VICENTE CU, PETITIONER, VS. THE HONORABLE COURT OF APPEALS, BRAULIO ABAD AND CAMARO PAINT MANUFACTURING ENTERPRISES, INC., RESPONDENTS.

Cu versus Court of Appeals

The Case

This is a petition for review on certiorari brought by Vicente Cu against the Court of Appeals, Braulio Abad, and Camaro Paint Manufacturing Enterprises, Incorporated. Cu sued for a sum of money and for accounting, claiming the one percent royalty promised to him when he sold his paint business. The respondents resisted, insisting that their consent to the royalty stipulation was vitiated by fraud. The case matters because it is the classic illustration of two rules a reviewee must command: the parol evidence rule, which treats a written contract as the law between the parties, and the exacting standard of proof for fraud as a ground for annulling a contract.

Procedural History

Cu, through his attorney-in-fact, filed a complaint for accounting and for payment of royalties with the Court of First Instance of Rizal. The trial court ruled in favor of Cu, ordering the respondents jointly and severally liable for the royalties due, requiring yearly certified accountings, and awarding attorney's fees, while dismissing the counterclaims. The respondents appealed to the then Intermediate Appellate Court, which affirmed the trial court in full. The respondents then moved for reconsideration, and the appellate court, in a resolution issued in September 1985, set aside its own decision, reversed the trial court, dismissed Cu's complaint, and even ordered Cu to refund eighty thousand pesos with interest and to pay attorney's fees. Cu's motion for reconsideration was denied in July 1986. Cu then came to the Supreme Court by petition for review on certiorari.

Facts

Vicente Cu did business as Camaro Enterprises, manufacturing and selling acrylic paints under the registered trademark McGill's. In February 1971, in anticipation of migrating to Canada, he sold the business to Braulio Abad for one hundred fifty thousand pesos. The contract of sale carried a stipulation granting Cu a one percent royalty on the gross sales of all the paints, and it required the vendee to submit yearly royalty payments together with a statement certified by an independent certified public accountant.

Abad later transferred all his rights to Camaro Paint Manufacturing Enterprises, Incorporated, which used the McGill's trademark with labels mentioning a formula provided by John Meek and Associates of Chicago. After martial law was declared, firms were required to prove foreign tie-ups. Abad wrote Cu asking for the contract and registration papers with Meek and Associates, warning that without them he could not remit the royalty. Cu never replied, though Camaro still provided for royalties in its financial statements for the years 1971 to 1973.

In 1974, Cu's attorney-in-fact demanded payment of the royalties. Abad replied that the royalty was meant to cover Cu's work abroad in securing the licensing papers, an arrangement he said was verbally agreed upon. No settlement was reached, so Cu sued. The respondents claimed the contract failed to express their true intent, that the sale included a tie-up with Meek and Associates, and that the royalty was void for want of valid consideration.

Issues

• Whether or not the appellate court's decision of May 1984 had already become final and executory because the fifteen-day period to file a motion for reconsideration cannot be extended.
• Whether or not the appellate court erred in holding that Cu employed fraud that effectively severed the binding terms of the contract of sale.

Applicable Provisions

Section 7 of Rule 130 of the Rules of Court, the parol evidence rule, provides:

Section 7. Evidence of Written Agreements. When the terms of an agreement have been reduced to writing, it is to be considered as containing all such terms, and, therefore, there can be, between the parties and their successors in interest, no evidence of the terms of the agreement other than the contents of the writing, except in the following cases: a) When a mistake or imperfection of the writing or its failure to express the true intent and agreement of the parties, or the validity of the agreement is put in issue by the pleadings; b) Where there is an intrinsic ambiguity in the writing.

This rule bars the respondents from adding contemporaneous conditions not found in the writing, unless they first prove fraud or mistake.

Article 1338 of the Civil Code defines the fraud relied upon by the respondents:

There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to.

This is the standard the respondents had to meet, and it is the provision against which their evidence failed.

Ruling

On the first issue, the Court declined to dwell on finality. It held that the Habaluyas ruling, which forbade extensions of the fifteen-day period, was given prospective application and applied only after June 1986, so it was not yet strictly enforced when the questioned motions for extension were filed. The Court chose, in the interest of justice, to resolve the second issue, which it found meritorious.

On the second issue, the Court held that no fraud vitiated Abad's consent. A contract is the law between the parties and is deemed to contain all their agreements. Parol evidence cannot incorporate additional contemporaneous conditions not mentioned in the writing unless fraud or mistake is shown. Allegations of fraud, the Court stressed, must be established by clear and convincing evidence, and mere preponderance is not enough. The respondents failed to meet this standard. The certification that Meek and Associates was a non-entity and the certification that Cu lacked a mayor's permit did not prove that the contract failed to reflect the parties' true intent. Abad himself admitted that he saw no necessity for the Meek contract until Presidential Decree Number 49 was issued. The Court concluded that the allegations of fraud were devices to avoid paying the royalty, and that had the respondents truly meant to nullify the stipulation, they would have sued to annul it upon learning of the supposed defect, instead of waiting to be sued.

Doctrine

A written contract is the law between the parties and is presumed to contain all their agreements. Under the parol evidence rule, no evidence of other terms is admissible, except where mistake, imperfection, failure to express the true intent, or the validity of the agreement is put in issue by the pleadings, or where there is an intrinsic ambiguity. Fraud under Article 1338 of the Civil Code must be proved by clear and convincing evidence, not mere preponderance. A party who claims that a stipulation was obtained through fraud cannot simply raise it as a defense; the failure to promptly sue for annulment, coupled with conduct inconsistent with the claim, betrays that the allegation is a mere afterthought to escape a valid obligation.

Disposition

The Supreme Court granted the petition, reversed and set aside the appellate resolutions, reinstated the May 1984 decision in favor of Cu, and taxed the costs against the private respondents.

Remember This

Memorize this line: fraud must be proved by clear and convincing evidence, and a written contract is the law between the parties. Examiners use this case to test the parol evidence rule and the quantum of proof for fraud in the annulment of contracts.