National Development Company vs. Madrigal Wan Hai Lines Corporation

A seller who drafts the sale documents as a contract of adhesion, warrants the thing sold against liens and encumbrances, and conceals known tax liabilities from the buyer despite the buyer's inquiries acts in bad faith and must reimburse the buyer for those taxes; an "as is, where is" stipulation covers only the physical condition of the thing sold, not its legal situation.

The National Development Company is a government-owned and controlled corporation created and existing under Commonwealth Act No. 182, as amended by Presidential Decree No. 1648, and the National Shipping Corporation of the Philippines is its wholly-owned subsidiary engaged in shipping services for containerized cargo between the Far East ports and the U.S. West Coast. In 1993 NDC moved to privatize NSCP, offering to the public its one hundred percent stock ownership in the subsidiary, valued at P150,000.00, together with three ocean-going vessels. The sale was to proceed under an Information Package containing NSCP's background, assets, operational and financial status and its financial statements from December 1990 to 1992, and under NDC-drafted Negotiated Sale Guidelines and a Proposal Letter Form prescribing how bids were to be submitted.

On March 1, 1993, NDC's Board of Directors approved the privatization plan of NSCP. In May 1993, the Board offered for sale to the public its one hundred percent stock ownership in NSCP worth P150,000.00, as well as its three ocean-going vessels, the M/V National Honor, M/V National Pride, and M/V National Dignity. NDC released to the public an Information Package containing NSCP's background, assets, operational and financial status, with NSCP's financial statements covering December 1990 up to 1992 attached. The package likewise contained the Negotiated Sale Guidelines embodying the terms and conditions of the proposed sale, and a Proposal Letter Form wherein bidders were advised to submit their bids. NDC's desired price for the NSCP shares and the vessels was $26,750,000.00.

During the public bidding on May 7, 1993, the lone bidder was respondent Madrigal Wan Hai Lines Corporation, a domestic private corporation organized under Philippine laws with principal office in Manila. Mr. Willie J. Uy, respondent's consultant, submitted a bid of $15 million through the Proposal Letter Form. NDC and the Commission on Audit rejected the bid, but since there was no other bidder, NDC entered into a negotiated sale with respondent. After several negotiations, respondent increased its offer to $18.5 million, which NDC accepted. The negotiated sale was approved by NDC's Board of Directors on August 26, 1993, by the President of the Philippines on September 28, 1993, by the Committee on Privatization on October 7, 1993, and by the Commission on Audit on February 2, 1994. On February 11, 1994, NDC issued a Notice of Award to respondent, and on March 14, 1994, the parties executed the corresponding Contract of Sale, with respondent acquiring NSCP, its assets, personnel, records, and its three vessels.

On September 22, 1994, respondent received from the US Department of Treasury, Internal Revenue Service, a Notice of Final Assessment against NSCP for deficiency taxes on gross transportation income derived from US sources for the years ending 1990, 1991, and 1992, based on Section 887 of the US Internal Revenue Code imposing a 4% tax on gross transportation income of any foreign corporation derived from US sources. Anxious that delay in the payment of the deficiency taxes might hamper its shipping operations overseas, respondent on October 14, 1994 assumed and paid NDC's tax liabilities, including the tax due for 1993, in the total amount of $671,653.00 — taxes incurred prior to respondent's take-over of NSCP's management — and paid an additional $16,533.10 as penalty for late payment.

Respondent eventually demanded reimbursement from NDC, which refused despite repeated demands. On March 20, 1996, respondent filed with the RTC, Branch 62, Makati City a complaint against NDC for reimbursement and damages, docketed as Civil Case No. 96-558. Both lower courts found that even before the sale NDC knew NSCP had tax liabilities with the US IRS yet did not inform respondent. The record showed exchanges of communications between NSCP and the US IRS, and a Partial Printout of NSCP's Unaudited Financial Statements for the year ending December 31, 1993 making provisions for US taxes — $3,919,018.81 for the year ending 1993 and $11,736,192.64 for the years ending 1990-1992 — but no showing that these were furnished to respondent, which asserted it had been denied access to NSCP's accounting books and financial statements. The Unaudited Financial Statements that allegedly included the US taxes among NSCP's Trade Payable and Accrued Expenses and Dividends did not clearly indicate those taxes, being vague on the matter.

• Nature of the Documents: Petitioner contended that the Negotiated Sale Guidelines and the Proposal Letter Form are mere invitations to bid, not contracts, and should be treated as mere offers or proposals to prospective buyers of the NSCP shares and marine vessels.
• "As Is, Where Is" Basis: Petitioner stressed that the sale was on an "AS IS, WHERE IS" basis, so that by accepting the terms and conditions respondent in effect accepted the risk of that arrangement and was charged with caution under the principle of caveat emptor.
• Offeror's Duty to Investigate: Petitioner argued that under the Negotiated Sale Guidelines and the Proposal Letter Form, respondent should have apprised itself of the financial status and liabilities of NSCP and its marine vessels, and therefore should not fault petitioner for its predicament.

