Associated Bank (United Overseas Bank [Phils.] v.

Spouses Pronstroller

(July 14, 2008)

Subjects: Agency and Partnership, Torts and Damages

Facts: In 1988, the spouses Vaca executed a real estate mortgage in favor of
petitioner bank over their parcel of land in Quezon City. For failure of the spouses
Vaca to pay their obligation, the subject property was sold at public auction with the
petitioner as the highest bidder. TCT was issued to petitioner. The spouses Vaca
however commenced an action for the nullification of the real estate mortgage and
the foreclosure sale. Petitioner filed a petition for a writ of possession. The cases
reached the SC, which eventually decided that the petitioner has a right to possess
the property.

During their pendency however, the petitioner advertised the property for sale. The
spouses Pronstroller offered to purchase the property. Said offer was made through
Atty. Soluta, Jr., the bank’s VP, Corporate Secretary and a member of its Board of
Directors. Respondents paid P750th or 10% of the purchase price. Petitioner,
through Atty. Soluta, and respondents executed a Letter-Agreement containing the
terms and conditions of the sale. One of the terms was that the Pronstrollers have to
make 10% deposit and balance of P6.75M to be deposited under escrow agreement.
This was modified by another letter-agreement which allowed the spouses to pay
the balance of the purchase price after the SC resolution of the cases.

By the end of 1993, petitioner reorganized its management and the new
management discovered that the spouses failed to pay the balance of the purchase
price. The bank then rescinded the sale and suggested that spouses come up with a
new proposal. The parties failed to reach an agreement and the spouses informed
the bank that they would be enforcing their second Letter-Agreement. Petitioner
countered that it was not aware of the existence of such agreement and Atty. Soluta
was not authorized to represent the bank. Respondents commenced the suit for
specific performance. During the pendency of this case, the bank sold the property
to spouses Vaca. Trial court ruled in favor of the respondents and applied the
doctrine of “apparent authority”. CA upheld the RTC decision. Hence, this petition
for review on certiorari.

Issue: 1) WON the petitioner is bound by the letter-agreement signed by Atty. Soluta
under the doctrine of apparent authority

Held: Yes. The general rule is that, in the absence of authority from the
board of directors, no person, not even its officers, can validly bind a
corporation. The power and responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged in the board of
directors. However, the board may validly delegate some of its functions and
powers to officers, committees and agents. The authority of such individuals to bind
the corporation is generally derived from law, corporate by-laws or authorization
from the board, either expressly or impliedly, by habit, custom, or acquiescence, in
the general course of business. The authority of a corporate officer or agent on
dealing with third persons may be actual or apparent. The doctrine of apparent
authority with special reference to banks, had long been recognized in this
jurisdiction. Apparent authority is derived not merely from practice. Its
existence may be ascertained through 1) the general manner in which the
corporation holds out an officer or agent as having the power to act, or in
other words, the apparent authority to act in general, with which it
clothes him; or 2) the acquiescence in his acts of particular nature, with
actual or constructive knowledge thereof, within or beyond the scope of
his ordinary powers. Accordingly, the authority to act for and to bind a
corporation may be presumed from acts of recognition in other instances,
wherein the power was exercised without any objection from its board or
shareholders. The bank had previously allowed Atty. Soluta to enter into the first
agreement without a board resolution; thus it had clothed him with apparent
authority to modify the same via the second letter-agreement. It is not the quantity
of similar acts which establishes apparent authority, but the vesting of a corporate
officer with the power to bind the corporation. Naturally, the third person has to rely
upon the external manifestations of corporate consent. The public has to rely on the
trustworthiness of bank officers and their acts.

Issue: 2) WON the bank is liable for moral damages

Held: Yes. Art. 2209 of the NCC allows the recovery of moral damages in breaches of
contract where the party acted fraudulently and in bad faith. As found by the CA,
petitioner undoubtedly acted fraudulently and in bad faith in breaching the letter-
agreements. Despite the pendency of the case in the RTC, it sold the subject
property to spouses Vaca. This is apart from its act of unilaterally rescinding the
subject contract. Clearly, petitioner’s acts are brazen attempts to frustrate the
decision that the court may render in favor of respondents. It is likewise apparent
that because of petitioner’s acts, respondents were compelled to litigate justifying
the award of attorney’s fees and expenses of litigation.