Orient Air Services & Hotel Representatives vs. Court of Appeals

An overriding commission stipulated in an exclusive general sales agency agreement covers total flown revenue — all sales of transportation over the principal's services — not merely ticketed sales made on the principal's ticket stock, where the contract distinguishes between a sales agency commission (expressly limited to sales on the principal's ticket stock) and an overriding commission (for all sales of transportation over the principal's services), and ambiguity in the agreement is construed against the party who drafted it.

American Airlines, Inc. ("American Air") is an air carrier offering passenger and air cargo transportation in the Philippines. Orient Air Services and Hotel Representatives ("Orient Air") was its exclusive general sales agent in the Philippines under a General Sales Agency Agreement ("GSA" or "the Agreement") executed on January 15, 1977. The Agreement, prepared by American Air, provided for two types of commissions: a sales agency commission of 7–8% of tariff fares for sales made on American Air ticket stock, and an overriding commission of 3% of tariff fares for all sales of transportation over American Air's services. The Agreement also contained provisions governing remittances (paragraph 4), default (paragraph 10), and termination without cause on 30 days' notice (paragraph 13). The relationship was exclusive: Orient Air was obligated to promote and solicit passenger traffic for American Air and was restricted from performing similar services for other carriers without American Air's consent.

On January 15, 1977, American Airlines, Inc. and Orient Air Services and Hotel Representatives entered into a General Sales Agency Agreement whereby American Air authorized Orient Air to act as its exclusive general sales agent within the Philippines for the sale of air passenger transportation. The Agreement, prepared by American Air, obligated Orient Air to solicit and promote passenger traffic for American Air's services, provide a suitable area in its place of business exclusively for American Air's transactions, arrange distribution of timetables and promotional material, service and supervise sales agents, and hold out a passenger reservation facility. In return, American Air was to pay two types of commissions: a sales agency commission of 7% or 8% of tariff fares for sales made on American Air ticket stock, and an overriding commission of 3% of tariff fares and charges for all sales of transportation over American Air's services by Orient Air or its sub-agents. The Agreement also provided that Orient Air would remit to American Air the proceeds of ticket sales, less commissions to which Orient Air was entitled, on a semi-monthly basis, and that all monies collected were to be held in trust until satisfactorily accounted for. Either party could terminate the Agreement without cause by giving 30 days' notice.

On May 11, 1981, American Air alleged that Orient Air had reneged on its obligations by failing to promptly remit the net proceeds of sales for January to March 1981 in the amount of US$254,400.40. American Air thereupon undertook the collection of the proceeds of tickets sold originally by Orient Air and terminated the Agreement forthwith pursuant to paragraph 13 thereof. Four days later, on May 15, 1981, American Air filed suit against Orient Air with the Court of First Instance of Manila, Branch 24, for Accounting with Preliminary Attachment or Garnishment, Mandatory Injunction and Restraining Order, citing Orient Air's failure to remit and its previous record of failures to promptly settle past outstanding refunds.

In its Answer with counterclaim dated July 9, 1981, Orient Air denied American Air's entitlement to the alleged unremitted amounts, contending that after application thereof to the commissions due under the Agreement, American Air in fact still owed Orient Air a balance in unpaid overriding commissions. Orient Air further contended that American Air's precipitous conduct in terminating the Agreement had occasioned prejudice to its business interests. The trial court found the record and evidence substantiated Orient Air's allegations, ruled in its favor, dismissed the complaint, held the termination illegal, ordered reinstatement, and awarded unpaid overriding commissions, exemplary damages, and attorney's fees. On appeal, the Court of Appeals affirmed the trial court's findings on material points but reduced the monetary awards and modified the rate of exchange to that prevailing on the date of actual payment. Both parties then elevated the case to the Supreme Court.

• Basis of Overriding Commission (American Air): American Air argued that the 3% overriding commission under paragraph 5(b) of the Agreement was based only on "ticketed sales" — sales actually negotiated or transacted by Orient Air using American Air's ticket stock. Since Orient Air carried only American Air's ticket stocks and had not appointed any sub-agents, American Air contended that Orient Air could claim entitlement to the overriding commission based solely on ticketed sales.
• Justification of Termination (American Air): American Air maintained that Orient Air's failure to promptly remit the net proceeds of sales constituted a default under the Agreement, justifying termination.
• Restoration of Monetary Awards (Orient Air): Orient Air, as petitioner in G.R. No. 76931, sought restoration of the trial court's original monetary awards, including exemplary damages of ₱1,500,000 and attorney's fees of ₱300,000, which the Court of Appeals had reduced.
• Rate of Exchange (Orient Air): Orient Air prayed that the rate of exchange for the dollar-denominated awards be fixed at the rate prevailing on the date of actual payment, as ultimately granted by the Court of Appeals in its resolution of December 17, 1986.