• Contract of Adhesion: Respondent maintained that the Negotiated Sale Guidelines and the Proposal Letter Form constitute a contract of adhesion because the buyer was required to submit its bid through a pro-forma proposal letter, and the offer was on a "take it, or leave it" basis leaving no room for argument or negotiation except as to price; being a contract of adhesion, it should be strictly construed against the seller.
• Duty to Disclose Under the Civil Code: Respondent contended that under Articles 19, 20, and 21 of the Civil Code, petitioner had the legal duty to disclose its tax liabilities, especially since respondent repeatedly inquired about the matter, and that instead of telling the truth petitioner made several assurances that NSCP was a clean, lien-free going concern and profitable entity.
• Warranty Against Liens: Respondent pointed to Section 7.01 of the Negotiated Sale Guidelines, under which petitioner made a warranty against any lien or encumbrance.

• Contract of Adhesion: Whether the Negotiated Sale Guidelines and the Proposal Letter Form constitute a contract of adhesion.
• Reimbursement: Whether petitioner is legally bound to reimburse respondent for the amounts it paid corresponding to the former's tax liabilities to the US IRS.

• Contract of Adhesion: Yes. The Guidelines and the Proposal Letter Form were ready-made documents prepared entirely by NSCP at NDC's requirement, leaving the bidder no choice but to accept or reject them, with the price as the only term open to negotiation.
• Reimbursement: Yes. NDC's concealment of its known US tax liabilities despite respondent's inquiries was bad faith that breached its warranty against liens and encumbrances, and the "as is, where is" stipulation covered only the physical condition of the vessels, not their legal situation.

• Contract of Adhesion: A contract of adhesion is one in which one party imposes a ready-made form of contract which the other may accept or reject but cannot modify, the terms being fixed by one party and the other having merely "to take it, or leave it"; it may be struck down as void and unenforceable for being subversive of public policy, especially when the will of the dominant party is imposed on the weaker party, who is denied the opportunity to bargain on equal footing. Such contracts are not strictly against the law, however: in Ong Yiu vs. Court of Appeals and Pan American World Airways, Inc. vs. Intermediate Appellate Court the SC held that the other party is free to reject the contract entirely, and if he adheres he gives his consent. Still, the inequality of bargaining positions and the resulting impairment of freedom to contract call for greater strictness and vigilance on the part of courts, to protect the weaker party from abuses and imposition and prevent such contracts from becoming traps for the unwary. On their face the Negotiated Sale Guidelines and the Proposal Letter Form fit the characteristics of a contract of adhesion: Section 4.01 required offerors to use the Proposal Letter Form; Section 4.02(b) required the Guidelines to be signed by the offeror on every page; Section 14.01 reserved to NDC and APT the right to reject any and all offers, waive any formality, and consider only such offer as may be advantageous to the National Government; Section 14.02 reserved the right to amend the Guidelines prior to submission of offers; and Section 14.05 made any violation of the terms cause cancellation of the award and automatic forfeiture of the deposit. The Proposal Letter Form in turn bound the bidder to accept and undertake without reservation all the terms and conditions issued by NDC and APT, including those in the March 1993 Information Memorandum and the Negotiated Sale Guidelines, and to represent and warrant that it had examined and understood the Information Package and accepted the conditions, including the right of NDC and APT to reject any and all offers without liability. Respondent thus had hardly any say in the terms and conditions; other than the price, it was left with little or no alternative but to comply. The trial court correctly found that acceptance of the Guidelines and submission of the Proposal Letter Form was a required formality of the bidding, so that respondent could not be deemed to have been given the opportunity to bargain on equal footing. Being a contract of adhesion, its terms must be strictly construed against the party who made them, and any ambiguity construed against its author, it being public policy to protect a party against oppressive and onerous conditions. The argument that the Guidelines were a mere invitation to bid fails because the Contract of Sale itself, in Section 8, incorporated by reference the March 1993 NDC Information Memorandum and Negotiated Sale Guidelines, including the amendments, more particularly those in NDC's letter to A.P. Madrigal Steamship Co. Inc. dated May 4, 1993, and the Notice of Award dated February 11, 1993, and made them applicable to the Contract.

