Safic Alcan & Cie vs. Imperial Vegetable Oil Co., Inc.

A corporate president has no blanket authority to bind the corporation to speculative or extraordinary contracts; acts beyond the scope of his authority do not bind the corporation absent express or implied ratification, and third persons dealing with him must ascertain the nature and extent of his authority at their peril.

Safic Alcan & Cie, a French corporation engaged in the international purchase, sale, and trading of coconut oil, entered into transactions with Imperial Vegetable Oil Co., Inc. (IVO), a corporation whose President was Dominador Monteverde. IVO’s By-Laws, Article III, Section 3[g], vested the President with direct and active management of the corporation’s business but required him to act according to the orders, resolutions, and instructions of the Board of Directors, and to exercise his own discretion only when not expressly limited by such orders, resolutions, and instructions. The dispute implicated the authority of a corporate president to enter forward or futures contracts and the requirements for ratification under the Civil Code and the Corporation Code.

Safic Alcan & Cie, a French corporation engaged in the international purchase, sale, and trading of coconut oil, filed a complaint dated February 26, 1987 with the Regional Trial Court of Manila, Branch XXV, against Imperial Vegetable Oil Co., Inc. (IVO), docketed as Civil Case No. 87-39597. Safic alleged that on July 1, 1986 and September 25, 1986, it placed purchase orders with IVO for 2,000 long tons of crude coconut oil, valued at US$222.50 per ton, covered by Purchase Contract Nos. A601446 and A601655, respectively, to be delivered within January 1987. IVO failed to deliver the coconut oil and instead offered a “wash out” settlement, whereby the coconut oil subject of the purchase contracts would be “sold back” to IVO at the prevailing price in the international market at the time of wash out. IVO thereby bound itself to pay Safic the difference between the prevailing price and the contract price of the 2,000 long tons, amounting to US$293,500.00. Despite repeated oral and written demands, IVO failed to pay.

Under its second cause of action, Safic alleged that on eight occasions between April 24, 1986 and October 31, 1986, it placed purchase orders with IVO for a total of 4,750 tons of crude coconut oil, covered by Purchase Contract Nos. A601297A/B, A601384, A601385, A601391, A601415, A601681, A601683, and A601770A/B/C. When IVO failed to honor the wash out settlement, Safic demanded that IVO make marginal deposits within forty-eight hours on the eight purchase contracts in amounts equivalent to the difference between the contract price and the market price of the coconut oil, to compensate it for damages it suffered when it was forced to acquire coconut oil at a higher price. IVO failed to make the prescribed marginal deposits on the eight contracts, in the aggregate amount of US$391,593.62, despite written demand. The demand was based on the customs of the trade, as governed by the N.I.O.P. Contract Rule 54 and the FOSFA Contract Rule 54. Safic prayed that IVO be ordered to pay the sums of US$293,500.00 and US$391,593.62, plus attorney’s fees and litigation expenses, and applied for a writ of preliminary attachment. Upon Safic’s posting of the requisite bond, the trial court issued a writ of preliminary attachment and subsequently ordered IVO’s assets placed under receivership to preserve them.

In its answer, IVO raised special affirmative defenses: that Safic had no legal capacity to sue because it was doing business in the Philippines without the requisite license or authority; that the subject contracts were speculative contracts entered into by IVO’s then President, Dominador Monteverde, in contravention of the Board of Directors’ prohibition against engaging in speculative paper trading, and despite IVO’s lack of the necessary license from the Central Bank to engage in such trading activity; and that under Article 2018 of the Civil Code, if a contract purporting to be for the delivery of goods, securities, or shares of stock is entered into with the intention that the difference between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner, the transaction is null and void. IVO also set up counterclaims anchored on harassment, paralyzation of business, financial losses, rumor-mongering, and oppressive action. It later filed a supplemental counterclaim alleging that it was unable to operate its business normally because of the arrest of most of its physical assets, that its suppliers were driven away, that its major creditors had inundated it with claims for immediate payment, and that China Banking Corporation had foreclosed its chattel and real estate mortgages.

