TL;DR

The Supreme Court ruled that provisional remedies like preliminary attachment and deposit orders cannot be issued against a party who is not directly involved in the contract at the heart of the dispute. In this case, Lorenzo Shipping Corporation (LSC), although a nominal defendant, was wrongly subjected to a writ of preliminary attachment and a deposit order because it was not a party to the agreement between Villarin and CASSCOR. This decision reinforces the principle of privity of contract in Philippine law, ensuring that entities are not unduly burdened by obligations or remedies arising from contracts they did not enter into. The Court emphasized that provisional remedies are harsh and must be strictly construed, protecting businesses from unwarranted financial burdens and legal overreach in contractual disputes where they are not principal parties.

Strangers to the Agreement: When Can Provisional Remedies Bind a Non-Party?

This case, Lorenzo Shipping Corporation v. Florencio O. Villarin, consolidates two petitions questioning the issuance of provisional remedies – a writ of preliminary attachment and an order for deposit – against Lorenzo Shipping Corporation (LSC). The central legal question is whether these remedies can be validly applied to LSC, a shipping company, in a dispute arising from a Cargo Handling Contract and a subsequent Memorandum of Agreement (MOA) to which LSC was not a direct party. The plaintiffs, Villarin and First Cargomasters Corporation (FCC), sought to enforce rights under the MOA against Cebu Arrastre and Stevedoring Services Corporation (CASSCOR) and its President, Dajao, and attempted to extend these claims to LSC, arguing for a form of implied trust and benefit from the services rendered.

The factual backdrop involves a MOA between CASSCOR and Villarin where Villarin would manage CASSCOR’s stevedoring services for LSC. Disputes arose over remittances, leading Villarin to sue CASSCOR and Dajao for specific performance and damages, impleading LSC as a nominal defendant. Crucially, Villarin sought a writ of preliminary attachment against all defendants, including LSC, and later, an order compelling LSC to deposit funds allegedly owed to CASSCOR directly to the court. The lower courts initially granted these remedies, finding LSC liable due to an alleged implied contract and benefit from Villarin’s services. However, the Supreme Court critically examined these rulings, focusing on the foundational principle of privity of contract, enshrined in Article 1311 of the New Civil Code, which states that:

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 Court underscored that the MOA was exclusively between CASSCOR and Villarin. LSC, not being a signatory or assignee, could not be directly bound by its terms. The attempt to attach LSC’s assets based on fraud in contracting or performing an obligation under Rule 57 of the Rules of Court was deemed untenable. The Court clarified that fraud as a ground for attachment must relate to the contract upon which the action is based, and since LSC had no contractual obligation to Villarin, fraud in this context was inapplicable. Furthermore, the Court rejected the notion of a constructive trust as a basis for attachment, noting that constructive trusts lack the fiduciary relationship required under Rule 57, Section 1(b).

Regarding the deposit order, the Supreme Court acknowledged that while deposit is not explicitly listed as a provisional remedy in Rules 57-61, Rule 135, Section 6 grants courts inherent powers to issue necessary processes to enforce jurisdiction. However, the Court distinguished between valid applications of deposit orders in cases like partition or recovery of possession, and the present scenario. Jurisprudence allows deposit orders in situations where the depositor-party’s claim to the funds is weak or non-existent, or when funds are regularly received from third parties related to the dispute. In this case, neither condition was met. LSC contested its liability, and the funds were not derived from a third party for the benefit of either claimant in the dispute. The Court emphasized that the deposit order, in this instance, was an overreach, effectively circumventing the rules on preliminary attachment and unjustly burdening LSC.

The Supreme Court concluded that both the writ of preliminary attachment and the deposit order against LSC were improper. The Court reversed the Court of Appeals’ decisions, reinstating the trial court orders that had initially set aside these remedies. This ruling serves as a significant reminder of the limits of provisional remedies and the enduring importance of privity of contract in Philippine jurisprudence. It prevents the unwarranted application of such remedies against parties who are merely incidentally connected to a contractual dispute, ensuring that legal burdens are appropriately placed upon those directly bound by agreements.

FAQs

For inquiries regarding the application of this ruling to specific circumstances, please contact Atty. Gabriel Ablola through gaboogle.com or via email at connect@gaboogle.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. Villarin, G.R. Nos. 175727 & 178713, March 6, 2019