SPOUSES JAIME AND MATILDE POON v. PRIME SAVINGS BANK REPRESENTED BY THE PHILIPPINE DEPOSIT INSURANCE CORPORATION AS STATUTORY LIQUIDATOR

G.R. No. 183794; June 13, 2016

Sereno. J., First Division

Topic: Contracts with a penal clause; Fortuitous Event

Nature: Appeal from a decision of the CA

FACTS:

The petitioners owned a commercial building. They executed a 10-year contract of lease over building with respondent Prime Savings Bank for the latter to use it as a branch office. They agreed to a fixed monthly rental with an advance payment. The contract also provided:

Should the lease[d] premises be closed, deserted or vacated by the LESSEE, the LESSOR shall have the right to terminate the lease ...

x x x

The LESSOR shall thereupon have the right to enter into a new contract with another party. All advanced rentals shall be forfeited in favor of the LESSOR.

Three years later, the BSP placed respondent under receivership of the PDIC and eventually ordered its litigation. The respondent vacated petitioner’s building and PDIC then demanded return of the advance rentals. Petitioners refused to return the advanced rentals. Thus respondent commenced this case for rescission of contract and recovery of sum of money.

The RTC ruled in favor of Petitioners and ordered the partial rescission of the contract insofar as the advance payment was forfeited. It held that the PDIC’s closure of their business was a fortuitous event. The CA affirmed but applied Art. 1229 instead.

ISSUE:

1. Whether or not respondent may avail of the remedy of rescission.

2. Whether or not the closure of respondent’s business is a fortuitous event.

3. Whether or not the forfeiture of the advance rentals was a penal clause.

4. Whether or not the penalty may be equitably reduced.

HELD:

1. YES. Respondents are entitled to rescission. The legal remedy of rescission is by no means limited to the situations covered in Arts. 1381 and 1382. The New Civil Code actually uses the term “rescission” in two different contexts. The first refers to breach of contract under Art. 1191, also known as the remedy of “resolution”; the second is rescission by reason of lesion or economic prejudice under Art. 1381. The first is a principal action based on breach of a party, while the second is a subsidiary action. From the allegations of the complaint, it is clear that respondent’s right of action rests on the alleged abuse of petitioner’s right under the contract on the theory that petitioner tenaciously enforced their right to forfeit the advanced rentals which was in bad faith since they knew that respondent was already insolvent. IN other words, respondents are seeking rescission under Art. 1191.

2. NO. The closure of respondent’s business was neither a fortuitous or unforeseen event. In this case, for it to be considered a fortuitous event, there has to be bad faith or arbitrariness on the part of the BSP. Instead, its decision to place respondent under receivership and liquidation was pursuant to R.A. No. 7653, moreover, respondent was partially accountable for closure of its banking business. Neither is this case, a case of unforeseen event under Art. 1267. After all, parties to a contract are presumed to have assumed the risks of unfavorable developments. It is only in absolutely exceptional changes of circumstance therefore that equity demands assistance for the debtor. In Tagaytay Realty vs. Gacutan the requisites for the application of Art. 1267 are:

1. The event could not have been foreseen at the time of the execution of the contract.

2. It makes performance of the contract extremely difficult but not impossible.

3. It must not be due to the act of any of the parties.

4. The contract is for a future prestation.

The case explains that mere inconvenience, unexpected impediments, increased expenses or even pecuniary inability to fulfill an engagement will not relieve the obligor from an undertaking that it has knowingly and freely contracted. In this case, the first and third requisites are lacking. Since the lease was for 10 years, the parties should have considered the possibility of closure of business.

3. YES. The forfeiture clause in the contract is penal in nature. A provision is a penal clause if it calls for the forfeiture of any remaining deposit still in the possession of the lessor without prejudice to any other obligation still owing, in the event of the termination or cancellation of the agreement by reason of the lessee’s violation of any of the terms and conditions thereof. This kind of agreement may be validly entered into the by the parties. In this case, it is evident that the stipulation on the forfeiture of advance rentals is a penal in the sense that it provides for liquidated damages. The penalty for the premature termination of the contract works both ways. The penalty was to compel respondent to complete the 10-year term of the lease. Petitioners, too were similarly obliged to ensure the peaceful use of the building by respondent for the duration of the lease under paid of losing the remaining advance rentals paid by the respondent.

4. YES. A reduction of the penalty agreed upon by the parties is warranted under Article 1229 of the New Civil Code.

The general rule is that courts have no power to ease the burden of obligations voluntarily assumed by parties, just because things did not turn out as expected at the inception of the contract. It must be noted that this case was initiated by the PDIC in furtherance of its statutory role as the fiduciary of Prime Savings Bank. As the state-appointed receiver and liquidator, the PDIC is mandated to recover and conserve the assets of the foreclosed bank on behalf of the latter's depositors and creditors. In other words, at stake in this case are not just the rights of petitioners and the correlative liabilities of respondent lessee. Over and above those rights and liabilities is the interest of innocent debtors and creditors of a delinquent bank establishment. These overriding considerations justify the 50% reduction of the penalty agreed upon by petitioners and respondent lessee in keeping with Article 1229 of the Civil Code, which provides for an equitable reduction of the penalty in some cases.

Under the circumstances, it is neither fair nor reasonable to deprive depositors and creditors of what could be their last chance to recoup whatever bank assets or receivables the PDIC can still legally recover. Strict adherence to the doctrine of freedom of contracts, at the expense of the rights of innocent creditors and investors, will only work injustice rather than promote justice in this case.

WHEREFORE, premises considered, the Petition for Review on Certiorari is DENIED. The Court of Appeals Decision dated 29 November 2007 and its Resolution dated 10 July 2008 in CA-G.R. CV No. 75349 are hereby MODIFIED in that legal interest at the rate of 6% per annum is imposed on the monetary award computed from the finality of this Decision until full payment.