Bacaltos Coal Mines vs. Court of Appeals

A third person dealing with a known agent is bound at its peril to ascertain not only the fact of agency but also the nature and extent of the agent's authority; failure to do so bars recovery against the principal, and the third person is deemed to have dealt with the agent at its own risk.

German A. Bacaltos is the proprietor of Bacaltos Coal Mines, a coal mining business operating under a coal operating contract governed by P.D. No. 972 (The Coal Development Act of 1976), as amended by P.D. No. 1174. On 1 March 1988, Bacaltos executed a written Authorization in favor of Rene R. Savellon, granting him authority to use the coal operating contract of Bacaltos Coal Mines "for any legitimate purpose that it may serve." The Authorization enumerated five prerogatives — to acquire purchase orders, to engage in trading under the style of "BACALTOS COAL MINES/RENE SAVELLON," to collect receivables, to extend by substitution the same authority to others, and to execute and sign documents, contracts, and other pertinent papers — all prefaced by the phrase "but not by way of limitation." The instrument was not notarized.

German A. Bacaltos is the proprietor of Bacaltos Coal Mines, a coal mining business. On 1 March 1988, Bacaltos executed an Authorization in favor of Rene R. Savellon, granting him authority to use the coal operating contract of Bacaltos Coal Mines "for any legitimate purpose that it may serve." The Authorization enumerated five prerogatives — (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 that style; (4) to extend to any person or company by substitution the same extent of authority granted to Savellon; and (5) in connection with the preceding paragraphs, to execute and sign documents, contracts, and other pertinent papers — all prefaced by the phrase "but not by way of limitation." The instrument further granted Savellon "full authority to do and perform all and every lawful act requisite or necessary to carry into effect the foregoing stipulations," with full power of substitution and revocation. The document was not notarized.

On 19 October 1988, Savellon entered into a Trip Charter Party with San Miguel Corporation (SMC), represented by Francisco B. Manzon, Jr., its SAVP and Director of Plant Operations-Mandaue. The contract was styled as executed "by and between BACALTOS COAL MINES, represented by its Chief Operating Officer, RENE ROSEL SAVELLON." Under the Trip Charter Party, Savellon represented that Bacaltos Coal Mines was the owner of the vessel M/V Premship II and agreed to let and demise the vessel to SMC for three round trips to Davao for ₱650,000.00, payable within seven days after execution. As payment, SMC issued a check payable to "RENE SAVELLON IN TRUST FOR BACALTOS COAL MINES," for which Savellon issued a receipt under the heading of Bacaltos Coal Mines bearing the address at No. 376-R Osmeña Blvd., Cebu City. SMC's witness, Mr. Valdescona, testified that Savellon had presented the Authorization and claimed that Bacaltos Coal Mines owned the vessel; SMC checked the vessel's seaworthiness through its in-house surveyor but did not require Savellon to produce the coal operating contract, did not verify the ownership of the vessel with any registry or with Bacaltos Coal Mines directly, and did not require any documentary proof of vessel ownership.

The vessel completed only one of the three promised trips. SMC's demands for compliance having gone unheeded, it filed a complaint for specific performance and damages against Savellon, Bacaltos Coal Mines, and German Bacaltos. In their Answer, petitioners alleged that Savellon was not their Chief Operating Officer and that the powers granted to him under the Authorization did not include the power to enter into any contract with SMC. They further contended that if SMC had truly contracted with them, the check should have been issued in their favor. They set up counterclaims for moral and exemplary damages and attorney's fees. Savellon did not file an Answer and was declared in default on 17 July 1990.

After trial, the RTC found the petitioners and Savellon jointly and severally liable, ruling that the Authorization necessarily included the power to enter into the Trip Charter Party and that SMC was an innocent party entitled to rely on the written Authorization. The Court of Appeals affirmed this decision in toto, holding that the "five prerogatives" prefaced by "but not by way of limitation" included the power to charter vessels and that SMC was not negligent. Petitioners' motion for reconsideration was denied, prompting the instant petition.

• Scope of Authority: Petitioners argued that the Authorization was a special power of attorney limited to the use of the coal operating contract, and that the five enumerated prerogatives were merely specific examples subsumed under that primary power; the clause "but not by way of limitation" could not contemplate powers unrelated to the coal operating contract, such as chartering vessels.
• Negligence of SMC: Petitioners asserted that SMC was negligent in (1) not verifying Savellon's credentials 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 it, and (3) making full payment of ₱650,000.00 after the vessel made only one trip and before it completed the three trips required under the Trip Charter Party.
• Joint and Several Liability of German Bacaltos: Petitioners contended that German Bacaltos should not be held jointly and severally liable with Savellon and Bacaltos Coal Mines, given the lower court's own finding that Bacaltos Coal Mines and Bacaltos are two distinct and separate legal personalities.

