Mendoza vs. Paule

A partner is an agent of the partnership for the purpose of its business, and a principal is bound by contracts entered into by the agent-partner within the partnership’s business, especially where the principal knew of the transaction and interposed no objection; revocation of the agency under Article 1920 is invalid when the agency is the means of fulfilling obligations already contracted or when a partner appointed manager is unjustifiably removed. A defendant’s counterclaim or cross-claim must be resolved on the merits and cannot be defeated by dismissal of the main complaint.

Engineer Eduardo M. Paule was the proprietor of E.M. Paule Construction and Trading (EMPCT), and Zenaida G. Mendoza was authorized under special powers of attorney to represent EMPCT in transactions with the National Irrigation Administration (NIA) for the NIA-Casecnan Multi-Purpose Irrigation and Power Project. Paule and Mendoza also entered into a partnership for that project: Paule contributed his contractor’s license and expertise, while Mendoza was to provide and secure funds for labor, materials, and services and deal with suppliers and subcontractors; Paule was to receive 3% of the project cost and Mendoza the rest of the profits. A related case, Civil Case No. 90-SD, had earlier resulted in a judgment holding Paule liable to Mendoza for obligations incurred for the NIA project, which was affirmed by the Court of Appeals and became final after the Supreme Court denied Paule’s petition in G.R. No. 173275.

Engineer Eduardo M. Paule was the proprietor of E.M. Paule Construction and Trading (EMPCT). On May 24, 1999, Paule executed a special power of attorney (SPA) authorizing Zenaida G. Mendoza to participate in the pre-qualification and bidding of a National Irrigation Administration (NIA) project and to represent him in all transactions related thereto, including representing EMPCT in its business transactions with NIA in Muñoz, Nueva Ecija; participating in the bidding and securing bid bonds and other pre-requisites for the Casicnan Multi-Purpose Irrigation and Power Plant (CMIPPL 04-99); receiving and collecting payment in check on behalf of EMPCT; and performing such acts as might be necessary to make the authority effective. On September 29, 1999, EMPCT, through Mendoza, participated in the bidding of the NIA-Casecnan Multi-Purpose Irrigation and Power Project (NIA-CMIPP) and was awarded Packages A-10 and B-11 of Schedule A. On November 16, 1999, Mendoza received the Notice of Award, signed by Engineer Alexander M. Coloma, then Acting Project Manager for the NIA-CMIPP. The packages involved the construction of a road system, canal structures, and drainage box culverts with a project cost of P5,613,591.69.

When Manuel de la Cruz learned that Mendoza needed heavy equipment for the NIA project, he met with her in Bayuga, Muñoz, Nueva Ecija, in an apartment where she held office under an EMPCT signboard. A series of meetings followed in that EMPCT office among Cruz, Mendoza, and Paule. On December 2 and 20, 1999, Mendoza and Cruz signed two Job Orders/Agreements for the lease of Cruz’s heavy equipment, consisting of dump trucks for hauling purposes, to EMPCT.

On April 27, 2000, Paule revoked the SPA he had issued in favor of Mendoza. Consequently, NIA refused to make payment to Mendoza on her billings, and Cruz could not be paid for the rent of his equipment. Upon Mendoza’s advice, Cruz addressed his demands for payment of lease rentals directly to NIA, but NIA refused to acknowledge the same and informed Cruz that it would remit payment only to EMPCT as the winning contractor for the project. In a letter dated April 5, 2000, Cruz demanded from Mendoza and/or EMPCT payment of the outstanding rentals, which amounted to P726,000.00 as of March 31, 2000.

