FIRST DIVISION

[G.R. No. 129459. September 29, 1998.]

SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC.,
petitioner, vs. COURT OF APPEALS, MOTORICH SALES
CORPORATION, NENITA LEE GRUENBERG, ACL DEVELOPMENT
CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents.
SYLLABUS
1.
CIVIL LAW; CONTRACTS; SALE; TRANSFER OR SALE OF
CORPORATE PROPERTY BY THE CORPORATION'S TREASURER
WITHOUT ANY AUTHORITY FROM THE BOARD OF DIRECTORS IS
NULL AND VOID. Indubitably, a corporation may act only
through its board of directors or, when authorized either by its
bylaws or by its board resolution, through its officers or agents in
the normal course of business. The general principles of agency
govern the relation between the corporation and its officers or
agents, subject to the articles of incorporation, bylaws, or
relevant provisions of law. Thus, this Court has held that " 'a
corporate officer or agent may represent and bind the
corporation in transactions with third persons to the extent that
the authority to do so has been conferred upon him, and this
includes powers which have been intentionally conferred, and
also such powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the powers
intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such
apparent powers as the corporation has caused persons dealing
with the officer or agent to believe that it has conferred.' "
Furthermore, the Court has also recognized the rule that "persons
dealing with an assumed agent, whether the assumed agency be
a general or special one, are bound at their peril, if they would

hold the principal liable, to ascertain not only the fact of agency
but also the nature and extent of authority, and in case either is
controvert, the burden of proof is upon them to establish it (Harry
Keeler vs. Rodriguez, 4 Phil. 19)." Unless duly authorized, a
treasurer, whose powers are limited, cannot bind the corporation
in a sale of its assets. In the case at bar, Respondent Motorich
categorically denies that it ever authorized Nenita Gruenberg, its
treasurer, to sell the subject parcel of land. Consequently,
petitioner had the burden of proving that Nenita Gruenberg was
in fact authorized to represent and bind Motorich in the
transaction. Petitioner failed to discharge this burden. Its offer of
evidence before the trial court contained no proof of such
authority. It has not shown any provision of said respondent's
articles of incorporation, bylaws or board resolution to prove that
Nenita Gruenberg possessed such power. That Nenita Gruenberg
is the treasurer of Motorich does not free petitioner from the
responsibility of ascertaining the extent of her authority to
represent the corporation. Petitioner cannot assume that she, by
virtue of her position, was authorized to sell the property of the
corporation. Selling is obviously foreign to a corporate treasurer's
function, which generally has been described as "to receive and
keep the funds of the corporation and to disburse them in
accordance with the authority given him by the board or the
properly authorized officers." Neither was such real estate sale
shown to be a normal business activity of Motorich. The primary
purpose of Motorich is marketing, distribution, export and import
in relation to a general merchandising business. Unmistakably, its
treasurer is not cloaked with actual or apparent authority to buy
or sell real property, an activity which falls way beyond the scope
of her general authority. ScHADI
2.
ID.; ID.; A CONTRACT THAT IS CONSIDERED INEXISTENT
AND VOID FROM THE BEGINNING IS NOT SUSCEPTIBLE TO
RATIFICATION. As a general rule, the acts of corporate officers

within the scope of their authority are binding on the corporation.

But when these officers exceed their authority, their actions
"cannot bind the corporation, unless it has ratified such acts or is
estopped from disclaiming them." In this case, there is a clear
absence of proof that Motorich ever authorized Nenita
Gruenberg, or made it appear to any third person that she had
the authority, to sell its land or to receive the earnest money.
Neither was there any proof that Motorich ratified, expressly or
impliedly, the contract. Petitioner rests its argument on the
receipt which, however, does not prove the fact of ratification.
The document is a handwritten one, not a corporate receipt, and
it bears only Nenita Gruenberg's signature. Certainly, this
document alone does not prove that her acts were authorized or
ratified by Motorich. Article 1318 of the Civil Code lists the
requisites of a valid and perfected contract: "(1) consent of the
contracting parties; (2) object certain which is the subject matter
of the contract; (3) cause of the obligation which is established."
As found by the trial court and affirmed by the Court of Appeals,
there is no evidence that Gruenberg was authorized to enter into
the contract of sale, or that the said contract was ratified by
Motorich. This factual finding of the two courts is binding on this
Court. As the consent of the seller was not obtained, no contract
to bind the obligor was perfected. Therefore, there can be no
valid contract of sale between petitioner and Motorich. Because
Motorich had never given a written authorization to Respondent
Gruenberg to sell its parcel of land, we hold that the February 14,
1989 Agreement entered into by the latter with petitioner is void
under Article 1874 of the Civil Code. Being inexistent and void
from the beginning, said contract cannot be ratified.
3.
COMMERCIAL LAW; CORPORATION CODE; PIERCING THE
CORPORATE VEIL IS NOT JUSTIFIED IN CASE AT BAR. We stress
that the corporate fiction should be set aside when it becomes a
shield against liability for fraud, illegality or inequity committed

on third persons. The question of piercing the veil of corporate

fiction is essentially, then, matter of proof. In the present case,
however, the Courts finds no reason to pierce the corporate veil
of Respondent Motorich. Petitioner utterly failed to establish that
said corporation was formed, or that it is operated, for the
purpose of shielding any alleged fraudulent or illegal activities of
its officers or stockholders; or that the said veil was used to
conceal fraud, illegality or inequity at the expense of third
persons like petitioner.
4.
ID.; ID.; PRIVATE RESPONDENT CORPORATION IS NOT A
CLOSE CORPORATION AS DEFINED UNDER SECTION 96 OF THE
CORPORATION CODE. The articles of incorporation of Motorich
Sales Corporation does not contain any provision stating that (1)
the number of stockholders shall not exceed 20, or (2) a
preemption of shares is restricted in favor of any stockholder or
of the corporation, or (3) listing its stocks in any stock exchange
or making a public offering of such stocks is prohibited. From its
articles, it is clear that Respondent Motorich is not a close
corporation. Motorich does not become one either, just because
Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its
subscribed capital stock. The "[m]ere ownership by a single
stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personalities." So, too, a
narrow distribution of ownership does not, by itself, make a close
corporation.
5.
CIVIL LAW, DAMAGES; AWARD OF ATTORNEY'S FEES IS
NOT JUSTIFIED IN CASE AT BAR; PETITIONER WAS A VICTIM OF ITS
OWN OFFICERS NEGLIGENCE IN ENTERING INTO A CONTRACT
WITH AN UNAUTHORIZED OFFICER OF ANOTHER CORPORATION.
We sustain the findings of both the trial and the appellate
courts that the foregoing allegations lack factual bases. Hence,

an award of damages or attorney's fees cannot be justified. The

amount paid as "earnest money" was not proven to have
redounded to the benefit of Respondent Motorich. Petitioner
claims that said amount was deposited to the account of
Respondent Motorich, because "it was deposited with the
account of Aren Commercial c/o Motorich Sales Corporation."
Respondent Gruenberg, however, disputes the allegations of
petitioner. In any event, Gruenberg offered to return the amount
to petitioner ". . . since the sale did not push through." Moreover,
we note that Andres Co is not a neophyte in the world of
corporate business. He has been the president of Petitioner
Corporation for more than ten years and has also served as chief
executive of two other corporate entities. Co cannot feign
ignorance of the scope of the authority of a corporate treasurer
such as Gruenberg. Neither can he be oblivious to his duty to
ascertain the scope of Gruenberg's authorization to enter into a
contract to sell a parcel of land belonging to Motorich. Indeed,
petitioner's claim of fraud and bad faith is unsubstantiated and
fails to persuade the Court. Indubitably, petitioner appears to be
the victim of its own officer's negligence in entering into a
contract with and paying an unauthorized officer of another
corporation. SDIaCT

The Case

DECISION

"Plaintiff-appellant San Juan Structural and Steel Fabricators,

Inc.'s amended complaint alleged that on 14 February 1989,
plaintiff-appellant entered into an agreement with defendantappellee Motorich Sales Corporation for the transfer to it of a
parcel of land identified as Lot 30, Block 1 of the Acropolis Greens
Subdivision located in the District of Murphy, Quezon City, Metro
Manila, containing an area of Four Hundred Fourteen (414)
square meters, covered by TCT No. (362909) 2876: that as
stipulated in the Agreement of 14 February 1989, plaintiffappellant paid the downpayment in the sum of One Hundred
Thousand (P100,000.00) Pesos, the balance to be paid on or

PANGANIBAN, J p:
May a corporate treasurer, by herself and without any
authorization from the board of directors, validly sell a parcel of
land owned by the corporation? May the veil of corporate fiction
be pierced on the mere ground that almost all of the shares of
stock of the corporation are owned by said treasurer and her
husband? LibLex

These questions are answered in the negative by this Court in

resolving the Petition for Review on Certiorari before us, assailing
the March 18, 1997 Decision 1 of the Court of Appeals 2 in CA GR
CV No. 46801 which, in turn, modified the July 18, 1994 Decision
of the Regional Trial Court of Makati, Metro Manila, Branch 63 3 in
Civil Case No. 89-3511. The RTC dismissed both the Complaint
and the Counterclaim filed by the parties. On the other hand, the
Court of Appeals ruled:
"WHEREFORE, premises considered, the appealed decision is
AFFIRMED WITH MODIFICATION ordering defendant-appellee
Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant
the downpayment of P100,000.00 which she received from
plaintiff-appellant. There is no pronouncement as to costs." 4
The petition also challenges the June 10, 1997 CA Resolution
denying reconsideration. 5
The Facts
The facts as found by the Court of Appeals are as follows:

before March 2, 1989; that on March 1, 1989, Mr. Andres T. Co,

president of plaintiff-appellant corporation, wrote a letter to
defendant-appellee Motorich Sales Corporation requesting for a
computation of the balance to be paid, that said letter was
coursed through defendant-appellee's broker, Linda Aduca, who
wrote the computation of the balance: that on March 2, 1989,
plaintiff-appellant was ready with the amount corresponding to
the balance, covered by Metrobank Cashier's Check No. 004223,
payable to defendant-appellee Motorich Sales Corporation; that
plaintiff-appellant and defendant-appellee Motorich Sales
Corporation were supposed to meet in the office of plaintiffappellant but defendant-appellee's treasurer, Nenita Lee
Gruenberg, did not appear; that defendant-appellee Motorich
Sales Corporation despite repeated demands and in utter
disregard of its commitments had refused to execute the Transfer
of Rights/Deed of Assignment which is necessary to transfer the
certificate of title; that defendant ACL Development Corp. is
impleaded as a necessary party since Transfer Certificate of Title
No. (362909) 2876 is still in the name of said defendant; while
defendant JNM Realty & Development Corp. is likewise impleaded
as a necessary party in view of the fact that it is the transferor of
right in favor of defendant-appellee Motorich Sales Corporation;
that on April 6, 1989, defendant ACL Development Corporation
and Motorich Sales Corporation entered into a Deed of Absolute
Sale whereby the former transferred to the latter the subject
property; that by reason of said transfer, the Registry of Deeds of
Quezon City issued a new title in the name of Motorich Sales
Corporation, represented by defendant-appellee Nenita Lee
Gruenberg and Reynaldo L Gruenberg, under Transfer Certificate
of Title No. 3571; that as a result of defendants-appellees Nenita
Lee Gruenberg and Motorich Sales Corporation's bad faith in
refusing to execute a formal Transfer of Rights/Deed of
Assignment, plaintiff-appellant suffered moral and nominal

damages which may be assessed against defendants-appellees

in the sum of Five Hundred Thousand (500,000.00) Pesos; that as
a result of defendants-appellees Nenita Lee Gruenberg and
Motorich Sales Corporation's unjustified and unwarranted failure
to execute the required Transfer of Rights/Deed of Assignment or
formal deed of sale in favor of plaintiff-appellant, defendantsappellees should be assessed exemplary damages in the sum of
One Hundred Thousand (P100,000.00) Pesos: that by reason of
defendants-appellees' bad faith in refusing to execute a Transfer
of Rights/Deed of Assignment in favor of plaintiff-appellant, the
latter lost the opportunity to construct a residential building in
the sum of One Hundred Thousand (P100,000.00) Pesos; and that
as a consequence of defendants-appellees Nenita Lee Gruenberg
and Motorich Sales Corporation's bad faith in refusing to execute
a deed of sale in favor of plaintiff-appellant, it has been
constrained to obtain the services of counsel at an agreed fee of
One Hundred Thousand (P100,000.00) Pesos plus appearance fee
for every appearance in court hearings.
"In its answer, defendants-appellees Motorich Sales Corporation
and Nenita Lee Gruenberg interposed as affirmative defense that
the President and Chairman of Motorich did not sign the
agreement adverted to in par. 3 of the amended complaint; that
Mrs. Gruenberg's signature on the agreement (ref: par. 3 of
Amended Complaint) is inadequate to bind Motorich. The other
signature, that of Mr. Reynaldo Gruenberg, President and
Chairman of Motorich, is required: that plaintiff knew this from
the very beginning as it was presented a copy of the Transfer of
Rights (Annex B of amended complaint) at the time the
Agreement (Annex B of amended complaint) was signed; that
plaintiff-appellant itself drafted the Agreement and insisted that
Mrs. Gruenberg accept the P100,000.00 as earnest money; that
granting, without admitting, the enforceability of the agreement,
plaintiff-appellant nonetheless failed to pay in legal tender within

the stipulated period (up to March 2, 1989); that it was the

understanding between Mrs. Gruenberg and plaintiff-appellant
that the Transfer of Rights/Deed of Assignment will be signed
only upon receipt of cash payment; thus they agreed that if the
payment be in check, they will meet at a bank designated by
plaintiff-appellant where they will encash the check and sign the
Transfer of Rights/Deed. However, plaintiff-appellant informed
Mrs. Gruenberg of the alleged availability of the check, by phone,
only after banking hours.
"On the basis of the evidence, the court a quo rendered the
judgment appealed from[,] dismissing plaintiff-appellant's
complaint, ruling that:
'The issue to be resolved is: whether plaintiff had the right to
compel defendants to execute a deed of absolute sale in
accordance with the agreement of February 14, 1989: and if so,
whether plaintiff is entitled to damages.
'As to the first question, there is no evidence to show that
defendant Nenita Lee Gruenberg was indeed authorized by
defendant corporation. Motorich Sales to dispose of that property
covered by T.C.T. No. (362909) 2876. Since the property is clearly
owned by the corporation, Motorich Sales, then its disposition
should be governed by the requirement laid down in Sec. 40, of
the Corporation Code of the Philippines, to wit:
Sec. 40.
Sale or other disposition of assets. Subject to the
provisions of existing laws on illegal combination and
monopolies, a corporation may by a majority vote of its board of
directors . . . sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its property and
assets including its goodwill . . . when authorized by the vote of

the stockholders representing at least two third (2/3) of the

outstanding capital stock . . .
'No such vote was obtained by defendant Nenita Lee Gruenberg
for that proposed sale[;] neither was there evidence to show that
the supposed transaction was ratified by the corporation. Plaintiff
should have been on the look out under these circumstances.
More so, plaintiff himself [owns] several corporations (tsn dated
August 16, 1993, p. 3) which makes him knowledgeable on
corporation matters.
'Regarding the question of damages, the Court likewise, does not
find substantial evidence to hold defendant Nenita Lee
Gruenberg liable considering that she did not in anyway
misrepresent herself to be authorized by the corporation to sell
the property to plaintiff (tsn dated September 27, 1991, p. 8).
'In the light of the foregoing, the Court hereby renders judgment
DISMISSING the complaint at instance for lack of merit.
'Defendants' counterclaim is also DISMISSED for lack of basis.'
(Decision, pp. 7-8; Rollo, pp. 34-35)"
For clarity, the Agreement dated February 14, 1989 is reproduced
hereunder:
"AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by and between:
MOTORICH SALES CORPORATION, a corporation duly organized
and existing under and by virtue of Philippine Laws, with principal
office address at 5510 South Super Hi-way cor. Balderama St., Pio
del Pilar, Makati, Metro Manila, represented herein by its

Treasurer, NENITA LEE GRUENBERG, hereinafter referred to as the

TRANSFEROR;
and
SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation
duly organized and existing under and by virtue of the laws of the
Philippines, with principal office address at Sumulong Highway,
Barrio Mambungan, Antipolo, Rizal, represented herein by its
President, ANDRES T. CO, hereinafter referred to as the
TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel of land
identified as Lot 30 Block 1 of the ACROPOLIS GREENS
SUBDIVISION located at the District of Murphy, Quezon City,
Metro Manila, containing an area of FOUR HUNDRED FOURTEEN
(414) SQUARE METERS, covered by a TRANSFER OF RIGHTS
between JNM Realty & Dev. Corp. as the Transferor and Motorich
Sales Corp. as the Transferee;
NOW, THEREFORE, for and in consideration of the foregoing
premises, the parties have agreed as follows:
1.
That the purchase price shall be at FIVE THOUSAND TWO
HUNDRED PESOS (P5,200.00) per square meter; subject to the
following terms:
a.
Earnest money amounting to ONE HUNDRED THOUSAND
PESOS (P100,000.00), will be paid upon the execution of this
agreement and shall form part of the total purchase price;
LLphil
b.

Balance shall be payable on or before March 2, 1989;

2.
That the monthly amortization for the month of February
1989 shall be for the account of the Transferor; and that the
monthly amortization starting March 21, 1989 shall be for the
account of the Transferee;
The transferor warrants that he [sic] is the lawful owner of the
above-described property and that there [are] no existing liens
and/or encumbrances of whatsoever nature;
In case of failure by the Transferee to pay the balance on the
date specified on 1. (b), the earnest money shall be forfeited in
favor of the Transferor.
That upon full payment of the balance, the TRANSFEROR agrees
to execute a TRANSFER OF RIGHTS/DEED OF ASSIGNMENT in
favor of the TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set their hands
this 14th day of February, 1989 at Greenhills, San Juan, Metro
Manila, Philippines.
MOTORICH SALES

SAN JUAN STRUCTURAL &

CORPORATION

STEEL FABRICATORS

TRANSFEROR TRANSFEREE
[SGD] [SGD]
By: NENITA LEE GRUENBERGBy: ANDRES T. CO
Treasurer

President

Signed in the presence of:

[SGD] [SGD]

________________________

________________________" 6

In its recourse before the Court of Appeals, petitioner insisted:

"1.
Appellant is entitled to compel the appellees to execute a
Deed of Absolute Sale in accordance with the Agreement of
February 14, 1989,
2.

Plaintiff is entitled to damages." 7

As stated earlier, the Court of Appeals debunked petitioner's

arguments and affirmed the Decision of the RTC with the
modification that Respondent Nenita Lee Gruenberg was ordered
to refund P100,000 to petitioner, the amount remitted as
"downpayment" or "earnest money." Hence, this petition before
us. 8

The Court synthesized the foregoing and will thus discuss them
seriatim as follows:
1.
Was there a valid contract of sale between petitioner and
Motorich?
2.
May the doctrine of piercing the veil of corporate fiction
be applied to Motorich?
3.
Is the alleged alteration of Gruenberg's testimony as
recorded in the transcript of stenographic notes material to the
disposition of this case?
4.

