Fabillo vs. Intermediate Appellate Court

A contingent fee contract between a lawyer and client stipulating forty percent of the "value" or "benefit" derived from a favorable judgment entitles the lawyer to a monetary fee, not ownership of a proportionate physical share of the recovered property; ambiguities in such contracts are construed against the lawyer who drafted them and in favor of the client.

Florencio Fabillo inherited a house and lot in San Salvador Street, Palo, Leyte, covered by Tax Declaration No. 19335, under the last will and testament of his sister Justina Fabillo dated August 16, 1957. Justina's husband, Gregorio D. Brioso, was bequeathed a separate parcel of land in Pugahanay, Palo, Leyte. After Justina's death, Florencio filed a petition for probate of the will. On June 2, 1962, the probate court approved the project of partition but reserved the determination of ownership over the San Salvador property for separate proceedings. Two years later, Florencio sought the legal services of lawyer Alfredo M. Murillo to recover the San Salvador property, leading to the execution of a contract of services that became the subject of the present dispute.

In her last will and testament dated August 16, 1957, Justina Fabillo bequeathed to her brother Florencio Fabillo a house and lot in San Salvador Street, Palo, Leyte, covered by Tax Declaration No. 19335, and to her husband Gregorio D. Brioso a parcel of land in Pugahanay, Palo, Leyte. After Justina's death, Florencio filed a petition for probate of the will. On June 2, 1962, the probate court approved the project of partition "with the reservation that the ownership of the land declared under Tax Declaration No. 19335 and the house erected thereon be litigated and determined in a separate proceedings."

Two years later, Florencio sought the assistance of lawyer Alfredo M. Murillo in recovering the San Salvador property. On August 9, 1964, Murillo wrote Florencio a handwritten letter stating that he had instructed his stenographer to prepare the complaint and proposing that, considering the case was a revival of a lost case, Florencio "gladly give me 40% of the money value of the house and lot as a contingent fee in case of a success." Thirteen days later, on August 22, 1964, Florencio and Murillo entered into a formal contract of services. The contract provided that Murillo would represent Florencio and his heirs in Special Proceedings No. 843 and in a new case, Civil Case No. 3532, until successful conclusion. In consideration of his legal services, Florencio promised to pay Murillo "in case of success in any or both cases the sum equivalent to FORTY PER CENTUM (40%) of whatever benefit I may derive from such cases." The contract specified that if the house and lot were sold, Murillo would receive 40% of the purchase price; if mortgaged, 40% of the proceeds; if leased, 40% of the rentals; and if occupied by Florencio or his heirs, Murillo would have the option of occupying or leasing 40% of the house and lot. The contract was signed by Florencio Fabillo, Josefa T. Fabillo, and Murillo, with the conformity of two of the Fabillo children, Roman Fabillo and Cristeta F. Maglinte, who also witnessed the document.

Pursuant to the contract, Murillo filed Civil Case No. 3532 against Gregorio D. Brioso to recover the San Salvador property. The case was terminated on October 29, 1964 when the court, upon the parties' joint motion for a compromise agreement, declared Florencio Fabillo as the lawful owner not only of the San Salvador property but also of the Pugahanay parcel of land. Murillo then proceeded to implement the contract by taking possession and exercising rights of ownership over 40% of both properties, installing a tenant in the Pugahanay property.

Sometime in 1966, Florencio Fabillo claimed exclusive right over the two properties and refused to give Murillo his share of their produce. After his demands went unheeded, Murillo filed on March 23, 1970 a complaint in the Court of First Instance of Leyte against the Fabillo spouses and their children, praying that he be declared lawful owner of 40% of the two properties, that defendants pay him P900 per annum from 1966 until he would receive his share, plus P5,000 as consequential damages and P1,000 as attorney's fees, and moral and exemplary damages. The defendants answered that their consent to the contract was vitiated by old age and ailment, that Murillo misled them into believing the probate proceedings were already terminated, and that the 40% contingent fee was excessive, unfair, and unconscionable. They prayed that the contract be declared null and void, that Murillo's fee be fixed at 10% of the assessed value of P7,780 of the San Salvador property, and that Murillo be ordered to account for rentals and produce he had collected and to vacate the portions he occupied.

The lower court found insufficient evidence that the Fabillo spouses' consent was vitiated, noting that the contract was witnessed by two of their children who appeared highly educated and that the spouses themselves were old but literate and physically fit. It upheld the contract as not violating Article 1491 of the Civil Code and declared Murillo the lawful owner of 40% of both properties, directing the defendants to pay P1,200 representing 40% of the net produce of the Pugahanay property from 1967 to 1973. On motions for reconsideration, the lower court modified the award to P2,450 for the net produce and added P300 as attorney's fees. Both Florencio and Josefa Fabillo died during the pendency of the case, and their children substituted them. The Intermediate Appellate Court affirmed the lower court's decision in toto on March 27, 1984. Murillo likewise died during the pendency of the petition before the Supreme Court, and his heirs substituted him.

