Case Summary (G.R. No. 178837)
Key Dates and Procedural Posture
Material chronology: leases executed circa 1994 (20-year prepaid leases); unilateral CAAD escalations imposed beginning 1997 through 2003, amounting to P2,269,735.64; complaints and provisional relief filings in March 2003 (TRO and writ of preliminary injunction); case tried at the Regional Trial Court (RTC), Branch 41, culminating in an August 3, 2012 decision in favor of Cua; Court of Appeals (CA) decision dated March 29, 2016 (partly granting appeal and modifying relief); final Supreme Court disposition rendered February 15, 2023, consolidating cross-petitions and affirming the CA decision with specified modifications. The 1987 Constitution governs the applicable constitutional framework.
Applicable Law and Legal Principles Relied Upon
Governing rules: freedom to contract subject to law, morals, public order and public policy (Civil Code provisions cited in the record); principle of mutuality of contracts; stipulation on interest requires express written agreement (Civil Code Article 1956); criteria for awarding attorney’s fees under Article 2208 of the Civil Code. Jurisprudential guidance referenced in the decisions includes authorities on escalation clauses, potestative stipulations, and the burden of proof when extraordinary economic events (e.g., currency crisis, inflation) are invoked.
Facts Relevant to the Dispute
Cua entered four 20-year prepaid lease contracts with Gotesco for retail and amusement units. Lease clause 17 provided that, unless otherwise arranged, the lessee shall pay monthly CAAD at P2.00 per sq.m. per day plus aircon dues of P2.25 per sq.m. per day (gross P4.25 per sq.m. per day), payable monthly; the clause further stipulated that CAAD "shall bear an annual escalation, compounded, at eighteen percent (18%) effective calendar year 1995 or at a rate to be determined by [the] LESSOR if said dues shall not be sufficient to meet inflation, Peso devaluation, and other escalation in utility and maintenance costs at any point in time." From 1997 to 2003 Gotesco applied varying escalations under this provision, resulting in the aggregate collection of P2,269,735.64, which Cua contested as unfair and unilateral.
Trial Court (RTC Branch 41) Ruling and Rationale
The RTC invalidated the escalation clause’s second paragraph for violating the principle of mutuality of contracts because it conferred upon Gotesco an unrestrained, unilateral power to adjust CAAD without the lessee’s assent. The RTC found Gotesco failed to show how it determined the escalations or to substantiate the factual predicate (inflation, peso devaluation, increased utility and maintenance costs) that would justify the increases; the court also noted escalated CAAD sometimes exceeded monthly rent. Relief ordered: permanent cease-and-desist from imposing escalated CAAD absent mutual agreement; restitution of P2,269,735.64 with 6% legal interest from January 1997; award of attorney’s fees (P500,000) and costs.
Court of Appeals Ruling and Modifications
The CA construed the clause as presenting two scenarios and upheld only the 18% compounded escalation rate as valid, while striking down the portion that would permit Gotesco to impose an unspecified rate at its sole discretion in response to inflation. The CA remanded computation of restitution to apply the 18% contractual rate and deleted the RTC award of attorney’s fees and litigation expenses for lack of equitable justification.
Issues Raised on Certiorari to the Supreme Court
Primary legal questions: (1) Whether the CAAD escalation clause (particularly the provision allowing the lessor to determine escalation rates if CAAD is insufficient to meet inflation and related contingencies) is valid or void for violating mutuality of contracts and being potestative; and (2) whether the lessee, Cua, is entitled to attorney’s fees under Article 2208 given the circumstances of the litigation.
Supreme Court’s Analysis on Mutuality and Escalation Clauses
The Court reaffirmed the foundational principle that contracts bind the parties and that important modifications to contractual terms—especially those affecting interest or monetary obligations—require mutual assent. Interest and escalation stipulations must be expressly stipulated in writing; any unilateral power to change such terms by one party is inimical to mutuality. The Court treated the second paragraph of clause 17 as an escalation clause that, insofar as it authorized the lessor to unilaterally set the escalation rate whenever CAAD "shall not be sufficient to meet inflation, Peso devaluation, and other escalation," rendered the stipulation potestative and void. The CA’s alternative interpretation (18% in the absence of inflation and a discretionary rate in case of inflation) was rejected because the clause’s language links the 18% figure and the lessor’s determinative power in a cumulative manner rather than in mutually exclusive scenarios; as written, the clause authorized the lessor to impose any rate, including but not limited to 18%, whenever the stated contingencies occurred.
