A principal's power to revoke an agency agreement is not absolute and may not be exercised in bad faith or with an abuse of right; a termination tainted with bad faith makes the principal liable for damages. Furthermore, an agency is considered "coupled with an interest" and is not freely revocable by the principal when the agent has been induced to assume a responsibility or incur a liability, such that the agent would be exposed to personal loss if the authority were withdrawn.

Arturo P. Valenzuela had been a General Agent for the Philippine American General Insurance Company, Inc. (Philamgen) since 1965. Over thirteen years, he built a successful insurance agency. The dispute arose from a particularly large marine insurance account he secured from Delta Motors, Inc., which entitled him to a 32.5% commission. In 1977, Philamgen expressed its desire to share in this specific commission on a fifty-fifty basis, which Valenzuela consistently refused, asserting his rights under their existing General Agency Agreement.

• Arturo P. Valenzuela, a General Agent for Philamgen since 1965, solicited and sold non-life insurance policies, earning a commission.
• From 1973 to 1975, Valenzuela secured a P4.4 million marine insurance account from Delta Motors, Inc., for which he was entitled to a 32.5% commission.
• In 1977, Philamgen began insisting on sharing Valenzuela's commission from the Delta account on a 50-50 basis, which Valenzuela repeatedly refused.
• Following his refusal, Philamgen took several adverse actions: it reversed commissions due to him, placed his agency transactions on a restrictive "cash-and-carry" basis, threatened to cancel policies issued by his agency, and spread rumors that he had a substantial outstanding account.
• These actions caused a significant decline in Valenzuela's insurance business.
• On December 27, 1978, Philamgen officially terminated Valenzuela's General Agency Agreement.
• The trial court found that the primary reason for the termination was Valenzuela's refusal to share his commission, not his alleged outstanding accounts.
• The Court of Appeals reversed this finding, holding that Philamgen had the power to revoke the agency at will and that Valenzuela was liable for unpaid premiums amounting to P1,932,532.17.

• The termination of the General Agency Agreement was unjustified and done in bad faith, primarily motivated by their refusal to share the Delta commission.
• The agency relationship was "coupled with an interest" because Valenzuela had built the business over 13 years and was held liable for unpaid premiums, making the agency not freely revocable at the principal's will.
• They did not have any outstanding account with Philamgen; in fact, Philamgen's own records showed Valenzuela had an overpayment.
• Philamgen's claim for unpaid premiums is baseless because under the Insurance Code, policies for which premiums are not paid are considered lapsed and invalid.

• A principal has the absolute power to revoke an agency at will, even if done in bad faith, subject only to liability for damages.
• The termination was justified because Valenzuela had a substantial outstanding account with Philamgen, which prejudiced the company's interests.
• The General Agency Agreement and the Civil Code provisions on agency provided the basis for terminating the contract.
• Valenzuela is liable for the unpaid and uncollected premiums from his clients.

• Procedural Issues:
  • Whether the Supreme Court can review the factual findings of the Court of Appeals when they are contrary to those of the trial court.
• Substantive Issues:
  • Whether the termination of the General Agency Agreement by Philamgen was tainted with bad faith and constituted an abuse of right, making it liable for damages.
  • Whether the agency agreement between Valenzuela and Philamgen was one "coupled with an interest" and therefore not unilaterally revocable at will.
  • Whether Valenzuela is liable to Philamgen for unpaid premiums on insurance policies that have already lapsed.

