Case Summary (G.R. No. 158361)
Petitioner
International Hotel Corporation (IHC), a corporate entity which approved a multi‑phase technical proposal and later cancelled shares issued to the technical group as compensation.
Respondents
Francisco B. Joaquin, Jr. (principal proponent and negotiator of foreign financing) and Rafael Suarez (associate in the technical group), who alleged they were promised compensation (stock and/or cash) for services rendered and sought judicial relief after IHC cancelled the issued shares.
Key Dates
Proposal submitted: February 1, 1969. Board approval of phases 1–6 and P2,000,000 estimate: February 11, 1969. Joaquin’s letter requesting P500,000 (or shares): July 11, 1969 (board thereafter approved compensation arrangements). Joaquin’s recommendation favoring Materials Handling: June 20, 1970. DBP cancellation of prior guaranty: December 6, 1971. IHC–Weston agreement: December 13, 1971; DBP denial communicated June 26, 1972. Complaint filed: December 6, 1973. RTC decision: August 26, 1993. CA decision: November 8, 2002. Supreme Court decision: April 10, 2013.
Applicable Law
1987 Philippine Constitution (governing constitution). Relevant statutory and doctrinal provisions relied on in the decision: Civil Code — Articles 1181, 1186, 1233, 1234; Corporation Code provisions invoked in the proceedings (Sections cited in record: Section 16 and Section 68). Equitable doctrines applied: constructive fulfillment of condition in mixed obligations; quantum meruit as measure of reasonable value of services; principles governing award of attorney’s fees.
Core Facts
Joaquin submitted a nine‑phase technical proposal to secure DBP guaranty and a foreign loan. IHC’s board approved phases 1–6 and allocated an estimated P2,000,000 for phase‑related expenses. Joaquin later requested P500,000 (or shares) as additional compensation and the stockholders authorized compensation to the technical group. Joaquin negotiated with prospective financiers (Materials Handling, Barnes, Weston). DBP withdrew its earlier guaranty and later denied guaranty for the Weston arrangement. IHC cancelled 17,000 shares previously issued to Joaquin and Suarez. Joaquin and Suarez filed suit claiming the cancellation was illegal and that they were owed compensation.
Procedural History
RTC (Branch 13, Manila) found IHC liable and awarded Joaquin P200,000, Suarez P50,000, plus P20,000 attorney’s fees and costs. Both sides appealed. The Court of Appeals affirmed liability but increased awards to Joaquin P700,000 and Suarez P200,000, and retained attorney’s fees. IHC sought certiorari review with the Supreme Court.
Issues Presented
(1) Whether compensation may be awarded despite alleged non‑fulfillment of respondents’ obligation to secure a DBP‑guaranteed foreign loan; (2) Whether attorney’s fees were properly awarded.
RTC and CA Findings (short)
RTC: Held that cancellation of shares was proper under Corporation Code provisions and that respondents had failed to meet obligations, but nonetheless awarded modest sums. CA: Held respondents had substantially performed and IHC could not rely on its ultra vires issuance/cancellation of shares to escape obligation; held IHC liable under Article 1186 and Article 1234 of the Civil Code, and awarded larger sums.
Supreme Court — Preliminary: Nature of Review
The Supreme Court treated the petition as raising questions of law because it required review of whether the lower courts correctly applied legal principles to the established facts. The Court therefore examined the applicability of Articles 1186 and 1234, the character of the parties’ obligation (conditional/mixed), and equitable remedies available in the absence of an express fee agreement.
Supreme Court — Article 1186 and Intent to Prevent Fulfillment
Article 1186 (constructive fulfillment when obligor voluntarily prevents fulfillment) requires both (a) intent of the obligor to prevent fulfillment and (b) actual prevention. The Court found the CA erred in applying Article 1186 because the record did not show IHC acted with intent to preempt Joaquin’s performance. The board’s minutes demonstrated that IHC relied on Joaquin’s recommendation and legitimately pursued negotiations with Materials Handling and Barnes; there was no proof of willful prevention of respondents’ performance.
Supreme Court — Article 1234 (Substantial Performance) Inapplicable
Article 1234 applies where an obligor in good faith substantially performs the material elements of the contract, with only slight or technical deviations. The Court concluded that securing a DBP‑guaranteed foreign loan was the essence of the parties’ bargain and a material, indispensable obligation. Failure to obtain such financing was not a slight or technical defect; any benefits IHC derived were minimal relative to the contract’s object. Therefore Article 1234’s substantial‑performance rule did not justify the CA’s award.
Supreme Court — Mixed Conditional Obligation and Constructive Fulfillment
The Court characterized the parties’ obligation as mixed because fulfillment depended partly on the respondents’ efforts and partly on the will of third parties (foreign financier and DBP). In mixed conditional obligations, when the obligor does all in his power to comply but the condition still fails through causes beyond his control, the condition may be deemed fulfilled. The Court found respondents had done what was within their power — th
...continue readingCase Syllabus (G.R. No. 158361)
Case Caption and Nature
- Petition for review on certiorari from a decision of the Court of Appeals (CA-G.R. No. 47094) affirming with modification the decision of the Regional Trial Court (RTC), Branch 13, Manila, Civil Case No. R-82-2434.
