FIRST DIVISION

[G.R. No. 126751. March 28, 2001]

SAFIC ALCAN & CIE, petitioner, vs. IMPERIAL VEGETABLE OIL CO.,
INC., respondent.

DECISION
YNARES-SANTIAGO, J.:

Petitioner Safic Alcan & Cie (hereinafter, Safic) is a French corporation engaged in the
international purchase, sale and trading of coconut oil. It filed with the Regional Trial Court of
Manila, Branch XXV, a complaint dated February 26, 1987 against private respondent Imperial
Vegetable Oil Co., Inc. (hereinafter, IVO), docketed as Civil Case No. 87-39597. Petitioner Safic
alleged that on July 1, 1986 and September 25, 1986, it placed purchase orders with IVO for
2,000 long tons of crude coconut oil, valued at US$222.50 per ton, covered by Purchase Contract
Nos. A601446 and A601655, respectively, to be delivered within the month of January
1987. Private respondent, however, failed to deliver the said coconut oil and, instead, offered a
wash out settlement, whereby the coconut oil subject of the purchase contracts were to be sold
back to IVO at the prevailing price in the international market at the time of wash out. Thus, IVO
bound itself to pay to Safic the difference between the said prevailing price and the contract price
of the 2,000 long tons of crude coconut oil, which amounted to US$293,500.00. IVO failed to
pay this amount despite repeated oral and written demands.
Under its second cause of action, Safic alleged that on eight occasions between April 24,
1986 and October 31, 1986, it placed purchase orders with IVO for a total of 4,750 tons of crude
coconut oil, covered by Purchase Contract Nos. A601297A/B, A601384, A601385, A601391,
A601415, A601681, A601683 and A601770A/B/C/. When IVO failed to honor its obligation
under the wash out settlement narrated above, Safic demanded that IVO make marginal deposits
within forty-eight hours on the eight purchase contracts in amounts equivalent to the difference
between the contract price and the market price of the coconut oil, to compensate it for the
damages it suffered when it was forced to acquire coconut oil at a higher price. IVO failed to
make the prescribed marginal deposits on the eight contracts, in the aggregate amount of
US$391,593.62, despite written demand therefor.
The demand for marginal deposits was based on the customs of the trade, as governed by the
provisions of the standard N.I.O.P. Contract and the FOSFA Contract, to wit:

N.I.O.P. Contract, Rule 54 If the financial condition of either party to a contract

subject to these rules becomes so impaired as to create a reasonable doubt as to the
ability of such party to perform its obligations under the contract, the other party may
from time to time demand marginal deposits to be made within forty-eight (48) hours
after receipt of such demand, such deposits not to exceed the difference between the
contract price and the market price of the goods covered by the contract on the day
upon which such demand is made, such deposit to bear interest at the prime rate plus
one percent (1%) per annum. Failure to make such deposit within the time specified
shall constitute a breach of contract by the party upon whom demand for deposit is
made, and all losses and expenses resulting from such breach shall be for the account
of the party upon whom such demand is made. (Underscoring ours.)[1]

FOSFA Contract, Rule 54 BANKRUPTCY/INSOLVENCY: If before the fulfillment

of this contract either party shall suspend payment, commit an act of bankruptcy,
notify any of his creditors that he is unable to meet his debts or that he has suspended
payment or that he is about to suspend payment of his debts, convene, call or hold a
meeting either of his creditors or to pass a resolution to go into liquidation (except for
a voluntary winding up of a solvent company for the purpose of reconstruction or
amalgamation) or shall apply for an official moratorium, have a petition presented for
winding up or shall have a Receiver appointed, the contract shall forthwith be closed,
either at the market price then current for similar goods or, at the option of the other
party at a price to be ascertained by repurchase or resale and the difference between
the contract price and such closing-out price shall be the amount which the other party
shall be entitled to claim shall be liable to account for under this contract (sic). Should
either party be dissatisfied with the price, the matter shall be referred to arbitration.
Where no such resale or repurchase takes place, the closing-out price shall be fixed by
a Price Settlement Committee appointed by the Federation. (Underscoring ours.)[2]

Hence, Safic prayed that IVO be ordered to pay the sums of US$293,500.00 and
US$391,593.62, plus attorneys fees and litigation expenses. The complaint also included an
application for a writ of preliminary attachment against the properties of IVO.
Upon Safics posting of the requisite bond, the trial court issued a writ of preliminary
attachment. Subsequently, the trial court ordered that the assets of IVO be placed under
receivership, in order to ensure the preservation of the same.
In its answer, IVO raised the following special affirmative defenses: Safic had no legal
capacity to sue because it was doing business in the Philippines without the requisite license or
authority; the subject contracts were speculative contracts entered into by IVOs then President,
Dominador Monteverde, in contravention of the prohibition by the Board of Directors against
engaging in speculative paper trading, and despite IVOs lack of the necessary license from
Central Bank to engage in such kind of trading activity; and that under Article 2018 of the Civil
Code, if a contract which purports to be for the delivery of goods, securities or shares of stock is
entered into with the intention that the difference between the price stipulated and the exchange
or market price at the time of the pretended delivery shall be paid by the loser to the winner, the
transaction is null and void.
IVO set up counterclaims anchored on harassment, paralyzation of business, financial
losses, rumor-mongering and oppressive action. Later, IVO filed a supplemental counterclaim
alleging that it was unable to operate its business normally because of the arrest of most of its
physical assets; that its suppliers were driven away; and that its major creditors have inundated it
with claims for immediate payment of its debts, and China Banking Corporation had foreclosed
its chattel and real estate mortgages.
During the trial, the lower court found that in 1985, prior to the date of the contracts sued
upon, the parties had entered into and consummated a number of contracts for the sale of crude
coconut oil. In those transactions, Safic placed several orders and IVO faithfully filled up those
orders by shipping out the required crude coconut oil to Safic, totalling 3,500 metric tons. Anent
the 1986 contracts being sued upon, the trial court refused to declare the same as gambling
transactions, as defined in Article 2018 of the Civil Code, although they involved some degree of
speculation. After all, the court noted, every business enterprise carries with it a certain measure
of speculation or risk. However, the contracts performed in 1985, on one hand, and the 1986
contracts subject of this case, on the other hand, differed in that under the 1985 contracts,
deliveries were to be made within two months. This, as alleged by Safic, was the time needed for
milling and building up oil inventory. Meanwhile, the 1986 contracts stipulated that the coconut
oil were to be delivered within period ranging from eight months to eleven to twelve months
after the placing of orders. The coconuts that were supposed to be milled were in all likelihood
not yet growing when Dominador Monteverde sold the crude coconut oil. As such, the 1986
contracts constituted trading in futures or in mere expectations.
The lower court further held that the subject contracts were ultra vires and were entered into
by Dominador Monteverde without authority from the Board of Directors. It distinguished
between the 1985 contracts, where Safic likewise dealt with Dominador Monteverde, who was
presumably authorized to bind IVO, and the 1986 contracts, which were highly speculative in
character. Moreover, the 1985 contracts were covered by letters of credit, while the 1986
contracts were payable by telegraphic transfers, which were nothing more than mere promises to
pay once the shipments became ready. For these reasons, the lower court held that Safic cannot
invoke the 1985 contracts as an implied corporate sanction for the high-risk 1986 contracts,
which were evidently entered into by Monteverde for his personal benefit.
The trial court ruled that Safic failed to substantiate its claim for actual damages. Likewise,
it rejected IVOs counterclaim and supplemental counterclaim.
Thus, on August 28, 1992, the trial court rendered judgment as follows:

WHEREFORE, judgment is hereby rendered dismissing the complaint of plaintiff

Safic Alcan & Cie, without prejudice to any action it might subsequently institute
against Dominador Monteverde, the former President of Imperial Vegetable Oil Co.,
Inc., arising from the subject matter of this case. The counterclaim and supplemental
counterclaim of the latter defendant are likewise hereby dismissed for lack of merit.
No pronouncement as to costs.

The writ of preliminary attachment issued in this case as well as the order placing
Imperial Vegetable Oil Co., Inc. under receivership are hereby dissolved and set
aside.[3]
 Both IVO and Safic appealed to the Court of Appeals, jointly docketed as CA-G.R. CV No.
40820.
IVO raised only one assignment of error, viz:

THE TRIAL COURT ERRED IN HOLDING THAT THE ISSUANCE OF THE

WRIT OF PRELIMINARY ATTACHMENT WAS NOT THE MAIN CAUSE OF
THE DAMAGES SUFFERED BY DEFENDANT AND IN NOT AWARDING
DEFENDANT-APPELLANT SUCH DAMAGES.

For its part, Safic argued that:

THE TRIAL COURT ERRED IN HOLDING THAT IVOS PRESIDENT,

DOMINADOR MONTEVERDE, ENTERED INTO CONTRACTS WHICH
WERE ULTRA VIRES AND WHICH DID NOT BIND OR MAKE IVO LIABLE.

THE TRIAL COURT ERRED IN HOLDING THAT SAFIC WAS UNABLE TO

PROVE THE DAMAGES SUFFERED BY IT AND IN NOT AWARDING SUCH
DAMAGES.

THE TRIAL COURT ERRED IN NOT HOLDING THAT IVO IS LIABLE UNDER
THE WASH OUT CONTRACTS.

On September 12, 1996, the Court of Appeals rendered the assailed Decision dismissing the
appeals and affirming the judgment appealed from in toto.[4]
Hence, Safic filed the instant petition for review with this Court, substantially reiterating the
errors it raised before the Court of Appeals and maintaining that the Court of Appeals grievously
erred when:

a. it declared that the 1986 forward contracts (i.e., Contracts Nos. A601446 and
A60155 (sic) involving 2,000 long tons of crude coconut oil, and Contracts Nos.
A601297A/B, A601385, A601391, A601415, A601681. A601683 and
A601770A/B/C involving 4,500 tons of crude coconut oil) were unauthorized acts of
Dominador Monteverde which do not bind IVO in whose name they were entered
into. In this connection, the Court of Appeals erred when (i) it ignored its own finding
that (a) Dominador Monteverde, as IVOs President, had an implied authority to make
any contract necessary or appropriate to the contract of the ordinary business of the
company; and (b) Dominador Monteverde had validly entered into similar forward
contracts for and on behalf of IVO in 1985; (ii) it distinguished between the 1986
forward contracts despite the fact that the Manila RTC has struck down IVOs
objection to the 1986 forward contracts (i.e. that they were highly speculative paper
trading which the IVO Board of Directors had prohibited Dominador Monteverde
from engaging in because it is a form of gambling where the parties do not intend
actual delivery of the coconut oil sold) and instead found that the 1986 forward
contracts were not gambling; (iii) it relied on the testimony of Mr. Rodrigo
Monteverde in concluding that the IVO Board of Directors did not authorize its
President, Dominador Monteverde, to enter into the 1986 forward contracts; and (iv) it
did not find IVO, in any case, estopped from denying responsibility for, and liability
under, the 1986 forward contracts because IVO had recognized itself bound to similar
forward contracts which Dominador Monteverde entered into (for and on behalf of
IVO) with Safic in 1985 notwithstanding that Dominador Monteverde was (like in the
1986 forward contracts) not expressly authorized by the IVO Board of Directors to
enter into such forward contracts;

b. it declared that Safic was not able to prove damages suffered by it, despite the fact
that Safic had presented not only testimonial, but also documentary, evidence which
proved the higher amount it had to pay for crude coconut oil (vis--vis the contract
price it was to pay to IVO) when IVO refused to deliver the crude coconut oil bought
by Safic under the 1986 forward contracts; and

c. it failed to resolve the issue of whether or not IVO is liable to Safic under the wash
out contracts involving Contracts Nos. A601446 and A60155 (sic), despite the fact
that Safic had properly raised the issue on its appeal, and the evidence and the law
support Safics position that IVO is so liable to Safic.

In fine, Safic insists that the appellate court grievously erred when it did not declare that
IVOs President, Dominador Monteverde, validly entered into the 1986 contracts for and on
behalf of IVO.
We disagree.
Article III, Section 3 [g] of the By-Laws[5] of IVO provides, among others, that

Section 3. Powers and Duties of the President. The President shall be elected by the
Board of Directors from their own number.

He shall have the following duties:

xxxxxxxxx

[g] Have direct and active management of the business and operation of the
corporation, conducting the same according to the orders, resolutions and instruction
of the Board of Directors and according to his own discretion whenever and wherever
the same is not expressly limited by such orders, resolutions and instructions.

It can be clearly seen from the foregoing provision of IVOs By-laws that Monteverde had no
blanket authority to bind IVO to any contract. He must act according to the instructions of the
Board of Directors. Even in instances when he was authorized to act according to his discretion,
that discretion must not conflict with prior Board orders, resolutions and instructions. The
evidence shows that the IVO Board knew nothing of the 1986 contracts[6] and that it did not
authorize Monteverde to enter into speculative contracts.[7] In fact, Monteverde had earlier
proposed that the company engage in such transactions but the IVO Board rejected his
proposal.[8] Since the 1986 contracts marked a sharp departure from past IVO transactions, Safic
should have obtained from Monteverde the prior authorization of the IVO Board. Safic can not
rely on the doctrine of implied agency because before the controversial 1986 contracts, IVO did
not enter into identical contracts with Safic. 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.[9] In the case of Bacaltos Coal Mines v. Court of Appeals,[10] we elucidated the rule on
dealing with an agent thus:

Every 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 inquiry, he is chargeable
with knowledge of the agents authority, and his ignorance of that authority will not be
any excuse. 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, to
ascertain not only the fact of the agency but also the nature and extent of the authority,
and in case either is controverted, the burden of proof is upon them to establish it.[11]

The most prudent thing petitioner should have done was to ascertain the extent of the
authority of Dominador Monteverde. Being remiss in this regard, petitioner can not seek relief on
the basis of a supposed agency.
Under Article 1898[12] of the Civil Code, the acts of an agent beyond the scope of his
authority do not bind the principal unless the latter ratifies the same expressly or impliedly. It
also bears emphasizing that when the third person knows that the agent was acting beyond his
power or authority, the principal can not be held liable for the acts of the agent. If the said third
person is aware of such limits of authority, he is to blame, and is not entitled to recover damages
from the agent, unless the latter undertook to secure the principals ratification.[13]
There was no such ratification in this case. When Monteverde entered into the speculative
contracts with Safic, he did not secure the Boards approval.[14] He also did not submit the
contracts to the Board after their consummation so there was, in fact, no occasion at all for
ratification. The contracts were not reported in IVOs export sales book and turn-out
book.[15] Neither were they reflected in other books and records of the corporation.[16] It must be
pointed out that the Board of Directors, not Monteverde, exercises corporate power.[17] Clearly,
Monteverdes speculative contracts with Safic never bound IVO and Safic can not therefore
enforce those contracts against IVO.
To bolster its cause, Safic raises the novel point that the IVO Board of Directors did not set
limitations on the extent of Monteverdes authority to sell coconut oil. It must be borne in mind in
this regard that a question that was never raised in the courts below can not be allowed to be
raised for the first time on appeal without offending basic rules of fair play, justice and due
process.[18] Such an issue was not brought to the fore either in the trial court or the appellate
court, and would have been disregarded by the latter tribunal for the reasons previously
stated. With more reason, the same does not deserve consideration by this Court.
Be that as it may, Safics belated contention that the IVO Board of Directors did not set
limitations on Monteverdes authority to sell coconut oil is belied by what appears on the
record. Rodrigo Monteverde, who succeeded Dominador Monteverde as IVO President, testified
that the IVO Board had set down the policy of engaging in purely physical trading thus:
Q. Now you said that IVO is engaged in trading. With whom does it usually trade its oil?
A. I am not too familiar with trading because as of March 1987, I was not yet an officer of the
corporation, although I was at the time already a stockholder, I think IVO is engaged in trading
oil.
Q. As far as you know, what kind of trading was IVO engaged with?
A. It was purely on physical trading.
Q. How did you know this?
A. As a stockholder, rather as member of [the] Board of Directors, I frequently visited the plant and
from my observation, as I have to supervise and monitor purchases of copras and also the sale of
the same, I observed that the policy of the corporation is for the company to engaged (sic) or to
purely engaged (sic)in physical trading.
Q. What do you mean by physical trading?
A. Physical Trading means we buy and sell copras that are only available to us. We only have to sell
the available stocks in our inventory.
Q. And what is the other form of trading?
Atty. Fernando
No basis, your Honor.
Atty. Abad
Well, the witness said they are engaged in physical trading and what I am saying [is] if there are any
other kind or form of trading.
Court
Witness may answer if he knows.
Witness
A. Trading future[s] contracts wherein the trader commits a price and to deliver coconut oil in the
future in which he is yet to acquire the stocks in the future.
Atty. Abad
Q. Who established the so-called physical trading in IVO?
A. The Board of Directors, sir.
Atty. Abad.
Q. How did you know that?
A. There was a meeting held in the office at the factory and it was brought out and suggested by our
former president, Dominador Monteverde, that the company should engaged (sic) in future[s]
contract[s] but it was rejected by the Board of Directors. It was only Ador Monteverde who then
wanted to engaged (sic) in this future[s] contract[s].
Q. Do you know where this meeting took place?
A. As far as I know it was sometime in 1985.
Q. Do you know why the Board of Directors rejected the proposal of Dominador Monteverde that the
company should engaged (sic) in future[s] contracts?
Atty. Fernando
Objection, your Honor, no basis.
Court
Why dont you lay the basis?
Atty. Abad
Q. Were you a member of the board at the time?
A. In 1975, I am already a stockholder and a member.
Q. Then would [you] now answer my question?
Atty. Fernando
No basis, your Honor. What we are talking is about 1985.
Atty. Abad
Q. When you mentioned about the meeting in 1985 wherein the Board of Directors rejected the
future[s] contract[s], were you already a member of the Board of Directors at that time?
A. Yes, sir.
Q. Do you know the reason why the said proposal of Mr. Dominador Monteverde to engage in
future[s] contract[s] was rejected by the Board of Directors?
A. Because this future[s] contract is too risky and it partakes of gambling.
Q. Do you keep records of the Board meetings of the company?
A. Yes, sir.
Q. Do you have a copy of the minutes of your meeting in 1985?
A. Incidentally our Secretary of the Board of Directors, Mr. Elfren Sarte, died in 1987 or 1988, and
despite [the] request of our office for us to be furnished a copy he was not able to furnish us a
copy.[19]
xxxxxxxxx
Atty. Abad
Q. You said the Board of Directors were against the company engaging in future[s] contracts. As far
as you know, has this policy of the Board of Directors been observed or followed?
Witness
 A. Yes, sir.
Q. How far has this Dominador Monteverde been using the name of I.V.O. in selling future contracts
without the proper authority and consent of the companys Board of Directors?
A. Dominador Monteverde never records those transactions he entered into in connection with these
future[s] contracts in the companys books of accounts.
Atty. Abad
Q. What do you mean by that the future[s] contracts were not entered into the books of accounts of the
company?
Witness
A. Those were not recorded at all in the books of accounts of the company, sir.[20]
xxxxxxxxx
Q. What did you do when you discovered these transactions?
A. There was again a meeting by the Board of Directors of the corporation and that we agreed to
remove the president and then I was made to replace him as president.
Q. What else?
A. And a resolution was passed disowning the illegal activities of the former president.[21]
Petitioner next argues that there was actually no difference between the 1985 physical
contracts and the 1986 futures contracts.
The contention is unpersuasive for, as aptly pointed out by the trial court and sustained by
the appellate court

Rejecting IVOs position, SAFIC claims that there is no distinction between the 1985
and 1986 contracts, both of which groups of contracts were signed or authorized by
IVOs President, Dominador Monteverde. The 1986 contracts, SAFIC would bewail,
were similarly with their 1985 predecessors, forward sales contracts in which IVO had
undertaken to deliver the crude coconut oil months after such contracts were entered
into. The lead time between the closing of the deal and the delivery of the oil
supposedly allowed the seller to accumulate enough copra to mill and to build up its
inventory and so meet its delivery commitment to its foreign buyers. SAFIC
concludes that the 1986 contracts were equally binding, as the 1985 contracts were, on
IVO.

Subjecting the evidence on both sides to close scrutiny, the Court has found some
remarkable distinctions between the 1985 and 1986 contracts. x x x

1. The 1985 contracts were performed within an average of two months from the date
of the sale. On the other hand, the 1986 contracts were to be performed within an
average of eight and a half months from the dates of the sale. All the supposed
performances fell in 1987. Indeed, the contract covered by Exhibit J was to be
performed 11 to 12 months from the execution of the contract. These pattern (sic)
belies plaintiffs contention that the lead time merely allowed for milling and building
up of oil inventory. It is evident that the 1986 contracts constituted trading in futures
or in mere expectations. In all likelihood, the coconuts that were supposed to be
milled for oil were not yet on their trees when Dominador Monteverde sold the crude
oil to SAFIC.

2. The mode of payment agreed on by the parties in their 1985 contracts was
uniformly thru the opening of a letter of credit LC by SAFIC in favor of IVO. Since
the buyers letter of credit guarantees payment to the seller as soon as the latter is able
to present the shipping documents covering the cargo, its opening usually mark[s] the
fact that the transaction would be consummated. On the other hand, seven out of the
ten 1986 contracts were to be paid by telegraphic transfer upon presentation of the
shipping documents. Unlike the letter of credit, a mere promise to pay by telegraphic
transfer gives no assurance of [the] buyers compliance with its contracts. This fact
lends an uncertain element in the 1986 contracts.

3. Apart from the above, it is not disputed that with respect to the 1985 contracts, IVO
faithfully complied with Central Bank Circular No. 151 dated April 1, 1963, requiring
a coconut oil exporter to submit a Report of Foreign Sales within twenty-four (24)
hours after the closing of the relative sales contract with a foreign buyer of coconut
oil. But with respect to the disputed 1986 contracts, the parties stipulated during the
hearing that none of these contracts were ever reported to the Central Bank, in
violation of its above requirement. (See Stipulation of Facts dated June 13, 1990). The
1986 sales were, therefore suspect.

