G.R. No. L-22450 - Yu Chuck vs. Kong Li Po

Case Summary (G.R. No. L-22450)

Procedural Posture

Plaintiffs sued for breach of an alleged three‑year employment contract and sought damages for premature dismissal. The trial court found the contract authentic, found implied ratification by the corporation, and entered judgment for plaintiffs in the amount of P13,340 (with interest and costs). The defendant appealed, presenting eighteen assignments of error, principally contesting Chen’s authority to bind the corporation and the existence of ratification. The appellate court reversed the judgment and absolved the corporation.

Material Facts

Sometime in 1919 C. C. (T. C.) Chen was acting as general business manager of Kong Li Po. In December 1919 Chen purportedly entered into a written agreement with the plaintiffs under which they were to do the necessary printing for the paper for a monthly sum (the complaint alleges P580 per month) beginning January 1, 1920. Plaintiffs worked from January 1, 1920 until they were dismissed January 31, 1921 by the new manager, Tan Tian Hong. The dismissal letter gave no special reasons. Plaintiffs alleged the employment term was three years and, upon discharge without just cause, claimed full pay for the unexpired term and damages amounting to P20,880. Plaintiffs introduced Exhibit A, the written contract, bearing the plaintiffs’ signatures and the signature “C. C. Chen, manager of Kong Li Po”; the defendant questioned the authenticity of Chen’s signature.

Exhibit, Signature, and Trial Court Findings

The trial court found the evidence preponderated in favor of plaintiffs on authenticity of the signature and on the existence of the contract. The trial court also found an implied ratification by the corporation and awarded judgment to plaintiffs. The appellate record shows that the complaint included (in translation) a copy of the contract and that the defendant did not, under oath in its answer, deny the genuineness and execution of that instrument as contemplated by section 103 of the Code of Civil Procedure; nevertheless, both parties tried the factual question of authority and authenticity.

Pleadings Rule and Waiver of Objection

The court discussed section 103 of the Code of Civil Procedure: where a complaint attaches a copy of an instrument purporting to be signed by an agent of a defendant corporation, the defendant, if it intends to deny genuineness or execution, should do so under oath in the answer. Failure to do so generally admits genuineness and execution (and the agent’s authority). Here, however, plaintiffs nonetheless introduced proof of execution and of the agent’s authority, and the defendant produced evidence to refute those points; neither party objected to that course at trial. The appellate court treated the matter as one tried on the merits and declined to allow the procedural omission to be decisive, reasoning that both parties proceeded on the assumed issue and that the objection was not raised below or briefed on appeal.

Issues Presented

The principal legal issues were:

Whether Chen (the general business manager) had authority—express or implied—to bind the corporation by the three‑year employment contract.
Whether the corporation impliedly ratified the contract.
Whether the defendant’s special defenses and counterclaims were established.

Applicable Legal Principles

The court articulated settled corporate agency principles found in the record and in authority quoted therein:

The power to bind a corporation typically resides with the board of directors but may be delegated expressly or impliedly to officers or agents.
An officer with general control and management of the corporation’s business may, by implied authority, employ such agents or employees as are usual and necessary in the conduct of that business, provided the contracts are reasonable in scope and duration.
A manager ordinarily lacks authority to enter into long or extraordinary employment contracts (e.g., multi‑year contracts) unless expressly authorized or held out by the corporation as having such authority.
Ratification requires knowledge of the contract by those having power to ratify (i.e., the board of directors where corporate powers are vested).

Court’s Analysis on Managerial Authority

Applying those principles, the court accepted that Chen, as general business manager, had implied authority to enter into employment contracts that were reasonable and customary for managing the printing business. However, the written contract in question stipulated a three‑year term and included language contemplating the possibility of bankruptcy—conditions the court characterized as unusually long and onerous. Because the contract could potentially expose the corporation to ruin, the court held that plaintiffs should have been put on inquiry as to the extent of Chen’s authority; they could not reasonably presume that a single manager had implied authority to bind the corporation to an employment contract of such extraordinary character. Consequently, Chen lacked implied authority to bind Kong Li Po to this particular three‑year contract.

