ASG Law

Tag: Implied Ratification

  • Verbal Contracts and Implied Ratification: Upholding Obligations in Broiler Chick Growing Agreements

    In San Miguel Foods, Inc. v. Magtuto, the Supreme Court affirmed that a contract, even if not written, is binding if all essential elements are present and there is evidence of implied ratification. The Court ruled that San Miguel Foods, Inc. (SMFI) was liable to Ernesto Raoul V. Magtuto for failing to deliver the agreed-upon number of broiler chicks, despite the absence of a formal written contract. This decision highlights the importance of honoring agreements based on conduct and mutual understanding, even without a formal document, protecting individuals engaged in business dealings based on trust and performance.

    From Handshake to Harvest: Can Actions Speak Louder Than Contract in Poultry Farming?

    This case revolves around Ernesto Raoul V. Magtuto, a businessman engaged in growing broiler chicks, and San Miguel Foods, Inc. (SMFI), a company involved in poultry breeding and processing. Magtuto claimed that SMFI breached an oral agreement to supply him with 36,000 broiler chicks, leading to financial losses. SMFI countered that Magtuto was merely an “accommodated” grower, not a formal contract grower, and thus not entitled to damages. The central legal question is whether the verbal agreement between Magtuto and SMFI, coupled with their actions, constituted a binding contract, and whether SMFI could be held liable for its breach.

    The facts reveal that Magtuto, after attending a gathering of broiler chick growers, entered into an agreement with James A. Vinoya, SMFI’s veterinarian and production supervisor. Although no written contract was executed, SMFI delivered chicks to Magtuto four times, and Magtuto was paid a grower’s fee for his services. However, on the fifth delivery, SMFI delivered only 32,000 chicks instead of the agreed-upon 36,000. Magtuto’s complaints about this shortage and Vinoya’s subsequent actions led to the termination of their arrangement. As a result, Magtuto filed a complaint for damages against SMFI and Vinoya, alleging breach of contract and seeking compensation for lost income and expenses.

    The Regional Trial Court (RTC) ruled in favor of Magtuto, stating that a contract existed despite the absence of a written agreement. The RTC emphasized that the verbal agreement and the conduct of the parties created mutual obligations. SMFI delivered chicks, Magtuto grew them, and SMFI paid him a grower’s fee. This was not a mere accommodation, but a contract. The Court of Appeals (CA) affirmed the RTC’s decision but modified the damages awarded. SMFI then appealed to the Supreme Court, arguing that there was no binding contract and that Vinoya had no authority to enter into any such agreement on behalf of SMFI.

    The Supreme Court, in its analysis, highlighted the essential elements of a valid contract: consent, object, and cause. According to Article 1318 of the Civil Code:

    Art. 1318. There is no contract unless the following requisites concur:

    (1) Consent of the contracting parties;
    (2) Object certain which is the subject matter of the contract; and
    (3) Cause of the obligation which is established.

    In this case, all three elements were present. Magtuto and Vinoya agreed on the growing of broiler chicks. SMFI would supply the chicks, and Magtuto would grow them. The chicks were the object of the contract, and the grower’s fee was the consideration. The Court emphasized that under Article 1356 of the Civil Code:

    Art. 1356. Contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present, x x x.

    SMFI argued that the agreement was unenforceable because it was not in writing and that Vinoya lacked the authority to bind the corporation. The Supreme Court rejected these arguments, asserting that the contract was impliedly ratified by SMFI’s conduct. The delivery of broiler chicks, feeds, medicines, and materials, and the subsequent harvesting of the grown chickens, demonstrated SMFI’s approval of the agreement. This happened multiple times over nine months. The Court cited Prime White Cement Corp. v. IAC, holding that implied ratification could take various forms, including silence, acquiescence, acts showing approval, or acceptance of benefits.

    Furthermore, Article 1317 of the Civil Code states:

    Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him.

    A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contradicting party.

    The Court noted that Magtuto reasonably believed that Vinoya had the authority to act on behalf of SMFI, given Vinoya’s position and the circumstances of their interactions. Vinoya and Ogilvie, as official representatives of SMFI, attended the gathering of Swift Foods, Inc. broiler chick growers. Vinoya directly dealt with Magtuto as a chick grower, showing him a standard Broiler Chicken Contract Growing Agreement of SMFI. Magtuto also posted a P72,000 cash bond to guarantee his obligations. These factors reinforced Magtuto’s belief that he was dealing with an authorized representative of SMFI.

