Barton vs. Leyte Asphalt & Mineral Oil Co.

An agent appointed to sell a principal's goods cannot procure orders from his own subagents and treat them as sales to bona fide purchasers; such transactions are ineffectual as against the principal, whether or not the agent acted fraudulently, unless the principal with full knowledge of the facts acquiesces. Additionally, the attorney-client privilege protecting confidential communications is lost once the document comes into the hands of the adverse party, regardless of how it was obtained, and the court will take no notice of the manner of acquisition when the document is offered in evidence.

James D. Barton, a United States citizen residing in Manila, was granted a sole and exclusive sales agency by the Leyte Asphalt & Mineral Oil Co., Ltd., a Philippine corporation with its principal office in Cebu, for the sale of bituminous limestone and other asphalt products mined from the company's Lucio quarry in Leyte. The agency covered specified territories including Australia, New Zealand, India, China, Hong Kong, Siam, the Straits Settlements, and the United States (the latter for a limited period). The contract, embodied in a letter dated October 1, 1920 (Exhibit A) and approved by the defendant's board of directors, established a tiered pricing structure, granted the plaintiff authority to sell at any price above the quoted rates with the excess as his commission, and contained provisions for automatic extension of the contract term upon the plaintiff's achieving specified sales volumes.

James D. Barton, a United States citizen residing in Manila, was granted a sole and exclusive sales agency by the Leyte Asphalt & Mineral Oil Co., Ltd., a Philippine corporation headquartered in Cebu and owner of the Lucio bituminous limestone mine on the island of Leyte. The agency was formalized in a letter dated October 1, 1920 (Exhibit A), signed by the defendant's president, Wm. Anderson, approved by the board of directors, and accepted by Barton. The contract covered Australia, New Zealand, India, China, Hong Kong, Siam, the Straits Settlements, Java, Sumatra, Tasmania, and Saigon, with the United States included only until May 1, 1921. It established tiered pricing from ₱15 per ton for 1,000-ton lots down to ₱10 per ton for 10,000-ton lots, granted Barton full authority to sell above those prices with the excess as his profit, and provided for automatic extension of the contract term if sales reached 10,000 tons by October 1, 1921, or 20,000 tons by May 1, 1922.

Prior to the execution of Exhibit A, Barton had already made an agreement with Frank B. Smith of Sydney, appointing Smith as his sales agent for Australia. After the contract became effective, Barton traveled to San Francisco and constituted the firm of Ludvigsen & McCurdy as his subagent for northern California for one year from November 11, 1920. He also sought a Japanese agency from the defendant, but Anderson declined to grant an exclusive agency for Japan, offering only the same commission terms as for Australian sales while leaving the agency open pending development of larger sales volume.

On February 5, 1921, Ludvigsen & McCurdy sent Barton an order for 6,000 tons of bituminous limestone to be loaded at Leyte not later than May 5, 1921. Barton endorsed his acceptance and returned to Manila. On March 2, 1921, Anderson wrote that the company was behind with construction and unable to handle big contracts. At a meeting at the Manila Hotel on March 12, 1921, Barton informed Anderson of the San Francisco order and other orders for Australia and Shanghai. Anderson responded that, owing to lack of capital, the company could not fill large contracts and suggested Barton hold off on taking orders; later that same day, Anderson definitively stated the contracts would not be filled. On March 5, 1921, Frank B. Smith had cabled Barton an order for 5,000 tons for Australia.

Barton then wrote the defendant on March 15, 1921 (Exhibit Y), notifying the company to prepare to ship 5,000 tons consigned to John Chapman Co. of San Francisco and another 5,000 tons through a contract with "Henry E. White," with consignees to be named later. No mention was made of the fact that these orders originated from Barton's own subagents, Ludvigsen & McCurdy and Frank B. Smith. The defendant's assistant manager replied on March 25, 1921, acknowledging the orders but stating that no orders would be entertained unless cash had been deposited with either the International Banking Corporation or the Chartered Bank of India, Australia and China in Cebu. Barton questioned this condition, noting that the contract provided for acceptance of contracts with responsible parties subject to draft attached to bill of lading.

While in Tokyo, Barton came into contact with H. Hiwatari, who signed an order (Exhibit W) for 1,000 tons of bituminous limestone, drafted by Barton himself, with payment to be arranged through the Bank of Taiwan. Hiwatari's letter indicated that the submanager of the Taiwan Bank had given encouraging but non-binding remarks about issuing a credit note, and that final approval awaited the bank manager's return from Formosa. Barton's attorney, Frank B. Ingersoll, communicated the Hiwatari order to the defendant on May 17, 1921, but inaccurately described it as an unconditional order for a minimum of 10,000 tons annually for five years, when in fact Hiwatari's letter called unconditionally for only 1,000 tons, the remainder being contingent on future testing and eventualities.

