Case Summary (G.R. No. 177232)
Facts of the Case
On February 9, 1993, Master Tours and Travel Corporation (Master Tours) and RCJ Bus Lines, Incorporated (RCJ) entered into a five-year lease agreement for four Daewoo air-conditioned buses, which were described as "presently junked and not operational." The lease term was from February 15, 1993, to February 15, 1998, with a lease fee of ₱600,000.00 payable ₱400,000.00 upon signing and ₱200,000.00 upon completion of rehabilitation of the buses by the lessee (RCJ).
On June 16, 1997, Master Tours demanded the return of the buses, which had been brought to RCJ’s garage for safekeeping, intending to settle outstanding obligations with creditors threatening foreclosure. RCJ refused to return the buses and, on February 2, 1998, asserted through counsel that it had no obligation to pay the lease fee and would only return the buses upon payment of storage fees owed by Master Tours.
Master Tours filed a collection suit against RCJ in the RTC, claiming payment of the lease amount. RCJ defended by arguing that the prior lease contract was novated into a contract of deposit, whereby RCJ would merely store the buses for a monthly storage fee, relying on Master Tours’ June 16, 1997 letter to support this modification.
Lower Courts’ Decisions
The RTC ruled in favor of Master Tours, ordering RCJ to pay the ₱600,000 lease fee with interest and attorney’s fees, rejecting RCJ’s claim of novation due to lack of proof of Master Tours’ consent. The Court of Appeals affirmed the RTC decision and denied RCJ’s motion for reconsideration.
Issues Presented
- Whether the Court of Appeals erred in holding that no novation occurred, i.e., the lease agreement was not replaced by a contract of deposit.
- Whether RCJ can be held liable for rental payments despite the buses never becoming operational.
- Whether the award of attorney’s fees and costs against RCJ was proper.
Legal Analysis on Novation
Under Article 1292 of the Civil Code, novation requires an unequivocal declaration or incompatible obligations such that the new obligation supersedes the old one. A lease contract’s cause is the enjoyment of the leased property, while a deposit contract relates to safekeeping. These distinct contractual purposes mean novation would only exist if a subsequent agreement clearly replaced the lease with a deposit contract involving the same subject matter.
RCJ failed to prove the existence of any subsequent agreement that modified the lease into a deposit contract. The sole evidence cited by RCJ was Master Tours’ June 16, 1997 letter requesting the return of buses “brought to your garage for safekeeping.” However, this letter did not constitute an agreement or contractual stipulation indicating novation or a warehousing arrangement. It merely acknowledged that the buses were at RCJ’s garage for safekeeping, consistent with the lessee’s obligation under the lease to preserve the leased property. The letter’s language and circumstances did not evidence any pre-termination of the lease and subsequent storage agreement. Moreover, it was illogical for Master Tours to terminate a lease earning ₱600,000 by agreeing to pay separate storage fees for the same buses.
Liability for Lease Payments Despite Non-Operational Condition
The lease contract explicitly provided for a rental amount of ₱600,000 payable in two installments: ₱400,000 upon signing and ₱200,000 upon completion of the rehabilitation of the buses by RCJ. The contract described the buses as junked and non-operational from the outset, so the risk and responsibility to rehabilitate and operationalize the buses were on the lessee. The Court found no contractual basis to exempt RCJ from rental payments because the buses never became operational. The payment terms were a mode of payment rather than a condition suspending the obligation to pay rent.
However, since Master Tours demanded early return of the buses before expiration of the lease period, RCJ was not yet in default for the second payment of ₱200,000 intended upon completion of rehabilitation. Equity required RCJ’s liability for this installment to be released due to pre-termination by Master Tours, ensuring neither party was unjustly enriched. The Court thus ordered RCJ to pay only the ₱400,000 initial payment plus interest.
Attorney’s Fees and Costs Award
RCJ challenged the award of attorney’s fees and costs, but this issue was not time
Case Syllabus (G.R. No. 177232)
Background and Facts of the Case
- On February 9, 1993, Master Tours and Travel Corporation (Master Tours) entered into a five-year lease agreement with RCJ Bus Lines, Incorporated (RCJ), covering four Daewoo air-conditioned buses described as “presently junked and not operational.”
- The lease term was from February 15, 1993, to February 15, 1998, with a total lease fee of ₱600,000.00 payable in two installments: ₱400,000.00 upon signing and ₱200,000.00 upon completion of the rehabilitation of the buses by the lessee.
- The lease agreement was signed by Master Tours’ Executive Vice-President Marciano T. Tan and RCJ’s President and Chairman Rolando Abadilla.
- On June 16, 1997, more than four years into the lease, Master Tours sent a letter to RCJ demanding the return of the four buses, which had been brought to RCJ’s garage for “safekeeping,” so Master Tours could settle creditor obligations.
- RCJ did not comply with this demand.
- On January 16, 1998, Master Tours sent another letter demanding the return of the buses and payment of the unpaid lease fee of ₱600,000.00 since 1993.
- RCJ replied through counsel on February 2, 1998, denying obligation to pay the lease fee and insisting that the buses would only be returned upon payment of storage fees.
- Master Tours filed a collection suit before the Regional Trial Court (RTC) of Manila.
- RCJ defended itself by arguing that no lease existed, that the prior lease agreement had been novated by a subsequent contract of deposit where RCJ was to store the buses for a monthly storage fee of ₱4,000.00.
- RCJ relied on Master Tours’ June 16, 1997 letter as evidence of this new agreement for safekeeping.
- The RTC ruled in favor of Master Tours, ordering RCJ to pay ₱600,000.00 plus interest and attorney’s fees, rejecting RCJ’s defense due to lack of proof of novation.
- The Court of Appeals (CA) affirmed the RTC decision on October 26, 2006, and denied RCJ’s motion for reconsideration.
- RCJ filed the present petition for review.
Legal Issue on Novation of Contract
- The main legal question was whether the initial lease agreement had been novated by a subsequent contract of deposit or safekeeping of the buses.
- Article 1292 of the Civil Code prescribes that novation must be declared unequivocally or results from incompatible obligations such that the new obligation extinguishes the old one.
- Lease contracts have as their cause the enjoyment of the leased thing, while deposit contracts have the cause of safekeeping.
- For novation to be valid, there must be a clear subsequent agreement regarding the same subject matter that supersedes the previous contract.
- RCJ’s claim of novation hinged on a June 16, 1997 letter from Master Tours referr