    Given these findings, the Supreme Court concluded that SMFI could not deny Vinoya’s authority to transact with Magtuto. The numerous documents submitted as evidence, such as delivery receipts, trust receipts, receiving slips, flock records, cash receipts, and liquidation statements, further supported the existence of an agreement. The Court also referenced the observations of the lower courts, which emphasized that SMFI was in estoppel and could not disown its previous declarations to Magtuto’s prejudice. Additionally, the Court records showed that SMFI issued official documents that prove the agreement, these include cash receipts for the day-old chicks; delivery receipts for feeds, medicines, and vaccines; transfer receipts; trust/delivery receipts for the harvested birds; and statements of payment or payment request memorandum after each harvest.

    Having established the existence of a valid contract, the Supreme Court addressed the issue of damages. The Court determined that Magtuto was entitled to actual or compensatory damages due to the shortage of 4,000 broiler chicks. However, the Court clarified that the contract was on a “per grow basis,” akin to a month-to-month lease as described in Article 1687 of the Civil Code:

    Art. 1687. If the period for the lease has not been fixed, it is understood to be from year to year, if the rent agreed upon is annual; from month to month, if it is monthly; from week to week, if the rent is weekly; and from day to day, if the rent is to be paid daily. However, even though a monthly rent is paid, and no period for the lease has been set, the courts may fix a longer term for the lease after the lessee has occupied the premises for over one year. If the rent is weekly, the courts may likewise determine a longer period after the lessee has been in possession for over six months. In case of daily rent, the courts may also fix a longer period after the lessee has stayed in the place for over one month.

    Since there was no clear period of renewal agreed upon, each delivery of chicks constituted a separate contract. Therefore, Magtuto was not entitled to damages for expenses incurred during the 15-day rest period or for lost income in the succeeding month.

    The Court relied on Articles 2199 and 2200 of the Civil Code, which govern actual or compensatory damages. These damages are awarded for pecuniary loss that is duly proven. The appellate court computed the actual or compensatory damages based on the grower’s fee paid by SMFI to Magtuto, resulting in an average income of P345,452.27 per grow. The unrealized income for the 4,000 missing chicks was calculated to be P38,383.58. The Supreme Court agreed with this computation, limiting the damages to the loss directly attributable to the short delivery of chicks. The amount of P38,383.58 was subjected to a legal interest rate of 6% per annum from the date of the decision’s finality until full payment.

    FAQs

    What was the key issue in this case? The key issue was whether a verbal agreement between Magtuto and SMFI for growing broiler chicks, coupled with their actions, constituted a binding contract despite the absence of a written agreement.
    What did the Supreme Court rule? The Supreme Court ruled that the verbal agreement, combined with the parties’ conduct, constituted a binding contract. SMFI was held liable for damages due to the shortage of chicks in one delivery because the contract was impliedly ratified.
    What is implied ratification? Implied ratification occurs when a party, through its actions, conduct, or acceptance of benefits, approves or adopts a contract entered into on its behalf by someone without authority.
    What are the essential elements of a valid contract? The essential elements of a valid contract are: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation which is established.
    What type of damages was Magtuto awarded? Magtuto was awarded actual or compensatory damages, specifically for the loss of income resulting from the shortage of 4,000 broiler chicks in one delivery.
    Why was Magtuto not awarded damages for lost income in the following month? The Court determined that the contract was on a “per grow basis,” meaning each delivery of chicks constituted a separate contract. Therefore, the damages were limited to the specific delivery in which the shortage occurred.
    What is the significance of Article 1356 of the Civil Code in this case? Article 1356 states that contracts are obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present. This supported the Court’s finding that a valid contract existed despite the absence of a written agreement.
    What evidence supported the existence of a contract? Evidence included SMFI’s delivery receipts, trust receipts, receiving slips, flock records, cash receipts, and liquidation statements. Also, Magtuto’s testimony and the testimony of other witnesses were presented.
    What is the relevance of Article 1317 of the Civil Code in this case? Article 1317 states that no one may contract in the name of another without authorization, but a contract can be ratified. SMFI’s actions impliedly ratified the agreement made by Vinoya.

    The Supreme Court’s decision underscores the principle that contracts can be valid and binding even without a written agreement, provided there is clear evidence of consent, object, cause, and implied ratification. This ruling protects parties who rely on verbal agreements and the conduct of others in business dealings. It also reinforces the importance of acting in good faith and honoring commitments made, regardless of whether they are formally documented.

