International Hotel Corporation vs. Joaquin

In a mixed conditional obligation, when the condition is not fulfilled but the obligor did all in his power to comply, the condition is deemed satisfied; and in the absence of an express agreement on fees, compensation is determined under the principle of quantum meruit, which prevents unjust enrichment by allowing recovery of the reasonable value of services rendered.

International Hotel Corporation (IHC) is a corporation engaged in hotel construction. Respondents Francisco B. Joaquin, Jr. and Rafael Suarez were engaged as technical consultants to assist IHC in securing a foreign loan for hotel construction, to be guaranteed by the Development Bank of the Philippines (DBP). The arrangement was not governed by a written contract specifying the fees due to respondents, leading to disputes over compensation after the loan was not secured and IHC cancelled shares of stock previously issued to respondents as payment for their services.

On February 1, 1969, Francisco B. Joaquin, Jr. submitted a proposal to the Board of Directors of International Hotel Corporation (IHC) to render technical assistance in securing a foreign loan for the construction of a hotel, to be guaranteed by the Development Bank of the Philippines (DBP). The proposal encompassed nine phases: (1) preparation of a new project study; (2) settlement of the unregistered mortgage; (3) preparation of papers for the DBP guaranty application; (4) securing a foreign financier; (5) securing DBP Board approval; (6) follow-up with DBP; (7) overall coordination in implementing the project study; (8) preparation of staff for hotel operations; and (9) actual hotel operations. On February 11, 1969, the IHC Board of Directors approved phases one through six and earmarked P2,000,000.00 for the project, described in the board resolution as the "estimated maximum expenses" for phase six, subject to the sound discretion of a designated committee.

IHC applied with DBP for a foreign loan guaranty, which DBP processed and approved on October 24, 1969 subject to several conditions. On July 11, 1969, Joaquin wrote to IHC requesting payment of P500,000.00 for services rendered and still to be rendered outside the scope of the technical proposal, expressing amenability to receive shares of stock instead of cash in view of IHC's financial situation. On the same date, IHC's stockholders granted the request, authorizing payment for both Joaquin and Rafael Suarez. The stockholders also authorized the issuance of P400,000.00 worth of common stock to the Technical Group—P200,000.00 each to Suarez and Joaquin—representing 70% project completion.

On June 20, 1970, Joaquin presented to the IHC Board the results of his negotiations with potential foreign financiers, narrowing the choices to Roger Dunn & Company and Materials Handling Corporation. He recommended Materials Handling Corporation based on its more favorable terms, and the Board unanimously approved. Negotiations with Materials Handling Corporation and later its principal, Barnes International, ensued. While those negotiations were ongoing, Joaquin and IHC Executive Director Jose Valero met with another financier, Weston International Corporation, to explore possible financing. When Barnes failed to deliver the needed loan, IHC informed DBP it would submit Weston for consideration. DBP cancelled its previous guaranty through a letter dated December 6, 1971. On December 13, 1971, IHC entered into an agreement with Weston and communicated this to DBP on June 26, 1972, but DBP denied the application for guaranty for failure to comply with the conditions in its November 12, 1971 letter.

Due to Joaquin's failure to secure the needed loan, IHC, through its President Felix Angelo Bautista, cancelled the 17,000 shares of stock previously issued to Joaquin and Suarez as payment for their services. Their request for reconsideration was rejected. On December 6, 1973, Joaquin and Suarez commenced an action for specific performance, annulment, damages, and injunction in the RTC in Manila, impleading IHC and members of its Board of Directors. The complaint alleged that the cancellation of the shares was illegal, that Barnes had been recommended by President Bautista rather than Joaquin, and that they had failed to meet their obligation because President Bautista and his son had intervened and negotiated with Barnes instead of Weston. IHC countered that the shares had been issued in violation of Section 16 of the Corporation Code as consideration for future services, that respondents had not provided a foreign financier acceptable to DBP, and that respondents had already received P96,350.00 as payment. The RTC found that respondents had failed to meet their obligations when IHC chose to negotiate with Barnes rather than Weston, and that the cancellation of the shares was proper under Section 68 of the Corporation Code, which allowed transfer of shares to compensate only past services, not future ones. Both parties appealed to the CA, which upheld IHC's liability under Article 1186 and Article 1234 of the Civil Code, finding that Joaquin had substantially performed his obligations and that the issuance of shares was ultra vires.