- Parties: International Hotel Corporation (IHC) as petitioner; Francisco B. Joaquin, Jr. and Rafael Suarez as respondents/plaintiffs in the trial court.
- Primary relief sought below: specific performance, annulment, damages and injunction arising from IHC’s cancellation of shares purportedly issued to Joaquin and Suarez as compensation for services in securing DBP-guaranteed foreign financing for a hotel project.
Antecedent Facts and Scope of Engagement
- On February 1, 1969, Joaquin submitted a technical proposal to IHC’s Board to render technical assistance in securing a foreign loan for construction of a hotel, guaranteed by the Development Bank of the Philippines (DBP).
- The proposal comprised nine phases: (1) preparation of a new project study; (2) settlement of an unregistered mortgage before application for guaranty; (3) preparation of papers for the guaranty application; (4) securing a foreign financier; (5) securing DBP Board of Governors’ approval; (6) follow-up of application with DBP; (7) overall coordination in implementing project study projections; (8) preparation of staff for hotel operations; (9) actual hotel operations.
- IHC’s Board approved phases 1 to 6 on February 11, 1969 and authorized an estimated P2,000,000.00 for the project (described in the minutes as an estimated maximum expense to be authorized subject to committee discretion).
- DBP processed and initially approved the guaranty application on October 24, 1969, subject to several conditions.
- On July 11, 1969, Joaquin requested payment of fees amounting to P500,000.00 for services rendered and to be rendered outside the technical proposal, offering to accept shares instead of cash due to IHC’s financial situation.
- On July 11, 1969, IHC stockholders met and authorized payment arrangements for Joaquin and Suarez; minutes noted an estimate that the technical group’s assistance was about 70% completed and authorized issuance of approximately P400,000.00 in common stock to the technical group (P200,000.00 each to Suarez and Joaquin).
- Joaquin recommended Materials Handling Corporation over Roger Dunn & Company based on more favorable terms; the Board accepted his recommendation on June 20, 1970.
- Negotiations proceeded with Materials Handling and Barnes International (Barnes); IHC later considered Weston International Corporation (Weston) when Barnes failed to deliver the needed loan.
- DBP canceled its prior guaranty by letter dated December 6, 1971. IHC entered into agreement with Weston on December 13, 1971 and later communicated to DBP on June 26, 1972, but DBP denied guaranty for failure to comply with its conditions.
- Due to Joaquin’s failure to secure the needed loan (as viewed by IHC), IHC, through its President Bautista, canceled 17,000 shares of stock previously issued to Joaquin and Suarez as payment. Requests for reconsideration by Joaquin and Suarez were rejected.
- Joaquin and Suarez filed suit on December 6, 1973 alleging illegal cancellation of shares, deprivation of corporate rights, that Barnes was recommended by President Bautista (not by Joaquin), intervention by the President and his son, DBP’s cancellation because Barnes failed to release the loan, and an alleged agreement by IHC to compensate them with 17,000 shares plus P1,000,000.00 in cash.
Pleadings and Contentions at Trial
- IHC and certain directors answered, asserting that the shares issued violated Section 16 of the Corporation Code, that Joaquin and Suarez had not produced a foreign financier acceptable to DBP, and that Joaquin and Suarez had already received P96,350.00.
- Other directors denied knowledge or participation in the cancellation; two persons denied being directors.
- Procedural note: one director, Reyes, died and was substituted by his administratrix.
RTC Ruling (Aug. 26, 1993)
- The RTC found IHC liable under the second paragraph of Article 1284 of the Civil Code and ordered IHC to pay:
- Francisco B. Joaquin, Jr. P200,000.00;
- Rafael Suarez P50,000.00;
- Co-plaintiffs’ attorney’s fees of P20,000.00; and costs of suit.
- RTC reasoning:
- Found Joaquin and Suarez had failed to meet obligations when IHC chose to negotiate with Barnes rather than Weston, the financier Joaquin recommended.
- Held cancellation of shares proper under Section 68 of the Corporation Code, which permits transfer of shares to compensate only past services, not future ones.
Court of Appeals Ruling (Nov. 8, 2002)
- The CA affirmed RTC’s finding of IHC’s liability but modified the amounts awarded:
- Ordered IHC to pay Joaquin P700,000.00 and Suarez P200,000.00, in cash.
- CA’s reasoning:
- Held IHC liable under Article 1186 of the Civil Code (constructive fulfillment where obligor prevents condition).
- Applied Article 1234 (substantial performance) concluding Joaquin had substantially performed and was entitled to payment; found issuance of shares ultra vires wh