Understanding Corporate Agency: When Unauthorized Actions Bind a Company

TLDR: This case clarifies that corporations are generally bound only by the authorized actions of their board or designated agents. Individuals dealing with agents must verify their authority, as corporations aren’t liable for unauthorized acts unless ratified. This prevents unexpected liabilities arising from individuals exceeding their corporate powers.

G.R. No. 144805, June 08, 2006

Introduction

Imagine a scenario where a company representative makes a deal that seems too good to be true – selling off valuable assets without proper authorization. Can the company be held to that agreement? This question lies at the heart of the Eternit Corporation vs. Lintonjua case, a landmark decision that underscores the importance of verifying an agent’s authority when dealing with corporations. The case highlights the limitations of corporate agents and the necessity of board approval for significant transactions, protecting companies from unauthorized commitments.

In this case, the Litonjua brothers sought to enforce a sale of Eternit Corporation’s properties, believing they had a valid agreement through the company’s representatives. However, the Supreme Court ultimately ruled against them, emphasizing that corporations are bound only by the authorized acts of their board or designated agents.

Legal Context

The legal framework governing corporate actions is rooted in the Corporation Code of the Philippines, specifically Sections 23 and 36. These provisions delineate the powers and responsibilities of a corporation’s board of directors and outline the process for conveying corporate property.

Section 23 of Batas Pambansa Bilang 68, states:

SEC. 23. The Board of Directors or Trustees. – Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified.

This section underscores that the board of directors is the central authority in managing a corporation’s affairs and assets.

Additionally, Article 1874 of the Civil Code is crucial, stating that when a sale of land is through an agent, the agent’s authority must be in writing; otherwise, the sale is void. This provision directly impacts real estate transactions involving corporate agents.

The concept of agency is also relevant. By the contract of agency, a person binds himself to render some service or to do something in representation on behalf of another, with the consent or authority of the latter.

Case Breakdown

The story begins in 1986 when Eternit Corporation (EC), facing political instability, considered selling its properties. Realtor Lauro Marquez offered the properties to Eduardo and Antonio Litonjua, with an initial offer price of P27,000,000.00. After negotiations, a counter-offer was made for US$1,000,000.00 plus P2,500,000.00.

The Litonjua brothers accepted the counter-offer and deposited US$1,000,000.00. However, before the sale could be finalized, Eternit Corporation, under new management due to improved political conditions, decided not to proceed with the sale.

Here’s a breakdown of the key events:

• Initial Offer: Marquez, representing Eternit, offered the properties for P27,000,000.00.
• Counter-Offer: Eternit, through representatives, proposed US$1,000,000.00 plus P2,500,000.00.
• Acceptance: The Litonjua brothers accepted and deposited funds.
• Withdrawal: Eternit withdrew from the sale due to changing circumstances.

The Litonjuas filed a complaint for specific performance and damages. The RTC dismissed the complaint, a decision upheld by the Court of Appeals. The Supreme Court affirmed these rulings, emphasizing the lack of written authority for the agents involved.

The Court emphasized the importance of verifying an agent’s authority:

A person dealing with a known agent is not authorized, under any circumstances, blindly to trust the agents; statements as to the extent of his powers; such person must not act negligently but must use reasonable diligence and prudence to ascertain whether the agent acts within the scope of his authority.

Moreover, the Court stated:

While a corporation may appoint agents to negotiate for the sale of its real properties, the final say will have to be with the board of directors through its officers and agents as authorized by a board resolution or by its by-laws.

Practical Implications

This ruling serves as a cautionary tale for anyone dealing with corporations. It highlights the importance of due diligence in verifying the authority of individuals claiming to represent a company. Without proper authorization, a corporation cannot be bound by the actions of its agents.

Key Lessons:

• Verify Authority: Always request proof of an agent’s authority, such as a board resolution or special power of attorney.
• Written Agreements: Ensure all agreements are in writing and properly authorized.
• Due Diligence: Conduct thorough due diligence before entering into significant transactions with corporations.

Frequently Asked Questions

Q: What is a corporate agent?

A: A corporate agent is an individual authorized to act on behalf of a corporation. Their authority is typically defined by the corporation’s by-laws or a board resolution.

Q: Why is written authority important for real estate transactions?

A: Article 1874 of the Civil Code requires written authority for an agent to sell real property. Without it, the sale is void.

Q: Can a corporation ratify an unauthorized act?

A: Yes, a corporation can ratify an unauthorized act, but this requires explicit approval from the board of directors.

Q: What is agency by estoppel?

A: Agency by estoppel occurs when a principal leads a third party to believe that someone is their agent, even if they are not. The principal may be bound by the agent’s actions if the third party relies on this representation.

Q: What due diligence should I perform when dealing with a corporation?

A: Verify the agent’s authority, review corporate documents, and seek legal counsel to ensure the transaction is valid and binding.

Q: What happens if the agent does not have authority from the corporation?

A: The corporation is not legally bound by the contract and is not required to perform the obligations set forth in the contract.

Q: Does owning the majority of the shares of stocks of a corporation allows you to sell its assets?

A: No, the property of a corporation is not the property of the stockholders or members, and as such, may not be sold without express authority from the board of directors.

ASG Law specializes in Corporate Law and Real Estate Transactions. Contact us or email hello@asglawpartners.com to schedule a consultation.