VICENTE M. COLEONGCO, PLAINTIFF AND APPELLANT, VS. EDUARDO L. CLAPAROLS, DEFENDANT AND APPELLEE.

Appeal by plaintiff Vicente Coleongco from a decision of the Court
of First Instance of Negros Occidental (in its Civil Case No. 4170).
dismissing plaintiff’s action for damages, and ordering him to pay
defendant Eduardo Claparols the amount of P81,387.27 plus legal
interest from the filing of the counterclaim till payment thereof;
P50,000 as moral and compensatory damages suffered by defendant; and
costs.

A writ of preliminary attachment for the sum of P100,000 was
subsequently issued against plaintiff’s properties, in spite of
opposition thereto.

Plaintiff Coleongco, not being in conformity with the judgment,
appealed to this Court directly, the claims involved being in excess of
P200,000.

The antecedent facts, as found by the trial court and shown by the records, are as follows:

Since 1951, defendant-appellee, Eduardo L. Claparols, operated a
factory for the manufacture of nails in Talisay, Occidental Negros,
under the style of “Claparols Steel & Nail Plant”. The raw
material, nail wire, was imported from foreign sources, specially from
Belgium; and Claparols had a regular dollar allocation therefor,
granted by the Import Control Commission and the Central Bank. The
marketing of the nails was handled by the “ABCD Commercial” of Bacolod,
which was owned by a chinaman named Kho To.

Losses compelled Claparols in 1953 to look for someone to finance
his imports of nail wire. At first, Kho To agreed to do the financing,
but on April 25, 1953, the Chinaman introduced his compadre, appellant
Vicente Coleongco, to the appellee, recommending said appellant to be
the financier in the stead of Kho To. Claparols agreed, and on April 25
of that year a contract (Exhibit B) was perfected between them whereby
Coleongeo undertook to finance and put up the funds required for the
importation of the nail wire, which Claparols bound himself to convert
into nails at his plant. It was agreed that Coleongco would have the
exclusive distribution of the product, and the “absolute care in the
marketing of these nails and the promotion of sales all over the
Philippines”, except the Davao Agency; that Coleongco would “share the
control of all the cash” from sales or deposited in banks; that he
would have a representative in the management; that all contracts and
transactions should be jointly approved by both parties; that proper
books would be kept and annual accounts rendered; and that profits and
losses would be shared” on a 50-50 basis”. The contract was renewed
from year to year until 1958, and Coleongco’s share subsequently
increased by 5% of the net profit of the factory (Exhibits D, E, F).

Two days after the execution of the basic agreement, Exhibit “B”, on
April 27, 1953, Claparols executed in favor of Coleongco, at the
latter’s behest, a special power of attorney (Exhibit C) to open and
negotiate letters of credit, to sign contracts, bills of lading,
invoices, and papers covering transactions; to represent appellee and
the nail factory; and to accept payments and cash advances from dealers
and distributors. Thereafter, Coleongco also became the assistant
manager of the factory, and took over its business transactions, while
Claparols devoted most of his time to the nail manufacture processes.

Around mid-November of 1956, appellee Claparols was disagreeably
surprised by service of an alias writ of execution to enforce a
judgment obtained against him by the Philippine National Bank, despite
the fact that on the preceding September he had submitted an
amortization plan to settle the account. Worried and alarmed, Claparols
immediately left for Manila to confer with the bank authorities. Upon
arrival, he learned to his dismay that the execution had been procured
because of derogatory information against appellee that had reached the
bank from his associate, appellant Coleongco. On July 6, 1956, the
latter, without appellee’s knowledge, had written to the bank-

“in connection with the verbal offer — for the
acquisition by me of the whole interest of Mr. Eduardo L. Claparols in
the Claparols Steel & Nail Plant and the Claparols Hollow Blocks
Factory” (Exhibit 36) ;

and later, on October 29, 1956, Coleongco had written agiant the
bank another letter (Exhibit 35), also behind the back of appellee,
wherein Coleongco charged Claparols with taking machines mortgaged to
the bank, and added-

“In my humble personal opinion I presume that Mr. Eduardo L.
Claparols is not serious in meeting his obligations with your bank,
otherwise he had not taken these machines and equipments a sign of bad
faith since the factory is making a satisfactory profit of my
administration.”

Fortunately, Claparols managed to arrange matters with the bank and
to have the execution levy lifted. Incensed at what he regarded as
disloyalty of his attorney-in-fact, he consulted lawyers. The upshot
was that appellee revoked the power of attorney (Exhibit “C”), and
informed Coleongco thereof (Exhibits T, T-1), by registered mail,
demanding a full accounting at the same time. Coleongco, as would be
expected, protested these acts of Claparols, but the latter insisted,
and on the first of January, 1957 wrote a letter to Coleongco
dismissing him as assistant manager of the plant and asked C. Miller
& Company, auditors, to go over the books and records of the
business with a view to adjusting the accounts of the associates. These
last steps were taken in view of the revelation made by his machinery
superintendent, Romulo Agsam, that in the course of the preceding New
Year celebrations Coleongco had drawn Agsam aside and proposed that the
latter should pour acid on the machinery to paralyze the factory. The
examination by the auditors, summarized in Exhibits 80 and 87, found
that Coleongco owed the Claparols Nail Factory the amount of
P87,387.37, as of June 30, 1957.