During trial, the lower court found that in 1985, prior to the contracts sued upon, the parties had entered into and consummated a number of contracts for the sale of crude coconut oil. In those transactions, Safic placed several orders and IVO faithfully filled them by shipping the required crude coconut oil to Safic, totaling 3,500 metric tons. As to the 1986 contracts, the trial court refused to declare them gambling transactions under Article 2018 of the Civil Code, although they involved some degree of speculation, noting that every business enterprise carries a certain measure of speculation or risk. The 1985 contracts, however, required delivery within two months, which Safic alleged was the time needed for milling and building up oil inventory, while the 1986 contracts stipulated delivery within periods ranging from eight months to eleven to twelve months after the placing of orders. The coconuts supposed to be milled were in all likelihood not yet growing when Dominador Monteverde sold the crude coconut oil, so the 1986 contracts constituted trading in futures or in mere expectations. The lower court further held that the subject contracts were ultra vires and were entered into by Monteverde without authority from the Board of Directors. It distinguished the 1985 contracts, where Safic likewise dealt with Monteverde, who was presumably authorized to bind IVO, from the 1986 contracts, which were highly speculative. The 1985 contracts were covered by letters of credit, while the 1986 contracts were payable by telegraphic transfers, which were mere promises to pay once the shipments became ready. For these reasons, the lower court held that Safic could not invoke the 1985 contracts as an implied corporate sanction for the high-risk 1986 contracts, which were evidently entered into by Monteverde for his personal benefit. The trial court ruled that Safic failed to substantiate its claim for actual damages and rejected IVO’s counterclaim and supplemental counterclaim.

On August 28, 1992, the trial court rendered judgment dismissing Safic’s complaint, without prejudice to any action it might subsequently institute against Dominador Monteverde, the former President of IVO, arising from the subject matter of the case. IVO’s counterclaim and supplemental counterclaim were likewise dismissed for lack of merit, with no pronouncement as to costs. The writ of preliminary attachment and the order placing IVO under receivership were dissolved and set aside. Both IVO and Safic appealed to the Court of Appeals, jointly docketed as CA-G.R. CV No. 40820. IVO raised only one assignment of error: that the trial court erred in holding that the issuance of the writ of preliminary attachment was not the main cause of the damages suffered by IVO and in not awarding IVO such damages. Safic argued that the trial court erred in holding that IVO’s President, Dominador Monteverde, entered into contracts which were ultra vires and which did not bind or make IVO liable; in holding that Safic was unable to prove the damages suffered by it and in not awarding such damages; and in not holding that IVO is liable under the wash out contracts. On September 12, 1996, the Court of Appeals rendered its Decision dismissing the appeals and affirming the judgment appealed from in toto. Safic then filed the instant petition for review with the Supreme Court, substantially reiterating the errors it raised before the Court of Appeals.

The evidence before the trial court showed that IVO’s Board of Directors knew nothing of the 1986 contracts and did not authorize Monteverde to enter into speculative contracts. Monteverde had earlier proposed that the company engage in such transactions, but the IVO Board rejected his proposal because futures contracts were too risky and partook of gambling. Rodrigo Monteverde, who succeeded Dominador Monteverde as IVO President, testified that the Board had set down a policy of engaging in purely physical trading, that Dominador Monteverde never recorded the futures transactions in IVO’s books of accounts, and that the Board later agreed to remove him as president and passed a resolution disowning his illegal activities. The 1986 contracts were never reported to the Central Bank, unlike the 1985 contracts, and were never recorded in IVO’s 1986 accounting books or annual financial statement. Emelita Ortega, formerly an assistant of Dominador Monteverde, testified that in unreported cases where profits were made, such profits were ordered remitted to unknown accounts in California, U.S.A., by Dominador Monteverde. Safic did not produce the documents ordered by the trial court relating to its alleged damages, prompting the trial court to assume that, if produced, the documents would have been adverse to Safic’s cause.

