The Supreme Court, in Union Refinery Corporation v. Reynaldo C. Tolentino, Sr., affirmed that contracts bind only the parties who entered into them, including their heirs and assigns. The Court also addressed the proper computation of the debt owed, clarifying which payments should be credited and adjusting the interest rates based on the stipulations in the contract. This decision underscores the importance of honoring contractual agreements while ensuring fairness in the computation of financial obligations.

Unraveling Unioil’s Dealership Dispute: Who’s Bound by the Contract?

Union Refinery Corporation (URC), owner of the brand name “Unioil,” appointed Roland B. Tolentino as its authorized dealer in Quezon province and the Bicol region through a Memorandum of Agreement (MOA). As security for his accountabilities, Roland was to provide a bond or mortgage. His brothers, Rex and Reynaldo, Jr., executed chattel mortgages on their vehicles in favor of URC. Roland was granted a credit line of P600,000.00. Roland’s father, Reynaldo, Sr., managed the dealership under a Special Power of Attorney. While payments were initially regular, Roland allegedly exceeded his credit line, leading to a restructuring of his credit and supplies sourced through ACOBI Resources Corporation, a URC subsidiary.

Roland’s UCPB check used to settle May 1987 purchases bounced, resulting in URC filing a case for violation of the Bouncing Checks Law, though Roland was acquitted. URC claimed Roland’s debt had ballooned to P2,555,362.34, leading to the termination of the dealership on August 24, 1987. When demands for payment went unheeded, URC filed a collection suit with preliminary attachment against Roland, also including his parents and siblings as co-defendants. The spouses Reynaldo, Sr., and Lucia Tolentino were included for allegedly securing the dealership, while Reynaldo, Jr., and Rex were sued due to the chattel mortgages on their vehicles. Marylou B. Tolentino, Roland’s sister, was later included for allegedly concealing the mortgaged vehicles.

The trial court initially sided with the Tolentino family, dismissing URC’s complaint. However, the Court of Appeals partially reversed this decision, holding only Roland liable for a reduced sum of P1,541,211.51, with a 6% interest rate from the date of judgment. Dissatisfied, URC appealed to the Supreme Court, questioning the limited liability, the reduced debt amount, the interest calculation, and the award of damages to Lucia and Marylou Tolentino. The Supreme Court then reviewed the factual findings of the Court of Appeals, leading to a re-examination of the debt computation and applicable interest.

The Supreme Court emphasized the principle of relativity of contracts, found in Article 1311 of the Civil Code, stating:

Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent.

Building on this principle, the Court affirmed the appellate court’s decision that only Roland was bound by the MOA. It then addressed the factual dispute regarding the amount owed. The Court of Appeals had determined that Roland made P1,002,010.50 in unrecorded payments. While the appellate court credited P364,464.39 from customer checks to Roland, the Supreme Court found that the actual uncredited amount was P412,683.39. This increased the total balance before interest to P1,905,675.90.

The Court rejected Roland’s claim of additional unrecorded payments, reiterating that the burden of proving payment lies with the debtor. This principle is especially important in business transactions, where proper documentation is expected. The court emphasized that the absence of receipts for payments made is an unlikely scenario.

Regarding the applicable interest, URC invoked the MOA, which stipulated a 2½% monthly interest on unpaid invoices, and the Deeds of Chattel Mortgage, which provided for 25% liquidated damages and 10% special liquidated damages. The Court recognized that contracts are the law between the parties, and their stipulations should be upheld unless their validity is challenged. Therefore, since the MOA was valid, the interest should apply. Although the Court affirmed the applicability of these interests, it clarified that the 2½% monthly interest could not be applied retroactively to the entire debt from August 24, 1987, because the obligation accrued over time.

Finally, the Court addressed the P25,000.00 damages awarded to Lucia B. Tolentino and Marylou B. Tolentino. The Court found that these respondents were not sued in bad faith. They were included in the suit to protect the rights of the petitioner. Consequently, the Court removed the damages award as there was no basis to make the award.

FAQs

What was the key issue in this case?	The key issue was determining the extent of Roland Tolentino’s liability to Union Refinery Corporation under the Memorandum of Agreement, as well as the applicability of interest and damages. The court clarified who was bound by the contract and how the debt should be computed.
Who was held liable in this case?	The Supreme Court affirmed the Court of Appeals’ decision that only Roland B. Tolentino was liable to Union Refinery Corporation under the Memorandum of Agreement. The other family members were not parties to the contract and therefore not bound by its terms.
What was the final amount of debt determined by the court?	The Supreme Court modified the Court of Appeals’ decision, increasing the debt owed by Roland B. Tolentino to P1,905,675.90. This adjustment reflected a more accurate accounting of payments made by Roland.
What interest rates were applied to the debt?	The Court applied the liquidated interest at 25% and special liquidated interest at 10% as stipulated in the Memorandum of Agreement and Deeds of Chattel Mortgage. The Court held that contracts are the law between the parties and should be upheld unless challenged.
Were damages awarded to any of the respondents?	No, the Supreme Court reversed the Court of Appeals’ decision to award damages to Lucia B. Tolentino and Marylou B. Tolentino. The Court found no evidence that they were sued in bad faith.
What is the principle of relativity of contracts?	The principle of relativity of contracts, as enshrined in Article 1311 of the Civil Code, states that contracts bind only the parties who entered into them, their heirs, and assigns. It means that a contract cannot impose obligations or confer rights on someone who is not a party to it.
Who has the burden of proving payment?	The party claiming to have made a payment has the burden of proving it. In this case, Roland B. Tolentino had the burden of proving that he made payments that were not recorded by Union Refinery Corporation.
Why was it important that there was a written contract?	The written contract (Memorandum of Agreement) was crucial because it specified the terms and conditions of the dealership, including the obligations of both parties. It allowed the court to determine the extent of Roland Tolentino’s liability and the applicable interest rates.

This case clarifies the limits of contractual obligations, emphasizing that contracts primarily bind the parties involved. It also highlights the importance of upholding contractual stipulations, such as interest rates, unless they are challenged for validity. The decision serves as a reminder to properly document all transactions and payments to avoid disputes.

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: Union Refinery Corporation vs. Reynaldo C. Tolentino, Sr., G.R. No. 155653, September 30, 2005