People's Aircargo vs. Court of Appeals

Contracts entered into by a corporate president without express prior board approval bind the corporation when: (1) the corporation has clothed such officer with apparent authority through prior acts of recognition or acquiescence in similar transactions; and (2) the corporation ratifies the contract by accepting the benefits flowing therefrom.

The dispute arose from the business operations of People's Aircargo and Warehousing Co., Inc., a domestic corporation established in 1986 to operate a customs bonded warehouse at the old Manila International Airport in Pasay City. To secure a license from the Bureau of Customs, the corporation required the preparation of a feasibility study and an operations manual, leading to two separate service agreements with private respondent Stefani Saño.

• Petitioner is a domestic corporation organized in mid-1986 to operate a customs bonded warehouse at the old Manila International Airport in Pasay City.
• Antonio Punsalan Jr. served as the corporation president, while Cheng Yong served as senior vice president, treasurer, and majority stockholder.
• First Contract (October 17, 1986): Punsalan entered into a contract with private respondent Stefani Saño for the preparation of a feasibility study for a fee of P350,000.00 without prior board approval. Despite objection from Yong regarding the exorbitant price, the corporation implemented and paid for the contract.
• Second Contract (December 4, 1986): Punsalan entered into another contract with Saño for the preparation of an operations manual and the conduct of a seminar-workshop for petitioner's employees for a fee of P400,000.00, also without prior board approval.
• Saño prepared the operations manual and conducted a three-day training seminar for petitioner's employees in January 1987. Petitioner received the manual, submitted it to the Bureau of Customs, and was granted a license to operate a bonded warehouse in May 1987.
• Punsalan resigned as president and sold his shares in petitioner in 1987.
• On February 9, 1988, Saño filed a collection suit against petitioner for the unpaid balance of P400,000.00.
• The trial court declared the Second Contract unenforceable or simulated but awarded P60,000.00 to Saño based on the principle of unjust enrichment under Article 2142 of the Civil Code.

• The Second Contract is unenforceable because President Punsalan lacked express authority from the board of directors to enter into the agreement, citing the general rule that corporate powers are exercised by the board.
• A single isolated instance of prior unauthorized contract (the First Contract) does not constitute "practice" necessary to establish apparent authority, distinguishing Board of Liquidators v. Kalaw which required sixty similar contracts.
• The Second Contract was simulated or fictitious, evidenced by several "badges of fraud": lack of down payment or post-dated checks despite contractual stipulation; delay in filing the suit; misspellings in the contract (Punsalan's name); use of "your employees" instead of "our employees" in notations; failure to implead Punsalan as a party; and the contract price being six times higher than the market rate.

• The president possessed apparent authority to bind the corporation based on the First Contract, which was similarly entered into without board approval but was honored and paid for by the corporation, demonstrating the board's acquiescence.
• The corporation ratified the Second Contract by accepting the benefits thereunder, specifically by receiving and using the operations manual, allowing the seminar to be conducted, and successfully obtaining a license from the Bureau of Customs based on these submissions.
• The contract was valid and not simulated; the alleged "badges of fraud" are insufficient to overcome the legal presumption of validity of contracts and merely indicate defects in performance rather than vitiation of consent.

• Procedural: Whether the Supreme Court should entertain a petition for review under Rule 45 where the petitioner alleged "grave abuse of discretion" instead of the required "reversible errors."
• Substantive Issues:
  • Whether the corporate president possessed apparent authority to bind the corporation to the Second Contract despite the lack of prior board approval.
  • Whether the Second Contract was valid and enforceable or merely simulated.

• Procedural: The Court overlooked the procedural lapse of alleging "grave abuse of discretion" instead of "reversible errors," treating the allegations as statements of reversible errors of law since the petitioner merely disputed the amount of liability, not the liability itself.
• Substantive:
  • Apparent Authority: The president possessed apparent authority. Apparent authority is derived not merely from the quantity of similar acts but from the general manner in which the corporation holds out an officer as having the power to act, or from the corporation's acquiescence in his acts with actual or constructive knowledge. By allowing Punsalan to enter into, perform, and pay for the First Contract without board approval and without objection, petitioner clothed him with apparent authority to enter into the Second Contract.
  • Ratification: Even absent apparent authority, the corporation ratified the contract by accepting the benefits, specifically by receiving the operations manual, submitting it to the Bureau of Customs, allowing the seminar to be conducted, and obtaining a license to operate. Under Articles 1403(2) and 1405 of the Civil Code, unenforceable contracts are ratified by the acceptance of benefits.
  • Simulation: The alleged "badges of fraud" (lack of payment, delay in filing, misspellings, lack of confirmation letter) do not prove simulation. The contract was supported by consent and consideration, evidenced by the actual performance of both parties. The presumption of validity of contracts prevails; inadequacy of cause does not invalidate a contract absent fraud, mistake, or undue influence.

• Apparent Authority (Ostensible Authority) — Authority that a corporation knowingly permits an officer to exercise, or which it holds him out as possessing, thereby estopping the corporation from denying such authority as against third persons who deal with the officer in good faith. Established by prior acts of recognition or acquiescence, not merely by the quantity of such acts.
• Ratification by Acceptance of Benefits — A corporation may ratify an unauthorized contract by accepting the benefits thereunder, making the contract binding despite the lack of initial authority.
• Simulation of Contracts — A contract is simulated if parties do not intend to be bound at all (absolutely simulated) or if they conceal their true agreement (relatively simulated). Requires proof of lack of consent or intent to be bound, not merely defects in performance.
• Presumption of Validity of Contracts — Contracts are presumed valid and binding; lesion or inadequacy of cause does not invalidate a contract unless fraud, mistake, or undue influence is present.

• "Contracts entered into by a corporate president without express prior board approval bind the corporation, when such officer's apparent authority is established and when these contracts are ratified by the corporation."
• "Apparent authority is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers."
• "It is familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent's authority."
• "A corporation, by accepting benefits of a transaction entered into without authority, has ratified the agreement and is, therefore, bound by it."

• Board of Liquidators v. Kalaw — Distinguished; petitioner cited this case to argue that apparent authority requires numerous similar acts (sixty contracts), but the Court clarified that apparent authority is not derived merely from the quantity of acts but from the manner in which the corporation holds out the officer or acquiesces in his acts.
• Yao Ka Sin Trading v. Court of Appeals — Cited for the definition of apparent authority and the requirement of evidence of similar acts to establish such authority.
• Premium Marble Resources, Inc v. Court of Appeals — Cited for the general rule that in the absence of authority from the board of directors, no person can validly bind a corporation.
• Francisco v. Government Service Insurance System and Maharlika Publishing Corporation v. Tagle — Cited for the doctrine of estoppel regarding apparent authority.

• Section 23, Corporation Code of the Philippines — Provides that corporate powers are exercised by the board of directors or trustees.
• Article 1345, Civil Code — Defines absolutely and relatively simulated contracts.
• Article 1355, Civil Code — States that lesion or inadequacy of cause shall not invalidate a contract unless there has been fraud, mistake or undue influence.
• Article 1371, Civil Code — Provides that contemporaneous and subsequent acts are principal factors in determining the will of the parties.
• Articles 1403(2) and 1405, Civil Code — Provide that unenforceable contracts are ratified by the acceptance of benefits under them.
• Article 2142, Civil Code — Civil Code provision on unjust enrichment (applied by the trial court but not by the Supreme Court).