G.R. No. 148332, September 30, 2003
NATIONAL DEVELOPMENT COMPANY, PETITIONER, VS. MADRIGAL WAN HAI LINES CORPORATION, RESPONDENT.

FACTS

The National Development Company (NDC), a government-owned corporation, initiated the privatization of its subsidiary, the National Shipping Corporation of the Philippines (NSCP), including its three vessels. After a public bidding where Madrigal Wan Hai Lines Corporation (Madrigal) was the lone bidder, the parties entered into a negotiated sale. The sale was finalized through a Contract of Sale executed on March 14, 1994, whereby Madrigal acquired NSCP and its assets for $18.5 million. The transaction was approved by the NDC Board, the President, the Committee on Privatization, and the Commission on Audit.
Subsequently, Madrigal received a Notice of Final Assessment from the US Internal Revenue Service for deficiency taxes on NSCP’s gross transportation income derived from US sources for the years 1990-1992, a period prior to the sale. To prevent disruption of its shipping operations, Madrigal paid the tax liabilities amounting to $671,653.00, plus penalties. Madrigal then demanded reimbursement from NDC, which refused. Consequently, Madrigal filed a complaint for sum of money and damages before the Regional Trial Court (RTC).

ISSUE

Whether NDC is liable to reimburse Madrigal for the deficiency taxes paid to the US IRS.

RULING

Yes, NDC is liable. The Supreme Court affirmed the decisions of the lower courts, holding NDC accountable under the principles of quasi-delict and abuse of rights. The Court found that NDC, as the seller, was aware of the potential tax liabilities of NSCP operating in the United States but deliberately concealed this material information from Madrigal during the sale negotiations. This constituted a breach of the obligation to act in good faith under Article 19 of the Civil Code.
The Court rejected NDC’s defense that the sale was on an “as-is, where-is” basis, as stipulated in the Negotiated Sale Guidelines. It ruled these stipulations were part of a contract of adhesion, prepared solely by NDC, and could not absolve it from liability arising from its own bad faith. By withholding knowledge of a substantial financial liability that directly affected the valuation of the assets, NDC willfully caused damage to Madrigal. This act contravened morals, good customs, and fair dealing, making NDC liable under Articles 20 and 21 of the Civil Code. The payment made by Madrigal was a necessary consequence of NDC’s non-disclosure, for which reimbursement, with legal interest, was justified. The award of attorney’s fees was sustained, but exemplary damages were correctly deleted by the Court of Appeals.