Article 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. (1710a)

Article 1870. Acceptance by the agent may also be express, or implied from his acts which carry out
the agency, or from his silence or inaction according to the circumstances. (n)

Article 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. (n)

Article 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. (n)

Article 1921. If the agency has been entrusted for the purpose of contracting with specified persons,
its revocation shall not prejudice the latter if they were not given notice thereof. (1734)

Article 1922. If the agent had general powers, revocation of the agency does not prejudice third
persons who acted in good faith and without knowledge of the revocation. Notice of the revocation in
a newspaper of general circulation is a sufficient warning to third persons. (n)

Article 1876. An agency is either general or special.

The former comprises all the business of the principal. The latter, one or more specific transactions.
(1712)

Article 1877. An agency couched in general terms comprises only acts of administration, even if the
principal should state that he withholds no power or that the agent may execute such acts as he may
consider appropriate, or even though the agency should authorize a general and unlimited
management. (n)

Article 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. (n)

Article 1878. Special powers of attorney are necessary in the following cases:

(1) To make such payments as are not usually considered as acts of administration;

(2) To effect novations which put an end to obligations already in existence at the time the
agency was constituted;

(3) To compromise, to submit questions to arbitration, to renounce the right to appeal from a
judgment, to waive objections to the venue of an action or to abandon a prescription already
acquired;

(4) To waive any obligation gratuitously;

 (5) To enter into any contract by which the ownership of an immovable is transmitted or
acquired either gratuitously or for a valuable consideration;

(6) To make gifts, except customary ones for charity or those made to employees in the
business managed by the agent;

(7) To loan or borrow money, unless the latter act be urgent and indispensable for the
preservation of the things which are under administration;

(8) To lease any real property to another person for more than one year;

(9) To bind the principal to render some service without compensation;

(10) To bind the principal in a contract of partnership;

(11) To obligate the principal as a guarantor or surety;

(12) To create or convey real rights over immovable property;

(13) To accept or repudiate an inheritance;

(14) To ratify or recognize obligations contracted before the agency;

(15) Any other act of strict dominion. (n)

Article 1879. A special power to sell excludes the power to mortgage; and a special power to
mortgage does not include the power to sell. (n)

Article 1880. A special power to compromise does not authorize submission to arbitration. (1713a)

Obligation to act within scope of authority Article 1879 Article1880 Article 1881 Article 1882 Article 1887

Article 1881. The agent must act within the scope of his authority. He may do such acts as may be
conducive to the accomplishment of the purpose of the agency. (1714a)

Article 1882. The limits of the agent's authority shall not be considered exceeded should it have
been performed in a manner more advantageous to the principal than that specified by him. (1715)

Article 1887. In the execution of the agency, the agent shall act in accordance with the instructions
of the principal.

In default thereof, he shall do all that a good father of a family would do, as required by the nature of
the business

B. Obligation to carry out the agency

Article 1884. The agent is bound by his acceptance to carry out the agency, and is liable for the
damages which, through his non-performance, the principal may suffer.
He must also finish the business already begun on the death of the principal, should delay entail any
danger. (1718)

Article 1928. The agent may withdraw from the agency by giving due notice to the principal. If the
latter should suffer any damage by reason of the withdrawal, the agent must indemnify him therefor,
unless the agent should base his withdrawal upon the impossibility of continuing the performance of
the agency without grave detriment to himself. (1736a)

Article 1929. The agent, even if he should withdraw from the agency for a valid reason, must
continue to act until the principal has had reasonable opportunity to take the necessary steps to
meet the situation. (1737a)

C. Obligation not to carry out the agency

Article 1888. An agent shall not carry out an agency if its execution would manifestly result in loss or
damage to the principal. (n)

D. Loyalty to its Principal

Article 1889. The agent shall be liable for damages if, there being a conflict between his interests
and those of the principal, he should prefer his own. (n)

Article 1890. If the agent has been empowered to borrow money, he may himself be the lender at
the current rate of interest. If he has been authorized to lend money at interest, he cannot borrow it
without the consent of the principal. (n)

Article 1491. The following persons cannot acquire by purchase, even at a public or judicial auction,
either in person or through the mediation of another:

(1) The guardian, the property of the person or persons who may be under his guardianship;

(2) Agents, the property whose administration or sale may have been intrusted to them,
unless the consent of the principal has been given;

(3) Executors and administrators, the property of the estate under administration;

(4) Public officers and employees, the property of the State or of any subdivision thereof, or of any
government-owned or controlled corporation, or institution, the administration of which has been
intrusted to them; this provision shall apply to judges and government experts who, in any manner
whatsoever, take part in the sale;

(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers
and employees connected with the administration of justice, the property and rights in litigation or
levied upon an execution before the court within whose jurisdiction or territory they exercise their
respective functions; this prohibition includes the act of acquiring by assignment and shall apply to
lawyers, with respect to the property and rights which may be the object of any litigation in which
they may take part by virtue of their profession;

(6) Any others specially disqualified by law. (1459a)

E. Diligence
Article 1885. In case a person declines an agency, he is bound to observe the diligence of a good
father of a family in the custody and preservation of the goods forwarded to him by the owner until
the latter should appoint an agent or take charge of the goods. (n)

Article 1887. In the execution of the agency, the agent shall act in accordance with the instructions
of the principal.

In default thereof, he shall do all that a good father of a family would do, as required by the nature of
the business. (1719)

Article 1909. The agent is responsible not only for fraud, but also for negligence, which shall be
judged with more or less rigor by the courts, according to whether the agency was or was not for a
compensation. (1726)

F. Obligation to render accounts

Article 1891. Every agent is bound to render an account of his transactions and to deliver to the
principal whatever he may have received by virtue of the agency, even though it may not be owing to
the principal.

Every stipulation exempting the agent from the obligation to render an account shall be void. (1720a)

G. Solidary liability
Article 1894. The responsibility of two or more agents, even though they have been appointed
simultaneously, is not solidary, if solidarity has not been expressly stipulated. (1723)

Article 1895. If solidarity has been agreed upon, each of the agents is responsible for the non-
fulfillment of agency, and for the fault or negligence of his fellows agents, except in the latter case
when the fellow agents acted beyond the scope of their authority. (n)

H. Liability of agent for interest

Article 1896. The agent owes interest on the sums he has applied to his own use from the day on
which he did so, and on those which he still owes after the extinguishment of the agency. (1724a)

Liability of agent for fraud and negligence / intentional wrong

I. Article 1909. The agent is responsible not only for fraud, but also for negligence, which
shall be judged with more or less rigor by the courts, according to whether the agency
was or was not for a compensation. (1726)

J. Specific obligations of commission agents

Article 1903. The commission agent shall be responsible for the goods received by him in the terms
and conditions and as described in the consignment, unless upon receiving them he should make a
written statement of the damage and deterioration suffered by the same. (n)

Article 1904. The commission agent who handles goods of the same kind and mark, which belong
to different owners, shall distinguish them by countermarks, and designate the merchandise
respectively belonging to each principal. (n)
Article 1905. The commission agent cannot, without the express or implied consent of the principal,
sell on credit. Should he do so, the principal may demand from him payment in cash, but the
commission agent shall be entitled to any interest or benefit, which may result from such sale. (n)

Article 1906. Should the commission agent, with authority of the principal, sell on credit, he shall so
inform the principal, with a statement of the names of the buyers. Should he fail to do so, the sale
shall be deemed to have been made for cash insofar as the principal is concerned. (n)

Article 1907. Should the commission agent receive on a sale, in addition to the ordinary
commission, another called a guarantee commission, he shall bear the risk of collection and shall
pay the principal the proceeds of the sale on the same terms agreed upon with the purchaser. (n)

Article 1908. The commission agent who does not collect the credits of his principal at the time
when they become due and demandable shall be liable for damages, unless he proves that he
exercised due diligence for that purpose. (n)

Responsibility for acts of sub-agents or agent’s substitutes

Article 1892. The agent may appoint a substitute if the principal has not prohibited him from doing
so; but he shall be responsible for the acts of the substitute:

(1) When he was not given the power to appoint one;

(2) When he was given such power, but without designating the person, and the person appointed
was notoriously incompetent or insolvent.

All acts of the substitute appointed against the prohibition of the principal shall be void. (1721)

Article 1893. In the cases mentioned in Nos. 1 and 2 of the preceding article, the principal may
furthermore bring an action against the substitute with respect to the obligations which the latter has
contracted under the substitution. (1722a)

VIII. Obligations and liabilities of agents to third parties

A. Agent acting within scope of authority

Article 1883. If an agent acts in his own name, the principal has no right of action against the
persons with whom the agent has contracted; neither have such persons against the principal.

]In such case the agent is the one directly bound in favor of the person with whom he has
contracted, as if the transaction were his own, except when the contract involves things
belonging to the principal.

The provisions of this article shall be understood to be without prejudice to the actions
between the principal and agent.
Article 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. (1725)

Article 1899. If a duly authorized agent acts in accordance with the orders of the principal, the latter
cannot set up the ignorance of the agent as to circumstances whereof he himself was, or ought to
have been, aware. (n)

A. Agent acting outside of authority

Article 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. (n)

Article 1901. A third person cannot set up the fact that the agent has exceeded his powers, if the
principal has ratified, or has signified his willingness to ratify the agent's acts. (n)

Article 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. (n)

G.R. No. L-29640 June 10, 1971

GUILLERMO AUSTRIA, petitioner,
vs.
THE COURT OF APPEALS (Second Division), PACIFICO ABAD and MARIA G.
ABAD, respondents.

Antonio Enrile Inton for petitioner.

Jose A. Buendia for respondents.

REYES, J.B.L., J.:

Guillermo Austria petitions for the review of the decision rendered by the Court of Appeal (in CA-
G.R. No. 33572-R), on the sole issue of whether in a contract of agency (consignment of goods for
sale) it is necessary that there be prior conviction for robbery before the loss of the article shall
exempt the consignee from liability for such loss.

In a receipt dated 30 January 1961, Maria G. Abad acknowledged having received from Guillermo
Austria one (1) pendant with diamonds valued at P4,500.00, to be sold on commission basis or to be
returned on demand. On 1 February 1961, however, while walking home to her residence in
Mandaluyong, Rizal, Abad was said to have been accosted by two men, one of whom hit her on the
face, while the other snatched her purse containing jewelry and cash, and ran away. Among the
pieces of jewelry allegedly taken by the robbers was the consigned pendant. The incident became
the subject of a criminal case filed in the Court of First Instance of Rizal against certain persons
(Criminal Case No. 10649, People vs. Rene Garcia, et al.).

As Abad failed to return the jewelry or pay for its value notwithstanding demands, Austria brought in
the Court of First Instance of Manila an action against her and her husband for recovery of the
pendant or of its value, and damages. Answering the allegations of the complaint, defendants
spouses set up the defense that the alleged robbery had extinguished their obligation.

After due hearing, the trial court rendered judgment for the plaintiff, and ordered defendants
spouses, jointly and severally, to pay to the former the sum of P4,500.00, with legal interest thereon,
plus the amount of P450.00 as reasonable attorneys' fees, and the costs. It was held that defendants
failed to prove the fact of robbery, or, if indeed it was committed, that defendant Maria Abad was
guilty of negligence when she went home without any companion, although it was already getting
dark and she was carrying a large amount of cash and valuables on the day in question, and such
negligence did not free her from liability for damages for the loss of the jewelry.

Not satisfied with his decision, the defendants went to the Court of Appeals, and there secured a
reversal of the judgment. The appellate court overruling the finding of the trial court on the lack of
credibility of the two defense witnesses who testified on the occurrence of the robbery, and holding
that the facts of robbery and defendant Maria Abad's possesion of the pendant on that unfortunate
day have been duly published, declared respondents not responsible for the loss of the jewelry on
account of a fortuitous event, and relieved them from liability for damages to the owner. Plaintiff
thereupon instituted the present proceeding.

It is now contended by herein petitioner that the Court of Appeals erred in finding that there was
robbery in the case, although nobody has been found guilty of the supposed crime. It is petitioner's
theory that for robbery to fall under the category of a fortuitous event and relieve the obligor from his
obligation under a contract, pursuant to Article 1174 of the new Civil Code, there ought to be prior
finding on the guilt of the persons responsible therefor. In short, that the occurrence of the robbery
should be proved by a final judgment of conviction in the criminal case. To adopt a different view,
petitioner argues, would be to encourage persons accountable for goods or properties received in
trust or consignment to connive with others, who would be willing to be accused in court for the
robbery, in order to be absolved from civil liability for the loss or disappearance of the entrusted
articles.

We find no merit in the contention of petitioner.

It is recognized in this jurisdiction that to constitute a caso fortuito that would exempt a person from
responsibility, it is necessary that (1) the event must be independent of the human will (or rather, of
the debtor's or obligor's); (2) the occurrence must render it impossible for the debtor to fulfill the
obligation in a normal manner; and that (3) the obligor must be free of participation in or aggravation
of the injury to the creditor.  A fortuitous event, therefore, can be produced by nature, e.g.,
1

earthquakes, storms, floods, etc., or by the act of man, such as war, attack by bandits, robbery,  etc.,
2

provided that the event has all the characteristics enumerated above.

It is not here disputed that if respondent Maria Abad were indeed the victim of robbery, and if it were
really true that the pendant, which she was obliged either to sell on commission or to return to
petitioner, were taken during the robbery, then the occurrence of that fortuitous event would have
extinguished her liability. The point at issue in this proceeding is how the fact of robbery is to be
established in order that a person may avail of the exempting provision of Article 1174 of the new
Civil Code, which reads as follows:

ART. 1174. Except in cases expressly specified by law, or when it is otherwise

declared by stipulation, or when the nature of the obligation requires the assumption
of risk, no person shall be responsible for those events which could not be foreseen,
or which, though foreseen, were inevitable.

It may be noted the reform that the emphasis of the provision is on the events, not on the agents or
factors responsible for them. To avail of the exemption granted in the law, it is not necessary that the
persons responsible for the occurrence should be found or punished; it would only be sufficient to
established that the enforceable event, the robbery in this case did take place without any
concurrent fault on the debtor's part, and this can be done by preponderant evidence. To require in
the present action for recovery the prior conviction of the culprits in the criminal case, in order to
establish the robbery as a fact, would be to demand proof beyond reasonable doubt to prove a fact
in a civil case.

It is undeniable that in order to completely exonerate the debtor for reason of a fortutious event, such
debtor must, in addition to the cams itself, be free of any concurrent or contributory fault or
negligence.  This is apparent from Article 1170 of the Civil Code of the Philippines, providing that:
3

ART. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are
liable for damages.

It is clear that under the circumstances prevailing at present in the City of Manila and its suburbs,
with their high incidence of crimes against persons and property that renders travel after nightfall a
matter to be sedulously avoided without suitable precaution and protection, the conduct of
respondent Maria G. Abad, in returning alone to her house in the evening, carrying jewelry of
considerable value would be negligent per se and would not exempt her from responsibility in the
case of a robbery. We are not persuaded, however, that the same rule should obtain ten years
previously, in 1961, when the robbery in question did take place, for at that time criminality had not
by far reached the levels attained in the present day.

There is likewise no merit in petitioner's argument that to allow the fact of robbery to be recognized
in the civil case before conviction is secured in the criminal action, would prejudice the latter case, or
would result in inconsistency should the accused obtain an acquittal or should the criminal case be
dismissed. It must be realized that a court finding that a robbery has happened would not
necessarily mean that those accused in the criminal action should be found guilty of the crime; nor
would a ruling that those actually accused did not commit the robbery be inconsistent with a finding
that a robbery did take place. The evidence to establish these facts would not necessarily be the
same.

WHEREFORE, finding no error in the decision of the Court of Appeals under review, the petition in
this case is hereby dismissed with costs against the petitioner.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor and
Makasiar, JJ., concur.

Castro, J., took no part.

G.R. No. L-20567             July 30, 1965

PHILIPPINE NATIONAL BANK, petitioner,

vs.
MANILA SURETY and FIDELITY CO., INC. and THE COURT OF APPEALS (Second
Division), respondents.

Besa, Galang and Medina for petitioner.

De Santos and Delfino for respondents.

REYES, J.B.L., J.:

The Philippine National Bank petitions for the review and reversal of the decision rendered by the
Court of Appeals (Second Division), in its case CA-G.R. No. 24232-R, dismissing the Bank's
complaint against respondent Manila Surety & Fidelity Co., Inc., and modifying the judgment of the
Court of First Instance of Manila in its Civil Case No. 11263.

The material facts of the case, as found by the appellate Court, are as follows:

The Philippine National Bank had opened a letter of credit and advanced thereon $120,000.00 to
Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this amount, 2,000 tons worth P279,000.00
were released and delivered to Adams & Taguba Corporation (known as ATACO) under a trust
receipt guaranteed by Manila Surety & Fidelity Co. up to the amount of P75,000.00.

To pay for the asphalt, ATACO constituted the Bank its assignee and attorney-in-fact to receive and
collect from the Bureau of Public Works the amount aforesaid out of funds payable to the assignor
under Purchase Order No. 71947. This assignment (Exhibit "A") stipulated that:

The conditions of this assignment are as follows:

1. The same shall remain irrevocable until the said credit accomodation is fully liquidated.

2. The PHILIPPINE NATIONAL BANK is hereby appointed as our Attorney-in-Fact for us and
in our name, place and stead, to collect and to receive the payments to be made by virtue of
the aforesaid Purchase Order, with full power and authority to execute and deliver on our
behalf, receipt for all payments made to it; to endorse for deposit or encashment checks,
money order and treasury warrants which said Bank may receive, and to apply said
payments to the settlement of said credit accommodation.

This power of attorney shall also remain irrevocable until our total indebtedness to the said
Bank have been fully liquidated. (Exhibit E)

ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt to the total value of
P431,466.52. Of this amount the Bank regularly collected, from April 21, 1948 to November 18,
1948, P106,382.01.

Thereafter, for unexplained reasons, the Bank ceased to collect, until in 1952 its investigators found
that more moneys were payable to ATACO from the Public Works office, because the latter-ATACO
had allowed mother creditor to collect funds due to ATACO under the same purchase order to a total
of P311,230.41.
Its demands on the principal debtor and the Surety having been refused, the Bank sued both in the
Court of First Instance of Manila to recover the balance of P158,563.18 as of February 15, 1950,
plus interests and costs.

On October 4, 1958, the trial court rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered as follows:

1. Ordering defendants, Adams & Taguba Corporation and Manila Surety & Fidelity Co., Inc.,
to pay plaintiff, Philippines National Bank, the sum of P174,462.34 as of February 24, 1956,
minus the amount of P8,000 which defendant, Manila Surety Co., Inc. paid from March, 1956
to October, 1956 with interest at the rate of 5% per annum from February 25, 1956, until fully
paid provided that the total amount that should be paid by defendant Manila Surety Co., Inc.,
on account of this case shall not exceed P75,000.00, and to pay the costs;

2. Orderinq cross-defendant, Adams & Taguba Corporation, and third-party defendant,

Pedro A. Taguba, jointly and severally, to pay cross and third-party plaintiff, Manila Surety &
Fidelity Co., Inc., whatever amount the latter has paid or shall pay under this judgment;

3. Dismissing the complaint insofar as the claim for 17% special tax is concerned; and

4. Dismissing the counterclaim of defendants Adams & Taguba Corporation and Manila
Surety & Fidelity Co., Inc.

From said decision, only the defendant Surety Company has duly perfected its appeal. The Central
Bank of the Philippines did not appeal, while defendant ATACO failed to perfect its appeal.

The Bank recoursed to the Court of Appeals, which rendered an adverse decision and modified the
judgment of the court of origin as to the surety's liability. Its motions for reconsideration having
proved unavailing, the Bank appealed to this Court.

The Court of Appeals found the Bank to have been negligent in having stopped collecting from the
Bureau of Public Works the moneys falling due in favor of the principal debtor, ATACO, from and
after November 18, 1948, before the debt was fully collected, thereby allowing such funds to be
taken and exhausted by other creditors to the prejudice of the surety, and held that the Bank's
negligence resulted in exoneration of respondent Manila Surety & Fidelity Company.

This holding is now assailed by the Bank. It contends the power of attorney obtained from ATACO
was merely in additional security in its favor, and that it was the duty of the surety, and not that of
the creditor, owed see to it that the obligor fulfills his obligation, and that the creditor owed the
surety no duty of active diligence to collect any, sum from the principal debtor, citing Judge
Advocate General vs. Court of Appeals, G.R. No. L-10671, October 23, 1958.

This argument of appellant Bank misses the point.

The Court of Appeals did not hold the Bank answerable for negligence in failing to collect from the
principal debtor but for its neglect in collecting the sums due to the debtor from the Bureau of
Public Works, contrary to its duty as holder of an exclusive and irrevocable power of attorney
to make such collections, since an agent is required to act with the care of a good father of a
family (Civ. Code, Art. 1887) and becomes liable for the damages which the principal may suffer
through his non-performance (Civ. Code, Art. 1884) (HENCE, DUE DILIGENCE OF A GOOD
FATHER IS REQUIRED OF AGENTS).

Certainly, the Bank could not expect that the Bank would diligently perform its duty under its power
of attorney, but because they could not have collected from the Bureau even if they had attempted to
do so. It must not be forgotten that the Bank's power to collect was expressly made irrevocable, so
that the Bureau of Public Works could very well refuse to make payments to the principal debtor
itself, and a fortiori reject any demands by the surety.

Even if the assignment with power of attorney from the principal debtor were considered as mere
additional security still, by allowing the assigned funds to be exhausted without notifying the surety,
the Bank deprived the former of any possibility of recoursing against that security. The Bank thereby
exonerated the surety, pursuant to Article 2080 of the Civil Code:

ART. 2080. — The guarantors, even though they be solidary, are released from their
obligation whenever by come act of the creditor they cannot be subrogated to the rights,
mortgages and preferences of the latter. (Emphasis supplied.)

The appellant points out to its letter of demand, Exhibit "K", addressed to the Bureau of Public
Works, on May 5, 1949, and its letter to ATACO, Exhibit "G", informing the debtor that as of its date,
October 31, 1949, its outstanding balance was P156,374.83. Said Exhibit "G" has no bearing on the
issue whether the Bank has exercised due diligence in collecting from the Bureau of Public Works,
since the letter was addressed to ATACO, and the funds were to come from elsewhere. As to the
letter of demand on the Public Works office, it does not appear that any reply thereto was made; nor
that the demand was pressed, nor that the debtor or the surety were ever apprised that payment
was not being made. The fact remains that because of the Bank's inactivity the other creditors were
enabled to collect P173,870.31, when the balance due to appellant Bank was only P158,563.18. The
finding of negligence made by the Court of Appeals is thus not only conclusive on us but fully
supported by the evidence.

Even if the Court of Appeals erred on the second reason it advanced in support of the decision now
under appeal, because the rules on application of payments, giving preference to secured
obligations are only operative in cases where there are several distinct debts, and not where there is
only one that is partially secured, the error is of no importance, since the principal reason based on
the Bank's negligence furnishes adequate support to the decision of the Court of Appeals that the
surety was thereby released.

WHEREFORE, the appealed decision is affirmed, with costs against appellant Philippine National
Bank.

G.R. No. L-30573 October 29, 1971

VICENTE M. DOMINGO, represented by his heirs, ANTONINA RAYMUNDO VDA. DE

DOMINGO, RICARDO, CESAR, AMELIA, VICENTE JR., SALVADOR, IRENE and JOSELITO, all
surnamed DOMINGO, petitioners-appellants,
vs.
GREGORIO M. DOMINGO, respondent-appellee, TEOFILO P. PURISIMA, intervenor-respondent.

Teofilo Leonin for petitioners-appellants.

Osorio, Osorio & Osorio for respondent-appellee.

Teofilo P. Purisima in his own behalf as intervenor-respondent.

MAKASIAR, J.:

Petitioner-appellant Vicente M. Domingo, now deceased and represented by his heirs, Antonina
Raymundo vda. de Domingo, Ricardo, Cesar, Amelia, Vicente Jr., Salvacion, Irene and Joselito, all
surnamed Domingo, sought the reversal of the majority decision dated, March 12, 1969 of the
Special Division of Five of the Court of Appeals affirming the judgment of the trial court, which
sentenced the said Vicente M. Domingo to pay Gregorio M. Domingo P2,307.50 and the intervenor
Teofilo P. Purisima P2,607.50 with interest on both amounts from the date of the filing of the
complaint, to pay Gregorio Domingo P1,000.00 as moral and exemplary damages and P500.00 as
attorney's fees plus costs.

The following facts were found to be established by the majority of the Special Division of Five of the
Court of Appeals:

In a document Exhibit "A" executed on June 2, 1956, Vicente M. Domingo granted Gregorio
Domingo, a real estate broker, the exclusive agency to sell his lot No. 883 of Piedad Estate with an
area of about 88,477 square meters at the rate of P2.00 per square meter (or for P176,954.00) with
a commission of 5% on the total price, if the property is sold by Vicente or by anyone else during the
30-day duration of the agency or if the property is sold by Vicente within three months from the
termination of the agency to apurchaser to whom it was submitted by Gregorio during the
continuance of the agency with notice to Vicente.

The said agency contract was in triplicate, one copy was given to Vicente, while the original and
another copy were retained by Gregorio.

On June 3, 1956, Gregorio authorized the intervenor Teofilo P. Purisima to look for a buyer,
promising him one-half of the 5% commission.

Thereafter, Teofilo Purisima introduced Oscar de Leon to Gregorio as a prospective buyer.

Oscar de Leon submitted a written offer which was very much lower than the price of P2.00 per
square meter (Exhibit "B").

Vicente directed Gregorio to tell Oscar de Leon to raise his offer.

After several conferences between Gregorio and Oscar de Leon, the latter raised his offer to
P109,000.00 on June 20, 1956 as evidenced by Exhibit "C", to which Vicente agreed by signing
Exhibit "C".

Upon demand of Vicente, Oscar de Leon issued to him a check in the amount of P1,000.00 as
earnest money, after which Vicente advanced to Gregorio the sum of P300.00.

Oscar de Leon confirmed his former offer to pay for the property at P1.20 per square meter in
another letter, Exhibit "D".
Subsequently, Vicente asked for an additional amount of P1,000.00 as earnest money, which Oscar
de Leon promised to deliver to him. Thereafter, Exhibit "C" was amended to the effect that Oscar de
Leon will vacate on or about September 15, 1956 his house and lot at Denver Street, Quezon City
which is part of the purchase price.

It was again amended to the effect that Oscar will vacate his house and lot on December 1, 1956,
because his wife was on the family way and Vicente could stay in lot No. 883 of Piedad Estate until
June 1, 1957, in a document dated June 30, 1956 (the year 1957 therein is a mere typographical
error) and marked Exhibit "D".

Pursuant to his promise to Gregorio, Oscar gave him as a gift or propina the sum of One Thousand
Pesos (P1,000.00) for succeeding in persuading Vicente to sell his lot at P1.20 per square meter or
a total in round figure of One Hundred Nine Thousand Pesos (P109,000.00).

This gift of One Thousand Pesos (P1,000.00) was not disclosed by Gregorio to Vicente.

Neither did Oscar pay Vicente the additional amount of One Thousand Pesos (P1,000.00) by way of
earnest money.

In the deed of sale was not executed on August 1, 1956 as stipulated in Exhibit "C" nor on August
15, 1956 as extended by Vicente, Oscar told Gregorio that he did not receive his money from his
brother in the United States, for which reason he was giving up the negotiation including the amount
of One Thousand Pesos (P1,000.00) given as earnest money to Vicente and the One Thousand
Pesos (P1,000.00) given to Gregorio as propina or gift. (UMATRAS SI BUYER)

When Oscar did not see him after several weeks, Gregorio sensed something fishy. So, he went to
Vicente and read a portion of Exhibit "A" marked habit "A-1" to the effect that Vicente was still
committed to pay him 5% commission, if the sale is consummated within three months after the
expiration of the 30-day period of the exclusive agency in his favor from the execution of the agency
contract on June 2, 1956 to a purchaser brought by Gregorio to Vicente during the said 30-day
period.

Vicente grabbed the original of Exhibit "A" and tore it to pieces. Gregorio held his peace, not
wanting to antagonize Vicente further, because he had still duplicate of Exhibit "A".

From his meeting with Vicente, Gregorio proceeded to the office of the Register of Deeds of Quezon
City, where he discovered Exhibit "G' deed of sale executed on September 17, 1956 by Amparo
Diaz, wife of Oscar de Leon, over their house and lot No. 40 Denver Street, Cubao, Quezon City, in
favor Vicente as down payment by Oscar de Leon on the purchase price of Vicente's lot No. 883 of
Piedad Estate. (RUMEKTA SI BUYER KAY SELLER, NAETSEPWERA SI AGENT)

Upon thus learning that Vicente sold his property to the same buyer, Oscar de Leon and his wife, he
demanded in writting payment of his commission on the sale price of One Hundred Nine Thousand
Pesos (P109,000.00), Exhibit "H". He also conferred with Oscar de Leon, who told him that Vicente
went to him and asked him to eliminate Gregorio in the transaction and that he would sell his
property to him for One Hundred Four Thousand Pesos (P104,000.0 In Vicente's reply to Gregorio's
letter, Exhibit "H", Vicente stated that Gregorio is not entitled to the 5% commission because he sold
the property not to Gregorio's buyer, Oscar de Leon, but to another buyer, Amparo Diaz, wife of
Oscar de Leon.
The Court of Appeals found from the evidence that Exhibit "A", the exclusive agency contract, is
genuine; that Amparo Diaz, the vendee, being the wife of Oscar de Leon the sale by Vicente of his
property is practically a sale to Oscar de Leon since husband and wife have common or identical
interests; that Gregorio and intervenor Teofilo Purisima were the efficient cause in the
consummation of the sale in favor of the spouses Oscar de Leon and Amparo Diaz;

that Oscar de Leon paid Gregorio the sum of One Thousand Pesos (P1,000.00) as "propina" or gift
and not as additional earnest money to be given to the plaintiff, because Exhibit "66", Vicente's letter
addressed to Oscar de Leon with respect to the additional earnest money, does not appear to have
been answered by Oscar de Leon and therefore there is no writing or document supporting Oscar de
Leon's testimony that he paid an additional earnest money of One Thousand Pesos (P1,000.00) to
Gregorio for delivery to Vicente, unlike the first amount of One Thousand Pesos (P1,000.00) paid by
Oscar de Leon to Vicente as earnest money, evidenced by the letter Exhibit "4"; and that Vicente did
not even mention such additional earnest money in his two replies Exhibits "I" and "J" to Gregorio's
letter of demand of the 5% commission.

ISSUES: (1) whether the failure on the part of Gregorio to disclose to Vicente the payment to him by
Oscar de Leon of the amount of One Thousand Pesos (P1,000.00) as gift or "propina" for having
persuaded Vicente to reduce the purchase price from P2.00 to P1.20 per square meter, so
constitutes fraud as to cause a forfeiture of his commission on the sale price; (2) whether
Vicente or Gregorio should be liable directly to the intervenor Teofilo Purisima for the latter's share in
the expected commission of Gregorio by reason of the sale; and (3) whether the award of legal
interest, moral and exemplary damages, attorney's fees and costs, was proper.

Unfortunately, the majority opinion penned by Justice Edilberto Soriano and concurred in by Justice
Juan Enriquez did not touch on these issues which were extensively discussed by Justice Magno
Gatmaitan in his dissenting opinion. However, Justice Esguerra, in his concurring opinion, affirmed
that it does not constitute breach of trust or fraud on the part of the broker and regarded same as
merely part of the whole process of bringing about the meeting of the minds of the seller and the
purchaser and that the commitment from the prospect buyer that he would give a reward to Gregorio
if he could effect better terms for him from the seller, independent of his legitimate commission, is
not fraudulent, because the principal can reject the terms offered by the prospective buyer if
he believes that such terms are onerous disadvantageous to him. On the other hand, Justice
Gatmaitan, with whom Justice Antonio Cafizares corner held the view that such an act on the part of
Gregorio was fraudulent and constituted a breach of trust, which should deprive him of his right to
the commission.

The duties and liabilities of a broker to his employer are essentially those which an agent owes to his
principal.
1

Consequently, the decisive legal provisions are in found Articles 1891 and 1909 of the New Civil
Code.

Art. 1891. Every agent is bound to render an account of his transactions and to
deliver to the principal whatever he may have received by virtue of the agency, even
though it may not be owing to the principal.

Every stipulation exempting the agent from the obligation to render an account shall
be void.

xxx xxx xxx

 Art. 1909. The agent is responsible not only for fraud but also for negligence, which
shall be judged with more less rigor by the courts, according to whether the agency
was or was not for a compensation.

