NIELSON & COMPANY, INC., PLAINTIFF-APPELLANT, VS. LEPANTO CONSOLIDATED MINING COMPANY, DEFENDANT-APPELLEE.

Nielson and Company versus Lepanto Consolidated Mining Company

The Case

This is a motion for reconsideration filed by Lepanto Consolidated Mining Company against Nielson and Company, Incorporated, seeking to overturn the Supreme Court's earlier decision in a suit for damages arising from the unilateral termination of a management and operating contract over a copper mine. The case matters because it draws the dividing line between a contract of agency and a contract of lease of services, and because it holds that a management contract whose principal undertaking is the physical operation and development of a mine is not an agency that the principal may revoke at will.

Procedural History

Nielson sued Lepanto in the trial court for damages. The trial judge ruled for Lepanto, holding that the management agreement was merely suspended and not extended by the war, and that Nielson's action had prescribed. The case went up on appeal, and the Supreme Court, in a decision rendered on December 17, 1966, reversed the trial judge and ruled in favor of Nielson. Lepanto then filed the present motion for reconsideration, raising four principal grounds and five alternative grounds. The Court resolves that motion in the decision now before us.

Facts

Lepanto was incorporated as a result of negotiations with Nielson and Company. Nielson offered to underwrite the entire issue of stock of the new corporation, and proposed that after organization an operating contract be entered into between the two companies, with Nielson supervising the development and mining of the property and the erection of a mill. The formal management contract was entered into on January 30, 1937, for a period of five years, renewable for a like period.

Under the contract, Nielson was to take complete charge, subject at all times to the general control of Lepanto's Board of Directors, of the exploration and development of the mining claims, the hiring of staff and laborers, the prospecting and development of the mine, the erection and operation of the mill, and the beneficiation and marketing of the minerals. Nielson was also to act as purchasing agent of supplies and to make contracts for the sale of minerals, but no purchase could be made and no sale concluded without the prior approval of Lepanto.

Paragraph Eleven of the contract allowed Lepanto to cancel the agreement upon ninety days written notice, but only in the event that Nielson should cease to prosecute the operation and development of the properties in good faith and in accordance with approved mining practice, except for acts of God, strike, and other causes beyond its control. The contract was renewed to last until January 31, 1947. When the mines were liberated from Japanese control in 1945, Lepanto took over exclusive management and refused to let Nielson resume, asserting that it had terminated the contract. Nielson had ceased operating because of the war, a cause beyond its control, and no written notice of termination was ever given.

Issues

• Whether or not Lepanto may, on reconsideration, raise for the first time the new theory that the management contract is one of agency revocable at will.
• Whether or not the management contract is a contract of agency or a contract of lease of services.
• Whether or not Lepanto could unilaterally terminate the management contract at will.
• Whether or not the war merely suspended the performance of the obligations without extending the period of the contract.

Applicable Provisions

Article 1709 of the old Civil Code defines the contract of agency:

By the contract of agency, one person binds himself to render some service or do something for the account or at the request of another.

This definition supplies the element of representation that Lepanto invokes to characterize the contract as an agency.

Article 1544 of the old Civil Code defines the contract of lease of services:

In a lease of work or services, one of the parties binds himself to make or construct something or to render a service to the other for a price certain.

This is the characterization the Court adopts, because the basis of the relation is employment rather than representation.

Article 1868 of the new Civil Code restates the definition of agency in more explicit terms:

By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter.

The Court uses this to stress that representation is the distinguishing mark of agency.

Paragraph Eleven of the management contract provides:

Both parties to this agreement fully recognize that the terms of this Agreement are made possible only because of the faith or confidence that the Officials of each company have in the other; therefore, in order to assure that such confidence and faith shall abide and continue, NIELSON agrees that LEPANTO may cancel this Agreement at any time upon ninety (90) days written notice, in the event that NIELSON for any reason whatsoever, except acts of God, strike and other causes beyond its control, shall cease to prosecute the operation and development of the properties herein described, in good faith and In accordance with approved mining practice.

This clause shows that the parties expressly limited the ground for cancellation, which is incompatible with an agency revocable at will.

Paragraph Two of the management contract provides:

In the event of inundation, flooding of the mine, typhoon, earthquake or any other force majeure, war, insurrection, civil commotion, organized strike, riot, fire, injury to the machinery or other event or cause reasonably beyond the control of NIELSON and which adversely affects the work of mining and milling; NIELSON shall report such fact to LEPANTO and without liability or breach of the terms of this Agreement, the same shall remain in suspense, wholly or partially during the terms of such inability.

This clause is the basis for holding that the war suspended the contract and extended its period for the time Nielson was unable to perform.

Ruling

On the first issue, the Court refuses to entertain Lepanto's new theory of agency. A party cannot change his theory on appeal, and Lepanto never asserted in the lower court or in its brief that the contract was an agency terminable at will. Even so, the Court addresses the theory and rejects it.

On the second issue, the Court holds that the contract is one of lease of services, not agency. Agency is distinguished from lease of services in that the basis of agency is representation, while the basis of lease of services is employment. The agent is destined to execute juridical acts creating, modifying, or extinguishing relations with third parties, while lease of services contemplates only material, non-juridical acts. Nielson's principal and paramount undertaking was the operation and development of the mine and the operation of the mill, which are material acts. Even where Nielson acted as purchasing agent or contracted for the sale of minerals, it could not bind Lepanto without prior approval, so it acted only as an intermediary, not as an agent.

On the third issue, the Court holds that Lepanto could not terminate the contract at will. Paragraph Eleven allowed cancellation only upon ninety days notice and only if Nielson ceased to prosecute the work in bad faith and not in accordance with approved mining practice, and not where the cessation was due to causes beyond its control. The reference to faith and confidence merely recites the circumstance that brought about the contract, not a principal-agent relation. The Court notes that if the contract were intended to create an agency, Paragraph Eleven would not have been inserted at all, because agency is essentially revocable at the will of the principal. By asserting termination in 1945, Lepanto violated the express terms of the contract.

On the fourth issue, the Court declines to reconsider its ruling that the war suspended the contract and extended its period. Paragraph Two expressly provides that upon the happening of the enumerated events the agreement shall remain in suspense during the term of the inability, and during that period neither party is liable for non-compliance.

Doctrine

A contract of agency is one where a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. The distinguishing element of agency is representation, while the basis of a lease of services is employment. The agent executes juridical acts that create, modify, or extinguish relations with third parties, while a lessor of services performs only material acts. Where the principal undertaking of a manager is the physical operation and development of a mine and the operation of a mill, the contract is a lease of services and cannot be unilaterally revoked by the employer. A party may not change his theory on appeal, and a stipulation expressly limiting the ground for cancellation must be given effect, for a construction that gives effect to all provisions is preferred.

Disposition

The motion for reconsideration is denied, and the Court upholds its earlier decision in favor of Nielson and Company.

Remember This

Memorize the line that representation is the test: an agent executes juridical acts for the principal, while a lessor of services performs only material acts. Examiners use this case to test the agency-versus-lease-of-services distinction and the rule against changing one's theory on appeal.