G.R. No. 11774 - Tolentino vs. Vitug

Petitioner: National Development Company (NDC), a government-owned and controlled corporation established under Commonwealth Act No. 182 and amended by Presidential Decree No. 1648.
Respondent: Madrigal Wan Hai Lines Corporation, a domestic private corporation, which participated as the lone bidder in the sale process.
Subsidiary Involved: National Shipping Corporation of the Philippines (NSCP), a wholly-owned subsidiary of NDC, providing containerized shipping services between the Far East and the U.S. West Coast.

In March 1993, NDC’s Board of Directors approved a privatization plan for NSCP.
In May 1993, NDC offered for public sale its 100% stock ownership in NSCP along with its three ocean-going vessels (M/V National Honor, M/V National Pride, and M/V National Dignity) at a desired price of US $26,750,000.00.
An Information Package, including NSCP’s background, assets, operational and financial status (with financial statements from December 1990 up to 1992), was released to the public.
The Information Package incorporated the Negotiated Sale Guidelines that detailed the terms and conditions of the sale process.
A Proposal Letter Form was appended instructing bidders to submit their offers in the prescribed format.

During the public bidding held on May 7, 1993, the only bidder was Madrigal Wan Hai Lines Corporation.
Initially, a bid of US $15 million was submitted by Mr. Willie J. Uy, respondent’s consultant, via the Proposal Letter Form; this bid was rejected by NDC and the Commission on Audit.
With no other bidders, NDC entered into a negotiated sale with the respondent.
Following several rounds of negotiations, the respondent increased its offer to US $18.5 million, which was eventually accepted.
The negotiated sale was approved sequentially by:

On February 11, 1994, NDC issued a Notice of Award to respondent, and a Contract of Sale was executed on March 14, 1994, transferring NSCP, its assets, personnel, records, and its three vessels to the respondent.

On September 22, 1994, shortly after the sale, the respondent received a Notice of Final Assessment from the US Department of Treasury, Internal Revenue Service (US IRS) against NSCP for deficiency taxes on gross transportation income derived from US sources for the years 1990, 1991, and 1992.
These tax assessments, based on Section 887 of the US Internal Revenue Code, imposed a 4% tax on gross transportation income of foreign corporations.
Concerned that delaying the payment of these taxes might affect its shipping operations, the respondent assumed and paid the tax liabilities—including amounts for the year 1993—in totalizing US $671,653.00, along with an additional US $16,533.10 as penalty for late payment, on October 14, 1994.
It is significant that the taxes addressed were incurred prior to the respondent taking over management of NSCP.

The respondent demanded reimbursement from NDC for the amounts paid to the US IRS, but NDC refused despite repeated demands.
Consequently, on March 20, 1996, the respondent filed a complaint before the Regional Trial Court (RTC), Branch 62, Makati City (Civil Case No. 96-558) seeking reimbursement and damages.
On August 6, 1999, the RTC rendered a decision in favor of the respondent, ordering NDC to reimburse the deficiency taxes, along with interest, exemplary damages of P100,000.00, and attorney’s fees of P100,000.00.
Upon appeal, the Court of Appeals, on May 21, 2001, affirmed the trial court’s judgment with modifications: it deleted the award for exemplary damages and reduced the attorney’s fees to P20,000.00.
In its decision, the Court of Appeals noted that the Negotiated Sale Guidelines and the Proposal Letter Form, being a ready-made form subject to the “take it or leave it” principle, constitute a contract of adhesion. The CA placed emphasis on the fact that the petitioner had full control over the terms, leaving the respondent with little room for negotiation regarding significant issues, including the non-disclosure of US tax liabilities.

Whether the Negotiated Sale Guidelines and the Proposal Letter Form constitute a contract of adhesion.
Alternatively, whether these documents should be treated merely as an invitation to bid, rather than as binding contractual terms.

Whether petitioner (NDC) is legally bound to reimburse respondent for the amounts it paid to the US IRS corresponding to NSCP’s deficiency tax liabilities.
Whether the principle of caveat emptor applies in this case, in view of the alleged non-disclosure of critical tax liability information by the petitioner.