Yu Chuck vs. Kong Li Po

A general business manager of a corporation has implied authority to bind the corporation only to reasonable and usual contracts of employment; a contract of employment for an unusually long term, with conditions so onerous that the possibility of the corporation's insolvency is expressly contemplated, exceeds such implied authority and does not bind the corporation. The plaintiffs, dealing with the manager, were put upon inquiry as to the extent of his authority and had no right to presume that he possessed implied authority to enter into a contract that might bring about the corporation's ruin.

The defendant is a domestic corporation organized under the laws of the Philippine Islands, engaged in the publication of a Chinese newspaper styled Kong Li Po. Its articles of incorporation and by-laws are in the usual form, providing for a board of directors and other officers, including a president whose duty is to "sign all contracts and other instruments of writing." No special provision is made for a business or general manager. The general rule is that the power to bind a corporation by contract lies with its board of directors or trustees, but this power may be expressly or impliedly delegated to other officers or agents.

The defendant is a domestic corporation engaged in the publication of a Chinese newspaper styled Kong Li Po, with articles of incorporation and by-laws in the usual form providing for a board of directors and other officers, including a president whose duty is to "sign all contracts and other instruments of writing." No special provision is made for a business or general manager. Some time during 1919, one C. C. Chen or T. C. Chen was appointed general business manager of the newspaper. During December of that year, he entered into an agreement with the plaintiffs by which they bound themselves to do the necessary printing for the newspaper for the sum of P580 per month. Under this agreement, the plaintiffs worked for the defendant from January 1, 1920, until January 31, 1921, when they were discharged by the new manager, Tan Tian Hong, who had been appointed in the meantime, C. C. Chen having left for China. The letter of dismissal stated no special reasons for the discharge.

The plaintiffs brought an action alleging that their contract of employment was for a term of three years from January 1, 1920; that in case of their discharge without just cause before the expiration of the term, they were to receive full pay for the remaining portion of the term; and that they had been so discharged without just cause, asking judgment for damages in the sum of P20,880. In its amended answer, the defendant denied the allegations and set up five special defenses and counterclaims: (1) that C. C. Chen was not authorized to execute the contract; (2) that the plaintiffs purposely delayed the issuance of the newspaper on three occasions, causing damage of P300; (3) that the plaintiffs failed to prepare extra pages for the January 1, 1921 issue, compelling the defendant to secure their preparation at a cost of P110; (4) that the plaintiffs neglected to correct errors in advertisements, causing a loss of P160.50; and (5) that the plaintiffs refused to do certain job printing, causing damage of P150.

At trial, the plaintiffs presented Exhibit A, a contract between Chen and the plaintiffs providing that in the event of discharge without cause before the expiration of the three-year term, they would be given full pay for the unexpired portion "even if the said paper has to fall into bankruptcy." The contract was signed by the plaintiffs and bore the signature "C. C. Chen, manager of Kong Li Po." The defendant questioned the authenticity of the signature, but the court below found that the evidence preponderated in favor of the plaintiffs. The trial court further found that the contract had been impliedly ratified by the defendant and rendered judgment for the plaintiffs for P13,340 with interest and costs. The defendant appealed, assigning eighteen errors, the substance of which was that the contract was not signed by C. C. Chen; that Chen had no power or authority to bind the corporation; and that there was no ratification of the contract by the corporation.

• Lack of Authority: The defendant argued that C. C. Chen, the person whose name appears to have been signed to the contract of employment, was not authorized by the defendant to execute such a contract in its behalf.
• No Ratification: The defendant maintained that there was no ratification of the contract by the corporation, as the contract was never presented to the president or to the board of directors.
• Counterclaims: The defendant set up five special defenses and counterclaims alleging that the plaintiffs delayed the issuance of the newspaper, failed to prepare extra pages, neglected to correct errors in advertisements, and refused to do certain job printing, causing various amounts of damage.