On June 30, 2000, Cruz filed Civil Case No. 18-SD (2000) with Branch 37 of the Regional Trial Court of Nueva Ecija for collection of sum of money with damages and a prayer for a writ of preliminary injunction against Paule, Coloma, and NIA. Paule filed a third-party complaint against Mendoza, who filed an answer with a cross-claim against Paule. Mendoza alleged that Paule’s whimsical revocation of the SPA barred her from collecting payments from NIA, causing her inability to fund checks she had issued to suppliers of materials, equipment, and labor for the project; that estafa and B.P. Blg. 22 cases were filed against her; that she could no longer finance her children’s education; that she was evicted from her home; that her vehicle was foreclosed; and that her reputation was destroyed, entitling her to actual and moral damages of P3 million and P1 million, respectively. On August 23, 2000, Paule again constituted Mendoza as his attorney-in-fact, this time with broader powers to represent him as General Manager of EMPCT in meetings, conferences, and transactions exclusively for Packages A-10 and B-11; to implement, execute, administer, and supervise the projects; to collect checks and other payments due on the projects; and to act as Project Manager for EMPCT.

At the pre-trial conference, the other parties were declared in default and Cruz was allowed to present his evidence ex parte. Among the witnesses he presented was Mendoza, who had been impleaded as defendant in Paule’s third-party complaint. On March 6, 2003, Mendoza filed a motion to declare third-party plaintiff Paule non-suited, with a prayer that she be allowed to present her evidence ex parte. Without resolving Mendoza’s motion and without granting her the opportunity to present evidence ex parte, the trial court rendered its decision dated August 7, 2003. The trial court found that Mendoza was duly constituted as EMPCT’s agent for the NIA project and that Paule knew of the transactions because he was present when Mendoza and Cruz met at the EMPCT office and offered no objections.

In a related case, Civil Case No. 90-SD, instituted on August 15, 2001 with the Regional Trial Court of Nueva Ecija, Branch 37, Mendoza sued Paule for unpaid rentals of heavy equipment and construction materials obtained for the NIA project. On September 15, 2003, judgment was rendered in favor of Mendoza and against Paule, ordering Paule to pay P138,304.00 for the obligation incurred with LGH Construction, P200,000.00 as balance of the obligation incurred with Artemio Alejandrino, P520,000.00 moral damages, P100,000.00 exemplary damages, P25,000.00 attorney’s fees, and costs. Paule appealed, but the Court of Appeals in CA-G.R. CV No. 81175 dismissed the appeal and affirmed the trial court, and the Supreme Court denied Paule’s petition in G.R. No. 173275 with finality on September 13, 2006.

• Mendoza — Failure to Resolve Cross-Claim: Mendoza argued that the trial court erred in deciding the case without affording her the opportunity to present evidence on her cross-claim against Paule; that, as a result, her cross-claim was not resolved, leaving her unable to collect the amounts of P3,018,864.04, P500,000.00, and P839,450.88, which allegedly represented the unpaid costs of the project and the amount Paule received in excess of payments made by NIA.
• Mendoza — Invalid Revocation: Mendoza maintained that she had a right to be heard on her cause of action in her cross-claim; that the trial court’s failure to resolve the cross-claim violated her constitutional right to be apprised of the facts or the law on which the decision is based; and that Paule could not revoke her appointment as attorney-in-fact because, as manager of their partnership in the NIA project, she was obligated to collect from NIA the funds to pay suppliers and contractors with whom she had contracted for labor, materials, and equipment.
• Cruz — Exceeded Agency: Cruz argued that the Court of Appeals decision was contrary to the provisions of law on agency and conflicted with the Supreme Court’s Resolution in G.R. No. 173275, which affirmed the Court of Appeals decision in CA-G.R. CV No. 81175 finding an agency relation and declaring Paule as Mendoza’s principal under the SPAs and liable for obligations incurred by her for the NIA project.
• Cruz — Scope of Authority: Cruz argued that Mendoza acted within the scope of her authority when she hired his hauling services because the NIA project involved construction of canal structures, which required clearing and disposal of waste, acts necessary and incidental to Paule’s obligation under the NIA project.
• Cruz — Final and Executory Judgment: Cruz argued that the decision in the civil case involving the same SPAs, where Paule was found liable as Mendoza’s principal, had become final and executory and should apply to his case.