• Interpretation of the Contract of Services: Petitioners questioned the appellate court's interpretation of the contract of services, contending that it did not entitle Murillo to ownership of 40% of the recovered properties but only to a contingent fee equivalent to 40% of their value.
• Violation of Article 1491 of the Civil Code: Petitioners contended that the contract of services was in violation of Article 1491 of the Civil Code, which prohibits lawyers from acquiring properties that are the objects of litigation in which they take part by virtue of their profession.
• Vitiated Consent: In their answer before the lower court, petitioners' predecessors argued that the Fabillo spouses' consent to the contract was vitiated by old age and ailment, and that Murillo misled them into believing that Special Proceedings No. 843 was already terminated when it was still pending.
• Excessive and Unconscionable Fee: Petitioners' predecessors argued that the 40% contingent fee was excessive, unfair, and unconscionable considering the nature of the case, the length of time spent, the efforts exerted by Murillo, and his professional standing, and prayed that the fee be fixed at 10% of the assessed value of the San Salvador property.

• Ownership Under the Contract: Respondent Murillo claimed entitlement to 40% ownership of both the San Salvador and Pugahanay properties based on the contract of services, praying that he be declared the lawful owner of said proportion and that defendants be directed to pay him his share of the produce plus damages.
• Validity of the Contract: Respondent maintained that the contract of services was valid and enforceable, having been entered into with the conformity of the Fabillo spouses and witnessed by their educated children.

• Validity Under Article 1491: Whether the contract of services entered into between Murillo and the Fabillo spouses violated Article 1491, paragraph 5, of the Civil Code, which prohibits lawyers from acquiring properties that are the objects of litigation in which they participate by virtue of their profession.
• Nature of the Contingent Fee: Whether the contract of services entitled Murillo to ownership of 40% of the recovered properties or merely to a contingent fee equivalent to 40% of the value of whatever benefit the Fabillos derived from the favorable judgments.
• Reasonableness of Attorney's Fees: Whether the amount of attorney's fees awarded by the lower courts was reasonable given the nature of the case, the value of the properties, and the effort exerted by Murillo.

• Validity Under Article 1491: No. The contract of services did not violate Article 1491(5) of the Civil Code, because the prohibition applies only to acquisitions made during the pendency of litigation, whereas a contingent fee is paid only after judgment has been rendered.
• Nature of the Contingent Fee: The contract entitled Murillo to 40% of the value of the properties as contingent fee, not to ownership of 40% of the properties themselves. The ambiguity in the contract was resolved against Murillo as the drafter, in accordance with the rule that contracts between lawyer and client are construed in favor of the client.
• Reasonableness of Attorney's Fees: The forty-percent fee was unreasonable. Considering the nature of the case, the value of the properties, and the time and effort exerted by Murillo, the Court fixed reasonable attorney's fees at P3,000.

• Validity Under Article 1491: Article 1491, paragraph 5, of the Civil Code prohibits lawyers from acquiring by purchase, even at public or judicial auction, properties and rights which are the objects of litigation in which they may take part by virtue of their profession. The prohibition, however, applies only if the sale or assignment of the property takes place during the pendency of the litigation involving the client's property. A contract stipulating a contingent fee is not covered by the prohibition because payment of the fee is not made during the pendency of the litigation but only after judgment has been rendered. Under the 1988 Code of Professional Responsibility, specifically Rule 16.03 of Canon 16, a lawyer may have a lien over funds and property of his client and may apply so much thereof as may be necessary to satisfy his lawful fees and disbursements. Contingent fees were likewise impliedly sanctioned by No. 13 of the Canons of Professional Ethics, which governed lawyer-client relationships when the contract was executed. As long as the lawyer does not exert undue influence, commits no fraud or imposition, and the compensation is not clearly excessive as to amount to extortion, a contract for contingent fee is valid and enforceable.

• Nature of the Contingent Fee: A careful scrutiny of the contract showed that the parties intended forty percent of the value of the properties as Murillo's contingent fee. This was borne out by the stipulation that "in case of success of any or both cases," Murillo shall be paid "the sum equivalent to forty per centum of whatever benefit" Fabillo would derive from favorable judgments—the same formulation Murillo used in his letter of August 9, 1964, where he referred to "40% of the money value of the house and lot." The contract's provisions regarding sale, mortgage, and lease all referred to monetary equivalents: 40% of the "purchase price," "proceeds of the mortgage," or "rentals." The contract was vague, however, with respect to a situation where the properties were neither sold, mortgaged, nor leased, as Murillo was merely given "the option of occupying or leasing to any interested party forty per cent of the house and lot." Had the parties intended that Murillo become the lawful owner of 40% of the properties, it would have been clearly and unequivocally stipulated, considering that the Fabillos would part with actual portions of their properties. The ambiguity was resolved against Murillo, who drafted the contract, in consonance with the rule of interpretation that contracts of professional services between lawyer and client should be construed more favorably to the client, even if it would work prejudice to the lawyer. This rule rests on the inequality in situation between an attorney who knows the technicalities of the law and a client who is usually ignorant of the vagaries of the law.