    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: San Miguel Foods, Inc. v. Magtuto, G.R. No. 225007, July 24, 2019

  • Deceptive Advertising in Real Estate: When Misleading Claims Don’t Nullify Contracts

    The Supreme Court ruled that a real estate developer’s misleading advertisements about a condominium’s location do not automatically void a sales contract if the buyer later acknowledges the correct location in the contract and continues with the purchase. This decision underscores that while deceptive practices are condemned, they don’t necessarily invalidate agreements if the buyer’s consent wasn’t solely based on the false information. The ruling emphasizes the importance of clear and convincing evidence to prove that the misrepresentation was the primary reason for entering into the contract. Essentially, the Court balances consumer protection with the sanctity of contracts, requiring buyers to demonstrate that the fraudulent claim was the critical factor in their decision to purchase.

    Location, Location, Misrepresentation: Can a False Ad Void a Condo Contract?

    ECE Realty and Development Inc. faced a lawsuit from Rachel Mandap, who sought to annul her contract to purchase a condominium unit. Mandap claimed that ECE Realty’s advertisements falsely stated the project was in Makati City, when it was actually in Pasay City. Despite this discrepancy, Mandap signed a Contract to Sell that correctly indicated the Pasay City location. The central legal question was whether ECE Realty’s misrepresentation constituted fraud sufficient to nullify the contract, despite Mandap’s subsequent acknowledgement of the correct location.

    The Civil Code defines fraud, specifically in Article 1338, as occurring “when through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to.” Furthermore, Article 1390 states that a contract is voidable if consent is vitiated by mistake, violence, intimidation, undue influence, or fraud. However, for fraud to void a contract, Article 1344 specifies that it must be serious and not employed by both parties.

    Jurisprudence dictates that fraud sufficient to annul a contract must meet two crucial conditions. First, it must be dolo causante, meaning the fraud directly caused the party to consent to the agreement. This deceit must be serious enough to mislead a reasonably prudent person. Second, the fraud must be proven by clear and convincing evidence, a higher standard than a mere preponderance of evidence. These dual requirements ensure that contracts are not lightly set aside based on unsubstantiated claims of deception.

    In this case, the Supreme Court acknowledged that ECE Realty engaged in false representation by advertising the condominium project as being in Makati City when it was actually in Pasay City. The Court condemned this act of misrepresentation and warned against its repetition. However, the Court sided with the Housing and Land Use Regulatory Board (HLURB) and the Office of the President, finding that this misrepresentation did not amount to the dolo causante necessary to annul the Contract to Sell. It must be proven that the fraudulent claim was the principal inducement that led her into buying the unit in the said condominium project.

    The Court emphasized that Mandap proceeded to sign the Contract to Sell despite knowing the condominium’s actual location. This act indicated that the location was not the sole determining factor in her decision to purchase the property. Had the location been a critical issue, she should have immediately objected and refused to sign the contract. Instead, she continued making payments, further weakening her claim of fraud based on location.

    The Court also upheld the validity of the notarized Contract to Sell, which enjoys a presumption of regularity. As such, it is considered conclusive as to the truthfulness of its contents. Respondent’s allegation that she signed the said Contract to Sell with several blank spaces, and which allegedly did not indicate the location of the condominium, was not supported by proof. To overcome this presumption requires clear and convincing evidence, which Mandap failed to provide.

    Moreover, the Court highlighted the principle of implied ratification, detailed in Article 1393 of the Civil Code. This article states that tacit ratification occurs when a person, aware of the reason that makes a contract voidable, takes actions implying an intention to waive their right to challenge it.

    Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right.

    Implied ratification can manifest through silence, acquiescence, acts showing approval, or acceptance of benefits from the contract. By signing the contract and continuing payments after knowing the actual location, Mandap effectively ratified the agreement, precluding her from later claiming fraud based on the initial misrepresentation.

    The Court ultimately reversed the Court of Appeals’ decision, reinstating the HLURB’s order for the parties to resume fulfilling the sales contract. This ruling reinforces the principle that contracts, especially notarized ones, are presumed valid unless compelling evidence proves otherwise. Furthermore, it underscores that a party cannot claim fraud if their actions indicate acceptance of the contract’s terms despite awareness of the alleged misrepresentation.

