Case Summary (G.R. No. 171821)
Facts: merger, pre-termination, and demand
Following bank mergers, the bank closed the branch occupying the subject premises and sent Ragasa a notice of pre-termination dated May 28, 2001, effective June 30, 2001. Ragasa demanded payment for unexpired rentals (July 1, 2001 to Jan. 31, 2003) totaling P3,146,596.42. The bank replied that its only liability was forfeiture of the security deposit under item 8(m). The bank vacated the premises June 30, 2001. Ragasa filed suit on March 11, 2002 for collection of the unexpired rentals and damages.
RTC ruling
The Regional Trial Court found for Ragasa and awarded (1) P3,146,596.42 representing monthly rentals for July 1, 2001 to Jan. 31, 2003; (2) 3% penalty of monthly rental for each month of delay; (3) 14% per annum interest on the full amount due; (4) attorney’s fees of P30,000; and (5) costs. The RTC held the bank could not unilaterally pre-terminate an unambiguous five‑year lease lacking a pre‑termination clause, thus remaining liable for the rentals for the remaining term.
Court of Appeals ruling
The Court of Appeals reversed and dismissed the complaint, holding that the bank’s breach (pre‑termination) triggered the contract’s automatic termination under item 8(p) and that the applicable contractual remedy for breach of the lease term was forfeiture of the security deposit under item 8(m). The CA found that awarding both the unexpired rentals and penalties would amount to unjust enrichment.
Issues presented on review
Ragasa’s petition raised, inter alia, whether: (1) the CA erred in applying Articles 1170 and 1308; (2) the CA erred in holding item 8(m) (forfeiture of deposit) rather than item 8(n) (3% penalty) was the applicable penalty clause; (3) the CA erred in concluding the contract had been terminated; and (4) the CA erred in finding unjust enrichment.
Contract interpretation and autonomy
The Supreme Court reaffirmed the principle that contracts are the law between the parties and that valid stipulations are binding so long as they are not contrary to law, morals, good customs, public order or public policy. Where contract terms are clear, their literal meaning controls. The Court analyzed the use of the term “Term/TERM” in the contract and concluded that “Term” in item 8(m) refers to the lease period (the five‑year duration), consistent with other usages in the contract.
Breach and automatic termination
The Court found that the bank breached the contractual “Term” by pre‑terminating and vacating the premises June 30, 2001. Because the contract contains an express automatic termination provision (item 8(p) providing that breach of the contract’s provisions shall mean termination), the lease was automatically terminated upon the bank’s breach. Given this automatic rescission provision, Ragasa could not elect to force continuation of the lease and instead was limited to claiming damages arising from the breach.
Nature and legal effect of item 8(m)
Item 8(m) (“The full deposit shall be forfeited … upon non‑compliance of the Term … and cannot be applied to Rental”) was analyzed as a penal clause (liquidated damages) accessory to the principal lease obligation. The Court reviewed the nature, purposes (coercive, liquidatory, punitive) and classifications of penal clauses and applied Article 1226: generally a penal clause substitutes for indemnity and interest unless there is a stipulation to the contrary or certain exceptions apply (e.g., debtor refuses to pay the penalty or is guilty of fraud). The Court deemed item 8(m) conventional and primarily compensatory, but read together with item 10 it produces additional consequences.
Joint application of items 8(m) and 10 — complementary and cumulative penalty
The Court construed items 8(m) and 10 together. Item 10 provides that in litigation arising from noncompliance the aggrieved party shall be paid “no less than P15,000 for attorney’s fees, and other damages that the honorable court may allow,” and that unpaid accounts bear 14% interest. Construed jointly, items 8(m) and 10 constitute a complementary and cumulative penal clause — i.e., the forfeiture of deposit (item 8(m)) is coupled with the possibility of additional damages, attorney’s fees (minimum P15,000), litigation costs, and interest as provided in item 10. The Court concluded that item 10 supplies the “stipulation to the contrary” in Article 1226 that allows recovery of damages in addition to the penal clause.
Limitation on recovery — mitigation and proof of damages
Although the contract permits recovery beyond the forfeited deposit, the Court stressed that Ragasa bore the burden to prove “other damages” it actually suffered. The bank vacated the premises, making the premises available for re‑lease as of July 1, 2001; Ragasa elected not to lease and presented no evidence of attempts to mitigate or of lost rentals. Citing Article 2203 (duty to mitigate), the Court held Ragasa f
...continue readingCase Syllabus (G.R. No. 171821)
Facts
- On January 30, 1998, petitioner D.M. Ragasa Enterprises, Inc. (Ragasa) and then Equitable Banking Corporation (lessee) executed a five-year Contract of Lease covering the ground and second floors of a commercial building at 175 Tomas Morato Avenue corner Scout Castor, Quezon City, with the lease term commencing February 1, 1998 and expiring January 31, 2003.
