Ramirez vs. The Orientalist Co.

A corporation is bound by contracts made by its officer with apparent authority, notwithstanding the officer's lack of actual authority, where the board of directors knew of and consented to the contract and subsequently ratified it by conduct. The failure of stockholders to approve a corporate contract does not abrogate the liability created, because stockholder resolutions on such matters are at most advisory and not binding on the board.

The Orientalist Company was a corporation organized under the laws of the Philippine Islands, engaged in maintaining and conducting a theatre in Manila for the exhibition of cinematographic films. Under its articles of incorporation, the company was authorized to manufacture, buy, or otherwise obtain all accessories necessary for conducting such a business. The plaintiff J. F. Ramirez was a resident of Paris, France, engaged in marketing films for manufacturers there, and was represented in Manila by his son, Jose Ramirez. The defendant Ramon J. Fernandez was a director and treasurer of the Orientalist Company.

The Orientalist Company, a corporation engaged in operating a theatre in Manila for cinematographic exhibitions, sought to secure the exclusive agencies for "Eclair Films" and "Milano Films" through negotiations conducted by its treasurer, Ramon J. Fernandez, with Jose Ramirez, the Manila representative of the Paris-based plaintiff J. F. Ramirez. In late July 1913, Jose Ramirez placed in Fernandez's hands an offer dated July 4, 1913, stating the terms upon which the plaintiff would supply the films from Paris, including price, required quantities, shipment intervals, and a 5 per cent commission for the plaintiff's services as commission agent. The offer was declared good only until the end of July.

On July 30, 1913, Fernandez had an informal conference with all but one of the company's board of directors, and with their approval addressed a letter to Jose Ramirez accepting the offer for the exclusive agency of the Eclair films. A few days later, on August 5, he addressed another letter in the same terms accepting the offer for the Milano films. Both letters contained a request that Jose Ramirez telegraph his father to make a contract with the film companies as attorney-in-fact for the Orientalist Company, an idea that was never given effect; the plaintiff procured the films on his own responsibility. The letters were signed "THE ORIENTALIST COMPANY, By R. J. FERNANDEZ, Treasurer," with the separate individual signature "R. J. FERNANDEZ" placed somewhat below and to the left of the company's signature.

Films began to arrive in Manila, with drafts for costs attached to bills of lading. The Orientalist Company was without funds to meet these obligations, and the first few drafts were accepted in the company's name by its president B. Hernandez and taken up with his own funds; Hernandez treated the films as his own property and rented them to the company. Between February 27, 1914, and April 30, 1914, several remittances of films arrived, and all accompanying drafts were drawn upon the Orientalist Company and accepted in the name of B. Hernandez, except the last, which was accepted by Hernandez individually. None of these drafts were taken up when they fell due, and the plaintiff was finally compelled to take them up as dishonored by non-payment.

The plaintiff instituted this action on May 19, 1914, against both defendants. A receiver was appointed to sell the deteriorating films, and the proceeds were applied in partial payment of the claim. At trial, judgment was given for the balance of P6,018.93 with interest, declaring the Orientalist Company principal debtor and Fernandez subsidiarily liable as guarantor. Both defendants appealed, each insisting the other was liable for the whole amount. It was stated in Fernandez's brief, unchallenged by the company, that the judgment had already been executed as against the company, so that if the company was exclusively and primarily liable for the entire indebtedness, the question of Fernandez's liability would be academic.

The record showed that on July 30, 1913, the board of directors convened in special session at Fernandez's request, where the offer was discussed and its terms approved, but definite action was postponed pending a special meeting of stockholders. At the stockholders' meeting on September 18, 1913, Fernandez informed those present of the offer and estimated an outlay of about P5,500 per month. The stockholders were told that if the corporation could not proceed, four gentlemen — Hernandez, Fernandez, Monroy, and Papa — would continue importing the films at their own account and risk for a compensation of 10 per cent of their outlay, payable in shares of the corporation. The stockholders adopted a resolution that the agencies should be accepted if the corporation could obtain the money, and appointed a committee to apply to the bank for credit; the bank declined. At a subsequent stockholders' meeting, a resolution was passed for the company to pay the four importers 10 per cent of their outlay in shares. On October 27, 1913, after Fernandez had departed from the Philippines, the board of directors adopted a resolution conferring powers on Vicente Ocampo, the theater manager, including renting a box for the films, taking charge of the films and their rental, advertising that the company was importing films, and giving ample powers to Hon. R. Acuña to enter into agreements with cinematograph proprietors for renting films.

• Liability of the Corporation: The Orientalist Company argued that Ramon J. Fernandez had no authority to bind it by the contracts, presenting evidence from the minutes of the board of directors and stockholders showing that authority to make the contracts had been withheld by the stockholders.
• Liability of Fernandez: The Orientalist Company insisted that Fernandez, having personally signed the contracts, was liable for the whole amount as principal obligor.

• Liability of the Corporation: Ramon J. Fernandez argued that the Orientalist Company was exclusively and primarily liable for the entire indebtedness, and that his own liability was merely that of a guarantor.
• Nature of Guaranty: Fernandez contended that his name was signed as a guaranty that the contract would be approved by the corporation, not as a guaranty of its performance.