• Authority of Monteverde and Implied Agency: Petitioner argued that the 1986 forward contracts were not unauthorized acts of Dominador Monteverde; as IVO’s President, he had implied authority to make any contract necessary or appropriate to the ordinary business of the company, and he had validly entered into similar forward contracts for and on behalf of IVO in 1985. Petitioner maintained that the Court of Appeals ignored its own finding on this implied authority and improperly relied on the testimony of Rodrigo Monteverde to conclude that the Board did not authorize the 1986 contracts.
• Estoppel: Petitioner contended that IVO was estopped from denying responsibility for and liability under the 1986 forward contracts because IVO had recognized itself bound to similar forward contracts that Monteverde entered into for IVO with Safic in 1985, notwithstanding that Monteverde was not expressly authorized by the Board to enter into such forward contracts.
• Distinction Between 1985 and 1986 Contracts: Petitioner argued that there was no difference between the 1985 physical contracts and the 1986 futures contracts, and that the Court of Appeals erred in distinguishing them despite the Manila RTC having struck down IVO’s objection that the 1986 contracts were highly speculative paper trading and instead finding that they were not gambling.
• Damages: Petitioner maintained that it proved the damages it suffered through testimonial and documentary evidence showing the higher amount it had to pay for crude coconut oil, vis-à-vis the contract price it was to pay to IVO, when IVO refused to deliver the crude coconut oil under the 1986 forward contracts.
• Wash Out Contracts: Petitioner argued that the Court of Appeals failed to resolve the issue of whether IVO is liable to Safic under the wash out contracts involving Contracts Nos. A601446 and A60155 (sic), despite the issue having been properly raised on appeal and the evidence and law supporting Safic’s position.
• Limitations on Authority: Petitioner raised the point that the IVO Board of Directors did not set limitations on the extent of Monteverde’s authority to sell coconut oil.

• Lack of Legal Capacity: Respondent raised that Safic had no legal capacity to sue because it was doing business in the Philippines without the requisite license or authority.
• Speculative and Ultra Vires Contracts: Respondent asserted that the subject contracts were speculative contracts entered into by its then President, Dominador Monteverde, in contravention of the Board of Directors’ prohibition against engaging in speculative paper trading, and despite IVO’s lack of the necessary license from the Central Bank to engage in such trading activity.
• Nullity under Article 2018: Respondent invoked Article 2018 of the Civil Code, arguing that if a contract purporting to be for the delivery of goods, securities, or shares of stock is entered into with the intention that the difference between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner, the transaction is null and void.
• Counterclaims: Respondent set up counterclaims anchored on harassment, paralyzation of business, financial losses, rumor-mongering, and oppressive action; its supplemental counterclaim alleged inability to operate normally because of the arrest of most of its physical assets, suppliers being driven away, major creditors demanding immediate payment, and China Banking Corporation foreclosing its chattel and real estate mortgages.
• Preliminary Attachment Damages: On appeal, respondent assigned error to the trial court’s holding that the issuance of the writ of preliminary attachment was not the main cause of the damages suffered by IVO and its failure to award such damages.

• Authority of Corporate President: Whether the 1986 forward contracts entered into by Dominador Monteverde, as IVO’s President, bound IVO or were unauthorized and ultra vires acts that did not bind IVO absent Board authorization or ratification.
• Implied Agency and Estoppel: Whether Safic could rely on implied agency or estoppel based on Monteverde’s 1985 contracts with Safic to hold IVO liable under the 1986 contracts.
• Wash Out Agreements: Whether IVO was liable to Safic under the wash out agreements.
• Proof of Damages: Whether Safic proved its claim for actual damages.
• New Issue on Appeal: Whether Safic could raise for the first time on appeal the contention that the IVO Board did not set limitations on Monteverde’s authority to sell coconut oil.

