Legaspi vs. Republic of the Philippines

A restrictive venue stipulation in a contract, containing words of exclusivity such as "the CONTRACTOR hereby expressly waiving any other venue," is binding and exclusive, and an action arising from that contract must be filed in the designated venue. The determination of whether a cause of action arises from a contract depends on the factual substance of the claim as alleged in the complaint, not merely on the legal basis cited by the plaintiff.

Petitioner Jesusito D. Legaspi, as owner and manager of J.D. Legaspi Construction, entered into a Construction Agreement with the Social Security System (SSS) in June 1997 for the construction of a four-storey building in Baguio City to serve as respondent's branch office, with a contract price of ₱88,348,533.74. The contract contained a "no escalation" clause under Article III, providing that the contract price shall not be subject to escalation and that all costs and expenses over and above the contract price, except as provided in Article IV, shall be for the account of the contractor. The contract also contained a venue stipulation under Article XIV, designating Quezon City as the exclusive venue for actions arising from the Agreement.

Petitioner Jesusito D. Legaspi, as owner and manager of J.D. Legaspi Construction, entered into a Construction Agreement with the Social Security System (SSS) in June 1997 for the construction of a four-storey building in Baguio City which would serve as respondent's branch office, with a contract price of ₱88,348,533.74. The contract contained a "no escalation" clause under Article III, providing that the contract price shall not be subject to escalation and that all costs and expenses over and above the contract price, except as provided in Article IV, shall be for the account of the contractor. The contract also contained a venue stipulation under Article XIV, which provided that all actions and controversies that may arise from the Agreement may be brought by the parties before the proper courts in Quezon City where the main office of the client is located, with the contractor expressly waiving any other venue.

In 1997, the Philippine peso collapsed against the U.S. Dollar, also known as the 1997-1998 Asian Financial Crisis. As a result, the cost of imported materials which petitioner was contracted to use and install on the project shot up, and petitioner incurred expenses more than the original contract price. Petitioner had several meetings with respondent's representatives during which he informed them of his difficulty in meeting his obligations under the contract due to the devaluation of the peso. After several failed meetings, petitioner sent a letter to respondent requesting an adjustment in the contract price, which was denied by respondent. This constrained petitioner to file a complaint for payment of sum of money plus damages with the Regional Trial Court (RTC) of Makati City, docketed as Civil Case No. 00-1354.

In his complaint, petitioner alleged that respondent should be ordered to pay the just and fair price for the construction of its building in Baguio, considering that the foreign currency crisis was manifestly beyond the contemplation of the parties, and that a re-negotiation of the contract price would be just and reasonable under the circumstances. Petitioner's request for price adjustment was based on Article 1267 of the New Civil Code, and he alleged that the 65% increase in price for the imported components of the project was manifestly beyond the contemplation of the parties, and that his request for price adjustment should not be considered as falling under the prohibition stated in Article III of the Construction Agreement.

Instead of filing an answer, respondent, represented by the Office of the Solicitor General, filed a Motion to Dismiss on the grounds that venue was improperly laid and petitioner had no cause of action. Respondent argued that the Construction Agreement provided that all actions may be brought before the proper court in Quezon City and that petitioner waived any other venue. Respondent also contended that petitioner's allegations in his Complaint stated no cause of action, since amendments or modifications are not allowed in bidded government contracts, especially since the contract expressly provided for a "no escalation" clause, and that an adjustment of the price would be disadvantageous to the government.

• Inapplicability of the Venue Provision: Petitioner insisted that the venue provision in the Construction Agreement does not apply, arguing that his cause of action does not arise from the agreement, nor was it for the performance of any of the obligations under the agreement.
• Basis of the Action: Petitioner argued that his action was for additional payment due to the extraordinary devaluation of the peso at the time, and is based on Article 1267 of the Civil Code, not on any provision of the Construction Agreement.
• Nature of the Action: Petitioner believed that his action is personal in nature such that Section 2, Rule 4 of the Rules of Court applies, and he has the option to file the same where he or respondent resides.

• Origin of the Claim: Respondent countered that petitioner's claim, while anchored on Article 1267 of the Civil Code, emanated from the Construction Agreement; hence, the restrictive provision on venue applies.
• Lack of Cause of Action: Respondent reiterated its argument that petitioner does not have any cause of action against respondent, since amendments or modifications are not allowed in bidded government contracts, especially since the contract expressly provided for a "no escalation" clause, and that an adjustment of the price would be disadvantageous to the government.