• Implied Authority: The plaintiffs maintained that C. C. Chen, as general business manager of the newspaper with charge of the printing, had implied authority to employ them on the terms stated, and that the defendant corporation is bound by his action.
• Implied Ratification: The plaintiffs contended that the corporation impliedly ratified the contract, principally based on the fact that Te Kim Hua, the president of the corporation for 1920, admitted on the witness stand that he saw the plaintiffs work as printers in the office of the newspaper.
• Notice as Evidence of Authority: The plaintiffs relied on a notice inserted in the January 14th issue of the Kong Li Po by T. C. Chen announcing that all contracts, agreements, and receipts would be null and void unless duly signed by him as General Manager, which they argued supported Chen's authority.

• Implied Authority of the General Manager: Whether C. C. Chen, as general business manager of the defendant corporation, had implied authority to bind the corporation to a three-year contract of employment with the plaintiffs.
• Implied Ratification by the Corporation: Whether the defendant corporation impliedly ratified the contract of employment entered into by C. C. Chen with the plaintiffs.
• Sufficiency of Counterclaims: Whether the defendant's counterclaims were sufficiently established by the evidence.

• Implied Authority of the General Manager: No. While Chen, as general manager, had implied authority to bind the corporation by a reasonable and usual contract of employment, the three-year contract with onerous conditions contemplating possible bankruptcy was not reasonable and usual, and thus exceeded his implied authority.
• Implied Ratification by the Corporation: No. Before a contract can be ratified, knowledge of its existence must be brought home to the parties who have authority to ratify it, or circumstances must be shown from which such knowledge may be presumed; no such knowledge or circumstances were shown here.
• Sufficiency of Counterclaims: No. The defendant's counterclaims were not sufficiently established by the evidence.

• Implied Authority of the General Manager: The general rule is that the power to bind a corporation by contract lies with its board of directors or trustees, but this power may either expressly or impliedly be delegated to other officers or agents. It is well settled that except where the authority of employing servants and agents is expressly vested in the board of directors or trustees, an officer or agent who has general control and management of the corporation's business, or a specific part thereof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business. However, the contracts of employment must be reasonable. Citing Corpus Juris, the Court noted that a manager has authority to hire an employee for such a period as is customary or proper under the circumstances, such as for a year, for the season, or for two seasons, but unless he is either expressly authorized or held out as having such authority, he cannot make a contract of employment for a long future period, such as for three years. The Court found that the contract in question was not only unusually long but also contained conditions so onerous to the defendant that the possibility of the corporation being thrown into insolvency was expressly contemplated. This fact in itself was sufficient to put the plaintiffs upon inquiry as to the extent of the business manager's authority; they had no right to presume that he or any other single officer or employee of the corporation had implied authority to enter into a contract of employment which might bring about its ruin.

• Implied Ratification by the Corporation: The contention that the corporation impliedly ratified the contract was not supported by the evidence. The contention was based principally on the fact that Te Kim Hua, the president of the corporation for 1920, admitted on the witness stand that he saw the plaintiffs work as printers in the office of the newspaper. He denied, however, any knowledge of the existence of the contract and asserted that it was never presented to him nor to the board of directors. Before a contract can be ratified, knowledge of its existence must be brought home to the parties who have authority to ratify it, or circumstances must be shown from which such knowledge may be presumed. No such knowledge or circumstances were shown. That the president saw the plaintiffs working in the office was of little significance, as there were other printers working there at that time, and the president had nothing to do with their employment. Moreover, a ratification by the president would have been of no avail; in order to validate a contract, a ratification by the board of directors was necessary. The fact that the president was required by the by-laws to sign documents evidencing contracts of the corporation does not mean that he had power to make the contracts.

• Sufficiency of Counterclaims: The defendant's counterclaims were not sufficiently established by the evidence.

• Implied Authority of a General Manager — An officer or agent who has general control and management of the corporation's business, or a specific part thereof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business, provided the contracts of employment are reasonable. A manager has authority to hire an employee for such a period as is customary or proper under the circumstances, such as for a year, for the season, or for two seasons, but unless he is either expressly authorized or held out as having such authority, he cannot make a contract of employment for a long future period, such as for three years. The Court applied this doctrine to find that the three-year contract with onerous conditions exceeded Chen's implied authority.

