Mendoza v. Paule

a. Revocation by the principal (Arts. 1920, 1925) — Irrevocable agencies (Art. 1927)

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Case DigestWeek 6 - Extinguishment of Agency

Mendoza v. Paule

G.R. Nos. 175885 & 176271 · February 13, 2009 · Supreme Court

a. Revocation by the principal (Arts. 1920, 1925) — Irrevocable agencies (Art. 1927)

Petitioner: Zenaida G. Mendoza and Manuel Dela CruzRespondent: Engr. Eduardo M. Paule, Engr. Alexander Coloma, and the National Irrigation Administration (NIA, Muñoz, Nueva Ecija)

Gist

A contractor gave an agent a special power of attorney to bid and run NIA projects in his firm's name, then revoked it once the contracts were won — leaving unpaid the equipment lessor who had relied on the agency. The Court held the revocation was in bad faith and made the principal answerable.

Core Doctrine

Although agency is generally revocable, a principal who revokes in bad faith — to appropriate the fruits of the agent's work or to evade obligations incurred through the agency — is liable in damages. Acts done by the agent within the scope of his authority bind the principal as to third persons who dealt with him in good faith, and the principal cannot repudiate them after taking the benefit.

Facts

Respondent Engr. Eduardo M. Paule (the principal) was the proprietor of E.M. Paule Construction and Trading (EMPCT).
On May 24, 1999, he executed a Special Power of Attorney (SPA) authorising petitioner Zenaida G. Mendoza to represent EMPCT in all transactions relating to projects of the National Irrigation Administration (NIA) — including participating in biddings, signing contracts, and collecting payments.
Acting under the SPA, Mendoza participated in the bidding for the NIA-CMIPP project and EMPCT was awarded the contracts for Packages A-10 and B-11, valued at about ₱5,613,591.69.
To carry out the work, Mendoza (the agent) entered into agreements on December 2 and 20, 1999 with petitioner Manuel Dela Cruz (the third person) for the lease of heavy equipment, to be used on the NIA project.
On April 27, 2000, Paule revoked the SPA. (By then the contracts had been won and the equipment committed on the strength of that authority, so the revocation landed on third persons who had already performed.)
NIA thereupon refused to process payments to Mendoza, and Dela Cruz was left unable to collect his rentals.
Both Mendoza and Dela Cruz sued.
Trial court and Court of Appeals — against them. The trial court and Court of Appeals rulings were unfavourable to them, essentially treating the revocation as an unqualified exercise of the principal's right.

Issue

Whether Paule may revoke the SPA and disclaim the obligations Mendoza incurred under it.
Whether Paule/EMPCT is liable to Dela Cruz, the equipment lessor who dealt with Mendoza.

Ruling

Paule is liable. The Supreme Court held that Mendoza acted within her authority, that the revocation was made in bad faith, and that Paule/EMPCT must answer to Dela Cruz for the equipment rentals and to Mendoza in damages. The consolidated petitions were granted and the case remanded for the proper determination of amounts.

Ratio

1. Mendoza Acted Within the Authority Granted

The SPA was broad: it empowered Mendoza to represent EMPCT in all transactions relating to NIA projects.
Leasing the heavy equipment necessary to perform the very contracts she had been authorised to bid for and sign was incidental and necessary to the purpose of the agency.
Under Article 1881 an agent must act within the scope of his authority, and under Article 1910 the principal is bound by everything the agent contracts within it.

2. The Revocation Was in Bad Faith

Paule revoked only after the contracts had been awarded — that is, after the agency had produced its intended fruit. The timing was decisive.
A principal is generally free to revoke (Art. 1920), but the right is not absolute in its consequences: revocation exercised to appropriate the benefit of the agent's efforts and to shed the obligations incurred in obtaining it is an abuse of right, and the principal answers in damages.
The Court applied the standard of Articles 19 and 21 — every person must act with justice, give everyone his due, and observe honesty and good faith.
Paule took the projects and discarded the agent who won them, along with the liabilities she had properly incurred.

3. Third Persons Who Dealt in Good Faith Are Protected

Dela Cruz was a stranger to whatever grievance Paule had with Mendoza.
He contracted with an agent holding a written SPA, for equipment used on the principal's own project, from which the principal benefited.
Article 1910 binds the principal to obligations contracted by the agent within the scope of authority, and the subsequent revocation cannot operate retroactively to defeat rights already acquired by a third person in good faith.
Under Article 1921, moreover, a revocation of an agency entrusted for dealing with specified persons does not prejudice them until they are given notice.

