Case

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National Development Company vs Madrigal

GR No. 148332
30 September 2003
Contracts, General
Contract of adhesion;
Definition of AS IS, WHERE IS

Facts:
National Development Company (NDS) is a GOCC. National Shipping
Corporation of the Philippines (NSCP) is a wholly-owned subsidiary of
petitioner.
NCSP was privatized, offered to sell to the public 100% stock owndership
worth P150, 000 as well as 3 ocean-going vessels.
NDS released to the public an information package containing NSCPs
background, assets, and operational and financial status. Also containing
terms and conditions for bidders. Desired price was USD 26.75 million.
During public bidding, lone bidder was respondent Madrigal Wan Hai Lines
Corporation, who submitted a bid of USD 15 million.
NDS entered into a negotiated sale with Madrigal, settled for USD 18.5
million. NDS issued a Notice of Award to Madrigal.
Madrigal was surprise to receive from US Dept of Treasury, Internal Revenue
and Service (US-IRS) against NSCP a deficiency of taxes amounting to USD
671, 653, and late fees of USD 16, 533.10 which Madrigal paid.
Madrigal demanded from NDS reimbursement for the amounts paid to US-
IRS. NDS refused.
Ruling of RTC
o In favor of respondent, ordered NDS to reimburse Madrigal the
deficiency and late fees.
o Petitioner knew about tax liabilities before the sale, yet did not inform
respondent about it.
Court of Appeals
o AFFIRMED the ruling of the RTC, with modification as to attys fees.
o NSCPs Negotiated Sale Guidelines is evidently a contract of adhesion.
A contract of adhesion may be struck down as void or unenforceable
for being subversive of public policy, because the weaker party is
completely deprived of the opportunity to bargain on equal footing,
and whose option is reduced to a take it or leave it alternative.
Supreme Court
o Petitioner maintains that:
Guidelines and proposal letterform are mere invitations to bid.
Petitioner further stresses the sale was on an AS IS WHERE IS
basis.
Based on the proposal letterform, Madrigal should have
appraised itself of the financial status and liabilities of NSCP.
Therefore, NDC should not be at fault for Madrigals
predicament.

o Respondent maintains that:

CA did not commit error.
Negotiated Sale Guidelines and Proposal Letter Form are a
contract of adhesion because buyer was required to submit its
bid through a pro-forma proposal letter.
Petitioner had legal duty to disclose its tax liabilities
o First issue:
Negotiated Sale Guidelines and Proposal Letter Form ARE
contracts of adhesion. It can be struck down, therefore, as void
and unenforceable for being subversive of public policy.
Contracts of adhesion are NOT strictly against law, since other
party is free to reject it entirely; if he adheres, he gives his
consent.
o Second issue:
There is no dispute that petitioner was aware of its US tax
liabilities. It bears stressing that petitioner did not convey such
info to respondent despite inquiries. This constitutes bad faith.
Obligation to reimburse is likewise clear under the Negotiated
Sale Guidelines.
AS IS, WHERE IS basis (Hian vs Court of Tax Appeals)
pertains solely to the physical condition of the thing sold, not
to its legal situation. In the case at bar, the US tax liabilities
constitute a potential lien that applies to the NSCPs legal
situation not to its physical aspect. Hence respondent has no
obligation to shoulder the same.
o Hence, petition is DENIED.

Doctrines
Contracts of adhesion may be struck down as void or unenforceable for being
subversive of public policy, because the weaker party is completely deprived
of the opportunity to bargain on equal footing, and whose option is reduced
to a take it or leave it alternative.
Failure to disclose tax liabilities, despite repeated inquiries, constitutes bad
faith.
AS IS, WHERE IS basis (Hian vs Court of Tax Appeals) pertains solely to the
physical condition of the thing sold, not to its legal situation.