Apparent Authority and Employer Liability: When Companies Are Bound by Employees' Acts

When an employee acts beyond their assigned duties, can the company disown the transaction and escape liability? The Supreme Court addressed this in Eternal Gardens Memorial Park Corp. v. Perlas (G.R. No. 236126, September 7, 2020), a case that clarifies the boundaries of employer responsibility under the doctrine of apparent authority.

The ruling serves as a practical reminder for businesses: a corporation cannot hide behind its internal rules when its own conduct leads third parties to reasonably believe that its employees have authority to act.

The Facts of the Case

Eternal Gardens Memorial Park Corporation issued a certificate of ownership over 24 burial lots to Zenaida Boiser in 1985. After Zenaida's death in 1999, her daughter Kathryn's former live-in partner, Michael Magpantay, presented an affidavit of loss and a deed of assignment purportedly signed by Zenaida. Based on these documents, Eternal Gardens issued a new certificate of ownership in Magpantay's name.

Magpantay later sold the lots to spouses Claudio and Rosita Bonifacio. Two of Eternal Gardens' employees—Balbin and Resoles—handled the transaction, issued an acknowledgment receipt for the P2.2 million payment, and the company issued a certificate of ownership to the Bonifacios.

The problem: Zenaida was already dead when the deed of assignment was executed. The documents were falsified, and the heirs sued to nullify the sale.

The Issue

The central question was whether Eternal Gardens could be held liable for the acts of its employees, Balbin and Resoles, who allegedly acted beyond their authority in facilitating the fraudulent sale.

The Ruling: Apparent Authority Binds the Principal

The Supreme Court denied Eternal Gardens' petition and affirmed the Court of Appeals' ruling holding the company solidarily liable with Magpantay and Kathryn.

The Court explained that while an agent who exceeds the limits of authority may be personally liable under Article 1897 of the Civil Code, that principle did not apply here. No special power of attorney was given to the employees to sell the lots on Magpantay's behalf.

However, the company could not escape liability because of the doctrine of apparent authority. Under this doctrine, acts of an agent within the apparent scope of authority bind the principal, even if no actual authority was given. The principal is liable to third persons who were led reasonably to believe, by the principal's conduct, that such authority existed.

The Court applied the principle of estoppel under Article 1431 of the Civil Code: if a corporation knowingly permits an agent to act within the scope of apparent authority, it holds that person out to the public as possessing such power. The corporation is then estopped from denying the agent's authority against anyone who dealt with it in good faith.

Here, Eternal Gardens issued the certificate of ownership to the Bonifacios, thereby acknowledging its employees' authority to transact on its behalf. The company could not disown the transaction after the fact.

The Company's Duty of Prudence

The Court also rejected Eternal Gardens' argument that it merely performed a ministerial duty in processing the transfer. The company presented no evidence that it verified the authenticity of the affidavit of loss and deed of assignment—documents that a simple check would have revealed as falsified, since Zenaida had died before they were executed.

The presumption of regularity attached to notarized documents is rebuttable. When evidence shows a document is invalid, the presumption does not apply. Eternal Gardens' failure to exercise caution and due diligence in processing the transfers contributed to the fraud.

Practical Takeaways

• Corporations are bound by the apparent authority of their employees. Internal job descriptions do not shield a company from liability when its conduct leads third parties to reasonably believe an employee has authority to act.
• Issuing documents ratifies employee conduct. When a company processes and issues certificates or similar documents based on its employees' work, it may be deemed to have acknowledged and ratified their authority.
• Presumptions of regularity are rebuttable. Companies should verify documents, especially where ownership of property is transferred. A notarized document does not guarantee validity.
• Employers have recourse against erring employees. A company held liable for an employee's fraud can still file its own action against that employee for damages.
• Due diligence protects against liability. Prudent verification of documents and supervision of employees are essential safeguards against fraudulent transactions.

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