Verbal Contracts and Implied Ratification: Upholding Obligations in Broiler Chick Growing Agreements

The Supreme Court recently clarified that contracts need not be in writing to be binding and that a corporation can be held liable under a verbal agreement through implied ratification. In San Miguel Foods, Inc. v. Magtuto (G.R. No. 225007, July 24, 2019), the Court addressed whether a broiler chick grower could enforce an oral growing agreement against a large corporation that had benefited from his services for nearly a year.

The Facts

Ernesto Raoul V. Magtuto was a seasoned broiler chick grower in Bicol. In 2002, he attended a gathering of growers organized because Swift Foods, Inc. was closing its Bicol operations. Representatives of San Miguel Foods, Inc. (SMFI) were present to recruit new growers.

Several months later, Magtuto and Dr. James Vinoya, SMFI's veterinarian and production supervisor, reached an oral agreement. Vinoya showed Magtuto SMFI's standard written contract and told him he would be bound by the same terms. Magtuto posted a P72,000 cash bond. SMFI delivered 36,000 day-old chicks four times between October 2002 and April 2003, and paid Magtuto a grower's fee after each harvest.

On the fifth delivery in June 2003, SMFI delivered only 32,000 chicks—short by 4,000. Vinoya explained there were no excess chicks. After Magtuto complained about Vinoya's conduct, SMFI terminated the arrangement, citing a "poor working relationship." Magtuto sued for damages.

The Issue

Was Magtuto entitled to damages despite the absence of a written contract, and could SMFI disown the agreement on the ground that Vinoya lacked authority to bind the corporation?

The Ruling

The Supreme Court held that a valid contract existed between Magtuto and SMFI, even without a written document.

Under Article 1318 of the Civil Code, a contract requires only three essential elements: consent, object certain, and cause of the obligation. All were present here. Magtuto consented to grow chicks; the chicks were the object; and the grower's fee was the cause or consideration. Article 1356 provides that contracts are obligatory in whatever form they are entered into, provided the essential requisites are present.

Implied Ratification

The Court also rejected SMFI's argument that Vinoya had no authority to bind the corporation. Under Article 1317 of the Civil Code, a contract entered into by one without authority is unenforceable unless ratified, expressly or impliedly.

SMFI impliedly ratified the agreement through its conduct. It delivered chicks, feeds, medicines, and materials; harvested the grown chickens; and paid Magtuto's grower's fees—not once, but five times over nine months. SMFI issued official documents including cash receipts, delivery receipts, trust receipts, flock records, and payment statements. These acts showed approval and acceptance of the contract's benefits.

The Court cited Prime White Cement Corp. v. IAC (292-A Phil. 198 [1993]), which held that implied ratification may take various forms, including silence, acquiescence, acts showing approval, or acceptance and retention of benefits.

Damages: Per Grow Basis

The Court then determined the contract was on a "per grow basis"—one growing season at a time—since the parties did not fix a duration. This was analogous to a month-to-month lease under Article 1687 of the Civil Code.

Consequently, Magtuto was entitled only to compensation for the 4,000 chicks short-delivered in June 2003, computed at P38,383.58 based on his average income per grow. He was not entitled to expenses for the 15-day rest period or lost income for the following month, since the contract did not guarantee future deliveries.

The award earned legal interest at 6% per annum from finality of the decision, following Nacar v. Gallery Frames (716 Phil. 267 [2013]).

Practical Takeaways

• Verbal contracts are generally binding. As long as consent, object, and cause exist, a contract need not be in writing to be enforceable under Philippine law.
• Corporations can ratify unauthorized acts through conduct. Delivering goods, issuing documents, and accepting benefits over repeated transactions may amount to implied ratification.
• Documentation matters. Even without a signed contract, receipts, delivery records, and payment statements can prove the existence and terms of an agreement.
• Damages require proof of actual loss. Courts will not award speculative or conjectural damages; the claimant must present competent evidence of pecuniary loss.
• Contract duration matters. Where no period is fixed, courts may imply one based on the nature of the arrangement, limiting liability for future obligations.

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