Article 1891 of the New Civil Code amends Article 17 of the old Spanish Civil Code which provides
that:

Art. 1720. Every agent is bound to give an account of his transaction and to pay to
the principal whatever he may have received by virtue of the agency, even though
what he has received is not due to the principal.

The modification contained in the first paragraph Article 1891 consists in changing the phrase "to
pay" to "to deliver", which latter term is more comprehensive than the former.

Paragraph 2 of Article 1891 is a new addition designed to stress the highest loyalty that is required
to an agent — condemning as void any stipulation exempting the agent from the duty and liability
imposed on him in paragraph one thereof.

Article 1909 of the New Civil Code is essentially a reinstatement of Article 1726 of the old Spanish
Civil Code which reads thus:

Art. 1726. The agent is liable not only for fraud, but also for negligence, which shall
be judged with more or less severity by the courts, according to whether the agency
was gratuitous or for a price or reward.

The aforecited provisions demand the utmost good faith, fidelity, honesty, candor and fairness
on the part of the agent, the real estate broker in this case, to his principal, the vendor. The
law imposes upon the agent the absolute obligation to make a full disclosure or complete account
to his principal of all his transactions and other material facts relevant to the agency, so much so
that the law as amended does not countenance any stipulation exempting the agent from such an
obligation and considers such an exemption as void. The duty of an agent is likened to that of a
trustee. This is not a technical or arbitrary rule but a rule founded on the highest and truest
principle of morality as well as of the strictest justice. 2

Hence, an agent who takes a secret profit in the nature of a bonus, gratuity or personal benefit from
the vendee, without revealing the same to his principal, the vendor, is guilty of a breach of his
loyalty to the principal and forfeits his right to collect the commission from his principal, even
if the principal does not suffer any injury by reason of such breach of fidelity, or that he obtained
better results or that the agency is a gratuitous one, or that usage or custom allows it; because the
rule is to prevent the possibility of any wrong, not to remedy or repair an actual damage.   3

By taking such profit or bonus or gift or propina from the vendee, the agent thereby assumes a
position wholly inconsistent with that of being an agent for hisprincipal, who has a right to treat him,
insofar as his commission is concerned, as if no agency had existed. The fact that the principal may
have been benefited by the valuable services of the said agent does not exculpate the agent who
has only himself to blame for such a result by reason of his treachery or perfidy.

This Court has been consistent in the rigorous application of Article 1720 of the old Spanish Civil
Code. Thus, for failure to deliver sums of money paid to him as an insurance agent for the account
of his employer as required by said Article 1720, said insurance agent was convicted estafa.   4
An administrator of an estate was likewise under the same Article 1720 for failure to render an
account of his administration to the heirs unless the heirs consented thereto or are estopped by
having accepted the correctness of his account previously rendered. 5

Because of his responsibility under the aforecited article 1720, an agent is likewise liable for estafa
for failure to deliver to his principal the total amount collected by him in behalf of his principal and
cannot retain the commission pertaining to him by subtracting the same from his collections. 6

A lawyer is equally liable unnder said Article 1720 if he fails to deliver to his client all the money and
property received by him for his client despite his attorney's lien.  The duty of a commission agent to
7

render a full account his operations to his principal was reiterated in Duhart, etc. vs. Macias. 8

The American jurisprudence on this score is well-nigh unanimous.

Where a principal has paid an agent or broker a commission while ignorant of the
fact that the latter has been unfaithful, the principal may recover back the
commission paid, since an agent or broker who has been unfaithful is not entitled to
any compensation.

xxx xxx xxx

In discussing the right of the principal to recover commissions retained by an

unfaithful agent, the court in Little vs. Phipps (1911) 208 Mass. 331, 94 NE 260, 34
LRA (NS) 1046, said: "It is well settled that the agent is bound to exercise the utmost
good faith in his dealings with his principal. As Lord Cairns said, this rule "is not a
technical or arbitrary rule. It is a rule founded on the highest and truest principles, of
morality." Parker vs. McKenna (1874) LR 10,Ch(Eng) 96,118 ... If the agent does not
conduct himself with entire fidelity towards his principal, but is guilty of taking a secret
profit or commission in regard the matter in which he is employed, he loses his right
to compensation on the ground that he has taken a position wholly inconsistent with
that of agent for his employer, and which gives his employer, upon discovering it, the
right to treat him so far as compensation, at least, is concerned as if no agency had
existed. This may operate to give to the principal the benefit of valuable services
rendered by the agent, but the agent has only himself to blame for that result."

xxx xxx xxx

The intent with which the agent took a secret profit has been held immaterial where
the agent has in fact entered into a relationship inconsistent with his agency, since
the law condemns the corrupting tendency of the inconsistent relationship. Little vs.
Phipps (1911) 94 NE 260. 9

As a general rule, it is a breach of good faith and loyalty to his principal for an agent,
while the agency exists, so to deal with the subject matter thereof, or with information
acquired during the course of the agency, as to make a profit out of it for himself in
excess of his lawful compensation; and if he does so he may be held as a
trustee and may be compelled to account to his principal for all profits, advantages,
rights, or privileges acquired by him in such dealings, whether in performance or in
violation of his duties, and be required to transfer them to his principal upon being
reimbursed for his expenditures for the same, unless the principal has consented to
or ratified the transaction knowing that benefit or profit would accrue or had accrued,
to the agent, or unless with such knowledge he has allowed the agent so as to
 change his condition that he cannot be put in status quo. The application of this rule
is not affected by the fact that the principal did not suffer any injury by reason of the
agent's dealings or that he in fact obtained better results; nor is it affected by the fact
that there is a usage or custom to the contrary or that the agency is a gratuitous one.
(Emphasis applied.)  10

In the case at bar, defendant-appellee Gregorio Domingo as the broker, received a gift or propina in
the amount of One Thousand Pesos (P1,000.00) from the prospective buyer Oscar de Leon, without
the knowledge and consent of his principal, herein petitioner-appellant Vicente Domingo.

His acceptance of said substantial monetary gift corrupted his duty to serve the interests only of his
principal and undermined his loyalty to his principal, who gave him partial advance of Three Hundred
Pesos (P300.00) on his commission. As a consequence, instead of exerting his best to persuade his
prospective buyer to purchase the property on the most advantageous terms desired by his
principal, the broker, herein defendant-appellee Gregorio Domingo, succeeded in persuading his
principal to accept the counter-offer of the prospective buyer to purchase the property at P1.20 per
square meter or One Hundred Nine Thousand Pesos (P109,000.00) in round figure for the lot of
88,477 square meters, which is very much lower the the price of P2.00 per square meter or One
Hundred Seventy-Six Thousand Nine Hundred Fifty-Four Pesos (P176,954.00) for said lot originally
offered by his principal.

The duty embodied in Article 1891 of the New Civil Code will not apply if the agent or broker acted
only as a middleman with the task of merely bringing together the vendor and vendee, who
themselves thereafter will negotiate on the terms and conditions of the transaction.

Neither would the rule apply if the agent or broker had informed the principal of the gift or bonus or
profit he received from the purchaser and his principal did not object therto.   Herein defendant-
11

appellee Gregorio Domingo was not merely a middleman of the petitioner-appellant Vicente
Domingo and the buyer Oscar de Leon. He was the broker and agent of said petitioner-appellant
only. And therein petitioner-appellant was not aware of the gift of One Thousand Pesos (P1,000.00)
received by Gregorio Domingo from the prospective buyer; much less did he consent to his agent's
accepting such a gift.

The fact that the buyer appearing in the deed of sale is Amparo Diaz, the wife of Oscar de Leon,
does not materially alter the situation; because the transaction, to be valid, must necessarily be with
the consent of the husband Oscar de Leon, who is the administrator of their conjugal assets
including their house and lot at No. 40 Denver Street, Cubao, Quezon City, which were given as part
of and constituted the down payment on, the purchase price of herein petitioner-appellant's lot No.
883 of Piedad Estate. Hence, both in law and in fact, it was still Oscar de Leon who was the buyer.

As a necessary consequence of such breach of trust, defendant-appellee Gregorio Domingo must

forfeit his right to the commission and must return the part of the commission he received from his
principal.

Teofilo Purisima, the sub-agent of Gregorio Domingo, can only recover from Gregorio Domingo his
one-half share of whatever amounts Gregorio Domingo received by virtue of the transaction as his
sub-agency contract was with Gregorio Domingo alone and not with Vicente Domingo, who was not
even aware of such sub-agency.

Since Gregorio Domingo received from Vicente Domingo and Oscar de Leon respectively the
amounts of Three Hundred Pesos (P300.00) and One Thousand Pesos (P1,000.00) or a total of One
Thousand Three Hundred Pesos (P1,300.00), one-half of the same, which is Six Hundred Fifty
Pesos (P650.00), should be paid by Gregorio Domingo to Teofilo Purisima.

Because Gregorio Domingo's clearly unfounded complaint caused Vicente Domingo mental anguish
and serious anxiety as well as wounded feelings, petitioner-appellant Vicente Domingo should be
awarded moral damages in the reasonable amount of One Thousand Pesos (P1,000.00) attorney's
fees in the reasonable amount of One Thousand Pesos (P1,000.00), considering that this case has
been pending for the last fifteen (15) years from its filing on October 3, 1956.

WHEREFORE, the judgment is hereby rendered, reversing the decision of the Court of Appeals and
directing defendant-appellee Gregorio Domingo: (1) to pay to the heirs of Vicente Domingo the sum
of One Thousand Pesos (P1,000.00) as moral damages and One Thousand Pesos (P1,000.00) as
attorney's fees; (2) to pay Teofilo Purisima the sum of Six Hundred Fifty Pesos (P650.00); and (3) to
pay the costs.

Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo and
Villamor, JJ., concur.

G.R. No. L-18058             January 16, 1923

FABIOLA SEVERINO, plaintiff-appellee,
vs.
GUILLERMO SEVERINO, defendant-appellant.
FELICITAS VILLANUEVA, intervenor-appellee.

Serafin P. Hilado and A. P. Seva for appellant.

Jose Ma. Arroyo, Jose Lopez Vito, and Fisher and DeWitt for appellees.

OSTRAND, J.:

This is an action brought by the plaintiff-FABIOLA as the alleged natural daughter and sole heir of
one Melecio Severino, deceased, to compel the defendant Guillermo Severino to convey to her four
parcels of land described in the complaint, or in default thereof to pay her the sum of P800,000 in
damages for wrongfully causing said land to be registered in his own name. DEFENDANT-Felicitas
Villanueva, in her capacity as administratrix of the estate of Melecio Severino, has filed a complaint
in intervention claiming in the same relief as the original plaintiff-FABIOLA, except in so far as she
prays that the conveyance be made, or damages paid, to the estate instead of to the plaintiff Fabiola
Severino. The defendant answered both complaints with a general denial.

The lower court rendered a judgment recognizing the plaintiff Fabiola Severino as the
acknowledged natural child of the said Melecio Severino and ordering the defendant-
GUILLERMO to convey 428 hectares of the land in question to the intervenor as administratrix of the
estate of the said Melecio Severino, to deliver to her the proceeds in his possession of a certain
mortgage placed thereon by him and to pay the costs. From this judgment only the defendant
appeals.

The land described in the complaint forms one continuous tract and consists of lots Nos. 827, 828,
834, and 874 of the cadaster of Silay, Province of Occidental Negros, which measure, respectively,
61 hectares, 74 ares, and 79 centiares; 76 hectares, 34 ares, and 79 centiares; 52 hectares, 86
ares, and 60 centiares and 608 hectares, 77 ares and 28 centiares, or a total of 799 hectares, 75
ares, and 46 centiares.

The evidence shows that Melecio Severino died on the 25th day of May, 1915; that some 428
hectares of the land were recorded in the Mortgage Law Register in his name in the year 1901 by
virtue of possessory information proceedings instituted on the 9th day of May of that year by his
brother Agapito Severino in his behalf; that during the lifetime of Melecio Severino the land was
worked by the defendant, Guillermo Severino, his brother, as administrator for and on behalf of
the said Melecio Severino; that after Melecio's death, the defendant Guillermo Severino continued to
occupy the land; that in 1916 a parcel survey was made of the lands in the municipality of Silay,
including the land here in question, and cadastral proceedings were instituted for the registration of
the lands titles within the surveyed area; that in the cadastral proceedings the land here in question
was described as four separate lots numbered as above stated; that Roque Hofileña, as lawyer for
Guillermo Severino, filed answers in behalf of the latter in said proceedings claiming the lots
mentioned as the property of his client; that no opposition was presented in the proceedings to the
claims of Guillermo Severino and the court therefore decreed the title in his favor, in pursuance of
which decree certificates of title were issued to him in the month of March, 1917.

It may be further observed that at the time of the cadastral proceedings the plaintiff Fabiola Severino
was a minor; that Guillermo Severino did not appear personally in the proceedings and did not there
testify; that the only testimony in support of his claims was that of his attorney Hofileña, who swore
that he knew the land and that he also knew that Guillermo Severino inherited the land from his
father and that he, by himself, and through his predecessors in interest, had possessed the land for
thirty years.

The appellant-GUILLERMO presents the following nine assignments of error:

1. The trial court erred in admitting the evidence that was offered by plaintiff in order to
establish the fact that said plaintiff was the legally acknowledged natural child of the
deceased Melecio Severino.

2. The trial court erred in finding that, under the evidence presented, plaintiff was the legally
acknowledged natural child of Melecio Severino.

3. The trial court erred in rejecting the evidence offered by defendant to establish the
absence of fraud on his part in securing title to the lands in Nacayao.

4. The trial court erred in concluding that the evidence adduced by plaintiff and intervenor
established that defendant was guilty of fraud in procuring title to the lands in question in his
name.

5. The trial court erred in declaring that the land that was formerly placed in the name of
Melecio Severino had an extent of either 434 or 428 hectares at the time of his death.

6. The trial court erred in declaring that the value of the land in litigation is P500 per hectare.

7. The trial court erred in granting the petition of the plaintiff for an attachment without first
giving the defendant an opportunity to be heard.

8. The trial court erred in ordering the conveyance of 428 hectares of land by defendant to
the administratrix.
 9. The trial court erred in failing or refusing to make any finding as to the defendant's
contention that the petition for attachment was utterly devoid of any reasonable ground.

In regard to the first two assignments of error, we agree with the appellant that the trial court erred in
making a declaration in the present case as to the recognition of Fabiola Severino as the natural
child of Melecio Severino. We have held in the case of Briz vs. Briz and Remigio (43 Phil., 763), that
"The legitimate heirs or kin of a deceased person who would be prejudiced by a declaration that
another person is entitled to recognition as the natural child of such decedent, are necessary and
indispensable parties to any action in which a judgment declaring the right to recognition is sought."
In the present action only the widow, the alleged natural child, and one of the brothers of the
deceased are parties; the other potential heirs have not been included.

But, inasmuch as the judgment appealed from is in favor of the intervenor and not of the plaintiff,
except to the extent of holding that the latter is a recognized natural child of the deceased, this
question is, from the view we take of the case, of no importance in its final disposition. We may say,
however, in this connection, that the point urged in appellant's brief that it does not appear
affirmatively from the evidence that, at the time of the conception of Fabiola, her mother was a single
woman, may be sufficiently disposed of by a reference to article 130 of the Civil Code and
subsection 1 of section 334 of the Code of Civil Procedure which create the presumption that a
child born out of wedlock is natural rather than illegitimate. The question of the status of the
plaintiff Fabiola Severino and her right to share in the inheritance may, upon notice to all the
interested parties, be determined in the probate proceedings for the settlement of the estate of the
deceased.

The fifth assignment of error relates to the finding of the trial court that the land belonging to Melecio
Severino had an area of 428 hectares. The appellant contends that the court should have found that
there were only 324 hectares inasmuch as one hundred hectares of the original area were given to
Melecio's brother Donato during the lifetime of the father Ramon Severino. As it appears that Ramon
Severino died in 1896 and that the possessory information proceedings, upon which the finding of
the trial court as to the area of the land is principally based, were not instituted until the year 1901,
we are not disposed to disturb the conclusions of the trial court on this point. Moreover, in the year
1913, the defendant Guillermo Severino testified under oath, in the case of Montelibano vs.
Severino, that the area of the land owned by Melecio Severino and of which he (Guillermo) was the
administrator, embraced an area of 424 hectares. The fact that Melecio Severino, in declaring the
land for taxation in 1906, stated that the area was only 324 hectares and 60 ares while entitled to
some weight is not conclusive and is not sufficient to overcome the positive statement of the
defendant and the recitals in the record of the possessory information proceedings.

The sixth assignment of error is also of minor importance in view of the fact that in the dispositive
part of the decision of the trial court, the only relief given is an order requiring the appellant to convey
to the administratrix the land in question, together with such parts of the proceeds of the mortgage
thereon as remain in his hands. We may say further that the court's estimate of the value of the land
does not appear unreasonable and that, upon the evidence before us, it will not be disturbed.

The seventh and within assignments of error relate to the ex parte granting by the trial court of a
preliminary attachment in the case and the refusal of the court to dissolve the same. We find no
merit whatever in these assignments and a detailed discussion of them is unnecessary.

The third, fourth, and eight assignments of error involve the vital points in the case, are inter-related
and may be conveniently considered together.
The defendant-GUILLERMO argues that the gist of the instant action is the alleged fraud on his part
in causing the land in question to be registered in his name; that the trial court therefore erred in
rejecting his offer of evidence to the effect that the land was owned in common by all the heirs of
Ramon Severino and did not belong to Melecio Severino exclusively; that such evidence, if
admitted, would have shown that he did not act with fraudulent intent in taking title to the land; that
the trial court erred in holding him estopped from denying Melecio's title; that more than a year
having elapsed since the entry of the final decree adjudicating the land to the defendant, said decree
cannot now be reopened; that the ordering of the defendant to convey the decreed land to the
administratrix is, for all practical purposes, equivalent to the reopening of the decree of registration;
that under section 38 of the Land Registration Act the defendant has an indefeasible title to the land;
and that the question of ownership of the land being thus judicially settled, the question as to the
previous relations between the parties cannot now be inquired into.

Upon no point can the defendant's contentions be sustained. It may first be observed that this is not
an action under section 38 of the Land Registration Act to reopen or set aside a decree; it is an
action in personam against an agent to compel him to return, or retransfer, to the heirs or the
estate of its principal, the property committed to his custody as such agent, to execute the
necessary documents of conveyance to effect such retransfer or, in default thereof, to pay damages.

That the defendant came into the possession of the property here in question as the agent of the
deceased Melecio Severino in the administration of the property, cannot be successfully disputed.

His testimony in the case of Montelibano vs. Severino (civil case No. 902 of the Court of First
Instance of Occidental Negros and which forms a part of the evidence in the present case) is, in fact,
conclusive in this respect. He there stated under oath that from the year 1902 up to the time the
testimony was given, in the year 1913, he had been continuously in charge and occupation of the
land as the encargado or administrator of Melecio Severino;

that he had always known the land as the property of Melecio Severino; and that the possession of
the latter had been peaceful, continuous, and exclusive. In his answer filed in the same case, the
same defendant, through his attorney, disclaimed all personal interest in the land and averred that it
was wholly the property of his brother Melecio.

Neither is it disputed that the possession enjoyed by the defendant at the time of obtaining his
decree was of the same character as that held during the lifetime of his brother, except in so far as
shortly before the trial of the cadastral case the defendant had secured from his brothers and sisters
a relinguishment in his favor of such rights as they might have in the land.

The relations of an agent to his principal are fiduciary and it is an elementary and very old rule that in
regard to property forming the subject-matter of the agency, he is estopped from acquiring or
asserting a title adverse to that of the principal.

His position is analogous to that of a trustee and he cannot consistently, with the principles of
good faith, be allowed to create in himself an interest in opposition to that of his principal or cestui
que trust.

Upon this ground, and substantially in harmony with the principles of the Civil Law (see sentence of
the supreme court of Spain of May 1, 1900), the English Chancellors held that in general whatever a
trustee does for the advantage of the trust estate inures to the benefit of the cestui que trust.
(Greenlaw vs. King, 5 Jur., 18; Ex parte Burnell, 7 Jur., 116; Ex parte Hughes, 6 Ves., 617; Ex
parte James, 8 Ves., 337; Oliver vs. Court, 8 Price, 127.) The same principle has been consistently
adhered to in so many American cases and is so well established that exhaustive citations of
authorities are superfluous and we shall therefore limit ourselves to quoting a few of the numerous
judicial expressions upon the subject. The principle is well stated in the case of Gilbert vs. Hewetson
(79 Minn., 326):

A receiver, trustee, attorney, agent, or any other person occupying fiduciary relations
respecting property or persons, is utterly disabled from acquiring for his own benefit the
property committed to his custody for management.

This rule is entirely independent of the fact whether any fraud has intervened. No fraud in
fact need be shown, and no excuse will be heard from the trustee. It is to avoid the necessity
of any such inquiry that the rule takes so general a form.

The rule stands on the moral obligation to refrain from placing one's self in positions which
ordinarily excite conflicts between self-interest and integrity.

It seeks to remove the temptation that might arise out of such a relation to serve one's self-
interest at the expense of one's integrity and duty to another, by making it impossible to profit
by yielding to temptation. It applies universally to all who come within its principle.

In the case of Massie vs. Watts (6 Cranch, 148), the United States Supreme Court, speaking
through Chief Justice Marshall, said:

But Massie, the agent of Oneale, has entered and surveyed a portion of that land for himself
and obtained a patent for it in his own name. According to the clearest and best established
principles of equity, the agent who so acts becomes a trustee for his principal. He cannot
hold the land under an entry for himself otherwise than as trustee for his principal.

In the case of Felix vs. Patrick (145 U. S., 317), the United States Supreme Court, after examining
the authorities, said:

The substance of these authorities is that, wherever a person obtains the legal title to land by
any artifice or concealment, or by making use of facilities intended for the benefit of another,
a court of equity will impress upon the land so held by him a trust in favor of the party who is
justly entitled to them, and will order the trust executed by decreeing their conveyance to the
party in whose favor the trust was created. (Citing Bank of Metropolis vs. Guttschlick, 14
Pet., 19, 31; Moses vs. Murgatroyd, 1 Johns. Ch., 119; Cumberland vs. Codrington, 3 Johns.
Ch., 229, 261; Neilson vs. Blight, 1 Johns. Cas., 205; Weston vs. Barker, 12 Johns., 276.)

The same doctrine has also been adopted in the Philippines. In the case of Uy Aloc vs. Cho Jan
Ling (19 Phil., 202), the facts are stated by the court as follows:

From the facts proven at the trial it appears that a number of Chinese merchants raised a
fund by voluntary subscription with which they purchased a valuable tract of land and
erected a large building to be used as a sort of club house for the mutual benefit of the
subscribers to the fund. The subscribers organized themselves into an irregular association,
which had no regular articles of association, and was not incorporated or registered in the
commercial registry or elsewhere. The association not having any existence as a legal entity,
it was agreed to have the title to the property placed in the name of one of the members, the
defendant, Cho Jan Ling, who on his part accepted the trust, and agreed to hold the property
as the agent of the members of the association. After the club building was completed with
the funds of the members of the association, Cho Jan Ling collected some P25,000 in rents
 for which he failed and refused to account, and upon proceedings being instituted to compel
him to do so, he set up title in himself to the club property as well as to the rents accruing
therefrom, falsely alleging that he had bought the real estate and constructed the building
with his own funds, and denying the claims of the members of the association that it was
their funds which had been used for that purpose.

The decree of the court provided, among other things, for the conveyance of the club house and the
land on which it stood from the defendant, Cho Jan Ling, in whose name it was registered, to the
members of the association. In affirming the decree, this court said:

In the case at bar the legal title of the holder of the registered title is not questioned; it is
admitted that the members of the association voluntarily obtained the inscription in the name
of Cho Jan Ling, and that they had no right to have that inscription cancelled; they do not
seek such cancellation, and on the contrary they allege and prove that the duly registered
legal title to the property is in Cho Jan Ling, but they maintain, and we think that they rightly
maintain, that he holds it under an obligation, both express and implied, to deal with it
exclusively for the benefit of the members of the association, and subject to their will.

In the case of Camacho vs. Municipality of Baliuag (28 Phil., 466), the plaintiff, Camacho, took title
to the land in his own name, while acting as agent for the municipality. The court said:

There have been a number of cases before this court in which a title to real property was
acquired by a person in his own name, while acting under a fiduciary capacity, and
who afterwards sought to take advantage of the confidence reposed in him by claiming the
ownership of the property for himself. This court has invariably held such evidence
competent as between the fiduciary and the cestui que trust.

xxx     xxx     xxx

What judgment ought to be entered in this case? The court below simply absolved the
defendant from the complaint. The defendant municipality does not ask for a cancellation of
the deed. On the contrary, the deed is relied upon the supplement the oral evidence showing
that the title to the land is in the defendant. As we have indicated in Consunji vs. Tison, 15
Phil., 81, and Uy Aloc vs. Cho Jan Ling, 19 Phil., 202, the proper procedure in such a case,
so long as the rights of innocent third persons have not intervened, is to compel a
conveyance to the rightful owner. This ought and can be done under the issues raised and
the proof presented in the case at bar.

The case of Sy-Juco and Viardo vs. Sy-Juco (40 Phil., 634) is also in point.

As will be seen from the authorities quoted, and agent is not only estopped from denying his
principal's title to the property, but he is also disable from acquiring interests therein adverse to those
of his principal during the term of the agency. But the defendant argues that his title has become res
adjudicata through the decree of registration and cannot now be disturbed.

This contention may, at first sight, appear to possess some force, but on closer examination it
proves untenable. The decree of registration determined the legal title to the land as the date of the
decree; as to that there is no question. That, under section 38 of the Land Registration Act, this
decree became conclusive after one year from the date of the entry is not disputed and no one
attempts to disturb the decree or the proceedings upon which it is based; the plaintiff in intervention
merely contends that in equity the legal title so acquired inured to the benefit of the estate of Melecio
Severino, the defendant's principal and cestui que trust and asks that this superior equitable right be
made effective by compelling the defendant, as the holder of the legal title, to transfer it to the estate.

We have already shown that before the issuance of the decree of registration it was the undoubted
duty of the defendant to restore the property committed to his custody to his principal, or to the
latter's estate, and that the principal had a right of action in personam to enforce the performance of
this duty and to compel the defendant to execute the necessary conveyance to that effect. The only
question remaining for consideration is, therefore, whether the decree of registration extinguishing
this personal right of action.

In Australia and New Zealand, under statutes in this respect similar to ours, courts of equity exercise
general jurisdiction in matters of fraud and error with reference to Torrens registered lands, and
giving attention to the special provisions of the Torrens acts, will issue such orders and direction to
all the parties to the proceedings as may seem just and proper under the circumstances. They may
order parties to make deeds of conveyance and if the order is disobeyed, they may cause proper
conveyances to be made by a Master in Chancery or Commissioner in accordance with the practice
in equity (Hogg, Australian Torrens System, p. 847).

In the Untied States courts have even gone so far in the exercise of their equity jurisdiction as to set
aside final decrees after the expiration of the statutory period of limitation for the reopening of such
decrees (Baart vs. Martin, 99 Minn., 197). But, considering that equity follows the law and that our
statutes expressly prohibit the reopening of a decree after one year from the date of its entry, this
practice would probably be out of question here, especially so as the ends of justice may be attained
by other equally effective, and less objectionable means.

Turning to our own Land Registration Act, we find no indication there of an intention to cut off,
through the issuance of a decree of registration, equitable rights or remedies such as those here in
question. On the contrary, section 70 of the Act provides:

Registered lands and ownership therein, shall in all respects be subject to the same burdens
and incidents attached by law to unregistered land. Nothing contained in this Act shall in any
way be construed to relieve registered land or the owners thereof from any rights incident to
the relation of husband and wife, or from liability to attachment on mesne process or levy on
execution, or from liability to any lien of any description established by law on land and the
buildings thereon, or the interest of the owner in such land or buildings, or to change the
laws of descent, or the rights of partition between coparceners, joint tenants and other
cotenants, or the right to take the same by eminent domain, or to relieve such land from
liability to be appropriated in any lawful manner for the payment of debts, or to change or
affect in any other way any other rights or liabilities created by law and applicable to
unregistered land, except as otherwise expressly provided in this Act or in the amendments
hereof.

Section 102 of the Act, after providing for actions for damages in which the Insular Treasurer, as the
Custodian of the Assurance Fund is a party, contains the following proviso:

Provided, however, That nothing in this Act shall be construed to deprive the plaintiff
of any action which he may have against any person for such loss or damage or deprivation
of land or of any estate or interest therein without joining the Treasurer of the Philippine
Archipelago as a defendant therein.

That an action such as the present one is covered by this proviso can hardly admit of doubt. Such
was also the view taken by this court in the case of Medina Ong-Quingco vs. Imaz and Warner,
Barnes & Co. (27 Phil., 314), in which the plaintiff was seeking to take advantage of his possession
of a certificate of title to deprive the defendant of land included in that certificate and sold to him by
the former owner before the land was registered. The court decided adversely to plaintiff and in so
doing said:

As between them no question as to the indefeasibility of a Torrens title could arise. Such an
action could have been maintained at any time while the property remained in the hands of
the purchaser. The peculiar force of a Torrens title would have been brought into play only
when the purchaser had sold to an innocent third person for value the lands described in his
conveyance. . . . Generally speaking, as between the vendor and the purchaser the same
rights and remedies exist with reference to land registered under Act No. 496, as exist in
relation to land not so registered.

In Cabanos vs. Register of Deeds of Laguna and Obiñana (40 Phil., 620), it was held that, while a
purchaser of land under a pacto de retro cannot institute a real action for the recovery thereof where
the vendor under said sale has caused such lands to be registered in his name without said
vendee's consent, yet he may have his personal action based on the contract of sale to compel
the execution of an unconditional deed for the said lands when the period for repurchase has
passed.

Torrens titles being on judicial decrees there is, of course, a strong presumption in favor of their
regularity or validity, and in order to maintain an action such as the present the proof as to the
fiduciary relation of the parties and of the breach of trust must be clear and convincing. Such
proof is, as we have seen, not lacking in this case.

But once the relation and the breach of trust on the part of the fiduciary in thus established, there is
no reason, neither practical nor legal, why he should not be compelled to make such reparation
as may lie within his power for the injury caused by his wrong, and as long as the land
stands registered in the name of the party who is guilty of the breach of trust and no rights of
innocent third parties are adversely affected, there can be no reason why such reparation
should not, in the proper case, take the form of a conveyance or transfer of the title to
the cestui que trust. No reasons of public policy demand that a person guilty of fraud or breach of
trust be permitted to use his certificate of title as a shield against the consequences of his own
wrong.

The judgment of the trial court is in accordance with the facts and the law. In order to prevent
unnecessary delay and further litigation it may, however, be well to attach some additional directions
to its dipositive clauses. It will be observed that lots Nos. 827, 828, and 834 of a total area of
approximately 191 hectares, lie wholly within the area to be conveyed to the plaintiff in intervention
and these lots may, therefore, be so conveyed without subdivision. The remaining 237 hectares to
be conveyed lie within the western part of lot No. 874 and before a conveyance of this portion can be
effected a subdivision of that lot must be made and a technical description of the portion to be
conveyed, as well as of the remaining portion of the lot, must be prepared. The subdivision shall be
made by an authorized surveyor and in accordance with the provisions of Circular No. 31 of the
General Land Registration Office, and the subdivision and technical descriptions shall be submitted
to the Chief of that office for his approval. Within thirty days after being notified of the approval of
said subdivision and technical descriptions, the defendant Guillermo Severino shall execute good
and sufficient deed or deeds of conveyance in favor of the administratrix of the estate of the
deceased Melecio Severino for said lots Nos. 827, 828, 834, and the 237 hectares segregated from
the western part of lot No. 874 and shall deliver to the register of deeds his duplicate certificates of
title for all of the four lots in order that said certificates may be cancelled and new certificates issued.
The cost of the subdivision and the fees of the register of deeds will be paid by the plaintiff in
intervention. It is so ordered

With these additional directions the judgment appealed from is affirmed, with the costs against the
appellant. The right of the plaintiff Fabiola Severino to establish in the probate proceedings of the
estate of Melecio Severino her status as his recognized natural child is reserved.

G.R. No. L-49395 December 26, 1984

GREEN VALLEY POULTRY & ALLIED PRODUCTS, INC., petitioner

vs.
THE INTERMEDIATE APPELLATE COURT and E.R. SQUIBB & SONS PHILIPPINE
CORPORATION, respondents.

