FACTS:

On January 27, 1992, Unimarine Shipping Lines, Inc. (Unimarine) contracted the services of Keppel Cebu Shipyard (formerly known as Cebu Shipyard and Engineering Works, Inc.) for dry docking and ship repair works on its vessel, the M/V Pacific Fortune. Cebu Shipyard issued Bill No. 26035 to Unimarine on February 14, 1992, amounting to P4,486,052.00. Through negotiation, the amount was reduced to P3,850,000.00, as agreed upon in a letter dated February 18, 1992. Unimarine agreed to pay the amount in two installments and issued post-dated checks for the payments in Philippine Peso. Unimarine also secured surety bonds from Country Bankers Insurance Corp. and Plaridel Surety and Insurance Co. On May 30, 1992, Unimarine failed to remit the first installment, causing Cebu Shipyard to deposit the dishonored peso check. Despite reminders and promises of payment, Unimarine failed to settle its account.

Unimarine's failure to pay and the sureties' failure to fulfill their obligations prompted Cebu Shipyard to file a complaint against Unimarine, CBIC Surety Group, Inc. (CBIC), and Plaridel Surety and Insurance Co., Inc. (Plaridel). CBIC, in its answer, claimed that the surety bond was issued by its agent, Quinain, in excess of his authority. CBIC argued that Cebu Shipyard should have doubted Quinain's authority based on the nature of the bond, the amount involved, and the fact that the bond was only supposed to be issued in favor of the Department of Public Works and Highways. CBIC also raised other defenses, including novation of the agreement between Cebu Shipyard and Unimarine, payment or extinguishment of Cebu Shipyard's claim, prescription of the claim, and limitation of CBIC's liability.

CBIC further filed a motion to admit a cross and third-party complaint against Unimarine, Paul Rodriguez, Albert Hontanosas, Peter Rodriguez, and Bethoven Quinain. CBIC claimed that Rodriguez, Hontanosas, and Peter Rodriguez executed an indemnity agreement with CBIC, while Quinain exceeded his authority as CBIC's agent. Hontanosas denied any financial interest in Unimarine, stating that his relationship with the company was only as its retained counsel and that his signature on the indemnity agreement was forged.

During the trial, witnesses were presented by both parties, including Myrna Obrinaga, the Chief Accountant of Cebu Shipyard, who supported Cebu Shipyard's claims, and Paul Rodriguez, who admitted to Unimarine's failure to pay but claimed that he trusted Quinain and was not aware of the consequences of signing the indemnity agreement. Dakila Rianzares, Senior Manager of CBIC's Bonding Department, testified on behalf of CBIC, providing information on the evaluation and approval of bonds issued by CBIC's agents.

Unimarine, CBIC, and Plaridel then filed an appeal before the Supreme Court.

ISSUES:

1. Whether Unimarine is liable to Cebu Shipyard for the ship-repair contract.

2. Whether the obligation of Unimarine to Cebu Shipyard has been extinguished by novation.

3. Whether CBIC, as the surety of Unimarine, is liable under Surety Bond No. 29419.

4. Whether Unimarine and the other defendants are liable under the Indemnity Agreement.

5. Whether Cebu Shipyard is entitled to the award of attorney's fees and litigation expenses.

6. Whether CBIC can be held liable on the surety bond issued by Quinain to Unimarine in favor of Cebu Shipyard.

7. Whether Cebu Shipyard was required to inquire into the extent of Quinain's authority as granted by CBIC.

8. Whether Quinain exceeded the limits of his authority under the Special Power of Attorney given to him by CBIC.

9. Whether CBIC can be held liable for Quinain's unauthorized acts.

10. Whether CBIC can be held liable under the principle of estoppel.

11. Whether or not Unimarine and Paul Rodriguez can hold CBIC liable for the extension of the surety bond beyond its expiration date.

12. Whether or not Unimarine and Paul Rodriguez can claim the benefit of estoppel against CBIC.

RULING:

1. Unimarine is held liable to Cebu Shipyard for the ship-repair contract.

2. The obligation of Unimarine to Cebu Shipyard has not been extinguished by novation.

3. CBIC is liable under Surety Bond No. 29419.

4. Unimarine and the other defendants are jointly and severally liable under the Indemnity Agreement.

5. Cebu Shipyard is entitled to the award of attorney's fees and litigation expenses.

6. CBIC can only be held liable on the surety bond if Quinain's act of issuing the bond is within the written terms of the power of attorney granted to him. The Special Power of Attorney granted to Quinain clearly states the limits of his authority. Therefore, CBIC cannot be held liable on the surety bond.

