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Linatoc, Page 1 of 2

Business Organization I under

FACTS Project contractor LCDC and project owner PRHC (with Engr. Dennis Abcede as its project construction manager, and Joselito Santos, its general manager and vice-president for operations) entered into several construction projects, including the Tektite Building. LCDC president, Manuel Ley, met with Abcede to discuss the unanticipated delay in construction due to sudden, unexpected hike in the prices of cement and other construction materials. Abcede asked LCDC to advance the amount necessary to complete construction. Ley acceded on condition that PRHC would allow escalation of contract price and disregard the prohibition contained in the agreements. The PRHC board of directors turned down the request, but it gave no notice to LCDC of said denial. Instead, Abcede signed a letter and sent it to LCDC, asking for its conformity, to the effect that should it infuse P36M into the project, a contract price escalation for the same amount would be granted in LCDCs favor. However, the letteragreement revealed no signature above PRHCs name. Notwithstanding the absence of said signature, LCDC proceeded with the construction of Tektite Building. It infused amounts totalling P38.2M, and religiously submitted to PRHC monthly reports on the same. But PRHC never replied to any of these monthly reports. When Ley inquired from Abcede and Santos why its requests for extension of time were not granted in full, the two assured him that LCDC would not be penalized with damages because the fact that it was working hard on the Tektite Building project was known to PRHC. However, when 96.43% of Tektite Building had been completed and LCDC requested the release of the P36M escalation price, PRHC did not reply. After the construction of the building was completed, it conveyed its decision to set off, in the form of liquidated damages, its claim to the supposed LCDCs liability. LCDCs alleged liability included the corrective works to redo or repair the defective waterproofing in one of the projects. LCDC denied the same by alleging that PRHC, as the principal, forced LCDC, as the agent, into hiring Vulchem Corp., as sub-agent or substitute, for the waterproofing works. It argued that under Art. 1892 of the Civil Code 1, an agent is responsible for the acts of the substitute if he was given the power to appoint a substitute. Conversely, if it is the principal and not the agent who appointed the substitute, the agent bears no responsibility for the acts of the sub-agent. LCDC filed a Complaint before the RTC in Makati City which ruled in its favor. PRHC filed a Notice of Appeal. The Court of Appeals (CA) reversed RTCs amended Decision.

Art. 1892. The agent may appoint a substitute if the principal has not prohibited him from doing so; but he shall be responsible for the acts of the substitute: (1) When he was not given the power to appoint one; (2) When he was given such power, but without designating the person, and the person appointed was notoriously incompetent or insolvent.

EMMANUEL E. DAEZ Atty. Linatoc, Page 2 of 2

Business Organization I under

ISSUES (related to Business Organization I, particularly on the topic of Agency) 1. Whether or not the signed letter of Abcede, without the signature above PRHCs name, could bind PRHC to the escalation agreement with LCDC. 2. Whether or not LCDC correctly applied Article 1892 on the principles of agency to the case at bar. HELD 1. SC ruled that the signature of Abcede, as PRHC construction manager, on the letter-agreement (contract) is sufficient to bind PRHC because it indicated authority to make such representation on behalf of PRHC. SC further agreed with LCDC that the actions of Abcede and Santos, assuming they were beyond the authority given to them by PRHC which they were representing, still bound PRHC under the doctrine of apparent authority2. Thus, the lack of authority on their part should not be used to prejudice it, considering that the two were clothed with apparent authority to execute such agreements. 2. SC ruled that LCDCs reliance on Art. 1892 was misplaced. The principles of agency could not to be applied to this case, since the legal relationship between PRHC and LCDC was not one of agency, but was rather that between the owner of the project and an independent contractor under a contract of service. Thus, it is the agreement between the parties and not the Civil Code provisions on agency that should be applied to resolve this issue. SC set aside CAs decision and ruled to set off the respective liabilities of the parties against each other, and PRHC was directed to pay LCDC the net amount due.

[a]lthough an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to the business, or a particular branch of it, continuously and publicly, for a considerable time. Also, 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. (Yao Ka Sin Trading v. Court of Appeals, et al. G.R. No. 53820, 15 June 1992, 209 SCRA 763)