• Limited Purpose of SPAs: Paule argued that Mendoza’s authority under the SPAs was for the limited purpose of securing the NIA project.
• No Authority to Contract with Third Parties: Paule argued that Mendoza was not authorized to contract with other parties with regard to the works and services required for the project, such as Cruz’s hauling services, and that she acted beyond her authority in contracting with Cruz.
• No Principal Liability: Paule argued that as principal he should not be made civilly liable to Cruz under the SPAs.
• No Cause of Action for Damages: Paule argued that Mendoza had no cause of action against him for actual and moral damages since she exceeded her authority under the agency.
• Procedural Objections: Paule claimed that he did not receive a copy of the order of default; that it was improper for Mendoza, as third-party defendant, to have taken the stand as plaintiff Cruz’s witness; and that the trial court erred in finding that an agency was created between him and Mendoza and that he was liable as principal thereunder.

• Exceeded Agency and Partnership Authority: Whether the Court of Appeals erred in dismissing Cruz’s complaint on the finding that Mendoza exceeded her authority under the SPAs, notwithstanding the partnership between Paule and Mendoza, Paule’s knowledge of and lack of objection to the hauling contract, and the final judgment in G.R. No. 173275.
• Revocation of Agency: Whether Paule’s revocation of the SPAs was valid under Article 1920 of the Civil Code, or whether the agency could not be revoked because it was the means of fulfilling obligations already contracted and because Mendoza was a partner appointed manager whose removal was unjustifiable.
• Cross-Claim/Counterclaim: Whether the trial court and the Court of Appeals erred in failing to resolve Mendoza’s cross-claim/counterclaim and in denying her the opportunity to present evidence thereon.
• Moral Damages: Whether Paule is liable for moral damages for revoking the SPAs in bad faith and abandoning the partnership.

• Exceeded Agency and Partnership Authority: No. The Court of Appeals erred in dismissing Cruz’s complaint; Mendoza acted within the partnership’s business and Paule, as principal and partner, was bound by the hauling contract, especially in light of the final judgment in G.R. No. 173275.
• Revocation of Agency: No. The revocation was invalid; Article 1920 does not permit revocation where the agency is the means of fulfilling obligations already contracted or where a partner-manager is unjustifiably removed.
• Cross-Claim/Counterclaim: Yes. The trial court erred in not resolving Mendoza’s cross-claim/counterclaim; it must be resolved on the merits after receiving evidence.
• Moral Damages: Yes. Paule’s bad-faith revocation and abandonment of the partnership make him liable for moral damages.

