In a contract dispute between the Government Service Insurance System (GSIS) and the spouses Deang, the Supreme Court ruled that GSIS was liable for damages due to its failure to return the owner’s duplicate title after the spouses had fully paid their loan. Even though GSIS was found to have acted in good faith, its negligence in not returning the title caused financial loss to the spouses, making it liable for temperate damages. This case clarifies that even without malicious intent, an obligor is responsible for the natural and probable consequences of failing to fulfill contractual obligations.

Lost Title, Lost Opportunity: Assigning Liability in Contractual Obligations

This case originates from a loan agreement between spouses Gonzalo and Matilde Labung-Deang and the Government Service Insurance System (GSIS). The spouses obtained a housing loan of P8,500.00 in December 1969, secured by a real estate mortgage on their property. As required, they deposited the owner’s duplicate copy of their title with GSIS. In January 1979, the spouses fully settled their debt and requested the return of their title, intending to use it as collateral for a new loan. However, GSIS was unable to locate the title.

Despite diligent searching, the title remained missing, prompting GSIS to initiate reconstitution proceedings. A certificate of release of mortgage was issued in June 1979, and a reconstituted title was eventually released to the spouses. Subsequently, the spouses filed a complaint for damages, claiming the delay prevented them from securing a loan for house renovations and business investments. The trial court ruled in favor of the spouses, finding GSIS negligent in losing the title. This decision was affirmed by the Court of Appeals, leading GSIS to appeal to the Supreme Court, questioning whether it, as a GOCC, should be liable for the negligence of its employees.

GSIS argued that as a GOCC, it should be considered part of the State and therefore not vicariously liable for the negligence of its employees under Article 2180 of the Civil Code, which states:

“The State is responsible in like manner when it acts though a special agent, but not when the damage has been caused by the official to whom the task done properly pertains, in which case what is provided in Article 2176 shall be applicable.”

However, the Supreme Court disagreed with the application of Article 2180. The Court clarified that the spouses’ claim was not based on quasi-delict (negligence without a pre-existing contract), but rather on a breach of contractual obligation. Article 2176 of the Civil Code defines quasi-delict as:

“Whoever by act or omission causes damages to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.”

Since a pre-existing loan agreement and mortgage existed between the parties, the relevant provisions were Articles 1170 and 2201 of the Civil Code. Article 1170 states:

“Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those who in any manner contravene the tenor thereof are liable for damages.”

And Article 2201 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 xxx.”

Building on this legal framework, the Supreme Court presumed GSIS acted in good faith but acknowledged their failure to return the title constituted a breach of contract. As a result, GSIS was liable for the natural and probable consequences of this breach. The spouses’ inability to secure a loan was directly linked to the missing title. The Court then assessed the appropriate amount of damages. Moral damages were not awarded due to the absence of fraud, malice, or bad faith. Actual damages also lacked factual basis because they weren’t proven by clear evidence. However, the Court recognized the financial damage suffered by the spouses due to the lost title, justifying an award of temperate damages. Article 2224 of the Civil Code defines temperate damages:

“Temperate or moderate damages, which are more than nominal but less than compensatory damages, may be recovered when the court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved with certainty.”

The award of P20,000.00 in temperate damages was deemed reasonable, considering that GSIS bore the cost of reconstituting the title. However, the Court addressed the issue of attorney’s fees, noting that such fees are generally not recoverable as damages unless justified by factual, legal, and equitable reasons. Finding no such justification in this case, the award of attorney’s fees was deleted. The Supreme Court ultimately denied GSIS’s petition, affirming the Court of Appeals’ decision with the modification that the award of attorney’s fees was removed. This case illustrates the importance of fulfilling contractual obligations promptly and the potential liability for damages arising from the failure to do so, even in the absence of bad faith.

FAQs

What was the key issue in this case?	The key issue was whether GSIS was liable for damages for failing to return the owner’s duplicate title to the spouses Deang after they had fully paid their loan, even though GSIS acted in good faith.
What is the difference between quasi-delict and breach of contract?	Quasi-delict involves negligence where there is no pre-existing contractual relationship, while breach of contract arises from the failure to fulfill obligations outlined in a contract.
What are temperate damages?	Temperate damages are awarded when some pecuniary loss has been suffered, but the exact amount cannot be proven with certainty. They are more than nominal but less than compensatory damages.
Why were moral damages not awarded in this case?	Moral damages were not awarded because there was no evidence of fraud, malice, or bad faith on the part of GSIS in failing to return the title.
Under what circumstances can attorney’s fees be awarded?	Attorney’s fees can be awarded as damages only when there is factual, legal, and equitable justification, and not as a matter of course in every case.
What Civil Code articles apply in this case?	The key articles are Articles 1170 (liability for fraud, negligence, or delay), 2201 (damages for obligor acting in good faith), and 2224 (temperate damages) of the Civil Code.
Was GSIS considered part of the State for purposes of liability?	No, the Supreme Court clarified that GSIS’s liability was not based on its status as a GOCC or part of the State, but on its contractual obligation to return the title.
What was the effect of GSIS acting in good faith?	Because GSIS acted in good faith, it was only liable for the natural and probable consequences of its breach, not for speculative or unforeseen damages.

This case serves as a reminder that contractual obligations must be fulfilled with diligence, and failure to do so can result in liability for damages, even in the absence of bad faith. It underscores the importance of institutions like GSIS being meticulous in handling important documents entrusted to them by their clients.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: GOVERNMENT SERVICE INSURANCE SYSTEM vs. SPOUSES GONZALO AND MATILDE LABUNG-DEANG, G.R. No. 135644, September 17, 2001