• Reasonableness of Attorney's Fees: Considering the nature of the case—which ended on a compromise agreement—the value of the properties subject matter thereof, and the length of time and effort exerted by Murillo, the Court held that P3,000 was a reasonable contingent fee for services rendered. The Court upheld the principle that a lawyer shall at all times uphold the integrity and dignity of the legal profession, so that the basic ideal becomes one of rendering service and securing justice, not money-making. The Court emphasized that the worst scenario that can happen to a client is to lose the litigated property to his lawyer in whom all trust and confidence were bestowed at the very inception of the legal controversy.

• Validity of Contingent Fee Contracts — A contract for contingent fee between a lawyer and client is valid and enforceable as long as the lawyer does not exert undue influence on the client, no fraud is committed or imposition applied, and the compensation is not clearly excessive as to amount to extortion. Contingent fees were impliedly sanctioned by the Canons of Professional Ethics and are recognized under the 1988 Code of Professional Responsibility, which allows a lawyer to have a lien over client funds and property to satisfy lawful fees.

• Prohibition Under Article 1491(5), Civil Code — The prohibition against lawyers acquiring by purchase properties that are the objects of litigation in which they participate by virtue of their profession applies only if the sale or assignment takes place during the pendency of the litigation. A contingent fee arrangement, where payment is made only after judgment, is not covered by the prohibition.

• Construction of Lawyer-Client Contracts — In construing a contract of professional services between a lawyer and client, such construction as would be more favorable to the client should be adopted even if it would work prejudice to the lawyer. This rule is rooted in the inequality in situation between an attorney who knows the technicalities of the law and a client who is usually ignorant of the vagaries of the law.

• Contra Proferentem in Attorney-Drafted Contracts — Ambiguities in a contract drafted by a lawyer for his client are resolved against the lawyer as drafter. In this case, the ambiguity regarding whether the 40% contingent fee conveyed ownership of a proportionate share of the properties or merely entitled the lawyer to a monetary equivalent was resolved against Murillo.

• "As long as the lawyer does not exert undue influence on his client, that no fraud is committed or imposition applied, or that the compensation is clearly not excessive as to amount to extortion, a contract for contingent fee is valid and enforceable." — This passage states the conditions under which a contingent fee contract is valid, establishing the governing standard for evaluating attorney-client fee arrangements.

• "[I]n construing a contract of professional services between a lawyer and his client, such construction as would be more favorable to the client should be adopted even if it would work prejudice to the lawyer." — This passage articulates the canonical rule of interpretation for lawyer-client contracts, grounded in the inequality of knowledge and position between attorney and client.

• "For the worst scenario that can ever happen to a client is to lose the litigated property to his lawyer in whom all trust and confidence were bestowed at the very inception of the legal controversy." — This passage captures the Court's normative concern about the fiduciary relationship between lawyer and client, underscoring why contingent fee contracts transferring ownership of litigated property to counsel are disfavored.

• Director of Lands vs. Ababa, 88 SCRA 513 (1979) — Cited as controlling authority for the proposition that the prohibition in Article 1491(5) of the Civil Code applies only if the sale or assignment of property takes place during the pendency of the litigation.
• Ulanday vs. Manila Railroad Co., 45 Phil. 540 (1923) — Cited for the principle that a contract for contingent fee is valid and enforceable absent undue influence, fraud, or extortionate compensation.
• Recto vs. Harden, 100 Phil. 427 (1956) — Cited to show that contingent fees were impliedly sanctioned by No. 13 of the Canons of Professional Ethics, which governed lawyer-client relationships at the time the contract was executed.
• Reyes vs. De la Cruz, 105 Phil. 372 (1959) — Cited as authority for the rule that ambiguities in a contract are resolved against the party who drafted it.
• De los Santos vs. Palanca, 119 Phil. 765 — Cited as the source of the rule that contracts of professional services between lawyer and client should be construed more favorably to the client.
• Amalgamated Laborers Association vs. CIR, 131 Phil. 374 — Cited to support the rationale for the pro-client construction rule, based on the inequality in situation between attorney and client.
• Licudan vs. Court of Appeals, G.R. No. 91958, January 24, 1991 — Cited for the principle that a lawyer's basic ideal is rendering service and securing justice, not money-making.

• Article 1491, paragraph 5, Civil Code — Prohibits lawyers from acquiring by purchase, even at public or judicial auction, properties and rights which are the objects of litigation in which they may take part by virtue of their profession. The Court held that the prohibition applies only during the pendency of litigation, not after judgment, and therefore does not bar a contingent fee arrangement.
• Rule 16.03, Canon 16, 1988 Code of Professional Responsibility — Provides that a lawyer may have a lien over funds and property of his client and may apply so much thereof as may be necessary to satisfy his lawful fees and disbursements. The Court cited this provision to support the validity of contingent fee arrangements.
• No. 13, Canons of Professional Ethics — Impliedly sanctioned contingent fees. The Court noted that this canon governed lawyer-client relationships at the time the contract of services was executed in 1964.

Gutierrez, Jr., Feliciano, Bidin, and Davide, Jr., JJ., concurred.