PASDA, Incorporated vs. Reynaldo P. Dimayacyac, Sr.

A contract provision that is clear and unambiguous must be applied according to its literal and express terms; courts cannot expand, restrict, or amend the agreement of the parties. Where a lease contract grants the lessor the right to sell the lessee's retained articles in a private sale and apply the proceeds to the lessee's obligations, the lessor has no authority to appropriate the articles for itself or to have their value deducted from the outstanding liability, and if the lessor instead chooses to sue for the principal obligation, it must return the retained articles.

PASDA, Incorporated is the lessor of Suite 506 of PASDA Mansion in Quezon City, and Reynaldo P. Dimayacyac, Sr., a lawyer, was its lessee under a Contract of Lease executed in March 1999. The lease provided for a monthly rental of P17,000.00 plus 10% Value-Added Tax, 2% interest per month in case of default, liquidated damages of P10,000.00, and attorney's fees equivalent to 25% of the amount claimed in the complaint in case of litigation. Paragraph 24 of the contract governed the lessor's rights upon the lessee's default or abandonment of the premises, including the authority to take possession of the lessee's articles and to dispose of them in a private sale, applying the proceeds to the lessee's liabilities and returning any excess.

In March 1999, PASDA, Incorporated and Reynaldo P. Dimayacyac, Sr. entered into a Contract of Lease for Suite 506 of PASDA Mansion in Quezon City, with a monthly rental of P17,000.00 plus 10% Value-Added Tax and 2% interest per month in case of default. Dimayacyac, as lessee, was also obligated to pay utility costs for the unit. The contract further provided that, in case of litigation, Dimayacyac would pay liquidated damages of P10,000.00 and attorney's fees equivalent to 25% of the amount claimed in the complaint.

On July 16, 2005, Dimayacyac vacated the unit, leaving an outstanding arrearage for monthly rentals, 10% VAT, and utility costs in the aggregate amount of P340,071.00. Pursuant to paragraph 24 of the lease contract, PASDA took possession of Dimayacyac's articles and equipment found in the rented unit and prepared an inventory of the items. Despite the lapse of the agreed 30-day period to settle his obligations and the demand letters sent to him, Dimayacyac failed to pay. On May 11, 2007, PASDA filed a complaint for sum of money before the MeTC to collect the outstanding obligation.

Paragraph 24 of the lease contract provided that, upon the lessee's default or abandonment, the lessor was given the right to enter and take possession of the leased premises, and the lessee constituted the lessor as attorney-in-fact to take inventories of all the lessee's merchandise, effects, and equipment and to remove and transfer them to the lessor's bodega. It further provided that failure of the lessee to clear such items within thirty days from closure and abandonment would give rise to the lessor's right to dispose of the same in a private sale and to apply the proceeds first to back rentals, next to expenses incurred by the lessor, then to other liabilities of the lessee, with any excess to be given to the lessee.

The MeTC found Dimayacyac liable but reduced the amount from P340,071.00 to P16,271.00, deducting the value of the items confiscated by PASDA, which amounted to P323,800.00. The MeTC also reduced the interest rate from 2% per month to 6% per annum and awarded P20,000.00 as attorney's fees. The RTC affirmed in toto, holding that the provisions of the lease contract were valid and had the force and effect of law, and that Dimayacyac, as a lawyer, could have asked for amendment or revision of the contract instead of merely noting his objection.

The CA affirmed with modification, citing paragraph 23 of the lease contract as a forfeiture clause and applying the ruling in Fort Bonifacio Development Corp. vs. Yllas Lending Corp. The CA held that the value of the retained items should be deducted from Dimayacyac's total liability, that the reduction of the interest rate and attorney's fees was proper because the stipulated rates were unconscionable, and awarded P10,000.00 as liquidated damages. During the proceedings before the CA, Dimayacyac died and was substituted by his heirs.

PASDA argued that the value of the retained items should not have been deducted because, under paragraph 24, it merely had the right, not the obligation, to sell the items and apply the proceeds to the remaining balance. PASDA explained that it filed the action after it was unable to sell the articles, that it did not appropriate the properties for itself, and that it merely retained them until they could be sold under execution of a final judgment. PASDA also assailed the valuation of the items, claiming that the prices were merely added or inserted by Dimayacyac after the inventory was signed, and that its representatives admitted only the contents of the inventory, not their monetary value. The respondent heirs countered that PASDA failed to indicate in its certificate against forum shopping that they had filed a Motion for Partial Reconsideration, that PASDA was estopped from questioning the RTC decision because they had already complied with it by paying P43,511.60 through a China Bank check, and that the courts correctly deducted the values of the articles because PASDA's representative admitted awareness of the inventory's contents.

