In a contract for services, the party who directly benefits from the service remains liable for payment, irrespective of a third-party’s actions, such as a government hold order. This ruling clarifies that a Bureau of Customs (BOC) hold order on goods does not absolve the consignee from their contractual obligations to pay storage fees to service providers like Asian Terminals Inc. (ATI). The Supreme Court emphasized that contracts bind only the parties involved, and the BOC’s regulatory action does not alter the private agreement between the consignee and the service provider. This decision underscores the importance of honoring contractual commitments, even when external factors complicate the situation. Parties to a contract cannot evade liability by invoking actions of third parties not privy to the agreement. It ensures that service providers are justly compensated for their services.

Whose Goods Are These Anyway? Determining Liability for Storage Fees Amidst Government Intervention

The case revolves around Padoson Stainless Steel Corporation’s shipments, which were subject to a Bureau of Customs (BOC) hold order due to Padoson’s tax liabilities. During this hold, Asian Terminals, Inc. (ATI) provided storage services for Padoson’s goods. When ATI sought payment for these services, Padoson argued that because the BOC had issued a hold order, the BOC should be responsible for the fees. Both the Regional Trial Court (RTC) and the Court of Appeals (CA) initially sided with Padoson, stating that the BOC’s hold order constituted constructive possession of the goods, thus shifting the liability for storage fees to the BOC. The central legal question is whether the issuance of a hold order by the BOC transfers the liability for storage fees from the consignee (Padoson) to the BOC, despite the contractual agreement between the consignee and the storage service provider (ATI).

The Supreme Court disagreed with the lower courts, emphasizing the principle of privity of contract. This principle dictates that contracts are only binding between the parties who enter into them. The Court cited Sps. Borromeo v. Hon. Court of Appeals, et al., stating,

“The basic principle of relativity of contracts is that contracts can only bind the parties who entered into it, and cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof.”

Since the BOC was not a party to the storage agreement between Padoson and ATI, it could not be held liable for the storage fees. The Court found that the CA and RTC misapplied the case of Subic Bay Metropolitan Authority v. Rodriguez, et al., emphasizing that the BOC’s jurisdiction over goods is specifically for enforcing customs laws and does not extend to private contracts for storage services.

Building on this principle, the Supreme Court highlighted that Padoson, as the consignee who contracted with ATI for storage services, directly benefited from those services. Regardless of the BOC’s hold order, Padoson retained the primary obligation to compensate ATI for their services. The Court noted that the BOC’s hold order was related to Padoson’s tax liabilities and was entirely separate from the contractual agreement between Padoson and ATI. The BOC’s action was aimed at securing Padoson’s compliance with customs laws, not at interfering with or assuming Padoson’s private contractual obligations.

Further, the Court pointed out that the issue of the BOC’s alleged constructive possession was never raised by Padoson as a defense during the pre-trial proceedings. This defense was only introduced later by the RTC, which the CA then adopted. According to LICOMCEN, Inc. v. Engr. Abainza, issues not included in the pre-trial order can only be considered if they are impliedly included or inferable from the issues raised. Since the theory of constructive possession was not part of the original arguments, the Court deemed it inappropriate to be the basis of the decision.

The Court also addressed Padoson’s claim that the goods were damaged while in ATI’s custody. Padoson attempted to present photographs as evidence of the damage, but these were disallowed by the RTC due to not being properly pre-marked during the pre-trial. The CA overlooked this evidentiary ruling. The Supreme Court emphasized that evidence not properly admitted cannot be considered in judgments, citing Dra. Dela Llano v. Biong, which states, “rule that evidence which has not been admitted cannot be validly considered by the courts in arriving at their judgments.” Moreover, the Court noted that Padoson’s reliance on documents from the Customs case was inappropriate, as ATI was not a party to that case and had no opportunity to contest the findings.

Analyzing the presented evidence, the Supreme Court found that Padoson failed to adequately prove that the goods were damaged while under ATI’s care. Declarations from the sheriff’s report, stating the goods were in “deteriorating condition,” were deemed unsubstantiated conclusions. The Court emphasized that mere allegations and speculation do not constitute proof. The Court also noted the absence of evidence regarding the condition of the shipments upon discharge from the vessels, further undermining Padoson’s claim of negligence on ATI’s part.

Ultimately, the Supreme Court found Padoson liable for the storage fees, amounting to P8,914,535.28, plus interest. The computation of these fees was deemed “clear and unmistakable” by the RTC, a point that Padoson never directly contested. The Court applied the principles outlined in Nacar v. Gallery Frames, et al., specifying the applicable interest rates. The rate of interest on the unpaid storage fees was set at twelve percent (12%) per annum from August 4, 2006 (the date of judicial demand) to June 30, 2013, and six percent (6%) per annum from July 1, 2013, until full satisfaction of the judgment.

Finally, the Court denied ATI’s claim for exemplary damages and attorney’s fees. Exemplary damages require a showing of bad faith or wanton conduct, which was not proven in this case. Similarly, attorney’s fees were not warranted as none of the circumstances under Article 2208 of the Civil Code were present.

FAQs

What was the key issue in this case?	The central issue was whether a Bureau of Customs (BOC) hold order on imported goods shifts the liability for storage fees from the consignee to the BOC, despite a pre-existing contractual agreement between the consignee and a storage service provider.
What did the Court rule regarding the BOC’s responsibility for storage fees?	The Court ruled that the BOC is not responsible for the storage fees. The BOC’s hold order, issued for customs law enforcement, does not negate the consignee’s contractual obligation to pay for storage services.
What is the principle of privity of contract, and how did it apply here?	Privity of contract means that a contract only binds the parties who are directly involved in it. Since the BOC was not a party to the storage agreement between Padoson and ATI, it could not be held liable for the fees.
Did Padoson successfully prove that the goods were damaged while in ATI’s custody?	No, Padoson failed to provide sufficient admissible evidence to prove that the goods were damaged while under ATI’s care. Photographs were disallowed and other evidence was related to the Customs case where ATI was not a party.
What amount is Padoson required to pay ATI?	Padoson is required to pay ATI P8,914,535.28, plus interest at 12% per annum from August 4, 2006, to June 30, 2013, and 6% per annum from July 1, 2013, until fully paid.
Why were ATI’s claims for exemplary damages and attorney’s fees denied?	The Court denied these claims because there was no evidence of bad faith or wanton conduct on Padoson’s part, which is required for exemplary damages. Additionally, none of the circumstances under Article 2208 of the Civil Code, which would justify attorney’s fees, were present.
What was the significance of the RTC’s pre-trial order in this case?	The pre-trial order defines the scope of issues to be litigated. Since Padoson did not raise the issue of the BOC’s constructive possession during the pre-trial, the Court deemed it inappropriate for the RTC to base its decision on that theory.
How does this case affect future contracts for storage services?	This case reinforces the importance of honoring contractual obligations. It clarifies that regulatory actions by third parties, such as government agencies, do not automatically absolve parties from their contractual responsibilities unless explicitly stated in the contract.

This case underscores the judiciary’s commitment to upholding contractual agreements and ensuring that parties are held responsible for their obligations. It provides a clear framework for determining liability in situations where government actions intersect with private contracts. The Supreme Court’s decision aims to prevent parties from evading their contractual duties by invoking actions of third parties, thereby promoting fairness and stability in commercial transactions.

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: ASIAN TERMINALS, INC. v. PADOSON STAINLESS STEEL CORPORATION, G.R. No. 211876, June 25, 2018