Are respondents liable for damages and attorney's fees?

The Court's Ruling

The Issues

The petition is devoid of merit.

Before this Court, petitioner raises the following issues:

First Issue: Validity of Agreement

"I.
Whether or not the doctrine of piercing the veil of
corporate fiction is applicable in the instant case

Petitioner San Juan Structural and Steel Fabricators, Inc. alleges

that on February 14, 1989, it entered through its president,
Andres Co, into the disputed Agreement with Respondent
Motorich Sales Corporation, which was in turn allegedly
represented by its treasurer, Nenita Lee Gruenberg. Petitioner
insists that "[w]hen Gruenberg and Co affixed their signatures on
the contract they both consented to be bound by the terms
thereof." Ergo, petitioner contends that the contract is binding on
the two corporations. We do not agree.

"II.
Whether or not the appellate court may consider matters
which the parties failed to raise in the lower court
"III.
Whether or not there is a valid and enforceable contract
between the petitioner and the respondent corporation
"IV.
Whether or not the Court of Appeals erred in holding that
there is a valid correction/substitution of answer in the transcript
of stenographic note[s]
V.
Whether or not respondents are liable for damages and
attorney's fees." 9

True, Gruenberg and Co signed on February 14, 1989, the

Agreement, according to which a lot owned by Motorich Sales
Corporation was purportedly sold. Such contract, however,
cannot bind Motorich, because it never authorized or ratified
such sale.

A corporation is a juridical person separate and distinct from its

stockholders or members. Accordingly, the property of the
corporation is not the property of its stockholders or members
and may not be sold by the stockholders or members without
express authorization from the corporation's board of directors.
10 Section 23 of BP 68, otherwise known as the Corporation Code
of the Philippines, provides:
"SEC. 23.
The Board of Directors or Trustees. Unless
otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no
stock, from among the members of the corporation, who shall
hold office for one (1) year and until their successors are elected
and qualified."
Indubitably, a corporation may act only through its board of
directors or, when authorized either by its bylaws or by its board
resolution, through its officers or agents in the normal course of
business. The general principles of agency govern the relation
between the corporation and its officers or agents, subject to the
articles of incorporation, bylaws, or relevant provisions of law. 11
Thus, this Court has held that "'a corporate officer or agent may
represent and bind the corporation in transactions with third
persons to the extent that the authority to do so has been
conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual
course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added
by custom and usage, as usually pertaining to the particular
officer or agent, and such apparent powers as the corporation

has caused persons dealing with the officer or agent to believe

that it has conferred.' " 12
Furthermore, the Court has also recognized the rule that "persons
dealing with an assumed agent, whether the assumed agency be
a general or special one, are bound at their peril, if they would
hold the principal liable, to ascertain not only the fact of agency
but also the nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to establish it
(Harry Keeler v. Rodriguez, 4 Phil. 19)." 13 Unless duly
authorized, a treasurer, whose powers are limited, cannot bind
the corporation in a sale of its assets. 14
In the case at bar, Respondent Motorich categorically denies that
it ever authorized Nenita Gruenberg, its treasurer, to sell the
subject parcel of land. 15 Consequently, petitioner had the
burden of proving that Nenita Gruenberg was in fact authorized
to represent and bind Motorich in the transaction. Petitioner
failed to discharge this burden. Its offer of evidence before the
trial court contained no proof of such authority. 16 It has not
shown any provision of said respondent's articles of
incorporation, bylaws or board resolution to prove that Nenita
Gruenberg possessed such power.
That Nenita Gruenberg is the treasurer of Motorich does not free
petitioner from the responsibility of ascertaining the extent of her
authority to represent the corporation. Petitioner cannot assume
that she, by virtue of her position, was authorized to sell the
property of the corporation. Selling is obviously foreign to a
corporate treasurer's function, which generally has been
described as "to receive and keep the funds of the corporation
and to disburse them in accordance with the authority given him
by the board or the properly authorized officers." 17

Neither was such real estate sale shown to be a normal business

activity of Motorich. The primary purpose of Motorich is
marketing, distribution, export and import in relation to a general
merchandising business. 18 Unmistakably, its treasurer is not
cloaked with actual or apparent authority to buy or sell real
property, an activity which falls way beyond the scope of her
general authority.
Articles 1874 and 1878 of the Civil Code of the Philippines
provides:
"ART. 1874. When a sale of a piece of land or any interest
therein is through an agent the authority of the latter shall be in
writing; otherwise, the sale shall be void."
"ART. 1878. Special powers of attorney are necessary in the
following case:
xxx

xxx

xxx

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

xxx

xxx

Petitioner further contends that Respondent Motorich has ratified

said contract of sale because of its "acceptance of benefits," as
evidenced by the receipt issued by Respondent Gruenberg. 19
Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope
of their authority are binding on the corporation. But when these
officers exceed their authority, their actions "cannot bind the

corporation, unless it has ratified such acts or is estopped from

disclaiming them." 20
In this case, there is a clear absence of proof that Motorich ever
authorized Nenita Gruenberg, or made it appear to any third
person that she had the authority, to sell its land or to receive
the earnest money. Neither was there any proof that Motorich
ratified, expressly or impliedly, the contract. Petitioner rests its
argument on the receipt which, however, does not prove the fact
of ratification. The document is a hand-written one, not a
corporate receipt, and it bears only Nenita Gruenberg's signature.
Certainly, this document alone does not prove that her acts were
authorized or ratified by Motorich.
Article 1318 of the Civil Code lists the requisites of a valid and
perfected contract: "(1) consent of the contracting parties; (2)
object certain which is the subject matter of the contract; (3)
cause of the obligation which is established." As found by the
trial court 21 and affirmed by the Court of Appeals, 22 there is no
evidence that Gruenberg was authorized to enter into the
contract of sale, or that the said contract was ratified by
Motorich. This factual finding of the two courts is binding on this
Court. 23 As the consent of the seller was not obtained, no
contract to bind the obligor was perfected. Therefore, there can
be no valid contract of sale between petitioner and Motorich.
Because Motorich had never given a written authorization to
Respondent Gruenberg to sell its parcel of land, we hold that the
February 14, 1989 Agreement entered into by the latter with
petitioner is void under Article 1874 of the Civil Code. Being
inexistent and void from the beginning, said contract cannot be
ratified. 24
Second Issue:

Piercing the Corporate Veil Not Justified

Petitioner also argues that the veil of corporate fiction of Motorich
should be pierced, because the latter is a close corporation. Since
"Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned
all or almost all or 99.866% to be accurate, of the subscribed
capital stock" 25 of Motorich, petitioner argues that Gruenberg
needed no authorization from the board to enter into the subject
contract. 26 It adds that, being solely owned by the Spouses
Gruenberg the company can be treated as a close corporation
which can be bound by the acts of its principal stockholder who
needs no specific authority. The Court is not persuaded.
First, petitioner itself concedes having raised the issue belatedly,
27 not having done so during the trial, but only when it filed its
sur-rejoinder before the Court of Appeals. 28 Thus, this Court
cannot entertain said issue at this late stage of the proceedings.
It is well-settled that points of law, theories and arguments not
brought to the attention of the trial court need not be, and
ordinarily will not be, considered by a reviewing court, as they
cannot be raised for the first time on appeal. 29 Allowing
petitioner to change horses in midstream, as it were, is to run
roughshod over the basic principles of fair play, justice and due
process.
Second, even if the above-mentioned argument were to be
addressed at this time, the Court still finds no reason to uphold it.
True, one of the advantages of a corporate form of business
organization is the limitation of an investor's liability to the
amount of the investment. 30 This feature flows from the legal
theory that a corporate entity is separate and distinct from its
stockholders. However, the statutorily granted privilege of a
corporate veil may be used only for legitimate purposes. 31 On
equitable considerations, the veil can be disregarded when it is

utilized as a shield to commit fraud, illegality or inequity; defeat

public convenience; confuse legitimate issues; or serve as a mere
alter ego or business conduit of a person or an instrumentality,
agency or adjunct of another corporation. 32
Thus, the Court has consistently ruled that "[w]hen the fiction is
used as a means of perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a
monopoly or generally the perpetration of knavery or crime, the
veil with which the law covers and isolates the corporation from
the members, or stockholders who compose it will be lifted to
allow for its consideration merely as an aggregation of
individuals." 33
We stress that the corporate fiction should be set aside when it
becomes a shield against liability for fraud, illegality or inequity
committed on third persons. The question of piercing the veil of
corporate fiction is essentially, then, a matter of proof. In the
present case, however, the Court finds no reason to pierce the
corporate veil of Respondent Motorich. Petitioner utterly failed to
establish that said corporation was formed, or that it is operated,
for the purpose of shielding any alleged fraudulent or illegal
activities of its officers or stockholders; or that the said veil was
used to conceal fraud, illegality or inequity at the expense of
third persons like petitioner. cdtai
Petitioner claims that Motorich is a close corporation. We rule
that it is not. Section 96 of the Corporation Code defines a close
corporation as follows:
"SEC. 96.
Definition and Applicability of Title. A close
corporation, within the meaning of this Code, is one whose
articles of incorporation provide that: (1) All of the corporation's

issued stock of all classes, exclusive of treasury shares, shall be

held of record by not more than a specified number of persons,
not exceeding twenty (20); (2) All of the issued stock of all
classes shall be subject to one or more specified restrictions on
transfer permitted by this Title; and (3) The corporation shall not
list in any stock exchange or make any public offering of any of
its stock of any class. Notwithstanding the foregoing, a
corporation shall be deemed not a close corporation when at
least two-thirds (2/3) of its voting stock or voting rights is owned
or controlled by another corporation which is not a close
corporation within the meaning of this Code . . ."

was contracted by the president of a close corporation with the

knowledge and acquiescence of its board of directors. 39 In the
present case, Motorich is not a close corporation, as previously
discussed, and the agreement was entered into by the corporate
treasurer without the knowledge of the board of directors.

The articles of incorporation 34 of Motorich Sales Corporation

does not contain any provision stating that (1) the number of
stockholders shall not exceed 20, or (2) a preemption of shares is
restricted in favor of any stockholder or of the corporation, or (3)
listing its stocks in any stock exchange or making a public
offering of such stocks is prohibited. From its articles, it is clear
that Respondent Motorich is not a close corporation. 35 Motorich
does not become one either, just because Spouses Reynaldo and
Nenita Gruenberg owned 99.866% of its subscribed capital stock.
The [m]ere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation
is not of itself sufficient ground for disregarding the separate
corporate personalities." 36 So, too, a narrow distribution of
ownership does not, by itself, make a close corporation.

As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg

own "almost 99.866%" of Respondent Motorich. 41 Since Nenita
is not the sole controlling stockholder of Motorich, the
aforementioned exception does not apply. Granting arguendo
that the corporate veil of Motorich is to be disregarded, the
subject parcel of land would then be treated as conjugal property
of Spouses Gruenberg, because the same was acquired during
their marriage. There being no indication that said spouses, who
appear to have been married before the effectivity of the Family
Code, have agreed to a different property regime, their property
relations would be governed by conjugal partnership of gains. 42
As a consequence, Nenita Gruenberg could not have effected a
sale of the subject lot because "[t]here is no co-ownership
between the spouses in the properties of the conjugal
partnership of gains. Hence, neither spouse can alienate in favor
of another his or her interest in the partnership or in any property
belonging to it; neither spouse can ask for a partition of the
properties before the partnership has been legally dissolved." 43

Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of

Appeals 37 wherein the Court ruled that ". . . petitioner
corporation is classified as a close corporation and, consequently,
a board resolution authorizing the sale or mortgage of the subject
property is not necessary to bind the corporation for the action of
its president." 38 But the factual milieu in Dulay is not on all
fours with the present case. In Dulay, the sale of real property

The Court is not unaware that there are exceptional cases where
"an action by a director, who singly is the controlling stockholder,
may be considered as a binding corporate act and a board action
as nothing more than a mere formality." 40 The present case,
however, is not one of them. LexLib

Assuming further, for the sake of argument, that the spouses'

property regime is the absolute community of property, the sale
would still be invalid. Under this regime, "alienation of

community property must have the written consent of the other

spouse or the authority of the court without which the disposition
or encumbrance is void." 44 Both requirements are manifestly
absent in the instant case.

Q
But you also did not say that you were not authorized to
sell the property, you did not tell that to Mr. Co, is that correct?
A

That was not asked of me.

Third Issue: Challenged Portion of TSN Immaterial

Yes, just answer it.

Petitioner calls our attention to the following excerpt of the

transcript of stenographic notes(TSN):

A
I just told them that I was the treasurer of the corporation
and it [was] also the president who [was] also authorized to sign
on behalf of the corporation.

"Q.
Did you ever represent to Mr. Co that you were authorized
by the corporation to sell the property?
A

Yes sir." 45

Petitioner claims that the answer "Yes" was crossed out, and, in
its place was written a "No" with an initial scribbled above it. 46
This, however, is insufficient to prove that Nenita Gruenberg was
authorized to represent Respondent Motorich in the sale of its
immovable property, Said excerpt should be understood in the
context of her whole testimony. During her cross-examination,
Respondent Gruenberg testified:

Q
You did not say that you were not authorized nor did you
say that you were authorized?
A
Mr. Co was very interested to purchase the property and
he offered to put up a P100,000.00 earnest money at that time.
That was our first meeting." 47

So, you signed in your capacity as the treasurer?

Clearly then, Nenita Gruenberg did not testify that Motorich had
authorized her to sell its property. On the other hand, her
testimony demonstrates that the president of Petitioner
Corporation, in his great desire to buy the property, threw
caution to the wind by offering and paying the earnest money
without first verifying Gruenberg's authority to sell the lot.

[A]

Yes, sir.

Fourth Issue:

Q
Even then you kn[e]w all along that you [were] not
authorized?
A

Yes, sir.

Q
You stated on direct examination that you did not
represent that you were authorized to sell the property?
A

Yes, sir.

Damages and Attorney's Fees

Finally, petitioner prays for damages and attorney's fees, alleging
that "[i]n an utter display of malice and bad faith, [r]espondents
attempted and succeeded in impressing on the trial court and
[the] Court of Appeals that Gruenberg did not represent herself
as authorized by Respondent Motorich despite the receipt issued
by the former specifically indicating that she was signing on
behalf of Motorich Sales Corporation. Respondent Motorich

likewise acted in bad faith when it claimed it did not authorize

Respondent Gruenberg and that the contract [was] not binding,
[insofar] as it [was] concerned, despite receipt and enjoyment of
the proceeds of Gruenberg's act." 48 Assuming that Respondent
Motorich was not a party to the alleged fraud, petitioner
maintains that Respondent Gruenberg should be held liable
because she "acted fraudulently and in bad faith [in]
representing herself as duly authorized by [R]espondent
[C]orporation." 49
As already stated, we sustain the findings of both the trial and
the appellate courts that the foregoing allegations lack factual
bases. Hence, an award of damages or attorney's fees cannot be
justified. The amount paid as "earnest money" was not proven to
have redounded to the benefit of Respondent Motorich. Petitioner
claims that said amount was deposited to the account of
Respondent Motorich, because "it was deposited with the
account of Aren Commercial c/o Motorich Sales Corporation." 50
Respondent Gruenberg, however, disputes the allegations of
petitioner. She testified as follows:
"Q.
You voluntarily accepted the P100,000.00, as a matter of
fact, that was encashed, the check was encashed.
A
it . . .

Yes, sir, the check was paid in my name and I deposit[ed]

In your account?

Yes, sir'." 51

In any event, Gruenberg offered to return the amount to

petitioner ". . . since the sale did not push through." 52

Moreover, we note that Andres Co is not a neophyte in the world

of corporate business. He has been the president of Petitioner
Corporation for more than ten years and has also served as chief
executive of two other corporate entities. 53 Co cannot feign
ignorance of the scope of the authority of a corporate treasurer
such as Gruenberg. Neither can he be oblivious to his duty to
ascertain the scope of Gruenberg's authorization to enter into a
contract to sell a parcel of land belonging to Motorich.
Indeed, petitioner's claim of fraud and bad faith is
unsubstantiated and fails to persuade the Court. Indubitably,
petitioner appears to be the victim of its own officer's negligence
in entering into a contract with and paying an unauthorized
officer of another corporation.
As correctly ruled by the Court of Appeals, however, Nenita
Gruenberg should be ordered to return to petitioner the amount
she received as earnest money, as "no one shall enrich himself at
the expense of another," 54 a principle embodied in Article 2154
of the Civil Code. 55 Although there was no binding relation
between them, petitioner paid Gruenberg on the mistaken belief
that she had the authority to sell the property of Motorich. 56
Article 2155 of the Civil Code provides that "[p]ayment by reason
of a mistake in the construction or application of a difficult
question of law may come within the scope of the preceding
article."
WHEREFORE, the petition is hereby DENIED and the assailed
Decision is AFFIRMED. cdll
SO ORDERED.

