Yao Ka Sin Trading vs. Court of Appeals

A corporate president cannot bind the corporation to a contract without prior authorization from the Board of Directors where the By-Laws lodge that power exclusively in the Board, and a contract entered into by an officer without authority is unenforceable under Article 1317 of the Civil Code unless ratified. An option to renew a contract of sale is unenforceable unless supported by a consideration distinct from the price, pursuant to Article 1324 and Article 1749 of the Civil Code.

Yao Ka Sin Trading (YKS) is a single proprietorship business concern owned and operated by Yao Ka Sin, represented by its manager, Henry Yao. Prime White Cement Corporation (PWCC) is a corporation whose Chairman of the Board, Constancio B. Maglana, also served as its President. PWCC was a semi-subsidiary of the government due to NIDC participation, with all contracts requiring approval from the NIDC and/or the PNB Board because of an exposure and financial involvement of around P10 million. Under PWCC's By-Laws, the Board of Directors had the exclusive power to enter into contracts, with the President merely authorized to sign them "through" the Board's authority.

Yao Ka Sin Trading (YKS), a single proprietorship owned by Yao Ka Sin and managed by Henry Yao, received an undated letter-offer from Constancio B. Maglana, President and Chairman of the Board of Prime White Cement Corporation (PWCC), offering to sell 45,000 bags of Prime White Cement at P24.30 per 94 lbs. bag net FOB Cebu City, or P23.30 per bag FOB Asturias, Cebu. The offer required a down payment of P243,000.00 payable upon signing, with the balance due upon presentation of shipping documents, and granted YKS options to extend the contract and to renew it under the same price, terms, and conditions. The letter-offer, marked as Exhibit "A," was prepared, typed, and signed on June 7, 1973, in the office of Teodoro Catindig, Senior Vice-President of Consolidated Bank and Trust Corporation (Solid Bank), with Henry Yao signing the confirmation and paying P243,000.00 via Producers' Bank of the Philippines Check No. C-153576 dated June 7, 1973.

On June 30, 1973, twenty-three days after the signing, the Board of Directors of PWCC disapproved Exhibit "A" in a meeting in Cebu City, resolving that the 10,000 bags of white cement sold to YKS was a new and separate contract and that the letter-offer was "totally disapproved and is unacceptable to the corporation." On July 5, 1973, PWCC wrote to YKS informing it of the disapproval, but pursuant to its decision regarding the 10,000 bags, issued the corresponding Delivery Order and Official Receipt No. 0394 for the P243,000.00 payment. YKS accepted both the Delivery Order and Official Receipt without protest. While YKS denied receiving a copy of the July 5 letter, it was established that the original was shown to Henry Yao and left at his office when no one would sign a receipt for it.

On August 4, 1973, PWCC wrote to YKS in response to the latter's letter of the same date, reminding YKS of the July 5 letter and stating that PWCC "only committed to you and which you correspondingly paid 10,000 bags of white cement of which 4,150 bags were already delivered to you as of August 11, 1973." On August 21, 1973, PWCC wrote another letter to YKS in reply to the latter's letter of August 15, 1973, enclosing a copy of the August 4 letter. YKS received this reply on August 21, 1973, but denied having received it. On September 10, 1973, YKS, through Henry Yao, wrote a follow-up letter insisting on the delivery of 45,030 bags of white cement. On September 12, 1973, Henry Yao sent a letter calling PWCC's attention to the statement of delivery dated August 24, 1973, particularly the price change from P23.30 to P24.30 per bag FOB Asturias, Cebu.

On November 2, 1973, YKS sent a telegram to PWCC insisting on full compliance with Exhibit "A" and informing PWCC that it was exercising the option stipulated therein. On November 3, 1973, YKS sent a follow-up letter, but it was returned to sender as unclaimed. As of December 7, 1973, PWCC had delivered only 9,775 bags of white cement. On February 9, 1974, YKS wrote PWCC requesting, for the last time, compliance with its obligation under Exhibit "A." On February 27, 1974, PWCC answered, reiterating the unenforceability of Exhibit "A." On March 4, 1974, YKS filed a complaint for Specific Performance with Damages against PWCC.

In its Answer with Counterclaim, PWCC denied the material averments and alleged that YKS had no legal personality to sue, that Maglana was lured into signing Exhibit "A," that the signing was subject to Board approval, that the Board disapproved it, and that the 10,000 bags were sold under a separate contract. PWCC also claimed that YKS was solely to blame for failing to take complete delivery of the 10,000 bags because it did not send its boat or truck to PWCC's plant. At the pre-trial, the parties admitted that under PWCC's By-Laws, the Chairman of the Board, who is also the President, "has the power to execute and sign, for and in behalf of the corporation, all contracts or agreements which the corporation enters into," subject to the qualification that "all the president's actuations, prior to and after he had signed and executed said contracts, shall be given to the board of directors of defendant Corporation." It was also stated that the corporation was a semi-subsidiary of the government because of NIDC participation, and all contracts should meet the approval of the NIDC and/or the PNB Board.

