G.R. No. 212689 - ECE Realty and Development, Inc. vs. Herdez

Case Summary (G.R. No. 212689)

Factual Background

Respondent alleged that ECE and Emir Realty and Development Corporation (EMIR) were involved in the condominium development and marketing of Harrison Mansion. Under the parties’ arrangement, ECE and EMIR promised to deliver to respondent a 30-square meter condominium unit referred to as Unit 808.

Respondent paid a reservation fee of P35,000.00 on July 22, 1997, and on August 2, 1997, he paid P104,063.65 to complete the downpayment. The Contract to Sell dated November 5, 1997 stated a projected occupancy or readiness date of December 31, 1999. Respondent claimed that ECE and EMIR failed to deliver Unit 808 by December 31, 1999, despite his having already paid a total of P452,551.65.

Respondent further asserted that he later discovered the unit measured only 26 square meters, instead of 30 square meters as contracted. He requested a corresponding reduction in price of P120,000.00, computed using the contracted price per square meter of P30,000.00. ECE and EMIR instead demanded that he settle all amortizations in arrears with interest.

Respondent also alleged that in 2005 he learned that ECE and EMIR had sold Unit 808 to a third party.

HLURB Complaint and Requested Relief

Respondent filed his HLURB complaint seeking orders against EMIR and ECE to accept the balance of the unit’s price after deducting P120,000.00, without interest. He likewise sought various forms of damages and attorney’s fees. In the alternative, if Unit 808 was no longer available, respondent requested reimbursement of P452,551.65, plus legal interest.

Defenses Raised by ECE and EMIR; Cancellation Theory

In their Answer with Counterclaim, ECE and EMIR sought dismissal for lack of cause of action and prayed for the dismissal of EMIR because it allegedly had no contractual relations with respondent. They claimed that respondent unjustifiably refused to accept turnover of Unit 808 and that he had been issued a Grace Period Notice stating that he was in arrears on monthly amortizations, but he allegedly allowed the grace period to lapse without settling past-due amortizations.

ECE and EMIR invoked Republic Act No. 6552 and asserted that ECE was compelled to cancel respondent’s contract to sell. They also sought exemplary damages, attorney’s fees, and litigation expenses.

Administrative Findings: HLURB-Regional Office and HLURB Board of Commissioners

On May 12, 2008, the HLURB-Regional Office ordered ECE and EMIR to reimburse respondent P452,551.65, plus legal interest from the filing of the complaint. It also awarded respondent P50,000.00 as moral damages, P50,000.00 as attorney’s fees, and P50,000.00 as exemplary damages.

ECE and EMIR appealed to the HLURB Board of Commissioners, which, in its Decision dated January 23, 2009, upheld the Regional Office ruling but dropped EMIR as a defendant.

OP Review and CA Affirmance with Modification

ECE appealed to the OP. The OP dismissed ECE’s appeal in a Decision dated January 10, 2011, and on July 5, 2011, it denied ECE’s motion for reconsideration.

ECE then elevated the controversy to the Court of Appeals, insisting that the OP erred in affirming the rescission-related relief and refund with legal interest from the filing of the complaint, together with moral and exemplary damages and attorney’s fees. ECE argued that respondent did not ask for rescission and refund due to delayed delivery but only sought a reduction in price. ECE also argued that interest could be imposed only from the time the judgment becomes final. It further denied bad faith and claimed the damages and attorney’s fees were excessive.

The Court of Appeals affirmed the OP decision with modification. The CA directed ECE to refund respondent P452,551.65 plus six percent (6%) interest per annum starting September 7, 2006, and twelve percent (12%) interest per annum from the time the judgment becomes final and executory until fully paid. The CA later deleted the award of moral and exemplary damages, finding no bad faith on ECE’s part, but it sustained the award of attorney’s fees of P50,000.00 pursuant to Article 2208 (2) of the Civil Code, reasoning that ECE’s act or omission compelled respondent to litigate.

In sustaining the refund obligation, the CA relied on Section 23 of P.D. No. 957, which provides that payments made by a buyer in a condominium or subdivision project shall not be forfeited when the buyer, after due notice, desists due to the owner’s failure to develop within the agreed period. The CA treated the facts as falling squarely within that provision because ECE failed to deliver Unit 808 on or before December 31, 1999, and the unit was also found to be smaller than promised. The CA noted that ECE’s own evidence showed that Unit 808 was ready for inspection only on June 28, 2002, or about two and a half years after the agreed delivery date.