• Interpretation of Paragraph 24: PASDA argued that the value of the retained items should not have been deducted from Dimayacyac's unpaid obligation because, under paragraph 24 (not paragraph 23) of the lease contract, it merely had the right, and not the obligation, to sell the items in case of the lessee's default and apply the proceeds to the remaining balance. It insisted that it did not appropriate Dimayacyac's properties for itself and merely retained them until they could be sold under execution of a final judgment.

• Valuation of Retained Items: PASDA assailed the valuation of the items in the inventory list, claiming that the corresponding prices were merely added or inserted by Dimayacyac after the parties signed the inventory, and that its representatives merely admitted the contents of the inventory but not their monetary value.

• Reduction of Interest and Attorney's Fees: PASDA averred that it was improper to reduce the interest rate and the attorney's fees because these were expressly stipulated in the lease contract.

• Forum Shopping Certification: In its Reply, PASDA manifested that its failure to mention the respondents' motion for partial reconsideration in its certification against forum shopping was due to inadvertence, an excusable mistake because it received its copy of the motion several days after filing its motion for extension of time to file the petition.

• Forum Shopping: The respondent heirs countered that the petition should be summarily dismissed because PASDA failed to indicate in its certificate against forum shopping that they had filed their Motion for Partial Reconsideration of the CA decision.

• Estoppel: The respondents contended that PASDA was estopped from questioning the RTC decision because they had already complied with it, having paid the judgment award of P43,511.60 through a China Bank check, which was allegedly accepted by PASDA as evidenced by an acknowledgment receipt signed by its counsel.

• Deduction of Values: The respondents argued that the courts a quo correctly deducted the values of the articles from Dimayacyac's obligations because PASDA's representative admitted in open court that she was aware of the contents of the inventory and could no longer deny the values thereof.

• Reduction of Interest and Attorney's Fees: The respondents agreed that the interest rates and attorney's fees should be reduced because the proper interest imposed as indemnity for damages in case of delay in payment of a sum of money was 6%, and attorney's fees could not even be recovered because no premium should be placed on the right to litigate.

• Enforcement Against the Estate: The respondents prayed that the CA decision be modified so that the running of the 6% interest period should stop as of February 4, 2014, when Dimayacyac made full payment of the RTC judgment award, and that the award of damages and attorney's fees should be enforced against Dimayacyac's estate under Rule 86 of the Revised Rules of Court, not against the individual heirs.

• Forum Shopping Certification: Whether PASDA's failure to mention the respondents' motion for partial reconsideration in its certification against forum shopping warrants dismissal of the petition.

• Interpretation of Paragraph 24: Whether the Court of Appeals erred in interpreting paragraph 24 of the lease contract to require that the values of the retained articles be deducted from Dimayacyac's unpaid rental accountabilities.

• Valuation of Retained Items: Whether the Court of Appeals erred in giving due weight and credence to the valuation of the retained articles, which was allegedly unsupported by evidence.

• Reduction of Attorney's Fees: Whether the Court of Appeals erred in reducing the amount of attorney's fees contrary to the express stipulation in the lease contract.

• Reduction of Interest Rate: Whether the Court of Appeals erred in reducing the stipulated rate of interest to 6% per annum contrary to the express stipulation in the lease contract.

• Enforcement Against the Estate: Whether the judgment award should be enforced as a claim against the estate of the deceased respondent rather than against the individual heirs.

• Forum Shopping Certification: No. PASDA was not obliged to state the respondents' motion for partial reconsideration in its certification against forum shopping because it involved different issues and relief compared to the present petition before the Supreme Court.

• Interpretation of Paragraph 24: No. The Court of Appeals erred. Paragraph 24 of the lease contract is clear and unequivocal: it gave PASDA only the right to sell the retained articles in a private sale and apply the proceeds to Dimayacyac's liabilities, not the right to appropriate them or offset their value against the outstanding obligation.

• Valuation of Retained Items: No. Even granting that the value of the articles could be deducted, it was improper to use the values provided by Dimayacyac, as PASDA's representative merely admitted the contents of the inventory and not the stated values, and Dimayacyac himself admitted that the prices he wrote down were not supported by appropriate documents or receipts.

• Reduction of Attorney's Fees: Yes, the reduction was proper. The stipulated attorney's fees can be equitably reduced because they were not integral to the rentals but merely incidental to collection, and were intended as a penal clause to answer for liquidated damages; reducing the rate equitably balances the rights and interests of both parties.

• Reduction of Interest Rate: No. The Court of Appeals erred in reducing the interest rate. The alleged partial payment of the obligation, made by deducting the value of the retained articles, was contrary to the explicit provisions of the lease contract and cannot be a ground to reduce the interest rate. The 2% monthly (24% per annum) stipulated rate was not unconscionable.