• Authority of Corporate President: No. Under IVO’s By-Laws, Monteverde had no blanket authority to bind IVO; he had to act according to the Board’s orders, resolutions, and instructions, and the 1986 contracts were unauthorized and not ratified.
• Implied Agency and Estoppel: No. Safic could not rely on implied agency because IVO had not entered into identical contracts with Safic before the 1986 contracts; a person dealing with an agent is put upon inquiry and must ascertain the agent’s authority at his peril.
• Wash Out Agreements: No. The wash out agreements were ultra vires and not binding on IVO.
• Proof of Damages: No. Safic failed to substantiate its actual damages; its claim was speculative and unsupported by the documents it refused to produce.
• New Issue on Appeal: No. A question not raised in the courts below cannot be raised for the first time on appeal without offending fair play, justice, and due process.

• Authority of Corporate President: Article III, Section 3[g] of IVO’s By-Laws provided that the President shall have direct and active management of the business and operation of the corporation, conducting the same according to the orders, resolutions and instructions of the Board of Directors and according to his own discretion whenever and wherever the same is not expressly limited by such orders, resolutions and instructions. This provision showed that Monteverde had no blanket authority to bind IVO to any contract; he had to act according to the Board’s instructions, and even his discretionary authority could not conflict with prior Board orders, resolutions, and instructions. The evidence established that the IVO Board knew nothing of the 1986 contracts and did not authorize Monteverde to enter into speculative contracts. Monteverde had earlier proposed that the company engage in such transactions, but the Board rejected his proposal. Because the 1986 contracts marked a sharp departure from past IVO transactions, Safic should have obtained from Monteverde the prior authorization of the IVO Board. Under Article 1898 of the Civil Code, the acts of an agent beyond the scope of his authority do not bind the principal unless the latter ratifies the same expressly or impliedly. There was no ratification: Monteverde did not secure the Board’s approval, did not submit the contracts to the Board after their consummation, and the contracts were not reported in IVO’s export sales book and turn-out book or reflected in other books and records. The Board of Directors, not Monteverde, exercises corporate power. Thus, Monteverde’s speculative contracts with Safic never bound IVO, and Safic could not enforce those contracts against IVO.
• Implied Agency and Estoppel: Safic could not rely on the doctrine of implied agency because, before the controversial 1986 contracts, IVO did not enter into identical contracts with Safic. The basis for agency is representation, and a person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. The Court cited Bacaltos Coal Mines vs. Court of Appeals: every person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent; if he does not make such inquiry, he is chargeable with knowledge of the agent’s authority, and his ignorance of that authority will not be any excuse. Persons dealing with an assumed agent, whether the assumed agency be general or special, are bound at their peril, if they would hold the principal, to ascertain not only the fact of the agency but also the nature and extent of the authority, and in case either is controverted, the burden of proof is upon them to establish it. The most prudent thing Safic should have done was to ascertain the extent of Monteverde’s authority. Being remiss, Safic could not seek relief on the basis of a supposed agency. The 1985 contracts did not create an implied agency or estoppel because they were not identical to the 1986 speculative contracts and did not authorize Monteverde to bind IVO to the latter.
• Wash Out Agreements: The so-called wash out agreements were clearly ultra vires and not binding on IVO. Furthermore, such agreements did not prove Safic’s actual losses in the transactions in question. Safic did not pay for the coconut oil that it supposedly ordered from IVO through Monteverde. Safic only claimed that, since it was ready to pay when IVO was not ready to deliver, Safic suffered damages to the extent that it had to buy the same commodity from others at higher prices. That claim was not substantiated by the evidence.
• Proof of Damages: Safic’s claim for damages was not substantiated. The Court noted that the claim raised several questions: Did Safic commit to deliver the quantity of oil covered by the 1986 contracts to its own buyers? Who were these buyers? What were the terms of those contracts with respect to quantity, price, and date of delivery? Did Safic pay damages to its buyers? Where were the receipts? Did Safic have to procure the equivalent oil from other sources? If so, who were these sources? Where were their contracts and what were the terms as to quantity, price, and date of delivery? During the trial, IVO filed an amended motion for production and inspection of documents, including contracts of resale of coconut oil that Safic bought from IVO, records of pooling and sales contracts, contracts of purchase of oil that Safic allegedly had to resort to in order to fill undelivered commitments of IVO, and all other contracts, confirmations, invoices, wash out agreements, and other documents of sale related to those matters. The trial court, in its September 16, 1988 Order, ruled that the motion was in order because the documents were material to Safic’s claim for damages, were specified, and were admitted by Safic’s witness Donald O’Meara to be available. Notwithstanding the ruling, Safic did not produce the required documents, prompting the trial court to assume that if produced, the documents would have been adverse to Safic’s cause. Safic’s suggested substitute mode of computing damages by getting the average price it paid for certain quantities of coconut oil allegedly bought in 1987 and deducting this from the average price of the 1986 contracts was flawed because it was conjectural, resting on average prices rather than actual prices multiplied by the actual volume of coconut oil per contract, and because it was based on the unproven assumption that the 1987 contracts of purchase provided the coconut oil needed to make up for the failed 1986 contracts. There was also no evidence that Safic had contracted to supply third parties with coconut oil from the 1986 contracts and that Safic had to buy such oil from others to meet the requirement. The quantities of oil covered by its 1987 contracts with third parties did not match the quantities of oil provided under the 1986 contracts. Had Safic produced the documents required by the trial court, a substantially correct determination of its actual damages would have been possible. The power of the courts to grant damages and attorney’s fees demands factual, legal, and equitable justification; its basis cannot be left to speculation and conjecture.
• New Issue on Appeal: Safic’s contention that the IVO Board of Directors did not set limitations on the extent of Monteverde’s authority to sell coconut oil was a question that was never raised in the courts below and could not be allowed to be raised for the first time on appeal without offending basic rules of fair play, justice, and due process. The issue was not brought to the fore either in the trial court or the appellate court. In any event, the contention was belied by the record. Rodrigo Monteverde testified that the IVO Board had set down the policy of engaging in purely physical trading, that the Board rejected Dominador Monteverde’s proposal to engage in futures contracts because such contracts were too risky and partook of gambling, and that the policy was observed. Dominador Monteverde never recorded the futures transactions in the company’s books of accounts. The Board later agreed to remove him as president and passed a resolution disowning his illegal activities.