THIRD DIVISION
[G.R. No. 156262. July 14, 2005.]
MARIA TUAZON, ALEJANDRO P. TUAZON, MELECIO P. TUAZON,
Spouses ANASTACIO and MARY T. BUENAVENTURA, petitioners,
vs. HEIRS OF BARTOLOME RAMOS, respondents.
Habitan Carbonell Ferrer Chan & Associates for petitioners.
Ireneo G. Calderon for respondents.
SYLLABUS
1.
REMEDIAL LAW; EVIDENCE; FACTUAL FINDINGS OF THE
TRIAL COURTS WHEN AFFIRMED BY THE COURT OF APPEALS, ARE
CONCLUSIVE ON THE PARTIES AND THIS COURT. Wellentrenched is the rule that the Supreme Court's role in a petition
under Rule 45 is limited to reviewing errors of law allegedly
committed by the Court of Appeals. Factual findings of the trial
court, especially when affirmed by the CA, are conclusive on the
parties and this Court. Petitioners have not given us sufficient
reasons to deviate from this rule. SacTCA
2.
ID.; CIVIL PROCEDURE; PARTIES TO CIVIL ACTIONS;
INDISPENSABLE PARTIES; THE DRAWER OF A CHECK IS NOT AN
INDISPENSABLE PARTY IN AN ACTION AGAINST THE INDORSER OF
THE CHECK; CASE AT BAR. We hold that respondents' cause of
action is clearly founded on petitioners' failure to pay the
purchase price of the rice. The trial court held that Petitioner
Maria Tuazon had indorsed the questioned checks in favor of
respondents, in accordance with Sections 31 and 63 of the
Negotiable Instruments Law. That Santos was the drawer of the
checks is thus immaterial to the respondents' cause of action. As
indorser, Petitioner Maria Tuazon warranted that upon due

presentment, the checks were to be accepted or paid, or both,

according to their tenor; and that in case they were dishonored,
she would pay the corresponding amount. After an instrument is
dishonored by nonpayment, indorsers cease to be merely
secondarily liable; they become principal debtors whose liability
becomes identical to that of the original obligor. The holder of a
negotiable instrument need not even proceed against the maker
before suing the indorser. Clearly, Evangeline Santos as the
drawer of the checks is not an indispensable party in an action
against Maria Tuazon, the indorser of the checks. Indispensable
parties are defined as "parties in interest without whom no final
determination can be had." The instant case was originally one
for the collection of the purchase price of the rice bought by
Maria Tuazon from respondents' predecessor. In this case, it is
clear that there is no privity of contract between respondents and
Santos. Hence, a final determination of the rights and interest of
the parties may be made without any need to implead her.
3.
CIVIL LAW; SPECIAL CONTRACTS; AGENCY; ELEMENTS;
BASIS. In a contract of agency, one binds oneself to render
some service or to do something in representation or on behalf of
another, with the latter's consent or authority. The following are
the elements of agency: (1) the parties' consent, express or
implied, to establish the relationship; (2) the object, which is the
execution of a juridical act in relation to a third person; (3) the
representation, by which the one who acts as an agent does so,
not for oneself, but as a representative; (4) the limitation that the
agent acts within the scope of his or her authority. As the basis of
agency is representation, there must be, on the part of the
principal, an actual intention to appoint, an intention naturally
inferable from the principal's words or actions. In the same
manner, there must be an intention on the part of the agent to
accept the appointment and act upon it. Absent such mutual
intent, there is generally no agency. IEAacT

4.
ID.; ID.; ID.; CANNOT BE PRESUMED AS ITS EXISTENCE,
NATURE AND EXTENT MUST BE PROVEN BY THE PERSON
ALLEGING IT; PETITIONERS WHO RAISED THE FACT OF AGENCY
AS AFFIRMATIVE DEFENSE FAILED TO PROVE ITS EXISTENCE;
CASE AT BAR. This Court finds no reversible error in the
findings of the courts a quo that petitioners were the rice buyers
themselves; they were not mere agents of respondents in their
rice dealership. The question of whether a contract is one of sale
or of agency depends on the intention of the parties. The
declarations of agents alone are generally insufficient to establish
the fact or extent of their authority. The law makes no
presumption of agency; proving its existence, nature and extent
is incumbent upon the person alleging it. In the present case,
petitioners raise the fact of agency as an affirmative defense, yet
fail to prove its existence. The Court notes that petitioners, on
their own behalf, sued Evangeline Santos for collection of the
amounts represented by the bounced checks, in a separate civil
case that they sought to be consolidated with the current one. If,
as they claim, they were mere agents of respondents, petitioners
should have brought the suit against Santos for and on behalf of
their alleged principal, in accordance with Section 2 of Rule 3 of
the Rules on Civil Procedure. Their filing a suit against her in their
own names negates their claim that they acted as mere agents in
selling the rice obtained from Bartolome Ramos.

Tuazon in favor of the said predecessor. Under these

circumstances, to enable respondents to collect on the
indebtedness, the check drawer need not be impleaded in the
Complaint. Thus, the suit is directed, not against the drawer, but
against the debtor who indorsed the checks in payment of the
obligation. cDICaS

DECISION

"1.
The sum of P1,750,050.00, with interests from the filing of
the second amended complaint;

PANGANIBAN, J p:
Stripped of nonessentials, the present case involves the
collection of a sum of money. Specifically, this case arose from
the failure of petitioners to pay respondents' predecessor-ininterest. This fact was shown by the non-encashment of checks
issued by a third person, but indorsed by herein Petitioner Maria

The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of
Court, challenging the July 31, 2002 Decision 2 of the Court of
Appeals (CA) in CA-GR CV No. 46535. The decretal portion of the
assailed Decision reads:
"WHEREFORE, the appeal is DISMISSED and the appealed
decision is AFFIRMED."
On the other hand, the affirmed Decision 3 of Branch 34 of the
Regional Trial Court (RTC) of Gapan, Nueva Ecija, disposed as
follows:
"WHEREFORE, judgment is hereby rendered in favor of the
plaintiffs and against the defendants, ordering the defendants
spouses Leonilo Tuazon and Maria Tuazon to pay the plaintiffs, as
follows:

"2.

The sum of P50,000.00, as attorney's fees;

"3.

The sum of P20,000.00, as moral damages

"4.

And to pay the costs of suit.

xxx

xxx

xxx" 4

The Facts
The facts are narrated by the CA as follows:
"[Respondents] alleged that between the period of May 2, 1988
and June 5, 1988, spouses Leonilo and Maria Tuazon purchased a
total of 8,326 cavans of rice from [the deceased Bartolome]
Ramos [predecessor-in-interest of respondents]. That of this
[quantity,] . . . only 4,437 cavans [have been paid for so far],
leaving unpaid 3,889 cavans valued at P1,211,919.00. In
payment therefor, the spouses Tuazon issued . . . [several]
Traders Royal Bank checks.
xxx

xxx

xxx

[B]ut when these [checks] were encashed, all of the checks

bounced due to insufficiency of funds. [Respondents] advanced
that before issuing said checks[,] spouses Tuazon already knew
that they had no available fund to support the checks, and they
failed to provide for the payment of these despite repeated
demands made on them. EHaDIC
"[Respondents] averred that because spouses Tuazon anticipated
that they would be sued, they conspired with the other
[defendants] to defraud them as creditors by executing . . .
fictitious sales of their properties. They executed . . . simulated
sale[s] [of three lots] in favor of the . . . spouses
Buenaventura . . . [,] as well as their residential lot and the house
thereon[,] all located at Nueva Ecija, and another simulated deed
of sale dated July 12, 1988 of a Stake Toyota registered with the
Land Transportation Office of Cabanatuan City on September 7,
1988. [Co-petitioner] Melecio Tuazon, a son of spouses Tuazon,
registered a fictitious Deed of Sale on July 19, 1988 . . . over a
residential lot located at Nueva Ecija. Another simulated sale of a
Toyota Willys was executed on January 25, 1988 in favor of their

other son, [co-petitioner] Alejandro Tuazon . . . As a result of the

said sales, the titles of these properties issued in the names of
spouses Tuazon were cancelled and new ones were issued in
favor of the [co-]defendants spouses Buenaventura, Alejandro
Tuazon and Melecio Tuazon. Resultantly, by the said ante-dated
and simulated sales and the corresponding transfers there was
no more property left registered in the names of spouses Tuazon
answerable to creditors, to the damage and prejudice of
[respondents]. DcSACE
"For their part, defendants denied having purchased . . . rice from
[Bartolome] Ramos. They alleged that it was Magdalena Ramos,
wife of said deceased, who owned and traded the merchandise
and Maria Tuazon was merely her agent. They argued that it was
Evangeline Santos who was the buyer of the rice and issued the
checks to Maria Tuazon as payments therefor. In good faith[,] the
checks were received [by petitioner] from Evangeline Santos and
turned over to Ramos without knowing that these were not
funded. And it is for this reason that [petitioners] have been
insisting on the inclusion of Evangeline Santos as an
indispensable party, and her non-inclusion was a fatal error.
Refuting that the sale of several properties were fictitious or
simulated, spouses Tuazon contended that these were sold
because they were then meeting financial difficulties but the
disposals were made for value and in good faith and done before
the filing of the instant suit. To dispute the contention of plaintiffs
that they were the buyers of the rice, they argued that there was
no sales invoice, official receipts or like evidence to prove this.
They assert that they were merely agents and should not be held
answerable." 5
The corresponding civil and criminal cases were filed by
respondents against Spouses Tuazon. Those cases were later
consolidated and amended to include Spouses Anastacio and

Mary Buenaventura, with Alejandro Tuazon and Melecio Tuazon as

additional defendants. Having passed away before the pretrial,
Bartolome Ramos was substituted by his heirs, herein
respondents.
Contending that Evangeline Santos was an indispensable party in
the case, petitioners moved to file a third-party complaint against
her. Allegedly, she was primarily liable to respondents, because
she was the one who had purchased the merchandise from their
predecessor, as evidenced by the fact that the checks had been
drawn in her name. The RTC, however, denied petitioners'
Motion. STIHaE
Since the trial court acquitted petitioners in all three of the
consolidated criminal cases, they appealed only its decision
finding them civilly liable to respondents.
Ruling of the Court of Appeals
Sustaining the RTC, the CA held that petitioners had failed to
prove the existence of an agency between respondents and
Spouses Tuazon. The appellate court disbelieved petitioners'
contention that Evangeline Santos should have been impleaded
as an indispensable party. Inasmuch as all the checks had been
indorsed by Maria Tuazon, who thereby became liable to
subsequent holders for the amounts stated in those checks, there
was no need to implead Santos. DTAaCE
Hence, this Petition. 6
Issues
Petitioners raise the following issues for our consideration:

"1.
Whether or not the Honorable Court of Appeals erred in
ruling that petitioners are not agents of the respondents.
"2.
Whether or not the Honorable Court of Appeals erred in
rendering judgment against the petitioners despite . . . the failure
of the respondents to include in their action Evangeline Santos,
an indispensable party to the suit." 7
The Court's Ruling
The Petition is unmeritorious.
First Issue:
Agency
Well-entrenched is the rule that the Supreme Court's role in a
petition under Rule 45 is limited to reviewing errors of law
allegedly committed by the Court of Appeals. Factual findings of
the trial court, especially when affirmed by the CA, are conclusive
on the parties and this Court. 8 Petitioners have not given us
sufficient reasons to deviate from this rule. TAacCE
In a contract of agency, one binds oneself to render some service
or to do something in representation or on behalf of another, with
the latter's consent or authority. 9 The following are the elements
of agency: (1) the parties' consent, express or implied, to
establish the relationship; (2) the object, which is the execution
of a juridical act in relation to a third person; (3) the
representation, by which the one who acts as an agent does so,
not for oneself, but as a representative; (4) the limitation that the
agent acts within the scope of his or her authority. 10 As the
basis of agency is representation, there must be, on the part of
the principal, an actual intention to appoint, an intention
naturally inferable from the principal's words or actions. In the

same manner, there must be an intention on the part of the

agent to accept the appointment and act upon it. Absent such
mutual intent, there is generally no agency. 11
This Court finds no reversible error in the findings of the courts a
quo that petitioners were the rice buyers themselves; they were
not mere agents of respondents in their rice dealership. The
question of whether a contract is one of sale or of agency
depends on the intention of the parties. 12
The declarations of agents alone are generally insufficient to
establish the fact or extent of their authority. 13 The law makes
no presumption of agency; proving its existence, nature and
extent is incumbent upon the person alleging it. 14 In the present
case, petitioners raise the fact of agency as an affirmative
defense, yet fail to prove its existence. CTHDcE
The Court notes that petitioners, on their own behalf, sued
Evangeline Santos for collection of the amounts represented by
the bounced checks, in a separate civil case that they sought to
be consolidated with the current one. If, as they claim, they were
mere agents of respondents, petitioners should have brought the
suit against Santos for and on behalf of their alleged principal, in
accordance with Section 2 of Rule 3 of the Rules on Civil
Procedure. 15 Their filing a suit against her in their own names
negates their claim that they acted as mere agents in selling the
rice obtained from Bartolome Ramos.
Second Issue:
Indispensable Party
Petitioners argue that the lower courts erred in not allowing
Evangeline Santos to be impleaded as an indispensable party.
They insist that respondents' Complaint against them is based on

the bouncing checks she issued; hence, they point to her as the
person primarily liable for the obligation. acITSD
We hold that respondents' cause of action is clearly founded on
petitioners' failure to pay the purchase price of the rice. The trial
court held that Petitioner Maria Tuazon had indorsed the
questioned checks in favor of respondents, in accordance with
Sections 31 and 63 of the Negotiable Instruments Law. 16 That
Santos was the drawer of the checks is thus immaterial to the
respondents' cause of action.
As indorser, Petitioner Maria Tuazon warranted that upon due
presentment, the checks were to be accepted or paid, or both,
according to their tenor; and that in case they were dishonored,
she would pay the corresponding amount. 17 After an instrument
is dishonored by nonpayment, indorsers cease to be merely
secondarily liable; they become principal debtors whose liability
becomes identical to that of the original obligor. The holder of a
negotiable instrument need not even proceed against the maker
before suing the indorser. 18 Clearly, Evangeline Santos as the
drawer of the checks is not an indispensable party in an action
against Maria Tuazon, the indorser of the checks. AIHDcC
Indispensable parties are defined as "parties in interest without
whom no final determination can be had." 19 The instant case
was originally one for the collection of the purchase price of the
rice bought by Maria Tuazon from respondents' predecessor. In
this case, it is clear that there is no privity of contract between
respondents and Santos. Hence, a final determination of the
rights and interest of the parties may be made without any need
to implead her.
WHEREFORE, the Petition is DENIED and the assailed Decision
AFFIRMED. Costs against petitioners.

SO ORDERED.

SECOND DIVISION
[G.R. No. 151319. November 22, 2004.]
MANILA MEMORIAL PARK CEMETERY, INC., petitioner, vs. PEDRO
L. LINSANGAN, respondent.
Siguion Reyna Montecillo & Ongsiako for petitioner.
Linsangan Linsangan & Linsangan Law Offices for respondent.
SYNOPSIS
Florencia Baluyot offered respondent Atty. Pedro L. Linsangan a
lot called Garden State at the Holy Cross Memorial Park owned by
petitioner Manila Memorial Park Cemetery, Inc. (MMPCI). Baluyot
stated that the former owner of the subject memorial lot under
Contract No. 25012 opted to sell his rights subject to
reimbursement of the amounts he already paid. The contract was
for P95,000.00. Respondent accepted the offer and paid the
initial down payment. Sometime thereafter, Baluyot informed
Atty. Linsangan that he would be issued Contract No. 28660, a
new contract covering the subject lot in the name of the latter,
instead of old Contract No. 25012. Atty. Linsangan protested, but
Baluyot assured him that he would still be paying the old price of
P95,000.00 with P19,838.00 credited as full down payment,
leaving a balance of about P75,000.00. Atty. Linsangan signed
Contract No. 28660 and accepted Official Receipt No. 118912. As
requested by Baluyot, Atty. Linsangan issued twelve (12)
postdated checks of P1,800.00 each in favor of MMPCI. The next
year, or on 29 April 1986, Atty. Linsangan again issued twelve
(12) postdated checks in favor of MMPCI. Subsequently, Baluyot
verbally advised Atty. Linsangan that Contract No. 28660 was
cancelled for reasons the latter could not explain, and presented
to him another proposal for the purchase of an equivalent

property. Respondent refused the new proposal, and insisted that

Baluyot and MMPCI honor their undertaking. For the alleged
failure of MMPCI and Baluyot to conform to their agreement, Atty.
Linsangan filed a Complaint for Breach of Contract and Damages
against the former. The trial court held MMPCI and Baluyot jointly
and severally liable. It found that Baluyot was an agent of MMPCI
and that the latter was estopped from denying this agency,
having received and encashed the checks issued by Atty.
Linsangan and given to it by Baluyot. The Court of Appeals
affirmed the decision of the trial court. CcAITa
The Supreme Court granted the petition. According to the Court,
persons dealing with an agent are bound at their peril, if they
would hold the principal liable, to ascertain not only the fact of
agency but also the nature and extent of authority, and in case
either is controverted, the burden of proof is upon them to
establish it. The basis for agency is representation and a person
dealing with an agent is put upon inquiry and must discover upon
his peril the authority of the agent. It has not been established
that Atty. Linsangan even bothered to inquire whether Baluyot
was authorized to agree to terms contrary to those indicated in
the written contract, much less bind MMPCI by her commitment
with respect to such agreements. As a lawyer, a greater degree
of caution should be expected of Atty. Linsangan especially in
dealings involving legal documents. He did not even bother to
ask for official receipts of his payments, nor inquire from MMPCI
directly to ascertain the real status of the contract, blindly relying
on the representations of Baluyot. A lawyer by profession, Atty.
Linsangan knew what he was doing when he signed the written
contract, knew the meaning and value of every word or phrase
used in the contract, and more importantly, knew the legal
effects which said document produced. He is bound to accept
responsibility for his negligence.

SYLLABUS
1.
CIVIL LAW; CONTRACTS; AGENCY; ESTABLISHED IN CASE
AT BAR. By the contract of agency, a person binds himself to
render some service or to do something in representation or on
behalf of another, with the consent or authority of the latter.
Thus, the elements of agency are (i) consent, express or implied,
of the parties to establish the relationship; (ii) the object is the
execution of a juridical act in relation to a third person; (iii) the
agent acts as a representative and not for himself; and (iv) the
agent acts within the scope of his authority. In an attempt to
prove that Baluyot was not its agent, MMPCI pointed out that
under its Agency Manager Agreement, an agency manager such
as Baluyot is considered an independent contractor and not an
agent. However, in the same contract, Baluyot as agency
manager was authorized to solicit and remit to MMPCI offers to
purchase interment spaces belonging to and sold by the latter.
Notwithstanding the claim of MMPCI that Baluyot was an
independent contractor, the fact remains that she was authorized
to solicit solely for and in behalf of MMPCI. As properly found both
by the trial court and the Court of Appeals, Baluyot was an agent
of MMPCI, having represented the interest of the latter, and
having been allowed by MMPCI to represent it in her dealings
with its clients/prospective buyers.
2.
ID.; ID.; ID.; A PERSON DEALING WITH AN AGENT
ASSUMES THE RISK OF LACK OF AUTHORITY IN THE AGENT AND
CANNOT CHARGE THE PRINCIPAL BY RELYING UPON THE AGENT'S
ASSUMPTION OF AUTHORITY THAT PROVES TO BE UNFOUNDED.
It is a settled rule that persons dealing with an agent are
bound at their peril, if they would hold the principal liable, to
ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the burden
of proof is upon them to establish it. The basis for agency is

representation and a person dealing with an agent is put upon

inquiry and must discover upon his peril the authority of the
agent. If he does not make such an inquiry, he is chargeable with
knowledge of the agent's authority and his ignorance of that
authority will not be any excuse. As noted by one author, the
ignorance of a person dealing with an agent as to the scope of
the latter's authority is no excuse to such person and the fault
cannot be thrown upon the principal. A person dealing with an
agent assumes the risk of lack of authority in the agent. He
cannot charge the principal by relying upon the agent's
assumption of authority that proves to be unfounded. The
principal, on the other hand, may act on the presumption that
third persons dealing with his agent will not be negligent in
failing to ascertain the extent of his authority as well as the
existence of his agency. ACaEcH
3.
ID.; ID.; ID.; RESPONDENT IS BOUND BY HIS NEGLIGENCE
IN FAILING TO INQUIRE WHETHER THE AGENT WAS AUTHORIZED
TO AGREE TO TERMS CONTRARY TO THOSE INDICATED IN THE
WRITTEN CONTRACT; AS A LAWYER, A GREATER DEGREE OF
CAUTION SHOULD BE EXPECTED OF RESPONDENT ESPECIALLY IN
DEALINGS INVOLVING LEGAL DOCUMENTS. It has not been
established that Atty. Linsangan even bothered to inquire
whether Baluyot was authorized to agree to terms contrary to
those indicated in the written contract, much less bind MMPCI by
her commitment with respect to such agreements. Even if
Baluyot was Atty. Linsangan's friend and known to be an agent of
MMPCI, her declarations and actions alone are not sufficient to
establish the fact or extent of her authority. Atty. Linsangan as a
practicing lawyer for a relatively long period of time when he
signed the contract should have been put on guard when their
agreement was not reflected in the contract. More importantly,
Atty. Linsangan should have been alerted by the fact that Baluyot
failed to effect the transfer of rights earlier promised, and was

unable to make good her written commitment, nor convince

MMPCI to assent thereto, as evidenced by several attempts to
induce him to enter into other contracts for a higher
consideration. As properly pointed out by MMPCI, as a lawyer, a
greater degree of caution should be expected of Atty. Linsangan
especially in dealings involving legal documents. He did not even
bother to ask for official receipts of his payments, nor inquire
from MMPCI directly to ascertain the real status of the contract,
blindly relying on the representations of Baluyot. A lawyer by
profession, he knew what he was doing when he signed the
written contract, knew the meaning and value of every word or
phrase used in the contract, and more importantly, knew the
legal effects which said document produced. He is bound to
accept responsibility for his negligence.
4.
ID.; ID.; ID.; ACTS OF AGENT BEYOND THE SCOPE OF HIS
AUTHORITY DO NOT BIND THE PRINCIPAL, UNLESS HE RATIFIES
THEM, EXPRESSLY OR IMPLIEDLY; NO RATIFICATION CAN BE
IMPLIED IN CASE AT BAR. The acts of an agent beyond the
scope of his authority do not bind the principal, unless he ratifies
them, expressly or impliedly. Only the principal can ratify; the
agent cannot ratify his own unauthorized acts. Moreover, the
principal must have knowledge of the acts he is to ratify.
Ratification in agency is the adoption or confirmation by one
person of an act performed on his behalf by another without
authority. The substance of the doctrine is confirmation after
conduct, amounting to a substitute for a prior authority.
Ordinarily, the principal must have full knowledge at the time of
ratification of all the material facts and circumstances relating to
the unauthorized act of the person who assumed to act as agent.
Thus, if material facts were suppressed or unknown, there can be
no valid ratification and this regardless of the purpose or lack
thereof in concealing such facts and regardless of the parties
between whom the question of ratification may arise.

