When Does a Bank Ratify an Unauthorized Act? Lessons from Westmont Bank v. Inland Construction

The Supreme Court, in Westmont Bank v. Inland Construction and Development Corp. (G.R. No. 123650, March 23, 2009), clarified when a corporation—particularly a bank—is considered to have ratified an unauthorized act of its officer. The ruling is a practical guide for businesses and individuals dealing with corporate agents: silence, inaction, or acceptance of benefits may bind the corporation.

The Facts of the Case

In 1977, Inland Construction and Development Corp. obtained loans from a bank then known as Associated Citizens Bank, secured by real estate mortgages over three properties in Pasig City. When the loans fell due, Inland defaulted.

In May 1978, Inland's president assigned the company's rights to Hanil-Gonzales Construction & Development Corp. Under a Deed of Assignment, Hanil-Gonzales assumed Inland's obligation under Promissory Note No. BD-2884-77 in the amount of P880,000. The bank's account officer, Lionel Calo Jr., signed the deed to signify the bank's conformity.

When the bank later foreclosed on the mortgaged properties in December 1979, Inland sued to stop the foreclosure, arguing that the bank had consented to the substitution of debtor.

The Issue

The central question was whether the bank ratified its account officer's act of signing the Deed of Assignment, even if Calo had no actual authority to bind the bank.

The Ruling: Ratification Through Conduct

The Supreme Court denied the bank's petition and affirmed the Court of Appeals' finding that the bank ratified the deed. The Court explained the governing principles:

General rule on corporate authority. As a general rule, no person—not even a corporate officer—can validly bind a corporation without authority from its board of directors. However, if a corporation consciously allows an officer or agent to act within the scope of apparent authority, it is estopped from denying that authority.

Burden of proof. The Court clarified the burden of proof in such cases. A corporation must first prove by clear evidence that its officer was not authorized to act on its behalf. Only then does the burden shift to the other party to prove, through previous specific acts, that the corporation clothed the officer with apparent authority.

Applying the rule. The bank failed to discharge this primary burden. It did not present its by-laws, board resolutions, or charter to show that Calo lacked authority. The only evidence it offered—an internal memorandum stating Calo had "no signing authority"—was self-serving and not formally offered in evidence.

Ratification through conduct. The Court found that the bank's conduct showed ratification:

• The bank conducted its business with Inland and Hanil-Gonzales through Calo, so it was presumed he had authority to sign for the bank.
• The assignee notified the bank of the assumption of Inland's obligation in a July 1979 letter.
• In November 1982, the bank's Executive Committee approved a restructuring of Hanil-Gonzales' obligations, which specifically included Inland's P880,000 loan.
• The bank never repudiated Calo's act until years later.

As a banking institution, the Court stressed, the bank was expected to exercise the highest degree of diligence in its business. When it received and approved the restructuring request that specifically mentioned Inland's promissory note, it was under an obligation to scrutinize the account.

The Dissenting View

Justice Brion dissented, arguing that Inland—not the bank—should have borne the burden of proving Calo's authority. He also noted that the restructuring in 1982 came after the foreclosure in 1979 and did not expressly release Inland from liability. Under Article 1293 of the Civil Code, novation by substitution of debtor requires the creditor's consent and the original debtor's express release.

Practical Takeaways

• Corporations must promptly repudiate unauthorized acts. Silence or delay in disowning an officer's act may be treated as ratification.
• Document authority clearly. A corporation that wants to deny an officer's authority should have clear board resolutions, by-laws, or charters ready to prove the lack of authority.
• Banks face a higher standard. As institutions required to exercise the highest degree of diligence, banks cannot feign ignorance of transactions involving substantial amounts.
• Burden of proof matters. The party alleging lack of authority must first prove it; otherwise, the burden shifts to the other side to show apparent authority.
• Accepting benefits can bind you. Approving a restructuring that includes an assumed obligation may be treated as ratification of the underlying assignment.

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