ASTROLAND DEVELOPERS, INC., PETITIONER, VS. GOVERNMENT SERVICE INSURANCE SYSTEM AND COURT OF APPEALS, RESPONDENTS.

Astroland Developers versus Government Service Insurance System

The Case

This is a petition for review on certiorari brought by Astroland Developers, Inc., a project manager of a housing subdivision, against the Government Service Insurance System, the government financial institution that financed the project. Astroland sued the GSIS for unearned management fees and damages after the GSIS terminated the Project Management Agreement and its Supplemental Contract. The case matters because it fixes the rule on when a party to a management contract may rescind for valid cause without judicial action, and on who bears liability for management fees when the project owner, not the financier, is the one contractually obliged to pay.

Procedural History

Astroland filed a complaint for damages and attorney's fees against the GSIS alone in the Regional Trial Court of Manila. The trial court rendered judgment in favor of Astroland, ruling that the GSIS's cancellation of the agreements was arbitrary and illegal, and ordered the GSIS to pay unearned management fees, an increase in management fees, actual and consequential damages, legal interest, exemplary damages, attorney's fees, and costs.

The GSIS appealed to the Court of Appeals, which reversed the trial court. The appellate court held that under Article X of the Project Management Agreement, as amended, the GSIS had the right to rescind, and that the Queen's Row Subdivision, not the GSIS, was liable for any valid claim for management fees. Astroland's motion for reconsideration was denied, so Astroland elevated the matter to the Supreme Court by petition for review on certiorari.

Facts

The Queen's Row Subdivision, Inc. owned a parcel of land in Bacoor, Cavite. To finance a housing project, it borrowed ten million pesos from the GSIS in May 1971, and an additional four million pesos in February 1972, undertaking to construct four thousand four hundred ninety-three housing units. By 1980 only one thousand two hundred fifty units had been built, a cease-and-desist order had been issued and later lifted, and Queen's Row's outstanding obligation to the GSIS had reached more than twenty-eight million pesos.

Queen's Row sought a further loan of eight million pesos. The GSIS agreed on condition that a new project manager be designated, free from interference by Queen's Row. Queen's Row designated Astroland, and on September 30, 1980, Queen's Row, Astroland, and the GSIS executed the Project Management Agreement, under which Astroland would develop the unfinished project and construct one thousand seven hundred forty-one housing units. Astroland was to take charge of operations, market and sell the units, and collect the proceeds, which were to be distributed first to the GSIS for the loans, then to Astroland for its commission, then to taxes, and then to other creditors. The parties agreed that Astroland would be paid by Queen's Row for its services, including a management fee, and that the GSIS could terminate or rescind the agreement for valid cause without need of judicial action, by giving sixty days' notice, which act would be final and binding. A Supplemental Contract appointed Isabel Arrieta, president of Queen's Row, as exclusive general sales agent.

A dispute arose over Arrieta's commissions. Arrieta then urged the GSIS to rescind the agreements, alleging that Astroland had violated their terms. The Office of the Government Corporate Counsel recommended termination, citing strained relations between Queen's Row and Astroland. On July 8, 1982, the GSIS Board of Trustees approved the recommendation and appointed a replacement project manager, to take effect upon expiration of the sixty-day notice. Astroland did not seek reconsideration nor assail the resolution in court. By September 1982 Astroland had completed six hundred twenty-six house-lot units and had paid fifteen million five hundred thousand pesos for Queen's Row's account, then wound up its operations and turned over the project. Its claims for management fees were denied by the GSIS Board, and it sued.

Issues

• Whether or not the rescission by the GSIS of the Project Management Agreement and the Supplemental Contract was in accord with those agreements.
• Whether or not Astroland is entitled to management fees from the GSIS under the agreements, or to damages under Article 19 of the New Civil Code.

Applicable Provisions

Section 10.02 of Article X of the Project Management Agreement, as amended by the Supplemental Contract, provides:

Notwithstanding the preceeding paragraph, QUEEN'S ROW and the PROJECT MANAGER hereby recognize the right of the GSIS to terminate and/or rescind this Agreement for valid cause without need of judicial action by giving sixty (60) days' notice to that effect to both parties, which act shall be final and binding on all parties. In such event, the GSIS shall have, among others, the right to demand the appointment of a new project manager for the unfinished project; in such event, the PROJECT MANAGER shall only be entitled to fees rightfully earned up to time of termination.

This clause is the contractual source of the GSIS's power to rescind without judicial action, and it also limits Astroland's recovery to fees rightfully earned up to the time of termination.

Article 19 of the New Civil Code, invoked by Astroland as an alternative basis for damages, provides:

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.

This is the standard against which Astroland asks the Court to measure the GSIS's conduct in terminating the agreements.

Ruling

On the first issue, the Court ruled against Astroland and held that the rescission was in accord with the agreements. The Court upheld the appellate court's finding that the GSIS acted upon the recommendation of the Office of the Government Corporate Counsel, which had called attention to a serious dispute between Queen's Row and the project manager that threatened to derail the project and jeopardize the GSIS's financial exposure. Given that situation, the GSIS had to act promptly and decisively, and its only option was to avail of the right granted to it by the parties in their management agreements. The Court held that the mere existence of such a serious dispute was enough to derail completion of the project, and that the GSIS was therefore justified in terminating the management contract as explicitly authorized therein. Hence the GSIS's actuation was far from arbitrary, and Astroland had no cause of action against it, whether under the management agreements or under the Civil Code.

On the second issue, the Court held that Astroland is not entitled to management fees from the GSIS. Under the agreements, it was Queen's Row, as project owner, that bound itself to pay Astroland's management fee, while the GSIS's role was that of financier. Astroland's remedy for fees rightfully earned lay against Queen's Row, not against the GSIS, and its claim for damages under Article 19 failed because the GSIS exercised a contractual right in good faith and for a valid cause.

Doctrine

A contract may expressly grant a party the right to terminate or rescind for valid cause without need of judicial action, upon notice, and such act is final and binding on all parties. Where the contract so provides, the rescinding party need not go to court; it exercises a contractual power, not a judicial remedy.

The existence of a serious dispute between the project owner and the project manager, which threatens the completion of a financed project and the financier's recovery, is a valid cause for the financier's rescission under such a clause. A termination grounded on that cause is not arbitrary and does not violate Article 19 of the New Civil Code, which requires every person to act with justice and good faith in the exercise of rights.

Liability for management fees follows the contract: the party that bound itself to pay the fee is the one liable, and the project manager's recovery is limited to fees rightfully earned up to the time of termination.

Disposition

The Supreme Court denied the petition and affirmed the decision of the Court of Appeals, holding that the GSIS validly rescinded the agreements and is not liable to Astroland for management fees or damages.

Remember This

Memorize this line: a rescission made for valid cause, without judicial action, under an express contractual power, is final and binding and is not arbitrary. Examiners use this case to test the validity of extrajudicial rescission clauses and the rule that the party contractually obliged to pay management fees, here the project owner and not the financier, is the one liable.