• Procedural:
  • Yes, the Supreme Court can review the facts. The Court held that while the factual findings of the Court of Appeals are generally final, an exception exists when the appellate court's findings are contrary to those of the trial court. Given the irreconcilable divergence between the two lower courts on the pivotal issue of bad faith, a review of the evidence was necessary.
• Substantive:
  • Yes, the termination was done in bad faith. The Court affirmed the trial court's finding that the principal cause for termination was Valenzuela's refusal to share his commission. The subsequent actions by Philamgen—reversing commissions, imposing a cash-and-carry basis, and spreading rumors—were acts of harassment constituting bad faith and an abuse of right under Articles 19, 20, and 21 of the Civil Code.
  • Yes, the agency was coupled with an interest. Valenzuela had an interest in the continuation of the agency because he had built it up over 13 years and, more importantly, because Philamgen continued to hold him liable for unpaid premiums, exposing him to personal loss if the agency were terminated. This made the agency not freely revocable at the unilateral will of the principal.
  • No, Valenzuela is not liable for unpaid premiums. Citing Section 77 of the Insurance Code, the Court ruled that no insurance policy is valid and binding unless the premium has been paid. Since the premiums were admittedly unpaid, the policies lapsed and Philamgen had no liability as an insurer. Therefore, Philamgen could not treat the contracts as valid for collecting premiums while they were invalid for the purpose of paying indemnity, and had no legal basis to sue Valenzuela for the uncollected amounts.

• Abuse of Right Doctrine — This doctrine, enshrined in Articles 19, 20, and 21 of the Civil Code, holds that every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. The Court applied this principle to rule that while Philamgen had the right to terminate the agency, it abused this right by doing so in bad faith as retaliation, making it liable for the resulting damages.
• Agency Coupled with an Interest — This is an exception to the general rule that an agency is revocable at the will of the principal. An agency is coupled with an interest when it is created not only for the interest of the principal but also for the mutual interest of the principal and agent, or for the interest of a third person. In this case, the Court found that Valenzuela's interest in the commissions he had worked to generate over many years, and his personal liability for unpaid premiums, constituted an interest that prevented Philamgen from unilaterally and arbitrarily terminating the agency.
• Effect of Non-Payment of Insurance Premiums — Under Section 77 of the Insurance Code, an insurance contract is not valid and binding unless and until the premium is paid. The Court applied this rule strictly, stating that non-payment does not merely suspend but puts an end to the insurance contract. Consequently, since the policies had lapsed, Philamgen had no obligation to pay indemnity and, correlatively, no right to collect the unpaid premiums from either the insured or the agent.

• "Hence, if a principal acts in bad faith and with abuse of right in terminating the agency, then he is liable in damages. This is in accordance with the precepts in Human Relations enshrined in our Civil Code that 'every person must in the exercise of his rights and in the performance of his duties act with justice, give every one his due, and observe honesty and good faith' (Art. 19, Civil Code)..."
• "Moreover, an insurer cannot treat a contract as valid for the purpose of collecting premiums and invalid for the purpose of indemnity."

• Danon v. Brimo — Cited to support the principle that while an agency with no fixed term may be terminated at will, this right must be exercised in good faith, and a principal who terminates in bad faith is liable for damages.
• Philippine Phoenix Surety and Insurance, Inc. v. Woodworks, Inc. — Referenced as a key precedent establishing that the non-payment of an insurance premium does not merely suspend but definitively ends an insurance contract.
• Arce v. The Capital Insurance and Surety Co., Inc. — Used to reiterate the rule under the amended Insurance Code that an insurance contract does not take effect unless the premium is paid.

• Article 19, Civil Code — Applied to establish that Philamgen's termination of the agency, while a right, was exercised in bad faith and without regard for justice and honesty, thus constituting an abuse of right.
• Article 20, Civil Code — Cited as the basis for indemnifying Valenzuela for damages caused by Philamgen's acts which were contrary to law.
• Article 21, Civil Code — Invoked to hold Philamgen liable for wilfully causing loss to Valenzuela in a manner contrary to morals and good customs.
• Section 77, Insurance Code — This was the legal basis for the Court's ruling that Valenzuela was not liable for uncollected premiums, as the non-payment rendered the insurance policies invalid and non-binding.
• Article 2200, Civil Code — Cited by the Supreme Court to justify the trial court's award of compensatory damages, which includes not only the loss suffered but also the profits the obligee failed to obtain.