G.R. No. 148332 - National Development Company vs. Madrigal Wan Hai Lines Corp.

Case Summary (G.R. No. 148332)

Key Dates

Board approval of NSCP privatization: March 1, 1993. Public offer/bidding announced: May 1993; public bidding: May 7, 1993. Negotiated sale approval sequence: NDC Board (August 26, 1993), President of the Philippines (September 28, 1993), Committee on Privatization (October 7, 1993), Commission on Audit (February 2, 1994). Notice of Award to respondent: February 11, 1994. Contract of Sale executed: March 14, 1994. US IRS Notice of Final Assessment received by respondent: September 22, 1994. Respondent’s payment of taxes and penalties: October 14, 1994. Complaint filed in RTC: March 20, 1996. RTC decision: August 6, 1999. Court of Appeals decision affirmed with modification: May 21, 2001. Supreme Court decision: September 30, 2003.

Factual Background

NDC offered for sale 100% of NSCP shares and three ocean-going vessels via an Information Package that included NSCP financial statements (1990–1992), Negotiated Sale Guidelines, and a Proposal Letter Form. The announced desired price was US$26,750,000. Only respondent submitted a bid (initially US$15,000,000, later increased) and, after negotiations and multiple approvals, agreed to purchase for US$18,500,000. The Contract of Sale incorporated by reference the Information Memorandum and Negotiated Sale Guidelines. After acquisition, respondent received a US IRS final assessment for deficiency taxes on NSCP’s gross transportation income from U.S. sources for 1990–1992 and paid US$671,653.00 (plus penalties), sums that allegedly represented liabilities incurred prior to respondent’s management takeover.

Procedural History

Respondent filed a complaint in the Regional Trial Court (RTC), Branch 62, Makati City, seeking reimbursement of the taxes and damages. The RTC rendered judgment in favor of respondent ordering NDC to reimburse specified amounts (US$671,653; US$14,415.87; US$2,117.23 or their peso equivalents), to pay 6% interest from filing, exemplary damages of P100,000, and attorney’s fees of P100,000; counterclaims were dismissed. On appeal, the Court of Appeals affirmed the RTC but deleted exemplary damages and reduced attorney’s fees to P20,000. NDC filed a petition for review on certiorari to the Supreme Court challenging the reimbursement order.

Issues Presented

(1) Whether the Negotiated Sale Guidelines and Proposal Letter Form constituted a contract of adhesion; and (2) whether petitioner NDC was legally obliged to reimburse respondent for amounts paid to the US IRS that corresponded to petitioner’s tax liabilities.

Contract-of-Adhesion Determination

The Supreme Court agreed with the lower courts that the Negotiated Sale Guidelines and the Proposal Letter Form were a contract of adhesion. The documents required bidders to submit offers using the pro-forma Proposal Letter and to sign the Negotiated Sale Guidelines on every page. The Guidelines reserved broad discretion to NDC and its agency partner to reject offers, amend guidelines prior to submission, and enforce forfeiture for violations. The Proposal Letter expressly bound the bidder to the Guidelines and represented that the bidder accepted those conditions without reservation. Because the buyer had no realistic opportunity to modify the terms other than price, the materials amounted to a “take it or leave it” instrument and fit the definition of a contract of adhesion.

Legal Consequences of Adhesion Contract

Acknowledging that adhesion contracts are not per se invalid, the Court emphasized heightened judicial scrutiny to protect the weaker party from oppressive terms. Any ambiguity in such contracts must be strictly construed against the party that drafted them. The Court therefore applied strict construction and equated public policy with protecting the weaker contracting party from unfair surprises and concealed liabilities.

Disclosure, Knowledge, and Bad Faith Findings

The RTC and Court of Appeals found, and the Supreme Court accepted, that NDC/NSCP had prior knowledge of an impending US IRS assessment. Documentary exchanges with the US IRS and NSCP’s unaudited financial statements showed contingent provisions for US taxes (US$3,919,018.81 for 1993 and US$11,736,192.64 for 1990–1992). However, there was no proof that these documents or the tax-related provisions had been disclosed to respondent despite respondent’s repeated inquiries and despite NDC’s assurances that NSCP was a clean, lien-free going concern. The Court held that concealing such information amounted to bad faith—intentional concealment of material facts—because petitioner failed to disclose a potential lien and tax liability affecting the legal status of the assets sold.

Interpretation of “As Is, Where Is”

Although the Negotiated Sale Guidelines stated the sale was on a “CASH, AS IS-WHERE IS” basis, the Court applied prior precedent cited in the record to construe “as is, where is” as relating to the physical condition of the thing sold, not to its legal status. Consequently, a tax liability that constitutes a legal encumbrance or potential lien is not borne by the buyer simply by inclusion of an “as is” clause regarding physical condition. Thus respondent was not required to assume NDC’s legal tax liabilities under the “as is, where is” term.