In the meantime, Claparols had found in the factory files certain
correspondence in February, 1955 between Coleongco and the nail dealer
Kho To whereby the former proposed to Kho that the latter should cut
his monthly advances to Claparols from P2.000 to P1,000 a month,
because –

“I think it is time that we do our plan to take
advantage of the difficulties of Eddie with the banks for our benefit.
If we can squeeze him more, I am sure that we can extend our contract
with him before it ends next year, and perhaps on better terms. If we
play well our cards we might yet own his factory” (Exhibit 32) ;

and conformably to Coleongco’s proposal, Kho To had written to
Claparols that “due to present business conditions” the latter could
only be allowed to draw P1,000 a month beginning April, 1955 (Exhibit
33).

As the parties could not amicably settle their accounts, Coleongco
filed a suit against Claparols charging breach of contract, asking for
accounting, and praying for P528,762.19 as damages, and attorney’s
fees, to which Claparols answered, denying the charge, and counter
claiming for the rescission of the agreement with Coleongco for
P561.387.39 by way of damages. After trial, the court rendered
judgment, as stated at the beginning of this opinion.

In this appeal, it is first contended by the appellant Coleongeo
that the power of attorney (Exhibit “C”) was made to protect his
interest under the financing agreement (Exhibit “B”), and was one
coupled with an interest that the appellee Claparols had no legal power
to revoke. This point can not be sustained. The financing agreement
itself already contained clauses for the protection of appellant’s
interest, and did not call for the execution of any power of attorney
in favor of Coleongco. But granting appellant’s view, it must not be
forgotten that a power of attorney can be made irrevocable by contract
only in the sense that the principal may not recall it at his pleasure;
but coupled with interest or not, the authority certainly can be
revoked for a just cause, such as when the attorney-in- fact betrays
the interest of the principal, as happened in this case. It is not open
to serious doubt that the irrevocability of the power of attorney may
not be used to shield the perpetration of acts in bad faith, breach of
confidence, or betrayal of trust, by the agent, for that would amount
to holding that a power, coupled with an interest authorizes the agent
to commit frauds against the principal.

Our new Civil Code, in Article 1172, expressly provides the contrary
in prescribing that responsibility arising from fraud is demandable in
all obligations, and that any waiver of action for future fraud is void.
It is also on this principle that the Civil Code, in its Article 1800,
declares that the powers of a partner, appointed as manager, in the
articles of copartnership are irrevocable without just or lawful cause;
and an agent with power coupled with an interest can not stand on
better ground than such a partner in so far as irrevocability of the
power is concerned.

That the appellant Coleongco acted in bad faith towards his
principal Claparols is, on the record, unquestionable. His letters to
the Philippine National Bank (Exhibits 35 and 36) attempting to
undermine the credit of the principal and to acquire the factory of the
latter, without the principal’s knowledge; Coleongco’s letter to his
cousin, Kho To (Exhibit 32), instructing the latter to reduce to
one-half the usual monthly advances to Claparols on account of nail
sales in order to squeeze said appellee and compel him to extend the
contract entitling Coleongeo to share in the profits of the nail
factory in better terms, and ultimately “own his factory”, a plan
carried out by Kho’s letter, Exhibit “33”, reducing the advances to
Claparols; Coleongco’s attempt to have Romulo Agsam pour acid on the
machinery; his illegal diversion of the profits of the factory to his
own benefit; and the subreptitious disposition of the Yates band resaw
machine in favor of his cousin’s Hong Shing Lumber Yard, made while
Claparols was in Baguio in July and August of 1956, are plain acts of
deliberate sabotage by the agent that fully justified the revocation of
the power of attorney (Exhibit “C”) by Claparols and his demand for an
accounting from his agent Coleongeo.

Appellant attempts to justify his letters to the Philippine National
Bank (Exhibits 35 and 36), claiming that Claparols’ mal-administration
of the business endangered the security for the advances that he had
made under the financing contract (Exhibit “B”). But if that were the
case, it is to be expected that Coleongeo would have first protested to
Claparols himself, which he never did. Appellant likewise denies the
authorship of the letter to Kho (Exhibit 32) as well as the attempt to
induce Agsam to damage the machinery of the factory. Between the
testimony of Agsam and Claparols and that of Coleongeo, the court befow
chose to believe the former, and we see no reason to alter the lower
court’s conclusion on the value of the evidence before it, considering
that Kho’s letter to Claparols (Exhibit 33) plainly corroborates and
dovetails with the plan outlined in Coleongco’s own letter (Exhibit
32), signed by him, and that the credibility of Coleongeo is affected
adversely by his own admission of his having been previously convicted
of estafa (t.s.n., p. 139, 276), a crime that implies moral turpitude.
Even disregarding Coleongco’s letter to his son-in-law (Exhibit 82)
that so fully reveals Coleongco’s lack of business scruples, the clear
preponderance of evidence is against appellant.

