In Lorenzo Shipping Corporation v. Villarin, the Supreme Court clarified the limits of provisional remedies like preliminary attachment and deposit orders, emphasizing that these cannot be applied indiscriminately against parties with no direct contractual relationship to the primary obligation. The Court held that these remedies, while powerful tools, must be exercised judiciously and in accordance with established legal principles, particularly the principle of privity of contract. This decision protects third parties from being unfairly subjected to legal processes arising from contracts they were not party to, ensuring fairness and due process in provisional remedy applications.

Navigating Troubled Waters: Can a Shipping Company Be Attached for Another’s Debt?

Lorenzo Shipping Corporation (LSC), an interisland shipping operator, found itself entangled in a legal battle stemming from a cargo handling contract with Cebu Arrastre and Stevedoring Services Corporation (CASSCOR). CASSCOR, in turn, had a separate agreement (MOA) with Florencio Villarin and Serafin Cabanlit to manage its arrastre and stevedoring operations for LSC’s vessels. When CASSCOR allegedly failed to remit Villarin and Cabanlit’s shares, they sued CASSCOR, its president Guerrero Dajao, and included LSC as a nominal defendant, seeking a writ of preliminary attachment against all parties. This raised a critical question: Can a party like LSC, which has no direct contractual relationship with the plaintiffs, be subjected to provisional remedies like attachment and deposit orders based on a contract between the plaintiffs and another party?

The Regional Trial Court (RTC) initially granted the writ of preliminary attachment, including LSC, based on the premise that LSC benefitted from Villarin’s services and was therefore implicated in the alleged fraud. The Court of Appeals (CA) upheld this decision, arguing that the complaint contained allegations of fraud against all defendants, including LSC, and that a contractual relationship wasn’t strictly necessary for the issuance of an attachment writ. However, the Supreme Court disagreed, emphasizing the importance of privity of contract. It cited Article 1311 of the New Civil Code, which states that contracts generally only bind the parties involved, their assigns, and heirs.

“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.”

Since LSC was not a party to the MOA between CASSCOR and Villarin, the Court found no basis to hold LSC liable for any alleged breach or fraud arising from that agreement. The Court emphasized that the provisional remedy of preliminary attachment is a harsh measure and must be strictly construed against the applicant. To justify an attachment based on fraud, the fraud must relate directly to the execution of the agreement between the parties. As the court emphasized, “To sustain an attachment [under this section], it must be shown that the debtor in contracting the debt or incurring the obligation intended to defraud the creditor. The fraud must relate to the execution of the agreement and must have been the reason which induced the other party into giving consent which he would not have otherwise given.”

Villarin argued that an implied trust existed between himself, LSC, and CASSCOR, suggesting that LSC held 73% of the amount payable to CASSCOR in trust for him. However, the Supreme Court dismissed this argument, stating that even if a constructive trust existed, it wouldn’t create a fiduciary relationship necessary to justify an attachment under Section 1(b) of Rule 57. The Court distinguished this case from Sta. Ines Melale Forest Products Corporation v. Macaraig, where a juridical relationship was established through the defendant’s wrongful act of cutting logs in the plaintiff’s timber license area. In contrast, LSC’s refusal to directly remit payments to Villarin was justified by the principle of privity of contract and could not be considered a wrongful act.

The Court also addressed the propriety of the Order to Deposit, which required LSC to deposit Php 10,297,499.59 under the joint account of CASSCOR and Villarin. While deposit orders can be valid provisional remedies under Rule 135, allowing courts to employ means to carry their jurisdiction into effect, they are not explicitly listed in Rules 57 to 61. The Court categorized provisional deposit orders into two types: those where the demandability of the money is uncontested, and those where a party regularly receives money from a non-party during the case. Here the Court was keen to establish that there must be an agreement or a juridical tie, which either binds the depositor-party and the party to be benefited by the deposit; or forms the basis for the regular receipt of payments by the depositor-party.

In cases like Eternal Gardens Memorial Parks Corp. v. First Special Cases Division, Intermediate Appellate Court and Reyes v. Lim, the depositor-party effectively resigned their interests over the amounts deposited. Similarly, in Go v. Go, Bustamante v. CA, and Province of Bataan, the depositor-parties regularly received rental payments based on lease agreements. The Court found that the deposit order against LSC did not fit into either category. LSC was not a party to the MOA, and the nature of the case allowed LSC to contest its liability. There was no juridical tie between LSC and Villarin that would justify a deposit order. As the court emphasizes in the case at bar, “involves a situation where the creditor seeks to attach properties of his debtor’s debtor, without establishing a juridical link between the two debts.”

The Supreme Court cautioned against the indiscriminate use of deposit orders when preliminary attachment is unavailable. The court stressed that the remedy of deposit is “a fair response to the exigencies and equities of the situation”, and it must be reserved only when the factual circumstances of the case call for its application. Without such a juridical tie, a deposit order would only amount to a circumvention of the rules on preliminary attachment and an unjust imposition on the alleged beneficiary who is not a party to the contract sought to be enforced.

FAQs

What was the key issue in this case?	The central question was whether a party with no direct contractual relationship to the plaintiff can be subjected to provisional remedies like attachment and deposit orders based on a contract between the plaintiff and another party.
What is a writ of preliminary attachment?	It is a provisional remedy where a court orders the seizure of a defendant’s property as security for a potential judgment in favor of the plaintiff. It prevents the defendant from disposing of assets during litigation.
What does “privity of contract” mean?	Privity of contract is a legal principle that states only parties to a contract are bound by its terms and can enforce its obligations. Third parties generally do not have rights or obligations under a contract.
What is a constructive trust?	A constructive trust is an equitable remedy imposed by a court to prevent unjust enrichment. It arises by operation of law, not by agreement, when someone holds property that they should not, in good conscience, retain.
What is a deposit order, as discussed in this case?	A deposit order is a provisional remedy where a court directs a party to deposit money or property into the court’s custody (custodia legis) pending the outcome of a case. This ensures restitution to the party ultimately deemed entitled to it.
Under what circumstances can a deposit order be issued?	Deposit orders are appropriate when the demandability of the money is uncontested, or when a party regularly receives money from a non-party during the case. A juridical tie or agreement between the parties is essential.
Why was the writ of attachment against LSC overturned?	The Supreme Court found that LSC had no direct contractual relationship with Villarin, the plaintiff, and therefore could not be held liable for any alleged fraud arising from the contract between Villarin and CASSCOR. Privity of contract was lacking.
Why was the deposit order against LSC overturned?	The Court held that the deposit order was inappropriate because there was no juridical tie between LSC and Villarin. The situation did not fall under either category where deposit orders are typically allowed.
What was the appellate court’s reasoning, and why did the Supreme Court disagree?	The appellate court believed that the complaint alleged fraud against all defendants, including LSC, and that privity of contract was not required. The Supreme Court disagreed, emphasizing the necessity of a direct contractual or juridical relationship for provisional remedies like attachment and deposit orders.

This case underscores the importance of adhering to fundamental legal principles when applying provisional remedies. The ruling protects parties from being unfairly targeted by legal processes arising from contracts to which they are not privy, ensuring a more equitable application of the law.

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: Lorenzo Shipping Corporation v. Florencio O. Villarin, G.R. Nos. 175727 & 178713, March 06, 2019