOING, We set aside the ecision of respondent appellate court, and
We affirm en toto the judgment rendered by then Hon. Amador E. Gomez of the Court of First
Instance of Cebu, quoted in pages 2 and 3 of this Opinion, with costs against respondent realty
corporation at all instances.

So Ordered.