Title
Hao vs. Galang
Case
G.R. No. 247472
Decision Date
Oct 6, 2021
Hao, acting as SUREMED's agent, signed a pre-incorporation lease. SUREMED ratified it by occupying and paying rent. SC ruled Hao not personally liable; liability shifted to SUREMED.
rental arrears
agent
liability

Case Summary (G.R. No. 247472)

Factual Background

The parties executed a written lease dated February 25, 2011 granting use of Galang’s property for five years beginning April 1, 2011 at monthly rent of P100,000 for the establishment of a diagnostic center. After incorporation in March 2011, Suremed Diagnostic Center Corp. (SUREMED) occupied the leased premises and operated the business. Hao was a stockholder and initially the president of SUREMED; Dr. Ramon Ragos replaced him as president in 2012. SUREMED refused to execute a revised lease replacing Hao as lessee and later incurred arrears, with unpaid rent rising to P540,655.75 by June 2014. Galang sent demand letters to SUREMED and to Hao, and filed an unlawful detainer suit against both Hao and SUREMED on June 13, 2014.

Trial Court Proceedings

The Metropolitan Trial Court held that SUREMED was not a party to the written lease because Hao signed the contract as lessee and there was no proof that he was authorized by the company to bind it. The MTC found Hao liable for rental arrears, awarded attorney’s fees and costs, dismissed the complaint against SUREMED for lack of privity, dismissed Hao’s cross-claim against SUREMED, and dismissed SUREMED’s counterclaim against Galang.

Regional Trial Court Ruling

On appeal, the Regional Trial Court affirmed the MTC. The RTC held that no substitution of lessee occurred and no novation of the lease took place because SUREMED refused to execute a new lease and there was no evidence of a new contract that extinguished Hao’s obligations. The RTC reasoned that a stranger’s accession to an obligation does not automatically extinguish the original debtor’s liability and that Hao remained liable under the contract he executed. The RTC advised that Hao could pursue a separate suit against SUREMED for collection.

Court of Appeals Decision

The Court of Appeals, in a decision dated May 10, 2019, also affirmed the RTC. The CA found no evidence that SUREMED acceded to or ratified a new lease, and therefore no valid substitution of debtor or novation occurred. Consequently, the CA upheld Hao’s personal liability for the unpaid rentals and dismissed his cross-claim as subsisting no longer upon the dismissal of the case against SUREMED.

Issues Presented to the Supreme Court

The principal legal question before the Supreme Court was whether Eliseo N. Hao could be held personally liable for the rental arrears under the written lease that he signed, in light of the subsequent incorporation of SUREMED and its occupation and operation of the leased premises.

Parties’ Contentions

Petitioner Hao contended that a subjective novation or substitution occurred such that his obligations were extinguished and replaced by SUREMED’s obligation; he asserted that SUREMED was the actual lessee and that Galang treated the company as such by delivering demand letters and accepting checks from it. Hao maintained that he acted only as an agent of SUREMED when entering the lease. Respondent Galang maintained that the lease expressly named Hao as lessee, that SUREMED had no legal existence at the time of execution, that SUREMED never consented to be bound by a new contract, and that Hao therefore remained personally liable on the face of the written lease.

Supreme Court’s Analysis

The Court examined the factual circumstances surrounding execution of the lease and the subsequent conduct of the parties. It observed that SUREMED had no juridical existence at the time of the February 25, 2011 lease but was incorporated in March 2011 and thereafter occupied and operated the premises without Galang’s dissent. The Court applied the law on pre-incorporation contracts and agency. It noted that contracts entered by promoters or organizers in the name of a corporation yet to be formed are governed by agency principles and that an agent who acts as such is not personally liable unless he expressly binds himself or exceeds his authority without adequate notice, citing Article 1897. The Court found that Hao’s purpose in executing the lease was to establish the diagnostic center and that Galang was aware that the corporation was in formation and that Hao acted as its representative. The Court further observed that Galang accepted checks from SUREMED and demanded payment from SUREMED, conduct consistent with ratification. The Court concluded that SUREMED ratified the pre-incorporation contract by occupying and operating under it, thereby making the lease binding on the corporation and relieving Hao of personal liability so long as the corporation ratified; the Court invoked the effects of ratification and non-ratification under Article 1898 and Article 1901.

Legal Basis and Reasoning

The Court grounded its decision on established principles that a corporation acquires juridical personality only upon creation in accordance with law, per Articles 44, 45, and 46, and that pre-incorporation contracts entered by promoters are governed by the law of agency and the doctrine of ratification. The Court relied on Article 1897 to hold that an agent acting within the scope of his representation is not personally liable, unless he binds himself or exceeds authority without notice. The Court reasoned that the subsequent occupation and operation of the leased premises by SUREMED, together with Galang’s acceptance of checks and her correspondence directed to SUREMED, manife

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