Title
Sauna vs. Ng
Case
G.R. No. 66394
Decision Date
Feb 5, 1990
A dispute over a 1975 contract between Paradise Sauna and Alejandro Ng, deemed a lease by courts, led to Ng's termination, breach claims, and damages, with corporate veil pierced for liability.
contract dispute
lease contract
management contract
A

Case Summary (G.R. No. 66394)

Factual Background

The petitioners relied on a disputed letter-contract signed by Juanito Uy, by authority of the Board of Directors, appointing Alejandro Ng to “MANAGE and ADMINISTER” the Paradise Sauna and Massage Corporation effective January 1, 1976, on a commission basis. The letter required, among others, that Ng remit P8,000.00 monthly within the first five days of each month and pay P16,000.00 upon acceptance as a guarantee bond for faithful performance, refundable after the appointment would last until September 30, 1979. The same document placed in Ng “sole control and management of the premises,” made him responsible for government licenses, permits, utilities, and services, and allowed him to make renovations and repairs at his expense. It further stated that he was not to report to any board of directors other than Uy.

Ng’s appointment was allegedly terminated because of his alleged failure to comply with terms and conditions. The termination took effect January 15, 1977. Ng then initiated the litigation, asserting that the arrangement was not merely managerial but instead constituted a lease granting him full enjoyment and control of the business for the remaining term. Conversely, the petitioners argued that they were the operators of the establishment, that Uy had relinquished his position as manager-administrator in favor of Ng, and that Ng’s appointment as manager-administrator was terminated due to alleged contractual violations.

Filing of the Case in the Trial Court

On January 21, 1977, Ng filed a case for specific performance and damages with prayer for a writ of preliminary mandatory injunction and attorneys’ fees against the petitioners in the Court of First Instance of Manila, Branch XII, docketed as Civil Case No. 106511. On January 28, 1977, Ng amended his complaint, withdrawing the initial theory and filing instead for breach of contract with damages, again with prayer for a writ of preliminary injunction and attorneys’ fees.

In the amended complaint, Ng alleged that, on December 30, 1975, the petitioners agreed to lease in his favor the business Paradise Sauna and Massage Corporation at E. Rodriguez, Sr. Avenue, Quezon City, under a contract where he would have full control and management effective January 1, 1976 until September 30, 1979. Ng contended that his principal obligation as lessee consisted of paying P8,000.00 monthly as rentals and remitting P16,000.00 as a guarantee bond. He claimed that he took over operations, hired and paid personnel, paid monthly rentals until December 1976, but was refused acceptance for January 1977. He alleged that the petitioners demanded that he vacate, forfeited the guarantee bond, and then, assisted by Metrocom soldiers on January 16, 1977, forcibly ejected him, assumed control of the business, and replaced him, while denying him entry thereafter. Ng claimed damages of not less than P100,000.00 for unrealized profits, forfeiture of the bond, and value of personal properties appropriated by the petitioners, and he sought moral damages of P50,000.00 and attorneys’ fees of P30,000.00.

Petitioners’ Defense

In their answer, the petitioners countered that the corporation remained the operator of the sauna bath and massage establishment and that Uy was its former manager and administrator. They stated that the corporation paid P4,000.00 as lease rentals for the premises occupied. They further alleged that Uy, in his desire to expand corporate operations, relinquished his manager-administrator position in favor of Ng, as evidenced by the December 30, 1975 letter. The petitioners insisted that Ng’s appointment as manager-administrator ended on January 15, 1977 due to alleged violations: failure to pay water and electric bills, failure to pay employee salaries, failure to supply provisions necessary for the business (such as lotion, towels, and blankets), inefficient management, and allegedly managing another sauna business simultaneously while inducing customers away from Paradise Sauna.

Trial Court Ruling and Its Material Findings

After trial, the Court of First Instance, on December 23, 1978, rendered judgment in favor of Ng. The dispositive portion declared that the letter-contract (Exhibit A) was a contract of lease covering the Paradise sauna bath and massage clinic, not a contract of employment. It ordered the petitioners to return the management and operation of the clinic to Ng so he could operate and manage it for the unexpired term of the lease for approximately two years, eight months and fifteen days.

