Poon vs.

Prime Savings Bank

G.R. No. 183794. June 13, 2016

Facts:
The petitioners owned a commercial building. They executed a 10-year contract of
lease over building with respondent Prime Savings Bank for the latter to use it as a branch
office. They agreed to a fixed monthly rental with an advance payment. The contract also
provided that should the lease[d] premises be closed, deserted or vacated by the LESSEE,
the lessor shall have the right to terminate the lease. The lessor shall thereupon have the
right to enter into a new contract with another party. All advanced rentals shall be forfeited
in favor of the lessor.
Three years later, the BSP placed respondent under receivership of the PDIC and
eventually ordered its litigation. The respondent vacated petitioner’s building and PDIC
then demanded return of the advance rentals. Petitioners refused to return the advanced
rentals. Thus respondent commenced this case for rescission of contract and recovery of
sum of money.
The RTC ruled in favor of Petitioners and ordered the partial rescission of the
contract insofar as the advance payment was forfeited. It held that the PDIC’s closure of
their business was a fortuitous event. The CA affirmed.

Issue:
Whether or not the forfeiture of the advance rentals was a penal clause.

Held:
Yes. The forfeiture clause in the contract is penal in nature. A provision is a penal
clause if it calls for the forfeiture of any remaining deposit still in the possession of the
lessor without prejudice to any other obligation still owing, in the event of the termination
or cancellation of the agreement by reason of the lessee’s violation of any of the terms and
conditions thereof. This kind of agreement may be validly entered into the by the parties. In
this case, it is evident that the stipulation on the forfeiture of advance rentals is a penal in
the sense that it provides for liquidated damages. The penalty for the premature
termination of the contract works both ways. The penalty was to compel respondent to
complete the 10-year term of the lease. Petitioners, too were similarly obliged to ensure the
peaceful use of the building by respondent for the duration of the lease under paid of losing
the remaining advance rentals paid by the respondent.