Nevertheless, this principle does not apply if the principal's

ignorance of the material facts and circumstances was willful, or
that the principal chooses to act in ignorance of the facts.
However, in the absence of circumstances putting a reasonably
prudent man on inquiry, ratification cannot be implied as against
the principal who is ignorant of the facts. No ratification can be
implied in the instant case. DASEac
5.
ID.; ID.; ID.; THE PRINCIPAL CANNOT BE HELD LIABLE FOR
THE ACTS OF THE AGENT IF THE THIRD PERSON DEALING WITH
THE AGENT KNEW THAT THE LATTER IS ACTING BEYOND HIS
POWER OR AUTHORITY. The acts of the agent beyond the
scope of his authority do not bind the principal unless the latter
ratifies the same. It also bears emphasis that when the third
person 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 was 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. This Court finds that Contract No. 28660
was validly entered into both by MMPCI and Atty. Linsangan. By
affixing his signature in the contract, Atty. Linsangan assented to
the terms and conditions thereof. When Atty. Linsangan incurred
delinquencies in payment, MMCPI merely enforced its rights
under the said contract by canceling the same. Being aware of
the limits of Baluyot's authority, Atty. Linsangan cannot insist on
what he claims to be the terms of Contract No. 28660. The
agreement, insofar as the P95,000.00 contract price is
concerned, is void and cannot be enforced as against MMPCI.
Neither can he hold Baluyot liable for damages under the same
contract, since there is no evidence showing that Baluyot
undertook to secure MMPCI's ratification. At best, the
"agreement" between Baluyot and Atty. Linsangan bound only
the two of them.

6.
ID.; GENERAL PRINCIPLES OF LAW; ESTOPPEL; NOT
APPLICABLE IN CASE AT BAR; NO INDICATION THAT THE
PRINCIPAL LET THE PUBLIC, OR SPECIFICALLY RESPONDENT TO
BELIEVE THAT ITS AGENT HAD THE AUTHORITY TO ALTER THE
STANDARD CONTRACTS OF THE COMPANY. Neither is there
estoppel in the instant case. The essential elements of estoppel
are (i) conduct of a party amounting to false representation or
concealment of material facts or at least calculated to convey the
impression that the facts are otherwise than, and inconsistent
with, those which the party subsequently attempts to assert; (ii)
intent, or at least expectation, that this conduct shall be acted
upon by, or at least influence, the other party; and (iii)
knowledge, actual or constructive, of the real facts. While there is
no more question as to the agency relationship between Baluyot
and MMPCI, there is no indication that MMPCI let the public, or
specifically, Atty. Linsangan to believe that Baluyot had the
authority to alter the standard contracts of the company. Neither
is there any showing that prior to signing Contract No. 28660,
MMPCI had any knowledge of Baluyot's commitment to Atty.
Linsangan. One who claims the benefit of an estoppel on the
ground that he has been misled by the representations of
another must not have been misled through his own want of
reasonable care and circumspection. Even assuming that Atty.
Linsangan was misled by MMPCI's actuations, he still cannot
invoke the principle of estoppel, as he was clearly negligent in his
dealings with Baluyot, and could have easily determined, had he
only been cautious and prudent, whether said agent was clothed
with the authority to change the terms of the principal's written
contract. Estoppel must be intentional and unequivocal, for when
misapplied, it can easily become a most convenient and effective
means of injustice. In view of the lack of sufficient proof showing
estoppel, we refuse to hold MMPCI liable on this score. ESHAIC
DECISION

TINGA, J p:
For resolution in this case is a classic and interesting textbook
question in the law on agency. DAEIHT
This is a petition for review assailing the Decision 1 of the Court
of Appeals dated 22 June 2001, and its Resolution 2 dated 12
December 2001 in CA G.R. CV No. 49802 entitled "Pedro L.
Linsangan v. Manila Memorial Cemetery, Inc. et al.," finding
Manila Memorial Park Cemetery, Inc. (MMPCI) jointly and
severally liable with Florencia C. Baluyot to respondent Atty.
Pedro L. Linsangan.
The facts of the case are as follows:
Sometime in 1984, Florencia Baluyot offered Atty. Pedro L.
Linsangan a lot called Garden State at the Holy Cross Memorial
Park owned by petitioner (MMPCI). According to Baluyot, a former
owner of a memorial lot under Contract No. 25012 was no longer
interested in acquiring the lot and had opted to sell his rights
subject to reimbursement of the amounts he already paid. The
contract was for P95,000.00. Baluyot reassured Atty. Linsangan
that once reimbursement is made to the former buyer, the
contract would be transferred to him. Atty. Linsangan agreed and
gave Baluyot P35,295.00 representing the amount to be
reimbursed to the original buyer and to complete the down
payment to MMPCI. 3 Baluyot issued handwritten and typewritten
receipts for these payments. 4
Sometime in March 1985, Baluyot informed Atty. Linsangan that
he would be issued Contract No. 28660, a new contract covering
the subject lot in the name of the latter instead of old Contract
No. 25012. Atty. Linsangan protested, but Baluyot assured him
that he would still be paying the old price of P95,000.00 with

P19,838.00 credited as full down payment leaving a balance of

about P75,000.00. 5
Subsequently, on 8 April 1985, Baluyot brought an Offer to
Purchase Lot No. A11 (15), Block 83, Garden Estate I
denominated as Contract No. 28660 and the Official Receipt No.
118912 dated 6 April 1985 for the amount of P19,838.00.
Contract No. 28660 has a listed price of P132,250.00. Atty.
Linsangan objected to the new contract price, as the same was
not the amount previously agreed upon. To convince Atty.
Linsangan, Baluyot executed a document 6 confirming that while
the contract price is P132,250.00, Atty. Linsangan would pay only
the original price of P95,000.00. AaCcST
The document reads in part:
The monthly installment will start April 6, 1985; the amount of
P1,800.00 and the difference will be issued as discounted to
conform to the previous price as previously agreed upon.
P95,000.00
Prepared by:
(Signed)
(MRS.) FLORENCIA C. BALUYOT
Agency Manager
Holy Cross Memorial Park
4/18/85
Dear Atty. Linsangan:

This will confirm our agreement that while the offer to purchase
under Contract No. 28660 states that the total price of
P132,250.00 your undertaking is to pay only the total sum of
P95,000.00 under the old price. Further the total sum of
P19,838.00 already paid by you under O.R. # 118912 dated April
6, 1985 has been credited in the total purchase price thereby
leaving a balance of P75,162.00 on a monthly installment of
P1,800.00 including interests (sic) charges for a period of five (5)
years. HAICET
(Signed)
FLORENCIA C. BALUYOT
By virtue of this letter, Atty. Linsangan signed Contract No. 28660
and accepted Official Receipt No. 118912. As requested by
Baluyot, Atty. Linsangan issued twelve (12) postdated checks of
P1,800.00 each in favor of MMPCI. The next year, or on 29 April
1986, Atty. Linsangan again issued twelve (12) postdated checks
in favor of MMPCI.
On 25 May 1987, Baluyot verbally advised Atty. Linsangan that
Contract No. 28660 was cancelled for reasons the latter could not
explain, and presented to him another proposal for the purchase
of an equivalent property. He refused the new proposal and
insisted that Baluyot and MMPCI honor their undertaking.
For the alleged failure of MMPCI and Baluyot to conform to their
agreement, Atty. Linsangan filed a Complaint 7 for Breach of
Contract and Damages against the former. CAcDTI
Baluyot did not present any evidence. For its part, MMPCI alleged
that Contract No. 28660 was cancelled conformably with the
terms of the contract 8 because of non-payment of arrearages. 9
MMPCI stated that Baluyot was not an agent but an independent

contractor, and as such was not authorized to represent MMPCI

or to use its name except as to the extent expressly stated in the
Agency Manager Agreement. 10 Moreover, MMPCI was not aware
of the arrangements entered into by Atty. Linsangan and Baluyot,
as it in fact received a down payment and monthly installments
as indicated in the contract. 11 Official receipts showing the
application of payment were turned over to Baluyot whom Atty.
Linsangan had from the beginning allowed to receive the same in
his behalf. Furthermore, whatever misimpression that Atty.
Linsangan may have had must have been rectified by the
Account Updating Arrangement signed by Atty. Linsangan which
states that he "expressly admits that Contract No. 28660 'on
account of serious delinquency . . . is now due for cancellation
under its terms and conditions.'" 12
The trial court held MMPCI and Baluyot jointly and severally
liable. 13 It found that Baluyot was an agent of MMPCI and that
the latter was estopped from denying this agency, having
received and encashed the checks issued by Atty. Linsangan and
given to it by Baluyot. While MMPCI insisted that Baluyot was
authorized to receive only the down payment, it allowed her to
continue to receive postdated checks from Atty. Linsangan, which
it in turn consistently encashed. 14
The dispositive portion of the decision reads:
WHEREFORE, judgment by preponderance of evidence is hereby
rendered in favor of plaintiff declaring Contract No. 28660 as
valid and subsisting and ordering defendants to perform their
undertakings thereof which covers burial lot No. A11 (15), Block
83, Section Garden I, Holy Cross Memorial Park located at
Novaliches, Quezon City. All payments made by plaintiff to
defendants should be credited for his accounts. NO DAMAGES,
NO ATTORNEY'S FEES but with costs against the defendants.

The cross claim of defendant Manila Memorial Cemetery

Incorporated as against defendant Baluyot is GRANTED up to the
extent of the costs.
SO ORDERED. 15
MMPCI appealed the trial court's decision to the Court of Appeals.
16 It claimed that Atty. Linsangan is bound by the written
contract with MMPCI, the terms of which were clearly set forth
therein and read, understood, and signed by the former. 17 It
also alleged that Atty. Linsangan, a practicing lawyer for over
thirteen (13) years at the time he entered into the contract, is
presumed to know his contractual obligations and is fully aware
that he cannot belatedly and unilaterally change the terms of the
contract without the consent, much less the knowledge of the
other contracting party, which was MMPCI. And in this case,
MMPCI did not agree to a change in the contract and in fact
implemented the same pursuant to its clear terms. In view
thereof, because of Atty. Linsangan's delinquency, MMPCI validly
cancelled the contract.
MMPCI further alleged that it cannot be held jointly and solidarily
liable with Baluyot as the latter exceeded the terms of her
agency, neither did MMPCI ratify Baluyot's acts. It added that it
cannot be charged with making any misrepresentation, nor of
having allowed Baluyot to act as though she had full powers as
the written contract expressly stated the terms and conditions
which Atty. Linsangan accepted and understood. In canceling the
contract, MMPCI merely enforced the terms and conditions
imposed therein. 18
Imputing negligence on the part of Atty. Linsangan, MMPCI
claimed that it was the former's obligation, as a party knowingly
dealing with an alleged agent, to determine the limitations of

such agent's authority, particularly when such alleged agent's

actions were patently questionable. According to MMPCI, Atty.
Linsangan did not even bother to verify Baluyot's authority or ask
copies of official receipts for his payments. 19

the Regional Trial Court, National Capital Judicial Region, Branch

57 of Makati, is hereby AFFIRMED in toto.

The Court of Appeals affirmed the decision of the trial court. It

upheld the trial court's finding that Baluyot was an agent of
MMPCI at the time the disputed contract was entered into, having
represented MMPCI's interest and acting on its behalf in the
dealings with clients and customers. Hence, MMPCI is considered
estopped when it allowed Baluyot to act and represent MMPCI
even beyond her authority. 20 The appellate court likewise found
that the acts of Baluyot bound MMPCI when the latter allowed the
former to act for and in its behalf and stead. While Baluyot's
authority "may not have been expressly conferred upon her, the
same may have been derived impliedly by habit or custom, which
may have been an accepted practice in the company for a long
period of time." 21 Thus, the Court of Appeals noted, innocent
third persons such as Atty. Linsangan should not be prejudiced
where the principal failed to adopt the needed measures to
prevent misrepresentation. Furthermore, if an agent
misrepresents to a purchaser and the principal accepts the
benefits of such misrepresentation, he cannot at the same time
deny responsibility for such misrepresentation. 22 Finally, the
Court of Appeals declared:

MMPCI filed its Motion for Reconsideration, 24 but the same was
denied for lack of merit. 25

There being absolutely nothing on the record that would show

that the court a quo overlooked, disregarded, or misinterpreted
facts of weight and significance, its factual findings and
conclusions must be given great weight and should not be
disturbed by this Court on appeal. EAIcCS
WHEREFORE, in view of the foregoing, the appeal is hereby
DENIED and the appealed decision in Civil Case No. 88-1253 of

SO ORDERED. 23

In the instant Petition for Review, MMPCI claims that the Court of
Appeals seriously erred in disregarding the plain terms of the
written contract and Atty. Linsangan's failure to abide by the
terms thereof, which justified its cancellation. In addition, even
assuming that Baluyot was an agent of MMPCI, she clearly
exceeded her authority and Atty. Linsangan knew or should have
known about this considering his status as a long-practicing
lawyer. MMPCI likewise claims that the Court of Appeals erred in
failing to consider that the facts and the applicable law do not
support a judgment against Baluyot only "up to the extent of
costs." 26
Atty. Linsangan argues that he did not violate the terms and
conditions of the contract, and in fact faithfully performed his
contractual obligations and complied with them in good faith for
at least two years. 27 He claims that contrary to MMPCI's
position, his profession as a lawyer is immaterial to the validity of
the subject contract and the case at bar. 28 According to him,
MMPCI had practically admitted in its Petition that Baluyot was its
agent, and thus, the only issue left to be resolved is whether
MMPCI allowed Baluyot to act as though she had full powers to be
held solidarily liable with the latter. 29
We find for the petitioner MMPCI.
The jurisdiction of the Supreme Court in a petition for review
under Rule 45 of the Rules of Court is limited to reviewing only

errors of law, not fact, unless the factual findings complained of

are devoid of support by the evidence on record or the assailed
judgment is based on misapprehension of facts. 30 In BPI
Investment Corporation v. D.G. Carreon Commercial Corporation,
31 this Court ruled:
There are instances when the findings of fact of the trial court
and/or Court of Appeals may be reviewed by the Supreme Court,
such as (1) when the conclusion is a finding grounded entirely on
speculation, surmises and conjectures; (2) when the inference
made is manifestly mistaken, absurd or impossible; (3) where
there is a grave abuse of discretion; (4) when the judgment is
based on a misapprehension of facts; (5) when the findings of
fact are conflicting; (6) when the Court of Appeals, in making its
findings, went beyond the issues of the case and the same is
contrary to the admissions of both appellant and appellee; (7)
when the findings are contrary to those of the trial court; (8)
when the findings of fact are conclusions without citation of
specific evidence on which they are based; (9) when the facts set
forth in the petition as well as in the petitioners' main and reply
briefs are not disputed by the respondents; and (10) the findings
of fact of the Court of Appeals are premised on the supposed
absence of evidence and contradicted by the evidence on record.
32
In the case at bar, the Court of Appeals committed several errors
in the apprehension of the facts of the case, as well as made
conclusions devoid of evidentiary support, hence we review its
findings of fact. DEHcTI
By the contract of agency, a person binds himself to render some
service or to do something in representation or on behalf of
another, with the consent or authority of the latter. 33 Thus, the
elements of agency are (i) consent, express or implied, of the

parties to establish the relationship; (ii) the object is the

execution of a juridical act in relation to a third person; (iii) the
agent acts as a representative and not for himself; and (iv) the
agent acts within the scope of his authority. 34
In an attempt to prove that Baluyot was not its agent, MMPCI
pointed out that under its Agency Manager Agreement; an
agency manager such as Baluyot is considered an independent
contractor and not an agent. 35 However, in the same contract,
Baluyot as agency manager was authorized to solicit and remit to
MMPCI offers to purchase interment spaces belonging to and sold
by the latter. 36 Notwithstanding the claim of MMPCI that Baluyot
was an independent contractor, the fact remains that she was
authorized to solicit solely for and in behalf of MMPCI. As properly
found both by the trial court and the Court of Appeals, Baluyot
was an agent of MMPCI, having represented the interest of the
latter, and having been allowed by MMPCI to represent it in her
dealings with its clients/prospective buyers.
Nevertheless, contrary to the findings of the Court of Appeals,
MMPCI cannot be bound by the contract procured by Atty.
Linsangan and solicited by Baluyot.
Baluyot was authorized to solicit and remit to MMPCI offers to
purchase interment spaces obtained on forms provided by
MMPCI. The terms of the offer to purchase, therefore, are
contained in such forms and, when signed by the buyer and an
authorized officer of MMPCI, becomes binding on both parties.
The Offer to Purchase duly signed by Atty. Linsangan, and
accepted and validated by MMPCI showed a total list price of
P132,250.00. Likewise, it was clearly stated therein that
"Purchaser agrees that he has read or has had read to him this
agreement, that he understands its terms and conditions, and

that there are no covenants, conditions, warranties or

representations other than those contained herein." 37 By
signing the Offer to Purchase, Atty. Linsangan signified that he
understood its contents. That he and Baluyot had an agreement
different from that contained in the Offer to Purchase is of no
moment, and should not affect MMPCI, as it was obviously made
outside Baluyot's authority. To repeat, Baluyot's authority was
limited only to soliciting purchasers. She had no authority to alter
the terms of the written contract provided by MMPCI. The
document/letter "confirming" the agreement that Atty. Linsangan
would have to pay the old price was executed by Baluyot alone.
Nowhere is there any indication that the same came from MMPCI
or any of its officers. SIcCEA
It is a settled rule that persons dealing with an agent are bound
at their peril, if they would hold the principal liable, to ascertain
not only the fact of agency but also the nature and extent of
authority, and in case either is controverted, the burden of proof
is upon them to establish it. 38 The basis for agency is
representation and a person dealing with an agent is put upon
inquiry and must discover upon his peril the authority of the
agent. 39 If he does not make such an inquiry, he is chargeable
with knowledge of the agent's authority and his ignorance of that
authority will not be any excuse. 40

