Case Summary (G.R. No. L-2660)
Applicable Law and Contracts Involved
The case primarily concerns the interpretation and legal effect of contractual provisions within the Amended and Restated Definitive Agreement (ARDA) executed on May 10, 1996, between PIC and PMO. The ARDA provided for PIC's acquisition of 22,500,000 shares, representing 90% ownership of PPC, from PMO, with payment in installments. Accompanying this is the Pledge Agreement executed on May 2, 1997, whereby PIC pledged PPC shares as security for payment obligations under the ARDA.
Relevant provisions include Section 8.02 of the ARDA, which provides for the automatic or "ipso facto" reversion of shares to PMO in case of default. The legal issue focuses on whether this automatic reversion amounts to a prohibited pactum commissorium under the Civil Code.
Background and Contractual Terms
The Development Bank of the Philippines and Philippine National Bank initially held PPC shares after foreclosure, which were transferred to APT (later PMO). Under the ARDA, PIC agreed to purchase PPC shares and PMO agreed to transfer ownership, conditioned upon payment by PIC. The ARDA explicitly required PIC to deliver a pledge agreement as security.
Sections 2.04 and 2.07 of the ARDA detail the pledge of shares and transfer of ownership, whereby new stock certificates in the name of PIC were issued, vesting PIC with shareholder rights, subject to the negative covenants of the pledge agreement.
Section 8 of the ARDA outlines default events and remedies, including failure to pay two consecutive installments and provides that, if not cured within 90 days, title to shares would automatically revert to PMO without demand.
The separate Pledge Agreement confirmed the pledge of shares as security and outlined remedies upon default, including the right of PMO to sell the pledged shares publicly or privately.
Initial Case Developments and Trial Court Proceedings
Due to financial difficulties and the obsolescence of PPC's refinery, PMO notified PIC of default in payment in 2002, demanding settlement within 90 days or reversion of shares. PIC filed a complaint to prevent reversion and payment suspension, arguing the reversion clause was a pactum commissorium—an unlawful stipulation allowing automatic appropriation of pledged property.
The Regional Trial Court (RTC) issued a temporary restraining order and later granted PIC a writ of preliminary injunction, finding the ipso facto reversion clause null and void as pactum commissorium violating good morals and public policy. The RTC emphasized PIC’s ownership and pledgor-pledgee relationship with PMO, forbidding automatic appropriation.
The RTC denied PMO’s motions for reconsideration and dismissal, reaffirming these findings and emphasizing that the contract must be interpreted consistent with law.
Pre-Trial Orders and Motions to Modify Issues
In 2009, the RTC formalized issues for resolution, including the validity of the reversion clause as pactum commissorium, PIC’s alleged default, and arbitration concerns. PIC moved to remove already resolved issues from the pre-trial order to expedite the case, which PMO opposed.
PMO filed multiple motions, including to dissolve the injunction and appoint representatives on the board, citing the lengthy duration of the injunction as prejudicial and asserting the matter should be arbitrated per contract terms.
The RTC granted PIC’s motion to delete resolved issues, denied PMO's motions to dissolve the injunction and for counterbond, and required PIC to submit financial reports to PMO.
Court of Appeals Ruling
The Court of Appeals (CA) reversed the RTC's determination that the clause constituted pactum commissorium, reasoning the ARDA and Pledge Agreement were separate contracts. According to the CA, pactum commissorium requires both a pledge or mortgage and automatic appropriation of pledged property in one contract, which was absent here: the pledge agreement contains the pledge, and the ARDA contains the automatic reversion clause.
Nonetheless, the CA held the ipso facto reversion clause invalid because ownership passed upon issuance of shares to PIC, and automatic title reversion upon default is contrary to law and public policy. The reinstated writ of preliminary injunction remained in effect pending resolution of default.
Issues Raised in Petitions for Review
PIC contended the CA erred in ruling that pactum commissorium requires both elements to concur in one contract, arguing the integrated effect of ARDA and Pledge Agreement should be considered. PIC also argued the CA improperly entertained a certiorari petition on a final order which should have been time-barred.
PMO argued the clause is not contrary to law as no statute expressly prohibits it, the injunction’s continuation after nearly a decade deprives PMO of legal remedies, and that dissolution of the injunction was warranted in the interest of justice.
Supreme Court’s Analysis on Pactum Commissorium
The Supreme Court affirmed that Section 8.02 of the ARDA constitutes a pactum commissorium and is, therefore, null and void under Article 2088 of the Civil Code. The Court cited Article 1305, recognizing parties’ freedom to contract within the bounds of law and public policy, and highlighted that a stipulation allowing the creditor to appropriate pledged property automatically upon default—without foreclosure—is prohibited.
