BPI-FAMILY SAVINGS BANK, INC., PETITIONER, VS. SPS. ZENAIDA DOMINGO & ABUNDIO S. DOMINGO, BENJAMIN VILLA AND SPS. JULIAN CRUZ, RESPONDENTS.

BPI-Family Savings Bank versus Domingo

The Case

This is a petition for review brought by BPI-Family Savings Bank against the spouses Zenaida Domingo and Abundio Domingo, Benjamin Villa, and the spouses Julian Cruz. The Domingos sued to recover the 650,000 pesos they paid to take over a restaurant and sublease the premises, money they lost when the owner padlocked the doors. The case matters because the Court untangles a web of interlocking contracts and draws a clean line between a sublease, which needs no consent of the lessor, and an assignment of rights, which does. It also reminds us when solidarity arises and when moral and exemplary damages may be awarded.

Procedural History

The Domingos filed a complaint for a sum of money with damages in the Regional Trial Court of Quezon City, Branch 81, against Villa and BPI-Family Savings Bank. Villa and the bank in turn filed third-party complaints against Julian Cruz, the owner-lessor. The trial court ruled for the Domingos, holding the bank and Villa solidarily liable for actual, moral, and exemplary damages and attorney's fees, and ordering Cruz to reimburse them. The bank and Villa appealed, and the Cruz spouses filed their own appeal; the appeals were consolidated in the Court of Appeals. The Court of Appeals affirmed the trial court in full and denied the motions for reconsideration. Only the bank elevated the matter to the Supreme Court by petition for review.

Facts

Julian Cruz owned a commercial lot and building in Novaliches, Quezon City, which he leased to the Family Savings Bank in 1976. In April 1989, after the Bank of the Philippine Islands acquired the savings bank, a new lease was executed between BPI-Family Savings Bank and Cruz. Both leases carried the same stipulation: the lessee may sublease, but may not assign or transfer its right without the lessor's written consent. In February 1989 the bank subleased the premises to Benjamin Villa, a former vice president, who ran a restaurant called Carousel Food House. Cruz knew of the sublease and raised no objection.

Villa's restaurant failed. In June 1990 he learned that Zenaida Domingo wanted to take over the business, and they agreed on a price of 650,000 pesos. Villa told her that as a mere sublessee he could not assign his rights, so his sublease with the bank had to be rescinded and the bank would sublease directly to the Domingos. The bank agreed. Villa received 300,000 pesos as partial payment, then 350,000 pesos as full payment, issuing receipts assigning the goodwill, rights, and interests over the premises. Villa vacated and turned over the key. The bank then executed a sublease in favor of the Domingos, and a deed of rescission of the Villa sublease was signed.

The next day the Domingos came to clean the premises but found the door padlocked and a notice posted that the place was not for lease or sublease. Cruz had done this, invoking the written-consent clause. Efforts by Villa and the bank to place the Domingos in possession failed. The Domingos demanded return of their money and sued.

Issues

• Whether or not BPI-Family Savings Bank may be held solidarily liable with Villa for the return of the 650,000 pesos and for damages, despite its claim that it was not a party to the Villa-Domingo agreement.
• Whether or not the contract between the bank and the Domingos was a sublease rather than an assignment of rights, such that the written consent of Cruz was not required.
• Whether or not the award of moral and exemplary damages against the bank was proper.

Applicable Provisions

Article 1311 of the Civil Code provides:

Contracts take effect only between the parties, their assigns and heirs.

The bank invoked this to deny privity with the Villa-Domingo agreement, but the Court held that the bank had its own contract with the Domingos.

Article 1207 of the Civil Code provides:

There is solidary liability only when the obligation expressly so states or when the law or the nature of the obligation requires solidarity.

The Court found that the intertwined contracts and the common failure to deliver possession made solidarity proper.

Article 1170 of the Civil Code provides:

Those who in any manner contravene the tenor of their obligations are liable for damages.

This is the basis for holding both the bank and Villa liable for breach of their respective undertakings.

Article 201 of the Civil Code provides:

In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable shall be those that are the natural and probable consequences of the breach of the obligation, and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted. In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation.

Because there was no bad faith, the Court deleted the moral and exemplary damages.

Ruling

On the first issue, the Court held that neither the bank nor Villa could escape liability by disclaiming privity. There were several agreements: the Cruz-BPI lease, the BPI-Villa sublease, the Villa-Domingo sale of goodwill, the BPI-Domingo sublease, and the deed of rescission. The bank's contract with the Domingos was intertwined with Villa's sale of goodwill, and the bank's failure to place the Domingos in possession breached its own sublease. Villa, for his part, breached his own contract of sale of goodwill and received the money. Both are liable under Article 1170.

On the second issue, the Court affirmed that the agreement was a sublease, not an assignment. The lease stipulation allowed subleasing but required written consent only for assignment. In a sublease the lessee remains liable to the lessor for rent and the sublessee pays the sublessor; in an assignment the assignee steps into the lessee's shoes and the lessee is freed. Hence no written consent was needed for the sublease. Cruz's padlocking was a breach of his own lease, and he was correctly ordered to reimburse the bank and Villa.

On the third issue, the Court found the award of moral and exemplary damages harsh. The failure to deliver possession was due to Cruz's acts, not to bad faith on the part of the bank, Villa, or Cruz. Under Article 201, absent fraud, bad faith, malice, or wanton attitude, such damages cannot stand. They were deleted.

Doctrine

A sublease does not require the lessor's consent unless expressly prohibited, because the lessee remains bound to the lessor; an assignment of rights transfers the lessee's entire interest and requires consent because it changes the person liable to the lessor. Solidary liability may arise from the nature of the obligation when several parties breach intertwined contracts producing a common injury. Moral and exemplary damages require bad faith or malice; good faith limits liability to foreseeable natural consequences under Article 201.

Disposition

The Court affirmed the decision of the Court of Appeals in all respects, except that it deleted the award of moral and exemplary damages in favor of the Domingos.

Remember This

Memorize the distinction: sublease needs no consent, assignment does. Examiners use this case to test the sublease-assignment distinction and the good-faith limitation on moral and exemplary damages.