As noted by one author, the ignorance of a person dealing with

an agent as to the scope of the latter's authority is no excuse to
such person and the fault cannot be thrown upon the principal.
41 A person dealing with an agent assumes the risk of lack of
authority in the agent. He cannot charge the principal by relying
upon the agent's assumption of authority that proves to be
unfounded. The principal, on the other hand, may act on the
presumption that third persons dealing with his agent will not be
negligent in failing to ascertain the extent of his authority as well
as the existence of his agency. 42
In the instant case, it has not been established that Atty.
Linsangan even bothered to inquire whether Baluyot was
authorized to agree to terms contrary to those indicated in the
written contract, much less bind MMPCI by her commitment with
respect to such agreements. Even if Baluyot was Atty.
Linsangan's friend and known to be an agent of MMPCI, her
declarations and actions alone are not sufficient to establish the
fact or extent of her authority. 43 Atty. Linsangan as a practicing
lawyer for a relatively long period of time when he signed the
contract should have been put on guard when their agreement
was not reflected in the contract. More importantly, Atty.
Linsangan should have been alerted by the fact that Baluyot
failed to effect the transfer of rights earlier promised, and was
unable to make good her written commitment, nor convince
MMPCI to assent thereto, as evidenced by several attempts to
induce him to enter into other contracts for a higher
consideration. As properly pointed out by MMPCI, as a lawyer, a
greater degree of caution should be expected of Atty. Linsangan
especially in dealings involving legal documents. He did not even
bother to ask for official receipts of his payments, nor inquire
from MMPCI directly to ascertain the real status of the contract,
blindly relying on the representations of Baluyot. A lawyer by
profession, he knew what he was doing when he signed the

written contract, knew the meaning and value of every word or

phrase used in the contract, and more importantly, knew the
legal effects which said document produced. He is bound to
accept responsibility for his negligence.
The trial and appellate courts found MMPCI liable based on
ratification and estoppel. For the trial court, MMPCI's acts of
accepting and encashing the checks issued by Atty. Linsangan as
well as allowing Baluyot to receive checks drawn in the name of
MMPCI confirm and ratify the contract of agency. On the other
hand, the Court of Appeals faulted MMPCI in failing to adopt
measures to prevent misrepresentation, and declared that in
view of MMPCI's acceptance of the benefits of Baluyot's
misrepresentation, it can no longer deny responsibility therefor.
The Court does not agree. Pertinent to this case are the following
provisions of the Civil Code:
Art. 1898.
If the agent contracts in the name of the principal,
exceeding the scope of his authority, and the principal does not
ratify the contract, it shall be void if the party with whom the
agent contracted is aware of the limits of the powers granted by
the principal. In this case, however, the agent is liable if he
undertook to secure the principal's ratification.
Art. 1910.
The principal must comply with all the obligations
that the agent may have contracted within the scope of his
authority. aDCIHE
As for any obligation wherein the agent has exceeded his power,
the principal is not bound except when he ratifies it expressly or
tacitly.

Art. 1911.
Even when the agent has exceeded his authority,
the principal is solidarily liable with the agent if the former
allowed the latter to act as though he had full powers.
Thus, the acts of an agent beyond the scope of his authority do
not bind the principal, unless he ratifies them, expressly or
impliedly. Only the principal can ratify; the agent cannot ratify his
own unauthorized acts. Moreover, the principal must have
knowledge of the acts he is to ratify. 44
Ratification in agency is the adoption or confirmation by one
person of an act performed on his behalf by another without
authority. The substance of the doctrine is confirmation after
conduct, amounting to a substitute for a prior authority.
Ordinarily, the principal must have full knowledge at the time of
ratification of all the material facts and circumstances relating to
the unauthorized act of the person who assumed to act as agent.
Thus, if material facts were suppressed or unknown, there can be
no valid ratification and this regardless of the purpose or lack
thereof in concealing such facts and regardless of the parties
between whom the question of ratification may arise. 45
Nevertheless, this principle does not apply if the principal's
ignorance of the material facts and circumstances was willful, or
that the principal chooses to act in ignorance of the facts. 46
However, in the absence of circumstances putting a reasonably
prudent man on inquiry, ratification cannot be implied as against
the principal who is ignorant of the facts. 47
No ratification can be implied in the instant case.
A perusal of Baluyot's Answer 48 reveals that the real
arrangement between her and Atty. Linsangan was for the latter
to pay a monthly installment of P1,800.00 whereas Baluyot was
to shoulder the counterpart amount of P1,455.00 to meet the

P3,255.00 monthly installments as indicated in the contract.

Thus, every time an installment falls due, payment was to be
made through a check from Atty. Linsangan for P1,800.00 and a
cash component of P1,455.00 from Baluyot. 49 However, it
appears that while Atty. Linsangan issued the post-dated checks,
Baluyot failed to come up with her part of the bargain. This was
supported by Baluyot's statements in her letter 50 to Mr. Clyde
Williams, Jr., Sales Manager of MMPCI, two days after she
received the copy of the Complaint. In the letter, she admitted
that she was remiss in her duties when she consented to Atty.
Linsangan's proposal that he will pay the old price while the
difference will be shouldered by her. She likewise admitted that
the contract suffered arrearages because while Atty. Linsangan
issued the agreed checks, she was unable to give her share of
P1,455.00 due to her own financial difficulties. Baluyot even
asked for compassion from MMPCI for the error she committed.
aECTcA
Atty. Linsangan failed to show that MMPCI had knowledge of the
arrangement. As far as MMPCI is concerned, the contract price
was P132,250.00, as stated in the Offer to Purchase signed by
Atty. Linsangan and MMPCI's authorized officer. The down
payment of P19,838.00 given by Atty. Linsangan was in
accordance with the contract as well. Payments of P3,235.00 for
at least two installments were likewise in accord with the
contract, albeit made through a check and partly in cash. In view
of Baluyot's failure to give her share in the payment, MMPCI
received only P1,800.00 checks, which were clearly insufficient
payment. In fact, Atty. Linsangan would have incurred arrearages
that could have caused the earlier cancellation of the contract, if
not for MMPCI's application of some of the checks to his account.
However, the checks alone were not sufficient to cover his
obligations.

If MMPCI was aware of the arrangement, it would have refused

the latter's check payments for being insufficient. It would not
have applied to his account the P1,800.00 checks. Moreover, the
fact that Baluyot had to practically explain to MMPCI's Sales
Manager the details of her "arrangement" with Atty. Linsangan
and admit to having made an error in entering such arrangement
confirm that MMCPI had no knowledge of the said agreement. It
was only when Baluyot filed her Answer that she claimed that
MMCPI was fully aware of the agreement.
Neither is there estoppel in the instant case. The essential
elements of estoppel are (i) conduct of a party amounting to false
representation or concealment of material facts or at least
calculated to convey the impression that the facts are otherwise
than, and inconsistent with, those which the party subsequently
attempts to assert; (ii) intent, or at least expectation, that this
conduct shall be acted upon by, or at least influence, the other
party; and (iii) knowledge, actual or constructive, of the real
facts. 51
While there is no more question as to the agency relationship
between Baluyot and MMPCI, there is no indication that MMPCI let
the public, or specifically, Atty. Linsangan to believe that Baluyot
had the authority to alter the standard contracts of the company.
Neither is there any showing that prior to signing Contract No.
28660, MMPCI had any knowledge of Baluyot's commitment to
Atty. Linsangan. One who claims the benefit of an estoppel on the
ground that he has been misled by the representations of
another must not have been misled through his own want of
reasonable care and circumspection. 52 Even assuming that Atty.
Linsangan was misled by MMPCI's actuations, he still cannot
invoke the principle of estoppel, as he was clearly negligent in his
dealings with Baluyot, and could have easily determined, had he
only been cautious and prudent, whether said agent was clothed

with the authority to change the terms of the principal's written

contract. Estoppel must be intentional and unequivocal, for when
misapplied, it can easily become a most convenient and effective
means of injustice. 53 In view of the lack of sufficient proof
showing estoppel, we refuse to hold MMPCI liable on this score.
IScaAE
Likewise, this Court does not find favor in the Court of Appeals'
findings that "the authority of defendant Baluyot may not have
been expressly conferred upon her; however, the same may have
been derived impliedly by habit or custom which may have been
an accepted practice in their company in a long period of time."
A perusal of the records of the case fails to show any indication
that there was such a habit or custom in MMPCI that allows its
agents to enter into agreements for lower prices of its interment
spaces, nor to assume a portion of the purchase price of the
interment spaces sold at such lower price. No evidence was ever
presented to this effect.
As the Court sees it, there are two obligations in the instant case.
One is the Contract No. 28660 between MMPCI and by Atty.
Linsangan for the purchase of an interment space in the former's
cemetery. The other is the agreement between Baluyot and Atty.
Linsangan for the former to shoulder the amount P1,455.00, or
the difference between P95,000.00, the original price, and
P132,250.00, the actual contract price.

To repeat, the acts of the agent beyond the scope of his authority
do not bind the principal unless the latter ratifies the same. It
also bears emphasis that when the third person 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 was 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. 54
This Court finds that Contract No. 28660 was validly entered into
both by MMPCI and Atty. Linsangan. By affixing his signature in
the contract, Atty. Linsangan assented to the terms and
conditions thereof. When Atty. Linsangan incurred delinquencies
in payment, MMCPI merely enforced its rights under the said
contract by canceling the same. HTSaEC
Being aware of the limits of Baluyot's authority, Atty. Linsangan
cannot insist on what he claims to be the terms of Contract No.
28660. The agreement, insofar as the P95,000.00 contract price
is concerned, is void and cannot be enforced as against MMPCI.
Neither can he hold Baluyot liable for damages under the same
contract, since there is no evidence showing that Baluyot
undertook to secure MMPCI's ratification. At best, the
"agreement" between Baluyot and Atty. Linsangan bound only
the two of them. As far as MMPCI is concerned, it bound itself to
sell its interment space to Atty. Linsangan for P132,250.00 under
Contract No. 28660, and had in fact received several payments in
accordance with the same contract. If the contract was cancelled
due to arrearages, Atty. Linsangan's recourse should only be
against Baluyot who personally undertook to pay the difference
between the true contract price of P132,250.00 and the original
proposed price of P95,000.00. To surmise that Baluyot was acting
on behalf of MMPCI when she promised to shoulder the said
difference would be to conclude that MMPCI undertook to pay

itself the difference, a conclusion that is very illogical, if not

antithetical to its business interests.
However, this does not preclude Atty. Linsangan from instituting
a separate action to recover damages from Baluyot, not as an
agent of MMPCI, but in view of the latter's breach of their
separate agreement. To review, Baluyot obligated herself to pay
P1,455.00 in addition to Atty. Linsangan's P1,800.00 to complete
the monthly installment payment under the contract, which, by
her own admission, she was unable to do due to personal
financial difficulties. It is undisputed that Atty. Linsangan issued
the P1,800.00 as agreed upon, and were it not for Baluyot's
failure to provide the balance, Contract No. 28660 would not
have been cancelled. Thus, Atty. Linsangan has a cause of action
against Baluyot, which he can pursue in another case.
WHEREFORE, the instant petition is GRANTED. The Decision of
the Court of Appeals dated 22 June 2001 and its Resolution dated
12 December 2001 in CA-G.R. CV No. 49802, as well as the
Decision in Civil Case No. 88-1253 of the Regional Trial Court,
Makati City Branch 57, are hereby REVERSED and SET ASIDE. The
Complaint in Civil Case No. 88-1253 is DISMISSED for lack of
cause of action. No pronouncement as to costs. ScCEIA
SO ORDERED.

FIRST DIVISION
[G.R. No. L-57339. December 29, 1983.]
AIR FRANCE, petitioner, vs. HONORABLE COURT OF APPEALS,
JOSE G. GANA, (Deceased), CLARA A. GANA, RAMON GANA,
MANUEL GANA, MARIA TERESA GANA, ROBERTO GANA, JAIME
JAVIER GANA, CLOTILDE VDA. DE AREVALO, and EMILY SAN JUAN,
respondents.
Benjamin S. Valte for petitioner.
Napoleon Garcia for private respondents.
SYLLABUS
1.
CIVIL LAW; OBLIGATIONS AND CONTRACT; CONTRACT OF
CARRIAGE; AIRPLANE TICKET; NO LONGER VALID FOR TRAVEL IF
IT HAS EXPIRED BEFORE COMPLETION OF TRIP. Pursuant to
tariff rules and regulations of the International Air Transportation
Association (IATA), included in paragraphs 9, 10, and 11 of the
Stipulations of Fact between the parties in the Trial Court, dated
31 March 1973, an airplane ticket is valid for one year. The
passenger must undertake the final portion of his journey by
departing from the last point at which he has made a voluntary
stop before the expiry of this limit (parag. 3.1.2) That is the time
allowed a passenger to begin and to complete his trip (parags.
3.2 and 3.3). . . . A ticket can no longer be used for travel if its
validity has expired before the passenger completes his trip
(parag. 3.5.1). . . . To complete the trip, the passenger must
purchase a new ticket for the remaining portion of the journey."
2.
ID.; ID.; ID.; ID.; DISHONOR OF TICKET UPON EXPIRATION
NOT A BREACH OF CONTRACT. From the foregoing rules, it is
clear that AIR FRANCE cannot be faulted for breach of contract

when it dishonored the tickets of the GANAS after 8 May 1971

since those tickets expired on said date; nor when it required the
GANAS to buy new tickets or have their tickets re-issued for the
Tokyo/Manila segment of their trip. Neither can it be said that,
when upon sale of the new tickets, it imposed additional charges
representing fare differentials, it was motivated by self-interest or
unjust enrichment considering that an increase of fares took
effect, as authorized by the Civil Aeronautics Board (CAB) in April,
1971. This procedure is well in accord with the IATA tariff rules.
3.
ID.; AGENCY; NOTICE TO AGENT CONSIDERED NOTICE TO
PRINCIPAL. The ruling relied on by respondent Appellate Court,
therefore, in KLM vs Court of Appeals, 65 SCRA 237(1975),
holding that it would be unfair to charge respondents therein with
automatic knowledge or notice of conditions in contracts of
adhesion, is inapplicable. To all legal intents and purposes,
Teresita was the agent of the GANAS and notice to her of the
rejection of the request for extension of the validity of the tickets
was notice to the GANAS, her principals.
DECISION
MELENCIO-HERRERA, J p:
In this petition for review on certiorari, petitioner AIR FRANCE
assails the Decision of then respondent Court of Appeals 1
promulgated on 15 December 1980 in CA-G.R. No. 58164-R,
entitled "Jose G. Gana, et al. vs. Sociedad Nacionale Air France",
which reversed the Trial Court's judgment dismissing the
Complaint of private respondents for damages arising from
breach of contract of carriage, and awarding instead P90,000.00
as moral damages.
Sometime in February, 1970, the late Jose G. Gana and his
family, numbering nine (the GANAS), purchased from AIR FRANCE

through Imperial Travels, Incorporated, a duly authorized travel

agent, nine (9) "open-dated" air passage tickets for the
Manila/Osaka/Tokyo/Manila route. The GANAS paid a total of
US$2,528.85 for their economy and first class fares. Said tickets
were bought at the then prevailing exchange rate of P3.90 per
US$1.00. The GANAS also paid travel taxes of P100.00 for each
passenger.
On 24 April 1970, AIR FRANCE exchanged or substituted the
aforementioned tickets with other tickets for the same route. At
this time, the GANAS were booked for the Manila/Osaka segment
on AIR FRANCE Flight 184 for 8 May 1970, and for the
Tokyo/Manila return trip on AIR FRANCE Flight 187 on 22 May
1970. The aforesaid tickets were valid until 8 May 1971, the date
written under the printed words "Non valable apres de"
(meaning, "not valid after the"). LibLex
The GANAS did not depart on 8 May 1970.
Sometime in January, 1971, Jose Gana sought the assistance of
Teresita Manucdoc, a Secretary of the Sta. Clara Lumber
Company where Jose Gana was the Director and Treasurer, for
the extension of the validity of their tickets, which were due to
expire on 8 May 1971. Teresita enlisted the help of Lee Ella,
Manager of the Philippine Travel Bureau, who used to handle
travel arrangements for the personnel of the Sta. Clara Lumber
Company. Ella sent the tickets to Cesar Rillo, Office Manager of
AIR FRANCE. The tickets were returned to Ella who was informed
that extension was not possible unless the fare differentials
resulting from the increase in fares triggered by an increase of
the exchange rate of the US dollar to the Philippine peso and the
increased travel tax were first paid. Ella then returned the tickets
to Teresita and informed her of the impossibility of extension.

