Coleongco vs. Claparols

A power of attorney, even if coupled with an interest, may be revoked for just cause such as the agent's bad faith, breach of confidence, or betrayal of the principal, and may not be used to shield fraud against the principal.

Eduardo L. Claparols operated the Claparols Steel & Nail Plant in Talisay, Occidental Negros since 1951, importing nail wire from Belgium under a regular dollar allocation from the Import Control Commission and the Central Bank, with marketing handled by Kho To's ABCD Commercial of Bacolod. After sustaining losses, Claparols accepted Vicente M. Coleongco, introduced by Kho To on April 25, 1953, as financier of the wire importations in exchange for exclusive distribution, joint control of cash and transactions, a management representative, and 50-50 sharing of profits and losses, later increased by 5% of net profit to Coleongco.

Since 1951, Eduardo L. Claparols operated a factory for the manufacture of nails in Talisay, Occidental Negros under the style Claparols Steel & Nail Plant, using imported nail wire principally from Belgium under a regular dollar allocation. After losses compelled him to seek financing for wire imports in 1953, Kho To first agreed to finance but on April 25, 1953 introduced his compadre Vicente M. Coleongco to take Kho's place. On that date Coleongco and Claparols perfected a contract whereby Coleongco undertook to finance and put up funds for importation of nail wire, which Claparols would convert into nails, with Coleongco given exclusive distribution except the Davao Agency, absolute care in marketing and promotion, shared control of cash and bank deposits, a representative in management, joint approval of contracts and transactions, proper books and annual accounts, and 50-50 sharing of profits and losses. The contract was renewed yearly until 1958, with Coleongco's share later increased by 5% of net profit. Two days later, on April 27, 1953, at Coleongco's behest, Claparols executed a special power of attorney authorizing Coleongco to open and negotiate letters of credit, sign contracts, bills of lading, invoices and papers, represent appellee and the factory, and accept payments and cash advances. Thereafter Coleongco also became assistant manager and took over business transactions while Claparols devoted himself to manufacturing processes.

In February 1955, Coleongco wrote Kho To proposing that monthly advances to Claparols be cut from P2,000 to P1,000 in order to take advantage of Claparols' difficulties with banks, squeeze him into extending the contract on better terms, and perhaps own his factory. Kho To conformably wrote Claparols that due to present business conditions only P1,000 monthly could be allowed beginning April 1955. Behind Claparols' back, Coleongco wrote the Philippine National Bank on July 6, 1956 in connection with his verbal offer for acquisition of Claparols' whole interest in the nail plant and hollow blocks factory, and again on October 29, 1956 charging Claparols with taking bank-mortgaged machines and opining that Claparols was not serious in meeting bank obligations, a sign of bad faith since the factory was making satisfactory profit under Coleongco's administration. In mid-November 1956 Claparols was served with an alias writ of execution to enforce a bank judgment despite having submitted an amortization plan in September, rushed to Manila, and learned the execution had been procured because of Coleongco's derogatory information, though he managed to have the levy lifted.

Incensed at the disloyalty, Claparols revoked the power of attorney by registered mail and demanded full accounting. Coleongco protested, but Claparols insisted and on January 1, 1957 dismissed Coleongco as assistant manager and engaged C. Miller & Company to audit the books, after machinery superintendent Romulo Agsam revealed that during the preceding New Year celebrations Coleongco had asked Agsam to pour acid on the machinery to paralyze the factory. The audit found Coleongco owed the factory P87,387.37 as of June 30, 1957. Meanwhile, while Claparols was in Baguio in July and August 1956, the Yates band resaw machine received in July 1956 was surreptitiously disposed of to Hong Shing Lumber Yard managed by Coleongco's cousin Vicente Kho, with sale in August 1956. According to Coleongco, Claparols admitted upon return from Baguio in September 1956 to having sold the machine, a claim contradicted by Coleongco's own October 29, 1956 letter inquiring its whereabouts, by Claparols' absence while Coleongco acted for him, and by Coleongco's interest in favoring his cousin as buyer. Examination also showed Coleongco advanced only 25% cash for raw material imports with the balance covered by surety agreements binding Claparols solidarily, paid import balances with dealers' advances against future sales without Claparols' knowledge, diverted profits including purchase of two motor vehicles, and from 1954 onward failed to liquidate Claparols' half of profits, leaving P38,068.41 due by end of 1956, while Claparols financed 1957 to 1958 imports without appellant's help.

