FACTS: In July 1995, Mar y Cielo Leisure Resort, Inc, owned by the Zamora family (MYC-Zamora for short) hired Matthew Jo and Ida Henares (to be referred hereinafter as Jo and Henares) to broker a joint venture between MYC-Zamora and Megaworld to develop MYC-Zamora’s beach-front properties in Lapu-Lapu, Cebu City consisting of 11,502 hectares to a world-class residential/commercial condominium complex. Brokers would be paid at 3% based on the total consideration to be received by MYC from Megaworld. Estimated commission was P60 Million.
Development Contract was drawn among the parties. Once developed, the realties will be marketed by Megaworld as the exclusive dealer thereof.
In March 1996, Jo and Henares, (the brokers) sued Megaworld and MYC for deceitful conduct, it appearing that MYC entered into a simulated contract to certain members of the family of MYC making it appear that they are not the real owners of the property in order to avoid payment of the commission.
To appease Jo and Henares, Megaworld and MYC-Zamora offered to honor the commission owing to Jo and Henares the amount of less than one half of the estimated commissions of P60 Million at P29 Million. Of this P29 Million, P3.9 Million to be paid by MYC-Zamora upon signing of the Compromise Agreement. The balance of P25.1 Million to be sourced from the proceeds of the joint venture agreement. Megaworld promised to pay Jo and Henares if MYC-Zamora failed to pay the balance of the commission.
On January 24, 1997, judgment was rendered based on the above compromise agreement. However, more than three years passed Megaworld and MYC-Zamora still had not paid private respondents the balance of P25.1 million brokers’ fee. Consequently, Jo and Henares filed a motion for execution of the judgment by compromise agreement which the Regional Trial Court, Branch 53 presided by Judge Benedicto Cobarde granted. The Court also garnished the Bank Account of Megaworld.
Megaworld went to the Court of Appeals. The Court of Appeals ruled in favor of Jo and Henares. It moved for a reconsideration. It was denied.
Megaworld went to the Supreme Court and Justice Corona rendered this controversial decision in 2004 in favor of Megaworld. Corona practically rescued Megaworld from paying P25.1 million to Jo and Henares by setting aside the compromise agreement and the principle of res judicata. Res judicata simply means that parties in a case that had become final and executory cannot go back to the court to set it aside. It can only be executed.
In setting aside the compromise agreement, Corona said that Megaworld cannot be ordered to pay pursuant thereof because the development contract between Megaworld and MYC-Zamora was unilaterally severed by MYC-Zamora. Only Corona or his division accepted the theory of Megaworld that there was a unilateral termination of the development contract.
Prior to the actual termination of the contract, MYC-Zamora tendered a 60-day revocation notice to Megaworld for its failure to commence development of the properties. Meaning if Megaworld was willing to continue with the contract of development, it may do so within the 60 day period. Unilateral, from this perspective means that nothing that the other party can do by virtue of the decision of the other on the matter. This is not so in this case because the 60 day period was meant for the other party to start performing its obligation under the contract. Please take note that three years had already lapsed but Megaworld had not started the project.
Megaworld insisted that there was a unilateral termination of the development contract by MYC-Zamora by arguing this way:
“Worse, the Joint Venture Agreement between MYC and/or the Zamora family and the developers was unilaterally terminated by MYC and/or the Zamora family themselves. In fact, they filed a case for a specific performance entitled Manuel Zamora, et al. vs. Megaworld Properties and Holdings, Inc., AEB Properties, Inc. and Acoland Inc. before the Regional Trial Court of Makati City.”
If you have a trained legal eye you can easily spot the legal anomaly here. If there was a suit for specific performance, it means that MYC-Zamora would like Megaworld to perform on the contract. But obviously, Megaworld cannot perform for alleged realty bubbles in 1996 and for additional reason that there was a notice of lis pendens on the beach-front properties. (Lis Pendens- translation: other people have some legal claim over the properties).
If MYC-Zamora failed on their warranties about the integrity of the properties to be developed, Megaworld has recourse to it by putting them to task for breach of warrranties and demand for damages. Jo and Henares as brokers have nothing to do with the “breach” of MYC-Zamora.
The correct decision is to award Jo and Henares the amount of P25.1 Million and let Megaworld and MYC-Zamora litigate the issue as to who was at fault in rescinding the development contract. If MYC-Zamora was at fault, Megaworld is entitled for damages and reimbursement of P25.1 million paid to Jo and Henares. If both are at fault, no recovery is possible and they bear their own respective losses.
“Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. “(n) (Civil Code).
Here is Corona’s argument:
“We find it totally unreasonable, oppressive even, for respondents to exact its broker’s fee from a party which is not even its principal or the entity that engaged its services. Even on the premise that petitioner obligated itself under the compromise agreement to pay respondents the P25.1 million commission, that assumption of liability – if indeed it was – was conditioned on the presence of earnings due MYC and the Zamora family. But how could there have accrued any earnings for MYC and the Zamora family when the latter unilaterally cancelled the project from which petitioner could draw the payment? To insist on holding petitioner liable for the P25.1 million, under the circumstances, is like Shylock’s insistence on his “pound of flesh.”
