**Facts:**
1. **Background:** The Pacific Export Lumber Company, based in Portland, shipped 581 cedar piles to Henry W. Peabody & Company, the defendants’ agents in Manila.
2. **Consignment Agreement:** The piles were shipped aboard the steamer Quito in May 1902. A commission arrangement was established: one-half of any sum over $15 per pile before storage, and 5% of the sale price after storage was allocated as commission to Peabody & Company.
3. **Communication and Instructions:** After the steamer arrived on August 2, Peabody & Company notified the Pacific Company’s agent in Shanghai that the piles might need to be sold for less than $15 due to lack of demand.
4. **Sales Offer and Acceptance:** On August 5, Peabody & Company telegraphed an offer of $12 per pile. The agent accepted the offer on August 6, leading Peabody & Company to remit $6,972 to the Pacific Company.
5. **Subsequent Sales:** It later emerged that negotiations had been conducted as of July 9 with the Insular Purchasing Agent, resulting in the sale of 213 piles on August 4 at $19 each, with additional sales at similar prices. Total revenue from these sales amounted to $10,417.66.
6. **Breach of Duty Identified:** The court found that, at the time of the agent’s purchase at $12 per pile, they had concealed ongoing negotiations for a higher price sale to the government, thus misrepresenting the market condition.
7. **Procedural Posture:** The trial court allowed a counterclaim of $6,993.80 to the defendants, with $2,063.16 retained for the plaintiff. The remaining $4,930.64 in favor of the defendants was contested by the plaintiff, leading to an appeal.
**Issues:**
1. **Can the defendants retain the commission earned on the sales derived from a fraudulent contract induced by their misrepresentation?**
2. **Should the original contract be annulled due to the defendants’ breach of duty?**
3. **Is mutual restitution applicable in this case, resulting in the return to the original positions of the parties?**
**Court’s Decision:**
1. **Misrepresentation and Breach of Duty:** The Supreme Court found the defendants liable for misrepresenting the market condition, as they concealed the higher price obtained in sales to the government. This breach of duty invalidated the inflated price contract.
2. **Annulment of Contract:** As the sale was founded on misrepresentation, it warranted annulment. Under Articles 1265, 1269, 1303, and 1306 of the Civil Code, contracts entered through fraud are subject to annulment, with parties restored to their pre-contractual state.
3. **Remedies and Restitution:** The defendants were not entitled to commission for sales under the annulled contract. However, they should receive a commission for the 213 piles sold under the original agency, not influenced by the fraudulent contract.
4. **Revised Judgment:** The net amount due, after integrating the unjust commissions of $331.17, adjusted to $2,092.05. With accrued interest, the plaintiff’s amended claim was $2,451.82. Deducted from the defendants’ counterclaim, the court ruled a balance of $4,541.98 in favor of defendants.
**Doctrine:**
– **Fraud Nullifies Contracts:** Contracts derived from fraudulent activities by an agent against a principal’s interest are voidable.
– **Mutual Restitution:** When annulling a contract, parties must be restored to their original positions, repealing unjust enrichment.
**Class Notes:**
– **Important Civil Code Articles Involved:** Articles 1265, 1269 (regarding fraud and annulment), and Articles 1303, 1306 (pertaining to restitution).
– **Key Concept of Agency Law:** Agents are duty-bound to avoid conflicts of interest and should not profit from deceitful conduct regarding the principal’s asset transactions.
**Historical Background:**
At the time, the Philippines was transitioning from Spanish to American colonial administration, impacting international trade and legal matters significantly. This case reflects the legal complexities involved in enforcing contractual obligations in the burgeoning commercial landscape dealing with American entities and local jurisdictions.
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