• Admission by Failure to Deny Under Oath: Whether the corporation's failure to deny under oath the genuineness and due execution of the contracts sued upon, as required by section 103 of the Code of Civil Procedure, operated as a conclusive admission of Fernandez's authority to bind the corporation.
• Corporate Liability on the Merits: Whether the Orientalist Company was bound by the contracts notwithstanding Fernandez's lack of independent authority as treasurer and the stockholders' failure to approve the contracts.
• Character of Fernandez's Liability: Whether Fernandez was liable jointly with the corporation as a principal obligor or merely as a guarantor.

• Admission by Failure to Deny Under Oath: Yes. The corporation's failure to deny under oath the genuineness and due execution of the contracts, and its failure to specially plead lack of authority in Fernandez, eliminated the question of his authority from the case as a matter of pleading; the contracts were deemed admitted, and all proof submitted contrary thereto should be ignored by the court.
• Corporate Liability on the Merits: Yes. The corporation was bound by the contracts because Fernandez acted with the knowledge and consent of the board of directors, and the board subsequently inferentially approved the contracts by taking steps to utilize the films; the stockholders' failure to approve the contracts did not abrogate the liability created.
• Character of Fernandez's Liability: Guarantor only. The form of Fernandez's signature, set off to the left of the company's signature, raised a doubt as to the intention, and parol evidence showed that his responsibility was intended to be that of guarantor of the contract's performance.

• Admission by Failure to Deny Under Oath: Section 103 of the Code of Civil Procedure provides that when an action is brought upon a written instrument and a copy is annexed to the complaint, the genuineness and due execution of the instrument shall be deemed admitted unless specifically denied under oath in the answer. The corporation filed no sworn answer denying the genuineness and due execution of the contracts or questioning Fernandez's authority. The admission created by the statute operates as a conclusive admission, and all proof submitted contrary thereto or inconsistent therewith should be ignored by the court, whether objection is interposed or not. A constructive admission created by the express words of the statute has the same effect as any other admission. The Court distinguished California cases holding that evidence admitted without objection could be considered, noting that defenses such as fraud, coercion, imbecility, and mistake do not involve genuineness or due execution and may be proved under the general issue. The Court also noted that lack of authority in an officer of a corporation to bind it by a contract is a defense that should be specially pleaded, quite apart from the verification requirement.

• Corporate Liability on the Merits: Even assuming the contracts were properly put in issue, the corporation was bound. While section 28 of the Corporation Law vests corporate power in the board of directors, and the by-laws vested the power to make contracts in the board, a formal vote of the board is not always required before contractual liability can be fixed upon a corporation. The board can create liability by other means than a formal expression of its will, including by the course of dealings sanctioned by the company or its directors. Fernandez conducted the negotiations with the knowledge and consent of other board members, and the contract was made with their prior approval. The board's resolution of October 27, 1913, conferring powers on Ocampo to take charge of the films, rent them, and advertise that the company was importing films, showed that the board had recognized the contract as being in existence and had proceeded to take steps necessary to utilize the films. The contracts were thus inferentially approved by the board. The subsequent failure of the stockholders to approve the contracts did not abrogate the liability, because the functions of stockholders are of a limited nature; the theory of a corporation is that stockholders may have all the profits but shall turn over the complete management of the enterprise to their representatives and agents, called directors. Stockholder resolutions on the propriety of making a corporate contract are at most advisory and not in any wise binding on the board. The Court emphasized that third parties dealing with corporations must rely on external manifestations of corporate consent, and a corporation that knowingly permits an officer to act within the scope of apparent authority is estopped from denying his authority as against one who has in good faith dealt with the corporation through such agent.

• Character of Fernandez's Liability: The form of the contract's signature raised a doubt as to the real intention of the parties. Fernandez's individual signature was not in line with the company's signature but was set off to the left and somewhat below. The Court felt justified in looking to the evidence to discover the intention, and the testimony of both Ramirez and Fernandez showed that Fernandez's responsibility was intended to be that of guarantor. The Court was convinced that the name was put on the contract for the purpose of guaranteeing its performance, not merely its approval by the corporation. Parol evidence was admissible to show the character in which the signature was affixed, supported by article 1281 of the Civil Code, which declares that if the words of a contract appear contrary to the evident intention of the parties, the intention shall prevail.

• Apparent Authority / Estoppel of Corporation — If a corporation knowingly permits one of its officers or agents to do acts within the scope of an apparent authority, and thus holds him out to the public as possessing power to do those acts, the corporation will, as against anyone who has in good faith dealt with the corporation through such agent, be estopped from denying his authority. "If the corporation permits" means the same as "if the thing is permitted by the directing power of the corporation." The Court applied this doctrine to bind the Orientalist Company, as Fernandez acted with the knowledge and consent of the board of directors.