The trial court found these facts against Coleongco, credited Agsam and Claparols over Coleongco whose credibility was impaired by admitted prior conviction for estafa, and sustained the auditor Atienza's testimony explaining ledger discrepancies and fixing Coleongco's liability as of June 30, 1957 at P83,466.34 later adjusted to P81,387.37, practically accepted even by appellant's auditor.

• Irrevocability of Power Coupled with Interest: Petitioner argued that the power of attorney was made to protect his interest under the financing agreement and was one coupled with an interest that Claparols had no legal power to revoke.
• Justification for Bank Letters: Petitioner maintained that his letters to the Philippine National Bank were justified by Claparols' maladministration endangering security for advances made under the financing contract.
• Denial of Disloyal Acts: Petitioner denied authorship of the letter to Kho and the attempt to induce Agsam to damage factory machinery, and disputed that he disposed of the band resaw equipment.
• Damages and Lost Profits: Petitioner argued that he was entitled to damages and lost profits due to discontinuance of the financing agreement, to sharing in factory profits for 1957 to 1958, and to restoration of the revoked power of attorney, while contesting the auditor's findings of liability.

• Denial and Rescission with Damages: Respondent denied the charge of breach of contract and counterclaimed for rescission of the agreement with Coleongco and for P561,387.99 by way of damages.

• Revocability of Power Coupled with Interest: Whether the special power of attorney in favor of Coleongco, claimed to be coupled with an interest, was irrevocable and beyond Claparols' legal power to revoke.
• Just Cause for Revocation: Whether Coleongco's bad faith and betrayal of trust supplied just cause for revocation and demand for accounting.
• Breach and Resolution of Financing Agreement: Whether the financing contract was properly resolved by Claparols and whether Coleongco breached his financing obligations and diverted funds so as to defeat his claim for damages, lost profits, and profit-sharing for 1957 to 1958.
• Monetary Liability and Damages: Whether Coleongco was correctly held liable for the audited deficiency of P81,387.37 and for P50,000 as material, moral and exemplary damages for undermining Claparols' credit.

• Revocability of Power Coupled with Interest: No. Even assuming a power coupled with an interest, irrevocability means only that the principal may not recall it at pleasure, pursuant to Articles 1172 and 1800.
• Just Cause for Revocation: Yes. Deliberate sabotage, disloyalty, and diversion justified revocation, the lower court's credibility findings being entitled to respect and corroborated by documentary evidence.
• Breach and Resolution of Financing Agreement: Yes. Resolution was proper because Coleongco failed to put up all necessary money, bound Claparols without authority, and misapplied factory income contrary to paragraphs 2, 8 and 11, violating the good-faith rule under Article 1315.
• Monetary Liability and Damages: Yes. Liability for P81,387.37 was proved by the auditor's reports and testimony, and P50,000 for mental anguish, serious anxiety and malevolence was proper under Article 2232, within trial court discretion.

• Revocability of Power Coupled with Interest: A power of attorney made irrevocable by contract only prevents recall at the principal's pleasure; coupled with interest or not, revocation for just cause remains available. Irrevocability may not shield bad faith, breach of confidence, or betrayal of trust, for that would authorize fraud by the agent. Responsibility arising from fraud is demandable in all obligations with waiver of future fraud void, and a partner-manager's powers are irrevocable only without just or lawful cause, so an agent with power coupled with interest stands on no better ground.
• Just Cause for Revocation: Bad faith was established by Coleongco's secret July 6 and October 29, 1956 letters to the bank to undermine the principal's credit and acquire the factory; the signed February 1955 letter instructing Kho To to halve advances to squeeze Claparols, carried out by Kho's April 1955 reduction; the proposal to Agsam to pour acid on machinery; illegal diversion of profits; and surreptitious disposition of the Yates band resaw to his cousin's lumber yard while Claparols was in Baguio. Protest to Claparols would have been expected if bank letters were motivated by maladministration, yet none was made. Credibility was resolved by the trial court against Coleongco, corroborated by Kho's letter dovetailing with Coleongco's plan and by Coleongco's admitted estafa conviction, while the resaw sale to his cousin, his October 29 inquiry inconsistent with an admission by Claparols, and Claparols' absence during receipt and sale confirmed Coleongco as seller.
• Breach and Resolution of Financing Agreement: Paragraph 2 required Coleongco to finance and put up all necessary money for raw material importations, yet only 25% cash was advanced with 75% covered by solidary suretyships binding Claparols, contrary to the agreement and to paragraph 11 denying authority to bind Claparols without prior consultation. Balances were paid with dealers' advances against future sales without Claparols' knowledge, and factory income was applied to Coleongco's own obligations before operating expenses were provided for, contrary to paragraphs 8 and 11. From 1954 onward Coleongco, controlling cash and deposits, never fully liquidated Claparols' half of profits, leaving P38,068.41 due by end of 1956, diverted funds to buy two motor vehicles, and contributed nothing to 1957-1958 importations financed solely by Claparols, negating any right to share in those years' profits or to restoration of the revoked authority.
• Monetary Liability and Damages: Accountant Atienza's reports and testimony, particularly Exhibits 80 to 87 and 91, proved P83,466.34 due as of June 30, 1957 later adjusted to P81,387.37, practically accepted by appellant's auditor, with ledger discrepancies satisfactorily explained. Attempts to discredit and squeeze Claparols out of his factory, culminating in the bank's writ of execution, necessarily caused mental anguish and serious anxiety compensable as moral damages, with malevolence warranting exemplary or deterrent damages; the P50,000 award, though capable of increase, lay primarily within trial court discretion and was respected.