• Enforcement Against the Estate: Yes. Under Section 20, Rule 3 and Section 5, Rule 86 of the Rules of Court, when a defendant dies before entry of final judgment in an action for recovery of money arising from contract, the action continues and a favorable judgment is enforced as a claim against the estate of the deceased person, not against the individual heirs.

• Forum Shopping Certification: Forum shopping is the simultaneous or successive institution of two or more actions or proceedings involving the same parties for the same cause of action with the hope that one or the other court would make a favorable disposition. It vexes the courts and litigants because different courts are asked to rule on the same or related causes, raising the same issues and praying for similar reliefs, creating the possibility of conflicting decisions. In this case, PASDA's certification against forum shopping complied with existing rules because the respondents' motion for partial reconsideration involved different issues and relief compared to the present petition.

• Interpretation of Paragraph 24: Contracts have the force of law between the parties, and unless the stipulations are contrary to laws, morals, good customs, public order, or public policy, they are binding. Except when the terms are ambiguous, the literal meaning of a contract's stipulation is controlling, pursuant to Article 1370 of the Civil Code. The Court cited Norton Resources and Development Corporation vs. All Asia Bank Corporation for the "plain meaning rule": if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. A contract provision is ambiguous only if it is susceptible of two reasonable alternative interpretations. Paragraph 24 of the lease contract is clear and unequivocal: it gave PASDA the right or authority to sell the articles in the leased premises and apply the proceeds to Dimayacyac's liabilities. It neither mandated PASDA to sell the same nor authorized it to appropriate them and offset their value against the outstanding liabilities. PASDA was even bound to return any excess from the private sale to Dimayacyac. The CA erred in citing paragraph 23 and applying Fort Bonifacio Development Corp. vs. Yllas Lending Corp., because in that case the contract expressly granted the lessor the right to offset the prevailing value of the properties as appraised by the lessor against unpaid rentals, whereas paragraph 24 here did not grant such authority. PASDA's options were to either enforce the security and sell the articles or claim the principal obligation and return the articles. Having opted to file the present action to recover the principal obligation, PASDA could no longer keep the retained items and was ordered to return them.

• Valuation of Retained Items: Even assuming the value of the articles could be deducted, it was improper to use the values provided by Dimayacyac. PASDA's representative merely admitted the contents of the inventory and not the stated values of the particular items. The inventory list was typewritten while the prices were handwritten, supporting PASDA's claim that Dimayacyac intercalated the values after the inventory was prepared. Moreover, Dimayacyac himself admitted that the prices he wrote down were not supported by appropriate documents or receipts.

• Reduction of Attorney's Fees: The Court held that the stipulated attorney's fees can be equitably reduced under the circumstances. The attorney's fees were not integral to the rentals but merely incidental to collection, and were intended as a penal clause to answer for liquidated damages. Reducing the rate equitably balances the rights and interests of both parties, especially considering that the attorney's fees would already serve as penalty for the default of the lessee, and payment of liquidated damages of P10,000.00 was also provided.

• Reduction of Interest Rate: The Court of Appeals erred in reducing the interest rate on the ground that the 2% monthly rate was unconscionable considering the partial payment. Because the application of the value of the retained articles to the outstanding balance was contrary to the explicit provisions of the lease contract, the alleged partial payment cannot be a ground to reduce the interest rate. Citing Mallari vs. Prudential Bank, the Court noted that parties are free to stipulate on the interest rate provided it is conscionable, and jurisprudence establishes that a 24% per annum stipulated interest rate is not considered unconscionable.

• Enforcement Against the Estate: Section 20, Rule 3 of the Rules of Court provides that when an action is for recovery of money arising from contract and the defendant dies before entry of final judgment, the action shall not be dismissed but shall continue until entry of final judgment, and a favorable judgment shall be enforced in the manner especially provided for prosecuting claims against the estate of a deceased person. Section 5, Rule 86 requires all claims for money against the decedent arising from contract to be filed within the time limited in the notice. Citing Genato vs. Bayhon, the Court held that while the deceased debtor may no longer be compelled to pay the loan, the debt subsists against his estate, and no property or portion of the inheritance may be transmitted to his heirs unless the debt has first been satisfied. The fact that the heirs have not instituted any action for settlement of the estate does not warrant enforcement against the individual heirs.

• Plain Meaning Rule in Contract Interpretation — Under Article 1370 of the Civil Code, if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. A contract provision is ambiguous only if it is susceptible of two reasonable alternative interpretations; where the written terms are not ambiguous and can only be read one way, the court interprets the contract as a matter of law. The Court applied this rule to paragraph 24 of the lease contract, holding that it clearly granted PASDA only the right to sell the retained articles, not to appropriate them.