• Exceeded Agency and Partnership Authority: The Court found that Paule and Mendoza had entered into a partnership for the NIA project. Paule’s contribution was his contractor’s license and expertise, while Mendoza would provide and secure the needed funds for labor, materials, and services, deal with suppliers and subcontractors, and, together with Paule, oversee the effective implementation of the project. Paule would receive 3% of the project cost, and the rest of the profits would go to Mendoza; Paule admitted this arrangement in all his pleadings. Although the SPAs limited Mendoza’s authority to representing EMPCT in its business transactions with NIA, participating in the bidding, receiving and collecting payment, and performing other acts in furtherance thereof, the evidence showed that when Mendoza and Cruz met and discussed the lease of Cruz’s heavy equipment at the EMPCT office, Paule was present and interposed no objection. Paule did not deny this. Mendoza’s actions were in accord with the division of labor and delineation of functions in their partnership. Under Article 1818 of the Civil Code, every partner is an agent of the partnership for the purpose of its business, and under Article 1801, each partner may separately execute all acts of administration unless a specification of duties has been agreed upon or it is stipulated that one cannot act without the consent of all. Paule had no valid cause for opposition because his only role was to provide his contractor’s license and expertise, while the sourcing of funds, materials, labor, and equipment was relegated to Mendoza. Moreover, Paule reinstated Mendoza as his attorney-in-fact with broader powers even after Cruz had filed his complaint and despite knowledge that he was being sued on the SPAs; if he truly believed Mendoza exceeded her authority, he would not have issued another SPA with broader authority. Thus, Cruz had a cause of action against Paule and Mendoza, and the Court of Appeals erred in dismissing Cruz’s complaint on a finding of exceeded agency. The issue of whether Paule could be held liable under the SPAs for transactions entered into by Mendoza with laborers, suppliers of materials, and services for the NIA project had been settled with finality in G.R. No. 173275. Although that case involved different parties and transactions, it finally disposed of the effect of the SPAs among Paule, Mendoza, and third parties with whom Mendoza had contracted by virtue of the SPAs, and that disposition should apply to Cruz. A former judgment between the same parties or their privies is final and conclusive in a second action if the same point or question was in issue and adjudicated in the first suit; identity of cause of action is not required, only identity of issues.
• Revocation of Agency: There was no valid reason for Paule to revoke Mendoza’s SPAs. Since Mendoza took care of the funding and sourcing of labor, materials, and equipment for the project, it was logical that she controlled the finances, which meant that the SPAs issued to her were necessary for the proper performance of her role in the partnership and to discharge the obligations she had already contracted prior to revocation. Without the SPAs, she could not collect from NIA because, as far as NIA was concerned, EMPCT—not the Paule-Mendoza partnership—was the entity it had contracted with. Without these payments from NIA, there would be no source of funds to complete the project and pay off obligations incurred. Under Article 1927 of the Civil Code, an agency cannot be revoked if a bilateral contract depends upon it, if it is the means of fulfilling an obligation already contracted, or if a partner is appointed manager of a partnership in the contract of partnership and his removal from the management is unjustifiable. Paule’s revocation was done in evident bad faith. He admitted throughout that his only entitlement in the partnership was his 3% royalty for the use of his contractor’s license, and he knew that the rest of the amounts collected from NIA were owing to Mendoza and to suppliers of materials and services, as well as laborers. Yet he deliberately revoked Mendoza’s authority so that she could no longer collect from NIA the amounts necessary to proceed with the project and settle outstanding obligations. From the way he conducted himself, Paule committed a willful and deliberate breach of his contractual duty to his partner and those with whom the partnership had contracted. Thus, Paule should be made liable for moral damages. Bad faith does not simply connote bad judgment or negligence; it imputes a dishonest purpose or moral obliquity and conscious doing of a wrong, a breach of a sworn duty through motive or intent or ill-will, and partakes of the nature of fraud. Evident bad faith connotes a manifest deliberate intent to do wrong or cause damage. Paule should also be made civilly liable for abandoning the partnership, leaving Mendoza to fend for herself, and for unduly revoking her authority to collect payments from NIA, which were necessary for the settlement of obligations contracted for and already owing to laborers and suppliers of materials and equipment like Cruz, not to mention the agreed profits owing to Mendoza by reason of their partnership agreement. The trial court erred in disregarding and dismissing Mendoza’s cross-claim—properly a counterclaim, since it was a claim made by her as defendant in a third-party complaint—against Paule, and the Court of Appeals erred in sustaining it on the justification that Paule’s revocation was within the bounds of his discretion under Article 1920.
• Cross-Claim/Counterclaim: Where the defendant has interposed a counterclaim, whether compulsory or permissive, or is seeking affirmative relief by a cross-complaint, the plaintiff cannot dismiss the action so as to affect the right of the defendant in his counterclaim or prayer for affirmative relief. The reason is that when the answer sets up an independent action against the plaintiff, it becomes an action by the defendant against the plaintiff, and the plaintiff has no right to ask for dismissal of the defendant’s action. Sections 2 and 3 of Rule 17 of the 1997 Rules of Civil Procedure ordain a more equitable disposition of counterclaims by ensuring that any judgment thereon is based on the merit of the counterclaim itself and not on the survival of the main complaint. If the counterclaim is palpably without merit or suffers jurisdictional flaws independent of the complaint, the trial court is not precluded from dismissing it under the amended rules, provided the judgment or order dismissing the counterclaim is premised on those defects. If the counterclaim is justified, the amended rules protect it from peremptory dismissal by reason of the dismissal of the complaint. Here, Mendoza’s cross-claim/counterclaim was justified and must be considered pending and unresolved; the exact amount of Paule’s liability to Mendoza is yet to be determined by the trial court after receiving evidence on her counterclaim.
• Moral Damages: The Court found that Paule’s revocation of the SPAs was in evident bad faith. He knew that the amounts collected from NIA were owing to Mendoza and to suppliers of materials and services, as well as laborers, yet he deliberately revoked Mendoza’s authority so that she could not collect the funds necessary to proceed with the project and settle outstanding obligations. This was a willful and deliberate breach of his contractual duty to his partner and those with whom the partnership had contracted. Bad faith imputes a dishonest purpose or moral obliquity and conscious doing of a wrong, and evident bad faith connotes a manifest deliberate intent to do wrong or cause damage. Paule was therefore liable for moral damages, and the exact amount thereof was to be determined by the trial court after receiving evidence on Mendoza’s counterclaim.