Contrary to the CA, the Supreme Court treated the ARDA and the Pledge Agreement as integral and inseparable, jointly embodying the two elements of pactum commissorium: (1) PIC’s pledge of PPC shares to PMO as security, and (2) the automatic appropriation clause in the ARDA allowing ipso facto reversion. The Court emphasized that intention and substance over form govern existence of pactum commissorium, relying on jurisprudence where separate documents are read as one contract where appropriate.
The Court rejected PMO’s argument that PIC was not yet owner of PPC shares and thus could not pledge them, finding that under the ARDA ownership passed upon closing, transfer of stock certificates, and exercise of shareholder rights by PIC, consistent with the Corporation Code. The Court also distinguished between contracts of sale and contracts to sell, holding that ownership transfer permits pledge and prohibits automatic reversion without judicial rescission.
On the Right to Rescind and Mutual Restitution
The Court reiterated that rescission of contracts due to default is not automatic and extrajudicial but requires judicial action with mutual restitution, returning parties to original status quo as mandated by law.
Section 8.02 of the ARDA's automatic reversion clause lacks provisions for rescission procedures or mutual restitution, resulting in unjust enrichment and violation of public policy.
Injunction and Forum Issues
The Court maintained that the writ of preliminary injunction issued by the RTC remains
Case Syllabus (G.R. No. L-2660)
Case Background and Parties Involved
- This case involves consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court, appealing a Court of Appeals Decision and Resolution that affirmed the Regional Trial Court’s (RTC) order in Civil Case No. 03-114.
- The petitioner in G.R. No. 199420 is Philnico Industrial Corporation (PIC), a corporation engaged in nickel mining and refining, part of the Philnico Group along with Philnico Processing Corporation (PPC) and Pacific Nickel Philippines, Inc. (PNPI).
- PIC and PNPI hold Mineral Production Sharing Agreements for nickel mining areas, while PPC owns a nickel refinery complex.
- The petitioner in G.R. No. 199432 is the Privatization and Management Office (PMO), an agency under the Department of Finance, successor to the Asset Privatization Trust (APT). PMO is responsible for the marketing, management, and disposition of government assets.
Contractual Agreements and Security Instruments
- In 1987, the Development Bank of the Philippines and Philippine National Bank, holding shares of PPC by foreclosure, transferred their shares to APT (now PMO).
- On May 10, 1996, PMO, PIC, and PPC executed the Amended and Restated Definitive Agreement (ARDA), where PIC agreed to purchase 22,500,000 shares (90% ownership) of PPC from PMO for the peso equivalent of US$333,762,000, payable in installments.
- Key provisions of ARDA included:
- Section 2.04: Stipulated PIC's pledge of the PPC shares and new/conversion shares as security for payment, with execution of a pledge agreement (Pledge Agreement).
- Section 2.07: Detailed the closing procedures including transfer of shares, issuance of new stock certificates, and execution of the Pledge Agreement.
- Section 8: Addressed default and remedies, including an ipso facto reversion clause (Section 8.02), allowing automatic reversion of shares to PMO upon default not remedied within 90 days.
The Pledge Agreement and Default Provisions
- On May 2, 1997, PIC and PNPI as pledgors and PMO as pledgee executed the Pledge Agreement securing PIC’s obligations under the ARDA.
- The Pledge Agreement explicitly referenced the ARDA as the basis for securing payment obligations and detailed events of default and remedies:
- Default included failure to pay obligations, breach of material covenants, bankruptcy, or impairment of lien priority.
- Remedies granted PMO authority to sell pledged shares (publicly or privately), including the right to be purchaser, and to apply proceeds to obligations and expenses.
Financial and Operational Context
- The PPC nickel refinery complex was obsolete and financially burdensome to rehabilitate, with estimates around US$1 Billion to build a new plant.
- Due to financial constraints and regional economic issues, the parties executed a 1999 Amendment Agreement to restructure payment terms and investment plans.
- PMO notified PIC in 2002 of default due to unpaid amortizations totaling US$275,000, demanding payment or face enforcement of automatic reversion.
Legal Proceedings and Injunction
- PIC filed suit before the RTC seeking prohibition against enforcement of the automatic reversion clause, requesting temporary restraining order (TRO) and preliminary injunction to prevent PMO from reverting the shares.
- RTC issued a TRO and later a writ of preliminary injunction, holding that the ipso facto reversion clause was null and void as it constituted pactum commissorium, an illegal and inequitable forfeiture clause.
- RTC ruled that automatic reversion without due process amounted to unjust enrichment and confiscation of property contrary to law and public policy.
- The injunction was conditioned on PIC posting a bond of P100 million.
Trial Court Orders and Subsequent Motions
- PMO’s motions for reconsideration and to dismiss were denied; the court held that:
- Ownership of shares passed to PIC under the ARDA.
- The relationship had shifted from seller-buyer to debtor-pledgor and creditor-pledgee.
- The automatic reversion constituted pactum commissorium and was illegal.
- The dispute was proper for court interpretation of contract provisions despi