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D.M. RAGASA ENTERPRISES v. BANCO DE ORO

FACTS:

The petitioner, D.M. Ragasa Enterprises, Inc. (Ragasa), entered into a Lease Contract with Equitable Banking Corporation (Equitable Bank) on January 30, 1998. The Lease Contract covered the ground and second floors of a commercial building in Quezon City for a period of five years. The monthly rental was set at P122,607.00, with an annual increase of 10%. The Lease Contract also included provisions regarding the forfeiture of the full deposit and the payment of penalties for non-compliance with the terms of the contract. Equitable Bank paid three months' advance rentals and three months' rentals as a security deposit. Equitable Bank merged with Philippine Commercial International Bank (PCI Bank) and later merged with Banco de Oro, Inc. to form the respondent bank.

In this case, the petitioner, Ragasa, and respondent bank, Equitable PCI Bank, entered into a Lease Contract for a certain premises. The bank then merged with Banco de Oro, Inc., resulting in the closure of certain branches, including the branch located in the subject premises. The bank sent a notice of pre-termination to Ragasa, informing them that the lease contract would be terminated. Ragasa demanded payment for the remaining term of the lease, but the bank argued that their liability was only the forfeiture of the security deposit.

The case involves a Lease Contract between the petitioner, Ragasa Automotive Industries, Inc., and the respondent, Philippine Savings Bank. The Lease Contract has a specific provision that the term of the lease shall be for a period of five years starting from February 1, 1998. The contract also stipulates that the tenant shall pay a deposit, which shall be refunded only upon termination of the lease. The contract further states that the full deposit shall be forfeited in favor of the lessor if the tenant fails to comply with the term of the lease. The contract does not contain a pre-termination clause. The bank breached the Lease Contract by serving a Notice of Pre-termination effective June 30, 2001, and vacating the premises on said date.

The case involves a Lease Contract between the complainant and a bank. The Lease Contract contained various provisions, including an explicit provision stating that the lease shall be for a term of five years. However, the bank unilaterally terminated the lease before the agreed-upon term. As a result, the complainant filed a complaint seeking damages for the bank's breach of the lease contract. The complainant argued that the bank's premature termination of the lease without any justifiable reason constituted a violation of the contract. The bank, on the other hand, argued that they are not liable for damages because the complainant failed to specify the particular provision of the contract that was violated by the bank's action. The lower court ruled in favor of the complainant, holding that the bank's termination of the lease contract before the agreed term constituted a violation of the contract and made the bank liable for damages. However, the lower court did not determine the specific amount of damages that the bank should pay.

ISSUES:

  1. WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED IN LAW IN GRANTING THE APPEAL OF RESPONDENT BANK AND IN DENYING THE MOTION FOR RECONSIDERATION OF THE PETITIONER WHICH IS CONTRARY TO ARTICLES 1170 AND 1308 OF THE NEW CIVIL CODE.

  2. WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED IN LAW IN RULING THAT THE PENALTY CLAUSE APPLICABLE IN THE CASE IS ITEM NO. 8(m) OF THE CONTRACT, AND NOT ITEM 8(n) OF THE SAME CONTRACT.

  3. WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED IN LAW IN RULING THAT THE SUBJECT CONTRACT HAD BEEN TERMINATED.

  4. WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED IN LAW IN RULING THAT THE PETITIONER IS GUILTY OF UNJUST ENRICHMENT.

RULING:

  1. NO, the Court ruled that the bank breached the Lease Contract and is liable for damages as stipulated in the contract, which is in accordance with Article 1170 of the Civil Code.

  2. NO, the correct penalty clause applicable is item No. 8(m) of the Lease Contract, which mandates forfeiture of the full deposit upon non-compliance with the term of the lease.

  3. NO, the Court ruled that the Lease Contract was automatically terminated upon the unauthorized pre-termination by the bank.

  4. NO, the Court found that the ruling of unjust enrichment was not applicable, and the petitioner is entitled to damages stipulated in the Lease Contract.

PRINCIPLES:

  • Autonomy of Contracts: Contracts are the law between the parties, and parties are bound to adhere to the stipulations provided they are not contrary to law, morals, good customs, public order, or public policy.

  • Penal Clause: A penal clause in a contract serves to ensure performance by imposing a penalty for non-compliance. It can serve coercive, liquidation, or punitive purposes depending on the stipulations between the parties.

  • Automatic Termination Clause: Such clauses are valid and enforceable, allowing for automatic termination of a lease or contract upon breach of specified conditions.

  • Article 1170, Civil Code: Persons who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages.

  • Article 1226, Civil Code: In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests unless there is a stipulation to the contrary.

  • Article 2203, Civil Code: The party suffering loss must exercise diligence to minimize the damages resulting from the act or omission.

  • Liquidated Damages: These are those agreed upon by parties to be paid in case of breach, and the courts may reduce them if they are iniquitous or unconscionable.

  • Principle of Unjust Enrichment: A person should not be allowed to profit or enrich themselves at the expense of another. This principle was considered but ruled inapplicable in this case.