GF Equity, Inc. vs. Valenzona

A contractual stipulation that makes the pre-termination of a contract dependent exclusively upon the sole and uncontrolled opinion of one party is null and void for violating the mutuality principle under Article 1308 of the Civil Code. Even where the stipulation is void, the party invoking it may still be liable for abuse of rights under Article 19 in relation to Article 20 if it fails to provide any legal basis for the pre-termination, warranting actual damages and attorney's fees — but not moral or exemplary damages absent proof of bad faith or wanton conduct.

GF Equity, Inc., represented by its Chief Financial Officer W. Steven Uytengsu, operated the Alaska basketball team in the Philippine Basketball Association (PBA). It hired Arturo Valenzona as head coach under a written Contract of Employment, succeeding a prior verbal arrangement under which Valenzona had coached GF Equity's Hills Brothers team in the 3rd PBA Conference of 1987. The written contract fixed a two-year term commencing January 1, 1988 and ending December 31, 1989, at a monthly salary of ₱35,000 net of taxes, with a service vehicle and gasoline allowance. Paragraph 3 of the contract included a resolutory condition permitting GF Equity to terminate the contract if, "in the sole opinion of the corporation," the coach failed to exhibit sufficient skill or competitive ability. Before signing, Valenzona's lawyer flagged the one-sidedness of this clause, but Valenzona nonetheless acceded, reposing trust and confidence in Uytengsu.

GF Equity, Inc., through its Chief Financial Officer W. Steven Uytengsu, hired Arturo Valenzona as Head Coach of the Alaska basketball team in the Philippine Basketball Association under a written Contract of Employment. Even before the contract was executed, Valenzona had already served GF Equity under a verbal arrangement, coaching its Hills Brothers team in the 3rd PBA Conference of 1987, where the team finished as runner-up. The written contract fixed an employment period of two years, commencing January 1, 1988 and ending December 31, 1989, with a monthly salary of ₱35,000 net of taxes, plus a service vehicle and gasoline allowance. The contract detailed Valenzona's duties to include coaching at all practices and games, observing corporate rules governing the team and its players, maintaining good physical condition, conducting himself with honesty and sportsmanship, and endorsing GF Equity's products in commercial advertising when requested.

The last sentence of paragraph 3 of the contract carried a resolutory condition: if at any time during the contract, the coach, "in the sole opinion of the corporation," failed to exhibit sufficient skill or competitive ability to coach the team, the corporation could terminate the contract. Before signing, Valenzona consulted his lawyer, who pointed out the one-sidedness of this clause. Despite the caveat, Valenzona acceded to the terms, reposing trust and confidence in Uytengsu, who had recommended him to GF Equity's management.

During his stint as Alaska's head coach, the team placed third in both the Open and All-Filipino PBA Conferences in 1988. On September 26, 1988, GF Equity's management advised Valenzona by letter that it was invoking its rights under paragraph 3 of the contract, terminating his services. The letter stated that he would continue to be paid until his outstanding balance — which as of September 25, 1988 stood at ₱75,868.38 — was fully paid, and directed him to return the service vehicle no later than September 30, 1988. GF Equity advanced no other ground for the termination beyond the invocation of paragraph 3.

Close to six years after the termination, Valenzona's counsel sent a demand letter on July 30, 1994, seeking payment of compensation arising from the arbitrary and unilateral termination. GF Equity refused the claim. On September 26, 1994, Valenzona filed a complaint for breach of contract with damages before the Regional Trial Court of Manila, ascribing bad faith, malice, and disregard for fairness, and praying for actual damages of ₱560,000 representing unpaid compensation from September 26, 1988 to December 31, 1989, moral damages of ₱100,000, exemplary damages of ₱50,000, attorney's fees of ₱100,000, and costs of suit. The trial court dismissed the complaint, upholding the validity of the assailed provision and holding that Valenzona was fully aware of entering into a bad bargain. The Court of Appeals reversed, finding that while the mutuality of the clause was evident, GF Equity abused its right by arbitrarily terminating the employment, and awarded compensatory damages, moral damages of ₱20,000, exemplary damages of ₱20,000, and attorney's fees equivalent to 10% of actual damages.