On interest, the CA cited Eastern Shipping Lines, Inc. v. Court of Appeals and Fil-Estate Properties, Inc. v. Spouses Go, concluding that the refunded amount was not a loan or forbearance of money, goods, or credit, and therefore applied interest in line with the Civil Code and the established guidelines.

Issues Presented to the Court

ECE maintained before the Court that the CA and OP erred in: sustaining the refund of respondent’s payments; imposing interest from the filing of the complaint; awarding attorney’s fees; and deleting or maintaining certain damages. The principal challenge carried through to the Supreme Court focused heavily on the propriety of the interest rate and the timing of the accrual of interest, especially after finality of judgment.

Legal Basis and Reasoning of the Court

The Court affirmed the CA decision with modification, but it reduced the interest imposed after finality from twelve percent (12%) to six percent (6%).

The Court anchored its ruling on Article 2209 of the Civil Code, which states that when an obligation consists in the payment of a sum of money and the debtor incurs delay, the indemnity is the stipulated interest, and in the absence of stipulation, the legal interest is six percent (6%) per annum. The Court held that there was no doubt that ECE incurred delay in delivering the condominium unit, thus justifying the award of interest to respondent from the filing of the complaint.

The Court then applied the guidelines laid down in Eastern Shipping Lines, Inc. v. Court of Appeals. Under those rules, the twelve percent (12%) rate applies only to loans or forbearance of money, goods, or credit, or judgments involving such loan or forbearance; in contrast, where the obligation breached does not constitute a loan or forbearance, legal interest may be imposed at the rate of six percent (6%) per annum on the amount of damages awarded, and the interest runs from the time the claim is made judicially or extrajudicially once the demand is established with reasonable certainty, but if not reasonably ascertainable, from the date of judgment.

The Court also discussed the doctrinal clarification in Sunga-Chan, et al. v. Court of Appeals, et al. and reiterated that Central Bank Circular No. 416’s twelve percent (12%) rate applied only in cases involving loan or forbearance, whereas transactions involving damages arising from default in obligations, or money judgments not involving loan or forbearance, fall under Article 2209 and its six percent (6%) interest. The Court emphasized that upon finality, the legal interest rate should be determined according to the nature of the obligation and the governing rate.

The Court recognized that Central Bank Circular No. 416, together with later adjustments, had resulted in the twelve percent (12%) interim rate from finality until satisfaction in earlier jurisprudence, but it noted that the current regulatory framework had reverted the rate for loan or forbearance and judgments, in the absence of an express contract, back to six percent (6%). Specifically, the Court cited

Case Syllabus (G.R. No. 212689)

ECE Realty and Development, Inc. filed a Petition for Review on Certiorari seeking reversal of the Court of Appeals (CA) decision.
Haydyn Hernandez appeared as respondent and defended the rulings of the Office of the President (OP) and the CA.
The controversy arose from administrative proceedings under HLURB involving a Contract to Sell for a condominium unit and the buyer’s claim for reimbursement and damages upon non-delivery and nonconformity.
The CA had affirmed with modification the OP decision in O.P. Case Number 09-D-152.
The Supreme Court resolved to affirm the CA decision with modification, focusing on the correct legal interest rates and accrual periods.

Parties and Procedural Posture

The buyer, Haydyn Hernandez, filed an administrative Complaint for specific performance, with damages before the HLURB-Regional Office.
The developer involved, ECE Realty and Development, Inc., acted as petitioner in the Supreme Court.
The seller/other corporate party, Emir Realty and Development Corporation (EMIR), was dropped as defendant in the HLURB proceedings based on lack of contractual relations.
The HLURB-Regional Office ordered reimbursement and damages on May 12, 2008.
The HLURB Board of Commissioners upheld the Regional Office but dropped EMIR in its Decision dated January 23, 2009.
The OP dismissed ECE’s appeal in a Decision dated January 10, 2011, and later denied reconsideration.
On review, the CA affirmed the OP decision with modification through a decision dated November 4, 2013.
The Supreme Court’s final disposition affirmed the CA ruling but reduced and clarified the interest framework.