The trial court found for the plaintiff on the first and fourth causes of action, awarding $202,500 in damages based on the orders from Ludvigsen & McCurdy, Frank B. Smith, and Hiwatari. The court absolved the defendant on the remaining causes of action, and the plaintiff did not appeal those portions. The defendant appealed the adverse judgment. During trial, the court excluded Exhibit 14, a carbon copy of a letter from Barton to his attorney Ingersoll stating that his profit from the San Francisco contract would have been eighty-five cents per ton, on the ground that it was a privileged attorney-client communication. The defendant had received the document from its former attorneys without explanation of how it had been obtained.

• Bona Fide Purchasers: Whether orders procured by the plaintiff from his own subagents constitute sales to bona fide purchasers sufficient to support a claim for damages against the principal for breach of the sales agency contract.
• Agent's Duty Under the Code of Commerce: Whether the plaintiff's procurement of orders from his own subagents, without disclosure to the defendant, violates the prohibition in Article 267 of the Code of Commerce against an agent purchasing for himself what he was ordered to sell.
• Attorney-Client Privilege: Whether a confidential letter from the plaintiff to his attorney, which had come into the possession of the adverse party, was properly excluded by the trial court as a privileged communication.
• Evidentiary Admissibility: Whether a court may take notice of how a document offered in evidence was obtained, whether legally or illegally, properly or improperly.

• Bona Fide Purchasers: No. Orders emanating from the plaintiff's own subagents were not sales to bona fide purchasers and could not support a judgment for damages against the principal.
• Agent's Duty Under the Code of Commerce: Yes. The plaintiff's conduct violated Article 267 of the Code of Commerce, which prohibits an agent from purchasing for himself or for another that which he has been ordered to sell, rendering the sales ineffectual regardless of fraud.
• Attorney-Client Privilege: No. The trial court erred in excluding Exhibit 14, because attorney-client privilege is lost once the confidential communication comes into the hands of the adverse party, regardless of how it was acquired.
• Evidentiary Admissibility: No. A court will take no notice of how papers offered in evidence were obtained, whether legally or illegally, and will not form a collateral issue to try that question.

• Bona Fide Purchasers: The contract (Exhibit A) contemplated that Barton would find reliable and solvent buyers prepared to obligate themselves to take the contracted quantities on terms consistent with the contract. The orders from Ludvigsen & McCurdy of San Francisco and Frank B. Smith of Sydney were not independent purchases but emanated from persons Barton had himself constituted as subagents. These orders were, in legal effect, the same as if signed by Barton and drawn upon himself. The plaintiff did not disclose to the defendant that the orders originated from his subagents; instead, he concealed the names of the authors, using the name "Henry E. White" based on an erroneous inference from Smith's cable. The extension provisions of the contract made the volume of reported sales critically important, and the San Francisco and Australian orders were precisely calibrated to trigger automatic extension of the contract in those territories. Given the concealment, the defendant's officers could justly suspect that the real person behind the contracts was Barton himself, which turned out to be the case.

• Agent's Duty Under the Code of Commerce: Article 267 of the Code of Commerce declares that no agent shall purchase for himself or for another that which he has been ordered to sell. The law prohibits a broker from purchasing from his principal unless the principal, with full knowledge of all facts and circumstances, acquiesces; even then, the broker must act with utmost good faith. A sale by a broker to himself without the principal's consent is ineffectual whether or not the broker acted fraudulently. Because Barton's subagents' orders were tantamount to purchases by Barton himself, and the defendant never consented with full knowledge, the orders could not bind the defendant. As for Hiwatari's order from Tokyo, although he may not have been formally appointed a subagent at the time, the order did not proceed from a responsible source: the Bank of Taiwan's submanager had refrained from giving approval, and no affirmative showing of financial responsibility was made.

• Attorney-Client Privilege: Exhibit 14 was a carbon copy of a letter from Barton to his attorney containing admissions about his expected profit. Even assuming the letter was within the privilege protecting attorney-client communications, that privilege was lost when the letter came into the hands of the adverse party. The law protects the client from disclosure by the attorney or their agents, but when a document containing the client's admissions reaches a third party and the adversary, it becomes admissible. The privilege is a derogation from the general testimonial duty and must be strictly construed; it should not be extended to prohibit third persons who obtain knowledge of the communications.

• Evidentiary Admissibility: The better doctrine, supported by authority, is that when papers are offered in evidence, a court will take no notice of how they were obtained, whether legally or illegally, properly or improperly, nor will it form a collateral issue to try that question. The defendant's counsel received the document from the firm's former attorneys without explanation of how it was acquired, but the manner of acquisition did not affect its admissibility. Although the Court found the trial court's exclusion erroneous, it noted that the error did not ultimately change the result, as the reversal rested on the substantive finding that no bona fide purchasers had been found.