• Freedom to Contract: Petitioner argued that the freedom to enter into contracts is protected by law and that courts will not interfere therewith unless the contract is contrary to law, morals, good customs, public policy, or public order.
• No Bad Faith: Petitioner averred that there was absolutely no reason for the appellate court to have found bad faith on its part, maintaining that it merely exercised its right under the contract to pre-terminate Valenzona's employment due to incompetence.
• Laches: Petitioner posited that Valenzona was guilty of laches for his unexplained inaction for six years before asserting his right under the contract.
• Non-sequitur: Petitioner argued that the appellate court committed a non-sequitur when it agreed with the factual findings of the lower court but reached an opposite conclusion, and that the appellate court made itself a guardian of an otherwise intelligent individual well-versed in tactical maneuvers.

• Mutuality of Contract: Respondent challenged the condition in paragraph 3 of the contract as lacking the element of mutuality of contract, constituting a clear transgression of Article 1308 of the New Civil Code, and argued that reliance thereon did not warrant his unjustified and arbitrary dismissal.
• Bad Faith and Arbitrariness: Respondent ascribed bad faith, malice, and disregard to fairness and to his rights by GF Equity's unilateral and arbitrary pre-termination of the contract without just cause and legal and factual basis.

• Mutuality of Contracts: Whether the last sentence of paragraph 3 of the employment contract, allowing GF Equity to terminate the contract based on its "sole opinion" of the coach's skill, violates the principle of mutuality of contracts under Article 1308 of the Civil Code.
• Abuse of Rights: Whether GF Equity abused its right in pre-terminating Valenzona's employment, entitling him to damages under Articles 19 and 20 of the Civil Code.
• Laches: Whether Valenzona's claim is barred by laches on account of his six-year delay in asserting his right.
• Damages: Whether the awards of actual damages, moral damages, exemplary damages, and attorney's fees by the Court of Appeals were proper.

• Mutuality of Contracts: Yes. The assailed stipulation is null and void for leaving the determination of whether Valenzona failed to exhibit sufficient skill solely to GF Equity's uncontrolled opinion, in violation of Article 1308 of the Civil Code.
• Abuse of Rights: Yes. GF Equity abused its right under Article 19 by pre-terminating the contract anchored on an illegal ground and negligently failing to provide any legal basis therefor, entitling Valenzona to damages under Article 19 in relation to Article 20.
• Laches: No. The action upon a written contract prescribes in ten years under Article 1144; Valenzona's filing six years after his cause of action arose was well within the prescriptive period, and laches cannot lie where the claim was filed within the statutory period.
• Damages: Partially. Actual damages of ₱525,000 representing unearned salary for the unexpired contract term and attorney's fees of ₱60,000 were upheld; moral and exemplary damages were deleted for absence of proof of bad faith or wanton conduct.

• Mutuality of Contracts: The mutuality principle, enshrined in Article 1308 of the Civil Code, provides that a contract must bind both parties and its validity or compliance cannot be left to the will of only one of them. As explained in Garcia vs. Rita Legarda, Inc., the ultimate purpose of this principle is to render void any contract containing a condition that makes its fulfillment dependent exclusively upon the uncontrolled will of one party. Not all contracts vesting one party with a right of determination are void, however; jurisprudence upholds such clauses where essential equality between the parties exists. In this case, the assailed condition left the determination of whether Valenzona failed to exhibit sufficient skill or competitive ability solely to the opinion of GF Equity, giving it an unbridled prerogative to pre-terminate irrespective of the soundness, fairness, or reasonableness of its opinion. Sustaining the validity of such a stipulation would open the gate for arbitrary and illegal dismissals. The stipulation was therefore null and void.

• Abuse of Rights: The nullity of the stipulation did not preclude GF Equity from pre-terminating the contract, provided the pre-termination had legal basis. GF Equity failed to advance any ground to justify the termination, invoking only the void provision. While the act of pre-termination was not willful — because it was based on a stipulation in the contract, albeit one declared void — GF Equity negligently failed to provide a legal basis, such as a showing that Valenzona breached the contract by failing to discharge his duties. Under Article 19, every person must, in the exercise of rights and performance of duties, act with justice, give everyone his due, and observe honesty and good faith. Because GF Equity anchored the pre-termination on an illegal ground and negligently failed to provide legal basis, it failed to exercise its right in a legitimate manner, thereby abusing Valenzona's right and entitling him to damages under Article 19 in relation to Article 20, which provides that every person who, contrary to law, willfully or negligently causes damage to another shall indemnify the latter.

