G.R. No. 174882 - Mondragon Personal Sales, Inc. vs. Sola, Jr.

Case Summary (G.R. No. 174882)

Factual Background

MONDRAGON SALES, INC. engaged VICTORIANO S. SOLA, JR. as a service contractor under a Contract of Services commencing October 2, 1994 for three years, whereby respondent would provide a bodega cum office in General Santos City and receive monthly service fees computed by bands of monthly net sales. Prior to that contract, respondent’s wife, Lina Sola, maintained a separate Franchise Distributorship Account with petitioner. By letter dated January 26, 1995 respondent acknowledged and confirmed his wife’s indebtedness, undertook scheduled payments, and agreed that subsequent orders would be covered by postdated checks; the letter stated that respondent “fully understand[s] and voluntarily agree[s] to the above undertaking with full knowledge of the consequences which may arise therefrom.” Petitioner withheld respondent’s service fees for February to April 1995 and applied them against the indebtedness, and respondent closed and suspended operations of the bodega on April 29, 1995.

Trial Court Proceedings

Respondent filed a Complaint for accounting and rescission on May 24, 1995 alleging unlawful withholding of service fees totaling P222,202.84 and praying for rescission and an accounting. Petitioner filed an Answer with Counterclaim seeking payment of P1,547,892.55, delivery of goods padlocked in respondent’s bodega, damages for loss of income, and recovery of an advance. The RTC granted petitioner’s motion for preliminary attachment and replevin upon bond, denied respondent’s motion to quash the writ, and proceeded to trial. On July 6, 2000 the RTC rendered judgment for respondent in the amount of P1,543,643.96 as principal balance of petitioner’s account with respondent, plus legal interest from filing, attorney’s fees of P25,000.00, and costs. The RTC found the contract of services valid and non-rescissible under Article 1381, Civil Code, upheld petitioner’s computation of service fees for February to April 1995 at P125,040.01, and concluded respondent had acknowledged and assumed his wife’s debt by his January 26, 1995 letter; it therefore deducted the P125,040.01 from the confirmed indebtedness to arrive at the balance awarded to petitioner.

Court of Appeals Decision

On appeal the Court of Appeals reversed in material part. The CA held that petitioner breached the contract by unlawfully withholding respondent’s service fees and that such breach justified rescission under Article 1191, Civil Code, which governs rescission of reciprocal obligations for breach. The CA declared the Contract of Services rescinded, remanded the case to the RTC to determine the amount of service fees unlawfully withheld, and ordered petitioner to pay respondent attorney’s fees of P25,000.00. The CA rejected petitioner’s contention that respondent assumed his wife’s obligation and ruled that no novation or legal compensation occurred because the wife, not respondent, was principally indebted under the franchise agreement.

Issues Presented in the Petition

Petitioner sought review and urged that the CA erred (1) in finding petitioner breached the contract and that Article 1279, Civil Code (compensation) did not apply; (2) in finding that respondent did not assume his wife’s obligation; (3) in remanding the case despite the RTC’s accounting; and (4) in obliterating the award of petitioner’s counterclaim despite respondent’s admissions.

Parties’ Contentions on Appeal

Petitioner argued that respondent became a principal debtor by his January 26, 1995 letter and that petitioner lawfully withheld and applied respondent’s service fees against that debt, effecting legal compensation under Article 1279, Civil Code. Respondent maintained that he did not assume his wife’s liability, that petitioner’s withholding was unlawful, and that the withholding justified rescission under Article 1191, Civil Code.

Supreme Court’s Analysis on Assumption of Debt

The Court examined respondent’s January 26, 1995 letter in full and construed its language, particularly the concluding paragraph where respondent stated he “fully understand and voluntarily agree to the above undertaking with full knowledge of the consequences which may arise therefrom.” The Court found that the letter unequivocally bound respondent to pay the confirmed amount of P1,973,154.73 and that he thus became a principal debtor of petitioner for that sum. The Court concluded that respondent solidarily bound himself to pay the debt by his express undertaking.

