Locsin vs. Puerto Galera Resort Hotel, Inc.

An agency is coupled with interest and thus irrevocable when it is the means of fulfilling an obligation already contracted under a bilateral agreement, such as a memorandum of agreement under which the agent introduced substantial improvements on the principal's property and both parties agreed to jointly lease the property and share in earnings therefrom. The agent's material interest in the subject property likewise qualifies him as a real party-in-interest entitled to prosecute the action with or without the principal's cooperation.

Robustiniano Quinto, Jr. owned a hotel complex located in Oriental Mindoro. In 1993, resort manager and developer Luisito B. Padilla entered into a lease contract with Quinto over the hotel complex for a term of ten years, with the right to introduce improvements, later extended up to 2013 with authority to construct new structures and renovate the premises. On October 15, 2004, Padilla and Quinto executed a Memorandum of Agreement (MOA) under which they undertook to jointly look for prospective lessees, share in rental earnings, and individually or collectively defend, protect, or enforce their rights and interests in the property. Padilla, through his corporation Phoenix Omega Development and Management Corporation, funded the renovation and improvement of the hotel complex, introducing a conference building, guest rooms, a restaurant and bar, a swimming pool, and numerous other structures at substantial cost. Puerto Galera Resort Hotel, Inc. (PGRHI) was the corporate entity associated with the hotel complex operations.

Robustiniano Quinto, Jr. was the registered owner of a hotel complex located in Oriental Mindoro. In 1993, resort manager and developer Luisito B. Padilla entered into a lease contract with Quinto over the hotel complex for a term of ten years, with the right to introduce improvements. The lease was later extended up to 2013, with authority for Padilla to construct new structures and renovate the premises. Through his corporation, Phoenix Omega Development and Management Corporation, Padilla funded extensive renovations, introducing a new conference and convention building, additional guest rooms, a restaurant and bar, a music and function room, a scuba dive shop, a view deck, a swimming pool, a poolside bar and restaurant, a game room, a bigger office and lounge, a stock room and laundry building, a new building with nine bedrooms, two concrete water tanks, a concrete fence, and a power house with a 187 KVA generator.

On October 15, 2004, Padilla and Quinto executed a Memorandum of Agreement (MOA) under which they undertook to look for prospective tenants or lessees of the hotel complex together with all its improvements, to jointly share in the earnings derived from the rentals, and to individually or collectively defend, protect, or enforce their rights, title, and interests in the property. The MOA expressly acknowledged that Padilla had introduced "very substantial improvements" to the hotel complex during his lease.

In May 2006, pursuant to the MOA, Padilla and Quinto agreed to lease the hotel complex to Cecilia Yulo Locsin for a period of ten years beginning June 1, 2006, with a guaranteed monthly rental of P90,000.00. Cecilia manifested her intention to lease through a letter dated May 26, 2006, which was accepted by Quinto and Padilla. Cecilia paid a security deposit of P500,000.00 and immediately took possession of the hotel complex, with all keys turned over to her. She thereafter paid monthly rentals for October and November 2006, December 2006, and January 2007, as evidenced by disbursement and check vouchers.

After one year, Quinto visited the hotel complex and discovered that the premises had been totally damaged. All facilities, equipment, fixtures, and improvements existing prior to turnover were either removed or destroyed, and the place was in a state of ruin. Quinto informed Padilla, who arrived the next day and reported the incident to the police. The estimated cost of damages and losses amounted to P12,500,000.00. Padilla wrote letters to Cecilia seeking a meeting, but they went unanswered. A formal demand letter followed, demanding payment of P12,500,000.00. Cecilia responded by claiming that the contract of lease had not been perfected and was merely in its preparatory stages, so she could not be held liable.

Padilla, in his personal capacity and on behalf of PGRHI and Quinto, instituted a complaint for actual, moral, and exemplary damages with prayer for attorney's fees and costs of suit, pursuant to a Special Power of Attorney (SPA) dated August 28, 2007 executed by Quinto in his favor. The SPA authorized Padilla to exercise general supervision over the lease agreement with Cecilia, to demand and litigate for recovery of damages and losses, and to execute compromise agreements and contracts pertaining to the leased properties. Cecilia moved to dismiss but was denied. During trial, Padilla presented four witnesses, including the property development head who identified purchase orders for renovation materials, the accounting officer who attested to funding for the renovation, and the stay-in caretaker who testified that Cecilia fired him and took over the premises.

Quinto was supposed to be Padilla's fifth witness, but on two occasions he sought postponement. On the third resetting, Quinto manifested that he would move for dismissal, claiming he did not fully understand the contents of the August 28, 2007 SPA or his Judicial Affidavit dated December 21, 2011. He executed a Revocation of the SPA and an Affidavit stating he never intended to authorize Padilla to file the case on his behalf. The trial court granted the dismissal on the basis of the revocation, holding that Padilla and PGRHI were not real parties in interest and that no perfected contract of lease existed. The trial court later awarded attorney's fees and litigation expenses to Cecilia on the ground that she was compelled to litigate. Padilla and PGRHI appealed to the CA, which reversed the trial court, holding the agency coupled with interest and thus irrevocable, and setting aside the award of attorney's fees. Cecilia passed away during the proceedings and was substituted by Leandro Y. Locsin, who filed the present petition.

