C.F. Sharp & Co. Inc. vs. Pioneer Insurance & Surety Corporation

A contract of employment is perfected upon the parties' agreement on its essential elements—consent, object, and cause—even prior to actual deployment of the worker, and the employment agency's unjustified failure to deploy the seafarer constitutes breach of the perfected contract entitling the latter to damages. The commencement of the employer-employee relationship, which requires actual deployment, is distinct from the perfection of the employment contract, which occurs when the parties agree on the terms.

C.F. Sharp & Co. Inc. is a local private employment agency engaged in recruiting seafarers for overseas employment, acting on behalf of foreign principals. Pioneer Insurance & Surety Corporation served as surety for C.F. Sharp under a Contract of Suretyship. John J. Rocha, the executive vice-president of C.F. Sharp, had executed an Indemnity Agreement with Pioneer Insurance whereby he bound himself to jointly and severally indemnify the surety for any damages it might incur. Respondents Wilfredo C. Agustin and Hernando G. Minimo were applicant seafarers who sought employment abroad through C.F. Sharp's recruitment services. The dispute arose within the regulatory framework governing overseas employment under the Labor Code and the POEA's implementing rules, which prescribe sanctions for unlawful withholding of worker documents but are silent on the payment of damages to undeployed seafarers.

Respondents Wilfredo C. Agustin and Hernando G. Minimo responded to a newspaper advertisement by C.F. Sharp & Co. Inc. for job openings for sandblasters and painters in Libya. They applied sometime in August 1990 and, after passing the interview, were required to submit their passports, seaman's book, National Bureau of Investigation clearance, employment certificates, certificates of seminars attended, and medical examination results. Upon submission of these requirements, a Contract of Employment was executed between respondents and C.F. Sharp, whereby they were hired as sandblasters/painters for a three-month contract with a basic monthly salary of US$450.00 and an overtime rate of US$439.00 per month. C.F. Sharp acted on behalf of its principal, International Shipping Management, Inc. The contract also incorporated the terms of the Revised Employment Contract for seafarers approved by the POEA/DOLE on July 14, 1989 under Memorandum Circular No. 41, series of 1989.

Thereafter, respondents were required to attend various seminars, open a bank account with corresponding allotment slips, and attend a pre-departure orientation. They were advised to prepare for immediate deployment and to report to C.F. Sharp to ascertain their deployment schedule. After a month had passed without deployment, respondents requested the release of the documents they had submitted. C.F. Sharp refused to surrender the documents, leading respondents to file a complaint before the Philippine Overseas Employment Administration on 21 January 1991. The POEA found C.F. Sharp guilty of violating Article 34(k) of the Labor Code for withholding travel documents and suspended its license until the documents were returned, but declared it had no jurisdiction over respondents' monetary claims.

On 10 March 1995, respondents filed a Complaint for breach of contract and damages before the Regional Trial Court of Pasay City against C.F. Sharp and its surety, Pioneer Insurance & Surety Corporation. Pioneer Insurance, in turn, filed a cross-claim against Rocha, the executive vice-president of C.F. Sharp, based on an Indemnity Agreement whereby he bound himself to jointly and severally indemnify Pioneer Insurance for any damages it might incur as surety. The RTC found that C.F. Sharp would only release the documents if respondents signed a quitclaim, and ruled that the unjustified failure to deploy and refusal to release documents constituted breach of contract. On appeal, the Court of Appeals found no perfected contract because respondents were not cleared for travel, but nonetheless held C.F. Sharp and Rocha liable for damages under Article 21 of the Civil Code for the unlawful withholding of documents. The lower courts' factual findings that C.F. Sharp unjustifiably refused to return the documents and imposed a quitclaim as a condition for their release were affirmed by the Supreme Court.