• Freedom of Contract — Under Article 1306 of the Civil Code, contracting parties may establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. The Court applied this doctrine in upholding the stipulated 2% monthly interest rate, which was not unconscionable, while equitably reducing the attorney's fees.

• Claims Against the Estate of a Deceased Debtor — Under Section 20, Rule 3 and Section 5, Rule 86 of the Rules of Court, when a defendant dies before entry of final judgment in an action for recovery of money arising from contract, the action continues and a favorable judgment is enforced as a claim against the estate of the deceased person, not against the individual heirs. The debt subsists against the estate, and no property or portion of the inheritance may be transmitted to the heirs unless the debt has first been satisfied.

• "The cardinal rule in the interpretation of contracts is embodied in the first paragraph of Article 1370 of the Civil Code: '[i]f the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.'" — This passage, quoted from Norton Resources and Development Corporation v. All Asia Bank Corporation, articulates the controlling rule of contract interpretation applied by the Court to paragraph 24 of the lease contract.

• "Paragraph 24 is clear and unequivocal. Hence, it must be applied according to its literal and express terms and not in a manner which would expand or run contrary to it. Literally applying the provisions of the present contract, PASDA merely had the right or authority to sell the articles in the leased premises and apply the proceeds thereof to Dimayacyac's liabilities. It neither mandated PASDA to sell the same nor authorized it to appropriate them and offset their value against the outstanding liabilities of Dimayacyac." — This is the ratio decidendi of the case, defining the scope of the lessor's rights under the forfeiture clause and rejecting the deduction of the retained items' value from the outstanding obligation.

• "While he may no longer be compelled to pay the loan, the debt subsists against his estate. No property or portion of the inheritance may be transmitted to his heirs unless the debt has first been satisfied." — Quoted from Genato v. Bayhon, this passage states the principle governing the enforcement of money claims against the estate of a deceased debtor, which the Court applied to the present case.

• Norton Resources and Development Corporation vs. All Asia Bank Corporation, 620 Phil. 381 (2009) — Cited as instructive authority for the plain meaning rule in contract interpretation, providing the canonical formulation of Article 1370 of the Civil Code and the rule that courts cannot stipulate for the parties or amend their agreement.

• Fort Bonifacio Development Corp. vs. Yllas Lending Corp., 588 Phil. 748 (2008) — Distinguished from the present case. In that case, the lease contract expressly granted the lessor the right to offset the prevailing value of the properties as appraised by the lessor against unpaid rentals, whereas paragraph 24 of the contract here did not grant such authority.

• Mallari vs. Prudential Bank, 710 Phil. 490 (2013) — Cited for the doctrine that parties are free to stipulate on interest rates provided they are conscionable, and that a 24% per annum stipulated interest rate is not considered unconscionable.

• Genato vs. Bayhon, 613 Phil. 318 (2009) — Cited for the rule that when a debtor dies while a case is pending, the debt subsists against his estate, and the creditor's remedy is to file a claim against the estate of the deceased debtor.

• Yap vs. Chua, 687 Phil. 392 (2012) — Cited for the definition of forum shopping as the simultaneous or successive institution of two or more actions or proceedings involving the same parties for the same cause of action.

• Morla vs. Belmonta, 678 Phil. 102 (2011) — Cited for the principle that contracts have the force of law between the parties and are binding unless contrary to laws, morals, good customs, public order, or public policy.

• RGM Industries Inc. vs. United Pacific Capital Corporation, 689 Phil. 660 (2012) — Cited for the proposition that attorney's fees intended as a penal clause to answer for liquidated damages may be equitably reduced.

• Article 1370, Civil Code — Provides that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. The Court applied this provision to interpret paragraph 24 of the lease contract.

• Article 1306, Civil Code — Provides that contracting parties may establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. The Court applied this provision in upholding the stipulated interest rate.

• Section 20, Rule 3, Rules of Court — Provides that when an action is for recovery of money arising from contract and the defendant dies before entry of final judgment, the action shall not be dismissed but shall continue until entry of final judgment, and a favorable judgment shall be enforced as a claim against the estate of the deceased person. The Court applied this provision to require enforcement against Dimayacyac's estate.

• Section 5, Rule 86, Rules of Court — Requires all claims for money against the decedent arising from contract to be filed within the time limited in the notice, otherwise they are barred forever. The Court read this provision in consonance with Section 20, Rule 3 to govern the enforcement of the judgment against the estate.

Carpio (Chairperson), Del Castillo, and Leonen, JJ., concurred. Brion, J., was on leave.

N/A — No dissenting opinion was noted in the provided case text.