G.R. No. L-47698 April 28, 1978
LEDESMA OVERSEAS SHIPPING CORPORATION, petitioner, vs. HON. CELSO AVELINO, in his capacity as Presiding Judge of CFI of Cebu, Branch XIII, and CEBU STEVEDORING CO., INC., respondents.

FACTS

Petitioner Ledesma Overseas Shipping Corporation and private respondent Cebu Stevedoring Co., Inc. entered into an extrajudicial compromise agreement on January 21, 1976, settling the latter’s claim. The agreement stipulated that petitioner’s liability was fixed at P18,388.74, with P10,000.00 payable immediately and the balance of P8,388.74 payable within 60 days. Petitioner paid the initial P10,000.00. The following day, January 22, 1976, petitioner sent a copy of this agreement to respondent Judge Celso Avelino, explicitly stating it was to be treated as its Answer to the summons in the pending case.
Despite this submission, private respondent later filed a motion to declare petitioner in default for alleged failure to file a formal responsive pleading. Respondent Judge granted the motion on February 17, 1977, and allowed private respondent to present evidence ex-parte. This resulted in a decision dated June 2, 1977, which increased petitioner’s liability to P16,388.74, plus attorney’s fees and costs, effectively ignoring the compromise agreement. Petitioner’s motion under oath to lift the default order and for reconsideration was denied.

ISSUE

Whether respondent Judge committed a grave abuse of discretion, amounting to lack or excess of jurisdiction, in declaring petitioner in default and rendering an ex-parte judgment despite being informed of a compromise agreement submitted as an Answer, thereby violating procedural due process.

RULING

Yes. The Supreme Court granted the petition for certiorari and set aside the challenged orders and decision. The legal logic is anchored on fundamental due process and a liberal interpretation of procedural rules to secure substantial justice. First, a default order is a harsh remedy justified only to expedite litigation, not to decide merits, and it risks considerable injustice. Courts must view motions to set aside default with liberality. Respondent Judge ignored this settled doctrine, originating from Coombs v. Santos, which mandates a careful examination of circumstances to prevent positive injustice.
Second, the respondent Judge gravely erred in declaring petitioner in default. The letter transmitting the compromise agreement to the court unequivocally stated it constituted petitioner’s Answer. Under a liberal construction of the Rules of Court, this submission sufficed as a responsive pleading that should have precluded a default declaration. The judge’s rigid adherence to technicality, despite knowledge of the compromise, was improper.
Third, the ex-parte decision, which arbitrarily increased the liability fixed by the compromise, compounded the error. The compromise agreement, partly performed with the P10,000.00 payment, had the character of a binding contract between the parties. By rendering a judgment on a different basis without affording petitioner a hearing, the court deprived petitioner of its right to be heard, a core element of due process. The Supreme Court thus rendered judgment based on the compromise, holding petitioner liable only for the agreed balance of P8,388.74.