G.R. No. 131436 . May 31, 2000.
Golden Diamond, Inc., petitioner, vs. The Court of Appeals and Lawrence Cheng, respondent.

FACTS

Petitioner Golden Diamond, Inc. (GDI) held an area market franchise from International Family Food Services, Inc. (IFFSI) to operate Shakey’s outlets in Caloocan City, effective from February 6, 1981, to February 6, 1991. On August 1, 1988, GDI entered into a Memorandum of Agreement (MOA) with respondent Lawrence Cheng, assigning to him its rights and obligations for the Shakey’s outlet at Gotesco Grand Central. Cheng bound himself to pay GDI a monthly royalty fee of 5% of gross sales for five years, from August 1, 1988, to August 1, 1993. The MOA’s Whereas clause stated GDI was the franchise holder by virtue of the Dealer Agreement, a copy of which was attached and made integral to the MOA.
Cheng paid the royalties until February 6, 1991, when GDI’s underlying Dealer Agreement with IFFSI expired. Cheng ceased payments, contending his obligation was conditioned upon the existence of GDI’s franchise. IFFSI did not renew GDI’s area franchise for Caloocan City but instead granted Cheng a direct site franchise for the Gotesco outlet on March 6, 1991. GDI sued for collection of royalties from February 1991 to August 1993, arguing the MOA’s five-year term was independent of its own franchise period.

ISSUE

Whether respondent Cheng is obligated to pay monthly royalty fees to petitioner GDI for the period after the expiration of GDI’s Dealer Agreement with IFFSI on February 6, 1991, up to August 1, 1993.

RULING

No. The Supreme Court affirmed the Court of Appeals’ decision, ruling that Cheng’s obligation to pay royalties under the MOA did not extend beyond the life of GDI’s franchise with IFFSI. The MOA was an assignment of GDI’s rights and interests under its Dealer Agreement. The clear language of the MOA, particularly its Whereas clause incorporating the Dealer Agreement as an integral part, established that the assigned rights were derived from and dependent upon that primary agreement. The Court applied the principle that a contract is the law between the parties and must be interpreted according to its literal meaning when terms are clear.
The obligation to pay a royalty fee is intrinsically linked to the right or privilege granted. Since GDI’s underlying franchise expired on February 6, 1991, and was not renewed as an area franchise, GDI had no remaining rights to assign or license to Cheng after that date. Cheng’s subsequent direct franchise from IFFSI was a new and separate grant, not flowing from GDI. The Court found no unequivocal language in the MOA indicating the parties intended for royalty payments to continue even after GDI’s franchise lapsed. Therefore, Cheng’s duty to pay GDI ceased when GDI’s source of authority terminated.