Tuesday, April 26, 2016

Compromise agreement; remedies when a party fails/refuses to perform; Art. 2041 Civil Code

CRISANTA ALCARAZ MIGUEL VS. JERRY D. MONTANEZ, G.R. No. 191336, January 25, 2012. 

“x x x.

Because the respondent failed to comply with the terms of the Kasunduang Pag-aayos, said agreement is deemed rescinded pursuant to Article 2041 of the New Civil Code and the petitioner can insist on his original demand. Perforce, the complaint for collection of sum of money is the proper remedy.

The petitioner contends that the CA erred in ruling that she should have followed the procedure for enforcement of the amicable settlement as provided in the Revised Katarungang Pambarangay Law, instead of filing a collection case. The petitioner points out that the cause of action did not arise from the Kasunduang Pag-aayos but on the respondent’s breach of the original loan agreement.[1]

This Court agrees with the petitioner.

It is true that an amicable settlement reached at the barangay conciliation proceedings, like the Kasunduang Pag-aayos in this case, is binding between the contracting parties and, upon its perfection, is immediately executory insofar as it is not contrary to law, good morals, good customs, public order and public policy.[2] This is in accord with the broad precept of Article 2037 of the Civil Code, viz:

A compromise has upon the parties the effect and authority of res judicata; but there shall be no execution except in compliance with a judicial compromise.

Being a by-product of mutual concessions and good faith of the parties, an amicable settlement has the force and effect of res judicata even if not judicially approved.[3] It transcends being a mere contract binding only upon the parties thereto, and is akin to a judgment that is subject to execution in accordance with the Rules.[4] Thus, under Section 417 of the Local Government Code,[5] such amicable settlement or arbitration award may be enforced by execution by the Barangay Lupon within six (6) months from the date of settlement, or by filing an action to enforce such settlement in the appropriate city or municipal court, if beyond the six-month period.

Under the first remedy, the proceedings are covered by the Local Government Code and the Katarungang Pambarangay Implementing Rules and Regulations. The Punong Barangay is called upon during the hearing to determine solely the fact of non-compliance of the terms of the settlement and to give the defaulting party another chance at voluntarily complying with his obligation under the settlement. Under the second remedy, the proceedings are governed by the Rules of Court, as amended. The cause of action is the amicable settlement itself, which, by operation of law, has the force and effect of a final judgment.[6]

It must be emphasized, however, that enforcement by execution of the amicable settlement, either under the first or the second remedy, is only applicable if the contracting parties have not repudiated such settlement within ten (10) days from the date thereof in accordance with Section 416 of the Local Government Code. If the amicable settlement is repudiated by one party, either expressly or impliedly, the other party has two options, namely, to enforce the compromise in accordance with the Local Government Code or Rules of Court as the case may be, or to consider it rescinded and insist upon his original demand. This is in accord with Article 2041 of the Civil Code, which qualifies the broad application of Article 2037, viz:

If one of the parties fails or refuses to abide by the compromise, the other party may either enforce the compromise or regard it as rescinded and insist upon his original demand.

In the case of Leonor v. Sycip,[7] the Supreme Court (SC) had the occasion to explain this provision of law. It ruled that Article 2041 does not require an action for rescission, and the aggrieved party, by the breach of compromise agreement, may just consider it already rescinded, to wit:

It is worthy of notice, in this connection, that, unlike Article 2039 of the same Code, which speaks of “a cause of annulment or rescission of the compromise” and provides that “the compromise may be annulled or rescinded” for the cause therein specified, thus suggesting an action for annulment or rescission, said Article 2041 confers upon the party concerned, not a “cause” for rescission, or the right to “demand” the rescission of a compromise, but the authority, not only to “regard it as rescinded”, but, also, to “insist upon his original demand”. The language of this Article 2041, particularly when contrasted with that of Article 2039, denotes that no action for rescission is required in said Article 2041, and that the party aggrieved by the breach of a compromise agreement may, if he chooses, bring the suit contemplated or involved in his original demand, as if there had never been any compromise agreement, without bringing an action for rescission thereof. He need not seek a judicial declaration of rescission, for he may “regard” the compromise agreement already “rescinded”[8]. (emphasis supplied)

As so well stated in the case of Chavez v. Court of Appeals,[9] a party’s non-compliance with the amicable settlement paved the way for the application of Article 2041 under which the other party may either enforce the compromise, following the procedure laid out in the Revised Katarungang Pambarangay Law, or consider it as rescinded and insist upon his original demand. To quote:

In the case at bar, the Revised Katarungang Pambarangay Law provides for a two-tiered mode of enforcement of an amicable settlement, to wit: (a) by execution by the Punong Barangay which is quasi-judicial and summary in nature on mere motion of the party entitled thereto; and (b) an action in regular form, which remedy is judicial. However, the mode of enforcement does not rule out the right of rescission under Art. 2041 of the Civil Code. The availability of the right of rescission is apparent from the wording of Sec. 417 itself which provides that the amicable settlement “may” be enforced by execution by the lupon within six (6) months from its date or by action in the appropriate city or municipal court, if beyond that period. The use of the word “may” clearly makes the procedure provided in the Revised Katarungang Pambarangay Law directory or merely optional in nature.

Thus, although the “Kasunduan” executed by petitioner and respondent before the Office of the Barangay Captain had the force and effect of a final judgment of a court, petitioner’s non-compliance paved the way for the application of Art. 2041 under which respondent may either enforce the compromise, following the procedure laid out in the Revised Katarungang Pambarangay Law, or regard it as rescinded and insist upon his original demand. Respondent chose the latter option when he instituted Civil Case No. 5139-V-97 for recovery of unrealized profits and reimbursement of advance rentals, moral and exemplary damages, and attorney’s fees. Respondent was not limited to claiming P150,000.00 because although he agreed to the amount in the “Kasunduan,” it is axiomatic that a compromise settlement is not an admission of liability but merely a recognition that there is a dispute and an impending litigation which the parties hope to prevent by making reciprocal concessions, adjusting their respective positions in the hope of gaining balanced by the danger of losing. Under the “Kasunduan,” respondent was only required to execute a waiver of all possible claims arising from the lease contract if petitioner fully complies with his obligations thereunder. It is undisputed that herein petitioner did not.[10] (emphasis supplied and citations omitted)

In the instant case, the respondent did not comply with the terms and conditions of the Kasunduang Pag-aayos. Such non-compliance may be construed as repudiation because it denotes that the respondent did not intend to be bound by the terms thereof, thereby negating the very purpose for which it was executed. Perforce, the petitioner has the option either to enforce the Kasunduang Pag-aayos, or to regard it as rescinded and insist upon his original demand, in accordance with the provision of Article 2041 of the Civil Code. Having instituted an action for collection of sum of money, the petitioner obviously chose to rescind the Kasunduang Pag-aayos. As such, it is error on the part of the CA to rule that enforcement by execution of said agreement is the appropriate remedy under the circumstances.

Considering that the Kasunduang Pag-aayos is deemed rescinded by the non-compliance of the respondent of the terms thereof, remanding the case to the trial court for the enforcement of said agreement is clearly unwarranted.

X x x.”