Philippine National Bank vs. Welch, Fairchild & Co., Inc.

An agent who intervenes in the making of a contract cannot intercept and appropriate the thing the principal is bound to deliver, thereby making performance by the principal impossible; and a party who advances money in reliance on a promise becomes the equitable owner of the insurance effected on the property to the extent necessary to indemnify it for the advance.

La Compañía Naviera, Inc. was organized in Manila in 1918 under the laws of the Philippine Islands for the purpose of engaging in marine shipping. Welch, Fairchild & Co., a corporation organized under the same laws with its principal place of business in Manila, subscribed to 325 shares of La Compañía Naviera's capital stock at a par value of P100 each and acted as its agent in the United States. The Philippine National Bank extended a $125,000 loan to La Compañía Naviera to purchase the ship Benito Juarez, which was on the market in the United States.

In the first half of 1918, La Compañía Naviera, Inc. was organized in Manila under the laws of the Philippine Islands for the purpose of engaging in marine shipping. Welch, Fairchild & Co., a corporation organized under the same laws with its principal place of business in Manila, subscribed to 325 shares of La Compañía Naviera's capital stock at a par value of P100 each. Because the new enterprise lacked sufficient ready capital, its officials applied in May 1918 to the Philippine National Bank for a loan of $125,000 with which to purchase a boat called the Benito Juarez, which had been found on the market in the United States. The credit was extended as a loan for $125,000 to run for one year from May 17, 1918, but owing to delay in the delivery of the vessel, the money was not actually advanced until several months later.

Welch, Fairchild & Co. was not among the original promoters of La Compañía Naviera, but its president, Mr. Geo. H. Fairchild, left Manila for the United States in March 1918 and acted for the company in important matters, including obtaining the consent of the proper authorities in Washington, D.C. for the transfer of the Benito Juarez to Philippine registry. In August 1918, the vessel was on the California coast, and steps were taken for its delivery to the agents of the purchaser in San Francisco at the price of $125,000. It was understood that the Anglo-London and Paris National Bank, as agent of the Philippine National Bank, would deliver the purchase money contemporaneously with the delivery of the bill of sale and the policy of insurance. However, the vessel needed repairs before it could be dispatched on its voyage to the Orient, and it became impracticable to deliver the bill of sale and insurance policy to the bank in San Francisco at the time the money was needed.

Being advised of this circumstance, Welch, Fairchild & Co. addressed a letter on August 8, 1918 to the Philippine National Bank, requesting it to cable its correspondent in San Francisco to release the money and make payment for the vessel upon application by Welch & Co., without requiring the delivery of the bill of sale or policy of insurance, "in which event, the Compañía Naviera will deliver to you here the bill of sale also the insurance policy covering the voyage to Manila." La Compañía Naviera confirmed this request in a letter dated August 10, 1918. In response, the bank sent a cablegram on August 14, 1918 to its correspondent authorizing payment of the purchase price without the production of either bill of sale or insurance policy, and the vessel was delivered and the money paid over.

After the repair of the Benito Juarez had been accomplished, it was insured by Welch & Co. to the value of $150,000 and dispatched in November 1918 on its voyage to the Philippine Islands. On December 3, 1918, the vessel encountered a storm off the Island of Molokai in the Hawaiian group and became a total loss. No policy was issued by any insurer; the insurance was placed by Welch & Co. of San Francisco upon the instructions of Welch, Fairchild & Co. as agents of La Compañía Naviera, taken out in the ordinary course of business to protect the interests of all parties concerned. The risk was distributed among several companies, and it was many months before Welch & Co. had collected the full amount due from the insurers. As the money came to the hands of Welch & Co., it was remitted by draft or telegraphic transfer to Welch, Fairchild & Co. in Manila, and practically the full amount for which the vessel had been insured was transmitted to Manila by the last days of June 1919.

The bank exhibited no concern about its loan or the insurance proceeds until after the period of credit had expired on May 17, 1919. In the latter part of that month, Welch & Co. collected $13,000 upon account of the insurance and attempted to remit it by telegraphic transfer to Welch, Fairchild & Co., but by mistake the money was remitted to the Philippine National Bank in New York, and it was not until about a month later that authority was received by the bank in Manila to pay the $13,000 to Welch, Fairchild & Co. The bank officials at first determined to intercept the transfer, claiming the money belonged to the bank on the basis of the letter of August 8, 1918. After a strong protest and an interview with the bank's president, the president receded from his position, and the money was passed to the credit of Welch, Fairchild & Co. on July 23, 1919, with interest of P119.65 for the time it had been withheld. During the interview, the attorney for Welch, Fairchild & Co. argued that the defendant had acted merely as agent for La Compañía Naviera and was not legally bound by the promise in the letter of August 8, 1918, a contention the bank president acknowledged.