4. It is not disputed that, unlike the 1985 contacts, the 1986 contracts were never
recorded either in the 1986 accounting books of IVO or in its annual financial
statement for 1986, a document that was prepared prior to the controversy. (Exhibits 6
to 6-0 and 7 to 7-I). Emelita Ortega, formerly an assistant of Dominador Monteverde,
testified that they were strange goings-on about the 1986 contract. They were neither
recorded in the books nor reported to the Central Bank. What is more, in those
unreported cases where profits were made, such profits were ordered remitted to
unknown accounts in California, U.S.A., by Dominador Monteverde.

xxxxxxxxx

Evidently, Dominador Monteverde made business for himself, using the name of IVO
but concealing from it his speculative transactions.

Petitioner further contends that both the trial and appellate courts erred in concluding that
Safic was not able to prove its claim for damages. Petitioner first points out that its wash out
agreements with Monteverde where IVO allegedly agreed to pay US$293,500.00 for some of the
failed contracts was proof enough and, second, that it presented purchases of coconut oil it made
from others during the period of IVOs default.
We remain unconvinced. The so-called wash out agreements are clearly ultra vires and not
binding on IVO. Furthermore, such agreements did not prove Safics actual losses in the
transactions in question.The fact is that Safic did not pay for the coconut oil that it supposedly
ordered from IVO through Monteverede. Safic only claims that, since it was ready to pay when
IVO was not ready to deliver, Safic suffered damages to the extent that they had to buy the same
commodity from others at higher prices.
The foregoing claim of petitioner is not, however, substantiated by the evidence and only
raises several questions, to wit: 1.] Did Safic commit to deliver the quantity of oil covered by the
1986 contracts to its own buyers? Who were these buyers? What were the terms of those
contracts with respect to quantity, price and date of delivery? 2.] Did Safic pay damages to its
buyers? Where were the receipts? Did Safic have to procure the equivalent oil from other
sources? If so, who were these sources? Where were their contracts and what were the terms of
these contracts as to quantity, price and date of delivery?
The records disclose that during the course of the proceedings in the trial court, IVO filed an
amended motion[22] for production and inspection of the following documents: a.] contracts of
resale of coconut oil that Safic bought from IVO; b.] the records of the pooling and sales
contracts covering the oil from such pooling, if the coconut oil has been pooled and sold as
general oil; c.] the contracts of the purchase of oil that, according to Safic, it had to resort to in
order to fill up alleged undelivered commitments of IVO; d.] all other contracts, confirmations,
invoices, wash out agreements and other documents of sale related to (a), (b) and (c). This
amended motion was opposed by Safic.[23] The trial court, however, in its September 16, 1988
Order,[24] ruled that:

From the analysis of the parties respective positions, conclusion can easily be drawn
therefrom that there is materiality in the defendants move: firstly, plaintiff seeks to
recover damages from the defendant and these are intimately related to plaintiffs
alleged losses which it attributes to the default of the defendant in its contractual
commitments; secondly, the documents are specified in the amended motion. As such,
plaintiff would entertain no confusion as to what, which documents to locate and
produce considering plaintiff to be (without doubt) a reputable going concern in the
management of the affairs which is serviced by competent, industrious, hardworking
and diligent personnel; thirdly, the desired production and inspection of the
documents was precipitated by the testimony of plaintiffs witness (Donald OMeara)
who admitted, in open court, that they are available. If the said witness represented
that the documents, as generally described, are available, reason there would be none
for the same witness to say later that they could not be produced, even after they have
been clearly described.

Besides, if the Court may additionally dwell on the issue of damages, the production
and inspection of the desired documents would be of tremendous help in the ultimate
resolution thereof. Plaintiff claims for the award of liquidated or actual damages to the
tune of US$391,593.62 which, certainly, is a huge amount in terms of pesos, and
which defendant disputes. As the defendant cannot be precluded in taking exceptions
to the correctness and validity of such claim which plaintiffs witness (Donald
OMeara) testified to, and as, by this nature of the plaintiffs claim for damages, proof
thereof is a must which can be better served, if not amply ascertained by examining
the records of the related sales admitted to be in plaintiffs possession, the amended
motion for production and inspection of the defendant is in order.

The interest of justice will be served best, if there would be a full disclosure by the
parties on both sides of all documents related to the transactions in litigation.

Notwithstanding the foregoing ruling of the trial court, Safic did not produce the required
documents, prompting the court a quo to assume that if produced, the documents would have
been adverse to Safics cause. In its efforts to bolster its claim for damages it purportedly
sustained, Safic suggests a substitute mode of computing its damages by getting the average
price it paid for certain quantities of coconut oil that it allegedly bought in 1987 and deducting
this from the average price of the 1986 contracts. But this mode of computation if flawed
because: 1.] it is conjectural since it rests on average prices not on actual prices multiplied by the
actual volume of coconut oil per contract; and 2.] it is based on the unproven assumption that the
1987 contracts of purchase provided the coconut oil needed to make up for the failed 1986
contracts. There is also no evidence that Safic had contracted to supply third parties with coconut
oil from the 1986 contracts and that Safic had to buy such oil from others to meet the
requirement.
Along the same vein, it is worthy to note that the quantities of oil covered by its 1987
contracts with third parties do not match the quantities of oil provided under the 1986
contracts. Had Safic produced the documents that the trial court required, a substantially correct
determination of its actual damages would have been possible. This, unfortunately, was not the
case. Suffice it to state in this regard that [T]he power of the courts to grant damages and
attorneys fees demands factual, legal and equitable justification; its basis cannot be left to
speculation and conjecture.[25]
WHEREFORE, in view of all the foregoing, the petition is DENIED for lack of merit.
SO ORDERED.
Davide, Jr., C.J. (Chairman), Kapunan, and Pardo, JJ., concur.
Puno, J., on official leave.

[1]
Complaint; Rollo, p 49.
[2]
Ibid., pp. 49-50
[3]
Rollo, p. 99; penned by Judge Leonardo I. Cruz.
[4]
Penned by Associate Justice Artemio G. Tuquero, with Associate Justices Cancio C. Garcia and Eugenio S.
Labitoria concurring.
[5]
Exhibit 5; Record, p. 764.
[6]
TSN, 23 June 1990, p. 18.
[7]
Ibid., pp. 5, 7, 8 and 18.
[8]
Id., p. 7.
[9]
Dizon v. Court of Appeals, 302 SCRA 288 [1999], citing Article 1868, Civil Code and Bordador v. Luz, 283
SCRA 374 [1997].
[10]
245 SCRA 460 [1995].
[11]
Citing Pineda v. Court of Appeals, 226 SCRA 754 [1993]; Veloso v. La Urbana, 58 Phil. 681 [1933]; Harry E.
Keller Electric Co. v. Rodriguez, 44 Phil.19 [1922]; Deen v. Pacific Commercial Co., 42 Phil. 738 [1922] and
Strong v. Repide, 6 Phil. 680 [1906].
[12]
ART. 1898. If the agent contracts in the name of the principal, extending the scope of his authority and the
principal does not ratify the contract, it shall be void if the party with whom the agent contracted is aware of the
limits of the powers granted by the principal. In this case, however, the agent is liable if he undertook to secure the
principals ratification.
[13]
Cervantes v. Court of Appeals, 304 SCRA 25 [1999].
[14]
Id., p. 18.
[15]
TSN, 16 August 1990, pp-3-6.
[16]
Ibid., pp. 7-9.
[17]
Section 23, Corporation Code.
[18]
Ysmael v. Court of Appeals, 318 SCRA 215 [1999], citing Medida v. Court of Appeals, 208 SCRA 887 [1992];
see also Sumbad v. Court of Appeals, 308 SCRA 575 [1999]; Buag v. Court of Appeals, 303 SCRA 591 [1999];
Reburiano v. Court of Appeals, 301 SCRA 342 [1999]; Spouses Jimenez v. Patricia, Inc., G.R. No. 134651, 18
September 2000.
[19]
TSN, 21 June 1990, pp. 4-8.
[20]
Ibid., pp. 12-13.
[21]
Id., p. 18.
[22]
Record, pp. 494-497.
[23]
Ibid., pp. 498-501.
[24]
Id., pp. 502-505.
[25]
Ranola v. Court of Appeals, 322 SCRA 1 [2000], citing Scott Consultants & Resource Development Corporation,
Inc. v. Court of Appeals, 242 SCRA 393 [1995]; People v. Castro, 282 SCRA 212 [1997].
G.R. No. L-2246 January 31, 1951

JOVITO R. SALONGA, plaintiff-appellee,

vs.
WARNER, BARNES AND CO., LTD., defendant-appellant.

Perkins, Ponce Enrile, Contreras and Gomez for appellant.

Pedro L. Yap for appellee.

BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Manila ordering the defendant, as
agent of Westchester Fire Insurance Company of New York, to pay to the plaintiff the sum of P727.
82 with legal interest thereon from the filing of the complaint until paid, and the costs. The case was
taken to this court because it involves only questions of law.

On August 28, 1946, Westchester Fire Insurance Company of New York entered into a contract with
Tina J. Gamboa whereby said company insured one case of rayon yardage which said Tina J.
Gamboa shipped from San Francisco, California, on steamer Clovis Victory, to Manila, Philippines
and consigned to Jovito Salonga, plaintiff herein. According to the contract of insurance, the
insurance company undertook to pay to the sender or her consignee the damages that may be
caused to the goods shipped subject to the condition that the liability of the company will be limited
to the actual loss which the insured may suffer not to the exceed the sum of (2,000. The ship arrived
in Manila on September 10, 1946. On October 7, the shipment was examined by C. B. Nelson and
Co., marine surveyors, at the request of the plaintiff, and in their examination the surveyors found a
shortage in the shipment in the amount of P1,723,12. On October 9, plaintiff filed a claim for
damages in the amount of P1,723.12 against the American President Lines, agents of the
ship Clovis Victory, demanding settlement, and when apparently no action was taken on this claim,
plaintiff demanded payment thereof from Warner, Barnes and Co., Ltd., as agent of the insurance
company in the Philippines, and this agent having refused to pay the claim, on April 17, 1947,
plaintiff instituted the present action.

In the meantime, the American President Lines, in a letter dated November 25, 1946, agreed to pay
to the plaintiff the amount of P476.17 under its liability in the bill of lading, and when this offer was
rejected, the claim was finally settled in the amount of P1,021.25. As a result, the amount claimed in
the complaint as the ultimate liability of the defendant under the insurance contract was reduced to
P717.82 only.

After trial, at which both parties presented their respective evidence, the court rendered judgment as
stated in the early part of this decision. The motion for reconsideration filed by the defendant having
been denied, the case was appealed to this court.

Appellant now assigns the following errors:

The trial court erred in finding that the loss or damage of the case of rayon yardage
(Pilferage, as found by the marine surveyors)is included in the risks insured against as
enunciated in the insurance policy.

II
 The trial court erred in holding that defendant, as agent of Westchester Fire Insurance
Company of New York, United States of America, is responsible upon the insurance claim
subject to the suit.

III

The trial court erred in denying defendant's motion for new trial and to set aside the decision.
(Appellant's assignments of error).

We will begin by discussing the second error assigned by appellant for the reason that if our view on
the question raised is in favor of the claim of appellant there would be no need to proceed with the
discussion of the other errors assigned, for that would put an end to the controversy.

As regards the second assignment of error, counsel claims that the defendant cannot be made
responsible to pay the amount in litigation because (1) said defendant has no contractual relation
with either the plaintiff or his consignor; (2) the defendant is not the real party in interest against
whom the suit should be brought; and (3) a judgment for or against an agent in no way binds the real
party in interest.

1. We are of the opinion that the first point is well taken. It is a well known rule that a contractual
obligation or liability, or an action ex-contractu, must be founded upon a contract, oral or written,
either express or implied. This is axiomatic. If there is no contract, there is no corresponding liability,
and no cause of action may arise therefrom. This is what is provided for in article 1257 of the Civil
Code. This article provides that contracts are binding upon the parties who make them and their
heirs, excepting, with respect to the latter, where the rights and obligations are not transmissible,
and when the contract contains a stipulation in favor of a third person, he may demand its fulfillment
if he gives notice of his acceptance before it is revoked. This is also the ruling laid down by this court
in the case of E. Macias and Co. vs. Warner, Barnes and Co. (43 Phil. 155) wherein, among others,
the court said:

xxx xxx xxx

. . . There is no contract of any kind, either oral or written, between the plaintiff and Warner,
Barnes and Company. Plaintiff's contracts are with the insurance companies, and are in
writing, and the premiums were paid to the insurance companies and the policies were
issued by, and in the name of, the insurance companies, and on the face of the policy itself,
the plaintiff knew that the defendant was acting as agent, for, and was representing, the
respective insurance companies in the issuance and delivery of the policies. The defendant
company did not contract or agree to do anything or to pay the plaintiff any money at any
time or on any condition, either as agent or principal.

xxx xxx xxx

Every cause of action ex-contractu must be founded upon a contract, oral or written, either
express or implied.

Warner, Barnes and Co., as principal or agent, did not make any contract, either oral or
written, with the plaintiff. The contracts were made between the respective insurance
companies and the insured, and were made by the insurance companies, through Warner,
Barnes and Co., as their agent.
 As in the case of a bank draft, it is not the cashier of the bank who makes the contract to pay
the money evidenced by the draft, it is the bank, acting through its cashier, that makes the
contract. So, in the instant case, it was the insurance companies, acting through Warner,
Barnes and Co., as their agent, that made the written contracts with the insured. (E. Macias
and Co. vs. Warner, Barnes and Co., 43 Phil., 155, 161, 162.)

Bearing in mind the above rule, we find that the defendant has not taken part, directly or indirectly, in
the contract in question. The evidence shows that the defendant did not enter into any contract
either with the plaintiff or his consignor — Tina J. Gamboa. The contract of marine insurance, Exhibit
C, was made and executed only by and between the Westchester Fire Insurance Company of New
York and Tina J. Gamboa. The contract was entered in New York. There is nothing therein which
may affect, in favor or adversely, the defendant, the fulfillment of which may be demanded by or
against it. That contract is purely bilateral, binding only upon Gamboa and the insurance company.
When the lower court, therefore, imposed upon the defendant an obligation which it has never
assumed, either expressly or impliedly, or when it extended to the defendant the effects of a contract
which was entered into exclusively by and between the Westchester Fire Insurance Company of
New York and Tina J. Gamboa, the error it has committed is evident. This is contrary to law.

We do not find any material variance between this case and the case of E. Macias and
Co. vs. Warner, Barnes and Co., supra, as pointed out by counsel for appellee, in so far as the
principle we are considering is concerned. Both cases involve similar facts which call for the
application of a similar ruling. In both cases the issue is whether an agent, who acts within the scope
of his authority, can assume personal liability for a contract entered into by him in behalf of his
principal. And in the Macias case we said that the agent did not assume personal liability because
the only party bound was the principal. And in this case this principle acquires added force and effect
when we consider the fact that the defendant did not sign the contract as agent of the foreign
insurance company as the defendant did in the Macias case. The Macias case, therefore, is on all
fours with this case and is decisive of the question under consideration.

2. Counsel next contends that Warner, Barnes and Co., Ltd., is not the real party in interest against
whom the suit should be brought. It is claimed that this action should have been filed against its
principal, the Westchester Fire Insurance Company of New York. This point is also well taken.
Section 2, Rule 3 of the Rules of Court requires that "every action must be prosecuted in the name
of the real party in interest." A corollary proposition to this rule is that an action must be brought
against the real party in interest, or against a party which may be bound by the judgment to be
rendered therein (Salmon and Pacific Commercial Co. vs. Tan Cueco, 36 Phil., 556). The real party
in interest is the party who would be benefited or injured by the judgment, or the "party entitled to the
avails of the suit" (1 Sutherland, Court Pleading Practice and Forms, p. 11). And in the case at bar,
the defendant issued upon in its capacity as agent of Westchester Fire Insurance Company of New
York in spite of the fact that the insurance contract has not been signed by it. As we have said, the
defendant did not assume any obligation thereunder either as agent or as a principal. It cannot,
therefore, be made liable under said contract, and hence it can be said that this case was filed
against one who is not the real party in interest.

We agree with counsel for the appellee that the defendant is a settlement and adjustment agent of
the foreign insurance company and that as such agent it has the authority to settle all the losses and
claims that may arise under the policies that may be issued by or in behalf of said company in
accordance with the instructions it may receive from time to time from its principal, but we disagree
with counsel in his contention that as such adjustment and settlement agent, the defendant has
assumed personal liability under said policies, and, therefore, it can be sued in its own right. An
adjustment and settlement agent is no different from any other agent from the point of view of his
responsibility, for he also acts in a representative capacity. Whenever he adjusts or settles a claim,
he does it in behalf of his principal, and his action is binding not upon himself but upon his principal.
And here again, the ordinary rule of agency applies. The following authorities bear this out:

An insurance adjuster is ordinarily a special agent for the person or company for whom he
acts, and his authority is prima facie coextensive with the business intrusted to him. . . .

An adjuster does not discharge functions of a quasi-judicial nature, but represents his
employer, to whom he owes faithful service, and for his acts, in the employer's interest, the
employer is responsible so long as the acts are done while the agent is acting within the
scope of his employment. (45 C. J. S., 1338-1340.)

It, therefore, clearly appears that the scope and extent of the functions of an adjustment and
settlement agent do not include personal liability. His functions are merely to settle and adjusts
claims in behalf of his principal if those claims are proven and undisputed, and if the claim is
disputed or is disapproved by the principal, like in the instant case, the agent does not assume any
personal liability. The recourse of the insured is to press his claim against the principal.

3. This brings us to the consideration of the third point. It is claimed that a judgment, for or against
an agent, in no way binds the real party in interest. In our opinion this point is also well taken, for it is
but a sequel to the principle we have pointed out above. The reason is obvious. An action is brought
for a practical purpose, nay to obtain actual and positive relief. If the party sued upon is not the
proper party, any decision that may be rendered against him would be futile, for it cannot be
enforced or executed. The effort that may be employed will be wasted. Such would be the result of
this case if it will be allowed to proceed against the defendant, for even if a favorable judgment is
obtained against it, it cannot be enforced because the real party is not involved. The defendant
cannot be made to pay for something it is not responsible. Thus, in the following authorities it was
held:

. . . Section 114 of the Code of Civil Procedure requires an action to be brought in the name
of the real party in interest; and a corollary proposition requires that an action shall be
brought against the persons or entities which are to be bound by the judgment obtained
therein. An action upon a cause of action pertaining to his principal cannot be brought by an
attorney-in-fact in his name (Arroyo vs. Granada and Gentero, 18 Phil., 484); nor can an
action based upon a right of action belonging to a principal be brought in the name of his
representative (Lichauco vs. Limjuco and Gonzalo, 19 Phil., 12). Actions must be brought by
the real parties in interest and against the persons who are to be bound by the judgment
obtained therein. (Salmon and Pacific Commercial Co. vs. Tan Cueco, 36 Phil., 557-558.)

xxx xxx xxx

An action to set aside an instrument of transfer of land should be brought in the name of the
real party in interest. An apoderado or attorney in fact is not a real party. He has no interest
in the litigation and has absolutely no right to bring the defendant into court or to put him to
the expense of a suit, and there is no pro-vision of law permitting action to be brought in such
manner. A judgment for or against the apoderado in no way binds or affects the real party,
and a decision in the suit would be utterly futile. It would touch no interest, adjust no
question, bind no one, and settle no litigation. Courts should not be required to spend their
time solemnly considering and deciding cases where no one could be bound and no interest
affected by such deliberation and decision. (Arroyo vs. Granada and Gentero, 18 Phil., 484.)

If the case cannot be filed against the defendant as we have pointed out, what then is the remedy of
the plaintiff under the circumstances? Is the case of the plaintiff beyond remedy? We believe that the
only way by which the plaintiff can bring the principal into this case or make it come under the courts
in this jurisdiction is to follow the procedure indicated in section 14, Rule 7, of the Rules of Court
concerning litigations involving foreign corporations. This rule says that if the defendant is a foreign
corporation and it has not designated an agent in the Philippines on whom service may be made in
case of litigation, such service may be made on any agent it may have in the Philippines. And in our
opinion the Westchester Fire Insurance Company of new York comes within the import of this rule
for even if it has not designated an agent as required by law, it has however a settling agent who
may serve the purpose. In other words, an action may be brought against said insurance company in
the Philippines and the process may be served on the defendant to give our courts the necessary
jurisdiction. This is the way we have pointed out in the case of General Corporation of the
Philippines and Mayon Investment Co. vs. Union Insurance Society of Canton Ltd. et al., (87 Phil.,
313).

In view of the foregoing, we are of the opinion and so hold that the lower court erred in holding the
defendant responsible for the loss or damage claimed in the complaint. And having arrived at this
conclusion, we do not deem it necessary to pass upon the other errors assigned by the appellant.

Wherefore, the decision appealed from is hereby reversed. The complaint is hereby dismissed, with
costs against the appellee.

Moran, C.J., Paras, Feria, Pablo, Bengzon, Padilla, Tuason, Montemayor, Reyes and Jugo,
JJ., concur.
CORAZON CH. VELOSO Y RICABLANCA and ROBUSTIANO M. ROSALES, plaintiff-appellee,
vs.
LA URBANA, Mutual Building and Loan Association, and JOSE MARIA DEL MAR, defendants.
LA URBANA, Mutual Building and Loan Association, appellant.

Ramirez and Ortigas for appellant.

Gullas, Lopez and Tuaño and Jose N. Leuterio for appellees.
Office of the Solicitor-General Hilado for the Insular Treasurer as amicus curiae.

IMPERIAL, J.:

The plaintiffs herein brought this action to annul certain mortgages constituted by Jose Maria del Mar
in the name of the plaintiff, Corazon Ch. Veloso in favor of the defendant corporation, and recover
damages amounting to P2,000 from the defendants.

La Urbana, one of the defendants herein, appealed from the judgment rendered in this case, the
dispositive part of which reads as follows:

For the reasons above stated, the deeds of mortgage executed by Jose del Mar in the name
of Corazon Ch. Veloso in favor of La Urbana are declared null and void in so far as they
purport to bind the plaintiffs or their property; the sale of the said property to La Urbana by
virtue of these mortgages is also hereby declared null and void; and it is further ordered and
adjudged that the registration of the said deeds in the office of the register of deeds of Manila
be cancelled, and that La Urbana and Jose del Mar pay the costs of this suit.