The basic error in this erudition was in applying the law on equity in a situation where the parties had clearly intended that their relationship be governed by a written contract. (development contract with brokers fee of 3%). The same contract was ratified by the parties when they entered into a compromise agreement whereby MYC-Zamora would pay the sum of P3.9 million to Jo and Henares upon signing of the compromise agreement and the balance of P25.1 to be sourced from receipts of the project. Megaworld promised that it would pay Jo and Henares the amount of P25.1 million if MYC-Zamora defaulted on their promise.
The contract between the parties is the law between them. Courts cannot stipulate for the parties. In setting aside the compromise agreement and declaring Megaworld not liable to Jo and Henares, Corona had stipulated for the parties that in case of the failure to develop the project by Megaworld, Jo and Henares cannot collect from developer despite its promise to pay them. Corona also made revenues of the project as a condition for performance instead of treating it as a mere promise. In contract, there is a big difference between the two. A condition which was not fulfilled discharges the duty to perform, a promise on the other hand requires “best effort to perform” from the parties. Here, the revenues was not a condition but a promise to perform the contract in good faith.
Corona’s ruling in this case was opposed to his ruling in a prior case of Golangco Construction v. PCIB in which he said:
“Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
Obligations arising from contracts have the force of law between the parties and should be complied with in good faith. In characterizing the contract as having the force of law between the parties, the law stresses the obligatory nature of a binding and valid agreement. We cannot countenance an interpretation that undermines a contractual stipulation freely and validly agreed upon. The courts will not relieve a party from the effects of an unwise or unfavorable contract freely entered into.”
It was folly for Megaworld in not making it clear in the Compromise of Jan. 24, 1997 that revenues from development of the properties was a condition for the payment of P25.1, but Corona nonetheless, relieved Megaworld from its folly.
In another case, the Supreme Court said:
“Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations governs. In such cases, courts have no authority to alter the contract by construction or to make a new contract for the parties; a court’s duty is confined to the interpretation of the contract the parties made for themselves without regard to its wisdom or folly, as the court cannot supply material stipulations or read into the contract words the contract does not contain. It is only when the contract is vague and ambiguous that courts are permitted to resort to the interpretation of its terms to determine the parties’ intent.”
The brokers fee contract among Megaworld, Jo and Henares and MYC-Zamora was validly agreed upon by the parties. It was not against the law, morals, good customs, public order, or public policy. In fact it was even judicially approved in a Decision On Compromise Agreement rendered by Judge Cobarde on January 24, 1997.
Parties are required by law to observe the terms and the conditions of the contract in good faith. This is the basic premise.
Was Megaworld in bad faith in not commencing its contract to develop the beach-front properties of MYC-Zamora pursuant to the timetable of the development contract or was it MYC-Zamora which was in bad faith in contracting for development of properties it did not have any legal title? If both were in bad faith, they bear their own losses and they have no cause of action against each other, but Jo and Henares are innocent parties here.
The professional services of Jo and Henares were utilized in bringing the parties to agree to develop the beach-front properties of MYC-Zamora by Megaworld. They bargained for a 3% brokers fee and both developers and owners of the property agreed for that fee originally computed at P60 million, though in the compromise agreement, Jo and Henares accepted less than half the fee at P29 million.
Assuming the brokers’s entitlement to the balance of P25.1 million was conditioned on the presence of earnings (which I submit was not) due to MYC and the Zamora family, such condition was considered by law to have been complied with when the parties (Megaworld- MYC-Zamora) prevented the condition from happening by rescinding the contract of development in bad faith. The obligation to pay Jo and Henares the balance of the commission of P25.1 matures and becomes legally demandable from either MYC-Zamora or Megaworld the moment the parties rescinded their contract.
“Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. “(1119) (Civil Code).
Megaworld can get out from its promise to pay Jo and Henares if it can prove that its promise was not supported by any consideration. The brokers originally demanded for a P60 million commission. In the compromise, they agreed for payment of P29 million commission, in reliance of the promise of Megaworld and MYC-Zamora to pay said amount. Such reliance provides new consideration aside from the fact Megaworld in accepting the original development contract worked out by the brokers, had recognized the right of Jo and Henares for the commission.
Corona resolved the issue by citing Shylock’s “pound of flesh”, but Jo and Henares here were simply asking for cold cash, not flesh, nor blood from Megaworld which incidentally in its 2007 financial disclosures had earned P3.03 Billion profit for that year.
The law on agency, (Jo and Henares being hired by MYC-Zamora) did not even come into play here. Megaworld promised to pay the brokers should MYC-Zamora default. Megaworld was simply being called upon to keep its contractual promise to Jo and Henares.
If you bring this problem inside a classrom of second year law students presently taking up their “obligations and contract” they will decide this case in accordance with my humble submission.
Mind you, Corona is the Chief Justice of the Supreme Court and he misapplied the law to help Megaworld avoid its legal obligation of P25.1 million to Jo and Henares.
Does the discount of P10 Million on the Bellagio Condo unit looks like “quid pro quo” for you? You bet!