• Agency — Duty to Inquire into Agent’s Authority — Every person dealing with an agent is put upon inquiry and must discover upon peril the authority of the agent; if he does not make such inquiry, he is chargeable with knowledge of the agent’s authority, and his ignorance of that authority will not be any excuse. Persons dealing with an assumed agent, whether the assumed agency be general or special, are bound at their peril, if they would hold the principal, to ascertain not only the fact of the agency but also the nature and extent of the authority, and in case either is controverted, the burden of proof is upon them to establish it. The Court applied this rule against Safic, which dealt with Monteverde without ascertaining his authority and could not rely on implied agency.
• Corporate President’s Authority — A corporate president has no blanket authority to bind the corporation to any contract. Under IVO’s By-Laws, the President had direct and active management of the business but was required to conduct it according to the orders, resolutions, and instructions of the Board of Directors, and his discretion could not conflict with prior Board orders, resolutions, and instructions. The Court applied this to hold that Monteverde’s 1986 speculative contracts were unauthorized and did not bind IVO.
• Ratification under Article 1898 — The acts of an agent beyond the scope of his authority do not bind the principal unless the latter ratifies the same expressly or impliedly. No ratification occurred where the agent did not secure Board approval, did not submit the contracts to the Board after consummation, and the contracts were not reported or recorded in the corporation’s books and records. The Court applied this to reject Safic’s claim against IVO.
• Ultra Vires Contracts — Contracts entered into beyond the authority of a corporate officer or agent are ultra vires and not binding on the corporation. The Court applied this to both the 1986 forward contracts and the wash out agreements, holding that they could not be enforced against IVO.
• Proof of Damages — The power of the courts to grant damages and attorney’s fees demands factual, legal, and equitable justification; its basis cannot be left to speculation and conjecture. The Court applied this to reject Safic’s damages claim, which was unsupported by the documents it refused to produce and was based on a conjectural average-price computation.
• Issues Not Raised Below — A question that was never raised in the courts below cannot be allowed to be raised for the first time on appeal without offending basic rules of fair play, justice, and due process. The Court applied this to bar Safic’s contention that the IVO Board did not set limitations on Monteverde’s authority.
• Physical Trading vs. Futures or Speculative Contracts — The Court distinguished the 1985 physical contracts from the 1986 futures contracts based on the delivery periods, modes of payment, compliance with Central Bank reporting, and recording in corporate books. The 1986 contracts were trading in futures or mere expectations, not ordinary physical trading, which reinforced that they were outside Monteverde’s authority.