• Venue: Whether the Court of Appeals erred in ordering the dismissal of the civil case on the ground of improper venue, considering that the venue stipulation in the Construction Agreement designated Quezon City as the exclusive venue.
• Cause of Action: Whether petitioner's complaint stated a sufficient cause of action against respondent.

• Venue: No. The venue stipulation in the Construction Agreement was restrictive and exclusive, designating Quezon City as the proper venue for actions arising from the Agreement. Petitioner's claim for price adjustment, though anchored on Article 1267 of the Civil Code, arose from the Construction Agreement, as shown by the factual allegations in his complaint.
• Cause of Action: Yes. Petitioner's complaint set forth the ultimate facts upon which his claim for price adjustment is based, and a motion to dismiss based on lack of cause of action hypothetically admits the truth of the allegations in the complaint. Respondent's allegation that petitioner is not entitled to the price adjustment is a matter of defense, properly raised in an answer and threshed out in full-blown proceedings.

• Venue: The Court applied the general rule on venue of personal actions under Section 2, Rule 4 of the Rules of Court, which allows actions to be commenced where the plaintiff or defendant resides, but noted that parties are not precluded from agreeing in writing on an exclusive venue, as qualified by Section 4 of the same rule. Written stipulations as to venue may be restrictive or merely permissive, and what is essential is the ascertainment of the intention of the parties. As regards restrictive stipulations on venue, jurisprudence instructs that it must be shown that such stipulation is exclusive; in the absence of qualifying or restrictive words, such as "exclusively," "waiving for this purpose any other venue," "shall only" preceding the designation of venue, "to the exclusion of the other courts," or words of similar import, the stipulation should be deemed as merely an agreement on an additional forum. In the present case, the Construction Agreement provided that all actions and controversies that may arise from the Agreement may be brought by the parties before the proper courts in Quezon City, with the contractor expressly waiving any other venue. The Court held that the venue is specific — Quezon City — and accompanied by the words "the CONTRACTOR hereby expressly waiving any other venue," which connote exclusivity of the designated venue. Contrary to petitioner's contention, the allegations in his complaint indubitably show that his cause of action arose from the Construction Agreement, since his claim for price adjustment rests on the basic operative facts that the Construction Agreement originally pegged the contract price at ₱88,348,533.74, and that the devaluation of the peso in 1997 brought about an increase in the costs of imported materials and furnishings to be used in the construction. The Court adopted the CA's ruling that although the prayer for price adjustment is anchored on the Civil Code, the controversy started when petitioner claimed difficulty of performance due to change of circumstances, and in effect, petitioner is assailing the "no escalation clause" of the project cost indicated in the contract. If the action proceeds, the court in determining whether petitioner has the right to claim will necessarily have to determine the intent of the parties in assuming the contractual risks by necessarily referring to the Construction Agreement. Therefore, the venue stipulation applies.
• Cause of Action: The Court held that a motion to dismiss based on lack of cause of action hypothetically admits the truth of the allegations in the complaint. The allegations in a complaint are sufficient to constitute a cause of action against the defendants if, hypothetically admitting the facts alleged, the court can render a valid judgment upon the same in accordance with the prayer therein. The complaint filed by petitioner sets forth the ultimate facts upon which his claim for price adjustment is based. Respondent's allegation that petitioner is not entitled to it is a matter of defense, properly raised in an answer which will then be accordingly threshed out in full-blown proceedings. The complaint does not have to establish or allege facts proving the existence of a cause of action at the outset, as this will have to be done at the trial on the merits of the case.

• Restrictive Venue Stipulations — A written stipulation on venue is restrictive or exclusive when it contains qualifying or restrictive words such as "exclusively," "waiving for this purpose any other venue," "shall only" preceding the designation of venue, "to the exclusion of the other courts," or words of similar import. In the absence of such words, the stipulation is deemed merely an agreement on an additional forum, not as limiting venue to the specified place. In this case, the phrase "the CONTRACTOR hereby expressly waiving any other venue" was held to connote exclusivity, making the Quezon City venue mandatory.
• Determination of Whether a Cause of Action Arises from a Contract — What is essential in determining whether a cause of action arises from a contract is the factual substance of the claim, as alleged in the complaint, not merely the legal basis cited by the plaintiff. Even if the claim is anchored on a provision of the Civil Code, if the factual allegations show that the claim originates from the contract, the venue stipulation in the contract applies.
• Motion to Dismiss Based on Lack of Cause of Action — A motion to dismiss based on lack of cause of action hypothetically admits the truth of the allegations in the complaint. The allegations are sufficient to constitute a cause of action if, hypothetically admitting the facts alleged, the court can render a valid judgment upon the same in accordance with the prayer therein. The complaint does not have to establish or allege facts proving the existence of a cause of action at the outset, as this will have to be done at the trial on the merits.

