ZENAIDA G. MENDOZA, PETITIONER, VS. ENGR. EDUARDO PAULE, ENGR. ALEXANDER COLOMA AND NATIONAL IRRIGATION ADMINISTRATION (NIA MUÑOZ, NUEVA ECIJA), RESPONDENTS.

Mendoza versus Paule

The Case

This is the story of a partnership that wore the mask of an agency. Zenaida Mendoza and Engineer Eduardo Paule joined forces to win and carry out a National Irrigation Administration project, with Paule contributing his contractor's license and expertise and Mendoza providing the funds, labor, materials and equipment. When a supplier of hauling services sued for unpaid rentals, Paule disowned Mendoza's acts and revoked her special powers of attorney. The Supreme Court had to decide whether Mendoza acted within her authority, whether Paule could revoke that authority in the middle of the venture, and whether Mendoza's own claim against Paule could simply be left unresolved by the trial court. The case matters because it teaches the bar candidate how agency, partnership, and the rules on counterclaims intersect, and how bad faith in revoking an agency can generate liability for damages.

Procedural History

Manuel de la Cruz filed a complaint for collection of a sum of money with damages and a prayer for injunctive relief before Branch 37 of the Regional Trial Court of Nueva Ecija. Paule filed a third-party complaint against Mendoza, who in turn filed an answer with a cross-claim against Paule. At pre-trial, the other parties were declared in default and de la Cruz was allowed to present evidence ex parte. Mendoza moved to have Paule declared non-suited and to be allowed to present her own evidence ex parte, but the trial court rendered judgment without resolving her motion and without giving her that opportunity. The trial court held Paule liable as principal, finding that he had clothed Mendoza with apparent authority and that he knew of and did not object to her transactions. Both Paule and Mendoza appealed to the Court of Appeals. The appellate court dismissed de la Cruz's complaint and Mendoza's appeal, holding that the special powers of attorney did not authorize Mendoza to contract for hauling services, that de la Cruz knew the limits of her authority, and that the revocation of the agency was a lawful prerogative under Article 1920 of the Civil Code. After their motions for reconsideration were denied, Mendoza and de la Cruz filed consolidated petitions for review before the Supreme Court.

Facts

Paule was the proprietor of E.M. Paule Construction and Trading. In May 1999 he executed a special power of attorney authorizing Mendoza to represent the firm in its transactions with the National Irrigation Administration in Muñoz, Nueva Ecija, to participate in the bidding for the irrigation and power project, to secure bid bonds and related documents, to receive and collect payment in check on his behalf, and to do such acts as might be necessary to make that authority effective. In September 1999 the firm, through Mendoza, joined the bidding and was awarded Packages A-10 and B-11, involving a road system, canal structures and drainage box culverts with a project cost of more than five million six hundred thousand pesos. In November 1999 Mendoza received the Notice of Award signed by Engineer Alexander Coloma, then Acting Project Manager.

Manuel de la Cruz learned that Mendoza needed heavy equipment. He met her at the firm's office in Bayuga, Muñoz, Nueva Ecija, where a signboard bore the firm's name, and a series of meetings followed among de la Cruz, Mendoza and Paule. In December 1999 Mendoza and de la Cruz signed two job orders for the lease of the latter's dump trucks for hauling purposes. In April 2000 Paule revoked the special power of attorney, and the irrigation administration refused to pay Mendoza on her billings. De la Cruz could not be paid, and his demand for rentals amounting to seven hundred twenty-six thousand pesos as of the end of March 2000 went unsatisfied.

In June 2000 de la Cruz sued Paule, Coloma and the irrigation administration. Paule filed a third-party complaint against Mendoza, who cross-claimed against him, alleging that the whimsical revocation of the special power of attorney barred her from collecting payments, that she could not fund the checks she had issued to suppliers, and that she suffered actual and moral damages. In August 2000, even after the complaint had been filed, Paule executed another special power of attorney in Mendoza's favor, this time with broader powers to implement, administer and supervise the project, to collect checks and payments, and to act as Project Manager. The trial court rendered judgment against Paule without resolving Mendoza's cross-claim. On appeal, the Court of Appeals dismissed the complaint and Mendoza's appeal. The Supreme Court noted that a related case involving the same special powers of attorney had already become final, with Paule held liable as Mendoza's principal.

Issues

• Whether or not Mendoza acted within the scope of her authority when she contracted with de la Cruz for hauling services, such that Paule as principal is bound by that contract.
• Whether or not Paule could validly revoke the special powers of attorney under Article 1920 of the Civil Code.
• Whether or not the trial court erred in failing to resolve Mendoza's cross-claim against Paule, and whether she is entitled to damages.