• Inapplicability of Article 1186: IHC maintained that Article 1186 of the Civil Code was erroneously applied, arguing that it had no intention of preventing Joaquin from complying with his obligations when it adopted his recommendation to negotiate with Barnes.
• Inapplicability of Article 1234: IHC argued that Article 1234 applied only if there was a merely slight deviation from the obligation, and the omission or defect was technical and unimportant; substantial compliance was unacceptable because the foreign loan was material and was the ultimate goal of the contract.
• Indivisible Obligation with Suspensive Condition: IHC contended that the obligation was indivisible and subject to a suspensive condition under Article 1181 of the Civil Code, under which partial performance was equivalent to non-performance, so respondents were not entitled to any compensation.
• Deletion of Attorney's Fees: IHC argued that the award of attorney's fees should be deleted for lack of legal and factual bases.

• Procedural Defect: Joaquin argued that the petition was fatally defective for raising questions of fact, which are not proper in a petition for review on certiorari.
• Divisible Obligation: Joaquin contended that the obligation was divisible and capable of partial performance.
• Constructive Fulfillment: Joaquin maintained that the suspensive condition was deemed fulfilled through IHC's own actions.

• Nature of the Petition: Whether IHC's petition raised questions of law or questions of fact.
• Applicability of Article 1186: Whether the CA correctly applied Article 1186 of the Civil Code in holding IHC liable on the ground that it voluntarily prevented the fulfillment of the suspensive condition.
• Applicability of Article 1234: Whether the CA correctly applied Article 1234 of the Civil Code on substantial performance to hold IHC liable despite respondents' non-fulfillment of their obligation.
• Liability under Mixed Conditional Obligation: Whether IHC was liable to pay respondents under the rule on constructive fulfillment of a mixed conditional obligation.
• Amount of Compensation: Whether quantum meruit should apply to determine the amount of fees due to respondents in the absence of an express agreement.
• Attorney's Fees: Whether the CA correctly awarded attorney's fees to respondents.

• Nature of the Petition: Yes, IHC raised questions of law. The petition sought review of the CA's application of law on the facts presented, which is a question of law, not fact.
• Applicability of Article 1186: No. Article 1186 did not apply because IHC had no intent to prevent respondents from fulfilling their obligation; it merely relied on Joaquin's own recommendation to negotiate with Barnes.
• Applicability of Article 1234: No. Article 1234 did not apply because securing a foreign loan was the essence of the contract, and its non-fulfillment was a material breach, not a slight or technical deviation.
• Liability under Mixed Conditional Obligation: Yes. The obligation was mixed conditional—dependent partly on respondents' diligence and partly on the will of third parties—and respondents constructively fulfilled it by doing all in their power to comply.
• Amount of Compensation: Quantum meruit applies; P100,000.00 each is reasonable compensation in the absence of an express agreement on fees.
• Attorney's Fees: No. The award of attorney's fees lacked factual or legal basis, there being no sufficient justification in the records.

• Nature of the Petition: A question of law exists when there is doubt as to what the law is on a certain state of facts, while a question of fact exists when the doubt arises as to the truth or falsity of the facts alleged. A question of law does not involve an examination of the probative value of the evidence. Considering that IHC sought review of the CA's application of the law on the facts presented, the issue was whether the conclusions drawn by the CA were correct under the pertinent laws—a question of law. The petition was therefore proper.

• Applicability of Article 1186: Article 1186 provides that a condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. Its application requires two requisites: (a) the intent of the obligor to prevent the fulfillment of the condition, and (b) the actual prevention of the fulfillment. The minutes of the June 20, 1970 special board meeting showed that Joaquin himself recommended Materials Handling Corporation as offering more favorable terms, and the Board unanimously approved his recommendation. IHC merely relied on the opinion of its consultant in deciding to transact with Materials Handling and later Barnes. There was no evidence of intent, willful or otherwise, to prevent Joaquin and Suarez from meeting their undertaking. The absence of intent negated the basis for the CA's reliance on Article 1186.