Supreme Court’s Findings on Proof and Gotesco’s Conduct
The Court emphasized that a party asserting inflation, currency devaluation, or extraordinary escalation must prove those facts and the causal connection to increased charges; judicial notice alone is insufficient to validate unilateral escalations. Gotesco failed to present competent proof quantifying the asserted increases or demonstrating how such events translated into the applied escalations. Testimony by Gotesco’s operations head showed computations based on generalized economic conditions without discernible standards or documentation; several cost categories cited as bases for escalation were not included in clause 17. Circulars and notices issued later did not cure the lack of contemporaneous, contractual, and evidentiary basis for the increases, particularly where escalations were applied years prior to the circular cited.
Remedies: Restitution, Re-computation, Interest, and Remand
Because the discretionary portion of the escalation clause was invalidated, the Court ordered Gotesco to retur
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Procedural Posture and Consolidation
- The matter consists of consolidated petitions for review on certiorari: G.R. No. 228513 (filed by Gotesco Properties, Inc.) and G.R. No. 228552 (filed by Victor C. Cua).
- Both petitions assail the Court of Appeals (CA) Decision dated March 29, 2016 and the CA Resolution dated November 29, 2016 in CA-G.R. CV No. 100311, which affirmed with modification the August 3, 2012 Decision of the Regional Trial Court (RTC) of Manila, Branch 41.
- On June 7, 2017, the Supreme Court ordered consolidation of the petitions for review.
- The petitions seek review of: (a) RTC Branch 41’s finding invalidating escalation charges on common area and aircon dues (CAAD) and ordering restitution and attorney’s fees; and (b) the CA’s modification of RTC’s rulings, including the deletion of attorney’s fees and the CA’s re-computation instruction.
Antecedent Facts
- In or about 1994, Victor C. Cua entered into four prepaid 20-year lease contracts with Gotesco Properties, Inc. for commercial units in Ever-Gotesco Commonwealth Center.
- The leased units housed two jewelry stores (Carmille Jewelry Emporium and Beverly Hills Emporium) and two amusement centers (Val and Vhon Amusement and Carl Amusement Center).
- In addition to rent, the leases required payment of common area and aircon dues (CAAD) and other charges for the use of common areas, entrance, hallways, comfort rooms, stairs, escalators, elevators, centralized aircon, janitorial and security services.
- From January 1997 to 2003, Gotesco imposed escalation charges on CAAD, which cumulatively amounted to P2,269,735.64 charged to Cua.
- Cua protested the escalation costs by letters dated February 23, 2001 and March 26, 2001; Gotesco, through General Manager Ellen Miranda, maintained the validity of the escalation charges as stipulated in the lease contracts.
- On March 3, 2003, Cua filed a Complaint for Injunctive Relief, Restitution, and Damages with Emergency Application for an Ex Parte TRO and a Writ of Preliminary Injunction against Gotesco.
Relevant Contractual Provision (Clause 17)
- Clause 17 of the lease contracts, transcribed in the records, provides:
- Base CAAD: Two Pesos (P2.00) per square meter per day.
- Aircon dues: Two and 25/100 Pesos (P2.25) per square meter per day.
- Gross amount: Four and 25/100 Pesos (P4.25) per square meter per day.
- Payment timing: on or before the 5th day of each month without demand.
- A proviso: "The aforementioned common area and aircon dues shall bear an annual escalation, compounded, at eighteen [percent] (18%) effective calendar year 1995 or at a rate to be determined by [the] LESSOR if said dues shall not be sufficient to meet inflation, Peso[]devaluation, and other escalation in utility and maintenance costs at any point in time."