- The Lease Contract provided a monthly rental of P122,607.00 (P463.16 per square meter per month), inclusive of VAT and withholding tax, payable in advance within the first five days of each month, with an annual increase of 10% during the lease term.
- The Lease Contract contained default and security provisions including:
- Item 7: payment by lessee of P735,642.00 composed of P367,821.00 as three months advanced rental and P367,821.00 as three months deposit; the deposit refundable only upon termination after expiration, unpaid utilities and damages to be deducted.
- Item 8(m): "The full deposit shall be forfeited in favor of the LESSOR upon non-compliance of the Term of the Contract of Lease by the TENANT, and cannot be applied to Rental."
- Item 8(n): a penalty of 3% of the monthly rental for every month of delay in payment.
- Item 8(p): breach or non-compliance of any provision, especially non-payment of two consecutive monthly rentals on time, "shall mean the termination of this Contract" and within five days the tenant shall vacate without need of judicial proceedings; padlocking authorized if tenant does not vacate.
- Item 10: where court litigation arises from non-compliance of any provision, the aggrieved party shall be paid attorney's fees of not less than P15,000.00 and "other damages that the honorable court may allow"; cost of litigation and interest at 14% per annum on unpaid accounts are borne by party in default.
- Equitable Bank paid the two P367,821.00 payments (advance and deposit) as required.
- Equitable Banking Corporation merged with PCI Bank to form Equitable PCI Bank, Inc.; later, separate merger activity resulted in Banco de Oro, Inc. as surviving corporation (respondent bank).
- Due to branch rationalization following mergers, the bank sent Ragasa a notice dated May 28, 2001 informing Ragasa of pre-termination of the Lease Contract effective June 30, 2001.
- Ragasa sent a demand letter dated June 20, 2001 seeking payment of monthly rentals for the remaining term (July 1, 2001 to January 31, 2003) totaling P3,146,596.42, arguing there was no express pre-termination clause in the Lease Contract.
- The bank replied by letter dated June 26, 2001 asserting its only liability was forfeiture of the security deposit under item 8(m).
- The bank vacated the premises on June 30, 2001. Ragasa sent two further demand letters (dated July 27, 2001 and February 27, 2002) which were ignored.
Procedural History
- Ragasa filed a Complaint for Collection of Sum of Money (P3,146,596.42) and Damages with the Regional Trial Court (RTC), Quezon City, on March 11, 2002.
- RTC, Branch 216, issued a Decision dated April 4, 2006 ruling for Ragasa and ordering the bank to pay:
- P3,146,596.42 representing monthly rentals from July 1, 2001 to January 31, 2003;
- a penalty of 3% of the monthly rental for every month of delay;
- interest of 14% per annum on the full amount due until fully paid;
- attorney's fees of P30,000.00; and
- costs of litigation.
- The RTC denied the bank's Motion for Reconsideration in an Order dated October 3, 2006.
- The bank appealed to the Court of Appeals (CA). In the questioned Decision dated March 27, 2009, the CA reversed and set aside the RTC decision, dismissed the complaint for lack of legal basis, and held that:
- the bank's unilateral pre-termination constituted a breach which triggered automatic termination under item 8(p);
- the bank was not liable for rentals for the unexpired term; and
- the bank was liable to forfeit its security deposit pursuant to item 8(m).
- The CA denied Ragasa's Motion for Reconsideration in a Resolution dated November 25, 2009.
- Ragasa filed a Petition for Review on Certiorari under Rule 45 of the Rules of Court on January 21, 2010, raising four main issues against the CA rulings.
- The Supreme Court, in a decision penned by Justice Caguioa and with concurrence, partly granted the petition and affirmed the CA decision with modification.
Issues Presented to the Supreme Court
- Whether the CA erred in granting the bank's appeal and denying Ragasa's Motion for Reconsideration contrary to Articles 1170 and 1308 of the Civil Code.
- Whether the CA erred in ruling that the applicable penalty clause is item 8(m) and not item 8(n) of the Lease Contract.
- Whether the CA erred in ruling that the Lease Contract had been terminated.
- Whether the CA erred in ruling that Ragasa's claim amounted to unjust enrichment.
Legal Framework and Doctrines Applied
- Contracts are the law between the parties; obligations arising from contracts have the force of law and must be complied with in good faith (Civil Code, Art. 1159; Art. 1306 cited).
- Literal meaning of clear contract stipulations controls when terms are clear (Civil Code, Art. 1370).
- Article 1170: liability for damages where parties contravene the tenor of their obligations (tort/contract liability interplay).
- Article 1659: options available to the aggrieved party upon noncompliance—rescission and indemnification, or indemnification alone while preserving the contract.
- Article 1226 (penal clause rule): where obligations contain a penal clause, the penalty shall substitute indemnity for damages and payment of interests unless there is stipulation to the contrary; damages are payable if obligor refuses to pay the penalty or is guilty of fraud