Juan, acting as president of Maharlika Car Dealers Incorporated (MCDI), entered into a contract of long-term lease with Antonino over a large commercial property along Pasong Tamo Avenue owned by the latter. When Antonino received a better offer for the commercial property, and having learned that MCDI was not formally incorporated with the Securities and Exchange Commission, he sought to have the contract of lease nullified on the ground that it was void for lack of the essential element of consent, since the lessee was not a juridical person with capacity to contract. May Juan, acting on behalf of MCDI, which is in the process of incorporation, legally insist on the enforceability and binding effect of the contract of lease as against Antonino? Explain your answer.
Suggested answer only. Not an official answer and not legal advice.
Yes, Juan may legally insist on the enforceability and binding effect of the lease contract against Antonino.
Under Section 20 of the Revised Corporation Code and Missionary Sisters of Our Lady of Fatima v. Alzona, the doctrine of corporation by estoppel applies in reverse. Anyone who assumes an obligation in favor of an ostensible corporation is prevented from denying its existence to avoid performance of the contract.
Here, Antonino voluntarily transacted and entered into a long-term lease with MCDI as an ostensible corporation. Having assumed contractual obligations in favor of MCDI, Antonino cannot seek nullification or resist performance on the ground that MCDI was not formally incorporated.
Therefore, Juan may legally insist on the enforceability of the contract against Antonino under the doctrine of corporation by estoppel.
This is not an official scoring system and carries no weight with the Supreme Court or any bar review provider. It measures how much of the suggested answer's wording your response covers, not whether your reasoning is correct. For practice only.
Quick check
Under Section 20 of the Revised Corporation Code, what is the legal consequence when a third party assumes an obligation in favor of an ostensible corporation?
Section 20 prevents a party who contracts with an ostensible corporation from raising its lack of corporate personality to evade performance.
In Missionary Sisters of Our Lady of Fatima versus Alzona, how did the Supreme Court apply the doctrine of corporation by estoppel?
The Supreme Court held that the doctrine of corporation by estoppel applies in reverse to prevent third parties from evading contractual duties.
Can a lessor nullify a long-term commercial lease on the ground of lack of corporate consent after learning the lessee is not yet incorporated?
A lessor who transacts with an ostensible corporation cannot deny its existence to invalidate the lease contract.
What is the liability under Section 20 of the Revised Corporation Code for persons who assume to act as a corporation knowing it lacks authority?
Persons who assume to act as a corporation without authority are liable as general partners under Section 20.
Which statute governs the rules on corporate formation, quorum, and corporation by estoppel in the Philippines?
Republic Act Number 11232, known as the Revised Corporation Code, governs corporate law and corporation by estoppel in the Philippines.
Learn more about these topics
1. Corporation by Estoppel
Under Section 20 of the Revised Corporation Code (Republic Act Number 11232), all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities, and damages incurred or arising as a result thereof. The doctrine of corporation by estoppel treats an unincorporated association as a corporation in relation to those who deal with it as such. This statutory rule prevents parties from raising lack of corporate personality to defeat valid contractual commitments entered into in good faith.
2. Reverse Estoppel Application
In Missionary Sisters of Our Lady of Fatima versus Alzona, the Supreme Court affirmed that the doctrine of corporation by estoppel applies in reverse. A third party who assumes an obligation in favor of an ostensible corporation, having transacted with it as if it possessed full legal personality, is stopped from denying its corporate existence to evade contractual liabilities. When a party voluntarily reaps benefits or assumes obligations under a contract with an unincorporated entity, justice prohibits that party from attacking the entity's corporate capacity to escape performance.
3. Pre-incorporation Lease Validity
Pre-incorporation contracts entered into by promoters or officers on behalf of an unformed corporation become binding and enforceable under the doctrine of estoppel when third parties knowingly contract with the ostensible corporate entity. While an unincorporated group lacks inherent juridical personality, a lessor who signs a long-term lease with the ostensible corporation cannot later nullify the contract for lack of consent upon receiving a better commercial offer. The contract remains valid and enforceable against the lessor under the principles of corporate estoppel.