• “Every person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. If he does not make such inquiry, he is chargeable with knowledge of the agent’s authority, and his ignorance of that authority will not be any excuse.” — This is the Court’s canonical formulation of the duty of a third person dealing with an agent; it supplied the controlling rule for rejecting Safic’s implied agency claim.
• “Under Article 1898 of the Civil Code, the acts of an agent beyond the scope of his authority do not bind the principal unless the latter ratifies the same expressly or impliedly.” — This states the ratification requirement applied to Monteverde’s unauthorized 1986 contracts and wash out agreements.
• “Clearly, Monteverde’s speculative contracts with Safic never bound IVO and Safic can not therefore enforce those contracts against IVO.” — This is the ratio decidendi on the central issue of corporate liability.
• ”[T]he power of the courts to grant damages and attorney’s fees demands factual, legal and equitable justification; its basis cannot be left to speculation and conjecture.” — This is the Court’s formulation of the evidentiary standard for damages, applied to reject Safic’s unsubstantiated claim.

• Bacaltos Coal Mines vs. Court of Appeals, 245 SCRA 460 [1995] — Cited by the Court for the rule that every person dealing with an agent is put upon inquiry and must discover upon peril the agent’s authority; if he does not, he is chargeable with knowledge of the agent’s authority, and ignorance is no excuse. This was controlling in rejecting Safic’s implied agency claim.
• Cervantes vs. Court of Appeals, 304 SCRA 25 [1999] — Cited in support of the rule under Article 1898 that when the third person knows the agent acted beyond authority, the principal cannot be held liable, and the third person is to blame unless the agent undertook to secure the principal’s ratification.
• Ysmael vs. Court of Appeals, 318 SCRA 215 [1999] — Cited for the rule that a question never raised in the courts below cannot be raised for the first time on appeal without offending fair play, justice, and due process.
• Ranola vs. Court of Appeals, 322 SCRA 1 [2000] — Cited for the rule that the power of the courts to grant damages and attorney’s fees demands factual, legal, and equitable justification and cannot be left to speculation and conjecture.

• Article III, Section 3[g], IVO By-Laws — Provides that the President shall have direct and active management of the business and operation of the corporation, conducting the same according to the orders, resolutions and instructions of the Board of Directors and according to his own discretion whenever and wherever the same is not expressly limited by such orders, resolutions and instructions. The Court relied on this to hold that Monteverde had no blanket authority to bind IVO and had to act within Board instructions.
• Article 1898, Civil Code — If an agent contracts in the name of the principal, extending the scope of his authority and the principal does not ratify the contract, it shall be void if the party with whom the agent contracted is aware of the limits of the powers granted by the principal; the agent is liable if he undertook to secure the principal’s ratification. The Court applied this to hold that Monteverde’s unauthorized acts did not bind IVO absent ratification.
• Section 23, Corporation Code — Cited for the principle that the Board of Directors, not the President, exercises corporate power. The Court used this to reinforce that Monteverde’s acts could not bind IVO without Board authorization.
• Central Bank Circular No. 151 dated April 1, 1963 — Required a coconut oil exporter to submit a Report of Foreign Sales within twenty-four (24) hours after the closing of the relative sales contract with a foreign buyer. The Court noted that the 1985 contracts complied, while the 1986 contracts were never reported, making the 1986 sales suspect and supporting the distinction between physical and speculative trading.

Davide, Jr.; Puno (on official leave); Kapunan; and Pardo, JJ., concur.