NIELSON & CO. INC. V. LEPANTO CONSOLIDATED MINING CO.

Nielson & Co. Inc. vs. Lepanto Consolidated Mining Co.

[GR L-21601, 28 December 1968] Facts: [GR L-21601, 17 December 1966; Zaldivar (J): 6 concur, 2 took no part] An operating agreement was executed before World War II (on 30 January 1937) between Nielson & Co. Inc. and the Lepanto Consolidated Mining Co. whereby the former operated and managed the mining properties owned by the latter for a management fee of P2,500.00 a month and a 10% participation in the net profits resulting from the operation of the mining properties, for a period of 5 years. In 1940, a dispute arose regarding the computation of the 10% share of Nielson in the profits. The Board of Directors of Lepanto, realizing that the mechanics of the contract was unfair to Nielson, authorized its President to enter into an agreement with Nielson modifying the pertinent provision of the contract effective 1 January 1940 in such a way that Nielson shall receive (1) 10% of the dividends declared and paid, when and as paid, during the period of the contract and at the end of each year, (2) 10% of any depletion reserve that may be set up, and (3) 10% of any amount expended during the year out of surplus earnings for capital account. In the latter part of 1941, the parties agreed to renew the contract for another period of 5 years, but in the meantime, the Pacific War broke out in December 1941. In January 1942 operation of the mining properties was disrupted on account of the war. In February 1942, the mill, power plant, supplies on hand, equipment, concentrates on hand and mines, were destroyed upon orders of the United States Army, to prevent their utilization by the invading Japanese Army. The Japanese forces thereafter occupied the mining properties, operated the mines during the continuance of the war, and who were ousted from the mining properties only in August 1945. After the mining properties were liberated from the Japanese forces, LEPANTO took possession thereof and embarked in rebuilding and reconstructing the mines and mill; setting up new organization; clearing the mill site; repairing the mines; erecting staff quarters and bodegas and repairing existing structures; installing new machinery and equipment; repairing roads and maintaining the same; salvaging equipment and storing the same within the bodegas; doing police work necessary to take care of the materials and equipment recovered; repairing and renewing the water system; and retimbering. The rehabilitation and reconstruction of the mine and mill was not completed until 1948. On 26 June 1948 the mines resumed operation under the exclusive management of LEPANTO. Shortly after the mines were liberated from the Japanese invaders in 1945, a disagreement arose between NIELSON and LEPANTO over the status of the operating contract which as renewed expired in 1947. Under the terms thereof, the management contract shall remain in suspense in case fortuitous event or force majeure, such as war or civil commotion, adversely affects the work of mining and milling. On 6 February 1958, NIELSON brought an action against LEPANTO before the Court of First Instance of Manila to recover certain sums of money representing damages allegedly suffered by the former in view of the refusal of the latter to comply with the terms of a management contract entered into between them on 30 January 1937, including attorney's fees and costs. LEPANTO in its answer denied the material allegations of the complaint and set up certain special defenses, among them, prescription and laches, as bars against the institution of the action. After trial, the court a quo rendered a decision dismissing the complaint with costs. The court stated that it did not find sufficient evidence to establish LEPANTO's counterclaim and so it likewise dismissed the same. NIELSON appealed. The Supreme Court reversed the decision of the trial court and enter in lieu thereof another, ordering Lepanto to pay Nielson (1) 10% share of cash dividends of December, 1941 in the amount of P17,500.00, with legal interest thereon from the date of the filing of the complaint; (2) management fee for January, 1942 in the amount of P2,500.00, with legal interest thereon from the date of the filing of the complaint; (3) management fees for the sixty-month period of extension of the management contract, amounting to P150,000.00, with legal interest from