• Irrevocability of the SPA: Petitioner argued that the CA erred in ruling that the August 28, 2007 SPA was irrevocable as an agency coupled with interest, contending that the subject matter of the agency was the enforcement of rights over a nonexistent lease agreement, not the hotel complex or improvements made therein, and that the lease agreement was separate and distinct from the hotel complex and its improvements.
• Real Party-in-Interest: Petitioner maintained that Padilla had no right to pursue the case in his personal capacity because he was not a real party-in-interest who would be benefited or injured by the judgment.
• Attorney's Fees and Litigation Expenses: Petitioner averred that the CA incorrectly set aside the award of attorney's fees and litigation expenses, arguing that the award was justified under several circumstances contemplated under Article 2208 of the Civil Code because the unfounded suit filed by respondents compelled her to litigate and incur expenses to protect her interest.
• Nonexistence of the Lease Contract: Petitioner claimed that the contract of lease was never perfected, asserting that her letter to Quinto merely signified her family's interest to lease the hotel complex but never ripened into a contract, and that execution was conditioned upon Quinto's timely presentation of the original title, which Quinto failed to do.

• Revocability of the SPA: Whether the SPA or the contract of agency between Padilla and Quinto had been effectively revoked by Quinto.
• Real Party-in-Interest: Whether Padilla is a real party-in-interest.
• Attorney's Fees: Whether Cecilia is entitled to attorney's fees and litigation expenses.

• Revocability of the SPA: No. The SPA was not effectively revoked because the agency was coupled with interest, being the means of fulfilling an obligation already contracted under the October 15, 2004 MOA, and was therefore irrevocable at the sole will of the principal.
• Real Party-in-Interest: Yes. Padilla is a real party-in-interest because he introduced substantial improvements on the hotel complex at considerable expense and, pursuant to the MOA, stood to be benefited or injured by the judgment.
• Attorney's Fees: No. Cecilia was not entitled to attorney's fees and litigation expenses because the complaint was not unfounded or filed in bad faith, Padilla having had factual and legal bases for his claim.

• Revocability of the SPA: A contract of agency is generally revocable because it is based on trust and confidence, and the agent's power ceases when the principal withdraws permission. An exception exists when the agency is coupled with interest — for example, when a bilateral contract depends upon the agency, or when the agency is the means of fulfilling an obligation already contracted. The reason for irrevocability is that the agency becomes part of another obligation or agreement, affecting not only the principal's rights but also those of the agent and third persons. Here, the October 15, 2004 MOA between Quinto and Padilla was the bilateral contract upon which the agency depended. Under the MOA, the parties acknowledged Padilla's substantial improvements, agreed to jointly seek lessees, share in rental earnings, and individually or collectively defend their interests in the property. The August 28, 2007 SPA was executed to enforce those very rights after Cecilia damaged the property. The lease agreement over the hotel complex and its improvements was the subject matter of the agency; the lease agreement could not be separated from its object. The Court applied the ruling in Wheelers Club International, Inc. vs. Bonifacio, Jr., where a Lease Development Agreement and a subsequent General Power of Attorney were held to constitute an agency coupled with interest because the agent had introduced substantial improvements on the property at its expense. By analogy, Padilla's material interest in the hotel complex — having spent substantial amounts for renovation — made the agency irrevocable. Quinto's belated claim that he did not understand the SPA was deemed suspect, given his execution of a Judicial Affidavit affirming Padilla's authority and his background as a military dentist and owner of a multi-million-peso property. Furthermore, a perfected contract of lease was found to exist: Cecilia manifested her intention through a letter dated May 26, 2006, the parties agreed on the essential terms, Cecilia paid a P500,000.00 security deposit, took possession, and paid monthly rentals for four months — all indicative of perfection and consummation. Cecilia never denied taking possession or damaging the property, rendering her claim of nonexistence highly suspect.
• Real Party-in-Interest: Interest means material interest — an interest in issue to be affected by the judgment. A real party-in-interest is the party who would be benefited or injured by the judgment or entitled to the avails of the suit. Padilla introduced extensive improvements on the hotel complex, including a conference building, guest rooms, a restaurant and bar, a swimming pool, and numerous other structures, at substantial cost. The MOA itself categorically stated that Padilla introduced "very substantial improvements" to the property. With the huge amount spent, Padilla stood to be benefited or injured by the judgment. The MOA also provided that the parties would individually or collectively defend, protect, or enforce their rights and interests in the property. Because the SPA was coupled with interest, Padilla possessed material interest to prosecute the action with or without Quinto's cooperation, making the trial court's dismissal on the basis of Quinto's revocation erroneous.
• Attorney's Fees: The power to award attorney's fees under Article 2208 demands factual, legal, and equitable justification. Even when a claimant is compelled to litigate with third persons or incur expenses to protect his rights, attorney's fees may not be awarded absent a sufficient showing of bad faith in a party's persistence in a case other than an erroneous conviction of the righteousness of his cause. Padilla filed the complaint exercising his right to litigate based on his material interest in the hotel complex, backed by the MOA and SPA. The suit was not unfounded, and there was no showing that Padilla filed the case in bad faith. The trial court itself found that Cecilia failed to show that the complaint was tainted with fraud, malice, or bad faith. Accordingly, attorney's fees and litigation expenses should not have been awarded.