• Stockholder Resolutions on Corporate Contracts Are Advisory — The functions of stockholders of a corporation are of a limited nature; stockholders may have all the profits but shall turn over the complete management of the enterprise to their representatives and agents, called directors. Contracts between a corporation and third persons must be made by the directors and not by the stockholders. Where a meeting of stockholders is called for the purpose of passing on the propriety of making a corporate contract, its resolutions are at most advisory and not in any wise binding on the board.

• Admission by Failure to Deny Under Oath — Under section 103 of the Code of Civil Procedure, when an action is brought upon a written instrument and the complaint contains or annexes a copy, the genuineness and due execution of the instrument shall be deemed admitted unless specifically denied under oath in the answer. This constructive admission operates as a conclusive admission, and all proof submitted contrary thereto or inconsistent therewith should be ignored by the court, whether objection is interposed by the opposite party or not.

• Parol Evidence to Show Character of Signature — Where the form of a signature on a contract raises a doubt as to the capacity in which a person signed, parol evidence is admissible to show the intention of the contracting parties. This is supported by article 1281 of the Civil Code, which declares that if the words of a contract appear contrary to the evident intention of the parties, the intention shall prevail.

• "The public is not supposed nor required to know the transactions which happen around the table where the corporate board of directors or the stockholders are from time to time convoked. Whether a particular officer actually possesses the authority which he assumes to exercise is frequently known to very few, and the proof of it usually is not readily accessible to the stranger who deals with the corporation on the faith of the ostensible authority exercised by some of the corporate officers." — This passage articulates the rationale for the doctrine of apparent authority, explaining why corporations must be held strictly to liability fixed by their agents in accordance with law.

• "It is familiar doctrine that an admission made in a pleading can not be controverted by the party making such admission; and all proof submitted by him contrary thereto or inconsistent therewith should simply be ignored by the court, whether objection is interposed by the opposite party or not. We can see no reason why a constructive admission, created by the express words of the statute, should be considered to have less effect than any other admission." — This states the Court's holding on the effect of the corporation's failure to deny the contracts under oath, establishing that statutory constructive admissions have the same conclusive effect as express admissions.

• "The functions of the stockholders of a corporation are, it must be remembered, of a limited nature. The theory of a corporation is that the stockholders may have all the profits but shall turn over the complete management of the enterprise to their representatives and agents, called directors." — This articulates the foundational principle of corporate governance applied by the Court to hold that stockholder resolutions on corporate contracts are merely advisory.

• "The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance with law, and we would be sorry to announce a doctrine which would permit the property of a man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the earth without recourse against the corporations whose name and authority had been used in the manner disclosed in this case." — This expresses the policy consideration underlying the Court's holding on corporate liability, emphasizing the protection of third parties dealing with corporations in good faith.

• Merchant vs. International Banking Corporation, 6 Phil. Rep., 314 — Controlling precedent on the effect of failure to deny a written instrument under oath; held that the admission extends not only to the authenticity of the signature but also to the authority of the agent to make the contract.
• Barrett Mining Co. vs. Tappan, 2 Colo., 124 — Followed; held that a corporation sued on an obligation signed by an agent must deny the signature under oath to put the obligee to proof, as the statute refers to the legal effect of the signature rather than the manual act of signing.
• Union Dry Company vs. Reid, 26 Ga., 107 — Followed; held that under a statute requiring the defendant to deny on oath an instrument upon which he is sued, the plea should have been verified.
• Songco vs. Sellner, 37 Phil. Rep., 254 — Cited for the proposition that an attack on an instrument in general terms is insufficient, even though the answer is under oath, as section 103 requires the denial to be specific.
• Robert Gair Co. vs. Columbia Rice Packing Co., 124 La., 194 — Followed; held that the authority of a subordinate agent of a corporation may depend upon the course of dealings which the company or its directors have sanctioned, and may be established by proof of usage permitted to grow up in business.
• Crowley vs. Railroad Co., 60 Cal., 628 — Distinguished; the Court questioned the reasoning of this case, explaining that the defense of incapacity due to drunkenness did not involve genuineness or due execution and could be proved under the general issue.

• Section 103, Code of Civil Procedure — Provides that when an action is brought upon a written instrument and the complaint contains or annexes a copy, the genuineness and due execution of the instrument shall be deemed admitted unless specifically denied under oath in the answer. The Court applied this provision to hold that the corporation's failure to deny the contracts under oath operated as a conclusive admission of Fernandez's authority.
• Section 109, Code of Civil Procedure — Provides that immaterial variances between the allegations of a pleading and the proof shall be disregarded and the facts shall be found according to the evidence, but recognizes the necessity for amendment of pleadings. The Court noted its authority to permit amendment of the answer but declined to exercise it.
• Section 28, Corporation Law — Declares that corporate power shall be exercised and all corporate business conducted by the board of directors. The Court applied this provision to hold that Fernandez, as treasurer, had no independent authority to bind the company, but that the board could create liability by other means than formal expression of its will.
• Article 1281, Civil Code — Declares that if the words of a contract should appear contrary to the evident intention of the parties, the intention shall prevail. The Court cited this provision in support of admitting parol evidence to show the character in which Fernandez's signature was affixed.

• Justice Torres
• Justice Johnson
• Justice Malcolm
• Justice Avanceña
• Justice Fisher