On August 28, 1919, the bank made demand upon La Compañía Naviera for the delivery of the insurance policies on the Benito Juarez, but was informed that no policy had ever been received, as the vessel had been insured in San Francisco by Welch, Fairchild & Co. on behalf of the company. The bank later caused La Compañía Naviera to execute pledges upon three steamers as security for its indebtedness. On December 9, 1919, the bank made formal demand upon Welch, Fairchild & Co. for the delivery of the insurance policy for $125,000, basing its demand on the letter of August 8, 1918, to which demand Welch, Fairchild & Co. responded with a negative. Meanwhile, the proceeds of the insurance had been applied by Welch, Fairchild & Co. in part satisfaction of indebtedness incurred by La Compañía Naviera to it, with the tacit approval of La Compañía Naviera. Welch, Fairchild & Co. had advanced several thousands of pesos for the repair and equipment of the vessel, which explained why insurance was taken out for $150,000 instead of $125,000, and its advances steadily mounted into the hundreds of thousands of pesos. The trial court absolved the defendant from the complaint, and the plaintiff appealed.

• Liability on the Promise: The bank argued that the defendant was bound by its letter of August 8, 1918, in which it promised that the insurance policy covering the voyage to Manila would be delivered to the bank, and that the proceeds of the insurance, to the extent of $125,000, belonged to the bank.
• Equitable Ownership: The bank argued that, by virtue of the promise contained in the letter of August 8, 1918, it became the equitable owner of the insurance effected on the Benito Juarez to the extent necessary to indemnify it for the money advanced in reliance upon that promise.

• Agency: The defendant argued that, inasmuch as it acted exclusively in the character of agent for La Compañía Naviera in the purchase of the Benito Juarez, no obligation enforceable against it was created by the letter of August 8, 1918, and the bank should look exclusively to La Compañía Naviera as principal for indemnification.
• Waiver: The defendant argued that, even supposing the letter of August 8, 1918 created any obligation, the bank waived and abandoned any right it may have had upon the facts stated.
• Estoppel: The defendant argued that, by reason of the bank's delay and its abandonment of its claim, in relation with the prejudice thereby incurred by the defendant, the bank is estopped to assert any right it may have had in the premises.

• Liability of Agent: Whether the defendant, having acted as agent for a revealed principal, is liable on the promise made in the letter of August 8, 1918.
• Waiver: Whether the bank waived and abandoned any right it may have had to the insurance proceeds.
• Estoppel: Whether the bank is estopped by its delay and abandonment of its claim from asserting any right in the premises.

• Liability of Agent: Yes. The defendant, though an agent for a revealed principal, could not intercept and appropriate the insurance proceeds that the principal was bound to deliver to the bank, as ordinary good faith towards the other contracting party requires.
• Waiver: No. The bank's receding from its position on the $13,000 remittance did not constitute a release of the defendant from any obligation incurred by virtue of the letter of August 8, 1918.
• Estoppel: No. Mere delay unaccompanied by acts sufficient to create an equitable estoppel does not destroy legal rights, and the defendant failed to show prejudice from the bank's delay.

• Liability of Agent: The Court held that, even conceding that the obligation created by the letter of August 8, 1918 was directly binding only on the principal, and that in law the agent may stand apart therefrom, one who has intervened in the making of a contract in the character of agent cannot be permitted to intercept and appropriate the thing which the principal is bound to deliver, and thereby make performance by the principal impossible. The agent must in any event be precluded from doing any positive act that could prevent performance on the part of his principal, as ordinary good faith towards the other contracting party requires. The situation was one where, notwithstanding the promise held out jointly by principal and agent in the letters of August 8 and 10, 1918, the two conspired to make an application of the proceeds of the insurance entirely contrary to the tenor of said letters, which could not be permitted.

• Equitable Ownership: By virtue of the promise contained in the letter of August 8, 1918, the bank became the equitable owner of the insurance effected on the Benito Juarez to the extent necessary to indemnify the bank for the money advanced by it, in reliance upon that promise, for the purchase of said vessel. This right of the bank must be respected by all persons having due notice thereof, and most of all by the defendant, which took out the insurance itself in the interest of the parties then concerned, including the bank. The defendant therefore could not be permitted to ignore the right of the bank and appropriate the insurance to the prejudice of the bank, even though the act be done with the consent of its principal.

