Short answer. The same authority it needs to sell its property. Article 2033 provides that juridical persons may compromise only in the form and with the requisites necessary to alienate their property. So a corporation settles a claim through whatever internal authority — board action and the like — its own rules demand for disposing of assets.
What the law says
Juridical persons may compromise only in the form and with the requisites which may be necessary to alienate their property
Civil Code, Article 2033 — Compromise by Juridical Persons. Read the full provision →
A compromise is treated as a disposition
A juridical person — a corporation, a partnership, an association — has no will of its own; it acts only through the persons and procedures its charter and the law give it. Article 2033 fixes the standard for one particular act: Juridical persons may compromise only in the form and with the requisites which may be necessary to alienate their property. The logic is that a compromise surrenders rights and value, so the law treats settling a claim as the same order of act as selling an asset, and demands the same authority for it. You do not get to settle on looser terms than you could sell on.
What that means in practice
To know whether an entity can validly compromise, you ask what it would take for that entity to alienate its property, and you require exactly that. For a corporation this points to the internal authority its governing documents and the law prescribe for disposing of assets — action by the board and, where the entity's rules demand it, the officers duly authorised to sign. An individual employee's say-so, or a manager acting outside the authority actually conferred on him, is not enough. The form and the requisites are borrowed wholesale from the law on alienation, whatever those happen to be for the particular juridical person.
Why authority is the thing to verify
The consequence of getting this wrong falls on the deal itself. A purported settlement signed by someone without the authority the entity needs to alienate its property may not bind the entity, leaving the other side holding an agreement that does not hold. Because the person across the table is usually a representative rather than the juridical person in the flesh, the real question is never just whether he signed, but whether he was clothed with the authority Article 2033 requires. That is a question about the entity's internal empowerment, not about how convincing the signatory sounded.
Before you rely on the settlement
The practical safeguard when compromising with a company is to confirm the signatory's authority at the point of settlement, not after a dispute erupts over it. Ask to see the internal action — the resolution or authorisation — that empowers this person to bind the entity to a disposition of its rights, since that is the same thing the law would require to sell its property. Where that authority is clear and documented, the compromise rests on solid ground; where it is merely assumed, the whole settlement may be resting on nothing.
Cases citing this provision
These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.
- Paraiso International Properties, Inc. vs. Court of Appeals, et al, G.R. No. 153420, April 16, 2008 — read the decision on LawPhil →