Diolosa vs. Court of Appeals

An exclusive sales agency agreement that expressly stipulates the agent's authority continues "until all the subject property as subdivided is fully disposed of" cannot be terminated at will by the principal before that condition is met without incurring liability for damages for breach of contract. A valid contract may be rescinded only on the grounds specified in Articles 1381 and 1382 of the Civil Code, and a principal's personal desire to reserve unsold property for family members is not among them.

The parties were Quirino Baterna, a licensed real estate broker doing business as Quin Baterna Realty, and the spouses Mariano Diolosa and Alegria Villanueva-Diolosa, owners of the Villa Alegre Subdivision in Mandurriao, Iloilo City, a parcel of land containing 39,016 square meters. On June 20, 1968, the Diolosas constituted Baterna as their exclusive sales agent to dispose of, sell, cede, transfer, and convey the subdivision lots, with his authority expressly extending until all the subject property as subdivided was fully disposed of. The agreement was the sole instrument governing the parties' relationship, and its terms became the central point of contention upon its termination.

The spouses Mariano Diolosa and Alegria Villanueva-Diolosa owned the Villa Alegre Subdivision in Mandurriao, Iloilo City, a parcel of land containing 39,016 square meters, more or less. On June 20, 1968, they entered into an agreement with Quirino Baterna, a licensed real estate broker, constituting him as their exclusive sales agent "to dispose of, sell, cede, transfer and convey" the subdivision lots "until all the subject property as subdivided is fully disposed of." Baterna thereafter acted for and in behalf of the Diolosas as their agent in the sale of the lots included in the subdivision.

On September 27, 1968, Alegria V. Diolosa sent Baterna a letter stating that the owners had "finally decided to reserve the remaining unsold lots" of the subdivision "for our grandchildren," and that the agreement of June 20, 1968 was thereby rescinded. At that time, 27 lots of the subdivision remained unsold and the Diolosas had only six grandchildren. Baterna denied that there was any agreement to reserve lots for the family, and the pre-trial order reflected the parties' competing contentions: Baterna maintained the contract gave him irrevocable authority to sell all the lots until fully disposed of, while the Diolosas claimed they were within their legal right to terminate because they needed the undisposed lots for the use of the family.

Baterna filed a complaint in the Court of First Instance of Iloilo for recovery of unpaid commission on the unsold lots, moral damages of P50,000.00, damages to his goodwill of P100,000.00, attorney's fees of P10,000.00, and exemplary damages. The Diolosas counterclaimed for moral damages of P50,000.00, exemplary damages of P20,000.00, and attorney's fees of P10,000.00, alleging that the complaint was filed to make money out of the suit, to harass, and to molest them. The trial court dismissed the complaint, but the Court of Appeals reversed, ordering the Diolosas to pay P10,000.00 as damages and P2,000.00 as attorney's fees, plus costs. The Court of Appeals found that the testimony of Roberto Malundo that Baterna agreed to the Diolosas' intention to reserve some lots for family use could not prevail over the clear terms of the agency agreement, and that the desire to reserve the 27 remaining lots for six grandchildren was not a legal reason to rescind the agreement, especially since the Diolosas had other lands that could be reserved.

• Right to Terminate: Petitioners contended that they were within their legal right to terminate the agency on the ground that they needed the undisposed lots for the use of the family.
• No Commission on Unsold Lots: Petitioners argued that Baterna had no right in law to claim commission on lots that he had not sold.

• Irrevocable Authority: Respondent contended that under the terms of the contract, he had irrevocable authority to sell all the lots included in the Villa Alegre Subdivision and to act as exclusive sales agent of the defendants until all the lots were disposed of.
• Rescission Contravened Agreement: Respondent argued that the rescission of the contract under Exhibit "B" contravened the agreement of the parties.

• Termination of Agency: Whether the petitioners could terminate the agency agreement, Exhibit "A", without paying damages to the private respondent.

• Termination of Agency: No. The agency agreement expressly stipulated that the agent's authority continued "until all the subject property as subdivided is fully disposed of," and the petitioners' revocation of the contract before that condition was met constituted a breach of contract for which they were liable for damages.

• Termination of Agency: The contract's plain terms made the authority to sell coextensive with the full disposition of all subdivision lots; the authority was not extinguished until all the lots had been disposed of. When the petitioners revoked the contract by the letter of September 27, 1968, they became liable to the private respondent for damages for breach of contract. The agency agreement being a valid contract, it could be rescinded only on the grounds specified in Articles 1381 and 1382 of the Civil Code — those involving guardianship, representation of absentees, fraud of creditors, things under litigation, and other contracts specially declared by law to be subject to rescission — none of which were present. The petitioners could not claim that Baterna violated the terms of the agreement, such as by failing to deliver the proceeds of the purchase price of the lots. The desire to reserve the 27 remaining lots for six grandchildren was not a legal ground for rescission, since even if each grandchild were given one lot, 21 lots would still remain available for sale, and the Diolosas had other lands that could be reserved for their grandchildren.

• Agency — Term of Authority — An agency agreement that expressly provides the agent's authority continues until a specified event occurs cannot be terminated at will by the principal before that event without incurring liability for damages. The Court applied this principle to hold that the Diolosas' revocation of Baterna's exclusive sales agency before all subdivision lots were sold constituted a breach of contract.
• Rescission of Contracts — Statutory Grounds — A valid contract may be rescinded only on the grounds specified in Articles 1381 and 1382 of the Civil Code. The Court held that none of these grounds were present in this case, and the petitioners' personal desire to reserve unsold lots for grandchildren was not a legal ground for rescission.

• "Article 1920 of the Civil Code of the Philippines notwithstanding, the defendants could not terminate the agency agreement, Exh. 'A', at will without paying damages." — Quoted from the Court of Appeals decision, this states the core principle that an agency agreement with a definite term cannot be terminated at will without liability.
• "Under the contract, Exhibit 'A', herein petitioners allowed the private respondent 'to dispose of, sell, cede, transfer and convey ... until out the subject property as subdivided is fully disposed of.' The authority to sell is not extinguished until all the lots have been disposed of." — This is the Supreme Court's articulation of the controlling contract term that defined the scope and duration of the agent's authority.
• "When, therefore, the petitioners revoked the contract with private respondent in a letter, Exhibit 'B' ... they become liable to the private respondent for damages for breach of contract." — This states the Court's conclusion that the revocation before the contract's term was fulfilled constituted a breach.
• "And, it may be added that since the agency agreement, Exhibit 'A', is a valid contract, the same may be rescinded only on grounds specified in Articles 1381 and 1382 of the Civil Code." — This articulates the Court's additional ground for the ruling, limiting rescission of valid contracts to the statutory grounds enumerated.

• Article 1920, Civil Code — Cited in the Court of Appeals decision; the Court noted that even notwithstanding this provision, the defendants could not terminate the agency at will without paying damages.
• Articles 1381 and 1382, Civil Code — The Court held that a valid contract may be rescinded only on the grounds specified in these provisions, none of which were present in this case.

Teehankee (Chairman), Melencio-Herrera, Plana, Gutierrez Jr., and Dela Fuente, JJ., concurred.