Court’s Analysis on Ratification and Estoppel

The court rejected plaintiffs’ ratification theory. Ratification requires that those authorized to ratify (the board of directors) have knowledge of the contract. The evidence showed only that the corporation’s president saw the plaintiffs working; he denied knowledge of the contract and stated it was never presented to him or to the board. The court held that the president’s mere observation of plaintiffs working did not supply the required knowledge or amount to board ratification. A later notice published by Chen stating that contracts were to be valid only if signed by him was issued after the contract date and did not constitute evidence that the corporation had held him out as having authority at the time the contract was made; nor was there proof the notice was brought to the attention of corporate officers. Thus ratification and estoppel were not established.

Counterclaims and Defendant’s Special Defenses

The defendant had pleaded five special defenses and counterclaims: (1) Chen lacked authority to sign the contract; (2) plaintiffs delayed issuance of the paper on three occasions causing P300 damage; (3) plaintiffs failed to prepare extra pages, costing P110; (4) plaintiffs failed to correct advertisement errors, resulting in advertiser losses of P160.50; and (5) plaintiffs refused certain job printing causing P150 damage. The appellate court found those counterclaims not sufficiently proven.

Holding and Disposition

The appellate court reversed the trial court’s judgment for the plaintiffs, absolved the defendant corporation from the complaint, and denied costs. The court concluded Chen lacked authority to bind the corporation to the three‑year contract and that the corporation had not ratified the contract; the defendant’s counterclaims were not sustained.

Concurring Opinion

Judge Street concurred, emphasizing proper pleading practice (the necessity to raise lack of authority by way of special defense under oath under the

Case Syllabus (G.R. No. L-22450)

Case Citation and Date

46 Phil. 608; G.R. No. 22450; Decision rendered December 3, 1924.
Opinion of the Court by Justice Ostrand; concurrence by Justice Street; dissent by Justice Malcolm, with Justice Villamor concurring in the dissent.

Parties and Character of Case

Plaintiffs and appellees: Yu Chuck, Mack Yueng, and Ding Moon — printers who worked for the Chinese newspaper Kong Li Po.
Defendant and appellant: "Kong Li Po," a domestic corporation organized under the laws of the Philippine Islands engaged in publishing the Chinese newspaper Kong Li Po.
Nature of action: Suit by the plaintiffs for enforcement of a written employment contract and for damages for alleged wrongful discharge before expiration of a fixed term.

Principal Facts

The defendant corporation's articles of incorporation and by-laws establish a board of directors and officers, including a president whose duty is to "sign all contracts and other instruments of writing"; the by-laws do not provide specifically for a business or general manager.
Around 1919 a person referred to as C. C. Chen (also referenced in the record as T. C. Chen and Chen Yu Man/T. G. Chen) was appointed general business manager of the newspaper.
In December 1919 this manager (named in the contract as "C. C. Chen, manager of Kong Li Po") purportedly entered into a written contract (Exhibit A) with the plaintiffs by which the plaintiffs agreed to do the necessary printing for the newspaper for the sum of P580 per month, as alleged in the complaint.
Under the agreement the plaintiffs worked for the defendant from January 1, 1920, until January 31, 1921.
The plaintiffs were discharged on January 31, 1921, by a subsequently appointed manager, Tan Tian Hong. The dismissal letter stated no special reasons.
Plaintiffs alleged their contract was for a three-year term beginning January 1, 1920, and that if discharged without just cause before expiration they were entitled to full pay for the remaining term; they claimed wrongful discharge and sought damages totaling P20,880 as alleged in the complaint.
Exhibit A bears the signature "C. C. Chen, manager of Kong Li Po"; the defendant questioned the authenticity of this signature at trial.

