Obligations with a Penal Clause

New World Developers and Management Inc. vs. AMA Computer

Learning Center, Inc.
G.R. No. 187930 & 188250, 23 February 2015

Facts:
1. New World Developers (NWD) owns a commercial building in
Sampaloc, Manila. In 1998, it entered into a contract of lease
with AMA for a period of eight years (15 June 1998-14 March
2006)
a. AMA paid P450k as advance rental and another P450k as
security deposit.
2. AMA religiously paid rentals for the first three years. In 2002, it
requested the deferment of the annual increase in monthly rent
due to financial constraints.
a. NWD agreed to reduce the escalation rate by 50% for the
next six months.
b. AMA again requested an adjustment the following year.
The parties executed an addendum to the lease
agreement, whereby NWD granted a 45% of the monthly
rate and 5% reduction of the escalation rate.
3. On the evening of 6 July 2004, AMA removed all of its
equipment from the premises and informed NWD the following
day that it was preterminating the lease due to drastic decline
in enrollments.
a. AMA also demanded the refund of the advance rental and
security deposit.
4. NWD replied with a Statement of Account indicating the ff.
amounts due:
a. Unpaid two months’ rental – P466,620;
b. 3% monthly interest for unpaid rent – P67,426.59;
c. Liquidated damages – P1,399,860
d. Damage to the premises – P15,580
5. NWD then filed a suit for sum of money before the RTC of
Marikina.
a. RTC: ordered AMA to pay the ff. amounts: unpaid rentals
plus 3% interest; liquidated damages, with the advance
and security deducted therefrom; damage to the premises;
attorney’s fees; costs.
6. On appeal to the CA: It ruled that the RTC erred in imposing the
3% penalty because there was not stipulation in the Contract of
Lease or in the Addendum.
a. It also reduced the liquidated damages on the basis that
courts may equitably reduce penalties according to its
sound discretion.
 b. It likewise deleted the award for damage to the premises,
as there was no proof. Attorney’s fees was also deleted for
lack of justification.
7. Hence, this consolidated appeal of the parties.
a. NWD: parties may freely stipulate on the manner of
pretermination. Since AMA preterminated, it became
liable for liquidated damages. The manner of
pretermination also “smacked of gross bad faith”
b. AMA: there was compensation between the unpaid rentals
and the advance rentals that it paid. Moreover, there is no
basis for interest and that liquidated damages should be
further reduced.
Issue: Is AMA liable to pay six months’ worth of rent as liquidated
damages?
Held: Yes
Ratio:
1. The Contract of Lease states:
a. “That [AMA] may pre-terminate this Contract of Lease by
notice in writing to [New World] at least six (6) months
before the intended date of pre-termination, provided,
however, that in such case, [AMA] shall be liable to [New
World] for an amount equivalent to six (6) months current
rental as liquidated damages”
2. AMA never denied liability for the payment of liquidated
damages. What it claims is that it is entitled to the reduction of
the amount due to its serious business losses.
3. The SC ruled that the law does not relieve a party from the
consequences of a contract it entered into with all the required
formalities.
4. A contract is the law between the parties. It will be strictly
enforced by the courts, unless shown to be contrary to law,
morals, good customs, public order, or public policy.
5. Ligutan v CA: penalties may be equitably reduced depending on
factors to be appreciated by the court.
6. In this case, the pretermination was attended by the following
circumstances:
a. It preterminated the lease without notifying NWD at least
6 mos prior
b. It removed all of its premises in the middle of the night
c. Only after such removal that it gave a notice of
pretermination
d. It had “the gall to demand a full refund” of the advance
and security without prejudice to the damage it
introduced to the premises
Issue: Did AMA remain liable for the rental arrears?
Held: No
Ratio:
1. Unlike the security, the advance was not meant to be refunded
to AMA. Upon pretermination, it retained its purpose of
answering for the outstanding amounts that AMA may owe
NWD.
2. At the time of the pretermination, the two-month arrears
ampunted to P466, 620. Applying the P450k security, the
balance in arrears would be P16,620.
a. Its total liability to NWD is P1,416,480. Applying the
advance of P450k, there would be a total extinguishment
of the liability for unpaid rentals and a partial
extinguishment of the liability for liquidated damages.
b. This shall leave AMA still liable for the total of P966,480.
3. Applying Eastern Shipping, the applicable interest is 6% pa
from 12 July 2004 (time of the extrajudicial demand) up to the
finality of this Decision. After which, Nacar shall apply, at the
rate of 6% pa until staisfaciton.

Disposition: CA affirmed with modification.