Siredy Enterprises, Inc. vs. Court of Appeals

Factual Background

The Court of Appeals found, and the parties did not dispute, that Yanga executed an undated Letter of Authority appointing Hermogenes B. Santos to negotiate and enter contracts to build housing units on subdivision lots in Ysmael Village. The Letter of Authority required that proceeds from such contracts be deposited in Yanga’s name and that payments of obligations be made in connection with the contracts, with the remainder to be paid to Santos. It also authorized Santos to sell lots and to represent Siredy by interceding and making agreements for payments in Siredy’s favor, with actual receipts to be made by the undersigned.

On October 15, 1978, Santos entered into a Deed of Agreement with De Guzman. The Deed expressly stated that Santos was representing Siredy. De Guzman was referred to as the contractor, while Siredy was cited as the principal. The Deed stipulated that the principal had contracts with SSS members and that the project site was Ysmael Village owned and developed by Siredy and Ismael Yanga. It fixed the contract prices for two-bedroom single units and four-bedroom duplex residences, and it projected the contractor would build eighty (80) single and eighteen (18) duplex residences, with a total lump sum of P4,842,000.00. It further provided that the principal would pay permits and papers per government rules, supply needed water and electrical facilities during construction, and that payments would be in accordance with SSS releases. It also stated that if SSS failed to pay the principal, the principal would remain obligated to pay the contractor for accomplishments completed, provided the SSS’s non-payment was not due to defective work of the contractor.

From October 1978 to April 1990, De Guzman constructed twenty-six (26) residential units in Ysmael Village. Thirteen (13) were fully paid, while thirteen (13) remained unpaid. The total contractual price of the unpaid houses was P412,154.93, which Santos verified and confirmed as correct through an accomplishment billing he signed. De Guzman attempted collection but failed, prompting suit.

Trial Court Proceedings

De Guzman instituted an action for specific performance before the Regional Trial Court of Malolos, Bulacan, naming as defendants Siredy Enterprises, Inc., Ismael Yanga, and Hermogenes B. Santos. During trial, Santos disappeared, and his whereabouts remained unknown. In its defense, Siredy presented testimonial evidence asserting that it had no contract with De Guzman and had not authorized Santos to enter into a construction contract for housing units at Ysmael Village.

The trial court sustained Siredy’s position. It invoked the doctrine of privity of contract and reasoned that the Deed of Agreement showed the parties as De Guzman and Santos, as purported authorized representative of Siredy. It held that Siredy and Yanga were not parties or signatories to the Deed and that the Letter of Authority allegedly did not justify liability for the fulfillment of the Deed’s terms. The trial court concluded that Siredy had “absolutely had nothing to do with the fulfillment” of the contract and “much less had they benefited” in any perceptible degree. Relying on Art. 1311 of the Civil Code, it ruled that contracts take effect only between the parties, their assigns, and heirs, and that no exception applied.

Consistently, the trial court ordered Santos to pay De Guzman P412,154.93 as actual damages with legal interest from July 29, 1982 until full payment, plus P25,000.00 as attorneys’ fees, and then dismissed the case as against Siredy Enterprises, Inc. and Dr. Ismael Yanga, Sr.

Court of Appeals Proceedings and Ruling

On appeal, De Guzman obtained a reversal. The Court of Appeals held that Yanga’s Letter of Authority constituted Santos as Siredy’s agent and that his authority included entering into a contract for building housing units in Ysmael Village. Accordingly, the Court of Appeals ruled that Siredy could not deny liability for the Deed of Agreement because the contract was entered into by Siredy’s duly designated agent, Santos, and it was not necessary for Yanga himself to personally sign the contract for Siredy to be bound.

The appellate court thus reversed the trial court and rendered judgment ordering Siredy Enterprises, Inc. to pay De Guzman P412,154.93 as actual damages plus legal interest from the filing of the complaint on July 29, 1982 until full payment, with dismissal of all other claims and counterclaims.

Issues Raised in the Petition

Siredy sought review under Rule 45, presenting three main arguments: first, that the Court of Appeals erred in holding that a valid agency existed despite Siredy’s alleged lack of involvement in construction; second, that the appellate court erred in failing to consider a vital provision in the Deed of Agreement, particularly paragraph 8; and third, that the appellate court failed to consider that De Guzman should not be entitled to his claim because he allegedly violated the contract.

Parties’ Contentions on Agency and Contract Liability

The petition required resolution of two core questions. First, whether Santos was a duly constituted agent of Siredy with authority to enter into construction contracts binding Siredy. Second, assuming Siredy was bound by Santos’s acts, whether Siredy could still avoid liability under the terms of the Deed of Agreement and De Guzman’s asserted alleged violation.

On agency, Siredy challenged the validity of Santos’s authority. It maintained that Siredy’s business did not involve construction and that Santos’s act exceeded any authority granted. It also contended that the Letter of Authority was defective and needed reformation, and it further suggested that the Letter of Authority had been impliedly revoked. It additionally argued that if only lot-selling was contemplated, the construction contracting capacity could not bind Siredy.

On the second issue, Siredy relied on paragraph 8 and argued that De Guzman’s entitlement should fail because of alleged contract violation by De Guzman, and it asserted that the Court of Appeals did not properly address the consequences of that alleged breach.

Legal Basis and Reasoning

The Court framed agency through the principle that one party authorizes another, the agent, to act for and in his behalf in transactions with third persons, and that the authority of the agent derives from powers granted by the principal. It emphasized that if the agent acts within the scope of authority, the agent’s act becomes the principal’s act.

On whether Santos was an agent, the Court reviewed the Letter of Authority. On its face, the instrument empowered Santos to negotiate and enter contracts to build housing units on Siredy’s subdivision lots at Ysmael Village. This written grant directly supported the conclusion that Santos was authorized to negotiate and enter a construction contract of the kind later executed in the Deed of Agreement. The Court rejected Siredy’s effort to defeat liability through self-serving testimony that it sold only empty lots and did not practice constructing houses.

The Court treated Siredy’s documentary evidence as controlling. It relied on Siredy’s Articles of Incorporation, approved by the Securities and Exchange Commission, which authorized Siredy not only to acquire, hold, and improve, subdivide and develop real estate, but also to erect buildings and houses on its lands, and to sell, lease, or otherwise dispose of those properties. Coupled with the Letter of Authority, the Court held that De Guzman had reason to believe Santos had been duly authorized for the purpose stated in the Deed of Agreement.

The Court thus declared that a valid agency was created between Siredy and Santos, and that Santos’s authority included the power to enter into a construction contract to build houses like the one in the Deed of Agreement. It reasoned that the legal fiction of representation converts the principal’s actual absence into juridical presence. Consequently, Siredy was bound by Santos’s contract acts within the scope of authority.

Even assuming arguendo that Santos’s mandate was only to sell subdivision lots, the Court explained that De Guzman was a third person who had no knowledge of the internal limitations between principal and agent. The Court invoked Civil Code Art. 1900, holding that third persons are deemed to have dealt within the scope of the agent’s authority if the act falls within the written terms of the power of attorney, even if the agent exceeded limits according to an understanding between principal and agent. The Court stressed that the scope of the agent’s authority is what appears in the written power of attorney, and third pe