• Ratification of Contracts by a Corporation — Before a contract can be ratified, knowledge of its existence must be brought home to the parties who have authority to ratify it, or circumstances must be shown from which such knowledge may be presumed. In order to validate a contract, ratification by the board of directors is necessary. The Court applied this doctrine to find that the corporation did not ratify the contract, as the president had no knowledge of its existence and ratification by him alone would have been insufficient.

• "But the contracts of employment must be reasonable." — This statement articulates the controlling limitation on the implied authority of a general manager to bind a corporation by employment contracts, forming the basis of the Court's ruling.

• "Not only is the term of employment unusually long, but the conditions are otherwise so onerous to the defendant that the possibility of the corporation being thrown into insolvency thereby is expressly contemplated in the same contract. This fact in itself was, in our opinion, sufficient to put the plaintiffs upon inquiry as to the extent of the business manager's authority; they had not the rights to presume that he or any other single officer or employee of the corporation had implied authority to enter into a contract of employment which might bring about its ruin." — This passage states the ratio decidendi: the unusual length and onerous conditions of the contract exceeded the manager's implied authority and put the plaintiffs on inquiry notice.

• "Before a contract can be ratified knowledge of its existence must, of course, be brought home to the parties who have authority to ratify it or circumstances must be shown from which such knowledge may be presumed." — This passage defines the requirement for ratification of a contract by a corporation, which the Court found was not satisfied in this case.

• Merchant vs. International Banking Corporation, 6 Phil., 314 — Cited in connection with the rule under section 103 of the Code of Civil Procedure regarding the failure to deny under oath the genuineness and due execution of a document, which constitutes an admission of its genuineness and of the agent's authority to bind the defendant.
• Nery Lim-Chingco vs. Terariray, 5 Phil., 124 — Cited for the object of the rule requiring a sworn denial: to relieve a party of the trouble and expense of proving in the first instance an alleged fact, the existence or nonexistence of which is necessarily within the knowledge of the adverse party.
• Ramirez vs. Orientalist Co. and Fernandez, 38 Phil., 634 — Discussed in the concurring opinion of Justice Street, distinguishing the case on the ground that the defendant there failed to plead lack of authority by way of special defense, whereas the defendant in the present case properly raised the point in its answer.

• Section 103, Code of Civil Procedure — The provision provides that the failure to deny under oath the genuineness and due execution of a document attached to a complaint constitutes an admission of its genuineness and due execution, as well as of the agent's authority to bind the defendant. The Court noted that while this rule would ordinarily apply, the parties in this case tried the case upon the theory that the rule did not apply, and the plaintiffs waived the rule by introducing evidence as to the execution of the document and failing to object to the defendant's evidence in refutation.
• Section 28, Corporation Law — Referenced in the quoted portion of Ramirez vs. Orientalist Co. and Fernandez within the dissenting opinion, providing that corporate powers shall be exercised, and all corporate business conducted, by the board of directors.

Johns, Avanceña, and Romualdez, JJ., concurred. Justice Street wrote a separate concurring opinion, adding observations on the procedural point regarding the defendant's failure to verify its special defense under oath, and on the principal point that a manager cannot make a contract of employment for a long period such as three years unless expressly authorized or held out by the corporation as having such authority. Justice Street distinguished the case from Ramirez vs. Orientalist Co. and Fernandez on the ground that the defendant there failed to plead lack of authority by way of special defense, whereas the defendant in the present case properly raised the point in its answer.

• Justice Malcolm — Dissented, arguing that the prevailing opinion neglected certain points and facts demonstrating the tenability of the plaintiffs' action. Justice Malcolm argued that: (1) the defendant's failure to deny under oath the genuineness and due execution of the instrument sued on constituted an admission of the genuineness of the signature and of the authority of the agent to sign it; (2) the defendant corporation held T. C. Chen out to the public as its business manager, clothing him with apparent authority to bind the corporation, and the action of the business manager was ratified by his superior officers, who were now in estoppel to deny such ratification; and (3) the court decided the case on a legal point not raised in the lower court, not assigned as an error, and not argued in the appellant's brief. Justice Malcolm opined that a contract extending over three years and calling for payment of P480 per month for three persons, entered into by the business manager under apparent power and ratified by the officers of the corporation, was not invalid. Justice Villamor concurred with the dissent.