• Reimbursement: The trial court's findings, affirmed by the CA, established that during the negotiation for the sale NSCP was already aware of an impending assessment by the US government on its gross transportation income derived from US sources; the exchanges of communications between NSCP and the US IRS were glaring proof of prior knowledge of a possible assessment or additional taxes, and the Partial Printout of NSCP's Unaudited Financial Statements for the year ending December 31, 1993 made provisions for US taxes of $3,919,018.81 for the year ending 1993 and $11,736,192.64 for the years ending 1990-1992, a clear indication that NSCP had prior knowledge of the deficiency taxes and in fact recognized them even without a final assessment from the US IRS. There was no showing, however, that this document had been furnished to respondent, which asserted that it had been denied access to NDC's accounting books and financial statements; since he who asserts the affirmative of an allegation bears the burden of proving it, and NDC failed to prove that the pertinent statement or the document itself had been disclosed, the claim of disclosure failed. The Unaudited Financial Statements that allegedly included the US taxes among NSCP's Trade Payable and Accrued Expenses and Dividends did not clearly indicate those taxes, being vague, so that by mere reading one would not have the slightest inkling or suspicion that such taxes existed among NSCP's liabilities. NDC was therefore aware of its US tax liabilities given its numerous communications with the agents of the US IRS just prior to the sale, and NSCP itself made an ambiguous contingent provision in its Unaudited Financial Statements for the year ending December 1993 indicating awareness of a possible US tax assessment, yet NDC did not convey such information to respondent despite its inquiries. Such concealment constitutes bad faith, which implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity and contemplates a state of mind affirmatively operating with furtive design or ill will. The factual findings of both the trial court and the CA, which NDC did not dispute, must be respected absent any showing that they were reached arbitrarily or without sufficient basis. Under Section 7.01 of the Negotiated Sale Guidelines the seller gives no warranty regarding the sale of the shares and assets except a warranty on ownership and against any liens or encumbrances, and the offeror is not relieved of its obligation to make the examinations and verifications; the terms are clear and unequivocal, and a tax liability of $688,186.10 was then a potential lien upon NSCP's marine vessels. Having failed in bad faith to inform the buyer of such potential lien, NDC breached its warranty and must be held liable for the resulting damage, i.e., reimbursement of the amounts respondent paid to the US IRS. Section 2.01's "CASH, AS IS-WHERE IS" stipulation does not save NDC: in Hian vs. Court of Tax Appeals the SC construed the phrase as referring to the physical condition of the thing sold and not to the legal situation in which it was at the time of the sale, and here the US tax liabilities constitute a potential lien that pertains to NSCP's legal situation, not its physical aspect, so that respondent as buyer had no obligation to shoulder them. The result also follows from the principle of unjust enrichment, nemo cum alterius detrimento locupletari potest — no person shall be allowed to enrich himself unjustly at the expense of others — embodied in Article 22 of the Civil Code, so that justice and equity oblige NDC to reimburse respondent. On the damages, the deletion of exemplary damages and the reduction of attorney's fees were not challenged by either party, and no error attended them: exemplary damages may be granted only in addition to moral, temperate, liquidated or compensatory damages under Article 2229 of the Civil Code, none of which was awarded or deserved, the trial court having merely granted the prayer for reimbursement; and the award of attorney's fees was excessive considering that the case was a simple action for reimbursement not involving extensive litigation, so it was reduced to P20,000.00.

• Contract of adhesion — A contract in which one party imposes a ready-made form of contract which the other may accept or reject but cannot modify, the terms being fixed by one party and the other having merely "to take it, or leave it." Such contracts are not entirely prohibited — the other party is free to reject and, if he adheres, gives his consent — but the inequality of bargaining positions calls for greater strictness and vigilance by courts to protect the weaker party from abuses and imposition and to prevent the contract from becoming a trap for the unwary, and its terms are strictly construed against the party who drafted them. Applied: the Negotiated Sale Guidelines and Proposal Letter Form were prepared entirely by NSCP at NDC's requirement, NDC controlled the terms and reserved the right to reject offers and amend the Guidelines, and the bidder's only open term was the price.
• Warranty against liens and encumbrances — A seller's warranty that the thing sold is free of liens and encumbrances. Where the seller knows of a tax liability that constitutes a potential lien on the thing sold and conceals it from the buyer despite the buyer's inquiries, the seller acts in bad faith and breaches the warranty, becoming liable for the resulting damage. Applied: NDC's known US tax liability of $688,186.10 was a potential lien on NSCP's marine vessels, and its concealment made NDC liable to reimburse respondent.
• "As is, where is" stipulation — A stipulation that pertains solely to the physical condition of the thing sold, not to its legal situation. Applied: the US tax liabilities were a potential lien going to NSCP's legal situation, so respondent as buyer was not obliged to shoulder them.
• Unjust enrichment (Nemo cum alterius detrimento locupletari potest) — No person shall be allowed to enrich himself unjustly at the expense of others, as embodied in Article 22 of the Civil Code. Applied: relieving NDC of the tax liabilities it had concealed would unjustly enrich it at respondent's expense.
• Bad faith — Implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity, and contemplates a state of mind affirmatively operating with furtive design or ill will. Applied: NDC's failure to convey its known US tax liabilities despite respondent's inquiries was concealment amounting to bad faith.
• Exemplary damages — May be granted only in addition to moral, temperate, liquidated or compensatory damages under Article 2229 of the Civil Code; where no actual or moral damages are awarded, there is no legal basis for exemplary damages. Applied: the CA correctly deleted the award since the trial court granted only reimbursement.