• Laches: Laches is defined as the failure or neglect for an unreasonable and unexplained length of time to do that which, by exercising due diligence, could or should have been done earlier. It is not concerned with mere lapse of time; delay standing alone is insufficient. Laches applies in equity, whereas prescription applies at law. Philippine courts are basically courts of law, not courts of equity, and laches cannot be invoked to evade the enforcement of an existing legal right. Where a claim is filed within the statutory prescriptive period, recovery cannot be barred by laches. Under Article 1144 of the Civil Code, an action upon a written contract must be brought within ten years from the time the right of action accrues. Valenzona's action, filed six years after his cause of action arose, was well within the prescriptive period, and GF Equity had not proven inexcusable delay or acquiescence. The defense of laches therefore failed.

• Damages: Valenzona was entitled to actual damages representing his salary for the unexpired portion of the contract — from September 26, 1988 to December 31, 1989, or fifteen months at ₱35,000 per month, totaling ₱525,000. As for moral damages, Article 2220 allows such award in breaches of contract where the defendant acted fraudulently or in bad faith, but bad faith cannot be presumed and must be established by clear and convincing evidence. Since the pre-termination was not willful — GF Equity based it on a void stipulation rather than acting with conscious and intentional design — malice or bad faith could not be ascribed to it. The award of moral damages was therefore set aside, and with it the award of exemplary damages, absent any showing that GF Equity acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. The award of attorney's fees was sustained under Article 2208, GF Equity having refused to pay the balance of Valenzona's salaries to which he was entitled, thus compelling him to litigate to protect his interest.

• Mutuality of Contracts (Article 1308, Civil Code) — The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. The ultimate purpose of the mutuality principle is to render void a contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties. Not all contracts vesting one party with a right of determination are void, however; where essential equality between the parties exists, such clauses may be upheld. In this case, the stipulation allowing GF Equity to terminate based on its "sole opinion" of the coach's skill was void because it gave one party an unbridled prerogative irrespective of the soundness, fairness, or reasonableness of its opinion.

• Abuse of Rights (Article 19, Civil Code) — Every person must, in the exercise of rights and in the performance of duties, act with justice, give everyone his due, and observe honesty and good faith. Article 19 sets standards that must be observed not only in the exercise of one's rights but also in the performance of one's duties. A right, though by itself legal because recognized or granted by law, may nevertheless become the source of some illegality. When a right is exercised in a manner which does not conform with the norms of Article 19 and results in damage to another, a legal wrong is committed for which the wrongdoer must be held responsible. Article 19 does not itself provide a remedy; generally, an action for damages under either Article 20 or Article 21 is proper. In this case, GF Equity abused its right by pre-terminating the contract on an illegal ground and negligently failing to provide any legal basis, entitling Valenzona to damages under Article 19 in relation to Article 20.

• Laches vs. Prescription — Laches is the failure or neglect for an unreasonable and unexplained length of time to do that which, by exercising due diligence, could or should have been done earlier. Laches applies in equity, whereas prescription applies at law. Philippine courts are basically courts of law, not courts of equity, and laches cannot be invoked to evade the enforcement of an existing legal right. Where a claim is filed within the statutory prescriptive period, recovery cannot be barred by laches. The doctrine of laches should never be applied earlier than the expiration of the time limited for the commencement of actions at law, unless inexcusable delay and acquiescence are proven.

• Moral Damages in Breach of Contract — Under Article 2220 of the Civil Code, moral damages may be awarded in breaches of contract where the defendant acted fraudulently or in bad faith. Bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity; it cannot be presumed and must be established by clear and convincing evidence. Where a party is not shown to have acted fraudulently or in bad faith, liability is limited to the natural and probable consequences of the breach, and moral damages are not recoverable.

• "The ultimate purpose of the mutuality principle is thus to nullify a contract containing a condition which makes its fulfillment or pre-termination dependent exclusively upon the uncontrolled will of one of the contracting parties." — This passage articulates the core ratio decidendi, defining the precise scope of the mutuality principle and explaining why the assailed stipulation was struck down.

