National Power Corp. v. National Merchandising Corp.

j. When agent personally liable to third persons (Art. 1897)

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Case DigestWeeks 3 & 4 - Obligations, Powers & Liabilities of the Agent

National Power Corp. v. National Merchandising Corp.

G.R. Nos. L-33819 & L-33897 · October 23, 1982 · Supreme Court

j. When agent personally liable to third persons (Art. 1897)

Petitioner: National Power CorporationRespondent: National Merchandising Corporation and Domestic Insurance Company of the Philippines

Gist

A local agent contracted to supply NAPOCOR with sulfur, quietly dropping its New York principal's condition that delivery depended on shipping space. When no steamer could be secured and delivery failed, the agent — not the principal — was made to answer for the liquidated damages.

Core Doctrine

Under Article 1897, an agent who exceeds the limits of his authority without giving the other party sufficient notice of his powers is personally liable on the contract. The third person's ignorance is decisive: an agent who conceals a limitation imposed by his principal cannot shelter behind the agency he has misrepresented.

Facts

National Power Corporation (NAPOCOR) (the third person/buyer) and National Merchandising Corporation (NAMERCO) (the agent) — the Philippine representative of the New York-based International Commodities Corporation (the principal/seller) — executed a contract of sale of sulfur, with a stipulation for liquidated damages in case of breach.
Domestic Insurance Company of the Philippines (the surety) executed a performance bond in NAPOCOR's favour to guarantee the seller's obligation.
NAMERCO's New York principal had cabled instructions that the sale was subject to the availability of a steamer.
NAMERCO did not disclose this condition to NAPOCOR. (The buyer therefore never learned the true limit of the agent's authority — the omission that decides liability under Article 1897.)
On the contrary, and contrary to its principal's instructions, NAMERCO agreed in the contract that the non-availability of a steamer would not justify non-payment of liquidated damages.
The New York supplier was in fact unable to deliver the sulfur, having failed to secure shipping space.
NAPOCOR sued NAMERCO and the surety for the stipulated liquidated damages.
Trial court — NAMERCO and the surety held liable. The trial court held NAMERCO and Domestic Insurance liable.
Both sides appeal. Both sides appealed on the amount and on the question of who should bear the liability.

Issue

Whether NAMERCO, as agent of the New York principal, is personally liable for the damages arising from the undelivered sulfur.

Ruling

Yes. The Supreme Court held NAMERCO liable for having exceeded the limits of its authority without notifying NAPOCOR of its powers, and ordered NAMERCO and Domestic Insurance Company to pay NAPOCOR, solidarily, ₱45,100 as liquidated damages (the stipulated sum having been equitably reduced).

Ratio

1. Article 1897 Fixes the Agent with Personal Liability

Article 1897 provides:

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

NAMERCO fell squarely within the second exception.
Its principal's authority was qualified — the sale was contingent on the availability of a steamer.
NAMERCO bound the principal unconditionally, and worse, expressly stipulated that the very contingency its principal had reserved would not excuse liability.

2. The Decisive Fact Is the Absence of Notice

The Court stressed that the agent's liability turns on the third party's ignorance of the limitation.
NAPOCOR was never told of the steamer condition; it contracted in the belief that NAMERCO was fully empowered to bind its principal on the terms written.
Having withheld that information, NAMERCO cannot invoke the agency it misrepresented.
An agent's duty in this respect is affirmative: he must give the party with whom he deals sufficient notice of his powers.
A third person who is told the truth about the agent's authority and contracts anyway must look to the principal.
One who is kept in the dark may hold the agent.

3. The Undisclosed Principal Is Not Bound

Because the contract as executed departed from the authority given, it did not bind the New York corporation.
There being no principal answerable on those terms, the obligation rests where the misconduct lies — on the agent.

4. Liquidated Damages May Be Equitably Reduced

While the contract fixed liquidated damages, the Court exercised its power under Article 2227 to reduce the stipulated amount as iniquitous or unconscionable in the circumstances, arriving at ₱45,100.
The surety, having bound itself for the seller's performance, was held solidarily with NAMERCO.

Doctrine

Article 1897 — the second exception. An agent is personally liable where he exceeds his authority without giving sufficient notice of his powers. Both elements matter: excess of authority and absence of notice.
Duty of disclosure. The agent must apprise the third person of the limits of his authority. Concealing a condition the principal imposed shifts the resulting liability onto the agent.
No binding effect on the principal. A contract concluded beyond the authority granted does not bind the principal unless ratified; the agent alone answers.
Liquidated damages may be equitably reduced by the courts where iniquitous or unconscionable (Art. 2227).

Cited Laws & Provisions

Every statute, rule, and issuance the decision turns on — the text as written, and the work it does in this case.

Civil Code

Article 1897, Civil Code

Civil Code of the Philippines (R.A. No. 386), Book IV (Obligations and Contracts), Title X (Agency), Chapter 2 (Obligations of the Agent)

The agent who acts as such is not personally liable to the party with whom he contracts, unless he expressly binds himself or exceeds the limits of his authority without giving such party sufficient notice of his powers. (1725)

Why it is cited here

The article the case is built on, and this is its clearest illustration.