• Validity of the Contract: Petitioner argued that Exhibit "A" is a valid contract binding on PWCC because Maglana, as President and Chairman of the Board, had the power to enter into contracts for the corporation as implied from the By-Laws provisions granting the Board the power to enter into contracts "through its President" and granting the Chairman the power to "execute and sign, for and in behalf of the corporation, all contracts or agreements which the corporation may enter into."
• Apparent Authority: Petitioner argued that even if Maglana was not authorized under the By-Laws, PWCC was still bound by his act under the doctrine of apparent authority, citing Francisco vs. Government Service Insurance System and Board of Liquidators vs. Kalaw.
• No Novation: Petitioner argued that Exhibit "A" was never novated nor superseded by a subsequent contract.
• Enforceability of Option: Petitioner argued that the option to renew the contract as contained in Exhibit "A" is enforceable.
• Rules of Court Application: Petitioner argued that Section 8, Rule 8 of the Rules of Court only applies when the adverse party appears to be a party to the instrument, and Section 1, Rule 9 regarding denial under oath refers only to allegations of usury.

• Lack of Authority: Respondent argued that Exhibit "A" is not binding upon it because Maglana was not authorized to make the offer and sign the contract in behalf of the corporation; per its By-Laws, only the Board of Directors has the power to enter into contracts, and the Board totally rejected and disapproved Exhibit "A" in clear language, duly informing and transmitting the same to petitioner.
• Unenforceable Contract: Respondent argued that the agreement is unenforceable under Articles 1317 and 1403(1) of the Civil Code because Maglana was not authorized by the Board nor was his actuation ratified by the Board.
• New Transaction: Respondent argued that YKS accepted the counter-offer for 10,000 bags of cement only, under price, terms, and conditions totally different from those in Exhibit "A," and cannot repudiate its acceptance and receipts of benefits from that transaction.
• Counterclaim: Respondent argued that the trial court erred in dismissing its counterclaims, which were duly supported by clear and indubitable evidence.

• Corporate Authority: Whether Exhibit "A" is a valid contract binding on PWCC, given that it was signed by its President and Chairman without prior authorization from the Board of Directors.
• Apparent Authority: Whether PWCC clothed Maglana with apparent authority to execute Exhibit "A" such that the corporation is estopped from denying such authority.
• Novation: Whether Exhibit "A" was novated or superseded by a subsequent contract for 10,000 bags of white cement.
• Option to Renew: Whether the option to renew the contract contained in Exhibit "A" is enforceable.
• Rules of Court Application: Whether Section 8, Rule 8 of the Rules of Court applies to documents attached to the Answer when the adverse party is not a party to the instrument.
• Legal Personality: Whether YKS, as a single proprietorship, has the legal capacity to sue.

• Corporate Authority: No. Exhibit "A" is an unenforceable contract under Article 1317 of the Civil Code because Maglana was not authorized by the Board of Directors to enter into it, and the Board subsequently disapproved it.
• Apparent Authority: No. Petitioner failed to prove that PWCC clothed Maglana with apparent authority to execute Exhibit "A" or any similar contract; no evidence of similar acts was presented.
• Novation: No. The second ground fails because it assumes Exhibit "A" is a valid contract; the Board effectively disapproved and rejected it, and the P243,000.00 was treated as payment for 10,000 bags under a separate contract, which YKS accepted without protest.
• Option to Renew: No. Exhibit "A" being unenforceable, the option to renew has no basis; moreover, the option is without consideration distinct from the price, as required by Articles 1324 and 1749 of the Civil Code.
• Rules of Court Application: Yes. Section 8, Rule 8 of the Rules of Court does not apply because the petitioner is not a party to the documents attached to the respondent's Answer; however, this error does not change the outcome.
• Legal Personality: The defect is merely formal. Yao Ka Sin should be deemed as the plaintiff in Civil Case No. 5064 and the petitioner in the instant case, as the defect in designation may be summarily corrected at any stage of the action.

• Corporate Authority: The Court ruled that while Maglana was an officer of PWCC, the By-Laws provisions do not confer upon the President the authority to enter into contracts for the corporation independently of the Board of Directors. The power to contract is exclusively lodged in the Board, and the words "through the president" in Exhibit "8-A" and the power of the chairman "to execute and sign" in Exhibit "I-1" both presuppose a prior act of the corporation exercised through the Board of Directors. No greater power can be implied from such express but limited delegated authority. The Court found inapplicable the authority that a president given general control and supervision over corporate affairs is presumed to have authority to make contracts, because PWCC had a general manager who had the active and direct management of the business and operations of the corporation, and no evidence was adduced to show that Maglana had previously entered into similar contracts. Thus, Exhibit "A" is an unenforceable contract under Article 1317 of the Civil Code, which provides that no one may contract in the name of another without being authorized by the latter, and a contract entered into by one who has no authority or legal representation shall be unenforceable unless ratified.