Contract and Project Promises

The parties executed a Contract to Sell dated November 5, 1997 for Unit 808, Building B, Phase 1 in Harrison Mansion.
The contract promised that the unit would be ready for occupancy by December 31, 1999.
The respondent paid a reservation fee of P35,000.00 on July 22, 1997.
The respondent paid P104,063.65 on August 2, 1997 to complete the downpayment.
The total amount paid by the respondent by the time of default/non-delivery was found to be P452,551.65.
The respondent alleged that the contracted unit area was 30 sq m, but the delivered unit measured only 26 sq m.

Key Factual Allegations

The respondent alleged that ECE and EMIR failed to deliver Unit 808 by December 31, 1999, despite full performance of his payment obligations to that extent.
The respondent also alleged a major deviation in the unit’s area from 30 sq m to 26 sq m, which prompted his demand for a corresponding price reduction.
The respondent claimed that after requesting price reduction by P120,000.00 (computed based on P30,000.00 per sq m), ECE and EMIR instead demanded settlement of amortizations in arrears with interest.
The respondent learned sometime in 2005 that ECE and EMIR had sold Unit 808 to a third party.
The respondent maintained that he suspended or withheld further payment because of the delayed delivery and consequent breach.
The CA later found that the respondent had duly notified ECE that he was suspending subsequent amortizations due to the delay in delivery.

Reliefs Sought Before HLURB

The respondent sought an order requiring EMIR and ECE to accept the balance of the price of Unit 808, less P120,000.00, and without interest.
The respondent demanded moral damages of P500,000.00, actual damages of P100,000.00, exemplary damages of P100,000.00, and attorney’s fees of P50,000.00 plus P2,000.00 per appearance fee.
In the alternative, if Unit 808 was no longer available, the respondent asked for reimbursement of P452,551.65 plus legal interest.
The administrative complaint thus framed both a performance remedy and, alternatively, a refund remedy contingent upon the unit’s nonavailability.

Defense Theory and Counterclaim

EMIR and ECE argued that the HLURB complaint should be dismissed for lack of cause of action.
They also moved to drop EMIR because it had no contractual relations with the respondent.
The respondents alleged that the buyer unjustifiably refused to accept turnover of Unit 808.
They claimed that a Grace Period Notice was issued for delinquency in monthly amortizations and that the buyer allowed the grace period to lapse without settling arrears.
They invoked Republic Act No. 6552 to justify cancellation of the Contract to Sell.
They sought exemplary damages, attorney’s fees, and litigation expenses on the counterclaim.
These defenses were ultimately rejected in material respects by the HLURB and the OP, as affirmed by the CA.

Administrative Rulings

The HLURB-Regional Office ordered ECE and EMIR to reimburse the respondent P452,551.65, plus legal interest from the filing of the complaint.
The HLURB-Regional Office also awarded P50,000.00 as moral damages, P50,000.00 as attorney’s fees, and P50,000.00 as exemplary damages.
On appeal, the HLURB Board of Commissioners upheld the Regional Office’s orders but dropped EMIR as defendant.
The OP later dismissed ECE’s appeal and sustained the core reimbursement and damages awards.
The OP’s disposition as modified in the CA decision preserved reimbursement, interest, and attorney’s fees while deleting some categories of moral and exemplary damages.

CA Decision and Modifications

The CA affirmed the OP decision but modified the final outcomes as to damages.
The CA directed ECE to pay P452,551.65 representing the total amount paid by the respondent, plus six percent (6%) interest per annum starting 07 September 2006, and twelve percent (12%) interest per annum from finality until full payment.
The CA deleted the awards of moral and exemplary damages on the ground that ECE did not act in bad faith.
The CA sustained an award of attorney’s fees of P50,000.00 based on Article 2208 (2) of the Civil Code, reasoning that ECE’s act or omission compelled the respondent to litigate.
On the rate and start of interest, the CA relied on Eastern Shipping Lines, Inc. v. Court of Appeals and Fil-Estate Properties, Inc. v. Spouses Go, reasoning that the refund obligation was not a loan or forbearance of money, goods, or cred