• Applicability of Article 1234: Article 1234 allows an obligor who has substantially performed in good faith to recover as though there had been strict and complete fulfillment, less damages suffered by the obligee. The provision applies only when the obligor has performed all material elements except for some technical aspects causing no serious harm. The deviation 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 intended is not attained. The primary objective of the parties was to obtain a foreign loan to finance the construction of IHC's hotel project, as inferred from IHC's approval of phases one through six. Finding a foreign financier acceptable to DBP was the essence of the contract. The failure to completely satisfy that obligation could not be characterized as slight and unimportant. Whatever benefits IHC gained from respondents' services were minimal and probably outweighed by losses from the delayed construction. Article 1234 therefore did not apply.

• Liability under Mixed Conditional Obligation: The agreement between the parties was not circumscribed by a definite period, so its termination was subject to a condition—the happening of a future and uncertain event. Both lower courts held that respondents' obligation was subject to the suspensive condition of successfully securing a foreign loan guaranteed by DBP. However, securing such a loan did not solely depend on respondents' diligence or will; it required the action and discretion of third persons—an able and willing foreign financial institution and the DBP Board of Governors. When the fulfillment of a condition is dependent partly on the will of the obligor and partly on chance, hazard, or the will of a third person, the obligation is mixed. The established rule in a mixed conditional obligation is that when the condition was not fulfilled but the obligor did all in his power to comply, the condition should be deemed satisfied. Respondents secured an agreement with Weston and subsequently tried to reverse the prior cancellation of the guaranty by DBP. They thereby constructively fulfilled their obligation, entitling them to compensation.

• Amount of Compensation: The P2,000,000.00 approved by the IHC Board was not allocated exclusively to compensate respondents but was intended as the estimated maximum to fund the expenses of the project, including their compensation. Joaquin's claim for an additional P500,000.00 was similarly without basis because the services he described were identical to those enumerated in the technical proposal, and the amount purportedly included services still to be rendered extending until completion of construction—payment for which could not be demanded absent complete performance. The confusion on compensation arose from the parties' inability to agree on fees. Given the absence of an express agreement and respondents' constructive fulfillment, quantum meruit applied. Under this principle, a contractor may recover the reasonable value of services rendered despite the lack of a written contract. The measure of recovery relates to the reasonable value of the services performed. The principle prevents unjust enrichment and should only be applied if no express contract was entered into and no specific statutory provision was applicable. Under the circumstances, P100,000.00 each was deemed reasonable compensation.

• Attorney's Fees: Attorney's fees are not awarded every time a party prevails, as no premium should be placed on the right to litigate. There must be factual or legal support in the records. It is not enough justification simply because respondents were compelled to protect their rights. The CA failed to explain why it granted attorney's fees, and the records lacked sufficient basis for the award. The award was therefore deleted.

• Quantum meruit — A principle that allows a contractor to recover the reasonable value of services rendered despite the lack of a written contract. The measure of recovery relates to the reasonable value of the services performed. The principle prevents unjust enrichment based on the equitable postulate that it is unjust for a person to retain any benefit without paying for it. Being predicated on equity, it should only be applied if no express contract was entered into and no specific statutory provision was applicable. In this case, because the parties never agreed on the fees due to respondents and respondents constructively fulfilled their mixed conditional obligation, the Court applied quantum meruit to determine reasonable compensation at P100,000.00 each.

• Mixed conditional obligation; constructive fulfillment — When the fulfillment of a condition is dependent partly on the will of one of the contracting parties or the obligor and partly on chance, hazard, or the will of a third person, the obligation is mixed. The established rule 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. The Court applied this doctrine because securing a DBP-guaranteed foreign loan depended not solely on respondents' diligence but also on the will of third parties (the foreign financier and DBP), and respondents had done all in their power by securing an agreement with Weston and attempting to reverse DBP's cancellation of the guaranty.

• Substantial performance (Article 1234, Civil Code) — If the obligation has been substantially performed in good faith, the obligor may recover as though there had been strict and complete fulfillment, less damages suffered by the obligee. The provision applies only when the obligor has attempted in good faith to perform without willful or intentional departure, and the deviation is slight, the omission or defect is technical and unimportant, and does not defeat the object of the contract. The non-performance of a material part prevents the performance from amounting to substantial compliance. The Court held this doctrine inapplicable because securing a foreign loan was the essence of the contract, and its non-fulfillment was a material breach.