• Apparent Authority: The Court stated that while a corporation may be bound by the apparent authority with which it clothes an officer, it was incumbent upon the petitioner to prove that PWCC had clothed Maglana with apparent power to execute Exhibit "A" or any similar contract. This could have been shown by evidence of similar acts executed either in its favor or in favor of other parties, but petitioner "miserably failed to do that." The Court distinguished Francisco vs. GSIS and Board of Liquidators vs. Kalaw, noting that in those cases, sufficient evidence of apparent authority was found based on the conduct and actuations of the corporations concerned, including ratification through silence and acceptance of benefits, and the practice of allowing the general manager to negotiate and execute contracts without prior board approval.

• Novation: The Court ruled that the second ground was based on a wrong premise because it assumed Exhibit "A" was a valid contract. The Board effectively disapproved and rejected Exhibit "A" and considered the P243,000.00 as payment for 10,000 bags of white cement under an entirely different contract, and forthwith notified petitioner of its decision. Petitioner received the notification and thereafter accepted without protest the Delivery Receipt covering the 10,000 bags and the Official Receipt for the P243,000.00. The Court thus agreed with the respondent Court that petitioner had in fact agreed to a new transaction involving only 10,000 bags of white cement.

• Option to Renew: The Court ruled that since Exhibit "A" is unenforceable, the option to renew it "would have no leg to stand on. The river cannot rise higher than its source." Moreover, the option granted in this case is without any consideration. Article 1324 of the Civil Code provides that an offer may be withdrawn at any time before acceptance, except when the option is founded upon a consideration, as something paid or promised. Article 1749 provides that an accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. Since the option was not supported by any consideration distinct from the price, it cannot validly bind the private respondent.

• Rules of Court Application: The Court agreed with the petitioner that Section 8, Rule 8 of the Rules of Court does not apply because the petitioner is not a party to the documents attached to the private respondent's Answer. The rule provides that the genuineness and due execution of a written instrument shall be deemed admitted unless the adverse party, under oath, specifically denies them, "but this provision does not apply when the adverse party does not appear to be a party to the instrument." However, the Court noted that while the respondent Court erred in holding otherwise, the challenged decision must nevertheless stand in view of the disquisitions on the first to the third grounds.

• Legal Personality: The Court resolved the issue of YKS's lack of capacity to sue, which was raised in the Answer but not pursued on appeal. Citing Juasing Hardware vs. Mendoza, the Court held that a single proprietorship is neither a natural person nor a juridical person under Article 44 of the Civil Code and is not an entity authorized by law to bring suit in court. However, the Court deemed Yao Ka Sin as the proper party plaintiff and petitioner, noting that the defect is merely formal and not substantial, and an amendment to cure such defect is expressly authorized by Section 4, Rule 10 of the Rules of Court. Citing Alonso vs. Villamor, the Court stated that no one has been misled by the error in the name of the party plaintiff, and there is not enough in a name to justify sending the case back for amendment and new trial.

• Authority of Corporate Officers — A corporation can act only through its officers and agents, and the same general principles of law which govern the relation of agency for a natural person govern the officer or agent of a corporation. A corporate officer may represent and bind the corporation in transactions with third persons to the extent that authority to do so has been conferred upon him, including powers intentionally conferred, powers incidental to or implied from the powers intentionally conferred, powers added by custom and usage, and such apparent powers as the corporation has caused persons dealing with the officer to believe that it has conferred. In this case, the Court held that the By-Laws of PWCC lodged the power to contract exclusively in the Board of Directors, and the President's authority to sign contracts presupposed a prior act of the corporation exercised through the Board.

• Apparent Authority — Apparent authority may result from (1) the general manner by which the corporation holds out an officer or agent as having power to act, or (2) acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or without the scope of his ordinary powers. If a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be estopped to deny that such apparent authority is real, as to innocent third persons dealing in good faith with such officers or agents. The party claiming apparent authority has the burden of proving it, which may be done through evidence of similar acts executed either in its favor or in favor of other parties. In this case, petitioner failed to present such evidence.

• Unenforceable Contracts (Article 1317, Civil Code) — No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him. A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. In this case, Maglana's execution of Exhibit "A" without Board authorization rendered the contract unenforceable against PWCC, and the Board's disapproval constituted a rejection rather than ratification.

• Option Contracts (Articles 1324 and 1749, Civil Code) — When an offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. In this case, the option to renew contained in Exhibit "A" was not supported by any consideration distinct from the price, and thus could not validly bind PWCC.

