Spouses Poon V Prime Savings Bank

GR 183794, June 13, 2016

[Per J. Sereno, First Division]

This case is a contract of lease wherein Spouses poon as the lessor and Prime Savings Bank as
the lessee, they executed the contract in a 10-year period and agreed at a monthly rental of Php
60,000.00 per month, there is also an advance payment for the first 100 months in the amount of
Php 100,000.00. However the Banko Sentral ng Pilipinas (BSP) placed Prime Savings Bank
under receivership of the Philippine Deposit Insurance Corporation (PDIC) and ordered its
litigation. Prime Savings Bank vacated the premises and PDIC demanded the return of the
advance rentals, Spouses Poon refuses hence Prime Savings Bank commences an action for
rescission of contract and recovery of sum of money. Spouses Poon invoked that in their contract
provided a provision which states that should the leased premises be closed, deserted or vacated
by the LESSEE, the LESSOR shall have the right to terminate the lease.

What have we learned about the topic?

Art. 1229 The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the
penalty may also be reduced by the courts if it is iniquitous or unconscionable.

Art. 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the
claims due them;

(4) Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to rescission.

Art. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor
could not be compelled at the time they were effected, are also rescissible.
Art. 1191 The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.

This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.

Art. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in part.

What does the case teach us?

First issue is whether the respondent may avail the remedy of rescission.

Yes. Prime Savings Bank are entitled rescission. Legal remedy of rescission is not limited to
situations under art. 1381 and 1382. The Civil Code uses it to 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. In the case at
bar 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. Hence, respondents are seeking rescission under Art. 1191 not
Art 1381 and 1382 of the New Civil Code.

Second issue is whether the foreclosure of respondent’s business is a fortuitous event.

No. The closure was neither a fortuitous or unforeseen event. Here in order 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. Moreover Prime Savings Bank
was partially accountable for closure of its banking business. Neither it is also an unforeseen
event under Art. 1267. The requisites for the application of the provision are first the event could
not have been foreseen at the time of the execution of the contract; second it makes performance
of the contract extremely difficult but not impossible; third it must not be due to the act of any of
the parties; and fourth 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. Here, 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. Therefore Prime Savings
Bank cannot invoke that there is a fortuitous or unforeseen event.

Third issue is the forfeiture of the advance rentals a penal clause.

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. Here 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 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. Hence the provision the parties stipulated is a penal clause.

Fourth issue is whether the penalty may be equitably reduced under art. 1229

Yes. 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. As Article 1229 of the Civil Code provides that Even if there has been no performance,
the penalty may also be reduced by the courts if it is iniquitous or unconscionable. In the present
case 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. 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. Therefore 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.