In AF Realty & Development, Inc. v. Dieselman Freight Services, Co., the Supreme Court affirmed the principle that a sale of land by an agent on behalf of a corporation is void unless the agent’s authority is in writing. This ruling protects property rights by ensuring that corporations are bound only by transactions authorized in writing by their board of directors. The decision emphasizes the importance of due diligence when dealing with corporate agents, providing clarity on the requirements for valid real estate transactions and upholding the necessity of written authorization to prevent fraudulent or unauthorized property conveyances.
Unauthorized Deals: How Written Authority Protects Corporate Property
The case arose from a dispute over a parcel of land owned by Dieselman Freight Service Co. (Dieselman). Manuel C. Cruz, Jr., a member of Dieselman’s board, issued a letter to Cristeta N. Polintan, a real estate broker, authorizing her to sell the company’s property. Polintan, in turn, authorized Felicisima Noble to sell the same lot. Noble offered the property to AF Realty & Development, Inc. (AF Realty), which accepted the offer and issued a check for P300,000.00 as partial payment. However, Cruz, Jr. lacked written authorization from Dieselman to sell the property. This absence of written authority became the central issue.
AF Realty argued that a perfected contract of sale existed and filed a complaint for specific performance, seeking to compel Dieselman to execute a final deed of sale. Dieselman countered that no meeting of the minds occurred, and it had not authorized anyone to enter into the transaction. Meanwhile, Dieselman sold the same property to Midas Development Corporation (Midas), leading Midas to intervene in the case to protect its interest in the property. The trial court initially ruled in favor of AF Realty, but the Court of Appeals reversed the decision, finding that no perfected contract existed between Dieselman and AF Realty due to the lack of written authority. AF Realty then appealed to the Supreme Court.
The Supreme Court affirmed the Court of Appeals’ decision, emphasizing the importance of written authorization for an agent to sell corporate property. The Court cited Section 23 of the Corporation Code, which states that corporate powers are exercised by the board of directors. It acknowledged that a board may delegate functions to individual officers or agents but stressed that contracts or acts of a corporation must be made by the board or a duly authorized agent. Here, Cruz, Jr. had no written authority from Dieselman’s board to sell the lot, rendering his actions and those of his sub-agents, Polintan and Noble, non-binding on Dieselman.
AF Realty contended that Dieselman ratified the contract by accepting the P300,000.00 partial payment. The Supreme Court dismissed this argument, invoking Article 1874 of the Civil Code, which specifically requires that the authority of an agent selling a piece of land must be in writing; otherwise, the sale is void. Since Cruz, Jr., Polintan, and Noble lacked the necessary written authorization, the purported contract was deemed void and incapable of ratification, as per Article 1409 of the Civil Code. The Court emphasized the application of agency principles in corporate transactions. The ruling highlighted the importance of due diligence in real estate transactions, especially when dealing with corporate entities.
The sale of the property to Midas, on the other hand, was deemed valid, as it was authorized by a board resolution of Dieselman. The Supreme Court ordered Dieselman to return AF Realty’s partial payment of P300,000.00 but removed the award of damages and attorney’s fees against Cruz, Jr., finding that AF Realty’s vice-president, Zenaida Ranullo, knew of the requirement for written authorization but proceeded with the transaction anyway. Thus, Cruz Jr. should not be held liable for damages because AF Realty was aware of his lack of written authority.
FAQs
| What was the key issue in this case? | The key issue was whether a corporation could be bound by the sale of land by an agent who lacked written authority from the corporation’s board of directors. |
| What does the Corporation Code say about corporate powers? | Section 23 of the Corporation Code states that the corporate powers of all corporations are exercised by the board of directors. |
| What does the Civil Code say about the sale of land through an agent? | Article 1874 of the Civil Code requires that when a sale of a piece of land is through an agent, the agent’s authority must be in writing; otherwise, the sale is void. |
| What does it mean that the contract was void? | A void contract is considered inexistent from the beginning and cannot be ratified. This means the parties cannot enforce its terms, and it has no legal effect. |
| Why was the sale to Midas valid, while the attempted sale to AF Realty was not? | The sale to Midas was valid because it was authorized by a board resolution of Dieselman, while the attempted sale to AF Realty was not authorized in writing by Dieselman’s board. |
| Can an unauthorized sale of land be ratified by the corporation? | No, a sale of land through an agent without written authority is void and cannot be ratified, according to Article 1409 of the Civil Code. |
| What was the result of this case for AF Realty? | The Supreme Court ruled against AF Realty, finding that no valid contract of sale existed. Dieselman was ordered to return the partial payment of P300,000.00 to AF Realty. |
| What is the main takeaway for people entering into real estate contracts with corporations? | The main takeaway is that you must verify that the agent has written authorization from the corporation’s board of directors to sell the property. Perform due diligence. |
In conclusion, the Supreme Court’s decision in AF Realty & Development, Inc. v. Dieselman Freight Services, Co. serves as a clear reminder of the importance of adhering to legal requirements in real estate transactions, especially when dealing with corporations. Ensuring that agents have written authority is crucial for the validity and enforceability of contracts, protecting the rights of all parties involved.
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: AF Realty & Development, Inc. v. Dieselman Freight Services, Co., G.R. No. 111448, January 16, 2002
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