• Legal Personality of Sole Proprietorships — A sole proprietorship is neither a natural person nor a juridical person under Article 44 of the Civil Code; it is not an entity authorized by law to bring suit in court. The law merely recognizes the existence of a sole proprietorship as a form of business organization conducted for profit by a single individual, and requires the proprietor or owner thereof to secure licenses and permits, register the business name, and pay taxes to the national government. However, the defect in the designation of parties is merely formal and not substantial, and may be summarily corrected at any stage of the action provided no prejudice is caused to the adverse party.

• "A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it, has been execrated, before it is revoked by the other contracting party." — This passage quotes Article 1317 of the Civil Code, which is the controlling provision for the Court's ruling that Exhibit "A" is unenforceable against PWCC because Maglana lacked Board authorization.

• "The river cannot rise higher than its source." — This maxim encapsulates the Court's reasoning that since Exhibit "A" is unenforceable, the option to renew it has no legal basis and cannot stand independently.

• "No one has been misled by the error in the name of the party plaintiff. If we should by reason of this error send this case back for amendment and new trial, there would be on the retrial the same complaint, the same answer, the same defense, the same interests, the same witnesses, and the same evidence. The name of the plaintiff would constitute the only difference between the old trial and the new. In our judgment there is not enough in a name to justify such action." — This passage from Alonso vs. Villamor, quoted by the Court, supports the ruling that the defect in YKS's legal personality is merely formal and should not defeat the action.

• Juasing Hardware vs. Mendoza, 115 SCRA 783 (1982) — Controlling precedent on the legal personality of sole proprietorships; the Court relied on it to hold that a single proprietorship is neither a natural person nor a juridical person and cannot bring suit in court, but the defect is merely formal.
• Alonso vs. Villamor, 16 Phil. 315 (1910) — Cited to support the ruling that a defect in the designation of the party plaintiff is not sufficient to justify sending the case back for amendment and new trial.
• Francisco vs. Government Service Insurance System, 7 SCRA 577 (1963) — Distinguished; in that case, the Court found sufficient evidence of apparent authority based on the corporation's silence and acceptance of benefits, which constituted binding ratification under Article 1393 of the Civil Code.
• Board of Liquidators vs. Kalaw, 20 SCRA 987 (1967) — Distinguished; in that case, the corporation's practice of allowing its general manager to negotiate and execute contracts without prior board approval constituted apparent authority, unlike the present case where no such practice was shown.
• Vicente vs. Geraldez, 52 SCRA 227 — Cited by the Court of Appeals for the proposition that a corporate officer's power as an agent must be sought from the law, the articles of incorporation, and the By-Laws or from a resolution of the Board.
• Gaw vs. Court of Appeals, 191 SCRA 77 (1990) — Cited to support the ruling that Section 8, Rule 8 of the Rules of Court does not apply when the adverse party is not a party to the instrument.

• Article 1317, Civil Code — Provides that no one may contract in the name of another without being authorized, and a contract entered into by one who has no authority or legal representation shall be unenforceable unless ratified. The Court applied this provision to hold Exhibit "A" unenforceable against PWCC.
• Article 1324, Civil Code — Provides that an offer may be withdrawn at any time before acceptance, except when the option is founded upon a consideration. The Court applied this provision to hold the option to renew unenforceable for lack of consideration.
• Article 1749, Civil Code — Provides that an accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. The Court applied this provision to hold the option to renew unenforceable.
• Article 1403(1), Civil Code — Cited by the Court of Appeals for the proposition that the agreement was an unauthorized contract and therefore unenforceable.
• Article 1393, Civil Code — Cited in Francisco vs. GSIS for the proposition that ratification may be effected expressly or tacitly, and there is tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right.
• Section 1, Rule 3, Rules of Court — Provides that only natural or juridical persons or entities authorized by law may be parties in a civil action. The Court applied this provision to hold that YKS, as a sole proprietorship, lacked legal personality to sue.
• Section 4, Rule 10, Rules of Court — Provides that a defect in the designation of the parties may be summarily corrected at any stage of the action provided no prejudice is caused thereby to the adverse party. The Court applied this provision to deem Yao Ka Sin as the proper party plaintiff.
• Section 8, Rule 8, Rules of Court — Provides that the genuineness and due execution of a written instrument shall be deemed admitted unless the adverse party, under oath, specifically denies them, but this provision does not apply when the adverse party does not appear to be a party to the instrument. The Court held this provision inapplicable to the petitioner.
• Section 28, Corporation Law — Cited by the Court of Appeals for the proposition that all corporate commitments and business are conducted by, and contracts entered into through, the express authority of the Board of Directors.

Justices Gutierrez, Jr., Feliciano, Bidin, and Romero concurred with the decision.