In the meantime, the GANAS had scheduled their departure on 7

May 1971 or one day before the expiry date. In the morning of
the very day of their scheduled departure on the first leg of their
trip, Teresita requested travel agent Ella to arrange the
revalidation of the tickets. Ella gave the same negative answer
and warned her that although the tickets could be used by the
GANAS if they left on 7 May 1971, the tickets would no longer be
valid for the rest of their trip because the tickets would then have
expired on 8 May 1971. Teresita replied that it will be up to the
GANAS to make the arrangements. With that assurance, Ella, on
his own, attached to the tickets validating stickers for the
Osaka/Tokyo flight, one a JAL sticker and the other an SAS
(Scandinavian Airways System) sticker. The SAS sticker indicates
thereon that it was "Revalidated by: the Philippine Travel Bureau,
Branch No. 2" (as shown by a circular rubber stamp) and signed
"Ador", and the date is handwritten in the center of the circle.
Then appear under printed headings the notations: JL 108
(Flight), 16 May (Date), 1040 (Time), OK (status). Apparently, Ella
made no more attempt to contact AIR FRANCE as there was no
more time.
Notwithstanding the warnings, the GANAS departed from Manila
in the afternoon of 7 May 1971 on board AIR FRANCE Flight 184
for Osaka, Japan. There is no question with respect to this leg of
the trip.
However, for the Osaka/Tokyo flight on 17 May 1971, Japan
Airlines refused to honor the tickets because of their expiration,
and the GANAS had to purchase new tickets. They encountered
the same difficulty with respect to their return trip to Manila as
AIR FRANCE also refused to honor their tickets. They were able to
return only after pre-payment in Manila, through their relatives,
of the readjusted rates. They finally flew back to Manila on

separate Air France Flights on 19 May 1971 for Jose Gana and 26
May 1971 for the rest of the family.
On 25 August 1971, the GANAS commenced before the then
Court of First Instance of Manila, Branch III, Civil Case No. 84111
for damages arising from breach of contract of carriage.
AIR FRANCE traversed the material allegations of the Complaint
and alleged that the GANAS brought upon themselves the
predicament they found themselves in and assumed the
consequential risks; that travel agent Ella's affixing of validating
stickers on the tickets without the knowledge and consent of AIR
FRANCE, violated airline tariff rules and regulations and was
beyond the scope of his authority as a travel agent; and that AIR
FRANCE was not guilty of any fraudulent conduct or bad faith.
On 29 May 1975, the Trial Court dismissed the Complaint based
on Partial and Additional Stipulations of Fact as well as on the
documentary and testimonial evidence.
The GANAS appealed to respondent Appellate Court. During the
pendency of the appeal, Jose Gana, the principal plaintiff, died.
On 15 December 1980, respondent Appellate Court set aside and
reversed the Trial Court's judgment in a Decision, which decreed:
prLL
"WHEREFORE, the decision appealed from is set aside. Air France
is hereby ordered to pay appellants moral damages in the total
sum of NINETY THOUSAND PESOS (P90,000.00) plus costs."
"SO ORDERED." 2

Reconsideration sought by AIR FRANCE was denied, hence,

petitioner's recourse before this instance, to which we gave due
course.
The crucial issue is whether or not, under the environmental
milieu, the GANAS have made out a case for breach of contract of
carriage entitling them to an award of damages.
We are constrained to reverse respondent Appellate Court's
affirmative ruling thereon.
Pursuant to tariff rules and regulations of the International Air
Transportation Association (IATA), included in paragraphs 9, 10,
and 11 of the Stipulations of Fact between the parties in the Trial
Court, dated 31 March 1973, an airplane ticket is valid for one
year. "The passenger must undertake the final portion of his
journey by departing from the last point at which he has made a
voluntary stop before the expiry of this limit (parag. 3.1.2) . . .
That is the time allowed a passenger to begin and to complete
his trip (parags. 3.2 and 3.3.). . . . A ticket can no longer be used
for travel if its validity has expired before the passenger
completes his trip (parag. 3.5.1). . . . To complete the trip, the
passenger must purchase a new ticket for the remaining portion
of the journey" (ibid.) 3
From the foregoing rules, it is clear that AIR FRANCE cannot be
faulted for breach of contract when it dishonored the tickets of
the GANAS after 8 May 1971 since those tickets expired on said
date; nor when it required the GANAS to buy new tickets or have
their tickets re-issued for the Tokyo/Manila segment of their trip.
Neither can it be said that, when upon sale of the new tickets, it
imposed additional charges representing fare differentials, it was
motivated by self-interest or unjust enrichment considering that
an increase of fares took effect, as authorized by the Civil

Aeronautics Board (CAB) in April, 1971. This procedure is well in

accord with the IATA tariff rules which provide:
"6.

TARIFF RULES

"3.

APPLICABLE FARE ON THE DATE OF DEPARTURE

"3.1

General Rule.

"All journeys must be charged for at the fare (or charge) in effect
on the date on which transportation commences from the point
of origin. Any ticket sold prior to a change of fare or charge
(increase or decrease) occurring between the date of
commencement of the journey, is subject to the above general
rule and must be adjusted accordingly. A new ticket must be
issued and the difference is to be collected or refunded as the
case may be. No adjustment is necessary if the increase or
decrease in fare (or charge) occurs when the journey is already
commenced." 4
The GANAS cannot defend by contending lack of knowledge of
those rules since the evidence bears out that Teresita, who
handled travel arrangements for the GANAS, was duly informed
by travel agent Ella of the advice of Rillo, the Office Manager of
Air France, that the tickets in question could not be extended
beyond the period of their validity without paying the fare
differentials and additional travel taxes brought about by the
increased fare rate and travel taxes.
"ATTY. VALTE
"Q
What did you tell Mrs. Manucdoc, in turn, after being told
this by Mr. Rillo?

"A
I told her, because that is the reason why they accepted
again the tickets when we returned the tickets again, that they
could not be extended. They could be extended by paying the
additional fare, additional tax and additional exchange during
that time.
"Q

You said so to Mrs. Manucdoc?

"A

Yes, sir." . . . 5

The ruling relied on by respondent Appellate Court, therefore, in

KLM vs. Court of Appeals, 65 SCRA 237 (1975), holding that it
would be unfair to charge respondents therein with automatic
knowledge or notice of conditions in contracts of adhesion, is
inapplicable. To all legal intents and purposes, Teresita was the
agent of the GANAS and notice to her of the rejection of the
request for extension of the validity of the tickets was notice to
the GANAS, her principals. LLphil
The SAS validating sticker for the Osaka/Tokyo flight affixed by
Ella showing reservations for JAL Flight 108 for 16 May 1971,
without clearing the same with AIR FRANCE allegedly because of
the imminent departure of the GANAS on the same day so that
he could not get in touch with Air France, 6 was certainly in
contravention of IATA rules although as he had explained, he did
so upon Teresita's assurance that for the onward flight from
Osaka and return, the GANAS would make other arrangements.
"Q
Referring you to page 33 of the transcript of the last
session, I had this question which reads as follows: 'But did she
say anything to you when you said that the tickets were about to
expire?' Your answer was: 'I am the one who asked her. At that
time I told her if the tickets being used . . . I was telling her what
about their bookings on the return. What about their travel on
the return? She told me it is up for the Ganas to make the

arrangement.' May I know from you what did you mean by this
testimony of yours?
"A
That was on the day when they were asking me on May 7,
1971 when they were checking the tickets. I told Mrs. Manucdoc
that I was going to get the tickets. I asked her what about the
tickets onward from the return from Tokyo, and her answer was it
is up for the Ganas to make the arrangement, because I told her
that they could leave on the seventh, but they could take care of
that when they arrived in Osaka.
"Q

What do you mean?

"A
The Ganas will make the arrangement from Osaka, Tokyo
and Manila.
"Q

What arrangement?

"A
The arrangement for the airline because the tickets would
expire on May 7, and they insisted on leaving. I asked Mrs.
Manucdoc what about the return onward portion because they
would be traveling to Osaka, and her answer was, it is up for the
Ganas to make the arrangement.
"Q
Exactly what were the words of Mrs. Manucdoc when you
told her that? If you can remember, what were her exact words?
"A
Her words only, it is up for the Ganas to make the
arrangement.
"Q

This was in Tagalog or in English?

"A

I think it was in English. . . . 7

The circumstance that AIR FRANCE personnel at the ticket

counter in the airport allowed the GANAS to leave is not

tantamount to an implied ratification of travel agent Ella's

irregular actuations. It should be recalled that the GANAS left
Manila the day before the expiry date of their tickets and that
"other arrangements" were to be made with respect to the
remaining segments. Besides, the validating stickers that Ella
affixed on his own merely reflect the status of reservations on the
specified flight and could not legally serve to extend the validity
of a ticket or revive an expired one.
The conclusion is inevitable that the GANAS brought upon
themselves the predicament they were in for having insisted on
using tickets that were due to expire in an effort, perhaps, to beat
the deadline and in the thought that by commencing the trip the
day before the expiry date, they could complete the trip even
thereafter. It should be recalled that AIR FRANCE was even
unaware of the validating SAS and JAL stickers that Ella had
affixed spuriously. Consequently, Japan Air Lines and AIR FRANCE
merely acted within their contractual rights when they
dishonored the tickets on the remaining segments of the trip and
when AIR FRANCE demanded payment of the adjusted fare rates
and travel taxes for the Tokyo/Manila flight.
WHEREFORE, the judgment under review is hereby reversed and
set aside, and the Amended Complaint filed by private
respondents hereby dismissed.
No costs.
SO ORDERED.

THIRD DIVISION
[G.R. No. 161757. January 25, 2006.]
SUNACE INTERNATIONAL MANAGEMENT SERVICES, INC.,
petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION,
Second Division; HON. ERNESTO S. DINOPOL, in his capacity as
Labor Arbiter, NLRC; NCR, Arbitration Branch, Quezon City and
DIVINA A. MONTEHERMOZO, respondents.
Gaspar V. Tagalo for petitioner.
The Solicitor General for public respondents.
Neva B. Biancaver for private respondent.
SYLLABUS
1.
CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS
ARE BINDING ONLY TO PARTIES OR THOSE PRIVY THERETO; CASE
AT BAR. The finding of the Court of Appeals solely on the basis
of the above-quoted telefax message, that Sunace continually
communicated with the foreign "principal" (sic) and therefore was
aware of and had consented to the execution of the extension of
the contract is misplaced. The message does not provide
evidence that Sunace was privy to the new contract executed
after the expiration on February 1, 1998 of the original contract.
That Sunace and the Taiwanese broker communicated regarding
Divina's allegedly withheld savings does not necessarily mean
that Sunace ratified the extension of the contract. . . . There
being no substantial proof that Sunace knew of and consented to
be bound under the 2-year employment contract extension, it
cannot be said to be privy thereto. As such, it and its "owner"
cannot be held solidarily liable for any of Divina's claims arising

from the 2-year employment extension as [Article 1311 of the]

New Civil Code provides.
2.
ID.; SPECIAL CONTRACTS; AGENCY, IMPLIEDLY REVOKED
WHEN THE PRINCIPAL DIRECTLY MANAGES THE BUSINESS
ENTRUSTED TO THE AGENT AND DEALS DIRECTLY WITH THIRD
PERSONS; CASE AT BAR. As Sunace correctly points out, there
was an implied revocation of its agency relationship with its
foreign principal when, after the termination of the original
employment contract, the foreign principal directly negotiated
with Divina and entered into a new and separate employment
contract in Taiwan. Article 1924 of the New Civil Code reading
"the agency is revoked if the principal directly manages the
business entrusted to the agent, dealing directly with third
persons," thus applies. cEISAD
DECISION
CARPIO MORALES, J p:
Petitioner, Sunace International Management Services (Sunace),
a corporation duly organized and existing under the laws of the
Philippines, deployed to Taiwan Divina A. Montehermozo (Divina)
as a domestic helper under a 12-month contract effective
February 1, 1997. 1 The deployment was with the assistance of a
Taiwanese broker, Edmund Wang, President of Jet Crown
International Co., Ltd. ITHADC
After her 12-month contract expired on February 1, 1998, Divina
continued working for her Taiwanese employer, Hang Rui Xiong,
for two more years, after which she returned to the Philippines on
February 4, 2000.
Shortly after her return or on February 14, 2000, Divina filed a
complaint 2 before the National Labor Relations Commission

(NLRC) against Sunace, one Adelaide Perez, the Taiwanese

broker, and the employer-foreign principal alleging that she was
jailed for three months and that she was underpaid.

FOR THE REFUND OF HER 24 MONTHS

The following day or on February 15, 2000, Labor Arbitration

Associate Regina T. Gavin issued Summons 3 to the Manager of
Sunace, furnishing it with a copy of Divina's complaint and
directing it to appear for mandatory conference on February 28,
2000.

3.
Complainant could not anymore claim nor entitled for the
refund of her 24 months savings as she already took back her
saving already last year and the employer did not deduct any
money from her salary, in accordance with a Facsimile Message
from the respondent SUNACE's employer, Jet Crown International
Co. Ltd., a xerographic copy of which is herewith attached as
ANNEX "2" hereof;

The scheduled mandatory conference was reset. It appears to

have been concluded, however.
On April 6, 2000, Divina filed her Position Paper 4 claiming that
under her original one-year contract and the 2-year extended
contract which was with the knowledge and consent of Sunace,
the following amounts representing income tax and savings were
deducted:
Year

Deduction for Deduction for Savings

Income Tax

1997

NT10,450.00 NT23,100.00

1998

NT9,500.00

1999

NT13,300.00 NT36,000.00; 5

NT36,000.00

and while the amounts deducted in 1997 were refunded to her,

those deducted in 1998 and 1999 were not. On even date,
Sunace, by its Proprietor/General Manager Maria Luisa Olarte,
filed its Verified Answer and Position Paper, 6 claiming as follows,
quoted verbatim:
COMPLAINANT IS NOT ENTITLED

SAVINGS

COMPLAINANT IS NOT ENTITLED

TO REFUND OF HER 14 MONTHS TAX
AND PAYMENT OF ATTORNEY'S FEES
4.
There is no basis for the grant of tax refund to the
complainant as the she finished her one year contract and hence,
was not illegally dismissed by her employer. She could only lay
claim over the tax refund or much more be awarded of damages
such as attorney's fees as said reliefs are available only when the
dismissal of a migrant worker is without just valid or lawful cause
as defined by law or contract.
The rationales behind the award of tax refund and payment of
attorney's fees is not to enrich the complainant but to
compensate him for actual injury suffered. Complainant did not
suffer injury, hence, does not deserve to be compensated for
whatever kind of damages. ACTIHa
Hence, the complainant has NO cause of action against
respondent SUNACE for monetary claims, considering that she

has been totally paid of all the monetary benefits due her under
her Employment Contract to her full satisfaction.
6.
Furthermore, the tax deducted from her salary is in
compliance with the Taiwanese law, which respondent SUNACE
has no control and complainant has to obey and this Honorable
Office has no authority/jurisdiction to intervene because the
power to tax is a sovereign power which the Taiwanese
Government is supreme in its own territory. The sovereign power
of taxation of a state is recognized under international law and
among sovereign states.

The Labor Arbiter, rejected Sunace's claim that the extension of

Divina's contract for two more years was without its knowledge
and consent in this wise:
We reject Sunace's submission that it should not be held
responsible for the amount withheld because her contract was
extended for 2 more years without its knowledge and consent
because as Annex "B" 9 shows, Sunace and Edmund Wang have
not stopped communicating with each other and yet the matter
of the contract's extension and Sunace's alleged non-consent
thereto has not been categorically established.

7.
That respondent SUNACE respectfully reserves the right to
file supplemental Verified Answer and/or Position Paper to
substantiate its prayer for the dismissal of the above case
against the herein respondent. AND BY WAY OF

What Sunace should have done was to write to POEA about the
extension and its objection thereto, copy furnished the
complainant herself, her foreign employer, Hang Rui Xiong and
the Taiwanese broker, Edmund Wang.

xxx
supplied)

And because it did not, it is presumed to have consented to the

extension and should be liable for anything that resulted
thereform (sic). 10 (Underscoring supplied)

xxx

xxx (Emphasis and underscoring

Reacting to Divina's Position Paper, Sunace filed on April 25, 2000

an ". . . ANSWER TO COMPLAINANT'S POSITION PAPER" 7 alleging
that Divina's 2-year extension of her contract was without its
knowledge and consent, hence, it had no liability attaching to
any claim arising therefrom, and Divina in fact executed a
Waiver/Quitclaim and Release of Responsibility and an Affidavit of
Desistance, copy of each document was annexed to said ". . .
ANSWER TO COMPLAINANT'S POSITION PAPER."
To Sunace's ". . . ANSWER TO COMPLAINANT'S POSITION PAPER,"
Divina filed a 2-page reply, 8 without, however, refuting Sunace's
disclaimer of knowledge of the extension of her contract and
without saying anything about the Release, Waiver and Quitclaim
and Affidavit of Desistance.

The Labor Arbiter rejected too Sunace's argument that it is not

liable on account of Divina's execution of a Waiver and Quitclaim
and an Affidavit of Desistance. Observed the Labor Arbiter:
Should the parties arrive at any agreement as to the whole or
any part of the dispute, the same shall be reduced to writing and
signed by the parties and their respective counsel (sic), if any,
before the Labor Arbiter.
The settlement shall be approved by the Labor Arbiter after being
satisfied that it was voluntarily entered into by the parties and
after having explained to them the terms and consequences
thereof. DAcSIC

A compromise agreement entered into by the parties not in the

presence of the Labor Arbiter before whom the case is pending
shall be approved by him, if after confronting the parties,
particularly the complainants, he is satisfied that they
understand the terms and conditions of the settlement and that it
was entered into freely voluntarily (sic) by them and the
agreement is not contrary to law, morals, and public policy.
And because no consideration is indicated in the documents, we
strike them down as contrary to law, morals, and public policy. 11
He accordingly decided in favor of Divina, by decision of October
9, 2000, 12 the dispositive portion of which reads:
Wherefore, judgment is hereby rendered ordering respondents
SUNACE INTERNATIONAL SERVICES and its owner ADELAIDA
PERGE, both in their personal capacities and as agent of Hang Rui
Xiong/Edmund Wang to jointly and severally pay complainant
DIVINA A. MONTEHERMOZO the sum of NT91,950.00 in its peso
equivalent at the date of payment, as refund for the amounts
which she is hereby adjudged entitled to as earlier discussed plus
10% thereof as attorney's fees since compelled to litigate,
complainant had to engage the services of counsel.
SO ORDERED. 13 (Underscoring supplied)
On appeal of Sunace, the NLRC, by Resolution of April 30, 2002,
14 affirmed the Labor Arbiter's decision.
Via petition for certiorari, 15 Sunace elevated the case to the
Court of Appeals which dismissed it outright by Resolution of
November 12, 2002, 16 the full text of which reads:
The petition for certiorari faces outright dismissal.

The petition failed to allege facts constitutive of grave abuse of

discretion on the part of the public respondent amounting to lack
of jurisdiction when the NLRC affirmed the Labor Arbiter's finding
that petitioner Sunace International Management Services
impliedly consented to the extension of the contract of private
respondent Divina A. Montehermozo. It is undisputed that
petitioner was continually communicating with private
respondent's foreign employer (sic). As agent of the foreign
principal, "petitioner cannot profess ignorance of such extension
as obviously, the act of the principal extending complainant (sic)
employment contract necessarily bound it." Grave abuse of
discretion is not present in the case at bar.
ACCORDINGLY, the petition is hereby DENIED DUE COURSE and
DISMISSED. 17
SO ORDERED.
(Emphasis on words in capital letters in the original; emphasis on
words in small letters and underscoring supplied)
Its Motion for Reconsideration having been denied by the
appellate court by Resolution of January 14, 2004, 18 Sunace
filed the present petition for review on certiorari.
The Court of Appeals affirmed the Labor Arbiter and NLRC's
finding that Sunace knew of and impliedly consented to the
extension of Divina's 2-year contract. It went on to state that "It
is undisputed that [Sunace] was continually communicating with
[Divina's] foreign employer." It thus concluded that "[a]s agent of
the foreign principal, 'petitioner cannot profess ignorance of such
extension as obviously, the act of the principal extending
complainant (sic) employment contract necessarily bound it.'"

