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PHILIPPINE-JAPAN ACTIVE CARBON CORPORATION v. HABIB BORGAILY

FACTS:

Philippine-Japan Active Carbon Corporation (petitioner) leased two apartment units from Habib Borgaily (respondent) for a period from August 1, 2002, to August 1, 2003. As a security for the faithful performance of petitioner's obligations under the lease contracts, a security deposit of P90,000.00 was required. After the expiration of the lease, petitioner still occupied the premises until October 31, 2003. Upon vacating the premises, petitioner requested for the return of the security deposit, claiming that it has no outstanding obligation. In his counterclaim, respondent alleged that petitioner failed to comply with its obligations under the lease contracts and that the leased premises were destroyed when petitioner vacated. He claimed that he had the right to withhold the security deposit and use it to cover the cost of repairs amounting to P79,534.00. Petitioner then filed an action for collection of the sum equivalent to the security deposit. The Municipal Trial Court Cities (MTCC) ruled in favor of petitioner, ordering the defendant to refund the security deposit with interest and pay attorney's fees. However, the Regional Trial Court (RTC) reversed the ruling and held that respondent had the right to withhold the deposit until his claim for damages was reimbursed.

ISSUES:

  1. Whether the MTCC has jurisdiction over the case.

  2. Whether the RTC was correct when it offset the amount of the security deposit with the amount of the repairs made by the respondent, plus the amount of nominal damages awarded to respondent.

  3. Whether the respondent has the right to withhold the security deposit and apply it to the damages incurred by the apartment units.

  4. Whether the award of nominal damages is proper.

RULING:

  1. The allegations of the complaint filed by petitioner make out a case for collection of sum of money and not for breach of contract. Since the lease agreement had already expired when petitioner filed an action for the return of the security deposit, there is no more contract to breach. The demand for the return of the security deposit was merely a collection suit. The CA erred when it held that the MTCC has no jurisdiction over the case and dismissed the same for lack of jurisdiction.

  2. The RTC was correct in offsetting the amount of the security deposit with the amount of the repairs made by the respondent, plus the amount of nominal damages awarded to respondent. According to Paragraph 19 of the lease agreements, the security deposit is for the faithful performance by the lessee of its obligations under the lease agreement. The respondent had the right to withhold the deposit until his claim for damages to the units which were not caused by ordinary wear and tear have been reimbursed. The major repairs were covered by receipts, amounting to P79,534.00. Therefore, the claim of the plaintiff for refund of the security deposit has already been offset by the amount spent by the defendant for repairs.

  3. Yes, the respondent has the right to withhold the security deposit and apply it to the damages incurred by the apartment units. While the respondent must return the security deposit to the petitioner, the respondent had the right to offset it against the expenses for repairs amounting to P79,534.00. The photographs presented during trial showed that the apartment units were in need of major repairs when the petitioner vacated them.

  4. No, the award of nominal damages is not proper. Nominal damages cannot co-exist with actual damages. Since the respondent has already been indemnified for the damages made on the leased premises, there is no more reason to further grant nominal damages.

PRINCIPLES:

  • A lessor has the right to withhold the security deposit and apply it to the damages incurred by the leased property.

  • Nominal damages cannot co-exist with actual damages. Nominal damages are awarded to vindicate or recognize a violated right, and not for indemnification.