• Jurisdiction: Petitioners argued that the RTC had no jurisdiction over the case pursuant to Section 4(a) of Executive Order No. 797, which vests upon the POEA jurisdiction over all cases, including money claims, arising out of or by virtue of any contract involving workers for overseas employment.
• Perfection of Contract: Petitioners maintained that the perfection and effectivity of the Contract of Employment depend upon the actual deployment of respondents, and that since respondents were never cleared for travel, no employer-employee relationship commenced and no contract was perfected.
• Article 21 Damages: Rocha argued that there was no basis to hold him liable under Article 21 of the Civil Code because C.F. Sharp had signified its intention to return the documents and had informed respondents they could withdraw them at any time during business hours.
• Moral Damages: Rocha contended that respondents failed to establish the basis for their entitlement to moral damages.
• Exemplary Damages: Rocha refuted the award of exemplary damages, arguing that requiring respondents to sign a quitclaim prior to the release of their documents could not be considered bad faith.
• Temperate Damages: Rocha questioned the award of temperate damages on the ground that the act of withholding respondents' documents could not be considered "chronic and continuing."
• Corporate Separate Personality: In his Reply, Rocha introduced the argument that he should not be held jointly liable with C.F. Sharp because the company has a separate personality, that there was no showing in the Complaint that he participated in the malicious act complained of, and that his liability stemmed only from the Indemnity Agreement with Pioneer Insurance and did not extend to respondents.

• Article 21 Damages: Respondents maintained that they were entitled to damages under Article 21 of the Civil Code for C.F. Sharp's unjustified refusal to release their documents and for requiring them to sign a quitclaim which would effectively bar them from seeking redress against petitioners.
• Other Damages: Respondents justified the award of other damages on the ground that they suffered pecuniary losses attributable to petitioner's malice and bad faith.

• Perfection of Contract: Whether the Contract of Employment was perfected despite the non-deployment of respondents.
• Breach of Contract: Whether C.F. Sharp's failure to deploy respondents constitutes breach of contract entitling them to damages.
• Actionable Wrong Under Article 21: Whether C.F. Sharp's withholding of respondents' documents and requirement of a quitclaim constitute an actionable wrong under Article 21 of the Civil Code.
• Award of Damages: Whether respondents are entitled to moral damages, exemplary damages, and attorney's fees.
• Rocha's Personal Liability: Whether Rocha may raise the defense of corporate separate personality for the first time at the Reply stage to avoid joint and solidary liability.

• Perfection of Contract: Yes. The Contract of Employment was perfected upon the parties' agreement on its essential elements—consent, object, and cause—as manifested by their signatures, independent of actual deployment. The perfection of the employment contract is distinct from the commencement of the employer-employee relationship, the latter requiring actual deployment.

• Breach of Contract: Yes. C.F. Sharp's failure to deploy respondents constituted breach of the perfected Contract of Employment, entitling respondents to compensatory damages for the income they would have received under the contract.

• Actionable Wrong Under Article 21: Yes. C.F. Sharp's unjustified withholding of respondents' documents, coupled with its arbitrary imposition of a quitclaim as a condition for release, constituted an actionable wrong under Article 21 because it effectively deprived respondents of employment opportunities elsewhere and of resort to legal remedies.

• Award of Damages: Yes. Moral damages were proper under Article 2219(10) in relation to Article 21 of the Civil Code. Exemplary damages were warranted under Article 2232 because the wrongful act was accompanied by bad faith. Attorney's fees and costs of suit were recoverable under Article 2208.

• Rocha's Personal Liability: Yes. Rocha was barred from raising the defense of corporate separate personality at the Reply stage, it being doctrinal that defenses not pleaded in the answer may not be raised for the first time on appeal, and a party may not change his theory on appeal after the case has been decided on a different theory below.

• Perfection of Contract: Contracts undergo three stages: negotiation, perfection or birth, and consummation. Perfection occurs when the parties agree upon the essential elements of the contract. Under Article 1315 of the Civil Code, a contract is perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all consequences which, according to their nature, may be in keeping with good faith, usage, and law. An employment contract, like any other contract, is perfected when the parties concur in the essential elements: consent, object certain, and cause. The Contract of Employment here contained all essential elements: the position (sandblaster/painter), duration (three months), basic monthly salary (US$450.00), overtime rate (US$439.00 per month), and other terms. The object was the service to be rendered on board the vessel; the cause was the monthly compensation. Both parties freely gave their consent through their signatures, and neither disavowed that consent. The Court of Appeals erred in conflating the perfection of the employment contract with the commencement of the employer-employee relationship. The latter requires actual deployment, but the former is perfected upon agreement on the terms. Santiago vs. CF Sharp Crew Management, Inc. established this distinction: the perfection of the contract coincided with the date of execution, while the commencement of the employer-employee relationship would have taken place had the seafarer been actually deployed.

