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May a final judgment be subject of a compromise agreement?

A compromise agreement is a contract whereby the parties make reciprocal concessions in order to resolve their differences and thus avoid or put an end to a lawsuit [Article 2028, Civil Code]. They adjust their difficulties in the manner they have agreed upon, disregarding the possible gain in litigation, keeping in mind that such gain is balanced by the danger of losing. The compromise may be either extrajudicial – to prevent litigation or judicial – to end a litigation. A compromise must not be contrary to law, morals, good customs and public policy; and must have been freely and intelligently agreed by the parties. To have the force of law between the parties, it must comply with the requisites and principles of contracts. It has the effect and the authority of res judicata, once entered into [Article 2037, Civil Code]. When a compromise agreement is given judicial approval, it becomes more than a contract binding upon the parties. Having been sanctioned by the court, it is entered as a determination of a controversy and has the force and effect of a judgment. It is immediately executory and not appealable, except for vices of consent or forgery [Article 2038, Civil Code]. The nonfulfillment of its terms and conditions justifies the issuance of a writ of execution; thus, execution becomes a ministerial duty of the court. Following these basic principles, apparently unnecessary is a compromise agreement after final judgment has been entered. If the case is terminated by final judgment, the rights of the parties are settled. There are no more disputes to be compromised.

Can the parties still enter a compromise agreement on a final and executory judgment? May a Supreme Court decision be subject of a compromise agreement? This issue was raised in Magbanua, et. al. v. Uy, G.R. No. 161003 dated 06 May 2005. This is a labor case that started at the Arbiter level, appealed from the NLRC to the Court of Appeals, decided by our Supreme Court [Uy v. NLRC, G.R. No. 117983] and became final and executory awarding P1.48 Million wage differentials of eight [8] complainants. Uy filed a Manifestation that judgment award was satisfied praying that the case be deemed terminated and closed. A Joint Affidavit was also signed attesting the receipt of payment and waiving all other benefits. In June 1997, Magbanua filed an Urgent Motion for Issuance of Writ of Execution confirming each of them received P.40,000.00 – only as partial payment of the judgment award. Six [6] filed a Manifestation for closure as they were satisfied of what they have received P.320,000.00. The Labor Arbiter denied the motion for execution and closed the case. The NLRC reversed it and directed the issuance of a writ of execution holding that a final and executory judgment can no longer be altered and quitclaims are frowned upon as contrary to public policy. The Court of Appeals reversed the NLRC. The case reached the Supreme Court.

The legality of a compromise agreement after final judgment, not the prudence of entering into one was raised. Petitioners argue that a compromise of a final judgment is invalid under Article 2040 of the Civil Code – If after a litigation has been decided by a final judgment, a compromise should be agreed upon, either or both parties being unaware of the existence of the final judgment, the compromise may be rescinded -. Ignorance of a judgment which may be revoked or set aside is not a valid ground for attacking a compromise. It is evident from the quoted paragraph that such an agreement is not prohibited or void or voidable. Instead, a remedy to impugn the contract, which is an action for rescission, is declared available. The law allows a party to rescind a compromise agreement, because it could have been entered into in ignorance of the fact that there was already a final judgment. Knowledge of decision’s finality may affect the resolve to enter into a compromise agreement. The issue involving the validity of a compromise agreement notwithstanding a final judgment is not novel. Jesalva v. Bautista upheld a compromise that covered cases pending trial, on appeal, and with final judgment. The Court found no evidence of fraud or of any showing that the agreement was contrary to law, morals, good customs, public order, or public policy. There is no justification to disallow a compromise agreement, solely because it was entered into after final judgment. The principle of novation supports the validity of a compromise after final judgment. Thus, the validity of the compromise agreement even after judgment and even it became final and executory by the Supreme Court was sustained.

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