This decision is without prejudice to any right of action which La Urbana may have against
Jose Maria del Mar or the Insular Treasurer, or both, under the provisions of sections 99 to
107 of Act No. 496. So ordered. lawphil.net

The plaintiff Corazon Ch. Veloso was the owner of certain undivided portions of the five parcels of
land in question together with the improvements thereon, situated in the City of Manila, and
described in certificates of title Nos. 5767 and 33360. In the month of May, 1929, the defendant
herein Jose Maria del Mar, plaintiff's brother-in-law, forged two powers of attorney purporting to have
been executed by the plaintiffs, as husband and wife, conferring upon him ample authority to
mortgage the plaintiff's participation in the aforementioned properties described in said certificates of
title. These powers of attorney were duly registered in the office of the register of deeds. Acting
under these powers of attorney, Del Mar succeeded in mortgaging the plaintiff's participations to La
Previsora Filipina. On February 6, 1929, he cancelled said mortgage and transferred it to the
defendant La Urbana which granted him a loan of P10,600. Upon mortgaging the said participations
of the plaintiff to the aforesaid defendant, Del Mar delivered to the mortgage creditor the owner's
duplicates of the certificates of title whereon the mortgage in question was noted. On November 14
of the same year. Del Mar obtained from the same defendant an additional loan, of P2,875 and
executing another mortgage deed which was likewise noted or, the aforesaid duplicates of the
certificates of title. Del Mar later violated the conditions of the mortgages whereupon La Urbana
foreclosed them and purchased the said properties at public auction for the sum of P10,051.82
which was the total amount of Del Mar's indebtedness at that time. The plaintiffs herein learned of
del Mar's fraudulent transactions from the advertisement of the sale thereof, and in addition to this
civil action, they instituted criminal proceedings against him resulting in his conviction of the crime of
falsification and the imposition upon him of a sentence of two (2) years, four (4) months and one (1)
day of prision correccional.

In view of the foregoing facts, the court held that pursuant to article 1714 of the Civil Code and under
the Torrens Act in force in this jurisdiction, the forged powers of attorney prepared by Del Mar were
without force and effects and that the registration of the mortgages constituted by virtue thereof were
likewise null and void and without force and effect, and that they could not in any way prejudice the
rights of the plaintiff as the registered owners of her participations in the properties in question.

The defendant-appellant herein assign various alleged errors in its brief consideration thereof.
Inasmuch as Del Mar is not the registered owner of the mortgaged properties and inasmuch as the
appellant was fully aware of the fact that it was dealing with him on the strength of the alleged
powers of attorney purporting to have been conferred upon him by the plaintiff, it was its duty to
ascertain the genuineness of said instruments and not the said powers of attorney appeared to have
been registered. In view of its failure to proceed in this manner, it acted negligently and should suffer
the consequences and damages resulting from such transactions. lawph!l.net

Every person dealing with an agent is put upon inquiry, and must discover upon his peril the
authority of the agent, and this is specially true where the act of the agent is of an unusual
nature.

If a person makes no inquiry, he is chargeable with knowledge of the agent's authority, and
his ignorance of that authority will not be any excuse. (Deen vs. Pacific Commercial Co., 42
Phil., 738.)

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, to ascertain not only the
fact of the agency but the nature and extent of the authority, and in case either is
controverted, the burden of proof is upon them to establish it. (Harry E. Keeler Electric
Co. vs. Rodriguez, 44 Phil., 19.)

As has been noted at the beginning, the court reserved to the appellant any right of action it might
have against Del Mar and the Insular Treasurer under the provisions of sections 99 to 107 of Act
496. We deem it unnecessary to repeat such reservation in this decision. At all events, the appellant
may exercise such right of action without the necessity of such reservation if the facts of the case so
warrant.

Wherefore, the judgment appealed from is hereby affirmed, with the costs against the appellant. So
ordered.

Malcolm, Villa-Real, Hull, and Butte, JJ., concur.

ELEANOR ERICA STRONG, ET AL., plaintiffs-appellees,
vs.
FRANCISCO GUTIERREZ REPIDE, defendant-appellant.

Chicote and Miranda and Tirso de Irureta Goyena for appellant.

Bruce, Lawrence, Ross and Block for appellees.

MORELAND, J.:

Prior to October 10, 1903, the plaintiff, Eleanor Erica Strong, was the owner of 800 shares of the
capital stock of the Philippine Sugar Estates Development Company, Limited (sociedad anonima), of
the par value of P100 each, evidenced by certificates Nos. 2125 to 2924, inclusive. On the said 10th
day of October, 1903, the defendant, Francisco Gutierrez Repide, by means subsequently found and
adjudged to have been fraudulent, obtained possession of said shares and thereafter alleged to be
the owner thereof. On the 12th day of January, 1904, the plaintiff commenced an action against the
defendant in the Court of First Instance of the city of Manila (case No. 2365) asking that the
fraudulent sale by means of which the defendant obtained possession of the said shares be
declared null and void and that they be returned to her. On the 29th of April, 1904, the Court of First
Instance of the city of Manila rendered its decision, finding in part as follows:

Upon the facts stated, the court holds that the sale of these shares was made without the
authority of Mrs. Strong, that she never ratified the sale but repudiated it as soon as she
learned of it, that this sale was induced by fraud on the part of the defendant, and therefore
was a fraudulent sale.

The court, therefore, declares that the purchase of these shares of stock by the defendant is
fraudulent and void, and it is ordered by the court that the same be set aside and for nothing
held.

This judgment fixed the value of the shares at P138,352.71, awarding judgment in this amount to the
plaintiff and directing that the said judgment might be satisfied by defendant's delivering to the
plaintiff the said shares, in which event the plaintiff should pay to the defendant $16,000 Mexican
currency, or its equivalent in Philippine currency. This judgment was, on appeal to the Supreme
Court of the Philippine Islands, reversed, and plaintiff's complaint dismissed on the
merits.1 Thereupon plaintiff prosecuted an appeal to the Supreme Court of the United States, which
court, on the 3d of May, 1909, rendered its judgment, reversing the decision of the Supreme Court of
the Philippine Islands and affirming the judgment of the trial court. On the 27th of July, 1909, the said
judgment of April 29, 1904, was satisfied by defendant's returning to the plaintiff 800 shares of stock
of said company, evidenced by certificates Nos. 1621, 1623, 1624, 1625, 1626, 1628, 1629, and
1630, and the payment by the plaintiff to the defendant of P14,159.29 Philippine currency, equivalent
to $16,000 Mexican currency. Said satisfaction was effected by means of a stipulation or agreement
entered into between the attorneys for the plaintiff and the defendant, in which the satisfaction of the
judgment was acknowledged by both parties. From the 10th day of October, 1903, the date of the
said fraudulent purchase by the defendant, until the 27th day of July, 1909, the defendant retained
said shares in his possession or under his control and after the rendition of said judgment of April 29,
1904, collected the dividends earned by said shares for the years 1905, 1906, 1907, and 1908 at the
rate of 6 per cent per annum, amounting to a total of P19,200, which sum the defendant retained
and refused to pay over to the plaintiff. After demand upon and refusal by the defendant, the plaintiff
began this action for the recovery of said sum. On the 24th of March, 1911, the Court of First
Instance of the city of Manila rendered judgment in favor of the plaintiff for the said sum of P19,200,
with interest thereon at the rate of 6 per cent per annum from the date of the filing of the complaint,
allowing to the defendant as an offset interest on P14,159.29 at 6 per cent per annum from October
10, 1903, to July 27, 1909, being the dates, respectively, of the purchase of the stock by the
defendant and the satisfaction of the judgment in case No. 2365. Both parties excepted to this
judgment and filed motions for a new trial, and the court upon the hearings modified its judgment by
allowing defendant to offset against plaintiff's judgment interest on P14,159.29 at the rate of 6 per
cent per annum from the 10th day of October, 1903, to the 12th day of January, 1904, the latter date
being that of plaintiff's tender of repayment of defendant. From said judgment as modified the
defendant prosecutes this appeal. The plaintiff is satisfied.

The appellant in this case relies for the success of this appeal upon the form of the judgment of the
court below in said action No. 2365. He asserts that that judgment is for a sum of money and not for
the rescission of a contract and the return of shares of stock. This being so, he maintains that the
payment of the sum named in the judgment, whether by money or by shares of stock, was a
complete satisfaction of the judgment in that case. The mere fact that it was paid in shares of stock
did not indicate that the judgment of the trial court was for shares of stock but said judgment was, on
the contrary, in reality and in legal effect for a sum of money which could be paid in shares of stock
as well as in coin of the realm. Basing himself upon this contention appellant asserts that that
judgment having been satisfied by the payment of the sum adjudged to be due, a subsequent action
for dividends on said stock is in effect an action for interest on the said sum found to be due, that it
affects the subject matter of a judgment already paid and discharged.

We do not believe that the contention of the appellant is sound. The action begun in the trial court
was to set aside a sale made by the plaintiff to the defendant and for the return of the shares of
stock which were the subject of that sale. The basis of that action was the claim that the plaintiff had
been deprived of the shares of stock in question by false and fraudulent representations and
fraudulent concealment on the part of the defendant, or of his agents, and that thereby she had been
induced to part with those shares without just compensation and, in reality, without her legal
consent. The trial court found in favor of the plaintiff, declaring the sale of the stock to have been
fraudulently obtained and setting aside the sale absolutely, as is indicated by that portion of its
opinion heretofore quoted. On the appeal to the Supreme Court of the United States the fraudulent
character of the representations by which the plaintiff had been induced to part with her stock was
fully affirmed after a thorough consideration of the facts and circumstances of the case and the
judgment of the trial court setting aside the sale on the ground of fraud was affirmed in every
particular. It is a necessary conclusion, therefore, that the action was in reality for the return of the
stock itself, with appropriate damages in case the return was not made by the defendant. The finding
of the court that the value of the stock was P138,352.71 was not made for the purpose of declaring
the nature of the action to be one for the recovery of money, but rather, for the purpose of giving to
the plaintiff her alternative remedy in case the stock itself should not be returned. That the same
identical shares of stock obtained by the defendant were not, as a matter of fact, returned to plaintiff
is not controlling. They were identical in everything except their numbers and were tendered and
received in fulfillment of the provisions of the judgment. All of the stock of said company was the
same kind and paid the same dividend.

The judgment of the trial court, as affirmed by the Supreme Court of the United States, set aside the
sale as fraudulent, and, therefore, by necessary result, the title to the shares of stock in question
passed to the plaintiff if it be conceded that the title ever legally passed from her. The delivery of
those shares to her by the defendant under that judgment was an admission of her title as declared
by the court and was a delivery of possession in pursuance of that declaration of ownership. Under
the decisions referred to, as between the parties thereto, the plaintiff was legally the owner of said
stock from the time when she was fraudulently deprived of it until the time it was returned to her as
fully and as completely as she was after the adjudication of the title and return of the stock itself.
Whoever, therefore, during that period collected the dividends upon the said stock took from the
plaintiff something which belonged to her. While the defendant asserts that he was at no time the
owner of said stock, the finding of the trial court and the finding of the Supreme Court of the United
States on appeal were to the effect that the defendant was the real purchaser of the stock from the
plaintiff under the fraudulent sale, although the negotiations leading up to the sale were carried on by
other persons. The fraudulent sale having been made to him, it is unquestionable that he became
responsible to the plaintiff from that moment forward. So far as the responsibility of the defendant
was concerned, it is of no consequence who actually collected and retained the dividends. The
plaintiff had a right to look to the defendant and to him alone.

Unless, therefore, the plaintiff has, by some act subsequent to obtaining the judgment referred to,
released her rights to recover of the defendant the income of the stock during the time he held it, that
right still subsists. The consideration of this question brings us to the other contention of the
appellant. It is to the effect that when the judgement in question was paid a stipulation or agreement
was entered into between him and the plaintiff by virtue of which the plaintiff released him from all
responsibility in connection with the transaction relating to the stock. That agreement, translated,
reads as follows:

I, W. H. Lawrence, lawyer, with full authority from the plaintiff in the above-entitled action for
the purpose of this instrument; and I, Eduardo Gutierrez Repide, lawyer, and being also fully
authorized and empowered hereto by the defendant in said action, now, for the purpose of
satisfying the judgment rendered therein, I, W. H. Lawrence, hereby deliver to Eduardo
Gutierrez P14,159.29, and I, Eduardo Gutierrez, on my part deliver to said W. H. Lawrence
the cost of this action and eight certificates of stock of the Philippine Sugar Estates
Development Company, each certificate representing 100 shares, which certificates are of
the par value of P10,000 each, and are numbered 1621, 1623, 1624, 1625, 1626, 1628,
1629, and 1630. Wherefore, both parties agree and stipulate that, by reason of the said
payments hereby mutually made, the judgment in the above-entitled action is entirely paid
and the action is finally settled and terminated, together with all the legal results flowing from
said judgment.

We see nothing in this written discharge which could properly be given the legal effects which the
appellant in this case assigns to it. It is a discharge of a judgment and nothing more. Being such, it
reaches no further than the terms of the judgment itself. It is to be presumed that an instrument
satisfying a debt or obligation manifested in another instrument extends no further than the terms of
the instrument which manifests the obligation to be discharged, unless, from the terms of the
instrument, it is clear that the parties intended something more. So far as the record discloses, at the
time this satisfaction was executed nothing whatever occurred between the parties relative to the
dividends on the stock which formed the subject-matter of that judgment, nor did anything transpire
as to any other relations between the parties than those embraced within the judgment itself. There
was nothing in the conduct of the parties, or in their relations or attitudes, from which it could be
implied or inferred that they were dealing with aught else than the judgement itself. There is no
basis, then, for the contention of the appellant unless it be found in the wording of that instrument
itself. As we have already indicated, however, there is nothing in the phraseology of that document
which in the remotest way touches the rights of the parties as to the dividends upon the stock or
which embraces any other matter between the parties than the subject matter of the judgment itself.
The words employed in such an instrument should not be extended beyond the consideration upon
which the instrument was executed as otherwise the courts would be making for the parties a
release which they never intended or contemplated.

Relative to the scope and extent of the satisfaction referred to the trial court said:

While it may appear from the stipulation entered into when the judgment was satisfied
between the parties interchanging the shares of stock and money, as before stated, that the
plaintiff had no further claim against the defendant, because at that time the plaintiff paid the
 defendant a large sum of money without making claim, it also appears that the plaintiff was
not aware that the defendant had collected the dividends before referred to.

In arguing this question plaintiff's counsel devotes himself at some length to sustaining this finding of
fact, and asserts that "even had she been aware of this fact it would make no difference for the
reason that the matter of dividends was not and could not have been involved in the original suit." It
is true that the dividends were not included in the cause of action set forth in the complaint in cause
No. 2365 and were not, therefore, a subject of adjudication in that action. We are of the opinion,
however, that they might have been, at least in part. The plaintiff in suing for the recovery of shares
illegally taken from her by the defendant had the right to demand their return and with them whatever
damages she had sustained by reason of their retention, which would be in this case the dividends
which had been collected on them by the defendant while they were in his possession. That is,
strictly speaking, what the plaintiff should have demanded in her complaint. Generally speaking, it is
not permitted that a plaintiff sue for the recovery of property which is illegally detained by another,
and, after recovering that property, sue in a separate action for the damages sustained by that illegal
detention. The law seeks to prevent multiplicity of actions, and it is the duty of every person suing to
join in one action every cause of action which he has against the defendant, to the end that all
questions between the parties be litigated in one suit and multiplicity of actions and resulting
expenses prevented. This is a question, however, which could have been raised in the court below
by the defendant. He did not do so. Neither has he raised the question in this court directly. We,
therefore, do not pass upon it or base any finding upon it. The purpose which we have in referring to
it at all is to indicate that the real question arising from the controversy between the parties relative
to this particular assignment of error really resolves itself into one of multiplicity of actions, that is, of
the duty of the plaintiff to join all her causes of action against the defendant in one complaint, and
not the one presented by the appellant in his argument relative to the reach which should be given to
the document of satisfaction. We, therefore, disapprove of the contention of the appellant that the
satisfaction of the judgment reaches further than the terms of the judgment itself. It does not
embrace any other relations between the parties than those embraced in the plain wording of the
judgment. While the dividends might, in part, have been included in the cause of action set forth in
the complaint in that action and, as far as possible, should have been incorporated therein,
nevertheless they were not so made and, therefore, formed no part of the judgment in which that
action terminated. When, therefore, after the satisfaction of that judgment, plaintiff began a separate
action to recover the dividends, the only defense available to the defendant was the plea of
multiplicity. That plea not having been made, no question relating thereto is presented on this
appeal.

It is true that plaintiff could have included in her action and recovered at the most only those
dividends which were due at the time judgment in her favor was entered. It happens in this case that
most of the dividends became payable after the plaintiff had secured her judgment. That being so,
they could not have been included by her in the original complaint, not could they have been
incorporated within the judgment in that action. This, then, furnishes another reason why the
contention of the appellant in this regard cannot be sustained. Under such circumstances a plea of
multiplicity, even if made, would not have been available as to those dividends which became
payable after the judgment was entered in that action.

The remaining question presented by appellant relates to the interest which he was entitled to
recover or the amount due him from the plaintiff. As we have already seen, the judgment of the court
in the first place gave him the interest on said amount from the 10th day of October, 1903, to the
27th day of July, 1909. On motion made by the plaintiff the court amended that judgment by giving
the defendant interest on said sum from the 10th day of October, 1903, to the 12th day of January,
1904. The reason for the amendment was the fact, as disclosed by the proofs, that on the latter date
the plaintiff tendered to the defendant said sum of money and the defendant at that time refused to
accept the same. Under such circumstances, the court properly held that the tender of the sum and
its refusal by the defendant stopped the running of interest in favor of the latter and he was not,
therefore, entitled to recover interest from that day forward. The appellant argues in this connection
that he should not be blamed or punished for the refusal to accept the tender of the plaintiff for the
reason that he was not the owner of the stock at the time of such tender and, therefore, could not
accept it. As we have already seen in touching another question raised on this appeal, the court, in a
judgment now final, found that the sale of stock afterwards declared fraudulent was executed
between the plaintiff and the defendant. As to this there can be no question. As a necessary result
the plaintiff need look for her redress no further than the defendant himself and she could produce all
of the legal effects possible in her favor by dealing directly with him, as she did when she made the
tender in question.

For these reasons the judgment appealed from is affirmed, without special finding as to costs. So
ordered.

Torres, Johnson, Carson and Trent, JJ., concur.

N. T. DEEN, plaintiff-appellee,
vs.
PACIFIC COMMERCIAL CO., defendant-appellant.

Mas Shoop & Block, Johnston and Greenbaum for appellant.

McVean & Vickers for appellee.

JOHNS, J.:

It is undisputed that the plaintiff is a resident of Cebu and duly licensed as real estate broker in the
Philippine Islands. That the Pacific Commercial Company, to which we will hereafter refer as the
Company, is a duly organized corporation and authorized to do business in the Philippine Islands,
with its principal office and place of business in the city of Manila. That it has numerous branch
houses, one of which is in Cebu, and does more or less business all over the Philippine Islands.
That the defendant L.J. Francisco is a resident of Cebu and the local manager of the Company at
that place. That at the time specified, the Company was the owner of a concrete cement warehouse
in sections 4 and 5 of block 6 on the water front of Cebu, which is used and rented as a bodega.
That H.B. Pond was a resident of Manila and the vice-president and general manager of the
Company. That on October 15, 1919, he wrote a letter to Francisco at Cebu, enclosing a blueprint of
the property which the Company owned there, and stating that it was offered for the sum of
P300,000 and our warehouse P100,000," in which he further said: "If this property is sold
arrangements will of course have to be made to protect us and also to protect the leases at present
on the property of the Cebu Warehouse Co. As you know, it is our plan to occupy the warehouse at
present leased to Messrs. Macleod and Co. which adjoins our Cebu Office. Will you please look
around Cebu and see if you can find buyers for this property?"

December 1, 1919, Francisco wrote the following letter to the plaintiff:

I attach blueprint which will show P. C. C. properties for sale on the waterfront. Dr. Pond is
familiar with the terms of the Government leases. They were to run for 100 years, I believe,
from 1910, and are subject to re-valuation each ten years. Dr. Pond has recently investigated
the subject and will give you details, I am sure.

Block No. 4. — The Pacific Commercial Company has for sale sections Nos. 1, 2, and 3. The
area is given in the sections. Sections Nos. 1 and 2 are at present occupied by Stevenson
and Co. and section No. 3, by Macleod and Co. Stevenson and Co. pay P750 a month for
section 1 and 2, and Macleod and Company pay P375, for section No. 3. The Pacific
Commercial Company is asking P200,000 net to them for these three sections. Our offer to
any one is that these three sections are subject to leases with Macleod and Co. and
Stevenson and Co. These leases expire December 31, 1921.

Block No. 6. — The Pacific Commercial Company now owns and occupies a bodega on
areas Nos. 4 and 5 in Block No. 6. The areas are given on the blueprint.

The Pacific Commercial Company is placing this property for sale at P100,000 net to them.

In case a sale is consummated it must be understood that we shall be permitted to continue

to occupy this warehouse for a reasonable length of time in order that we may secure other
bodega space and arrange the transfer of our hemp press, etc."

December 12, 1919, the plaintiff wrote the following letter to Francisco:
 Re the sale of Bodegas as per your letter of Dec. 1st/19, I beg to inform you that I have set
the ball rolling. Am I right in assuming that there is no other person authorized to offer these
Bodegas for sale? I, furthermore, beg to request that no prices be given to any person
directly, but any inquiries made be referred to me.