ABAD SANTOS, J.:

This is a petition to review a decision of the defunct Court of Appeals which affirmed the judgment of
the trial court whereby:

... judgment is hereby rendered in favor of the plaintiff [E.R. Squibb & Sons Philippine
Corporation], ordering the defendant [Green Valley Poultry & Allied Products, Inc.] to
pay the sum of P48,374.74 plus P96.00 with interest at 6% per annum from the filing
of this action; plus attorney's fees in the amount of P5,000.00 and to pay the costs.

FACTS:

On November 3, 1969, Squibb and Green Valley entered into a letter agreement the text of which
reads as follows:

E.R. Squibb & Sons Philippine Corporation is pleased to appoint Green Valley
Poultry & Allied Products, Inc. as a non-exclusive distributor for Squibb Veterinary
Products, as recommended by Dr. Leoncio D. Rebong, Jr. and Dr. J.G. Cruz, Animal
Health Division Sales Supervisor.

As a distributor, Green Valley Poultry & Allied Products, Inc. wig be entitled to a
discount as follows:

Feed Store Price (Catalogue)

Less 10%

Wholesale Price
Less 10%

Distributor Price

There are exceptions to the above price structure. At present, these are:

1. Afsillin Improved — 40 lbs. bag

The distributor commission for this product size is 8% off P120.00

2. Narrow — Spectrum Injectible Antibiotics

These products are subject to price fluctuations. Therefore, they are invoiced at net
price per vial.

3. Deals and Special Offers are not subject to the above distributor price structure. A
5% distributor commission is allowed when the distributor furnishes copies for each
sale of a complete deal or special offer to a feedstore, drugstore or other type of
account.

Deals and Special Offers purchased for resale at regular price invoiced at net deal or
special offer price.

Prices are subject to change without notice. Squibb will endeavor to advise you
promptly of any price changes. However, prices in effect at the tune orders are
received by Squibb Order Department will apply in all instances.

Green Valley Poultry & Allied Products, Inc. win distribute only for the Central Luzon
and Northern Luzon including Cagayan Valley areas. We will not allow any transfer
or stocks from Central Luzon and Northern Luzon including Cagayan Valley to other
parts of Luzon, Visayas or Mindanao which are covered by our other appointed
Distributors. In line with this, you will follow strictly our stipulations that the maximum
discount you can give to your direct and turnover accounts will not go beyond 10%.

It is understood that Green Valley Poultry and Allied Products, Inc. will accept turn-
over orders from Squibb representatives for delivery to customers in your area. If for
credit or other valid reasons a turn-over order is not served, the Squibb
representative will be notified within 48 hours and hold why the order will not be
served.

It is understood that Green Valley Poultry & Allied Products, Inc. will put up a bond of
P20,000.00 from a mutually acceptable bonding company.

Payment for Purchases of Squibb Products will be due 60 days from date of invoice
or the nearest business day thereto. No payment win be accepted in the form of
post-dated checks. Payment by check must be on current dating.

It is mutually agreed that this non-exclusive distribution agreement can be terminated

by either Green Valley Poultry & Allied Products, Inc. or Squibb Philippines on 30
days notice.
 I trust that the above terms and conditions will be met with your approval and that the
distributor arrangement will be one of mutual satisfaction.

If you are agreeable, please sign the enclosed three (3) extra copies of this letter and
return them to this Office at your earliest convenience.

Thank you for your interest and support of the products of E.R. Squibb & Sons
Philippines Corporation. (Rollo, pp. 12- 13.)

For goods delivered to Green Valley but unpaid, Squibb filed suit to collect. The trial court as
aforesaid gave judgment in favor of Squibb which was affirmed by the Court of Appeals.

In both the trial court and the Court of Appeals, the parties advanced their respective theories.

Green Valley claimed that the contract with Squibb was a mere agency to sell; that it never
purchased goods from Squibb; that the goods received were on consignment only with the obligation
to turn over the proceeds, less its commission, or to return the goods ff not sold, and since it had
sold the goods but had not been able to collect from the purchasers thereof, the action was
premature.

Upon the other hand, Squibb claimed that the contract was one of sale so that Green Valley was
obligated to pay for the goods received upon the expiration of the 60-day credit period. (GOOD AS
SOLD DAW SABI NI SQUIBB, SAMANTALA PINAAHENTE SABI NI G.VALLEY, HINDI PA LANG
NAKAKASINGIL)

Both courts below upheld the claim of Squibb that the agreement between the parties was a sales
contract.

We do not have to categorize the contract. Whether viewed as an agency to sell or as a contract of
sale, the liability of Green Valley is indubitable.

Adopting Green Valley's theory that the contract is an agency to sell, it is liable because it sold on
credit without authority from its principal. The Civil Code has a provision exactly in point. It reads:

Art. 1905. The commission agent cannot, without the express or implied consent of
the principal, sell on credit. Should he do so, the principal may demand from him
payment in cash, but the commission agent shall be entitled to any interest or
benefit, which may result from such sale.

WHEREFORE, the petition is hereby dismissed; the judgment of the defunct Court of Appeals is
affirmed with costs against the petitioner.

SO ORDERED.

Aquino, Concepcion, Jr., Escolin and Cuevas, JJ., concur.

G.R. No. L-32977             November 17, 1930

THE MUNICIPAL COUNCIL OF ILOILO, plaintiff-appellee,
vs.
JOSE EVANGELISTA, ET AL., defendants-appellees.
TAN ONG SZE VDA. DE TAN TOCO, appellant.

Trenas & Laserna for defendant-appellant.

Provincial Fiscal Blanco of Iloilo for plaintiff-appellees.
Felipe Ysmael for appellee Mauricio Cruz & Co.
No appearance for other appellees.

VILLA-REAL, J.:

This is an appeal taken by the defendant-Tan Ong Sze Vda. de Tan Toco from the judgment of the
Court of First Instance of Iloilo, providing as follows:

Wherefore, judgment is hereby rendered, declaring valid and binding the deed of
assignment of the credit executed by Tan Toco's widow, through her attorney-in-fact
Tan Buntiong, in favor of late Antero Soriano;

likewise the assignment executed by the latter-ANTERO SORIANO during his lifetime in
favor of the defendant Mauricio Cruz & Co., Inc., and the plaintiff is hereby ordered to pay
the said Mauricio Cruz & Co., Inc., the balance of P30,966.40; the plaintiff is also ordered to
deposit said sum in a local bank within the period of ninety days from the time this judgment
shall become final, at the disposal of the aforesaid Mauricio Cruz & Co. Inc., and in case that
the plaintiff shall not make such deposit in the manner indicated, said amount shall bear the
legal interest of six percent per annum from the date when the plaintiff shall fail to make the
deposit within the period herein set forth, until fully paid.

Without special pronouncement of costs.

In support of its appeal, the appellant assigns the following alleged errors as committed by the trial
court in its decision, to wit:

1. The lower court erred in rejecting as evidence Exhibit 4-A, Tan Toco, and Exhibit 4-B, Tan
Toco.

2. The lower court erred in sustaining the validity of the deed of assignment of the credit,
Exhibit 2-Cruz, instead of finding that said assignment made by Tan Buntiong to Attorney
Antero Soriano was null and void.

3. The lower court erred in upholding the assignment of that credit by Antero Soriano to
Mauricio Cruz & Co., Inc., instead of declaring it null and void.

4. The court below erred in holding that the balance of the credit against the municipality of
Iloilo should be adjudicated to the appellant herein, Tan Toco's widow.

5. The lower court erred in denying the motion for a new trial filed by the defendant-
appellant.
The facts of the case are as follows:

On March 20, 1924, the Court of First Instance of Iloilo rendered judgment in civil case No. 3514
thereof, wherein the appellant-DEFENDANT herein, Tan Ong Sze Vda. de Tan Toco was the
plaintiff, and the municipality of Iloilo the defendant, and the former sought to recover of the latter the
value of a strip of land belonging to said plaintiff taken by the defendant to widen a public street; the
judgment entitled the plaintiff to recover P42,966.40, representing the value of said strip of land,
from the defendant (Exhibit A). On appeal to this court (G. R. No .22617) 1 the judgment was
affirmed on November 28, 1924 (Exhibit B). (BINABAWI MULA SA MUNISIPYO NG ILOILO ANG
LUPA DAW NYA)

After the case was remanded to the court of origin, and the judgment rendered therein had become
final and executory, Attorney Jose Evangelista, in his own behalf and as counsel for the
administratrix of Jose Ma .Arroyo's intestate estate, filed a claim in the same case for professional
services rendered by him, which the court, acting with the consent of the appellant widow, fixed at 15
per cent of the amount of the judgment (Exhibit 22 — Soriano).

At the hearing on said claim, the claimants appeared, as did also the Philippine National Bank, which
prayed that the amount of the judgment be turned over to it because the land taken over had been
mortgaged to it.

Antero Soriano also appeared claiming the amount of the judgment as it had been assigned to him,
and by him, in turn, assigned to Mauricio Cruz & Co., Inc.

After hearing all the adverse claims on the amount of the judgment the court ordered that the
attorney's lien in the amount of 15 per cent of the judgment, be recorded in favor of Attorney Jose
Evangelista, in his own behalf and as counsel for the administratrix of the deceased Jose Ma
.Arroyo, and directed the municipality of Iloilo to file an action of interpleading against the adverse
claimants, the Philippine National Bank, Antero Soriano, Mauricio Cruz & Co., Jose Evangelista and
Jose Arroyo, as was done, the case being filed in the Court of First Instance of Iloilo as civil case No.
7702.

After due hearing, the court rendered the decision quoted from at the beginning.

On March 29, 1928, the municipal treasurer of Iloilo, with the approval of the auditor of the provincial
treasurer of Iloilo and of the Executive Bureau, paid the late Antero Soriano the amount of P6,000 in
part payment of the judgment mentioned above, assigned to him by Tan Boon Tiong, acting as
attorney-in-fact of the appellant herein, Tan Ong Sze Vda. de Tan Toco.

On December 18, 1928, the municipal treasurer of Iloilo deposited with the clerk of the Court of First
Instance of Iloilo the amount of P6,000 on account of the judgment rendered in said civil case No.
3514. In pursuance of the resolution of the court below ordering that the attorney's lien in the amount
of 15 per cent of the judgment be recorded in favor of Attorney Jose Evangelista, in his own behalf
and as counsel for the late Jose Ma. Arroyo, the said clerk of court delivered on the same date to
said Attorney Jose Evangelista the said amount of P6,000.

At the hearing of the instant case, the codefendants of Attorney Jose Evangelista agreed not to
discuss the payment made to the latter by the clerk of the Court of First Instance of Iloilo of the
amount of P6,000 mentioned above in consideration of said lawyer's waiver of the remainder of the
15 per cent of said judgment amounting to P444.69.
With these two payments of P6,000 each making a total of P12,000, the judgment for P42,966.44
against the municipality of Iloilo was reduced to P30,966.40, which was adjudicated by said court to
Mauricio Cruz & Co (eto yung pinagkautangan naman ni Antero NA ABUGADO NG PAMILYA).

This appeal, then, is confined to the claim of Mauricio Cruz & Co. as alleged assignee of the rights of
the late Attorney Antero Soriano by virtue of the said judgment in payment of professional services
rendered by him to the said widow and her coheirs.

The only question to be decided in this appeal is the legality of the assignment made by Tan Boon
Tiong as attorney-in-fact of the appellant-DEFENDANT Tan Ong Sze Viuda de Tan Toco, to
Attorney Antero Soriano, of all the credits, rights and interests belonging to said appellant Tan Ong
Sze Viuda de Tan Toco by virtue of the judgment rendered in civil case No .3514 of the Court of First
Instance of Iloilo, entitled Viuda de Tan Toco vs. The Municipal Council of Iloilo, adjudicating to said
widow the amount of P42,966.40, plus the costs of court, against said municipal council of Iloilo, in
consideration of the professional services rendered by said attorney to said widow of Tan Toco and
her coheirs, by virtue of the deed Exhibit 2.

The appellant contends, in the first place, that said assignments was not made in consideration of
professional services by Attorney Antero Soriano, for they had already been satisfied before the
execution of said deed of assignment, but in order to facilitate the collection of the amount of said
judgment in favor of the appellant, for the reason that, being Chinese, she had encountered many
difficulties in trying to collect.
lawphil.net

In support of her contention on this point, the appellant alleges that the payments admitted by the
court in its judgment, as made by Tan Toco's widow to Attorney Antero Soriano for professional
services rendered to her and to her coheirs, amounting to P2,900, must be added to the P700
evidenced by Exhibits 4-A, Tan Toco, and 4-B Tan Toco, respectively, which exhibits the court below
rejected as evidence, on the ground that they were considered as payments made for professional
services rendered, not by Antero Soriano personally, by the firm of Soriano & Arroyo.

A glance at these receipts shows that those amounts were received by Attorney Antero Soriano for
the firm of Soriano & Arroyo, which is borne out by the stamp on said receipts reading, "Befete
Soriano & Arroyo," and the manner in which said attorney receipted for them, "Soriano &
Arroyo, by A. Soriano." (BAYAD NA DAW DATI PA SI ANTERO ANI TANTOCO-DEFENDANT,
PERO PALPAK YUNG EVIDENCE NYA)

Therefore, the appellant's contention that the amounts of P200 and P500 evidence by said receipts
should be considered as payments made to Attorney Antero Soriano for professional services
rendered by him personally to the interests of the widow of Tan Toco, is untenable.

Besides, if at the time of the assignments to the late Antero Soriano his professional services to the
appellant widow of Tan Toco had already been paid for, no reason can be given why it was
necessary to write him money in payment of professional services on March 14, 1928 (Exhibit 5-G
Tan Toco) and December 15, of the same year (Exhibit 5-H Tan Toco) after the deed of assignment,
(Exhibit 2-Cruz) dated September 27, 1927, had been executed. In view of the fact that the amounts
involved in the cases prosecuted by Attorney Antero Soriano as counsel for Tan Toco's widow, some
of which cases have been appealed to this court, run into the hundreds of thousands of pesos, and
considering that said attorney had won several of those cases for his clients, the sum of P10,000 to
date paid to him for professional services is wholly inadequate, and shows, even if indirectly, that the
assignments of the appellant's rights and interests made to the late Antero Soriano and determined
in the judgment aforementioned, was made in consideration of the professional services rendered by
the latter to the aforesaid widow and her coheirs. (SA LAKI NG NAIPANALO NI ANTERO,
MALAMANG NA TALAGANG BAYAD SA KANYA YUNG RES SUBJECT MATTER)

The defendant-appellant also contends that the deed of assignment Exhibit 2-Cruz was drawn up in
contravention of the prohibition contained in article 1459, case 5, of the Civil Code, which reads as
follows:

ART. 1459. The following persons cannot take by purchase, even at a public or judicial
auction, either in person or through the mediation of another:

xxx     xxx     xxx

5. Justices, judges, members of the department of public prosecution, clerks of superior and
inferior courts, and other officers of such courts, the property and rights in litigation before
the court within whose jurisdiction or territory they perform their respective duties .This
prohibition shall include the acquisition of such property by assignment.

Actions between co-heirs concerning the hereditary property, assignments in payment of

debts, or to secure the property of such persons, shall be excluded from this rule.

The prohibition contained in this paragraph shall include lawyers and solicitors with respect
to any property or rights involved in any litigation in which they may take part by virtue of
their profession and office.

It does not appear that the Attorney Antero Soriano was counsel for the herein appellant in civil case
No. 3514 of the Court of First Instance of Iloilo, which she instituted against the municipality of Iloilo,
Iloilo, for the recovery of the value of a strip of land expropriated by said municipality for the widening
of a certain public street. The only lawyers who appear to have represented her in that case were
Arroyo and Evangelista, who filed a claim for their professional fees .

When the appellant's credit, right, and interests in that case were assigned by her attorney-in-fact
Tan Boon Tiong, to Attorney Antero Soriano in payment of professional services rendered by the
latter to the appellant and her coheirs in connection with other cases, that particular case had been
decided, and the only thing left to do was to collect the judgment. There was no relation of attorney
and client, then, between Antero Soriano and the appellant, in the case where that judgment was
rendered; and therefore the assignment of her credit, right and interests to said lawyer did not violate
the prohibition cited above. (NO VIOLATION, YUNG AWARD NA YUNG INASSIGN, TAPOS NA
ANG BOXING)

As to whether Tan Boon Tiong as attorney-in-fact of the appellant, was empowered by his principal
to make as assignment of credits, rights and interests, in payment of debts for professional services
rendered by lawyers, in paragraph VI of the power of attorney, Exhibit 5-Cruz, Tan Boon Tiong is
authorized to employ and contract for the services of lawyers upon such conditions as he may deem
convenient, to take charge of any actions necessary or expedient for the interests of his principal,
and to defend suits brought against her. (AUTHORIZED SI TANBOONTIONG)

This power necessarily implies the authority to pay for the professional services thus engaged. In the
present case, the assignment made by Tan Boon Tiong, as Attorney-in-fact for the appellant, in favor
of Attorney Antero Soriano for professional services rendered in other cases in the interests of the
appellant and her coheirs, was that credit which she had against the municipality of Iloilo, and such
assignment was equivalent to the payment of the amount of said credit to Antero Soriano for
professional services. (in short, LAHAT NG MAKUKUHANG PERA SA NAIPANALO VS ILOILO AY
INASSIGN KAY ATTY ANTERO PAMBAYAD SA KANYANG SERBISYO, NA, INASSIGN NAMAN
NI ANTERO SA ISA PANG THIRD PARTY – BIGLA NGAYONG NAGIIBA ANG IHIP NG
PRINCIPAL NI TANBOONTIONG)

With regard to the failure of the other attorney-in-fact of the appellant, Tan Montano, authorized by
Exhibit 1 — Tan Toco, to consent to the deed of assignment, the latter being also authorized to pay,
in the name and behalf of the principal, all her debts and the liens and encumbrances her property,
the very fact that different letters of attorney were given to each of these two representatives shows
that it was not the principal's intention that they should act jointly in order to make their acts valid.
Furthermore, the appellant was aware of that assignment and she not only did not repudiate it, but
she continued employing Attorney Antero Soriano to represent her in court.

For the foregoing considerations, the court is of opinion and so holds: (1) That an agent of attorney-
in -fact empowered to pay the debts of the principal, and to employ lawyers to defend the latter's
interests, is impliedly empowered to pay the lawyer's fees for services rendered in the interests of
said principal, and may satisfy them by an assignment of a judgment rendered in favor of said
principal; (

2) that when a person appoints two attorneys-in-fact independently, the consent of the one will not
be required to validate the acts of the other unless that appears positively to have been the
principal's attention; and (3) that the assignment of the amount of a judgment made by a person to
his attorney, who has not taken any part in the case wherein said judgment was rendered, made in
payment of professional services in other cases, does not contravene the prohibition of article 1459,
case 5, of the Civil Code.

By virtue whereof, and finding no error in the judgment appealed from, the same is affirmed in its
entirety, with costs against the appellant. So ordered.

Avanceña, C.J., Johnson, Street, Malcolm, Villamor, Ostrand, Johns and Romualdez, JJ., concur.

G.R. No. 160016             February 27, 2006

ABACUS SECURITIES CORPORATION, Petitioner,

vs.
RUBEN U. AMPIL, Respondent.

DECISION

PANGANIBAN, CJ:

Stock market transactions affect the general public and the national economy. The rise and fall of
stock market indices reflect to a considerable degree the state of the economy. Trends in stock
prices tend to herald changes in business conditions. Consequently, securities transactions are
impressed with public interest, and are thus subject to public regulation. In particular, the laws and
regulations requiring payment of traded shares within specified periods are meant to protect the
economy from excessive stock market speculations, and are thus mandatory.
In the present case, respondent-AMPIL cannot escape payment of stocks validly traded by
petitioner-ABACUS on his behalf. These transactions took place before both parties violated the
trading law and rules. Hence, they fall outside the purview of the pari delicto rule.

The Case

Before the Court is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the March
21, 2003 Decision2 and the September 19, 2003 Resolution3 of the Court of Appeals (CA) in CA-GR
CV No. 68273. The assailed Decision disposed as follows:

"UPON THE VIEW WE TAKE OF THIS CASE THUS, this appeal is hereby DISMISSED. With
costs."4

The CA denied reconsideration in its September 19, 2003 Resolution.

The Facts

The factual antecedents were summarized by the trial court (and reproduced by the CA in its
assailed Decision) in this wise:

"Evidence adduced by the [petitioner]-ABACUS has established the fact that [petitioner] is engaged
in business as a broker and dealer of securities of listed companies at the Philippine Stock
Exchange Center.

"Sometime in April 1997, [respondent]-AMPIL opened a cash or regular account with [petitioner] for
the purpose of buying and selling securities as evidenced by the Account Application Form. The
parties’ business relationship was governed by the terms and conditions [stated therein] x x x.

"Since April 10, 1997, [respondent] actively traded his account, and as a result of such trading
activities, he accumulated an outstanding obligation in favor of [petitioner]-ABACUS in the principal
sum of ₱6,617,036.22 as of April 30, 1997.

"Despite the lapse of the period within which to pay his account as well as sufficient time given by
[petitioner] for [respondent] to comply with his proposal to settle his account, the latter failed to do
so. Such that [petitioner] thereafter sold [respondent’s] securities to set off against his unsettled
obligations.

"After the sale of [respondent’s] securities and application of the proceeds thereof against his
account, [respondent’s] remaining unsettled obligation to [petitioner] was ₱3,364,313.56. [Petitioner]
then referred the matter to its legal counsel for collection purposes.

"In a letter dated August 15, 1997, [petitioner] through counsel demanded that [respondent] settle his
obligation plus the agreed penalty charges accruing thereon equivalent to the average 90-day
Treasury Bill rate plus 2% per annum (200 basis points).

"In a letter dated August [26], 1997, [respondent] acknowledged receipt of [petitioner’s] demand
[letter] and admitted his unpaid obligation and at the same time request[ed] for 60 days to raise
funds to pay the same, which was granted by [petitioner].

"Despite said demand and the lapse of said requested extension, [respondent] failed and/or refused
to pay his accountabilities to [petitioner].
"For his defense, [respondent] claims that he was induced to trade in a stock security with [petitioner]
because the latter allowed offset settlements wherein he is not obliged to pay the purchase price.

Rather, it waits for the customer to sell. And if there is a loss, [petitioner] only requires the payment
of the deficiency (i.e., the difference between the higher buying price and the lower selling price). In
addition, it charges a commission for brokering the sale.

"However, if the customer sells and there is a profit, [petitioner] deducts the purchase price and
delivers only the surplus – after charging its commission.

"[respondent] further claims that all his trades with [petitioner] were not paid in full in cash at anytime
after purchase or within the T+4 [4 days subsequent to trading] and none of these trades was
cancelled by [petitioner] as required in Exhibit ‘A-1’. Neither did [petitioner] apply with either the
Philippine Stock Exchange or the SEC for an extension of time for the payment or settlement of his
cash purchases. This was not brought to his attention by his broker and so with the requirement of
collaterals in margin account. Thus, his trade under an offset transaction with [petitioner] is unlimited
subject only to the discretion of the broker. x x x [Had petitioner] followed the provision under par. 8
of Exh. ‘A-1’ which stipulated the liquidation within the T+3 [3 days subsequent to trading], his net
deficit would only be ₱1,601,369.59. [respondent] however affirmed that this is not in accordance
with RSA [Rule 25-1 par. C, which mandates that if you do not pay for the first] order, you cannot
subsequently make any further order without depositing the cash price in full. So, if RSA Rule 25-1,
par. C, was applied, he was limited only to the first transaction. That [petitioner] did not comply with
the T+4 mandated in cash transaction. When [respondent] failed to comply with the T+3, [petitioner]
did not require him to put up a deposit before it executed its subsequent orders. [Petitioner] did not
likewise apply for extension of the T+4 rule.

Because of the offset transaction, [respondent] was induced to [take a] risk which resulted [in] the
filing of the instant suit against him [because of which] he suffered sleepless nights, lost appetite
which if quantified in money, would amount to ₱500,000.00 moral damages and ₱100,000.00
exemplary damages."5

In its Decision6 dated June 26, 2000, the Regional Trial Court (RTC) of Makati City (Branch 57) held
that petitioner violated Sections 23 and 25 of the Revised Securities Act (RSA) and Rule 25-1 of the
Rules Implementing the Act (RSA Rules) when it failed to:

1) require the respondent to pay for his stock purchases within three (T+3) or four days (T+4) from
trading; and

2) request from the appropriate authority an extension of time for the payment of respondent’s cash
purchases. The trial court noted that despite respondent’s non-payment within the required period,
petitioner did not cancel the purchases of respondent.

Neither did it require him to deposit cash payments before it executed the buy and/or sell orders
subsequent to the first unsettled transaction. According to the RTC, by allowing respondent to trade
his account actively without cash, petitioner effectively induced him to purchase securities thereby
incurring excessive credits.

The trial court also found respondent to be equally at fault, by incurring excessive credits and
waiting to see how his investments turned out before deciding to invoke the RSA. Thus, the RTC
concluded that petitioner and respondent were in pari delicto and therefore without recourse
against each other.
Ruling of the Court of Appeals

The CA upheld the lower court’s finding that the parties were in pari delicto. It castigated petitioner
for allowing respondent to keep on trading despite the latter’s failure to pay his outstanding
obligations. It explained that "the reason [behind petitioner’s act] is elemental in its simplicity. And it
is not exactly altruistic. Because whether [respondent’s] trading transaction would result in a surplus
or deficit, he would still be liable to pay [petitioner] its commission. [Petitioner’s] cash register will
keep on ringing to the sound of incoming money, no matter what happened to [respondent]."7

The CA debunked petitioner’s contention that the trial court lacked jurisdiction to determine violations
of the RSA. The court a quo held that petitioner was estopped from raising the question, because it
had actively and voluntarily participated in the assailed proceedings.

Hence, this Petition.8

Issues

Petitioner submits the following issues for our consideration:

"I.

Whether or not the Court of Appeal’s ruling that petitioner and respondent are in pari delicto which
allegedly bars any recovery, is in accord with law and applicable jurisprudence considering that
respondent was the first one who violated the terms of the Account Opening Form, [which was the]
agreement between the parties.

"II.

Whether or not the Court of Appeal’s ruling that the petitioner and respondent are in pari delicto is in
accord with law and applicable jurisprudence considering the Account Opening Form is a valid
agreement.

"III.

Whether or not the Court of Appeal’s ruling that petitioner cannot recover from respondent is in
accord with law and applicable jurisprudence since the evidence and admission of respondent
proves that he is liable to petitioner for his outstanding obligations arising from the stock trading
through petitioner.

"IV.

Whether or not the Court of Appeal’s ruling on petitioner’s alleged violation of the Revised Securities
Act [is] in accord with law and jurisprudence since the lower court has no jurisdiction over violations
of the Revised Securities Act."9

Briefly, the issues are (1) whether the pari delicto rule is applicable in the present case, and (2)
whether the trial court had jurisdiction over the case.

The Court’s Ruling

The Petition is partly meritorious.

 Main Issue:

Applicability of the

Pari Delicto Principle

In the present controversy, the following pertinent facts are undisputed: (1) on April 8, 1997,
respondent opened a cash account with petitioner for his transactions in securities;10 (2)
respondent’s purchases were consistently unpaid from April 10 to 30, 1997;11 (3) respondent failed to
pay in full, or even just his deficiency,12 for the transactions on April 10 and 11, 1997;13 (4) despite
respondent’s failure to cover his initial deficiency, petitioner subsequently purchased and sold
securities for respondent’s account on April 25 and 29;14 (5) petitioner did not cancel or liquidate a
substantial amount of respondent’s stock transactions until May 6, 1997.15

The provisions governing the above transactions are Sections 23 and 25 of the RSA16 and Rule 25-1
of the RSA Rules, which state as follows:

"SEC. 23. Margin Requirements. –

xxxxxxxxx

(b) It shall be unlawful for any member of an exchange or any broker or dealer, directly or indirectly,
to extend or maintain credit or arrange for the extension or maintenance of credit to or for any
customer –

(1) On any security other than an exempted security, in contravention of the rules and regulations
which the Commission shall prescribe under subsection (a) of this Section;

(2) Without collateral or on any collateral other than securities, except (i) to maintain a credit initially
extended in conformity with the rules and regulations of the Commission and (ii) in cases where the
extension or maintenance of credit is not for the purpose of purchasing or carrying securities or of
evading or circumventing the provisions of subparagraph (1) of this subsection.

x x x x x x x x x"

"SEC. 25. Enforcement of margin requirements and restrictions on borrowings. – To prevent indirect
violations of the margin requirements under Section 23 hereof, the broker or dealer shall require the
customer in nonmargin transactions to pay the price of the security purchased for his account within
such period as the Commission may prescribe, which shall in no case exceed three trading days;
otherwise, the broker shall sell the security purchased starting on the next trading day but not
beyond ten trading days following the last day for the customer to pay such purchase price, unless
such sale cannot be effected within said period for justifiable reasons. The sale shall be without
prejudice to the right of the broker or dealer to recover any deficiency from the customer. x x x."

"RSA RULE 25-1

"Purchases and Sales in Cash Account

"(a) Purchases by a customer in a cash account shall be paid in full within three (3) business days
after the trade date.
"(b) If full payment is not received within the required time period, the broker or dealer shall cancel or
otherwise liquidate the transaction, or the unsettled portion thereof, starting on the next business day
but not beyond ten (10) business days following the last day for the customer to pay, unless such
sale cannot be effected within said period for justifiable reasons.

"(c) If a transaction is cancelled or otherwise liquidated as a result of non-payment by the customer,

prior to any subsequent purchase during the next ninety (90) days, the customer shall be required to
deposit sufficient funds in the account to cover each purchase transaction prior to execution.

xxxxxxxxx

"(f) Written application for an extension of the period of time required for payment under paragraph
(a) be made by the broker or dealer to the Philippine Stock Exchange, in the case of a member of
the Exchange, or to the Commission, in the case of a non-member of the Exchange. Applications for
the extension must be based upon exceptional circumstances and must be filed and acted upon
before the expiration of the original payment period or the expiration of any subsequent extension."

Section 23(b) above -- the alleged violation of petitioner which provides the basis for respondent’s
defense -- makes it unlawful for a broker to extend or maintain credit on any securities other than in
conformity with the rules and regulations issued by Securities and Exchange Commission (SEC).
Section 25 lays down the rules to prevent indirect violations of Section 23 by brokers or dealers.
RSA Rule 25-1 prescribes in detail the regulations governing cash accounts.

The United States, from which our country’s security policies are patterned,17 abound with authorities
explaining the main purpose of the above statute on margin18 requirements. This purpose is to
regulate the volume of credit flow, by way of speculative transactions, into the securities market and
redirect resources into more productive uses. Specifically, the main objective of the law on margins
is explained in this wise:

"The main purpose of these margin provisions xxx is not to increase the safety of security loans for
lenders. Banks and brokers normally require sufficient collateral to make themselves safe without
the help of law. Nor is the main purpose even protection of the small speculator by making it
impossible for him to spread himself too thinly – although such a result will be achieved as a
byproduct of the main purpose.

xxxxxxxxx

"The main purpose is to give a [g]overnment credit agency an effective method of reducing the
aggregate amount of the nation’s credit resources which can be directed by speculation into the
stock market and out of other more desirable uses of commerce and industry x x x."19

A related purpose of the governmental regulation of margins is the stabilization of the

economy.20 Restrictions on margin percentages are imposed "in order to achieve the objectives of
the government with due regard for the promotion of the economy and prevention of the use of
excessive credit."21

Otherwise stated, the margin requirements set out in the RSA are primarily intended to achieve a
macroeconomic purpose -- the protection of the overall economy from excessive speculation in
securities. Their recognized secondary purpose is to protect small investors.
The law places the burden of compliance with margin requirements primarily upon the brokers and
dealers.22 Sections 23 and 25 and Rule 25-1, otherwise known as the "mandatory close-out
rule,"23 clearly vest upon petitioner the obligation, not just the right, to cancel or otherwise liquidate a
customer’s order, if payment is not received within three days from the date of purchase. The word
"shall" as opposed to the word "may," is imperative and operates to impose a duty, which may be
legally enforced. For transactions subsequent to an unpaid order, the broker should require its
customer to deposit funds into the account sufficient to cover each purchase transaction prior to its
execution. These duties are imposed upon the broker to ensure faithful compliance with the margin
requirements of the law, which forbids a broker from extending undue credit to a customer.