• Prohibition on Agent's Self-Dealing (Article 267, Code of Commerce) — No agent shall purchase for himself or for another that which he has been ordered to sell. A sale made by a broker to himself without the consent of the principal is ineffectual whether or not the broker has been guilty of fraudulent conduct. The principal must have full knowledge of all facts and circumstances and must acquiesce; even then, the broker must act with the utmost good faith. In this case, the plaintiff's procurement of orders from his own subagents, without disclosure to or consent from the defendant, violated this prohibition, rendering the orders unenforceable against the principal.

• Loss of Attorney-Client Privilege Upon Third-Party Acquisition — The attorney-client privilege protects communications made in confidence between attorney and client, but the privilege is lost when the communication comes into the possession of a third party, including the adverse party. It makes no difference how the adversary acquired possession. One who surreptitiously reads or obtains possession of a privileged document is not within the protection of the privilege. The Court applied this rule to hold that Exhibit 14, a letter from the plaintiff to his attorney, was admissible once it reached the defendant's hands.

• Court Will Not Inquire Into Manner of Obtaining Evidence — When papers are offered in evidence, a court will take no notice of how they were obtained, whether legally or illegally, properly or improperly, nor will it form a collateral issue to try that question. This principle was invoked to support the admissibility of Exhibit 14 regardless of how the defendant's counsel came into possession of the carbon copy.

• "The law has placed its ban upon a broker's purchasing from his principal unless the latter with full knowledge of all the facts and circumstances acquiesces in such course; and even then, the broker's action must be characterized by the utmost good faith. A sale made by a broker to himself without the consent of the principal is ineffectual whether the broker has been guilty of fraudulent conduct or not." — This passage states the ratio decidendi on the agency issue, articulating the rule that an agent's self-dealing is voidable regardless of fraud, a formulation frequently cited in subsequent Philippine commercial law jurisprudence.

• "The law protects the client from the effect of disclosures made by him to his attorney in the confidence of the legal relation, but when such a document, containing admissions of the client, comes to the hand of a third party, and reaches the adversary, it is admissible in evidence." — This defines the Court's holding on the loss of attorney-client privilege upon third-party acquisition, the controlling rule on the evidentiary issue in the case.

• "When papers are offered in evidence a court will take no notice of how they were obtained, whether legally or illegally, properly or improperly; nor will it form a collateral issue to try that question." — This articulates the doctrine that courts will not inquire into the manner of obtaining documentary evidence, a principle the Court adopted from American authority and applied to uphold the admissibility of Exhibit 14.

• Uy Chico vs. Union Life Assurance Society, 29 Phil. 163 (1915) — Cited in the dissent for the proposition that communications made by a client to his attorney for the purpose of being communicated to others are not privileged if they have been so communicated. The dissent used this case to argue that Exhibit 14, which was not intended for communication to others, should have remained privileged.

• Southern Railway Co. vs. White, 108 Ga. 201 (1899) — Cited in the dissent for the proposition that statements in a letter to a party's attorney, handed by the latter to the opponent's attorney, are confidential communications and must be excluded. The dissent relied on this to challenge the majority's rule on privilege loss.

• State vs. Mathers, 15 L.R.A. 268 — Cited by the majority in support of the doctrine that a court will take no notice of how papers offered in evidence were obtained.

• Gross vs. State, 33 L.R.A. (N.S.) 477 — Cited by the majority as further support for the rule that the manner of obtaining evidence is not a ground for exclusion.

• Article 267, Code of Commerce — Declares that no agent shall purchase for himself or for another that which he has been ordered to sell. Applied to hold that the plaintiff's procurement of orders from his own subagents, without the defendant principal's informed consent, rendered those orders ineffectual as sales to bona fide purchasers.

Araullo, C.J., Johnson, Avanceña, Ostrand, Johns, and Romualdez, JJ., concurred.

• Malcolm, J. — Dissented, voting to affirm the trial court's judgment. The dissent argued that the contract nowhere prohibited the plaintiff from securing subagents, that the orders were phrased to make the ordering parties personally responsible, and that the defendant's only pre-suit objection related to the manner of payment (cash deposit in Cebu), not to the financial standing of the customers. The defendant was therefore estopped from raising new objections to the orders. The dissent further contended that the majority's ruling on attorney-client privilege and the admissibility of improperly obtained documents was unnecessary obiter dictum, destructive of the attorney's privilege, and an obstacle to amicable compromise, citing Uy Chico vs. Union Life Assurance Society and Southern Railway Co. vs. White in support.