Central Surety v. Hodges
REITERATIONFacts
The Antecedents: C. N. Hodges sold lots to Vicente M. Layson on installment. Layson owed P15,516.00. To secure a bank loan, Layson persuaded Hodges to execute a deed of absolute sale, with the understanding that Layson would provide a surety bond for the balance. Layson executed a promissory note for P15,516.00 plus interest and attorney's fees. Central Surety and Insurance Company (petitioner), through its Iloilo branch manager, Mrs. Rosita Mesa, issued a surety bond on January 23, 1954, to guarantee Layson's obligation. Procedural History: When Layson defaulted, Hodges demanded payment from petitioner, which failed to honor its commitment despite extensions. Hodges filed an action against Layson and petitioner. Petitioner was declared in default but later its answer was admitted after motions. The trial court initially rendered judgment against petitioner for P8,000.00 plus interest and attorney's fees. Hodges appealed the P8,000.00 limitation, and petitioner appealed the liability itself. The Court of Appeals modified the decision, holding petitioner liable for P17,826.08 plus interest and P1,551.60 as attorney's fees. Petitioner appealed to the Supreme Court. The Petition: Petitioner alleged that the surety bond was null and void because Mrs. Mesa's authority to issue such bonds was withdrawn prior to its issuance, that she exceeded her authority without main office approval, and that the action was barred by a three-month limitation clause in the bond. The Supreme Court considered petitioner's alleged errors regarding the agent's authority, implied admission, and the legal effect of the waiver.
Issue(s)
Whether the revocation of the agent's authority without notice to the public or the respondent prejudiced the validity of the surety bond. Whether the three-month period stipulated in the bond for filing claims constitutes a prescriptive period that bars the judicial action. Whether the petitioner's failure to deny the genuineness and due execution of the bond under oath (Rule 8, Section 8) precluded it from proving the agent's lack of authority to bind the company beyond P8,000.00.
Ruling
The Supreme Court modified the decision of the Court of Appeals, limiting petitioner's liability to P8,000.00. The Court affirmed the validity of the surety bond and petitioner's liability, but ruled that the failure to deny the bond under oath was waived by the parties' conduct during trial, allowing petitioner to present evidence on the agent's lack of authority. The three-month limitation clause was interpreted as a condition precedent, not a bar to the action.
Ratio Decidendi
On Issue 1: The Supreme Court held that the surety bond is valid and binding despite the internal revocation of Rosita Mesa's authority. Applying Article 1922 of the Civil Code, the Court noted that Mesa had general powers as a branch manager and that Central Surety failed to publish a notice of revocation in a newspaper of general circulation or directly notify Hodges, a regular client. The opening of a branch office serves as a public grant of power to its manager, and third persons acting in good faith without knowledge of revocation are protected. Furthermore, Central Surety had honored several other bonds issued by Mesa after the alleged revocation, thereby inducing the public to believe she still possessed authority. Consequently, the petitioner is estopped from pleading the absence of authority against Hodges. On Issue 2: The Court ruled that the provision in the bond requiring claims to be filed within three months of expiration is a condition precedent for the presentation of a claim, not a limitation for the filing of a court action. Following the rulings in Pao Chuan Wei v. Nomorosa and Zabaljaurregui v. Luzon Surety Co., the Court explained that if a claim is presented within the three-month period, the obligee maintains the right to file a court action within the standard statutory prescriptive period. In this case, Hodges made repeated demands within the three-month window, and Central Surety even requested and obtained multiple extensions of time beyond that period. Since the claim was timely presented, the subsequent filing of the judicial action on October 24, 1955, was not barred. On Issue 3: The Supreme Court held that while the petitioner failed to deny the genuineness and due execution of the bond under oath as required by Rule 8, Section 8, the respondent (Hodges) waived the benefit of this rule. Citing Yu Chuck v. "Kong Li Po", the Court clarified that when a case is tried in complete disregard of the implied admission rule—such as when the plaintiff fails to object to evidence refuting the agent's authority—the rule is considered waived. During the trial, Hodges did not object to the introduction of evidence showing that Mesa's authority was strictly limited to P8,000.00 without main office approval. Because this evidence was admitted and considered, the Court determined that the petitioner's liability cannot exceed the agent's actual authorized limit of P8,000.00.
Main Doctrine
A principal is estopped from setting up an agent's lack of authority to issue surety bonds after honoring similar unauthorized acts and inducing the public to believe the agent has authority. Failure to deny under oath the genuineness and due execution of a pleaded written instrument constitutes an admission, but this rule may be waived if the parties disregard it and present evidence on the matter without objection.