SPOUSES JAIME AND MATILDE POON v. PRIME SAVINGS BANK REPRESENTED BY THE PHILIPPINE DEPOSIT INSURANCE
CORPORATION AS STATUTORY LIQUIDATOR
G.R. No. 183794; June 13, 2016
Sereno. J.,  First Division
Topic: Contracts with a penal clause; Fortuitous Event
Nature: Appeal from a decision of the CA
FACTS:
The petitioners owned a commercial building. They executed a 10-year contract of lease over building with respondent
Prime Savings Bank for the latter to use it as a branch office. They agreed to a fixed monthly rental with an advance
payment. The contract also provided:
Should the lease[d] premises be closed, deserted or vacated by the LESSEE, the LESSOR shall have the right to terminate
the lease ...
xxx
The LESSOR shall thereupon have the right to enter into a new contract with another party. All advanced rentals shall be
forfeited in favor of the LESSOR.
Three years later, the BSP placed respondent under receivership of the PDIC and eventually ordered its litigation. The
respondent vacated petitioner’s building and PDIC then demanded return of the advance rentals. Petitioners refused to
return the advanced rentals. Thus respondent commenced this case for rescission of contract and recovery of sum of
money.
The RTC ruled in favor of Petitioners and ordered the partial rescission of the contract insofar as the advance payment
was forfeited. It held that the PDIC’s closure of their business was a fortuitous event. The CA affirmed but applied Art.
1229 instead.
ISSUE:
1. Whether or not respondent may avail of the remedy of rescission.
2. Whether or not the closure of respondent’s business is a fortuitous event.
3. Whether or not the forfeiture of the advance rentals was a penal clause.
4. Whether or not the penalty may be equitably reduced.
HELD:
1. YES. Respondents are entitled to rescission. The legal remedy of rescission is by no means limited to the situations
covered in Arts. 1381 and 1382. The New Civil Code actually uses the term “rescission” in two different contexts. The
first refers to breach of contract under Art. 1191, also known as the remedy of “resolution”; the second is rescission by
reason of lesion or economic prejudice under Art. 1381. The first is a principal action based on breach of a party, while
the second is a subsidiary action. From the allegations of the complaint, it is clear that respondent’s right of action rests
on the alleged abuse of petitioner’s right under the contract on the theory that petitioner tenaciously enforced their
right to forfeit the advanced rentals which was in bad faith since they knew that respondent was already insolvent. IN
other words, respondents are seeking rescission under Art. 1191.
2. NO. The closure of respondent’s business was neither a fortuitous or unforeseen event. In this case, for it to be
considered a fortuitous event, there has to be bad faith or arbitrariness on the part of the BSP. Instead, its decision to
place respondent under receivership and liquidation was pursuant to R.A. No. 7653, moreover, respondent was partially
accountable for closure of its banking business. Neither is this case, a case of unforeseen event under Art. 1267. After all,
parties to a contract are presumed to have assumed the risks of unfavorable developments. It is only in absolutely
exceptional changes of circumstance therefore that equity demands assistance for the debtor. In Tagaytay Realty vs.
Gacutan the requisites for the application of Art. 1267 are:
1. The event could not have been foreseen at the time of the execution of the contract.
2. It makes performance of the contract extremely difficult but not impossible.
3. It must not be due to the act of any of the parties.
4. The contract is for a future prestation.
The case explains that mere inconvenience, unexpected impediments, increased expenses or even pecuniary inability to
fulfill an engagement will not relieve the obligor from an undertaking that it has knowingly and freely contracted. In this
case, the first and third requisites are lacking. Since the lease was for 10 years, the parties should have considered the
possibility of closure of business.
3. YES. The forfeiture clause in the contract is penal in nature. A provision is a penal clause if it calls for the forfeiture of
any remaining deposit still in the possession of the lessor without prejudice to any other obligation still owing, in the
event of the termination or cancellation of the agreement by reason of the lessee’s violation of any of the terms and
conditions thereof. This kind of agreement may be validly entered into the by the parties. In this case, it is evident that
the stipulation on the forfeiture of advance rentals is a penal in the sense that it provides for liquidated damages. The
penalty for the premature termination of the contract works both ways. The penalty was to compel respondent to
complete the 10-year term of the lease. Petitioners, too were similarly obliged to ensure the peaceful use of the building
by respondent for the duration of the lease under paid of losing the remaining advance rentals paid by the respondent.
4. YES. A reduction of the penalty agreed upon by the parties is warranted under Article 1229 of the New Civil Code.
The general rule is that courts have no power to ease the burden of obligations voluntarily assumed by parties, just
because things did not turn out as expected at the inception of the contract. It must be noted that this case was initiated
by the PDIC in furtherance of its statutory role as the fiduciary of Prime Savings Bank. As the state-appointed receiver
and liquidator, the PDIC is mandated to recover and conserve the assets of the foreclosed bank on behalf of the latter's
depositors and creditors. In other words, at stake in this case are not just the rights of petitioners and the correlative
liabilities of respondent lessee. Over and above those rights and liabilities is the interest of innocent debtors and
creditors of a delinquent bank establishment. These overriding considerations justify the 50% reduction of the penalty
agreed upon by petitioners and respondent lessee in keeping with Article 1229 of the Civil Code, which provides for an
equitable reduction of the penalty in some cases.
Under the circumstances, it is neither fair nor reasonable to deprive depositors and creditors of what could be their last
chance to recoup whatever bank assets or receivables the PDIC can still legally recover. Strict adherence to the doctrine
of freedom of contracts, at the expense of the rights of innocent creditors and investors, will only work injustice rather
than promote justice in this case.
WHEREFORE, premises considered, the Petition for Review on Certiorari is DENIED. The Court of Appeals Decision dated
29 November 2007 and its Resolution dated 10 July 2008 in CA-G.R. CV No. 75349 are hereby MODIFIED in that legal
interest at the rate of 6% per annum is imposed on the monetary award computed from the finality of this Decision until
full payment.