• Waiver: The most that can fairly be said about the July 23, 1919 incident is that the bank president admitted himself to be a convert to the proposition advanced by the attorney for the defendant that, as the defendant had merely acted as agent, the bank must look exclusively to La Compañía Naviera for the fulfillment of the promise about the insurance money. As a statement of legal doctrine that proposition was a mistake. There was no evidence whatever that the president of the bank assumed to release the defendant from any obligation which might have been incurred by virtue of the letter of August 8, 1918.

• Estoppel: Mere delay unaccompanied by acts sufficient to create an equitable estoppel does not destroy legal rights. The delay was in part explained by the fact that the loan did not mature until May 17, 1919, and a demand for the surrender of the proceeds before that date would have seemed premature. Most of the insurance was not in fact collected until June 1919. The proof showed little or no tangible basis for the contention that the defendant was misled to its prejudice; not one dollar was ever advanced by the defendant to La Compañía Naviera upon the faith of any request, promise, or representation of the bank. The suggestion that, but for the attitude assumed by the bank, the defendant would have materially bettered its position, was a speculation too remote to affect the issue.

• Agent's Duty Not to Prevent Performance — An agent who intervenes in the making of a contract cannot intercept and appropriate the thing the principal is bound to deliver, thereby making performance by the principal impossible. The agent must be precluded from doing any positive act that could prevent performance on the part of his principal. Applied here: Welch, Fairchild & Co. intercepted the insurance proceeds and applied them to its own claims against La Compañía Naviera, preventing the principal from delivering the policy or its proceeds to the bank.
• Equitable Ownership — A party who advances money in reliance on a promise becomes the equitable owner of the insurance effected on the property to the extent necessary to indemnify it for the money advanced. This right must be respected by all persons having due notice thereof. Applied here: the bank became equitable owner of the insurance on the Benito Juarez to the extent of its $125,000 advance, and the defendant, which took out the insurance itself, had due notice.
• Waiver — Waiver requires evidence that the party intentionally relinquished a known right. Applied here: the bank president's receding from his position on the $13,000 remittance did not constitute a release of the defendant, as there was no evidence the president assumed to release the defendant from any obligation.
• Equitable Estoppel — Mere delay unaccompanied by acts sufficient to create an equitable estoppel does not destroy legal rights. Applied here: the bank's delay was explained by the loan not maturing until May 17, 1919, and the defendant failed to show that it advanced money on the faith of any bank representation.

• "one who has intervened in the making of a contract in the character of agent cannot be permitted to intercept and appropriate the thing which the principal is bound to deliver, and thereby make performance by the principal impossible." — This states the ratio decidendi on the agency issue: the agent's duty not to prevent performance by the principal.
• "By virtue of the promise contained in the letter of August 8, 1918, the bank became the equitable owner of the insurance effected on the Benito Juarez to the extent necessary to indemnify the bank for the money advanced by it, in reliance upon that promise, for the purchase of said vessel." — This articulates the equitable ownership doctrine and the basis of the bank's right to the insurance proceeds.
• "mere delay unaccompanied by acts sufficient to create an equitable estoppel does not destroy legal rights" — This is the canonical formulation of the estoppel principle applied to reject the defendant's third defense.
• "There is no evidence whatever that the president of the bank assumed to release the defendant from any obligation which might have been incurred by virtue of the letter of August 8, 1918." — This disposes of the waiver defense, holding that the bank's conduct on July 23, 1919 did not amount to a release.

• Article 1725, Civil Code — Provides that an agent who acts for a revealed principal in the making of a contract does not become personally bound to the other party in the sense that an action can ordinarily be maintained upon such contract directly against the agent. The Court distinguished this provision, holding that it does not control where the agent intercepts and appropriates the thing the principal is bound to deliver.

Araullo, C.J., Avanceña, Villamor, Ostrand, and Romualdez, JJ. concurred. Justice Johns voted for reversal but was absent at the time of the promulgation of the decision, and his signature therefore does not appear on the opinion of the court.

• Justice Malcolm — Dissented, holding that judgment should be affirmed for the reason that no contractual relation ever existed between Welch, Fairchild & Co. and the Philippine National Bank with respect to the fund in question.