Supreme Court’s Analysis on Legal Compensation

The Court applied Article 1279, Civil Code, and the established requisites for legal compensation as explained in Bank of the Philippine Islands v. Court of Appeals, G.R. No. 142731. The Court found that all requisites for legal compensation were present: both parties were principal obligors and creditors of each other; the debts were sums of money; the debts were due, liquidated, and demandable; and no third-party retention or controversy existed. The service fees owed petitioner to respondent for February to April 1995 totaled P125,040.01, which the Court accepted as properly computed and unassailed on appeal. The Court held that petitioner’s withholding and application of those service fees constituted recognition of legal compensation by operation of law, extinguishing obligations to the concurrent amount.

Resolution of Counterclaim and Computation

Having found legal compensation, the Court rejected the CA’s rescission ruling. It held that respondent could not rescind because petitioner’s withholding was a consequence of compensation arising from respondent’s own undertaking and because respondent had himself

Case Syllabus (G.R. No. 174882)

Parties and Posture

MONDRAGON SALES, INC., is the petitioner and plaintiff in the trial court in an action arising from a Contract of Services.
VICTORIAN0 S. SOLA, JR., is the respondent and defendant in the trial court who counterclaimed and later appealed to the Court of Appeals.
The case reaches the Court on a petition for review on certiorari seeking to set aside the Court of Appeals Decision dated February 10, 2006 and Resolution dated September 6, 2006.
The Supreme Court rendered the final decision reversing the Court of Appeals and ordering respondent to pay petitioner a specified monetary balance with interest.

Key Facts

The parties executed a Contract of Services under which respondent would provide a bodega cum office and service petitioner’s sales operations in General Santos City for a three-year period commencing October 2, 1994 and ending October 1, 1997.
The contract provided a graduated monthly sales service-fee schedule with percentage and fixed-amount bands for specified sales brackets.
Respondent’s wife, Lina Sola, had an existing indebtedness to petitioner arising from a Franchise Distributorship Agreement prior to the Contract of Services.
On January 26, 1995 respondent sent a letter to petitioner acknowledging and confirming his wife’s indebtedness and undertaking, together with his wife, to pay specified amounts by installment, including confirming P1,973,154.73 as due and designating P1,490,091.15 as subject to reconciliation.
Petitioner withheld respondent’s service fees for February to April 1995 and applied them as partial payments on the indebtedness acknowledged in respondent’s January 26, 1995 letter.
On April 29, 1995 respondent closed and suspended operations of the bodega cum office occupied by petitioner’s goods and personnel.
Respondent filed a complaint for accounting and rescission seeking P222,202.84 in withheld commissions and rescission of the Contract of Services.

Procedural History

Petitioner filed an Answer with Counterclaim alleging respondent’s confirmation of his wife’s indebtedness and seeking P1,547,892.55 plus other reliefs.
The trial court granted petitioner’s motion for preliminary attachment and replevin, which respondent unsuccessfully moved to quash and unsuccessfully sought certiorari review in G.R. No. 126427, which was dismissed by resolution dated November 11, 1996.
The Regional Trial Court rendered judgment on July 6, 2000 in favor of defendant (respondent) ordering petitioner to pay P1,543,643.96 plus legal interest and attorney’s fees.
Court of Appeals reversed on February 10, 2006, granted the appeal, rescinded the Contract of Services under Article 1191 of the Civil Code, remanded for computation of unlawfully withheld service fees, and awarded attorney’s fees to respondent.
Petitioner filed the present petition for review on certiorari with the Supreme Court which issued the challenged decision reversing the CA decision.

Issues Presented

Whether the Court of Appeals erred in finding that petitioner unlawfully breached the Contract of Services by withholding respondent’s service fees and in admitting rescission under Article 1191.
Whether respondent assumed his wife’s obligation to petitioner such that petitioner’s application of respondent’s service fees to that indebtedness constituted unlawful compensation.
Wheth