• Agency Coupled with Interest — An agency is generally revocable at the will of the principal because it is a personal contract of representation based on trust and confidence. However, when the agency is coupled with interest — such as when a bilateral contract depends upon the agency, or when the agency is the means of fulfilling an obligation already contracted — it becomes irrevocable. The rationale is that the agency forms part of another obligation or agreement, affecting not only the principal's rights but also those of the agent and third persons. In this case, the MOA between Quinto and Padilla was the bilateral contract upon which the SPA depended; because Padilla had a material interest in the hotel complex through the substantial improvements he introduced, the agency was coupled with interest and could not be revoked at Quinto's sole will.
• Real Party-in-Interest — A real party-in-interest is the party who stands to be benefited or injured by the judgment, or the party entitled to the avails of the suit. Interest means material interest — an interest in issue to be affected by the judgment. An agent who has introduced substantial improvements on property subject of a lease, and who has agreed with the principal to jointly lease and defend the property, has adequate and legitimate interest to prosecute an action for damages even without the principal's cooperation when the agency is coupled with interest.
• Award of Attorney's Fees — Attorney's fees under Article 2208 of the Civil Code require factual, legal, and equitable justification. Mere compulsion to litigate is insufficient; there must be a showing of bad faith by the opposing party. An erroneous conviction of the righteousness of one's cause, without fraud, malice, or bad faith, does not warrant an award of attorney's fees.

• "However, an exception to the revocability of a contract of agency is when it is coupled with interest, e.g., if a bilateral contract depends upon the agency, or if it is the means of fulfilling an obligation already contracted." — This passage articulates the controlling exception to the general rule of revocability of agency, establishing the doctrinal basis for the Court's holding that the SPA was irrevocable.
• "The reason for its irrevocability is because the agency becomes part of another obligation or agreement. It is not solely the rights of the principal, but also that of the agent and third persons, which are affected." — This explains the rationale behind the irrevocability of an agency coupled with interest, clarifying why the principal cannot unilaterally revoke the agency when third-party rights are implicated.
• "Even when a claimant is compelled to litigate with third persons, or to incur expenses to protect his rights, attorney's fees may not be awarded where no sufficient showing of bad faith in a party's persistence in a case other than an erroneous conviction of the righteousness of his cause." — This states the canonical formulation of the rule limiting awards of attorney's fees, frequently cited in subsequent jurisprudence on Article 2208 of the Civil Code.

• Wheelers Club International, Inc. vs. Bonifacio, Jr., 500 Phil. 497 (2005) — Controlling precedent found to be "on all fours" with the present case. In Wheelers, a Lease Development Agreement authorized the agent to renovate, manage, develop, and sublease property, and the agent introduced substantial improvements at its expense. The Court held that the agent's interest in the property was sufficient to deprive the principals of the power to revoke the agency at will, making it one coupled with interest. The Court applied the same reasoning here, treating the MOA as the bilateral contract upon which the SPA depended.
• Republic vs. Evangelista, 504 Phil. 115 (2005) — Cited for the general principle that agency is revocable at the will of the principal, and for the exception when the agency is coupled with interest under Article 1927 of the Civil Code.
• Rockland Construction Company, Inc. vs. Mid-Pasig Land Development Corporation, 567 Phil. 565 (2008) — Cited for the doctrine on the three stages of a contract: preparation, perfection, and consummation, applied to determine that a perfected contract of lease existed between Cecilia and Quinto.
• Bacaling vs. Muya, 430 Phil. 531 (2002) — Cited for the definition of interest as material interest and the concept of a real party-in-interest as the party who would be benefited or injured by the judgment.
• Cabrera vs. Baguio, G.R. No. 247238, March 4, 2020 — Cited for the rule that attorney's fees may not be awarded absent a sufficient showing of bad faith beyond an erroneous conviction of the righteousness of one's cause.

• Article 1868, Civil Code — Defines a contract of agency as one whereby a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. Applied to characterize the SPA executed by Quinto in favor of Padilla.
• Article 1927, Civil Code — Provides the exception to the revocability of agency when it is coupled with interest. Applied to hold that the SPA was irrevocable because it was the means of fulfilling an obligation already contracted under the October 15, 2004 MOA.
• Article 2208, Civil Code — Governs the award of attorney's fees. Applied to deny the award of attorney's fees and litigation expenses to Cecilia, there being no showing of bad faith in the filing of the complaint by Padilla.

Gesmundo, C.J. (Chairperson), Zalameda, Rosario, and Marquez, JJ., concurred.