Applicable Provisions

Article 1920 of the Civil Code, which the Court of Appeals relied upon and the Supreme Court construed, provides:

The principal may revoke the agency at will, and compel the agent to return the document evidencing the agency. Such revocation may be express or implied.

This is the provision invoked to justify Paule's revocation, and the Court had to determine whether that general power yields to the exceptions the law itself recognizes.

The Court also applied the partnership rule on mutual agency, Article 1818 of the Civil Code, which provides:

Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority.

This provision supplies the basis for holding Paule bound by Mendoza's acts, because as a partner she was an agent of the partnership for its business.

Finally, the Court cited the rule on counterclaims under the Rules of Court, which provides:

If the plaintiff files a notice of dismissal before the service on the defendant of the plaintiff's answer or of a motion for summary judgment, whichever first occurs, or files a notice of dismissal at any time before the service of the plaintiff's answer, the dismissal is without prejudice, except that a notice operates as an adjudication upon the merits when filed by a plaintiff who has once dismissed in a competent court an action or claim based on or including the same claim.

This rule protects a defendant's counterclaim from being extinguished by the dismissal of the main complaint, which is why Mendoza's claim had to be resolved on its own merits.

Ruling

On the first issue, the Court held that Mendoza acted within her authority. The records showed that Paule and Mendoza had entered into a partnership for the irrigation project, with Paule contributing his contractor's license and expertise in exchange for three percent of the project cost and Mendoza providing the funds and dealing with suppliers and subcontractors. When Mendoza and de la Cruz discussed the lease of heavy equipment at the firm's office, Paule was present and interposed no objection, and his pleadings did not deny this. Under Article 1818 of the Civil Code, every partner is an agent of the partnership for the purpose of its business. The Court also found it telling that Paule reinstated Mendoza with broader powers even after de la Cruz had sued, which betrayed any claim that she had exceeded her authority. The Court further held that the final judgment in the earlier case involving the same special powers of attorney bound the parties on the effect of those instruments, since identity of issues, not identity of cause of action, is what matters.

On the second issue, the Court held that there was no valid reason to revoke the special powers of attorney. Since Mendoza controlled the funding and sourcing of labor, materials and equipment, the authority was necessary for the proper performance of her role and for discharging obligations already contracted. The Court recognized that an agency cannot be revoked if a bilateral contract depends upon it, if it is the means of fulfilling an obligation already contracted, or if a partner is appointed manager of a partnership and his removal is unjustifiable. Paule's revocation was done in evident bad faith, since he knew that the amounts collected from the irrigation administration were owing to Mendoza and the suppliers and laborers, yet he deliberately cut off her means of collection. The Court defined bad faith as a dishonest purpose or moral obliquity, a conscious doing of a wrong, partaking of the nature of fraud.

On the third issue, the Court held that the trial court erred in disregarding Mendoza's cross-claim, which was properly a counterclaim since it was a claim made by her as defendant in a third-party complaint. Where a defendant has interposed a counterclaim or seeks affirmative relief, the plaintiff cannot dismiss the action so as to affect that right, and the judgment on the counterclaim must rest on its own merits. The Court therefore ordered the trial court to receive evidence on Mendoza's counterclaim, since the exact amount of Paule's liability remained to be determined.

Doctrine

First, every partner is an agent of the partnership for the purpose of its business under Article 1818 of the Civil Code, so a partner who contracts for labor, materials and equipment in carrying out partnership business binds the partnership and the other partners who knew of and did not object to the transaction.

Second, although Article 1920 of the Civil Code allows the principal to revoke an agency at will, that power is subject to exceptions: an agency cannot be revoked if a bilateral contract depends upon it, if it is the means of fulfilling an obligation already contracted, or if a partner is appointed manager of a partnership and his removal is unjustifiable. A revocation made in evident bad faith, to defeat obligations already owing to laborers and suppliers, renders the principal liable for moral damages.

Third, where a defendant has interposed a counterclaim or cross-claim seeking affirmative relief, the dismissal of the main complaint does not extinguish that claim; the court must resolve it on its own merits after receiving evidence.

Fourth, a final judgment on a particular point or question is conclusive in a later action between the same parties or their privies where the same point was in issue and adjudicated, and identity of issues, not identity of cause of action, is what is required.

Disposition

The Supreme Court granted the consolidated petitions, reversed and set aside the Court of Appeals decision, reinstated the trial court's judgment finding Paule liable, and ordered the trial court to receive evidence on Mendoza's counterclaim.

Remember This

The single line worth memorizing is that a partner is an agent of the partnership, and an agency that is the means of fulfilling an obligation already contracted cannot be revoked at will. Examiners like to use this case to test the exceptions to the principal's power of revocation under Article 1920 and the rule that a counterclaim survives the dismissal of the main complaint.