Contractual Warranty and Breach

The Negotiated Sale Guidelines contained an express warranty of ownership and against liens or encumbrances. The Court read this warranty together with the contract language incorporated into the Contract of Sale, concluding

Case Syllabus (G.R. No. 148332)

Case Caption, Citation and Forum

G.R. No. 148332; Decision promulgated September 30, 2003; reported at 458 Phil. 1038; Third Division.
Petition for review on certiorari filed under Rule 45 of the 1997 Rules of Civil Procedure, as amended.
Decision of the Court of Appeals dated May 21, 2001 in CA-G.R. CV No. 66026 is the assailed ruling; the Court of Appeals affirmed with modification the Regional Trial Court, Branch 62, Makati City Decision dated August 6, 1999 in Civil Case No. 96-558.
Supreme Court ponente: Justice Sandoval-Gutierrez; concurrence by Justices Puno (Chairman), Panganiban, and Carpio-Morales; Justice Corona on leave.

Parties

Petitioner: National Development Company (NDC), a government-owned and controlled corporation created under Commonwealth Act No. 182 as amended by Presidential Decree No. 1648.
Respondent: Madrigal Wan Hai Lines Corporation (MWH), a domestic private corporation organized and existing under Philippine laws, principal office in Manila.
Related entity: National Shipping Corporation of the Philippines (NSCP), a wholly-owned subsidiary of petitioner offering shipping services for containerized cargo between Far East ports and the U.S. West Coast; NSCP and three ocean-going vessels were the subject of the privatization and sale.

Factual Background — Privatization and Offer to Public

On March 1, 1993, NDC’s Board approved the privatization plan of NSCP.
In May 1993, NDC offered for public sale its 100% stock ownership in NSCP, valued initially at P150,000.00 by the source materials, and NSCP’s three ocean-going vessels (M/V National Honor, M/V National Pride and M/V National Dignity).
NDC released to the public an Information Package containing NSCP’s background, assets, operational and financial status, with attached Financial Statements covering from December 1990 to 1992.
The Information Package included Negotiated Sale Guidelines that embodied the terms and conditions of the proposed sale and a Proposal Letter Form which bidders were required to use to specify and submit their bids.
NDC’s asking price for the NSCP shares and vessels was Twenty-Six Million Seven Hundred Fifty Thousand US Dollars ($26,750,000.00).

Bidding, Negotiation and Award

Public bidding occurred on May 7, 1993. The lone bidder was respondent, MWH. Mr. Willie J. Uy, respondent’s consultant, submitted a bid of US $15,000,000.00 using the Proposal Letter Form.
NDC and the Commission on Audit initially rejected the $15,000,000.00 bid. Because there were no other bidders, NDC proceeded to negotiate with respondent.
After negotiations, respondent increased its offer to US $18,500,000.00, which NDC accepted.
The negotiated sale was approved successively by: NDC’s Board of Directors (August 26, 1993), the President of the Philippines (September 28, 1993), the Committee on Privatization (October 7, 1993), and the Commission on Audit (February 2, 1994).
On February 11, 1994, NDC issued a Notice of Award to respondent for the sale at US $18,500,000.00.
On March 14, 1994, petitioner and respondent executed the Contract of Sale, whereby respondent acquired NSCP, its assets, personnel, records and the three vessels.

Documents, Contractual Terms and Exhibits

The Negotiated Sale Guidelines (March 1993) and the Proposal Letter Form were components of the Information Package and were required to be signed and submitted by offerors.
Negotiated Sale Guidelines: provisions included mandatory use of the Proposal Letter Form (4.01), requirement that the Guidelines be signed on every page (4.02), wide discretion reserved to NDC and APT to reject any and all offers, to waive formalities, to require additional information, to amend guidelines prior to submission (14.01–14.02), and automatic forfeiture of deposit upon violation (14.05).
Offeror’s Responsibility clause (7.01) in the Negotiated Sale Guidelines stated that the seller gives no warranty regarding the sale except a warranty on ownership and against any liens or encumbrances, and the offeror is not relieved of the obligation to make examinations and verifications.
Proposal Letter Form expressly bound bidders to the Negotiated Sale Guidelines and the Information Memorandum; it contained representations and warranties that the bidder had examined and understood the Information Package and accepted the Negotiated Sale Guidelines, including the right of NDC and APT to reject any and all offers.

Post-sale Discovery — US IRS Assessment

On September 22, 1994, respondent received from the US Department of the Treasury, Internal Revenue Service (US IRS), a Notice of Final Assessment against NSCP for deficiency taxes on gross transportation income from US sources for the years ending 1990, 1991 and 1992.
The US tax assessment was based on Section 887 of the US Internal Revenue Code, imposing a 4% tax on gross transportation income of any foreign corporation derived from US sources.
Concerned that delay in payment would hamstring its overseas operations, respondent on October 14, 1994 assumed and paid petitioner’s tax liabilities (including tax due for 1993) totaling US $671,653.00. Respondent also paid an additional US $16,533.10 as penalty for late payment.
The aggregate tax/penalty figures are reflected in the records cited by the courts; the trial court’s dispositive award itemized US $671,653.00, US $14,415.87 and US $2,117.23 (peso equivalents to be paid at time of payment as ordered).

Procedural Posture — Complaint and RTC Decision

After petitioner refused respondent’s repeated demands for reimbursement, respondent filed a complaint for reimbursement and damages against petitioner in the Regional Trial Court, Branch 62, Makati City, docketed Civil Case No. 96-558 (filed March 20, 1996).
RTC Decision dated August 6, 199