G.R. No. 158361, April 10, 2013
On February 1, 1969, respondent Francisco B. Joaquin, Jr. submitted a proposal to International Hotel Corporation (IHC) for him to render technical assistance in securing a foreign loan for the construction of a hotel, to be guaranteed DBP. The proposal encompassed nine phases. The IHC Board of Directors approved phase one to phase six of the proposal and earmarked P2,000,000.00 for the project. Anent the financing, IHC applied with DBP for a foreign loan guaranty. DBP approved it on October 24, 1969 subject to several conditions. On July 11, 1969, shortly after submitting the application to DBP, Joaquin wrote to IHC to request the payment of his fees in the amount of P500,000.00 for the services that he had provided and would be providing to IHC in relation to the hotel project that were outside the scope of the technical proposal. Joaquin intimated his amenability to receive shares of stock instead of cash in view of IHC’s financial situation.
IHC granted Joaquin’s request. Joaquin recommended that he commence negotiating with a prospective financier, Materials handling corp. IHC allowed. So Joaquin started negotiating Materials Handling Corp and later on with its principal, Barnes international. While the negotiations with Barnes were ongoing, Joaquin and Jose Valero, the Executive Director of IHC, met with another financier, the Weston International Corporation (Weston), to explore possible financing. When Barnes failed to deliver the needed loan, IHC informed DBP that it would submit Weston for DBP’s consideration. As a result, DBP cancelled its previous guaranty. Due to Joaquin’s failure to secure the needed loan, IHC, through its President Bautista, canceled the 17,000 shares of stock previously issued to Joaquin and Suarez as payment for their services. The latter requested a reconsideration of the cancellation, but their request was rejected. Consequently, Joaquin and Suarez commenced this action for specific performance, annulment, damages against IHC and the members of its BOD. IHC lost.
Whether or not IHC is liable to pay despite the alleged non performance of obligation on the part of the petitioner.
Article 1186 and Article 1234 of the Civil Code cannot be the source of IHC’s obligation to pay respondents. IHC argues that it should not be held liable because: (a) it was Joaquin who had recommended Barnes; and (b) IHC’s negotiation with Barnes had been neither intentional nor willfully intended to prevent Joaquin from complying with his obligations.
Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. This provision refers to the constructive fulfillment of a suspensive condition, whose application calls for two requisites, namely: (a) the intent of the obligor to prevent the fulfillment of the condition, and (b) the actual prevention of the fulfillment. Mere intention of the debtor to prevent the happening of the condition, or to place ineffective obstacles to its compliance, without actually preventing the fulfillment, is insufficient.
Evidently, IHC only relied on the opinion of its consultant in deciding to transact with Materials Handling and, later on, with Barnes. In negotiating with Barnes, IHC had no intention, willful or otherwise, to prevent Joaquin and Suarez from meeting their undertaking. Such absence of any intention negated the basis for the CA’s reliance on Article 1186 of the Civil Code.
Nor the Supreme Court agrees to the CA’s upholding of IHC’s liability by virtue of Joaquin and Suarez’s substantial performance. In so ruling, the CA applied Article 1234 of the Civil Code, which states: If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. It is well to note that Article 1234 applies only when an obligor admits breaching the contract after honestly and faithfully performing all the material elements thereof except for some technical aspects that cause no serious harm to the obligee.
In order that there may be substantial performance of an obligation, there must have been an attempt in good faith to perform, without any willful or intentional departure therefrom. The deviation from the obligation must be slight, and the omission or defect must be technical and unimportant, and must not pervade the whole or be so material that the object which the parties intended to accomplish in a particular manner is not attained. The non-performance of a material part of a contract will prevent the performance from amounting to a substantial compliance. The party claiming substantial performance must show that he has attempted in good faith to perform his contract, but has through oversight, misunderstanding or any excusable neglect failed to completely perform in certain negligible respects, for which the other party may be adequately indemnified by an allowance and deduction from the contract price or by an award of damages. But a party who knowingly and wilfully fails to perform his contract in any respect, or omits to perform a material part of it, cannot be permitted, under the protection of this rule, to compel the other party, and the trend of the more recent decisions is to hold that the percentage of omitted or irregular performance may in and of itself be sufficient to show that there had not been a substantial performance.
By reason of the inconsequential nature of the breach or omission, the law deems the performance as substantial, making it the obligee’s duty to pay. The compulsion of payment is predicated on the substantial benefit derived by the obligee from the partial performance. Although compelled to pay, the obligee is nonetheless entitled to an allowance for the sum required to remedy omissions or defects and to complete the work agreed upon.
Conversely, the principle of substantial performance is inappropriate when the incomplete performance constitutes a material breach of the contract. A contractual breach is material if it will adversely affect the nature of the obligation that the obligor promised to deliver, the benefits that the obligee expects to receive after full compliance, and the extent that the non-performance defeated the purposes of the contract. Accordingly, for the principle embodied in Article 1234 to apply, the failure of Joaquin and Suarez to comply with their commitment should not defeat the ultimate purpose of the contract. The primary objective of the parties in entering into the services agreement was to obtain a foreign loan to finance the construction of IHC’s hotel project. This objective could be inferred from IHC’s approval of phase 1 to phase 6 of the proposal. Phase 1 and phase 2, respectively the preparation of a new project study and the settlement of the unregistered mortgage, would pave the way for Joaquin and Suarez to render assistance to IHC in applying for the DBP guaranty and thereafter to look for an able and willing foreign financial institution acceptable to DBP. All the steps that Joaquin and Suarez undertook to accomplish had a single objective – to secure a loan to fund the construction and eventual operations of the hotel of IHC. In that regard, Joaquin himself admitted that his assistance was specifically sought to seek financing for IHC’s hotel project.
Needless to say, finding the foreign financier that DBP would guarantee was the essence of the parties’ contract, so that the failure to completely satisfy such obligation could not be characterized as slight and unimportant as to have resulted in Joaquin and Suarez’s substantial performance that consequentially benefitted IHC. Whatever benefits IHC gained from their services could only be minimal, and were even probably outweighed by whatever losses IHC suffered from the delayed construction of its hotel. Consequently, Article 1234 did not apply.
Notwithstanding the inapplicability of Article 1186 and Article 1234 of the Civil Code, IHC was liable based on the nature of the obligation. Considering that the agreement between the parties was not circumscribed by a definite period, its termination was subject to a condition – the happening of a future and uncertain event. The prevailing rule in conditional obligations is that the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event that constitutes the condition.
To secure a DBP-guaranteed foreign loan did not solely depend on the diligence or the sole will of the respondents because it required the action and discretion of third persons – an able and willing foreign financial institution to provide the needed funds, and the DBP Board of Governors to guarantee the loan. Such third persons could not be legally compelled to act in a manner favorable to IHC. There is no question that when the fulfillment of a condition is dependent partly on the will of one of the contracting parties,44 or of the obligor, and partly on chance, hazard or the will of a third person, the obligation is mixed.45 The existing rule in a mixed conditional obligation is that when the condition was not fulfilled but the obligor did all in his power to comply with the obligation, the condition should be deemed satisfied.
Considering that the respondents were able to secure an agreement with Weston, and subsequently tried to reverse the prior cancellation of the guaranty by DBP, the Supreme Court ruled that they thereby constructively fulfilled their obligation.
Lastly, the amount purportedly included services still to be rendered that supposedly extended until the completion of the construction of the hotel. It is basic, however, that in obligations to do, there can be no payment unless the obligation has been completely rendered.
* Case digest by Aisha Mie Faith Fernandez, LLB-1, Andres Bonifacio Law School, SY 2017-2018