It will be noted that trading on credit (or "margin trading") allows investors to buy more securities
than their cash position would normally allow.24 Investors pay only a portion of the purchase price of
the securities; their broker advances for them the balance of the purchase price and keeps the
securities as collateral for the advance or loan.25 Brokers take these securities/stocks to their bank
and borrow the "balance" on it, since they have to pay in full for the traded stock. Hence, increasing
margins26 i.e., decreasing the amounts which brokers may lend for the speculative purchase and
carrying of stocks is the most direct and effective method of discouraging an abnormal attraction of
funds into the stock market and achieving a more balanced use of such resources.

"x x x [T]he x x x primary concern is the efficacy of security credit controls in preventing speculative
excesses that produce dangerously large and rapid securities price rises and accelerated declines in
the prices of given securities issues and in the general price level of securities. Losses to a given
investor resulting from price declines in thinly margined securities are not of serious significance
from a regulatory point of view. When forced sales occur and put pressures on securities prices,
however, they may cause other forced sales and the resultant snowballing effect may in turn have a
general adverse effect upon the entire market."27

The nature of the stock brokerage business enables brokers, not the clients, to verify, at any time,
the status of the client’s account.28 Brokers, therefore, are in the superior position to prevent the
unlawful extension of credit.29 Because of this awareness, the law imposes upon them the primary
obligation to enforce the margin requirements.

Right is one thing; obligation is quite another. A right may not be exercised; it may even be waived.
An obligation, however, must be performed; those who do not discharge it prudently must
necessarily face the consequence of their dereliction or omission.30

Respondent Liable for the First,

But Not for the Subsequent Trades

Nonetheless, these margin requirements are applicable only to transactions entered into by the
present parties subsequent to the initial trades of April 10 and 11, 1997. Thus, we hold that petitioner
can still collect from respondent to the extent of the difference between the latter’s outstanding
obligation as of April 11, 1997 less the proceeds from the mandatory sell out of the shares pursuant
to the RSA Rules. Petitioner’s right to collect is justified under the general law on obligations and
contracts.31

Article 1236 (second paragraph) of the Civil Code, provides:

"Whoever pays for another may demand from the debtor what he has paid, except that if he paid
without the knowledge or against the will of the debtor, he can recover only insofar as the payment
has been beneficial to the debtor." (Emphasis supplied)
Since a brokerage relationship is essentially a contract for the employment of an agent, principles of
contract law also govern the broker-principal relationship.32

The right to collect cannot be denied to petitioner as the initial transactions were entered pursuant to
the instructions of respondent. The obligation of respondent for stock transactions made and entered
into on April 10 and 11, 1997 remains outstanding. These transactions were valid and the obligations
incurred by respondent concerning his stock purchases on these dates subsist. At that time, there
was no violation of the RSA yet. Petitioner’s fault arose only when it failed to: 1) liquidate the
transactions on the fourth day following the stock purchases, or on April 14 and 15, 1997; and 2)
complete its liquidation no later than ten days thereafter, applying the proceeds thereof as payment
for respondent’s outstanding obligation.33

Elucidating further, since the buyer was not able to pay for the transactions that took place on April
10 and 11, that is at T+4, the broker was duty-bound to advance the payment to the settlement
banks without prejudice to the right of the broker to collect later from the client.34

In securities trading, the brokers are essentially the counterparties to the stock transactions at the
Exchange.35 Since the principals of the broker are generally undisclosed, the broker is personally
liable for the contracts thus made.36 Hence, petitioner had to advance the payments for respondent’s
trades. Brokers have a right to be reimbursed for sums advanced by them with the express or
implied authorization of the principal,37 in this case, respondent.

It should be clear that Congress imposed the margin requirements to protect the general economy,
not to give the customer a free ride at the expense of the broker.38 Not to require respondent to pay
for his April 10 and 11 trades would put a premium on his circumvention of the laws and would
enable him to enrich himself unjustly at the expense of petitioner.

In the present case, petitioner obviously failed to enforce the terms and conditions of its Agreement
with respondent, specifically paragraph 8 thereof, purportedly acting on the plea39 of respondent to
give him time to raise funds therefor. These stipulations, in relation to paragraph 4,40 constituted
faithful compliance with the RSA. By failing to ensure respondent’s payment of his first purchase
transaction within the period prescribed by law, thereby allowing him to make subsequent
purchases, petitioner effectively converted respondent’s cash account into a credit account.

However, extension or maintenance of credits on nonmargin transactions, are specifically prohibited

under Section 23(b). Thus, petitioner was remiss in its duty and cannot be said to have come to
court with "clean hands" insofar as it intended to collect on transactions subsequent to the initial
trades of April 10 and 11, 1997.

Respondent Equally Guilty

for Subsequent Trades

On the other hand, we find respondent equally guilty in entering into the transactions in violation of
the RSA and RSA Rules. We are not prepared to accept his self-serving assertions of being an
"innocent victim" in all the transactions. Clearly, he is not an unsophisticated, small investor merely
prodded by petitioner to speculate on the market with the possibility of large profits with low -- or no
-- capital outlay, as he pictures himself to be. Rather, he is an experienced and knowledgeable
trader who is well versed in the securities market and who made his own investment decisions. In
fact, in the Account Opening Form (AOF), he indicated that he had excellent knowledge of stock
investments; had experience in stocks trading, considering that he had similar accounts with other
firms.41 Obviously, he knowingly speculated on the market, by taking advantage of the "no-cash-out"
arrangement extended to him by petitioner.

We note that it was respondent who repeatedly asked for some time to pay his obligations for his
stock transactions. Petitioner acceded to his requests. It is only when sued upon his indebtedness
that respondent raised as a defense the invalidity of the transactions due to alleged violations of the
RSA. It was respondent’s privilege to gamble or speculate, as he apparently did so by asking for
extensions of time and refraining from giving orders to his broker to sell, in the hope that the prices
would rise. Sustaining his argument now would amount to relieving him of the risk and
consequences of his own speculation and saddling them on the petitioner after the result was known
to be unfavorable.42 Such contention finds no legal or even moral justification and must necessarily
be overruled. Respondent’s conduct is precisely the behavior of an investor deplored by the law.

In the final analysis, both parties acted in violation of the law and did not come to court with clean
hands with regard to transactions subsequent to the initial trades made on April 10 and 11, 1997.
Thus, the peculiar facts of the present case bar the application of the pari delicto rule -- expressed in
the maxims "Ex dolo malo non oritur action" and "In pari delicto potior est conditio defendentis" -- to
all the transactions entered into by the parties. The pari delecto rule refuses legal remedy to either
party to an illegal agreement and leaves them where they were.43 In this case, the pari delicto rule
applies only to transactions entered into after the initial trades made on April 10 and 11, 1997.

Since the initial trades are valid and subsisting obligations, respondent is liable for them. Justice and
good conscience require all persons to satisfy their debts. Ours are courts of both law and equity;
they compel fair dealing; they do not abet clever attempts to escape just obligations. Ineludibly, this
Court would not hesitate to grant relief in accordance with good faith and conscience.

Pursuant to RSA Rule 25-1, petitioner should have liquidated the transaction (sold the stocks) on the
fourth day following the transaction (T+4) and completed its liquidation not later than ten days
following the last day for the customer to pay (effectively T+14). Respondent’s outstanding obligation
is therefore to be determined by using the closing prices of the stocks purchased at T+14 as basis.

We consider the foregoing formula to be just and fair under the circumstances. When petitioner
tolerated the subsequent purchases of respondent without performing its obligation to liquidate the
first failed transaction, and without requiring respondent to deposit cash before embarking on trading
stocks any further, petitioner, as the broker, violated the law at its own peril. Hence, it cannot now
complain for failing to obtain the full amount of its claim for these latter transactions.

On the other hand, with respect to respondent’s counterclaim for damages for having been allegedly
induced by petitioner to generate additional purchases despite his outstanding obligations, we hold
that he deserves no legal or equitable relief consistent with our foregoing finding that he was not an
innocent investor as he presented himself to be.

Second Issue:

Jurisdiction

It is axiomatic that the allegations in the complaint, not the defenses set up in the answer or in the
motion to dismiss determine which court has jurisdiction over an action.44 Were we to be governed
by the latter rule, the question of jurisdiction would depend almost entirely upon the defendant.45
The instant controversy is an ordinary civil case seeking to enforce rights arising from the Agreement
(AOF) between petitioner and respondent. It relates to acts committed by the parties in the course of
their business relationship. The purpose of the suit is to collect respondent’s alleged outstanding
debt to petitioner for stock purchases.

To be sure, the RSA and its Rules are to be read into the Agreement entered into between petitioner
and respondent. Compliance with the terms of the AOF necessarily means compliance with the
laws. Thus, to determine whether the parties fulfilled their obligations in the AOF, this Court had to
pass upon their compliance with the RSA and its Rules. This, in no way, deprived the Securities and
Exchange Commission (SEC) of its authority to determine willful violations of the RSA and impose
appropriate sanctions therefor, as provided under Sections 45 and 46 of the Act.

Moreover, we uphold the SEC in its Opinion, thus:

"As to the issue of jurisdiction, it is settled that a party cannot invoke the jurisdiction of a court to
secure affirmative relief against his opponent and after obtaining or failing to obtain such relief,
repudiate or question that same jurisdiction.

"Indeed, after voluntarily submitting a cause and encountering an adverse decision on the merits, it
is too late for petitioner to question the jurisdictional power of the court. It is not right for a party who
has affirmed and invoked the jurisdiction of a court in a particular matter to secure an affirmative
relief, to afterwards deny that same jurisdiction to escape a penalty."46

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are hereby MODIFIED.
Respondent is ordered to pay petitioner the difference between the former’s outstanding obligation
as of April 11, 1997 less the proceeds from the mandatory sell out of shares pursuant to the RSA
Rules, with interest thereon at the legal rate until fully paid.

The RTC of Makati, Branch 57 is hereby directed to make a computation of respondent’s

outstanding obligation using the closing prices of the stocks at T+14 as basis -- counted from April
11, 1997 and to issue the proper order for payment if warranted. It may hold trial and hear the
parties to be able to make this determination.

No finding as to costs in this instance.

SO ORDERED.

G.R. No. 214567

DRA. MERCEDES OLIVER, Petitioner,

vs.
PHILIPPINE SAVINGS BANK and LILIA CASTRO, Respondents.

DECISION

MENDOZA, J.:
This is a petition for review on certiorari seeking to reverse and set aside the October 25, 2013
Decision  and the September 12, 2014 Resolution  of the Court of Appeals (CA) in CA-G.R. CV No.
1 2

95656, which reversed the July 22, 2010 Order  of the Regional Trial Court, Branch 276, Muntinlupa
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City (RTC) in Civil Case No. 99-278, a case for injunction and damages.

Petitioner Mercedes Oliver (Oliver) was a depositor of respondent Philippine Savings

Bank (PSBank) with account number 2812-07991-6.             dent Lilia Castro (Castro) was the
Assistant Vice President of               the Acting Branch Manager of PSBank San Pedro, Laguna.

Oliver’s Position

In her Complaint,  dated October 5, 1999, Oliver alleged that sometime in 1997, she made an initial
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deposit of P12 million into her PSBank account. During that time, Castro-AVP convinced her to loan
out her deposit as interim or bridge financing for the approved loans of bank borrowers who were
waiting for the actual release of their loan proceeds.

Under this arrangement, Castro would first show the approved loan documents to Oliver. Thereafter,
Castro would withdraw the amount needed from Oliver’s account. Upon the actual release of the
loan by PSBank to the borrower, Castro would then charge the rate of 4% a month from the loan
proceeds as interim or bridge financing interest. (PARA DING REDISCOUNTING SCHEME,
HABANG WALA PA, DUN KA KIKITA)

Together with the interest income, the principal amount previously withdrawn from Oliver’s bank
account would be deposited back to her account. Meanwhile, Castro would earn a commission of
10% from the interest.

Their arrangement went on smoothly for months. Due to the frequency of bank transactions, Oliver
even entrusted her passbook to Castro. (RED FLAG) Because Oliver earned substantial profit, she
was further convinced by Castro to avail of an additional credit line in the amount of P10 million.

The said credit line was secured by a real estate mortgage on her house and lot in Ayala Alabang
covered by Transfer Certificate of Title (TCT) No. 137796.5

Oliver instructed Castro to pay P2 million monthly to PSBank starting on September 3, 1998 so that
her credit line for P10 million would be fully paid by January 3, 1999.

Beginning September 1998, Castro stopped rendering an accounting for Oliver. (ETO NA TAYO)
The latter then demanded the return of her passbook. When Castro showed her the passbook
sometime in late January or early February 1995, she noticed several erasures and
superimpositions therein. She became very suspicious of the many erasures pertaining to the
December 1998 entries so she requested a copy of her transaction history register from PSBank.

When her transaction history register  was shown to her, Oliver was surprised to discover that the
6

amount of P4,491,250.00 (estimated at P4.5 million) was entered into her account on December 21,
1998. While a total of P7 million was withdrawn from her account on the same day, Oliver asserted
that she neither applied for an additional loan of P4.5 million nor authorized the withdrawal of P7
million. She also discovered another loan for P1,396,310.45, acquired on January 5, 1999 and
allegedly issued in connection with the P10 million credit line.
In Oliver’s passbook,   there were no entries from December 17, 1998 to December 27, 1998. The
7

transaction history register, however, showed several transactions on these very same dates
including the crediting of P4.5 million and the debiting of P7 million on December 21, 1998. Oliver
then learned that the additional P4.5 million and P1,396,310.45 loans were also secured by the real
estate mortgage,  dated January 8, 1998, covering the same property in Ayala Alabang. Oliver
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received two collection letters,  dated May 13, 1999 and June 18, 1999, from PSBank referring to the
9

non-payment of unpaid loans, to wit: (1) P4,491,250.00 from the additional loan and (2)
P1,396,310.45 from the P10 million credit line.  In response, Oliver protested that she neither
10

availed of the said loans nor authorized the withdrawal of P7 million from her account.  She also
11

claimed that the P10 million loan from her credit line was already paid in full.
12

On July 14, 1999, a final demand letter  was sent to Oliver by PSBank, requiring her to pay the
13

unpaid loans. Oliver, however, still refused to pay. Subsequently, Oliver received a notice of
sale  involving the property in Ayala Alabang, issued by Notary Public Jose Celestino Torres on
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September 15, 1999. The said notice informed her of the impending extra-judicial foreclosure and
sale of her house and lot to be held on October 21, 1999.

As a result, Oliver filed the subject complaint against PSBank and Castro.

Castro’s Position

In her Answer,  Castro admitted that she and Oliver agreed that the latter would lend out money to
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borrowers at 4% to 5% interest per month provided that the former would screen them. She also
acknowledged having been instructed by Oliver to pay the bank P2 million every month to settle the
P10 million credit line. Nonetheless, Castro informed Oliver that the payment thereof was subject to
the availability of funds in her account. She disclosed that she made some alterations and erasures
in Oliver’s passbook so as to reconcile the passbook with the computer printout of the bank, but
denied any attempt to hide the passbook as she was able to return it sometime in January 1999.

Castro also denied the deceit imputed against her. She asserted that their arrangement was not
"interim or bridge financing" inasmuch as the loans were entirely new and distinct from that granted
by PSBank. When Oliver’s clients multiplied, Castro advised her to apply for a credit line of P10
million. The said credit line was first approved in December 1997 with a term of one year. 16

Sometime in August 1998, Castro informed Oliver about the impending expiration of her credit line.
Subsequently, Oliver applied for another loan in the amount of P4.5 million as evidenced by a
promissory note,  dated December 21, 1998. On January 5, 1999, another promissory note  was
17 18

executed by Oliver to cover a loan in the amount of P1,396,310.45.

Castro asserted that, on December 21, 1998, upon Oliver’s instruction, a total of P7 million was
withdrawn from the latter’s account and was then deposited to the account of one Ben Lim (Lim) on
the same date. Lim was a businessman who borrowed money from Oliver. Castro knew him
because he was also a depositor and borrower of PSBank San Pedro Branch. 19

As to the amount of P1,396,310.45, Castro explained that it was a separate and personal loan
obtained by her from Oliver. To secure the payment of such obligation, Castro mortgaged a property
located in Camella Homes III in Tunasan, Muntinlupa City.

Castro admitted that on October 19, 1999, she was terminated by PSBank because of certain
problems regarding client accommodation and loss of confidence. 20
 PSBank’s Position

In its defense, PSBank averred that Oliver applied for a credit line of P10 million which was granted
by the bank and which secured by a real estate mortgage. Because Oliver failed to pay the P10
million loan, she obtained another loan in the amount of P4.5 million, as evidenced by a promissory
note. Days later, she again acquired a separate loan amounting to P1,396,310.45 as shown by
another promissory note. Both loans were secured by a real estate mortgage, dated January 8,
1998, and the proceeds thereof were issued as proved by the release tickets,  dated December 21,
21

1998 and January 5, 1999, respectively. 22

The RTC Decision

In its March 30, 2010 Decision,  the RTC dismissed the complaint and rendered judgment in favor of
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PSBank and Castro. According to the RTC, PSBank and Castro should not be held liable for the
loan of P4.5 million and the withdrawal of the P7 million. Castro was able to submit the Debit Credit
Memo  and the Savings Account Check Deposit Slip  to prove that there were some previous loan
24 25

transactions between Oliver and Lim. Considering that neither PSBank nor Castro obtained the P7
million, there was no obligation on their part to return the amount.

Moreover, the trial court stated that Oliver failed to controvert PSBank’s allegation that she had
unpaid loan obligations. Thus, it concluded that PSBank had the right to foreclose the mortgaged
property. The fallo reads:

WHEREFORE, finding lack of merit, the instant case is hereby DISMISSED. Accordingly, the Writ of
Preliminary Injunction is hereby LIFTED and SET ASIDE.

SO ORDERED. 26

Oliver seasonably filed her motion for reconsideration.  She insisted that the P7 million was
27

unlawfully withdrawn. She claimed that what happened in this case was a "cash savings withdrawal"
and that there should have been a corresponding withdrawal slip for such transaction. Also, if indeed
the P7 million was withdrawn from her account and was credited to the account of Lim, the deposit
slip for his account should have been presented.

The RTC Order

On July 22, 2010, the RTC resolved the motion and issued an order reversing its earlier decision.
According to the RTC, Oliver’s assertion that the withdrawal was made without her consent prevailed
in the absence of any proof to the contrary. The cash savings withdrawal slips should have been
offered in evidence by either PSBank or Castro to settle the issue of whether the amount of P7
million was actually withdrawn by Oliver or by her authorized representative or agent.

The RTC also rejected the position of PSBank and Castro that the erasures and alterations in
Oliver’s passbook were made simply to reconcile the same with the transaction history register of the
bank because even after the alleged corrections, the said documents still contained different entries.
Although Oliver and Lim had previous transactions, none of them pertained to the P7 million
purportedly transferred on December 21, 1998.

With regard to PSBank, the RTC stated that it failed to exercise utmost diligence in safekeeping
Oliver’s deposit. Had it not been for the unauthorized, withdrawal which was attributable to the bank
and Castro, the P4.5 million and the P1,396,310.45 loans would not have remained outstanding,
considering that the improperly withdrawn P7 million was more than sufficient to discharge those
liabilities.  The dispositive portion of the order reads:
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WHEREFORE, premises considered, the Motion for Reconsideration is hereby GRANTED. The
Decision dated March 30, 2010 is hereby reconsidered and set aside. In lieu thereof, a new one is
hereby rendered ordering the defendants Lilia Castro and Philippine Savings Bank to jointly and
solidarily pay plaintiff Dra. Mercedes Oliver, the sums of

1. P1,111,850.77 as actual damages;

2. P100,000.00 as moral damages;

3. P100,000.00 as attorney’s fees; and

4. P100,000.00 as exemplary damages

Moreover, the Writ of Preliminary Injunction is hereby made permanent.

SO ORDERED. 29

Aggrieved, Castro and PSBank appealed before the CA.

The CA Decision

On October 25, 2013, the CA granted the appeal. It reversed the July 22, 2010 of the RTC order and
reinstated its March 30, 2010 decision. The appellate court found no compelling evidence to prove
that fraud attended the processing and release of the P4.5 million loan as well as the withdrawal of
P7 million from Oliver’s account. The CA found that Oliver admitted signing the loan documents, the
promissory notes and the release tickets pertaining to the obligations that she had contracted with
PSBank. In addition, the CA stated that Oliver also failed to establish her assertion that she was
manipulated and defrauded into signing the said loan documents.

The CA also found that PSBank exercised extraordinary diligence in handling Oliver’s account, thus,
the awards of damages were deleted. The dispositive portion of the CA decision reads:

WHEREFORE, the Appeal is hereby GRANTED. The Order dated 22 July 2010 of the Regional Trial
Court of Muntinlupa City, Branch 276, is REVERSED and SET ASIDE, and another one entered
REINSTATING the Decision dated March 30, 2010, in Civil Case No. 99-278.

SO ORDERED. 30

Oliver filed her motion for reconsideration but the same was denied in the CA Resolution, dated
September 12, 2014.

Hence, this petition.

ISSUES

I
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE
PETITIONER FAILED TO SHOW COMPELLING EVIDENCE TO PROVE THAT FRAUD
ATTENDED THE PROCESSING AND RELEASE OF THE LOAN OF P4.5 MILLION AS WELL AS
THE WITHDRAWAL OF P7 MILLION PESOS FROM HER ACCOUNT.

II

WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED WHEN IT RULED THAT
THERE WAS NO EVIDENCE TO PROVE THAT THE SUM OF P7 MILLION WAS DEBITED FROM
THE ACCOUNT OF PETITIONER SANS HER AUTHORIZATION.

III

WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED WHEN IT RULED THAT THE
RESPONDENTS TREATED THE PETITIONER’S ACCOUNT WITH EXTRAORDINARY
DILIGENCE.

IV

WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED WHEN IT FAILED TO HOLD
THAT THE RESPONDENTS ARE JOINTLY AND SEVERALLY LIABLE TO THE PETITIONER
FOR DAMAGES. 31

In her petition for review,  Oliver insisted that she had no knowledge of any loan released because
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she never availed of any new loan from PSBank. Neither the P4.5 million loan nor the cash
withdrawal of P7 million was reflected in her passbook.

Oliver further argued that the burden of proving that the withdrawal was made with her authority
would lie on the part of PSBank and Castro. The cash savings withdrawal slip containing the
signature of Oliver should have been presented in court. While the respondents claimed that the
amount withdrawn was lent to Lim, the latter was never called to the witness stand as PSBank and
Castro opted not to present him in court. Castro, aside from her self-serving testimony, failed to
present any concrete proof to show that Oliver indeed lent the withdrawn P7 million cash to Lim.

Finally, Oliver averred that the erasures and alterations in her passbook undeniably established that
Castro manipulated the same to conceal the loan release and the cash withdrawal from her account.

In her Comment,  Castro countered that the CA had more opportunity and facilities to examine the
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facts. Hence, there was no reason to depart from the rule that the findings of fact of the CA were
final and conclusive and could not be reviewed on appeal. She asserted that there was no proof that
the P7 million was withdrawn without Oliver’s authority. She added that Oliver was an astute
businesswoman who knew her clients and bank deposits and who was knowledgeable of her bank
transactions and was aware of her loaned amounts from the bank.

In its Comment,  PSBank asserted that the issues and arguments propounded by Oliver had been
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judiciously passed upon. On the stated facts alone, the petition, which was akin to a motion for
reconsideration, should be denied outright for being pro forma.

In her Reply,  Oliver faulted PSBank and Castro for failing to present the cash withdrawal slip which
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would show her signature to prove that the money was withdrawn with her authority. She also
reiterated that Lim should have been presented as a witness to substantiate their defense that he
actually received the amount of P7 million.

The Court’s Ruling

The petition is impressed with merit.

There was an implied agency

between Oliver and Castro; the
loans were properly acquired

A contract of agency may be inferred from all the dealings between Oliver and Castro. Agency can
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.  The36

question of whether an agency has been created is ordinarily a question which may be established
in the same way as any other fact, either by direct or circumstantial evidence. The question is
ultimately one of intention.37

In this case, Oliver and Castro had a business agreement wherein Oliver would obtain loans from
the bank, through the help of Castro as its branch manager; and after acquiring the loan proceeds,
Castro would lend the acquired amount to prospective borrowers who were waiting for the actual
release of their loan proceeds. Oliver would gain 4% to 5% interest per month from the loan
proceeds of her borrowers, while Castro would earn a commission of 10% from the interests.
Clearly, an agency was formed because Castro bound herself to render some service in
representation or on behalf of Oliver, in the furtherance of their business pursuit. 38

For months, the agency between Oliver and Castro benefited both parties. Oliver, through Castro’s
representations, was able to obtain loans, relend them to borrowers, and earn interests; while Castro
acquired commissions from the transactions. Oliver even gave Castro her passbook to facilitate the
transactions.

Accordingly, the laws on agency apply to their relationship. Article 1881 of the New Civil Code
provides that the agent must act within the scope of his authority. He may do such acts as may be
conducive to the accomplishment of the purpose of the agency. Thus, as long as the agent acts
within the scope of the authority given by his principal, the actions of the former shall bind the latter.

Oliver claims that the P4.5 million loan, released on December 21, 1998, and the P1,396,310.45
loan, released on January 5, 1999, were not acquired with her consent. Castro and PSBank, on the
other hand, countered that these loans were obtained with Oliver’s full consent. The Court finds
that the said loans were acquired with Oliver’s authority. The promissory notes  and the release
39

tickets  for the said loans bore her signatures. She failed to prove that her signatures appearing on
40

the loan documents were forged.

Hence, the loan documents were reliable and these proved that the loans were processed by Castro
within the scope of her authority. As the loans were validly obtained, PSBank correctly stated that
Oliver had incurred a debt of P4.5 million and P1,396,310.45, or a total of P5,888,149.33.

P7 million was
improperly withdrawn;
agent acted beyond her
scope of authority
Although it was proven that Oliver authorized the loans, in the aggregate amount of P5,888,149.33,
there was nothing in the records which proved that she also allowed the withdrawal of P7 million
from her bank account.

Oliver vehemently denied that she gave any authority whatsoever to either Castro or PSBank to
withdraw the said amount. In her judicial affidavit before the RTC, Castro initially claimed that Oliver
authorized the withdrawal of P7 million from her bank account, to wit:

Q: Do you know when was this 4.5 million pesos loan was credited to plaintiff’s deposit account?

A: Based on the Transaction Ledge of PS Bank, the 4.5 million pesos was credit to plaintiff’s deposit
account on 21 December 21 1998

Q: What happened after the 4.5 million pesos loan was credited to plaintiff’s account?

A: Upon plaintiff’s instruction, 7 million was withdrawn from her account including her loaned
amount to be deposited at Mr. Ben Lim’s account at PS Bank, San Pedro Branch. 41

[Emphasis Supplied]

During her cross-examination, however, Castro could no longer remember whether Oliver gave her
the authority to withdraw the P7 million from her account. The transcript of stenographic notes reads:

Q: You said here, your statement here, "Upon Plaintiff’s instruction". So, my question is, who did the
Plaintiff instruct you, was it you?

A: I cannot remember, sir.

Q: You are not definite? Your statement here it is categorical. It’s on page 9 of 17 in the Judicial
Affidavit, the question is "What happened after the 4.5 million Pesos loan was credited to the
Plaintiff’s account" And your answer was, "Upon Plaintiff’s instruction Seven (7) million was
withdrawn from her account. My question is, this phrase, upon plaintiff’s instruction, who did the
Plaintiff’s (sic) instruct, was it you?

A: I cannot remember, sir because I still have other officers other than me, who were assisting me
during that time, so it could be the instruction even I said upon the instruction of the plaintiff, but I
cannot remember if I was the one who received the instruction from the plaintiff. It could be
other officers of mine during that time, sir.

Q: May I remind you, this is Seven (7) million Pesos?

A: Yes, sir. 42

[Emphasis Supplied]

Verily, Castro, as agent of Oliver and as branch manager of PS Bank, utterly failed to secure
the authorization of Oliver to withdraw such substantial amount. As a standard banking
practice intended precisely to prevent unauthorized and fraudulent withdrawals, a bank manager
must verify with the client-depositor to authenticate and confirm that he or she has validly authorized
such withdrawal. 43
Castro’s lack of authority to withdraw the P7 million on behalf of Oliver became more apparent when
she altered the passbook to hide such transaction. It must be remembered that Oliver entrusted her
passbook to Castro. In the transaction history register for her account, it was clear that there was a
series of dealings from December 17, 1998 to December 23, 1998. When compared with Oliver’s
passbook, the latter showed that the next transaction from December 16, 1998 was on December
28, 1998. It was also obvious to the naked eye that the December 28, 1998 entry in the passbook
was altered. As aptly observed by the RTC, nowhere in the testimony of Castro could be gathered
that she made a detailed, plausible and acceptable explanation as to why she had to make
numerous corrections in the entries in the passbook.  Even after the corrections allegedly done to
44

reconcile the records, the passbook and the transaction history register still contained different
entries.

Curiously, though she asserts that Oliver obtained a loan of P4.5 million and authorized the
withdrawal of P7 million,  Castro could not explain why these transactions were not reflected in the
45

passbook which was in her possession. Bearing in mind that the alleged unauthorized withdrawal
happened on December 21, 1998, while Castro was questionably withholding the passbook, the
Court is of the impression that she manipulated the entries therein to conceal the P7 million
withdrawal.

Further, Castro claims that Oliver instructed her to withdraw the P7 million from her bank account
and to deposit the same in Lim’s account. Glaringly, Lim was not presented as a witness to
substantiate her defense. Even though she testified that the P7 million transfer from Oliver’s account
to Lim’s was duly documented, Castro never presented a single documentary proof of that specific
transaction.

The Court is convinced that Castro went beyond the scope of her authority in withdrawing the P7
million from Oliver’s bank account. Her flimsy excuse that the said amount was transferred to the
account of a certain Lim deserves scant consideration. Hence, Castro must be held liable for
prejudicing Oliver.
46

PSBank failed to
exercise the highest
degree of diligence
required of banking
institutions

Aside from Castro, PSBank must also be held liable because it failed to exercise utmost
diligence in the improper withdrawal of the P7 million from Oliver’s bank account.

In the case of banks, the degree of diligence required is more than that of a good father of a family.
Considering the fiduciary nature of their relationship with their depositors, banks are duty bound to
treat the accounts of their clients with the highest degree of care. The point is that as a business
affected with public interest and because of the nature of its functions, the bank is under obligation to
treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature
of their relationship. 47

In Simex International v. Court of Appeals,  the Court held that the depositor expected the bank to
48

treat his account with the utmost fidelity, whether such account consisted only of a few hundred
pesos or of millions. The bank must record every single transaction accurately, down to the last
centavo, and as promptly as possible. This has to be done if the account is to reflect at any given
time the amount of money the depositor can dispose of as he sees fit, confident that the bank will
deliver it as and to whomever he directs. A blunder on the part of the bank, such as the dishonor of a
check without good reason, can cause the depositor not a little embarrassment if not also financial
loss and perhaps even civil and criminal litigation.
49

Time and again, the Court has emphasized that the bank is expected to ensure that the depositor’s
funds shall only be given to him or his authorized representative. In Producers Bank of the Phil. v.
Court of Appeals,  the Court held that the usual banking procedure was that withdrawals of savings
50

deposits could only be made by persons whose authorized signatures were in the signature cards on
file with the bank. In the said case, the bank therein allowed an unauthorized person to withdraw
from its depositor’s savings account, thus, it failed to exercise the required diligence of banks and
must be held liable.

With respect to withdrawal slips, the Court declared in Philippine National Bank v. Pike  that
51

"[o]rdinarily, banks allow withdrawal by someone who is not the account holder so long as the
account holder authorizes his representative to withdraw and receive from his account by signing on
the space provided particularly for such transactions, usually found at the back of withdrawal slips."
There, the bank violated its fiduciary duty because it allowed a withdrawal by a representative even
though the authorization portion of the withdrawal slip was not signed by the depositor.

Finally, in Cagungun v. Planters Development Bank,  a case very similar to the present one, the
52

depositors therein entrusted their passbook to the bank employees for some specific transactions.
The bank employees went beyond their authority and were able to withdraw from the depositors’
account without the latter’s consent. The bank was held liable therein for the acts of its employees
because it failed to safeguard the accounts of its depositors.