• Revocation of agency coupled with interest for just cause — A power of attorney made irrevocable by contract only means the principal may not recall it at pleasure; whether coupled with interest or not, it may be revoked for just cause such as the agent's betrayal of the principal's interest. Applied here, Claparols' revocation was sustained because Coleongco undermined his credit, plotted to squeeze him out of the factory, attempted sabotage, and diverted funds, and irrevocability could not shield such bad faith.
• Non-waivability of liability for future fraud — Responsibility arising from fraud is demandable in all obligations, and any waiver of an action for future fraud is void. Applied to reject the contention that a power coupled with an interest authorized the agent to commit frauds against the principal with impunity.
• Irrevocability of partner-manager's powers only without just cause — Powers of a partner appointed as manager in the articles of co-partnership are irrevocable without just or lawful cause. Applied by analogy to hold that an agent with power coupled with an interest cannot claim stronger irrevocability than such a partner.
• Good faith and loyalty in contracts — Parties to contracts are required to act loyally toward each other in pursuit of the common end, pursuant to the rule of good faith. Applied to declare the financing contract properly resolved where Coleongco violated financing, non-binding, and profit-liquidation stipulations and diverted factory funds.
• Moral and exemplary damages for malicious discrediting — Mental anguish and serious anxiety caused by malicious acts are compensable, and malevolence justifies exemplary or deterrent damages, with amount primarily within trial court discretion. Applied to sustain P50,000 for Coleongco's malicious undermining of Claparols' bank credit that led to execution against him.

• "It is not open to serious doubt that the irrevocability of the power of attorney may not be used to shield the perpetration of acts in bad faith, breach of confidence, or betrayal of trust, by the agent for that would amount to holding that a power coupled with an interest authorizes the agent to commit frauds against the principal." — States the controlling limitation on irrevocable powers and the ratio for sustaining revocation for betrayal.
• "that any waiver of action for future fraud is void" — Quotes the statutory bar invoked to reject immunity for the agent's fraud against the principal.
• "irrevocable without just or lawful cause" — Quotes the partnership-manager rule applied by analogy to limit an agent's claim of absolute irrevocability.
• "The basic rule of contracts requires parties to act loyally toward each other in the pursuit of the common end, and appellant clearly violated the rule of good faith prescribed by Art. 1315 of the new Civil Code." — States the contractual good-faith basis for holding the financing agreement properly resolved against the disloyal financier.

• Article 1172, New Civil Code — Provides that responsibility arising from fraud is demandable in all obligations and waiver of action for future fraud is void; applied to deny that a power coupled with an interest could authorize fraud against the principal.
• Article 1800, New Civil Code — Provides that powers of a partner appointed manager in the articles of co-partnership are irrevocable without just or lawful cause; applied by analogy to limit irrevocability claimed by an agent with power coupled with an interest.
• Article 1315, New Civil Code — Prescribes the rule of good faith and loyalty in contracts; applied to find Coleongco violated his financing and fiduciary obligations and to sustain resolution of the financing agreement.
• Article 2232, Civil Code — Governs exemplary or deterrent damages; applied with moral damages to sustain the P50,000 award for malicious undermining of credit causing mental anguish and serious anxiety.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur.