Country Bankers Insurance Corporation vs. Keppel Cebu Shipyard

A principal is not liable for its agent's unauthorized act when the written power of attorney clearly specifies the limits of authority and the third party dealing with the agent failed to exercise reasonable diligence to ascertain the nature and extent of that authority. Article 1911 of the Civil Code does not apply unless the principal manifested a representation of the agent's authority or knowingly allowed the agent to assume such authority, and the third person relied in good faith upon such representation to his detriment.

Unimarine Shipping Lines, Inc. engaged in the shipping industry and contracted with Cebu Shipyard (now Keppel Cebu Shipyard) for dry docking and ship repair works on its vessel, the M/V Pacific Fortune. As part of the credit terms extended by Cebu Shipyard, Unimarine was required to present surety bonds equal to 120% of the credit extended, totaling ₱4,620,000. Unimarine obtained two bonds: one from CBIC through its agent Bethoven Quinain in the amount of ₱3,000,000, and another from Plaridel Surety and Insurance Co. in the amount of ₱1,620,000. CBIC is an insurance corporation that appointed Quinain as its general agent and attorney-in-fact under a Special Power of Attorney that expressly limited his authority to issue surety bonds to ₱500,000 and only in favor of specified government agencies.

On January 27, 1992, Unimarine Shipping Lines, Inc. contracted the services of Cebu Shipyard and Engineering Works, Inc. for dry docking and ship repair works on its vessel, the M/V Pacific Fortune. Cebu Shipyard issued Bill No. 26035 on February 14, 1992, in the amount of ₱4,486,052. After negotiations, the parties agreed to reduce the amount to ₱3,850,000, exclusive of VAT. The terms were embodied in a February 18, 1992 letter from Cebu Shipyard to Unimarine's President/General Manager, Paul Rodriguez, who signed his conformity. The agreement required Unimarine to pay in two installments—₱2,350,000 due on May 30, 1992, and ₱1,500,000 due on June 30, 1992—plus 10% VAT of ₱385,000. As a condition for the credit terms and the release of the vessel before full payment, Unimarine agreed to present surety bonds equal to 120% of the credit extended, totaling ₱4,620,000.

In compliance, Unimarine, through Paul Rodriguez, secured from CBIC, through the latter's agent Bethoven Quinain, CBIC Surety Bond No. G (16) 29419 on January 15, 1992, in the amount of ₱3,000,000. The bond's expiration was extended to January 15, 1993, through Endorsement No. 33152. Unimarine also obtained a second bond from Plaridel Surety and Insurance Co. on February 19, 1992, in the amount of ₱1,620,000. On February 17, 1992, Unimarine executed a Contract of Undertaking in favor of Cebu Shipyard, unconditionally and irrevocably undertaking to make punctual payment and expressly waiving any right of excussion.

When the first installment became due on May 30, 1992, Unimarine failed to remit payment. Cebu Shipyard deposited the corresponding peso check, but it was dishonored for insufficient funds. Cebu Shipyard sent multiple faxed demands to Unimarine over the following months. On November 18, 1992, through counsel, Cebu Shipyard formally demanded payment of ₱4,859,458, comprising the negotiated amount, VAT, and interest/penalty charges. When Unimarine still failed to pay, Cebu Shipyard wrote to the sureties CBIC and Plaridel on November 18 and 19, 1992, respectively, informing them of Unimarine's nonpayment and demanding that they fulfill their obligations within seven days. The sureties likewise failed to discharge their obligations.

Cebu Shipyard filed a Complaint on January 8, 1993, before the RTC of Cebu City against Unimarine, CBIC, and Plaridel. CBIC raised several defenses: that the surety bond was issued by Quinain in excess of his authority; that the bond was stamped "Valid only in favor of DPWH"; that the issuance was not reported and premiums were not remitted to CBIC; that its liability was extinguished by novation when Cebu Shipyard and Unimarine modified their agreement without CBIC's consent; that the claim had been paid or extinguished through an Assignment of Claims over the proceeds of the sale of Unimarine's vessel M/V Headline; and that the claim had prescribed. CBIC also filed a cross and third-party complaint against Unimarine, Paul Rodriguez, Peter Rodriguez, and Albert Hontanosas (as signatories to an Indemnity Agreement in favor of CBIC), and against Quinain (as the agent who exceeded his authority). Hontanosas denied signing the Indemnity Agreement and alleged his signature was forged.

During trial, CBIC's Senior Manager for its Bonding Department, Dakila Rianzares, testified that she only learned of the surety bond's existence upon receiving the summons. Investigation revealed that Quinain had not reported the bond to CBIC, in violation of their General Agency Contract requiring reporting within one week of issuance. The Special Power of Attorney granted to Quinain authorized him to issue surety bonds not exceeding ₱500,000 and only in favor of the Department of Public Works and Highways, the National Power Corporation, and other government agencies. Paul Rodriguez admitted that he did not notice the limitation stamped on the surety bond and that he signed the Indemnity Agreement upon Quinain's assurance without reading it or understanding its consequences. The RTC found CBIC liable under the surety bond, applying Articles 1900 and 1911, holding that Quinain's act was within the terms of the power of attorney as written. The Court of Appeals affirmed, additionally holding Quinain solidarily liable with CBIC under Article 1911, finding CBIC negligent in supervising its agents.

• Misapplication of Article 1911: CBIC argued that the Court of Appeals erred in applying Article 1911 of the Civil Code to hold it liable for its agent's acts in excess of authority, because CBIC did not allow Quinain to act as though he had full powers; rather, the Special Power of Attorney clearly set forth the limits of his authority.
• Third Party's Duty to Inquire: CBIC maintained that the authority to bind a principal as guarantor or surety requires a Special Power of Attorney under Article 1878 of the Civil Code, and that Cebu Shipyard was charged with knowledge of the extent of Quinain's authority by its failure to perform due diligence investigations.
• Correct Provision is Article 1898: CBIC asserted that the correct Civil Code provision to apply is Article 1898, which provides that if the agent contracts in the name of the principal exceeding the scope of his authority and the principal does not ratify, the contract is void if the other party is aware of the limits of the powers granted.
• Extension of Period Does Not Release Surety: CBIC argued that the Court of Appeals erred in holding that an extension of the period for performance granted by the creditor to the principal debtor is not sufficient to release the surety.
• Liability Limited to Bond's Face Value: Assuming CBIC is liable, it contended that the Court of Appeals erred in affirming solidary liability beyond the face value of the bond.
• Attorney's Fees: CBIC questioned the award of ₱100,000 in attorney's fees.

• Propriety of Petition: Cebu Shipyard assailed the propriety of the petition for raising factual issues, claiming that the Court of Appeals' application of Article 1911 was founded on findings of fact that CBIC now disputes, rendering the question not purely one of law.

• Agent's Authority: Whether CBIC is liable under Surety Bond No. G (16) 29419 issued by its agent Quinain in excess of his authority, given the clear written limits in the Special Power of Attorney.
• Applicable Provision: Whether Article 1911 (agency by estoppel) or Article 1898 (contract void if third party aware of limits) of the Civil Code governs the situation.
• Ratification: Whether CBIC ratified the surety bond either expressly or tacitly.
• Third Party Diligence: Whether Unimarine and Cebu Shipyard exercised reasonable diligence in ascertaining Quinain's authority before relying on the surety bond.

• Agent's Authority: No. CBIC is not liable under the surety bond because Quinain's issuance of the bond—₱3,000,000 in favor of a private corporation—manifestly exceeded the written limits of his Special Power of Attorney, which restricted surety bonds to ₱500,000 and only in favor of government agencies.
• Applicable Provision: Article 1898 and Article 1910 govern, not Article 1911. Article 1911 (agency by estoppel) does not apply because CBIC did not manifest a representation of Quinain's authority or knowingly allow him to act as though he had full powers.
• Ratification: No. There was no ratification, express or implied, because CBIC was unaware of the surety bond's existence until it received the summons, and neither Unimarine nor Cebu Shipyard repudiated this testimony.
• Third Party Diligence: No. Unimarine failed to exercise reasonable diligence in ascertaining Quinain's authority. Paul Rodriguez did not inquire into Quinain's authority, did not request documents evidencing such authority, and did not even notice the restriction stamped on the bond.

• Agent's Authority: The scope of an agent's authority is what appears in the written terms of the power of attorney. Under Article 1878(11) of the Civil Code, a special power of attorney is necessary to obligate the principal as a guarantor or surety. The Special Power of Attorney granted to Quinain clearly and specifically limited his authority to issue surety bonds to ₱500,000 and only in favor of the Department of Public Works and Highways, the National Power Corporation, and other government agencies. The surety bond issued—₱3,000,000 in favor of Unimarine, a private corporation—manifestly exceeded these written limits. CBIC's defense was grounded not on any secret agreement but on the clear, written terms of its contract with Quinain. Accordingly, Quinain's act of issuing the bond cannot be deemed to have been performed within the terms of the power of attorney as written, which is the condition for binding the principal under Article 1900.

• Applicable Provision: Article 1911 is based on the principle of estoppel and requires three elements: (1) the principal manifested a representation of the agent's authority or knowingly allowed the agent to assume such authority; (2) the third person, in good faith, relied upon such representation; and (3) relying upon such representation, the third person changed his position to his detriment. None of these elements was established. CBIC clearly stated the limits of its agents' powers in their contracts, stamped the surety bonds with the restrictions to alert concerned parties, and maintained reporting procedures to monitor insurance contracts issued by its agents. CBIC cannot be faulted for Quinain's deliberate failure to notify it of the transaction, nor did it receive the premiums. The Court of Appeals' finding of negligence on CBIC's part was unsupported. The correct provisions are Articles 1898 and 1910: where the agent exceeds his authority and the principal does not ratify, the contract is void if the party dealing with the agent is aware of the limits of the powers granted; the principal is not bound except upon ratification.

• Ratification: Ratification requires that the principal have full knowledge at the time of ratification of all material facts and circumstances relating to the unauthorized act. Neither Unimarine nor Cebu Shipyard was able to repudiate CBIC's testimony that it was unaware of the existence of the surety bond and the endorsement. There were no allegations that CBIC should have been alerted to Quinain's transactions. Without knowledge of the unauthorized act, there can be no valid ratification, whether express or implied.

• Third Party Diligence: Persons dealing with an agent are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority. The burden of proof is upon them when either is controverted. Unimarine failed to establish that it inquired into Quinain's authority. Paul Rodriguez did not request documents proving Quinain's authority, did not verify directly with CBIC the validity and effectivity of the bond, and did not even notice the restriction stamped on the bond. He signed the Indemnity Agreement on Quinain's mere assurance without reading or understanding it. Both Unimarine and Paul Rodriguez blindly relied on Quinain's representations. A person dealing with a known agent must use reasonable diligence and prudence to ascertain whether the agent acts within the scope of his authority; the principal may presume that third persons will not be negligent in failing to ascertain the extent of authority. Unimarine's failure to discharge this burden precludes it from holding CBIC liable.

• Scope of Agent's Authority as to Third Persons (Article 1900, Civil Code) — So far as third persons are concerned, an act is deemed to have been performed within the scope of the agent's authority if such act is within the terms of the power of attorney as written, even if the agent has in fact exceeded the limits of his authority according to an understanding between the principal and the agent. In this case, the act of issuing a ₱3,000,000 surety bond in favor of a private corporation was not within the terms of the power of attorney as written, which limited surety bonds to ₱500,000 and government agencies only; hence Article 1900 did not avail the third party.

• Agency by Estoppel (Article 1911, Civil Code) — Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the former allowed the latter to act as though he had full powers. The requisites are: (1) the principal manifested a representation of the agent's authority or knowingly allowed the agent to assume such authority; (2) the third person, in good faith, relied upon such representation; and (3) relying upon such representation, the third person changed his position to his detriment. The Court held that none of these requisites was present because CBIC had clearly delineated its agent's authority in writing, stamped the bond with restrictions, and maintained monitoring procedures.

• Duty of Third Persons Dealing with an Agent — Persons dealing with an agent are bound at their peril to ascertain not only the fact of agency but also the nature and extent of authority; if either is controverted, the burden of proof is upon them. A person dealing with a known agent must use reasonable diligence and prudence to ascertain whether the agent acts within the scope of his authority. The principal may presume that third persons will not be negligent in failing to ascertain the extent of authority. Unimarine's failure to inquire into Quinain's authority precluded it from holding CBIC liable.

• Ratification in Agency — Ratification is the adoption or confirmation by the principal of an act performed on its behalf by another without authority. The principal must have full knowledge at the time of ratification of all material facts and circumstances relating to the unauthorized act. If material facts were suppressed or unknown, there can be no valid ratification. Only the principal, not the agent, can ratify. In this case, CBIC's undisputed lack of knowledge of the bond's existence precluded any ratification.

• "The scope of an agent's authority is what appears in the written terms of the power of attorney granted upon him." — This statement encapsulates the Court's foundational premise for analyzing whether the principal is bound: the written terms of the power of attorney are controlling as to third persons, and the agent's act must fall within those terms for the principal to be held liable.

• "It is a settled rule that persons dealing with an agent are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it." — Quoted from Manila Memorial Park Cemetery, Inc. vs. Linsangan, this passage articulates the duty of inquiry imposed on third parties dealing with agents and was the decisive basis for releasing CBIC from liability.

• "A person dealing with a known agent is not authorized, under any circumstances, blindly to trust the agent's statements as to the extent of his powers; such person must not act negligently but must use reasonable diligence and prudence to ascertain whether the agent acts within the scope of his authority." — Quoted from Litonjua, Jr. vs. Eternit Corp., this passage reinforces the standard of diligence required of third parties and was applied to find that Unimarine's blind reliance on Quinain's representations was insufficient to bind CBIC.

• Siredy Enterprises, Inc. vs. Court of Appeals, 437 Phil. 580 (2002) — Cited for the principle that agency is based on representation, where the agent acts for and in behalf of the principal, and the agent's acts have the same legal effect as if personally done by the principal.

• Manila Memorial Park Cemetery, Inc. vs. Linsangan, G.R. No. 151319, November 22, 2004, 443 SCRA 377 — Cited as controlling authority for the doctrine that persons dealing with an agent are bound at their peril to ascertain the fact and extent of agency, and that the burden of proof is upon them when controverted. Also cited for the principle of ratification in agency, including the requirement that the principal must have full knowledge of material facts.

• Litonjua, Jr. vs. Eternit Corp., G.R. No. 144805, June 8, 2006, 490 SCRA 204 — Cited for the requisites of agency by estoppel and the standard that a person dealing with a known agent must use reasonable diligence to ascertain the scope of the agent's authority, and that reliance on the agent's representations without inquiry is insufficient to bind the principal.

• Article 1868, Civil Code — Defines agency as a contract whereby a person binds himself to render some service or to do something in representation or on behalf of another, with the latter's consent or authority. Cited as the foundational definition of the agency relationship in this case.

• Article 1878(11), Civil Code — Provides that a special power of attorney is necessary to obligate the principal as a guarantor or surety. Applied to establish that Quinain required a special power of attorney to issue the surety bond, which he possessed but which contained express limitations.

• Article 1881, Civil Code — Provides that the agent must act within the scope of his authority and must do all that is proper for the execution of the agency. Cited to underscore the requirement that agents act within their conferred authority.

• Article 1898, Civil Code — Provides that if the agent contracts in the name of the principal exceeding the scope of his authority, and the principal does not ratify, the contract is void if the party with whom the agent contracted is aware of the limits of the powers granted. Applied as the governing provision: because the Special Power of Attorney clearly stated Quinain's limits, and Cebu Shipyard/Unimarine failed to ascertain those limits, the contract was unenforceable against CBIC absent ratification.

• Article 1900, Civil Code — Provides that as far as third persons are concerned, an act is deemed within the scope of the agent's authority if it is within the terms of the power of attorney as written, even if the agent exceeded the limits according to an understanding between principal and agent. The Court found this provision inapplicable because the issuance of the ₱3,000,000 bond was not within the written terms of the power of attorney.

• Article 1902, Civil Code — Provides that a third person may require the presentation of the power of attorney or instructions, and that private or secret orders do not prejudice third persons who relied upon the power of attorney shown to them. Cited to support the third party's right—and duty—to inspect the agent's authority.

• Article 1910, Civil Code — Provides that the principal must comply with obligations contracted within the scope of the agent's authority, but is not bound for obligations where the agent exceeded his power unless ratified. Applied to hold that CBIC was not bound because Quinain exceeded his authority and CBIC did not ratify.

• Article 1911, Civil Code — Provides that even when the agent has exceeded his authority, the principal is solidarily liable if the former allowed the latter to act as though he had full powers. The Court held this provision inapplicable because CBIC did not allow Quinain to act as though he had full powers; it had clearly delineated and publicized the limits of his authority.

Lucas P. Bersamin, Mariano C. Del Castillo, Martin S. Villarama, Jr., and Estela M. Perlas-Bernabe concurred with the decision. No separate concurring opinions were written.