In the case at bench, it must be determined whether the P7 million was withdrawn from the bank
with the authority of Oliver. As testified to by Castro, every withdrawal from the bank was duly
evidenced by a cash withdrawal slip, a copy of which is given both to the bank and to its
client.  Contrary to the position of the CA and that of the respondents, Oliver cannot be required to
53

produce the cash withdrawal slip for the said transaction because, precisely, she consistently
denied giving authority to withdraw such amount from her account.

Necessarily, the party that must have access to such crucial document would either be PSBank or
Castro. They must present the said cash withdrawal slip, duly signed by Oliver, to prove that the
withdrawal of P7 million was indeed sanctioned. Unfortunately, both PSBank and Castro failed to
present the cash withdrawal slip.

During the trial, the counsel of PSBank conceded that the cash withdrawal slip for the P7 million
transaction could not be located, to quote:

ATTY DEJARESCO: Your Honor, excuse me just a comment for the record we asked for two (2)
years, Your Honor to subpoena this from the bank, the bank never produce (sic) the withdrawal slip
two (2) years (sic), Your Honor, this case was delayed by the previous Court for two (2) years. Your
Honor, no withdrawal slip was produced by the bank, Your Honor. I would just like to place it on
record.

COURT: Were there subpoenas issued by the bank, was there an order?

ATTY. DEJARESCO: Yes Your Honor, I think the good counsel was the counsel at that time would
you able to confirm that it took us two (2) years to subpoena and subpoena (sic) this withdrawal slip
because there must be an authority to withdraw, and it there is a signature of the plaintiff, we will
admit that.
ATTY. CORPUZ: I remember having manifested that the withdrawal slip cannot be located.

ATTY. DEJARESCO: Let’s put that on record, Your Honor.

ATTY. CORPUS: (sic) I remember having made that manifestation, Your Honor.

COURT: That’s the reason why no document was produced in Court by the PS Bank?

ATTY. CORPUS: (sic) With respect to the withdrawal slip only, Your Honor on December 21.

ATTY. DEJARESCO: Of that Seven (7) million from the account.

COURT: Make that on record.

ATTY. CORPUS: Yes, Your Honor. 54

[Emphasis Supplied]

Castro, as agent of Oliver, could not produce either the said withdrawal slip allegedly authorizing the
withdrawal of the P7 million, her testimony is quoted as follows:

ATTY. DEJARESCO:

Q: Can you show poof of the withdrawal slip?

A: The withdrawal slip.

Q: I’m asking you do you have proof?

A: None, sir.

Q: You cannot produce in Court in support of your Judicial Affidavit?

A: None.

Q: And you cannot produce that in Court?

A: As far as the withdrawal slip as for myself, none. 55

[Emphasis Supplied]

From the foregoing, there was a clear showing of PSBank’s failure to exercise the degree of
diligence that it ought to have exercised in dealing with its clients. It could not prove that the
withdrawal of P7 million was duly authorized by Oliver. As a banking institution, PSBank was
expected to ensure that such substantial amount should only be transacted with the consent and
authority of Oliver. PSBank, however, reneged on its fiduciary duty by allowing an encroachment
upon its depositor’s account without the latter’s permission. Hence, PSBank must be held liable for
such improper transaction.
PSBank and Castro
failed to discharge their
burden and must be held
solidarily liable

The party who alleges a fact has the burden of proving it. Section 1, Rule 131 of the Rules of Court
defines "burden of proof" as "the duty of a party to present evidence on the facts in issue necessary
to establish his claim or defense by the amount of evidence required by law." In civil cases, the
burden of proof rests upon the plaintiff, who is required to establish his case by a preponderance of
evidence. Once the plaintiff establishes his case, the burden of evidence shifts to the defendant,
who, in turn, bears the burden to establish his defense. 56

Here, Oliver alleged that she did not authorize the withdrawal of P7 million from her account. To
establish her allegation, Oliver presented the following: (1) the transaction history register which
showed the withdrawal of P7 million from her account on December 21, 1998; (2) the passbook
which contained alterations to conceal the withdrawal on December 21, 1998 while in the
possession of Castro; and (3) testimonial evidence that she did not allow the withdrawal of the said
amount.  The Court is of the view that Oliver had sufficiently discharged her burden in proving that
57

P7 million was withdrawn from her account without her authorization. Hence, the burden was shifted
to the respondents to refute the allegation of Oliver.

As discussed above, both Castro and PSBank failed to establish the burden of their defense. They
failed to present proof that Oliver authorized the said transaction. They could have presented either
the cash withdrawal slip for the P7 million on December 21, 1999 or Lim’s testimony to prove the
transfer of funds to the latter’s account, but they did neither. Without an iota of proof to substantiate
the validity of the said transaction, the respondents unlawfully deprived Oliver of her funds.

Indeed, the bank should be solidarily liable with its employee for the damages committed to its
depositor.58 Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily
liable for damages caused by their employees acting within the scope of their assigned tasks.

Castro, as acting branch manager of PSBank ,was able to facilitate the questionable transaction as
she was also entrusted with Oliver’s passbook. In other words, Castro was the representative of
PSBank, and, at the same time, the agent of Oliver, earning commissions from their transactions.
Oddly, PSBank, either consciously or through sheer negligence, allowed the double dealings of its
employee with its client. Such carelessness and lack of protection of the depositors from its own
employees led to the unlawful withdrawal of the P7 million from Oliver’s account. Although Castro
was eventually terminated by PSBank because of certain problems regarding client accommodation
and loss of confidence, the damage to Oliver had already been done. Thus, both Castro and
PSBank must be held solidarily liable.

Award of damages;
invalid foreclosure

To recapitulate, the loans of Oliver from PSBank which were secured by real estate mortages
amounted to P5,888,149.33. Finding PSBank and Castro solidarily liable to Oliver in the amount of
P7 million because it was improperly withdrawn from her bank account, the Court agrees with the
RTC that had it not been for the said unauthorized withdrawal, Oliver’s debts amounting to
P5,888,149.33 would have been satisfied.

Consequently, PSBank’s foreclosure of the real estate mortgage covering the two (2) loans in the
total amount of P5,888,149.33 was improper. With PSBank being found liable to Oliver for P7
million, after offsetting her loans would have PSBank and Castro still owing her P1,111,850.77,
which must be suitably paid in the form of actual damages.

The award of moral damages must also be upheld. Specifically, in culpa contractual or breach of
contract, like in the present case, moral damages are recoverable only if the defendant has acted
fraudulently or in bad faith, or is found guilty of gross negligence amounting to bad faith, or in wanton
disregard of his contractual obligations. Verily, the breach must be wanton, reckless, malicious, or in
bad faith, oppressive or abusive. 59

Here, Castro and PSBank were utterly reckless in allowing the withdrawal of a huge amount from
Oliver's account without her consent.  The bank's negligence is a result of lack of due care and
1âwphi1

caution required of managers and employees of a firm engaged in a business so sensitive and
demanding.  Hence, the award of Pl00,000.00 as moral damages is warranted.
60

The award of exemplary damages is also proper due to the failure of Castro and PSBank to prevent
the unauthorized withdrawal from Oliver's account. The law allows the grant of exemplary damages
to set an example for public good.  The Court, however, finds that the amount of exemplary
61

damages must be decreased to P50,000.00.

Finally; the Court agrees with the RTC that Castro and PSBank should be held solidarily liable for
attorney's fees. Article 2208 of the Civil Code is clear that attorney's fees may be recovered when
exemplary damages are awarded or when the plaintiff, through the defendant's act or omission, has
been compelled to litigate with thirds persons. A decreased amount of P50,000.00 attorney's fees
should be sufficient.

WHEREFORE, the petition is GRANTED. The October 25, 2013 Decision and the September 12,
2014 Resolution of the Court of Appeals in CA-G.R. CV No. 95656 are REVERSED and SET
ASIDE. The July 22, 2010 Order of the Regional Trial Court, Branch 276, Muntinlupa City in Civil
Case No. 99-278 is hereby REINSTATED with the MODIFICATION that the award of exemplary
damages and attorney's fees be decreased to P50,000.00 each.

All awards shall earn interests at the rate of six percent (6%) per annum from the finality of this
decision.

SO ORDERED.

JOSE CATRAL MENDOZA

Article 1892. The agent may appoint a substitute if the principal has not prohibited him from doing
so; but he shall be responsible for the acts of the substitute:

(1) When he was not given the power to appoint one;

(2) When he was given such power, but without designating the person, and the person appointed
was notoriously incompetent or insolvent.

All acts of the substitute appointed against the prohibition of the principal shall be void. (1721)
Article 1893. In the cases mentioned in Nos. 1 and 2 of the preceding article, the principal may
furthermore bring an action against the substitute with respect to the obligations which the latter has
contracted under the substitution. (1722a)

G.R. No. L-10099            January 27, 1916

TEOFILA DEL ROSARIO DE COSTA and BERNARDO COSTA, plaintiffs-appellants,

vs.
LA BADENIA, a corporation, defendant-appellee.

Albert E. Somersille for appellant.

Williams, Ferrier and SyCip for appellee.

CARSON, J.:

The plaintiffs, Teofila del Rosario de Costa and her husband, Bernardino Costa, brought this action
to recover from the defendant-LA BEDANIA corporation the sum of P1,795.25 a balance alleged to
be due Teofila del Rosario de Costa as the agent of the defendant corporation for services rendered
and expenses incurred in the sale of its products. The defendant-LA BEDANIA denied the claim and
set up counterclaim for P55.43. Judgment having been rendered in favor of the defendant, the
record is now before us on plaintiff's bill of exceptions.

The plaintiffs are residents of Legaspi, Albay, and the defendant corporation is engaged in the
manufacture and sale of tobacco products with its head office in the city of Manila. The record shows
that in the year 1911 the defendant corporation, a new concern, inaugurated an extensive selling
campaign for the purpose of introducing its products to the retail trade. Celestino Aragon, a
general agent of the defendant corporation, was in charged of this campaign in Albay, Sorsogon,
and other provinces in the southern end of Luzon. He established a central distributing agency or
depot at Legaspi with the plaintiff, Teofila del Rosario de Costa, nominally in charge, though her
husband, Bernardino de Costa appears to have been the actual manager of the agency.

The business relations between the plaintiffs and the defendant extended from February 1, 1911, to
March 24, 1912, and during this time no settlement of their accounts was ever had. When Aragon,
the general agent, came to Legaspi in 1911 he established his headquarters there and took up his
residence with the plaintiffs, using the lower part of their house as a store room or depository for
large quantities of cigarettes and cigars. He employed a number of persons as solicitors and paid
their salaries; he paid the internal revenue fees incident to the conduct of the business in Legaspi,
and also the rent of the building in which he lived with the plaintiffs and which he made use of as the
general headquarters for the agency.

The record shows that business amounting to more than P24,000 (wholesale) was done by the
Legaspi agency from February 1, 1911, to March 24, 1912.

All goods sent to Legaspi were charged by the head office at Manila against the general agent,
Aragon, while on the books kept by Aragon these goods were charged against the plaintiffs, and as
goods were withdrawn by himself, he credited the amount of the withdrawals to the account of the
plaintiffs. The business at Legaspi appears to have been that of a distributing agency actively in
charge of the plaintiffs-COSTA but over which the general agent-ARAGON maintained a close
supervision. Goods were withdrawn from the depository at Legaspi from time to time by the general
agent for shipment to other points; goods were likewise withdrawn by plaintiffs and shipped to
neighboring towns without any intervention on the part of the general agent. All accounts incident to
the business were carried on the books of Aragon. The plaintiffs do not appear to have kept a
separate set of books. The account as carried on the books of Aragon, the general agent, was
between Teofila del Rosario de Costa and La Badenia, the defendant corporation. On March 24,
1912, the general agent had a settlement with the plaintiffs and acknowledged over his signature
that these books showed a balance in favor of the plaintiffs amounting to P1,795.25.

Plaintiffs' Exhibit B is a tabulated statement taken from the books of account kept by Aragon and
shows in detail the whole course of the business at Legaspi from February 1, 1911, to March 24,
1912. In this statement goods received by the Legaspi agency from the factory in Manila are
charged against Teofila del Rosario de Costa, while credits are given on various items, such as,
withdrawals of goods from the depository at Legaspi shipped to other towns, remittances made to
the head office in Manila, money paid over to the general agent, advertising expenses, commissions
on sales, salaries of employees, and other expenses incident to the conduct of the business.

When this final settlement of accounts was had on the 24th of March, 1912, both Aragon and the
plaintiff, Teofila del Rosario de Costa, confirmed it as a true statement of the account. The defendant
corporation however, refused to pay over to plaintiffs the balance of P1,795.25, claiming that
plaintiffs had been improperly allowed a credit of P1,850.68 which represented unpaid accounts due
the business in Legaspi for cigars and cigarettes sold by it. – MAY UTANG DAW PALA ANG MGA
SUB-AGENT NA SINA COSTA DAHIL SA MGA UNPAID NA PAUTANG.

If these uncollected claims are charged to the defendant corporation a balance is left in favor of
plaintiffs amounting to P1,795.25; and if charged to plaintiffs there remains a balance in favor of the
defendant corporation amounting to P55.43. (WHO SHOULDERS WHO?)

It is the contention of the defendant corporation that the plaintiffs were simply merchants who
purchased the goods at fixed wholesale prices and sold them on their own account, and that they
were never employed as their agents. On the other hand plaintiffs contend that they were the agents
of the defendant corporation; that they received commissions on the sales made by the agency; and
that they were authorized to extend a reasonable credit under the supervision of the general
agent. (GENERAL RULE BAWAL PAUTANG EXCEPT IF MAY AUTHORITY)

It is not clear from the record just what were the precise terms of the arrangement made by Aragon
with the plaintiffs. It is not denied however, that Aragon was acting as the general agent of the
defendant corporation and that as such he was invested with authority to inaugurate and carry out a
selling campaign with a view of interesting the sale of the defendant's products in the territory
assigned to him. The record does not show what limitations, if any, were placed upon his powers to
act for the corporation. The general conduct of the selling campaign intrusted to him was approved
and commended by the head office, and judging from the amount of the sales the business appears
to have been a very prosperous one for the corporation.

It appears further that the head office at Manila was fully informed of plaintiffs' relations with
the general agent in extending the sales of its products. (PARANG MAY IMPLIED
RATIFICATION NG SUBAGENCY A)

Plaintiffs made direct remittances to the head office in Manila and these remittances were credited to
the account of the agency at Legaspi, and acknowledgment was made directly to the plaintiffs.
Neither the head office nor Aragon appear to have made any distinction between the business done
by Aragon and that done by the plaintiffs. The purchases, sales and remittances made by the
plaintiffs do not seem to have been considered as those of an independent business concern, but
rather as a part of the work of the Legaspi agency under the control and supervision of Aragon. The
fact that the defendant corporation carried the Legaspi account in the name of the general agent,
Aragon, and carried no account with the plaintiffs, would seem to negative the contention that
plaintiffs were simply merchants purchasing their goods in Manila at wholesale and selling them
locally on their own account.

The active management and participation of the plaintiffs in the conduct of the business at Legaspi
are fully recognized in the following letters written by the assistant manager of the defendant
corporation to one of the plaintiffs.

EXHIBIT A.

MANILA, P.I., October 9, 1911.

Mr. BERNARDINO COSTA, Legaspi, Albay.

DEAR SIR: We have the pleasure of hereby acknowledging receipt of your two letters dated
the 4th instant, in which we found enclosed two drafts, to wit:

No. 528________________c/ Ang Siliong P200

No. 1240_______________c/ Smith, Bell &     980

Co

1,180

Which sum of one thousand one hundred and eighty pesos we have duly credited on the
account current of Mr. Celestino Aragon.

We also acknowledge receipt of the bill of lading for the eight packages you have forwarded
to us, but to date we have not received said packages. As soon as we get then we will send
you timely notice.

We are, yours very sincerely,

LA BADENIA, INC.,
__________ __________, Assistant
Manager.

EXHIBIT B.

MANILA, P. I., Sept. 19, 1911.

Mr. BERNARDINO COSTA, Legaspi, Albay.

 DEAR SIR: We have the pleasure of hereby acknowledging receipt of your letter dated the
12th instant, of which we have made note.

By the steamer Cebu we are sending, according to the attached invoice, 3 boxes of small
cigars (cajas de tabaquitos) for the agency in your charge.

We are, yours very sincerely,

LA BADENIA, INC.,
__________ __________, Assistant
Manager.

Several other letters received by the plaintiffs from the defendant corporation were offered in
evidence, but the two letters just quoted are sufficient to show that the defendant was fully aware of
plaintiffs' connection with the agency at Legaspi, and recognized them as agents of the company,
and clearly did not consider them as independent merchants buying solely on their own account, but
rather as subagents working under the supervision of the general agent, Aragon.

It seems equally clear that Aragon did not consider the plaintiffs as independent merchants
operating on their own account, but rather as agents cooperating with him and working under his
supervision. This fact is clearly borne out by the nature of the entries made in his books of account.
A reference to that statement taken from the books of account shows that the plaintiffs were given
credit on various items, such as advertising expenses, the free distribution of cigars and cigarettes
for advertising purposes, freight and carriage charges on shipments to neighboring towns, and the
like, and it does not seem at all likely that plaintiffs would have been allowed credit on such items if
they had been conducting the business solely on their own account.

Aragon extended credit to certain purchasers of cigars and cigarettes and the entries made by him
on his books of account show that he knew that the plaintiffs were also extending credit to some of
the purchasers of the goods shipped from Legaspi.

He approved the very items now questioned when as general agent of the defendant corporation he
signed the statement of account showing a balance of P1,795.25 in favor of the plaintiffs. Aragon
thereby admitted that he, at least, considered these outstanding claims as properly chargeable
against the defendant corporation, and unless the plaintiffs had been specifically authorized by him
to extend credit it seems certain that he would never have approved this balance in their favor.

It is contended that it is unreasonable that plaintiffs would have so large a balance in their favor, and
that they are now merely seeking to saddle upon the defendant corporation a lot of unpaid accounts.
In view of the fact that plaintiffs are only seeking to enforce the payment of a balance admitted by
the general agent of the defendant corporation to be rightly due them, we fail to see how it can be
reasonably urged that plaintiffs are attempting to saddle these unpaid claims on the defendant.

The general agent who was in control of the Legaspi business, and who was fully conversant with all
of its details, clearly recognized the right of the plaintiffs to have credit on their account for the
amount of these unpaid claims. This agent had employed the plaintiffs to assist him in extending the
sale of the defendant's products, and the defendant was well aware of this fact. Certainly the only
reliable source of information as to what plaintiffs' account with the defendant corporation was, is to
be found in the books kept by the general agent, Aragon. The defendant carried no account
whatever with the plaintiffs, and having intrusted the entire management of the Legaspi business to
Aragon, it can not now come into court and repudiate the account confirmed by him, unless it can
show that he acted beyond the scope of his authority in making the arrangement he did with the
plaintiffs. Aragon's powers as a selling agent appear to have been very broad, and there is no
evidence in the record to indicate that he acted beyond his powers in conducting the business at
Legaspi as he did; and there can be no doubt that plaintiffs had been authorized by him to extend
credit on behalf of the agency. There is no other reasonable explanation of the entries made by
Aragon in his books of account, and his approval of the balance in favor of the plaintiffs.

The lower court was of the opinion that the specific goods sold to the delinquent debtors, whose
unpaid accounts form the basis of this litigation, had already been paid for by the plaintiffs and that
this was conclusive evidence that the plaintiffs were not acting as the agents of the defendant
corporation, and that in effect, the purpose of this suit was to recover back money already paid for
the goods purchased and sold by the plaintiffs. We find ourselves unable to agree with the
conclusions of the trial court in this respect.

It appears that the plan under which the business was conducted was as follows: a shipment of
cigars and cigarettes was made from the Manila office and charged against the account of the
general agent, Aragon; these goods were deposited in the store room at Legaspi, and in the account
carried by Aragon were charged against the plaintiffs. Withdrawals were made from the Legaspi
stock by Aragon and the plaintiffs, and credit was given the plaintiffs for the amount of the
withdrawals by Aragon. Both Aragon and the plaintiffs drew on the Legaspi stock for advertising
purposes, such as the free distribution of cigars and cigarettes, and plaintiffs were credited with the
value of the goods so withdrawn. The stock on hand was being replenished from time to time by new
shipments received from Manila. The plaintiffs made remittances to Manila which were credited to
the account of the Legaspi agency and this account included not only the goods sold and withdrawn
from stock by the plaintiffs, but also the goods withdrawn by Aragon. Thus evidently these
remittances were not in payment of any particular shipments, but were simply payments on account
and covered goods sold by Aragon as well as those sold by the plaintiffs. Remittances were
doubtless made to Manila by Aragon and credited on the agency account in the same manner.
Under this method of conducting the business a balance for or against the plaintiffs might well
remain at any time, and such a balance would not be determined solely by the value of the goods
withdrawn from stock by the plaintiffs, and the amount of the remittances made by them, but would
be determined by the total value of the stock of the Legaspi agency charged against the plaintiffs
and the amounts allowed them as credits; these credits would include not only the remittances made
to Manila, but also goods withdrawn by Aragon, and such other items as might constitute proper
credits on the account. We do not therefore think it at all unreasonable that a balance should have
remained in favor of the plaintiffs when the settlement was made, nor do we see that the existence
of such a balance would necessarily indicate that the plaintiffs had overpaid their account with the
defendant corporation.

It is further contended that the goods were charged to plaintiffs at wholesale prices, and that they
were to have as profits any amounts received over and above the wholesale cost price on the goods
sold by them, and it is urged that such an arrangement indicates that they were independent
merchants doing business on their own account. Even granting that such was the arrangement
made with the plaintiffs by Aragon, it does not necessarily follow that they were conducting an
independent business on their own account. As already stated, the record does not disclose what
were the precise terms of arrangement made with the plaintiffs. The record does show however, that
in many instances the plaintiffs were allowed commissions on sales made by them, but whether or
not these were in addition to other profits allowed them the record does not show. Upon a careful
examination of the whole record we are satisfied that plaintiffs were not conducting an independent
business but were the agents of the defendant corporation operating under the supervision of the
general agent, Aragon.
For the reasons set out we are of the opinion, and so hold, that plaintiffs are entitled to the reversal
of the judgment appealed from and to a judgment against La Badenia, the defendant corporation, for
the sum of P1,795.25, with legal interest thereon from August 5, 1914, the date of filing the
complaint, until paid, and under their costs in both instances.

Let judgment be entered in accordance herewith. So ordered.

Arellano, C.J., Torres, Johnson, Moreland and Trent, JJ., concur.

G.R. No. L-42465             November 19, 1936

INTERNATIONAL FILMS (CHINA), LTD., plaintiff-appellant,

vs.
THE LYRIC FILM EXCHANGE, INC., defendant-appellee.

This is an appeal taken by the plaintiff company International Films (China), Ltd. from the judgment
of the Court of First Instance of Manila dismissing the complaint filed by it against the defendant
company the Lyric Film Exchange, Inc., with costs to said plaintiff.

In support of its appeal the appellant assigns six alleged errors as committed by the court a quo in its
said judgment, which will be discussed in the course of this decision.

The record shows that Bernard Gabelman was the Philippine agent of the plaintiff company
International Films (China), Ltd. by virtue of a power of attorney executed in his favor on April 5,
1933 (Exhibit 1).

On June 2, 1933, the International Films (China), Ltd., through its said agent, leased the film entitled
"Monte Carlo Madness" to the defendant company, the Lyric Film Exchange, Inc., to be shown in
Cavite for two consecutive days, that is, on June 1 and 2, 1933, for 30 per cent of the receipts; in the
Cuartel de España for one day, or on June 6, 1933, for P45; in the University Theater for two
consecutive days, or on June 8, and 9, 1933, for 30 per cent of the receipts; in Stotsenburg for two
consecutive days, or on June 18 and 19, 1933, for 30 per cent of the receipts, and in the Paz
Theater for two consecutive days, or on June 21 and 22, 1933, for 30 per cent of the receipts
(Exhibit C).

One of the conditions of the contract was that the defendant company would answer for the loss of
the film in question whatever the cause. On June 23, 1933, following the last showing of the film in
question in the Paz Theater, Vicente Albo, then chief of the film department of the Lyric Film
Exchange, Inc., telephoned said agent-GABELMAN of the plaintiff company informing him that the
showing of said film had already finished and asked, at the same time, where he wished to have the
film returned to him.

In answer, Bernard Gabelman informed Albo that he wished to see him personally in the latter's
office. At about 11 o'clock the next morning, Gabelman went to Vicente Albo's office and asked
whether he could deposit the film in question in the vault of the Lyric Film Exchange, Inc., as the
International Films (China) Ltd. did not yet have a safety vault, as required by the regulations of the
fire department. After the case had been referred to O'Malley, Vicente Albo's chief, the former
answered that the deposit could not be made inasmuch as the film in question would not be covered
by the insurance carried by the Lyric Film Exchange, Inc. Bernard Gabelman then requested Vicente
Albo to permit him to deposit said film in the vault of the Lyric Film Exchange, Inc., under
Gabelman's own responsibility.

As there was a verbal contract between Gabelman and the Lyric Film Exchange Inc., whereby the
film "Monte Carlo Madness" would be shown elsewhere, O'Malley agreed and the film was deposited
in the vault of the defendant company under Bernard Gabelman's responsibility.

About July 27, 1933, Bernard Gabelman severed his connection with the plaintiff company, being
succeeded by Lazarus Joseph. Bernard Gabelman, upon turning over the agency to the new agent,
informed the latter of the deposit of the film "Monte Carlo Madness" in the vault of the defendant
company as well as of the verbal contract entered into between him and the Lyric Film Exchange,
Inc., whereby the latter would act as a subagent of the plaintiff company, International Films (China)
Ltd., with authority to show this film "Monte Carlo Madness" in any theater where said defendant
company, the Lyric Film Exchange, Inc., might wish to show it after the expiration of the contract
Exhibit C.

As soon as Lazarus Joseph had taken possession of the Philippine agency of the International Films
(China) Ltd., he went to the office of the Lyric Film Exchange, Inc., to ask for the return not only of
the film "Monte Carlo Madness" but also of the films "White Devils" and "Congress Dances". On
August 13 and 19, 1933, the Lyric Film Exchange, Inc., returned the films entitled "Congress
Dances" and "White Devils" to Lazarus Joseph, but not the film "Monte Carlo Madness" because it
was to be shown in Cebu on August 29 and 30, 1933.

Inasmuch as the plaintiff would profit by the showing of the film "Monte Carlo Madness", Lazarus
Joseph agreed to said exhibition. It happened, however, that the bodega of the Lyric Film Exchange,
Inc., was burned on August 19, 1933, together with the film "Monte Carlo Madness" which
was not insured.

The first question to be decided in this appeal, which is raised in the first assignment of alleged error,
is whether or not the court a quo erred in allowing the defendant company to amend its answer after
both parties had already rested their respective cases.

In Torres Viuda de Nery vs. Tomacruz (49 Phil., 913, 915), this court, through Justice Malcolm, said:

Sections 109 and 110 of the Philippine Code of Civil Procedure, relating to the subjects of
Variance and Amendments in General, should be equitably applied to the end that cases
may be favorably and fairly presented upon their merits, and that equal and exact justice
may be done between the parties. Under code practice, amendments to pleadings are
favored, and should be liberally allowed in furtherance of justice. This liberality, it has been
said, is greatest in the early stages of a lawsuit, decreases as it progresses, and changes at
times to a strictness amounting to a prohibition. The granting of leave to file amended
pleadings is a matter peculiarly within the sound discretion of the trial court. The discretion
will not be disturbed on appeal, except in case of an evident abuse thereof. But the rule
allowing amendments to pleadings is subject to the general but not inflexible limitation that
the cause of action or defense shall not be substantially changed, or that the theory of the
case shall not be altered. (21 R. C. L., pp. 572 et seq.; 3 Kerr's Cyc. Codes of California,
sections 469, 470 and 473; Ramirez vs. Murray [1855], 5 Cal., 222; Hayden vs. Hayden
[1873], 46 Cal., 332; Hackett vs. Bank of California [1881], 57 Cal., 335; Hancock vs. Board
 of Education of City of Santa Barbara [1903], 140 Cal., 554; Dunphy vs. Dunphy [1911], 161
Cal., 87; 38 L. R. A. [N. S.], 818.)
lawphi1 .net

In the case of Gould vs. Stafford (101 Cal., 32, 34), the Supreme Court of California, interpreting
section 473 of the Code of Civil Procedure of said State, from which section 110 of our Code was
taken, stated as follows:

The rule is that courts will be liberal in allowing an amendment to a pleading when it does not
seriously impair the rights of the opposite party — and particularly an amendment to an
answer. A defendant can generally set up as many defenses as he may have. Appellant
contends that the affidavits upon which the motion to amend was made show that it was
based mainly on a mistake of law made by respondent's attorney; but, assuming that to be,
so, still the power of a court to allow an amendment is not limited by the character of the
mistake which calls forth its exercise. The general rule that a party cannot be relieved from
an ordinary contract which is in its nature final, on account of a mistake of law, does not
apply to proceedings in an action at law while it is pending and undetermined. Pleadings are
not necessarily final until after judgment. Section 473 of the Code of Civil Procedure provides
that the court may allow an amendment to a pleading to correct certain enumerated mistakes
or "a mistake in any other respect," and "in other particulars." The true rule is well stated in
Ward vs. Clay (62 Cal. 502). In the case at bar evidence of the lease was given at the first
trial; and we cannot see that the amendment before the second trial put plaintiff in a position
any different from that which he would have occupied if the amendment had been made
before the first trial.

In the case of Ward vs. Clay (82 Cal., 502, 510), the Supreme Court of said State stated:

The principal purpose of vesting the court with this discretionary power is to enable it "to
mold and direct its proceedings so as to dispose of cases upon their substantial merits,"
when it can be done without injustice to either party, whether the obstruction to such a
disposition of cases be a mistake of fact or a mistake as to the law; although it may be that
the court should require a stronger showing to justify relief from the effect of a mistake in law
than in case of a mistake as to matter of fact. The exercise of the power conferred by section
473 of the code, however, should appear to have, been "in furtherance of justice," and the
relief, if any, should be granted upon just terms.

Lastly, in the case of Simpson vs. Miller (94 Pac., 253), the said Supreme Court of California said:

In an action to recover property which had vested in plaintiff's trustee in bankruptcy prior to
the suit, an amendment to the answer, made after both parties had rested, but before the
cause was submitted, pleading plaintiff's bankruptcy in bar to the action, was properly
allowed in the discretion of the court.

Under the above-cited doctrines, it is discretionary in the court which has cognizance of a case to
allow or not the amendment of an answer for the purpose of questioning the personality of the
plaintiff to bring the action, even after the parties had rested their cases, as it causes no injustice to
any of the parties, and this court will not interfere in the exercise of said discretion unless there is an
evident abuse thereof, which does not exist in this case.

The second question to be decided is whether or not the defendant company, the Lyric Film
Exchange, Inc., is responsible to the plaintiff, International Films (China) Ltd., for the destruction by
fire of the film in question, entitled "Monte Carlo Madness".
The plaintiff company claims that the defendant's failure to return the film "Monte Carlo Madness" to
the former was due to the fact that the period for the delivery thereof, which expired on June 22,
1933, had been extended in order that it might be shown in Cebu on August 29 and 30, 1933, in
accordance with an understanding had between Lazarus Joseph, the new agent of the plaintiff
company, and the defendant.

The defendant company, on the other hand, claims that when it wanted to return the film "Monte
Carlo Madness" to Bernard Gabelman, the former agent of the plaintiff company, because of the
arrival of the date for the return thereof, under the contract Exhibit C, said agent, not having a safety
vault, requested Vicente Albo, chief of the film department of the defendant company, to keep said
film in the latter's vault under Gabelman's own responsibility, verbally stipulating at the same time
that the defendant company, as subagent of the International Films (China) Ltd., might show the film
in question in its theaters.

It does not appear sufficiently proven that the understanding had between Lazarus Joseph, second
agent of the plaintiff company, and Vicente Albo, chief of the film department of the defendant
company, was that the defendant company would continue showing said film under the same
contract Exhibit C.

The preponderance of evidence shows that the verbal agreement had between Bernard Gabelman,
the former agent of the plaintiff company, and Vicente Albo, chief of the film department of the
defendant company, was that said film "Monte Carlo Madness" would remain deposited in the safety
vault of the defendant company under the responsibility of said former agent and that the defendant
company, as his subagent, could show it in its theaters, the plaintiff company receiving 5 per cent of
the receipts up to a certain amount, and 15 per cent thereof in excess of said amount.