    FAQs

    What was the key issue in this case? The key issue was whether the real estate developer’s misrepresentation of the condominium’s location in its advertisements constituted fraud that would void the Contract to Sell, even though the correct location was stated in the contract itself.
    What is “dolo causante”? “Dolo causante” refers to the causal fraud that induces a party to enter into a contract. It is a critical element for proving that fraud vitiated consent, making the contract voidable.
    What is the significance of a notarized contract? A notarized contract carries a presumption of regularity and is considered conclusive as to the truthfulness of its contents. Overcoming this presumption requires clear and convincing evidence to the contrary.
    What is implied ratification? Implied ratification occurs when a party, knowing the reason that makes a contract voidable, takes actions that imply an intention to waive their right to challenge it. This can include continuing to perform the contract or accepting benefits from it.
    What evidence is needed to prove fraud in a contract? To prove fraud, there must be clear and convincing evidence demonstrating that the misrepresentation was the primary reason the party entered into the contract. This is a higher standard of proof than a mere preponderance of evidence.
    Why did the Supreme Court rule in favor of ECE Realty? The Supreme Court ruled in favor of ECE Realty because Mandap signed the Contract to Sell knowing the correct location of the condominium and continued making payments. This implied ratification of the contract despite the earlier misrepresentation.
    What is the practical implication of this ruling for consumers? This ruling means consumers must show that the misrepresentation was the essential and moving factor in their decision to buy the unit. It’s not enough that there was a misrepresentation; they must prove it was the main reason they entered the contract.
    Does this ruling mean real estate developers can freely make false claims in advertisements? No, the Court condemned ECE Realty’s misrepresentation and warned against its repetition. This ruling emphasizes the importance of accurate advertising but also upholds the sanctity of contracts when misrepresentations are not the sole reason for entering into them.

    This case clarifies the conditions under which misrepresentation can invalidate a contract, emphasizing the need for clear evidence and demonstrating the importance of parties’ actions after discovering the truth. It serves as a reminder of the need for transparency in advertising and the responsibilities of parties entering into contractual agreements.

    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: ECE Realty and Development Inc. vs. Rachel G. Mandap, G.R. No. 196182, September 1, 2014

  • Implied Ratification: When Unauthorized Contracts Become Binding

    Understanding Implied Ratification: When a Corporation is Bound by Unauthorized Acts

    G.R. No. 121313, April 10, 1997

    Imagine a scenario: a company uses equipment under a lease agreement signed by someone without proper authorization. Can the company later deny the contract’s validity? This case explores the principle of implied ratification, demonstrating that a corporation can be bound by contracts entered into by unauthorized individuals if it knowingly accepts the benefits of the agreement.

    Introduction

    In the Philippines, contracts form the bedrock of business transactions. However, disputes often arise regarding the authority of individuals signing on behalf of corporations. This case, Ravago Equipment Rentals, Inc. vs. Court of Appeals and Alcolex Corporation, delves into the legal concept of implied ratification, a crucial principle in contract law. It illustrates how a corporation’s actions can validate an agreement even if the person who signed it lacked the initial authority. This case provides valuable insights for businesses and individuals entering into contracts with corporations, emphasizing the importance of understanding the implications of their actions.

    The Legal Framework: Agency and Ratification

    The legal principle at play here revolves around agency and ratification. Agency, in legal terms, is a relationship where one person (the agent) acts on behalf of another (the principal). A key aspect of agency is the agent’s authority to bind the principal to contracts. Without proper authorization, an agent’s actions are generally not binding on the principal.

    However, the law provides a remedy: ratification. Ratification occurs when the principal approves or confirms an act performed by an agent who lacked the initial authority. Article 1317 of the Civil Code of the Philippines addresses this directly:

    “ART. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him.

    A contract entered into in the name of another by one who has no authority of legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contradicting party.”

    Ratification can be express, meaning the principal explicitly approves the unauthorized act, or implied, meaning the principal’s actions demonstrate an intent to adopt the agreement. For example, if a company uses goods delivered under an unauthorized contract and pays for them, it might be considered an implied ratification. This principle protects parties who deal in good faith, preventing corporations from disavowing contracts after benefiting from them.

    Consider this hypothetical: A small business owner, Maria, enters into a supply agreement with a representative of a large corporation. The representative, unbeknownst to Maria, lacks the authority to sign such agreements. However, the corporation accepts deliveries under the agreement and makes partial payments. Later, the corporation attempts to void the contract, claiming the representative’s lack of authority. Under the principle of implied ratification, the corporation’s actions of accepting deliveries and making payments could be interpreted as ratifying the unauthorized agreement, making it binding.