It appears that, as Francisco construed the letter of vice-president Pond to him of date October 15th,
he did not think it prudent for the Company to dispose of its property in section 4 and 5 of block 6 in
Cebu, and that on December tenth, he wrote to Pond, as vice-president, advising against the sale.
December 16th, vice-president Pond wrote a letter to Francisco, in which, among other things, he
said:

Your letter leads me to believe that you have misunderstood the basis on which we were
considering the sale of your warehouse No. 2. In selling this warehouse we have, therefore,
considered all along that it would be only on the understanding that we shall be permitted to
occupy this warehouse until the lease of Macleod and Company on their present premises
expires. On any other basis it would of course be foolish for us to dispose of the property.

In view of recent developments I suggest that you discontinue making any efforts to dispose
of warehouse No. 2. We shall take up our future policy in connection with our warehouses in
Cebu at the time Mr. Loewenstain and I visit Cebu in January.

This letter was received by Francisco at Cebu on the morning of December 19th, and he at once
telephoned the plaintiff the substance of the letter, and that the property was withdrawn from the
market.

December 19th, the plaintiff wrote Francisco, as manager of the Company, the following letter:

With reference to our telephone conversation this morning, the deal for the sale of your
Bodega has gone so far and in accordance with the terms of your letter to me, that I don't
see how I can repudiate the agreement I have made with the buyer. The entire transaction
will be terminated and the money paid to you within ten days or less.

On the same day, Francisco, as manager, wrote the plaintiff the following letter:

I have your letter of the 19th of December with reference to the sale of our Warehouse No. 2.
As soon as we receive the offer it will be placed before our Manila Executives for
acceptance.

I beg to state — outside of this particular deal — that this property was withdrawn from sale
in accordance with the instructions received today from our Manila Office.

And on December 20th, wrote him another letter, the material portions of which are as follows:

Replying to your letters of December 19th and December 20th, we beg to state that our offer
to you to negotiate on our behalf a sale of waterfront property in Cebu was subject to
confirmation of the agreement to sell by our head office in Manila. This branch has no
authority to close a deal of this character without express approval of the Manila office and in
fact assignment of the lease to the land must be approved by the Bureau of Lands. On
December 19th the writer telephoned you and talked to you withdrawing this property from
sale and you replied on the same day by letter that the deal for the sale had gone too far for
you to then withdraw your offer. Not until December 20th was a definite offer made to us and
 then you quoted a price of P100,000 in cash and stated that the money would be paid as
soon as the necessary documents are drawn up. We again call your attention to the fact that
the necessary documents cannot be drawn up until the Manila office approves this sale, that
is to say, you were notified before you closed with the person who is now offering to buy that
the writer alone was not authorized to consummate this sale.

A lease of this character for this period is essential to consummate this deal for the reason
that the Pacific Commercia Company is now occupying the property was are discussing and
no other suitable bodega space is available in Cebu and will not be, according to our
information, until about December 31, 1921, and the Company does not propose to be put
out into the street. The writer regrets that you misunderstood his letter of December 1st
which was intended to have you secure offers which were to be submitted and forwarded to
Manila. . . .

The plaintiff claiming that he had a buyer who was able, ready and willing to purchase the property
and pay P120,000 for it, and the Company refusing to sell and convey the property, after certain
negotiations, for the purpose of trying to settle the dispute between them, the plaintiff commenced
this action.

The complaint alleges that on December 1, 1919, the defendant Francisco, as manager of the
defendant Company, and complying with its instructions, offered in writing to plaintiff for sale
sections 4 and 5 of block of 6 of the Cebu Reclaimed Lands for the sum of P100,000, "and utilized in
effect plaintiff in his capacity already cited to negotiate the sale of the property."

That said defendant, L. J. Francisco, in offering and recommending to plaintiff the negotiation
for the sale of the property already mentioned, agreed with the latter that, if he could sell said
property for the fixed sum of P100,000, the plaintiff would receive, as remuneration for his
services in the negotiation of the sale, any amount which could be obtained from the buyer in
excess of the said sum, whatever may be the value of the difference.

That on the 18th of December, 1919, the plaintiff effected the negotiation of the sale said
warehouse, and promised in the name of his principal with the Roman Catholic Bishop of
Cebu, that he would sell to him for the sum of P120,000 the warehouse referred to, having
closed the agreement with the Roman Catholic Bishop referred to on the same date; and that
the defendant L. J. Francisco was immediately notified of the execution of this agreement.

It is then alleged that the defendants "have refused to pay the plaintiff his commission of P20,000,
notwithstanding the demands made by the plaintiff, which sum is due and payable by the defendants
jointly and severally."

As a second cause of action, the plaintiff alleges in substance that the defendants have formed a
conspiracy to defeat plaintiff's claim against the Company, and to place all liability upon the
defendant Francisco.

The defendants filed a general demurrer to the complaint which was overruled. An answer was then
filed, in which they admit the formal allegations of the complaint, and make a general denial of all the
others. Testimony was taken upon such issues, and the trial court dismissed the action as to
Francisco, and rendered a judgment against the Company for P20,000, with interest and costs, from
which is appealed, making eighteen assignments of error. The plaintiff did not appeal.

Although the trial court found for the plaintiff and against the Company, and there is a sharp conflict
in much of the evidence, there is no dispute about any of the matters above stated. Neither is there
any allegation or proof that Francisco was an officer or director of the Company, or that he had any
authority to convey the property, or that his signature was necessary to the conveyance. It is also
undisputed that the fee to the property was in the Government, and that the Company had a ninety-
nine-year lease from the Government, dating from 1910, subject to certain terms and provisions,
among which was the fact that the lease could not be assigned without the consent of the
Government. It is also undisputed that at the time in question Mr. Pond was vice-president and
general manager of the Company, and that his signature was necessary to any conveyance of real
property. In fact, he was the only officer of the Company in the Philippine Islands who had authority
to make such a conveyance.

The defendant Francisco, being only the local manager of the branch office of the Company at Cebu
and not an officer or director, unless otherwise empowered, would not have any authority to sell or
convey the real property of the Company, or make a contract for a sale or conveyance. That power
was primarily vested in the Board of Directors and the executive officers of the Company, and it
appears from the record that at the time of the alleged acts, it was delegated to, and vested in, Mr.
Pond, who was the vice-president and general manager of the Company, and that he alone was
authorized by the Board of Directors to exercise that power. Francisco, as local manager, not having
any authority to make contracts for the sale or conveyance of the real property of the Company, his
authority, if any, must come from the Company or Pond, its general manager. Any authority of
Francisco must be found in the letter to him of October 15, 1919, from vice-president Pond, in which,
after speaking of the value of relative areas, and that the value of the property in question would
figure out P100,000, he says: "If this property is sold arrangements will of course have to be made to
protect us and also to protect the leases at present, on the property of the Cebu Warehouse Co. As
you know, it is our plan to occupy the warehouse at present leased to Messrs. Macleod and Co.
which adjoins our Cebu Office. Will you please look around Cebu and see if you can find buyers for
this property." By the express terms of this letter, the authority of Francisco was limited to "look
around Cebu and see if you can find buyers for this property." It did not authorize him to sell the
property or to contract for its sale. His instructions were to look around and see if he could find a
buyer. Again, the letter clearly says that an agreement will "have to be made to protect us and also
to protect the leases at present on the property of the Cebu Warehouse Co." That it was the plan of
the Company to occupy the warehouse which adjoint its Cebu office. By the very terms of the latter,
any sale of the property was subject to the approval of the home office at Manila, and no sale could
be made without its approval, and yet, under the record, any authority of Francisco to sell or contract
for the sale of the property must be found in this letter. This letter was followed by the one of
Francisco to the plaintiff of December 1, 1919, above quoted, which was written on the stationery of
the Company, and is signed merely "L. J. Francisco." The letterhead shows upon its face that the
head office of the Company is in Manila, and that it has branch offices at Sydney, Kobe, Cebu, Iloilo
and Zamboanga. After stating that the property is held under Government leases and placing the
value of the property at P200,000 on block 4, this letter says: The Company "now owns and
occupies a bodega on areas Nos. 4 and 5 in block No. 6. The areas are given on the blueprint," and
it "is placing this property for sale at P100,000 net to them." Also, that in the event of a sale, "it must
be understood that we shall be permitted to continue to occupy this warehouse for a reasonable
length of time in order that we may secure other bodega space and arrange the transfer of our hemp
press, etc." Here again, this letter expressly says any sale of the property would be conditional.
Although this letter is not as clear and explicit on that point as that of vice-president Pond of October
15th, it does clearly point out that, as one of the conditions of the sale, the Company must have an
agreement satisfactory to it for the continued possession of the property. By the very terms of this
letter, the right was reserved to the Company to say what terms would be and would not be
satisfactory, and what would be a reasonable length of time, for its continued possession of the
property. The power to do that was never delegated by the Company, or in the letter to Deen. Again,
the plaintiff either knew or it was his business to know that he was dealing with a corporation which
had executive officers and a board of directors, and whose principal office was in Manila, and that
Francisco was not an officer or director of the corporation, and that he was only a local manager of
the Company's property at Cebu, and that as such he had no legal right to sell or contract to sell the
real property of the Company, and that any power which he had or claimed to have in such matters
must be expressly conferred.

In Mechem on Agency, 2d ed., vol. 1, section 797, it is said:

Authority to sell rather than merely to find a purchaser; mere broker no authority to make a
binding contract. — It is to be noted also that the case here contemplated is that in which the
agent is really authorized to sell, and not merely employed to find a purchaser to whom the
principal may sell. The distinction is one of consequence, because one employed as a mere
real estate broker to `sell' land, even though employed by writing, is usually held to have no
power to make a binding contract (much less a deed of conveyance), but is confined to the
finding of a person ready, willing and able to buy from the principal on the terms proposed by
him. . . .

In section 800, the same author says:

Mere preliminary correspondence or negotiations not enough to confer authority. — It is

obvious also that before the questions here suggested can be determined, the authority
intended to be conferred must be completely agreed upon and vested. If, therefore, the
dealings between the principal and the agent have not passed beyond the stage of
preliminary correspondence, if the terms upon which the authority is to be executed or the
property sold are not yet fully determined, if further communications are to be had with the
principal, or further assent given, before the authority is to be exercised, and the like, there
can ordinarily be no present authority to sell in such wise as to bind the principal.

It is Horn-Book law that a person dealing with an agent is put upon inquiry as to the power and
authority of the agent.

Corpus Juris, vol. 2, p. 562, section 204, says:

Duty of third person to ascertain authority; general rule. — It follows from the above rules
that as a general rule every person who undertakes to deal with an alleged agent is, by the
mere fact of the agency, put upon inquiry, and must discover at his peril that it is in its nature
and extent sufficient to permit the agent to do the proposed act, and that its source can be
traced to the will of the alleged principal, particularly where he is dealing with an agent
whose authority he knows to be special, or where it is his first transaction with the agent, or
the circumstances connected with the agency are such as should put him on inquiry, as
where it appears from the circumstances of the particular business that the interests of the
agent and principal are necessarily adverse, or that the authority is of an unusual,
improbable, or extraordinary nature. Such a person is to be regarded as dealing with the
power before him, and must, at his peril, observe that the act done by the agent is legally
identical with the act authorized by the power.

Source of information. — The person dealing with the agent should ascertain the extent of
his authority from the principal, or from some other person who will have a motive to tell the
truth in the interests of the principal, and he cannot rely upon the agent's statement or
assumption of authority, or upon the mere presumption of authority.

Failure to inquire. — If such person makes no inquiry but chooses to rely on the agent's
statements he is chargeable with knowledge of the agent's authority, and his ignorance of its
 extent will be no excuse to him, and the fault cannot be thrown upon the principal who never
authorized the act or contract, although he was careless in reposing confidence in his agent.

Section 207 says:

Where authority is, or required to be, in writing. — Where a third person dealing with an
agent has knowledge that his authority must necessarily be in writing in order to bind the
principal, it is his duty to ascertain whether the agent has such authority and whether it is in
proper form; and where there is written authority, whether it is required or not, and such
person has, or is charged with knowledge thereof, it is his duty to ascertain the nature and
extent of the authority conferred, and whether the agent is acting within its scope, unless he
is excused from inspecting the written authority by a statement from the principal himself
defining the authority. When the authority is by law required to be in writing he is charged
with knowledge of that fact, and of the limitations upon the agent's power contained in such
writing. . . .

The same rule is laid down in Mechem on Agency, vol. 1, section 758.

As a matter of law, it must follow, upon the undisputed facts, that the plaintiff does not have a cause
of action against the Company. The lower court dismissed the case as to the defendant Francisco.
The plaintiff did not appeal, and that decision is now final. In the final analysis of the facts, Francisco
did nothing more than to advise and represent to the plaintiff that this Company was willing to sell
the property in question for P100,000, and on condition that the Company would have the right to
continue in the use and possession of the property upon such terms and conditions, and for such a
length of time, as the Company would approve. That statement was true when it was made, and
upon a change in the policy of the Company, Francisco at once notified the plaintiff.

The judgment of the lower court against the defendant Pacific Commercial Company will be
reversed, and one entered here in favor of the Company and against the plaintiff for the costs and
disbursements of this action.

So ordered.

Araullo, C.J., Johnson, Street, Malcolm, Avanceña, Villamor, Ostrand and Romualdez, JJ., concur.
TOYOTA SHAW, INC., petitioner,
vs.
COURT OF APPEALS and LUNA L. SOSA, respondents.

DAVIDE, JR., J.:

At the heart of the present controversy is the document marked Exhibit "A" 1 for the private
respondent, which was signed by a sales representative of Toyota Shaw, Inc. named Popong
Bernardo. The document reads as follows:

AGREEMENTS BETWEEN MR. SOSA

& POPONG BERNARDO OF TOYOTA
SHAW, INC.

1. all necessary documents will be submitted to TOYOTA SHAW, INC. (POPONG

BERNARDO) a week after, upon arrival of Mr. Sosa from the Province (Marinduque)
where the unit will be used on the 19th of June.

2. the downpayment of P100,000.00 will be paid by Mr. Sosa on June 15, 1989.

3. the TOYOTA SHAW, INC. LITE ACE yellow, will be pick-up [sic] and released by
TOYOTA SHAW, INC. on the 17th of June at 10 a.m.
 (Sgd.)
POPO
NG
BERN
ARDO.

Was this document, executed and signed by the petitioner's sales representative, a perfected
contract of sale, binding upon the petitioner, breach of which would entitle the private respondent to
damages and attorney's fees? The trial court and the Court of Appeals took the affirmative view. The
petitioner disagrees. Hence, this petition for review on certiorari.

The antecedents as disclosed in the decisions of both the trial court and the Court of Appeals, as
well as in the pleadings of petitioner Toyota Shaw, Inc. (hereinafter Toyota) and respondent Luna L.
Sosa (hereinafter Sosa) are as follows. Sometime in June of 1989, Luna L. Sosa wanted to
purchase a Toyota Lite Ace. It was then a seller's market and Sosa had difficulty finding a dealer
with an available unit for sale. But upon contacting Toyota Shaw, Inc., he was told that there was an
available unit. So on 14 June 1989, Sosa and his son, Gilbert, went to the Toyota office at Shaw
Boulevard, Pasig, Metro Manila. There they met Popong Bernardo, a sales representative of Toyota.

Sosa emphasized to Bernardo that he needed the Lite Ace not later than 17 June 1989 because he,
his family, and a balikbayan guest would use it on 18 June 1989 to go to Marinduque, his home
province, where he would celebrate his birthday on the 19th of June. He added that if he does not
arrive in his hometown with the new car, he would become a "laughing stock." Bernardo assured
Sosa that a unit would be ready for pick up at 10:00 a.m. on 17 June 1989. Bernardo then signed the
aforequoted "Agreements Between Mr. Sosa & Popong Bernardo of Toyota Shaw, Inc." It was also
agreed upon by the parties that the balance of the purchase price would be paid by credit financing
through B.A. Finance, and for this Gilbert, on behalf of his father, signed the documents of Toyota
and B.A. Finance pertaining to the application for financing.

The next day, 15 June 1989, Sosa and Gilbert went to Toyota to deliver the downpayment of
P100,000.00. They met Bernardo who then accomplished a printed Vehicle Sales Proposal (VSP)
No. 928,2 on which Gilbert signed under the subheading CONFORME. This document shows that
the customer's name is "MR. LUNA SOSA" with home address at No. 2316 Guijo Street, United
Parañaque II; that the model series of the vehicle is a "Lite Ace 1500" described as "4 Dr minibus";
that payment is by "installment," to be financed by "B.A.," 3 with the initial cash outlay of P100,000.00
broken down as follows:

a) downpayment — P 53,148.00
b) insurance — P 13,970.00
c) BLT registration fee — P 1,067.00
CHMO fee — P 2,715.00
service fee — P 500.00
accessories — P 29,000.00
and that the "BALANCE TO BE FINANCED" is "P274,137.00." The spaces provided for "Delivery
Terms" were not filled-up. It also contains the following pertinent provisions:

CONDITIONS OF SALES

1. This sale is subject to availability of unit.

2. Stated Price is subject to change without prior notice, Price prevailing and in effect
at time of selling will apply. . . .

Rodrigo Quirante, the Sales Supervisor of Bernardo, checked and approved the VSP.

On 17 June 1989, at around 9:30 a.m., Bernardo called Gilbert to inform him that the vehicle would
not be ready for pick up at 10:00 a.m. as previously agreed upon but at 2:00 p.m. that same day. At
2:00 p.m., Sosa and Gilbert met Bernardo at the latter's office. According to Sosa, Bernardo
informed them that the Lite Ace was being readied for delivery. After waiting for about an hour,
Bernardo told them that the car could not be delivered because "nasulot ang unit ng ibang malakas."

Toyota contends, however, that the Lite Ace was not delivered to Sosa because of the disapproval
by B.A. Finance of the credit financing application of Sosa. It further alleged that a particular unit had
already been reserved and earmarked for Sosa but could not be released due to the uncertainty of
payment of the balance of the purchase price. Toyota then gave Sosa the option to purchase the
unit by paying the full purchase price in cash but Sosa refused.

After it became clear that the Lite Ace would not be delivered to him, Sosa asked that his
downpayment be refunded. Toyota did so on the very same day by issuing a Far East Bank check
for the full amount of P100,000.00, 4 the receipt of which was shown by a check voucher of
Toyota,5 which Sosa signed with the reservation, "without prejudice to our future claims for
damages."

Thereafter, Sosa sent two letters to Toyota. In the first letter, dated 27 June 1989 and signed by him,
he demanded the refund, within five days from receipt, of the downpayment of P100,000.00 plus
interest from the time he paid it and the payment of damages with a warning that in case of Toyota's
failure to do so he would be constrained to take legal action. 6 The second, dated 4 November 1989
and signed by M. O. Caballes, Sosa's counsel, demanded one million pesos representing interest
and damages, again, with a warning that legal action would be taken if payment was not made within
three days.7 Toyota's counsel answered through a letter dated 27 November 1989 8 refusing to
accede to the demands of Sosa. But even before this answer was made and received by Sosa, the
latter filed on 20 November 1989 with Branch 38 of the Regional Trial Court (RTC) of Marinduque a
complaint against Toyota for damages under Articles 19 and 21 of the Civil Code in the total amount
of P1,230,000.00.9 He alleges, inter alia, that:

9. As a result of defendant's failure and/or refusal to deliver the vehicle to plaintiff,

plaintiff suffered embarrassment, humiliation, ridicule, mental anguish and sleepless
nights because: (i) he and his family were constrained to take the public
transportation from Manila to Lucena City on their way to Marinduque; (ii) his
balikbayan-guest canceled his scheduled first visit to Marinduque in order to avoid
the inconvenience of taking public transportation; and (iii) his relatives, friends,
neighbors and other provincemates, continuously irked him about "his Brand-New
Toyota Lite Ace — that never was." Under the circumstances, defendant should be
made liable to the plaintiff for moral damages in the amount of One Million Pesos
(P1,000,000.00). 10
In its answer to the complaint, Toyota alleged that no sale was entered into between it and Sosa,
that Bernardo had no authority to sign Exhibit "A" for and in its behalf, and that Bernardo signed
Exhibit "A" in his personal capacity. As special and affirmative defenses, it alleged that: the VSP did
not state date of delivery; Sosa had not completed the documents required by the financing
company, and as a matter of policy, the vehicle could not and would not be released prior to full
compliance with financing requirements, submission of all documents, and execution of the sales
agreement/invoice; the P100,000.00 was returned to and received by Sosa; the venue was
improperly laid; and Sosa did not have a sufficient cause of action against it. It also interposed
compulsory counterclaims.

After trial on the issues agreed upon during the pre-trial session, 11 the trial court rendered on 18
February 1992 a decision in favor of Sosa. 12 It ruled that Exhibit "A," the "AGREEMENTS BETWEEN
MR. SOSA AND POPONG BERNARDO," was a valid perfected contract of sale between Sosa and
Toyota which bound Toyota to deliver the vehicle to Sosa, and further agreed with Sosa that Toyota
acted in bad faith in selling to another the unit already reserved for him.

As to Toyota's contention that Bernardo had no authority to bind it through Exhibit "A," the trial court
held that the extent of Bernardo's authority "was not made known to plaintiff," for as testified to by
Quirante, "they do not volunteer any information as to the company's sales policy and guidelines
because they are internal matters." 13 Moreover, "[f]rom the beginning of the transaction up to its
consummation when the downpayment was made by the plaintiff, the defendants had made known
to the plaintiff the impression that Popong Bernardo is an authorized sales executive as it permitted
the latter to do acts within the scope of an apparent authority holding him out to the public as
possessing power to do these acts." 14 Bernardo then "was an agent of the defendant Toyota Shaw,
Inc. and hence bound the defendants." 15

The court further declared that "Luna Sosa proved his social standing in the community and suffered
besmirched reputation, wounded feelings and sleepless nights for which he ought to be
compensated." 16 Accordingly, it disposed as follows:

WHEREFORE, viewed from the above findings, judgment is hereby rendered in favor
of the plaintiff and against the defendant:

1. ordering the defendant to pay to the plaintiff the sum of P75,000.00

for moral damages;

2. ordering the defendant to pay the plaintiff the sum of P10,000.00

for exemplary damages;

3. ordering the defendant to pay the sum of P30,000.00 attorney's

fees plus P2,000.00 lawyer's transportation fare per trip in attending
to the hearing of this case;

4. ordering the defendant to pay the plaintiff the sum of P2,000.00

transportation fare per trip of the plaintiff in attending the hearing of
this case; and

5. ordering the defendant to pay the cost of suit.