7. Cebu Shipyard was not required to inquire into the extent of Quinain's authority as granted by CBIC. Third persons dealing with an agent may rely on the power of attorney shown to them, and private or secret orders and instructions of the principal do not prejudice them.

8. Yes, Quinain exceeded the limits of his authority under the Special Power of Attorney given to him by CBIC.

9. Yes, CBIC can be held liable for Quinain's unauthorized acts because an agent's act, even if done beyond the scope of his authority, may bind the principal if the principal ratifies them. However, in this case, there is no valid ratification because CBIC did not have knowledge of the material facts and circumstances relating to Quinain's unauthorized act. Therefore, CBIC cannot be held liable.

10. No, CBIC cannot be held liable under the principle of estoppel because the requirements for an agency by estoppel are not established. CBIC did not manifest a representation of Quinain's authority, and there is no proof that the third party, Unimarine, relied upon such representation to its detriment.

11. No, Unimarine and Paul Rodriguez cannot hold CBIC liable for the extension of the surety bond beyond its expiration date. Unimarine failed to establish that CBIC knew of the existence of the surety bond before the endorsement extending its life was issued. Unimarine also failed to inquire about the authority of Quinain, the agent, to agree to terms beyond the limits indicated in his special power of attorney. Unimarine and Paul Rodriguez relied blindly on the representation of Quinain without verifying the validity and effectivity of the surety bond and endorsement. Therefore, Unimarine and Paul Rodriguez cannot hold CBIC liable for the extension of the surety bond.

12. No, Unimarine and Paul Rodriguez cannot claim the benefit of estoppel against CBIC. They failed to show that they were misled by CBIC's representations regarding the extent of Quinain's authority. Unimarine and Paul Rodriguez were negligent in their dealings with Quinain and blindly relied on his assurance without understanding the consequences of the Indemnity Agreement. Therefore, Unimarine and Paul Rodriguez cannot claim the benefit of estoppel against CBIC.

PRINCIPLES:

• An act is deemed to have been performed within the scope of the agent's authority if it is within the terms of the powers of attorney as written, even if the agent has in fact exceeded the limits of his authority according to an understanding between the principal and the agent.

• Liability on a surety bond is not extinguished by an extension of the period for the performance of the obligation granted by the creditor to the principal debtor.

• Third parties who rely on the representation of an agent can hold the principal and the agent solidarily liable.

• Signatories to an indemnity agreement can be held jointly and severally liable if they fail to prove that their signatures were forged.

• A party who clearly establishes the liability of the opposing party is entitled to an award of attorney's fees and litigation expenses.

• In a contract of agency, the agent acts for and in behalf of the principal within the scope of the authority conferred upon him.

• Acts performed by an agent within the terms of the written power of attorney are deemed to have been performed within the scope of the agent's authority.

• If the agent contracts in the name of the principal exceeding the scope of his authority and the principal does not ratify the contract, it shall be void if the other party is aware of the limits of the agent's authority. However, the agent is liable if he undertook to secure the principal's ratification.

• The principal must comply with all the obligations contracted by the agent within the scope of his authority, and the principal is solidarily liable with the agent if he allowed the agent to act as though he had full powers.

• Third persons dealing with an agent may require the presentation of the power of attorney, but private or secret orders and instructions of the principal do not prejudice them.

• An agent's act, even if done beyond the scope of his authority, may bind the principal if the principal ratifies them.

• Ratification in agency requires full knowledge of all material facts and circumstances relating to the unauthorized act.

• Agency by estoppel requires the principal to manifest a representation of the agent's authority, reliance upon such representation by a third person in good faith, and a change in position to the third person's detriment.

• Persons dealing with an agent are bound to ascertain the fact of agency and the nature and extent of authority. The burden of proof is on them to establish the agency and authority.

• Ignorance of a person dealing with an agent as to the scope of the agent's authority is not an excuse, and the fault cannot be thrown upon the principal.

• A person dealing with a known agent must not blindly trust the agent's statements about the extent of their powers. They must use reasonable diligence and prudence to ascertain whether the agent is acting within their authority.

• Persons dealing with an assumed agent are bound at their peril and must ascertain not only the fact of agency but also the nature and extent of authority. The burden of proof is on them to establish the agency and authority.