This case clarifies that a partner’s bad faith revocation of an agency agreement can result in liability for damages. The Supreme Court ruled that Eduardo Paule acted in bad faith when he revoked Zenaida Mendoza’s authority to collect payments, disrupting the project and harming both Mendoza and third parties. This decision underscores the principle that partners must act in good faith and uphold their obligations, especially when those obligations affect the interests of others.

Partnership Gone Sour: Can a Principal Revoke Authority to Avoid Obligations?

This case stems from a National Irrigation Administration (NIA) project where Eduardo Paule, using his contractor’s license through E.M. Paule Construction and Trading (EMPCT), partnered with Zenaida Mendoza. Mendoza was authorized via a Special Power of Attorney (SPA) to handle project transactions. Manuel de la Cruz then entered the scene, providing heavy equipment rentals to EMPCT through Mendoza. However, Paule later revoked the SPA, leading NIA to withhold payments from Mendoza. This left Cruz unpaid and triggered a legal battle, with Cruz suing Paule, Coloma, and NIA for the sum of money, damages, and a writ of preliminary injunction. The core issue revolves around whether Paule, as the principal, could revoke Mendoza’s authority in bad faith, thereby avoiding obligations to both Mendoza and third parties like Cruz.

The Regional Trial Court initially ruled in favor of Cruz, ordering Paule to pay for the services rendered and damages incurred. However, the Court of Appeals reversed this decision, stating that Mendoza exceeded her authority and that Cruz was aware of the limitations of her SPA. But the Supreme Court sided with both Mendoza and Cruz, highlighting the existing partnership between Paule and Mendoza. Under Article 1818 of the Civil Code, every partner acts as an agent of the partnership, empowered to conduct business-related acts. Mendoza’s actions aligned with their agreed-upon division of labor; Paule, with the contractor license and expertise and Mendoza with sourcing of funds, materials, labor, and equipment.

Furthermore, Paule’s subsequent reinstatement of Mendoza as his attorney-in-fact, even after the initial dispute, indicated an acknowledgment of her authority. This contradicted his claim that Mendoza had acted beyond her power under the first SPA. “If he truly believed that Mendoza exceeded her authority with respect to the initial SPA, then he would not have issued another SPA.” said the court, showing the improbability of his argument. A critical point of contention was Paule’s bad faith revocation of the SPAs. According to the Court, this was done deliberately to prevent Mendoza from collecting payments and settling outstanding obligations. In essence, it was a move to circumvent his contractual duties.

The Supreme Court emphasized that an agency cannot be revoked if it is essential for fulfilling an obligation or if a bilateral contract depends on it. In this instance, the SPAs were crucial for Mendoza to collect funds from NIA, pay suppliers, and fulfill her role in the partnership. Paule’s actions constituted a willful breach of his contractual duty, leading to the court to underscore liability for moral damages.

Bad faith does not simply connote bad judgment or negligence; it imputes a dishonest purpose or some moral obliquity and conscious doing of a wrong; a breach of a sworn duty through some motive or intent or ill-will; it partakes of the nature of fraud (Spiegel v. Beacon Participation, 8 NE 2nd Series, 895, 1007). It contemplates a state of mind affirmatively operating with furtive design or some motive of self-interest or ill will for ulterior purposes (Air France v. Carrascoso, 18 SCRA 155, 166-167). Evident bad faith connotes a manifest deliberate intent on the part of the accused to do wrong or cause damage.

Moreover, the Court acknowledged the previously settled matter in G.R. No. 173275, which involved a similar issue concerning the SPAs between Paule and Mendoza. Even though it involved different parties, it finally disposed of the effect of the SPAs amongst Paule, Mendoza, and third parties which Mendoza contracted through by virtue of the SPAs.

The Supreme Court ultimately reinstated the RTC’s decision, holding Paule liable, and remanded the case to the trial court to determine the exact amount owed to Mendoza based on her counterclaim. The court highlighted that “PAULE should be made civilly liable for abandoning the partnership, leaving MENDOZA to fend for her own, and for unduly revoking her authority to collect payments from NIA, payments which were necessary for the settlement of obligations contracted for and already owing to laborers and suppliers of materials and equipment like CRUZ, not to mention the agreed profits to be derived from the venture that are owing to MENDOZA by reason of their partnership agreement.”

FAQs

What was the key issue in this case?	The central issue was whether a principal could revoke an agent’s authority in bad faith, thereby evading contractual obligations to both the agent and third parties involved. The Supreme Court determined that such actions could lead to liability for damages.
Who were the key parties involved?	The key parties were Eduardo Paule (the principal), Zenaida Mendoza (the agent and partner), and Manuel dela Cruz (the third-party equipment lessor). NIA was also involved as the government entity for whom the project was being conducted.
What was the significance of the Special Power of Attorney (SPA)?	The SPA granted Mendoza the authority to act on behalf of EMPCT in transactions with NIA. It defined the scope of her agency and was central to determining whether she acted within her authority when contracting with Cruz.
How did the partnership between Paule and Mendoza affect the outcome?	The existence of a partnership meant that Paule and Mendoza had mutual duties, including acting in good faith. Paule’s bad faith revocation of the SPA constituted a breach of these duties.
What does it mean to revoke an agency in bad faith?	Revoking an agency in bad faith implies a dishonest purpose, ill motive, or intent to do wrong. In this case, it meant Paule intentionally disrupted Mendoza’s ability to collect payments and fulfill contractual obligations.
What are the implications for third parties dealing with agents?	Third parties are protected when an agent acts within the scope of their authority. However, they should also be aware of the limitations of the agent’s power, although the court acknowledged that those SPAs were binding in relation to the contract the agent made, for as long as those transactions had a relation to their partnership
What is a cross-claim/counterclaim and why was it important in this case?	A counterclaim is a claim made by a defendant against a plaintiff in the same case, while a cross-claim is a claim asserted between co-defendants or co-plaintiffs. Mendoza’s cross-claim against Paule was important because it allowed her to seek compensation for damages resulting from his actions.
What was the final ruling of the Supreme Court?	The Supreme Court held Paule liable for damages due to his bad faith revocation of the SPAs, and ordered the trial court to receive evidence on Mendoza’s counterclaim to determine the exact amount of damages owed to her. The claim of De la Cruz against Paule for unpaid lease rentals was granted as well.

In conclusion, the Supreme Court’s decision reinforces the importance of good faith and fair dealing in partnerships and agency relationships. Partners cannot simply revoke authority to avoid obligations; doing so can lead to liability for damages, ensuring that the rights of both agents and third parties are protected.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: ZENAIDA G. MENDOZA vs. ENGR. EDUARDO PAULE, G.R. No. 175885, February 13, 2009