SO ORDERED.
Dissatisfied with the trial court's judgment, Toyota appealed to the Court of Appeals. The case was
docketed as CA-G.R. CV No. 40043. In its decision promulgated on 29 July 1994,17 the Court of
Appeals affirmed in toto the appealed decision.

Toyota now comes before this Court via this petition and raises the core issue stated at the
beginning of the ponenciaand also the following related issues: (a) whether or not the standard VSP
was the true and documented understanding of the parties which would have led to the ultimate
contract of sale, (b) whether or not Sosa has any legal and demandable right to the delivery of the
vehicle despite the non-payment of the consideration and the non-approval of his credit application
by B.A. Finance, (c) whether or not Toyota acted in good faith when it did not release the vehicle to
Sosa, and (d) whether or not Toyota may be held liable for damages.

We find merit in the petition.

Neither logic nor recourse to one's imagination can lead to the conclusion that Exhibit "A" is
a perfected contract of sale.

Article 1458 of the Civil Code defines a contract of sale as follows:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent.

A contract of sale may be absolute or conditional.

and Article 1475 specifically provides when it is deemed perfected:

Art. 1475. The contract of sale is perfected at the moment there is a meeting of
minds upon the thing which is the object of the contract and upon the price.

From that moment, the parties may reciprocally demand performance, subject to the
provisions of the law governing the form of contracts.

What is clear from Exhibit "A" is not what the trial court and the Court of Appeals appear to see. It is
not a contract of sale. No obligation on the part of Toyota to transfer ownership of a determinate
thing to Sosa and no correlative obligation on the part of the latter to pay therefor a price certain
appears therein. The provision on the downpayment of P100,000.00 made no specific reference to a
sale of a vehicle. If it was intended for a contract of sale, it could only refer to a sale on installment
basis, as the VSP executed the following day confirmed. But nothing was mentioned about the full
purchase price and the manner the installments were to be paid.

This Court had already ruled that a definite agreement on the manner of payment of the price is an
essential element in the formation of a binding and enforceable contract of sale. 18 This is so because
the agreement as to the manner of payment goes into the price such that a disagreement on the
manner of payment is tantamount to a failure to agree on the price. Definiteness as to the price is an
essential element of a binding agreement to sell personal property. 19

Moreover, Exhibit "A" shows the absence of a meeting of minds between Toyota and Sosa. For one
thing, Sosa did not even sign it. For another, Sosa was well aware from its title, written in bold
letters, viz.,
 AGREEMENTS BETWEEN MR. SOSA & POPONG BERNARDO OF
TOYOTA SHAW, INC.

that he was not dealing with Toyota but with Popong Bernardo and that the latter did not
misrepresent that he had the authority to sell any Toyota vehicle. He knew that Bernardo was only
a sales representative of Toyota and hence a mere agent of the latter. It was incumbent upon Sosa
to act with ordinary prudence and reasonable diligence to know the extent of Bernardo's authority as
an
agent20 in respect of contracts to sell Toyota's vehicles. A person dealing with an agent is put upon
inquiry and must discover upon his peril the authority of the agent.21

At the most, Exhibit "A" may be considered as part of the initial phase of the generation or
negotiation stage of a contract of sale. There are three stages in the contract of sale, namely:

(a) preparation, conception, or generation, which is the period of negotiation and

bargaining, ending at the moment of agreement of the parties;

(b) perfection or birth of the contract, which is the moment when the parties come to
agree on the terms of the contract; and

(c) consummation or death, which is the fulfillment or performance of the terms

agreed upon in the contract.22

The second phase of the generation or negotiation stage in this case was the execution of the VSP.
It must be emphasized that thereunder, the downpayment of the purchase price was P53,148.00
while the balance to be paid on installment should be financed by B.A. Finance Corporation. It is, of
course, to be assumed that B.A. Finance Corp. was acceptable to Toyota, otherwise it should not
have mentioned B.A. Finance in the VSP.

Financing companies are defined in Section 3(a) of R.A. No. 5980, as amended by P.D. No. 1454
and P.D. No. 1793, as "corporations or partnerships, except those regulated by the Central Bank of
the Philippines, the Insurance Commission and the Cooperatives Administration Office, which are
primarily organized for the purpose of extending credit facilities to consumers and to industrial,
commercial, or agricultural enterprises, either by discounting or factoring commercial papers or
accounts receivables, or by buying and selling contracts, leases, chattel mortgages, or other
evidence of indebtedness, or by leasing of motor vehicles, heavy equipment and industrial
machinery, business and office machines and equipment, appliances and other movable property." 23

Accordingly, in a sale on installment basis which is financed by a financing company, three parties
are thus involved: the buyer who executes a note or notes for the unpaid balance of the price of the
thing purchased on installment, the seller who assigns the notes or discounts them with a financing
company, and the financing company which is subrogated in the place of the seller, as the creditor of
the installment buyer. 24 Since B.A. Finance did not approve Sosa's application, there was then no
meeting of minds on the sale on installment basis.

We are inclined to believe Toyota's version that B.A. Finance disapproved Sosa's application for
which reason it suggested to Sosa that he pay the full purchase price. When the latter refused,
Toyota cancelled the VSP and returned to him his P100,000.00. Sosa's version that the VSP was
cancelled because, according to Bernardo, the vehicle was delivered to another who was "mas
malakas" does not inspire belief and was obviously a delayed afterthought. It is claimed that
Bernardo said, "Pasensiya kayo, nasulot ang unit ng ibang malakas," while the Sosas had already
been waiting for an hour for the delivery of the vehicle in the afternoon of 17 June 1989. However, in
paragraph 7 of his complaint, Sosa solemnly states:

On June 17, 1989 at around 9:30 o'clock in the morning, defendant's sales
representative, Mr. Popong Bernardo, called plaintiff's house and informed the
plaintiff's son that the vehicle will not be ready for pick-up at 10:00 a.m. of June 17,
1989 but at 2:00 p.m. of that day instead. Plaintiff and his son went to defendant's
office on June 17 1989 at 2:00 p.m. in order to pick-up the vehicle but the defendant
for reasons known only to its representatives, refused and/or failed to release the
vehicle to the plaintiff. Plaintiff demanded for an explanation, but nothing was given; .
. . (Emphasis supplied). 25

The VSP was a mere proposal which was aborted in lieu of subsequent events. It follows that the
VSP created no demandable right in favor of Sosa for the delivery of the vehicle to him, and its non-
delivery did not cause any legally indemnifiable injury.

The award then of moral and exemplary damages and attorney's fees and costs of suit is without
legal basis. Besides, the only ground upon which Sosa claimed moral damages is that since it was
known to his friends, townmates, and relatives that he was buying a Toyota Lite Ace which they
expected to see on his birthday, he suffered humiliation, shame, and sleepless nights when the van
was not delivered. The van became the subject matter of talks during his celebration that he may not
have paid for it, and this created an impression against his business standing and reputation. At the
bottom of this claim is nothing but misplaced pride and ego. He should not have announced his plan
to buy a Toyota Lite Ace knowing that he might not be able to pay the full purchase price. It was he
who brought embarrassment upon himself by bragging about a thing which he did not own yet.

Since Sosa is not entitled to moral damages and there being no award for temperate, liquidated, or
compensatory damages, he is likewise not entitled to exemplary damages. Under Article 2229 of the
Civil Code, exemplary or corrective damages are imposed by way of example or correction for the
public good, in addition to moral, temperate, liquidated, or compensatory damages.

Also, it is settled that for attorney's fees to be granted, the court must explicitly state in the body of
the decision, and not only in the dispositive portion thereof, the legal reason for the award of
attorney's fees. 26 No such explicit determination thereon was made in the body of the decision of the
trial court. No reason thus exists for such an award.

WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of Appeals in
CA-G.R. CV NO. 40043 as well as that of Branch 38 of the Regional Trial Court of Marinduque in
Civil Case No. 89-14 are REVERSED and SET ASIDE and the complaint in Civil Case No. 89-14 is
DISMISSED. The counterclaim therein is likewise DISMISSED.

No pronouncement as to costs.

SO ORDERED.

Padilla, Bellosillo and Kapunan, JJ., concur.

Quiason, J., is on leave.

VIOLETA TUDTUD BANATE, MARY MELGRID M. CORTEL, BONIFACIO CORTEL, ROSENDO
MAGLASANG, and PATROCINIA MONILAR, Petitioners,
vs.
PHILIPPINE COUNTRYSIDE RURAL BANK (LILOAN, CEBU), INC. and TEOFILO SOON,
JR., Respondents.

DECISION

BRION, J.:

Before the Court is a petition for review on certiorari1 assailing the December 19, 2003 decision2 and
the May 5, 2004 resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 74332. The CA decision
reversed the Regional Trial Court (RTC) decision4 of June 27, 2001 granting the petitioners’
complaint for specific performance and damages against the respondent Philippine Countryside
Rural Bank, Inc. (PCRB).5

THE FACTUAL ANTECEDENTS

On July 22, 1997, petitioner spouses Rosendo Maglasang and Patrocinia Monilar (spouses
Maglasang) obtained a loan (subject loan) from PCRB for ₱1,070,000.00. The subject loan was
evidenced by a promissory note and was payable on January 18, 1998. To secure the payment of
the subject loan, the spouses Maglasang executed, in favor of PCRB a real estate mortgage over
their property, Lot 12868-H-3-C, 6 including the house constructed thereon (collectively referred to as
subject properties), owned by petitioners Mary Melgrid and Bonifacio Cortel (spouses Cortel), the
spouses Maglasang’s daughter and son-in-law, respectively. Aside from the subject loan, the
spouses Maglasang obtained two other loans from PCRB which were covered by separate
promissory notes7 and secured by mortgages on their other properties.

Sometime in November 1997 (before the subject loan became due), the spouses Maglasang and the
spouses Cortel asked PCRB’s permission to sell the subject properties. They likewise requested that
the subject properties be released from the mortgage since the two other loans were adequately
secured by the other mortgages. The spouses Maglasang and the spouses Cortel claimed that the
PCRB, acting through its Branch Manager, Pancrasio Mondigo, verbally agreed to their request but
required first the full payment of the subject loan. The spouses Maglasang and the spouses Cortel
thereafter sold to petitioner Violeta Banate the subject properties for ₱1,750,000.00. The spouses
Magsalang and the spouses Cortel used the amount to pay the subject loan with PCRB. After
settling the subject loan, PCRB gave the owner’s duplicate certificate of title of Lot 12868-H-3-C to
Banate, who was able to secure a new title in her name. The title, however, carried the mortgage
lien in favor of PCRB, prompting the petitioners to request from PCRB a Deed of Release of
Mortgage. As PCRB refused to comply with the petitioners’ request, the petitioners instituted an
action for specific performance before the RTC to compel PCRB to execute the release deed.

The petitioners additionally sought payment of damages from PCRB, which, they claimed, caused
the publication of a news report stating that they "surreptitiously" caused the transfer of ownership of
Lot 12868-H-3-C. The petitioners considered the news report false and malicious, as PCRB knew of
the sale of the subject properties and, in fact, consented thereto.

PCRB countered the petitioners’ allegations by invoking the cross-collateral stipulation in the
mortgage deed which states:

1. That as security for the payment of the loan or advance in principal sum of one million
seventy thousand pesos only (₱1,070,000.00) and such other loans or advances already
 obtained, or still to be obtained by the MORTGAGOR(s) as MAKER(s), CO-MAKER(s) or
GUARANTOR(s) from the MORTGAGEE plus interest at the rate of _____ per annum and
penalty and litigation charges payable on the dates mentioned in the corresponding
promissory notes, the MORTGAGOR(s) hereby transfer(s) and convey(s) to MORTGAGEE
by way of first mortgage the parcel(s) of land described hereunder, together with the
improvements now existing for which may hereafter be made thereon, of which
MORTGAGOR(s) represent(s) and warrant(s) that MORTGAGOR(s) is/are the absolute
owner(s) and that the same is/are free from all liens and encumbrances;

TRANSFER CERTIFICATE OF TITLE NO. 827468

Accordingly, PCRB claimed that full payment of the three loans, obtained by the spouses
Maglasang, was necessary before any of the mortgages could be released; the settlement of the
subject loan merely constituted partial payment of the total obligation. Thus, the payment does not
authorize the release of the subject properties from the mortgage lien.

PCRB considered Banate as a buyer in bad faith as she was fully aware of the existing mortgage in
its favor when she purchased the subject properties from the spouses Maglasang and the spouses
Cortel. It explained that it allowed the release of the owner’s duplicate certificate of title to Banate
only to enable her to annotate the sale. PCRB claimed that the release of the title should not indicate
the corresponding release of the subject properties from the mortgage constituted thereon.

After trial, the RTC ruled in favor of the petitioners. It noted that the petitioners, as "necessitous
men," could not have bargained on equal footing with PCRB in executing the mortgage, and
concluded that it was a contract of adhesion. Therefore, any obscurity in the mortgage contract
should not benefit PCRB.9

The RTC observed that the official receipt issued by PCRB stated that the amount owed by the
spouses Maglasang under the subject loan was only about ₱1.2 million; that Mary Melgrid Cortel
paid the subject loan using the check which Banate issued as payment of the purchase price; and
that PCRB authorized the release of the title further indicated that the subject loan had already been
settled. Since the subject loan had been fully paid, the RTC considered the petitioners as rightfully
entitled to a deed of release of mortgage, pursuant to the verbal agreement that the petitioners made
with PCRB’s branch manager, Mondigo. Thus, the RTC ordered PCRB to execute a deed of release
of mortgage over the subject properties, and to pay the petitioners moral damages and attorney’s
fees.10

On appeal, the CA reversed the RTC’s decision. The CA did not consider as valid the petitioners’
new agreement with Mondigo, which would novate the original mortgage contract containing the
cross-collateral stipulation. It ruled that Mondigo cannot orally amend the mortgage contract between
PCRB, and the spouses Maglasang and the spouses Cortel; therefore, the claimed commitment
allowing the release of the mortgage on the subject properties cannot bind PCRB. Since the cross-
collateral stipulation in the mortgage contract (requiring full settlement of all three loans before the
release of any of the mortgages) is clear, the parties must faithfully comply with its terms. The CA
did not consider as material the release of the owner’s duplicate copy of the title, as it was done
merely to allow the annotation of the sale of the subject properties to Banate.11

Dismayed with the reversal by the CA of the RTC’s ruling, the petitioners filed the present appeal by
certiorari, claiming that the CA ruling is not in accord with established jurisprudence.

THE PETITION
The petitioners argue that their claims are consistent with their agreement with PCRB; they complied
with the required full payment of the subject loan to allow the release of the subject properties from
the mortgage.

Having carried out their part of the bargain, the petitioners maintain that PCRB must honor its
commitment to release the mortgage over the subject properties.

The petitioners disregard the cross-collateral stipulation in the mortgage contract, claiming that it had
been novated by the subsequent agreement with Mondigo. Even assuming that the cross-collateral
stipulation subsists for lack of authority on the part of Mondigo to novate the mortgage contract, the
petitioners contend that PCRB should nevertheless return the amount paid to settle the subject loan
since the new agreement should be deemed rescinded.

The basic issues for the Court to resolve are as follows:

1. Whether the purported agreement between the petitioners and Mondigo novated the
mortgage contract over the subject properties and is thus binding upon PCRB.

2. If the first issue is resolved negatively, whether Banate can demand restitution of the
amount paid for the subject properties on the theory that the new agreement with Mondigo is
deemed rescinded.

THE COURT’S RULING

We resolve to deny the petition.

The purported agreement did not novate the mortgage contract, particularly the cross- collateral
stipulation thereon

Before we resolve the issues directly posed, we first dwell on the determination of the nature of the
cross-collateral stipulation in the mortgage contract. As a general rule, a mortgage liability is usually
limited to the amount mentioned in the contract. However, the amounts named as consideration in a
contract of mortgage do not limit the amount for which the mortgage may stand as security if, from
the four corners of the instrument, the intent to secure future and other indebtedness can be
gathered. This stipulation is valid and binding between the parties and is known as the "blanket
mortgage clause" (also known as the "dragnet clause)."12

In the present case, the mortgage contract indisputably provides that the subject properties serve as
security, not only for the payment of the subject loan, but also for "such other loans or advances
already obtained, or still to be obtained." The cross-collateral stipulation in the mortgage contract
between the parties is thus simply a variety of a dragnet clause. After agreeing to such stipulation,
the petitioners cannot insist that the subject properties be released from mortgage since the security
covers not only the subject loan but the two other loans as well.

The petitioners, however, claim that their agreement with Mondigo must be deemed to have novated
the mortgage contract. They posit that the full payment of the subject loan extinguished their
obligation arising from the mortgage contract, including the stipulated cross-collateral provision.
Consequently, consistent with their theory of a novated agreement, the petitioners maintain that it
devolves upon PCRB to execute the corresponding Deed of Release of Mortgage.
We find the petitioners’ argument unpersuasive. Novation, in its broad concept, may either be
extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a
new obligation that takes the place of the former; it is merely modificatory when the old obligation
subsists to the extent that it remains compatible with the amendatory agreement. An extinctive
novation results either by changing the object or principal conditions (objective or real), or by
substituting the person of the debtor or subrogating a third person in the rights of the creditor
(subjective or personal). Under this mode, novation would have dual functions – one to extinguish an
existing obligation, the other to substitute a new one in its place – requiring a conflux of four
essential requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a
new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation.13

The second requisite is lacking in this case. Novation presupposes not only the extinguishment or
modification of an existing obligation but, more importantly, the creation of a valid new
obligation.14 For the consequent creation of a new contractual obligation, consent of both parties is,
thus, required. As a general rule, no form of words or writing is necessary to give effect to a
novation. Nevertheless, where either or both parties involved are juridical entities, proof that the
second contract was executed by persons with the proper authority to bind their respective principals
is necessary.15

Section 23 of the Corporation Code16 expressly provides that the corporate powers of all
corporations shall be exercised by the board of directors. The power and the responsibility to decide
whether the corporation should enter into a contract that will bind the corporation are lodged in the
board, subject to the articles of incorporation, bylaws, or relevant provisions of law. In the absence of
authority from the board of directors, no person, not even its officers, can validly bind a corporation.

However, just as a natural person may authorize another to do certain acts for and on his behalf, the
board of directors may validly delegate some of its functions and powers to its officers, committees
or agents. The authority of these individuals to bind the corporation is generally derived from law,
corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business.17

The authority of a corporate officer or agent in dealing with third persons may be actual or apparent.
Actual authority is either express or implied. The extent of an agent’s express authority is to be
measured by the power delegated to him by the corporation, while the extent of his implied authority
is measured by his prior acts which have been ratified or approved, or their benefits accepted by his
principal.18 The doctrine of "apparent authority," on the other hand, with special reference to banks,
had long been recognized in this jurisdiction. The existence of apparent authority may be
ascertained through:

1) the general manner in which the corporation holds out an officer or agent as having the
power to act, or in other words, the apparent authority to act in general, with which it clothes
him; or

2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, within or beyond the scope of his ordinary powers.

Accordingly, the authority to act for and to bind a corporation may be presumed from acts of
recognition in other instances when the power was exercised without any objection from its board or
shareholders.19

Notably, the petitioners’ action for specific performance is premised on the supposed actual or
apparent authority of the branch manager, Mondigo, to release the subject properties from the
mortgage, although the other obligations remain unpaid. In light of our discussion above, proof of the
branch manager’s authority becomes indispensable to support the petitioners’ contention. The
petitioners make no claim that Mondigo had actual authority from PCRB, whether express or implied.
Rather, adopting the trial court’s observation, the petitioners posited that PCRB should be held liable
for Mondigo’s commitment, on the basis of the latter’s apparent authority.

We disagree with this position.

Under the doctrine of apparent authority, acts and contracts of the agent, as are within the apparent
scope of the authority conferred on him, although no actual authority to do such acts or to make
such contracts has been conferred, bind the principal.20 The principal’s liability, however, is limited
only to third persons who have been led reasonably to believe by the conduct of the principal that
such actual authority exists, although none was given. In other words, apparent authority is
determined only by the acts of the principal and not by the acts of the agent.21There can be no
apparent authority of an agent without acts or conduct on the part of the principal; such acts or
conduct must have been known and relied upon in good faith as a result of the exercise of
reasonable prudence by a third party as claimant, and such acts or conduct must have produced a
change of position to the third party’s detriment.22

In the present case, the decision of the trial court was utterly silent on the manner by which PCRB,
as supposed principal, has "clothed" or "held out" its branch manager as having the power to enter
into an agreement, as claimed by petitioners. No proof of the course of business, usages and
practices of the bank about, or knowledge that the board had or is presumed to have of, its
responsible officers’ acts regarding bank branch affairs, was ever adduced to establish the branch
manager’s apparent authority to verbally alter the terms of mortgage contracts.23 Neither was there
any allegation, much less proof, that PCRB ratified Mondigo’s act or is estopped to make a contrary
claim.24

Further, we would be unduly stretching the doctrine of apparent authority were we to consider the
power to undo or nullify solemn agreements validly entered into as within the doctrine’s ambit.
Although a branch manager, within his field and as to third persons, is the general agent and is in
general charge of the corporation, with apparent authority commensurate with the ordinary business
entrusted him and the usual course and conduct thereof,25 yet the power to modify or nullify
corporate contracts remains generally in the board of directors.26 Being a mere branch manager
alone is insufficient to support the conclusion that Mondigo has been clothed with "apparent
authority" to verbally alter terms of written contracts, especially when viewed against the telling
circumstances of this case: the unequivocal provision in the mortgage contract; PCRB’s vigorous
denial that any agreement to release the mortgage was ever entered into by it; and, the fact that the
purported agreement was not even reduced into writing considering its legal effects on the parties’
interests. To put it simply, the burden of proving the authority of Mondigo to alter or novate the
mortgage contract has not been established.27

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 the agent’s
authority, and in case either is controverted, the burden of proof is upon them to establish it.28 As
parties to the mortgage contract, the petitioners are expected to abide by its terms. The subsequent
purported agreement is of no moment, and cannot prejudice PCRB, as it is beyond Mondigo’s actual
or apparent authority, as above discussed.