4. Unjust Enrichment

Allowing Paule to keep the awarded contracts and the work done with Dela Cruz's equipment, while paying neither the agent nor the lessor, would enrich him at their expense without just cause.

Doctrine

Revocability with responsibility. Agency is revocable, but revocation in bad faith — timed to seize the fruits of the agency or to escape its liabilities — makes the principal liable in damages under Articles 19 and 21.
Article 1910. The principal is bound by all obligations the agent contracts within the scope of his authority, including those incidental to and necessary for the agency's purpose.
Protection of third persons. Revocation does not defeat rights already vested in third persons who dealt with the agent in good faith, and under Article 1921 it does not prejudice specified persons until notice is given to them.

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 1920, Civil Code

Civil Code of the Philippines (R.A. No. 386), Book IV (Obligations and Contracts), Title X (Agency), Chapter 4 (Modes of Extinguishment of Agency)

The principal may revoke the agency at will, and compel the agent to return the document evidencing the agency. Such revocation may be express or implied. (1733a)

Why it is cited here

The starting point — the principal "may revoke the agency at will" — and the case is about what that power does not license.

Revocation at will means the principal needs no cause and owes no explanation. It does not mean he may revoke for any purpose. A principal who revokes in bad faith — to appropriate the fruits of the agent's work, or to evade obligations already incurred through the agency — has exercised a lawful power for an end the law will not protect, and is liable in damages.

Note the shape of the remedy, which follows from the shape of the right. The agent does not get the agency back; specific performance is unavailable because agency rests on trust. What he gets is compensation.

Civil Code

Article 1910, Civil Code

Civil Code of the Philippines (R.A. No. 386), Book IV (Obligations and Contracts), Title X (Agency), Chapter 3 (Obligations of the Principal)

The principal must comply with all the obligations which the agent may have contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he ratifies it expressly or tacitly. (1727)

Why it is cited here

The rule that protects the people who dealt with the agent before the revocation.

"The principal must comply with all the obligations which the agent may have contracted within the scope of his authority."

A revocation operates prospectively. Acts already done within the agent's authority bind the principal as to third persons who dealt with him in good faith, and no later change of mind unwinds them. So a principal who revokes to escape obligations incurred through the agency finds that the revocation does not reach backwards — which is why the attempt produces damages rather than relief.

Civil Code

Article 1881, Civil Code

Civil Code of the Philippines (R.A. No. 386), Book IV (Obligations and Contracts), Title X (Agency), Chapter 1 (Nature, Form and Kinds of Agency)

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

Why it is cited here

The measure of the authority whose exercise binds: "The agent must act within the scope of his authority. He may do such acts as may be conducive to the accomplishment of the purpose of the agency."

The second sentence is easy to skip and does real work. Authority is not confined to acts expressly enumerated; it extends to what is conducive to the purpose for which the agency was created. An agent engaged to carry out a construction undertaking may do the things that undertaking requires without a separate grant for each.

That breadth is what makes the Article 1910 protection meaningful here — it is the reason the obligations the agent incurred were inside his authority in the first place, and so beyond the reach of a later revocation.

Civil Code

Article 1921, Civil Code

Civil Code of the Philippines (R.A. No. 386), Book IV (Obligations and Contracts), Title X (Agency), Chapter 4 (Modes of Extinguishment of Agency)

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

Why it is cited here

The notice rule for an agency directed at named persons: revocation "shall not prejudice" those persons "if they were not given notice thereof."

It closes the remaining gap. Even as to dealings after the revocation, a third person the principal knew the agent would deal with is protected until told. A principal who wants his revocation to bind the people his agent was sent to deal with must say so to them.

Cited laws & provisions

Article 1920, Civil Code

Civil Code

Civil Code of the Philippines (R.A. No. 386), Book IV (Obligations and Contracts), Title X (Agency), Chapter 4 (Modes of Extinguishment of Agency)

The principal may revoke the agency at will, and compel the agent to return the document evidencing the agency. Such revocation may be express or implied. (1733a)

Why it is cited here

The starting point — the principal "may revoke the agency at will" — and the case is about what that power does not license.

Full entry below ↓

Article 1910, Civil Code

Civil Code

Civil Code of the Philippines (R.A. No. 386), Book IV (Obligations and Contracts), Title X (Agency), Chapter 3 (Obligations of the Principal)

The principal must comply with all the obligations which the agent may have contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he ratifies it expressly or tacitly. (1727)

Why it is cited here

The rule that protects the people who dealt with the agent before the revocation.