If, as it has been sufficiently proven in our opinion, the verbal contract had between Bernard
Gabelman, the former agent of the plaintiff company, and Vicente Albo, chief of the film department
of the defendant company, was a sub-agency or a submandate, the defendant company is not
civilly liable for the destruction by fire of the film in question because as a mere submandatary or
subagent, it was not obliged to fulfill more than the contents of the mandate and to answer for the
damages caused to the principal by his failure to do so (art. 1718, Civil Code).

The fact that the film was not insured against fire does not constitute fraud or negligence on the part
of the defendant company, the Lyric Film Exchange, Inc., because as a subagent, it received no
instruction to that effect from its principal and the insurance of the film does not form a part of the
obligation imposed upon it by law.

As to the question whether or not the defendant company having collected the entire proceeds of the
fire insurance policy of its films deposited in its vault, should pay the part corresponding to the film in
question which was deposited therein, the evidence shows that the film "Monte Carlo Madness"
under consideration was not included in the insurance of the defendant company's films, as this was
one of the reasons why O'Malley at first refused to receive said film for deposit and he consented
thereto only when Bernard Gabelman, the former agent of the plaintiff company, insisted upon his
request, assuming all responsibility. Furthermore, the defendant company did not collect from the
insurance company an amount greater than that for which its films were insured, notwithstanding the
fact that the film in question was included in the vault, and it would have collected the same amount
even if said film had not been deposited in its safety vault. Inasmuch as the defendant company, The
Lyric Film Exchange, Inc., had not been enriched by the destruction by fire of the plaintiff company's
film, it is not liable to the latter.
For the foregoing considerations, we are of the opinion and so hold: (1) That the court a quo acted
within its discretionary power in allowing the defendant company to amend its answer by pleading
the special defense of the plaintiff company's lack of personality to bring the action, after both parties
had already rested their respective cases; (2) that the defendant company, as subagent of the
plaintiff in the exhibition of the film "Monte Carlo Madness", was not obliged to insure it against fire,
not having received any express mandate to that effect, and it is not liable for the accidental
destruction thereof by fire.

Wherefore, and although on a different ground, the appealed judgment is affirmed, with the costs to
the appellant. So ordered.

Avanceña, C. J., Abad Santos, Imperial, Diaz, Laurel, and Concepcion, JJ., concur.

VIII. Obligations and liabilities of agents to third parties

B. Agent acting within scope of authority

Article 1883. If an agent acts in his own name, the principal has no right of action against the
persons with whom the agent has contracted; neither have such persons against the principal.

]In such case the agent is the one directly bound in favor of the person with whom he has
contracted, as if the transaction were his own, except when the contract involves things
belonging to the principal.

The provisions of this article shall be understood to be without prejudice to the actions
between the principal and agent.

Article 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. (1725)

Article 1899. If a duly authorized agent acts in accordance with the orders of the principal, the latter
cannot set up the ignorance of the agent as to circumstances whereof he himself was, or ought to
have been, aware. (n)

C. Agent acting outside of authority

Article 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. (n)

Article 1901. A third person cannot set up the fact that the agent has exceeded his powers, if the
principal has ratified, or has signified his willingness to ratify the agent's acts. (n)

Article 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. (n)
G.R. No. L-39037             October 30, 1933

THE PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
PAZ AGUDELO Y GONZAGA, ET AL., defendants.
PAZ AGUDELO Y GONZAGA, appellant.

Hilado and Hilado and Norberto Romualdez for appellant.

Roman J. Lacson for appellee.

VILLA-REAL, J.:

The defendant Paz Agudelo y Gonzaga appeals to this court from the judgment rendered by the
Court of First Instance of Occidental Negros, the dispositive part of which reads as follows:

Wherefore, judgment is rendered herein absolving the defendant Mauro A. Garrucho from
the complaint and ordering the defendant Paz Agudelo y Gonzaga to pay to the plaintiff the
sum of P31,091.55, Philippine currency, together with the interest on the balance of
P20,774.73 at 8 per cent per annum of P4.55 daily from July 16, 1929, until fully paid, plus
the sum of P1,500 as attorney's fees, and the costs of this suit.

It is hereby ordered that in case the above sums adjudged in favor of the defendant by virtue
of this judgment are not paid to the Philippine National Bank or deposited in the office of the
clerk of this court, for delivery to the plaintiff, within three months from the date of this
decision, the provincial sheriff of Occidental Negros shall set at public auction the mortgaged
properties described in annex E of the second amended complaint, and apply the proceeds
thereof to the payment of the sums in question.

It is further ordered that in case the proceeds of the mortgaged properties are not sufficient
to cover the amount of this judgment, a writ of execution be issued against any other
property belonging to the defendant Paz Agudelo y Gonzaga, not otherwise exempt from
execution, to cover the balance resulting therefrom.

In support of her appeal, the appellant assigns six alleged errors as committed by the trial court,
which we shall discuss in the course of this decision.

FACTS

On November 9, 1920, the defendant-appellant Paz Agudelo y Gonzaga executed in favor of her
nephew, Mauro A. Garrucho, the document Exhibit K conferring upon him a special power of
attorney sufficiently broad in scope to enable him to sell, alienate and mortgage in the manner and
form he might deem convenient, all her real estate situated in the municipalities of Murcia and
Bacolod, Occidental Negros, consisting in lots Nos. 61 and 207 of the cadastral survey of Bacolod,
Occidental Negros, together with the improvement thereon.
On December 22, 1920, Amparo A. Garrucho executed the document Exhibit H whereby she
conferred upon her brother Mauro A Garrucho a special power of attorney sufficiently broad in scope
to enable him to sell, alienate, mortgage or otherwise encumber, in the manner and form he might
deem convenient, all her real estate situated in the municipalities of Murcia and Bago, Occidental
Negros.

Nothing in the aforesaid powers of attorney expressly authorized Mauro A. Garrucho to contract any
loan nor to constitute a mortgage on the properties belonging to the respective principals, to secure
his obligations.

On December 23, 1920, Mauro A. Garrucho executed in the favor of the plaintiff entity, the Philippine
National bank, the document Exhibit G, whereby he constituted a mortgage on lot No. 878 of the
cadastral survey of Murcia, Occidental Negros, with all the improvements thereon, described in
transfer certificate of title No. 2415 issued in the name of Amparo A. Garrucho, to secure the
payment of credits, loans, commercial overdrafts, etc., not exceeding P6,000, together with interest
thereon, which he might obtain from the aforesaid plaintiff entity, issuing the corresponding
promissory note to that effect.

During certain months of the year 1921 and 1922, Mauro A. Garrucho maintained a personal current
account with the plaintiff bank in the form of a commercial credit withdrawable through checks
(Exhibits S, 1 and T).

On August 24, 1931, the said Mauro A. Garrucho executed in favor of the plaintiff entity, the
Philippine National Bank, the document Exhibit J whereby he constituted a mortgage on lots Nos. 61
and 207 of the cadastral survey of Bacolod together with the buildings and improvements thereon,
described in original certificates of title Nos. 2216 and 1148, respectively, issued in the name of Paz
Agudelo y Gonzaga, to secure the payment of credits, loans and commercial overdrafts which the
said bank might furnish him to the amount of P16,00, payable on August 24, 1922, executing the
corresponding promissory note to that effect.

The mortgage deeds Exhibit G and J as well as the corresponding promissory notes for P6,000 and
P16,000, respectively, were executed in Mauro A. Garrucho's own name and signed by him in
his personal capacity, authorizing the mortgage creditor, the Philippine National Bank, to take
possession of the mortgaged properties, by means of force if necessary, in case he failed to comply
with any of the conditions stipulated therein.

On January 4, 1922, the manager of the Iloilo branch of the Philippine National Bank notified Mauro
A. Garrucho that his promissory note for P6,000 of 10 days within which to make payment thereof
(Exhibit O).
1awphil.net

On May 9, 1922, the said manager notified Mauro A. Garrucho that his commercial credit was closed
from that date (Exhibit S).

Inasmuch as Mauro A. Garrucho had overdrawn his credit with the plaintiff-appellee, the said
manager thereof, in a letter dated June 27, 1922 (Exhibit T), requested him to liquidate his account
amounting to P15,148.15, at the same time notifying him that his promissory note for P16,000 giving
as security for the commercial overdraft in question, had fallen due some time since.

On July 15, 1922, Mauro A. Garrucho, executed in favor of the plaintiff entity the deed Exhibit C
whereby he constituted a mortgage on lots Nos. 61 and 207 of the cadastral survey of Bacolod,
together with the improvements thereon, described in transfer certificates of title Nos. 2216 and
1148, respectively, issued in the name of Paz Agudelo y Gonzaga, and on lot No. 878 of the
cadastral survey of Murcia, described in transfer certificate of title No. 2415, issued in the name of
Amparo A. Garrucho.

In connection of the credits, loans, and commercial overdrafts amounting to P21,000 which had
been granted him, Mauro A. Garrucho, on the said date July 15, 1922, executed the promissory
note, Exhibit B, for P21,000 as a novation of the former promissory notes for P6,000 and P16,000,
respectively.

In view of the aforesaid consolidated mortgage, Exhibit C, the Philippine National Bank, on the said
date of July 15, 1922, cancelled the mortgages constituted on lots Nos. 61, 207 and 878 described
in Torrens titles Nos. 2216, 1148 and 2415, respectively.

On November 25, 1925, Amparo A. Garrucho sold lot No. 878 described in certificate of title
No. 2415, to Paz Agudelo y Gonzaga (Exhibit M).

On January 15, 1926, in the City of Manila, Paz Agudelo y Gonzaga signed the affidavit, Exhibit N,
which reads as follows:

Know all men by these presents: That I, Paz Agudelo y Gonzaga, single, of age, and
resident of the City of Manila, P. I., by these present do hereby agree and consent to
the transfer in my favor of lot No. 878 of the Cadastre of Murcia, Occidental Negros,
P. I., by Miss Amparo A. Garrucho, as evidenced by the public instrument dated
November 25, 1925, executed before the notary public Mr. Genaro B. Benedicto, and
do hereby further agree to the amount of the lien thereon stated in the mortgage
deed executed by Miss Amparo A. Garrucho in favor of the Philippine National Bank.

In testimony whereof, I hereunto affix my signature in the City of Manila, P.I., this
15th of January, 1926.

(Sgd.) PAZ AGUDELO Y GONZAGA.          

Pursuant to the sale made by Amparo A. Garrucho in favor of Paz Agudelo y Gonzaga, of lot No.
878 of the cadastral survey of Murcia, described in certificate of title No. 2145 issued in the name of
said Amparo A. Garrucho, and to the affidavit, Exhibit N, transfer certificate of title No. 5369 was
issued in the name of Paz Agudelo y Gonzaga.

Without discussing and passing upon whether or not the powers of attorney issued in favor of Mauro
A. Garrucho by his sister, Amparo A. Garrucho, and by his aunt, Paz Agudelo y Gonzaga,
respectively, to mortgage their respective real estate, authorized him to obtain loans secured by
mortgage in the properties in question, we shall consider the question of

whether or not Paz Agudelo y Gonzaga is liable for the payment of the loans obtained by Mauro A.
Garrucho from the Philippine National Bank for the security of which he constituted a mortgage on
the aforesaid real estate belonging to the defendant-appellant Paz Agudelo y Gonzaga.

Article 1709 of the Civil Code provides the following:

ART. 1709. By the contract of agency, one person binds himself to render some service, or
to do something for the account or at the request of another.

And article 1717 of the same Code provides as follows:

 ART. 1717. When an agent acts in his own name, the principal shall have no right of action
against the persons with whom the agent has contracted, or such persons against the
principal.

In such case, the agent is directly liable to the person with whom he has contracted, as if the
transaction were his own. Cases involving things belonging to the principal are excepted.

The provisions of this article shall be understood to be without prejudice to actions between
principal and agent.

Aside from the phrases "attorney in fact of his sister, Amparo A. Garrucho, as evidenced by the
power of attorney attached hereto" and "attorney in fact of Paz Agudelo y Gonzaga" written after the
name of Mauro A. Garrucho in the mortgage deeds, Exhibits G. and J, respectively, there is nothing
in the said mortgage deeds to show that Mauro A. Garrucho is attorney in fact of Amparo A.
Garrucho and of Paz Agudelo y Gonzaga, and that he obtained the loans mentioned in the aforesaid
mortgage deeds and constituted said mortgages as security for the payment of said loans, for the
account and at the request of said Amparo A. Garrucho and Paz Agudelo y Gonzaga.

The above-quoted phrases which simply described his legal personality, did not mean that Mauro A.
Garrucho obtained the said loans and constituted the mortgages in question for the account, and at
the request, of his principals.

From the titles as well as from the signatures therein, Mauro A. Garrucho, appears to have
acted in his personal capacity.

In the aforesaid mortgage deeds, Mauro A. Garrucho, in his capacity as mortgage debtor, appointed
the mortgage creditor Philippine National Bank as his attorney in fact so that it might take actual and
full possession of the mortgaged properties by means of force in case of violation of any of the
conditions stipulated in the respective mortgage contracts. If Mauro A. Garrucho acted in his
capacity as mere attorney in fact of Amparo A. Garrucho and of Paz Agudelo y Gonzaga, he could
not delegate his power, in view of the legal principle of "delegata potestas delegare non potest" (a
delegated power cannot be delegated), inasmuch as there is nothing in the records to show that he
has been expressly authorized to do so.

He executed the promissory notes evidencing the aforesaid loans, under his own signature,
without authority from his principal and, therefore, were not binding upon the latter (2 Corpus
Juris, pp. 630-637, par. 280). Neither is there anything to show that he executed the promissory
notes in question for the account, and at the request, of his respective principals (8 Corpus Juris, pp.
157-158).

Furthermore, it is noted that the mortgage deeds, Exhibits C and J, were cancelled by the
documents, Exhibits I and L, on July 15, 1922, and in their stead the mortgage deed, Exhibit C, was
executed, in which there is absolutely no mention of Mauro A. Garrucho being attorney in fact of
anybody, and which shows that he obtained such credit fro himself in his personal capacity and
secured the payment thereof by mortgage constituted by him in his personal capacity, although on
properties belonging to his principal Paz Agudelo y Gonzaga.

Furthermore, the promissory notes executed by Mauro A. Garrucho in favor of the Philippine
National Bank, evidencing loans of P6,000 and P16,000 have been novated by the promissory notes
for P21,000 (Exhibit B) executed by Mauro A. Garrucho, not only without express authority from his
principal Paz Agudelo y Gonzaga but also under his own signature.
In the case of National Bank vs. Palma Gil (55 Phil., 639), this court laid down the following doctrine:

A promissory note and two mortgages executed by the agent for and on behalf of his
principal, in accordance with a power of attorney executed by the principal in favor of the
agent, are valid, and as provided by article 1727 of contracted by the agent; but a mortgage
on real property of the principal not made and signed in the name of the principal is
not valid as to the principal.

It has been intimated, and the trial judge so stated. that it was the intention of the parties that Mauro
A. Garrucho would execute the promissory note, Exhibit B, and the mortgage deed, Exhibit C, in his
capacity as attorney in facts of Paz Agudelo y Gonzaga, and that although the terms of the aforesaid
documents appear to be contrary to the intention of the parties, such intention should prevail in
accordance with article 1281 of the Civil Code.

Commenting on article 1281 of the Civil Code, Manresa, in his Commentaries to the Civil Code, says
the following:

IV. Intention of the contracting parties; its appreciation. — In order that the intention may
prevail, it is necessary that the question of interpretation be raised, either because the words
used appear to be contrary thereto, or by the existence of overt acts opposed to such words,
in which the intention of the contracting parties is made manifest. Furthermore, in order that it
may prevail against the terms of the contract, it must be clear or, in other words, besides the
fact that such intention should be proven by admissible evidence, the latter must be of such
charter as to carry in the mind of the judge an unequivocal conviction. This requisite as to the
kind of evidence is laid down in the decision relative to the Mortgage Law of September 30,
1891, declaring that article 1281 of the Civil Code gives preference to intention only when it
is clear. When the aforesaid circumstances is not present in a document, the only thing left
for the register of deeds to do is to suspend the registration thereof, leaving the solution of
the problem to the free will of the parties or to the decision of the courts.

However, the evident intention which prevails against the defective wording thereof is not
that of one of the parties, but the general intent, which, being so, is to a certain extent
equivalent to mutual consent, inasmuch as it was the result desired and intended by the
contracting parties. (8 Manresa, 3d edition, pp. 726 and 727.)

Furthermore, the records do not show that the loan obtained by Mauro A. Garrucho, evidenced by
the promissory note, Exhibit B, was for his principal Paz Agudelo y Gonzaga. The special power of
attorney, Exhibit K, does not authorize Mauro A. Garrucho to constitute a mortgage on the
real estate of his principal to secure his personal obligations. Therefore, in doing so by virtue of
the document, Exhibit C, he exceeded the scope if his authority and his principal is not liable for
his acts. (2 Corpus Juris, p. 651; article 1714, Civil Code.)

It is further claimed that inasmuch as the properties mortgaged by Mauro A. Garrucho belong to Paz
Agudelo y Gonzaga, the latter is responsible for the acts of the former although he acted in his own
name, in accordance with the exception contained in article 1717 of the Civil Code.

It would be an exception with the properties of his own name in connection with the properties of his
principal, does so within the scope of his authority. It is noted that Mauro A. Garrucho was not
authorized to execute promissory notes even in the name of his principal Paz Agudelo y Gonzaga,
nor to constitute a mortgage on her real properties to secure such promissory notes. T
he plaintiff Philippine National Bank should know this inasmuch as it is in duty bound to ascertain the
extent of the agent's authority before dealing with him. Therefore, Mauro A. Garrucho and not Paz
Agudelo y Gonzaga is personally liable for the amount of the promissory note Exhibit B. (2 Corpus
Juris, pp. 563-564.)

However, Paz Agudelo y Gonzaga in an affidavit dated January 15, 1926 (Exhibit AA), and in a letter
dated January 16, 1926 (Exhibit Z), gave her consent to the lien on lot No. 878 of the cadastre
of Murcia, Occidental Negros, described in Torrens title No. 5369, the ownership of which was
transferred to her by her niece Amparo A. Garrucho. This acknowledgment, however, does not
extend to lots Nos. 207 and 61 of the cadastral survey of Bacolod, described in transfer certificates
of title Nos. 1148 and 2216, respectively, inasmuch as, although it is true that a mortgage is
indivisible as to the contracting parties and as top their successors in interest (article 1860, Civil
Code), it is not so with respect to a third person who did not take part in the constitution thereof
either personally or through an agent, inasmuch as he can make the acknowledgment thereof in the
form and to the extent he may deem convenient, on the ground that he is not in duty bound to
acknowledge the said mortgage.

Therefore, the only liability of the defendant-appellant Paz Agudelo y Gonzaga is that which arises
from the aforesaid acknowledgment, but only with respect to the lien and not to the principal
obligation secured by the mortgage acknowledged by her to have been constituted on said
lot No. 878 of the cadastral survey of Murcia, Occidental Negros. Such liability is not direct but a
subsidiary one.

Having reach this contention, it is unnecessary to pass upon the other questions of law raised by the
defendant- appellant in her brief and upon the law cited therein.

In view of the foregoing consideration, we are of the opinion and so hold that when an agent
negotiates a loan in his personal capacity and executes a promissory note under his own signature,
without express authority from his principal, giving as security therefor real estate belonging to the
letter, also in his own name and not in the name and representation of the said principal, the
obligation do constructed by him is personal and does not bind his aforesaid principal.

Wherefore, it is hereby held that the liability constructed by the aforesaid defendant-appellant Paz
Agudelo y Gonzaga is merely subsidiary to that of Mauro A. Garrucho, limited lot No. 878 of the
cadastral survey of Murcia, Occidental Negros, described in Torrens title No. 2415.

However, inasmuch as the principal obligator, Mauro A. Garrucho, has been absolved from the
complaint and the plaintiff- appellee has not appealed from the judgment absolving him, the law
does not afford any remedy whereby Paz Agudelo y Gonzaga may be required to comply with the
said subsidiary obligation in view of the legal maxim that the accessory follows the principal.
Wherefore, the defendant herein should also be absolved from the complaint which is hereby
dismissed, with the costs against the appellee. So ordered.

Avanceña, C.J., Malcolm, Hull, and Imperial, JJ., concur.

G.R. No. L-17160           November 29, 1965

PHILIPPINE PRODUCTS COMPANY, plaintiff-appellant,

vs.
PRIMATERIA SOCIETE ANONYME POUR LE COMMERCE EXTERIEUR: PRIMATERIA
(PHILIPPINES) INC., ALEXANDER G. BAYLIN and JOSE M. CRAME, defendants-appellees.

Jose A. Javier for plaintiff-appellant.

Ibarra and Papa for defendants-appellees.

BENGZON, C.J.:

This is an action to recover from defendants-PRIMATERIA, the sum of P33,009.71 with interest and
attorney's fees of P8,000.00.

Defendant Primateria Societe Anonyme Pour Le Commerce Exterieur (hereinafter referred to as

Primateria Zurich) is a foreign juridical entity and, at the time of the transactions involved herein, had
its main office at Zurich, Switzerland. It was then engaged in "Transactions in international trade with
agricultural products, particularly in oils, fats and oil-seeds and related products."

The record shows that:

On October 24, 1951, Primateria Zurich, through defendant Alexander B. Baylin, entered into an
agreement with plaintiff Philippine Products Company, whereby the latter undertook to buy copra in
the Philippines for the account of Primateria Zurich, during "a tentative experimental period of one
month from date." (PPC TO BUY IN BEHALF OF PRIMATERIA)

The contract was renewed by mutual agreement of the parties to cover an extended period up to
February 24, 1952, later extended to 1953. During such period, plaintiff caused the shipment of
copra to foreign countries, pursuant to instructions from defendant Primateria Zurich, thru Primateria
(Phil.) Inc. — referred to hereafter as Primateria Philippines — acting by defendant Alexander G.
Baylin and Jose M. Crame, officers of said corporation. As a result, the total amount due to the
plaintiff as of May 30, 1955, was P33,009.71.

At the trial, before the Manila court of first instance, it was proven that the amount due from
defendant Primateria Zurich, on account of the various shipments of copra, was P31,009.71,
because it had paid P2,000.00 of the original claim of plaintiff. There is no dispute about accounting.

And there is no question that Alexander G. Baylin and Primateria Philippines acted as the duly
authorized agents of Primateria Zurich in the Philippines. As far as the record discloses, Baylin acted
indiscriminately in these transactions in the dual capacities of agent of the Zurich firm and executive
vice-president of Primateria Philippines, which also acted as agent of Primateria Zurich. It is likewise
undisputed that Primateria Zurich had no license to transact business in the Philippines.

For failure to file an answer within the reglementary period, defendant Primateria Zurich was
declared in default.

After trial, judgment was rendered by the lower court holding defendant Primateria Zurich liable to
the plaintiff for the sums of P31,009.71, with legal interest from the date of the filing of the complaint,
and P2,000.00 as and for attorney's fees; and absolving defendants Primateria (Phil.), Inc.,
Alexander G. Baylin, and Jose M. Crame from any and all liability.

Plaintiff appealed from that portion of the judgment dismissing its complaint as regards the three
defendants.
It is plaintiff's theory that Primateria Zurich is a foreign corporation within the meaning of Sections 68
and 69 of the Corporation Law, and since it has transacted business in the Philippines without the
necessary license, as required by said provisions, its agents here are personally liable for contracts
made in its behalf.

Section 68 of the Corporation Law states: "No foreign corporation or corporation formed, organized,
or existing under any laws other than those of the Philippines shall be permitted to transact business
in the Philippines, until after it shall have obtained a license for that purpose from the Securities and
Exchange Commission .. ." And under Section 69, "any officer or agent of the corporation or any
person transacting business for any foreign corporation not having the license prescribed shall be
punished by imprisonment for etc. ... ."

The issues which have to be determined, therefore, are the following:

1. Whether defendant Primateria Zurich may be considered a foreign corporation within the meaning
of Sections 68 and 69 of the Corporation Law;

2. Assuming said entity to be a foreign corporation, whether it may be considered as having

transacted business in the Philippines within the meaning of said sections; and

3. If so, whether its agents may be held personally liable  on contracts made in the name of
the entity with third persons in the Philippines.

The lower court ruled that the Primateria Zurich was not duly proven to be a foreign corporation; nor
that a societe anonyme ("sociedad anomima") is a corporation; and that failing such proof,
the societe cannot be deemed to fall within the prescription of Section 68 of the Corporation Law.
We agree with the said court's conclusion. In fact, our corporation law recognized the difference
between sociedades anonimas and corporations.

At any rate, we do not see how the plaintiff could recover from both the principal (Primateria Zurich)
and its agents. It has been given judgment against the principal for the whole amount. It asked for
such judgment, and did not appeal from it. It clearly stated that its appeal concerned the other three
defendants.

But plaintiff alleges that the appellees as agents of Primateria Zurich are liable to it under Art. 1897
of the New Civil Code which reads as follows:

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

But there is no proof that, as agents, they exceeded the limits of their authority. In fact, the principal
— Primateria Zurich — who should be the one to raise the point, never raised it, denied its liability on
the ground of excess of authority. At any rate, the article does not hold that in cases of excess
of authority, both  the agent and the principal are liable to the other contracting party.

This view of the cause dispenses with the necessity of deciding the other two issues, namely:
whether the agent of a foreign corporation doing business, but not licensed here is personally liable
for contracts made by him in the name of such corporation.1 Although, the solution should not be
difficult, since we already held that such foreign corporation may be sued here (General Corporation
vs. Union Ins., 87 Phil. 509). And obviously, liability of the agent is necessarily premised on the
inability to sue the principal or non-liability of such principal. In the absence of express legislation, of
course.

IN VIEW OF THE FOREGOING CONSIDERATIONS, the appealed judgment is affirmed, with costs
against appellant.

Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar,
JJ., concur.

Barrera, J., took no part.

[G.R. Nos. L-33819 and L-33897. October 23, 1982.]

NATIONAL POWER CORPORATION, Plaintiff-Appellant, v. NATIONAL

MERCHANDISING CORPORATION and DOMESTIC INSURANCE COMPANY OF
THE PHILIPPINES, Defendants-Appellants.

The Solicitor General, for Plaintiff-Appellant.

Sycip, Salazar, Luna Manalo & Feliciano, for Defendants-Appellants.

SYNOPSIS

Plaintiff-appellant National Power Corporation (NPC) and defendant- appellant National

Merchandising Corporation (NAMERCO), the Philippine representative of New York-
based International Commodities Corporation, executed a contract of sale of sulfur with
a stipulation for liquidated damages in case of breach.

Defendant-appellant Domestic Insurance Company executed a performance bond in

favor of NPC to guarantee the seller’s obligation. In entering into the contract,
Namerco, however, did not disclose to NPC that Namerco’s principal, in a cabled
instruction, stated that the sale was subject to availability of a steamer, and
contrary to its principal’s instruction, Namerco agreed that non-availability of a steamer
was not a justification for non-payment of liquidated damages.

The New York supplier was not able to deliver the sulfur due to its inability to secure
shipping space. Consequently, the Government Corporate Counsel rescinded the
contract of sale due to the supplier’s non-performance of its obligations, and demanded
payment of liquidated damages from both Namerco and the surety. Thereafter, NPC
sued for recovery of the stipulated liquidated damages. After trial, the Court of First
Instance rendered judgment ordering defendants-appellants to pay solidarity to the
NPC reduced liquidated damages with interest.

The Supreme Court held that Namerco is liable fur damages because under Article 1897
of the Civil Code the agent who exceeds the limits of his authority without giving the
party with whom he contracts sufficient notice of his powers is personally liable to such
 party. The Court, however, further reduced the solidary liability of defendants-
appellants for liquidated damages.

This case is about the recovery of liquidated damages from a seller’s agent that
allegedly exceeded its authority in negotiating the sale. (PUMAYAG NA BURAHIN YUNG
LIMITATION NG LIABILITY, E.G. NON-AVAILABILITY OF A STEAMER, WITHOUT THE
CONSENT NUNG PRINCIPAL)

Plaintiff National Power Corporation appealed on questions of law from the decision of
the Court of First Instance of Manila dated October 10, 1966, ordering defendants
National Merchandising Corporation and Domestic Insurance Company of the Philippines
to pay solidarily to the National Power Corporation reduced liquidated damages in the
sum of P72,114.66 plus legal, rate of interest from the filing of the complaint and the
costs (Civil Case No. 33114).

The two defendants appealed from the same decision allegedly because it is contrary to
law and the evidence. As the amount originally involved is P360,572.80 and defendants’
appeal is tied up with plaintiff’s appeal on questions of law, defendants’ appeal can be
entertained under Republic Act No. 2613 which amended section 17 of the Judiciary
Law.

FACTS

On October 17, 1956, the National Power Corporation and National Merchandising
Corporation (Namerco) of 3111 Nagtahan Street, Manila, as the representative
(AHENTE) of the International Commodities Corporation (PRINCIPAL) of 11 Mercer
Street, New York City (Exh. C), executed in Manila a contract for the purchase by the
NPC (BUYER-THIRD PARTY) from the New York firm of four thousand long tons of
crude sulfur for its Maria Cristina Fertilizer Plant in Iligan City at a total price of
(450,716 (Exh. E).

On that same date, a performance bond in the sum of P90,143.20 was executed by the
Domestic Insurance Company in favor of the NPC to guarantee the seller’s obligations
(Exh. F). (NPC insured Namerco, it has insurable interest as it stands to suffer
pecuniary damage if the other party does not deliver, it has an inchoate interest
coupled with an existing interest)

It was stipulated in the contract of sale that the seller would deliver the sulfur at Iligan
City within sixty days from notice of the establishment in its favor of a letter of credit
for $212,120 and that failure to effect delivery would subject the seller and its surety to
the payment of liquidated damages at the rate of two-fifth of one percent of the full
contract price for the first thirty days of default and four-fifth of one percent for every
day thereafter until complete delivery is made (Art. 8, p. 111, Defendants’ Record on
Appeal).

In a letter dated November 12, 1956, the NPC advised John Z. Sycip, the president of
Namerco, of the opening on November 8 of a letter of credit for $212,120 in favor of
International Commodities Corporation which would expire on January 31, 1957 (Exh.
I). Notice of that letter of credit was, received by cable by the New York firm on
November 15, 1956 (Exh. 80-Wallick). Thus, the deadline for the delivery of the sulfur
was January 15, 1957.

The New York supplier was not able to deliver the sulfur due to its inability to secure
shipping space. (WALANG BARKO)

During the period from January 20 to 26, 1957 there was a shutdown of the NPC’s
fertilizer plant because there was no sulfur. No fertilizer was produced (Exh. K).
(NAPREJUDICE SI NPC DAHIL WALANG SULFUR, DAMAGES ITO)

In a letter dated February 27, 1957, the general manager of the NPC advised Namerco
and the Domestic Insurance Company that under Article 9 of the contract of sale "non-
availability of bottom or vessel" was not a fortuitous event that would excuse non-
performance and that the NPC would resort to legal remedies to enforce its rights (Exh.
L and M).

The Government Corporate Counsel in his letter to Sycip dated May 8, 1957 rescinded
the contract of sale due to the New York supplier’s non-performance of its obligations
(Exh. G). The same counsel in his letter of June 8, 1957 demanded from Namerco the
payment of P360,572.80 as liquidated damages. He explained that time was of the
essence of the contract. A similar demand was made upon the surety (Exh. H and H-1).

The liquidated damages were computed on the basis of the 115-day period between
January 15, 1957, the deadline for the delivery of the sulfur at Iligan City, and May 9,
1957 when Namerco was notified of the rescission of the contract, or P54,085.92 for
the first thirty days and P306,486.88 for the remaining eighty-five days. Total:
P360,572.80.

On November 5, 1957, the NPC sued the New York firm, Namerco and the Domestic
Insurance Company for the recovery of the stipulated liquidated damages (Civil Case
No. 33114).

The trial court in its order of January 17, 1958 dismissed the case as to the New York
firm for lack of jurisdiction because it was not doing business in the Philippines (p. 60,
Defendants Record on Appeal).

On the other hand, Melvin Wallick, as the assignee of the New York corporation and
after the latter was dropped as a defendant in Civil Case No. 33114, sued Namerco for
damages in connection with the same sulfur transaction (Civil Case No. 37019). The
two cases, both filed in the Court of First Instance of Manila, were consolidated. A joint
trial was held. The lower court rendered separate decisions in the two cases on the
same date.