• Total Flown Revenue Basis (Orient Air): Orient Air contended that the 3% overriding commission covered the total revenue of American Air and not merely that derived from ticketed sales undertaken by Orient Air, invoking its designation as the exclusive general sales agent with corresponding obligations to promote and solicit sales for its principal. By virtue of such exclusivity, Orient Air argued that all sales of transportation over American Air's services were necessarily by Orient Air.
• Justified Withholding (Orient Air): Orient Air maintained that its withholding of remittances was justified under paragraph 4 of the Agreement, which provided for remittances less commissions to which Orient Air was entitled, and paragraph 5(d), which allowed Orient Air to retain the full amount of its commissions. Since Orient Air was entitled to the 3% override, American Air's premise for cancellation did not exist.
• Improper Termination (Orient Air): Orient Air argued that American Air's precipitous conduct in terminating the Agreement was untenable and had occasioned prejudice to its business interests.

• Scope of Overriding Commission: Whether the 3% overriding commission under the General Sales Agency Agreement is based on total flown revenue — all sales of transportation over American Air's services — or only on "ticketed sales" made by Orient Air using American Air's ticket stock.
• Propriety of Termination: Whether American Air's termination of the Agreement was justified by Orient Air's failure to remit the net proceeds of sales.
• Reinstatement of Agent: Whether a court may order the reinstatement of an agent in an agency relationship, notwithstanding the principal's lack of consent.
• Damages and Attorney's Fees: Whether the Court of Appeals correctly modified the trial court's awards of exemplary damages and attorney's fees.

• Scope of Overriding Commission: Yes. The 3% overriding commission covers total flown revenue — all sales of transportation over American Air's services — not merely ticketed sales. The Agreement distinguishes between the sales agency commission (expressly limited to sales on American Air ticket stock) and the overriding commission (for all sales of transportation over American Air's services), and ambiguity is construed against American Air as the drafter.
• Propriety of Termination: No. The termination was without cause. Orient Air was justified in retaining from the sales proceeds its accrued commissions before remitting the balance, pursuant to paragraphs 4 and 5 of the Agreement.
• Reinstatement of Agent: No. A court cannot compel an agency relationship. Agency requires the consent of the principal, and ordering reinstatement violates the essence of agency as defined by law. The Agreement itself allowed either party to terminate without cause on 30 days' notice.
• Damages and Attorney's Fees: Yes. The Court of Appeals' modification by reduction of exemplary damages and attorney's fees was affirmed, the Court finding no error therein.

• Scope of Overriding Commission: The well-settled principle that a contract must be interpreted in its entirety, with all stipulations read together to give effect to all, was applied. The Agreement provided for two types of commissions: a sales agency commission of 7–8% for sales made on American Air ticket stock, and an overriding commission of 3% for all sales of transportation over American Air's services. The precondition attached to the first type — that the sale be made on American Air ticket stock — did not obtain for the second. To limit the overriding commission to ticketed sales would erase the distinction between the two types and lead to the absurd conclusion that the parties had entered into a contract with meaningless provisions. Additionally, since American Air was responsible for preparing the Agreement, any ambiguity in this "contract of adhesion" was construed contra proferentem — against the party who caused the ambiguity — pursuant to Article 1377 of the Civil Code. The Court therefore agreed with the appellate court's declaration that any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it.

• Propriety of Termination: As established, Orient Air was entitled to the 3% overriding commission based on total flown revenue. American Air's perception that Orient Air was remiss or in default was, in fact, a situation where Orient Air acted in accordance with the Agreement — retaining from the sales proceeds its accrued commissions before remitting the balance. Paragraph 4 provided for remittances less commissions to which Orient Air was entitled, and paragraph 5(d) specifically allowed Orient Air to retain the full amount of its commissions. Since American Air was still obligated to Orient Air by way of such commissions, Orient Air was justified in retaining and refusing to remit the sums claimed. The termination was therefore without cause and basis, for which American Air was held liable to Orient Air.