"The principal must comply with all the obligations which the agent may have contracted within the scope of his authority."

Full entry below ↓

Article 1881, Civil Code

Civil Code

Civil Code of the Philippines (R.A. No. 386), Book IV (Obligations and Contracts), Title X (Agency), Chapter 1 (Nature, Form and Kinds of Agency)

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

Why it is cited here

Full entry below ↓

Article 1921, Civil Code

Civil Code

Civil Code of the Philippines (R.A. No. 386), Book IV (Obligations and Contracts), Title X (Agency), Chapter 4 (Modes of Extinguishment of Agency)

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

Why it is cited here

The notice rule for an agency directed at named persons: revocation "shall not prejudice" those persons "if they were not given notice thereof."

Full entry below ↓

Facts

Respondent Engr. Eduardo M. Paule (the principal) was the proprietor of E.M. Paule Construction and Trading (EMPCT).
On May 24, 1999, he executed a Special Power of Attorney (SPA) authorising petitioner Zenaida G. Mendoza to represent EMPCT in all transactions relating to projects of the National Irrigation Administration (NIA) — including participating in biddings, signing contracts, and collecting payments.
Acting under the SPA, Mendoza participated in the bidding for the NIA-CMIPP project and EMPCT was awarded the contracts for Packages A-10 and B-11, valued at about ₱5,613,591.69.
To carry out the work, Mendoza (the agent) entered into agreements on December 2 and 20, 1999 with petitioner Manuel Dela Cruz (the third person) for the lease of heavy equipment, to be used on the NIA project.
On April 27, 2000, Paule revoked the SPA. (By then the contracts had been won and the equipment committed on the strength of that authority, so the revocation landed on third persons who had already performed.)
NIA thereupon refused to process payments to Mendoza, and Dela Cruz was left unable to collect his rentals.
Both Mendoza and Dela Cruz sued.
Trial court and Court of Appeals — against them. The trial court and Court of Appeals rulings were unfavourable to them, essentially treating the revocation as an unqualified exercise of the principal's right.

Issue

Whether Paule may revoke the SPA and disclaim the obligations Mendoza incurred under it.
Whether Paule/EMPCT is liable to Dela Cruz, the equipment lessor who dealt with Mendoza.

Ruling

Ratio

1. Mendoza Acted Within the Authority Granted

The SPA was broad: it empowered Mendoza to represent EMPCT in all transactions relating to NIA projects.
Leasing the heavy equipment necessary to perform the very contracts she had been authorised to bid for and sign was incidental and necessary to the purpose of the agency.
Under Article 1881 an agent must act within the scope of his authority, and under Article 1910 the principal is bound by everything the agent contracts within it.

2. The Revocation Was in Bad Faith

Paule revoked only after the contracts had been awarded — that is, after the agency had produced its intended fruit. The timing was decisive.
A principal is generally free to revoke (Art. 1920), but the right is not absolute in its consequences: revocation exercised to appropriate the benefit of the agent's efforts and to shed the obligations incurred in obtaining it is an abuse of right, and the principal answers in damages.
The Court applied the standard of Articles 19 and 21 — every person must act with justice, give everyone his due, and observe honesty and good faith.
Paule took the projects and discarded the agent who won them, along with the liabilities she had properly incurred.

3. Third Persons Who Dealt in Good Faith Are Protected

Dela Cruz was a stranger to whatever grievance Paule had with Mendoza.
He contracted with an agent holding a written SPA, for equipment used on the principal's own project, from which the principal benefited.
Article 1910 binds the principal to obligations contracted by the agent within the scope of authority, and the subsequent revocation cannot operate retroactively to defeat rights already acquired by a third person in good faith.
Under Article 1921, moreover, a revocation of an agency entrusted for dealing with specified persons does not prejudice them until they are given notice.

4. Unjust Enrichment

Allowing Paule to keep the awarded contracts and the work done with Dela Cruz's equipment, while paying neither the agent nor the lessor, would enrich him at their expense without just cause.

Doctrine

Revocability with responsibility. Agency is revocable, but revocation in bad faith — timed to seize the fruits of the agency or to escape its liabilities — makes the principal liable in damages under Articles 19 and 21.
Article 1910. The principal is bound by all obligations the agent contracts within the scope of his authority, including those incidental to and necessary for the agency's purpose.
Protection of third persons. Revocation does not defeat rights already vested in third persons who dealt with the agent in good faith, and under Article 1921 it does not prejudice specified persons until notice is given to them.