- A clause that interruptions or fortuitous events shall not excuse non-payment of CAAD.
Preliminary and Trial Court Proceedings (TROs, Re-rafflings, Trial)
- On March 3, 2003, an Executive Judge issued a 72-hour TRO upon service to Gotesco; the case was raffled to RTC Manila, Branch 14.
- On March 6, 2003, RTC Branch 14 extended the TRO for up to 20 days.
- On March 27, 2003, RTC Branch 14 granted a writ of preliminary injunction ordering Gotesco to cease collection of CAAD pending resolution.
- Gotesco filed a motion for reconsideration; on April 22, 2003 RTC Branch 14 dissolved the writ of preliminary injunction.
- On June 25, 2003, Cua filed a motion for disqualification of the presiding judge; disqualification was granted on August 4, 2003 and the case was re-raffled to RTC Branch 39.
- After further proceedings and exchanges of pleadings, the case was eventually re-raffled to RTC Branch 41 where it was tried on the merits.
Trial Court (RTC Branch 41) — Findings and Ruling (August 3, 2012)
- RTC Branch 41 rendered judgment in favor of Cua, invalidating the escalation clause (second paragraph of clause 17) for violating the principle of mutuality of contracts.
- RTC found Gotesco’s unilateral and unrestrained right to adjust escalation costs deprived Cua of the right to assent to an important modification of the contract.
- The RTC observed that Gotesco failed to demonstrate how it determined, computed, or arrived at its escalation assessments.
- The RTC noted that the increased CAAD rates at times exceeded monthly rentals, despite CAAD being an additional imposition intended for contingencies.
- RTC ordered:
- Gotesco to permanently cease charging escalated CAAD unless mutually agreed upon;
- Restitution of P2,269,735.64 representing CAAD collected pursuant to paragraph 2 of paragraph (17) of the contracts, plus interest at 6% per annum reckoned from January 1997 until full restitution;
- Payment to Cua of P500,000.00 as attorney’s fees and litigation expenses;
- Costs of suit.
- Gotesco sought reconsideration; RTC denied it in an Order dated January 9, 2013. Gotesco filed a notice of appeal.
Court of Appeals — Findings and Ruling (March 29, 2016; Resolution Nov. 29, 2016)
- The CA partly granted the appeal and interpreted the escalation clause as covering two situations:
- Where CAAD is insufficient to meet inflation, Gotesco may impose an 18% escalation rate;
- In case of inflation, Gotesco may determine the rate to impose (this second scenario was declared invalid by the CA).
- The CA held the 18% interest-rate scenario valid but declared the provision granting Gotesco the power to impose any new rate without notice to Cua invalid for violating mutuality of contracts.
- The CA affirmed RTC’s direction to return P2,269,735.64 but ordered re-computation of the restitution based on the 18% interest rate expressly stated in the lease contract.
- The CA deleted the award of attorney’s fees and litigation expenses (P500,000.00), finding no equitable justification for their award.
- Motions for reconsideration by both parties were denied by the CA on November 29, 2016.
Parties’ Contentions on Review
- Cua’s contentions:
- The escalation clause violates the principle of mutuality by giving Gotesco sole power to determine escalation rates.
- Escalation clauses must not be potestative and should be based on reasonable and valid grounds, with proof of inflation, peso devaluation, and increases in utility and maintenance costs.
- Alternatively, imposition of escalation is subject to a suspensive condition (that CAAD be insufficient to meet inflation, etc.), which Gotesco must prove as having occurred.
- Gotesco acted in bad faith and imposed escalation costs without factual basis and discriminatorily as to leasehold tenants.
- Seeks restitution of P2,269,735.64 and attorney’s fees for the costly and protracted litigation.
- Gotesco’s contentions:
- The escalation clause was consensually agreed and valid under the principle of mutuality of contracts.
- Terms of the lease are clear; Gotesco justified imposition of escalation due to the Asian currency crisis, increased rates of utilities and service providers, and other maintenance/upkeep costs.
- The Court may take judicial notice of the adverse economic conditions since 1997.
- The provision allowi