• "A contract of adhesion is one in which one of the parties imposes a ready-made form of contract, which the other party may accept or reject, but which the latter cannot modify. In other words, in such contract, the terms therein are fixed by one party, and the other party has merely 'to take it, or leave it.'" — The SC's canonical definition of a contract of adhesion, the premise for construing the sale documents strictly against NDC.
• "The phrase 'as is, where is' basis pertains solely to the physical condition of the thing sold, not to its legal situation." — The ratio for rejecting NDC's caveat emptor defense: the concealed US tax liabilities were a legal, not a physical, defect.
• "Bad faith 'implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity; it x x x contemplates a state of mind affirmatively operating with furtive design or ill will.'" — The standard the SC applied in characterizing NDC's concealment of its known tax liabilities.
• "No person shall be allowed to enrich himself unjustly at the expense of others." — The equity principle, drawn from Article 22 of the Civil Code, that independently supports reimbursement.

• Ong Yiu vs. Court of Appeals, G.R. No. L-40597, June 29, 1979, 91 SCRA 223 — Followed for the rule that contracts of adhesion are not entirely prohibited, the other party being free to reject and, if he adheres, giving his consent.
• Pan American World Airways, Inc. vs. Intermediate Appellate Court, G.R. No. L-70462, August 11, 1988, 164 SCRA 268 — Followed alongside Ong Yiu for the same rule on contracts of adhesion.
• Saludo vs. Court of Appeals, G.R. No. 95536, March 23, 1992, 207 SCRA 498 — Cited for the rule that a contract of adhesion may be struck down as void and unenforceable when the weaker party is imposed upon by the dominant bargaining party and denied the opportunity to bargain on equal footing.
• Qua Chee Gan vs. Law Union and Rock Insurance Co., 98 Phil. 95 (1955) — Cited for the duty of courts to exercise greater strictness and vigilance to protect the weaker party from abuses and imposition and prevent contracts from becoming traps for the unwary.
• Hian vs. Court of Tax Appeals, G.R. No. L-28782, November 27, 1981, 109 SCRA 470 — Controlling precedent construing "as is, where is" as referring to the physical condition of the thing sold and not to its legal situation.
• Laureano Investment and Development Corporation vs. Court of Appeals, G.R. No. 100468, May 6, 1997, 272 SCRA 253 — Cited for the definition of bad faith applied to NDC's concealment.
• Geraldez vs. Court of Appeals, 230 SCRA 320 — Cited for the rule that he who asserts the affirmative of an allegation bears the burden of proving it, applied to NDC's failed claim of disclosure.
• Scott Consultants and Resources Development Corp. Inc. vs. Court of Appeals, 242 SCRA 393 — Cited for the rule that exemplary damages may be granted only in addition to moral, temperate, liquidated or compensatory damages, sustaining the deletion of the award.

• 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. Invoked by respondent as the source of NDC's duty to disclose its tax liabilities.
• Article 20, Civil Code — Every person who, contrary to law, wilfully or negligently causes damage to another shall indemnify the latter for the same. Invoked by respondent against NDC's non-disclosure.
• Article 21, Civil Code — 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. Invoked by respondent.
• Article 22, Civil Code — Every person who through an act or performance by another or by any other means acquires or comes into possession of something at the expense of the latter without just or legal ground shall return the same to him. Applied as the statutory basis for the unjust enrichment principle that obliged NDC to reimburse respondent.
• Article 2229, Civil Code — Exemplary damages may be granted only in addition to moral, temperate, liquidated or compensatory damages. Applied to sustain the CA's deletion of the exemplary damages award.
• Section 887, US Internal Revenue Code — Imposes a 4% tax on gross transportation income of any foreign corporation derived from US sources; the provision on which the US IRS assessment against NSCP for 1990, 1991, and 1992 was based.
• Rule 45, 1997 Rules of Civil Procedure — The mode by which NDC brought the petition for review on certiorari assailing the CA decision.