• Partnership Agency — Under Articles 1818 and 1801 of the Civil Code, every partner is an agent of the partnership for the purpose of its business, and each may separately execute acts of administration unless a specification of duties has been agreed upon or it is stipulated that one cannot act without the consent of all. The Court applied this where Paule and Mendoza had a partnership for the NIA project; Mendoza’s engagement of Cruz’s hauling services fell within the partnership’s business, and Paule’s presence and lack of objection bound him.
• Non-Revocability of Agency in Certain Cases — Under Article 1927 of the Civil Code, an agency cannot be revoked if a bilateral contract depends upon it, if it is the means of fulfilling an obligation already contracted, or if a partner is appointed manager of a partnership in the contract of partnership and his removal from management is unjustifiable. The Court held that Paule’s revocation under Article 1920 was invalid because the SPAs were necessary for Mendoza to collect from NIA and pay obligations already contracted, and because she was a partner-manager whose removal was unjustified.
• Bad Faith and Moral Damages — Bad faith does not simply connote bad judgment or negligence; it imputes a dishonest purpose or moral obliquity and conscious doing of a wrong, a breach of a sworn duty through motive or ill-will, and partakes of the nature of fraud. Evident bad faith connotes a manifest deliberate intent to do wrong or cause damage. The Court found Paule’s revocation was in evident bad faith, making him liable for moral damages.
• Counterclaim/Cross-Claim Survives Dismissal of Main Complaint — Where a defendant interposes a counterclaim (compulsory or permissive) or seeks affirmative relief by cross-complaint, the plaintiff cannot dismiss the action so as to affect the defendant’s right in the counterclaim or prayer for affirmative relief. Sections 2 and 3 of Rule 17 of the 1997 Rules of Civil Procedure require that judgment on the counterclaim be based on its merits, not on the survival of the main complaint. The Court applied this to Mendoza’s cross-claim/counterclaim, ordering the trial court to receive evidence thereon.
• Collateral Estoppel / Conclusiveness of Prior Judgment on Same Issue — A former judgment between the same parties or their privies is final and conclusive in a second action if the same point or question was in issue and adjudicated in the first suit; identity of cause of action is not required, only identity of issues. The Court applied this to G.R. No. 173275, which had settled the effect of the SPAs among Paule, Mendoza, and third parties, and held it should apply to Cruz.

• "Under the Civil Code, every partner is an agent of the partnership for the purpose of its business; each one may separately execute all acts of administration, unless a specification of their respective duties has been agreed upon, or else it is stipulated that any one of them shall not act without the consent of all the others." — This states the partnership-agency doctrine applied to hold that Mendoza’s contract with Cruz for hauling services fell within the partnership’s business and bound Paule.
• "As MENDOZA correctly argues, an agency cannot be revoked if a bilateral contract depends upon it, or if it is the means of fulfilling an obligation already contracted, or if a partner is appointed manager of a partnership in the contract of partnership and his removal from the management is unjustifiable." — This is the Court’s canonical formulation of the exceptions to revocability of agency, applied to invalidate Paule’s revocation of the SPAs.
• "Where the defendant has interposed a counterclaim (whether compulsory or permissive) or is seeking affirmative relief by a cross-complaint, the plaintiff cannot dismiss the action so as to affect the right of the defendant in his counterclaim or prayer for affirmative relief." — This states the procedural rule that protected Mendoza’s cross-claim/counterclaim from being defeated by the dismissal of the main complaint.
• "Bad faith does not simply connote bad judgment or negligence; it imputes a dishonest purpose or some moral obliquity and conscious doing of a wrong; a breach of a sworn duty through some motive or intent or ill-will; it partakes of the nature of fraud..." — This defines bad faith for purposes of the award of moral damages against Paule for his deliberate revocation of the SPAs.