• Breach of Contract: Because the Contract of Employment was perfected, C.F. Sharp was under obligation to deploy respondents, which is the natural effect and consequence of the contract. The failure to deploy constituted a unilateral and unreasonable reneging on this obligation. Santiago categorically ruled that failure to deploy constitutes breach of contract, giving rise to the seafarer's cause of action and entitling him to actual damages. The fact that the POEA Rules are silent as to the payment of damages to an undeployed seafarer does not preclude the seafarer from instituting an action for damages; the sanctions provided for non-deployment (suspension or cancellation of license, fine, return of documents) do not foreclose a separate action for damages.

• Actionable Wrong Under Article 21: The lower courts' factual findings—that C.F. Sharp unjustifiably refused to return the documents and would only release them upon signing of a quitclaim—were affirmed. This constituted an actionable wrong under Article 21, which provides that any person who wilfully causes loss or injury to another in a manner contrary to morals, good customs, or public policy shall compensate the latter for the damage. The withholding of documents prevented respondents from seeking lucrative employment elsewhere, and the quitclaim requirement effectively deprived them of resort to legal remedies, amounting to bad faith.

• Award of Damages: Moral damages are recoverable under Article 2219(10) of the Civil Code in relation to Article 21, the latter being among the acts referred to in the enumeration. Exemplary damages may be awarded when a wrongful act is accompanied by bad faith or when the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, pursuant to Article 2232. Since the award of exemplary damages was proper, attorney's fees and costs of suit could also be recovered under Article 2208.

• Rocha's Personal Liability: Rocha and C.F. Sharp filed a single brief before the Court of Appeals, both questioning the trial court's declaration of breach of contract and the award of damages. The Court of Appeals found them both liable. It was only in his Reply dated 25 March 2008, through new representation, that Rocha raised the defense of corporate separate personality. This was too late. It is doctrinal that defenses not pleaded in the answer may not be raised for the first time on appeal, and a party cannot change fundamentally the nature of the issue on appeal after the case has been decided on a different theory below. The sudden exclusion of C.F. Sharp from the petition, even as Rocha posited arguments on its behalf, further indicated disingenuousness.

• Three Stages of a Contract — Contracts undergo three distinct stages: (1) negotiation, which begins from the time the prospective contracting parties manifest their interest and ends at the moment of agreement; (2) perfection or birth, which takes place when the parties agree upon the essential elements of the contract; and (3) consummation, which occurs when the parties fulfill or perform the terms agreed upon, culminating in the extinguishment thereof. The Court applied this framework to hold that the employment contract had reached the perfection stage upon the parties' signing, even though consummation (actual deployment) never occurred.

• Distinction Between Perfection of Employment Contract and Commencement of Employer-Employee Relationship — The perfection of an employment contract, which occurs when the parties agree on the essential elements (consent, object, cause), is separate and distinct from the commencement of the employer-employee relationship, which requires actual deployment. Rights and obligations arise upon perfection, even before the employer-employee relationship begins, and breach of those rights gives rise to a cause of action. The Court relied on Santiago vs. CF Sharp Crew Management, Inc. to establish this distinction.

• Actionable Wrong Under Article 21 — Any person who wilfully causes loss or injury to another in a manner contrary to morals, good customs, or public policy shall compensate the latter for the damage. The Court applied this to C.F. Sharp's withholding of documents and imposition of a quitclaim condition, which deprived respondents of employment opportunities and legal recourse.

• Prohibition Against Changing Theory on Appeal — Defenses not pleaded in the answer may not be raised for the first time on appeal. A party who deliberately adopts a certain theory and has the case decided upon that theory in the court below will not be permitted to change the same on appeal, as it would be unfair to the adverse party. The Court applied this to bar Rocha from invoking corporate separate personality at the Reply stage.

• "The commencement of an employer-employee relationship must be treated separately from the perfection of an employment contract." — This passage articulates the central distinction in the case: that contract perfection and the start of the employer-employee relationship are conceptually separate, with the former occurring upon agreement and the latter upon actual deployment.

