G.R. No. L-9141 - Republic vs. Vda. de Ferdez

In November 1996 and December 1996, respondent Agua Vida Systems, Inc. (AVSI) and petitioner Makati Water, Inc. (MWI) entered into two separate Franchise Agreements.
The Agreements granted MWI the right to operate two water refilling stations—AV-Pilar located at 8788 Doña Aguirre Avenue cor. Daisy Road, Pilar Villas, Las Piñas City and AV-Arnaiz located at Pasay Road Extension, Makati City—with an initial term of five years from the date of execution.
Under the agreements, MWI complied by operating the stations and remitting all payments due to AVSI.

Prior to expiration, specifically on November 11, 2001 (AV-Pilar) and December 23, 2001 (AV-Arnaiz), MWI sought an extension via a written request from its president, Ms. Ruby Estaniel, to extend the Franchise Agreements until December 31, 2001.
AVSI consented to the extension, reminding MWI that failure to renew would trigger the enforcement of specific contractual provisions—namely Sections IV-4 and IV-5—regarding equipment repurchase and a prohibition on operating water vending businesses.
Despite the discussion on extension, the parties did not renew the agreements. Accordingly, the franchises expired on the respective dates, and although MWI ceased operating under the AVSI brand, it continued operations under its own name.

Following the expiry, AVSI issued letters on January 23, 2002 and June 11, 2002, demanding that MWI allow the repurchase of equipment and cease operations at the franchise sites.
MWI’s inaction led AVSI to file two separate complaints on November 5, 2002, for Specific Performance and Damages (Civil Cases No. 69191 and 69192) seeking:

Closure of the water refilling stations after a two-year period following the pre-termination.
Payment of compensatory damages calculated from the time of termination until the actual closure of the stations.
An order allowing AVSI to repurchase the water purification equipment at a predetermined rate, as provided in Section IV-4 of the agreements.

MWI filed motions including a Motion to Dismiss and an Omnibus Motion for consolidation and deferment, which resulted in the consolidation of the two cases before the Regional Trial Court (RTC).

RTC, Branch 67 rendered its decision on February 28, 2011, affirming that the provisions of Section IV-5 applied even upon the expiration of the agreements.
The RTC ordered:

The closure of both water refilling stations operated by MWI.
Payment of compensatory damages based on sales performance data, exemplary damages, and attorney’s fees amounting to 25% of the total amount due.

Subsequent motions for reconsideration by MWI were denied, prompting an appeal to the Court of Appeals (CA).
The CA affirmed the RTC’s decision on the merits with the modification of reducing the attorney’s fees from 25% to 10% of the total amount due and denied MWI’s appeal.

Whether the term “termination” under Section IV-5 of the Franchise Agreements should include the mere expiration of the agreements, thereby making the two-year prohibition on operating a water vending business applicable even when the agreements lapse naturally.

Petitioner MWI contended that Section IV-5 should apply only to cases of early cancellation or termination for specific breaches, not to the expiration of the agreements.
Respondent AVSI argued that the plain meaning of “termination” encompasses the expiration of the franchise period.

The closure of the water refilling stations operated by MWI based on the enforcement of Section IV-5.
The award of compensatory damages, exemplary damages, and attorney’s fees due to MWI’s continued operation of the stations in contravention of the contractual prohibition, even after the expiration of the agreements.