• Reinstatement of Agent: By affirming the trial court's order of reinstatement, the appellate court in effect compelled American Air to extend its personality to Orient Air. This was held violative of the principles and essence of agency, defined by law 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 consent or authority of the latter. In an agent-principal relationship, the personality of the principal is extended through the facility of the agent; such a relationship can only be effected with the consent of the principal, which must not be compelled by law or by any court. The Agreement itself provided that either party could terminate without cause by giving 30 days' notice. The Court therefore set aside the portion of the appellate court's ruling reinstating Orient Air as general sales agent.

• Damages and Attorney's Fees: The Court of Appeals reduced the trial court's award of exemplary damages from ₱1,500,000 to ₱200,000 and attorney's fees from ₱300,000 to ₱25,000. The Court found no error in such modification and affirmed the same.

• Interpretation of Contracts in Their Entirety — The various stipulations in a contract must be read together to give effect to all, and the entirety of the contract must be considered to ascertain the meaning of its provisions. The Court applied this principle to distinguish between the two types of commissions in the Agreement: the sales agency commission (limited to sales on American Air ticket stock) and the overriding commission (for all sales of transportation over American Air's services). Limiting the overriding commission to ticketed sales would erase the distinction and render provisions meaningless.

• Contra Proferentem — When a contract is susceptible of different interpretations, ambiguity is construed against the party who caused the obscurity and could have avoided it by the exercise of greater care. Pursuant to Article 1377 of the Civil Code, the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. When several interpretations are equally proper, that which is most favorable to the party in whose favor the provision was made and who did not cause the ambiguity is adopted. The Court applied this rule against American Air, which had prepared the Agreement.

• Essence of Agency Requires Consent of the Principal — Agency is a contract 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. The personality of the principal is extended through the facility of the agent, and such a relationship can only be effected with the consent of the principal, which must not be compelled by law or by any court. The Court applied this principle to set aside the order compelling American Air to reinstate Orient Air as its general sales agent.

• "To rule otherwise, i.e., to limit the basis of such overriding commissions to sales from American Air ticket stock would erase any distinction between the two (2) types of commissions and would lead to the absurd conclusion that the parties had entered into a contract with meaningless provisions. Such an interpretation must at all times be avoided with every effort exerted to harmonize the entire Agreement." — This passage articulates the ratio decidendi for the Court's interpretation of the overriding commission provision, applying the principle that all contract stipulations must be read together to give effect to each.

• "Any ambiguity in a contract, whose terms are susceptible of different interpretations, must be read against the party who drafted it." — This is the Court's endorsement of the contra proferentem rule as applied by the Court of Appeals, quoting the appellate court's formulation, and is frequently cited in subsequent contract interpretation jurisprudence.

• "Such a relationship can only be effected with the consent of the principal, which must not, in any way, be compelled by law or by any court." — This passage defines the essential nature of agency and the limits of judicial power to compel an agency relationship, forming the basis for setting aside the reinstatement order.

• NAESS Shipping Philippines, Inc. vs. NLRC, G.R. No. 73441, September 4, 1987, 153 SCRA 657 — Cited as authority for the principle that in the interpretation of a contract, the entirety thereof must be taken into consideration to ascertain the meaning of its provisions.
• North Negros Sugar Co. vs. Compania General de Tabacos, No. L-9277, March 29, 1957 — Cited together with Article 1374 of the Civil Code for the principle that the various stipulations in a contract must be read together to give effect to all.
• Equitable Banking Corporation vs. Intermediate Appellate Court, G.R. No. 74451, May 25, 1988, 161 SCRA 518 — Cited as authority for the application of Article 1377 of the Civil Code, providing that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.
• Government of the Philippine Islands vs. Derham Brothers and the International Banking Corporation, 36 Phil. 960 — Cited for the rule that when several interpretations of a provision are otherwise equally proper, that interpretation is to be adopted which is most favorable to the party in whose favor the provision was made and who did not cause the ambiguity.

• Article 1374, Civil Code of the Philippines — Provides that the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. The Court relied on this provision to harmonize the two commission provisions in the Agreement.
• Article 1377, Civil Code of the Philippines — Provides that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. The Court applied this provision to construe the ambiguity in the overriding commission clause against American Air, the drafter of the Agreement.
• Definition of Agency, Civil Code of the Philippines — Agency is defined 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 consent or authority of the latter. The Court invoked this definition to hold that an agency relationship cannot be compelled by law or by any court, and therefore the order to reinstate Orient Air as general sales agent was improper.

Melencio-Herrera, J., and Regalado, J., concurred. Paras, J., took no part (his son is a partner in one of the counsel). Sarmiento, J., was on leave.