Contrary to the Court of Appeals finding, the alleged continuous

communication was with the Taiwanese broker Wang, not with
the foreign employer Xiong. DEICTS
The February 21, 2000 telefax message from the Taiwanese
broker to Sunace, the only basis of a finding of continuous
communication, reads verbatim:
xxx

xxx

xxx

Regarding to Divina, she did not say anything about her saving in
police station. As we contact with her employer, she took back
her saving already last years. And they did not deduct any
money from her salary. Or she will call back her employer to
check it again. If her employer said yes! we will get it back for
her.
Thank you and best regards.
(sgd.)
Edmund Wang
President 19

The finding of the Court of Appeals solely on the basis of the

above-quoted telefax message, that Sunace continually
communicated with the foreign "principal" (sic) and therefore was
aware of and had consented to the execution of the extension of
the contract is misplaced. The message does not provide
evidence that Sunace was privy to the new contract executed
after the expiration on February 1, 1998 of the original contract.
That Sunace and the Taiwanese broker communicated regarding
Divina's allegedly withheld savings does not necessarily mean
that Sunace ratified the extension of the contract. As Sunace
points out in its Reply 20 filed before the Court of Appeals,
As can be seen from that letter communication, it was just an
information given to the petitioner that the private respondent
had t[aken] already her savings from her foreign employer and
that no deduction was made on her salary. It contains nothing
about the extension or the petitioner's consent thereto. 21
Parenthetically, since the telefax message is dated February 21,
2000, it is safe to assume that it was sent to enlighten Sunace
who had been directed, by Summons issued on February 15,
2000, to appear on February 28, 2000 for a mandatory
conference following Divina's filing of the complaint on February
14, 2000.
Respecting the Court of Appeals following dictum:
As agent of its foreign principal, [Sunace] cannot profess
ignorance of such an extension as obviously, the act of its
principal extending [Divina's] employment contract necessarily
bound it, 22
it too is a misapplication, a misapplication of the theory of
imputed knowledge.

The theory of imputed knowledge ascribes the knowledge of the

agent, Sunace, to the principal, employer Xiong, not the other
way around. 23 The knowledge of the principal-foreign employer
cannot, therefore, be imputed to its agent Sunace.

WHEREFORE, the petition is GRANTED. The challenged

resolutions of the Court of Appeals are hereby REVERSED and
SET ASIDE. The complaint of respondent Divina A. Montehermozo
against petitioner is DISMISSED.

There being no substantial proof that Sunace knew of and

consented to be bound under the 2-year employment contract
extension, it cannot be said to be privy thereto. As such, it and its
"owner" cannot be held solidarily liable for any of Divina's claims
arising from the 2-year employment extension. As the New Civil
Code provides,

SO ORDERED.

Contracts take effect only between the parties, their assigns, and
heirs, except in case where the rights and obligations arising
from the contract are not transmissible by their nature, or by
stipulation or by provision of law. 24
Furthermore, as Sunace correctly points out, there was an
implied revocation of its agency relationship with its foreign
principal when, after the termination of the original employment
contract, the foreign principal directly negotiated with Divina and
entered into a new and separate employment contract in Taiwan.
Article 1924 of the New Civil Code reading
The agency is revoked if the principal directly manages the
business entrusted to the agent, dealing directly with third
persons. SIAEHC
thus applies.
In light of the foregoing discussions, consideration of the validity
of the Waiver and Affidavit of Desistance which Divina executed
in favor of Sunace is rendered unnecessary.

EN BANC
[G.R. No. L-24833. September 23, 1968.]
FIELDMEN'S INSURANCE CO., INC., petitioner, vs. MERCEDES
VARGAS VDA. DE SONGCO, Et Al. and COURT OF APPEALS,
respondents.
Jose S. Suarez for petitioner.
Eligio G. Guzman for respondents.
SYLLABUS
1.
COMMERCIAL LAWS; INSURANCE CONTRACTS; COMMON
CARRIER LIABILITY INSURANCE; INSURER WHO REPRESENTS
INSURABILITY OF VEHICLE ESTOPPED FROM DENYING LIABILITY
THEREON. After petitioner FIELDMEN'S Insurance Co., Inc., had
led the insured Federico Songco to believe that he could qualify
under the common carrier liability insurance policy, and to enter
into contract of insurance paying the premiums due, it could not,
thereafter, in any litigation arising out of such representation, be
permitted to change its stand to the detriment of the heirs of the
insured. As estoppel is primarily based on the doctrine of good
faith and the avoidance of harm that will befall the innocent party
due to its injurious reliance, the failure to apply it in this case
would result in a gross travesty of justice.
2.
ID.; ID.; ID.; INSURER ESTOPPED FROM ASSERTING
BREACH OF IMPOSSIBLE CONDITION IN THE CONTRACT. Why
liability under the terms of the policy was inescapable was set
forth in the decision of respondent Court of Appeals: Thus: "Since
some of the conditions contained in the policy issued by the
defendant-appellant were impossible to comply with under the
existing conditions at the time and 'inconsistent with the known

facts,' the insurer 'is estopped from asserting breach of such

conditions. From this jurisprudence, we find no valid reason to
deviate and consequently hold that the decision appealed from
should be affirmed. The injured parties, to wit, Carlos Songco,
Angelito Songco and Jose Manuel, for whose hospital and medical
expenses the defendant company was being made liable, were
passengers of the jeepney at the time of the occurrence, and
Rodolfo Songco, for whose burial expenses the defendant
company was also being made liable, was the driver of the
vehicle in question. Except for the fact that they were not farepaying passengers, their status as beneficiaries under the policy
is recognized therein."
DECISION
FERNANDO, J p:
An insurance firm, petitioner FIELDMEN'S Insurance Co., Inc., was
not allowed to escape liability under a common carrier insurance
policy on the pretext that what was insured, not once but twice,
was a private vehicle and not a common carrier, the policy being
issued upon the insistence of its agent who discounted fears of
the insured that his privately owned vehicle might not fall within
its terms, the insured moreover being "a man of scant
education", finishing only the first grade. So it was held in a
decision of the lower court thereafter affirmed by respondent
Court of Appeals. Petitioner in seeking the review of the above
decision of respondent Court of Appeals cannot be sanguine as to
entertain the belief that a different outcome could be expected.
To be more explicit, we sustain the Court of Appeals.
The facts as found by respondent Court of Appeals, binding upon
us, follow: "This is a peculiar case. Federico Songco of
Floridablanca, Pampanga, a man of scant education, being only a

first grader . . ., owned a private jeepney with Plate No. 41-289

for the year 1960. On September 15, 1960, as such private
vehicle owner, he was induced by FIELDMEN'S Insurance
Company Pampanga agent Benjamin Sambat to apply for a
Common Carrier's Liability Insurance Policy covering his motor
vehicle .. Upon paying an annual premium of P16.50, defendant
FIELDMEN'S Insurance Company Inc. issued on September 19,
1960, Common Carriers Accident Insurance Policy No. 45-HO4254 . . . the duration of which will be for one (1) year, effective
September 15, 1960 to September 15, 1961. On September 22,
1961, the defendant company, upon payment of the
corresponding premium, renewed the policy by extending the
coverage from October 15, 1961 to October 15, 1962. This time
Federico Songco's private jeepney carried Plate No. J-68136Pampanga - 1961 . . . On October 29, 1961, during the effectivity
of the renewed policy, the insured vehicle while being driven by
Rodolfo Songco, a duly licensed driver and son of Federico (the
vehicle owner) collided with a car in the municipality of Calumpit,
province of Bulacan, as a result of which mishap Federico Songco
(father) and Rodolfo Songco (son) died, Carlos Songco (another
son), the latter's wife, Angelita Songco, and a family friend by the
name of Jose Manuel sustained physical injuries of varying
degrees." 1
It was further shown according to the decision of respondent
Court of Appeals: "Amor Songco, 42-year-old son of deceased
Federico Songco, testifying as witness, declared that when
insurance agent Benjamin Sambat was inducing his father to
insure his vehicle, he butted in saying: 'That cannot be, Mr.
Sambat, because our vehicle is an 'owner' private vehicle and not
for passengers,' to which agent Sambat replied: 'whether our
vehicle was an 'owner' type or for passengers it could be insured
because their company is not owned by the Government and the
Government has nothing to do with their company. So they could

do what they please whenever they believe a vehicle is insurable'

. . . In spite of the fact that the present case was filed and tried in
the CFI Pampanga, the defendant company did not even care to
rebut Amor Songco's testimony by calling on the witness-stand
agent Benjamin Sambat, its Pampanga Field Representative." 2
The plaintiffs in the lower court, likewise respondents here, were
the surviving widow and children of the deceased Federico
Songco as well as the injured passenger Jose Manuel. On the
above facts they prevailed, as had been mentioned, in the lower
court and in the respondent Court of Appeals.
The basis for the favorable judgment is the doctrine announced
in Qua Chee Gan vs. Law Union Bank and Rock Insurance Co.,
Ltd., 3 with Justice J.B.L. Reyes speaking for the Court. It is now
beyond question that where inequitable conduct is shown by an
insurance firm, it is "estopped from enforcing forfeitures in its
favor, in order to forestall fraud or imposition on the insured." 4
As much, if not much more so than the Qua Chee Gan decision,
his is a case where the doctrine of estoppel undeniably calls for
application. After petitioner FIELDMEN'S Insurance Co., Inc., had
led the insured Federico Songco to believe that he could qualify
under the common carrier liability insurance policy, and to enter
into contract of insurance paying the premiums due, it could not,
thereafter, in any litigation arising out of such representation, be
permitted to change its stand to the detriment of the heirs of the
insured. As estoppel is primarily based on the doctrine of good
faith and the avoidance of harm that will befall the innocent party
due to its injurious reliance, the failure to apply it in this case
would result in a gross travesty of justice.
That is all that needs be said insofar as the first alleged error of
respondent Court of Appeals is concerned, petitioner being

adamant in its far-from-reasonable plea that estoppel could not

be invoked by the heirs of the insured as a bar to the alleged
breach of warranty and condition in the policy. It would now rely
on the fact that the insured owned a private vehicle, not a
common carrier, something which it knew all along, when not
once but twice its agent, no doubt without any objection in its
part, exerted the utmost pressure on the insured, a man of scant
education, to enter into such a contract.

'memo of warranty' invoked by appellant bars the latter from

questioning the existence of the appliances called for in the
insured premises, since its initial expression, 'the under-noted
appliances for the extinction of fire being kept on the premises
insured hereby, . . . it is hereby warranted . . .', admits of
interpretation as an admission of the existence of such
appliances which appellant cannot now contradict, should the
parol evidence rule apply." 7

Nor is there any merit to the second alleged error of respondent

Court that no legal liability was incurred under the policy by
petitioner. Why liability under the terms of the policy 5 was
inescapable was set forth in the decision of respondent Court of
Appeals. Thus: "Since some of the conditions contained in the
policy issued by the defendant-appellant were impossible to
comply with under the existing conditions at the time and
'inconsistent with the known facts,' the insurer 'is estopped from
asserting breach of such conditions.' From this jurisprudence, we
find no valid reason to deviate and consequently hold that the
decision appealed from should be affirmed. The injured parties,
to wit, Carlos Songco, Angelito Songco and Jose Manuel, for
whose hospital and medical expenses the defendant company
was being made liable, were passengers of the jeepney at the
time of the occurrence, and Rodolfo Songco, for whose burial
expenses the defendant company was also being made liable
was the driver of the vehicle in question. Except for the fact, that
they were not fare-paying passengers, their status as
beneficiaries under the policy is recognized therein." 6

To the same effect is the following citation from the same leading
case: "This rigid application of the rule on ambiguities has
become necessary in view of current business practices. The
courts cannot ignore that nowadays monopolies, cartels and
concentrations of capital, endowed with overwhelming economic
power, manage to impose upon parties dealing with them
cunningly prepared 'agreements' that the weaker party may not
change one whit, his participation in the 'agreement' being
reduced to the alternative to 'take it or leave it' labelled since
Raymond Saleilles 'contracts by adherence' (contracts d'
adhesion), in contrast to these entered into by parties bargaining
on an equal footing, such contracts (of which policies of
insurance and international bills of lading are prime example)
obviously call for greater strictness and vigilance on the part of
courts of justice with a view to protecting the weaker party from
abuses and imposition, and prevent their becoming traps for the
unwary (New Civil Code, Article 24; Sent. of Supreme Court of
Spain, 13 Dec. 1934, 27 February 1942)." 8

Even if it be assumed that there was an ambiguity, an excerpt

from the Qua Chee Gan decision would reveal anew the
weakness of petitioner's contention. Thus: "Moreover, taking into
account the well known rule that ambiguities or obscurities must
be strictly interpreted against the party that caused them, the

The last error assigned which would find fault with the decision of
respondent Court of Appeals insofar as it affirmed the lower court
award for exemplary damages as well as attorney's fees is, on its
face, of no persuasive force at all.

The conclusion that inescapably emerges from the above is the

correctness of the decision of respondent Court of Appeals
sought to be reviewed. For, to borrow once again from the
language of the Qua Chee Gan opinion: "The contract of
insurance is one of perfect good faith (uberrima fides) not for the
insured alone, but equally so for the insurer; in fact, it is more so
for the latter, since its dominant bargaining, position carries with
it stricter responsibility." 9
This is merely to stress that while the morality of the business
world is not the morality of institutions of rectitude like the pulpit
and the academe, it cannot descend so low as to be another
name for guile or deception. Moreover, should it happen thus, no
court of justice should allow itself to lend its approval and
support.
We have no choice but to recognize the monetary responsibility
of petitioner FIELDMEN'S Insurance Co., Inc. It did not succeed in
its persistent effort to avoid complying with its obligation in the
lower court and the Court of Appeals. Much less should it find any
receptivity from us for its unwarranted and unjustified plea to
escape from its liability.
WHEREFORE, the decision of respondent Court of Appeals of July
20, 1965, is affirmed in its entirety. Costs against petitioner
FIELDMEN'S Insurance Co., Inc.

SECOND DIVISION
[G.R. No. 94071. March 31, 1992.]
NEW LIFE ENTERPRISES and JULIAN SY, petitioners, vs. HON.
COURT OF APPEALS, EQUITABLE INSURANCE CORPORATION,
RELIANCE SURETY AND INSURANCE CO., INC. and WESTERN
GUARANTY CORPORATION, respondents.
Alfredo I. Raya for petitioners.
Ambrocio Padilla, Mempin & Reyes Law Offices for private
respondents.
SYLLABUS
1.
COMMERCIAL LAW; INSURANCE; CO-INSURANCE;
KNOWLEDGE OF THE AGENT OF THE EXISTENCE THEREOF, NOT
KNOWLEDGE OF THE INSURANCE COMPANY; CASE AT BAR. The
terms of the contract are clear and unambiguous. The insured is
specifically required to disclose to the insurer any other
insurance and its particulars which he may have effected on the
same subject matter. The knowledge of such insurance by the
insurer's agents, even assuming the acquisition thereof by the
former, is not the "notice" that would estop the insurers from
denying the claim. Besides, the so-called theory of imputed
knowledge, that is, knowledge of the agent is knowledge of the
principal, aside from being of dubious applicability here has
likewise been roundly refuted by respondent court whose factual
findings we find acceptable. Thus, it points out that while
petitioner Julian Sy claimed that he had informed insurance agent
Alvarez regarding the co-insurance on the property, he
contradicted himself by inexplicably claiming that he had not
read the terms of the policies; that Yap Dam Chuan could not
likewise have obtained such knowledge for the same reason,

aside from the fact that the insurance with Western was obtained
before those of Reliance and Equitable; and that the conclusion
of the trial court that Reliance and Equitable are "sister
companies" is an unfounded conjecture drawn from the mere fact
that Yap Kam Chuan was an agent for both companies which also
had the same insurance claims adjuster. Availment of the
services of the same agents and adjusters by different
companies is a common practice in the insurance business and
such facts do not warrant the speculative conclusion of the trial
court.
2.
ID.; ID.; POLICY OR CONTRACT OF INSURANCE; RULE ON
CONSTRUCTION. When the words and language of documents
are clear and plain or readily understandable by an ordinary
reader thereof, there is absolutely no room for interpretation or
construction anymore. Courts are not allowed to make contracts
for the parties; rather, they will intervene only when the terms of
the policy are ambiguous, equivocal, or uncertain. The parties
must abide by the terms of the contract because such terms
constitute the measure of the insurer's liability and compliance
therewith is a condition precedent to the insured's right of
recovery from the insurer. While it is a cardinal principle of
insurance law that a policy or contract of insurance is to be
construed liberally in favor of the insured and strictly against the
insurer company, yet contracts of insurance, like other contracts,
are to be construed according to the sense and meaning of the
terms which the parties themselves have used. If such terms are
clear and unambiguous, they must be taken and understood in
their plain, ordinary and popular sense. Moreover, obligations
arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
3.
ID.; ID.; ID.; AS A GENERAL RULE, ACCEPTANCE OF THE
INSURED THEREOF WITHOUT READING IS NOT NEGLIGENCE PER