In Civil Case No. 37019, the trial court dismissed Wallick’s action for damages against
Namerco because the assignment in favor of Wallick was champertous in
character. Wallick appealed to this Court. The appeal was dismissed because the
record on appeal did not disclose that the appeal was perfected on time (Res. of July
11, 1972 in L-33893).In this Civil Case No. 33114, although the records on appeal were
approved in 1967, inexplicably, they were elevated to this Court in 1971. That anomaly
initially contributed to the delay in the adjudication of this case.

Defendants’ appeal L-33819. — They contend that the delivery of the sulfur was
conditioned on the availability of a vessel to carry the shipment and that Namerco acted
within the scope of its authority as agent in signing the contract of sale.

The documentary evidence belies these contentions. The invitation to bid issued by
the NPC provides that non-availability of a steamer to transport the sulfur is
not a ground for non-payment of the liquidated damages in case of non-
performance by the seller.

"4. Responsibility for availability of vessel. — The availability of vessel to transport the
quantity of sulfur within the time specified in item 14 of this specification shall be the
responsibility of the bidder. In case of award of contract, failure to ship on time
allegedly due to non-availability of vessels shall not exempt the Contractor from
payment of liquidated damages provided in item 15 of this specification." cralaw virtua1aw library

"15. Liquidated damages. — . . .

"Availability of vessel being a responsibility of the Contractor as specified in item 4 of

this specification, the terms ‘unforeseeable causes beyond the control and without the
fault or negligence of the Contractor’ and ‘force majeure’ as used herein shall not be
deemed to embrace or include lack or nonavailability of bottom or vessel. It is agreed
that prior to making his bid, a bidder shall have made previous arrangements regarding
shipments within the required time. It is clearly understood that in no event shall the
Contractor be exempt from the payment of liquidated damages herein specified for
reason of lack of bottom or vessel. Lack of bottom or nonavailability of vessel shall, in
no case, be considered as a ground for extension of time. . . . ." cralaw virtua1aw library

Namerco’s bid or offer is even more explicit. It provides that it was "responsible for the
availability of bottom or vessel" and that it "guarantees the availability of bottom or
vessel to ship the quantity of sulfur within the time specified in this bid" (Exh. B, p. 22,
Defendants’ Record on Appeal).

In the contract of sale itself item 15 of the invitation to bid is reproduced in Article 9
which provides that "it is clearly understood that in no event shall the seller be entitled
to an extension of time or be exempt from the payment of liquidated damages herein
specified for reason of lack of bottom or vessel" (Exh. E, p. 36, Record on Appeal).

It is true that the New York corporation in its cable to Namerco dated August 9, 1956
stated that the sale was subject to availability of a steamer (Exh. N). However,
Namerco (AHENTE) did not disclose that cable to the NPC and, contrary to its principal’s
instruction, it agreed that nonavailability of a steamer was not a justification for
nonpayment of the liquidated damages.

The trial court rightly concluded that Namerco acted beyond the bounds of its
authority because it violated its principal’s cabled instructions (1) that the delivery of
the sulfur should be "C & F Manila", not "C & F Iligan City" ; (2) that the sale be
subject to the availability of a steamer and (3) that the seller should be allowed to
withdraw right away the full amount of the letter of credit and not merely eighty
percent thereof (pp- 123-124, Record on Appeal).

The defendants argue that it was incumbent upon the NPC to inquire into the extent of
the agent’s authority and, for its failure to do so, it could not claim any liquidated
damages which, according to the defendants, were provided for merely to make the
seller more diligent in looking for a steamer to transport the sulfur.

The NPC counter-argues that Namerco should’ have advised the NPC of the limitations
on its authority to negotiate the sale.

We agree with the trial court that Namerco is liable for damages because under article
1897 of the Civil Code the agent who exceeds the limits of his authority without giving
the party with whom he contracts sufficient notice of his powers is personally liable
to such party.

The truth is that even before the contract of sale was signed Namerco was already
aware that its principal was having difficulties in booking shipping space. In a cable
dated October 16, 1956, or one day before the contract of sale was signed, the New
York supplier advised Namerco that the latter should not sign the contract unless it
(Namerco) wished to assume sole responsibility for the shipment (Exh. T).

Sycip, Namerco’s president, replied in his letter to the seller dated also October 16,
1956, that he had no choice but to finalize the contract of sale because the NPC would
forfeit Namerco’s bidder’s bond in the sum of P45,100 posted by the Domestic
Insurance Company if the contract was not formalized (Exh. 14, 14-A and Exh. V).

Three days later, or on October 19, the New York firm cabled Namerco that the firm did
not consider itself bound by the contract of sale and that Namerco signed the contract
on its own responsibility (Exh. W).

In its letters dated November 8 and 19, 1956, the New York corporation informed
Namerco that since the latter acted contrary to the former’s cabled instructions, the
former disclaimed responsibility for the contract and that the responsibility for the sale
rested on Namerco (Exh. Y and Y-1).

The letters of the New York firm dated November 26 and December 11, 1956 were
even more revealing. It bluntly told Namerco that the latter was never authorized to
enter into the contract and that it acted contrary to the repeated instructions of the
former (Exh. U and Z). Said the vice-president of the New York firm to Namerco: chanrobles virtual lawlibrary

"As we have pointed out to you before, you have acted strictly contrary to our repeated
instructions and, however regretfully, you have no one but yourselves to blame." cralaw virtua1aw library

The rule relied upon by the defendants-appellants that every person dealing with an
agent is put upon inquiry and must discover upon his peril the authority of the agent
would apply in this case if the principal is sought to be held liable on the contract
entered into by the agent.

That is not so in this case. Here, it is the agent that it sought to be held liable on a
contract of sale which was expressly repudiated by the principal because the agent
took chances, it exceeded its authority, and, in effect, it acted in its own name.

As observed by Castan Tobeñas, an agent "que haya traspasado los limites dew
mandato, lo que equivale a obrar sin mandato" (4 Derecho Civil Español, 8th Ed., 1956,
p. 520).

As opined by Olivieri, "si el mandante contesta o impugna el negocio juridico concluido

por el mandatario con el tercero, aduciendo el exceso de los limites impuestos, es justo
que el mandatario, que ha tratado con engaño al tercero, sea responsable
personalmente respecto de el des las consecuencias de tal falta de aceptacion por parte
del mandate. Tal responsabilidad del mandatario se informa en el principio de la falta
de garantia de la existencia del mandato y de la cualidad de mandatario, garantia
impuesta coactivamente por la ley, que quire que aquel que contrata como mandatario
este obligado a garantizar al tercero la efectiva existencia de los poderes que afirma se
halla investido, siempre que el tercero mismo sea de buena fe. Efecto de tal garantia es
el resarcimiento de los daños causados al tercero como consecuencia de la negativa del
mandante a reconocer lo actuado por el mandatario." (26, part II, Scaveola, Codigo
Civil, 1951, pp. 358-9).

Manresa says that the agent who exceeds the limits of his authority is personally liable
"porque realmente obra sin poderes" and the third person who contracts with the agent
in such a case would be defrauded if he would not be allowed to sue the agent (11
Codigo Civil, 6th Ed., 1972, p. 725).

The defendants also contend that the trial court erred in holding as enforceable the
stipulation for liquidated damages despite its finding that the contract was executed by
the agent in excess of its authority and is, therefore, allegedly unenforceable.

In support of that contention, the defendants cite article 1403 of the Civil Code which
provides that a contract entered into in the name of another person by one who has
acted beyond his powers is unenforceable. (AGAINIST THE PRINCIPAL, YES
unenforceable, but against the exceeding agent, NO. Personally liable sila )

We hold that defendants’ contention is untenable because article 1403 refers to the
unenforceability of the contract against the principal. In the instant case, the contract
containing the stipulation for liquidated damages is not being enforced against it
principal but against the agent and its surety.

It is being enforced against the agent because article 1807 implies that the agent who
acts in excess of his authority is personally liable to the party with whom he contracted.

And that rule is complemented by article 1898 of the Civil Code which provides that "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."

It is being enforced against the agent because article 1897 implies that the agent who
acts in excess of his authority is personally liable to the party with whom he contracted.
And the rule is complemented by article 1898 of the Civil Code which provides that "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."

As priorly discussed, namerco, as agent, exceeded the limits of its authority in

contracting with the NPC in the name of its principal. The NPC was unaware of the
limitations on the powers granted by the New York firm to Namerco. chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph

The New York corporation in its letter of April 26, 1956 said: jgc:chanrobles.com.ph

"We hereby certify that National Merchandising Corporation . . . are our exclusive
representatives in the Philippines for the sale of our products.

"Furthermore, we certify that they are empowered to present our offers in our behalf in
accordance with our cabled or written instructions." (Exh. C).

Namerco never disclosed to the NPC the cabled or written instructions of its principal.
For that reason and because Namerco exceeded the limits of its authority, it virtually
acted in its own name and not as agent and it is, therefore, bound by the contract of
sale which, however, is not enforceable against its principal.

If, as contemplated in articles 1897 and 1898, Namerco is bound under the contract of
sale, then it follows that it is bound by the stipulation for liquidated damages in that
contract.

Defendants’ contention that Namerco’s liability should be based on tort or quasi-delict,

as held in some American cases, like Mendelsohn v. Holton, 149 N.E. 38, 42 ALR 1307,
is not well-taken. As correctly argued by the NPC, it would be unjust and inequitable for
Namerco to escape liability after it had deceived the NPC.

Another contention of the defendants is that the Domestic Insurance Company is not
liable to the NPC because its bond was posted, not for Namerco, the agent, but for the
New York firm which is not liable on the contract of sale.

That contention cannot be sustained because it was Namerco that actually solicited the
bond from the Domestic Insurance Company and, as explained already, Namerco is
being held liable under the contract of sale because it virtually acted in its own name. It
became the principal in the performance bond. In the last analysis, the Domestic
Insurance Company acted as surety for Namerco.

The rule is that "want of authority of the person who executes an obligation as the
agent or representative of the principal will not, as a general rule, affect the surety’s
liability thereon, especially in the absence of fraud, even though the obligation is not
binding on the principal" (72 C.J.S. 525).

Defendants’ other contentions are that they should be held liable only for nominal
damages, that interest should not be collected on the amount of damages and that the
damages should be computed on the basis of a forty-five day period and not for a
period of one hundred fifteen days.
With respect to the imposition of the legal rate of interest on the damages from the
filing of the complaint in 1957, or a quarter of a century ago, defendants’ contention is
meritorious. It would be manifestly inequitable to collect interest on the damages
especially considering that the disposition of this case has been considerably delayed
due to no fault of the defendants.

The contention that only nominal damages should be adjudged is contrary to the
intention of the parties (NPC, Namerco and its surety) because it is clearly provided
that liquidated damages are recoverable for delay in the delivery of the sulfur and, with
more reason, for nondelivery.

No proof of pecuniary loss is required for the recovery of liquidated damages. the
stipulation for liquidated damages is intended to obviate controversy on the amount of
damages. There can be no question that the NPC suffered damages because its
production of fertilizer was disrupted or diminished by reason of the nondelivery of the
sulfur.
chanrobles.com.ph : virtual law library

The parties foresaw that it might be difficult to ascertain the exact amount of damages
for nondelivery of the sulfur. So, they fixed the liquidated damages to be paid as
indemnity to the NPC.

On the other hand, nominal damages are damages in name only or are in fact the same
as no damages (25 C.J.S. 466). It would not be correct to hold in this case that the NPC
suffered damages in name only or that the breach of contract was merely technical in
character.

As to the contention that the damages should be computed on the basis of forty-five
days, the period required by a vessel leaving Galveston, Texas to reach Iligan City, that
point need not be resolved in view of our conclusion that the liquidated damages should
be equivalent to the amount of the bidder’s bond posted by Namerco.

NPC’s appeal, L-33897. — The trial court reduced the liquidated damages to twenty
percent of the stipulated amount. the NPC contends the it is entitled to the full amount
of liquidated damages in the sum of P360,572.80.

In reducing the liquidated damages, the trial court relied on article 2227 of the Civil
Code which provides that "liquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or unconscionable."

Apparently, the trial court regarded as an equitable consideration the persistent efforts
of Namerco and its principal to charter a steamer and that the failure of the New York
firm to secure shipping space was not attributable to its fault or negligence.

The trial court also took into account the fact that the selling price of the sulfur was
P450,716 and that to award as liquidated damages more than eighty percent of the
price would not be altogether reasonable.

The NPC contends that Namerco was an obligor in bad faith and, therefore, it should be
responsible for all damages which could be reasonably attributed to its nonperformance
of the obligation as provided in article 2201 of the Civil Code.

On the other hand, the defendants argue that Namerco having acted as a mere agent,
was not liable for the liquidated damages stipulated in the alleged unenforceable
contract of sale; that, as already noted, Namerco’s liability should be based on tort or
quasi-delict and not on the contract of sale; that if Namerco is not liable, then the
insurance company, its surety, is likewise not liable; that the NPC is entitled only to
nominal damages because it was able to secure the sulfur from another source (58-59
tsn November 10, 1960) and that the reduced award of stipulated damages is highly
iniquitous, considering that Namerco acted in good faith and that the NPC did not suffer
any actual damages. chanrobles law library : red

These contentions have already been resolved in the preceding discussion. We find no
sanction or justification for NPC’s claim that it is entitled to the full payment of the
liquidated damages computed by its official.

Ruling on the amount of damages. — A painstaking evaluation of the equities of the

case in the light of the arguments of the parties as expounded in their five briefs leads
to the conclusion that the damages due from the defendants should be further reduced
to P45,100 which is equivalent to their bidder’s bond or to about ten percent of the
selling price of the sulfur.

WHEREFORE, the lower court’s judgment is modified and defendants National

Merchandising Corporation and Domestic Insurance Company of the Philippines are
ordered to pay solidarily to the National Power Corporation the sum of P45,100.00 as
liquidated damages. No costs.

SO ORDERED.

FIRST DIVISION

[G.R. No. 19689. April 4, 1923. ]

PHILIPPINE NATIONAL BANK, Plaintiff-Appellant, v. WELCH, FAIRCHILD & CO.,

INC., Defendant-Appellee.

Quintin Paredes for Appellant.

Ross & Lawrence for Appellee.

SYLLABUS

1. PRINCIPAL AND AGENT; LIABILITY OF AGENT; APPROPRIATION OF PROPERTY

WHICH PRINCIPAL IS OBLIGATED TO DELIVER TO THIRD PARTY. — An agent who
obligates his principal to deliver specific property to a third party may thereafter, to the
prejudice of such third party, appropriate and apply the same property, or its proceeds,
to the payment of debts owing by the principal to the agent; and the circumstances
that the principal assents to such application of the property does not alter the case.
 DECISION

STREET, J. :

By this decision the plaintiff, the Philippine National Bank, seeks to recover of the
defendant, Welch, Fairchild & Co., Inc., the sum of $125,000, with interest from May
17, 1918, being part of the proceeds of certain insurance effected in the year 1918
upon a ship called the Benito Juarez and collected by the defendant after said ship had
been lost at sea. Upon hearing the cause the trial judge absolved the defendant from
the complaint and plaintiff appealed.

In the first half of the year 1918, a corporation, know as La Compania Naviera, Inc.,
was organized in Manila under the laws of the Philippine Islands, for the purpose of
engaging in the business of marine shipping.

Among its shareholders was Welch, Fairchild & Co., another corporation organized
under the laws of these Islands and having its principal place of business in the City of
Manila. Of the shares of La Compania Naviera, Welch, Fairchild & Co. subscribed for 325
shares of the par value of P100 each.

As La Compania Naviera was an entirely new enterprise in the shipping world, it was
necessary for it to acquire a proper complement of vessels and adequate equipment,
and as shipping values in those days were high, the company did not have sufficient
ready capital to meet all requirements.

Its official therefore in May, 1918, applied to the Philippine National Bank for a loan of
$125,000, with which to purchase a boat called Benito Juarez, which had been found on the
market in the United States.

The necessary credit appears to have been extended by the bank in the form of a loan
for $125,000, to run for one year from May 17,1918. Nevertheless, owing to delay in
the delivery of the vessel, the money was not then delivered and was not actually
advanced by the bank until several months later as will presently appear.

It appears that Welch, Fairchild & Co. was not numbered among the original promoters
of La Compania Naviera, but its interest are to a considerable extent involved in the
general shipping conditions in the Islands and it looked with a friendly eye upon the
new enterprise. Moreover, the mercantile ramifications of Welch, Fairchild & Co. appear
to be extensive; and its friendly offices were freely exerted in behalf of La Compania
Naviera, not only through Welch & Co., the correspondent of the defendant in San
Francisco, but also through Mr. Geo H. Fairchild, the president of Welch, Fairchild & Co.,
who left Manila for the United States Mr. Fairchild was kept advised as to certain needs
of La Compania Naviera, and he acted for it in important matters requiring attention in
the United States. In particular it was through the efforts of himself and of Judge James
Ross, as attorney, that the consent of the proper authorities in Washington, D. C., was
obtained for the transfer of the Benito Juarez to Philippine registry.
In August, 1918, the Benito Juarez was on the California coast, and after the approval
of its transfer to Philippine registry had been obtained, steps were taken for the
delivery of the vessel to the agents of the purchaser in San Francisco at the price of
&125,000, as agreed; and it was understood that the delivery of the purchase money
would be made by the Anglo-London and Paris National Bank, in San Francisco, as
agent of the Philippine National Bank, contemporaneously with the delivery to it of the
bill of sale and the policy of insurance on the vessel. it developed, however, that the
vessel needed repairs before it could be dispatched on its voyage to the Orient; and it
became impracticable to deliver the bill of sale and insurance policy to the bank in San
Francisco at the time the money was needed to effect the transfer.

Being advised of this circumstance, and fearing that a hitch might thus occur in the
negotiations, Welch, Fairchild & Co., in Manila, addressed a letter on August 8, 1918, to
the Philippine National Bank, requesting it to cable its correspondent in San Francisco to
release the money and make payment for the vessel upon application by Welch & Co.,
without requiring the delivery of the bill of sale or policy of insurance, "in which event,"
the letter continued, "the Compania Naiver will deliver to you here the bill of sale also
the insurance policy covering the voyage to Manila." In a letter bearing date of August
10,1918, also addressed to the Philippine National Bank, La Compania Naviera, Inc.,
confirmed this request and authorized the bank to send the cablegram necessary to
give it effect.

In response to these communication the Philippine National Bank, on August 14, sent a
cablegram to its correspondent in San Francisco authorizing payment of the purchase
price of the Benito Juarez, without the production of either bill of sale or
insurance policy.
Under these circumstances the vessel was delivered and money paid over without the
production or delivery of the documents mentioned.

After the repair of the Benito Juarez had been accomplished it was insured by Welch &
Co. to the value of $150,000 and was dispatched, in November, 1918, on its voyage to
the Philippine Islands.

On December 3, 1918, the encountered a storm off the Island of Molokai, in the
Hawaiian group, and became a total loss.

When the insurance was taken out to cover the voyage to Manila, no policy was issued
by any insurer; but the insurance was placed by Welch & Co. of San Francisco, upon
the instructions of Welch & Co., as agents of the Compania Naviera, and it was taken
out in the ordinary course of business to protect the interests of all parties concerned.

As would naturally happen in an insurance of this amount, the risk was distributed
among several companies, some in remote centers; and it was many months before
Welch & Co., of San Francisco, had collected the full amount due from the insurers.

However, as the money came to the hands of Welch & Co,, of San Francisco, it was
remitted by draft or telegraphic transfer to Welch, Fairchild & Co. in Manila; and in this
manner practically the full amount for which the Benito Juarez had been insured was
transmitted to Manila by the last days of June, 1919.
As was perhaps but natural under the circumstances, the Philippine National Bank
appears to have exhibited no concern about its loan of $125,000 to La Compania
Naviera, or about the proceeds of the insurance on the Benito Juarez, until after the
period of credit had expired, that is to say, after May 17, 1919.

A short while after this date, an incident occurred upon which the attorneys for the
defendant in this case have placed great emphasis, and it is this: In the latter part of
the month aforesaid Welch & Co., having collected $13,000 upon account of the
insurance on the Benito Juarez, attempted to remit it by telegraphic transfer to Welch,
Fairchild & Co. in Manila, but by some mistake or other, the money was remitted to the
Philippine National Bank in New York, and it was not until about a month later that
authority was received by the Philippine National Bank in Manila to pay to Welch,
Fairchild & Co. the sum of $13,000 upon account of said insurance.

When the authority for the transfer of this credit reached the Philippine National Bank,
the attention of the bank officials was drawn to the fact that the transfer related to
money forming part of the proceeds of the insurance on the Benito Juarez, and they at
first determined to intercept the transfer and withhold the credit from Welch, Fairchild &
Co., on the ground that the money belonged to the bank.

This claim on the part of the bank was of course based on the letter of Welch, Fairchild
& Co. dated August 8, 1918, in which the promise had been held out that if the bank
would advance the purchase money of the Benito Juarez without requiring the current
delivery of the policy of insurance, said policy would be delivered later by La Compania
Naviera in Manila.

When the determination of the bank’s officials to withhold the money was
communicated to Welch, Fairchild & Co., a strong protest was made, and its attorney
came at once to the bank to interview its president. As a result of this interview the
president of the bank receded from his position about the matter, and an order was
made that the money should be to the credit of Welch, Fairchild & Co., with the sum of
P119.65, as interest on the money during the time it had been withheld.

In the course of the interview above alluded to, not only did the attorney of Welch,
Fairchild & Co. call the attention of the president of the bank to doubtful propriety of its
act in intercepting a remittance of money which had been confided to its agent in San
Francisco for transmission to Welch, Fairchild & Co. in Manila, but he also pointed out
that Welch, Fairchild & Co. had acted throughout merely in the capacity of agent for La
Compania Naviera, and he therefore insisted that Welch, Fairchild & Co. was not legally
bound by the promise made by it in the letter of August 8, 1918, to the effect that the
policy of insurance would be delivered to the bank in Manila by La Compania Naviera;
and this contention was urged with such force that the president of the bank — who
was not a lawyer — acknowledged himself vanquished, and in the end said that he
must have been mistaken in his attention and that the attorney was right.

Shortly after this incident the bank which had permitted La Compania Naviera to
become indebted to it upon adequate security to the extent of nearly a million pesos
began to take steps looking to the betterment of its position in relation with said
company. To this end, on August 28, 1919, it went through the barren formality of
making demand upon La Compania Naviera for the delivery of the insurance policies on
the Benito Juarez, but was informed by La Compañia that it had never received any
policy of insurance upon the Benito Juarez as the vessel had been insured in San
Francisco by Welch, Fairchild & Co. in behalf of La Compania Naviera. A little later the
bank caused La Compania Naviera to execute pledges to the bank upon three streamers
belonging to said company as security for its indebtedness to the bank. Thereafter
matters were permitted to drift until it became apparent that La Compania Naviera was
insolvent; and on December 9, 1919, the bank made formal demand upon Welch,
Fairchild & Co. for the delivery of the insurance policy for $125,000 on the Benito
Juarez, basing its demand on the letter of Welch, Fairchild & Co. of August 8, 1918,
already mentioned.

As the bank officials already knew that the insurance had been collected many months
previously by Welch, Fairchild & Co., it is evident that the making of demand for
delivery of a policy for $125,000 was mere formula by which the bank intended to plant
contention that the proceeds of the insurance, to the extent of $125,000, belonged to
it. To this demand Welch, Fairchild & Co. responded with a negative.

Meanwhile, what had become of the proceeds of the insurance upon the Benito Juarez?
That money, as we have already seen, came to the hands of Welch, Fairchild & Co. in
Manila and has there rested, having been applied by Welch, Fairchild & Co. in part
satisfaction of indebtedness incurred by La Compania Naviera to it. This disposition of
the insurance money was made by Welch, Fairchild & Co. with the tacit approval of La
Compania Naviera, the credits being notified to the latter by the former as the
remittance were received in Manila and entered in the accounts of both companies
accordingly.

To explain the situation which had thus arisen between the two companies, further
reference is here necessary to matters that had taken place during the preceding year.
As we have already stated, Welch, Fairchild & Co. had assisted La Compania Naviera in
effecting the purchase and transfer of the Benito Juarez to Philippine registry.

In addition to this, Welch, Fairchild & Co. advanced in San Francisco several thousands
of pesos necessary for the repair and equipment of that vessel prior to its departure for
the Philippine Islands; and the incurring of these expenses explain why insurance was
taken out to the extent of $150,000 instead of $125,000, the latter sum being merely
the item cost price. But the friendly offices of Welch, Fairchild & Co. were not limited to
the foregoing matters, and said company rendered practically the same service with
respect to other vessels which were purchased for La Compania Naviera, with the result
that the advances made by Welch, Fairchild & Co., beginning in the autumn of 1918,
steadily mounted in the course of succeeding months and in the end ran up into the
hundreds of thousands of pesos. One particular incident, most disastrous to the latter
company, consisted in the operation by it, during several months in 1919, of the San
Pedro, one of the vessels belonging to La Compania Naviera, under contract with the
latter company.

The result of these expenditures and advances of money by Welch, Fairchild & Co. was
that the indebtedness of La Compania Naviera to Welch, Fairchild & Co. mounted
steadily during the year 1919, and said indebtedness was by no means liquidated by
the application to it of the insurance money from the Benito Juarez. In this connection
we note the following debit balances charged on the books of Welch, Fairchild & Co.
against the La Compania Naviera as the same appear by monthly statements from
November 30, 1918, to September 30, 1918; and it will be remembered that these are
the balances appearing after credit had been given for the collections of the insurance
money. Said debit balances for the months stated are as follows: Upon November 30,
1918, P3,675.71; upon December 31, 1918, P30,627; upon January 25, 1918,
P93,961.49; upon February 27, 1919, P145,130.78; upon March 30, 1919,
P146,370.66; upon April 29, 1919, P148,542.25; upon May 30, 1919, P153,060.13;
upon June 30, 1919, P139,531.27; upon July 31, 1919, P168,724; upon August 31,
1919, P169,932.41; upon September 30, 1919, P185,651.73.

The foregoing statement of facts makes comprehensible the contentions upon which the
defense to the present action is based; and these contentions may be stated in the
following propositions;

First, that, in as much as Welch, Fairchild & Co. acted exclusively in the character of
agent for La Compania Naviera in the purchase of the Benito Juarez, no obligation
enforcible against it was created by the letter of August 8, 1918, and as a
consequence the bank should look exclusively to La Compania Naviera, as principal,
for indemnification for any loss resulting from the failure of said company to deliver the
insurance policy, or policies, on the Benito Juarez, or the proceeds thereof, to the bank;

secondly, that, even supposing that the letter of August 8, 1918, created any obligation
that the defendant was bound to respect, nevertheless the bank waived and abandoned
any right that it may have had upon the facts stated; and, thirdly and finally, that, by
reason of the delay of the bank and its abondonment of its claim against the defendant,
in relation with prejudice thereby incurred by the defendant, the bank is estopped to
assert any right that it may have had in the premises.

We are the opinion that all of these contentions are untenable and that the plaintiff
bank has a clear right of action against the defendant, in nowise affected adversely by
any of the considerations suggested.

Upon the first point, while it is true that an agent who acts for a revealed principal in
the making of a contract does not become personally bound to the other party in the
sense that an action can ordinarily be maintained upon such contract directly against
the agent (art. 1725, Civ. Code), yet that rule clearly does not control this case; for
even conceding that the obligation created by the letter of August 8, 1918, was directly
binding only on the principal, and that in law the agent may stand apart therefrom, yet
it is manifest upon the simplest principles of jurisprudence that one who has intervened
in the making of a contract in the character of agent cannot be permitted to intercept
and appropriate the thing which the principal is bound to deliver, and thereby make
performance by the principal impossible.

The agent in any event must be precluded from doing any positive act that could
prevent performance on the part of his principal. This much, ordinary good faith
towards the other contracting party requires. The situation before us in effect is one
where, notwithstanding the promise held out jointly by principal and agent in the letters
of August 8 and 10, 1918, the two have conspired to make an application of the
proceeds of the insurance entirely contrary to the tenor of said letters. This cannot be
permitted.

The idea on which we here proceed can perhaps be made more readily apprehensible
from another point of view, which is this: By virtue of the promise contained in the
letter of August 8, 1918 the bank became the equitable owner of the insurance effected
on the Benito Juarez to the extent necessary to indemnify the bank for the money
advanced by it, in reliance upon that promise, for the purchase of said vessel; and this
right of the bank must be respected by all persons having due notice thereof, and most
of all by the defendant which took out the insurance itself in the interest of the parties
then concerned, including of course the bank. The defendant therefore cannot now be
permitted to ignore the right of the bank and appropriate the insurance to the prejudice
of the bank, even though the act be done with the consent of its principal.

As to the argument founded upon the delay of the bank in asserting its right to the
insurance money, it is enough to say that mere delay unaccompanied by acts sufficient
to create an equitable estoppel does not destroy legal rights, but such delay as
occurred here is in part explained by the fact that the loan to La Compania Naviera did
not mature till May 17, 1919, and a demand for that date would have seemed
premature. Besides, it is to be borne in mind the most of the insurance was not in fact
collected until in June of 1919. It is true that in the month of March previous about
P50,000 of this insurance had been remitted to Manila for Welch, Fairchild & Co.
through the plaintiff bank, and the bank, we assume, took notice of the source of the
remittance. However, it is failure then to assert its claim to the money is not a matter
of legitimate criticism, since the loan was not then due. After May 17, 1919, the
situation was somewhat different; and as we have already seen, the bank was not slow
in asserting its right to the remittance that came through the bank in June to Welch,
Fairchild & Co., consisting of $13,000 of the proceeds of this insurance.

This brings us to consider the legal effect of the incident which culminated on July 28,
1919, when the bank abandoned its previous position with regard to this remittance
and passed the money to the credit of the defendant, with interest upon the same
during the time payment had been withheld. The most, we think, that can fairly be said
about that incident is that the bank president admitted himself to be a convert to the
proposition advanced by the attorney for the defendant to the effect that as the
defendant had merely acted as agent for La Compania Naviera in the matter, the bank
must look exclusively to La Compania Naviera for the fulfillment of the promise about
the insurance money. As a statement of legal doctrine that proposition was, as we have
already shown, a mistake; but of course it would have been a matter of indifference if
La Compania Naviera had remained solvent. One consideration that must have
operated on the mind of the president of the bank in releasing this money was that it
had been remitted on ordinary course of exchange through the bank to the defendant,
which was an entirely responsible party; and even though the bank may have had the
power to intercept the remittance, the president may have considered that the
commercial integrity of the institution in matters of exchange was perhaps was perhaps
worth more than could be gained by an obstinate insistence on its right to this money.
There is no evidence whatever that the president of the bank assumed to release the
defendant from any obligation which might have been incurred by virtue of the letter of
August 8, 1918.

From intimations contained in the testimony of some of the witnesses presented by the
defendant it might be inferred that at some time or another an understanding had been
reached between the bank and the defendant company by which it was agreed that the
defendant should make advances of money to La Compania Naviera and that it might
look to the proceeds of the insurance on the Benito Juarez to reimburse itself for those
outlays. No such agreement with the bank or any official of the bank is alleged in the
defendant’s answer; and as one reads the testimony submitted by the defendant this
hearsay suggestion continually flits away, until it becomes apparent that no such
agreement was made. That there was some such understanding between the defendant
and La Compania Naviera is highly probable, but to that understanding the bank clearly
was not a party.

It is insisted, however, that the attitude of the bank has been such that the defendant
has been misled to its prejudice, in that not only did it give large credit to La Compania
Naviera for sums to be recouped from this insurance money but that in reliance upon
its right to that money it refrained from taking the steps that it might have taken to
save itself from loss; and in this connection it is suggested that but for the incident in
July, 1919, when the bank waived its claim to the $13,000 remitted through it to
Welch, Fairchild & Co., the defendant would have sought and would have been able to
get additional security in the form of mortgages of pledges of one or more vessels
belonging to La Compania Naviera.

The proof in our opinion shows little or no tangible basis for these contentions; and so
far as we can see not one dollar was ever advanced by the defendant to La Compania
Naviera upon the faith of any request, promise, or representation of the bank in that
extend; and it should be noted that the bank in that behalf extended; and it should be
noted that the large losses incurred by the defendant for advances to that concern after
July 23, 1919, were mostly incurred in the desperate effort to retrieve its position by
operating the San Pedro. The suggestion that, but for the misleading attitude of the
bank, the defendant would have been able to obtain additional security losses much of
its force when it is considered that upon December 31, 1921, the defendant’s books still
showed unsecured indebtedness, against La Compania Naviera to the amount of nearly
P50,000. The idea that, but for the attitude assumed by the bank, the defendant would
have materially bettered it position, is a speculation too remote to affect the issue of
this action.