The trial court also declared the forfeiture of Ng’s P16,000.00 deposit null and void, treating it as subsisting for the purpose of the contract if Exhibit A would continue. It provided detailed monetary and accounting relief regarding specified items and equipment listed in evidence, and it awarded damages, including moral damages of P50,000.00 and exemplary damages of P50,000.00. It further required Ng to pay the petitioners the amount of P28,572.45, with legal interest, setting it off against Ng’s entitlement, and it dismissed the remaining claims for lack of merit.

Appellate Proceedings

On appeal, the then Intermediate Appellate Court affirmed the trial court’s judgment in toto on November 29, 1983. The petitioners’ subsequent motion for reconsideration was denied, prompting the present petition for review.

The Parties’ Contentions on Review

The petitioners advanced three main arguments. First, they argued that the appellate court sanctioned a legal error when the trial court reformed Exhibit A from a management contract into a lease contract, which they claimed violated Art. 1367 of the Civil Code. They contended that because Ng filed an action for specific performance—an action to enforce the instrument—he should have been barred from later seeking reformation.

Second, the petitioners maintained that the contract was, in substance, a management arrangement, and that Ng’s rights stemmed from an appointment as manager-administrator rather than from a lease. They implied that the trial and appellate courts should have respected the written characterization in Exhibit A.

Third, the petitioners challenged the awards of moral and exemplary damages, arguing that there was no showing of bad faith.

Ng’s position, consistent with the findings of the lower courts, was that the contract’s true nature was a lease, and that the petitioners acted in bad faith when they barred him from the premises using Metrocom soldiers and forcibly took over the operation.

Legal Basis and Reasoning: Characterization of the Contract

In resolving the petition, the Court framed the controversy around whether the contract between the petitioners and Ng was a lease or a management contract. On the petitioners’ claim regarding Art. 1367, the Court held that the invoked bar did not apply under the circumstances. It explained that Ng amended his pleading from specific performance to breach of contract before the petitioners filed a responsive pleading to the original complaint. It applied the rule that under Section 2, Rule 10 of the Revised Rules of Court, a party may amend once as a matter of course before a responsive pleading is served; when amended, the original is deemed abandoned and the case proceeds on the basis of the amended pleading.

The Court emphasized that in the amended complaint Ng did not seek enforcement of Exhibit A as a management appointment. Instead, Ng sought relief as a lessee under the same basic contract transaction. It further noted that during trial, parol evidence was introduced to show that the written instrument did not reflect the true nature of the agreement. The Court relied on Rule 130, Sec. 7 of the Revised Rules of Court on evidence of written agreements, which allows evidence of the true intent when the validity or true intent is put in issue by the pleadings or when the writing fails to express the parties’ true agreement.

On the merits, the Court sustained the lower courts’ determination that Exhibit A was a lease contract under Art. 1643 of the Civil Code, which defines a lease of things as an arrangement where one party gives another enjoyment or use of a thing for a price certain and for a definite or indefinite period. The Court found no reason to disturb the concurrent factual findings that the real substance of the arrangement was leasing rather than employment.

The Court identified several factors supporting this conclusion. First, Ng paid the petitioners a fixed amount of P8,000.00 monthly even when the business suffered loss, and this amount was paid at the start of the month with no linkage to operating expenses, profits, or losses, suggesting rental rather than commission. Second, the petitioners’ receipts referred to the payments as rentals for January to October 1976, while for November and December the receipts substituted the word “commission.” The Court treated this shift as a matter of receipt phrasing rather than a change in the economic arrangement, noting that Ng explained the change by stating that Uy altered the wording because he realized that subleasing would violate the owner’s contract. The receipts were said to be prepared by the petitioners but signed in Ng’s presence when payment was made. Third, Ng bore responsibility for government licenses, permits, utilities, and services, including installation and repairs of equipment such as air-conditioning units. Crucially, Ng had sole control and management and did not report to anyone.

Corporate Entity Theory and Liability

On the petitioners’ contention that they should not be held liable separately because Uy was a stockholder or officer distinct from the corporation, the Court rejected the argument. It held that the corporate entity theory could not apply where it was invoked as a cloak or shield for illegality. It reasoned that because there was proof that Uy and the petitioners engaged in a simulated management contract, Uy as a party to that simulatio

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