Rescission has no legal basis; there can be no restitution of the amount paid
The petitioners, nonetheless, invoke equity and alternatively pray for the restitution of the amount
paid, on the rationale that if PCRB’s branch manager was not authorized to accept payment in
consideration of separately releasing the mortgage, then the agreement should be deemed
rescinded, and the amount paid by them returned.

PCRB, on the other hand, counters that the petitioners’ alternative prayer has no legal and factual
basis, and insists that the clear agreement of the parties was for the full payment of the subject loan,
and in return, PCRB would deliver the title to the subject properties to the buyer, only to enable the
latter to obtain a transfer of title in her own name.

We agree with PCRB. Even if we were to assume that the purported agreement has been sufficiently
established, since it is not binding on the bank for lack of authority of PCRB’s branch manager, then
the prayer for restitution of the amount paid would have no legal basis. Of course, it will be asked:
what then is the legal significance of the payment made by Banate? Article 2154 of the Civil Code
reads:

Art 2154. If something is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises.
1avvphi1

Notwithstanding the payment made by Banate, she is not entitled to recover anything from PCRB
under Article 2154. There could not have been any payment by mistake to PCRB, as the check
which Banate issued as payment was to her co-petitioner Mary Melgrid Cortel (the payee), and not
to PCRB. The same check was simply endorsed by the payee to PCRB in payment of the subject
loan that the Maglasangs owed PCRB.29

The mistake, if any, was in the perception of the authority of Mondigo, as branch manager, to
verbally alter the mortgage contract, and not as to whether the Cortels, as sellers, were entitled to
payment. This mistake (on Mondigo’s lack of authority to alter the mortgage) did not affect the
validity of the payment made to the bank as the existence of the loan was never disputed. The
dispute was merely on the effect of the payment on the security given.30

Consequently, no right to recover accrues in Banate’s favor as PCRB never dealt with her. The
borrowers-mortgagors, on the other hand, merely paid what was really owed. Parenthetically, the
subject loan was due on January 18, 1998, but was paid sometime in November 1997. It appears,
however, that at the time the complaint was filed, the subject loan had already matured.
Consequently, recovery of the amount paid, even under a claim of premature payment, will not
prosper.

In light of these conclusions, the claim for moral damages must necessarily fail. On the alleged
injurious publication, we quote with approval the CA’s ruling on the matter, viz:

Consequently, there is no reason to hold [respondent] PCRB liable to [petitioners] for damages. x x x
[Petitioner] Maglasang cannot hold [respondent] PCRB liable for the publication of the extra-judicial
sale. There was no evidence submitted to prove that [respondent] PCRB authored the words
"Mortgagors surreptitiously caused the transfer of ownership of Lot 12868-H-3-C x x x" contained in
the publication since at the bottom was x x x Sheriff Teofilo C. Soon, Jr.’s name. Moreover, there
was not even an iota of proof which shows damage on the part of [petitioner] Mary Melgrid M.
Cortel.31

WHEREFORE, we DENY the petitioners’ petition for review on certiorari for lack of merit, and
AFFIRM the decision of the Court of Appeals dated December 19, 2003 and its resolution dated May
5, 2004 in CA-G.R. CV No. 74332. No pronouncement as to costs.
SO ORDERED
BACALTOS COAL MINES and GERMAN A. BACALTOS, petitioners,
vs.
HON. COURT OF APPEALS and SAN MIGUEL CORPORATION, respondents.

DAVIDE, JR., J.:

Petitioners seek the reversal of the decision of 30 September 1993 of the Court of Appeals in CA-
G.R. CV No. 35180,1 entitled "San Miguel Corporation vs. Bacaltos Coal Mines, German A. Bacaltos
and Rene R. Savellon," which affirmed the decision of 19 August 1991 of the Regional Trial Court
(RTC) of Cebu, Branch 9, in Civil Case No. CEB-81872 holding petitioners Bacaltos Coal Mines and
German A. Bacaltos and their co-defendant Rene R. Savellon jointly and severally liable to private
respondent San Miguel Corporation under a Trip Charter Party.

The paramount issue raised is whether Savellon was duly authorized by the petitioners to enter into
the Trip Charter Party (Exhibit "A") 3 under and by virtue of an Authorization (Exhibit "C" and Exhibit
"1"),4 dated 1 March 1988, the pertinent portions of which read as follows:

I. GERMAN A. BACALTOS, of legal age, Filipino, widower, and residing at second

street, Espina Village, Cebu City, province of Cebu, Philippines, do hereby authorize
RENE R. SAVELLON, of legal age, Filipino and residing at 376-R Osmeña Blvd.,
Cebu City, Province of Cebu, Philippines, to use the coal operating contract of
BACALTOS COAL MINES of which I am the proprietor, for any legitimate purpose
that it may serve. Namely, but not by way of limitation, as follows:

(1) To acquire purchase orders for and in behalf of BACALTOS

COAL MINES;

(2) To engage in trading under the style of BACALTOS COAL

MINES/RENE SAVELLON;

(3) To collect all receivables due or in arrears from people or

companies having dealings under BACALTOS COAL MINES/RENE
SAVELLON;

(4) To extend to any person or company by substitution the same

extent of authority that is granted to Rene Savellon;

(5) In connection with the preceeding paragraphs to execute and sign

documents, contracts, and other pertinent papers.

Further, I hereby give and grant to RENE SAVELLON full authority to do and perform
all and every lawful act requisite or necessary to carry into effect the foregoing
stipulations as fully to all intents and purposes as I might or would lawfully do if
personally present, with full power of substitution and revocation.

The Trip Charter Party was executed on 19 October 1988 "by and between BACALTOS COAL
MINES, represented by its Chief Operating Officer, RENE ROSEL SAVELLON" and private
respondent San Miguel Corporation (hereinafter SMC), represented by Francisco B. Manzon, Jr., its
"SAVP and Director, Plant Operations-Mandaue" Thereunder, Savellon claims that Bacaltos Coal
Mines is the owner of the vessel M/V Premship II and that for P650,000.00 to be paid within seven
days after the execution of the contract, it "lets, demises" the vessel to charterer SMC "for three
round trips to Davao."

As payment of the aforesaid consideration, SMC issued a check (Exhibit "B")5 payable to "RENE
SAVELLON IN TRUST FOR BACALTOS COAL MINES" for which Savellon issued a receipt under
the heading of BACALTOS COAL MINES with the address at No 376-R Osmeña Blvd., Cebu City
(Exhibit "B-1"). 6

The vessel was able to make only one trip. Its demands to comply with the contract having been
unheeded, SMC filed against the petitioners and Rene Savellon the complaint in Civil Case No.
CEB-8187 for specific performance and damages. In their Answer,7 the petitioners alleged that
Savellon was not their Chief Operating Officer and that the powers granted to him are only those
clearly expressed in the Authorization which do not include the power to enter into any contract with
SMC. They further claimed that if it is true that SMC entered into a contract with them, it should have
issued the check in their favor. They setup counterclaims for moral and exemplary damages and
attorney's fees.

Savellon did not file his Answer and was declared in default on 17 July 1990. 8

At the pre-trial conference on 1 February 1991, the petitioners and SMC agreed to submit the
following issues for resolution:

Plaintiff —

1. Whether or not defendants are jointly liable to plaintiff for damages on account of
breach of contract;

2. Whether or not the defendants acted in good faith in its representations to the
plaintiff;

3. Whether or not defendant Bacaltos was duly enriched on the payment made by
the plaintiff for the use of the vessel;

4. Whether or not defendant Bacaltos is estopped to deny the authorization given to

defendant Savellon;

Defendants —

1. Whether or not the plaintiff should have first investigated the ownership of vessel
M/V PREM [SHIP] II before entering into any contract with defendant Savellon;

2. Whether or not defendant Savellon was authorized to enter into a shipping

contract with the [plaintiff] corporation;

3. Whether or not the plaintiff was correct and not mistaken in issuing the checks in
payment of the contract in the name of defendant Savellon and not in the name of
defendant Bacaltos Coal Mines;
 4. Whether or not the plaintiff is liable on defendants'
counterclaim.9

After trial, the lower court rendered the assailed decision in favor of SMC and against the petitioners
and Savellon as follows:

WHEREFORE, by preponderance of evidence, the Court hereby renders judgment in

favor of plaintiff and against defendants, ordering defendants Rene Savellon,
Bacaltos Coal Mines and German A. Bacaltos, jointly and severally, to pay to plaintiff:

1. The amount of P433,000.00 by way of reimbursement of the consideration paid by

plaintiff, plus 12% interest to start from date of written demand, which is June 14,
1989;

2. The amount of P20,000.00 by way of exemplary damages;

3. The amount of P20,000.00 as attorney's fees and P5,000.00 as Litigation

expenses. Plus costs. 10

It ruled that the Authorization given by German Bacaltos to Savellon necessarily included the power
to enter into the Trip Charter Party. It did not give credence to the petitioners' claim that the
authorization refers only to coal or coal mining and not to shipping because, according to it, "the
business of coal mining may also involve the shipping of products" and "a company such as a coal
mining company is not prohibited to engage in entering into a Trip Charter Party contract." It further
reasoned out that even assuming that the petitioners did not intend to authorize Savellon to enter
into the Trip Charter Party, they are still liable because: (a) SMC appears to be an innocent party
which has no knowledge of the real intent of the parties to the Authorization and has reason to rely
on the written Authorization submitted by Savellon pursuant to Articles 1900 and 1902 of the Civil
Code; (b) Savellon issued an official receipt of Bacaltos Coal Mines (Exhibit "B-1") for the
consideration of the Trip Charter Party, and the petitioners denial that they caused the printing of
such official receipt is "lame" because they submitted only a cash voucher and not their official
receipt; (c) the "Notice of Readiness" (Exhibit "A-1") is written on a paper with the letterhead
"Bacaltos Coal Mines" and the logo therein is the same as that appearing in their voucher; (d) the
petitioners were benefited by the payment because the real payee in the check is actually Bacaltos
Coal Mines and since in the Authorization they authorized Savellon to collect receivables due or in
arrears, the check was then properly delivered to Savellon; and, (e) if indeed Savellon had not been
authorized or if indeed he exceeded his authority or if the Trip Charter Party was personal to him and
the petitioners have nothing to do with it, then Savellon should have "bother[ed] to answer" the
complaint and the petitioners should have filed "a cross-claim" against him.

In their appeal to the Court of Appeals in CA-G.R. CV No. 35180, the petitioners asserted that the
trial court erred in: (a) not holding that SMC was negligent in (1) not verifying the credentials of
Savellon and the ownership of the vessel, (2) issuing the check in the name of Savellon in trust for
Bacaltos Coal Mines thereby allowing Savellon to encash the check, and, (3) making full payment of
P650,000.00 after the vessel made only one trip and before it completed three trips as required in
the Trip Charter Party; (b) holding that under the authority given to him Savellon was authorized to
enter into the Trip Charter Party; and, (c) holding German Bacaltos jointly and severally liable with
Savellon and Bacaltos Coal Mines. 11

As stated at the beginning, the Court of Appeals affirmed in toto the judgment of the trial court. It
held that: (a) the credentials of Savellon is not an issue since the petitioners impliedly admitted the
agency while the ownership of the vessel was warranted on the face of the Trip Charter Party; (b)
SMC was not negligent when it issued the check in the name of Savellon in trust for Bacaltos Coal
Mines since the Authorization clearly provides that collectibles of the petitioners can be coursed
through Savellon as the agent; (c) the Authorization includes the power to enter into the Trip Charter
Party because the "five prerogatives" enumerated in the former is prefaced by the phrase "but not by
way of limitation"; (d) the petitioners' statement that the check should have been issued in the name
of Bacaltos Coal Mines is another implicit admission that the Trip Charter Party is part and parcel of
the petitioners' business notwithstanding German Bacaltos's contrary interpretation when he
testified, and in any event, the construction of obscure words should not favor him since he prepared
the Authorization in favor of Savellon; and, (e) German Bacaltos admitted in the Answer that he is
the proprietor of Bacaltos Coal Mines and he likewise represented himself to be so in the
Authorization itself, hence he should not now be permitted to disavow what he initially stated to be
true and to interpose the defense that Bacaltos Coal Mines has a distinct legal personality.

Their motion for a reconsideration of the above decision having been denied, the petitioners filed the
instant petition wherein they raise the following errors:

I. THE RESPONDENT COURT ERRED IN HOLDING THAT RENE

SAVELLON WAS AUTHORIZED TO ENTER INTO A TRIP
CHARTER PARTY CONTRACT WITH PRIVATE RESPONDENT
INSPITE OF ITS FINDING THAT SUCH AUTHORITY CANNOT BE
FOUND IN THE FOUR CORNERS OF THE AUTHORIZATION;

II. THE RESPONDENT COURT ERRED IN NOT HOLDING THAT

BY ISSUING THE CHECK IN THE NAME OF RENE SAVELLON IN
TRUST FOR BACALTOS COAL MINES, THE PRIVATE
RESPONDENT WAS THE AUTHOR OF ITS OWN DAMAGE; AND

III. THE RESPONDENT COURT ERRED IN HOLDING PETITIONER

GERMAN BACALTOS JOINTLY AND SEVERALLY LIABLE WITH
RENE SAVELLON AND CO-PETITIONER BACALTOS COAL
MINES IN SPITE OF THE FINDING OF THE COURT A QUO THAT
PETITIONER BACALTOS COAL MINES AND PETITIONER
BACALTOS ARE TWO DISTINCT AND SEPARATE LEGAL
PERSONALITIES. 12

After due deliberations on the allegations, issues raised, and arguments adduced in the petition, and
the comment thereto and reply to the comment, the Court resolved to give due course to the petition.

Every 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 inquiry, he is chargeable with knowledge of the agent's
authority, and his ignorance of that authority will not be any excuse. 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, to ascertain not only the fact of the agency but also the nature and
extent of the authority, and in case either is controverted, the burden of proof is upon them to
establish it. 13 American jurisprudence 14 summarizes the rule in dealing with an agent as follows:

A third person dealing with a known agent may not act negligently with regard to the
extent of the agent's authority or blindly trust the agent's statements in such respect.
Rather, he must use reasonable diligence and prudence to ascertain whether the
agent is acting and dealing with him within the scope of his powers. The mere
opinion of an agent as to the extent of his powers, or his mere assumption of
authority without foundation, will not bind the principal; and a third person dealing
 with a known agent must bear the burden of determining for himself, by the exercise
of reasonable diligence and prudence, the existence or nonexistence of the agent's
authority to act in the premises. In other words, whether the agency is general or
special, the third person is bound to ascertain not only the fact of agency, but the
nature and extent of the authority. 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.

Or, as stated in Harry E. Keller Electric Co. vs. Rodriguez, 15 quoting Mechem on Agency:

The person dealing with the agent must also act with ordinary prudence and
reasonable diligence. Obviously, if he knows or has good reason to believe that the
agent is exceeding his authority, he cannot claim protection. So if the suggestions of
probable limitations be of such a clear and reasonable quality, or if the character
assumed by the agent is of such a suspicious or unreasonable nature, or if the
authority which he seeks to exercise is of such an unusual or improbable character,
as would suffice to put an ordinarily prudent man upon his guard, the party dealing
with him may not shut his eyes to the real estate of the case, but should either refuse
to deal with the agent at all, or should ascertain from the principal the true condition
of affairs. [emphasis supplied].

In the instant case, since the agency of Savellon is based on a written document, the Authorization
of 1 March 1988 (Exhibits "C" and "1"), the extent and scope of his powers must be determined on
the basis thereof. The language of the Authorization is clear. It pertinently states as follows:

I. GERMAN A. BACALTOS do hereby authorize RENE R. SAVELLON . . . to use the coal operating
contract of BACALTOS COAL MINES, of which I am the proprietor, for any legitimate purpose that it
may serve. Namely, but not by way of limitation, as follows . . . [emphasis supplied].

There is only one express power granted to Savellon, viz., to use the coal operating contract
for anylegitimate purpose it may serve. The enumerated "five prerogatives" — to employ the
term used by the Court of Appeals — are nothing but the specific prerogatives subsumed
under or classified as part of or as examples of the power to use the coal operating contract.
The clause "but not by way of limitation" which precedes the enumeration could only refer to
or contemplate other prerogatives which must exclusively pertain or relate or be germane to
the power to use the coal operating contract. The conclusion then of the Court of Appeals
that the Authorization includes the power to enter into the Trip Chapter Party because the
"five prerogatives" are prefaced by such clause, is seriously flawed. It fails to note that the
broadest scope of Savellon's authority is limited to the use of the coal operating contract and
the clause cannot contemplate any other power not included in the enumeration or which are
unrelated either to the power to use the coal operating contract or to those already
enumerated. In short, while the clause allows some room for flexibility, it can comprehend
only additional prerogatives falling within the primary power and within the same class as
those enumerated. The trial court, however, went further by hastily making a sweeping
conclusion that "a company such as a coal mining company is not prohibited to engage in
entering into a Trip Charter Party contract." 16 But what the trial court failed to consider was
that there is no evidence at all that Bacaltos Coal Mines as a coal mining company owns and
operates vessels, and even if it owned any such vessels, that it was allowed to charter or
lease them. The trial court also failed to note that the Authorization is not a general power of
attorney. It is a special power of attorney for it refers to a clear mandate specifically
authorizing the performance of a specific power and of express acts subsumed therein. 17 In
short, both courts below unreasonably expanded the express terms of or otherwise gave
 unrestricted meaning to a clause which was precisely intended to prevent unwarranted and
unlimited expansion of the powers entrusted to Savellon. The suggestion of the Court of
Appeals that there is obscurity in the Authorization which must be construed against German
Bacaltos because he prepared the Authorization has no leg to stand on inasmuch as there is
no obscurity or ambiguity in the instrument. If any obscurity or ambiguity indeed existed, then
there will be more reason to place SMC on guard and for it to exercise due diligence in
seeking clarification or enlightenment thereon, for that was part of its duty to discover upon
its peril the nature and extent of Savellon's written agency. Unfortunately, it did not.

Howsoever viewed, the foregoing conclusions of the Court of Appeals and the trial court are tenuous
and farfetched, bringing to unreasonable limits the clear parameters of the powers granted in the
Authorization.

Furthermore, had SMC exercised due diligence and prudence, it should have known in no time that
there is absolutely nothing on the face of the Authorization that confers upon Savellon the authority
to enter into any Trip Charter Party. Its conclusion to the contrary is based solely on the second
prerogative under the Authorization, to wit:

(2) To engage in trading under the style of BACALTOS COAL MINES/RENE

SAVELLON;

unmindful that such is but a part of the primary authority to use the coal operating contract
which it did not even require Savellon to produce. Its principal witness, Mr. Valdescona,
expressly so admitted on cross-examination, thus:

Atty. Zosa (to witness — ON CROSS)

Q You said that in your office Mr. Rene Savellon presented to you
this authorization marked Exhibit "C" and Exhibit "1" for the
defendant?

A Yes, sir.

Q Did you read in the first part[y] of this authorization Mr. Valdescona
that Mr. Rene Savellon was authorized as the coal operating contract
of Bacaltos Coal Mines?

A Yes, sir.

Q Did it not occur to you that you should have examined further the
authorization of Mr. Rene Savellon, whether or not this coal operating
contract allows Mr. Savellon to enter into a trip charter party?

A Yes, sir. We discussed about the extent of his authorization and he

referred us to the number 2 provision of this authorization which is to
engage in trading under the style of Bacaltos Coal Mines/Rene
Savellon, which we followed up to the check preparation because it is
part of the authority.
 Q In other words, you examined this and you found out that Mr.
Savellon is authorized to use the coal operating contract of Bacaltos
Coal Mines?

A Yes, sir.

Q You doubted his authority but you found out in paragraph 2 that he
is authorized that's why you agreed and entered into that trip charter
party?

A We did not doubt his authority but we were questioning as to the

extent of his operating contract.

Q Did you not require Mr. Savellon to produce that coal operating
contract of Bacaltos Coal Mines?

A No sir. We did not. 18

Since the principal subject of the Authorization is the coal operating contract, SMC should have
required its presentation to determine what it is and how it may be used by Savellon. Such a
determination is indispensable to an inquiry into the extent or scope of his authority. For this reason,
we now deem it necessary to examine the nature of a coal operating contract.

A coal operating contract is governed by P.D. No. 972 (The Coal Development Act of 1976), as
amended by P.D. No. 1174. It is one of the authorized ways of active exploration, development, and
production of coal resources 19 in a specified contract area. 20 Section 9 of the decree prescribes the
obligation of the contractor, thus:

Sec. 9. Obligations of Operator in Coal Operating Contract. — The operator under a

coal operating contract shall undertake, manage and execute the coal operations
which shall include:

(a) The examination and investigation of lands supposed to contain coal, by detailed
surface geologic mapping, core drilling, trenching, test pitting and other appropriate
means, for the purpose of probing the presence of coal deposits and the extent
thereof;

(b) Steps necessary to reach the coal deposit so that it can be mined, including but
not limited to shaft sinking and tunneling; and

(c) The extraction and utilization of coal deposits.

The Government shall oversee the management of the operation contemplated in a

coal operating contract and in this connection, shall require the operator to:

(a) Provide all the necessary service and technology;

(b) Provide the requisite financing;

(c) Perform the work obligations and program prescribed in the coal operating
contract which shall not be less than those prescribed in this Decree;
 (d) Operate the area on behalf of the Government in accordance with good coal
mining practices using modern methods appropriate for the geological conditions of
the area to enable maximum economic production of coal, avoiding hazards to life,
health and property, avoiding pollution of air, lands and waters, and pursuant to an
efficient and economic program of operation;

(e) Furnish the Energy Development Board promptly with all information, data and
reports which it may require;.