In the light of what has been said, it becomes necessary to reverse, as we hereby do
reverse, the judgment appealed from; and judgment will entered in favor of the plaintiff
to recover of the defendant the sum of P250,000, with lawful interest from May 31,
1921, the date of the filing of the complaint. No special pronouncement will be made as
to costs. So ordered.

Araullo, C.J., Avanceña, Villamor, Ostrand, and Romualdez, JJ., concur.

Mr. Justice Johns voted for reversal but he was absent at the time of the promulgation
of the decision, and his signature therefore does not appear signed to the opinion of the
court.

(Sgd.) Manuel Araullo

Chief Justice
 EN BANC

[G.R. No. 2344. February 10, 1906. ]

GONZALO TUASON, Plaintiff-Appellee, v. DOLORES OROZCO, Defendant-Appellant.

Hartigan, Marple, Rhode & Gutierrez, for Appellant.

On November 19, 1888, Juan de Vargas y Amaya, the defendant’s -OROZCO husband,
executed a power of attorney to Enrique Grupe, authorizing him, among other things,
to dispose of all his property, and particularly of a certain house and lot known as No.
24 Calle Nueva, Malate, in the city of Manila, for the price at which it was actually sold.

He was also authorized to mortgage the house for the purpose of securing the
payment of any amount advanced to his wife.

Dolores Orozco de Rivero, who, inasmuch as the property had been acquired with funds
belonging to the conjugal partnership, was necessary party to its sale or incumbrance.

On the 21st of January, 1890, Enrique Grupe and Dolores Orozco de Rivero obtained a
loan from the plaintiff-TUASON secured by a mortgage on the property referred to in
the power of attorney.

In the caption of the instrument evidencing the debt it is stated the Grupe and Dolores
Orozco appeared as the parties of the first part and Gonzalo Tuason, the plaintiff, as the
party of the second part; that Grupe acted for himself and also in behalf of Juan Vargas
by virtue of the power granted him by latter, and that Dolores Orozco appeared merely
for the purpose of complying with the requirements contained in the power of attorney.
In the body of the instrument the following appears: jgc:chanrobles.com.ph

"1. Enrique Grupe acknowledges to have this day received from Gonzalo Tuason as a
loan, after deducting therefrom the interest agreed upon, the sum of 3,500 pesos in
cash, to his entire satisfaction, which sum he promises to pay within one year from the
date hereof.

"2. Grupe also declares that of the 3,500 pesos, he has delivered to Dolores Orozco the
sum of 2,200 pesos, having retained the remaining 1,300 pesos for use in his business;
that notwithstanding this distribution of the amount borrowed, he assumed liability for
the whole sum of 3,500 pesos, which he promises to repay in current gold or silver
coin, without discount, in this city on the date of the maturity of the loan, he otherwise
to be liable for all expenses incurred and damages suffered by his creditor by reason of
his failure to comply with any or all of the conditions stipulated herein, and to pay
further interest at the rate of 1 per cent per month from the date of default until the
debt is fully paid.

"3. Grupe pledges as special security for the payment of the debt 13 shares of stock in
the "Compañia de los Tranvias de Filipinas,’ which shares he has delivered to his
creditor duly indorsed so that the latter in case of his insolvency may dispose of the
same without any further formalities.

"4. To secure the payment of the 2,200 pesos delivered to Dolores Orozco as aforesaid
he specially mortgages the house and lot No. 24, Calle Nueva, Malate, in the city of
Manila (the same house referred to in the power of attorney executed by Vargas to
Grupe).

"5. Dolores Orozco states that, in accordance with the requirement contained in the
power of attorney executed by Vargas to Grupe, she appears for the purpose of
confirming the mortgage created upon the property in question.

"6. Gonzalo Tuason does hereby accept all rights and actions accruing to him under this
contract."cralaw virtua1aw library

This instrument was duly recorded in the Registry of Property, and it appears therefrom
that Enrique Grupe, as attorney in fact for Vargas, received from the plaintiff a loan of
2,200 pesos and delivered the same to the defendant; that to secure its payment he
mortgaged the property of his principal with defendant’s consent as required in the
power of attorney. He also received 1,300 pesos. This amount he borrowed for
his own use. The recovery of this sum not being involved in this action, it will not be
necessary to refer to it in this decision. The complaint refers only to the 2,200 pesos
delivered to the defendant under the terms of the agreement.

The defendant denies having received this sum, but her denial can not overcome the
proof to the country contained in the agreement. She was one of the parties to that
instrument and signed it. This necessarily implies an admission on her part that the
statements in the agreement relating to her are true. She executed another act which
corroborates the delivery to her of the money in question — that is, her personal
intervention in the execution of the mortgage and her statement in the deed that the
mortgage had been created with her knowledge and consent. The lien was created
precisely upon the assumption that she had received that amount and for the purpose
of securing its payment.

In addition to this the defendant wrote a letter on October 23, 1903, to the attorneys
for the plaintiff promising to pay the debt on or before the 5th day of November
following. The defendant admits the authenticity of this letter, which is a further
evidence of the fact that she had received the amount in question. Thirteen years had
elapsed since she signed the mortgage deed. During all this time she never denied
having received the money. On the contrary, she promised to settle within a short time.
The only explanation that we can find for this is that she actually received the money as
set forth in the instrument.

The fact that the defendant received the money from her husband’s agent and not from
the creditor does not affect the validity of the mortgage in view of the conditions
contained in the power of attorney under which the mortgage was created. Nowhere
does it appear in this power that the money was to be delivered to her by the creditor
himself and not through the agent or any other person. The important thing was that
she should have received the money. This we think is fully established by the record.

This being an action for the recover of the debt referred to, the court below properly
admitted the instrument executed January 21, 1890, evidencing the debt.

The appellant-OROZCO claims that the instrument is evidence of a debt personally

incurred by Enrique Grupe for his own benefit, and not incurred for the benefit of his
principal, Vargas, as alleged in the complaint.

As a matter of fact, Grupe, by the terms of the agreement, bound himself personally to
pay the debt. The appellant’s contention, however, can not be sustained.

The agreement, so far as that amount is concerned, was signed by Grupe as attorney in
fact for Vargas. Pursuant to instructions contained in fact for Vargas. Pursuant to
instructions contained in the power of attorney the money was delivered to Varga’s
wife, the defendant in this case.

To secure the payment of the debt, Varga’s property was mortgaged. His wife took part
in the execution of the mortgage as required in the power of attorney. A debt thus
incurred by the agent is binding directly upon the principal, provided the
former acted, as in the present case, within the scope of his authority. (Art.
1727 of the Civil Code.)

The fact that the agent has also bound himself to pay the debt does not relieve from
liability the principal for whose benefit the debt was incurred.

The individual liability of the agent constitutes in the present case a further security
in favor of the creditor and does not affect or preclude the liability of the principal.

In the present case the latter’s liability was further guaranteed by a mortgage upon his
property. The law does not provide that the agent can not bind himself personally to
the fulfillment of an obligation incurred by him in the name and on behalf of his
principal. On the contrary, it provides that such act on the part of an agent would be
valid. (Art. 1725 of the Civil Code.)

The above mortgage being valid and having been duly recorded in the Register of
Property, directly subjects the property thus encumbered, whoever its possessor may
be, to the fulfillment of the obligation for the security of which it was created. (Art.
1876 of the Civil Code and art. 105 of the Mortgage Law.) This presents another phase
of the question. Under the view we have taken of the case it is practically of no
importance whether or not Enrique Grupe bound himself personally to pay the debt in
question. Be this as it may and assuming that Vargas, though principal in the agency,
was not the principal debtor, the right in rem arising from the mortgage would have
justified the creditor in bringing his action directly against the property encumbered had
he chosen to foreclose the mortgage rather than to sue Grupe, the alleged principal
debtor. This would be true irrespective of the personal liability incurred by Grupe. The
result would be practically the same even though it were admitted that appellant’s
contention is correct.

The appellant also alleges that Enrique Grupe pledged to the plaintiff thirteen shares of
stock in the "Compania de los Tranvias de Filipinas" to secure the payment of the entire
debt, and contends that it must be shown what has become of these shares, the value
of which might be amply sufficient to pay the debt, before proceeding to foreclose the
mortgage. This contention can not be sustained in the face of the law above quoted to
the effect that a mortgage directly subjects the property encumbered, whoever its
possessor may be, to the fulfillment of the obligation for the security of which it was
created. Moreover it was incumbent upon the appellant to show that the debt had been
paid with shares. Payment is not presumed but must be proved. It is a defense which
the defendant may interpose. It was therefore her duty to show this fact affirmatively.
She failed, however, to do so.

The appellant’s final contention is that in order to render judgment against the
mortgaged property it would be necessary that the minor children of Juan de Vargas be
made parties defendant in this action, they having an interest in the property. Under
article 154 of the Civil Code, which was in force at the time of the death of Vargas, the
defendant had the parental authority over her children and consequently the legal
representation of their persons and property. (Arts. 155 and 159 of the Civil Code.) It
can not be said, therefore, that they were not properly represented at the trial.
Furthermore this action was brought against the defendant in her capacity as
administratrix of the estate of the deceased Vargas. She did not deny in her answer
that she was such administratrix.

Vargas having incurred this debt during his marriage, the same should not be paid out
of property belonging to the defendant exclusively but from that pertaining to the
conjugal partnership. This fact should be borne in mind in case the proceeds of the
mortgaged property be not sufficient to pay the debt and interest thereon. The
judgment of the court below should be modified in so far as it holds the defendant
personally liable for the payment of the debt.

The judgment thus modified is affirmed and the defendant is hereby ordered to pay to
the plaintiff the sum of 2,200 pesos as principal, together with interest thereon from
the 21st day of January, 1891, until the debt shall have been fully discharged. The
appellant shall pay the costs of this appeal.

After the expiration of ten days let judgment be entered in accordance herewith and let
the case be remanded to the court below for execution. So ordered.

Arellano, C.J., Johnson, Carson and Willard, JJ., concur.

G.R. No. 125138 March 2, 1999

NICHOLAS Y. CERVANTES, petitioner,
vs.
COURT OF APPEALS AND THE PHILIPPINE AIR LINES, INC., respondent.

PURISMA, J.:

This Petition for Review on certiorari assails the 25 July 1995 decision of the Court of Appeals   in
1

CA GR CV No. 41407, entitled "Nicholas Y. Cervantes vs. Philippine Air Lines Inc.", affirming in
toto the judgment of the trial court dismissing petitioner's complaint for damages.

On March 27, 1989, the private respondent, Philippines Air Lines, Inc. (PAL), issued to the herein
petitioner, Nicholas Cervantes (Cervantes), a round trip plane ticket for Manila-Honolulu-Los
Angeles-Honolulu-Manila, which ticket expressly provided an expiry of date of one year from
issuance, i.e., until March 27, 1990. The issuance of the said plane ticket was in compliance with a
Compromise Agreement entered into between the contending parties in two previous suits, docketed
as Civil Case Nos. 3392 and 3451 before the Regional Trial Court in Surigao City.  2

On March 23, 1990, four days before the expiry date of subject ticket, the petitioner used it.

Upon his arrival in Los Angeles on the same day, he immediately booked his Los Angeles-Manila
return ticket with the PAL office, and it was confirmed for the April 2, 1990 flight.

Upon learning that the same PAL plane would make a stop-over in San Francisco, and considering
that he would be there on April 2, 1990, petitioner made arrangements with PAL for him to board the
flight In San Francisco instead of boarding in Las Angeles.

On April 2, 1990, when the petitioner checked in at the PAL counter in San Francisco, he was not
allowed to board. The PAL personnel concerned marked the following notation on his ticket:
"TICKET NOT ACCEPTED DUE EXPIRATION OF VALIDITY."

Aggrieved, petitioner Cervantes filed a Complaint for Damages, for breach of contract of carriage
docketed as Civil Case No. 3807 before Branch 32 of the Regional Trial Court of Surigao del Norte
in Surigao City. But the said complaint was dismissed for lack of merit.  3

On September 20, 1993, petitioner interposed an appeal to the Court of Appeals, which came out
with a Decision, on July 25, 1995, upholding the dismissal of the case.

On May 22, 1996, petitioner came to this Court via the Petition for Review under consideration.

The issues raised for resolution are: (1) Whether or not the act of the PAL agents in confirming
subject ticket extended the period of validity of petitioner's ticket; (2) Whether or not the defense of
lack of authority was correctly ruled upon; and (3) Whether or not the denial of the award for
damages was proper.
To rule on the first issue, there is a need to quote the findings below. As a rule, conclusions and
findings of fact arrived at by the trial court are entitled to great weight on appeal and should not be
disturbed unless for strong and cogent reasons.  4

The facts of the case as found by the lower court   are, as follows:
5

The plane ticket itself (Exhibit A for plaintiff; Exhibit 1 for defendant) provides that it is
not valid after March 27, 1990. (Exhibit 1-F). It is also stipulated in paragraph 8 of the
Conditions of Contract (Exhibit 1, page 2) as follows:

8. This ticket is good for carriage for one year from date of
issue, except as otherwise provided in this ticket, in carrier's tariffs,
conditions of carriage, or related regulations. The fare for carriage
hereunder is subject to change prior to commencement of carriage.
Carrier may refuse transportation if the applicable fare has not been
paid.  6

The question on the validity of subject ticket can be resolved in light of the ruling in the case
of Lufthansa vs. Court of Appeals.   In the said case, the Tolentinos were issued first class tickets on
7

April 3, 1982, which will be valid until April 10, 1983. On June 10, 1982, they changed their
accommodations to economy class but the replacement tickets still contained the same restriction.
On May 7, 1983, Tolentino requested that subject tickets be extended, which request was refused by
the petitioner on the ground that the said tickets had already expired. The non-extension of their
tickets prompted the Tolentinos to bring a complaint for breach of contract of carriage against the
petitioner. In ruling against the award of damages, the Court held that the "ticket constitute the
contract between the parties. It is axiomatic that when the terms are clear and leave no doubt as to
the intention of the contracting parties, contracts are to be interpreted according to their literal
meaning."

In his effort to evade this inevitable conclusion, petitioner theorized that the confirmation by the
PAL's agents in Los Angeles and San Francisco changed the compromise agreement
between the parties.

As aptly by the appellate court:

. . . on March 23, 1990, he was aware of the risk that his ticket could
expire, as it did, before he returned to the Philippines.' (pp. 320-321,
Original Records)  8

The question is: "Did these two (2) employees, in effect, extend the
validity or lifetime of the ticket in question? The answer is in the
negative. Both had no authority to do so. Appellant knew this from
the very start when he called up the Legal Department of appellee in
the Philippines before he left for the United States of America. He had
first hand knowledge that the ticket in question would expire on
March 27, 1990 and that to secure an extension, he would have to
file a written request for extension at the PAL's office in the
Philippines (TSN, Testimony of Nicholas Cervantes, August 2, 1991,
pp. 20-23). Despite this knowledge, appellant persisted to use the
ticket in question."  9
From the aforestated facts, it can be gleaned that the petitioner was fully aware that there was a
need to send a letter to the legal counsel of PAL for the extension of the period of validity of
his ticket.

Since the PAL agents are not privy to the said Agreement and petitioner knew that a written request
to the legal counsel of PAL was necessary, he cannot use what the PAL agents did to his
advantage.

The said agents, according to the Court of Appeals,   acted without authority when they
10

confirmed the flights of the petitioner.

Under Article 1989   of the New Civil Code, the acts an agent beyond the scope of his authority do
11

not bind the principal, unless the latter ratifies the same expressly or impliedly.

Furthermore, when the third person (herein petitioner) knows that the agent was acting
beyond his power or authority, the principal cannot be held liable for the acts of the agent. If
the said third person is aware of such limits of authority, he is to blame, and is not entitled to
recover damages from the agent, unless the latter undertook to secure the principal's ratification.  12

Anent the second issue, petitioner's stance that the defense of lack of authority on the part of the
PAL employees was deemed waived under Rule 9, Section 2 of the Revised Rules of Court, is
unsustainable. Thereunder, failure of a party to put up defenses in their answer or in a motion to
dismiss is a waiver thereof.

Petitioner stresses that the alleged lack of authority of the PAL employees was neither raised in the
answer nor in the motion to dismiss. But records show that the question of whether there was
authority on the part of the PAL employees was acted upon by the trial court when Nicholas
Cervantes was presented as a witness and the depositions of the PAL employees, Georgina M.
Reyes and Ruth Villanueva, were presented.

The admission by Cervantes that he was told by PAL's legal counsel that he had to submit a letter
requesting for an extension of the validity of subject tickets was tantamount to knowledge on his
part that the PAL employees had no authority to extend the validity of subject tickets and
only PAL's legal counsel was authorized to do so.

However, notwithstanding PAL's failure to raise the defense of lack of authority of the said PAL
agents in its answer or in a motion to dismiss, the omission was cured since the said issue was
litigated upon, as shown by the testimony of the petitioner in the course of trial. Rule 10, Section 5 of
the 1997 Rules of Civil Procedure provides:

Sec. 5. Amendment to conform, or authorize presentation of evidence. — When

issues not raised by the pleadings are tried with express or implied consent of the
parties, as if they had been raised in the pleadings. Such amendment of the
pleadings as may be necessary to cause them to conform to the evidence and to
raise these issues may be made upon motion of any party at any time, even after
judgment; but failure to amend does not affect the result of the trial of these
issues. . . .

Thus, "when evidence is presented by one party, with the express or implied consent of the adverse
party, as to issues not alleged in the pleadings, judgment may be rendered validly as regards the
said issue, which shall be treated as if they have been raised in the pleadings. There is implied
consent to the evidence thus presented when the adverse party fails to object thereto."  13

Re: the third issue, an award of damages is improper because petitioner failed to show that PAL
acted in bad faith in refusing to allow him to board its plane in San Francisco.

In awarding moral damages for breach of contract of carriage, the breach must be wanton and
deliberately injurious or the one responsible acted fraudulently or with malice or bad
faith.   Petitioner knew there was a strong possibility that he could not use the subject ticket, so
14

much so that he bought a back-up ticket to ensure his departure. Should there be a finding of bad
faith, we are of the opinion that it should be on the petitioner. What the employees of PAL did was
one of simple negligence. No injury resulted on the part of petitioner because he had a back-up
ticket should PAL refuse to accommodate him with the use of subject ticket.

Neither can the claim for exemplary damages be upheld. Such kind of damages is imposed by way
of example or correction for the public good, and the existence of bad faith is established. The
wrongful act must be accompanied by bad faith, and an award of damages would be allowed only if
the guilty party acted in a wanton, fraudulent, reckless or malevolent manner.   Here, there is no
15

showing that PAL acted in such a manner. An award for attorney's fees is also improper.

WHEREFORE, the Petition is DENIED and the decision of the Court of Appeals dated July 25, 1995
AFFIRMED in toto. No pronouncement as to costs.

SO ORDERED.

SECOND DIVISION

G.R. No. 205206, March 16, 2016

BANK OF THE PHILIPPINE ISLANDS AND FGU INSURANCE CORPORATION

(PRESENTLY KNOWN AS BPI/MS INSURANCE
CORPORATION), Petitioners, v. YOLANDA LAINGO, Respondent.

DECISION

CARPIO, J.:

The Case

This is a petition for review on certiorari 1 assailing the Decision dated 29 June
20122 and Resolution dated 11 December 20123 of the Court of Appeals in CA-G.R. CV
No. 01575.

On 20 July 1999, Rheozel Laingo (Rheozel), the son of respondent Yolanda Laingo
(Laingo), opened a "Platinum 2-in-1 Savings and Insurance" account with petitioner
Bank of the Philippine Islands (BPI) in its Claveria, Davao City branch.
The Platinum 2-in-1 Savings and Insurance account is a savings account where
depositors are automatically covered by an insurance policy against disability or death
issued by petitioner FGU Insurance Corporation (FGU Insurance), now known as BPI/MS
Insurance Corporation. BPI issued Passbook No. 50298 to Rheozel corresponding to
Savings Account No. 2233-0251-11. A Personal Accident Insurance Coverage Certificate
No. 043549 was also issued by FGU Insurance in the name of Rheozel with Laingo as
his named beneficiary.

On 25 September 2000, Rheozel died due to a vehicular accident as evidenced by

a Certificate of Death issued by the Office of the Civil Registrar General of Tagum City,
Davao del Norte. Since Rheozel came from a reputable and affluent family, the Daily
Mirror headlined the story in its newspaper on 26 September 2000.

On 27 September 2000, Laingo instructed the family's personal secretary, Alice

Torbanos (Alice) to go to BPI, Claveria, Davao City branch and inquire about the
savings account of Rheozel. Laingo wanted to use the money in the savings account for
Rheozel's burial and funeral expenses.

Alice went to BPI and talked to Jaime Ibe Rodriguez, BPI's Branch Manager regarding
Laingo's request. Due to Laingo's credit standing and relationship with BPI, BPI
accommodated Laingo who was allowed to withdraw P995,000 from the account of
Rheozel. A certain Ms. Laura Cabico, an employee of BPI, went to Rheozel's wake at the
Cosmopolitan Funeral Parlor to verify some information from Alice and brought with her
a number of documents for Laingo to sign for the withdrawal of the P995,000.

More than two years later or on 21 January 2003, Rheozel's sister, Rhealyn Laingo-
Concepcion, while arranging Rheozel's personal things in his room at their residence in
Ecoland, Davao City, found the Personal Accident Insurance Coverage Certificate No.
043549 issued by FGU Insurance. Rhealyn immediately conveyed the information to
Laingo.

Laingo sent two letters dated 11 September 2003 and 7 November 2003 to BPI and
FGU Insurance requesting them to process her claim as beneficiary of Rheozel's
insurance policy.

On 19 February 2004, FGU Insurance sent a reply-letter to Laingo denying her claim.
FGU Insurance stated that Laingo should have filed the claim within three calendar
months from the death of Rheozel as required under Paragraph 15 of the Personal
Accident Certificate of Insurance which states:
chanRoblesvirtualLawlibrary

15. Written notice of claim shall be given to and filed at FGU Insurance Corporation
within three calendar months of death or disability.
On 20 February 2004, Laingo filed a Complaint 4 for Specific Performance with Damages
and Attorney's Fees with the Regional Trial Court of Davao City, Branch 16 (trial court)
against BPI and FGU Insurance.

In a Decision5 dated 21 April 2008, the trial court decided the case in favor of
respondents. The trial court ruled that the prescriptive period of 90 days shall
commence from the time of death of the insured and not from the knowledge of the
beneficiary.
 Since the insurance claim was filed more than 90 days from the death of the insured,
the case must be dismissed. The dispositive portion of the Decision states:
chanRoblesvirtualLawlibrary

PREMISES CONSIDERED, judgment is hereby rendered dismissing both the complaint

and the counterclaims.

SO ORDERED.6 ChanRoblesVirtualawlibrary

Laingo filed an appeal with the Court of Appeals.

The Ruling of the Court of Appeals

In a Decision dated 29 June 2012, the Court of Appeals reversed the ruling of the trial
court. The Court of Appeals ruled that Laingo could not be expected to do an obligation
which she did not know existed. The appellate court added that Laingo was not a party
to the insurance contract entered into between Rheozel and petitioners. Thus, she could
not be bound by the 90-day stipulation. The dispositive portion of the Decision states:
chanRoblesvirtualLawlibrary

WHEREFORE, the Appeal is hereby GRANTED. The Decision dated April 21, 2008 of the
Regional Trial Court, Branch 16, Davao City, is hereby REVERSED and SET ASIDE.

Appellee Bank of the Philippine Islands and FGU Insurance Corporation are DIRECTED
to PAY jointly and severally appellant Yolanda Laingo Actual Damages in the amount of
P44,438.75 and Attorney's Fees in the amount of P200,000.00.

Appellee FGU Insurance Corporation is also DIRECTED to PAY appellant the insurance
proceeds of the Personal Accident Insurance Coverage of Rheozel Laingo with legal
interest of six percent (6%) per annum reckoned from February 20, 2004 until this
Decision becomes final. Thereafter, an interest of twelve percent (12%) per
annum shall be imposed until fully paid.

SO ORDERED.7 ChanRoblesVirtualawlibrary

Petitioners filed a Motion for Reconsideration which was denied by the appellate court in
a Resolution dated 11 December 2012.

Hence, the instant petition.

The Issue

The main issue for our resolution is whether or not Laingo, as named beneficiary who
had no knowledge of the existence of the insurance contract, is bound by the three
calendar month deadline for filing a written notice of claim upon the death of the
insured.

The Court's Ruling

The petition lacks merit.

Petitioners contend that the words or language used in the insurance contract,
particularly under paragraph 15, is clear and plain or readily understandable by any
reader which leaves no room for construction. Petitioners also maintain that ignorance
about the insurance policy does not exempt respondent from abiding by the deadline
and petitioners cannot be faulted for respondent's failure to comply.
Respondent, on the other hand, insists that the insurance contract is ambiguous since
there is no provision indicating how the beneficiary is to be informed of the three
calendar month claim period. Since petitioners did not notify her of the insurance
coverage of her son where she was named as beneficiary in case of his death, then her
lack of knowledge made it impossible for her to fulfill the condition set forth in the
insurance contract.

In the present case, the source of controversy stems from the alleged non-compliance
with the written notice of insurance claim to FGU Insurance within three calendar
months from the death of the insured as specified in the insurance contract.

Laingo contends that as the named beneficiary entitled to the benefits of the insurance
claim she had no knowledge that Rheozel was covered by an insurance policy against
disability or death issued by FGU Insurance that was attached to Rheozel's savings
account with BPI. Laingo argues that she dealt with BPI after her son's death, when she
was allowed to withdraw funds from his savings account in the amount of P995,000.

However, BPI did not notify her of the attached insurance policy. Thus, Laingo
attributes responsibility to BPI and FGU Insurance for her failure to file the notice of
insurance claim within three months from her son's death.

We agree.

BPI offered a deposit savings account with life and disability insurance coverage to its
customers called the Platinum 2-in-1 Savings and Insurance account. This was a
marketing strategy promoted by BPI in order to entice customers to invest their money
with the added benefit of an insurance policy. Rheozel was one of those who availed of
this account, which not only included banking convenience but also the promise of
compensation for loss or injury, to secure his family's future.

As the main proponent of the 2-in-1 deposit account, BPI tied up with its affiliate, FGU
Insurance, as its partner. Any customer interested to open a deposit account under this
2-in-1 product, after submitting all the required documents to BPI and obtaining BPI's
approval, will automatically be given insurance coverage. Thus, BPI acted as agent
of FGU Insurance with respect to the insurance feature of its own marketed
product.

Under the law, an agent is one who binds himself to render some service or to do
something in representation of another.8 In Doles v. Angeles,9 we held that the
basis of an agency is representation.

The question of whether an agency has been created is ordinarily a question which may
be established in the same way as any other fact, either by direct or circumstantial
evidence. The question is ultimately one of intention. Agency may even be implied from
the words and conduct of the parties and the circumstances of the particular case. For
an agency to arise, it is not necessary that the principal personally encounter the third
person with whom the agent interacts. The law in fact contemplates impersonal
dealings where the principal need not personally know or meet the third person with
whom the agent transacts: precisely, the purpose of agency is to extend the
personality of the principal through the facility of the agent.

In this case, since the Platinum 2-in-1 Savings and Insurance account was BPI's
commercial product, offering the insurance coverage for free for every deposit account
opened, Rheozel directly communicated with BPI, the agent of FGU Insurance. BPI not
only facilitated the processing of the deposit account and the collection of necessary
documents but also the necessary endorsement for the prompt approval of the
insurance coverage without any other action on Rheozel's part. Rheozel did not
interact with FGU Insurance directly and every transaction was coursed
through BPI.

In Eurotech Industrial Technologies, Inc. v. Cuizon,10 we held that when an agency

relationship is established, the agent acts for the principal insofar as the world is
concerned. Consequently, the acts of the agent on behalf of the principal within the
scope of the delegated authority have the same legal effect and consequence as though
the principal had been the one so acting in the given situation.

BPI, as agent of FGU Insurance, had the primary responsibility to ensure that the 2-in-1
account be reasonably carried out with full disclosure to the parties concerned,
particularly the beneficiaries. Thus, it was incumbent upon BPI to give proper notice of
the existence of the insurance coverage and the stipulation in the insurance contract for
filing a claim to Laingo, as Rheozel's beneficiary, upon the latter's death.

Articles 1884 and 1887 of the Civil Code state:

chanRoblesvirtualLawlibrary

Art. 1884. The agent is bound by his acceptance to carry out the agency and is liable
for the damages which, through his non-performance, the principal may suffer.

He must also finish the business already begun on the death of the principal, should
delay entail any danger.

Art. 1887. In the execution of the agency, the agent shall act in accordance with the
instructions of the principal.

In default, thereof, he shall do all that a good father of a family would do, as required
by the nature of the business.
The provision is clear that an agent is bound to carry out the agency. The relationship
existing between principal and agent is a fiduciary one, demanding conditions of trust
and confidence. It is the duty of the agent to act in good faith for the advancement of
the interests of the principal. In this case, BPI had the obligation to carry out the
agency by informing the beneficiary, who appeared before BPI to withdraw funds of the
insured who was BPI's depositor, not only of the existence of the insurance contract but
also the accompanying terms and conditions of the insurance policy in order for the
beneficiary to be able to properly and timely claim the benefit.

Upon Rheozel's death, which was properly communicated to BPI by his mother Laingo,
BPI, in turn, should have fulfilled its duty, as agent of FGU Insurance, of advising
Laingo that there was an added benefit of insurance coverage in Rheozel's savings
account. An insurance company has the duty to communicate with the beneficiary upon
receipt of notice of the death of the insured. This notification is how a good father of a
family should have acted within the scope of its business dealings with its clients. BPI is
expected not only to provide utmost customer satisfaction in terms of its own products
and services but also to give assurance that its business concerns with its partner
entities are implemented accordingly.

There is a rationale in the contract of agency, which flows from the "doctrine of
representation," that notice to the agent is notice to the principal, 11 Here, BPI had been
informed of Rheozel's death by the latter's family. Since BPI is the agent of FGU
Insurance, then such notice of death to BPI is considered as notice to FGU Insurance as
well. FGU Insurance cannot now justify the denial of a beneficiary's insurance claim for
being filed out of time when notice of death had been communicated to its agent within
a few days after the death of the depositor-insured. In short, there was timely notice of
Rheozel's death given to FGU Insurance within three months from Rheozel's death as
required by the insurance company.

The records show that BPI had ample opportunity to inform Laingo, whether verbally or
in writing, regarding the existence of the insurance policy attached to the deposit
account. First, Rheozel's death was headlined in a daily major newspaper a day after
his death. Second, not only was Laingo, through her representative, able to inquire
about Rheozel's deposit account with BPI two days after his death but she was also
allowed by BPI's Claveria, Davao City branch to withdraw from the funds in order to
help defray Rheozel's funeral and burial expenses. Lastly, an employee of BPI visited
Rheozel's wake and submitted documents for Laingo to sign in order to process the
withdrawal request. These circumstances show that despite being given many
opportunities to communicate with Laingo regarding the existence of the insurance
contract, BPI neglected to carry out its duty.

Since BPI, as agent of FGU Insurance, fell short in notifying Laingo of the existence of
the insurance policy, Laingo had no means to ascertain that she was entitled to the
insurance claim. It would be unfair for Laingo to shoulder the burden of loss when BPI
was remiss in its duty to properly notify her that she was a beneficiary.

Thus, as correctly decided by the appellate court, BPI and FGU Insurance shall bear the
loss and must compensate Laingo for the actual damages suffered by her family plus
attorney's fees. Likewise, FGU Insurance has the obligation to pay the insurance
proceeds of Rheozel's personal accident insurance coverage to Laingo, as Rheozel's
named beneficiary. chanrobleslaw

WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 29 June 2012

and Resolution dated 11 December 2012 of the Court of Appeals in CA-G.R. CV No.
01575.

SO ORDERED. cralawlawlibrary

Agent acting in his own name

Article 1883. If an agent acts in his own name, the principal has no right of action against the
persons with whom the agent has contracted; neither have such persons against the principal.

In such case the agent is the one directly bound in favor of the person with whom he has contracted,
as if the transaction were his own, except when the contract involves things belonging to the
principal.

The provisions of this article shall be understood to be without prejudice to the actions between the
principal and agent. (1717)