• Implied Admission of Agency: Respondent countered that the petitioners impliedly admitted the agency relationship, rendering verification of Savellon's credentials unnecessary, and that the ownership of the vessel was warranted on the face of the Trip Charter Party itself.
• Scope of Authorization: Respondent maintained that the Authorization included the power to enter into the Trip Charter Party because the five enumerated prerogatives were prefaced by the phrase "but not by way of limitation," which allowed flexibility beyond the enumerated items.
• Proper Issuance of Check: Respondent argued that issuing the check in the name of Savellon in trust for Bacaltos Coal Mines was proper because the Authorization clearly provided that collectibles of the petitioners could be coursed through Savellon as agent.
• Notice of Readiness as Evidence of Shipping Business: Respondent contended that the petitioners' claim of not being engaged in shipping and not owning any vessel was belied by their maintenance of a pre-printed business form known as a "Notice of Readiness" bearing the letterhead of Bacaltos Coal Mines.

• Authority to Enter into Trip Charter Party: Whether Savellon was duly authorized by petitioners to enter into the Trip Charter Party with SMC under the Authorization dated 1 March 1988.
• Negligence of SMC: Whether SMC was negligent in issuing the check in the name of Savellon in trust for Bacaltos Coal Mines, thereby making it the author of its own damage.
• Joint and Several Liability of German Bacaltos: Whether German Bacaltos should be held jointly and severally liable with Savellon and Bacaltos Coal Mines.

• Authority to Enter into Trip Charter Party: No. The Authorization was a special power of attorney limited to the use of the coal operating contract; the clause "but not by way of limitation" could only comprehend additional prerogatives falling within the primary power and within the same class as those enumerated, not unrelated powers such as chartering vessels.
• Negligence of SMC: Yes. SMC was negligent in failing to ascertain the extent of Savellon's authority, in not requiring production of the coal operating contract, in not verifying vessel ownership, and in issuing the check in the agent's name rather than the principal's, making it the author of its own damage.
• Joint and Several Liability of German Bacaltos: Rendered moot. Having found that SMC was the author of its own damage and that the petitioners are free from any liability, it became unnecessary to discuss whether Bacaltos Coal Mines has a personality distinct and separate from German Bacaltos.

• Authority to Enter into Trip Charter Party: The extent and scope of Savellon's powers had to be determined on the basis of the written Authorization, since the agency was embodied in a written document. The language of the Authorization was clear: it granted only one express power — to use the coal operating contract for any legitimate purpose it may serve. The five enumerated prerogatives were specific examples subsumed under that primary power. The clause "but not by way of limitation" could only refer to other prerogatives which must exclusively pertain or be germane to the power to use the coal operating contract; it could not contemplate any power unrelated to that primary power or to those already enumerated. The Court of Appeals' conclusion that the Authorization included the power to enter into the Trip Charter Party because of the prefatory clause was seriously flawed, as it failed to note that the broadest scope of Savellon's authority was limited to the use of the coal operating contract. The trial court's sweeping conclusion that a coal mining company is not prohibited from entering into a Trip Charter Party was likewise erroneous, there being no evidence that Bacaltos Coal Mines owned or operated vessels or was allowed to charter them. The Authorization was not a general power of attorney but a special power of attorney under Article 1876 of the Civil Code, referring to a clear mandate specifically authorizing the performance of a specific power and express acts subsumed therein. Both lower courts unreasonably expanded the express terms of a clause intended to prevent unwarranted expansion of the powers entrusted to Savellon. The suggestion that any obscurity should be construed against German Bacaltos because he prepared the Authorization had no leg to stand on, since there was no obscurity or ambiguity in the instrument; and if any existed, there would be more reason to place SMC on guard to exercise due diligence in seeking clarification.

• Negligence of SMC: Every person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. A third person dealing with a known agent must use reasonable diligence and prudence to ascertain whether the agent is acting within the scope of his powers; the mere opinion of an agent as to the extent of his powers will not bind the principal. Since the principal subject of the Authorization was the coal operating contract, SMC should have required its presentation to determine what it was and how it could be used by Savellon. SMC's own witness, Valdescona, admitted on cross-examination that SMC did not require Savellon to produce the coal operating contract. A scrutiny of the coal operating contract, governed by P.D. No. 972, would have revealed the activities germane to the power to use it — examination and investigation of coal lands, steps to reach coal deposits, and extraction and utilization of coal — none of which involved chartering vessels. SMC's negligence was 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 or is at least entitled to its possession with power to lease or charter it. SMC made no such attempt; it merely relied on Savellon's claim and the Authorization, which itself does not state that Bacaltos Coal Mines owns any vessel. SMC further committed negligence in drawing the check in favor of "RENE SAVELLON IN TRUST FOR BACALTOS COAL MINES" rather than in favor of the principal, even disregarding Savellon's own written request that it be drawn in favor of "BACALTOS COAL MINES/RENE SAVELLON." Under the equitable maxim that between two innocent parties, the one who made it possible for the wrong to be done should bear the resulting loss, SMC — having made the wrong possible through its own negligence — must bear the resulting loss. The condition precedent for this maxim is that both parties must be innocent, but SMC was guilty of not ascertaining the extent and limits of Savellon's authority, and thus dealt with Savellon at its own peril. The "Notice of Readiness" (Exhibit "A-1") relied upon by SMC was only a photocopy and, though admissible for lack of timely objection, had no probative value as to vessel ownership.