(f) Maintain detailed technical records and account of its expenditures;

(g) Conform to regulations regarding, among others, safety demarcation of

agreement acreage and work areas, non-interference
with the rights of the other petroleum, mineral and natural resources operators; —

(h) Maintain all necessary equipment in good order and allow access to these as well
as to the exploration, development and production sites and operations to inspectors
authorized by the Energy Development Board;

(i) Allow representatives authorized by the Energy Development Board full access to
their accounts, books and records for tax and other fiscal purposes.

Section 11 thereof provides for the minimum terms and conditions of a coal operating contract.

From the foregoing, it is obvious that a scrutiny of the coal operating contract of Bacaltos Coal Mines
would have provided SMC knowledge of the activities which are germane, related, or incident to the
power to use it. But it did not even require Savellon to produce the same.

SMC's negligence was further compounded by its failure to verify if Bacaltos Coal Mines owned a
vessel. A party desiring to charter a vessel must satisfy itself that the other party is the owner of the
vessel or is at least entitled to its possession with power to lease or charter the vessel. In the instant
case, SMC made no such attempt. It merely satisfied itself with the claim of Savellon that the vessel
it was leasing is owned by Bacaltos Coal Mines and relied on the presentation of the Authorization
as well as its test on the sea worthiness of the vessel. Valdescona thus declared on direct
examination as follows:

A In October, a certain Rene Savellon called our office offering us

shipping services. So I told him to give us a formal proposal and also
for him to come to our office so that we can go over his proposal and
formally discuss his offer.

Q Did Mr. Rene Savellon go to your office?

A Few days later he came to our office and gave us his proposal
verbally offering a vessel for us to use for our cargo.

Q Did he mention the owner of that vessel?

A Yes, sir. That it is Bacaltos.

Q Did he present a document to you?

 A Yes, sir. He presented to us the authorization.

Q When Mr. Rene Savellon presented to you the authorization what

did you do?.

A On the strength of that authorization we initially asked him for us to

check the vessel to see its sea worthiness, and we assigned our in-
house surveyor to check the sea worthiness of the vessel which was
on dry dock that time in Danao.

Q What was the result of your inspection?

A We found out the vessel's sea worthiness to be our cargo carrier.

Q After that what did you do?

A After that we were discussing the condition of the contract.

Q Were you able to execute that contract?

A Yes, sir .21

He further declared as follows:

Q When you entered into a trip charter contract did you check the
ownership of M/V Premship?

A The representation made by Mr. Rene Savellon was that Bacaltos

Coal Mines operates the vessel and on the strength of the
authorization he showed us we were made to believe that it was
Bacaltos Coal Mines that owned it.

COURT: (to witness)

Q In other words, you just believed Rene Savellon?

A Yes, sir.

COURT: (to witness)

Q You did not check with Bacaltos Coal Mines?

A That is the representation he made.

Q Did he show you document regarding this M/V Premship II?

A No document shown.22

The Authorization itself does not state that Bacaltos Coal Mines owns any vessel, and since it is
clear therefrom that it is not engaged in shipping but in coal mining or in coal business, SMC should
have required the presentation of pertinent documentary proof of ownership of the vessel to be
chartered. Its in-house surveyor who saw the vessel while drydocked in Danao and thereafter
conducted a sea worthiness test could not have failed to ascertain the registered owner of the
vessel. The petitioners themselves declared in open court that they have not leased any vessel for
they do not need it in their coal operations23 thereby implying that they do not even own one.

The Court of Appeals' asseveration that there was no need to verify the ownership of the vessel
because such ownership is warranted on the face of the trip charter party begs the question since
Savellon's authority to enter into that contract is the very heart of the controversy.

We are not prepared to accept SMC's contention that the petitioners' claim that they are not
engaged in shipping and do not own any ship is belied by the fact that they maintained a pre-printed
business form known as a "Notice of Readiness" (Exhibit "A-1"). 24 This paper is only a photocopy
and, despite its reservation to present the original for purposes of comparison at the next
hearing, 25 SMC failed to produce the latter. This "Notice of Readiness" is not, therefore, the best
evidence, hence inadmissible under Section 3, Rule 130 of the Rules of Court. It is true that when
SMC made a formal offer of its exhibits, the petitioners did not object to the admission of Exhibit "A-
1," the "Notice of Readiness," under the best evidence rule but on the ground that Savellon was not
authorized to enter into the Trip Charter Party and that the party who signed it, one Elmer Baliquig, is
not the petitioners' employee but of Premier Shipping Lines, the owner of the vessel in
question. 26 The petitioners raised the issue of inadmissibility under the best evidence rule only
belatedly in this petition. But although Exhibit "A-1" remains admissible for not having been timely
objected to, it has no probative value as to the ownership of the vessel.

There is likewise no proof that the petitioners received the consideration of the Trip Charter Party.
The petitioners denied having received it. 27 The evidence for SMC established beyond doubt that it
was Savellon who requested in writing on 19 October 1988 that the check in payment therefor be
drawn in favor of BACALTOS COAL MINES/RENE SAVELLON (Exhibit "B-3") and that SMC drew
the check in favor of RENE SAVELLON IN TRUST FOR BACALTOS COALMINES (Exhibit "B") and
delivered it to Savellon who there upon issued a receipt (Exhibit "B-1"). We agree with the petitioners
that SMC committed negligence in drawing the check in the manner aforestated. It even disregarded
the request of Savellon that it be drawn in favor of BACALTOS COAL MINES/RENE SAVELLON.
Furthermore, assuming that the transaction was permitted in the Authorization, the check should still
have been drawn in favor of the principal. SMC then made possible the wrong done. There is an
equitable maxim that between two innocent parties, the one who made it possible for the wrong to
be done should be the one to bear the resulting loss. 28 For this rule to apply, the condition precedent
is that both parties must be innocent. In the present case, however, SMC is guilty of not ascertaining
the extent and limits of the authority of Savellon. In not doing so, SMC dealt with Savellon at its own
peril.

Having thus found that SMC was the author of its own damage and that the petitioners are,
therefore, free from any liability, it has become unnecessary to discuss the issue of whether Bacaltos
Coal Mines is a corporation with a personality distinct and separate from German Bacaltos.

WHEREFORE, the instant petition is GRANTED and the challenged decision of 30 September 1993
of the Court of Appeals in CA-G.R. CV No. 35180 is hereby REVERSED and SET ASIDE and
another judgment is hereby rendered MODIFYING the judgment of the Regional Trial Court of Cebu,
Branch 9, in Civil Case No. CEB-8187 by setting aside the declaration of solidary liability, holding
defendant RENE R. SAVELLON solely liable for the amounts adjudged, and ordering the dismissal
of the case as against herein petitioners.

SO ORDERED.
HARRY E. KEELER ELECTRIC CO., INC., plaintiff-appellant,
vs.
DOMINGO RODRIGUEZ, defendant-appellee.

Hartford Beaumont for appellant.

Ross and Lawrence and Antonio T. Carrascoso, Jr., for appellee.

STATEMENT

The plaintiff is a domestic corporation with its principal office in the city of Manila and engaged in the
electrical business, and among other things in the sale of what is known as the "Matthews" electric
plant, and the defendant is a resident of Talisay, Occidental Negros, and A. C. Montelibano was a
resident of Iloilo.

Having this information, Montelibano approached plaintiff at its Manila office, claiming that he was
from Iloilo and lived with Governor Yulo; that he could find purchaser for the "Matthews" plant, and
was told by the plaintiff that for any plant that he could sell or any customer that he could find he
would be paid a commission of 10 per cent for his services, if the sale was consummated. Among
other persons. Montelibano interviews the defendant, and, through his efforts, one of the "Matthews"
plants was sold by the plaintiff to the defendant, and was shipped from Manila to Iloilo, and later
installed on defendant's premises after which, without the knowledge of the plaintiff, the defendant
paid the purchase price to Montelibano. As a result, plaintiff commenced this action against the
defendant, alleging that about August 18, 1920, it sold and delivered to the defendant the electric
plant at the agreed price of P2,513.55 no part of which has been paid, the demands judgment for the
amount with interest from October 20, 1920.

For answer, the defendant admits the corporation of the plaintiff, and denies all other material
allegations of the complaint, and, as an affirmative defense, alleges "that on or about the 18th of
August, 1920, the plaintiff sold and delivered to the defendant a certain electric plant and that the
defendant paid the plaintiff the value of said electric plant, to wit: P2,513.55."

Upon such issues the testimony was taken, and the lower court rendered judgment for the
defendant, from which the plaintiff appeals, claiming that the court erred in holding that the payment
to A. C. Montelibano would discharge the debt of defendant, and in holding that the bill was given to
Montelibano for collection purposes, and that the plaintiff had held out Montelibano to the defendant
as an agent authorized to collect, and in rendering judgment for the defendant, and in not rendering
judgment for the plaintiff.

JOHNS, J.:

The testimony is conclusive that the defendant paid the amount of plaintiff's claim to Montelibano,
and that no part of the money was ever paid to the plaintiff. The defendant, having alleged that the
plaintiff sold and delivered the plant to him, and that he paid the plaintiff the purchase price, it
devolved upon the defendant to prove the payment to the plaintiff by a preponderance of the
evidence.

It appears from the testimony of H. E. Keeler that he was president of the plaintiff and that the plant
in question was shipped from Manila to Iloilo and consigned to the plaintiff itself, and that at the time
of the shipment the plaintiff sent Juan Cenar, one of its employees, with the shipment, for the
purpose of installing the plant on defendant's premises. That plaintiff gave Cenar a statement of the
account, including some extras and the expenses of the mechanic, making a total of P2,563,95. That
Montelibano had no authority from the plaintiff to receive or receipt for money. That in truth and in
fact his services were limited and confined to the finding of purchasers for the "Matthews" plant to
whom the plaintiff would later make and consummate the sale. That Montelibano was not an
electrician, could not install the plant and did not know anything about its mechanism.

Cenar, as a witness for the plaintiff, testified that he went with shipment of the plant from Manila to
Iloilo, for the purpose of installing, testing it, and to see that everything was satisfactory. That he was
there about nine days, and that he installed the plant, and that it was tested and approved by the
defendant. He also says that he personally took with him the statement of account of the plaintiff
against the defendant, and that after he was there a few days, the defendant asked to see the
statement, and that he gave it to him, and the defendant said, "he was going to keep it." I said that
was all right "if you want." "I made no effort at all to collect the amount from him because Mr.
Rodriguez told me he was going to pay for the plant here in Manila." That after the plant was
installed and approved, he delivered it to the defendant and returned to Manila.

The only testimony on the part of the defendant is that of himself in the form of a deposition in which
he says that Montelibano sold and delivered the plant to him, and "was the one who ordered the
installation of that electrical plant," and he introduced in evidence as part of his deposition a
statement and receipt which Montelibano signed to whom he paid the money. When asked why he
paid the money to Montelibano, the witness says:

Because he was the one who sold, delivered, and installed the electrical plant, and he
presented to me the account, Exhibits A and A-I, and he assured me that he was duly
authorized to collect the value of the electrical plant.

The receipt offered in evidence is headed:

STATEMENT Folio No. 2494

Mr. DOMINGO RODRIGUEZ,

Iloilo, Iloilo, P.I.

In account with
HARRY E. KEELER ELECTRIC COMPANY, INC.
221 Calle Echaque, Quiapo, Manila, P.I.
MANILA, P.I., August 18, 1920.

The answer alleges and the receipt shows upon its face that the plaintiff sold the plant to the
defendant, and that he bought it from the plaintiff. The receipt is signed as follows:

Received payment
HARRY E. KEELER ELECTRIC CO. Inc.,

Recibi
(Sgd.) A. C. MONTELIBANO.

There is nothing on the face of this receipt to show that Montelibano was the agent of, or that he was
acting for, the plaintiff. It is his own personal receipt and his own personal signature. Outside of the
fact that Montelibano received the money and signed this receipt, there is no evidence that he had
any authority, real or apparent, to receive or receipt for the money. Neither is there any evidence that
the plaintiff ever delivered the statement to Montelibano, or authorized anyone to deliver it to him,
and it is very apparent that the statement in question is the one which was delivered by the plaintiff
to Cenar, and is the one which Cenar delivered to the defendant at the request of the defendant.

The evidence of the defendant that Montelibano was the one who sold him the plant is in direct
conflict with his own pleadings and the receipt statement which he offered in evidence. This
statement also shows upon its face that P81.60 of the bill is for:

To Passage round trip, 1st Class @

P40.80 a trip ........................................... P81.60.

Plus Labor @ P5.00 per day —

Machine's transportation ................. 9.85.

This claim must be for the expenses of Cenar in going to Iloilo from Manila and return, to install the
plant, and is strong evidence that it was Cenar and not Montelibano who installed the plant. If
Montelibano installed the plant, as defendant claims, there would not have been any necessity for
Cenar to make this trip at the expense of the defendant. After Cenar's return to Manila, the plaintiff
wrote a letter to the defendant requesting the payment of its account, in answer to which the
defendant on September 24 sent the following telegram:

Electric plant accessories and installation are paid to Montelibano about three weeks Keeler
Company did not present bill.

This is in direct conflict with the receipted statement, which the defendant offered in evidence,
signed by Montelibano. That shows upon its face that it was an itemized statement of the account of
plaintiff with the defendant. Again, it will be noted that the receipt which Montelibano signed is not
dated, and it does not show when the money was paid: Speaking of Montelibano, the defendant also
testified: "and he assured me that he was duly authorized to collect the value of the electrical plant."
This shows upon its face that the question of Montelibano's authority to receive the money must
have been discussed between them, and that, in making the payment, defendant relied upon
Montelibano's own statements and representation, as to his authority, to receipt for the money.

In the final analysis, the plant was sold by the plaintiff to the defendant, and was consigned by the
plaintiff to the plaintiff at Iloilo where it was installed by Cenar, acting for, and representing, the
plaintiff, whose expense for the trip is included in, and made a part of, the bill which was receipted by
Montelibano.

There is no evidence that the plaintiff ever delivered any statements to Montelibano, or that he was
authorized to receive or receipt for the money, and defendant's own telegram shows that the plaintiff
"did not present bill" to defendant. He now claims that at the very time this telegram was sent, he
had the receipt of Montelibano for the money upon the identical statement of account which it is
admitted the plaintiff did render to the defendant.

Article 1162 of the Civil Code provides:

Payment must be made to the persons in whose favor the obligation is constituted, or to
another authorized to receive it in his name.
And article 1727 provides:

The principal shall be liable as to matters with respect to which the agent has exceeded his
authority only when he ratifies the same expressly or by implication.

In the case of Ormachea Tin-Conco vs. Trillana (13 Phil., 194), this court held:

The repayment of a debt must be made to the person in whose favor the obligation is
constituted, or to another expressly authorized to receive the payment in his name.

Mechem on Agency, volume I, section 743, says:

In approaching the consideration of the inquiry whether an assumed authority exist in a given
case, there are certain fundamental principles which must not be overlooked. Among these
are, as has been seen, (1) that the law indulges in no bare presumptions that an agency
exists: it must be proved or presumed from facts; (2) that the agent cannot establish his own
authority, either by his representations or by assuming to exercise it; (3) that an authority
cannot be established by mere rumor or general reputation; (4)that even a general authority
is not an unlimited one; and (5) that every authority must find its ultimate source in some act
or omission of the principal. An assumption of authority to act as agent for another of itself
challenges inquiry. Like a railroad crossing, it should be in itself a sign of danger and suggest
the duty to "stop, look, and listen." It is therefore declared to be a fundamental rule, never to
be lost sight of and not easily to be overestimated, 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, to ascertain not only the fact of the agency but the nature and
extent of the authority, and in case either is controverted, the burden of proof is upon them to
establish it.

. . . It is, moreover, in any case entirely within the power of the person dealing with the agent
to satisfy himself that the agent has the authority he assumes to exercise, or to decline to
enter into relations with him. (Melchem on Agency, vol. I, sec. 746.)

The person dealing with the agent must also act with ordinary prudence and reasonable
diligence. Obviously, if he knows or has good reason to believe that the agent is exceeding
his authority, he cannot claim protection. So if the suggestions of probable limitations be of
such a clear and reasonable quality, or if the character assumed by the agent is of such a
suspicious or unreasonable nature, or if the authority which he seeks to exercise is of such
an unusual or improbable character, as would suffice to put an ordinarily prudent man upon
his guard, the party dealing with him may not shut his eyes to the real state of the case, but
should either refuse to deal with the agent at all, or should ascertain from the principal the
true condition of affairs. (Mechem on Agency, vol. I, sec 752.)

And not only must the person dealing with the agent ascertain the existence of the
conditions, but he must also, as in other cases, be able to trace the source of his reliance to
some word or act of the principal himself if the latter is to be held responsible. As has often
been pointed out, the agent alone cannot enlarge or extend his authority by his own acts or
statements, nor can he alone remove limitations or waive conditions imposed by his
principal. To charge the principal in such a case, the principal's consent or concurrence must
be shown. (Mechem on Agency, vol. I, section 757.)

This was a single transaction between the plaintiff and the defendant. lawph!l.net
Applying the above rules, the testimony is conclusive that the plaintiff never authorized Montelibano
to receive or receipt for money in its behalf, and that the defendant had no right to assume by any
act or deed of the plaintiff that Montelibano was authorized to receive the money, and that the
defendant made the payment at his own risk and on the sole representations of Montelibano that he
was authorized to receipt for the money.

The judgment of the lower court is reversed, and one will be entered here in favor of the plaintiff and
against the defendant for the sum of P2,513.55 with interest at the legal rate from January 10, 1921,
with costs in favor of the appellant. So ordered.

Araullo, C. J., Johnson, Street, Malcolm, Avanceña, Villamor, Ostrand, and Romualdez, JJ., concur.
SPOUSES YU ENG CHO and FRANCISCO TAO YU, petitioners,
vs.
PAN AMERICAN WORLD AIRWAYS, INC., TOURIST WORLD SERVICES, INC., JULIETA
CANILAO and CLAUDIA TAGUNICAR, respondents.

PUNO, J.:

This petition for review seeks a reversal of the 31 August 1995 Decision 1 and 11 January 1998
Resolution 2 of the Court of Appeals holding private respondent Claudia Tagunicar solely liable for
moral and exemplary damages and attorney's fees, and deleting the trial court's award for actual
damages.

The facts as found by the trial court are as follows:

Plaintiff Yu Eng Cho is the owner of Young Hardware Co. and Achilles Marketing. In
connection with [this] business, he travels from time to time to Malaysia, Taipei and
Hongkong. On July 10, 1976, plaintiffs bought plane tickets (Exhs. A & B) from defendant
Claudia Tagunicar who represented herself to be an agent of defendant Tourist World
Services, Inc. (TWSI). The destination[s] are Hongkong, Tokyo, San Francisco, U.S.A., for
the amount of P25,000.00 per computation of said defendant Claudia Tagunicar (Exhs. C &
C-1). The purpose of this trip is to go to Fairfield, New Jersey, U.S.A. to buy to two (2) lines
of infrared heating system processing textured plastic article (Exh. K).

On said date, only the passage from Manila to Hongkong, then to Tokyo, were confirmed.
[PAA] Flight 002 from Tokyo to San Francisco was on "RQ" status, meaning "on request".
Per instruction of defendant Claudia Tagunicar, plaintiffs returned after a few days for the
confirmation of the Tokyo-San Francisco segment of the trip. After calling up Canilao of
TWSI, defendant Tagunicar told plaintiffs that their flight is now confirmed all the way.
Thereafter, she attached the confirmation stickers on the plane tickets (Exhs. A & B).

A few days before the scheduled flight of plaintiffs, their son, Adrian Yu, called the Pan Am
office to verify the status of the flight. According to said Adrian Yu, a personnel of defendant
Pan Am told him over the phone that plaintiffs' booking[s] are confirmed.

On July 23, 1978, plaintiffs left for Hongkong and stayed there for five (5) days. They left
Hongkong for Tokyo on July 28, 1978. Upon their arrival in Tokyo, they called up Pan-Am
office for reconfirmation of their flight to San Francisco. Said office, however, informed them
that their names are not in the manifest. Since plaintiffs were supposed to leave on the 29th
of July, 1978, and could not remain in Japan for more than 72 hours, they were constrained
to agree to accept airline tickets for Taipei instead, per advise of JAL officials. This is the only
option left to them because Northwest Airlines was then on strike, hence, there was no
chance for the plaintiffs to obtain airline seats to the United States within 72 hours. Plaintiffs
paid for these tickets.

Upon reaching Taipei, there were no flight[s] available for plaintiffs, thus, they were forced to
return back to Manila on August 3, 1978, instead of proceeding to the United States. [Japan]
Air Lines (JAL) refunded the plaintiffs the difference of the price for Tokyo-Taipei [and]
Tokyo-San Francisco (Exhs. I & J) in the total amount of P2,602.00.

In view of their failure to reach Fairfield, New Jersey, Radiant Heat Enterprises, Inc.
cancelled Yu Eng Cho's option to buy the two lines of infra-red heating system (Exh. K). The
agreement was for him to inspect the equipment and make final arrangement[s] with the said
company not later than August 7, 1978. From this business transaction, plaintiff Yu Eng Cho
expected to realize a profit of P300,000.00 to P400,000.00.

[A] scrutiny of defendants' respective evidence reveals the following:

Plaintiffs, who were intending to go to the United States, were referred to defendant Claudia
Tagunicar, an independent travel solicitor, for the purchase of their plane tickets. As such
travel solicitor, she helps in the processing of travel papers like passport, plane tickets,
booking of passengers and some assistance at the airport. She is known to defendants Pan-
Am, TWSI/Julieta Canilao, because she has been dealing with them in the past years.
Defendant Tagunicar advised plaintiffs to take Pan-Am because Northwest Airlines was then
on strike and plaintiffs are passing Hongkong, Tokyo, then San Francisco and Pan-Am has a
flight from Tokyo to San Francisco. After verifying from defendant TWSI, thru Julieta Canilao,
she informed plaintiffs that the fare would be P25,093.93 giving them a discount of P738.95
(Exhs. C, C-1). Plaintiffs, however, gave her a check in the amount of P25,000.00 only for
the two round trip tickets. Out of this transaction, Tagunicar received a 7% commission and
1% commission for defendant TWSI.

