Tuesday, December 8, 2015

Extrajudicial rescission of contract and due process of law

SANGGUNIANG PANLUNGSOD NG BAGUIO CITY vs. JADEWELL PARKING SYSTEMS CORPORATION, G.R. No. 160025, April 23, 2014; with companion cases: GR 163052; G.R. No. 164107; G.R. No. 165564; G.R. No. 172215; G.R. No. 172216; G.R. No. 173043; G.R. No. 174879; G.R. No. 181488. 

“x x x.

b. On the denial of due process.

X x x.

From the above, the following are clear: (1) that the City of Baguio decided on the privatization of the administration of parking for environmental and peace and safety reasons, both of which are within its powers under Section 458(A)(5)(v) and (vi) of the Local Government Code; and (2) that the terms of agreement between the City of Baguio and Jadewell involve the delegation of governmental functions in terms of regulating the designation and use of parking spaces as well as the collection of fees for such use. These are indicators that any privatization contract pursuant to the above Resolution takes the essential character of a franchise because what is being privatized is a government-monopolized function.

It would thus be relevant to ask if there is a provision in the applicable laws or the franchise (MOA) that grants the City of Baguio the right to revoke the latter either at will, or upon the satisfaction of certain conditions, such that ordinary due process protection can be considered to have been waived by the franchisee. We must caution that when we refer to revocation at will here, we are referring to the revocation of resolutory, not suspensive, obligations.147

We have looked closely at Resolution No. 003-2000 and the MOA and have additionally reflected on the applicable provision under the Civil Code. We have come to the conclusion that:

(a) There is only one provision that allows for unilateral revocation of the MOA, which can be found in Section 9 thereof:

9. Minimum Guaranty – The FIRST PARTY guaranties (sic) a minimum period of five (5) years against rescission; provided that after such period, the parties may agree to increase to a reasonable rate the parking fees and the share of the city from the parking fees collected as provided for in the guidelines, (Annex "B");

(b) This Section 9 requires that five years must have lapsed – presumably from the date of execution of the MOA – before the unilateral right to revoke the MOA can be exercised;

(c) Therefore, before the five year period has lapsed, the right to revoke the MOA arises only under Article 1191 of the Civil Code, which reads:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.

From the above, it appears that in order to effect a valid revocation of the MOA prior to the lapse of the 5-year period provided for in Section 9, the City of Baguio had to approach the problem from one or both of two perspectives: one, negotiate the termination of the MOA with Jadewell, or two, exercise its option under Article 1191 of the Civil Code.

The first option, a negotiated pretermination of the contract, is an inherent right of every party in a contract. This can be inferred from the freedom of the parties to contract and modify their previous covenants provided it would not be contrary to law, morals, good customs, public order or public policy.148 Despite the provision on the minimum warranty against rescission stipulated in the MOA, the parties were not constrained to mutually modify such restriction. The Sanggunian could have proposed to Jadewell the possibility of lifting the warranty against rescission subject to the condition that the latter will comply with its obligations under the MOA.

This scenario could have impressed upon Jadewell that its contractual relations with the city government of Baguio were less than ideal. The suggested approach for the Sanggunian could have been legally sound and practical. Obviously, this was not done in this case; thus, Jadewell’s Complaint before the RTC of Baguio City.

The second option is the exercise of the unilateral right to rescind a bilateral contract on the part of a party who believes that it has been injured by a breach substantial enough to warrant revocation. Where one party allegedly failed to comply with his obligations under a contract, the injured party may rescind the obligation if the other does not perform or is not ready and willing to perform.149 We will examine the acts of Baguio City in relation to what is allowed under Article 1191.

Rescission under Article 1191 takes place through either of two modes: (1) through an extrajudicial declaration of rescission; or (2) upon the grant of a judicial decree of rescission.

Extrajudicial declaration of rescission is recognized as a power which does not require judicial intervention.150 If the rescission is not opposed, extrajudicial declaration of rescission produces legal effect151 such that the injured party is already relieved from performing the undertaking.152

However, the power of declaring extrajudicial rescission conferred upon the injured party is regulated by the Civil Code. If the extrajudicial rescission is impugned by the other party, it shall be subject to a judicial determination153 where court action must be taken, and the function of the court is to declare the rescission as having been properly or improperly made, or to give a period within which the debtor must perform the obligation alleged to be breached.154 A unilateral cancellation of a contract may be questioned in courts by the affected party to determine whether or not cancellation is warranted.155Thus, in an extrajudicial decree of rescission, revocation cannot be completely exercised solely on a party’s own judgment that the other has committed a breach of the obligation156 but always subject to the right of the other party to judicially impugn such decision.

It is important to contextualize that the agreement entered into by the City of Baguio with Jadewell is the embodiment of a grant of franchise imbued with public interest and is not merely an agreement between two private parties.

It is our view that the first act of rescission by the City of Baguio may be valid even if there is a stipulation against it within the first five years of the MOA’s existence. Article 1191 of the New Civil Code provides a party the right to rescind the agreement and clearly overrides any stipulation to the contrary. However, the grounds that would serve as basis to the application of the said article must be clearly established.

In the exercise of this option under Article 1191, was it necessary for the City of Baguio to provide Jadewell an opportunity to air its side on the matter before the former implemented the rescission of the MOA? In the instant case, was Jadewell deprived of procedural due process?

We answer in the negative. We disagree with the rulings of the RTC and the CA that Jadewell was deprived of due process. In Taxicab Operators of Metro Manila v. The Board of Transportation,157 we confronted the issue of whether the petitioners were denied procedural due process when the respondent Board of Transportation issued a circular ordering the phasing out of old vehicles to be used as taxicabs. In the said case, the phase-out was embodied in a circular that was promulgated without holding a public hearing or at least requiring those affected to submit their position papers on the policy to be implemented. We held for the respondent Board, and ruled in this wise:

Dispensing with a public hearing prior to the issuance of the Circulars is neither violative of procedural due process. As held in Central Bank vs. Hon. Cloribel and Banco Filipino, 44 SCRA 307 (1972):

Previous notice and hearing as elements of due process, are constitutionally required for the protection of life or vested property rights, as well as of liberty, when its limitation or loss takes place in consequence of a judicial or quasi-judicial proceeding, generally dependent upon a past act or event which has to be established or ascertained. It is not essential to the validity of general rules or regulations promulgated to govern future conduct of a class or persons or enterprises, unless the law provides otherwise.

In the instant case, the assailed act by the Sanggunian Panlungsod in rescinding the MOA – be it first or second act of rescission – was clearly in the exercise of its legislative or administrative functions and was not an exercise of a judicial or quasi-judicial function. The Sanggunian Panlungsod does not possess any judicial or quasi-judicial functions. The preamble of the MOA lends support to this view. Evidently, the foremost reason why the agreement was entered into by the parties was to provide order, given Baguio City’s parking problems in identified areas, as well as to generate income.

The objectives of the Sanggunian Panlungsod, as well as its intention to rescind the MOA; because it deems to no longer serve the interest of the City of Baguio, are clearly an exercise of its legislative or administrative function. However, it is another matter as to whether the City of Baguio was able to clearly establish the grounds as basis for the exercise of its right to rescind.

X x x.”