Apparent Authority in Corporate Contracts: When a President's Actions Bind a Philippine Company

The general rule in Philippine corporate law is clear: only the board of directors can bind a corporation. But what happens when a company president signs a contract without prior board approval? In People's Aircargo and Warehousing Co., Inc. v. Court of Appeals (G.R. No. 117847, October 7, 1998), the Supreme Court clarified that a corporation may still be bound when its president acts with apparent authority — especially when the company ratifies the contract by accepting its benefits.

The Case: A Consultant's Unpaid Services

Stefani Saño, an industrial engineering consultant, was hired by People's Aircargo and Warehousing Co., Inc. to prepare a feasibility study for its application to operate a customs bonded warehouse. The company's president, Antonio Punsalan Jr., signed two contracts with Saño: the first for ₱350,000 for the feasibility study, and the second for ₱400,000 for an operations manual and employee seminar.

The company paid the first contract in full. However, when Saño demanded payment for the second contract, the company refused, claiming Punsalan had no board authority to sign it. Saño sued for collection. The trial court awarded only ₱60,000 based on unjust enrichment, but the Court of Appeals ruled the second contract valid and ordered the company to pay the full ₱400,000.

The Issue: Did the President Have Authority to Bind the Corporation?

The Supreme Court addressed two questions: (1) whether Punsalan had apparent authority to bind the corporation to the second contract, and (2) whether that contract was simulated or fictitious.

The Doctrine of Apparent Authority

Under Section 23 of the Corporation Code, all corporate powers are exercised by the board of directors. However, the Court recognized that the board may delegate authority to officers — either expressly or impliedly through habit, custom, or acquiescence.

The Court emphasized that apparent authority arises when a corporation "clothes" an officer with the power to act, or when it acquiesces in similar acts with knowledge of them. Importantly, the Court ruled that the number of prior similar acts is not what matters. What matters is whether the corporation held out the officer as having authority.

In this case, the company had previously allowed Punsalan to enter into the first contract without board approval, and it paid that contract without objection. This "clothed" him with apparent authority to enter into similar contracts. The Court also noted that a party dealing with a corporate president may presume he has authority to enter contracts within the scope of the corporation's business.

Ratification Through Acceptance of Benefits

Even assuming the second contract exceeded Punsalan's usual powers, the Court found the company ratified it. The company accepted the operations manual, submitted it to the Bureau of Customs, and allowed Saño to conduct a seminar for its employees. These acts resulted in the company obtaining its license to operate.

Under Article 1405 of the Civil Code, contracts that are unenforceable under Article 1403(2) are ratified by the acceptance of benefits under them. By accepting the benefits of the contract, the corporation bound itself to pay for them.

No Simulation of Contract

The company argued the contract was simulated, pointing to "badges of fraud" such as the lack of down payment, delayed filing of the case, and misspellings in the document. The Court rejected these arguments:

• Lack of payment imports only a defect in performance, not invalidity
• The action was filed within the 10-year prescriptive period for written contracts (Article 1144, Civil Code)
• Misspellings do not vitiate consent
• A confirmation letter is not essential to perfect a contract
• Failure to implead the president does not prove collusion
• An inadequate price does not invalidate a contract absent fraud, mistake, or undue influence (Article 1355, Civil Code)

The Court found no evidence that the parties did not intend to be bound. The company's receipt and use of the operations manual demonstrated its consent or ratification.

Practical Takeaways

• Board approval is the default rule. Corporate officers cannot bind a corporation without board authority, but this rule yields to apparent authority and ratification.
• Consistency matters. A corporation that allows its president to sign contracts without board approval in the past may be estopped from denying that authority later.
• Accepting benefits creates liability. A company that accepts and uses the fruits of an unauthorized contract ratifies it and must pay for it.
• Document everything. The absence of a written demand or confirmation letter does not invalidate a contract; courts look at the actual conduct of the parties.
• Act promptly to repudiate. A corporation that remains silent while an officer acts — and benefits from those acts — risks being bound by them.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.