The same remarks apply to the finding of the trial court that it was
appellant Coleongco, and not Claparols, who disposed of the band
resawing equipment, since said machine was received in July, 1956 and
sold in August of that year to the Hong Shing Lumber Co., managed ‘SI
by appellant’s cousin, Vicente Kho. The untruth of Coleongco’s charge
that Claparols, upon his return from Baguio in September, 1956,
admitted having sold the machines behind his associate’s back is
further evidenced by (a) Coleongco’s letter, Exhibit “V”, dated October
29, 1956, inquiring the whereabouts of the resaw equipment from
Claparols (an inquiry incompatible with Claparols previous admission);
(b) by the undenied fact that the appellee was in Baguio and Coleongco
was acting for him during the months of July and August when the
machine was received and sold; and (c) the fact that as between the two
it is Coleongco who had a clear interest in selling the sawing machine
to his cousin Kho To’s lumber yard. If Claparols wished to sell the
machine without Coleongco’s knowledge, he would not have picked the
latter’s cousin for a buyer.

The action of plaintiff-appellant for damages and lost profits due
to the discontinuance of the financing agreement, Exhibit “B”, may not
prosper, because the record shows that the appellant likewise breached
his part of the contract. It will be recalled that under paragraph 2 of
the contract, Exhibit “B”, it was stipulated:

“That the Party of the Second Part (Coleongco) has
agreed to finance and put up all the necessary money which may be
needed to pay for the importation of the raw material needed by such
nail factory and allocated by the ICC from time to time either in cash
or with whatever suitable means which the Party of the Second Fart may
be able to make by suitable arrangements with any well known banking
institution recognized by the Central Bank of the Philippines.”

Instead of putting up all the necessary money needed
to finance the imports of raw material, Coleongco merely advanced 25%
in cash on account of the price and had the balance covered by surety
agreements executed by Claparols and others as solidary (joint and
several) guarantors (see Exhibits G, H, I). The upshot of this
arrangement was that Claparpls was made to shoulder 3/4 of the payment
for the imports, contrary to the financing agreement. Paragraph 11 of
the latter expressly denied Coleongco any power or authority to bind
Claparols without previous consultation and authority. When the
balances for the cost of the importations became due, Coleongco in some
instances, paid it with the dealers’ advances to the nail factory
against future sales without the knowledge of Claparols (Exhibits “K”
to K-11, K-13). Under paragraphs 8 and 11 of the financing agreement,
Coleongco was to give preference to the operating expenses before
sharing profits, so that until the operating costs were provided for,
Coleongco had no right to apply the factory’s income to pay his own
obligations.

Again, the examination of the books by accountant Atienza of C.
Miller and Co., showed that from 1954 onwards Coleongco (who had the
control of the factory’s cash and bank deposits, under paragraph 11 of
Exhibit “B”) never liquidated and paid in full to Claparols his half of
the profits, so that by the end of 1956 there was due to Claparols
P38.068.41 on this account (Exhibit 91). For 1957 to 1958 Claparols
financed the imports of nail wire without the help of appellant, and in
view of the latter’s infringement of his obligations, his acts of
disloyalty previously discussed, and his diversions of factory funds
(he even bought two motor vehicles with them), we find no justification
for his insistence in sharing in the factory’s profit for these years,
nor for the restoration of the revoked power of attorney.

The accountant’s reports and testimony (specially Exhibits 80 and
87) prove that as of June 30, 1957, Coieongco owed to Claparols the sum
of P83,466.34 that after some adjustment was reduced to P81,387.37,
practically accepted even by appellant’s auditor. The alleged
discrepancies 1(, between the general ledger and the result thus
arrived at was satisfactorily explained by accountant Atienza in his Vj
testimony (t.s.n., 1173-1178).

No error was, therefore, committed by the trial court in declaring
the financing contract (Exh. B) properly resolved by Claparols or in
rendering judgment against appellant in favor of appellee for the said
amount of P81,387.37. The basic rule of contracts requires parties to
act loyally toward each other, in the pursuit of the common end, and
appellant clearly violated the rule of good faith prescribed by Art.
1315 of the new Civil Code.

The lower court also allowed Claparols P50,000 for damages,
material, moral and exemplary, caused toy the appellant Coleongeo’s
acts in maliciously undermining appellee’s credit that led the
Philippine National Bank to secure a writ of execution against
Claparols. Undeniably, the attempts of Coleongco to discredit and
“squeeze” Claparols out of his own factory and business could not ibut
cause the latter mental anguish and serious anxiety, as found by the
court below, for which he is entitled to compensation; and the
malevolence that lay behind appellee’s actions justified also the
imposition of exemplary or deterrent damages (Civ. Code, Art, 2232).
While the award could have been made larger without violating the
canons of justice, the discretion in fixing such damages primarily lay
in the trial court, and we feel that the same should be respected.

IN VIEW OF THE FOREGOING, the decision appealed from is affirmed. Costs against appellant Vicente Coleongco.

Bengzon, C. J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes, Dizon, Regala, and Makalintal, JJ., concur.