• "The venue is specific - Quezon City - and accompanied by the words 'the CONTRACTOR hereby expressly waiving any other venue,' which connote exclusivity of the designated venue. These terms clearly stipulate exclusively the venue where actions arising from the Construction Agreement should be filed." — This passage establishes the controlling rule on restrictive venue stipulations, identifying the specific words that make a venue designation exclusive and mandatory.
• "Ineluctably, the allegations in the Complaint relating to petitioner's request for price adjustment clearly originate from the Construction Agreement. Article 1267 of the Civil Code is merely the law upon which petitioner's claim for price adjustment is anchored. What is essential is the factual substance of his claim, as alleged in the Complaint, which should be taken into account in determining whether or not it arose from the Construction Agreement." — This passage articulates the test for determining whether a cause of action arises from a contract, focusing on the factual substance of the claim rather than the legal basis cited.
• "A motion to dismiss based on lack of cause of action hypothetically admits the truth of the allegations in the complaint. The allegations in a complaint are sufficient to constitute a cause of action against the defendants if, hypothetically admitting the facts alleged, the court can render a valid judgment upon the same in accordance with the prayer therein." — This passage states the canonical formulation of the rule on motions to dismiss based on lack of cause of action, which is frequently cited in Philippine jurisprudence.

• Unimasters Conglomeration, Inc. vs. Court of Appeals, 335 Phil. 415, 424 (1997) — Cited for the rule that written stipulations as to venue may be restrictive or merely permissive, and that what is essential is the ascertainment of the intention of the parties respecting the matter.
• Auction in Malinta, Inc. vs. Luyaben, G.R. No. 173979, February 12, 2007, 515 SCRA 569, 572-573 — Cited for the rule that in the absence of qualifying or restrictive words, such as "exclusively," "waiving for this purpose any other venue," "shall only" preceding the designation of venue, "to the exclusion of the other courts," or words of similar import, the stipulation should be deemed as merely an agreement on an additional forum, not as limiting venue to the specified place.
• Philippine Bank of Communications vs. Trazo, G.R. No. 165500, August 30, 2006, 500 SCRA 242, 256 — Cited for the rule that a motion to dismiss based on lack of cause of action hypothetically admits the truth of the allegations in the complaint.
• Universal Aquarius Inc. vs. Q.C. Human Resources Management Corporation, G.R. No. 155990, September 12, 2007, 533 SCRA 38, 47 — Cited for the rule that the complaint does not have to establish or allege facts proving the existence of a cause of action at the outset, as this will have to be done at the trial on the merits of the case.

• Article 1267, Civil Code — Provides that when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. The Court held that this provision was merely the law upon which petitioner's claim for price adjustment was anchored, and that the factual substance of the claim, as alleged in the complaint, determined whether the cause of action arose from the Construction Agreement.
• Section 2, Rule 4, Rules of Court — Provides the general rule on venue of personal actions, allowing actions to be commenced and tried where the plaintiff or any of the principal plaintiffs resides, or where the defendant or any of the principal defendants resides, or in the case of a non-resident defendant, where he may be found, at the election of the plaintiff. The Court noted that this general rule is subject to written stipulations on exclusive venue under Section 4 of the same rule.
• Section 4, Rule 4, Rules of Court — Qualifies the general rule on venue by allowing the parties to agree in writing on an exclusive venue. The Court applied this provision in upholding the restrictive venue stipulation in the Construction Agreement.
• Article III, Construction Agreement — The "no escalation" clause providing that the contract price shall not be subject to escalation and that all costs and expenses over and above the contract price, except as provided in Article IV, shall be for the account of the contractor. The Court held that petitioner's claim for price adjustment effectively assailed this clause, showing that the cause of action arose from the Construction Agreement.
• Article XIV, Construction Agreement — The venue stipulation providing that all actions and controversies that may arise from the Agreement may be brought by the parties before the proper courts in Quezon City, with the contractor expressly waiving any other venue. The Court held that this stipulation was restrictive and exclusive.

• Justice Leonardo A. Quisumbing (in lieu of Justice Minita V. Chico-Nazario, per Special Order No. 508 dated June 25, 2008)
• Justice Consuelo Ynares-Santiago
• Justice Antonio Eduardo B. Nachura
• Justice Ruben T. Reyes