• Constructive fulfillment of a suspensive condition (Article 1186, Civil Code) — The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. Two requisites must concur: (a) the intent of the obligor to prevent the fulfillment of the condition, and (b) the actual prevention of the fulfillment. Mere intention without actual prevention is insufficient. The Court found this doctrine inapplicable because IHC had no intent to prevent respondents from fulfilling their obligation; it merely followed Joaquin's own recommendation to negotiate with Barnes.

• "To avoid unjust enrichment to a party from resulting out of a substantially performed contract, the principle of quantum meruit may be used to determine his compensation in the absence of a written agreement for that purpose." — This opening statement frames the ratio decidendi of the case: quantum meruit serves as the equitable fallback for determining compensation when no express agreement on fees exists.

• "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." — This passage articulates the controlling doctrine on mixed conditional obligations, which the Court used to hold respondents entitled to compensation despite the non-fulfillment of the suspensive condition.

• "The non-performance of a material part of a contract will prevent the performance from amounting to a substantial compliance." — This formulation, drawn from Tolentino's commentary on Article 1234, defines the boundary of substantial performance and explains why the Court rejected its application where securing a foreign loan was the essence of the contract.

• "The principle prevents undue enrichment based on the equitable postulate that it is unjust for a person to retain any benefit without paying for it. Being predicated on equity, the principle should only be applied if no express contract was entered into, and no specific statutory provision was applicable." — This defines the scope and limits of quantum meruit, clarifying that it is a remedy of last resort grounded in equity.

• Smith Bell & Co. vs. Sotelo Matti, 44 Phil. 874 (1922) — Cited as authority for the rule that in a mixed conditional obligation, when the condition was not fulfilled but the obligor did all in his power to comply, the condition should be deemed satisfied. The Court applied this rule to hold that respondents constructively fulfilled their obligation.
• Naga Telephone Co., Inc. vs. Court of Appeals, 230 SCRA 351 (1994) — Cited for the proposition that when the fulfillment of a condition is dependent partly on the will of the obligor and partly on chance, hazard, or the will of a third person, the obligation is mixed.
• Development Bank of the Philippines vs. Court of Appeals, 262 SCRA 245 (1996) — Cited for the general rule that in conditional obligations, the acquisition of rights and the extinguishment or loss of those already acquired depend upon the happening of the event constituting the condition.
• Heirs of Ramon C. Gaite vs. The Plaza, Inc., 640 SCRA 576 (2011) — Cited as authority for the principle that under quantum meruit, a contractor is allowed to recover the reasonable value of services rendered despite the lack of a written contract.
• Department of Health vs. C.V. Canchela & Associates, 475 SCRA 218 (2005) — Cited for the proposition that the measure of recovery under quantum meruit should relate to the reasonable value of the services performed.
• Sazon vs. Vasquez-Menacio, G.R. No. 192085, February 22, 2012 — Cited for the limitation that quantum meruit, being predicated on equity, should only be applied if no express contract was entered into and no specific statutory provision was applicable.

• Article 1186, Civil Code — Provides that a condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. The Court held this provision inapplicable because IHC lacked the requisite intent to prevent respondents from fulfilling their obligation.
• Article 1234, Civil Code — Provides that if the obligation has been substantially performed in good faith, the obligor may recover as though there had been strict and complete fulfillment, less damages suffered by the obligee. The Court held this inapplicable because the non-fulfillment—failure to secure a foreign loan—was a material breach, not a slight or technical deviation.
• Article 1181, Civil Code — Provides that in conditional obligations, the acquisition of rights and the extinguishment or loss of those already acquired shall depend upon the happening of the event constituting the condition. IHC invoked this to argue that partial performance of a conditional obligation was tantamount to no performance; the Court disagreed, finding the obligation to be mixed conditional.
• Article 1233, Civil Code — Provides that in obligations to do, there can be no payment unless the obligation has been completely rendered. The Court cited this to explain why Joaquin's claim for P500,000.00, which included services still to be rendered until completion of construction, could not be sustained.
• Section 16, Corporation Code — IHC argued that the shares issued to respondents as consideration for future services were issued in violation of this provision. The CA found the issuance ultra vires.
• Section 68, Corporation Code — The RTC found that the cancellation of shares was proper under this provision, which allowed transfer of shares to compensate only past services, not future ones.

Sereno, C.J., Leonardo-De Castro, Villarama, Jr., and Reyes, JJ., concurred.