the date of the filing of the complaint; (4) 10% share in the cash dividends during the period of extension of the management contract, amounting to P1,400,000.00, with legal interest thereon from the date of the filing of the complaint; (5) 10% of the depletion reserve set up during the period of extension, amounting to P53,928.88, with legal interest thereon from the date of the filing of the complaint; (6) 10% of the expenses for capital account during the period of extension, amounting to P694,364.76, with legal interest thereon from the date of the filing of the complaint; (7) to issue and deliver to Nielson and Co. Inc. shares of stock of Lepanto Consolidated Mining Co. at par value equivalent to the total of Nielson's 10% share in the stock dividends declared on November 28, 1949 and August 22, 1950, together with all cash and stock dividends, if any, as may have been declared and issued subsequent to November 28, 1949 and August 22, 1950, as fruits that accrued to said shares; provided that if sufficient shares of stock of Lepanto's are not available to satisfy this judgment, Lepanto shall pay Nielson an amount in cash equivalent to the market value of said shares at the time of default, that is, all shares of stock that should have been delivered to Nielson before the filing of the complaint must be paid at their market value as of the date of the filing of the complaint; and all shares, if any, that should have been delivered after the filing of the complaint at the market value of the shares at the time Lepanto disposed of all its available shares, for it is only then that Lepanto placed itself in condition of not being able to perform its obligation; (8) the sum of P50,000.00 as attorney's fees; and (9) the costs. Lepanto seeks the reconsideration of the decision rendered on 17 December 1966. Issue: Whether the management contract is a contract of agency or a contract of lease of services. Held: Article 1709 of the Old Civil Code, defining contract of agency, provides that "By the contract of agency, one person binds himself to render some service or do something for the account or at the request of another." Article 1544, defining contract of lease of service, provides that "In a lease of work or services, one of the parties binds himself to make or construct something or to render a service to the other for a price certain." In both agency and lease of services one of the parties binds himself to render some service to the other party. Agency, however, is distinguished from lease of work or services in that the basis of agency is representation, while in the lease of work or services the basis is employment. The lessor of services does not represent his employer, while the agent represents his principal. Further, agency is a preparatory contract, as agency "does not stop with the agency because the purpose is to enter into other contracts." The most characteristic feature of an agency relationship is the agent's power to bring about business relations between his principal and third persons. "The agent is destined to execute juridical acts (creation, modification or extinction of relations with third parties). Lease of services contemplate only material (non-juridical) acts." Herein, the principal and paramount undertaking of Nielson under the management contract was the operation and development of the mine and the operation of the mill. All the other undertakings mentioned in the contract are necessary or incidental to the principal undertaking these other undertakings being dependent upon the work on the development of the mine and the operation of the mill. In the performance of this principal undertaking Nielson was not in any way executing juridical acts for Lepanto, destined to create, modify or extinguish business relations between Lepanto and third persons. In other words, in performing its principal undertaking Nielson was not acting as an agent of Lepanto, in the sense that the term agent is interpreted under the law of agency, but as one who was performing material acts for an employer, for a compensation. It is true that the management contract provides that Nielson would also act as purchasing agent of supplies and enter into contracts regarding the sale of mineral, but the contract also provides that Nielson could not make any purchase, or sell the minerals, without the prior approval of Lepanto. It is clear, therefore, that even in these cases Nielson could not execute juridical acts which would bind Lepanto without first securing the approval of Lepanto. Nielson, then, was to act only as an intermediary, not as an agent. Further, from the statements in the annual report for 1936, and from the provision of paragraph XI of the Management contract, that the employment by Lepanto of Nielson to operate and manage its mines was principally in consideration of the know-how and

technical services that Nielson offered Lepanto. The contract thus entered into pursuant to the offer made by Nielson and accepted by Lepanto was a "detailed operating contract". It was not a contract of agency. Nowhere in the record is it shown that Lepanto considered Nielson as its agent and that Lepanto terminated the management contract because it had lost its trust and confidence in Nielson.