• "Respondent's act of preventing petitioner from departing the port of Manila and boarding 'MSV Seaspread' constitutes a breach of contract, giving rise to petitioner's cause of action. Respondent unilaterally and unreasonably reneged on its obligation to deploy petitioner and must therefore answer for the actual damages he suffered." — This quotation from Santiago vs. CF Sharp Crew Management, Inc., adopted by the Court as controlling precedent, establishes that failure to deploy a seafarer who has a perfected employment contract constitutes breach entitling the worker to damages.

• "The fact that the POEA Rules are silent as to the payment of damages to the affected seafarer does not mean that the seafarer is precluded from claiming the same. The sanctions provided for non-deployment do not end with the suspension or cancellation of license or fine and the return of all documents at no cost to the worker. They do not forfend a seafarer from instituting an action for damages against the employer or agency which has failed to deploy him." — This passage defines the scope of available remedies for undeployed seafarers, clarifying that administrative sanctions under POEA rules do not preclude civil actions for damages.

• "It is doctrinal that defenses not pleaded in the answer may not be raised for the first time on appeal. A party cannot, on appeal, change fundamentally the nature of the issue in the case." — This statement of the rule against changing theories on appeal was applied to bar Rocha from raising corporate separate personality at the Reply stage.

• Santiago vs. CF Sharp Crew Management, Inc., G.R. No. 162419, 10 July 2007, 527 SCRA 165 — Controlling precedent. The Court relied on this case to establish the distinction between the perfection of an employment contract and the commencement of the employer-employee relationship, and to hold that failure to deploy constitutes breach of contract entitling the seafarer to damages. The Court noted that the Court of Appeals could not be faulted for failing to adhere to Santiago because the CA decision was promulgated in 2003 while Santiago was decided in 2007.

• Spouses Tongson vs. Emergency Pawnshop Bula, Inc., G.R. No. 167874, 15 January 2010, 610 SCRA 150 — Cited for the three stages of a contract (negotiation, perfection, consummation), which the Court applied to determine that the employment contract had reached the perfection stage.

• Penera vs. Commission on Election (COMELEC), G.R. No. 181613, 11 September 2009, 599 SCRA 609 — Cited for the doctrine that defenses not pleaded in the answer may not be raised for the first time on appeal, applied to bar Rocha's belated invocation of corporate separate personality.

• Sunbanun vs. Go, G.R. No. 163280, 2 February 2010, 611 SCRA 320 — Cited for the propriety of awarding exemplary damages and attorney's fees when a wrongful act is accompanied by bad faith.

• Article 1315, Civil Code — Provides that a contract is perfected by mere consent, and from that moment the parties are bound to the fulfillment of what has been expressly stipulated and to all consequences which, according to their nature, may be in keeping with good faith, usage, and law. Applied to hold that the employment contract was perfected upon the parties' agreement on its terms.

• Article 21, Civil Code — Provides that any person who wilfully causes loss or injury to another in a manner contrary to morals, good customs, or public policy shall compensate the latter for the damage. Applied to hold C.F. Sharp liable for withholding documents and imposing a quitclaim condition.

• Article 2219(10), Civil Code — Authorizes the recovery of moral damages for acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35. Applied in relation to Article 21 to sustain the award of moral damages.

• Article 2232, Civil Code — Authorizes exemplary damages when a wrongful act is accompanied by bad faith or when the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Applied to sustain the award of exemplary damages.

• Article 2208, Civil Code — Authorizes recovery of attorney's fees and costs of suit when exemplary damages are awarded. Applied to sustain the award of attorney's fees.

• Article 34(k), Labor Code — Makes it unlawful for any entity to withhold or deny travel documents from applicant workers before departure for monetary or financial considerations other than those authorized. The POEA found C.F. Sharp guilty of violating this provision.

• Section 4(a), Executive Order No. 797 — Vests upon the POEA jurisdiction over all cases, including money claims, arising out of or by virtue of any contract involving workers for overseas employment. Petitioners invoked this provision to challenge RTC jurisdiction, but the CA ruled they were estopped from raising the issue.

Antonio T. Carpio (Chairperson), Martin S. Villarama, Jr., Maria Lourdes P. A. Sereno, and Bienvenido L. Reyes concurred. No separate concurring opinions were written.