Pleadings and Special Defenses (as alleged by defendant)

The defendant's amended answer denied the complaint generally and specifically and asserted five special defenses and counterclaims:
- First special defense: the person whose name appears on the contract (C. C. Chen) was not authorized by the defendant to execute such contract on its behalf.
- Second special defense/counterclaim: plaintiffs purposely delayed issuance of the newspaper on three occasions in January 1921, causing damage and injury of P300.
- Third special defense/counterclaim: plaintiffs failed to prepare extra pages for the January 1, 1921 issue, forcing the defendant to secure preparation by others at a cost of P110.
- Fourth special defense/counterclaim: plaintiffs neglected to correct advertisement errors, leading advertisers to withdraw patronage and refuse payment, causing loss of P160.50.
- Fifth special defense/counterclaim: plaintiffs neglected and refused certain job printing, causing damage of P150.

Evidence at Trial — Exhibit A and Signature Authenticity

Plaintiffs introduced Exhibit A into evidence; it purports to be a written contract between Chen and the plaintiffs providing for a three-year term from January 1, 1920, and containing a clause that if plaintiffs were discharged without cause they would receive full pay for the unexpired portion "even if the said paper has to fall into bankruptcy."
Exhibit A is signed by the plaintiffs and bears the signature "C. C. Chen, manager of Kong Li Po."
The defendant questioned the authenticity of Chen's signature; the trial court found the evidence preponderated in favor of the plaintiffs regarding authenticity, and the appellate court found no sufficient reason to disturb that finding.

Procedural History and Trial Court Disposition

At the trial level (Court of First Instance), the court found (1) that the contract had been impliedly ratified by the defendant corporation and (2) that plaintiffs were entitled to judgment.
The trial court rendered judgment in favor of the plaintiffs for P13,340, with interest from the date of filing the complaint, and awarded costs.
The defendant appealed to the Supreme Court, making eighteen assignments of error. The fourth and seventeenth assignments related to the defendant's special defenses and counterclaims; the other assignments largely challenged the contract's execution, Chen's authority to bind the corporation, and the alleged ratification.

Central Legal Issues Presented

Whether Chen (referred to as C. C. Chen, T. C. Chen, or Chen Yu Man) had the power to bind the defendant corporation by the employment contract in Exhibit A.
Whether the contract was valid and enforceable against the corporation either by Chen's actual or apparent authority or by ratification.
Whether the rule in section 103 of the Code of Civil Procedure (requiring a sworn denial of genuineness/due execution of an instrument attached to a complaint) applied and if it was waived or otherwise inapplicable.
Whether the defendant's special defenses and counterclaims were supported by sufficient evidence.
Whether the trial court erred in finding implied ratification by the corporation.

Governing Legal Principles and Authorities Cited by Court

Corporate power to bind the corporation is generally vested in the board of directors or trustees; such power may, however, be expressly or impliedly delegated to other officers or agents.
An officer or agent who has general control and management of the corporation's business or a specific part thereof may bind the corporation by employing agents and employees usual and necessary in conduct of that business unless the authority to employ is expressly vested in the board.
Contracts of employment made by such a manager must be reasonable and customary; a manager cannot, in the absence of express authorization or being held out as having such authority, bind the corporation by making a long-term or unusually onerous employment contract (Corpus Juris, 14a C. J., 431, quoted).
Section 103, Code of Civil Procedure: omission to deny genuineness/due execution of an instrument attached to a complaint under oath may operate as an admission (Merchant v. International Banking Corporation, 6 Phil. 314, and other authorities).
Case law and authorities cited in various opinions: Ramirez v. Orientalist Co. and Fernandez (38 Phil. 634), Laird v. Michigan Lubricator Co., Caldwell v. Mutual Reserve Fund Life Association, Carney v. New York Life Ins. Co., Vogel v. St. Louis Museum, Manross v. Uncle Sam Oil Co., Gamacho v. Hamilton Bank-Note & Engraving Co., Macke v. Camps, McGuire v. Old Sweet Springs Co., Thomson on Corporations, and citations to Corpus Juris.

Court's Analysis — Evidence Rule (Section 103) and Waiver

The complaint averred that a copy of the contract (Exhibit A) accompanied the complaint and was made part thereof; the copy is