    Case Summary: Ravago Equipment Rentals, Inc. vs. Alcolex Corporation

    The case of Ravago Equipment Rentals, Inc. vs. Alcolex Corporation revolves around a lease contract for a Caterpillar diesel generator. Here’s a step-by-step breakdown of the events:

    • Ravago (the lessor) and Alcolex (the lessee) purportedly entered into a lease contract.
    • The contract was signed on behalf of Alcolex by Mr. Edgardo Chua.
    • Ravago claimed Alcolex owed unpaid rentals and overtime charges.
    • Alcolex denied the validity of the contract, arguing that Chua lacked the authority to represent the corporation.
    • Alcolex admitted partial payment but claimed it represented full settlement.

    The trial court initially ruled in favor of Ravago, ordering Alcolex to pay the unpaid rentals, overtime charges, and damages. However, the Court of Appeals reversed this decision, leading Ravago to elevate the case to the Supreme Court.

    The Supreme Court focused on two key issues: whether the Court of Appeals erred in considering issues not raised in the trial court, and whether Ravago sufficiently proved its claim against Alcolex. The Court ultimately affirmed the Court of Appeals’ decision, finding that while the contract was indeed binding due to implied ratification, Ravago failed to adequately prove the overtime charges.

    The Supreme Court emphasized that Alcolex’s statement indicating that the monthly payment covers full operation is an effective denial of liability for any overtime charges. The Court also highlighted the lack of concrete evidence presented by Ravago to substantiate the overtime claims. As the Supreme Court noted, “The record is bereft of any proof whatsoever about the alleged overtime, whether actually incurred their respective duration on specific dates and other relevant data.”

    Regarding the enforceability of the contract, the Supreme Court cited Article 1317 of the Civil Code and stated, “The Court of Appeals correctly held that the contract, assuming that Edgardo Chua had no authority to sign for Alcolex, was impliedly ratified when the generator subject of the contract was used by Alcolex for its operations… the contract is enforceable against respondent Alcolex.”

    Practical Implications and Key Lessons

    This case offers significant practical lessons for businesses. While a corporation can be bound by a contract even if signed by an unauthorized person through implied ratification, proving the specific terms and extent of the obligation remains crucial.

    Key Lessons:

    • Verify Authority: Always verify the authority of individuals signing contracts on behalf of corporations. Request board resolutions or other documentation confirming their power to bind the company.
    • Document Everything: Maintain meticulous records of all transactions, including usage hours, agreed-upon rates, and any deviations from the original contract.
    • Address Discrepancies Promptly: If you receive a demand letter or invoice that you dispute, respond promptly and clearly stating your objections. Silence can be misconstrued as acquiescence.
    • Burden of Proof: Remember that the party making a claim (such as Ravago claiming overtime charges) bears the burden of proving that claim with sufficient evidence.

    Going forward, businesses should implement robust contract review processes to ensure that all agreements are properly authorized and documented. This includes conducting due diligence on the individuals representing counter-parties and maintaining detailed records to support any claims arising from the contract.

    Frequently Asked Questions

    Q: What is implied ratification?

    A: Implied ratification occurs when a principal (like a corporation) takes actions that demonstrate an intent to approve or adopt an unauthorized act performed by someone on their behalf. This can include accepting benefits under the contract or making payments.

    Q: How can a corporation avoid implied ratification?

    A: A corporation can avoid implied ratification by promptly disavowing any unauthorized acts and clearly communicating its objections to the other party. It should also refrain from accepting any benefits under the unauthorized agreement.

    Q: What evidence is needed to prove overtime charges in a lease agreement?

    A: To prove overtime charges, you need detailed records of the equipment’s usage, including dates, times, and the agreed-upon overtime rate. Testimony from individuals who monitored the equipment’s operation is also helpful.

    Q: What happens if a corporation fails to respond to a demand letter?

    A: While failing to respond to a demand letter does not automatically create liability, it can weaken your position in a legal dispute. A prompt response clearly stating your objections is always advisable.

    Q: Is a contract always unenforceable if signed by an unauthorized person?

    A: Not necessarily. The contract is initially unenforceable, but it can become binding if the principal ratifies it, either expressly or impliedly.

    ASG Law specializes in contract law and corporate litigation. Contact us or email hello@asglawpartners.com to schedule a consultation.