Shell Co. v. Firemens Insurance Facts: This is an action for recovery of sum of money, based on alleged negligence of the defendant. Plymounth car owned by Salvador R. Sison was brought to the Shell Gasoline and Service Station, located at the corner of Marques de Comillas and Isaac Peral Streets, Manila, for washing, greasing and spraying. The operator of the station, having agreed to do service upon payment of P8.00, the car was placed on a hydraulic lifter under the direction of the personnel of the station. A Shell gasoline station was owned by dela Fuente. The car was raised up and then washing was done. After washing, and before greasing was finished, there was a part of the car which the grease men cannot reach, so they lowered the lifter. However, unfortunately, for unknown reasons (probably due to mechanicalfailure or human error), while the lifter was being lowered, the car swung and fell from the plat form.
The case was immediately reported to the firemen's Insurance Company, as the car was insured with these insurance companies. Then the damaged car was taken to the shops of the Philippine Motors, Incorporated, for repair upon order of the Firemen's Insurance Company with the consent of Salvador R. Sison. The car was restored to running condition after repairs amounting to P1,651.38, and was delivered to Salvador R. Sison, who, in turn made assignments of his rights to recover damages in favor of the Firemen's Insurance Company and the Commercial Casualty Insurance Company. the insures and the owner of the car brought an action against the Shell Company of the Philippines, Ltd. and Porfirio de la Fuente to recover from them, jointly and severally, the sum of P1,651.38, with interest. Trial the Court dismissed the complaint. The Court of Appeals reversed the judgment and sentenced the defendant to pay the amount sought to be recovered, legal interest and costs. And ruled that DE LA FUENTE is SHELLs agent; hence, as principal, it is liable for his agents breach of undertaking. That is why SHELL now comes to the SC on appeal questioning the aforesaid CAdecision. Issue: W/n de la Fuente is an agent of Shell Company or an independent contractor Held: DE LA FUENTE is SHELLs agent.

The operator of a gasoline station De La Fuente is an agent of the oil company Shell. He cannot be considered as an independent contractor because SHELL Company has an extensive control and supervision over the tasks of de la fuente. Rationale: DE LA FUENTE owed his position to SHELL which could remove him or terminate his services at will or at any time. He merely undertook to exclusively sell SHELLs products at the station he operates. For this purpose, he was placed in possession of all the equipment needed to operate it, including the hydraulic lifter from which SISONs automobile fell But it must be noted that these equipments were delivered to DE LAFUENTE merely on loan basis. SHELL still took charge of its care and maintenance. It supervised DE LA FUENTE and conducted periodic inspection of the gasoline and service station. Moreover, SHELL did not leave the fixing of price for gasoline to DELA FUENTE; on the other hand, SHELL had complete control thereof; and it had supervision over DE LA FUENTE in the operation of the station and in the sale of its products therein. In fine, the gasoline and service station really belonged to SHELL. It bore its trade name and the operator DE LA FUENTE merely sold the products of SHELL DE LAFUENTE is not an independent contractor of SHELL because of the extensive control and supervision that SHELL exercises over DE LA FUENTE such circumstances show the existence of agency relationship between them. The existence of agency between SHELL and DE LA FUENTE is also evidenced by a receipt issued by SHELL and signed by DE LAFUENTE, acknowledging the delivery of equipments for the gas station in question and an official from of the inventory of said equipment containing DE LA FUENTEs signature above the words: "Agent's signature" RE: Liability of Principal for Agents breach of undertaking. As the CA correctly ruled, the fall of SISONs car from the hydraulic lift was the result of some unforeseen shortcoming of the mechanism itself. As the servicing job on SISONs car was accepted by DE LA FUENTE in the normal and ordinary conduct of his business as operator of SHELLs service station, and that the defective hydraulic lift caused the fall of the car, he is liable therefor. SHELL, his principal, is also liable as DE LA FUENTE acted within the representative authority granted him as SHELLs agent. As the act of the agent acting within the scope of his authority is the act of the principal, the breach of the undertaking by the agent is one for which the principal is answerable. Moreover, SHELL undertook to "answer and see to it that the equipment are in good running order and usable condition. "Obviously, SHELL failed to make a thorough check up of the hydraulic lifter. Hence, it was also negligent in that aspect to which it must answer, a s the faulty lifter was the cause of the fall of the SISONs car.