• Joint and Several Liability of German Bacaltos: Having found that SMC was the author of its own damage and that the petitioners are free from any liability, it became unnecessary to discuss whether Bacaltos Coal Mines is a corporation with a personality distinct and separate from German Bacaltos.

• Duty to Ascertain Agent's Authority — Every person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. Persons dealing with an assumed agent, whether the assumed agency be general or special, are bound at their peril, if they would hold the principal, to ascertain not only the fact of 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. 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; he must use reasonable diligence and prudence to ascertain whether the agent is acting within the scope of his powers. The Court applied this doctrine to hold SMC negligent for failing to verify the scope of Savellon's written authority, for not requiring production of the coal operating contract, and for not verifying vessel ownership.

• Special Power of Attorney vs. General Power of Attorney — A special power of attorney refers to a clear mandate specifically authorizing the performance of a specific power and of express acts subsumed therein (Article 1876, Civil Code). The Authorization in favor of Savellon was a special power of attorney, not a general one, because it granted only one express power — to use the coal operating contract — with the five enumerated prerogatives being specific examples subsumed under that primary power. The clause "but not by way of limitation" could only comprehend additional prerogatives falling within the primary power and within the same class as those enumerated, not unrelated powers.

• Equitable Maxim — Author of Own Damage — 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. The condition precedent is that both parties must be innocent. In this case, SMC was not innocent, having failed to ascertain the extent and limits of Savellon's authority; it thus dealt with Savellon at its own peril and was the author of its own damage.

• "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." — This passage articulates the foundational doctrine governing third-party dealings with agents, establishing the affirmative duty of due diligence that the Court applied to defeat SMC's claim against the petitioners.

• "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." — This passage defines the ratio decidendi on the scope-of-authority issue, establishing that a prefatory flexibility clause in a special power of attorney cannot expand the grant beyond the primary power it qualifies.

• "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." — This passage marks the Court's resolution of the third issue as moot, confirming that the finding of SMC's negligence was dispositive of the entire dispute.

• Veloso vs. La Urbana, 58 Phil. 681 (1933) — Cited as the source of the doctrine that every person dealing with an agent must discover upon his peril the authority of the agent; the Court relied on this as the controlling principle governing SMC's duty to ascertain Savellon's authority.
• Harry E. Keller Electric Co. vs. Rodriguez, 44 Phil. 19 (1922) — Cited through Veloso for the proposition, drawn from Mechem on Agency, that a person dealing with an agent must act with ordinary prudence and reasonable diligence, and that if the authority sought to be exercised is of such an unusual or improbable character as would put an ordinarily prudent person upon guard, the party should either refuse to deal or ascertain the true condition from the principal.
• Francisco vs. Government Service Insurance System, 7 SCRA 577 (1963) — Cited for the equitable maxim that between two innocent parties, the one who made it possible for the wrong to be done should bear the resulting loss; the Court applied this maxim, modified by the requirement that both parties must be innocent, to hold SMC liable for its own loss.

• Article 1876, Civil Code — Defines a special power of attorney as one referring to a clear mandate specifically authorizing the performance of a specific power and of express acts subsumed therein. The Court applied this provision to classify the Authorization as a special power of attorney, limiting Savellon's authority to the use of the coal operating contract.
• Articles 1900 and 1902, Civil Code — Cited by the trial court for the proposition that an innocent third party who has no knowledge of the real intent of the parties to an authorization and has reason to rely on the written authorization may hold the principal liable. The Supreme Court effectively rejected this application by finding SMC was not an innocent party due to its negligence.
• P.D. No. 972 (Coal Development Act of 1976), as amended by P.D. No. 1174 — Governs coal operating contracts. Sections 4, 6, 9, and 11 define the nature and obligations of coal operating contracts, which involve examination and investigation of coal lands, steps to reach coal deposits, and extraction and utilization of coal. The Court examined these provisions to demonstrate that chartering vessels is not an activity germane to a coal operating contract, thereby confirming that SMC should have discovered Savellon's lack of authority had it required production of the contract.
• Section 3, Rule 130, Rules of Court (Best Evidence Rule) — The Court noted that the "Notice of Readiness" (Exhibit "A-1"), being only a photocopy, was not the best evidence and thus inadmissible under this rule; although it remained admissible for lack of timely objection, it had no probative value as to vessel ownership.

Bellosillo, Quiason, and Kapunan, JJ., concurred. Padilla, J., took no part.