• "The assailed condition clearly transgresses the principle of mutuality of contracts. It leaves the determination of whether Valenzona failed to exhibit sufficient skill or competitive ability to coach Alaska team solely to the opinion of GF Equity." — This is the direct application of the mutuality doctrine to the facts, identifying the fatal defect in the contractual stipulation.

• "Since the pre-termination of the contract was anchored on an illegal ground, hence, contrary to law, and GF Equity negligently failed to provide legal basis for such pre-termination, . . . GF Equity failed to exercise in a legitimate manner its right to pre-terminate the contract, thereby abusing the right of Valenzona to thus entitle him to damages under Art. 19 in relation to Article 20 of the Civil Code." — This passage links the void stipulation to the abuse of rights doctrine and establishes the basis for the award of damages.

• "Where the claim was filed within the statutory period of prescription, recovery therefor cannot be barred by laches. The doctrine of laches should never be applied earlier than the expiration of time limited for the commencement of actions at law." — This formulation clarifies the relationship between laches and prescription, a principle frequently invoked in subsequent jurisprudence.

• Garcia vs. Rita Legarda, Inc., 21 SCRA 555 (1967) — Followed. The Court relied on this case's explanation of Article 1308 (then Article 1256 of the old Civil Code) to articulate the ultimate purpose of the mutuality principle: to render void contracts whose fulfillment depends exclusively on the uncontrolled will of one party.

• Globe Mackay Cable and Radio Corporation vs. Court of Appeals, 176 SCRA 778 (1989) — Followed. The Court quoted extensively from this case for its exposition of the abuse of rights principle under Article 19, including the formulation that a right, though legal, may become the source of illegality when exercised in a manner not conforming with the norms of Article 19.

• De Guzman vs. NLRC, 211 SCRA 723 (1992) — Followed. The Court quoted Tolentino's explanation of why it is impermissible to abuse rights to the prejudice of others, invoking the principles of honeste vivere, alterum non laedere, and jus suum quique tribuere.

• Taylor vs. Uy Tieng Piao, 43 Phil. 873 (1922) — Distinguished. The Court cited this case for the proposition that Article 1308 creates no impediment to a resolutory condition permitting cancellation by one party, but distinguished it on the basis that essential equality existed between the parties in those instances, unlike in the present case.

• Teknika Skills and Trade Services, Inc. vs. NLRC, 212 SCRA 132 (1992) — Followed. Cited for the rule that where breach of an employment contract for a definite period is established, the employee is entitled to salary corresponding to the unexpired portion of the contract.

• Article 1308, Civil Code — "The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." Applied to strike down the assailed stipulation, which left pre-termination solely to GF Equity's opinion, as null and void for violating the mutuality principle.

• Article 19, Civil Code — "Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith." Applied to hold GF Equity liable for abuse of rights, having pre-terminated the contract on an illegal ground without providing any legal basis.

• Article 20, Civil Code — "Every person who, contrary to law, willfully or negligently causes damage to another, shall indemnify the latter for the same." Applied in relation to Article 19 as the remedial basis for the award of actual damages, GF Equity having negligently caused damage to Valenzona by pre-terminating the contract contrary to law.

• Article 1144, Civil Code — Prescribes a ten-year period for actions upon a written contract. Applied to hold that Valenzona's action, filed six years after his cause of action arose, was well within the prescriptive period, thereby defeating GF Equity's defense of laches.

• Article 2220, Civil Code — Allows award of moral damages in breaches of contract where the defendant acted fraudulently or in bad faith. Applied to delete the award of moral damages, bad faith not having been established by clear and convincing evidence.

• Article 2208, Civil Code — Enumerates instances when attorney's fees may be recovered. Applied to sustain the award of attorney's fees, GF Equity having refused to pay Valenzona's salaries to which he was entitled, thus compelling him to litigate to protect his interest.

• Article 2232, Civil Code — Allows exemplary damages when the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Applied to delete the award of exemplary damages, no such conduct having been shown.

Panganiban (Chairman), Sandoval-Gutierrez, Corona, and Garcia, JJ., concurred.