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

The second exception has two parts, and both must be present: the agent must have exceeded his authority and failed to give sufficient notice of his powers. Read them together and you see what the article is really protecting — not the principal's instructions as such, but the third party's ability to know what he is dealing with.

That is why the third person's ignorance is decisive. An agent who discloses his limits and then oversteps has still told the other side where the boundary lay; the third party who contracted anyway took the risk knowingly, and the agent is not personally answerable. An agent who conceals a limitation his principal imposed has denied the other side that choice, and cannot then shelter behind an agency he misrepresented.

Note the practical asymmetry this creates. The agent controls the information, so the agent bears the consequence of withholding it. Disclosure is cheap; the article prices silence.

Cited laws & provisions

Article 1897, Civil Code

Civil Code

Civil Code of the Philippines (R.A. No. 386), Book IV (Obligations and Contracts), Title X (Agency), Chapter 2 (Obligations of the Agent)

Why it is cited here

The article the case is built on, and this is its clearest illustration.

Note the practical asymmetry this creates. The agent controls the information, so the agent bears the consequence of withholding it. Disclosure is cheap; the article prices silence.

Full entry below ↓

Facts

National Power Corporation (NAPOCOR) (the third person/buyer) and National Merchandising Corporation (NAMERCO) (the agent) — the Philippine representative of the New York-based International Commodities Corporation (the principal/seller) — executed a contract of sale of sulfur, with a stipulation for liquidated damages in case of breach.

Domestic Insurance Company of the Philippines (the surety) executed a performance bond in NAPOCOR's favour to guarantee the seller's obligation.

NAMERCO's New York principal had cabled instructions that the sale was subject to the availability of a steamer.

NAMERCO did not disclose this condition to NAPOCOR. (The buyer therefore never learned the true limit of the agent's authority — the omission that decides liability under Article 1897.)

On the contrary, and contrary to its principal's instructions, NAMERCO agreed in the contract that the non-availability of a steamer would not justify non-payment of liquidated damages.

The New York supplier was in fact unable to deliver the sulfur, having failed to secure shipping space.

NAPOCOR sued NAMERCO and the surety for the stipulated liquidated damages.

Trial court — NAMERCO and the surety held liable. The trial court held NAMERCO and Domestic Insurance liable.

Both sides appeal. Both sides appealed on the amount and on the question of who should bear the liability.

Ratio

1. Article 1897 Fixes the Agent with Personal Liability

Article 1897 provides:

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

NAMERCO fell squarely within the second exception.

Its principal's authority was qualified — the sale was contingent on the availability of a steamer.

NAMERCO bound the principal unconditionally, and worse, expressly stipulated that the very contingency its principal had reserved would not excuse liability.

2. The Decisive Fact Is the Absence of Notice

The Court stressed that the agent's liability turns on the third party's ignorance of the limitation.

NAPOCOR was never told of the steamer condition; it contracted in the belief that NAMERCO was fully empowered to bind its principal on the terms written.

Having withheld that information, NAMERCO cannot invoke the agency it misrepresented.

An agent's duty in this respect is affirmative: he must give the party with whom he deals sufficient notice of his powers.

A third person who is told the truth about the agent's authority and contracts anyway must look to the principal.

One who is kept in the dark may hold the agent.

3. The Undisclosed Principal Is Not Bound

Because the contract as executed departed from the authority given, it did not bind the New York corporation.

There being no principal answerable on those terms, the obligation rests where the misconduct lies — on the agent.

4. Liquidated Damages May Be Equitably Reduced

While the contract fixed liquidated damages, the Court exercised its power under Article 2227 to reduce the stipulated amount as iniquitous or unconscionable in the circumstances, arriving at ₱45,100.

The surety, having bound itself for the seller's performance, was held solidarily with NAMERCO.

Doctrine

Article 1897 — the second exception. An agent is personally liable where he exceeds his authority without giving sufficient notice of his powers. Both elements matter: excess of authority and absence of notice.

Duty of disclosure. The agent must apprise the third person of the limits of his authority. Concealing a condition the principal imposed shifts the resulting liability onto the agent.

No binding effect on the principal. A contract concluded beyond the authority granted does not bind the principal unless ratified; the agent alone answers.

Liquidated damages may be equitably reduced by the courts where iniquitous or unconscionable (Art. 2227).

Cited Laws & Provisions

Every statute, rule, and issuance the decision turns on — the text as written, and the work it does in this case.

Civil Code

Article 1897, Civil Code

Civil Code of the Philippines (R.A. No. 386), Book IV (Obligations and Contracts), Title X (Agency), Chapter 2 (Obligations of the Agent)

Why it is cited here

The article the case is built on, and this is its clearest illustration.

Note the practical asymmetry this creates. The agent controls the information, so the agent bears the consequence of withholding it. Disclosure is cheap; the article prices silence.