CASE DIGEST : GOTESCO PROPERTIES v. VICTOR C. CUA GR No. 228513, Feb 15, 2023 GAERLAN

FACTS : Sometime in 1994, Cua entered into four 20-year prepaid lease contracts with Gotesco for commercial units in Ever-Gotesco Commonwealth Center, where he operated two jewelry stores and two amusement centers. Aside from prepaid rent, the contracts required Cua to pay Common Area and Airconditioning Dues (CAAD) for the use of common facilities. Clause 17 of the lease agreements fixed the CAAD at P4.25 per square meter per day and provided for an 18% annual compounded escalation beginning in 1995, or "at a rate to be determined by the LESSOR if said dues shall not be sufficient to meet inflation, peso devaluation, and other escalation in utility and maintenance costs." From 1997 to 2003, Gotesco imposed escalating CAAD charges totaling P2,269,735.64. After Cua's written protests were rejected, he filed a complaint for injunctive relief, restitution, and damages, arguing that the unilateral escalation was invalid.

The RTC ultimately ruled in favor of Cua, holding that the escalation clause violated the principle of mutuality of contracts under Article 1308 of the Civil Code because it allowed Gotesco to unilaterally determine the CAAD escalation without Cua's consent. The RTC permanently enjoined Gotesco from imposing the escalated CAAD unless mutually agreed upon, ordered the return of P2,269,735.64 with 6% legal interest, and awarded P500,000.00 as attorney's fees. On appeal, the CA partly reversed the RTC, holding that the fixed 18% annual escalation expressly stipulated in the lease contracts was valid, while only the portion allowing Gotesco to determine a higher rate based on inflation or other factors without Cua's consent violated the principle of mutuality of contracts. It ordered the recomputation of the refundable amount after applying the valid 18% escalation, deleted the award of attorney's fees, and remanded the case to the RTC for proper computation. Both parties elevated the case to the Supreme Court through separate petitions for review, which were later consolidated.

ISSUE : WON RTC is correct

HELD : The Supreme Court granted Cua’s petition and denied Gotesco’s, holding that the CAAD (Common Area and Aircon Dues) escalation clause was void for violating the principle of mutuality of contracts under Article 1308 of the Civil Code, which prohibits leaving the fulfillment or modification of a contract solely to the will of one party. While parties are free to stipulate contract terms under Article 1306 of the Civil Code, modifications affecting material provisions—such as interest or escalation rates—require the mutual consent of both parties. The Court emphasized that interest or escalation clauses are valid only if they do not grant one party the unilateral and unrestricted power to determine the applicable rate. Here, Clause 17 allowed Gotesco to impose an 18% escalation or any rate it deemed appropriate whenever it believed the CAAD was insufficient to cover inflation, peso devaluation, or increased maintenance costs, effectively giving Gotesco exclusive authority to alter the financial obligations of the lease without Cua’s assent.

The Court rejected the Court of Appeals’ interpretation that the clause merely imposed a fixed 18% escalation absent inflation. Instead, it held that the clause was entirely potestative, allowing Gotesco to determine whatever rate it wished whenever it claimed the stated conditions existed. Gotesco failed to present competent evidence proving that inflation, peso devaluation, or increased utility and maintenance costs actually justified the increases, relying instead on generalized references to the Asian financial crisis and requesting the Court to take judicial notice thereof. Citing Citibank v. Sabeniano, the Court ruled that extraordinary inflation or economic conditions cannot be presumed and must be proven by competent evidence. Testimony from Gotesco’s mall operations head further revealed that the escalation rates were arbitrarily computed, included expenses not contemplated by the contract, and were imposed years before tenants were even formally notified. Consequently, the Court ordered Gotesco to refund ₱2,269,735.64 representing the improperly collected escalation charges, with 6% legal interest per annum from the finality of the decision until full payment, and directed that the CAAD be recomputed using the original contractual rate of ₱4.25 per square meter per day under the first paragraph of Clause 17.

The Court likewise reinstated Cua’s entitlement to attorney’s fees, although it reduced the amount from ₱500,000 to ₱100,000 pursuant to Article 2208 of the Civil Code, which allows recovery of attorney’s fees when a party is compelled to litigate to protect his rights or when equitable considerations justify such award. The Court found that Cua was forced to endure more than nine years of litigation involving multiple provisional remedies, judicial inhibitions, discovery proceedings, and voluminous pleadings because of Gotesco’s insistence on enforcing a clearly void escalation clause despite lacking factual basis. Considering the complexity, duration, and expenses incurred in the litigation, the Court held that an award of attorney’s fees was justified, but reduced it to an amount deemed more reasonable and equitable under the circumstances.