• Manila Memorial Park Cemetery, Inc. vs. Linsangan, G.R. No. 151319, November 22, 2004, 443 SCRA 377 — Cited by the Court of Appeals for the rule that a principal may not be bound by the acts of an agent where the third person transacting with the agent knew the latter was acting beyond the scope of her authority. The Supreme Court found the Court of Appeals’ reliance misplaced because Mendoza acted within the partnership’s business and Paule was bound.
• Firestone Tire and Rubber Company of the Philippines vs. Tempongko, G.R. No. L-24399, March 28, 1969, 27 SCRA 418 — Cited by the Court of Appeals in holding that the trial court’s judgment resolved not only the plaintiff’s complaint but also the third-party complaint. The Supreme Court ultimately found the cross-claim/counterclaim still required resolution on the merits.
• Heirs of Clemencia Parasac vs. Republic, G.R. No. 159910, May 4, 2006, 489 SCRA 498, 517-518, citing Nabus vs. Court of Appeals, G.R. No. 91670, February 7, 1991, 193 SCRA 732 — Cited by the Supreme Court for the rule that a former judgment is conclusive as to a particular point or question actually litigated, even without identity of cause of action; identity of issues suffices. The Court used this to apply the final judgment in G.R. No. 173275 to Cruz.
• Spiegel vs. Beacon Participation, 8 NE 2nd Series, 895, 1007 — Cited by the Supreme Court for the definition of bad faith as importing a dishonest purpose or moral obliquity and conscious wrongdoing.
• Air France vs. Carrascoso, 18 SCRA 155, 166-167 — Cited by the Supreme Court for the definition of bad faith as a state of mind operating with furtive design or self-interest or ill will for ulterior purposes.
• Canson vs. Garchitorena, SB-99-9-J, July 28, 1999, 311 SCRA 268 — Cited by the Supreme Court for the rule that evident bad faith connotes a manifest deliberate intent to do wrong or cause damage.
• Pinga vs. Heirs of German Santiago, G.R. No. 170354, June 30, 2006, 494 SCRA 393, 416; 421 — Cited by the Supreme Court for the rule that a counterclaim cannot be peremptorily dismissed by reason of the dismissal of the main complaint if the counterclaim is justified; the judgment on the counterclaim must be based on its merits.

• Article 1818, Civil Code — Every partner is an agent of the partnership for the purpose of its business. Applied to hold that Mendoza’s acts for the NIA project bound the partnership and Paule.
• Article 1801, Civil Code — Each partner may separately execute all acts of administration unless a specification of duties has been agreed upon or it is stipulated that one cannot act without consent of all. Applied to support Mendoza’s authority to contract for hauling services within the partnership’s business.
• Article 1920, Civil Code — The principal may revoke the agency at will, express or implied. The Court held this power was not absolute and did not validate Paule’s revocation under the circumstances.
• Article 1927, Civil Code — An agency cannot be revoked if a bilateral contract depends upon it, if it is the means of fulfilling an obligation already contracted, or if a partner is appointed manager of a partnership in the contract of partnership and his removal from management is unjustifiable. Applied to invalidate Paule’s revocation.
• Sections 2 and 3, Rule 17, 1997 Rules of Civil Procedure — Govern dismissal of actions and protect a defendant’s counterclaim or cross-claim from being affected by dismissal of the main complaint; judgment on the counterclaim must be based on its merits. Applied to require the trial court to receive evidence on Mendoza’s counterclaim.

• Ma. Alicia Austria-Martinez
• Minita V. Chico-Nazario
• Antonio Eduardo B. Nachura
• Diosdado M. Peralta