SE; CASE AT BAR, AN EXCEPTION. Petitioners should be aware

of the fact that a party is not relieved of the duty to exercise the
ordinary care and prudence that would be exacted in relation to
other contracts. The conformity of the insured to the terms of the
policy is implied from his failure to express any disagreement
with what is provided for. It may be true that the majority rule, as
cited by petitioners, is that insured persons may accept policies
without reading them, and that this is not negligence per se. But,
this is not without any exception. It is and was incumbent upon
petitioner Sy to read the insurance contracts, and this can be
reasonably expected of him considering that he has been a
businessman since 1965 and the contract concerns indemnity in
case of loss in his money-making trade of which important
consideration he could not have been unaware as it was precisely
the reason for his procuring the same.
4.
ID.; ID.; PRESCRIPTIVE PERIOD FOR FILING AN ACTION
AGAINST INSURANCE COMPANY FOR DENIAL OF CLAIM. "It is
important to note the principle laid down by this Court in the
case of Ang vs. Fulton Fire Insurance Co. (2 SCRA 945 [1961]) to
wit: 'The condition contained in an insurance policy that claims
must be presented within one year after rejection is not merely a
procedural requirement but an important matter essential to a
prompt settlement of claims against insurance companies as it
demands that insurance suits be brought by the insured while the
evidence as to the origin and cause of destruction have not yet
disappeared.' "In enunciating the above-cited principle, this Court
had definitely settled the rationale for the necessity of bringing
suits against the Insurer within one year from the rejection of the
claim. The contention of the respondents that the one-year
prescriptive period does not start to run until the petition for
reconsideration had been resolved by the insurer, runs counter to
the declared purpose for requiring that an action or suit be filed
in the Insurance Commission or in a court of competent

jurisdiction from the denial of the claim. To uphold respondents'

contention would contradict and defeat the very principle which
this Court had laid down. Moreover, it can easily be used by
insured persons as a scheme or device to waste time until any
evidence which may be considered against them is destroyed.
"While in the Eagle Star case (96 Phil. 701), this Court uses the
phrase 'final rejection,' the same cannot be taken to mean the
rejection of a petition for reconsideration as insisted by
respondents. Such was clearly not the meaning contemplated by
this Court. The insurance policy in said case provides that the
insured should file his claim first, with the carrier and then with
the insurer. The 'final rejection' being referred to in said case is
the rejection by the insurance company." (Sun Insurance Office,
Ltd. vs. Court of Appeals, et al., 195 SCRA 193 (1991))
DECISION
REGALADO, J p:
This appeal by certiorari seeks the nullification of the decision 1
of respondent Court of Appeals in CA-G.R. CV No. 13866 which
reversed the decision of the Regional Trial Court, Branch LVII at
Lucena City, jointly deciding Civil Cases Nos. 6-84, 7-84 and 8-84
thereof and consequently ordered the dismissal of the aforesaid
actions filed by herein petitioners.
The undisputed background of this case as found by the court a
quo and adopted by respondent court, being sustained by the
evidence on record, we hereby reproduce the same with
approval. 2
"The antecedents of this case show that Julian Sy and Jose Sy
Bang have formed a business partnership in the City of Lucena.
Under the business name of New Life Enterprises, the partnership
engaged in the sale of construction materials at its place of

business, a two storey building situated at Iyam, Lucena City. The

facts show that Julian Sy insured the stocks in trade of New Life
Enterprises with Western Guaranty Corporation, Reliance Surety
and Insurance Co. Inc., and Equitable Insurance Corporation.
"On May 15, 1981, Western Guaranty Corporation issued Fire
Insurance Policy No. 37201 in the amount of P350,000.00. This
policy was renewed on May 13, 1982.
"On July 30, 1981, Reliance Surety and Insurance Co., Inc. issued
Fire Insurance Policy No. 69135 in the amount of P300,000.00
(Renewed under Renewal Certificate No. 41997). An additional
insurance was issued by the same company on November 12,
1981 under Fire Insurance Policy No. 71547 in the amount of
P700,000.00.
"On February 8, 1982, Equitable Insurance Corporation issued
Fire Insurance Policy No. 39328 in the amount of P200,000.00.
"Thus when the building occupied by the New Life Enterprises
was gutted by fire at about 2:00 o'clock in the morning of
October 19, 1982, the stocks in trade inside said building were
insured against fire in the total amount of P1,550,000.00.
According to the certification issued by the Headquarters,
Philippine Constabulary/Integrated National Police, Camp Crame,
the cause of fire was electrical in nature. According to the
plaintiffs, the building and the stocks inside were burned. After
the fire, Julian Sy went to the agent of Reliance Insurance whom
he asked to accompany him to the office of the company so that
he can file his claim. He averred that in support of his claim, he
submitted the fire clearance, the insurance policies and inventory
of stocks. He further testified that the three insurance companies
are sister companies, and as a matter of fact when he was
following-up his claim with Equitable Insurance, the Claims

Manager told him to go first to Reliance Insurance and if said

company agrees to pay, they would also pay. The same
treatment was given him by the other insurance companies.
Ultimately, the three insurance companies denied plaintiffs' claim
for payment.
"In its letter of denial dated March 9, 1983, (Exhibit 'C' No. 8-84)
Western Guaranty Corporation through Claims Manager Bernard
S. Razon told the plaintiff that his claim 'is denied for breach of
policy conditions.' Reliance Insurance purveyed the same
message in its letter dated November 23, 1982 and signed by
Executive Vice-President Mary Dee Co (Exhibit 'C' No. 7-84) which
said that "plaintiff's claim is denied for breach of policy
conditions." The letter of denial received by the plaintiff from,
Equitable Insurance Corporation (Exhibit 'C' No. 6-84) was of the
same tenor, as said letter dated February 22, 1983, and signed
by Vice-President Elma R. Bondad, said 'we find that certain
policy conditions were violated, therefore, we regret, we have to
deny your claim, as it is hereby denied in its entirety.'
"In relation to the case against Reliance Surety and Insurance
Company, a certain Atty. Serafin D. Dator, acting in behalf of the
plaintiff, sent a letter dated February 13, 1983 (Exhibit 'G-1' No.
7-84) to Executive Vice-President Mary Dee Co asking that he be
informed as to the specific policy conditions allegedly violated by
the plaintiff. In her reply-letter dated March 30, 1983, Executive
Vice-President Mary Dee Co informed Atty. Dator that Julian Sy
violated Policy Condition No. '3' which requires the insured to
give notice of any insurance or insurances already effected
covering the stocks in trade."3
Because of the denial of their claims for payment by the three (3)
insurance companies, petitioner filed separate civil actions
against the former before the Regional Trial Court of Lucena City,

which cases were consolidated for trial, and thereafter the court
below rendered its decision on December 19, 1986 with the
following disposition: cdrep
"WHEREFORE, judgment in the above-entitled cases is rendered
in the following manner, viz:
1.
In Civil Case No. 6-84, judgment is rendered for the
plaintiff New Life Enterprises and against the defendant Equitable
Insurance Corporation ordering the latter to pay the former the
sum of Two Hundred Thousand (P200,000.00) Pesos and
considering that payment of the claim of the insured has been
unreasonably denied, pursuant to Sec. 244 of the Insurance
Code, defendant is further ordered to pay the plaintiff attorney's
fees in the amount of Twenty Thousand (P20,000.00) Pesos. All
sums of money to be paid by virtue hereof shall bear interest at
12% per annum (pursuant to Sec. 244 of the Insurance Code)
from February 14, 1983, (91st day from November 16, 1982,
when Sworn Statement of Fire Claim was received from the
insured) until they are fully paid;
2.
In Civil Case No. 7-84, judgment is rendered for the
plaintiff Julian Sy and against the defendant Reliance Surety and
Insurance Co., Inc., ordering the latter to pay the former the sum
of P1,000,000.00 (P300,000.00 under Policy No. 69135 and
P700,000.00 under policy No. 71547) and considering that
payment of the claim of the insured has been unreasonably
denied, pursuant to Sec. 244 of the Insurance Code, defendant is
further ordered to pay the plaintiff the amount of P100,000.00 as
attorney's fees.
All sums of money to be paid by virtue hereof shall bear interest
at 12% per annum (pursuant to Sec. 244 of the Insurance Code)
from February 14, 1983, (91st day from November 16, 1982

when Sworn Statement of Fire Claim was received from the

insured) until they are fully paid;
3.
In Civil Case No. 8-84, judgment is rendered for the
plaintiff New Life Enterprises and against the defendant Western
Guaranty Corporation ordering the latter to pay the sum of
P350,000.00 to the Consolidated Bank and Trust Corporation,
Lucena Branch, Lucena City, as stipulated on the face of Policy
No. 37201, and considering that payment of the aforementioned
sum of money has been unreasonably denied, pursuant to Sec.
244 of the Insurance Code, defendant is further ordered to pay
the plaintiff attorney's fees in the amount of P35,000.00.
All sums of money to be paid by virtue hereof shall bear interest
at 12% per annum (pursuant to Sec. 244 of the Insurance Code)
from February 5, 1982, (91st day from 1st week of November
1983 when insured filed formal claim for full indemnity according
to adjuster Vetremar Dela Merced) until they are fully paid."4
As aforestated, respondent Court of Appeals reversed said
judgment of the trial court, hence this petition the crux wherein
is whether or not Conditions Nos. 3 and 27 of the insurance
contracts were violated by petitioners thereby resulting in their
forfeiture of all the benefits thereunder.
Condition No. 3 of said insurance policies, otherwise known as
the "Other Insurance Clause," is uniformly contained in all theaforestated insurance contracts of herein petitioners, as follows:
cdphil
"3.
The insured shall give notice to the Company of any
insurance or insurances already effected, or which may
subsequently be effected, covering any of the property or
properties consisting of stocks in trade, goods in process and/or
inventories only hereby insured, and unless such notice be given

and the particulars of such insurance or insurances be stated

therein or endorsed on this policy pursuant to Section 50 of the
Insurance Code, by or on behalf of the Company before the
occurrence of any loss or damage, all benefits under this policy
shall be deemed forfeited, provided however, that this condition
shall not apply when the total insurance or insurances in force at
the time of loss or damage is not more than P200,000.00." 5
Petitioners admit that the respective insurance policies issued by
private respondents did not state or endorse thereon the other
insurance coverage obtained or subsequently effected on the
same stocks in trade for the loss of which compensation is
claimed by petitioners. 6 The policy issued by respondent
Western Guaranty Corporation (Western) did not declare
respondent Reliance Surety and Insurance Co., Inc. (Reliance)
and respondent Equitable Insurance Corporation (Equitable) as
co-insurers on the same stocks, while Reliance's policies covering
the same stocks did not likewise declare Western and Equitable
as such co-insurers. It is further admitted by petitioners that
Equitable's policy stated "nil" in the space thereon requiring
indication of any co-insurance although there were three (3)
policies subsisting on the same stocks in trade at the time of the
loss, namely, that of Western in the amount of P350,000.00 and
two (2) policies of Reliance in the total amount of P1,000,000.00.
7
In other words, the coverage by other insurance or co-insurance
effected or subsequently arranged by petitioners were neither
stated nor endorsed in the policies of the three (3) private
respondents, warranting forfeiture of all benefits thereunder if we
are to follow the express stipulation in the aforequoted Policy
Condition No. 3.

Petitioners contend that they are not to be blamed for the

omissions, alleging that insurance agent Leon Alvarez (for
Western) and Yap Kam Chuan (for Reliance and Equitable) knew
about the existence of the additional insurance coverage and
that they were not informed about the requirement that such
other or additional insurance should be stated in the policy, as
they have not even read said policies. 8 These contentions
cannot pass judicial muster.
The terms of the contract are clear and unambiguous. The
insured is specifically required to disclose to the insurer any other
insurance and its particulars which he may have effected on the
same subject matter. The knowledge of such insurance by the
insurer's agents, even assuming the acquisition thereof by the
former, is not the "notice" that would stop the insurers from
denying the claim. Besides, the so-called theory of imputed
knowledge, that is, knowledge of the agent is knowledge of the
principal, aside from being of dubious applicability here has
likewise been roundly refuted by respondent court whose factual
findings we find acceptable.
Thus, it points out that while petitioner Julian Sy claimed that he
had informed insurance agent Alvarez regarding the co-insurance
on the property, he contradicted himself by inexplicably claiming
that he had not read the terms of the policies; that Yap Dam
Chuan could not likewise have obtained such knowledge for the
same reason, aside from the fact that the insurance with Western
was obtained before those of Reliance and Equitable; and that
the conclusion of the trial court that Reliance and Equitable are
"sister companies" is an unfounded conjecture drawn from the
mere fact that Yap Kam Chuan was an agent for both companies
which also had the same insurance claims adjuster. Availment of
the services of the same agents and adjusters by different
companies is a common practice in the insurance business and

such facts do not warrant the speculative conclusion of the trial

court. LLphil
Furthermore, when the words and language of documents are
clear and plain or readily understandable by an ordinary reader
thereof, there is absolutely no room for interpretation or
construction anymore. 9 Courts are not allowed to make
contracts for the parties; rather, they will intervene only when
the terms of the policy are ambiguous, equivocal, or uncertain.10
The parties must abide by the terms of the contract because
such terms constitute the measure of the insurer's liability and
compliance therewith is a condition precedent to the insured's
right of recovery from the insurer. 11
While it is a cardinal principle of insurance law that a policy or
contract of insurance is to be construed liberally in favor of the
insured and strictly against the insurer company, yet contracts of
insurance, like other contracts, are to be construed according to
the sense and meaning of the terms which the parties
themselves have used. If such terms are clear and unambiguous,
they must be taken and understood in their plain, ordinary and
popular sense. 12 Moreover, obligations arising from contracts
have the force of law between the contracting parties and should
be complied with in good faith. 13
Petitioners should be aware of the fact that a party is not relieved
of the duty to exercise the ordinary care and prudence that would
be exacted in relation to other contracts. The conformity of the
insured to the terms of the policy is implied from his failure to
express any disagreement with what is provided for. 14 It may be
true that the majority rule, as cited by petitioners, is that insured
persons may accept policies without reading them, and that this
is not negligence per se. 15 But, this is not without any
exception. It is and was incumbent upon petitioner Sy to read the

insurance contracts, and this can be reasonably expected of him

considering that he has been a businessman since 196516 and
the contract concerns indemnity in case of loss in his moneymaking trade of which important consideration he could not have
been unaware as it was precisely the reason for his procuring the
same. prcd
We reiterate our pronouncement in Pioneer Insurance and Surety
Corporation vs. Yap: 17
". . . 'And considering the terms of the policy which required the
insured to declare other insurances, the statement in question
must be deemed to be a statement (warranty) binding on both
insurer and insured, that there were no other insurance on the
property. . . .
'The annotation then, must be deemed to be a warranty that the
property was not insured by any other policy. Violation thereof
entitled the insurer to rescind (Sec. 69, Insurance Act). Such
misrepresentation is fatal in the light of our views in Santa Ana
vs. Commercial Union Assurance Company, Ltd., 55 Phil. 329.
The materiality of non-disclosure of other insurance policies is
not open to doubt.'
xxx

xxx

xxx

"The obvious purpose of the aforesaid requirement in the policy

is to prevent over-insurance and thus avert the perpetration of
fraud. The public, as well as the insurer, is interested in
preventing the situation in which a fire would be profitable to the
insured. According to Justice Story: 'The insured has no right to
complain, for he assents to comply with all the stipulations on his
side, in order to entitle himself to the benefit of the contract,
which, upon reason or principle, he has no right to ask the court
to dispense with the performance of his own part of the

agreement, and yet to bind the other party to obligations, which,

but for those stipulations, would not have been entered into.'"

(Tongoy vs. C.A., 123 SCRA 99 (1983); Avila v. C.A. 145 SCRA,
1986).

Subsequently, in the case of Pacific Banking Corporation vs.

Court of Appeals, et al., 18 we held:

"As the insurance policy against fire expressly required that

notice should be given by the insured of other insurance upon
the same property, the total absence of such notice nullifies the
policy."

"It is not disputed that the insured failed to reveal before the loss
three other insurances. As found by the Court of Appeals, by
reason of said unrevealed insurances, the insured had been
guilty of a false declaration; a clear misrepresentation and a vital
one because where the insured had been asked to reveal but did
not, that was deception. Otherwise stated, had the insurer known
that there were many co-insurances, it could have hesitated or
plainly desisted from entering into such contract. Hence, the
insured was guilty of clear fraud (Rollo, p. 25).
"Petitioner's contention that the allegation of fraud is but a mere
inference or suspicion is untenable. In fact, concrete evidence of
fraud or false declaration by the insured was furnished by the
petitioner itself when the facts alleged in the policy under clauses
'Co-Insurances Declared' and 'Other Insurance Clause' are
materially different from the actual number of co-insurances
taken over the subject property. Consequently, 'the whole
foundation of the contract fails, the risk does not attach and the
policy never becomes a contract between the parties.'
Representations of facts are the foundation of the contract and if
the foundation does not exist, the superstructure does not arise.
Falsehood in such representations is not shown to vary or add to
the contract, or to terminate a contract which has once been
made, but to show that no contract has ever existed (Tolentino,
Commercial Laws of the Philippines, p. 991, Vol. II, 8th Ed.) A void
or inexistent contract is one which has no force and effect from
the very beginning, as if it had never been entered into, and
which cannot be validated either by time or by ratification

To further warrant and justify the forfeiture of the benefits under

the insurance contracts involved, we need merely to turn to
Policy Condition No. 15 thereof, which reads in part:
"15.
. . . if any false declaration be made or used in support
thereof, . . . all benefits under this Policy shall be forfeited . . ."19
Additionally, insofar as the liability of respondent Reliance is
concerned, it is not denied that the complaint for recovery was
filed in court by petitioners only on January 31, 1984, or after
more than one (1) year had elapsed from petitioners' receipt of
the insurers' letter of denial on November 29, 1982. Policy
Condition No. 27 of their insurance contract with Reliance
provides:
"27.
Action or suit clause. If a claim be made and rejected
and an action or suit be not commenced either in the Insurance
Commission or any court of competent jurisdiction of notice of
such rejection, or in case of arbitration taking place as provided
herein, within twelve (12) months after due notice of the award
made by the arbitrator or arbitrators or umpire, then the claim
shall for all purposes be deemed to have been abandoned and
shall not thereafter be recoverable hereunder." 20
On this point, the trial court ruled:

". . . However, because of the peculiar circumstances of this case,

we hesitate in concluding that plaintiff's right to ventilate his
claim in court has been barred by reason of the time constraint
provided in the insurance contract. It is evident that after the
plaintiff had received the letter of denial, he still found it
necessary to be informed of the specific causes or reasons for the
denial of his claim, reason for which his lawyer, Atty. Dator
deemed it wise to send a letter of inquiry to the defendant which
was answered by defendant's Executive Vice-President in a letter
dated March 30, 1983, xxx. Assuming, gratuitously, that the
letter of Executive Vice-President Mary Dee Co dated March 30,
1983, was received by plaintiff on the same date, the period of
limitation should start to run only from said date in the spirit of
fair play and equity . . ." 21
We have perforce to reject this theory of the court below for
being contrary to what we have heretofore declared:
"It is important to note the principle laid down by this Court in the
case of Ang vs. Fulton Fire Insurance Co. (2 SCRA 945 [1961]) to
wit:
'The condition contained in an insurance policy that claims must
be presented within one year after rejection is not merely a
procedural requirement but an important matter essential to a
prompt settlement of claims against insurance companies as it
demands that insurance suits be brought by the insured while the
evidence as to the origin and cause of destruction have not yet
disappeared.'
"In enunciating the above-cited principle, this Court had
definitely settled the rationale for the necessity of bringing suits
against the Insurer within one year from the rejection of the
claim. The contention of the respondents that the one-year

prescriptive period does not start to run until the petition for
reconsideration had been resolved by the insurer, runs counter to
the declared purpose for requiring that an action or suit be filed
in the Insurance Commission or in a court of competent
jurisdiction from the denial of the claim. To uphold respondents'
contention would contradict and defeat the very principle which
this Court had laid down. Moreover, it can easily be used by
insured persons as a scheme or device to waste time until any
evidence which may be considered against them is destroyed.
xxx

xxx

xxx

"While in the Eagle Star case (96 Phil. 701), this Court uses the
phrase 'final rejection', the same cannot be taken to mean the
rejection of a petition for reconsideration as insisted by
respondents. Such was clearly not the meaning contemplated by
this Court. The insurance policy in said case provides that the
insured should file his claim first, with the carrier and then with
the insurer. The 'final rejection' being referred to in said case is
the rejection by the insurance company." 22
Furthermore, assuming arguendo that petitioners felt the
legitimate need to be clarified as to the policy condition violated,
there was a considerable lapse of time from their receipt of the
insurer's clarificatory letter dated March 30, 1983, up to the time
the complaint was filed in court on January 31, 1984. The oneyear prescriptive period was yet to expire on November 29, 1983,
or about eight (8) months from the receipt of the clarificatory
letter, but petitioners let the period lapse without bringing their
action in court. We accordingly find no "peculiar circumstances"
sufficient to relax the enforcement of the one-year prescriptive
period and we, therefore, hold that petitioners' claim was
definitely filed out of time. LLjur

WHEREFORE, finding no cogent reason to disturb the judgment of

respondent Court of Appeals, the same is hereby AFFIRMED.

SO ORDERED.