Corporate Ratification: When a Corporation Becomes Bound by Unauthorized Acts

The Supreme Court recently clarified a fundamental rule in corporate law: a corporation can become bound by the unauthorized acts of its officers if it later ratifies those acts through its conduct. In Terp Construction Corporation v. Banco Filipino Savings and Mortgage Bank (G.R. No. 221771, September 18, 2019), the Court held that a corporation's repeated payment of an allegedly unauthorized obligation effectively ratifies the officer's act, even if the corporation claims the payments were made by mistake.

The Case: A Disputed Interest Commitment

The dispute arose from a 1995 housing and condominium project financed through the issuance of P400 million in bonds called Margarita Project Participation Certificates. Banco Filipino purchased P100 million worth of these bonds, which carried a guaranteed interest rate of 8.5% per annum.

Banco Filipino claimed that Terp Construction's Senior Vice President, Alberto Escalona, committed through two letters to pay additional interest—16.5% on one P50 million bond and 15.5% on another. When the bonds matured, the asset pool funds were insufficient, and only the guaranteed 8.5% interest was paid. Banco Filipino demanded the unpaid interest differentials of P18,104,431.33.

Terp Construction refused, arguing that Escalona had no authority to make such commitments and that the corporation never agreed to the additional interest.

The Issue: When Does an Unauthorized Act Bind a Corporation?

The central question was whether Terp Construction was bound by Escalona's promises, given that he allegedly acted without board authorization.

The Regional Trial Court ruled in favor of Terp Construction, finding no evidence of obligation and no ratification. The Court of Appeals reversed, holding that Terp Construction ratified Escalona's acts when it paid the additional interest twice during the bonds' holding period.

The Ruling: Payment Constitutes Ratification

The Supreme Court denied Terp Construction's petition, affirming the Court of Appeals.

The Court explained that a corporation exercises its powers through its board of directors, but this power may be delegated to officers. An officer's authority to bind the corporation may be actual (express or implied) or apparent.

Implied actual authority arises from prior acts that the corporation has ratified or whose benefits it has accepted. Here, Terp Construction's subsequent act of twice paying the additional interest Escalona committed to was considered a ratification of his acts. The Court rejected the corporation's defense that these were "erroneous payments," stating plainly: "Corporations are bound by errors of their own making."

The Court also found that Escalona had apparent authority. Citing Yao Ka Sin Trading v. Court of Appeals, the Court noted that a corporation is bound by an officer's acts when it has clothed that officer with apparent authority by holding him out as having such authority, and a party deals with him in good faith in reliance on that authority.

Notably, the Court observed that Escalona signed the Petition's Verification and Certification as president of the corporation at the time of filing—demonstrating that the corporation did not consider his alleged unauthorized acts fatal to his continued involvement in corporate affairs.

Practical Takeaways

• Ratification can be implied. A corporation need not pass a formal board resolution to ratify an officer's unauthorized act. Repeated payments or acceptance of benefits can constitute ratification.
• "Mistake" is not a defense. A corporation that pays an obligation cannot later claim the payments were erroneous to escape liability.
• Apparent authority matters. Officers with titles like "Senior Vice President" may bind the corporation if the corporation holds them out as having authority and third parties rely on that in good faith.
• Boards should monitor officer commitments. To avoid unintended obligations, corporations should establish clear approval processes for significant financial commitments and promptly disavow unauthorized acts.
• Review the Revised Corporation Code. While the Court cited the old Corporation Code provision on board powers, this has since been amended by Section 22 of Republic Act No. 11232 (the Revised Corporation Code), which continues to vest corporate powers in the board.

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