Defendant Claudia Tagunicar purchased the two round-trip Pan-Am tickets from defendant
Julieta Canilao with the following schedules:

Origin Destination Airline Date Time/Travel

Manila Hongkong CX900 7-23-78 1135/1325hrs

Hongkong Tokyo CS500 7-28-78 1615/2115hrs

Tokyo San Francisco PA002 7-29-78 1930/1640hrs

The use of another airline, like in this case it is Cathay Pacific out of Manila, is allowed,
although the tickets issued are Pan-Am tickets, as long as it is in connection with a Pan-Am
flight. When the two (2) tickets (Exhs. A & B) were issued to plaintiffs, the letter "RQ"
appears below the printed word "status" for the flights from Tokyo to San Francisco which
means "under request," (Exh. 3-A, 4-A Pan-Am). Before the date of the scheduled departure,
defendant Tagunicar received several calls from the plaintiffs inquiring about the status of
their bookings. Tagunicar in turn called up TWSI/Canilao to verify; and if Canilao would
answer that the bookings are not yet confirmed, she would relate that to the plaintiffs.

Defendant Tagunicar claims that on July 13, 1978, a few days before the scheduled flight,
plaintiff Yu Eng Cho personally went to her office, pressing her about their flight. She called
up defendant Julieta Canilao, and the latter told her "o sige Claudia, confirm na." She even
noted this in her index card (Exh. L), that it was Julieta who confirmed the booking (Exh. L-
1). It was then that she allegedly attached the confirmation stickers (Exhs. 2, 2-B TWSI) to
the tickets. These stickers came from TWSI.

Defendant Tagunicar alleges that it was only in the first week of August, 1978 that she
learned from Adrian Yu, son of plaintiffs, that the latter were not able to take the flight from
Tokyo to San Francisco, U.S.A. After a few days, said Adrian Yu came over with a
gentleman and a lady, who turned out to be a lawyer and his secretary. Defendant Tagunicar
claims that plaintiffs were asking for her help so that they could file an action against Pan-
Am. Because of plaintiffs' promise she will not be involved, she agreed to sign the affidavit
(Exh. M) prepared by the lawyer.
 Defendants TWSI/Canilao denied having confirmed the Tokyo-San Francisco segment of
plaintiffs' flight because flights then were really tight because of the on-going strike at
Northwest Airlines. Defendant Claudia Tagunicar is very much aware that [said] particular
segment was not confirmed, because on the very day of plaintiffs' departure, Tagunicar
called up TWSI from the airport; defendant Canilao asked her why she attached stickers on
the tickets when in fact that portion of the flight was not yet confirmed. Neither TWSI nor
Pan-Am confirmed the flight and never authorized defendant Tagunicar to attach the
confirmation stickers. In fact, the confirmation stickers used by defendant Tagunicar are
stickers exclusively for use of Pan-Am only. Furthermore, if it is the travel agency that
confirms the booking, the IATA number of said agency should appear on the validation or
confirmation stickers. The IATA number that appears on the stickers attached to plaintiffs'
tickets (Exhs. A & B) is 2-82-0770 (Exhs. 1, 1-A TWSI), when in fact TWSI's IATA number is
2-83-0770 (Exhs. 5, 5-A TWSI). 3

A complaint for damages was filed by petitioners against private respondents Pan American World
Airways, Inc. (Pan Am), Tourist World Services, Inc. (TWSI), Julieta Canilao (Canilao), and Claudia
Tagunicar (Tagunicar) for expenses allegedly incurred such as costs of tickets and hotel
accommodations when petitioners were compelled to stay in Hongkong and then in Tokyo by reason
of the non-confirmation of their booking with Pan-Am. In a Decision dated November 14, 1991, the
Regional Trial Court of Manila, Branch 3, held the defendants jointly and severally liable, except
defendant Julieta Canilao, thus:

WHEREFORE, judgment is hereby rendered for the plaintiffs and ordering defendants Pan
American World Airways, Inc., Tourist World Services, Inc. and Claudia Tagunicar, jointly
and severally, to pay plaintiffs the sum of P200,000.00 as actual damages, minus P2,602.00
already refunded to the plaintiffs; P200,000.00 as moral damages; P100,000.00 as
exemplary damages; an amount equivalent to 20% of the award for and as attorney's fees,
plus the sum of P30,000.00 as litigation expenses.

Defendants' counterclaims are hereby dismissed for lack of merit.

SO ORDERED.

Only respondents Pan Am and Tagunicar appealed to the Court of Appeals. On 11 August 1995, the
appellate court rendered judgment modifying the amount of damages awarded, holding private
respondent Tagunicar solely liable therefor, and absolving respondents Pan Am and TWSI from any
and all liability, thus:

PREMISES CONSIDERED, the decision of the Regional Trial Court is hereby SET ASIDE
and a new one entered declaring appellant Tagunicar solely liable for:

1) Moral damages in the amount of P50,000.00;

2) Exemplary damages in the amount of P25,000.00; and

3) Attorney's fees in the amount of P10,000.00 plus costs of suit.

The award of actual damages is hereby DELETED.

SO ORDERED.
In so ruling, respondent court found that Tagunicar is an independent travel solicitor and is not a duly
authorized agent or representative of either Pan Am or TWSI. It held that their business transactions
are not sufficient to consider Pan Am as the principal, and Tagunicar and TWSI as its agent and
sub-agent, respectively. It further held that Tagunicar was not authorized to confirm the bookings of,
nor issue validation stickers to, herein petitioners and hence, Pan Am and TWSI cannot be held
responsible for her actions. Finally, it deleted the award for actual damages for lack of proof.

Hence this petition based on the following assignment of errors:

1. the Court of Appeals, in reversing the decision of the trial court, misapplied the ruling
in Nicos Industrial Corporation vs. Court of Appeals, et. al. [206 SCRA 127]; and

2. the findings of the Court of Appeals that petitioners' ticket reservations in question were
not confirmed and that there is no agency relationship among PAN-AM, TWSI and Tagunicar
are contrary to the judicial admissions of PAN-AM, TWSI and Tagunicar and likewise
contrary to the findings of fact of the trial court.

We affirm.

I. The first issue deserves scant consideration. Petitioners contend that contrary to the ruling of the
Court of Appeals, the decision of the trial court conforms to the standards of an ideal decision set
in Nicos Industrial Corporation, et. al. vs. Court of Appeals, et. al., 4 as "that which, with welcome
economy of words, arrives at the factual findings, reaches the legal conclusions, renders its ruling
and, having done so, ends." It is averred that the trial court's decision contains a detailed statement
of the relevant facts and evidence adduced by the parties which thereafter became the bases for the
court's conclusions.

A careful scrutiny of the decision rendered by the trial court will show that after narrating the
evidence of the parties, it proceeded to dispose of the case with a one-paragraph generalization, to
wit:

On the basis of the foregoing facts, the Court is constrained to conclude that defendant Pan-
Am is the principal, and defendants TWSI and Tagunicar, its authorized agent and sub-
agent, respectively. Consequently, defendants Pan-Am, TWSI and Claudia Tagunicar should
be held jointly and severally liable to plaintiffs for damages. Defendant Julieta Canilao, who
acted in her official capacity as Office Manager of defendant TWSI should not be held
personally liable. 5

The trial court's finding of facts is but a summary of the testimonies of the witnesses and the
documentary evidence presented by the parties. It did not distinctly and clearly set forth, nor
substantiate, the factual and legal bases for holding respondents TWSI, Pan Am and Tagunicar
jointly and severally liable. In Del Mundo vs. CA, et al. 6 where the trial court, after summarizing the
conflicting asseverations of the parties, disposed of the kernel issue in just two (2) paragraphs, we
held:

It is understandable that courts, with their heavy dockets and time constraints, often find
themselves with little to spare in the preparation of decisions to the extent most desirable.
We have thus pointed out that judges might learn to synthesize and to simplify their
pronouncements. Nevertheless, concisely written such as they may be, decisions must still
distinctly and clearly express, at least in minimum essence, its factual and legal bases.
For failing to explain clearly and well the factual and legal bases of its award of moral damages, we
set it aside in said case. Once more, we stress that nothing less than Section 14 of Article VIII of the
Constitution requires that "no decision shall be rendered by any court without expressing therein
clearly and distinctly the facts and the law on which it is based." This is demanded by the due
process clause of the Constitution. In the case at bar, the decision of the trial court leaves much to
be desired both in form and substance. Even while said decision infringes the Constitution, we will
not belabor this infirmity and rather examine the sufficiency of the evidence submitted by the
petitioners.

II. Petitioners assert that Tagunicar is a sub-agent of TWSI while TWSI is a duly authorized ticketing
agent of Pan Am. Proceeding from this premise, they contend that TWSI and Pan Am should be
held liable as principals for the acts of Tagunicar. Petitioners stubbornly insist that the existence of
the agency relationship has been established by the judicial admissions allegedly made by
respondents herein, to wit: (1) the admission made by Pan Am in its Answer that TWSI is its
authorized ticket agent; (2) the affidavit executed by Tagunicar where she admitted that she is a duly
authorized agent of TWSI; and (3) the admission made by Canilao that TWSI received commissions
from ticket sales made by Tagunicar.

We do not agree. 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. 7 The
elements of agency are: (1) consent, express or implied, of the parties to establish the relationship;
(2) the object is the execution of a juridical act in relation to a third person; (3) the agent acts as a
representative and not for himself; (4) the agent acts within the scope of his authority. 8 It is a settled
rule that persons dealing with an assumed agent are bound at their peril, if they would hold the
principal liable, to ascertain not only the fact of agency but also the nature and extent of authority,
and in case either is controverted, the burden of proof is upon them to establish it. 9

In the case at bar, petitioners rely on the affidavit of respondent Tagunicar where she stated that she
is an authorized agent of TWSI. This affidavit, however, has weak probative value in light of
respondent Tagunicar's testimony in court to the contrary. Affidavits, being taken ex parte, are
almost always incomplete and often inaccurate, sometimes from partial suggestion, or for want of
suggestion and inquiries. Their infirmity as a species of evidence is a matter of judicial experience
and are thus considered inferior to the testimony given in court. 10 Further, affidavits are not complete
reproductions of what the declarant has in mind because they are generally prepared by the
administering officer and the affiant simply signs them after the same have been read to
her. 11 Respondent Tagunicar testified that her affidavit was prepared and typewritten by the
secretary of petitioners' lawyer, Atty. Acebedo, who both came with Adrian Yu, son of petitioners,
when the latter went to see her at her office. This was confirmed by Adrian Yu who testified that Atty.
Acebedo brought his notarial seal and notarized the affidavit of the same day. 12 The circumstances
under which said affidavit was prepared put in doubt petitioners' claim that it was executed
voluntarily by respondent Tagunicar. It appears that the affidavit was prepared and was based on
the answers which respondent Tagunicar gave to the questions propounded to her by Atty.
Acebedo. 13 They never told her that the affidavit would be used in a case to be filed against
her. 14 They even assured her that she would not be included as defendant if she agreed to execute
the affidavit. 15 Respondent Tagunicar was prevailed upon by petitioners' son and their lawyer to sign
the affidavit despite her objection to the statement therein that she was an agent of TWSI. They
assured her that "it is immaterial"16 and that "if we file a suit against you we cannot get anything from
you." 17 This purported admission of respondent Tagunicar cannot be used by petitioners to prove
their agency relationship. At any rate, even if such affidavit is to be given any probative value, the
existence of the agency relationship cannot be established on its sole basis. The declarations of the
agent alone are generally insufficient to establish the fact or extent of his authority. 18 In addition, as
between the negative allegation of respondents Canilao and Tagunicar that neither is an agent nor
principal of the other, and the affirmative allegation of petitioners that an agency relationship exists, it
is the latter who have the burden of evidence to prove their allegation, 19 failing in which, their claim
must necessarily fail.

We stress that respondent Tagunicar categorically denied in open court that she is a duly authorized
agent of TWSI, and declared that she is an independent travel agent. 20 We have consistently ruled
that in case of conflict between statements in the affidavit and testimonial declarations, the latter
command greater weight. 21

As further proofs of agency, petitioners call our attention to TWSI's Exhibits "7", "7-A", and "8" which
show that Tagunicar and TWSI received sales commissions from Pan Am. Exhibit "7" 22 is the Ticket
Sales Report submitted by TWSI to Pan Am reflecting the commissions received by TWSI as an
agent of Pan Am. Exhibit "7-A" 23 is a listing of the routes taken by passengers who were audited to
TWSI's sales report. Exhibit "8" 24 is a receipt issued by TWSI covering the payment made by
Tagunicar for the tickets she bought from TWSI. These documents cannot justify the decision that
Tagunicar was paid a commission either by TWSI or Pan Am. On the contrary, Tagunicar testified
that when she pays TWSI, she already deducts in advance her commission and merely gives the net
amount to TWSI. 25 From all sides of the legal prism, the transaction is simply a contract of sale
wherein Tagunicar buys airline tickets from TWSI and then sells it at a premium to her clients.

III. Petitioners included respondent Pan Am in the complainant on the supposition that since TWSI is
its duly authorized agent, and respondent Tagunicar is an agent of TWSI, then Pan Am should also
be held responsible for the acts of respondent Tagunicar. Our disquisitions above show that this
contention lacks factual and legal bases. Indeed, there is nothing in the records to show that
respondent Tagunicar has been employed by Pan Am as its agent, except the bare allegation of
petitioners. The real motive of petitioners in suing Pan Am appears in its Amended Complaint that
"[d]efendants TWSI, Canilao and Tagunicar may not be financially capable of paying plaintiffs the
amounts herein sought to be recovered, and in such event, defendant Pan Am, being their ultimate
principal, is primarily and/or subsidiary liable to pay the said amounts to plaintiffs." 26 This lends
credence to respondent Tagunicar's testimony that she was persuaded to execute an affidavit
implicating respondents because petitioners knew they would not be able to get anything of value
from her. In the past, we have warned that this Court will not tolerate an abuse of judicial process by
passengers in order to pry on international airlines for damage awards, like "trophies in a safari." 27

This meritless suit against Pan Am becomes more glaring with petitioner' inaction after they were
bumped off in Tokyo. If petitioners were of the honest belief that Pan Am was responsible for the
misfortune which beset them, there is no evidence to show that they lodged a protest with Pan Am's
Tokyo office immediately after they were refused passage for the flight to San Francisco, or even
upon their arrival in Manila. The testimony of petitioner Yu Eng Cho in this regard is of title value, viz:

Atty. Jalandoni: . . .

q Upon arrival at the Tokyo airport, what did you do if any in connection with your
schedule[d] trip?

a I went to the Hotel, Holiday Inn and from there I immediately called up Pan Am office in
Tokyo to reconfirm my flight, but they told me that our names were not listed in the manifest,
so next morning, very early in the morning I went to the airport, Pan Am office in the airport
to verify and they told me the same and we were not allowed to leave.

q You were scheduled to be in Tokyo for how long Mr. Yu?

a We have to leave the next day 29th.

 q In other words, what was your status as a passenger?

a Transient passengers. We cannot stay for more than 72 hours.

xxx xxx xxx

q As a consequence of the fact that you claimed that the Pan Am office in Tokyo told you
that your names were not in the manifest, what did you do, if any?

a I ask[ed] them if I can go anywhere in the State? They told me I can go to LA via Japan
Airlines and I accepted it.

q Do you have the tickets with you that they issued for Los Angels?

a It was taken by the Japanese Airlines instead they issue[d] me a ticket to Taipei.

xxx xxx xxx

q Were you able to take the trip to Los Angeles via Pan Am tickets that was issued to you in
lieu of the tickets to San Francisco?

a No, sir.

q Why not?

a The Japanese Airlines said that there were no more available seats.

q And as a consequence of that, what did you do, if any?

a I am so much scared and worried, so the Japanese Airlines advised us to go to Taipei and
I accepted it.

xxx xxx xxx

q Why did you accept the Japan Airlines offer for you to go to Taipei?

a Because there is no chance for us to go to the United States within 72 hours because
during that time Northwest Airlines [was] on strike so the seats are very scarce. So they
advised me better left (sic) before the 72 hours otherwise you will have trouble with the
Japanese immigration.

q As a consequence of that you were force[d] to take the trip to Taipei?

a Yes, sir. 28 (emphasis supplied)

It grinds against the grain of human experience that petitioners did not insist that they be allowed to
board, considering that it was then doubly difficult to get seats because of the ongoing Northwest
Airlines strike. It is also perplexing that petitioners readily accepted whatever the Tokyo office had to
offer as an alternative. Inexplicably too, no demand letter was sent to respondents TWSI and
Canilao. 29 Nor was a demand letter sent to respondent Pan Am. To say the least, the motive of
petitioners in suing Pan Am is suspect.

We hasten to add that it is not sufficient to prove that Pan Am did not allow petitioners to board to
justify petitioners' claim for damages. Mere refusal to accede to the passenger's wishes does not
necessarily translate into damages in the absence of bad faith. 30 The settled rule is that the law
presumes good faith such that any person who seeks to be awarded damages due to acts of
another has the burden of proving that the latter acted in bad faith or with ill motive. 31 In the case at
bar, we find the evidence presented by petitioners insufficient to overcome the presumption of good
faith. They have failed to show any wanton, malevolent or reckless misconduct imputable to
respondent Pan Am in its refusal to accommodate petitioners in its Tokyo-San Francisco flight. Pan
Am could not have acted in bad faith because petitioners did not have confirmed tickets and more
importantly, they were not in the passenger manifest.

In not a few cases, this Court did not hesitable to hold an airline liable for damages for having acted
in bad faith in refusing to accommodate a passenger who had a confirmed ticket and whose name
appeared in the passenger manifest. In Ortigas Jr. v. Lufthansa German Airlines Inc., 32 we ruled that
there was a valid and binding contract between the airline and its passenger after finding that
validating sticker on the passenger's ticket had the letters "O.K." appearing in the "Res. Status" box
which means "space confirmed" and that the ticket is confirmed or validated. In Pan American World
Airways Inc. v. IAC, et al. 33 where a would-be-passenger had the necessary ticket, baggage claim
and clearance from immigration all clearly showing that she was a confirmed passenger and
included in the passenger manifest and yet was denied accommodation in said flight, we awarded
damages. In Armovit, et al. v. CA, et al., 34 we upheld the award of damages made against an airline
for gross negligence committed in the issuance of tickets with erroneous entries as to the time of
flight. In Alitalia Airways v. CA, et al., 35we held that when airline issues a ticket to a passenger
confirmed on a particular flight, on a certain date, a contract of carriage arises, and the passenger
has every right to expect that he would fly on that flight and on that date. If he does not, then the
carrier opens itself to a suit for breach of contract of carriage. And finally, an award of damages was
held proper in the case of Zalamea, et al. v. CA, et al., 36 where a confirmed passenger included in
the manifest was denied accommodation in such flight.

On the other hand, the respondent airline in Sarreal, Sr. v. Japan Airlines Co., Ltd., 37 was held not
liable for damages where the passenger was not allowed to board the plane because his ticket had
not been confirmed. We ruled that "[t]he stub that the lady employee put on the petitioner's ticket
showed among other coded items, under the column "status" the letters "RQ" — which was
understood to mean "Request." Clearly, this does not mean a confirmation but only a request. JAL
Traffic Supervisor explained that it would have been different if what was written in the stub were the
letter "ok" in which case the petitioner would have been assured of a seat on said flight. But in this
case, the petitioner was more of a wait-listed passenger than a regularly booked passenger."

In the case at bar, petitioners' ticket were on "RQ" status. They were not confirmed passengers and
their names were not listed in the passenger manifest. In other words, this is not a case where Pan
Am bound itself to transport petitioners and thereafter reneged on its obligation. Hence, respondent
airline cannot be held liable for damages.

IV. We hold that respondent Court of Appeals correctly rules that the tickets were never confirmed
for good reasons: (1) The persistent calls made by respondent Tagunicar to Canilao, and those
made by petitioners at the Manila, Hongkong and Tokyo offices in Pan Am, are eloquent indications
that petitioners knew that their tickets have not been confirmed. For, as correctly observed by Pan
Am, why would one continually try to have one's ticket confirmed if it had already been confirmed?
(2) The validation stickers which respondent Tagunicar attached to petitioners' tickets were those
intended for the exclusive use of airline companies. She had no authority to use them. Hence, said
validation stickers, wherein the word "OK" appears in the status box, are not valid and binding. (3)
The names of petitioners do not appear in the passengers manifest. (4) Respondent Tagunicar's
"Exhibit 1" 38 shows that the status of the San Francisco-New York segment was "Ok", meaning it
was confirmed, but that the status of the Tokyo-San Francisco segment was still "on request". (5)
Respondent Canilao testified that on the day that petitioners were to depart for Hongkong,
respondent Tagunicar called her from the airport asking for confirmation of the Tokyo-San Francisco
flight, and that when she told respondent Tagunicar that she should not have allowed petitioners to
leave because their tickets have not been confirmed, respondent Tagunicar merely said "Bahala
na." 39This was never controverted nor refuted by respondent Tagunicar. (6) To prove that it really did
not confirm the bookings of petitioners, respondent Canilao pointed out that the validation stickers
which respondent Tagunicar attached to the tickets of petitioners had IATA No. 2-82-0770 stamped
on it, whereas the IATA number of TWSI is 28-30770. 40

Undoubtedly, respondent Tagunicar should be liable for having acted in bad faith in misrepresenting
to petitioners that their tickets have been confirmed. Her culpability, however, was properly
mitigated. Petitioner Yu Eng Cho testified that he repeatedly tried to follow up on the confirmation of
their tickets with Pan Am because he doubted the confirmation made by respondent
Tagunicar. 41 This is clear proof that petitioners knew that they might be bumped off at Tokyo when
they decided to proceed with the trip. Aware of this risk, petitioners exerted efforts to confirm their
tickets in Manila, then in Hongkong, and finally in Tokyo. Resultantly, we find the modification as to
the amount of damages awarded just and equitable under the circumstances.

WHEREFORE, the decision appealed from is hereby AFFIRMED. Cost against petitioners. 1âwphi1.nêt

SO ORDERED.